FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-10804
XL CAPITAL LTD
(Exact name of registrant as specified in its charter)
|
|
|
Cayman Islands |
|
98-0191089 |
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
XL House, One Bermudiana Road, Hamilton, Bermuda HM 11
(Address of principal executive offices and zip code)
(441) 292-8515
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As of August 3, 2009, there were 342,173,340 outstanding Class A Ordinary Shares, $0.01 par value per share, of the registrant.
XL CAPITAL LTD
INDEX TO FORM 10-Q
|
|
|
|
FINANCIAL STATEMENTS |
|
|
|
XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Unaudited Consolidated Financial Statements
3
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||
|
|
|
|
|
|
||||||||
(U.S. dollars in thousands, except share amounts) |
|
2009 |
|
2008
|
|
2009 |
|
2008
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,429,700 |
|
$ |
1,681,722 |
|
$ |
2,881,221 |
|
$ |
3,394,084 |
|
Net investment income |
|
|
328,348 |
|
|
440,352 |
|
|
676,314 |
|
|
939,581 |
|
Realized investment gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on investments sold |
|
|
4,520 |
|
|
49,742 |
|
|
37,623 |
|
|
62,242 |
|
Other-than-temporary impairments on investments |
|
|
(115,620 |
) |
|
(47,702 |
) |
|
(400,660 |
) |
|
(162,453 |
) |
Other-than-temporary impairments on investments transferred to other comprehensive income |
|
|
30,670 |
|
|
|
|
|
30,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (losses) on investments |
|
|
(80,430 |
) |
|
2,040 |
|
|
(332,367 |
) |
|
(100,211 |
) |
Net realized and unrealized gains (losses) on derivative instruments |
|
|
969 |
|
|
8,124 |
|
|
(438 |
) |
|
52,806 |
|
Net income (loss) from investment fund affiliates |
|
|
37,086 |
|
|
(20,435 |
) |
|
10,193 |
|
|
(8,636 |
) |
Fee income and other |
|
|
9,796 |
|
|
12,796 |
|
|
21,954 |
|
|
21,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,725,469 |
|
$ |
2,124,599 |
|
$ |
3,256,877 |
|
$ |
4,298,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses incurred |
|
$ |
779,628 |
|
$ |
938,585 |
|
$ |
1,569,911 |
|
$ |
1,939,478 |
|
Claims and policy benefits |
|
|
174,588 |
|
|
209,725 |
|
|
332,547 |
|
|
406,024 |
|
Acquisition costs |
|
|
223,272 |
|
|
246,237 |
|
|
441,491 |
|
|
512,534 |
|
Operating expenses |
|
|
264,219 |
|
|
298,298 |
|
|
532,606 |
|
|
562,122 |
|
Exchange losses |
|
|
145,221 |
|
|
7,936 |
|
|
120,597 |
|
|
75,681 |
|
Interest expense |
|
|
54,198 |
|
|
65,441 |
|
|
115,539 |
|
|
189,553 |
|
Amortization of intangible assets |
|
|
464 |
|
|
420 |
|
|
929 |
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
1,641,590 |
|
$ |
1,766,642 |
|
$ |
3,113,620 |
|
$ |
3,686,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and loss (income) from operating affiliates |
|
$ |
83,879 |
|
$ |
357,957 |
|
$ |
143,257 |
|
$ |
612,479 |
|
Provision for income tax |
|
|
16,045 |
|
|
51,205 |
|
|
61,998 |
|
|
81,907 |
|
Income (loss) from operating affiliates |
|
|
17,667 |
|
|
(68,901 |
) |
|
7,339 |
|
|
(48,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,501 |
|
$ |
237,851 |
|
$ |
88,598 |
|
$ |
482,224 |
|
Non-controlling interest in net loss of subsidiary |
|
|
40 |
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to XL Capital Ltd |
|
$ |
85,541 |
|
$ |
237,851 |
|
$ |
88,638 |
|
$ |
482,224 |
|
Preference share dividends |
|
|
(5,592 |
) |
|
|
|
|
(42,126 |
) |
|
(32,500 |
) |
Gain on redemption of Series C Preference Ordinary Shares |
|
|
|
|
|
|
|
|
211,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to ordinary shareholders |
|
$ |
79,949 |
|
$ |
237,851 |
|
$ |
258,328 |
|
$ |
449,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares and
ordinary share equivalents
|
|
|
342,154 |
|
|
179,054 |
|
|
339,155 |
|
|
178,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares and
ordinary share equivalents
|
|
|
342,468 |
|
|
179,054 |
|
|
339,262 |
|
|
178,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per ordinary share and ordinary share equivalent basic |
|
$ |
0.23 |
|
$ |
1.33 |
|
$ |
0.76 |
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per ordinary share and ordinary share equivalent diluted |
|
$ |
0.23 |
|
$ |
1.33 |
|
$ |
0.76 |
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Consolidated Financial Statements
4
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||
|
|
|
|
|
|
||||||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to XL Capital Ltd. |
|
$ |
85,541 |
|
$ |
237,851 |
|
$ |
88,638 |
|
$ |
482,224 |
|
Impact of adoption of FSP FAS 115-2 and FAS 124-2, net of taxes |
|
|
(229,670 |
) |
|
|
|
|
(229,670 |
) |
|
|
|
Change in net unrealized (losses) on investments, net of tax |
|
|
1,115,165 |
|
|
(686,280 |
) |
|
326,480 |
|
|
(1,761,867 |
) |
Change in other-than-temporary impairment losses recognized in other comprehensive income, net of tax |
|
|
(25,595 |
) |
|
|
|
|
(25,595 |
) |
|
|
|
Change in underfunded pension liability |
|
|
(250 |
) |
|
(21 |
) |
|
(316 |
) |
|
(65 |
) |
Change in value of cash flow hedge |
|
|
110 |
|
|
109 |
|
|
218 |
|
|
218 |
|
Foreign currency translation adjustments, net |
|
|
184,893 |
|
|
6,946 |
|
|
89,639 |
|
|
237,418 |
|
Change in net unrealized gain (loss) on future policy benefit reserves |
|
|
(5,487 |
) |
|
|
|
|
2,007 |
|
|
(1,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,124,707 |
|
$ |
(441,395 |
) |
$ |
251,401 |
|
$ |
(1,043,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Consolidated Financial Statements
5
XL CAPITAL LTD
C
ONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
(U.S. dollars in thousands) |
|
|
|
|
|
|
|
Non-controlling Interest in Equity of Consolidated Subsidiaries: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
1,598 |
|
$ |
2,419 |
|
Non-controlling interest in net income (loss) of subsidiary |
|
|
(40 |
) |
|
|
|
Non-controlling interest share in change in accumulated other comprehensive (loss) income |
|
|
816 |
|
|
(832 |
) |
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
2,374 |
|
$ |
1,587 |
|
|
|
|
|
|
|
|
|
Series E Preference Ordinary Shares: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
10 |
|
$ |
10 |
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
10 |
|
$ |
10 |
|
|
|
|
|
|
|
|
|
Class A Ordinary Shares: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
3,308 |
|
$ |
1,779 |
|
Issuance of Class A ordinary shares |
|
|
115 |
|
|
13 |
|
Exercise of stock options |
|
|
1 |
|
|
|
|
Repurchase of shares |
|
|
(2 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
3,422 |
|
$ |
1,791 |
|
|
|
|
|
|
|
|
|
Additional Paid in Capital: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
9,792,371 |
|
$ |
7,358,801 |
|
Issuance of Class A ordinary shares |
|
|
742,258 |
|
|
49,093 |
|
Repurchase of Class A ordinary shares |
|
|
|
|
|
(4,246 |
) |
Dividends on Class A ordinary shares |
|
|
(68,390 |
) |
|
|
|
Dividends on preference ordinary shares |
|
|
(42,126 |
) |
|
|
|
Stock option expense |
|
|
9,165 |
|
|
10,039 |
|
Net change in deferred compensation |
|
|
21,704 |
|
|
(21,721 |
) |
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
10,454,982 |
|
$ |
7,391,966 |
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive (Loss) Income: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
(3,364,927 |
) |
$ |
9,159 |
|
Impact of adoption of FSP FAS 115-2 and FAS 124-2, net of taxes |
|
|
(229,670 |
) |
|
|
|
Change in net unrealized (losses) on investment portfolio, net of tax |
|
|
319,960 |
|
|
(1,761,735 |
) |
Change in other-than-temporary impairment losses recognized in other comprehensive income, net of tax |
|
|
(25,595 |
) |
|
|
|
Change in net unrealized (losses) gains on affiliate and other investments, net of tax |
|
|
6,520 |
|
|
(132 |
) |
Change in underfunded pension liability |
|
|
(316 |
) |
|
(65 |
) |
Change in value of cash flow hedge |
|
|
218 |
|
|
218 |
|
Foreign currency translation adjustments |
|
|
89,639 |
|
|
237,418 |
|
Change in net unrealized gain (loss) on future policy benefit reserves |
|
|
2,007 |
|
|
(1,688 |
) |
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
(3,202,164 |
) |
$ |
(1,516,825 |
) |
|
|
|
|
|
|
|
|
Retained (Deficit) Earnings: |
|
|
|
|
|
|
|
Balance beginning of year |
|
$ |
(315,529 |
) |
$ |
2,578,393 |
|
Impact of adoption of FSP FAS 115-2 and FAS 124-2, net of taxes |
|
|
229,670 |
|
|
|
|
Net income |
|
|
88,638 |
|
|
482,224 |
|
Dividends on preference ordinary shares |
|
|
|
|
|
(32,500 |
) |
Dividends on Class A ordinary shares |
|
|
|
|
|
(135,866 |
) |
Gain on redemption of Series C preference ordinary shares |
|
|
211,816 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period |
|
$ |
214,595 |
|
$ |
2,892,251 |
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
$ |
7,473,219 |
|
$ |
8,770,780 |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Consolidated Financial Statements
6
XL CAPITAL LTD
CO
NSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
(U.S. dollars in thousands) |
|
|
|
|
|
|
|
Cash flows (used in) provided by operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
88,638 |
|
$ |
482,224 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
Net realized losses on investments |
|
|
332,367 |
|
|
100,211 |
|
Net realized and unrealized losses (gains) on derivative instruments |
|
|
438 |
|
|
(52,806 |
) |
Amortization of (discounts) on fixed maturities |
|
|
(18,267 |
) |
|
(21,117 |
) |
Loss (income) from investment and operating affiliates |
|
|
(17,532 |
) |
|
56,984 |
|
Amortization of deferred compensation |
|
|
19,713 |
|
|
26,973 |
|
Accretion of convertible debt |
|
|
496 |
|
|
499 |
|
Accretion of deposit liabilities |
|
|
23,306 |
|
|
92,396 |
|
Unpaid losses and loss expenses |
|
|
(328,569 |
) |
|
(665,502 |
) |
Future policy benefit reserves |
|
|
(45,102 |
) |
|
(8,470 |
) |
Unearned premiums |
|
|
(13,572 |
) |
|
588,745 |
|
Premiums receivable |
|
|
(154,816 |
) |
|
(395,077 |
) |
Unpaid losses and loss expenses recoverable |
|
|
121,547 |
|
|
669,117 |
|
Prepaid reinsurance premiums |
|
|
(51,718 |
) |
|
(139,148 |
) |
Reinsurance balances receivable |
|
|
165,926 |
|
|
118,674 |
|
Deferred acquisition costs |
|
|
(21,422 |
) |
|
(93,215 |
) |
Reinsurance balances payable |
|
|
(252,006 |
) |
|
(45,114 |
) |
Deferred tax asset |
|
|
(26,375 |
) |
|
38,248 |
|
Other assets |
|
|
(42,857 |
) |
|
89,958 |
|
Other liabilities |
|
|
(253,383 |
) |
|
(265,286 |
) |
Other |
|
|
(47,780 |
) |
|
69,007 |
|
|
|
|
|
|
|
|
|
Total adjustments |
|
$ |
(609,606 |
) |
$ |
165,077 |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(520,968 |
) |
$ |
647,301 |
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities: |
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities and short-term investments |
|
$ |
5,140,997 |
|
$ |
9,840,029 |
|
Proceeds from redemption of fixed maturities and short-term investments |
|
|
2,119,654 |
|
|
1,333,153 |
|
Proceeds from sale of equity securities |
|
|
353,600 |
|
|
529,130 |
|
Purchases of fixed maturities and short-term investments |
|
|
(7,467,848 |
) |
|
(7,470,615 |
) |
Purchases of equity securities |
|
|
(18,339 |
) |
|
(331,062 |
) |
Net disposition of investment affiliates |
|
|
597,852 |
|
|
201,749 |
|
Other investments |
|
|
(25,014 |
) |
|
31,354 |
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
$ |
700,902 |
|
$ |
4,133,738 |
|
|
|
|
|
|
|
|
|
Cash flows (used in) financing activities: |
|
|
|
|
|
|
|
Proceeds from issuance of Class A ordinary shares |
|
$ |
745,000 |
|
$ |
|
|
Repurchase of Class A ordinary shares |
|
|
(541 |
) |
|
(4,247 |
) |
Redemption of Series C preference ordinary shares |
|
|
(104,718 |
) |
|
|
|
Dividends paid on Class A ordinary shares |
|
|
(68,372 |
) |
|
(135,381 |
) |
Dividends paid on preference ordinary shares |
|
|
(50,178 |
) |
|
(32,500 |
) |
Deposit liabilities |
|
|
(138,976 |
) |
|
(5,056,582 |
) |
Repayment of debt |
|
|
(745,000 |
) |
|
|
|
Net cash flow on securities lending |
|
|
(242,662 |
) |
|
186,700 |
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities |
|
$ |
(605,447 |
) |
$ |
(5,042,010 |
) |
Effects of exchange rate changes on foreign currency cash |
|
|
61,059 |
|
|
85,190 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(364,454 |
) |
|
(175,781 |
) |
Cash and cash equivalents beginning of period |
|
|
4,353,826 |
|
|
3,880,030 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
3,989,372 |
|
$ |
3,704,249 |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Consolidated Financial Statements
7
XL CAPITAL LTD
N OTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Preparation and Consolidation
These unaudited consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, these unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the Companys financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant inter-company accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation. There was no effect on net income from this change in presentation.
Unless the context otherwise indicates, references herein to the Company include XL Capital Ltd and its consolidated subsidiaries.
The Company has performed an evaluation of subsequent events through August 5, 2009, which is the date the financial statements were issued.
2. Significant Accounting Policies
(a) Recent Accounting Pronouncements
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (FAS 160), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the companys equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; requires any changes in ownership interest of the subsidiary be accounted for as equity transactions; and requires that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. FAS 160 is effective for interim and annual financial statements issued after January 1, 2009. While the adoption of this standard did not have a material impact on the Companys financial condition or results of operations, such adoption did result in certain changes in the presentation and disclosure of noncontrolling interests as noted above.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. FAS 161 requires enhanced disclosures about an entitys derivative and hedging activities, and is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The Company adopted the standard as of January 1, 2009. FAS 161 requires only additional disclosures concerning derivatives and hedging activities, and therefore the adoption of FAS 161 did not have an impact on the Companys financial condition and results of operations. See Note 2-(b), Significant Accounting Policies Derivative Instruments and Note 7, Derivative Instruments for disclosures required under this standard.
8
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(a) Recent Accounting Pronouncements (Continued)
In May 2008, the FASB issued FAS 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FAS 60 (FAS 163) to address current diversity in practice with respect to accounting for financial guarantee insurance contracts by insurance enterprises under FAS 60, Accounting and Reporting by Insurance Enterprises (FAS 60). That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views regarding when a loss has been incurred under FAS 5, Accounting for Contingencies. FAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. FAS 163 also clarifies how FAS 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. FAS 163 also requires expanded disclosures about financial guarantee insurance contracts. The standard was adopted by the Company as of January 1, 2009. The Company had reserves for financial guarantee insurance contracts of $14.5 million recorded within Unpaid Losses and Loss Expenses, at both June 30, 2009 and December 31, 2008. The adoption of FAS 163 during 2009 did not have a material impact on the Companys financial condition or results of operations.
As of June 30, 2009, the Companys outstanding financial guarantee contracts that were subject to FAS 163 included the reinsurance of 47 financial guarantee contracts with total insured contractual payments outstanding of $788.7 million ($638.2 million of principal and $150.5 million of interest) with a remaining weighted-average contract period of 8.4 years. The total gross claim liability and unearned premiums recorded at June 30, 2009 were $14.5 million and $2.3 million, respectively. Of the contractual exposure existing at June 30, 2009, the Company has reinsured $400.3 million with a third party. There are no gross claim liabilities or recoverables recorded relating to this exposure. As of December 31, 2008, the Companys outstanding financial guarantee contracts that were subject to FAS 163 included the reinsurance of 48 financial guarantee contracts with total insured contractual payments outstanding of $936.6 million ($798.5 million of principal and $138.1 million of interest) with a remaining weighted-average contract period of 7.9 years. The total gross claim liability and unearned premiums recorded at December 31, 2008 were $14.5 million and $3.1 million, respectively. Of the contractual exposure existing at December 31, 2008, the Company had reinsured $360.5 million with subsidiaries of Syncora Holdings Ltd (Syncora), however as at June 30, 2009 no reinsurance balances recoverable from Syncora had been recorded. Surveillance procedures to track and monitor credit deteriorations in the insured financial obligations are performed by the primary obligors for each transaction on the Companys behalf. Information regarding the performance status and updated exposure values is provided to the Company on a quarterly basis and evaluated by management in recording claims reserves. Of the 47 contracts noted above, 5 contracts with total insured contractual payments outstanding of $18.1 million had experienced an event of default and were considered by the Company to be non-performing at June 30, 2009, while the remaining 42 contracts were considered to be performing at such date.
While not financial guarantee insurance contracts under FAS 163, the Companys guarantees to the European Investment Bank in respect of financial guaranty policies issued by subsidiaries of Syncora to the European Investment Bank (the EIB Policies), subject to certain limitations, have been accounted for under FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. These guarantees were provided for the benefit of EIB polices relating to project finance transactions comprised of transportation, school and hospital projects with an average rating of BBB, written between 2001 and 2006 with anticipated maturities ranging between 2027 and 2038. As at June 30, 2009, the Companys exposures relating to the EIB Policies was approximately $996.3 million, as compared to $955.4 million at December 31, 2008, mainly due to the weakening of the U.S. dollar against the currencies of the underlying obligations. As of June 30, 2009, there have been no reported events of default on the underlying obligations, accordingly, no reserves have been recorded.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. (FSP EITF 03-6-1) This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (EPS) pursuant to the two-class method described in
9
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(a) Recent Accounting Pronouncements (Continued)
paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. A share-based payment award that contains a non-forfeitable right to receive cash when dividends are paid to ordinary shareholders irrespective of whether that award ultimately vests or remains unvested shall be considered a participating security as these rights to dividends provide a non-contingent transfer of value to the holder of the share-based payment award. Accordingly, these awards should be included in the computation of basic EPS pursuant to the two-class method. The guidance in this FSP was effective for the Company as of January 1, 2009. All prior period EPS data presented was adjusted retrospectively to conform to the provisions of the FSP. Under the terms of the Companys restricted stock awards, grantees are entitled to the right to receive dividends on the unvested portions of their awards. There is no requirement to return these dividends in the event the unvested awards are forfeited in the future. Accordingly, this FSP had an impact on the Companys EPS calculations. See Note 14, Earnings Per Share, for a description of the impact of the adoption of FSP EITF 03-6-1 on the 2008 EPS figures.
In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. FSP FAS No. 133-1 and FIN 45-4 requires enhanced disclosures about credit derivatives and guarantees and amends FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others to exclude derivative instruments accounted for at fair value under FAS 133. The FSP is effective for financial statements issued for reporting periods ending after November 15, 2008. Since FSP FAS No. 133-1 and FIN 45-4 only requires additional disclosures concerning credit derivatives and guarantees, adoption of FSP FAS No. 133-1 and FIN 45-4 did not impact the Companys financial condition or results of operations.
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which provides additional guidance for estimating fair value in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly and amends certain FAS 157 disclosure guidance. FSP FAS 157-4 was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Companys financial condition or results of operations.
In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2) which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted this guidance effective April 1, 2009, which resulted in a net after-tax increase to retained earnings and decrease to Accumulated Other Comprehensive Income (Loss) of $229.7 million, as of April 1, 2009. The disclosures required by this FSP are provided in Note 6, Investments.
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1 (FSP FAS 107-1), Interim Disclosures about Fair Value of Financial Instruments which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 107-1 was effective for interim reporting periods ending after June 15, 2009. This standard affects disclosures only and accordingly did not have an impact on the Companys financial condition or results of operations.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP requires an asset acquired or liability assumed in a business combination that arises from a contingency to be recognized at fair value at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period. If the acquisition date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability shall be recognized at the acquisition date using the guidance in FAS No. 5, Accounting for Contingencies. This FSP also amends disclosure requirements. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Companys adoption of this guidance effective January 1, 2009 did not have a material effect on the Companys financial position or results of operations.
10
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(a) Recent Accounting Pronouncements (Continued)
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (FAS 165). This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, but the rules concerning recognition and disclosure of subsequent events will remain essentially unchanged. Subsequent events guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under FAS 165 as under current practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009. The adoption of FAS 165 did not have a material impact on the Companys financial condition or results of operations.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140 (FAS 166). FAS 166 amends the accounting for transfers of financial assets and also removes the concept of a qualifying special-purpose entity from FAS 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), to qualifying special-purpose entities. FAS 166 must be applied from January 1, 2010 for the Company, for both interim and annual periods. Earlier application is prohibited. FAS 166 must be applied to transfers occurring on or after the effective date. The Company is currently evaluating the potential impact of this standard, however, it is not currently expected to have a material impact on the Companys financial condition or results of operations.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167) in an effort to improve financial reporting by enterprises involved with variable interest entities. FAS 167 retains the scope of FIN 46(R) with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in FAS 166. FAS 167 amends FIN 46(R) to require an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity under revised guidelines that are more qualitative than under previous guidance and amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Before this Statement, FIN 46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred. FAS 167 also amends FIN 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement with a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. FAS 167 nullifies FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. However, the content of the enhanced disclosures required by this Statement is generally consistent with that previously required by the FSP. The Company is currently evaluating the potential impact of this standard on its financial condition and results of operations.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, A replacement of FAS 162 (FAS 168). FAS 168 specifies that the FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. For financial statements issued for interim and annual periods ending after September 15, 2009, the effective date of FAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. While the Codification does not change GAAP, it introduces a new structureone that is intended to be organized in an easily accessible, user-friendly online research system. The adoption of this standard is not expected to have a material impact on the Companys financial position or results of operations.
11
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(b) Fair Value Measurements and Total Investments
FAS 157, Fair Value Measurements (FAS 157) requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Instruments that the Company owns (long positions) are marked to bid prices and instruments that the Company has sold but not yet purchased (short positions) are marked to offer prices. Fair value measurements are not adjusted for transaction costs.
Basis of Fair Value Measurement
FAS 157 also establishes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). An assets or liabilitys classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The three levels of the fair value hierarchy under FAS 157 are described further below:
|
|
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities (unadjusted); no blockage factors. |
|
|
|
|
|
Level 2 Other observable inputs (quoted prices in markets that are not active or inputs that are observable either directly or indirectly) include quoted prices for similar assets/liabilities (adjusted) other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entitys own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
Investments Available For Sale
Investments that are considered available for sale (comprised of the Companys fixed maturities, equity securities and short-term investments) are carried at fair value. The fair values for available for sale investments are generally sourced from third parties. The fair value of fixed maturity securities is based upon quoted market values where available, evaluated bid prices provided by third party pricing services (pricing services) where quoted market values are not available, or by reference to broker or underwriter bid indications where pricing services do not provide coverage for a particular security. To the extent the Company believes current trading conditions represent distressed transactions, the Company may elect to utilize internally generated models. The pricing services use market approaches to valuations using primarily Level 2 inputs in the vast majority of valuations, or some form of discounted cash flow analysis, to obtain investment values for a small percentage of fixed maturity securities for which they provide a price. Pricing services indicate that they will only produce an estimate of fair value if there is objectively verifiable information available to produce a valuation. Standard inputs to the valuations provided by the pricing services listed in approximate order of priority for use when available include: reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The pricing services may prioritize inputs differently on any given day for any security, and not all inputs listed are available for use in the evaluation process on any given day for each security evaluation; however, the pricing services also monitor market indicators, industry and economic events. Information of this nature is a trigger to acquire further corroborating market data. When these inputs are not available, they identify buckets of similar securities (allocated by asset class types, sectors, sub-sectors, contractual cash flows/structure, and credit rating characteristics) and apply some form of matrix or other modeled pricing to determine an appropriate security value which represents their best estimate as to what a buyer in the marketplace would pay for a security in a current sale. While the Company receives values for the majority of the investment securities it holds from one or more pricing services, it is ultimately managements responsibility to determine whether the values received and recorded in the financial statements are representative of appropriate fair value measurements. It is common industry practice to utilize pricing services as a source for determining the fair values of investments where the pricing services are able to obtain sufficient market corroborating information to allow them to produce a valuation at a reporting date. In addition, in the majority
12
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(b) Fair Value Measurements and Total Investments (Continued)
of cases, although a value may be obtained from a particular pricing service for a security or class of similar securities, these values are corroborated against values provided by other pricing sources.
Broker quotations are used to value fixed maturities where prices are unavailable from pricing services due to factors specific to the security such as limited liquidity, lack of current transactions, or trades only taking place in privately negotiated transactions. These are considered Level 3 valuations, as significant inputs utilized by brokers may be difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not obtained to support a Level 2 classification.
Prices provided by independent pricing services and independent broker quotes can vary widely even for the same security. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of the Companys securities, for example, Collateralized loan obligations (CLOs), Alt-A and sub-prime mortgage backed securities, if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity and management judgment with regard to fair value. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation, thereby resulting in values which may be different than the value at which the investments may be ultimately sold.
The net unrealized gain or loss on investments, net of tax, is included in accumulated other comprehensive income (loss). Any unrealized depreciation in value considered by management to be other than temporary is charged to income in the period in which that determination is made.
Short-term investments comprise investments with a remaining maturity of less than one year and are valued using the same external factors and in the same manner as fixed maturity securities.
Equity securities include investments in open end mutual funds and shares of publicly traded alternative funds. The fair value of equity securities is based upon quoted market values (Level 1), or monthly net asset value statements provided by the investment managers upon which subscriptions and redemptions can be executed (Level 2).
All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of equities and fixed income investments are determined on the basis of average cost and amortized cost, respectively. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments. Amortization of discounts on fixed maturities includes amortization to expected recovery values for investments which have previously been recorded as other than temporarily impaired. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Prepayment fees or call premiums that are only payable to the Company when a security is called prior to its maturity, are earned when received and reflected in net investment income.
Investment In Affiliates
Investments in which the Company has significant influence over the operating and financial policies of the investee are classified as investments in affiliates on the Companys balance sheet and are accounted for under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss from such investments in its results for the period as well as its portion of movements in certain of the investee shareholders equity balances. When financial statements of the affiliate are not available on a timely basis to record the Companys share of income or loss for the same reporting periods as the Company, the most recently available financial statements are used. This lag in reporting is applied consistently until such time as timely information may become available. Significant influence is generally deemed to exist where the Company has an investment of 20% or more in the common stock of a corporation or an investment of 3% or greater in closed end funds, limited partnerships, LLCs or similar investment vehicles. The Company records its alternative and private fund affiliates on a one month and three month lag, respectively, and its operating affiliates on a three month lag. Significant influence is considered for other strategic investments on a case- by-case basis. Investments in affiliates are not subject to FAS 157 as they are not considered to be fair value measurements under FAS 157. However, impairments associated with investments in affiliates that are deemed to be other-than-temporary are calculated in
13
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(b) Fair Value Measurements and Total Investments (Continued)
accordance with FAS 157 and appropriate disclosures included within the financial statements during the period the losses are recorded.
Other investments
Contained within this asset class are investments including direct equity investments, investment funds, limited partnerships, unrated tranches of collateralized debt obligations and certain structured project finance transactions. The Company accounts for its other investments that do not have readily determinable market values at estimated fair value as it has no significant influence (as defined above) over these entities.
Fair values for other investments, principally other direct equity investments, investment funds and limited partnerships, are primarily based on the net asset value provided by the investment manager, the general partner or the respective entity, recent financial information, available market data and, in certain cases, management judgment may be required. These entities generally carry their trading positions and investments, the majority of which have underlying securities valued using Level 1 or Level 2 inputs, at fair value as determined by their respective investment managers; accordingly, these investments are generally classified as Level 2. Private equity investments are classified as Level 3. The net unrealized gain or loss on investments, net of tax, is included in Accumulated other comprehensive income (loss). Any unrealized loss in value considered by management to be other than temporary is charged to income in the period that it is determined.
Income on unrated tranches of collateralized debt obligations is reflected only to the extent the Companys principal has been fully recovered. This is not considered to be a fair value measurement under FAS 157 and accordingly these investments have been excluded from FAS 157 disclosures. These investments are carried under the cost recovery method given the uncertainty of future cash flows. The carrying value of these investments held by the Company at June 30, 2009 and December 31, 2008 was $13.1 million and $14.7 million, respectively.
The Company historically participated in structured transactions in project finance related areas under which the Company provided a cash loan supporting trade finance transactions. These transactions are accounted for in accordance with SOP 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others under which the loans are considered held for investment as the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff. Accordingly, these funded loan participations are reported in the balance sheet at outstanding principal adjusted for any allowance for loan losses as considered necessary by management. In addition, the Company invested in a payment obligation that is carried at amortized cost as described in Note 7, Other Investments. These investments are not considered to be fair value measurements under FAS 157 and accordingly they have been excluded from the FAS 157 disclosures. The carrying value of these investments held by the Company at June 30, 2009 and December 31, 2008 was $212.1 million and $80.1 million, respectively.
Cash Equivalents
Cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased. Bank deposits are not considered to be fair value measurements and as such are not subject to FAS 157 disclosures. Money market funds are classified as Level 1 as these instruments are considered actively traded; however, certificates of deposit are classified as Level 2.
14
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(c) Derivative Instruments
The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The changes in fair value of derivatives are shown in the consolidated statement of income as net realized and unrealized gains and losses on derivative instruments unless the derivatives are designated as hedging instruments. The accounting for derivatives which are designated as hedging instruments is discussed below. Changes in fair value of derivatives may create volatility in the Companys results of operations from period to period. Amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) are offset against net fair value amounts recognized in the consolidated balance sheet for derivative instruments executed with the same counterparty under the same netting arrangement.
Derivative contracts can be exchange-traded or OTC. Exchange-traded derivatives (futures and options) typically fall within Level 1 of the FAS 157 fair value hierarchy depending on whether they are deemed to be actively traded or not. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources where an understanding of the inputs utilized in arriving at the valuations is obtained. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms and specific risks inherent in the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, interest rate swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments comprise the majority of derivatives held by the Company and are typically classified within Level 2 of the fair value hierarchy.
Certain OTC derivatives trade in less liquid markets with limited pricing information, or required model inputs which are not directly market corroborated, which causes the determination of fair value for these derivatives to be inherently more subjective. Accordingly, such derivatives are classified within Level 3 of the fair value hierarchy. The valuations of less standard or liquid OTC derivatives are typically based on Level 1 and/or Level 2 inputs that can be observed in the market, as well as unobservable Level 3 inputs. Level 1 and Level 2 inputs are regularly updated to reflect observable market changes, with resulting gains and losses reflected within Level 3. Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, pricing services and/or broker or dealer quotations. The Company conducts its derivative activities in four main areas: investment related derivatives, credit derivatives, other non-investment related derivatives, and until late 2008 it also utilized weather and energy derivatives.
Investment related derivatives
The Companys direct use of derivatives includes futures, forwards, swaps and option contracts that derive their value from underlying assets, indices, reference rates or a combination of these factors. The Company uses derivatives to manage duration, credit and foreign currency exposure for its investment portfolio as well as to add value to the investment portfolio through replicating permitted investments, provided the use of such investments is incorporated into the overall portfolio evaluation and complies with the Companys investment guidelines.
The Company also uses derivative instruments, primarily interest rate swaps, to manage the interest rate exposure associated with certain assets and liabilities. These derivatives are recorded at fair value. On the date the derivative contract is entered into, the Company may designate the derivative as a hedge of the fair value of a recognized asset or liability (fair value hedge); a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset or liability (cash flow hedge); a hedge of a net investment in a foreign operation; or the Company may not designate any hedging relationship for a derivative contract.
Credit derivatives
Credit derivatives are recorded at fair value, which is determined using either models developed by the Company or third party prices and are dependent upon a number of factors, including changes in interest rates, future default rates, credit spreads, changes in credit quality, future expected recovery rates and other market factors. The change resulting from movements in credit and credit quality spreads is unrealized as the credit derivatives are not traded to realize this resultant value.
Other Non-Investment Related Derivatives
The Company may also enter into derivatives as part of contingent capital facilities including put options and interest rate swaps, or hold contracts containing embedded derivatives such as life reinsurance contracts containing guaranteed minimum income
15
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
(c) Derivative Instruments (continued)
benefits (GMIB) over the account balance upon the policyholders election to take the income benefit. The fair value of this derivative is determined based on the present value of expected cash flows. In addition, the Company has modified coinsurance and funds withheld reinsurance agreements that provide for a return based on a portfolio of fixed income securities; as such, the agreements contain embedded derivatives. The embedded derivative is bifurcated from the funds withheld balance and recorded at fair value with changes in fair value recognized in earnings through net realized and unrealized gains and losses on derivative instruments.
Weather and Energy derivatives
Fair values for the Companys remaining portfolio of natural gas contracts are determined through the use of quoted market prices when available. As quoted market prices are not widely available in the weather and electricity derivative markets, management uses available market data and internal pricing models based upon consistent statistical methodologies to estimate fair values. Estimating the fair value of instruments which do not have quoted market prices requires managements judgment in determining amounts which could reasonably be expected to be received from, or paid to, a third party in settlement of the contracts. The amounts could be materially different from the amounts that might be realized in an actual sale transaction. Fair values are subject to change in the near-term and reflect managements best estimate based on various factors including, but not limited to, actual and forecasted weather conditions, changes in commodity prices, changes in interest rates and other market factors.
Fair Value Hedges
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings (through net realized and unrealized gains and losses on derivative instruments) with any differences between the net change in fair value of the derivative and the hedged item representing the hedge ineffectiveness. Periodic derivative net coupon settlements are recorded in net investment income with the exception of hedges of Company issued debt which are recorded in interest expense.
Cash Flow Hedges
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income (AOCI) and are reclassified into earnings when the variability of the cash flow of the hedged item impacts earnings. Gains and losses on derivative contracts that are reclassified from AOCI to current period earnings are included in the line item in the consolidated statements of operations in which the cash flows of the hedged item are recorded. Any hedge ineffectiveness is recorded immediately in current period earnings as net realized and unrealized gains and losses on derivative instruments. Periodic derivative net coupon settlements are recorded in net investment income.
16
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements
Effective January 1, 2008, the Company adopted FAS 157, which requires disclosures about the Companys assets and liabilities that are carried at fair value. As required by FAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following tables set forth the Companys assets and liabilities that were accounted for at fair value as of June 30, 2009 and December 31, 2008 by level within the fair value hierarchy (for further information, see Note 2 (b) to the Consolidated Financial Statements, Significant Accounting Policies Fair Value Measurements in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and Note 2 (b) above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Quoted
Prices in
|
|
Significant
Other
|
|
Significant
|
|
Collateral
and
|
|
Balance
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
|
|
$ |
4,500,762 |
|
$ |
|
|
$ |
|
|
$ |
4,500,762 |
|
Corporate |
|
|
|
|
|
9,316,570 |
|
|
21,462 |
|
|
|
|
|
9,338,032 |
|
Residential mortgage-backed securities Agency |
|
|
|
|
|
3,080,359 |
|
|
|
|
|
|
|
|
3,080,359 |
|
Residential mortgage-backed securities Non-Agency |
|
|
|
|
|
1,107,451 |
|
|
18,938 |
|
|
|
|
|
1,126,389 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
1,461,816 |
|
|
33,289 |
|
|
|
|
|
1,495,105 |
|
Collateralized debt obligations |
|
|
|
|
|
61,689 |
|
|
503,168 |
|
|
|
|
|
564,857 |
|
Other asset-backed securities |
|
|
|
|
|
1,345,983 |
|
|
43,341 |
|
|
|
|
|
1,389,324 |
|
U.S. States and political subdivisions of the States |
|
|
|
|
|
493,107 |
|
|
|
|
|
|
|
|
493,107 |
|
Non-U.S. Sovereign Government |
|
|
|
|
|
3,630,818 |
|
|
42,585 |
|
|
|
|
|
3,673,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed maturities, at fair value |
|
$ |
|
|
$ |
24,998,555 |
|
$ |
662,783 |
|
$ |
|
|
$ |
25,661,338 |
|
Equity securities, at fair value |
|
|
15,040 |
|
|
37,440 |
|
|
|
|
|
|
|
|
52,480 |
|
Short-term investments, at fair value (7) |
|
|
|
|
|
2,004,524 |
|
|
20,614 |
|
|
|
|
|
2,025,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale |
|
$ |
15,040 |
|
$ |
27,040,519 |
|
$ |
683,397 |
|
$ |
|
|
$ |
27,738,956 |
|
Cash equivalents (1) |
|
|
2,419,330 |
|
|
556,413 |
|
|
|
|
|
|
|
|
2,975,743 |
|
Other investments (2) |
|
|
|
|
|
399,928 |
|
|
65,134 |
|
|
|
|
|
465,062 |
|
Other assets (3)(5) |
|
|
|
|
|
138,380 |
|
|
205,398 |
|
|
(234,249 |
) |
|
109,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value |
|
$ |
2,434,370 |
|
$ |
28,135,240 |
|
$ |
953,929 |
|
$ |
(234,249 |
) |
$ |
31,289,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, but not yet purchased (6) |
|
$ |
|
|
$ |
26,135 |
|
$ |
|
|
$ |
|
|
$ |
26,135 |
|
Other liabilities (4)(5) |
|
|
|
|
|
16,011 |
|
|
84,663 |
|
|
(81,947 |
) |
|
18,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value |
|
$ |
|
|
$ |
42,146 |
|
$ |
84,663 |
|
$ |
(81,947 |
) |
$ |
44,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Quoted
Prices in
|
|
Significant
Other
|
|
Significant
|
|
Collateral
and
|
|
Balance
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
|
|
$ |
3,978,342 |
|
$ |
|
|
$ |
|
|
$ |
3,978,342 |
|
Corporate |
|
|
|
|
|
9,226,097 |
|
|
62,506 |
|
|
|
|
|
9,288,603 |
|
Residential mortgage-backed securities Agency |
|
|
|
|
|
2,099,955 |
|
|
|
|
|
|
|
|
2,099,955 |
|
Residential mortgage-backed securities Non-Agency |
|
|
|
|
|
1,329,052 |
|
|
37,150 |
|
|
|
|
|
1,366,202 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
2,097,757 |
|
|
43,811 |
|
|
|
|
|
2,141,568 |
|
Collateralized debt obligations |
|
|
|
|
|
40,669 |
|
|
598,110 |
|
|
|
|
|
638,779 |
|
Other asset-backed securities |
|
|
|
|
|
2,158,602 |
|
|
121,150 |
|
|
|
|
|
2,279,752 |
|
U.S. States and political subdivisions of the States |
|
|
|
|
|
468,770 |
|
|
|
|
|
|
|
|
468,770 |
|
Non-U.S. Sovereign Government |
|
|
|
|
|
3,285,245 |
|
|
89,152 |
|
|
|
|
|
3,374,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed maturities, at fair value |
|
$ |
|
|
$ |
24,684,489 |
|
$ |
951,879 |
|
$ |
|
|
$ |
25,636,368 |
|
Equity securities, at fair value |
|
|
276,040 |
|
|
85,779 |
|
|
|
|
|
|
|
|
361,819 |
|
Short-term investments, at fair value (7) |
|
|
|
|
|
1,445,577 |
|
|
20,746 |
|
|
|
|
|
1,466,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale |
|
$ |
276,040 |
|
$ |
26,215,845 |
|
$ |
972,625 |
|
$ |
|
|
$ |
27,464,510 |
|
Cash equivalents (1) |
|
|
1,082,813 |
|
|
1,227,461 |
|
|
|
|
|
|
|
|
2,310,274 |
|
Other investments (2) |
|
|
|
|
|
299,325 |
|
|
65,354 |
|
|
|
|
|
364,679 |
|
Other assets (3)(5) |
|
|
|
|
|
219,366 |
|
|
314,906 |
|
|
(411,316 |
) |
|
122,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value |
|
$ |
1,358,853 |
|
$ |
27,961,997 |
|
$ |
1,352,885 |
|
$ |
(411,316 |
) |
$ |
30,262,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, but not yet purchased (6) |
|
$ |
|
|
$ |
26,536 |
|
$ |
|
|
$ |
|
|
$ |
26,536 |
|
Other liabilities (4)(5) |
|
|
|
|
|
53,101 |
|
|
88,088 |
|
|
(65,232 |
) |
|
75,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value |
|
$ |
|
|
$ |
79,637 |
|
$ |
88,088 |
|
$ |
(65,232 |
) |
$ |
102,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Cash equivalents balances subject to fair value measurement include certificates of deposit and money market funds. Operating cash balances are not subject to FAS 157. |
|
|
(2) |
The Other investments balance excludes certain unrated tranches of collateralized loan obligations which are carried under the cost recovery method given the uncertainty of future cash flows that totaled $13.1 million and $14.7 million at June 30, 2009 and December 31, 2008, respectively, as well as certain investments in project finance transactions and a payment obligation (as described in Note 7, Other Investments) which are carried at amortized cost that totaled $212.1 million at June 30, 2009 and $80.1 million at December 31, 2008, respectively. |
|
|
(3) |
Other assets include derivative instruments. |
|
|
(4) |
Other liabilities include derivative instruments. |
|
|
(5) |
The derivative balances included in each category above are reported on a gross basis by level with a netting adjustment presented separately in the Collateral and Counterparty Netting column. The Company often enters into different types of derivative contracts with a single counterparty and these contracts are covered under a netting agreement. In addition, the Company held cash collateral related to derivative assets of approximately $152.3 million and $346 million at June 30, 2009 and December 31, 2008, respectively. This balance is included within cash and cash equivalents and the corresponding liability to return the collateral has been offset against the derivative asset within the balance sheet as appropriate under the netting agreement. The fair value of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy. |
|
|
(6) |
Financial instruments sold, but not purchased are included within Net receivable for investments sold on the balance sheet. |
|
|
(7) |
Short-term investments consist primarily of corporate, U.S. Government and Government Agency securities, and non-U.S. Sovereign Government securities. |
|
|
18
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below present additional information about assets and liabilities measured at fair value on a recurring basis and for which Level 3 inputs were utilized to determine fair value. The table reflects gains and losses for the three and six month periods ended June 30, 2009 for all financial assets and liabilities categorized as Level 3 as of March 31, 2009 and June 30, 2009, respectively. The tables do not include gains or losses that were reported in Level 3 in prior periods for assets that were transferred out of Level 3 prior to June 30, 2009. Gains and losses for assets and liabilities classified within Level 3 in the table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, it should be noted that the following table does not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by the Company that are either economically hedged by certain exposures to the Level 3 positions or that hedge the exposures in Level 3 positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and Liabilities
|
|
|||||||||||||
|
||||||||||||||||
(U.S. dollars in thousands (Unaudited) |
|
Corporate |
|
Residential
|
|
Commercial
|
|
Collateralized
debt
|
|
Other
asset
|
|
|||||
Balance, beginning of period |
|
$ |
31,146 |
|
$ |
19,270 |
|
$ |
34,933 |
|
$ |
429,460 |
|
$ |
61,794 |
|
Realized (losses) gains |
|
|
(1,224 |
) |
|
(749 |
) |
|
(1,069 |
) |
|
(8,916 |
) |
|
507 |
|
Movement in unrealized (losses) gains |
|
|
3,545 |
|
|
2,631 |
|
|
(670 |
) |
|
102,377 |
|
|
(4,509 |
) |
Purchases, sales issuances and settlements, net |
|
|
(2,223 |
) |
|
|
|
|
(57 |
) |
|
(915 |
) |
|
|
|
Transfers into Level 3 |
|
|
1,974 |
|
|
174 |
|
|
166 |
|
|
993 |
|
|
7 |
|
Transfers out of Level 3 |
|
|
(11,716 |
) |
|
(2,388 |
) |
|
(14 |
) |
|
(19,831 |
) |
|
(14,458 |
) |
Fixed maturities to short term investments classification change |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
21,462 |
|
$ |
18,938 |
|
$ |
33,289 |
|
$ |
503,168 |
|
$ |
43,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) above relating to instruments still held at the reporting date |
|
$ |
2,425 |
|
$ |
2,091 |
|
$ |
(734 |
) |
$ |
89,027 |
|
$ |
(4,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and Liabilities
|
|
||||||||||
|
|
|
|
||||||||||
(U.S. dollars in thousands (Unaudited) |
|
Non-U.S.
Sovereign
|
|
Short-term Investments |
|
Other investments |
|
Derivative Contracts - Net |
|
||||
Balance, beginning of period |
|
$ |
45,719 |
|
$ |
13,830 |
|
$ |
64,391 |
|
$ |
186,448 |
|
Realized (losses) gains |
|
|
912 |
|
|
(4,167 |
) |
|
|
|
|
2,823 |
|
Movement in unrealized (losses) gains |
|
|
847 |
|
|
7,348 |
|
|
1,720 |
|
|
(73,454 |
) |
Purchases, sales issuances and settlements, net |
|
|
15,975 |
|
|
471 |
|
|
(977 |
) |
|
4,918 |
|
Transfers into Level 3 |
|
|
|
|
|
188 |
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
(17,960 |
) |
|
(4 |
) |
|
|
|
|
|
|
Fixed maturities to short term investments classification change |
|
|
(2,908 |
) |
|
2,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
42,585 |
|
$ |
20,614 |
|
$ |
65,134 |
|
$ |
120,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) above relating to instruments still held at the reporting date |
|
$ |
(775 |
) |
$ |
5,485 |
|
$ |
1,720 |
|
$ |
(73,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and Liabilities
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands (Unaudited) |
|
Corporate |
|
Residential
|
|
Commercial
|
|
Collateralized
debt
|
|
Other
asset backed
|
|
|||||
Balance, beginning of period |
|
$ |
62,506 |
|
$ |
37,150 |
|
$ |
43,811 |
|
$ |
598,110 |
|
$ |
121,150 |
|
Realized (losses) gains |
|
|
(5,514 |
) |
|
(2,621 |
) |
|
(4,294 |
) |
|
(29,518 |
) |
|
(2,570 |
) |
Movement in unrealized (losses) gains |
|
|
6,042 |
|
|
2,116 |
|
|
7,551 |
|
|
(19,525 |
) |
|
(6,789 |
) |
Purchases, sales issuances and settlements, net |
|
|
(4,071 |
) |
|
641 |
|
|
(5,260 |
) |
|
(11,826 |
) |
|
(5,481 |
) |
Transfers into Level 3 |
|
|
1,455 |
|
|
200 |
|
|
3,082 |
|
|
1,044 |
|
|
2 |
|
Transfers out of Level 3 |
|
|
(38,256 |
) |
|
(18,548 |
) |
|
(11,601 |
) |
|
(35,117 |
) |
|
(62,971 |
) |
Fixed maturities to short term investments classification change |
|
|
(700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
21,462 |
|
$ |
18,938 |
|
$ |
33,289 |
|
$ |
503,168 |
|
$ |
43,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) above relating to instruments still held at the reporting date |
|
$ |
4,073 |
|
$ |
1,970 |
|
$ |
5,741 |
|
$ |
(36,681 |
) |
$ |
(9,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and Liabilities
|
|
||||||||||
(U.S. dollars in thousands (Unaudited) |
|
Non-U.S. Sovereign Government |
|
Short-term Investments |
|
Other investments |
|
Derivative Contracts - Net |
|
||||
Balance, beginning of period |
|
$ |
89,152 |
|
$ |
20,746 |
|
$ |
65,354 |
|
$ |
226,818 |
|
Realized (losses) gains |
|
|
|
|
|
(2,827 |
) |
|
|
|
|
2,823 |
|
Movement in unrealized (losses) gains |
|
|
(1,192 |
) |
|
3,684 |
|
|
(5,898 |
) |
|
(118,803 |
) |
Purchases, sales issuances and settlements, net |
|
|
16,395 |
|
|
(5,073 |
) |
|
5,678 |
|
|
9,897 |
|
Transfers into Level 3 |
|
|
|
|
|
418 |
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
(58,804 |
) |
|
|
|
|
|
|
|
|
|
Fixed maturities to short term investments classification change |
|
|
(2,966 |
) |
|
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
42,585 |
|
$ |
20,614 |
|
$ |
65,134 |
|
$ |
120,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) above relating to instruments still held at the reporting date |
|
$ |
(1,026 |
) |
$ |
2,700 |
|
$ |
(5,898 |
) |
$ |
(118,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements (Continued)
Level 3 Gains and Losses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands)
|
|
Fixed
|
|
Short-term
|
|
Other
|
|
Derivative
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance, beginning of period |
|
$ |
1,221,766 |
|
$ |
9,569 |
|
$ |
52,338 |
|
$ |
52,446 |
|
Realized (losses) gains |
|
|
(53,062 |
) |
|
|
|
|
|
|
|
24,762 |
|
Movement in unrealized (losses) gains |
|
|
(59,036 |
) |
|
(94 |
) |
|
(4,159 |
) |
|
(28,544 |
) |
Purchases, issuances and settlements |
|
|
165,601 |
|
|
(1,918 |
) |
|
13,414 |
|
|
6,687 |
|
Transfers in and/or out of Level 3 |
|
|
252,471 |
|
|
886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,527,740 |
|
$ |
8,443 |
|
$ |
61,593 |
|
$ |
55,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) gains above relating to instruments still held at the reporting date |
|
$ |
(10,726 |
) |
$ |
19 |
|
$ |
(4,159 |
) |
$ |
(28,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Assets and
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands)
|
|
Fixed
|
|
Short-term
|
|
Other
|
|
Derivative
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance, beginning of period |
|
$ |
1,385,601 |
|
$ |
15,606 |
|
$ |
40,354 |
|
$ |
12,283 |
|
Realized (losses) gains |
|
|
(132,363 |
) |
|
13 |
|
|
|
|
|
26,843 |
|
Movement in unrealized (losses) gains |
|
|
(216,020 |
) |
|
(181 |
) |
|
(3,494 |
) |
|
6,189 |
|
Purchases, issuances and settlements |
|
|
142,552 |
|
|
(6,105 |
) |
|
24,733 |
|
|
10,036 |
|
Transfers in and/or out of Level 3 |
|
|
347,970 |
|
|
(890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,527,740 |
|
$ |
8,443 |
|
$ |
61,593 |
|
$ |
55,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total (losses) gains above relating to instruments still held at the reporting date |
|
$ |
(226,154 |
) |
$ |
|
|
$ |
(3,494 |
) |
$ |
6,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets include securities for which the values were obtained from brokers where either significant inputs were utilized in determining the value that were difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not available to support a Level 2 classification. Level 3 assets also include securities for which the Company determined current market trades represent distressed transactions, and accordingly, the Company determined fair value using certain inputs that are not observable to market participants. Transfers from Level 3 to Level 2 during the quarter ended June 30, 2009, were primarily as a result of the Company utilizing pricing services containing significant observable inputs over other Level 3 valuations for certain assets.
Fixed maturities and short term investments
At June 30, 2009, a significant component of Level 3 assets represented Core collateralized debt obligations (CDOs) (defined by the Company as investments in non-mortgage CDOs), totaling $520.4 million. Certain asset classes, primarily consisting of privately placed investments, did not have sufficient market corroborated information available to allow a pricing service to provide a price and accordingly the valuation was determined by the use of broker quotes. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments as is currently the case for certain CDOs, for which sufficient information, such as cash flows or other security structure or market information, was not available to enable a third party pricing service to provide a price and as such valuation is determined based on broker quotes for which sufficient information regarding the specific inputs utilized by the broker in determining the fair value was not obtained to support a Level 2 classification. In addition, as noted below, for certain CDO holdings, the Company previously determined in late 2008 that internal models would be more appropriate and better representative of the fair value of these securities given that recent valuations were as a result of broker bids or valuation models that used recent market trading
21
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements (Continued)
which the Company considered to be distressed transactions. The Companys holdings in securities exposed to sub-prime mortgages are generally not based on quoted prices for identical securities, they are based on model-derived valuations from pricing services in which all significant inputs and significant value drivers are considered to be observable in active markets, and these securities continue to be classified within Level 2.
Of the total CDO holdings of $582.3 million at June 30, 2009, the Company has determined that for a portion of such CDO holdings with a fair value of $450.5 million and a par value of $807.5 million, valuations were as a result of broker bids that used recent market trading which the Company considered to be distressed transactions. The corresponding fair value and par value of such CDO holdings at December 31, 2008, was $483.2 million and $801.5 million, respectively. As of June 30, 2009, the market for CDOs remained extremely illiquid due to a number of factors including risk aversion and reduction among institutional buyers. As a result, the Company believes that current broker bids reflect loss expectations that do not reflect fair values at which willing buyers and sellers would transact. The Company continues to believe that internal models would be more appropriate and better representative of the fair value at which these securities would be sold in an orderly transaction.
At June 30, 2009, the Companys internal models resulted in a fair value that was $154.7 million higher than those that would have been determined by utilizing third party values sourced through brokers or pricing services. This variance represents 19.2% of par value of these holdings, which based on the portfolios spread duration of 4.9 years corresponds to an approximate 390 basis point decrease relative to the spread levels implied in current market levels of trading which management believes are distressed trades. The Company believes that, in the aggregate, this is appropriate as compared to current estimates of market credit spreads.
The Companys approach for determining its CLO portfolio fair value was to apply a 60% weighting to three scenarios that the Company considered as extreme, and 40% weighting to a scenario that the Company viewed as likely. This resulted in a valuation that was based primarily on extreme loss outcomes, which the Company does not believe are likely, but recognizes as a possibility that an orderly market would price into its credit assessments given the level of uncertainty currently in the market. The individual components can be summarized as follows:
60% extreme loss outcomes:
|
|
|
|
|
20% weighting to current third party valuations, with a fair value of $295.8 million, which the Company believes includes the current market liquidity premium; |
|
|
|
|
|
20% weighting to current cash flow estimates discounted at managements view of current market spreads, with a fair value of $277.0 million, which the Company believes includes the current market liquidity premium; |
|
|
|
|
|
20% weighting to current cash flow estimates, adjusted by a multiple of the current underlying loss estimates, discounted at the coupon of the securities, with a further reduction in value representing a liquidity premium equal to double the prevailing total credit spread levels of the most severe previous CLO market deterioration, which resulted in a fair value of $462.4 million; and |
40% likely loss outcomes:
|
|
|
|
|
40% weighting to likely loss outcomes, representing current cash flow estimates discounted at the coupon of the securities, with a further reduction in value representing a liquidity premium equal to the prevailing credit spread levels of the most severe previous CLO market deterioration, which resulted in a fair value of $608.7 million. |
While a number of the Level 3 investments have been written down as a result of the Companys impairment analysis, the Company continues to report, at June 30, 2009, gross unrealized losses of $493.2 million related to Level 3 available-for-sale investments. Management completed a detailed review in conjunction with its external investment managers and third party advisors, of the Companys underlying sub-prime and related residential mortgage exposures, as well as a consideration of the broader structured credit market, and concluded that the unrealized gains and losses in these asset classes are the result of a decrease in value due to technical spreads widening and broader market sentiment, rather than fundamental collateral deterioration and are temporary in nature.
The remainder of the Level 3 assets relate to private equity investments where the nature of the underlying assets held by the investee include positions such as private business ventures and are such that significant Level 3 inputs are utilized in the valuation, and certain derivative positions.
22
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements (Continued)
Other investments
Included within the Other Investments component of the Companys Level 3 valuations are private investments where the Company is not deemed to have significant influence over the investee. The fair value of these investments is based upon net asset values received from the investment manager or general partner of the respective entity. The nature of the underlying investments held by the investee which form the basis of the net asset value include assets such as private business ventures and are such that significant Level 3 inputs are utilized in the determination of the individual underlying holding values and accordingly the fair value of the Companys investment in each entity is classified within Level 3. The Company also incorporates factors such as the most recent financial information received, the values at which capital transactions with the investee take place, and managements judgment regarding whether any adjustments should be made to the net asset value in recording the fair value of each position which are recorded on a one quarter lag basis as a result.
Derivative instruments
Derivative instruments classified within Level 3 include: (i) certain interest rate swaps where the duration of the contract the Company holds exceeds that of the longest term on a market observable input, (ii) weather and energy derivatives, (iii) GMIB benefits embedded within a certain reinsurance contract, (iv) a put option included within the Companys remaining contingent capital facility and (v) credit derivatives sold providing protection on senior tranches of structured finance transactions where the value is obtained directly from the investment bank counterparty for which sufficient information regarding the inputs utilized in the valuation was not obtained to support a Level 2 classification. The majority of inputs utilized in the valuations of these types of derivative contracts are considered Level 1 or Level 2; however, each valuation includes at least one Level 3 input that was significant to the valuation and accordingly the values are disclosed within Level 3.
In addition, see Item 8, Note 2 to the Consolidated Financial Statements, Significant Accounting Policies in the Companys Annual Report on Form 10-K for a general discussion of types of assets and liabilities that are classified within Level 3 of the fair value hierarchy as well as the Companys valuation policies for such instruments.
Financial Instruments Not Carried at Fair Value
FAS 107, Disclosures about Fair Value of Financial Instruments (FAS 107) requires additional disclosure of fair value information for financial instruments not carried at fair value. Certain financial instruments, particularly insurance contracts, are excluded from the fair value disclosure requirements of FAS 107. The carrying values of cash and cash equivalents, accrued investment income, net receivable from investments sold, other assets, net payable for investments purchased, other liabilities and other financial instruments not included below approximated their fair values. The following table includes financial instruments for which the carrying amount differs from the estimated fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
As of December 31, 2008 |
|
||||||||
(U.S. dollars in
thousands)
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
$ |
690.4 |
|
$ |
679.1 |
|
$ |
459.5 |
|
$ |
443.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
$ |
690.4 |
|
$ |
679.1 |
|
$ |
459.5 |
|
$ |
443.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit Liabilities |
|
$ |
2,436.8 |
|
$ |
1,963.1 |
|
$ |
2,711.0 |
|
$ |
1,714.9 |
|
Notes payable and debt |
|
|
2,445.2 |
|
|
2,038.8 |
|
|
3,189.7 |
|
|
1,215.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
$ |
4,882.0 |
|
$ |
4,001.9 |
|
$ |
5,900.7 |
|
$ |
2,929.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable series C preference ordinary shares |
|
$ |
182.7 |
|
$ |
77.6 |
|
$ |
500.0 |
|
$ |
110.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments includes direct equity investments, investment funds, limited partnerships, certain structured project finance transactions, and unrated tranches of collateralized debt obligations. Items included in other investments are carried at fair value except as mentioned below.
23
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fair Value Measurements (Continued)
The Company historically participated in project finance related loan transactions. These transactions are accounted for in accordance with SOP 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others under which the loans are considered held for investment as the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff. Accordingly, these funded loan participations are reported in the balance sheet at outstanding principal adjusted for any allowance for loan losses as considered necessary by management. In addition, the Company invested in a payment obligation that is carried at amortized cost as described in Note 7, Other Investments. These investments are not considered to be fair value measurements under FAS 157 and accordingly they have been excluded from the FAS 157 disclosures. The fair value of these investments held by the Company is determined through use of internal models utilizing reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The carrying value and estimated fair value of these investments were $212.1 million and $200.8 million as of June 30, 2009 and were $80.1 million and $63.9 million as of December 31, 2008, respectively.
Unrated tranches of CDOs are carried under the cost recovery method given the uncertainty of future cash flows and accordingly it is not practicable to determine an estimate of the fair value of these positions. The carrying value of these investments held by the Company at June 30, 2009 and December 31, 2008 was $13.1 million and $14.7 million, respectively.
Deposit liabilities include obligations under structured insurance and reinsurance transactions as well as funding agreements issued. For purposes of fair value disclosures, The Company determines the fair value of the deposit liabilities by assuming a discount rate equal to the appropriate U.S. Treasury rate plus 902 basis points and the appropriate U.S. Treasury Rate plus 427 basis points at June 30, 2009 and December 31, 2008, respectively, to determine the present value of projected contractual liability payments through final maturity. The discount rate incorporates the Companys own credit risk into the determination of estimated fair value. The carrying value and estimated fair value of these liabilities were $2.4 million and $2.0 million as of June 30, 2009 and were $2.7 million and $1.7 million as of December 31, 2008, respectively.
The fair value of the Companys notes payable and debt outstanding are determined based on quoted market prices. The carrying value and estimated fair value of notes payable and debt outstanding were $2.4 billion and $2.0 billion as of June 30, 2009 and were $3.2 billion and $1.2 billion as of December 31, 2008, respectively.
The fair value of the Companys redeemable series C preference ordinary shares outstanding is determined based on indicative quotes provided by brokers. The carrying value and estimated fair value of the redeemable series C preference ordinary shares outstanding were $182.7 million and $77.6 million as of June 30, 2009 and were $500.0 million and $110.0 million as of December 31, 2008, respectively.
There are no significant concentrations of credit risk within the Companys financial instruments as defined in FAS 107.
24
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information
Following a streamlining of the Companys operating segments in the first quarter of 2009, the Company is organized into three operating segments: Insurance, Reinsurance and Life Operations in addition to a Corporate segment that includes the general investment and financing operations of the Company.
The Company evaluates the performance for both the Insurance and Reinsurance segments based on underwriting profit and contribution from its Life Operations segment. Other items of revenue and expenditure of the Company are not evaluated at the segment level for reporting purposes. In addition, the Company does not allocate investment assets by segment for its property and casualty (P&C) operations. Investment assets related to the Companys Life Operations and certain structured products included in the Insurance, Reinsurance and Corporate segments are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from each of these segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in
thousands, except ratios)
|
|
Insurance |
|
Reinsurance |
|
Total P&C |
|
Life
|
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross premiums written |
|
$ |
1,124,220 |
|
$ |
376,970 |
|
$ |
1,501,190 |
|
$ |
150,711 |
|
$ |
|
|
$ |
1,651,901 |
|
Net premiums written |
|
|
766,606 |
|
|
311,672 |
|
|
1,078,278 |
|
|
140,674 |
|
|
|
|
|
1,218,952 |
|
Net premiums earned |
|
|
881,490 |
|
|
400,259 |
|
|
1,281,749 |
|
|
147,951 |
|
|
|
|
|
1,429,700 |
|
Net losses incurred |
|
|
598,784 |
|
|
180,844 |
|
|
779,628 |
|
|
174,588 |
|
|
|
|
|
954,216 |
|
Acquisition expenses |
|
|
112,430 |
|
|
85,302 |
|
|
197,732 |
|
|
25,540 |
|
|
|
|
|
223,272 |
|
Operating expenses (1) |
|
|
167,931 |
|
|
47,019 |
|
|
214,950 |
|
|
4,269 |
|
|
|
|
|
219,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
2,345 |
|
$ |
87,094 |
|
$ |
89,439 |
|
$ |
(56,446 |
) |
$ |
|
|
$ |
32,993 |
|
Net investment income |
|
|
|
|
|
|
|
|
218,490 |
|
|
82,855 |
|
|
|
|
|
301,345 |
|
Net results structured products (2) |
|
|
4,093 |
|
|
6,172 |
|
|
10,265 |
|
|
|
|
|
5,019 |
|
|
15,284 |
|
Net fee income and other (3) |
|
|
(3,220 |
) |
|
545 |
|
|
(2,675 |
) |
|
123 |
|
|
|
|
|
(2,552 |
) |
Net realized (losses) gains on investments |
|
|
|
|
|
|
|
|
(34,570 |
) |
|
(51,663 |
) |
|
5,803 |
|
|
(80,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C and Life Operations |
|
|
|
|
|
|
|
$ |
280,949 |
|
$ |
(25,131 |
) |
$ |
10,822 |
|
$ |
266,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized gains (losses) on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
969 |
|
$ |
969 |
|
Net income (loss) from financial, investment and other operating affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,753 |
|
|
54,753 |
|
Exchange losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,221 |
|
|
145,221 |
|
Corporate operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,219 |
|
|
32,219 |
|
Interest expense (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,912 |
|
|
42,912 |
|
Non-controlling interest in net income (loss) of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
(40 |
) |
Income taxes and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,509 |
|
$ |
16,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(170,277 |
) |
$ |
85,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
67.9 |
% |
|
45.2 |
% |
|
60.8 |
% |
|
|
|
|
|
|
|
|
|
Underwriting expense ratio |
|
|
31.8 |
% |
|
33.0 |
% |
|
32.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.7 |
% |
|
78.2 |
% |
|
93.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(1) |
Operating expenses exclude corporate operating expenses, shown separately. |
|
|
(2) |
The net results from P&C and Corporate structured products includes net investment income, interest expense and operating expenses of $19.4 million and $7.6 million, $9.1 million and $2.2 million, and nil and $0.4, respectively. |
|
|
(3) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
(4) |
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance, Reinsurance, and Corporate segments. |
|
|
(5) |
Ratios are based on net premiums earned from property and casualty operations. |
25
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in
thousands, except ratios)
|
|
Insurance |
|
Reinsurance |
|
Total P&C |
|
Life
|
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross premiums written |
|
$ |
1,388,771 |
|
$ |
397,460 |
|
$ |
1,786,231 |
|
$ |
161,251 |
|
$ |
|
|
$ |
1,947,482 |
|
Net premiums written |
|
|
1,084,820 |
|
|
274,647 |
|
|
1,359,467 |
|
|
150,933 |
|
|
|
|
|
1,510,400 |
|
Net premiums earned |
|
|
1,018,350 |
|
|
490,437 |
|
|
1,508,787 |
|
|
172,935 |
|
|
|
|
|
1,681,722 |
|
Net losses incurred |
|
|
653,822 |
|
|
284,763 |
|
|
938,585 |
|
|
209,725 |
|
|
|
|
|
1,148,310 |
|
Acquisition expenses |
|
|
113,877 |
|
|
106,528 |
|
|
220,405 |
|
|
25,832 |
|
|
|
|
|
246,237 |
|
Operating expenses (1) |
|
|
178,282 |
|
|
45,159 |
|
|
223,441 |
|
|
9,299 |
|
|
|
|
|
232,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
72,369 |
|
$ |
53,987 |
|
$ |
126,356 |
|
$ |
(71,921 |
) |
$ |
|
|
$ |
54,435 |
|
Net investment income |
|
|
|
|
|
|
|
|
298,128 |
|
|
98,058 |
|
|
|
|
|
396,186 |
|
Net investment results structured products (2) |
|
|
12,366 |
|
|
2,579 |
|
|
14,945 |
|
|
|
|
|
6,203 |
|
|
21,148 |
|
Net fee income and other (3) |
|
|
1,389 |
|
|
471 |
|
|
1,860 |
|
|
136 |
|
|
|
|
|
1,996 |
|
Net realized gains (losses) on investments |
|
|
|
|
|
|
|
|
(24,445 |
) |
|
11,792 |
|
|
14,693 |
|
|
2,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C and Life Operations |
|
|
|
|
|
|
|
$ |
416,844 |
|
$ |
38,065 |
|
$ |
20,896 |
|
$ |
475,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized (losses) gains on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,124 |
|
$ |
8,124 |
|
Net (loss) income from financial, investment and other operating affiliates (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,336 |
) |
|
(89,336 |
) |
Exchange losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,936 |
|
|
7,936 |
|
Corporate operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,104 |
|
|
47,104 |
|
Interest expense (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,077 |
|
|
50,077 |
|
Income taxes and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,625 |
|
|
51,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(217,058 |
) |
$ |
237,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
64.2 |
% |
|
58.1 |
% |
|
62.2 |
% |
|
|
|
|
|
|
|
|
|
Underwriting expense ratio |
|
|
28.7 |
% |
|
30.9 |
% |
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.9 |
% |
|
89.0 |
% |
|
91.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(1) |
Operating expenses exclude corporate operating expenses, shown separately. |
|
|
(2) |
The net results from P&C and corporate structured products includes net investment income, interest expense and operating expenses of $25.1 million and $19.1 million, $3.7 million and $11.7 million, and $6.5 million and $1.2 million, respectively. |
|
|
(3) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
(4) |
Net loss from investment fund and operating affiliates for the three months ended June 30, 2008 includes additional losses totaling $82.4 million related to the reinsurance and guarantee agreements with Syncora. |
|
|
(5) |
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance, Reinsurance, and Corporate segments. |
|
|
(6) |
Ratios are based on net premiums earned from property and casualty operations. The underwriting expense ratio excludes exchange gains and losses. |
26
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in
thousands, except ratios)
|
|
Insurance |
|
Reinsurance |
|
Total P&C |
|
Life
|
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross premiums written |
|
$ |
2,215,465 |
|
$ |
1,163,953 |
|
$ |
3,379,418 |
|
$ |
285,823 |
|
$ |
|
|
$ |
3,665,241 |
|
Net premiums written |
|
|
1,598,774 |
|
|
984,815 |
|
|
2,583,589 |
|
|
262,259 |
|
|
|
|
|
2,845,848 |
|
Net premiums earned |
|
|
1,791,601 |
|
|
811,835 |
|
|
2,603,436 |
|
|
277,785 |
|
|
|
|
|
2,881,221 |
|
Net losses incurred |
|
|
1,213,998 |
|
|
355,913 |
|
|
1,569,911 |
|
|
332,547 |
|
|
|
|
|
1,902,458 |
|
Acquisition expenses |
|
|
217,842 |
|
|
181,026 |
|
|
398,868 |
|
|
42,623 |
|
|
|
|
|
441,491 |
|
Operating expenses (1) |
|
|
347,259 |
|
|
94,107 |
|
|
441,366 |
|
|
8,110 |
|
|
|
|
|
449,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
12,502 |
|
$ |
180,789 |
|
$ |
193,291 |
|
$ |
(105,495 |
) |
$ |
|
|
$ |
87,796 |
|
Net investment income |
|
|
|
|
|
|
|
|
460,656 |
|
|
160,377 |
|
|
|
|
|
621,033 |
|
Net results structured products (2) |
|
|
7,214 |
|
|
14,596 |
|
|
21,810 |
|
|
|
|
|
9,664 |
|
|
31,474 |
|
Net fee income and other (3) |
|
|
(4,220 |
) |
|
2,596 |
|
|
(1,624 |
) |
|
174 |
|
|
|
|
|
(1,450 |
) |
Net realized gains (losses) on investments |
|
|
|
|
|
|
|
|
(197,383 |
) |
|
(126,313 |
) |
|
(8,671 |
) |
|
(332,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Contribution from P&C and Life Operations |
|
|
|
|
|
|
|
$ |
476,750 |
|
$ |
(71,257 |
) |
$ |
993 |
|
$ |
406,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized (losses) gains on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(438 |
) |
$ |
(438 |
) |
Net income (loss) from financial, investment and other operating affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,532 |
|
|
17,532 |
|
Exchange losses (gains) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,597 |
|
|
120,597 |
|
Corporate operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,931 |
|
|
58,931 |
|
Interest expense (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,527 |
|
|
92,527 |
|
Non-controlling interest in net income (loss) of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
(40 |
) |
Income taxes and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,927 |
|
|
62,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(316,855 |
) |
$ |
88,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
67.8 |
% |
|
43.8 |
% |
|
60.3 |
% |
|
|
|
|
|
|
|
|
|
Underwriting expense ratio |
|
|
31.5 |
% |
|
33.9 |
% |
|
32.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.3 |
% |
|
77.7 |
% |
|
92.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(1) |
Operating expenses exclude corporate operating expenses, shown separately. |
|
|
(2) |
The net results from P&C and Corporate structured products includes net investment income, interest expense and operating expenses of $39.7 million and $15.6 million, $17.9 million and $5.1 million, and nil and $0.8 million, respectively. |
|
|
(3) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
(4) |
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance, Reinsurance, and Corporate segments. |
|
|
(5) |
Ratios are based on net premiums earned from property and casualty operations. |
27
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in
thousands, except ratios)
|
|
Insurance |
|
Reinsurance |
|
Total P&C |
|
Life
|
|
Corporate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross premiums written |
|
$ |
3,017,120 |
|
$ |
1,470,005 |
|
$ |
4,487,125 |
|
$ |
396,209 |
|
$ |
|
|
$ |
4,883,334 |
|
Net premiums written |
|
|
2,268,672 |
|
|
1,227,348 |
|
|
3,496,020 |
|
|
375,146 |
|
|
|
|
|
3,871,166 |
|
Net premiums earned |
|
|
2,026,752 |
|
|
1,034,815 |
|
|
3,061,567 |
|
|
332,517 |
|
|
|
|
|
3,394,084 |
|
Net losses incurred |
|
|
1,338,634 |
|
|
600,844 |
|
|
1,939,478 |
|
|
406,024 |
|
|
|
|
|
2,345,502 |
|
Acquisition expenses |
|
|
239,713 |
|
|
222,872 |
|
|
462,585 |
|
|
49,949 |
|
|
|
|
|
512,534 |
|
Operating expenses (1) |
|
|
332,775 |
|
|
90,517 |
|
|
423,292 |
|
|
17,382 |
|
|
|
|
|
440,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
115,630 |
|
$ |
120,582 |
|
$ |
236,212 |
|
$ |
(140,838 |
) |
$ |
|
|
$ |
95,374 |
|
Net investment income |
|
|
|
|
|
|
|
|
606,169 |
|
|
195,193 |
|
|
|
|
|
801,362 |
|
Net investments results structured products (2) |
|
|
3,173 |
|
|
13,403 |
|
|
16,576 |
|
|
|
|
|
13,926 |
|
|
30,502 |
|
Net fee income and other (3) |
|
|
(1,159 |
) |
|
1,234 |
|
|
75 |
|
|
200 |
|
|
|
|
|
275 |
|
Net realized gains (losses) on investments |
|
|
|
|
|
|
|
|
(42,750 |
) |
|
6,748 |
|
|
(64,209 |
) |
|
(100,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C and Life Operations |
|
|
|
|
|
|
|
$ |
816,282 |
|
$ |
61,303 |
|
$ |
(50,283 |
) |
$ |
827,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized gains (losses) on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,806 |
|
$ |
52,806 |
|
Net (loss) income from financial, investment and other operating affiliates (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,984 |
) |
|
(56,984 |
) |
Exchange losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,681 |
|
|
75,681 |
|
Corporate operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,030 |
|
|
83,030 |
|
Interest expense (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,442 |
|
|
99,442 |
|
Income taxes & other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,747 |
|
|
82,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(395,361 |
) |
$ |
482,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
66.0 |
% |
|
58.1 |
% |
|
63.3 |
% |
|
|
|
|
|
|
|
|
|
Underwriting expense ratio |
|
|
28.3 |
% |
|
30.2 |
% |
|
29.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.3 |
% |
|
88.3 |
% |
|
92.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(1) |
Operating expenses exclude corporate operating expenses, shown separately. |
|
|
(2) |
The net results from P&C and corporate structured products includes net investment income, interest expense and operating expenses of $59.2 million and $79.1 million, $31.3 million and $58.8 million, and $11.3 million and $6.3, respectively. |
|
|
(3) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business |
|
|
(4) |
Net loss from investment fund and operating affiliates for the six months ended June 30, 2008 includes additional losses totaling $87.1 million related to the reinsurance and guarantee agreements with Syncora. |
|
|
(5) |
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance, Reinsurance, and Corporate segments. |
|
|
(6) |
Ratios are based on net premiums earned from property and casualty operations. The underwriting expense ratio excludes exchange gains and losses. |
28
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information (Continued)
The following tables summarize the Companys net premiums earned by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009:
|
|
Insurance |
|
Reinsurance |
|
Life
|
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
P&C Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines |
|
$ |
311,071 |
|
$ |
57,115 |
|
$ |
|
|
$ |
368,186 |
|
Casualty other lines |
|
|
160,653 |
|
|
65,680 |
|
|
|
|
|
226,333 |
|
Property catastrophe |
|
|
1,760 |
|
|
75,478 |
|
|
|
|
|
77,238 |
|
Other property |
|
|
104,492 |
|
|
140,336 |
|
|
|
|
|
244,828 |
|
Marine, energy, aviation and satellite |
|
|
139,835 |
|
|
20,333 |
|
|
|
|
|
160,168 |
|
Other specialty lines (1) |
|
|
153,990 |
|
|
|
|
|
|
|
|
153,990 |
|
Other (2) |
|
|
4,621 |
|
|
39,944 |
|
|
|
|
|
44,565 |
|
Structured indemnity |
|
|
5,068 |
|
|
1,373 |
|
|
|
|
|
6,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total P&C Operations |
|
$ |
881,490 |
|
$ |
400,259 |
|
$ |
|
|
$ |
1,281,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life |
|
$ |
|
|
$ |
|
|
$ |
114,560 |
|
$ |
114,560 |
|
Annuity |
|
|
|
|
|
|
|
|
33,391 |
|
|
33,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Operations |
|
$ |
|
|
$ |
|
|
$ |
147,951 |
|
$ |
147,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
881,490 |
|
$ |
400,259 |
|
$ |
147,951 |
|
$ |
1,429,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other specialty lines within the Insurance segment includes: environmental, programs, equine, warranty, specie, middle markets and excess and surplus lines. |
|
|
|
|
(2) |
Other includes credit and surety, whole account contracts and other lines. |
29
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Segment Information (Continued)
The following tables summarize the Companys net premiums earned by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009:
|
|
Insurance |
|
Reinsurance |
|
Life
|
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
P&C Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines |
|
$ |
627,260 |
|
$ |
110,237 |
|
$ |
|
|
$ |
737,497 |
|
Casualty other lines |
|
|
315,158 |
|
|
137,335 |
|
|
|
|
|
452,493 |
|
Property catastrophe |
|
|
1,762 |
|
|
146,174 |
|
|
|
|
|
147,936 |
|
Other property |
|
|
215,090 |
|
|
283,096 |
|
|
|
|
|
498,186 |
|
Marine, energy, aviation and satellite |
|
|
287,483 |
|
|
41,614 |
|
|
|
|
|
329,097 |
|
Other specialty lines (1) |
|
|
324,087 |
|
|
|
|
|
|
|
|
324,087 |
|
Other (2) |
|
|
10,831 |
|
|
92,037 |
|
|
|
|
|
102,868 |
|
Structured indemnity |
|
|
9,930 |
|
|
1,342 |
|
|
|
|
|
11,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total P&C Operations |
|
$ |
1,791,601 |
|
$ |
811,835 |
|
$ |
|
|
$ |
2,603,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life |
|
$ |
|
|
$ |
|
|
$ |
214,967 |
|
$ |
214,967 |
|
Annuity |
|
|
|
|
|
|
|
|
62,818 |
|
|
62,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Operations |
|
$ |
|
|
$ |
|
|
$ |
277,785 |
|
$ |
277,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,791,601 |
|
$ |
811,835 |
|
$ |
277,785 |
|
$ |
2,881,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other specialty lines within the Insurance segment includes: environmental, programs, equine, warranty, specie, middle markets and excess and surplus lines. |
|
|
|
|
(2) |
Other includes credit and surety, whole account contracts and other lines. |
30
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Restructuring and Asset Impairment Charges
During the third quarter of 2008 and during the first quarter of 2009, expense reduction initiatives were implemented in order to reduce the Companys operating expenses. The goal of these initiatives was to achieve enhanced efficiency and an overall reduction in operating expenses by streamlining processes across all geographic locations, with a primary emphasis on corporate functions. To date, this has been achieved through redundancies, increased outsourcing and the cessation of certain projects and activities. Charges have been recognized and accrued as restructuring and asset impairment charges and allocated to the Companys reportable segments in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities and FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Other costs that do not meet the criteria for accrual are being expensed as restructuring charges as they are incurred. Restructuring charges relate mainly to employee termination benefits as well as costs associated with ceasing to use certain leased property accounted for as operating leases. Asset impairment charges relate primarily to the write-off of certain IT system and equipment costs previously capitalized. The Company recognizes an asset impairment charge when net proceeds expected from disposition of an asset are less than the carrying value of the asset and reduces the carrying amount of the asset to its estimated fair value. Restructuring and asset impairment charges noted above have been recorded in the Companys income statement under Operating Expenses.
Total estimated costs the Company expects to incur in connection with the restructuring initiatives noted above as well as costs incurred during the six months ended June 30, 2009 and total cumulative costs incurred through June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Total
|
|
Costs
Incurred
|
|
Costs
Incurred During the Six Months Ended
|
|
Cumulative
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Employee Termination Benefits |
|
$ |
87.4 |
|
$ |
9.5 |
|
$ |
27.6 |
|
$ |
71.4 |
|
Lease Termination and Other Costs |
|
|
14.6 |
|
|
0.8 |
|
|
7.0 |
|
|
13.6 |
|
Asset Impairment |
|
|
16.3 |
|
|
(0.5 |
) |
|
15.8 |
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118.3 |
|
$ |
9.8 |
|
$ |
50.4 |
|
$ |
101.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These costs are allocated to the Companys segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Total
|
|
Costs
Incurred
|
|
Costs
Incurred During the Six Months Ended
|
|
Cumulative
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Insurance (1) |
|
$ |
64.5 |
|
$ |
4.1 |
|
$ |
35.2 |
|
$ |
62.6 |
|
Reinsurance (1) |
|
|
12.3 |
|
|
3.0 |
|
|
7.2 |
|
|
11.1 |
|
Corporate |
|
|
41.5 |
|
|
2.7 |
|
|
8.0 |
|
|
27.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118.3 |
|
$ |
9.8 |
|
$ |
50.4 |
|
$ |
101.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes allocated restructuring charges associated with eliminating the XL Financial Solutions business unit.
Activity related to restructuring and asset impairment charges for the six months ended June 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Accrual
at
|
|
Costs
|
|
Amounts
Paid and
|
|
Balance
of Liability
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Employee Termination Benefits |
|
$ |
4.4 |
|
$ |
27.6 |
|
$ |
22.8 |
|
$ |
9.2 |
|
Lease Termination and Other Costs |
|
|
5.3 |
|
|
7.0 |
|
|
7.4 |
|
|
4.9 |
|
Asset Impairment |
|
|
|
|
|
15.8 |
|
|
15.7 |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.7 |
|
$ |
50.4 |
|
$ |
45.9 |
|
$ |
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments
The cost (amortized cost for fixed maturities and short-term investments), fair value, gross unrealized gains, gross unrealized (losses), and Other-than-temporary impairments recorded in AOCI of the Companys investments at June 30, 2009 and December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other Comprehensive
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|||||||
June 30, 2009
|
|
Cost or
|
|
Gross
|
|
Related to
|
|
OTTI
|
|
Fair Value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
4,413,428 |
|
$ |
108,891 |
|
$ |
(21,557 |
) |
$ |
|
|
$ |
4,500,762 |
|
Corporate |
|
|
10,834,884 |
|
|
152,004 |
|
|
(1,648,856 |
) |
|
|
|
|
9,338,032 |
|
Residential mortgage-backed securities Agency |
|
|
3,008,701 |
|
|
77,847 |
|
|
(6,189 |
) |
|
|
|
|
3,080,359 |
|
Residential mortgage-backed securities Non-Agency |
|
|
1,723,809 |
|
|
8,415 |
|
|
(508,657 |
) |
|
(97,178 |
) |
|
1,126,389 |
|
Commercial mortgage-backed securities |
|
|
1,809,682 |
|
|
1,308 |
|
|
(298,832 |
) |
|
(17,053 |
) |
|
1,495,105 |
|
Collateralized debt obligations |
|
|
1,055,312 |
|
|
3,734 |
|
|
(481,373 |
) |
|
(12,816 |
) |
|
564,857 |
|
Other asset-backed securities |
|
|
1,957,406 |
|
|
11,528 |
|
|
(451,392 |
) |
|
(128,218 |
) |
|
1,389,324 |
|
U.S. States and political subdivisions of the States |
|
|
498,198 |
|
|
9,639 |
|
|
(14,730 |
) |
|
|
|
|
493,107 |
|
Non-U.S. Sovereign Government |
|
|
3,618,193 |
|
|
127,097 |
|
|
(71,887 |
) |
|
|
|
|
3,673,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
28,919,613 |
|
$ |
500,463 |
|
$ |
(3,503,473 |
) |
$ |
(255,265 |
) |
$ |
25,661,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
2,034,109 |
|
$ |
13,235 |
|
$ |
(22,206 |
) |
$ |
|
|
$ |
2,025,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
59,960 |
|
$ |
2,749 |
|
$ |
(10,229 |
) |
$ |
|
|
$ |
52,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the amount of other-than-temporary impairment losses in Accumulated other comprehensive income (loss) (AOCI), which from April 1, 2009 was not included in earnings under FSP FAS 115-2 and FAS 124-2. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other Comprehensive
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|||||||
December 31, 2008
|
|
Cost or
|
|
Gross
|
|
Related to
|
|
OTTI included
|
|
Fair Value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
3,649,168 |
|
$ |
334,302 |
|
$ |
(5,128 |
) |
$ |
|
|
$ |
3,978,342 |
|
Corporate |
|
|
11,187,246 |
|
|
80,049 |
|
|
(1,978,692 |
) |
|
|
|
|
9,288,603 |
|
Residential mortgage-backed securities Agency |
|
|
2,039,783 |
|
|
62,638 |
|
|
(2,466 |
) |
|
|
|
|
2,099,955 |
|
Residential mortgage-backed securities Non-Agency |
|
|
1,970,267 |
|
|
10,443 |
|
|
(614,508 |
) |
|
|
|
|
1,366,202 |
|
Commercial mortgage-backed securities |
|
|
2,505,698 |
|
|
1,200 |
|
|
(365,330 |
) |
|
|
|
|
2,141,568 |
|
Collateralized debt obligations |
|
|
1,100,358 |
|
|
3,521 |
|
|
(465,100 |
) |
|
|
|
|
638,779 |
|
Other asset-backed securities |
|
|
2,798,440 |
|
|
8,036 |
|
|
(526,724 |
) |
|
|
|
|
2,279,752 |
|
U.S. States and political subdivisions of the States |
|
|
486,394 |
|
|
5,229 |
|
|
(22,853 |
) |
|
|
|
|
468,770 |
|
Non-U.S. Sovereign Government |
|
|
3,253,123 |
|
|
224,094 |
|
|
(102,820 |
) |
|
|
|
|
3,374,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
28,990,477 |
|
$ |
729,512 |
|
$ |
(4,083,621 |
) |
$ |
|
|
$ |
25,636,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
1,500,767 |
|
$ |
4,258 |
|
$ |
(38,702 |
) |
$ |
|
|
$ |
1,466,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
337,765 |
|
$ |
31,632 |
|
$ |
(7,578 |
) |
$ |
|
|
$ |
361,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments (Continued)
The Company had gross unrealized losses totaling $3.8 billion at June 30, 2009, which it considers to be temporarily impaired. Individual security positions comprising this balance have been evaluated by management, based on specified criteria, to determine if these impairments should be considered other than temporary. These criteria include an assessment of the severity and length of time securities have been impaired, along with managements assessment as to whether it believes it will continue to hold such securities to recovery, among other factors included below.
At June 30, 2009 and December 31, 2008, approximately 3.9% and 2.5%, respectively, of the Companys fixed income investment portfolio at fair value was invested in securities which were below investment grade or not rated. Approximately 23.9% of the unrealized losses in the Companys fixed income securities portfolio at June 30, 2009 related to securities that were below investment grade or not rated. The information shown below about the unrealized losses on the Companys investments at June 30, 2009 relates to the potential effect upon future earnings and financial position should management later conclude that some of the current declines in the fair value of these investments are other than temporary declines.
The following is an analysis of how long each of those securities at June 30, 2009 had been in a continual unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
Equal to or greater
|
|
||||||||
|
|
|
|
|
|
||||||||
June 30, 2009
|
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities and short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
1,174,741 |
|
$ |
23,293 |
|
$ |
|
|
$ |
|
|
Corporate |
|
|
1,468,205 |
|
|
400,374 |
|
|
4,441,950 |
|
|
1,262,789 |
|
Residential mortgage-backed securities Agency |
|
|
467,605 |
|
|
6,007 |
|
|
1,442 |
|
|
189 |
|
Residential mortgage-backed securities Non-Agency |
|
|
231,384 |
|
|
112,131 |
|
|
832,619 |
|
|
493,704 |
|
Commercial mortgage-backed securities |
|
|
45,208 |
|
|
29,720 |
|
|
1,412,215 |
|
|
286,165 |
|
Collateralized debt obligations |
|
|
59,912 |
|
|
32,890 |
|
|
520,283 |
|
|
462,093 |
|
Other asset-backed securities |
|
|
314,809 |
|
|
235,864 |
|
|
733,740 |
|
|
343,803 |
|
U.S. States and political subdivisions of the States |
|
|
73,877 |
|
|
1,616 |
|
|
88,316 |
|
|
13,114 |
|
Non-U.S. Sovereign Government |
|
|
832,429 |
|
|
35,306 |
|
|
388,396 |
|
|
41,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and short-term investments |
|
$ |
4,668,170 |
|
$ |
877,201 |
|
$ |
8,418,961 |
|
$ |
2,903,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
37,216 |
|
$ |
10,229 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is an analysis of how long each of those securities at December 31, 2008 had been in a continual unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
Equal to or greater
|
|
||||||||
|
|
|
|
|
|
||||||||
December 31,
2008
|
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities and short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
103,040 |
|
$ |
7,214 |
|
$ |
|
|
$ |
|
|
Corporate |
|
|
3,641,376 |
|
|
633,371 |
|
|
4,005,267 |
|
|
1,363,661 |
|
Residential mortgage-backed securities Agency |
|
|
32,279 |
|
|
1,276 |
|
|
3,162 |
|
|
1,190 |
|
Residential mortgage-backed securities Non-Agency |
|
|
849,662 |
|
|
328,957 |
|
|
604,726 |
|
|
285,551 |
|
Commercial mortgage-backed securities |
|
|
961,040 |
|
|
155,279 |
|
|
832,537 |
|
|
210,051 |
|
Collateralized debt obligations |
|
|
66,409 |
|
|
26,134 |
|
|
693,943 |
|
|
438,966 |
|
Other asset-backed securities |
|
|
1,357,662 |
|
|
208,778 |
|
|
786,958 |
|
|
317,946 |
|
U.S. States and political subdivisions of the States |
|
|
201,048 |
|
|
9,774 |
|
|
37,328 |
|
|
13,079 |
|
Non-U.S. Sovereign Government |
|
|
612,380 |
|
|
92,676 |
|
|
168,834 |
|
|
28,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and short-term investments |
|
$ |
7,824,896 |
|
$ |
1,463,459 |
|
$ |
7,132,755 |
|
$ |
2,658,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
188,614 |
|
$ |
7,578 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments (Continued)
The contractual maturities of fixed maturity securities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 (1) |
|
December 31, 2008 (1) |
|
||||||||
|
|
|
|
|
|
||||||||
(U.S.
dollars in thousands)
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Due after 1 through 5 years |
|
$ |
9,359,907 |
|
$ |
9,042,822 |
|
$ |
7,451,243 |
|
$ |
6,987,957 |
|
Due after 5 through 10 years |
|
|
4,216,296 |
|
|
4,036,764 |
|
|
5,316,304 |
|
|
5,097,672 |
|
Due after 10 years |
|
|
5,788,500 |
|
|
4,925,718 |
|
|
5,808,384 |
|
|
5,024,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,364,703 |
|
|
18,005,304 |
|
|
18,575,931 |
|
|
17,110,112 |
|
Residential mortgage-backed securities Agency |
|
|
3,008,701 |
|
|
3,080,359 |
|
|
2,039,783 |
|
|
2,099,955 |
|
Residential mortgage-backed securities Non-Agency |
|
|
1,723,809 |
|
|
1,126,389 |
|
|
1,970,267 |
|
|
1,366,202 |
|
Commercial mortgage-backed securities |
|
|
1,809,682 |
|
|
1,495,105 |
|
|
2,505,698 |
|
|
2,141,568 |
|
Collateralized debt obligations |
|
|
1,055,312 |
|
|
564,857 |
|
|
1,100,358 |
|
|
638,779 |
|
Other asset-backed securities |
|
|
1,957,406 |
|
|
1,389,324 |
|
|
2,798,440 |
|
|
2,279,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage and asset-backed securities |
|
|
9,554,910 |
|
|
7,656,034 |
|
|
10,414,546 |
|
|
8,526,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,919,613 |
|
$ |
25,661,338 |
|
$ |
28,990,477 |
|
$ |
25,636,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Included in the table above are $911.6 million and $980.6 million in Tier One and upper Tier Two securities, representing committed term debt and hybrid instruments senior to the common and preferred equities of the financial institutions, at fair value as at June 30, 2009 and December 31, 2008, respectively. These securities have been distributed in the table based on their call date and have net unrealized losses of $604.1 million and $637.1 million as at June 30, 2009 and December 31, 2008, respectively. |
Factors considered in determining that additional other-than-temporary impairment charges were not warranted include managements consideration of current and near term liquidity needs and other available sources, an evaluation of the factors and time necessary for recovery, and the results of on-going retrospective reviews of security sales and the basis for such sales.
Gross unrealized losses of $3.8 billion at June 30, 2009 can be attributed to the following significant drivers:
|
|
|
|
|
gross unrealized losses of $957.7 million related to the Companys Life Operations investment portfolio, which had a fair value of $6.2 billion as at June 30, 2009. Of this, $824.5 million of gross unrealized losses related to $3.3 billion of exposures to corporate financial institutions including Tier One and Upper Tier Two securities. During the quarter ended June 30, 2009, as a result of a substantial rally on financial credit spreads, the gross unrealized loss position has declined substantially. At June 30, 2009, this portfolio had average interest rate duration of 8.4 years, primarily denominated in U.K. Sterling and Euros. As a result of the long duration, significant gross losses have arisen as the fair values of these securities are more sensitive to prevailing government interest rates and credit spreads. This portfolio has limited turnover as it is matched to corresponding long duration liabilities. A hypothetical parallel increase in interest rates and credit spreads of 50 and 25 basis points, respectively, would increase the unrealized losses related to this portfolio at June 30, 2009 by approximately $246.4 million and $89.2 million, respectively. Given the long term nature of this portfolio, and the level of credit spreads as at June 30, 2009 relative to historical averages within the U.K. and Euro-zone as well as the Companys liquidity needs at June 30, 2009, the Company believes that these assets will continue to be held until such time as they mature, or credit spreads revert to levels more consistent with historical averages. |
34
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments (Continued)
|
|
|
gross unrealized losses of $849.4 million related to the corporate holdings within the Companys non-life operations fixed maturity portfolios, which had a fair value of $6.9 billion as at June 30, 2009. During the quarter ended June 30, 2009, as a result of declining credit spreads, the gross unrealized losses on these holdings has declined substantially. The Company believes these impairments are a function of the currently elevated levels of corporate credit spreads in the U.S. and globally, which spiked particularly during the third and fourth quarters of 2008 and continued to be at elevated levels, resulting in a severely depressed level of valuations. The amount of these gross losses has proven very volatile as a result of the severe deterioration in credit spreads over the past year. Despite the recent rally, corporate credit spreads remain at elevated levels relative to historical averages. The Company continues to believe that the gross unrealized losses are a reflection of a severe premium being charged by the market for credit, rather than fundamental deterioration in the debt service capabilities of the issuers. |
|
|
|
gross unrealized losses of $743.5 million related to the Topical Asset portfolio (which consists of the Companys holdings of sub-prime non-agency securities, second liens, ABS CDOs with sub-prime collateral as well as Alt-A mortgage exposures (“Topical Assets”)), which had a fair value of $743.2 million as at June 30, 2009. The Company undertakes a security level reviews of these securities and recognized charges to the extent it believed the intrinsic value of any security was below its amortized cost. The Company has recognized realized losses on this portfolio, consisting of charges for OTTI and realized cumulative losses from sales, of approximately $782.5 million since the beginning of 2007 and through June 30, 2009 on these asset classes. The Company purchased a number of these assets to support certain previously written GIC and funding agreement contracts and has previously announced its intention to reduce its exposure to these asset classes as part of its strategic portfolio realignment. The Company believes that based on market conditions and liquidity needs at June 30, 2009, this reduction will be realized through natural cash flows of the portfolio, and limited selective sales, rather than selling these assets into markets which continue to be illiquid and not reflective of the intrinsic value of these assets. The weighted average term-to-maturity of the sub-prime and Alt-A residential holdings within this portfolio at June 30, 2009 were 2.7 years and 3.8 years, respectively. The Company, based on current market conditions and liquidity needs as at June 30, 2009 as well as its assessment of the holdings, believes it will continue to hold these securities until either maturity, or a return of liquidity and valuations more reflective of the intrinsic value of these holdings. |
|
|
|
gross unrealized losses of $490.6 million related to the non-life portfolio of Core CDO holdings (defined by the Company as investments in non-mortgage collateralized debt obligations), which consisted primarily of collateralized loan obligations and had a fair value of $585.9 million as of June 30, 2009. The Company undertook a security level review of these securities and recognized charges to the extent it believed the intrinsic value of the security was below the amortized cost. The Company believes that the level of impairment is primarily a function of historically wide spreads in the CLO market during the period, driven by the high level of illiquidity in this market. The Company purchased a number of these assets to support the previously written GIC and funding agreement contracts and has announced its intention to reduce its exposure to this asset class over time as a part of its strategic portfolio realignment. The Company, based on current market conditions and liquidity needs as well as its assessment of the holdings, believes it is likely that the Company will continue to hold these securities until either maturity or a recovery of value, following which the Company intends to reduce its exposure to this asset class. |
|
|
|
gross unrealized losses of $300.7 million related to the non-life portion of CMBS holdings, which had a fair value of $1.4 billion as at June 30, 2009. The Companys holdings in CMBS are 97.1% rated AAA. The Company believes that the currently depressed pricing, which represents approximately 79.1% of the par value of the securities, is directly related to the 525 basis point widening in credit spreads within this market since the beginning of 2008, as a result of the heightened risk premium attached to property collateral. Credit spreads have improved significantly in the first half of 2009, particularly during the second quarter. The Companys portfolio is highly diversified, has limited delinquencies and has experienced limited downgrades. |
|
|
|
gross unrealized losses of $269.6 million related to the Companys holdings in non-agency RMBS secured by prime mortgages which had a fair value of $718.7 at June 30, 2009. In the U.S., the average price on these securities declined to approximately 56.0% of par value at June 30, 2009, reflecting concerns over rising unemployment in the U.S. and the potential impact on previously high quality borrowers to meet their obligations. The Company undertook a security level review of these securities and recognized charges to the extent it believed the intrinsic value of any security was below its amortized cost. |
35
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments (Continued)
Management, in its assessment of whether securities in a gross unrealized loss position are temporarily impaired, considers the significance of the impairments. The Company had securities with gross unrealized losses of $1.4 billion, with a fair value of $691.7 million, which as at June 30, 2009 were impaired by greater than 50% of amortized costs. The Company has evaluated each of these securities in conjunction with its investment managers and believes it is probable that the issuer will be able to fund sufficient principal and interest payments to exceed current amortized cost, and believes that the current levels of impairments are a function of the currently extremely elevated levels of credit spreads.
Structured credit securities with gross unrealized losses representing greater than 50% of amortized cost represent $934.1 million of gross unrealized losses, with a fair value of $408.5 million. Of these gross unrealized losses, $260.1 million are rated investment grade. The Company has evaluated each of these holdings on a security-by-security basis in conjunction with its investments managers and utilizing additional corroborative modeling techniques, and believes these securities will fund sufficient principal and interest payments to exceed current amortized cost. These securities include $255.1 million of Topical investments, $92.5 million of Core CDOs, $37.1 million of prime RMBS and $15.4 million of CMBS holdings.
Corporate securities with gross unrealized losses representing greater than 50% of amortized cost represent $468.3 million of gross unrealized losses, with a fair value of $283.1 million. Of these gross unrealized losses, $175.9 million are rated investment grade. Gross unrealized losses of $239.4 million are related to holdings of financial issuers, with the majority ($216.7 million) representing hybrid instruments. The Company believes these are high-grade issuers which will continue to service their principal and interest obligations.
For the quarter ended June 30, 2009, the Company recorded net impairment charges of $85.0 million. The significant assumptions and inputs associated with these securities consist of:
|
|
|
|
|
For corporate securities, the Company recorded net impairments totaling $38.1 million. The impairment charges consisted of below-investment grade securities, where the Company believes the current fair value is representative of likely recoveries following default, below-investment grade hybrids, where the Company considered impairment factors consistent with an equity impairment model, along with a debt impairment model, and accordingly recorded impairment charges to fair value, or securities in an unrealized loss position that management intends to sell. |
|
|
|
|
|
For structured credit securities, the Company recorded net impairments of $46.9 million. The Company determined that the likely recovery on these securities was below the carrying value, and accordingly impaired the securities to the discounted value of the cash flows of these securities, or in certain instances fair value to the extent that the fair value was believed to be more representative of recoverable value given the extreme illiquidity within structured credit markets. |
|
|
|
|
Of the other-than-temporary impairments, $30.2 million related to changes of intent-to-hold, primarily representing planned exchanges of hybrid securities. |
Included in the gross unrealized losses associated with the Companys corporate portfolio are gross unrealized losses of $163.8 million related to Tier One and Upper Tier Two perpetual preferred securities that have been rated below investment grade by at least one major rating agency. Of this total $132.1 million have gross unrealized losses representing greater than 50% of amortized cost. The Company has completed its review of this portfolio and believes, at this time, that these impairments remain temporary in nature. The primary basis for this conclusion was the analysis of the fundamentals of these securities using a debt-based impairment model, which indicated these securities continue to meet their obligations, and the issuer has the ability to call these obligations at their call date. In addition, as these securities are below investment grade, the Company considered these securities using an equity-impairment model. Factors that were considered and supported that these impairments were temporary included that the vast majority of these securities had only recently been rated below-investment-grade, in certain cases alternative ratings were available that indicated these securities remained investment grade, or the securities were only slightly below investment-grade. At June 30, 2009, the Company believes that it is likely that the fair values of these securities will ultimately increase to equal the cost basis over a reasonable period of time. However, there is a high degree of judgment in reaching this conclusion, including an assessment of how various governments will treat the perpetual preferred shareholding in the event of governmental intervention in these institutions operations. Management will closely monitor the developments related to these securities and will consider these developments on other than temporary impairments (OTTI) conclusions reached in future quarters.
36
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments (Continued)
The following represents an analysis of net realized gains (losses) on investments:
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||
Gross realized gains |
|
$ |
97,579 |
|
$ |
285,254 |
|
Gross realized losses |
|
|
(178,009 |
) |
|
(617,621 |
) |
|
|
|
|
|
|
|
|
Net realized (losses) on investments |
|
|
(80,430 |
) |
|
(332,367 |
) |
|
|
|
|
|
|
|
|
As discussed in Note 2, a portion of certain other-than-temporary impairment (OTTI) losses on fixed maturity securities and short term investments are recognized in Other comprehensive income (loss) (OCI). Effective under FSP FAS 115-2/124-2, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors ( e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income (loss). The net amount recognized in earnings (credit loss impairments) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.
|
|
|
|
|
|
|
OTTI related to
|
|
|
(U.S. dollars and
shares in thousands)
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
|
|
Credit losses remaining in retained earnings related to adoption of FSP FAS 115-2 and FAS 124-2 |
|
|
187,773 |
|
Credit loss impairment recognized in the current period on securities not previously impaired |
|
|
13,594 |
|
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period |
|
|
(4,177 |
) |
Credit loss impairments previously recognized on securities impaired to fair value during the period |
|
|
|
|
Additional credit loss impairments recognized in the current period on securities previously impaired Increases due to the passage of time on previously recorded credit losses |
|
|
27,988 |
|
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected |
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
225,178 |
|
|
|
|
|
|
Prior to June 30, 2009, the Company participated in a securities lending program operated by a third party banking institution, whereby certain assets were loaned out and for which the Company earned an incremental return. During the quarter, the Company discontinued its participation in this program, and no longer holds any collateral, has no remaining liabilities to the borrowers of the securities. Prior to discontinuation, for securities on loan, the lending agent received cash collateral generally worth 102 to 105% of the loaned securities which must be returned to the borrower upon return of the securities and which in the meantime is invested in a collateral pool managed by the banking institution. The collateral pool was subject to written investment guidelines with key objectives which included safeguard of principal and adequate liquidity to meet anticipated needs with a maximum weighted average maturity of ninety days. At June 30, 2009 and December 31, 2008, nil and $238.5 million, respectively, of securities included in investments available for sale were loaned to various counterparties through the securities lending program. The cash collateral received as at June 30, 2009 and December 31, 2008 was nil and $242.8 million respectively. At June 30, 2009 and December 31, 2008, the value of the Companys share of the collateral pool and investments available-for-sale held was nil and $231.0 million, respectively, in connection with these loans, and is included in cash and cash equivalents and investments available-for-sale, with a corresponding liability reflected in net payable for investments purchased.
37
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Other Investments
On June 9, 2009, XL Specialty Insurance Company (XL Specialty), a wholly-owned subsidiary of XL Capital Ltd, entered into an agreement with National Indemnity Company, an insurance company subsidiary of Berkshire Hathaway Inc. (National Indemnity). Under the agreement, and a related reinsurance agreement, National Indemnity will issue endorsements (Endorsements) to certain directors and officers liability insurance policies known as Side A coverage policies underwritten by XL Specialty (the Facility).
The Endorsements entitle policyholders to present claims under such D&O policies directly to National Indemnity in the event that XL Specialty is unable to meet its obligations due to an order of insolvency, liquidation or an injunction that prohibits XL Specialty from paying claims. Under the terms of the Facility, National Indemnity will issue Endorsements with aggregate premiums up to $140 million. In addition, XL Specialty has an irrevocable option, which may be exercised during the first eleven months of the Facility, to require National Indemnity to issue Endorsements on D&O policies with additional aggregate premiums up to $100 million (the Option). The Endorsements will terminate on the tenth anniversary of their issuance. The Facility provides that National Indemnity will be obligated to issue Endorsements on D&O policies issued during an eighteen month period that commenced on June 8, 2009.
National Indemnitys obligations under the Facility to issue new Endorsements will terminate if XL Specialtys financial strength rating is downgraded to or below BBB+ by Standard & Poors Corporation or to or below A- by A.M. Best. In connection with the Facility, XL Insurance (Bermuda) Ltd (XLIB) will purchase a payment obligation in an aggregate principal amount of $150 million from National Indemnity. If XL Specialty elects to exercise the Option, XLIB will purchase a second obligation in an aggregate principal amount of $100 million. In addition, XL Specialty will establish a trust to hold the premiums (net of commissions) on the D&O policies endorsed by National Indemnity. XL Specialty will also arrange to provide National Indemnity with a letter of credit in the event the assets in the trust are insufficient to meet XL Specialtys obligations under the Facility (the Letter of Credit). The trust, the Letter of Credit and the payment obligations collateralize XL Specialtys indemnity obligations under the Facility to National Indemnity for any payments National Indemnity is required to make under the Endorsements.
The outstanding payment obligation is recorded in Other Investments at an estimated fair value of $128.1 million, pays a coupon of 3.5%, and will be accreted to $150 million over the 11.5 year term of the payment obligation. The difference between the estimated fair value of the Obligation and the cost of that Obligation at the time of the transaction was approximately $21.9 million and is recorded in Other Assets. This difference is being amortized in relation to the earning of the underlying policies written.
38
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments
The Company enters into derivative instruments for both risk management and speculative purposes. The Company is exposed to potential loss from various market risks, and manages its market risks based on guidelines established by management. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value with the changes in fair value of derivatives shown in the consolidated statement of income as net realized and unrealized gains and losses on derivative instruments unless the derivatives are designated as hedging instruments. The accounting for derivatives which are designated as hedging instruments is described in Note 2(b), Significant Accounting Policies Derivative Instruments.
The following table summarizes information on the location and gross amounts of derivative fair values contained in the consolidated balance sheet as at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|
||||||||||||
As at June 30, 2009
|
|
|
|
|
|
||||||||||||
(U.S. dollars in thousands)
|
|
Balance
Sheet
|
|
Notional
|
|
Fair
|
|
Balance
Sheet
|
|
Notional
|
|
Fair
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedging instruments under FAS 133: Interest rate contracts (1) |
|
Other assets |
|
$ |
983,446 |
|
$ |
250,134 |
|
Other Liabilities |
|
$ |
(98,248 |
) |
$ |
(8,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under FAS 133 |
|
|
|
$ |
983,446 |
|
$ |
250,134 |
|
|
|
$ |
(98,248 |
) |
$ |
(8,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Related Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure |
|
Other assets |
|
$ |
85,108 |
|
$ |
5,241 |
|
Other Liabilities |
|
$ |
7,100 |
|
$ |
(58 |
) |
Foreign exchange exposure |
|
Other assets |
|
|
434,500 |
|
|
25,128 |
|
Other Liabilities |
|
|
90,339 |
|
|
(7,356 |
) |
Credit exposure |
|
Other assets |
|
|
448,666 |
|
|
18,770 |
|
Other Liabilities |
|
|
417,800 |
|
|
(6,523 |
) |
Financial market exposure |
|
Other assets |
|
|
797,208 |
|
|
3,471 |
|
Other Liabilities |
|
|
13,300 |
|
|
(202 |
) |
Financial Operations Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure |
|
Other assets |
|
|
|
|
|
|
|
Other Liabilities |
|
|
296,044 |
|
|
(7,103 |
) |
Other Non-Investment Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent capital facility |
|
Other assets |
|
|
350,000 |
|
|
|
|
Other Liabilities |
|
|
|
|
|
|
|
Guaranteed minimum income benefit contract |
|
Other assets |
|
|
|
|
|
|
|
Other Liabilities |
|
|
105,670 |
|
|
(28,182 |
) |
Modified coinsurance funds withheld contract |
|
Other assets |
|
|
75,964 |
|
|
168 |
|
Other Liabilities |
|
|
|
|
|
|
|
Foreign exchange exposure |
|
Other assets |
|
|
|
|
|
|
|
Other Liabilities |
|
|
|
|
|
|
|
Weather and Energy Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured weather risk management products |
|
Other assets |
|
|
|
|
|
|
|
Other Liabilities |
|
|
|
|
|
|
|
Power generation outage contracts |
|
Other assets |
|
|
|
|
|
|
|
Other Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging under FAS 133 |
|
|
|
$ |
2,191,446 |
|
$ |
52,778 |
|
|
|
$ |
930,253 |
|
$ |
(49,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The company holds cash collateral related to these derivative assets of $152.3 million. The collateral balance is included within cash and cash equivalents and the corresponding liability to return the collateral has been offset against the derivative asset within the balance sheet as appropriate under the netting agreement. |
39
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments (Continued)
(a) Derivative Instruments Designated as Fair Value Hedges
The Company designates certain of its derivative instruments as fair value hedges or cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the hedging derivative to specific assets and liabilities. The Company assesses the effectiveness of the hedge, both at inception and on an on-going basis and determines whether the hedge is highly effective in offsetting changes in fair value or cash flows of the linked hedged item.
As at June 30, 2009, a portion of the Companys liabilities are hedged against changes in the applicable designated benchmark interest rate. In addition, interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to changes in the designated benchmark interest rate.
The following table provides the total impact on earnings relating to derivative instruments formally designated as fair value hedges along with the impacts of the related hedged items for the three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2009
|
|
||||||||||
|
|
|
|
||||||||||
(U.S. dollars in thousands) |
|
Location
of Gain (Loss)
|
|
Amount
of Gain
|
|
Amount
of Gain
|
|
Amount
of Gain
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as fair value hedges and related hedged items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure |
|
|
Net
realized and unrealized
|
|
$ |
(126,914 |
) |
$ |
|
|
$ |
1,530 |
|
Interest rate exposure |
|
|
Net investment income |
|
|
9,920 |
|
|
|
|
|
|
|
Deposit liabilities |
|
|
Net
realized and unrealized
|
|
|
|
|
|
117,832 |
|
|
|
|
Fixed maturity securities |
|
|
Net
realized and unrealized
|
|
|
|
|
|
10,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
$ |
(116,994 |
) |
$ |
128,444 |
|
$ |
1,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2009
|
|
||||||||||
|
|
|
|
||||||||||
(U.S. dollars in thousands) |
|
Location
of Gain (Loss)
|
|
Amount
of Gain
|
|
Amount
of Gain
|
|
Amount
of Gain
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as fair value hedges and related hedged items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure |
|
|
Net
realized and unrealized
|
|
$ |
(189,553 |
) |
$ |
|
|
$ |
2,841 |
|
Interest rate exposure |
|
|
Net investment income |
|
|
18,645 |
|
|
|
|
|
|
|
Deposit liabilities |
|
|
Net
realized and unrealized
|
|
|
|
|
|
182,635 |
|
|
|
|
Fixed maturity securities |
|
|
Net
realized and unrealized
|
|
|
|
|
|
9,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
$ |
(170,908 |
) |
$ |
192,394 |
|
$ |
2,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments (Continued)
(b) Derivative Instruments Designated as Cash Flow Hedges
During March 2007, the Company entered into an interest rate swap agreement in anticipation of the issuance of the 2027 Senior Notes, as described in Note 16, Notes Payable and Debt Financing Arrangements of the Companys Annual Report on Form 10-K for the year ended December 31, 2008. This transaction, which met the requirements of a cash flow hedge of a forecasted transaction under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was entered into to mitigate the interest rate risk associated with the subsequent issuance of the 2027 Senior Notes. The gain on the settlement of the swap transaction on May 2, 2007 of $3.8 million was credited to Accumulated Other Comprehensive Income and is being amortized to interest expense over the 20-year term of the related debt. In addition, the Company entered into a treasury rate guarantee agreement in anticipation of the issuance of $300.0 million of 5.25% Senior Notes due September 15, 2014 during 2004. The loss on the settlement of the treasury rate guarantee transaction on August 18, 2004 of $6.3 million was charged to Accumulated Other Comprehensive Income and is being amortized to interest expense over the 10-year term of the related debt. The impact on earnings relating to these derivative instruments formally designated as cash flow hedges for the three and six months ended June 30, 2009 was an increase to interest expense of $0.1 million and $0.2 million, respectively.
The following tables provide the total impact on earnings relating to derivative instruments not formally designated as hedging instruments under FAS 133:
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2009
|
|
|||
|
|
|
|
|||
(U.S. dollars in thousands) |
|
Location of Gain (Loss) Recognized in Income on Derivative |
|
Amount
of Gain
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
Investment Related Derivatives: |
|
|
|
|
|
|
Interest rate exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
$ |
4,751 |
|
Foreign exchange exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
14,930 |
|
Credit exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(28,280 |
) |
Financial market exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
367 |
|
Financial Operations Derivatives: |
|
|
|
|
|
|
Credit exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
3,669 |
|
Other Non-Investment Derivatives: |
|
|
|
|
|
|
Contingent capital facility |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(2,053 |
) |
Guaranteed minimum income benefit contract |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
3,355 |
|
Modified coinsurance funds withheld contract |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(213 |
) |
Weather and Energy Derivatives: |
|
|
|
|
|
|
Structured weather risk management products |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
2,913 |
|
Power generation outage contracts |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging under FAS 133 |
|
|
|
$ |
(561 |
) |
Amount of gain (loss) recognized in income from ineffective portion of fair value hedges |
|
|
|
|
1,530 |
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on derivative instruments |
|
|
|
$ |
969 |
|
|
|
|
|
|
|
|
41
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments (Continued)
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2009
|
|
|||
|
|
|
|
|||
(U.S. dollars in thousands) |
|
Location of Gain (Loss) Recognized in Income on Derivative |
|
Amount
of Gain
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
Investment Related Derivatives: |
|
|
|
|
|
|
Interest rate exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
$ |
5,624 |
|
Foreign exchange exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
8,514 |
|
Credit exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(27,244 |
) |
Financial market exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
2,327 |
|
Financial Operations Derivatives: |
|
|
|
|
|
|
Credit exposure |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
9,254 |
|
Other Non-Investment Derivatives: |
|
|
|
|
|
|
Contingent capital facility |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(4,083 |
) |
Guaranteed minimum income benefit contract |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
(608 |
) |
Modified coinsurance funds withheld contract |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
24 |
|
Weather and Energy Derivatives: |
|
|
|
|
|
|
Structured weather risk management products |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
2,913 |
|
Power generation outage contracts |
|
Net realized and unrealized gains (losses) on derivatives |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging under FAS 133 |
|
|
|
$ |
(3,279 |
) |
Amount of gain (loss) recognized in income from ineffective portion of fair value hedges |
|
|
|
|
2,841 |
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on derivative instruments |
|
|
|
$ |
(438 |
) |
|
|
|
|
|
|
|
The Companys objectives in using these derivatives are explained in sections (c) through (g) of this note below.
42
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments (Continued)
(c) Investment Related Derivatives
The Company, either directly or through its investment managers, may use derivative instruments within its investment portfolio, including interest rate swaps, inflation swaps, credit derivatives (single name and index credit default swaps), options, forward contracts and financial futures (foreign exchange, bond and stock index futures), primarily as a means of economically hedging exposures to interest rate, credit spread, equity price changes and foreign currency risk or in limited instances for investment purposes. The Company is exposed to credit risk in the event of non-performance by the counterparties under any swap contracts although the Company generally seeks to use credit support arrangements with counterparties to help manage this risk.
Investment Related Derivatives Interest Rate Exposure
The Company utilizes risk management and overlay strategies that incorporate the use of derivative financial instruments, primarily to manage its fixed income portfolio duration and exposure to interest rate risks associated with certain of its assets and liabilities. The Company uses interest rate swaps to convert certain liabilities from a fixed rate to a variable rate of interest and may also use them to convert a variable rate of interest from one basis to another.
Investment Related Derivatives Foreign Exchange Exposure
The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities and equity securities investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of twelve months or less.
In addition, certain of the Companys investment managers may, subject to investment guidelines, enter into forward contracts where potential gains may exist. The Company has exposure to foreign currency exchange rate fluctuations through its operations and in its investment portfolio.
Investment Related Derivatives Credit Exposure
Credit derivatives are purchased within the Companys investment portfolio in the form of single name and basket credit default swaps, which are used to mitigate credit exposure through a reduction in credit spread duration (i.e. macro credit strategies rather than single-name credit hedging) or exposure to selected issuers, including issuers that are not held in the underlying bond portfolio.
Investment Related Derivatives Financial Market Exposure
Stock index futures are purchased with the Companys investment portfolio in order to create synthetic equity exposure and to add value to the portfolio with overlay strategies where market inefficiencies are believed to exist. The Company previously wrote a number of resettable strike swaps contracts relating to an absolute return index and diversified baskets of funds. Finally, from time to time, the Company may enter into other financial market exposure derivative contracts on various indices including, but not limited to, inflation, commodity and correlation contracts.
(d) Financial Operations Derivatives Credit Exposure
Credit derivatives have been sold through a limited number of contracts written as part of the Companys previous XL Financial Solutions (XLFS) business, and were entered into through the Companys prior reinsurance agreements with Syncora, as described below. Following the secondary sale of Syncora common shares, the Company retained some credit derivative exposures written by Syncora and certain of its subsidiaries through reinsurance agreements that had certain derivatives exposures embedded within them. The change in value of the derivative portion of the financial guarantee reinsurance agreements the Company had with Syncora was included in Net (loss) income from operating affiliates. Following the closing of the Master Agreement during August 2008, as described in Note 4, Syncora Holdings Ltd. of the Companys Annual Report on Form 10-K for the year ended December 31, 2008, which terminated certain reinsurance and other agreements, these credit derivative exposures were eliminated by virtue of the commutation of the relevant reinsurance agreements.
As of June 30, 2009 and December 31, 2008 the remaining credit derivative exposure outside of the Companys investment portfolio consisted of 2 and 23 contracts, respectively, written by the Company that provide credit protection on senior tranches of structured finance transactions with total insured contractual payments outstanding of $296.0 million ($247.5 million principal and $48.5 million interest), and $639.5 million ($499.5 million principal and $140.0 million of interest), weighted average contractual
43
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments (Continued)
(d) Financial Operations Derivatives Credit Exposure (Continued)
term to maturity of 6.6 years and 5.7 years, a total liability recorded of $7.1 million and $28.6 million, respectively, and an average rating of AA underlying obligations at each of June 30, 2009 and December 31, 2008. As of June 30, 2009, there were no reported events of default on the underlying obligations. Credit derivatives are recorded at fair value, which is determined using either models developed by the Company or third party prices and are dependent upon a number of factors, including changes in interest rates, future default rates, credit spreads, changes in credit quality, future expected recovery rates and other market factors. The change resulting from movements in credit and credit quality spreads is unrealized as the credit derivatives are not traded to realize this resultant value.
(e) Other Non-Investment Derivatives
The Company enters into derivatives as part of its contingent capital facilities including put options, interest rate swaps, and asset return swaps. These derivatives are recorded at fair value with changes in fair value recognized in earnings.
The Company also has derivatives embedded in certain reinsurance contracts. For a particular life reinsurance contract, the Company pays the ceding company a fixed amount equal to the estimated present value of the excess of guaranteed benefit GMIB over the account balance upon the policyholders election to take the income benefit. The fair value of this derivative is determined based on the present value of expected cash flows. In addition, the Company has modified coinsurance and funds withheld reinsurance agreements that provide for a return based on a portfolio of fixed income securities. As such, the agreements contain embedded derivatives. The embedded derivative is bifurcated from the funds withheld balance and recorded at fair value with changes in fair value recognized in earnings through net realized and unrealized gains and losses on derivative instrument.
(f) Weather and Energy Derivatives
Prior to August 2008, the Company offered weather and energy risk management products in insurance or derivative form to end-users and managed the risks in the OTC and exchange traded derivative markets or through the use of quota share or excess of loss arrangements. However, as part of the Companys strategy to focus on its core lines of business within its Insurance and Reinsurance segments, the Company closed this unit in August 2008 and ceased writing such weather and energy risk management products. Weather and energy derivatives are recorded at fair value, which is determined through the use of quoted market prices where available. Where quoted market prices are unavailable, the fair values are estimated using available market data and internal pricing models based upon consistent statistical methodologies. Estimating fair value of instruments that do not have quoted market prices requires managements judgment in determining amounts that could reasonably be expected to be received from, or paid to, a third party in settlement of the contracts. The amounts could be materially different from the amounts that might be realized in an actual sale transaction. Fair values are subject to change in the near-term and reflect managements best estimate based on various factors including, but not limited to, actual and forecasted weather conditions, changes in commodity prices, changes in interest rates and other market factors. The majority of existing weather and energy contracts expired at the end of 2008 with the remainder of the portfolio expected to expire during 2009.
(g) Contingent Credit Features
Certain derivatives agreements entered into by the Company or its subsidiaries contain rating downgrade provisions that permit early termination of the agreement by the counterparty if collateral is not posted following failure to maintain certain credit ratings from one or more of the principal credit rating agencies. If the Company were required to early terminate such agreements due to rating downgrade, it could potentially be in a net liability position at time of settlement. The aggregate fair value of all derivatives agreements containing such rating downgrade provisions on June 30, 2009 was $7.2 million. The Company has not been required to post collateral under any of these agreements as of June 30, 2009.
44
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable and Debt and Financing Arrangements
In December 2005, the Company issued 29.8 million 7.0% Equity Security Units (the 7.0% Units) in a public offering. Each 7.0% Unit had a stated amount of $25.00 and consisted of (a) a purchase contract pursuant to which the holder agreed to purchase, for $25.00, a variable number of shares of the Companys Class A ordinary shares on February 15, 2009 and (b) a one-fortieth, or 2.5% in the 2011 Senior Notes. The 2011 Senior Notes were pledged by the holders to secure their obligations under the purchase contracts. The number of shares issued under the purchase contracts was adjustable based on, among other things, the average share price of the Company for the twenty consecutive trading days ending on the third trading day immediately preceding the stock purchase date and the dividend rate of the Company. In mid-February 2009, the 2011 Senior Notes were remarketed whereby the interest rate was reset in order to generate sufficient remarketing proceeds to satisfy the 7.0% Unit holders obligations under the purchase contracts. The Company purchased and retired the aggregate principle amount of the 2011 Senior Notes as a part of that remarketing. On February 15, 2009, the purchase contracts matured and the Company issued Class A ordinary shares in connection therewith. Each purchase contract provided for the sale by the Company of 0.38461 Class A Ordinary shares (the Shares) at a price of $25.00. The settlement of the purchase contracts resulted in the Companys issuance of an aggregate of 11,461,080 Shares for net proceeds of approximately $745.0 million, which was used to retire the 2011 Senior Notes.
10. Share Capital
In connection with the maturity of the purchase contracts associated with the 7.0% Units, the Company issued 11,461,080 shares for net proceeds of approximately $745.0 million, which was used to retire the 2011 Senior Notes.
On March 26, 2009, the Company completed a cash tender offer for its outstanding Series C Preference Ordinary Shares that resulted in approximately 12.7 million Series C Preference Ordinary Shares with a liquidation value of $317.3 million being purchased by the Company for approximately $104.7 million plus accrued and unpaid dividends, combined with professional fees totaling $0.8 million. As a result, a book value gain to ordinary shareholders of approximately $211.8 million was recorded in the first quarter of 2009.
11. XL Capital Finance (Europe) plc
XL Capital Finance (Europe) plc (XLFE) is a wholly owned finance subsidiary of the Company. In January 2002, XLFE issued $600.0 million par value 6.5% Guaranteed Senior Notes due January 2012. These Notes are fully and unconditionally guaranteed by the Company. XL Capital Ltds ability to obtain funds from its subsidiaries is subject to certain contractual restrictions, applicable laws and statutory requirements of the various countries in which the Company operates including Bermuda, the U.S. and the U.K., among others. Required statutory capital and surplus for the principal operating subsidiaries of the Company was $7.2 billion as of December 31, 2008.
12. Related Party Transactions
At June 30, 2009 and December 31, 2008, the Company owned non-controlling stakes in nine independent investment management companies (Investment Manager Affiliates) totaling $195.8 million and $211.7 million, respectively. The Company sought to develop relationships with specialty investment management organizations, generally acquiring an equity interest in the business. The Company also invests in certain of the funds and limited partnerships and other legal entities managed by these affiliates and through these funds and partnerships pay management and performance fees to the Companys Investment Manager Affiliates.
In the normal course of business, the Company enters into certain quota share reinsurance contracts with a subsidiary of one of its other strategic affiliates, ARX Holding Corporation. During the quarter ended June 30, 2009, these contracts resulted in reported net premiums written of $15.9 million, net paid claims of $5.4 million and reported acquisition costs of $6.1 million. During the same period in 2008, these contracts resulted in reported net premiums written of $21.5 million, net paid claims of $6.2 million and reported acquisition costs of $10.0 million. Management believes that these transactions are conducted at market rates consistent with negotiated arms-length contracts.
In the normal course of business, the Company enters into cost sharing and service level agreement transactions with certain other affiliates, which management believes to be conducted consistent with arms-length rates. Such transactions, individually and in the aggregate, are not material to the Companys financial condition, results of operations and cash flows.
45
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Variable Interest Entities
The Company utilizes variable interest entities both indirectly and directly in the ordinary course of business. The Company invests in equity tranches (or similar instruments) of CDOs, CBOs and other investment vehicles that are issued through variable interest entities as part of the Companys risk asset portfolio. Certain collateral facilities and contingent capital facilities are also structured using variable interest entities, in which the Company has a variable interest. The Company was not the primary beneficiary and therefore does not consolidate any of these entities. In addition, the Company does not believe that any of such interests would be characterized as significant to the Company. The Company considers the significance of its share of the entitys expected losses and expected residual returns in relation to the Companys consolidated results of operations, whether the Company holds a first loss portion in the entity, and the rating of its exposure and probability of loss.
14. Computation of Earnings Per Ordinary Share and Ordinary Share Equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2009 |
|
2008 (1) |
|
2009 |
|
2008 (1) |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per ordinary share and ordinary share equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,541 |
|
$ |
237,851 |
|
$ |
88,638 |
|
$ |
482,224 |
|
Less: preference share dividends |
|
|
(5,592 |
) |
|
|
|
|
(42,126 |
) |
|
(32,500 |
) |
Plus: gain on redemption of Series C Preference Ordinary shares |
|
|
|
|
|
|
|
|
211,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to ordinary shareholders |
|
$ |
79,949 |
|
$ |
237,851 |
|
$ |
258,328 |
|
$ |
449,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding |
|
|
342,154 |
|
|
179,054 |
|
|
339,155 |
|
|
178,701 |
|
Basic earnings per ordinary share & ordinary share equivalents outstanding |
|
$ |
0.23 |
|
$ |
1.33 |
|
$ |
0.76 |
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per ordinary share and ordinary share equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,541 |
|
$ |
237,851 |
|
$ |
88,638 |
|
$ |
482,224 |
|
Less: preference share dividends |
|
|
(5,592 |
) |
|
|
|
|
(42,126 |
) |
|
(32,500 |
) |
Plus: gain on redemption of Series C Preference Ordinary shares |
|
|
|
|
|
|
|
|
211,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to ordinary shareholders |
|
$ |
79,949 |
|
$ |
237,851 |
|
$ |
258,328 |
|
$ |
449,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding basic |
|
|
342,154 |
|
|
179,054 |
|
|
339,155 |
|
|
178,701 |
|
Impact of share based compensation and certain conversion features |
|
|
314 |
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding diluted |
|
|
342,468 |
|
|
179,054 |
|
|
339,262 |
|
|
178,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per ordinary share & ordinary share equivalents outstanding |
|
$ |
0.23 |
|
$ |
1.33 |
|
$ |
0.76 |
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per ordinary share |
|
$ |
0.10 |
|
$ |
0.38 |
|
$ |
0.20 |
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Basic and diluted earnings per ordinary share was adjusted for 2008 as noted below.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (EPS) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. A share-based payment award that contains a non- forfeitable right to receive cash when dividends are paid to ordinary shareholders irrespective of whether that award ultimately vests or remains unvested shall be considered a participating security as these rights to dividends provide a non-contingent transfer of value to the holder of the share-based payment award. Accordingly, these awards should be included in the computation of basic EPS pursuant to the two-class method. Under the terms of the Companys restricted stock awards, grantees are entitled to the right to receive dividends on the unvested portions of their awards. There is no requirement to return these dividends in the event the unvested awards are forfeited in the future. Accordingly, this FSP had an impact on the Companys EPS calculations. The guidance in this FSP was effective for the Company as of January 1, 2009. All prior period EPS data presented has been adjusted retrospectively to conform to the provisions of the FSP.
46
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Computation of Earnings Per Ordinary Share and Ordinary Share Equivalent (Continued)
The impact of the adoption of FSP EITF 03-6-1 on the earnings per share for the three and six months ended June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||||||
|
|
|
|
||||||||
(U.S. dollars in millions) |
|
2008 As adjusted |
|
2008 As originally reported |
|
||||||
|
|
|
|
|
|
||||||
Weighted average ordinary shares and ordinary share equivalents outstanding basic |
|
|
|
179,054 |
|
|
|
|
176,655 |
|
|
Weighted average ordinary shares and ordinary share equivalents outstanding diluted |
|
|
|
179,054 |
|
|
|
|
176,910 |
|
|
Earnings per ordinary share and ordinary share equivalent basic |
|
|
$ |
1.33 |
|
|
|
$ |
1.35 |
|
|
Earnings per ordinary share and ordinary share equivalent diluted |
|
|
$ |
1.33 |
|
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||||||
|
|
|
|
||||||||
(U.S. dollars in millions) |
|
2008 As adjusted |
|
2008 As originally reported |
|
||||||
|
|
|
|
|
|
||||||
Weighted average ordinary shares and ordinary share equivalents outstanding basic |
|
|
|
178,701 |
|
|
|
|
176,453 |
|
|
Weighted average ordinary shares and ordinary share equivalents outstanding diluted |
|
|
|
178,701 |
|
|
|
|
176,946 |
|
|
Earnings per ordinary share and ordinary share equivalent basic |
|
|
$ |
2.52 |
|
|
|
$ |
2.55 |
|
|
Earnings per ordinary share and ordinary share equivalent diluted |
|
|
$ |
2.52 |
|
|
|
$ |
2.54 |
|
|
47
|
|
|
|
|
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
|
|
|
General
The following is a discussion of the Companys financial condition and liquidity and results of operations. Certain aspects of the Companys business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Companys and an individual segments results of operations and financial condition.
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about the Companys beliefs and expectations, are forward-looking statements. These statements are based upon current plans, estimates and projections, all of which involve risk and uncertainty. Actual results may differ materially from those included in such forward-looking statements, and therefore undue reliance should not be placed on them. See Cautionary Note Regarding Forward-Looking Statements below for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement.
This discussion and analysis should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations, and the audited Consolidated Financial Statements and notes thereto, presented under Item 7 and Item 8, respectively, of the Companys Form 10-K for the year ended December 31, 2008.
Executive Overview
See Executive Overview in Item 7 of the Companys Form 10-K for the year ended December 31, 2008.
Results of Operations
The following table presents an analysis of the Companys net income available to ordinary shareholders and other financial measures (described below) for the three months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars and shares in thousands, except per share amounts) |
|
2009 |
|
2008 (1) |
|
||
|
|
|
|
|
|
||
Net income available to ordinary shareholders |
|
$ |
79,949 |
|
$ |
237,851 |
|
Earnings per ordinary share basic |
|
$ |
0.23 |
|
$ |
1.33 |
|
Earnings per ordinary share diluted |
|
$ |
0.23 |
|
$ |
1.33 |
|
Weighted average number of ordinary shares and ordinary share equivalents basic |
|
|
342,154 |
|
|
179,054 |
|
Weighted average number of ordinary shares and ordinary share equivalents diluted |
|
|
342,468 |
|
|
179,054 |
|
|
|
|
|
|
|
|
|
Change in fully diluted book value per share (2) |
|
$ |
3.87 |
|
$ |
(2.72 |
) |
The following table presents an analysis of the Companys net income available to ordinary shareholders and other financial measures (described below) for the six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars and shares in thousands, except per share amounts) |
|
2009 |
|
2008 (1) |
|
||
|
|
|
|
|
|
||
Net income available to ordinary shareholders |
|
$ |
258,328 |
|
$ |
449,724 |
|
Earnings per ordinary share basic |
|
$ |
0.76 |
|
$ |
2.52 |
|
Earnings per ordinary share diluted |
|
$ |
0.76 |
|
$ |
2.52 |
|
Weighted average number of ordinary shares and ordinary share equivalents basic |
|
|
339,155 |
|
|
178,701 |
|
Weighted average number of ordinary shares and ordinary share equivalents diluted |
|
|
339,262 |
|
|
178,701 |
|
|
|
|
|
|
|
|
|
Change in fully diluted book value per share (2) |
|
$ |
3.43 |
|
$ |
(6.91 |
) |
|
|
(1) |
Basic and diluted earnings per ordinary share were adjusted for 2008. For further information, see Note 14 to the Consolidated Financial Statements, Computation of Earnings per Ordinary Share and Ordinary Share Equivalents. |
|
|
(2) |
Fully diluted book value per ordinary share is a non-GAAP measure and represents book value per ordinary share combined with the impact from dilution of share based compensation including in-the-money stock options at any period end. The Company believes that fully diluted book value per ordinary share is a financial measure important to investors and other interested parties who benefit from having a consistent basis for comparison with other companies within the industry. However, this measure may not be comparable to similarly titled measures used by companies either outside or inside of the insurance industry. |
48
The Companys net income and other financial measures as shown below for the three months ended June 30, 2009 have been affected by, among other things, the following significant items:
1) Impact of credit market movements on the Companys investment portfolio
2) Factors impacting the underwriting environment
3) Favorable prior year reserve development
4) Redemption of Series C Preference Ordinary Shares
1) Impact of credit market movements on the Companys investment portfolio
During the quarter ended June 30, 2009, financial market conditions continued to be extremely challenging as the global credit crisis that began in July 2007 continued to impact global markets. This unprecedented market volatility directly and materially affected the Companys results of operations and investment portfolio during the three and six month periods ended June 30, 2009.
The deterioration in the market value of the Companys investment portfolio reported in the first quarter of 2009 was almost completely offset by the improved market conditions in the second quarter. During the three month period ended June 30, 2009, credit spreads across most classes of fixed maturity investments tightened significantly. While the benefits of improved credit markets were partially offset by increasing global interest rates and the impact of FSP FAS 115, the net impact of the market conditions on the Companys investment portfolio for the quarter resulted in a decrease in net unrealized losses on available-for-sale investments of $860.0 million and net realized losses of $80.4 million. This represents approximately a 2.4% appreciation of on average assets for the quarter ended June 30, 2009. See Item 1A, Risk Factors, Deterioration in the public debt and equity markets could lead to additional investment losses and We are exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect the Companys results of operations, financial condition or cash flows, in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. To the extent a period of inflation occurs as a result of the current market environment, such inflation may adversely impact the securities markets and the value of financial instruments.
The following table provides further detail regarding the extreme volatility in the global credit markets, as well as in government interest rates using some sample market indices:
|
|
|
|
|
|
|
Interest
Rate Movement
|
|
Credit
Spread Movement
|
|
|
|
|
|
United States |
|
+ 90 basis points (5 year Treasury) |
|
- 276 basis points (US Corporate A rated) |
|
|
|
|
- 48 basis points (US Agency RMBS, AAA rated) |
|
|
|
|
- 228 basis points (US CMBS, AAA rated) |
United Kingdom |
|
+ 52 basis points (10 year Gilt) |
|
- 121 basis points (UK Corporate, AA rated) |
Euro-zone |
|
+ 26 basis points (5 year Bund) |
|
- 158 basis points (Europe Corporate, A rated) |
|
|
(1) |
Source: Bloomberg Finance L.P. |
|
|
(2) |
Source: Merrill Lynch Global Indices |
Net realized losses on investments in the three months ended June 30, 2009 included net realized losses of approximately $84.9 million related to the write-down of certain of the Companys fixed income, equity and other investments, where the Company determined that there was an other than temporary decline in the value of those investments. Of the other-than-temporary impairments, $27.0 million related to changes of intent to hold, of which $1.4 million was within the Companys life operations. See below for further information.
$26.8 million of impairments related to the change in the intent to hold on certain Tier One and Upper Tier Two securities and $23.4 million related to credit impairments on securities with sub-prime and Alt-A collateral. The remaining impairment during the second quarter of 2009 was spread across the portfolio including structured credit and other fixed income investments. Consistent with prior quarters, management continues to evaluate the impairment of the portfolio and satisfy itself that the remaining gross unrealized losses are temporary in nature.
2) Factors Impacting the Underwriting Environment
Market concerns around the Companys financial condition continue to dissipate, although market conditions in general remain challenging due to general economic conditions and continuation of soft market behavior, seen over the last year.
49
Insurance
To date, 2009 renewals are flat (no rate change) across the entire book as compared to a 6.5% decrease in rates for the same period a year ago. There was a continuing rate strengthening from April through June, albeit gradual, where rates increased 2% for the period in aggregate. For the quarter, low single digit price decreases were seen in property (-2%) and professional (-1%) which were offset by moderate increases in specialty (+3%) and casualty (+3%) pricing. The impact of the S&P ratings downgrade in December 2008 has affected premiums particularly in certain longer tail lines, but this impact continues to lessen quite rapidly. Premium volumes have also been negatively impacted by the global economic conditions, ratable exposure bases down and reduction in M&A, the exiting of certain lines of business and the ongoing efforts of risk managers to reduce their concentration of risk (limits) with all insurers. Partially offsetting these impacts have been strengthening of retentions broadly in the segment during the second quarter, and in particular in our professional lines and property books where stronger retentions and increases in new business written occurred.
The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Insurance segment for the six month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||
(U.S. dollars in thousands) |
|
Gross
|
|
Net
|
|
Net
|
|
Gross
|
|
Net
|
|
Net
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Casualty professional lines |
|
$ |
582,110 |
|
$ |
539,128 |
|
$ |
627,260 |
|
$ |
690,471 |
|
$ |
624,297 |
|
$ |
688,167 |
|
Casualty other lines |
|
|
563,034 |
|
|
352,661 |
|
|
315,158 |
|
|
831,813 |
|
|
555,741 |
|
|
425,370 |
|
Property catastrophe |
|
|
(25 |
) |
|
1,762 |
|
|
1,762 |
|
|
(59 |
) |
|
(2,162 |
) |
|
107 |
|
Other property |
|
|
407,925 |
|
|
187,416 |
|
|
215,090 |
|
|
600,697 |
|
|
398,873 |
|
|
258,766 |
|
Marine, energy, aviation, and satellite |
|
|
344,182 |
|
|
266,055 |
|
|
287,483 |
|
|
408,377 |
|
|
325,022 |
|
|
322,618 |
|
Other specialty lines (1) |
|
|
313,147 |
|
|
247,430 |
|
|
324,087 |
|
|
430,827 |
|
|
355,917 |
|
|
324,924 |
|
Other (2) |
|
|
4,882 |
|
|
4,112 |
|
|
10,831 |
|
|
11,529 |
|
|
(29,831 |
) |
|
(27,359 |
) |
Structured indemnity |
|
|
210 |
|
|
210 |
|
|
9,930 |
|
|
43,465 |
|
|
40,815 |
|
|
34,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,215,465 |
|
$ |
1,598,774 |
|
$ |
1,791,601 |
|
$ |
3,017,120 |
|
$ |
2,268,672 |
|
$ |
2,026,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other specialty lines within the Insurance segment includes: environmental, programs, equine, warranty, specie, middle markets, and excess and surplus lines. |
|
|
(2) |
Other includes employers liability, surety, political risk and other lines. |
Reinsurance
Across the Reinsurance segment, January 1, 2009 and April 1, 2009 renewals resulted in a moderate rise in premium rates across most major lines of business. Market conditions continued to harden across short tail lines as a result of the reduction in available reinsurer capital, due in part to the credit and liquidity crisis, causing a firming in market pricing across most lines of business. U.S. and non-U.S. catastrophe exposed property lines experienced rate increases of approximately 10% to 15%, while other property lines in the U.S. remain generally flat. U.S. casualty rates, excluding D&O, were down slightly as rate reductions in underlying primary portfolios have slowed during the second quarter. International renewals in the second quarter were principally in Japan where rates increased approximately 4%.
While rate changes have positively impacted gross premiums written, such increases have been more than offset by the Companys focus on short-tail lines, certain lost renewals and reduced shares on certain accounts as a result of the S&P ratings downgrade in December 2008, most notably within the Companys European based reinsurance operations. In addition, unfavorable foreign exchange rate movements negatively impacted gross premiums written as a result of the increase in the value of the U.S. Dollar against most major currencies over the past six months.
50
The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Reinsurance segment for the six month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||
(U.S. dollars in thousands) |
|
Gross
|
|
Net
|
|
Net
|
|
Gross
|
|
Net
|
|
Net
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Casualty professional lines |
|
$ |
104,632 |
|
|
104,632 |
|
|
110,237 |
|
$ |
138,193 |
|
$ |
138,090 |
|
$ |
130,436 |
|
Casualty other lines |
|
|
144,546 |
|
|
139,714 |
|
|
137,335 |
|
|
250,444 |
|
|
244,610 |
|
|
222,645 |
|
Property catastrophe |
|
|
295,896 |
|
|
251,341 |
|
|
146,174 |
|
|
331,278 |
|
|
231,106 |
|
|
171,510 |
|
Other property |
|
|
431,843 |
|
|
324,927 |
|
|
283,096 |
|
|
455,300 |
|
|
349,595 |
|
|
342,374 |
|
Marine, energy, aviation, and satellite |
|
|
62,259 |
|
|
58,988 |
|
|
41,614 |
|
|
89,321 |
|
|
83,266 |
|
|
60,702 |
|
Other (1) |
|
|
126,559 |
|
|
106,995 |
|
|
92,037 |
|
|
204,109 |
|
|
179,321 |
|
|
104,915 |
|
Structured indemnity |
|
|
(1,782 |
) |
|
(1,782 |
) |
|
1,342 |
|
|
1,360 |
|
|
1,360 |
|
|
2,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,163,953 |
|
|
984,815 |
|
|
811,835 |
|
$ |
1,470,005 |
|
$ |
1,227,348 |
|
$ |
1,034,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other includes employers liability, surety, political risk and other lines. |
3) Favorable prior year reserve development
The Company incurred net favorable prior year reserve development in property and casualty operations for the three and six month periods ended June 30, 2009 of $89.6 million and $179.7 million, respectively compared to $182.5 million and $249.5 million, respectively, for the same periods in 2008. Reinsurance segment favorable development for the three and six month periods ended June 30, 2009 accounted for $55.3 million and $138.7 million, respectively, of the favorable development in 2009, with the balance from the Insurance segment. For further details see the segment results in Income Statement Analysis below.
4) Redemption of Series C Preference Ordinary Shares
On March 26, 2009, the Company completed a cash tender offer for its outstanding Series C Preference Ordinary Shares that resulted in approximately 12.7 million Series C Preference Ordinary Shares with a liquidation value of $317.3 million being purchased by the Company for approximately $104.7 million plus accrued and unpaid dividends, combined with professional fees totaling $0.8 million. As a result, a book value gain to ordinary shareholders of approximately $211.8 million was recorded.
Financial Measures
The following are some of the financial measures management considers important in evaluating the Companys operating performance:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars and shares in thousands, except ratios and per share amounts) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Underwriting profit property and casualty operations |
|
$ |
89,439 |
|
$ |
126,356 |
|
Combined ratio property and casualty operations |
|
|
93.0 |
% |
|
91.6 |
% |
Net investment income property and casualty operations (1) |
|
$ |
218,490 |
|
$ |
298,128 |
|
Annualized return on average shareholders equity |
|
|
5.5 |
% |
|
11.9 |
% |
51
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars and shares in thousands, except ratios and per share amounts) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Underwriting profit property and casualty operations |
|
$ |
193,291 |
|
$ |
236,212 |
|
Combined ratio property and casualty operations |
|
|
92.6 |
% |
|
92.3 |
% |
Net investment income property and casualty operations (1) |
|
$ |
460,656 |
|
$ |
606,169 |
|
Annualized return on average shareholders equity |
|
|
8.9 |
% |
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
December
31,
|
|
||
|
|
|
|
|
|
||
Book value per ordinary share |
|
$ |
18.91 |
|
$ |
15.46 |
|
Fully diluted book value per ordinary share (2) |
|
$ |
18.89 |
|
$ |
15.46 |
|
|
|
(1) |
Net investment income relating to property and casualty operations does not include the net investment income related to the net results from structured products. |
|
|
(2) |
Fully diluted book value per ordinary share is a non-GAAP measure and represents book value per ordinary share combined with the impact from dilution of share based compensation including in-the-money stock options at any period end. The Company believes that fully diluted book value per ordinary share is a financial measure important to investors and other interested parties who benefit from having a consistent basis for comparison with other companies within the industry. However, this measure may not be comparable to similarly titled measures used by companies either outside or inside of the insurance industry. |
Underwriting profit property and casualty operations
One way that the Company evaluates the performance of its insurance and reinsurance operations is the underwriting profit or loss. The Company does not measure performance based on the amount of gross premiums written. Underwriting profit or loss is calculated from premiums earned and fee income, less net losses incurred and expenses related to underwriting activities, plus unrealized foreign exchange gains and losses on underwriting balances. Underwriting profit in the six month period ended June 30, 2009 is primarily reflective of the combined ratio discussed below.
Combined ratio property and casualty operations
The combined ratio for property and casualty operations is used by the Company and many other insurance and reinsurance companies as another measure of underwriting profitability. The combined ratio is calculated from the net losses incurred and underwriting expenses as a ratio of the net premiums earned for the Companys insurance and reinsurance operations. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% reflects an underwriting loss. The Companys combined ratio for the six months ended June 30, 2009, is slightly higher than the same period in the previous year, primarily as a result of an increase in the underwriting expense ratio, partially offset by a decrease in the loss and loss expense ratio. The loss and loss expense ratio has declined as a result of lower levels of catastrophe losses in the reinsurance segment and lower current year professional lines losses in the insurance segment partially offset by larger prior year reserve releases reported in 2008. The increased underwriting expense ratio has been driven largely by increases in operating expenses against lower net premiums earned. Operating expenses increased mainly as a result of the Companys restructuring activities as described further below.
Net investment income property and casualty operations
Net investment income related to property and casualty operations is an important measure that affects the Companys overall profitability. The largest liability of the Company relates to its unpaid loss reserves, and the Companys investment portfolio provides liquidity for claims settlements of these reserves as they become due, and thus a significant part of the portfolio is invested in fixed income securities. Net investment income is influenced by a number of factors, including the amounts and timing of inward and outward cash flows, the level of interest rates and credit spreads and changes in overall asset allocation. Net investment income related to property and casualty operations decreased by $145.5 million during the first half of 2009 as compared to same period in the prior year. Overall, portfolio yields have decreased as the portfolio mix has changed as a result of the settlement of the GIC liabilities during 2008, as the property and casualty operations assumed a number of the floating rate securities that previously supported this business and are more sensitive to the year-on-year decline in U.S.dollar short-term interest rates. In addition, the Company increased its allocation to lower yielding U.S. Treasuries, cash and agencies as a result of the continued de-risking of the portfolio and to increase liquidity.
Book value per ordinary share
Management also views the change in the Companys book value per ordinary share as an additional measure of the Companys performance. Book value per share is calculated by dividing ordinary shareholders equity by the number of outstanding ordinary shares at any period end. Book value per ordinary share is affected primarily by the Companys net income (loss), by any changes in the net unrealized gains and losses on its investment portfolio, currency translation adjustments and also the impact of any share repurchase or issuance activity. Book value per ordinary share increased by $3.45 in the first six months of 2009 as compared to a decrease of $6.91 in the first six months of 2008. During the six months ended June 30, 2009, there was an increase in net unrealized losses of $859.8 million, net of tax. Although there was significant quarterto-quarter volatility, in aggregate the impact of widening credit spreads was slightly larger than the offsetting benefit from declining interest rates. During the second quarter, there was a significant decrease in net unrealized losses as tightening credit spreads were significantly larger than the impact of increasing rates within the quarter. Book value was further increased by the issuance of 11,461,080 shares issued at $65.0 per share upon the maturity of the purchase contracts associated with the 7.0% Units, as such issuance was accretive to book value. In addition, book value per ordinary share increased as a result of net income available to ordinary shareholders of $283.3 million which included a $211.8 million gain associated with the purchase of a portion of the Companys Series C Preference Ordinary Shares.
52
Annualized return on average ordinary shareholders equity
Annualized return on average ordinary shareholders equity (ROE) is another financial measure that management considers important in evaluating the Companys operating performance. ROE is calculated by dividing the net income for any period by the average of the opening and closing ordinary shareholders equity. The Company establishes minimum target ROEs for its total operations, segments and lines of business. If the Companys minimum ROE targets over the longer term are not met with respect to any line of business, the Company seeks to modify and/or exit these lines. In addition, the Companys compensation of its senior officers is significantly dependent on the achievement of the Companys performance goals to enhance shareholder value as measured by ROE (adjusted for certain items considered to be non-operating in nature). For the first half of 2009, ROE was 8.9%, 1.9 percentage points lower than the same period in the prior year, mainly as a result of lower net income to ordinary shareholders partially offset by lower levels of average shareholders equity. Shareholders equity decreased over the past twelve months mainly as a result of the Companys net loss recorded in 2008 as well as from increases in unrealized losses on investments and unfavorable foreign exchange translation adjustments during this period.
Other Key Focuses of Management
See the discussion of the Other Key Focuses of Management in Item 7 of the Companys Form 10-K for the year ended December 31, 2008. That discussion is updated with the disclosures set forth below.
Throughout the latter part of 2008 and into 2009, the Company remains focused on, among other things, simplifying the Companys business model to focus on core property and casualty business and enhancing its enterprise risk management capabilities. Details relating to these initiatives are highlighted below.
Simplify the Companys Business Model and Enhance Risk Management
In relation to these objectives, certain initiatives that have taken place or are underway include the following:
|
|
|
|
|
Focus on P&C Businesses : As previously announced, the Company is focusing on those lines of business within its Insurance and Reinsurance segments that provide the best return on capital. As such, the Company will continue to be highly selective on new business, emphasize short-tail lines, where applicable, in the Companys Reinsurance segment, exit other businesses (e.g., Casualty facultative business), non-renew certain insurance programs, as well as continue to reduce long-term agreements (within the Insurance segment) in order to capture the benefit of hardening markets. In addition, the Company recently completed a strategic review of its Life reinsurance business. In connection therewith, the Company announced that it sold renewal rights to a portion of its European life, accident and health reinsurance business, a relatively small block of business, and it will run-off its existing book of U.K. and Irish life and annuity business. In addition, subsequent to June 30, 2009, the Company entered into an agreement to sell its U.S. life reinsurance business. The transaction is expected to close on September 30, 2009, subject to regulatory approval and normal closing conditions. |
|
|
|
|
|
Enterprise Risk Management : The Company is focused on enhancing its risk management capabilities throughout all facets of its operations. This initiative is led by the Companys Chief Enterprise Risk Officer (CERO) and is supported by, among others, the Companys Enterprise Risk Management Committee (the ERM Committee) comprised of the most senior risk takers and managers of the Company. The ERM Committee will continue to assist with the efficient identification, assessment, monitoring and reporting of key risks across the Company. |
|
|
|
|
|
Simplify Investment Portfolio Over Time : The Company has continued to reposition the Companys investment portfolio to one that supports a P&C focused operation so that a) book value volatility, particularly related to credit spreads arising from the portfolio, is reduced, b) a reduction in lower rated corporate securities and financial issuers is achieved, c) exposure to commercial mortgage-backed securities (CMBS) is reduced and d) a reduction in asset classes such as sub-prime, Alt-A and Core CDOs previously supporting the guaranteed investment contract and funding agreement businesses is achieved. Realignment will be achieved primarily through cash generated from bond maturities and coupon reinvestment, cash flow from business operations as well as certain opportunistic sales. |
53
|
|
|
|
|
During the fourth quarter of 2008, the Company announced a charge on its investment portfolio for OTTI of $400.0 million in relation to impaired assets that it could no longer assert its intent to hold until recovery. During the first six months of 2009, the Company has substantively completed the sales associated with this charge. These actions, combined with sales of securities at realized gains and natural cash flows and maturities from the portfolio, had the effect of reducing the Companys exposure to the previously mentioned asset classes, and alternative investments, by $3.5 billion during the first half of 2009. |
|
|
|
|
|
Reduction of Expenses to Reflect Simplified Business : In light of the changes in business strategy noted above and in response to the significant market and other events which impacted the Company throughout 2008, the Company implemented in the third quarter of 2008, and subsequently in the first quarter of 2009, expense reduction initiatives designed to streamline certain of its processes and functions and reduce the Companys expense across all major geographic locations, with primary emphasis on corporate functions. In 2009, the Company expects to record a total of $2.4 million of restructuring charges associated with the restructuring efforts announced in the third quarter of 2008 and approximately $65.0 million associated with the restructuring efforts announced in the first quarter of 2009. Restructuring charges relate mainly to employee termination benefits as well as certain asset write-offs and ceasing to use certain leased property. For further details see Note 5 to the Consolidated Financial Statements, Restructuring and Asset Impairment Charges. |
Capital Management
Fundamental to supporting the Companys business model is its ability to underwrite business, which is largely dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that the Company is further downgraded, its ability to write business as well as its financial condition and/or results of operations, could be adversely affected. See Item 1, Business Ratings in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 for further information regarding recent rating actions by the various rating agencies, as well as details regarding the Companys financial strength and debt ratings.
In relation to the Companys capital position, the following activities have occurred in 2009:
|
|
|
|
|
On March 26, 2009, the Company completed a cash tender offer for its outstanding Series C Preference Ordinary Shares that resulted in approximately 12.7 million Series C Preference Ordinary Shares with a liquidation value of $317.3 million being purchased by the Company for approximately $104.7 million plus accrued and unpaid dividends, combined with professional fees totaling $0.8 million. As a result, a book value gain of approximately $211.8 million was recorded in the first quarter of 2009 to ordinary shareholders. |
|
|
|
|
|
In February 2009, the Board of Directors approved a reduction in the quarterly dividend payable on the Companys Class A Ordinary Shares to $0.10 per ordinary share beginning with the quarterly dividend paid in March 2009. |
|
|
|
|
|
Following the settlement of the purchase contracts associated with the 7.0% Units in February 2009, the Company issued 11,461,080 Shares for net proceeds of approximately $745.0 million, which was used to retire the senior notes previously due February 2011 which had a fixed coupon of 5.25% (the 2011 Senior Notes). |
Catastrophe Risk Management
The Company manages its limits to a catastrophe risk from any single loss in a given region/peril at a 1% exceedance probability. Tier 1 limits which include natural catastrophe, terrorism and other realistic disaster scenario risks are targeted at a level not to exceed 15% of beginning of the year tangible shareholders equity (adjusted, in 2009, for the issuance of Class A ordinary shares following maturity of the purchase contracts associated with the 7.0% Units for further information see Notes 9 and 10 to the Consolidated Financial Statements above), where Tier 2 limits, which include pandemic, longevity, and country risk, are established at no more than half of Tier 1 limits. These target limits are established by a combination of commercially available models, internally developed probable maximum loss estimates and the judgment of management.
Critical Accounting Policies and Estimates
See the discussion of the Companys Critical Accounting Policies and Estimates in Item 7 of the Companys Form 10-K for the year ended December 31, 2008.
54
Variable Interest Entities and Other Off-Balance Sheet Arrangements
At times, the Company has utilized VIEs both indirectly and directly in the ordinary course of the Companys business. The Company invests in CDOs, and other investment vehicles that are issued through variable interest entities as part of the Companys investment portfolio. The activities of these VIEs are generally limited to holding the underlying collateral used to service investments therein. Our involvement in these entities is passive in nature and we are not the arranger of these entities. The Company has not been involved in establishing these entities. The Company is not the primary beneficiary of these variable interest entities under paragraph 14 of FIN 46(R), Consolidation of Variable Interest Entities (FIN 46(R)).
In addition, the Company has utilized variable interest entities in certain instances as a means of accessing contingent capital. The Company has utilized unconsolidated entities in the formation of contingent capital facilities. The Companys interests in Stoneheath represents an interest in a variable interest entity under FIN 46(R), however, the Company is not the primary beneficiary under paragraph 14 of that guidance. Given that there are no contractual requirements or intentions to enter into additional variable interests in this entity; management considers the likelihood of consolidating Stoneheath in the future to be remote. For further information, see Note 18 to the Consolidated Financial Statements, Off-Balance Sheet Arrangements in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
Segment Results for the three months ended June 30, 2009 compared to the three months ended June 30, 2008
Following a streamlining of the Companys operating segments in the first quarter of 2009, the Company is organized into three operating segments: Insurance, Reinsurance and Life Operations in addition to a Corporate segment that includes the general investment and financing operations of the Company.
The Company evaluates the performance for both the Insurance and Reinsurance segments based on underwriting profit and contribution from its Life Operations segment. Other items of revenue and expenditure of the Company are not evaluated at the segment level for reporting purposes. In addition, the Company does not allocate investment assets by segment for its property and casualty (P&C) operations. Investment assets related to the Companys Life Operations and certain structured products included in the Insurance, Reinsurance and Corporate segments are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from each of these segments.
Income Statement Analysis
Insurance
Insurance business written includes risk management, professional and other specialty lines. Risk management products comprise global property and casualty insurance programs for large multinational companies, including excess and umbrella liability, products recall, U.S. workers compensation, property catastrophe, and primary property and liability coverages. Specialty lines products include the following lines of business: environmental liability, aviation and satellite, marine and offshore energy insurance, fine art and specie, equine and other insurance coverages including program business. In addition, certain structured indemnity products previously structured by XLFS are included within the results of the Insurance segment covering a range of insurance risks including property and casualty insurance, certain types of residual value exposures and other market risk management products.
The following table summarizes the underwriting results for this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
1,124,220 |
|
$ |
1,388,771 |
|
|
(19.0 |
)% |
Net premiums written |
|
|
766,606 |
|
|
1,084,820 |
|
|
(29.3 |
)% |
Net premiums earned |
|
|
881,490 |
|
|
1,018,350 |
|
|
(13.4 |
)% |
Net losses and loss expenses |
|
|
598,784 |
|
|
653,822 |
|
|
(8.4 |
)% |
Acquisition costs |
|
|
112,430 |
|
|
113,877 |
|
|
(1.3 |
)% |
Operating expenses |
|
|
167,931 |
|
|
178,282 |
|
|
(5.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
$ |
2,345 |
|
$ |
72,369 |
|
|
(96.8 |
)% |
Net fee income and other (1) |
|
$ |
(3,220 |
) |
$ |
1,389 |
|
|
NM |
* |
Net results structured products |
|
$ |
4,093 |
|
$ |
12,366 |
|
|
(66.9 |
)% |
|
|
|
|
(1) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
* |
NM not meaningful |
Gross premiums written decreased by 19.0% during the three months ended June 30, 2009 compared with the three months ended June 30, 2008. While decreases were seen across most lines as a result of poor market and economic conditions impacting retention and new business opportunities, the majority of the variance results from fewer long term agreements, unfavorable foreign exchange rate impacts and the exiting of specific lines of business and agency contracts. While rates were generally flat to slightly lower across most lines of business during the first half of 2009, as compared to 2008, as noted above, the level of rate reduction experienced throughout 2008 has slowed during 2009.
55
The decrease in casualty lines was most significant in European excess lines and related primarily to a reduction in long term agreements, unfavorable changes to prior period estimates combined with unfavorable foreign exchange rate impacts and to a lesser extent pricing and overall retention. Decreases in specialty lines relate mostly to the decision to eliminate specific lines of business and agency contracts partially offset by increases in new lines of business. Gross premiums written in property lines decreased as a result of lower retention rates combined with unfavorable foreign exchange rate impacts and generally poor global economic conditions impacting construction, partially offset by new business opportunities. Net premiums written decreased by 29.3% during the second quarter of 2009 as compared to same period in 2008 primarily as a result of the decrease in gross premiums written noted above, combined with timing changes and increased reinsurance pricing on the renewal of certain ceded property treaties.
Net premiums earned decreased by 13.4% in the three month period ended June 30, 2009 compared with the three month period ended June 30, 2008. The decrease primarily resulted from the earn-out of overall lower net premiums written in the past twelve months.
Fee income decreased in the second quarter of 2009 as compared to the second quarter of 2008 mainly as a result of lower property business opportunities regarding engineering services and the run off of certain financial lines of business.
The following table presents the ratios for this segment:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
67.9 |
% |
|
64.2 |
% |
Underwriting expense ratio |
|
|
31.8 |
% |
|
28.7 |
% |
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.7 |
% |
|
92.9 |
% |
|
|
|
|
|
|
|
|
The loss and loss expense ratio includes net losses incurred for both the current year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes the net (favorable) adverse prior year development relating to the Insurance segment for the three month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars in millions) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Property |
|
$ |
(5.7 |
) |
$ |
(53.3 |
) |
Casualty and professional |
|
|
(46.3 |
) |
|
(58.0 |
) |
Specialty and other |
|
|
17.7 |
|
|
11.6 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(34.3 |
) |
$ |
(99.7 |
) |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding prior year development |
|
|
71.8 |
% |
|
74.0 |
% |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding catastrophe losses and prior year development |
|
|
71.9 |
% |
|
68.1 |
% |
|
|
|
|
|
|
|
|
Excluding prior year development, the loss ratio for the three months ended June 30, 2009 decreased by 2.2 loss percentage points as compared to the same period in 2008 due primarily to lower levels of large property risk and catastrophe losses occurring in the second quarter of 2009 and the impact of anticipated sub prime and credit related loss activity in 2008 partially offset by lower premium rate levels in certain lines such as environmental business.
Net favorable prior year development in the quarter ending June 30, 2009 totaled $34.3 million, with gross prior year unfavorable development of $110 million.
|
|
§ |
For Property lines, net prior year development during the second quarter of 2009 was $5.7 million favorable largely as a result of an $8 million reduction in ultimate losses for the 2008 hurricanes Ike and Gustav due to lower incurred activity than expected based on the Companys prior valuation and the recognition of the increased maturity of the experience. Favorable Catastrophe development was partially offset by minor unfavorable developments related to non-catastrophe property exposures and provisions for unrecoverable reinsurance. |
56
|
|
|
§ |
For Casualty lines, net prior year development during the second quarter of 2009 was $5.6 million unfavorable, with gross prior year unfavorable development of $110 million. The significant events impacting this movement are as follows: |
|
|
|
|
|
§ |
$40 million unfavorable in Excess Casualty business as a result of greater than expected reported loss activity on the 2007 and 2008 accident years related to two individual losses totaling $72 million net and $224 million gross. |
|
|
|
|
§ |
$28 million favorable in Primary Casualty results mainly from benign large loss experience on European business in the 2007 and 2008 accident years; this has been partially offset by strengthening for US business in the 2001 and prior accident years. |
|
|
|
|
§ |
$6 million favorable in US large risk casualty business results from continued favorable loss development for older years of Auto liability and General Liability which we are now recognizing due to the maturity of the experience. |
|
|
|
|
§ |
$1 million favorable resulted from a reduction in the provision for unrecoverable reinsurance caused by changes in the level of recoveries and the distribution of recoveries by reinsurer. |
|
|
|
|
§ |
Gross prior year unfavorable development significantly exceeds the corresponding net unfavorable development, as the impact of increases in gross reported losses in certain casualty lines was mostly offset by the impact of the reinsurance recoverable component on such losses. This is mainly caused by the two large losses in Excess Casualty discussed above. |
|
|
|
§ |
For Professional lines, net prior year development during the second quarter of 2009 is $51.9 million favorable, primarily as a result of lower incurred activity than expected based on the Companys prior valuation in US D&O lines, primarily for underwriting years 2003 to 2006. These releases were partially offset by strengthening of reserves primarily in the 1999 to 2002 years to reflect the potential for more adverse claim activity in the non-U.S. business. The Company continues to analyze claim activity associated with financial markets deterioration in 2007 and 2008 and has reallocated the level of carried reserves between the two years without impacting the expected ultimate losses. |
|
|
|
|
§ |
For Specialty Lines, net prior year development during the second quarter is $17.7million unfavorable. The significant events impacting this movement are as follows: |
|
|
|
|
|
§ |
$7 million favorable in Aerospace due to the US Space and Aviation business, where development since the Companys prior review has been lower than implied by the historical average. |
|
|
|
|
§ |
$10 million unfavorable in Environmental due to unexpectedly high allocated loss adjustment expense increases for the General Liability account and large losses over and above expectations based on the Companys prior valuation related to pollution site exposures. |
|
|
|
|
§ |
$8 million unfavorable in Discontinued Specialty due to the results of a full valuation of the Lloyds Accident & Health business where incurred development was higher than implied by the Companys selected benchmarks. |
|
|
|
|
§ |
Specie and Other specialty business deteriorated by $7 million in total. |
The increase in the underwriting expense ratio in the three months ended June 30, 2009, compared to the same period in 2008 was due to an increase in the acquisition expense ratio of 1.6 points (12.8% as compared to 11.2%) combined with an increase in the operating expense ratio of 1.5 points (19.0% as compared to 17.5%). The increase in the acquisition expense ratio was primarily as a result of changes in the mix of business given the decreases in property and casualty lines which carry the lowest levels of acquisition cost. The increase in the operating expense ratio is attributable to the lower level of earned premium. Actual operating expenses in total decreased in 2009 as a result of the expense reduction initiatives announced in the third quarter of 2008 and first quarter of 2009.
Net results from structured insurance products include certain structured indemnity contracts that are accounted for as deposit contracts. Net results from these contracts for the three months ended June 30, 2009, have decreased compared to the same period in 2008 mainly due to a large gain on a negotiated cancellation in 2008 combined with the effects of the run off of this line of business.
Reinsurance
Reinsurance business written includes treaty and facultative reinsurance assumed from primary insurers of casualty and property risks, principally: general liability; professional liability; automobile and workers compensation; commercial and personal property risks; specialty risks including fidelity and surety and ocean marine; property catastrophe; property excess of loss; property pro-rata; marine and energy; aviation and satellite; and various other reinsurance to insurers on a worldwide basis. In addition, the results of certain transactions previously structured by XLFS that were generally written on an aggregate stop loss or excess of loss basis are included within the results of the Reinsurance segment.
57
The following table summarizes the underwriting results for this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
376,970 |
|
$ |
397,460 |
|
|
(5.2 |
)% |
Net premiums written |
|
|
311,672 |
|
|
274,647 |
|
|
13.5 |
% |
Net premiums earned |
|
|
400,259 |
|
|
490,437 |
|
|
(18.4 |
)% |
Net losses and loss expenses |
|
|
180,844 |
|
|
284,763 |
|
|
(36.5 |
)% |
Acquisition costs |
|
|
85,302 |
|
|
106,528 |
|
|
(19.9 |
)% |
Operating expenses |
|
|
47,019 |
|
|
45,159 |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
$ |
87,094 |
|
$ |
53,987 |
|
|
61.3 |
% |
Net fee income and other (1) |
|
|
545 |
|
|
471 |
|
|
15.8 |
% |
Net results structured products |
|
$ |
6,172 |
|
$ |
2,579 |
|
|
NM |
* |
|
|
|
|
(1) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
* |
NM not meaningful |
Gross premiums written decreased by 5.2%, while net written premiums increased by 13.5%, in the second quarter of 2009 as compared to the second quarter of 2008. The decrease in gross premiums written was largely as a result of the Companys focus on short-tail lines, certain lost renewals and reduced shares on certain accounts as a result of the S&P ratings downgrade in December 2008 and unfavorable foreign exchange rate movements. Partially offsetting these decreases were rate increases in certain lines of business including property catastrophe, marine and aviation. The increase in net premiums written reflects a reduction in ceded premiums in the three months ended June 30, 2009 as compared to the same period in 2008. This decrease was mainly as a result of the cancellation and non-renewal of Cyrus Re II at December 31, 2008 combined with the impact of the catastrophe covers purchased in the second quarter of 2008 including industry loss warranties. Cyrus Re II previously assumed a 10% cession of certain lines of property catastrophe reinsurance and retrocession business underwritten by certain operating subsidiaries of the Company.
Net premiums earned in the second quarter of 2009 decreased by 18.4% as compared to the second quarter of 2008. The decrease was a reflection of the overall reduction of net premiums written over the last 24 months.
The following table presents the ratios for this segment:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Loss and loss expense ratio |
|
|
45.2 |
% |
|
58.1 |
% |
Underwriting expense ratio |
|
|
33.0 |
% |
|
30.9 |
% |
|
|
|
|
|
|
|
|
Combined ratio |
|
|
78.2 |
% |
|
89.0 |
% |
|
|
|
|
|
|
|
|
The loss and loss expense ratio includes net losses incurred for both the current year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes the net (favorable) adverse prior year development relating to the Reinsurance segment for the three month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars in millions) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Property and other short-tail lines |
|
$ |
(36.3 |
) |
$ |
(55.0 |
) |
Casualty and other |
|
|
(19.0 |
) |
|
(27.9 |
) |
|
|
|
|
|
|
|
|
Total |
|
$ |
(55.3 |
) |
$ |
(82.9 |
) |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding prior year development |
|
|
59.0 |
% |
|
75.0 |
% |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding catastrophe losses and prior year development |
|
|
59.0 |
% |
|
67.2 |
% |
|
|
|
|
|
|
|
|
Excluding prior year development, the loss ratio for the three months ended June 30, 2009 decreased by 16.0 loss percentage points as compared to the same period in 2008 with 7.8 loss ratio points attributable to the impact of catastrophe losses occurring in 2008 (7.8 points) compared to the second quarter of 2009 (0.0 points). 2008 catastrophes included losses related to mid-west floods and snow storms and earthquakes in China.
58
Net favorable prior year development for the quarter ended June 30, 2009 totalled $55.3 million. This represents less than 1% of the beginning net reserve. Gross prior year development was $60 million for the same period.
|
|
|
|
Net favorable prior year development of $36.3 million for the short tailed lines in the quarter and details of these by specific lines are as follows: |
|
|
|
|
|
|
$32 million in favorable Property Other development due to reported losses coming in better than expected, some of this due to case reserve reductions, primarily from underwriting years 2006 to 2008 in portfolios. |
|
|
|
|
|
$5 million in favorable Marine development due to small releases from US, Europe and Latin America portfolios across most underwriting years. |
|
|
|
|
|
No material changes for Property Cat and Aviation lines as losses developed as expected in the quarter. |
|
|
|
|
Net favorable prior year development of $19.0 million for the long tailed lines in the quarter and details of these by specific lines are as follows: |
|
|
|
|
|
|
$12 million in favorable development primarily for US and European Professional portfolios. The US portfolio had favorable development of $8 million mainly due to favorable emergence in D&O and E&O non-proportional exposures in underwriting years 1998 through 2002. The European portfolio had releases of $6 million, predominantly from their Professional Indemnity exposures, due to better than expected activity in underwriting years 2004 through 2006. |
|
|
|
|
|
$7 million in releases for the Other lines mainly due to favorable emergence and reserve takedowns related to 2 treaties for US Bond runoff exposures from underwriting years 1997 through 2004. |
|
|
|
|
|
No material change for Casualty lines for the quarter. Adverse development in the US Casualty portfolio of $8 million mainly due to workers compensation clash and general liability non-proportional exposures in underwriting years 2001 and 2002 was offset by favorable development of $8 million in European portfolio related to releases from their motor liability book for most underwriting years and general liability non-proportional exposures in underwriting years 2007 and 2008. |
The increase in the underwriting expense ratio in the three months ended June 30, 2009, as compared with the three months ended June 30, 2008, was due to an increase in the operating expense ratio of 2.5 points (11.7% as compared to 9.2%) partially offset by a decrease in the acquisition expense ratio of 0.4 points (21.3% as compared to 21.7%). The increase in the operating expense ratio was primarily as a result of higher operating expenses due to charges associated with the Companys restructuring activities, against a lower level of net premiums earned. The decrease in the acquisition expense ratio was primarily as a result of changes in the mix of business, including the U.S. agricultural program.
Net results from structured reinsurance products include certain structured indemnity contracts that are accounted for as deposit contracts. Results from these products for the three months ended June 30, 2009, increased compared to the same period in 2008 mainly due to lower operating expenses and favorable development in the liability interest rate hedges in place partially offset by lower net investment income as a result of lower yields combined with a smaller investment base.
Life Operations
As noted above, the Company recently completed a strategic review of its Life reinsurance business which resulted in the Company selling the renewal rights to a portion of its European life, accident and health reinsurance business, a relatively small block of business, in late 2008 as well as ceasing to write new U.K. and Irish life and annuity business. In addition, subsequent to June 30, 2009, the Company entered into an agreement to sell its U.S. life reinsurance business. The transaction is expected to close on September 30, 2009, subject to regulatory approval and normal closing conditions. Business previously written by the Life Operations segment was primarily European life reinsurance and included term assurances, group life, critical illness cover, immediate annuities, disability income cover, and short-term life, accident and health business.
59
The following summarizes the contribution from this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
150,711 |
|
$ |
161,251 |
|
|
(6.6 |
)% |
Net premiums written |
|
|
140,674 |
|
|
150,933 |
|
|
(6.8 |
)% |
Net premiums earned |
|
|
147,951 |
|
|
172,935 |
|
|
(14.5 |
)% |
Claims and policy benefits |
|
|
174,588 |
|
|
209,725 |
|
|
(16.8 |
)% |
Acquisition costs |
|
|
25,540 |
|
|
25,832 |
|
|
(1.2 |
)% |
Operating expenses |
|
|
4,269 |
|
|
9,299 |
|
|
(54.1 |
)% |
Fee income and other |
|
|
123 |
|
|
136 |
|
|
(9.6 |
)% |
Net investment income |
|
|
82,855 |
|
|
98,058 |
|
|
(15.5 |
)% |
Net realized (losses) gains on investments |
|
|
(51,663 |
) |
|
11,792 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
Contribution from Life Operations |
|
$ |
(25,131 |
) |
$ |
38,065 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
NM Not meaningful |
The following table is an analysis of the Life Operations gross premiums written, net premiums written and net premiums earned for the three month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||
(U.S. dollars in thousands) |
|
Gross
|
|
Net
|
|
Net
|
|
Gross
|
|
Net
|
|
Net
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other Life |
|
$ |
109,648 |
|
$ |
107,283 |
|
$ |
114,560 |
|
$ |
108,743 |
|
$ |
107,942 |
|
$ |
129,944 |
|
Annuity |
|
|
41,063 |
|
|
33,391 |
|
|
33,391 |
|
|
52,508 |
|
|
42,991 |
|
|
42,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
150,711 |
|
$ |
140,674 |
|
$ |
147,951 |
|
$ |
161,251 |
|
$ |
150,933 |
|
$ |
172,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written relating to other life business increased by $0.9 million in the three months ended June 30, 2009 as compared to the same period in 2008. The increase is mainly driven by new business volumes in the term assurance treaties, almost entirely offset by unfavorable foreign exchange rate movements. Ceded premiums written for other life business increased by $1.6 million mainly as a result of short term life accident and health business, for which any residual 2009 renewals have been 100% retroceded in line with the sale of the renewal rights. There is also some impact from US business as more policies are above the retention sum assured of $2.0 million per life. Gross premiums written relating to annuity business decreased by $11.4 million in the three months ended June 30, 2009, mainly due to negative exchange rate movements. Ceded premiums written for annuities also decreased slightly by $1.8 million, again due to exchange rate movements.
Net premiums earned in the second quarter of 2009 decreased 14.5% as compared to the second quarter of 2008. This decrease was consistent with the decrease in gross and net premiums written as described above.
Claims and policy benefits decreased by $35.1 million or 16.8% in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, primarily as a result of favorable foreign exchange rate movements of $25.7 million, combined with a decrease in incurred losses associated with the short-term life, accident and health business. Changes in claims and policy benefits include the movement in policy benefit reserves related to other contracts (such as immediate annuities) where investment assets were acquired with the assumption of the policy benefit reserves at the inception of the contract.
For the three months ended June 30, 2009, acquisition costs decreased by 1.2% as compared to the same period in 2008, largely as a result of a decrease in business written associated with the short-term life, accident and health business combined with favorable foreign exchange rate movements. Operating expenses decreased by 54.1% in the second quarter of 2009 as compared to the same period in the prior year due mainly to corporate expenses which have not been allocated to life business in 2009. There are also impacts from lower compensation expenses as a result of overall lower staffing levels as well as from favorable foreign exchange rate movements in the second quarter of 2009.
Net investment income is included in the calculation of contribution from Life Operations, as it relates to income earned on portfolios of separately identified and managed life investment assets and other allocated assets. Net investment income decreased by $15.2 million or 15.5% in the three months ended June 30, 2009, as compared to the same period in 2008, primarily as a result of unfavorable foreign exchange rate movements, combined with lower investment yields.
60
See below for an analysis of the Companys total realized losses on investments during the three months ended June 30, 2009.
Investment Activities
The following table illustrates the change in net investment income from property and casualty operations, net income from investment fund affiliates, net realized (losses) gains on investments and net realized and unrealized gains (losses) on investment derivative instruments for the three months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Net investment income property and casualty operations (1) |
|
$ |
218,490 |
|
$ |
298,128 |
|
|
(26.8 |
)% |
Net income (loss) from investment fund affiliates (2) |
|
|
37,086 |
|
|
(20,435 |
) |
|
NM |
* |
Net realized (losses) gains on investments |
|
|
(80,430 |
) |
|
2,040 |
|
|
NM |
* |
Net realized and unrealized gains (losses) on investment and other derivative instruments |
|
|
969 |
|
|
8,124 |
|
|
NM |
* |
|
|
|
|
|
(1) |
Net investment income relating to property and casualty operations does not include the net investment income related to the net results from structured products. |
|
|
(2) |
The Company records the income related to alternative fund affiliates on a one month lag and the private investment fund affiliates on a three month lag in order for the Company to meet the accelerated filing deadlines. |
|
|
* |
NM Not meaningful |
Net investment income related to property and casualty operations decreased in the second quarter of 2009 as compared to the second quarter of 2008 due primarily to declining portfolio yields. Portfolio yields decreased as yields earned on investment of cash flows and reinvestment of maturing or sold securities were generally lower than on securities previously held, as prevailing market interest rates, particularly in the U.S., decreased over the last year. In addition, the Company increased its holdings in lower-yielding cash, government and agency securities in connection with its portfolio de-risking efforts and to increase liquidity, and as a result of an allocation to floating rate securities previously supporting the GIC and funding agreement businesses which are sensitive to declines in short-term U.S. dollar interest rates.
Net income from investment fund affiliates increased in the second quarter of 2009 compared to the second quarter of 2008, due primarily to strong results from the Companys alternative funds.
The Company manages its investment grade fixed income securities using an asset/liability management framework. Due to the unique nature of the underlying liabilities, customized benchmarks are used to measure investment performance and comparison to standard market indices is not meaningful. Investment performance is not monitored for certain assets primarily consisting of operating cash and special regulatory deposits. The following is a summary of the investment portfolio returns for the asset/liability portfolios and risk asset portfolios for the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 (1) |
|
2008 (1) |
|
||
|
|
|
|
|
|
||
Asset/Liability portfolios |
|
|
|
|
|
|
|
USD fixed income portfolio |
|
|
4.4 |
% |
|
(0.9 |
)% |
GBP fixed income portfolio |
|
|
7.5 |
% |
|
(1.3 |
)% |
EUR fixed income portfolio |
|
|
3.8 |
% |
|
(1.5 |
)% |
Risk Asset portfolios |
|
|
|
|
|
|
|
Alternative portfolio (2) |
|
|
5.5 |
% |
|
(0.8 |
)% |
Equity portfolio |
|
|
(2.0 |
)% |
|
(1.0 |
)% |
High-Yield fixed income portfolio |
|
|
18.2 |
% |
|
2.0 |
% |
|
|
|
|
|
(1) |
Portfolio returns are calculated by dividing the sum of net investment income or net income from investment affiliates, realized gains (losses) and unrealized gains (losses) by the average market value of each portfolio. Performance is measured in either the underlying asset currency or the functional currency. |
|
|
(2) |
Performance on the alternative portfolio reflects the three months ended May 31, 2009 and May 31, 2008, respectively. |
61
Net Realized Losses and Gains and Other than Temporary Declines in the Value of Investments
Net realized losses for the quarter ended June 30, 2009 can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Net realized gains (losses) on investments sold |
|
$ |
4,520 |
|
$ |
49,742 |
|
|
|
|
|
|
|
|
|
Other-than temporary impairments on investments |
|
|
(115,620 |
) |
|
(47,702 |
) |
Other-than-temporary impairments on investments transferred to other comprehensive income |
|
|
30,670 |
|
|
|
|
|
|
|
|
|
|
|
|
Net impact from other-than-temporary impairments |
|
|
(84,950 |
) |
|
(47,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments |
|
$ |
(80,430 |
) |
$ |
2,040 |
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2009, the Company recorded net impairment charges of $85.0 million. The significant assumptions and inputs associated with these securities consist of:
|
|
|
|
|
For corporate securities, the Company recorded net impairments totaling $38.1 million. The impairment charges consisted of below-investment grade securities, where the Company believes the current fair value is representative of likely recoveries following default, below-investment grade hybrids, where the Company considered impairment factors consistent with an equity impairment model, along with a debt impairment model, and accordingly recorded impairment charges to fair value, or securities in an unrealized loss position that management intends to sell. |
|
|
|
|
|
For structured credit securities, the Company recorded net impairments of $46.9 million. The Company determined that the likely recovery on these securities was below the carrying value, and accordingly impaired the securities to the discounted value of the cash flows of these securities, or in certain instances fair value to the extent that the fair value was believed to be more representative of recoverable value given the extreme illiquidity within structured credit markets. |
|
|
|
|
Of the other-than-temporary impairments, $30.2 million related to changes of intent-to-hold, primarily representing exchanges of hybrid securities. |
The Companys process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These primary factors include: (i) the time period during which there has been a significant decline in value; (ii) an analysis of the liquidity, business prospects and overall financial condition of the issuer; (iii) the significance of the decline; (iv) an analysis of the collateral structure and other credit support, as applicable, of the securities in question; (v) expected future interest rate movements; and (vi) the Companys intent and ability to hold the investment for a sufficient period of time for the value to recover. Where the Companys analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the cost of the security is written down to fair value and the previously unrealized loss is therefore realized in the period such determination is made.
Net Realized and Unrealized Gains and Losses on Derivatives
Net realized and unrealized gains on investment derivatives for the three months ended June 30, 2009 resulted from the Companys investment strategy to manage interest rate risk, foreign exchange risk and credit risk, and to replicate permitted investments. For further information see Note 8 to the Consolidated Financial Statements, Derivative Instruments.
62
Other Revenues and Expenses
The following table sets forth other revenues and expenses for the three months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) from operating affiliates (1) |
|
$ |
17,667 |
|
$ |
(68,901 |
) |
|
NM |
* |
Exchange losses (gains) |
|
|
145,221 |
|
|
7,936 |
|
|
NM |
* |
Amortization of intangible assets |
|
|
464 |
|
|
420 |
|
|
10.5 |
% |
Corporate operating expenses |
|
|
32,219 |
|
|
47,104 |
|
|
(31.6 |
)% |
Interest expense (2) |
|
|
42,912 |
|
|
50,077 |
|
|
(14.3 |
)% |
Income tax expense |
|
|
16,045 |
|
|
51,205 |
|
|
(68.7 |
)% |
|
|
(1) |
The Company generally records the income related to certain operating affiliates on a three month lag in order for the Company to meet accelerated filing deadlines. |
|
|
(2) |
Interest expense does not include interest expense related structured products as reported within the Insurance, Reinsurance and Corporate segments. |
|
|
* |
NM Not meaningful |
The following table sets forth the net income (loss) from operating affiliates for the three months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) from financial operating affiliates |
|
$ |
3,883 |
|
$ |
(81,677 |
) |
|
NM |
* |
Net income from investment manager affiliates |
|
|
4,407 |
|
|
1,741 |
|
|
NM |
* |
Net income from other strategic operating affiliates |
|
|
9,377 |
|
|
11,035 |
|
|
(15.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,667 |
|
$ |
(68,901 |
) |
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
NM Not meaningful |
Equity earnings from financial operating affiliates increased during the three months ended June 30, 2009 as a result of the Company no longer owning any interest in Syncora. During the three months ended June 30, 2008 the company reported $82.4 million in losses related to reinsurance and guarantee arrangements with Syncora.
Investment manager affiliate income increased during the second quarter of 2009 as compared to the same period in the prior year primarily as a result of the improved conditions for alternative asset managers in the first quarter of 2009.
Income from other strategic operating affiliates decreased in the second quarter of 2009 as compared to the second quarter of 2008 mainly due to lower earnings reported in the first quarter of 2009 relating to an insurance affiliate which writes largely direct U.S. homeowners insurance.
Foreign exchange losses in the quarter ended June 30, 2009 and June 30, 2008 were due primarily to the change in the value of the U.S. dollar against certain European currencies including the U.K. Sterling and the Euro on certain inter-company balances and net underwriting liability balances.
Corporate operating expenses in the three months ended June 30, 2009 decreased compared to the three months ended June 30, 2008 primarily as a result of cost savings achieved from restructuring activities implemented in 2008 and early 2009 as well as from higher professional fees recorded in the second quarter of 2008 associated with activities related to the Master Agreement that was executed in July 2008.
Interest expense for the three months ended June 30, 2009 as compared to the same period in 2008 was lower mainly as a result of lower interest associated with the retirement of the 2011 Senior Notes in February 2009 partially offset by interest associated with 8.25% senior notes which are part of the 10.75% Equity Security Units issued in August 2008. For more information on the Companys financial structure, see Liquidity and Capital Resources.
63
The decrease in the Companys income taxes arose principally from the increase in the profitability of the Companys U.S. and European operations.
Segment Results for the six months ended June 30, 2009 compared to the six months ended June 30, 2008
Insurance
The following table summarizes the underwriting results for this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
2,215,465 |
|
$ |
3,017,120 |
|
|
(26.6 |
)% |
Net premiums written |
|
|
1,598,774 |
|
|
2,268,672 |
|
|
(29.5 |
)% |
Net premiums earned |
|
|
1,791,601 |
|
|
2,026,752 |
|
|
(11.6 |
)% |
Net losses and loss expenses |
|
|
1,213,998 |
|
|
1,338,634 |
|
|
(9.3 |
)% |
Acquisition costs |
|
|
217,842 |
|
|
239,713 |
|
|
(9.1 |
)% |
Operating expenses |
|
|
347,259 |
|
|
332,775 |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
$ |
12,502 |
|
$ |
115,630 |
|
|
(89.2 |
)% |
Net fee income and other (1) |
|
$ |
(4,220 |
) |
$ |
(1,159 |
) |
|
NM |
* |
Net resultsstructured products |
|
$ |
7,214 |
|
$ |
3,173 |
|
|
NM |
* |
|
|
(1) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
* |
NM not meaningful |
Gross premiums written decreased by 26.6% during the six months ended June 30, 2009 compared with the six months ended June 30, 2008. Reductions in long term agreements and unfavorable foreign exchange rate impacts account for more than half of this decrease. Poor market and economic conditions and unfavorable foreign exchange rate impacts combined with the impacts of the S&P downgrade in December 2008 noted in both the first, and to a much lesser extent, second quarter of 2009 also contributed to the decreases which were seen across most lines. As 2009 has progressed both retentions and new business volume have seen improvement.
Net premiums written decreased by 29.5% in the six months ended June 30, 2009 compared with the six months ended June 30, 2008 primarily as a result of the decrease in gross premiums written noted above, combined with timing changes on the renewal of certain ceded property treaties, and an overall increase in reinsurance rates.
Net premiums earned decreased by 11.6% in the six months ended June 30, 2009 compared with the six months ended June 30, 2008. The decrease primarily resulted from the factors affecting net premiums written noted above.
Fee income remained consistent in the first six months of 2009 as compared to the same period in 2008 mainly as a result of higher engineering fee income associated with the Companys loss prevention consulting services business offset by the run off of certain financial lines of business.
The following table presents the ratios for this segment:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Loss and loss expense ratio |
|
|
67.8 |
% |
|
66.0 |
% |
Underwriting expense ratio |
|
|
31.5 |
% |
|
28.3 |
% |
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.3 |
% |
|
94.3 |
% |
|
|
|
|
|
|
|
|
The loss and loss expense ratio includes net losses incurred for both the current year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year.
64
The following table summarizes the net (favorable) adverse prior year development relating to the Insurance segment for the six month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Property |
|
$ |
(14.7 |
) |
$ |
(64.4 |
) |
Casualty and Professional |
|
|
(55.8 |
) |
|
(62.0 |
) |
Specialty and Other |
|
|
29.5 |
|
|
9.4 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(41.0 |
) |
$ |
(117.0 |
) |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding prior year development |
|
|
70.1 |
% |
|
71.8 |
% |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding catastrophe losses and prior year development |
|
|
69.8 |
% |
|
67.1 |
% |
|
|
|
|
|
|
|
|
Net prior period reserve releases in the six months ended June 30, 2009 occurred largely in the second quarter as a result of the factors noted above. Excluding prior year development, the loss ratio for the six months ended June 30, 2009 decreased by 1.7 loss percentage points as compared to the same period in 2008 due primarily to lower levels of large property risk and catastrophe losses occurring in 2009 combined with the impact of anticipated sub prime and credit related losses in 2008 partially offset by lower than expected rate increases in certain specialty lines.
The increase in the underwriting expense ratio in the six months ended June 30, 2009, compared to the same period in 2008 was due to an increase in the acquisition expense ratio of 0.4% points (12.2% as compared to 11.8%) combined with an increase in the operating expense ratio of 2.8% points (19.3% as compared to 16.5%). The increase in the acquisition expense ratio was primarily as a result of changes in the mix of business given the decreases in property and casualty lines which carry the lowest levels of acquisition cost. The increase in the operating expense ratio is attributable to the lower level of earned premium combined with the costs associated with the Companys expense reduction initiatives announced in the third quarter of 2008 and first quarter of 2009 including changes to the Companys previously communicated operational transformation program.
Net results from structured insurance products include certain structured indemnity contracts that are accounted for as deposit contracts. Net results from these products for the six months ended June 30, 2009, increased slightly compared to the same period in 2008 mainly due to the lower operating expenses of this run off line of business and favorable development in the liability interest rate hedges in place partially offset by lower net investment income as a result of lower yields combined with a smaller investment base.
Reinsurance
The following table summarizes the underwriting results for this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
1,163,953 |
|
$ |
1,470,005 |
|
|
(20.8 |
)% |
Net premiums written |
|
|
984,815 |
|
|
1,227,348 |
|
|
(19.8 |
)% |
Net premiums earned |
|
|
811,835 |
|
|
1,034,815 |
|
|
(21.5 |
)% |
Net losses and loss expenses |
|
|
355,913 |
|
|
600,844 |
|
|
(40.8 |
)% |
Acquisition costs |
|
|
181,026 |
|
|
222,872 |
|
|
(18.8 |
)% |
Operating expenses |
|
|
94,107 |
|
|
90,517 |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
$ |
180,789 |
|
$ |
120,582 |
|
|
49.9 |
% |
Net fee income and other (1) |
|
$ |
2,596 |
|
$ |
1,234 |
|
|
(110.4 |
)% |
Net results structured products |
|
$ |
14,596 |
|
$ |
13,403 |
|
|
8.9 |
% |
|
|
(1) |
Net fee income and other includes operating expenses from the Companys loss prevention consulting services business. |
|
|
* |
NM not meaningful |
Gross and net premiums written decreased by 20.8% and 19.8%, respectively, in the first six months of 2009 as compared to the first six months of 2008. The factors affecting gross and net written premiums for the first half of 2009 are consistent with those for the three months ended June 30, 2009 as mentioned above.
Net premiums earned decreased by 21.5% in the six months ended June 30, 2009 compared with the six months ended June 30, 2008 primarily as a result of the decrease in gross and net premiums written, as noted above.
65
The following table presents the ratios for this segment:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Loss and loss expense ratio |
|
|
43.8 |
% |
|
58.1 |
% |
Underwriting expense ratio |
|
|
33.9 |
% |
|
30.2 |
% |
|
|
|
|
|
|
|
|
Combined ratio |
|
|
77.7 |
% |
|
88.3 |
% |
|
|
|
|
|
|
|
|
The loss and loss expense ratio includes net losses incurred for both the current year and any favorable or adverse prior year development of loss reserves held at the beginning of the year. The following table summarizes the net (favorable) adverse prior year development relating to the Reinsurance segment for the six month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars in millions) |
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
||
Property and other short-tail lines |
|
$ |
(94.2 |
) |
$ |
(71.6 |
) |
Casualty and other |
|
|
(44.5 |
) |
|
(59.5 |
) |
Structured Indemnity |
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
Total |
|
$ |
(138.7 |
) |
$ |
(132.5 |
) |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding prior year development |
|
|
60.9 |
% |
|
70.9 |
% |
|
|
|
|
|
|
|
|
Loss and loss expense ratio excluding catastrophe losses and prior year development |
|
|
57.9 |
% |
|
64.6 |
% |
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009, property and other short-tail lines reserve releases were largely within property catastrophe and property risk portfolios while casualty reserve releases were largely within European casualty lines. Excluding prior year development, the loss ratio for the six months ended June 30, 2009 decreased by 10 loss percentage points as compared to the six months ended June 30, 2008 mainly as a result of lower levels of property, marine and professional liability losses during the second quarter of 2009. For the six months ended June 30, 2008, casualty reserve releases were primarily within European casualty lines, while property and other short-tail lines reserve releases were attributable to Bermuda and North American operations, partially offset by unfavorable reserve development in Latin American operations.
The increase in the underwriting expense ratio in the six months ended June 30, 2009, as compared with the six months ended June 30, 2008, was due to an increase in both operating expense and acquisition expense ratios to 11.6% and 22.3%, respectively, as compared with 8.7% and 21.5%, in the six months ended June 30, 2008. The increase in the operating expense ratio was primarily as a result of higher operating expenses due to charges associated with the Companys restructuring activities, against a lower level of net premiums earned. The increase in the acquisition expense ratio relates to changes in the mix of business, increased commissions associated with the U.S. agricultural program as well as increased profit related commissions associated with certain Bermuda-based property catastrophe business.
Net results from structured reinsurance products include certain structured indemnity contracts that are accounted for as deposit contracts. Net results from these products for the six months ended June 30, 2009, increased slightly compared to the same period in 2008 mainly due to the lower operating expenses of this run off line of business and favorable development in the liability interest rate hedges in place partially offset by lower net investment income as a result of lower yields combined with a smaller investment base.
Foreign exchange losses in the six months ended June 30, 2009 and 2008 were due primarily to the change in the value of the U.S. dollar against certain European currencies including the U.K. Sterling and Euro on certain inter-company balances.
66
Life Operations
The following summarizes the contribution from this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|||||
|
|
|
|
|
|
|||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Gross premiums written |
|
$ |
285,823 |
|
$ |
396,209 |
|
|
(27.9 |
)% |
Net premiums written |
|
|
262,259 |
|
|
375,146 |
|
|
(30.1 |
)% |
Net premiums earned |
|
|
277,785 |
|
|
332,517 |
|
|
(16.5 |
)% |
Claims and policy benefits |
|
|
332,547 |
|
|
406,024 |
|
|
(18.1 |
)% |
Acquisition costs |
|
|
42,623 |
|
|
49,949 |
|
|
(14.7 |
)% |
Operating expenses |
|
|
8,110 |
|
|
17,382 |
|
|
(53.3 |
)% |
Net investment income |
|
|
160,377 |
|
|
195,193 |
|
|
(17.8 |
)% |
Net fee income and other |
|
|
174 |
|
|
200 |
|
|
(13.0 |
)% |
Net realized (losses) gains on investments |
|
|
(126,313 |
) |
|
6,748 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
Contribution from Life operations |
|
$ |
(71,257 |
) |
$ |
61,303 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
||||||||||
* NM not meaningful |
The following table is an analysis of the Life Operations gross premiums written, net premiums written and net premiums earned for the six month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||||||||||||
|
|
|
|
|
|
||||||||||||
(U.S. dollars in thousands) |
|
Gross
|
|
Net
Premiums
|
|
Net Premiums Earned |
|
Gross
|
|
Net Premiums Written |
|
Net Premiums Earned |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Life |
|
$ |
208,571 |
|
199,441 |
|
214,967 |
|
$ |
292,478 |
|
$ |
290,438 |
|
$ |
247,809 |
|
Annuity |
|
|
77,252 |
|
62,818 |
|
62,818 |
|
|
103,731 |
|
|
84,708 |
|
|
84,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285,823 |
|
262,259 |
|
277,785 |
|
$ |
396,209 |
|
$ |
375,146 |
|
$ |
332,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written relating to total life business decreased by $110.4 million in the six months to June 30, 2009 as compared to the same period in 2008 mainly due to $66.5 million of lower renewal premiums associated with the short-term life, accident and health business as the renewal rights for this business were sold in late 2008. In addition, while premium growth of $16.9 million was experienced in the core underlying book of term assurance and critical illness business, unfavorable foreign exchange rate movements of $46.5 million more than offset such growth during the six months to June 30, 2009. Partially offsetting these decreases was premium growth of $4.8 million related to U.S. life business. While gross premiums written decreased during the six months ended June 30, 2009, ceded premiums written increased slightly by $2.5 million mainly as a result of a higher cession ratio associated with short-term life, accident and health business underwritten in the 2009 underwriting year, which occurred as part of the sale of the renewal rights as noted above.
Net premiums earned in the first six months of 2009 decreased 16.5% as compared to the first six months of 2008. This decrease was consistent with the decrease in gross and net premiums written as described above.
Claims and policy benefit reserves decreased by $73.5 million or 18.1% in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, primarily as a result of favorable foreign exchange rate movements of $64.7 million combined with a decrease in incurred losses associated with the short-term life, accident and health business and consistent with the decrease in gross premiums written associated with this business as noted above. Changes in claims and policy benefits include the movement in policy benefit reserves related to other contracts (such as immediate annuities) where investment assets were acquired with the assumption of the policy benefit reserves at the inception of the contract.
For the six months ended June 30, 2009, acquisition costs decreased by 14.7% as compared to the six months ended June 30, 2008, largely as a result of a decrease in business written associated with the short-term life, accident and health business combined with favorable foreign exchange rate movements. Operating expenses decreased by 53.3% in the first six months of 2009 as compared to the first six months of 2008 due mainly to corporate expenses that have not been allocated to life business in 2009, combined with lower compensation expenses as a result of overall lower staffing levels and favorable foreign exchange rate movements in 2009.
67
Net investment income is included in the calculation of contribution from Life Operations, as it relates to income earned on portfolios of separately identified and managed life investment assets and other allocated assets.
Net investment income decreased by $34.8 million in the six months ended June 30, 2009, as compared to the same period in 2008, primarily as a result of unfavorable foreign exchange rate movements combined with lower investment yields.
See below for an analysis of the Companys total realized losses on investments during the six months ended June 30, 2009.
Investment Activities
The following table illustrates the change in net investment income from property and casualty operations, net income from investment affiliates, net realized gains on investments and net realized and unrealized gains on investment and other derivative instruments from property and casualty operations for the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
||||
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
||
|
|
|
|
|
|
|
|
||
Net investment income property and casualty operations (1) |
|
$ |
460,656 |
|
$ |
606,169 |
|
(24.0 |
)% |
Net income (loss) from investment affiliates (2) |
|
|
10,193 |
|
|
(8,636 |
) |
NM |
|
Net realized (losses) gains on investments |
|
|
(332,367 |
) |
|
(100,211 |
) |
NM |
|
Net realized and unrealized (losses) gains on investment and other derivative instruments |
|
|
(438 |
) |
|
52,806 |
|
NM |
|
|
|
|
|
(1) |
Net investment income relating to property and casualty operations does not include the net investment income related to the net results from structured products. |
|
|
(2) |
The Company records the income related to alternative fund affiliates on a one month lag and the private investment affiliates on a three month lag in order for the Company to meet the accelerated filing deadlines. |
|
|
* |
NM Not meaningful |
Net investment income related to property and casualty operations decreased in the six months ended June 30, 2009 as compared to the same period in 2008 due primarily to declining portfolio yields. Portfolio yields decreased as yields earned on investment of cash flows and reinvestment of maturing or sold securities were generally lower than on securities previously held, as prevailing market interest rates, particularly in the U.S., decreased over the last year. In addition, the Company increased its holdings in lower-yielding cash, government and agency securities in connection with its portfolio de-risking efforts and to increase liquidity, and as a result of an allocation to floating rate securities previously supporting the GIC and funding agreement businesses which are sensitive to declines in short-term U.S. dollar interest rates.
Net income from investment fund affiliates increased in the first six months of 2009 compared to the first six months of 2008, due primarily to strong results from the Companys alternative funds, in the first six months of 2009 as compared to marginally negative results in the same period of the prior year. These results were offset by a decline in the Companys results from private investment funds, which reflect the deterioration in valuation in the first half of 2009.
The Company manages its investment grade fixed income securities using an asset/liability management framework. Due to the unique nature of the underlying liabilities, customized benchmarks are used to measure investment performance and comparison to standard market indices is not meaningful. Investment performance is not monitored for certain assets primarily consisting of operating cash and special regulatory deposits. The following is a summary of the investment portfolio returns for the asset/liability portfolios and risk asset portfolios:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
|
|
2009 (1) |
|
2008 (1) |
|
||
|
|
|
|
|
|
||
Asset/Liability portfolios |
|
|
|
|
|
|
|
USD fixed income portfolio |
|
|
2.2 |
% |
|
(3.5 |
)% |
GBP fixed income portfolio |
|
|
1.0 |
% |
|
(4.8 |
)% |
EUR fixed income portfolio |
|
|
1.3 |
% |
|
(1.8 |
)% |
Other fixed income portfolio |
|
|
0.6 |
% |
|
2.5 |
% |
Risk Asset portfolios |
|
|
|
|
|
|
|
Alternative portfolio (2) |
|
|
7.4 |
% |
|
(0.1 |
)% |
Equity portfolio |
|
|
(13.9 |
)% |
|
(11.2 |
)% |
High-Yield fixed income portfolio |
|
|
26.3 |
% |
|
(3.6 |
)% |
68
|
|
|
|
(1) |
Portfolio returns are calculated by dividing the sum of net investment income or net income from investment affiliates, realized gains (losses) and unrealized gains (losses) by the average market value of each portfolio. Performance is measured in either the underlying asset currency or the functional currency. |
|
|
(2) |
Performance on the alternative portfolio reflects the six months ended May 31, 2009 and May 31, 2008, respectively. |
Net Realized Gains and Losses and Other than Temporary Declines in the Value of Investments
Net realized losses for the six months ended June 30, 2009 can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
||||
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Net realized gains (losses) on investments sold |
|
$ |
37,623 |
|
$ |
62,242 |
|
|
|
|
|
|
|
|
|
Other-than temporary impairments on investments |
|
|
(400,660 |
) |
|
(162,453 |
) |
Other-than-temporary impairments on investments transferred to other comprehensive income |
|
|
30,670 |
|
|
|
|
|
|
|
|
|
|
|
|
Net impact from other-than-temporary impairments |
|
|
(369,990 |
) |
|
(162,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments |
|
$ |
(332,367 |
) |
$ |
(100,211 |
) |
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009, the Company recorded net impairment charges of $370.0 million. The significant assumptions and inputs associated with these securities consist of:
|
|
|
|
|
The Company recorded net impairments in relation to corporate securities totaling $134.1 million. The impairment charges consisted either of below-investment grade securities, where the Company believes the current fair value is representative of likely recoveries following default, below-investment grade hybrids, where the Company considered impairment factors consistent with an equity impairment model, along with a debt impairment model, and accordingly recorded impairment charges to fair value, or securities in an unrealized loss position that management intends to sell. |
|
|
|
|
|
The Company recorded net impairments in relation to structured credit securities totaling $218.9 million. The Company determined that the likely recovery on these securities was below the carrying value, and accordingly impaired the securities to the discounted cash flows of the cash flows of these securities, or in certain instances fair value to the extent that the fair value was believed to be more representative of recoverable value given the extreme illiquidity within structured credit markets. |
|
|
|
|
|
The Company recorded net impairments in relation to equity securities totaling $17.0 million, primarily representing securities in an unrealized loss position that management intends to sell. |
|
|
|
|
Of the impairments, $147.7 million related to changes of intent-to-hold, primarily representing exchanges of hybrid securities, and as part of the fourth quarter 2008 restructuring charge. |
Net realized losses on investments in the first six months of 2009 included net realized losses of $370.0 million related to the write-down of certain of the Companys fixed income, equity and other investments where the Company determined that there was an other than temporary decline in the value of those investments as well as net realized gains of $37.6 million from sales of investments. Included in the balances noted above are realized losses and impairments in Topical Assets totaling $119.3 million.
Net realized gains on investments in the first six months of 2008 included net realized gains of $62.2 million from sales of investments and net realized losses of $162.5 million related to the write-down of certain of the Companys fixed income and equity investments where the Company determined that there was an other than temporary decline in the value of those investments.
Net Realized Gains and Unrealized Gains and Losses on Derivatives
Net realized and unrealized gains on investment derivatives for the six months ended June 30, 2009 and 2008 resulted from the Companys investment strategy to manage interest rate risk, foreign exchange risk, credit risk and to replicate permitted investments. For further information see Note 8 to the Consolidated Financial Statements, Derivative Instruments.
69
Other Revenues and Expenses
The following table sets forth other revenues and expenses for the six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) from operating affiliates (1) |
|
$ |
7,339 |
|
$ |
(48,348 |
) |
|
NM |
* |
Amortization of intangible assets |
|
|
929 |
|
|
840 |
|
|
10.6 |
% |
Corporate operating expenses |
|
|
58,931 |
|
|
83,030 |
|
|
(29.1 |
)% |
Interest expense (2) |
|
|
92,527 |
|
|
99,442 |
|
|
(7.0 |
)% |
Income tax expense |
|
|
61,998 |
|
|
81,907 |
|
|
(24.3 |
)% |
|
|
|
|
(1) |
The Company records the income related to its operating affiliates on a three month lag in order for the Company to meet the accelerated filing deadlines. |
|
|
(2) |
Interest expense does not include interest expense related structured products as reported within the Insurance and Reinsurance segments. |
|
|
* |
NM Not meaningful |
The following table sets forth the net income (loss) from operating affiliates for the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
(U.S. dollars in thousands) |
|
2009 |
|
2008 |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|||
Net (loss) income from financial operating affiliates |
|
$ |
3,883 |
|
$ |
(85,948 |
) |
|
NM |
* |
Net income from investment manager affiliates |
|
|
(11,132 |
) |
|
14,620 |
|
|
NM |
* |
Net income from other strategic operating affiliates |
|
|
14,588 |
|
|
22,980 |
|
|
(36.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,339 |
|
$ |
(48,348 |
) |
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
NM Not meaningful |
Equity earnings from financial operating affiliates increased during the six months ended June 30, 2009 as a result of the Company no longer owning any interest in Syncora. During the six months ended June 30, 2008 the Company recorded $87.2 million in losses related to reinsurance and guarantee arrangements with Syncora.
Investment manager affiliate income decreased during the first half of 2009 as compared to the same period in the prior year primarily as a result of the challenging conditions for alternative asset managers.
Income from other strategic operating affiliates decreased in the first half of 2009 as compared to the first half of 2008 mainly due to lower earnings relating to an insurance affiliate which writes largely direct U.S. homeowners insurance.
Corporate operating expenses in the six months ended June 30, 2009 decreased compared to the six months ended June 30, 2008 primarily as a result of cost savings achieved from restructuring activities implemented in 2008 and early 2009 as well as from higher professional fees recorded in 2008 associated with activities related to the Master Agreement that was executed in July 2008.
Interest expense for the six months ended June 30, 2009 as compared to the same period in 2008 was lower mainly as a result of lower interest associated with the retirement of the 2011 Senior Notes in February 2009 partially offset by interest associated with 8.25% senior notes which are part of the 10.75% Equity Security Units issued in August 2008. For more information, see Liquidity and Capital Resources.
The decrease in the Companys income taxes arose principally from the increase in the profitability of the Companys U.S. and European operations.
Balance Sheet Analysis
Investments
The primary objectives of the investment strategy are to support the liabilities arising from the operations of the Company, generate stable investment income and to build book value for the Company over the longer term. The strategy strives to balance investment returns against market and credit risk. The Companys overall investment portfolio is structured to take into account a number of variables including local regulatory requirements, business needs, collateral management and risk tolerance.
70
At June 30, 2009 and December 31, 2008, total investments, cash and cash equivalents, accrued investment income and net receivable from investments sold were $34.0 billion and $34.3 billion, respectively. The following table summarizes the composition of the Companys invested assets at June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
(Unaudited)
|
|
Percent
of
|
|
Fair
Value at
|
|
Percent
of
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
3,989,372 |
|
|
11.7 |
% |
$ |
4,353,826 |
|
|
12.7 |
% |
Net receivable for investments sold |
|
|
6,078 |
|
|
0.0 |
% |
|
99,455 |
|
|
0.3 |
% |
Accrued investment income |
|
|
343,018 |
|
|
1.0 |
% |
|
363,376 |
|
|
1.1 |
% |
Short-term investments |
|
|
2,025,138 |
|
|
6.0 |
% |
|
1,466,323 |
|
|
4.3 |
% |
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency |
|
$ |
4,500,762 |
|
|
13.2 |
% |
$ |
3,978,342 |
|
|
11.6 |
% |
Corporate |
|
|
9,338,032 |
|
|
27.5 |
% |
|
9,288,603 |
|
|
27.1 |
% |
Residential mortgage-backed securities Agency |
|
|
3,080,359 |
|
|
9.1 |
% |
|
2,099,955 |
|
|
6.1 |
% |
Residential mortgage-backed securities Non-Agency |
|
|
1,126,389 |
|
|
3.3 |
% |
|
1,366,202 |
|
|
4.0 |
% |
Commercial mortgage-backed securities |
|
|
1,495,105 |
|
|
4.4 |
% |
|
2,141,568 |
|
|
6.2 |
% |
Collateralized debt obligations |
|
|
564,857 |
|
|
1.7 |
% |
|
638,779 |
|
|
2.0 |
% |
Other asset-backed securities |
|
|
1,389,324 |
|
|
4.1 |
% |
|
2,279,752 |
|
|
6.6 |
% |
U.S. States and political subdivisions of the States |
|
|
493,107 |
|
|
1.4 |
% |
|
468,770 |
|
|
1.4 |
% |
Non-U.S. Sovereign Government |
|
|
3,673,403 |
|
|
10.8 |
% |
|
3,374,397 |
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
25,661,338 |
|
|
75.5 |
% |
$ |
25,636,368 |
|
|
74.8 |
% |
Equity securities |
|
|
52,480 |
|
|
0.2 |
% |
|
361,819 |
|
|
1.0 |
% |
Investments in affiliates |
|
|
1,222,317 |
|
|
3.6 |
% |
|
1,552,789 |
|
|
4.5 |
% |
Other investments |
|
|
690,364 |
|
|
2.0 |
% |
|
459,481 |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents |
|
$ |
33,990,105 |
|
|
100.0 |
% |
$ |
34,293,437 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews on a regular basis its corporate debt concentration, credit quality and compliance with established guidelines. At both June 30, 2009 and December 31, 2008, the average credit quality of the Companys total fixed income portfolio (including fixed maturities, short-term investments, cash and cash equivalents and net payable for investment purchased) was AA. As at June 30, 2009, approximately 56.7% of the fixed income portfolio had an average rating of AAA from the principal rating agencies. Approximately 3.9% was below investment grade or not rated.
Refer to Results of Operations for further discussion surrounding the impact of credit market movements on the Companys investment portfolio and exposure to sub-prime related assets.
71
Gross and Net Unrealized Losses and Gains on Investments
At June 30, 2009, the Company had net unrealized losses on fixed maturities and short-term investments of $3.3 billion and net unrealized losses on equities of $7.5 million. Of these amounts, gross unrealized losses on fixed maturities and short term investments and equities were $3.8 billion and $10.2 million, respectively. The information presented below for the gross unrealized losses on the Companys investments at June 30, 2009 shows the potential effect upon future earnings and financial position should management later conclude that some of the current declines in the fair value of these investments are other than temporary. Realized losses or impairments, depending on their magnitude, may have a material adverse effect on the Companys operations. The increase in net unrealized losses on investments during the three months ended June 30, 2009 was primarily due to a continued widening of credit spreads. See Item 3. Quantitative and Qualitative Disclosures about Market RiskCredit Risk.
The following is an analysis of how long each of those securities with a gross unrealized loss at June 30, 2009 had been in a continual gross unrealized loss position:
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Length
of time in a continual gross
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||
|
|
|
|
|
|
|
|
||
Fixed
Maturities and
|
|
Less than six months |
|
$ |
209,428 |
|
$ |
2,756,757 |
|
|
|
At least 6 months but less than 12 months |
|
|
667,773 |
|
|
1,911,413 |
|
|
|
At least 12 months but less than 2 years |
|
|
1,036,380 |
|
|
3,779,690 |
|
|
|
2 years and over |
|
|
1,867,363 |
|
|
4,639,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,780,944 |
|
$ |
13,087,131 |
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
Less than six months |
|
$ |
433 |
|
$ |
1,800 |
|
|
|
At least 6 months but less than 12 months |
|
|
9,796 |
|
|
35,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,229 |
|
$ |
37,216 |
|
|
|
|
|
|
|
|
|
|
|
The following is the maturity profile of the fixed income securities that were in a gross unrealized loss position at June 30, 2009:
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
||
|
|
|
|
|
|
||
Less than 1 year remaining |
|
$ |
22,206 |
|
$ |
350,825 |
|
At least 1 year but less than 5 years remaining |
|
|
505,543 |
|
|
2,948,678 |
|
At least 5 years but less than 10 years remaining |
|
|
280,448 |
|
|
1,948,616 |
|
At least 10 years but less than 20 years remaining |
|
|
193,438 |
|
|
977,675 |
|
At least 20 years or more remaining |
|
|
777,601 |
|
|
2,268,298 |
|
Residential mortgage-backed securities - Agency |
|
|
6,189 |
|
|
468,780 |
|
Residential mortgage-backed securities Non-Agency |
|
|
605,835 |
|
|
1,063,494 |
|
Commercial mortgage-backed securities |
|
|
315,885 |
|
|
1,456,623 |
|
Collateralized debt obligations |
|
|
494,189 |
|
|
562,446 |
|
Other asset-backed securities |
|
|
579,610 |
|
|
1,041,696 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,780,944 |
|
$ |
13,087,131 |
|
|
|
|
|
|
|
|
|
Factors considered in determining that additional OTTI charges were not warranted include managements consideration of current and near term liquidity needs and other available sources, an evaluation of the factors and time necessary for recovery, and the results of on-going retrospective reviews of security sales and the basis for such sales.
Gross unrealized losses of $3.8 billion at June 30, 2009 can be attributed to the following significant drivers:
|
|
|
|
|
gross unrealized losses of $957.7 million related to the Companys Life Operations investment portfolio, which had a fair value of $5.9 billion as at June 30, 2009. Of this, $824.5 million of gross unrealized losses related to $3.3 billion of exposures to corporate financial institutions including Tier One and Upper Tier Two securities. During the quarter ended June 30, 2009, as a result of a substantial rally on financial credit spreads, the gross unrealized loss position has declined substantially. At June 30, 2009, this portfolio had average interest rate duration of 8.4 years, |
72
|
|
|
|
|
primarily denominated in U.K. Sterling and Euros. As a result of the long duration, significant gross losses have arisen as the fair values of these securities are more sensitive to prevailing government interest rates and credit spreads. This portfolio has limited turnover as it is matched to corresponding long duration liabilities. A hypothetical parallel increase in interest rates and credit spreads of 50 and 25 basis points, respectively, would increase the unrealized losses related to this portfolio at June 30, 2009 by approximately $246.4 million and $89.2 million, respectively. Given the long term nature of this portfolio, and the level of credit spreads as at June 30, 2009 relative to historical averages within the U.K. and Euro-zone as well as the Companys liquidity needs at June 30, 2009, the Company believes that these assets will continue to be held until such time as they mature, or credit spreads revert to levels more consistent with historical averages. |
|
|
|
|
|
gross unrealized losses of $849.4 million related to the corporate holdings within the Companys non-life fixed maturity portfolios, which had a fair value of $6.9 billion as at June 30, 2009. During the quarter ended June 30, 2009, as a result of declining credit spreads, the gross unrealized losses on these holdings has declined substantially. The Company believes these impairments are a function of the currently elevated levels of corporate credit spreads in the U.S. and globally, which spiked particularly during the third and fourth quarters of 2008 and continued to be at elevated levels, resulting in a severely depressed level of valuations. The amount of these gross losses has proven very volatile as a result of the severe deterioration in credit spreads in recent months. Despite the recent rally, corporate credit spreads remain at elevated levels relative to historical averages. The Company believes that the gross unrealized losses are a reflection of a severe premium being charged by the market for credit, rather than fundamental deterioration in the debt service capabilities of the issuers. |
|
|
|
|
|
gross unrealized losses of $743.5 million related to the Topical Asset portfolio (which consists of the Companys holdings of sub-prime non-agency securities, second liens, ABS CDOs with sub-prime collateral as well as Alt-A mortgage exposures (Topical Assets), which had a fair value of $743.2 million as at June 30, 2009. The Company undertakes a security level reviews of these securities and recognized charges to the extent it believed the intrinsic value of any security was below its amortized cost. The Company has recognized realized losses, consisting of charges for OTTI and realized cumulative losses from sales, of approximately $782.5 million since the beginning of 2007 and through June 30, 2009 on these asset classes. |
|
|
|
|
|
The Company purchased a number of these assets to support the previously written GIC and funding agreement contracts and has announced its intention to reduce its exposure to these asset classes as part of its strategic portfolio realignment. The Company believes that based on market conditions and liquidity needs at June 30, 2009, this reduction will be realized through natural cash flows of the portfolio, and limited selective sales, rather than selling these assets into markets which continue to be illiquid and not reflective of the intrinsic value of these assets. The weighted average term-to-maturity of the sub-prime and Alt-A residential holdings within this portfolio at June 30, 2009 were 3.5 years and 4.2 years, respectively. The Company, based on current market conditions and liquidity needs as at June 30, 2009 as well as its assessment of the holdings, believes it will continue to hold these securities until either maturity, or a return of liquidity and valuations more reflective of the intrinsic value of these holdings. |
|
|
|
|
|
gross unrealized losses of $490.6 million related to the non-life portfolio of Core CDO holdings (defined by the Company as investments in non-mortgage collateralized debt obligations), which consisted primarily of collateralized loan obligations and had a fair value of $585.9 million as of June 30, 2009. The Company undertook a security level review of these securities and recognized charges to the extent it believed the intrinsic value of the security was below the amortized cost. The Company believes that the level of impairment is primarily a function of historically wide spreads in the collateralized loan obligations market during the period, driven by the high level of illiquidity in this market. The Company purchased a number of these assets to support the previously written GIC and Funding Agreement contracts and has announced its intention to reduce its exposure to this asset class over time as a part of its strategic portfolio realignment. The Company, based on current market conditions and liquidity needs as well as its assessment of the holdings, believes it is likely that the Company will continue to hold these securities until either maturity or a recovery of value, following which the Company intends to reduce its exposure to this asset class. |
|
|
|
|
|
gross unrealized losses of $300.7 million related to the non-life portion of CMBS holdings, which had a fair value of $1.4 billion as at June 30, 2009. The Companys holdings in CMBS are 97.1% rated AAA. The Companys exposure to downgrades has been negligible, and it believes that the currently depressed pricing, which represents approximately 79.1% of the par value of the securities, is directly related to the 753 basis point widening in credit spreads within this market during 2008, as a result of the heightened risk premium attached to property collateral. Credit spreads have improved significantly in the first half of 2009, particularly during the second quarter. The Companys portfolio is highly diversified, has limited delinquencies and has experienced limited downgrades. |
|
|
|
|
|
gross unrealized losses of $269.6 million related to the Companys holdings in non-agency RMBS secured by prime mortgages which had a fair value of $718.7 at June 30, 2009. In the U.S., the average price on these securities declined to approximately 56.0% of par value at June 30, 2009, reflecting concerns over rising unemployment in the U.S. and the potential impact on previously high quality |
73
|
|
|
|
|
borrowers to meet their obligations. The Company undertook a security level review of these securities and recognized charges to the extent it believed the intrinsic value of any security was below its amortized cost. |
Gross Unrealized Gains and Losses
The following table summarizes the fair value, gross unrealized losses, credit rating and asset class of securities in a gross unrealized loss position within the Companys structured credit and corporate portfolios, which comprised $3.7 billion of the Companys total gross unrealized loss position of $3.8 billion at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB & Below |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|||||||||||||||||||
Financials (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
350.0 |
|
$ |
369.9 |
|
$ |
1,663.4 |
|
$ |
484.6 |
|
$ |
181.0 |
|
$ |
3,048.9 |
|
Gross unrealized loss |
|
$ |
(28.8 |
) |
$ |
(39.9 |
) |
$ |
(453.5 |
) |
$ |
(241.6 |
) |
$ |
(202.4 |
) |
$ |
(966.2 |
) |
Non-Financials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
63.9 |
|
$ |
475.0 |
|
$ |
1,058.6 |
|
$ |
879.7 |
|
$ |
506.4 |
|
$ |
2,983.6 |
|
Gross unrealized loss |
|
$ |
(0.5 |
) |
$ |
(49.9 |
) |
$ |
(300.4 |
) |
$ |
(222.4 |
) |
$ |
(132.5 |
) |
$ |
(705.7 |
) |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
413.9 |
|
$ |
844.9 |
|
$ |
2,722.0 |
|
$ |
1,364.3 |
|
$ |
687.4 |
|
$ |
6,032.5 |
|
Gross unrealized loss |
|
$ |
(29.3 |
) |
$ |
(89.8 |
) |
$ |
(753.9 |
) |
$ |
(464.0 |
) |
$ |
(334.9 |
) |
$ |
(1,671.9 |
) |
% Impaired (of amortized cost) (3) |
|
|
(6.7 |
)% |
|
(9.7 |
)% |
|
(22.1 |
)% |
|
(25.9 |
)% |
|
(33.3 |
)% |
|
(22.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Credit: |
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB & Below |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,425.4 |
|
$ |
7.1 |
|
$ |
8.4 |
|
$ |
8.1 |
|
$ |
15.1 |
|
$ |
1,464.1 |
|
Gross unrealized loss |
|
$ |
(278.9 |
) |
$ |
(4.2 |
) |
$ |
(5.9 |
) |
$ |
(2.0 |
) |
$ |
(22.1 |
) |
$ |
(313.1 |
) |
Prime RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
233.3 |
|
$ |
138.6 |
|
$ |
69.7 |
|
$ |
82.9 |
|
$ |
142.7 |
|
$ |
667.2 |
|
Gross unrealized loss |
|
$ |
(49.4 |
) |
$ |
(74.6 |
) |
$ |
(40.2 |
) |
$ |
(41.7 |
) |
$ |
(64.5 |
) |
$ |
(270.4 |
) |
Topical Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
174.8 |
|
$ |
92.5 |
|
$ |
95.8 |
|
$ |
162.9 |
|
$ |
192.3 |
|
$ |
718.3 |
|
Gross unrealized loss |
|
$ |
(85.7 |
) |
$ |
(94.4 |
) |
$ |
(110.1 |
) |
$ |
(186.7 |
) |
$ |
(266.6 |
) |
$ |
(743.5 |
) |
Core CDOs (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
120.4 |
|
$ |
298.3 |
|
$ |
57.3 |
|
$ |
60.5 |
|
$ |
47.0 |
|
$ |
583.5 |
|
Gross unrealized loss |
|
$ |
(34.2 |
) |
$ |
(119.5 |
) |
$ |
(46.2 |
) |
$ |
(77.2 |
) |
$ |
(213.5 |
) |
$ |
(490.6 |
) |
Other Asset & Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
320.9 |
|
$ |
117.6 |
|
$ |
143.4 |
|
$ |
123.1 |
|
$ |
33.0 |
|
$ |
738.0 |
|
Gross unrealized loss |
|
$ |
(40.6 |
) |
$ |
(23.0 |
) |
$ |
(30.2 |
) |
$ |
(44.8 |
) |
$ |
(22.6 |
) |
$ |
(161.2 |
) |
Agency RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
470.6 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
470.6 |
|
Gross unrealized loss |
|
$ |
(6.1 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(6.1 |
) |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
$ |
2,745.4 |
|
$ |
654.1 |
|
$ |
374.6 |
|
$ |
437.5 |
|
$ |
430.1 |
|
$ |
4,641.7 |
|
Gross unrealized loss |
|
$ |
(494.9 |
) |
$ |
(315.7 |
) |
$ |
(232.6 |
) |
$ |
(352.4 |
) |
$ |
(589.3 |
) |
$ |
(1,984.9 |
) |
% Impaired (of amortized cost) (3) |
|
|
(15.3 |
)% |
|
(32.7 |
)% |
|
(38.4 |
)% |
|
(44.7 |
)% |
|
(58.0 |
)% |
|
(30.1 |
)% |
|
|
(1) |
Included in the gross unrealized losses on corporate financials are gross unrealized losses of $604.5 million on Tier One and upper Tier Two securities of financials institutions (Hybrids), as well as $182.1 million of subordinated debt. |
|
|
(2) |
The Company defines Core CDOs as investments in non-mortgage collateralized debt obligations, which primarily consisted of collateralized loan obligations. |
|
|
(3) |
Management considers these impairments to be temporary. |
74
Management, in its assessment of whether securities in a gross unrealized loss position are temporarily impaired, considers the significance of the impairments. The Company had securities with gross unrealized losses of $1.4 billion, with a fair value of $691.7 million, which as at June 30, 2009 were impaired by greater than 50% of amortized costs. The Company has evaluated each of these securities and believes it is probable that the issuer will be able to fund sufficient principal and interest payments to exceed current amortized cost, and believes that the current levels of impairments are a function of the currently extremely elevated levels of credit spreads.
Structured credit securities with gross unrealized losses representing greater than 50% of amortized cost represent $934.1 million of gross unrealized losses, with a fair value of $408.5 million. Of these gross unrealized losses, $260.1 million are rated investment grade. The Company has evaluated each of these holdings on a security-by-security basis in conjunction with its investment managers and utilizing additional corroborative modeling techniques, and believes these securities will fund sufficient principal and interest payments to exceed current amortized cost. These securities include $255.1 million of Topical investments, $92.5 million of Core CDOs, $37.1 million of prime RMBS and $15.4 million of CMBS holdings.
Corporate securities with gross unrealized losses representing greater than 50% of amortized cost represent $468.3 million of gross unrealized losses, with a fair value of $283.1 million. Of these gross unrealized losses, $176.0 million are rated investment grade. Gross unrealized losses of $239.4 million are related to holdings of financial issuers, with the majority ($216.7 million) representing hybrid instruments. The Company believes these are high-grade issuers which will continue to service their principal and interest obligations.
Included in the gross unrealized losses associated with the Companys corporate portfolio are gross unrealized losses of $163.8 million related to Tier One and Upper Tier Two securities that have been rated below investment grade by at least one major ratings agency. Of this total $132.1 million have gross unrealized losses representing greater than 50% of amortized cost. The Company has completed its review of this portfolio and believes, at this time, that these impairments remain temporary in nature. The primary basis for this conclusion was analysis of the fundamentals of these securities using a debt-based impairment model, which indicated these securities continue to meet their obligations, and the issuer has the ability to call these obligations at their call date. In addition, as these securities are below investment grade, for securities representing perpetual securities, the Company considered these securities using an equity-impairment model. Factors that were considered and supported that these impairments were temporary included that the vast majority of these securities had only recently been rated below-investment-grade, alternative ratings were available that indicated these securities remained investment grade, or the securities were only slightly below investment-grade. At June 30, 2009, the Company believes that it is likely that the fair values of these securities will ultimately increase to equal the cost basis over a reasonable period of time. However, there is a high degree of judgment in reaching this conclusion, including an assessment of how various governments will treat the perpetual preferred shareholding in the event of governmental intervention in these institutions operations. Management will closely monitor the developments related to these securities and will consider these developments on OTTI conclusions reached in future quarters.
Net Unrealized Gains and Losses
The following table details the Companys corporate credit exposures by certain asset classes as well as ratings levels within the Companys fixed maturity portfolio and the current net unrealized (loss) position as at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporates: |
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB & Below |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Financials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
548.7 |
|
$ |
934.7 |
|
$ |
2,087.9 |
|
$ |
500.8 |
|
$ |
194.9 |
|
$ |
4,267.0 |
|
Net unrealized (loss) |
|
$ |
(25.5 |
) |
$ |
(26.8 |
) |
$ |
(445.2 |
) |
$ |
(240.3 |
) |
$ |
(200.4 |
) |
$ |
(938.2 |
) |
Non-Financials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
157.0 |
|
$ |
1,172.3 |
|
$ |
2,652.2 |
|
$ |
1,348.5 |
|
$ |
603.5 |
|
$ |
5,933.5 |
|
Net unrealized (loss) |
|
$ |
2.2 |
|
$ |
(24.2 |
) |
$ |
(232.8 |
) |
$ |
(219.8 |
) |
$ |
(115.7 |
) |
$ |
(590.3 |
) |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
705.7 |
|
$ |
2,107.0 |
|
$ |
4,740.1 |
|
$ |
1,849.3 |
|
$ |
798.4 |
|
$ |
10,200.5 |
|
Net unrealized (loss) |
|
$ |
(23.3 |
) |
$ |
(51.0 |
) |
$ |
(678.0 |
) |
$ |
(460.1 |
) |
$ |
(316.1 |
) |
$ |
(1,528.5 |
) |
75
At June 30, 2009, approximately $3.3 billion of the Companys $10.2 billion in corporate financial sector securities was held in the portfolios supporting the Companys Life Reinsurance Operations. The assets associated with that business are more heavily weighted towards longer term securities from financial institutions, including a significant portion of the Companys Tier 1 and Upper Tier 2 securities, representing committed term debt and hybrid instruments senior to the common and preferred equity of the financial institutions. Financials held in Life portfolios accounted for $672.3 million of the Companys net unrealized loss as at June 30, 2009. As at June 30, 2009 approximately 42.5% of the overall sensitivity to interest rate risk and 36.0% to credit risk was related to the life reinsurance portfolio, despite these portfolios accounting for only 19.4% of the fixed income portfolio.
The following table details the Companys structured credit exposures by certain asset classes as well as ratings levels within the Companys fixed maturity portfolio and the current net unrealized gain (loss) position as at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Structured Credit: |
|
AAA |
|
AA |
|
A |
|
BBB |
|
BB & Below |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,460.8 |
|
$ |
7.1 |
|
$ |
10.3 |
|
$ |
8.5 |
|
$ |
16.0 |
|
$ |
1,502.7 |
|
Net unrealized (loss) |
|
$ |
(278.5 |
) |
$ |
(4.2 |
) |
$ |
(5.8 |
) |
$ |
(2.0 |
) |
$ |
(22.0 |
) |
$ |
(312.5 |
) |
Prime RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
263.0 |
|
$ |
139.1 |
|
$ |
70.7 |
|
$ |
83.1 |
|
$ |
145.0 |
|
$ |
700.9 |
|
Net unrealized (loss) |
|
$ |
(48.2 |
) |
$ |
(74.6 |
) |
$ |
(40.2 |
) |
$ |
(41.6 |
) |
$ |
(6.9 |
) |
$ |
(211.5 |
) |
Topical Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
175.4 |
|
$ |
92.5 |
|
$ |
96.8 |
|
$ |
169.5 |
|
$ |
209.0 |
|
$ |
743.2 |
|
Net unrealized (loss) |
|
$ |
(85.7 |
) |
$ |
(94.4 |
) |
$ |
(110.1 |
) |
$ |
(186.2 |
) |
$ |
(265.3 |
) |
$ |
(741.7 |
) |
Core CDOs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
120.4 |
|
$ |
298.3 |
|
$ |
57.3 |
|
$ |
60.7 |
|
$ |
49.2 |
|
$ |
585.9 |
|
Net unrealized (loss) |
|
$ |
(34.2 |
) |
$ |
(119.5 |
) |
$ |
(46.2 |
) |
$ |
(77.2 |
) |
$ |
(212.9 |
) |
$ |
(490.0 |
) |
Other Asset & Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
627.7 |
|
$ |
125.5 |
|
$ |
169.9 |
|
$ |
129.4 |
|
$ |
42.3 |
|
$ |
1,094.8 |
|
Net unrealized (loss) |
|
$ |
(33.1 |
) |
$ |
(22.2 |
) |
$ |
(29.8 |
) |
$ |
(44.7 |
) |
$ |
(21.3 |
) |
$ |
(151.1 |
) |
Agency RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
3,093.0 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
3,093.0 |
|
Net unrealized gain |
|
$ |
75.1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
75.1 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
5,740.3 |
|
$ |
662.5 |
|
$ |
405.0 |
|
$ |
451.2 |
|
$ |
461.5 |
|
$ |
7,720.5 |
|
Net unrealized (loss) |
|
$ |
(404.6 |
) |
$ |
(314.9 |
) |
$ |
(232.1 |
) |
$ |
(351.7 |
) |
$ |
(528.4 |
) |
$ |
(1,831.7 |
) |
|
|
|
|
(1) |
The Company defines Core CDOs as investments in non-mortgage collateralized debt obligations, primarily consisting of collateralized loan obligations. |
The following table details the current exposures to Topical Assets within the Companys fixed income portfolio as well as the current net unrealized (loss) gain position as at June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2009 |
|
As at December 31, 2008 |
|
||||||||||||
|
|
|
|
|
|
||||||||||||
(U.S. dollars in thousands) |
|
Holding
at
|
|
Percent
|
|
Net
|
|
Holding
|
|
Percent
|
|
Net
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Topical Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime first lien mortgages |
|
$ |
384,983 |
|
1.2 |
% |
$ |
(389,842 |
) |
$ |
487,659 |
|
1.5 |
% |
$ |
(311,435 |
) |
Alt-A mortgages |
|
|
311,098 |
|
1.0 |
% |
|
(315,143 |
) |
|
406,098 |
|
1.3 |
% |
|
(270,486 |
) |
Second lien mortgages (including sub-prime second lien mortgages) |
|
|
41,840 |
|
0.1 |
% |
|
(29,686 |
) |
|
58,903 |
|
0.2 |
% |
|
(5,313 |
) |
ABS CDOs with sub-prime collateral |
|
|
5,289 |
|
0.0 |
% |
|
(7,016 |
) |
|
10,595 |
|
0.0 |
% |
|
(7,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exposure to Topical Assets |
|
$ |
743,210 |
|
2.3 |
% |
$ |
(741,687 |
) |
$ |
963,255 |
|
3.0 |
% |
$ |
(594,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Of the total Topical Assets with fair value exposure as at June 30, 2009 and December 31, 2008 of $743.2 million and $963.3 million, respectively, approximately $29.9 million and $40.5 million, respectively, of the related securities had ratings dependent on guarantees issued by third party guarantors (i.e., monoline insurers). Decreases in the ratings of such third party guarantors would typically decrease the fair value of guaranteed securities; however, at June 30, 2009, in the event of non-performance at such date on the part of these third party guarantors, the Company estimated that the average credit quality of this portfolio would be A- and that approximately 95% would have remained investment grade at such date. In addition, of the total fixed income portfolio as at June 30, 2009 and December 31, 2008, of $32.0 billion and $31.9 billion, respectively, less than 2% were guaranteed by such third parties with no individual third party representing more than 1%.
At June 30, 2009, the Companys sub-prime and Alt-A exposures remained primarily investment grade, had adequate underlying loan characteristics and the Company believed at such date that the current amortized cost levels were at or below the intrinsic value of the holdings, based on an analysis of subordination levels relative to current expectations of house price declines, loss severities and default levels. The Company had approximately $263.1 million of Topical Assets downgraded during the quarter ended June 30, 2009. However, 71.9% of the Companys holdings remain rated investment grade at June 30, 2009.
Liquidations necessary to fund the repayment of the GIC liabilities and the maturity of certain funding agreements in 2008 were funded through sales of assets in the Other Financial Lines segment investment portfolios as well as the general investment portfolio. Managements approach was to avoid the sale of assets where current market prices did not reflect intrinsic values or where transaction costs for liquidation were excessive. As a result, the Company continues to hold approximately $1.3 billion of Topical Assets and core CDOs and these have been transferred to the general portfolio in exchange for those assets that were liquidated.
Refer to Results of Operations for further discussion surrounding the impact of credit market movements on the Companys investment portfolio and exposure to sub-prime related assets.
As noted in Item 8, Note 2 to the Consolidated Financial Statements, Significant Accounting Policies, in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, the determination of the amount of OTTI varies by investment type and is based upon managements periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management considers a wide range of factors about the security issuer and uses their best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in managements evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Management updates its evaluations regularly and reflects additional impairments in net income as determinations are made. Managements determination of the amount of the impairment taken on investments is highly subjective and could adversely impact the Companys results of operations. There can be no assurance that management has accurately assessed the level of OTTI taken and reflected in the Companys financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
Levels of write down or OTTI are also impacted by the Companys assessment of the intent and ability to hold securities which have declined in value until recovery. If, due to changes in circumstances, the Company determines to reposition or realign portions of the portfolio where the Company determines not to hold certain securities in an unrealized loss position to recovery, then the Company will incur OTTI charges, which charges could be significant.
Unpaid Losses and Loss Expenses
The Company establishes reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Companys reserving practices and the establishment of any particular reserve reflects managements judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against the Company.
Unpaid losses and loss expenses totaled $21.5 billion at June 30, 2009, and $21.7 billion at December 31, 2008.
77
The table below represents a reconciliation of the Companys unpaid losses and loss expenses for the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|||
|
|
|
|
|
|
|
|
|||
Balance as at December 31, 2008 |
|
$ |
21,650,315 |
|
$ |
(3,964,836 |
) |
$ |
17,685,479 |
|
Losses and loss expenses incurred |
|
|
2,082,683 |
|
|
(512,772 |
) |
|
1,569,911 |
|
Losses and loss expenses paid/recovered |
|
|
(2,482,814 |
) |
|
614,811 |
|
|
(1,868,003 |
) |
Foreign exchange and other |
|
|
202,814 |
|
|
(14,027 |
) |
|
188,787 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at June 30, 2009 |
|
$ |
21,452,998 |
|
$ |
(3,876,824 |
) |
$ |
17,576,174 |
|
|
|
|
|
|
|
|
|
|
|
|
While the Company reviews the adequacy of established reserves for unpaid losses and loss expenses regularly, no assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. In the future, if such reserves develop adversely, such deficiency would have a negative impact on future results of operations. See Unpaid Losses and Loss Expenses in Item 1, Critical Accounting Policies and Estimates in Item 7 and Item 8, Note 12 to the Consolidated Financial Statements, each in the Companys Form 10-K for the year ended December 31, 2008 for further discussion.
Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable
As a significant portion of the Companys net premiums written incept in the first six months of the year, certain assets and liabilities have increased at June 30, 2009 compared to December 31, 2008. This includes deferred acquisition costs, unearned premiums, premiums receivable and prepaid reinsurance premiums.
In the normal course of business, the Company seeks to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk assumed in various areas of exposure with other insurers or reinsurers. While reinsurance agreements are designed to limit the Companys losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve the Company of its ultimate liability to its insureds. Accordingly, the loss and loss expense reserves on the balance sheet represent the Companys total unpaid gross losses. Unpaid losses and loss expenses recoverable relate to estimated reinsurance recoveries on the unpaid loss and loss expense reserves.
Unpaid losses and loss expense recoverables were $3.9 billion and $4.0 billion at June 30, 2009, and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008, reinsurance balances receivable were $0.4 billion and $0.6 billion, respectively. The table below presents the Companys net paid and unpaid losses and loss expenses recoverable and reinsurance balances receivable at June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
(U.S. dollars in thousands) |
|
(Unaudited)
|
|
December 31,
|
|
||
|
|
|
|
|
|
||
Reinsurance balances receivable |
|
$ |
469,828 |
|
$ |
636,284 |
|
Reinsurance recoverable on future policy benefits |
|
|
32,286 |
|
|
32,886 |
|
Reinsurance recoverable on unpaid losses and loss expenses |
|
|
3,993,912 |
|
|
4,079,860 |
|
Bad debt reserve on unpaid losses and loss expenses recoverable and reinsurance balances receivable |
|
|
(186,544 |
) |
|
(187,614 |
) |
|
|
|
|
|
|
|
|
Net paid and unpaid losses and loss expenses recoverable and reinsurance balances receivable |
|
$ |
4,309,482 |
|
$ |
4,561,416 |
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Assets and Liabilities
As disclosed in Note 3 to the Consolidated Financial Statements, Fair Value Measurements, effective January 1, 2008, the Company adopted FAS 157 and has accordingly provided required disclosures by level within the fair value hierarchy of the Companys assets and liabilities that are carried at fair value. As defined in the hierarchy, those assets and liabilities categorized as Level 3 have valuations determined using unobservable inputs. Unobservable inputs may include the entitys own assumptions about market participant assumptions, applied to a modeled valuation, however, this is not the case with respect to the Companys Level 3 assets and liabilities. The vast majority of the assets and liabilities classified as Level 3 are made up of those securities for which the values were obtained from brokers where either significant inputs were utilized in determining the value that were difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not obtained to support a Level 2 classification or the Company utilized internal valuation models.
78
At June 30, 2009, a significant component of Level 3 assets represented Core CDOs, totaling $520.4 million. Certain asset classes, primarily consisting of privately placed investments, did not have sufficient market corroborated information available to allow a pricing service to provide a price and accordingly the valuation was determined by the use of broker quotes. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments as is currently the case for certain U.S. CMOs, ABSs, CMBSs, certain CDOs, for which sufficient information, such as cash flows or other security structure or market information, was not available to enable a third party pricing service to provide a price and as such valuation is determined based on broker quotes for which sufficient information regarding the specific inputs utilized by the broker in determining the fair value was not obtained to support a Level 2 classification. In addition, as noted below, for certain CDO holdings, the Company determined that internal models would be more appropriate and better representative of the fair value of these securities given that recent valuations were as a result of broker bids or valuation models that used recent market trading which the Company considered to be distressed transactions. While the remainder of the Companys holdings in securities exposed to sub-prime mortgages are generally not based on quoted prices for identical securities, they are based on model-derived valuations from pricing services in which all significant inputs and significant value drivers are considered to be observable in active markets, and these securities continue to be classified within Level 2.
As noted above, the Company has determined that for certain of its CDO holdings with a fair value of $450.5 million and a par value of $807.5 million, valuations were as a result of broker bids that used recent market trading which the Company considered to be distressed transactions. The market for CDOs remains extremely illiquid due to a number of factors including risk aversion and reduction among institutional buyers. As a result, the Company believes that current broker bids reflect loss expectations that do not reflect fair values at which willing buyers and sellers would transact.
At June 30, 2009, the Companys internal models resulted in a fair value that was $154.7 million higher than those that would have been determined by its previous methodology of utilizing third party values sourced through brokers or pricing services. This variance represents 19.2% of par value of these holdings, which based on the portfolios spread duration of 4.9 years corresponds to an approximate 390 basis point decrease relative to the spread levels implied in current market levels of trading which management believes are distressed trades. The Company believes that, in the aggregate, this is appropriate as compared to current estimates of market credit spreads.
The Companys approach for determining its CLO portfolio fair value was to apply a 60% weighting to three scenarios that the Company considered as extreme, and 40% weighting to a scenario that the Company viewed as likely. This resulted in a valuation that was based primarily on extreme loss outcomes, which the Company does not believe are likely, but recognizes as a possibility that an orderly market would price into its credit assessments given the level of uncertainty currently in the market. The individual components can be summarized as follows:
60% extreme loss outcomes:
|
|
|
|
|
20% weighting to current third party valuations, with a fair value of $295.8 million, which the Company believes includes the current market liquidity premium; |
|
|
|
|
|
20% weighting to current cash flow estimates discounted at managements view of current market spreads, with a fair value of $277.0 million, which the Company believes includes the current market liquidity premium; |
|
|
|
|
|
20% weighting to current cash flow estimates, adjusted by a multiple of the current underlying loss estimates, discounted at the coupon of the securities, with a further reduction in value representing a liquidity premium equal to double the prevailing total credit spread levels of the most severe previous CLO market deterioration, which resulted in a fair value of $462.4 million; and |
40% likely loss outcomes:
|
|
|
|
|
40% weighting to likely loss outcomes, representing current cash flow estimates discounted at the coupon of the securities, with a further reduction in value representing a liquidity premium equal to the prevailing credit spread levels of the most severe previous CLO market deterioration, which resulted in a fair value of $608.7 million. |
While a number of the Level 3 investments have been written down as a result of the Companys impairment analysis, the Company continues to report, at June 30, 2009, gross unrealized losses of $493.2 million related to Level 3 available-for-sale investments. Management completed a detailed review in conjunction with its external investment managers and third party advisors, of the Companys underlying sub-prime and related residential mortgage exposures, as well as a consideration of the broader structured credit market, and concluded that the unrealized gains and losses in these asset classes are the result of a decrease in value due to technical spreads widening and broader market sentiment, rather than fundamental collateral deterioration and are temporary in nature
79
The remainder of the Level 3 assets relate to private equity investments where the nature of the underlying assets held by the investee include positions such as private business ventures and are such that significant Level 3 inputs are utilized in the valuation, and certain derivative positions.
Controls over Valuation of Financial Instruments
The Company performs quarterly reviews of the prices received from its third party valuation sources to assess if the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for providing the valuations. These reviews include, but are not limited to, valuation comparisons between external sources and completing recurring reviews of third party pricing services methodologies. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, the price received from one third party may be substituted for another or, in limited circumstances, management may determine that an adjustment is required to a third party value. In addition, similar valuation controls are followed by external parties responsible for sourcing appropriate valuations from third parties on the Companys behalf which provides additional support regarding the reasonableness of the fair values recorded in the Companys financial statements.
Valuation Methodology of Level 3 Assets and Liabilities
Refer to Notes 2 and 3 of the Consolidated Financial Statements, Significant Accounting Policies and Fair Value Measurements for a description of the valuation methodology utilized to value Level 3 assets and liabilities, how the valuation methodology is validated as well as further details associated with various assets classified as Level 3. As at June 30, 2009, the Company did not have any liabilities that were carried at fair value based on Level 3 inputs other than derivative instruments in a liability position at June 30, 2009.
Liquidity and Capital Resources
As a holding company, the Companys assets consist primarily of its investments in subsidiaries, and the Companys future cash flows depend on the availability of dividends or other statutorily permissible payments from its regulated subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries the Company operates in including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom, and those of the Society of Lloyds and certain contractual provisions. No assurance can be given that the Company or its subsidiaries will be permitted to pay dividends or other payments in the future.
The Company and its subsidiaries provide no guarantees or other commitments (express or implied) of financial support to the Companys subsidiaries or affiliates, except for where such guarantees are in writing.
Liquidity
Liquidity is a measure of the Companys ability to generate sufficient cash flows to meet the short-and long-term cash requirements of the Companys business operations.
As a holding company, XL Capital Ltd has no operations of its own and its assets consist primarily of its investments in its subsidiaries. Accordingly, XL Capital Ltds future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries and states in which XL Capital Ltds subsidiaries operate, including, among others, Bermuda, Delaware, New York, Ireland, Switzerland and the United Kingdom. See Risk Factors Risks Related to the Company Because we are a holding company, if the Companys subsidiaries do not make dividend and other payments to XL Capital Ltd, the Company may not be able to pay dividends or make payments on its debt securities and other obligations in Item 1A of the Companys Annual Report on Form 10-K for the year ended December 31, 2008. The ability to pay such dividends is also limited by the regulations of the Society of Lloyds and certain contractual provisions. No assurance can be given that the Companys subsidiaries will pay dividends in the future to XL Capital Ltd.
XL Capital Ltds principal uses of liquidity are for dividend payments to holders of its ordinary shares and preferred shares, interest and principal payments on debt, capital investments in its subsidiaries and corporate operating expenses.
Historically, cash receipts from operations, consisting of premiums and investment income, generally have provided sufficient funds to pay losses as well as operating expenses of the Companys subsidiaries and to fund dividends to XL Capital Ltd. Cash receipts from operations is generally derived from the receipt of investment income on the Companys total investment portfolio as well as the net receipt of premiums less claims and expenses related to the Companys underwriting activities in its property and casualty operations as well as its Life Operations segment. The Companys operating subsidiaries provide liquidity in that premiums are generally received months or even years before losses are paid under the policies related to such premiums.
During the first six months of 2009, net cash flows used in operating activities was $609.6 million primarily as a result of lower levels of premium income to offset claims payments related to previous underwriting years.
80
As at June 30, 2009, the Company had cash and cash equivalents of approximately $4.0 billion as compared to approximately $4.4 billion at December 31, 2008. In addition, the Company maintains credit facilities which provide additional liquidity. Details of these facilities are described below in Capital Resources.
In February 2009, the Board of Directors approved a reduction in the quarterly dividend payable on the Companys Class A Ordinary Shares to $0.10 per ordinary share beginning with the quarterly dividend paid in March 2009.
The Companys liquidity needs may change. For instance, in the event of certain ratings downgrades, the Company may be required to post cash collateral in connection with its letters of credit and revolving credit facilities, to return premiums to clients in the case of the cancellation of certain reinsurance agreements and to return cash or assets to settle certain derivative transactions. See Ratings below.
Capital Resources
At June 30, 2009, the Company had total shareholders equity of $7.5 billion. In addition to ordinary and preferred share capital, the Company depends on external sources of financing such as debt, credit facilities and contingent capital to support its underwriting activities.
In connection with the maturity of the purchase contracts associated with the 7.0% Units, the Company issued 11,461,080 Class A ordinary shares for net proceeds of approximately $745.0 million, which was used to retire the 2011 Senior Notes.
On March 26, 2009, the Company completed a cash tender offer for its outstanding Series C Preference Ordinary Shares that resulted in approximately 12.7 million Series C Preference Ordinary Shares with a liquidation value of $317.3 million being purchased by the Company for approximately $104.7 million plus accrued and unpaid dividends, combined with professional fees totaling $0.8 million. As a result, a book value gain of approximately $211.8 million was recorded in the first quarter of 2009 to ordinary shareholders.
Debt
The following table presents the Companys indebtedness under outstanding debt securities and lenders commitments as at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|||||||||||||
(U.S. dollars in thousands)
|
|
Commitment |
|
In Use |
|
Year
of
|
|
|
|
|||||||||||||
|
Less
than
|
|
1
to 3
|
|
3
to 5
|
|
After
5
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
5-year revolvers (1) |
|
$ |
1,000,000 |
|
$ |
|
|
|
2010/2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
5-year revolver |
|
|
100,000 |
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6.50% Guaranteed Senior Notes |
|
|
599,190 |
|
|
599,190 |
|
|
2012 |
|
|
|
|
|
|
|
|
600,000 |
|
|
|
|
5.25% Senior Notes |
|
|
596,606 |
|
|
596,606 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
8.25% Senior Notes |
|
|
575,000 |
|
|
575,000 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
575,000 |
|
6.375% Senior Notes |
|
|
350,000 |
|
|
350,000 |
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
6.25% Senior Notes |
|
|
324,434 |
|
|
324,434 |
|
|
2027 |
|
|
|
|
|
|
|
|
|
|
|
325,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,545,230 |
|
$ |
2,445,230 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
600,000 |
|
$ |
1,850,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment and In Use data represent June 30, 2009 accreted values. Payments Due by Period data represent ultimate redemption values.
|
|
Credit facilities, contingent capital and other sources of collateral
At June 30, 2009, the Company had six letter of credit facilities in place with total availability of $7.0 billion, of which $3.4 billion was utilized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of Commitment
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(U.S. dollars in thousands)
|
|
Commitment |
|
In Use |
|
Year
of
|
|
Less
than
|
|
1
to 3
|
|
3
to 5
|
|
After
5
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Letter of Credit Facility |
|
$ |
250,000 |
|
$ |
204,969 |
|
|
Continuous |
|
$ |
250,000 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Letter of Credit Facility (1) |
|
|
2,250,000 |
|
|
|
|
|
2010 |
|
|
|
|
|
2,250,000 |
|
|
|
|
|
|
|
Letter of Credit Facility (1) |
|
|
4,000,000 |
|
|
2,652,154 |
|
|
2012 |
|
|
|
|
|
|
|
|
4,000,000 |
|
|
|
|
Letter of Credit Facility |
|
|
186 |
|
|
186 |
|
|
2009 |
|
|
186 |
|
|
|
|
|
|
|
|
|
|
Letter of Credit Facility |
|
|
93 |
|
|
93 |
|
|
2009 |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
Letter of Credit Facility |
|
|
501,874 |
|
|
501,874 |
|
|
2009 |
|
|
501,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Six letter of credit facilities |
|
$ |
7,002,153 |
|
$ |
3,359,276 |
|
|
|
|
$ |
752,153 |
|
$ |
2,250,000 |
|
$ |
4,000,000 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and loss experience of such business. These facilities are principally utilized to support non-admitted insurance and reinsurance operations in the United States and capital requirements at Lloyds. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedants with statutory relief under state insurance regulations in the U.S. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedants. This could take the form of additional insurance trusts supported by the Companys investment portfolio or funds withheld using the Companys cash resources or combinations thereof.
In addition, the Company has previously entered into contingent capital transactions where no up-front proceeds were received by the Company, however, in the event that the associated irrevocable put and/or contingent put option agreements are exercised, proceeds previously raised from investors from the issuance of pass-through trust securities would be received in return for the issuance of preferred shares by the Company as applicable. As at June 30, 2009, the Companys remaining contingent capital facility was the $350 million Stoneheath Re facility. For further information, see Note 18 to the Consolidated Financial Statements, Off-Balance Sheet Arrangements in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
Ratings
The Companys ability to underwrite business is dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that the Company is downgraded, its ability to write business as well as its financial condition and/or results of operations could be adversely affected. The Company regularly evaluates its capital needs to support the volume of business written in order to maintain its claims paying and financial strength ratings.
A downgrade below A of the Companys principal insurance and reinsurance subsidiaries by either Standard & Poors (S&P) or A.M. Best Company (A.M. Best), which is two notches below the current S&P financial strength rating of A (Negative) and two notches below the current A.M. Best financial strength rating of A (Stable) of these subsidiaries, may trigger termination provisions in a significant amount of the Companys assumed reinsurance agreements and may potentially require the Company to return unearned premium to cedants. Whether a client would exercise its termination rights after such a downgrade would likely depend on, among other things, the reasons for the downgrade, the extent of the downgrade, prevailing market conditions, the degree of unexpired coverage, and the pricing and availability of replacement reinsurance coverage. In the event of such a downgrade, the Company cannot predict whether or how many of its clients would actually exercise such termination rights or the extent to which any such terminations would have a material adverse effect on its financial condition, results of operations or future prospects and could have a significant adverse effect on the market price for the Companys securities. In addition, due to collateral posting requirements under the Companys letter of credit and revolving credit facility agreements, such a downgrade may require the posting of cash collateral in support of certain in use portions of these facilities. Specifically, a downgrade below A by A.M. Best would trigger such collateral requirements for the Companys two largest credit facilities. In certain limited instances, such downgrades may require the Company to return cash or assets to counterparties or to settle derivative and/or other transactions with the respective counterparties. For further information, see the Risk Factor titled A downgrade or potential downgrade in the Companys financial strength and credit ratings by one or more rating agencies could materially and negatively impact the Companys business, financial condition, results of operations and/or liquidity in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
The following are the financial strength and claims paying ratings as at July 1, 2009 from internationally recognized rating agencies in relation to the Companys principal insurance and reinsurance subsidiaries and pools:
|
|
|
|
|
|
Rating agency |
|
Rating |
|
||
|
|
|
|
|
|
Standard & Poors |
|
A |
|
(Negative |
) |
Fitch |
|
A |
|
(Rating Watch Negative |
) |
A.M. Best |
|
A |
|
(Stable |
) |
Moodys Investor Services |
|
A2 |
|
(Negative |
) |
In addition, as at July 1, 2009 XL Capital Ltd had the following long-term debt ratings: bbb (Stable) from A.M. Best, BBB+ (Negative) from S&P, Baa2 (Negative) from Moodys and BBB+ (Rating Watch Negative) from Fitch.
82
Other
Since 2005, we have offered and sold ordinary shares to our shareholders and other investors under a dividend reinvestment and share purchase plan (the Old Plan). We filed a registration statement with the SEC covering the Old Plan in 2005. As a result of a change to the SECs registration requirements, the Company was required to file a new registration statement covering the purchase and sale of our ordinary shares under the Old Plan by December 20, 2008. On June 25, 2009, we terminated the Old Plan and entered into a new plan administered by The Bank of New York Mellon (the Bank) which allows the Companys shareholders and other investors the opportunity to buy and sell our ordinary shares in the open market. This new Bank plan is not required to be registered. Between December 20, 2008 and June 25, 2009, the Old Plan administrator acquired in the open market a small number of ordinary shares for delivery to purchasers pursuant to the Old Plan. Accordingly, the Company did not receive any proceeds from such purchases.
For information regarding cross-default and certain other provisions in the Companys debt and convertible securities documents, see Item 7 of the Companys Form 10-K for the year ended December 31, 2008.
See Part II, Item 2 Unregistered Sales of Equity Securities and Use of Proceeds, below.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (PSLRA) provides a safe harbor for forward-looking statements. Any prospectus, prospectus supplement, the Companys Annual Report to ordinary shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Companys current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular (both as to underwriting and investment matters). Statements that include the words expect, intend, plan, believe, project, anticipate, will, may, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) changes in ratings, rating agency policies or practices; (ii) changes in the size of the Companys claims relating to natural catastrophe losses due to the preliminary nature of some reports and estimates of loss and damage to date; (iii) trends in rates for property and casualty insurance and reinsurance; (iv) the timely and full recoverability of reinsurance placed by the Company with third parties, or other amounts due to the Company; (v) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (vi) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (vii) ineffectiveness or obsolescence of the Companys business strategy due to changes in current or future market conditions; (viii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (ix) greater frequency or severity of claims and loss activity than the Companys underwriting, reserving or investment practices anticipate based on historical experience or industry data; (x) the effects of inflation on our business, including on pricing and reserving; (xi) developments, including uncertainties related to the depth and duration of the current recession, and future volatility in the worlds credit, financial and capital markets that adversely affect the performance and valuation of XLs investments or access to such markets; (xii) the potential impact on the Company from government-mandated insurance coverage for acts of terrorism; (xiii) the potential for changes to methodologies; estimations and assumptions that underlie the valuation of the Companys financial instruments that could result in changes to investment valuations; (xiv) to the Companys assumptions as to whether it has the ability and intent to hold available-for-sale securities to recovery; (xv) developments in bankruptcy proceedings or other developments related to bankruptcies of companies insofar as they affect property and casualty insurance and reinsurance coverages or claims that the Company may have as a counterparty; (xvi) availability of borrowings and letters of credit under the Companys credit facilities; (xvii) the ability of the Companys subsidiaries to pay dividends to the holding company, XL Capital Ltd.; (xviii) the potential effect of domestic and foreign regulatory developments, including those which could increase the Companys business costs and required capital levels; (xix) changes in regulation or tax laws applicable to the Company or its subsidiaries, brokers or customers; (xx) acceptance of the Companys products and services, including new products and services; (xxi) changes in the availability, cost or quality of reinsurance; (xxii) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xxiii) loss of key personnel; (xxiv) the effects of mergers, acquisitions and divestitures; (xxv) changes in accounting policies or practices or the application thereof; (xxvi) legislative or regulatory developments including, but not limited to, changes in regulatory capital balances that must be maintained by the Companys operating subsidiaries and recent governmental actions for the purpose of stabilizing the financial markets; (xxvii) other changes in general economic conditions, including changes in interest rates, credit spreads, foreign currency exchange rates, inflation and other factors; (xxviii) the effects of business disruption or economic contraction due to war, terrorism or other hostilities; and (xxix) the other factors set forth in the Companys other documents on file with the SEC. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
83
|
|
|
|
|
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|
|
|
|
Except as described below, there have been no material changes in the Companys market risk exposures or how those exposures are managed, since December 31, 2008. The following discussion should be read in conjunction with Quantitative and Qualitative Disclosures about Market Risk, presented under Item 7A of the Companys Form 10-K for the year ended December 31, 2008.
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The Company is principally exposed to the following market risks: interest rate risk; foreign currency exchange rate risk; equity price risk; credit risk; and other related market risks.
The Companys investment market risk arises from its investment portfolio which consists of fixed income securities, alternative investments, public equities, private investments, derivatives, other investments, and cash, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, credit spreads, equity prices, foreign currency exchange rates and other related market risks. The Companys fixed income and equity securities are classified as available-for-sale, and as such changes in interest rates, credit spreads on corporate and structured credit, equity prices, foreign currency exchange rates or other related market instruments will have an immediate effect on comprehensive income and shareholders equity but will not ordinarily have an immediate effect on net income. Nevertheless, changes in interest rates, credit spreads, equity prices and other related market instruments effect consolidated net income when, and if, a security is sold or impaired.
The Company enters into derivatives and other financial instruments primarily for risk management purposes. The Company conducts activities in three main types of derivative instruments: credit derivatives, weather and energy derivatives and investment-related derivative instruments. From time to time, the Company also uses investment derivative instruments such as futures, options, interest rate swaps, credit default swaps and foreign currency forward contracts to manage the duration of its investment portfolio and foreign currency exposures and also to obtain exposure to a particular financial market. Historically the Company entered into credit derivatives outside of the investment portfolio in conjunction with the financial guarantee and financial products operations. The Company attempts to manage the risks associated with derivative use with guidelines established by senior management. Derivative instruments are carried at fair value with the resulting changes in fair value recognized in income in the period in which they occur.
This risk management discussion and the estimated amounts generated from the sensitivity and VaR analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, actual developments in the global financial markets and changes in the composition of the Companys investment portfolio. The results of analysis used by the Company to assess and mitigate risk should not be considered projections of future events of losses. See generally Cautionary Note Regarding Forward-Looking Statements in Item 2.
Interest Rate Risk
The Companys fixed income portfolio is exposed to interest rate risk. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The Company manages interest rate risk within the context of its overall asset liability management strategy by setting duration targets for its investment portfolio in line with the estimated duration of its liabilities, thus mitigating the overall economic effect of interest rate risk. The Company remains nevertheless exposed to accounting interest rate risk since the assets are marked to market, thus subject to market conditions, while liabilities are accrued at a static rate. The hypothetical case of an immediate 100 basis point adverse parallel shift in global bond curves as at June 30, 2009, would decrease the fair value of the Companys fixed income portfolio by approximately 3.9% or $1.25 billion.
Foreign Currency Exchange Rate Risk
Many of the Companys non-U.S. subsidiaries maintain both assets and liabilities in local currencies. Foreign currency exchange rate gains and losses arise for accounting purposes where net assets or liabilities are denominated in foreign currencies that differ from the functional currency of those subsidiaries. In addition, the Companys shareholders equity is impacted by movements in currency exchange rates through both the foreign exchange component of realized and unrealized gains and losses within the Companys investment portfolio, and the cumulative translation adjustments resulting from the translation of foreign subsidiary results.
The principal currencies creating foreign exchange risk for us are the British pound sterling, the Euro, the Swiss Franc, and the Canadian dollar. The Companys net notional foreign currency denominated exposure on foreign exchange contracts was $524.8 million and $186.2 million as at June 30, 2009 and December 31, 2008 respectively, with a net unrealized gain of $17.8 million and a net unrealized loss of $3.2 million as at June 30, 2009 and December 31, 2008, respectively.
Equity Price Risk
The Companys equity portfolio as well as other investments, primarily representing certain derivatives and certain affiliate investments, are exposed to equity price risk. Equity price risk is the potential loss arising from changes in the market value of
84
equities. An immediate hypothetical 10% change in the value of each equity position in the Companys equity portfolio would affect the fair value of the portfolio by approximately $2.9 million as at June 30, 2009. This excludes exposures to equities in the Companys affiliate investments.
As at June 30, 2009, the Companys equity portfolio was approximately $29 million as compared to $330 million as at December 31, 2008. This excludes fixed income fund investments that generally do not have the risk characteristics of equity investments. As at June 30, 2009, the Companys allocation to equity securities was approximately 0.1% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to approximately 1.1% as at December 31, 2008.
As at June 30, 2009, approximately 97.1% of the equity holdings was invested in U.S. companies as compared to approximately 10.5% as at December 31, 2008. As at June 30, 2009, the top ten equity holdings represented approximately 26.4% of the Companys total equity portfolio as compared to approximately 10.4% as at December 31, 2008.
Credit Risk
The Companys exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads will increase the net unrealized loss position of the investment portfolio, will increase losses associated with credit based non-qualifying derivatives where the Company assumes credit exposure, and, if issuer credit spreads increase significantly or for an extended period of time, would likely result in higher other-than-temporary impairments. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturities. In addition, market volatility can make it difficult to value certain of the Companys securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on the Companys consolidated results of operations or financial condition. Credit spreads on both corporate and structured securities tightened during the quarter ended June 30, 2009, resulting in a slight recovery of market values, however market pricing continues to remain depressed. Continuing challenges include continued weakness in the U.S. real estate market and increased mortgage delinquencies, investor anxiety over the U.S. economy, rating agency downgrades of various structured products and financial issuers, unresolved issues with structured investment vehicles and monolines, deleveraging of financial institutions and alternative funds and a serious dislocation in the inter-bank market. If significant, continued volatility, changes in interest rates, changes in credit spreads and defaults, a lack of pricing transparency, market liquidity, declines in equity prices, and the strengthening or weakening of foreign currencies against the U.S. dollar, individually or in tandem, could have a material adverse effect on the Companys consolidated results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.
The Companys exposure to market movements related to credit risk is primarily due to its investment portfolio, receivable and ceded reinsurance balances. Within the investment portfolio, credit risk is the exposure to adverse changes in the creditworthiness of individual investment holdings, issuers, groups of issuers, industries or countries. In addition, credit risk pertains to adverse change in the creditworthiness of the Companys reinsurers and retrocessionaires, and their ability to pay certain reinsurance receivable and recoverable balances. The hypothetical case of an immediate 25 basis point increase in all the global corporate and structured credit spreads to which the Companys fixed income portfolio is exposed to at June 30, 2009 would decrease the fair value of the Companys fixed income portfolio by approximately $258.6 million. This excludes exposure to credit in the Companys alternative investments and counterparty exposure.
85
The table below shows the Companys fixed income portfolio by credit rating in percentage terms of the Companys total fixed income exposure (including fixed maturities, short-term investments, cash and cash equivalents, accrued investment income and net payable for investments purchased) as at June 30, 2009:
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
AAA |
|
|
56.7 |
% |
AA |
|
|
14.7 |
% |
A |
|
|
16.8 |
% |
BBB |
|
|
7.8 |
% |
BB & below |
|
|
4.0 |
% |
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
|
|
|
At June 30, 2009, the average credit quality of the Companys total fixed income portfolio was AA.
The Company is closely monitoring its corporate financial bond holdings in light of the current credit market conditions. The table below summarizes the Companys significant exposures (defined as bonds issued by financial institutions with an amortized cost in excess of $50.0 million) to corporate bonds of financial issuers held within its available for sale investment portfolio at June 30, 2009, representing both amortized cost and unrealized gains (losses):
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Amortized Cost at
|
|
Unrealized gain
|
|
||
|
|
|
|
|
|
||
Lloyds Banking Group, Plc |
|
$ |
316.3 |
|
$ |
(78.8 |
) |
Bank of America Corporation. |
|
|
310.4 |
|
|
(39.6 |
) |
The Goldman Sachs Group, Inc. |
|
|
195.7 |
|
|
(12.7 |
) |
Citigroup Inc |
|
|
192.6 |
|
|
(29.8 |
) |
Banco Santander, S.A |
|
|
145.7 |
|
|
(47.2 |
) |
Wells Fargo & Company |
|
|
142.3 |
|
|
(3.0 |
) |
HSBC Holdings Plc |
|
|
141.6 |
|
|
(13.7 |
) |
JPMorgan Chase & Co |
|
|
120.0 |
|
|
(14.5 |
) |
Barclays Plc |
|
|
116.4 |
|
|
(42.7 |
) |
Nationwide Building Society |
|
|
105.6 |
|
|
(14.6 |
) |
Morgan Stanley |
|
|
104.3 |
|
|
(2.1 |
) |
American International Group, Inc |
|
|
93.7 |
|
|
(26.0 |
) |
Caisse Nationale des Caisses DEpargne et de Prevoyance (CNCEP) |
|
|
89.1 |
|
|
(18.5 |
) |
RFS Holdings B.V. (ABN AMRO) |
|
|
86.1 |
|
|
(11.0 |
) |
Aviva Plc |
|
|
83.3 |
|
|
(33.5 |
) |
HM Government Cabinet Office (Northern Rock plc) |
|
|
71.3 |
|
|
(8.3 |
) |
UBS AG |
|
|
69.1 |
|
|
(19.6 |
) |
Unicredit SpA |
|
|
63.5 |
|
|
(20.1 |
) |
Royal Bank of Canada |
|
|
63.5 |
|
|
0.7 |
|
Australia & New Zealand Banking Group Ltd |
|
|
62.4 |
|
|
(0.2 |
) |
Assicurazioni Generali SPA |
|
|
62.2 |
|
|
(18.7 |
) |
Danske Bank A/S |
|
|
62.2 |
|
|
(20.4 |
) |
Credit Agricole |
|
|
61.0 |
|
|
(13.6 |
) |
Legal and General Group Plc |
|
|
61.0 |
|
|
(22.2 |
) |
BNP Paribas |
|
|
60.5 |
|
|
(18.4 |
) |
HM Treasury (The Royal Bank of Scotland) |
|
|
58.5 |
|
|
(6.6 |
) |
Metlife, Inc. |
|
|
53.5 |
|
|
(4.6 |
) |
Within the Companys corporate financial bond holdings, the Company is further monitoring its exposures to hybrid securities, representing Tier One and Upper Tier Two securities of various financial institutions. The following table summarizes the top ten exposures to hybrid securities, representing both amortized cost and unrealized (losses) as June 30, 2009:
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Tier One
|
|
Upper
|
|
Total
|
|
Net
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Barclays, Plc |
|
$ |
55.2 |
|
$ |
61.2 |
|
$ |
116.4 |
|
$ |
(42.7 |
) |
Lloyds TSB Group, Plc. |
|
|
103.7 |
|
|
8.7 |
|
|
112.4 |
|
|
(65.4 |
) |
Banco Santander, S.A |
|
|
50.0 |
|
|
61.2 |
|
|
111.2 |
|
|
(43.1 |
) |
Assicurazioni Generali S.P.A |
|
|
62.2 |
|
|
|
|
|
62.2 |
|
|
(18.7 |
) |
Aviva, Plc. |
|
|
5.8 |
|
|
55.4 |
|
|
61.2 |
|
|
(26.8 |
) |
Danske Bank A/S |
|
|
35.3 |
|
|
20.7 |
|
|
56.0 |
|
|
(20.4 |
) |
Credit Agricole SA |
|
|
11.9 |
|
|
43.4 |
|
|
55.3 |
|
|
(13.7 |
) |
Unicredit S.P.A |
|
|
46.1 |
|
|
1.8 |
|
|
47.9 |
|
|
(20.3 |
) |
BNP Paribas |
|
|
42.4 |
|
|
|
|
|
42.4 |
|
|
(17.1 |
) |
Caisse Nationale des Caisses DEpargne et de Prevoyance (CNCEP) |
|
|
35.0 |
|
|
|
|
|
35.0 |
|
|
(18.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
447.6 |
|
$ |
252.4 |
|
$ |
700.0 |
|
$ |
(287.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2009, the top 10 corporate holdings, which exclude government guaranteed and government sponsored enterprises, represented approximately 5.3% of the total fixed income portfolio and approximately 16.8% of all corporate holdings. The top 10 corporate holdings listed below represent the direct exposure to the corporations listed below, including their subsidiaries, and excludes any securitized, credit enhanced and collateralized asset or mortgage backed securities, cash and cash equivalents, pooled notes and any over-the-counter (OTC) derivative counterparty exposure, if applicable.
|
|
|
|
|
Top 10 Corporate Holdings |
|
Percentage of
|
|
|
|
|
|
|
|
Bank of America Corporation |
|
0.86 |
% |
|
Lloyds Banking Group plc |
|
0.76 |
% |
|
General Electric Company |
|
0.73 |
% |
|
The Goldman Sachs Group, Inc |
|
0.58 |
% |
|
Citigroup Inc |
|
0.52 |
% |
|
Wells Fargo & Company |
|
0.44 |
% |
|
HSBC Holdings plc |
|
0.41 |
% |
|
AT&T Inc |
|
0.37 |
% |
|
JP Morgan Chase |
|
0.33 |
% |
|
Verizon Communications Inc |
|
0.33 |
% |
|
|
|
|
|
(1) |
Including fixed maturities, short-term investments, cash and cash equivalents, accrued investment income and net payable for investments purchased. |
As at June 30, 2009, the top 5 corporate sector exposures represented 21.5% of the total fixed income portfolio and 67.6% of all corporate holdings.
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
Fair Value |
|
Percent of
|
|
||
|
|
|
|
|
|
||
Financials Banks |
|
$ |
3,165.4 |
|
|
9.9 |
% |
Consumer, Non-Cyclical |
|
|
1,226.9 |
|
|
3.8 |
% |
Communications |
|
|
911.4 |
|
|
2.8 |
% |
Utilities |
|
|
865.5 |
|
|
2.7 |
% |
Industrials |
|
|
726.6 |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,895.8 |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
The Company also has exposure to market movement related to credit risk associated with its mortgage-backed and asset-backed securities. The table below shows the breakdown of the $7.7 billion structured credit portfolio as at June 30, 2009, of which approximately 74.3% is AAA rated:
87
|
|
|
|
|
|
|
|
(U.S. dollars in millions) |
|
Fair Value |
|
Percent of
|
|
||
|
|
|
|
|
|
||
CMBS |
|
$ |
1,502.7 |
|
|
19.5 |
% |
Agency |
|
|
3,093.0 |
|
|
40.1 |
% |
Prime RMBS |
|
|
718.7 |
|
|
9.3 |
% |
Core CDO (non-ABS CDOs and CLOs) |
|
|
585.9 |
|
|
7.6 |
% |
Other ABS: |
|
|
|
|
|
|
|
ABS Auto |
|
|
200.9 |
|
|
2.6 |
% |
ABS Credit Cards |
|
|
208.4 |
|
|
2.7 |
% |
ABS Other |
|
|
667.4 |
|
|
8.6 |
% |
Topical: |
|
|
|
|
|
|
|
Sub-prime first lien |
|
|
385.0 |
|
|
5.0 |
% |
Alt-A |
|
|
311.1 |
|
|
4.0 |
% |
Second lien (including sub-prime second lien mortgages) |
|
|
41.8 |
|
|
0.5 |
% |
ABS CDOs with sub-prime collateral |
|
|
5.5 |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,720.4 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
For further discussion of the exposure to credit market movements in the Companys investment portfolio see the Investment Value-at-Risk section below.
Credit derivatives are purchased within the Companys investment portfolio and have been sold through a limited number of contracts written as part of the Companys previous XL Financial Solutions business. The Company may purchase credit default swaps to hedge an existing position or concentration of its holdings. The credit derivatives are recorded at fair value.
As of June 30, 2009, the remaining credit derivative exposure outside of the Companys investment portfolio consisted of two contracts written by the Company that provide credit protection on senior tranches of structured finance transactions with total net par values outstanding of $296.0 million, a weighted average contractual term to maturity of 6.6 years and a total liability recorded of $7.1 million.
The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds and other investment funds and other institutions. Many of these transactions expose the Company to credit risk in the event of default of the Companys counterparty. In addition, with respect to secured transactions, the Companys credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due. The Company also has exposure to financial institutions in the form of unsecured debt instruments, derivative transactions, revolving credit facility and letter of credit commitments and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect the Companys business and results of operations.
With regards to unpaid losses and loss expenses recoverable and reinsurance balances receivable, the Company has credit risk should any of its reinsurers be unable or unwilling to settle amounts due to the Company; however, these exposures are not marked to market. For further information relating to reinsurer credit risk, see Managements Discussion and Analysis of Financial Condition and Results of Operations Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable.
The Company is exposed to credit risk in the event of non-performance by the other parties to its derivative instruments in general, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Companys maximum credit exposure.
Weather and Energy Risk
Prior to August 2008, the Company previously offered weather and contingent energy risk management products in insurance or derivative form to end-users and managed the risks in the OTC and exchange traded derivatives markets or through the use of quota share or excess of loss arrangements. However, as part of the Companys strategy to focus on its core Insurance and Reinsurance P&C operations, the Company, in August 2008, closed this unit and ceased writing such weather and energy risk management products.
Fair values for the Companys existing portfolio of previously written speculative natural gas derivative contracts are determined through the use of quoted market prices. As quoted market prices are not widely available in the weather derivative market, management uses available market data and internal pricing models based upon consistent statistical methodologies to estimate fair values. Estimating fair value of instruments that do not have quoted market prices requires managements judgment in determining amounts that could reasonably be expected to be received from, or paid to, a third party in respect of the contracts. The
88
amounts could be materially different from the amounts that might be realized in an actual sale transaction. Fair values are subject to change in the near-term and reflect managements best estimate based on various factors including, but not limited to, realized and forecasted weather conditions, changes in interest rates and other market factors.
Previously, when the Company offered weather and contingent energy risk management products, the Company managed its portfolio of such products through the employment of a variety of strategies. These included geographical and directional diversification of risk exposures and direct hedging within the capital and reinsurance markets. As at June 30, 2009, the Companys VaR related to these risks did not exceed $20.0 million in any one season. The remaining weather and energy contracts are expected to expire during 2009.
Other Market Risks
The Companys private investment portfolio is invested in limited partnerships and other entities which are not publicly traded. In addition to normal market risks, these positions may also be exposed to liquidity risk, risks related to distressed investments, and risks specific to startup or small companies. As at June 30, 2009, the Companys exposure to private investments was $361.4 million, as compared to $404.8 million as at December 31, 2008.
The Companys alternative investment portfolio, which is exposed to equity and credit risk as well as certain other market risks, had a total exposure of $880.4 million making up approximately 2.6% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) at June 30, 2009, as compared to December 31, 2008, where the Company had a total exposure of $1.1 billion representing approximately 3.2% of the total investment portfolio. The VaR associated with the alternative investment portfolio at June 30, 2009 based on a 95% confidence level with a one month holding period, excluding foreign exchange risk, was approximately $29.8 million.
At June 30, 2009, bond and stock index futures outstanding had a net long position of $66.0 million as compared to a net long position of $101.7 million at December 31, 2008. A 10% appreciation or depreciation of the underlying exposure to these derivative instruments would have resulted in realized gains or realized losses of $6.6 million as at June 30, 2009 and $10.2 million as at December 31, 2008, respectively. The Company may reduce its exposure to these futures through offsetting transactions, including options and forwards.
The Company invests a portion of its invested assets in investment funds, many of which make private equity investments. The amount and timing of income from such investment funds tends to be uneven as a result of the performance of the underlying investments, including private equity investments. As a result, the amount of income that the Company records from these investments can vary substantially from quarter to quarter. Recent equity and credit market volatility may reduce net income from investment affiliates for these type of investments. The timing of distributions from the funds, which depends on particular events relating to the underlying investments, as well as the funds schedules for making distributions and their needs for cash, can be difficult to predict.
Investment Value-at-Risk (VaR)
The VaR of the investment portfolio at June 30, 2009, based on a 95% confidence level with a one month holding period, excluding foreign exchange risk, was approximately $510.7 million as compared to $892.4 million at December 31, 2008. The VaR of all investment related derivatives excluding investments in affiliates and other investments was approximately $28.4 million as at June 30, 2009 as compared to $42.9 million at December 31, 2008. The Companys investment portfolio VaR as at June 30, 2009 is not necessarily indicative of future VaR levels.
To complement the VaR analysis based on normal market environments, the Company considers the impact on the investment portfolio of several different historical stress periods to analyze the effect of unusual market conditions. The Company establishes certain historical stress test scenarios which are applied to the actual investment portfolio. As these stress tests and estimated gains and losses are based on historical events, they will not necessarily reflect future stress events or gains and losses from such events. The results of the stress test scenarios are reviewed on a regular basis to ensure they are appropriate, based on current shareholders equity, market conditions and the Companys total risk tolerance.
Given the investment portfolio allocations as at June 30, 2009, the Company would expect to lose approximately 5.0% of the portfolio excluding foreign exchange movements, if the most damaging event stress tested was repeated, all other things held equal, as compared to 4.2% at December 31, 2008. Given the investment portfolio allocations as at June 30, 2009, the Company would expect to gain approximately 12.6% of the portfolio if the most favorable event stress tested was repeated, all other things held equal, as compared to 14.0% at December 31, 2008. The Company assumes that no action is taken during the stress period to either liquidate or rebalance the portfolio. The Company believes that this fairly reflects the potential decreased liquidity that is often associated with distressed market environments.
89
|
|
|
|
CONTROLS AND PROCEDURES |
|
|
|
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been made known to them in a timely fashion.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Companys evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
|
|
|
|
LEGAL PROCEEDINGS |
|
|
|
In November 2006, a subsidiary of the Company received a grand jury subpoena from the Antitrust Division of the U.S. Department of Justice (DOJ) and a subpoena from the SEC, both of which sought documents in connection with an investigation into the municipal GICs market and related products. In June 2008, subsidiaries of the Company also received a subpoena from the Connecticut Attorney General and an Antitrust Civil Investigative Demand from the Office of the Florida Attorney General in connection with a coordinated multi-state Attorneys General investigation into the matters referenced in the DOJ and SEC subpoenas. The Company is fully cooperating with these investigations.
Commencing in March 2008, the Company and two of its subsidiaries were named, along with approximately 20 other providers and insurers of municipal Guaranteed Investment Contracts and similar derivative products in the U.S. (collectively Municipal Derivatives) as well as fourteen brokers of such products, in several purported federal antitrust class actions. The Judicial Panel on Multidistrict Litigation ordered that these be consolidated for pretrial purposes and assigned them to the Southern District of New York. The consolidated amended complaint filed in August 2008 alleges that there was a conspiracy among the defendants during the period from January 1, 1992 to the present to rig bids and otherwise unlawfully decrease the yield for Municipal Derivative products. The purported class of plaintiffs consists of purchasers of Municipal Derivatives. On October 21, 2008 most of the defendants filed motions to dismiss the consolidated amended complaint. The District Judge granted the motions by order dated April 29, 2009, but allowed plaintiffs leave to file a second amended complaint within 20 days of the order. Plaintiffs filed a Second Consolidated Amended Class Action Complaint on June 18, 2009, but did not include the Company or any subsidiaries as a defendant. In addition, the same two subsidiaries of the Company were named in a number of similar actions filed by various municipalities in California state courts. The Defendants removed those cases to federal court and the cases were then transferred to the Southern District of New York by the Judicial Panel on Multidistrict Litigation. The Company intends to vigorously defend these actions.
From time to time, the Company has also received and responded to additional requests from Attorneys General, state insurance regulators and federal regulators for information relating to the Companys contingent commission arrangements with brokers and agents and/or the Companys insurance and reinsurance practices in connection with certain finite-risk and loss mitigation products. Similarly, the Companys affiliates outside the U.S. have, from time to time, received and responded to requests from regulators relating to the Companys insurance and reinsurance practices regarding contingent commissions or finite-risk and loss mitigation products. The Company has fully cooperated with the regulators in these matters.
In August 2005, plaintiffs in a proposed class action (the Class Action) that was consolidated into a multidistrict litigation in the United States District Court for the District of New Jersey, captioned In re Brokerage Antitrust Litigation, MDL No. 1663, Civil Action No. 04-5184 (the MDL), filed a consolidated amended complaint (the Amended Complaint), which named as new defendants approximately 30 entities, including Greenwich Insurance Company, Indian Harbor Insurance Company and XL Capital Ltd. In the MDL, the Class Action plaintiffs asserted various claims purportedly on behalf of a class of commercial insureds against approximately 113 insurance companies and insurance brokers through which the named plaintiffs allegedly purchased insurance. The Amended Complaint alleged that the defendant insurance companies and insurance brokers conspired to manipulate bidding practices for insurance policies in certain insurance lines and failed to disclose certain commission arrangements and asserted
90
statutory claims under the Sherman Act, various state antitrust laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as common law claims alleging breach of fiduciary duty, aiding and abetting a breach of fiduciary duty and unjust enrichment. By Opinion and Order dated August 31, 2007, the Court dismissed the Sherman Act claims with prejudice and, by Opinion and Order dated September 28, 2007, the Court dismissed the RICO claims with prejudice. The plaintiffs then appealed both Orders to the U.S. Court of Appeals for the Third Circuit. Oral argument before the appellate court was held on April 21, 2009. In accordance with the Third Circuits April 23, 2009 directive, the parties submitted on May 13, 2009 their respective supplemental letter briefs addressing a question raised by the Court.
Various XL entities have been named as defendants in three of the many tag-along actions that have been consolidated into the MDL for pretrial purposes. These tag-along actions make allegations similar to the Amended Complaint but do not purport to be class actions. On April 4, 2006, a tag-along Complaint was filed in the U.S. District Court for the Northern District of Georgia on behalf of New Cingular Wireless Headquarters LLC and several other corporations against approximately 100 defendants, including Greenwich Insurance Company, XL Specialty Insurance Company, XL Insurance America, Inc., XL Insurance Company Limited, Lloyds syndicates 861, 588 and 1209 and XL Capital Ltd. (the New Cingular Lawsuit). On or about May 21, 2007, a tag-along Complaint was filed in the U.S. District Court for the District of New Jersey on behalf of Henley Management Company, Big Bear Properties, Inc., Northbrook Properties, Inc., RCK Properties, Inc., Kitchens, Inc., Aberfeldy LP and Payroll and Insurance Group, Inc. against multiple defendants, including XL Winterthur International (the Henley Lawsuit). On October 12, 2007, a Complaint in a third tag-along action, captioned Sears Roebuck & Co. v. Marsh & McLennan Companies, Inc., et al., No. 1:07-CV-2535 (the Sears Lawsuit), was filed in the U.S. District Court for the Northern District of Georgia by Sears, Roebuck & Co., Sears Holdings Corporation, Kmart Corporation and Lands End Inc. Among the many named defendants are X.L. America, Inc., XL Insurance America, Inc., XL Specialty Insurance Company and XL Insurance (Bermuda) Ltd. The three tag-along actions are currently stayed.
Three purported class actions on behalf of shareholders of Syncora have been filed in the Southern District of New York against the Company and one of its subsidiaries (collectively XL), Syncora, four Syncora officers, and various underwriters of Syncora securities. The Judge ordered that these be consolidated. The consolidated amended complaint, filed in August 2008, alleges violations of the Securities Act of 1933 arising out of the secondary public offering of Syncora common shares held by XL on June 6, 2007 and sales/exchanges by Syncora of certain preferred shares as well as under the Securities Exchange Act of 1934 arising out of trading in Syncora securities during the asserted class period of March 15, 2007 to March 17, 2008. The principal allegations are that Syncora failed to appropriately and timely disclose its exposures under certain derivative contracts and insurance of tranches of structured securities. XL is named as a party that controlled Syncora during the relevant time period. In October, 2008, XL and other defendants filed motions to dismiss the consolidated amended complaint, which motions have been fully briefed. The Company intends to vigorously defend these actions.
In connection with the secondary offering of the Companys Syncora shares, the Company and Syncora each agreed to indemnify the several underwriters of that offering against certain liabilities, including liabilities under the Securities Act of 1933 for payment of legal fees and expenses, settlements and judgments incurred with respect to litigation such as this. The Company and Syncora have agreed to each bear 50% of this indemnity obligation.
The Company is subject to litigation and arbitration in the normal course of its business. These lawsuits and arbitrations principally involve claims on policies of insurance and contracts of reinsurance and are typical for the Company and for the property and casualty insurance and reinsurance industry in general. Such legal proceedings are considered in connection with the Companys loss and loss expense reserves. Reserves in varying amounts may or may not be established in respect of particular claims proceedings based on many factors, including the legal merits thereof. In addition to litigation relating to insurance and reinsurance claims, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance or reinsurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. The status of these legal actions is actively monitored by management. If management believed, based on available information, that an adverse outcome upon resolution of a given legal action was probable and the amount of that adverse outcome was reasonable to estimate, a loss would be recognized and a related liability recorded. The Company believes that the expected ultimate outcome of all outstanding litigation and arbitration will not have a material adverse effect on its consolidated financial condition, operating results and/or liquidity, although an adverse resolution of one or more of these items could have a material adverse effect on the Companys results of operations in a particular fiscal quarter or year.
|
|
|
|
RISK FACTORS |
|
|
|
Refer to Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 for further information.
91
|
|
|
|
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
||
|
|
|
|
|
|
(c) |
Purchases of Equity Securities by the Issuer and Affiliate Purchasers |
The following table provides information about purchases by the Company during the three months ended June 30, 2009 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total
Number
|
|
Average
Price
|
|
Total
Number
|
|
Approximate
Dollar
|
|
||
|
|
|
|
|
|
|
|
|
|
||
April 1-30, 2009 |
|
4,679 |
|
$ |
6.16 |
|
|
|
$ |
375.5 million |
|
May 1-31, 2009 |
|
1,590 |
|
$ |
9.51 |
|
|
|
$ |
375.5 million |
|
June 1-30, 2009 |
|
7,512 |
|
$ |
10.63 |
|
|
|
$ |
375.5 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
13,781 |
|
$ |
8.98 |
|
|
|
$ |
375.5 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
All share purchased were purchased in connection with the vesting of restricted shares granted under the Companys restricted stock plan. All of these purchases were made in connection with satisfying tax withholding obligations of those employees. These shares were not purchased as part of the Companys share repurchase program noted below. |
|
|
(2) |
On September 24, 2007, the Board of Directors of the Company approved a share repurchase program, authorizing the Company to repurchase up to $500.0 million of its Class A ordinary shares. During the quarter ended June 30, 2009, no share repurchases were made under the share repurchase program. As at June 30, 2009, the Company could repurchase $375.5 million of its equity securities under the share repurchase program. |
|
|
|
|
|
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
||
|
|
At the Annual General Meeting of holders of Class A Ordinary Shares (the Shareholders) held on April 24, 2009 at the Executive Offices of the Company, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, the Shareholders approved the following:
1. The election of three Class II Directors to hold office until 2012:
|
|
|
|
|
|
|
|
Votes in Favor |
|
Votes Withheld |
|
|
|
|
|
|
|
Dale R. Comey |
|
292,875,969 |
|
11,693,983 |
|
Robert R. Glauber |
|
279,206,772 |
|
25,363,180 |
|
G. Thompson Hutton |
|
301,094,512 |
|
3,475,440 |
|
|
|
2. Approval of the amendment and restatement of the Companys 1991 Performance Incentive Program:
|
|
|
|
|
|
Votes In Favor |
|
Votes Against |
|
Abstentions |
|
|
|
|
|
|
|
217,079,819 |
|
59,874,215 |
|
627,375 |
|
3. Approval of the amendment and restatement of the Companys Directors Stock and Option Plan
|
|
|
|
|
|
Votes In Favor |
|
Votes Against |
|
Abstentions |
|
|
|
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263,889,620 |
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13,078,825 |
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612,964 |
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4. The appointment of PricewaterhouseCoopers LLP, New York, to act as the registered independent public accounting firm for the Company for the year ending December 31, 2009:
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Votes In Favor |
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Votes Against |
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Abstentions |
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303,592,522 |
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475,787 |
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501,663 |
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92
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I TEM 6. |
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Exhibit | Description | ||
10.1 | ** | Employment Agreement, dated as of January 25, 2008, by and between XL Capital Ltd and David B. Duclos. | |
10.2 | ** | Amendment to Employment Agreement, dated as of December 19, 2008, between XL Capital Ltd and David B. Duclos (amended in response to Internal Revenue Code Section 457A). | |
10.3 | ** | Consulting Agreement, dated as of April 24, 2009, between XL Capital Ltd and Brian OHara. | |
10.4 | ** | 2008 Form of Employment Agreement between XL Capital Ltd and certain Executive Officers. | |
10.5 | ** | 2008 Form of Amendment to Employment Agreement between XL Capital Ltd and certain Executive Officers (amended in response to Internal Revenue Code Section 457A). | |
10.6 | ** | 2009 Form of Employment Agreement between XL Capital Ltd and certain Executive Officers. | |
10.7 | ** | Amended Employment Agreement, dated as of April 25, 2008, by and between XL Capital Ltd, X.L. Global Services, Inc. and James H. Veghte (amended in response to Internal Revenue Code Section 409A). | |
10.8 | ** | Amendment to Amended Employment Agreement, dated as of December, 2008, between XL Capital Ltd, X.L. Global Services, Inc. and Brian Nocco (amended in response to Internal Revenue Code Section 457A). | |
10.9 | ** | Amendment to Employment Agreement, dated as of December 2008, between XL Capital Ltd and Michael S. McGavick (amended in response to Internal Revenue Code Section 457A). | |
10.10 | ** | Master Commutation, Release and Restructuring Agreement by and among XL Capital Ltd, XL Insurance (Bermuda) Ltd, XL Reinsurance America Inc., X.L. Global Services, Inc., XL Services (Bermuda) Ltd and X.L. America, Inc., Security Capital Assurance Ltd (SCA), certain of SCAs subsidiaries and certain financial institutions who have entered into various credit default swaps with affiliates of SCA, dated as of July 28, 2008, as amended. | |
10.11 | ** | Letter Agreement, dated May 5, 2009, by and between XL Global Services, Inc. and Accenture LLP relating to early termination of the May 6, 2008 Operational Transformation Agreement. | |
10.12 | ** | Amendment to Letter Agreement, dated May 6, 2009, by and between XL Global Services, Inc. and Accenture LLP relating to early termination of the May 6, 2008 Operational Transformation Agreement. | |
31 | ** | Rule 13a-14(a)/15d-14(a) Certifications. | |
32 | ** | Section 1350 Certification. | |
** | filed herewith |
93
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 5, 2009 |
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XL CAPITAL LTD |
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(Registrant) |
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/s/ M ICHAEL S. M C G AVICK |
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Michael S. McGavick |
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Chief Executive Officer |
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Date: August 5, 2009 |
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/s/ B RIAN W. N OCCO |
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Brian W. Nocco |
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Executive Vice President and |
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Chief Financial Officer |
94
Exhibit 10.1
EMPLOYMENT
AGREEMENT
(dated as of January 25, 2008)
AGREEMENT, made and entered into as of the date first above written, by and between, XL Capital Ltd, a Cayman Islands corporation (the Company), and David B. Duclos (the Executive).
WHEREAS, the Executive has been in the employ of the Company and certain of its subsidiaries;
WHEREAS, the Company and the Executive desire to continue such employment and to amend the terms and conditions of such employment as set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, the Guarantors (as hereinafter defined) and the Executive (the Parties) agree as follows:
1. EMPLOYMENT.
The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the position and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
The stated term of employment under this Agreement shall commence on the date first above written (the Date of the Agreement) and shall continue through the close of business on the first anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8, below, and extension as provided in the next succeeding sentence. On the first anniversary of the Date of the Agreement and on each anniversary thereafter, the stated term of employment shall be automatically extended for an additional one year unless the Company gives notice in writing to the Executive or the Executive gives notice in writing to the Company at least six months prior to such anniversary that the term is not to be so extended.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as the Chief Executive, Insurance Operations of the Company. In such position, the Executive shall have the duties, responsibilities and authority normally associated with the office, position and titles of such an officer of an insurance, reinsurance and financial services company, or holding company, whose shares are publicly traded in the United States. In carrying out his duties and responsibilities, the Executive shall report to the Chief Operating Officer of the Company. During the term of this Agreement, the Executive shall devote his full business time to the business and affairs of the Company, and shall use his best efforts, skills and abilities to promote the Companys interests.
(b) PERFORMANCE OF SERVICES. The Executives services under this Agreement, which are global in nature, shall be performed at the location or locations reasonably
requested by the Company. The Executive acknowledges that the Company may require the Executive to travel to the extent such travel is reasonably necessary to perform the services here under and that such travel may be extensive. To the extent reasonably requested by the Company, the Executive shall allocate greater business time to a location other than his principal business location, and if reasonably requested by the Company, the Executive shall relocate to such other locations. Any such relocation will not be considered to be a breach of this Agreement.
4. BASE SALARY.
The Executive shall be paid a Base Salary by the Company equal to US$550,000, payable in accordance with the Companys regular pay practices. Such Base Salary shall be subject to annual review in accordance with the Companys practices for executives as in effect from time to time and may be increased at the discretion of the Compensation Committee of the Board of Directors of the Company (the Compensation Committee).
5. BONUSES.
In addition to the Base Salary provided for in Section 4, above, the Executive shall be eligible for an annual cash bonus under the Companys Annual Incentive Compensation Plan as in effect from time to time, with a bonus opportunity which is substantially similar to that of similarly situated executives. The Executive may be awarded such annual bonuses thereunder as may be approved by the Compensation Committee based on corporate, individual and business unit performance measures, as appropriate, established or approved from time to time, by the Compensation Committee. Any annual bonus shall be paid in cash in a lump sum after the end of the calendar year for which the annual bonus is paid and no later than March 15 following such calendar year, unless deferred at the Executives option in accordance with the provisions of any applicable deferred compensation plan of the Company or it subsidiaries in effect from time to time. Nothing in this Section 5 shall confer upon the Executive any right to a minimum annual bonus.
6. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company as are in effect from time to time and in which similarly situated senior executives of the Company are eligible to participate.
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7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in the Companys travel and entertainment expense reimbursement programs and its executive fringe benefit plans and arrangements, all in accordance with the terms and conditions of such programs, plans and arrangements as in effect from time to time as applied to the Companys similarly situated executives.
8. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies during the term of employment hereunder, the Executives spouse, if the spouse survives the Executive, (or, if the Executives spouse does not survive him, the estate or other legal representative of the Executive) shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of Executives death, to be paid in accordance with the Companys regular payroll practices (as in effect at the time of death) through the end of the sixth month after the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to:
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(i) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to death in accordance with Section 7 above, |
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(ii) within 45 days after the date of death (with the actual date of payment within such 45 day period to be determined by the Company), a pro rata bonus for the year of death in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less), |
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(iii) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive determined in accordance with the terms thereof, |
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(iv) for a period of six months following the Executives death, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executives dependents, if any, under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the dependents) as is then in existence for other executives during the coverage period; provided, that, if the Executives dependents cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executives dependents, or to the applicable taxing authority on their behalf, no later than the due date of such taxes), and |
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(v) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6, above, determined in accordance with the applicable terms and provisions of such programs. |
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(b) TERMINATION DUE TO DISABILITY. In the event the Executives employment hereunder is terminated due to his disability, as determined under the Companys long-term disability plan, the Executive shall be entitled to: |
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(i) a cash lump sum payment made, subject to Section 25 below, 60 days after the date of termination in an amount equal to the Base Salary as provided in Section 4, above, that would have been paid to the Executive had he remained employed through the end of the sixth month after the month in which the Executives employment terminates due to disability, |
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(ii) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to termination of employment in accordance with Section 7 above, |
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(iii) subject to Section 25 below, 60 days after the date of termination, a pro rata bonus for the year of termination in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less), |
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(iv) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof, |
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(v) for a period of six months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(vi) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs. |
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(c) TERMINATION FOR CAUSE. |
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(i) The employment of the Executive under this Agreement may be terminated by the Company for Cause, such termination to be effective upon the Company giving the Executive written notice of termination in accordance with the provisions of this Agreement. For this purpose, Cause shall mean: |
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(A) conviction of the Executive of a felony involving moral turpitude, dishonesty or laws to which the Company or its Affiliates are subject in connection with the conduct of its or their business; |
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(B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (1) willful misconduct or (2) substantial and continual refusal by the Executive to perform the duties assigned to the Executive pursuant to the terms hereof; provided, however , that any act or failure to act by the Executive shall not constitute Cause for purposes of this Section 8(c)(i)(B) if such act or failure to act was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the overall best interests of the Company, as the case may be. The determination of whether the Executive acted in good faith and that he reasonably believed his action to be in the Companys overall best interest, as the case may be, will be in the reasonable judgment of the General Counsel of the Company or, if the General Counsel shall have an actual or potential conflict of interest, the Compensation Committee; or |
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(C) the Executives continued willful refusal to obey any lawful policy or requirement duly adopted by the Board of Directors of the Company and the continuance of such refusal after receipt of written notice. |
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(ii) In the event of a termination for Cause under Section 8(c)(i), above, the Executive shall be entitled only to: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment for Cause, through the date on which termination for Cause occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof, and |
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(C) the vested accrued benefits, if any, under employee benefit programs of the Company, as provided in Section 6, above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7, above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs; provided that |
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the Executive shall not be entitled to any such benefits unless the terms and provisions of such programs expressly state that the Executive shall be entitled thereto in the event his employment is terminated for Cause (as defined in this Agreement or otherwise). |
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(d) TERMINATION WITHOUT CAUSE. |
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(i) Anything in this Agreement to the contrary notwithstanding, the Executives employment may be terminated by the Company without Cause as provided in this Section 8(d). A termination due to death or disability, as described in Section 8(a) or (b), above, or a termination for Cause, as described in Section 8(c), above, shall not be deemed a termination without Cause under this Section 8(d). For the avoidance of doubt, if a notice of non-renewal of this Agreement pursuant to Section 2 is issued by the Company, the termination of the Executives employment at the end of the term shall be considered a termination by the Company without Cause hereunder. |
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(ii) In the event the Executives employment is terminated by the Company without Cause (x) prior to a Change in Control (other than as provided in the last paragraph of Section 8(d)(iii), in which case the provisions of Section 8(d)(iii) shall apply in lieu of this Section 8(d)(ii)) or (y) following the Post-Change Period (as hereinafter defined), the Executive shall be entitled to: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment without Cause, through the date on which termination without Cause occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) provided the Executive executes, on or before the date that is fifty (50) days following the date of his termination of employment, a general release of claims against the Company and its Affiliates (as defined below) in form and substance satisfactory to the Company and does not revoke such release prior to the end of the seven day statutory revocation period, a cash lump sum payment made, subject to Section 25 below, sixty (60) days after termination of employment equal to (x) two times the Executives annual Base Salary, at the annual rate in effect in accordance with Section 4, above, immediately prior to such termination and (y) one times the higher of the targeted annual bonus for the year of such termination, if any, or the average of the Executives annual bonus payable by the Company for the three years immediately preceding the year of termination (or such shorter period during which the Executive has been employed by the Company), |
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(C) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to termination of employment in accordance with Section 7 above, |
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(D) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted |
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stock or other securities, held by the Executive, determined in accordance with the terms thereof, |
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(E) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided, further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(F) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs. |
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(iii) In the event the Executives employment is terminated by (x) the Company without Cause within the twenty-four month period following a Change in Control (as defined in Exhibit A hereto) (the Post-Change Period) or (y) the Executive terminates his employment for Good Reason (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to the following, paid in the case of amounts set forth in (B), (C) and (D) below, subject to Section 25 below, 60 days after termination of employment: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment, through the date on which termination occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) a cash lump sum payment equal to two times the Executives annual Base Salary, at the rate in effect in accordance with Section 4, above, or immediately prior to such termination or Change in Control, whichever is greater, |
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(C) a cash lump sum payment equal to two times the average annual bonus awarded to the Executive by the Company in the three years prior to the year in which the Change in Control occurs (or shorter period during which the Executive had been employed by the Company); provided such bonuses shall be at least equal to the targeted annual bonus, if any, for the year of such termination, |
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(D) an amount equal to (i) the higher of (x) the bonus actually awarded to the Executive by the Company for the year immediately preceding the year in which the Change in Control occurs or (y) the targeted amount of bonus, if any, that would have been awarded to the Executive in respect of the year in which the termination of employment occurs, multiplied by (ii) a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company in the year of termination of employment, and the denominator of which is 12, |
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(E) options to purchase equity securities of the Company or other rights with respect to equity securities of the Company held by the Executive shall immediately vest in full and shall continue to be exercisable for three years from the date of termination of employment, notwithstanding the Executives termination of employment, or the original full term of the option or other right, if shorter, |
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(F) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(G) full and immediate vesting under the Companys retirement plans as of the date of termination, to the extent permitted by applicable law; provided, however , that if such full and immediate vesting cannot be provided under a qualified employer plan (within the meaning of Treas. Reg. Section 1.409A-l(a)(2)) under applicable law, then |
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the present value of economically equivalent benefits, determined using reasonable assumptions and on an after-tax basis to the Executive, shall be paid in a cash lump sum to the Executive, subject to Section 25 below, 60 days after termination of employment. |
Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled to the benefits described in (A)-(G) above, if the Executives employment with the Company is terminated by the Company (other than for Cause) within one year prior to the date on which a 409A Change in Control (as defined below) occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated or intended to effect the 409A Change in Control or (ii) otherwise arose in connection with or anticipation of the 409A Change in Control; provided, however , that in such event, amounts in excess of those otherwise payable to the Executive under Section 8(d)(ii) above will be payable hereunder only following the 409A Change in Control (and, subject to Section 25 below, 10 days thereafter). For purposes hereof, a 409A Change in Control means a change in control event (as defined in Treas. Reg. Section 1.409A-3(i)(5)) with respect to the Company that also constitutes a Change in Control.
(iv) If, in situations where Section 8(d)(iii) does not apply, at any time during the term of the Executives employment hereunder and without the Executives written consent, duties are assigned to the Executive that are materially inconsistent with his position as described in Section 3 above, or the Company does not cure any material breach by it of any provision of Sections 4 through 7 of this Agreement within 30 calendar days following written notice of same by the Executive (which written notice must be given within 30 calendar days after such breach), the Executive shall have the right to terminate his employment within 30 calendar days of the Companys failure to rescind such assignment in accordance with the proviso below or of such failure to cure a breach, as the case may be, and such termination shall be deemed a termination by the Company without Cause under Section 8(d)(ii), above, provided , in the case of assignment of duties that are materially inconsistent with those set forth in Section 3 above, the Executive shall have given the Company written notice of such assignment within 30 calendar days of such assignment and shall not, within 30 calendar days thereafter, have had the assignment of inconsistent duties rescinded.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may voluntarily terminate his employment prior to the expiration of the term of this Agreement upon at least three months prior written notice to the Company. Such termination shall constitute a voluntary termination and, except as provided in Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company for Cause as provided in Section 8(c), above. A voluntary termination in accordance with this Section 8(e) shall not be deemed a breach of this Agreement. A termination of the Executives employment due to disability or death as described in Section 8(b) or 8(a), above, a termination by the Executive which the Executive is entitled to treat as a termination by the Company pursuant to Section 8(d), above, or a termination by the Executive under Section 8(d)(iv), above, shall not be deemed a voluntary termination within the meaning of this Section 8(e).
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9. EXCISE TAX PAYMENTS.
(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit or accelerated vesting or exercisability of any award) by the Company, any acquirer or any party related to the Company or the acquirer to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a Payment) would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code of 1986, as amended (the Code) (or any successor provision or similar excise tax), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), (ii) the aggregate amount of the Executives Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code) is less than 3.25 times the Executives Base Amount (as defined in Section 280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by up to 20 percent, then the payments set forth in Section 8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and in no event by more than 20 percent in the aggregate) such that no Payment is subject to the Excise Tax.
(b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) the aggregate amount of the Executives Parachute Payments equals or exceeds 3.25 times the Executives Base Amount, (ii) the aggregate amount of the Executives Parachute Payments is less than 3.25 times the Base Amount but one or more Payments would be subject to the Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by 20 percent, or (iii) notwithstanding a reduction in payments pursuant to Section 9(a) above, an Excise Tax is payable by the Executive on one or more Payments, then, in any such case, Payments shall not be reduced and the Executive shall be entitled to receive an additional payment (a Gross-Up Payment) in an amount such that after payment by the Executive of all taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments.
(c) Subject to the provisions of Section 9(d), all determinations required to be made under this Section 9, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-Up Payment, shall be made by a nationally recognized public accounting firm selected by the Company (the Accounting Firm) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executives employment, if applicable, or such earlier time as is reasonably requested. The initial Gross-Up Payment, if any, as determined pursuant to this Section 9(c), shall be paid to the Executive within five business days of the receipt of the Accounting Firms determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 9(c) shall be binding upon the Company and the Executive, subject only to payments pursuant to the following sentence based on a de-
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termination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments are referred to herein as the Gross-Up Underpayment). In the event that the Company exhausts its remedies pursuant to Section 9(d) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Company.
(d) The Executive shall notify the Company in writing of any claim by the United States Internal Revenue Service that, if successful, would require the payment by the Executive of any Excise Tax and, therefore, the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 30 business days after the Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires, in good faith, to contest such claim (which notice shall set forth the bases for such contest) and that it will bear the costs and provide the indemnification as required by this sentence, the Executive shall, in good faith:
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(i) give the Company any information reasonably requested by the Company relating to such claim, |
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(ii) take such action in connection with contesting such claim as the Company shall, in good faith, reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive, |
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(iii) cooperate with the Company in good faith in order effectively to contest such claim, and |
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(iv) permit the Company to participate, in good faith, in any proceedings relating to such claim; |
provided , however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of all costs and expenses.
Without limitation on the foregoing provisions of this Section 9(d), the Company shall, exercising good faith, control all proceedings taken in connection with such contest and, at its sole option (but in good faith), may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option (but in good faith), either direct the Executive to pay the tax claimed and sue for a
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refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided , however , that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Companys complying with the requirements of Section 9(d)) promptly pay to the Company, as the case may be, the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Executive to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
Notwithstanding any provision herein to the contrary, the Executives failure to strictly comply with the notice provisions set forth in this Section 9, so long as such failure does not prevent the Company from contesting an excise tax claim, shall not adversely affect the Executives rights under this Section 9. Any amount advanced shall be deemed a nonrefundable payment to the extent a refundable advance would be a violation of the Sarbanes-Oxley Act. Anything in this Agreement to the contrary notwithstanding, except as otherwise provided in Treas. Reg. Section 1.409A-3(i)(l)(v), in no event shall any payment by the Company pursuant to this Section 9 be made later than the end of the Executives taxable year next following the Executives taxable year in which he remits the related taxes.
10. NO MITIGATION; NO OFFSET.
In the event of any termination of employment under Section 8, above, the Executive shall be under no obligation to mitigate damages or seek other employment, and, except as expressly set forth herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.
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11. NONCOMPETITION AND NONSOLICITATION.
The
Executive represents and warrants that, to the best of his knowledge, he is not
using the confidential or proprietary information of any other person in
violation of any agreement or rights of others known to him. The Executive
agrees that the products of the Company and its Affiliates shall constitute the
exclusive property of the Company and its Affiliates.
For the avoidance of
doubt, all trademarks, policy language or forms, products or services (including products and services under
development), trade names, trade secrets, service marks, designs, computer
programs and software, utility models, copyrights, know-how and confidential
information, applications for registration of any of the foregoing and the
right to apply for them in any part of the world (whether any of the foregoing
shall be registered or unregistered) created or discovered or participated in
by the Executive during the course of his employment (whether or not pursuant
to the terms of this Agreement) or under the instructions of the Company or its
Affiliates are and shall be the absolute property of the Company and its
Affiliates, as appropriate. Without limiting the foregoing, the Executive
hereby assigns to the Company any and all of the Executives right, title and
interest, if any, pertaining to the insurance and reinsurance (including,
without limitation, finite insurance and reinsurance), risk assumption, risk
management, brokerage, financial and other products or services developed or
improved upon by the Executive (including, without limitation, any related
know-how) while employed by the Company or its Affiliates, including any
patent, trademark, trade name, copyright, ownership or other right that may
pertain thereto.
Since Executive has obtained and is likely to obtain in the course of Executives employment with the Company and its Affiliates knowledge of trade names, trade secrets, know-how, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, Executive hereby undertakes that:
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(i) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) encourage, entice, solicit or endeavor to encourage, entice or solicit away from employment with the Company or its Affiliates, or hire or cause to be hired, any officer or employee of the Company or its Affiliates (or any individual who was within the prior twelve months an officer or employee of the Company or its Affiliates), or encourage, entice, solicit or endeavor to encourage, entice or solicit any individual to violate the terms of any employment agreement or arrangement between such individual and the Company or any of its Affiliates; |
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(ii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) interfere with or disrupt or seek to interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twenty-four months immediately preceding such termination shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who during the period of twenty-four months immediately preceding such termination shall |
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have supplied services to any such person, nor will Executive interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided; and |
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(iii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except solely as a less than one percent stockholder of a publicly traded company), engage in any activities in Bermuda, the United States or greater London if such activities are competitive with the businesses that (i) are then being conducted by the Company or its Affiliates and (ii) during the period of the Executives employment were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates. |
The provisions of the immediately preceding sentence shall continue as long as the Executive is employed by the Company or its Affiliates and such provisions shall continue in effect after such employment is terminated for any reason until the first anniversary of such termination, provided that if such employment is terminated by the Company under Section 8(d)(iii) or by the Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii) shall automatically terminate upon such termination of employment, unless the Company elects, in writing, upon such termination to continue the provisions of clauses (ii) and (iii) in effect through the six-month anniversary of such termination of employment in which case the Company shall be obligated to pay the Executive, in addition to any of the Executives rights under Section 8(d)(iii), a lump sum payment equal to the sum of (x) six months of his Base Salary and (y) one half of the Executives average annual bonus payable by the Company or its subsidiaries for the three years (or shorter period of employment by any of such entities) immediately preceding the year of termination, and such lump sum payment shall, subject to Section 25 below, be made 60 days following his separation from service (within the meaning Treas. Reg. Section 1.409A-1(h)) with the Company.
For purposes of this Agreement, an Affiliate of the Company includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company, and such term shall specifically include, without limitation, the Companys majority-owned subsidiaries.
The limitations on the Executive set forth in this Section shall also apply to any agent or other representative acting on behalf of Executive.
While the restrictions aforesaid are considered by both parties to be reasonable in all the circumstances it is recognized that restrictions of the nature in question may fail for reasons unforeseen and accordingly it is hereby declared and agreed that if any of such restrictions or the geographic or other scope thereof shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods (if any) thereof reduced and/or geographic or other area dealt with thereby reduced in scope then said restrictions shall apply with such modifications as may be necessary to make them valid and effective.
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Nothing contained in this Section 11 shall limit in any manner any additional obligations to which Executive may be bound pursuant to any other agreement or any applicable law, rule or regulation and Section 11 shall apply, subject to its terms, after employment has terminated for any reason.
12. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior written consent of the Company, use for the Executives own benefit or the benefit of any other person or entity other than the Company and its Affiliates or disclose to any person, other than an employee of the Company or other person to whom disclosure is necessary to the performance by the Executive of his duties in the employ of the Company, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company or its Affiliates. Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by Executive during his employment, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application and this Section 12 shall apply in accordance with its terms after employment has terminated for any reason. The Executive acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee as evidenced by the signature of the Companys General Counsel.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied.
14. GUARANTY AND AFFILIATE SERVICES.
(a) LIABILITY. Each of XL Insurance Ltd and XL Re Ltd (together, the Guarantors) hereby agrees to be jointly and severally liable together with the Company, for the performance of all obligations and duties, and the payment of all amounts, due to the Executive under this Agreement.
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(b) RESPONSIBILITY. All of the other terms and provisions of this Agreement relating to the Executives employment by the Company shall likewise apply mutatis mutandis to the Executives employment by any of its Affiliates, it being understood that if the Executives employment with the Company is terminated, his employment with its Affiliates shall also be terminated and the Executive shall be required to resign immediately from all directorships and other positions held by the Executive in the Company and its Affiliates or in any other entities in respect of which the Executive was acting as a representative or designee of the Company or its Affiliates in connection with his employment.
15. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto.
16. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law.
17. INDEMNIFICATION.
The Executive shall be provided indemnification by the Company to the maximum extent permitted by applicable law and its charter documents against expenses incurred and damages paid or payable by the Executive with respect to claims based on actions or failures to act by the Executive in his capacity as an officer, director or employee of the Company or its Affiliates or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company or an Affiliate. In addition, he shall be covered by a directors and officers liability policy with coverage for all directors and officers of the Company in an amount equal to at least US $75,000,000. Such directors and officers liability insurance shall be maintained in effect for a period of six years following termination of the Executives employment for any reason other than pursuant to Section 8(c) or Section 8(e) hereof.
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18. SETTLEMENT OF DISPUTES.
(a) Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executives employment with the Company or its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be resolved by binding arbitration held in New York City in accordance with the rules of the American Arbitration Association.
(b) Executive acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if Executive breaches his obligations under Section 11 or 12. Accordingly, Executive agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or prospective breach by Executive of his obligations under Section 11 or 12 in any Federal or state court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom, or, at the Companys or any Affiliates election, in any other jurisdiction in which Executive maintains his residence or his principal place of business. Executive hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and Executive agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of Executive known to the Company or its Affiliates, or in any other manner authorized by law. Executive further agrees that, in addition to any other remedies available to the Company or its Affiliates by operation of law or otherwise, because of any breach by Executive of his obligations under Section 11 or 12 he will forfeit any and all bonus and rights to any payments to which he might otherwise then be entitled by virtue hereof and such payments may be suspended so long as any good faith dispute with respect thereto is continuing; provided , however , that payments, benefits and other rights and privileges of the Executive under this Agreement following termination of the Executives employment during a Post-Change Period shall not be forfeited, suspended, offset, diminished or otherwise altered in any way on account of any breach or prospective breach of Section 11, Section 12 or any other provision of this Agreement alleged by the Company.
(c) Notwithstanding any other provision of this Agreement, the Executive may elect to resolve any dispute involving a breach or alleged breach of this Agreement following termination of the Executives employment during a Post-Change Period in any Federal or State court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom. The Company and the Guarantors hereby submit to the non-exclusive jurisdiction of all those courts for the purposes of any such actions or proceedings instituted by the Executive, and the Company and the Guarantors agree that process in any or all of such actions or proceedings may be served by registered mail or delivery, addressed to the Company as set forth in Section 20, or in any other manner authorized by law. The Company and the Guarantors shall pay all costs associated with any court proceeding under this Section 18(c) without regard to the outcome of such proceeding, including all legal fees and expenses of the Executive, who shall be reimbursed for all such costs within ten (10) days following written demand therefor by the Executive (which written demand shall be made no later than six (6) months following the end of the calendar year in which such costs were incurred).
(d) Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses: provided ,
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however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in the proceeding. Following the final determination of the dispute in which the Executive has substantially prevailed, the Company shall reimburse all such reasonable costs within ten (10) days following written demand therefor (supported by documentation of such costs) by the Executive, and the Executive shall make such written demand within sixty (60) days following the final determination of the dispute; provided , however , that such payment shall be made no later than on or prior to the end of the calendar year following the calendar year in which the cost is incurred. Notwithstanding the foregoing, in the event a final determination of the dispute has not been made by December 20 of the year following the calendar year in which the cost is incurred, the Company shall, within ten (10) days after such December 20, reimburse such reasonable costs (supported by documentation of such costs) incurred in the prior taxable year; provided, however , that the Executive shall return such amounts to the Company within ten (10) business days following the final determination if the Executive did not substantially prevail in the dispute.
(e) The amount of any expenses eligible for payment under this Section 18 during a calendar year will not affect the amount of any expenses eligible for payment under this Section 18 in any other taxable year.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and the Guarantors. No waiver by any Party of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Except as set forth in Section 8(d)(iv) or Exhibit B, any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and the Guarantors, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of:
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XL Capital Ltd |
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One Bermudiana Road |
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Hamilton HM11, Bermuda |
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Attn: General Counsel |
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If to the Executive: |
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21. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
23. REFERENCE.
In the event of the Executives death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws.
25. SECTION 409A.
(a) It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible. No action or failure to act, pursuant to this Section 25 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Executive from the obligation to pay any taxes pursuant to Section 409A of the Code.
(b) Notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-l(i)), then with regard to any payment that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of his separation from service, or (ii) the date of his death (the Delay Period). Upon the expiration of the Delay Period, all payments delayed pursuant to this Section 25 (whether they would have otherwise been payable in a
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single sum or in installments in the absence of such delay) shall be paid to the Executive in a lump sum, and any remaining payments due under this Agreement shall be paid in accordance with the normal payment dates specified for them herein. In no case will compliance with this Section by the Company constitute a breach of the Companys or the Guarantors obligations under this Agreement. Notwithstanding any provision of this Agreement to the contrary, for purposes of Sections 8(b) and 8(d) above, the Executive will be deemed to have terminated his employment on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) with the Company.
26. HEADINGS.
The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
27. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
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XL CAPITAL LTD |
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By: |
/s/ Kirstin R. Gould |
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DAVID B. DUCLOS |
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By: |
/s/ David B. Duclos |
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GUARANTORS: |
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XL INSURANCE LTD |
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By: |
/s/ Kirstin R. Gould |
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XL RE LTD |
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By: |
/s/ Kirstin R. Gould |
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EXHIBIT A
CHANGE IN CONTROL
A Change in Control shall be deemed to have occurred:
(i) any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative) (a Person) or any group, as defined in Sections 13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than a group of which the Executive is a member or which has been organized by the Executive), becomes the beneficial owner, directly or indirectly, of securities of the Company representing, or acquires the right to control or direct, or to acquire through the conversion of securities or the exercise of warrants or other rights to acquire securities, 30% or more of either (I) the outstanding Ordinary Shares of the Company, (II) the outstanding securities of the Company having a right to vote in the election of directors, or (III) the combined voting power of the outstanding securities of the Company having a right to vote in the election of directors; or
(ii) if there shall be elected or appointed to the Board of Directors of the Company (the Board) any director or directors whose appointment or election by the Board or nomination for election by the Companys shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date of execution of this Agreement or whose election or appointment or nomination for election was previously so approved; or
(iii) upon consummation of a reorganization, scheme of arrangement, merger, consolidation, combination, amalgamation, corporate restructuring, liquidation, winding up, exchange of securities, or similar transaction (each, an Event), in each case, in respect of which the beneficial owners of the outstanding Company Ordinary Shares immediately prior to such Event do not, following such Event, beneficially own, directly or indirectly, more than 60% of each of the outstanding equity share capital, and the combined voting power of the then outstanding voting securities entitled to vote in the election of the directors, of the Company and any resulting entity, in substantially the same proportions as their ownership, immediately prior to such Event, of the Ordinary Shares and voting power of the Company; or
(iv) if there occurs an Event involving the Company as a result of which 25% of more of the members of the Board of the Company are not persons who were members of the Board immediately prior to the earlier of (x) the Event, (y) execution of an agreement, the consummation of which would result in the Event, or (z) announcement by the Company of an intention to effect the Event; or
(v) if the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change in Control has occurred.
EXHIBIT B
GOOD REASON
For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of the Executive:
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(i) (A) The assignment to Executive of duties inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); or (B) any elimination, diminution or reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; and for purposes for this clause (i), the determination of whether there has been a reduction of duties or responsibilities or an assignment of duties inconsistent with the Executives position shall take into account the Executives duties, responsibilities and position with the ultimate parent of the parent/subsidiary group as a whole which includes the Company; |
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(ii) The (A) reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) payment of an annual bonus in an amount less than the lesser of (x) the most recent annual bonus paid prior to the Change in Control or (y) the greater of (I) the most recent target bonus, if any, established prior to the Change in Control or (II) the annual average bonus paid for the preceding three complete years prior to the Change in Control (or such lesser number of complete years as the Executive shall have been employed by the Company); |
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(iii) The failure by the Company or the Guarantors to obtain the specific written assumption of this Agreement by any successor or assign of the Company or the Guarantors or any person acquiring substantially all of the Companys or the Guarantors assets; |
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(iv) Any breach by the Company or the Guarantors of any provision of this Agreement or any agreements entered into pursuant thereto that remains uncured for 20 calendar days following written notice of same by the Executive; |
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(v) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring the Executive to be based at any office or location that is greater than 35 miles from the office or location at which the Executive was principally located immediately prior to the Change in Control; |
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(vi) During the Post-Change Period, (A) the failure to continue in effect any compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with at least the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis both in terms of the amount of benefits provided |
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and the level of his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits and coverage at least as favorable in the aggregate as those enjoyed by him under the Companys pension, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which he was participating at the time of the Change in Control; or |
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(vii) The failure by the Company to pay within 7 calendar days of the due date any amounts due under any benefit or compensation plan, including any deferred compensation plan. |
Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission.
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Exhibit 10.2
AMENDMENT TO
EMPLOYMENT AGREEMENT
AMENDMENT TO EMPLOYMENT AGREEMENT (Amendment) dated as of December 19 , 2008 between XL Capital Ltd, a Cayman Islands corporation (the Company), and David B. Duclos (the Executive).
WHEREAS, the Company and the Executive are parties to an Employment Agreement dated as of January 25, 2008 (the Agreement);
WHEREAS, the Company and the Executive wish to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company, the Guarantors (as defined in the Agreement) and the Executive hereby agree as follows:
1. The last paragraph of Section 8(d)(iii) is amended by deleting 10 days thereafter and replacing it with on the date of the 409A Change in Control.
2 . The first sentence of Section 18(d) is amended to read in its entirety as follows:
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Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses; provided , however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in a proceeding following his separation from service (as defined below) with the Company. |
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3. Section 25(b) is amended to read in its entirety as follows: |
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(b) Without prejudice to the characterization of any other amounts payable under this Agreement, the parties hereto specifically intend that any amounts payable under Section 8(d)(ii)(A)-(C), Section 8(d)(iii)(A)-(D) and Section 11 will not be considered deferred compensation for purposes of Section 409A due to Treas. Reg. Section 1.409A-l(b)(4) or another applicable exception. However, notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-1(i)), then with regard to any payment or benefit that is considered deferred compensation under Section 409A payable on account of a separation from service that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account any applicable exceptions to such requirement), such payment or benefit shall be made or provided on the date that is the earlier of (i) the expiration of the six (6)-month |
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period measured from the date of the Executives separation from service, or (ii) the date of the Executives death (the Delay Period). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 25(b) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding any provision of this Agreement to the contrary, for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment, references to the Executives termination of employment (and corollary terms) with the Company shall be construed to refer to the Executives separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) with the Company. With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g ., payment shall be made within thirty (30) days after termination of employment), the actual date of payment within the specified period shall be within the sole discretion of the Company. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A. |
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4. The definition of Good Reason in Exhibit B is amended to read in its entirety as follows: |
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For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of Executive: |
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(i) (A) The assignment to Executive of duties materially inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); (B) any material diminution or material reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; (C) a material diminution in the authorities, duties or responsibilities of the supervisor to whom Ex- |
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ecutive is required to report; or (D) a material diminution in the budget over which Executive retains authority; |
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(ii) The (A) material reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) material diminution in bonus opportunity that results in a material reduction in Executives compensation; |
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(iii) Any material breach by the Company or the Guarantors of this Agreement or any material agreement entered into pursuant thereto; |
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(iv) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring Executive to be based at any office or location that is greater than 35 miles from the office or location at which Executive was principally located immediately prior to the Change in Control; |
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(v) During the Post-Change Period, the failure to continue in effect any material compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis as existed at the time of the Change in Control, which in any such case results in a material reduction in Executives compensation. |
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Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and the Company shall have thirty (30) days from such notice to remedy the condition, in which case Good Reason shall no longer exist with regard to such condition. Any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission. Any termination hereunder shall occur within one hundred twenty (120) days after the Good Reason event occurs. |
5. Except as set forth herein, the Agreement shall continue in full force and effect in accordance with its terms.
6. All questions concerning the construction, validity and interpretation of this Amendment and the Agreement shall be construed and governed in accordance with the laws of the State of New York, without reference to the principles of conflict of laws thereof.
7. This Amendment may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.
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XL CAPITAL LTD |
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By: |
/s/ Kirstin R. Gould |
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GUARANTORS: |
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XL
INSURANCE (BERMUDA) LTD
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By: |
/s/ Kirstin R. Gould |
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XL RE LTD |
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By: |
/s/ Kirstin R. Gould |
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READ, ACCEPTED & AGREED |
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/s/ David B. Duclos |
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David B. Duclos |
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Exhibit 10.3
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of April 24, 2009, by and between XL Capital Ltd, a Cayman Islands corporation (the Company ), and Brian OHara (the Consultant ), an individual.
WHEREAS, the Consultant was employed by the Company as its Chief Executive Officer and he was Chairman of its Board of Directors; and
WHEREAS, the Company desires to retain the services of the Consultant, and the Consultant desires to be retained by the Company, subject to and in accordance with the terms and conditions set forth herein; and
WHEREAS, the Consultant and the Company have agreed to the noncompetition, nonsolicitation and confidentiality provisions set forth herein.
NOW, THEREFORE, in consideration of the conditions and covenants set forth herein, the parties hereto hereby agree as follows:
1. Agreement . The Company hereby retains the Consultant as a consultant to the Company on and subject to the terms and conditions set forth herein, and the Consultant hereby accepts such consultancy, on and subject to such terms and conditions.
2. Consulting Services . During the Consulting Term (as defined below), the Consultant shall provide such consulting services to the Company commensurate with his status and experience as the former Chairman and Chief Executive Officer of the Company with respect to such matters as shall be reasonably requested from time to time by the Chief Executive Officer of the Company. Such services shall include, but not be limited to, services in connection with the Companys ongoing operations, including, without limitation, advising on industry activities, government and public affairs matters and client relationship matters, and in connection with the defense and/or investigation of any third party claim or any investigation or proceeding relating to the Company or its Affiliates (as defined below). The Consultant shall not, by virtue of the consulting services provided hereunder, be considered an officer or employee of the Company, and he shall have no power or authority to contract in the name of or bind the Company or its Affiliates.
3. Consulting Fee . During the Consulting Term, in consideration of the services to be provided by the Consultant to the Company described herein and in consideration for the covenants of the Consultant set forth herein, the Company shall pay the Consultant a fee in the amount of $800,000 per year, payable (i) $800,000 on May 1, 2009, (ii) $800,000 on January 4, 2010, and (iii) $800,000 on December 31, 2010. The Consultant shall not be entitled to participate in any employee benefit plans maintained by the Company or any of its Affiliates by reason of this Agreement.
4. Consulting Term . The period during which the Consultant will be retained by the Company to provide the consulting services hereunder shall commence on April 25, 2009 and shall terminate on the third anniversary thereof, unless sooner terminated as provided in this
Section 4 (the Consulting Term ). Notwithstanding the foregoing, the Consulting Term will end on the date of the Consultants death or termination of service due to his Permanent Disability (as defined below), and the Consulting Term may be terminated by the Company for Cause (as defined below). For purposes of this Agreement, the term Cause shall mean the Consultants (a) fraud or dishonesty in connection with the performance or provision by the Consultant of his services under this Agreement, (b) material breach of any of the terms of this Agreement or (c) the Consultants conviction of, or plea of nolo contendere to, a felony. For purposes of this Agreement, the term Permanent Disability means those circumstances where the Consultant has been unable to provide his services as described in this Agreement for at least 60 continuous days because of physical, mental or emotional incapacity resulting from injury, sickness or disease, and will be unable to continue to provide his services as described in this Agreement for a total of six (6) months in any twelve (12) month period because of physical, mental or emotional incapacity resulting from injury, sickness or disease. Any questions as to the existence of a Permanent Disability shall be determined by a qualified, independent physician selected by the Company and approved by the Consultant (which approval shall not be unreasonably withheld). The determination of any such physician shall be final and conclusive for all purposes of this Agreement.
5. Reimbursement of Expenses . The Company shall reimburse the Consultant for all reasonable expenses incurred by him in the course of performing his services under this Agreement (which expenses are consistent with the Companys policies in effect from time to time with respect to travel and other business expenses), subject to the Companys requirements with respect to reporting and documentation of expenses.
6. Noncompetition and Nonsolicitation . Since the Consultant has obtained in the course of his employment with the Company and his service as Chairman of the Board, and is likely to obtain in the course of his service as a consultant hereunder, knowledge of trade secrets, know-how, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, the Consultant hereby undertakes that, during the period beginning on the date hereof and ending on April 25, 2012:
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(a) the Consultant will not (either alone or jointly with or on behalf of others and whether directly or indirectly) encourage, entice, solicit or endeavor to encourage, entice or solicit away from employment with the Company or its Affiliates, or hire or cause to be hired, any officer or employee of the Company or its Affiliates (or any individual who was within the prior twelve months an officer or employee of the Company or its Affiliates), or encourage, entice, solicit or endeavor to encourage, entice or solicit any individual to violate the terms of any employment agreement or arrangement between such individual and the Company or any of its Affiliates; |
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(b) the Consultant will not (either alone or jointly with or on behalf of others and whether directly or indirectly) interfere with or disrupt or seek to interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twenty-four months immedi- |
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ately preceding the date of this Agreement shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who during the period of twenty-four months immediately preceding the date of this Agreement shall have supplied services to any such person, nor will the Consultant interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided; and |
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(c) the Consultant, without the express written consent of the Company (which shall not be unreasonably withheld), will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, consultant, partner, principal, agent, distributor, representative, director or stockholder (except solely as a less than one percent stockholder of a publicly traded company), engage in any activities in Bermuda, the United States or greater London if such activities are competitive with the businesses that (i) are then being conducted by the Company or its Affiliates and (ii) during the period of the Consultants employment or consultancy were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates. |
For purposes of this Agreement, an Affiliate of the Company means any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company, and such term shall specifically include, without limitation, the Companys majority-owned subsidiaries.
The limitations on the Consultant set forth in this Section 6 shall also apply to any agent or other representative acting on behalf of the Consultant.
While the restrictions aforesaid are considered by both parties to be reasonable in all the circumstances it is recognized that restrictions of the nature in question may fail for reasons unforeseen and accordingly it is hereby declared and agreed that if any of such restrictions or the geographic, duration or other scope thereof shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods thereof reduced and/or geographic or other area dealt with thereby reduced in scope then said restrictions shall apply with such modifications as may be necessary to make them valid and effective.
7. Confidential Information . The Consultant covenants that he shall not, without the prior written consent of the Company, use for his own benefit or the benefit of any other person or entity other than the Company and its Affiliates or disclose to any person, other than an employee of the Company or other person to whom disclosure is necessary to the performance by the Consultant of his duties as a consultant to the Company, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company
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or its Affiliates (the Confidential Information). The Consultant shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by the Consultant during his employment or consultancy, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Consultant) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Consultant shall be without limitation as to time and geographic application. The Consultant acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee of the Companys Board of Directors as evidenced by the signature of the Companys General Counsel.
8. Return of Company Property . The Consultant agrees that, upon the expiration or termination of the Consulting Term, he will immediately return to the Company all materials containing or reflecting the Confidential Information and all copies, reproductions and summaries thereof, in his possession or under his control and shall erase all Confidential Information from all media in his possession or under his control, and, if the Company so requests, shall certify in writing that he has done so. All Confidential Information is and shall remain the property of the Company or its Affiliates, as the case may be.
9. Indemnification . The Company shall indemnify the Consultant against expenses incurred and damages paid or payable by him with respect to claims based on actions or failures to act by the Consultant in his capacity as a consultant under this Agreement, but not including expenses incurred or damages paid or payable by the Consultant arising out of his gross negligence or willful misconduct.
10. General Provisions .
(a) This Agreement constitutes the entire understanding of the Company and the Consultant with respect to the subject matter hereof and supersedes all prior understandings, written or oral, with respect thereto. The terms of this Agreement may be changed, modified or discharged only by an instrument in writing signed by the parties hereto. A failure of the Company or the Consultant to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
(b) This Agreement shall be construed, enforced and interpreted in accordance with and governed by the laws of the State of New York, without regard to its conflict of laws provisions.
(c) This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement.
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(d) Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently by similar process give notice of:
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If to the Company: |
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XL Capital Ltd |
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One Bermudiana Road |
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Hamilton HM11, Bermuda |
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Attn: General Counsel |
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If to the Consultant: |
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To the last address delivered to |
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the Company by the Consultant in |
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the manner set forth herein. |
(e) The Consultant and the Company agree that the Consultant is acting as an independent contractor to the Company for all purposes with regard to the performance of his services hereunder during the Consulting Term, including, without limitation, for US Federal (including social security and unemployment), state and local tax purposes. The Consultant shall be solely responsible for fulfilling when due all Federal, state and local income tax and self-employment tax obligations arising in connection with his consultancy for the Company. Should the Company be required to pay any such tax or payment, the Consultant shall promptly reimburse the Company for such tax or payments, including any interest and penalties with respect thereto. Should it be determined that any payment hereunder is subject to withholding of tax under applicable law, all payments to be made hereunder shall be net of applicable income, employment, social security or other taxes required to be withheld therefrom.
(f) Any dispute between the parties hereto arising from or relating to the terms of this Agreement or the Consultants services hereunder shall, except as otherwise provided in this Section 10(f), be resolved by arbitration held in New York City, New York, in accordance with the rules of the American Arbitration Association. The Consultant acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if the Consultant breaches his obligations under Section 6 or 7 hereof. Accordingly, the Consultant agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or prospective breach by the Consultant of his obligations under Section 6 or 7 hereof in any Federal or state court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom, or, at the Companys or any Affiliates election, in any other jurisdiction in which the Consultant maintains his residence or his principal place of business. The Consultant hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and the Consultant agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of the Consultant known to the Com-
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pany or its Affiliates, or in any other manner authorized by law. The Consultant further agrees that, in addition to any other remedies available to the Company or its Affiliates by operation of law or otherwise, because of any breach by the Consultant of his obligations under Section 6 or 7 hereof he will forfeit any and all rights to any payments to which he might otherwise then be entitled by virtue of this Agreement and such payments may be suspended so long as any good faith dispute with respect thereto is continuing.
(g) This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. No rights or obligations of the Consultant under this Agreement may be assigned or transferred by him. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law.
(h) It is intended that this Agreement will comply with Section 409A and Section 457A of the Internal Revenue Code of 1986, as amended (the Code ) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to so comply, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible. No action or failure to act, pursuant to this Section 10(h) shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Consultant from the obligation to pay any taxes pursuant to Section 409A or 457A of the Code. With respect to any reimbursement arrangements of the Company and its Affiliates that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement under any such arrangement in one calendar year may not affect the amount eligible for reimbursement under such arrangement in any other calendar year, (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement is not subject to liquidation or exchange for another benefit. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized representative and the Consultant has hereunto set his hand as of the day and year first above written.
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CONSULTANT |
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/s/ Brian OHara |
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Brian OHara |
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XL CAPITAL LTD |
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By: |
/s/ Kirstin Gould |
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Name: Kirstin Gould |
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Title: Executive Vice President |
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General Counsel & Secretary |
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Exhibit 10.4
2008 FORM OF EMPLOYMENT AGREEMENT
(dated as of ____________________)
AGREEMENT, made and entered into as of the date first above written, by and between, XL Capital Ltd, a Cayman Islands corporation (the Company), and ______________ (the Executive).
WHEREAS, the Company and the Executive each desire that the Executive become employed by the Company and that the terms and condition of such employment be memorialized by a written agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, the Guarantors (as hereinafter defined) and the Executive (the Parties) agree as follows:
1. EMPLOYMENT.
[Subject to Section 3(c) below,]* the Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the position and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
[Subject to Section 3(c) below,]* the stated term of employment under this Agreement shall commence on the date first above written (the Date of the Agreement) and shall continue through the close of business on the first anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8, below, and extension as provided in the next succeeding sentence. On the first anniversary of the Date of the Agreement and on each anniversary thereafter, the stated term of employment shall be automatically extended for an additional one year unless the Company gives notice in writing to the Executive or the Executive gives notice in writing to the Company at least six months prior to such anniversary that the term is not to be so extended.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as the ____________ of the Company. In such position, the Executive shall have the duties, responsibilities and authority normally associated with the office, position and titles of such an officer of an insurance, reinsurance and financial services company, or holding company, whose shares are publicly traded in the United States. In carrying out his duties and responsibilities, the Executive shall report to the ________________ of the Company. During the term of this Agreement, the Executive shall
* Where applicable.
devote his full business time to the business and affairs of the Company, and shall use his best efforts, skills and abilities to promote the Companys interests.
(b) PERFORMANCE OF SERVICES. The Executives services under this Agreement, which are global in nature, shall be performed at the location or locations reasonably requested by the Company; [ provided , however , that such services will be performed outside the United States and in accordance with the guidelines established by the Company from time to time for the location of the performance of services on behalf of the Company and its subsidiaries.]* The Executive acknowledges that the Company may require the Executive to travel to the extent such travel is reasonably necessary to perform the services hereunder and that such travel may be extensive. To the extent reasonably requested by the Company, the Executive shall allocate greater business time to a location other than his principal business location, and if reasonably requested by the Company, the Executive shall relocate to such other locations. Any such relocation will not be considered to be a breach of this Agreement.
(c) [WORK PERMITS. The employment of the Executive by the Company shall be contingent upon the issuance to the Executive of a suitable (for the purposes of the Executives contemplated employment by the Company) work permit by the Bermuda government authorities and any other permits required by any Bermuda government authority. Both the Company and the Executive shall use their respective best efforts to obtain, maintain and renew said permit(s) so as to allow the Executive to be employed under the terms hereof. The Company shall be responsible for permit fees. If at any time said permit(s), having been obtained, expire and are not renewed or cease to be valid and such renewal or validation is necessary in order for the Executive to be employed by the Company as contemplated by this Agreement and the non-renewal or invalidation is beyond the control of both the Company and the Executive, employment under this Agreement shall terminate immediately upon the expiration of said per-mit(s) or upon said permit(s) ceasing to be valid unless the Executive can discharge his duties and responsibilities effectively from another location not requiring said permit(s) that is reasonably acceptable to the Executive and non-prejudicial to the interests of the Company. In the event of such termination, the provisions of Section 8(d) shall apply to such termination of the Executives employment (or, if within (i) the one-year period prior to the date of a Change in Control, as hereinafter defined, provided the conditions set forth in the last paragraph of Section 8(d)(iii) are satisfied, or (ii) the Post-Change Period, as hereinafter defined, such termination shall, in the case of clauses (i) or (ii), be considered a termination by the employee for Good Reason) provided that non-renewal of said permit(s) or invalidation thereof are not a direct result of any material action or omission of the Executive that would reasonably cause such permit(s) not to be renewed or validated.]*
* Where applicable.
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4. BASE SALARY.
The Executive shall be paid a Base Salary by the Company equal to US$ _______ payable in accordance with the Companys regular pay practices. Such Base Salary shall be subject to annual review in accordance with the Companys practices for executives as in effect from time to time and may be increased at the discretion of the Compensation Committee of the Board of Directors of the Company (the Compensation Committee).
5. BONUSES.
In addition to the Base Salary provided for in Section 4, above, the Executive shall be eligible for an annual cash bonus under the Companys Annual Incentive Compensation Plan as in effect from time to time, with a bonus opportunity which is substantially similar to that of similarly situated executives. The Executive may be awarded such annual bonuses thereunder as may be approved by the Compensation Committee based on corporate, individual and business unit performance measures, as appropriate, established or approved from time to time, by the Compensation Committee. Any annual bonus shall be paid in cash in a lump sum after the end of the calendar year for which the annual bonus is paid and no later than March 15 following such calendar year, unless deferred at the Executives option in accordance with the provisions of any applicable deferred compensation plan of the Company or it subsidiaries in effect from time to time. Nothing in this Section 5 shall confer upon the Executive any right to a minimum annual bonus.
6. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executives employment under this Agreement, the tive shall be entitled to participate in all employee benefit programs of the Company as are effect from time to time and in which similarly situated senior executives of the Company are eligible to participate.
7. BUSINESS EXPENSE REIMBURSEMENT, FRINGE BENEFITS AND RELOCATION EXPENSES.
(a) EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in the Companys travel and entertainment expense reimbursement programs and its executive fringe benefit plans and arrangements, all in accordance with the terms and conditions of such programs, plans and arrangements as in effect from time to time as applied to the Companys similarly situated executives.
(b) [RELOCATION EXPENSES. The Company shall pay directly or reimburse the Executive, in either case on an after-tax basis to the Executive, for reasonable moving expenses in relocating the Executive and his immediate family from Bermuda to a location in the United States designated by the Executive (or the Executives estate or other legal representative in the event of his death) following the Executives separation from service (within the meaning Treas. Reg. Section 1.409A -1(h)) with the Company for any reason other than Cause (as
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hereinafter defined). Any such expenses must be incurred by the Executive not later than the last day of the calendar year following the calendar year in which the Executives separation from service with the Company occurs. Any such reimbursement for moving expenses shall be made promptly by the Company and, in all events, no later than the last day of the second calendar year following the calendar year in which the Executives separation from service with the Company occurs. Any such payment or reimbursement for taxes shall be made on or before the due date of the Executives tax return for the applicable year, but in no event later than the end of the Executives taxable year next following the Executives taxable year in which he remits the related taxes.]*
8. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies during the term of employment hereunder, the Executives spouse, if the spouse survives the Executive, (or, if the Executives spouse does not survive him, the estate or other legal representative of the Executive) shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of Executives death, to be paid in accordance with the Companys regular payroll practices (as in effect at the time of death) through the end of the sixth month after the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to:
(i) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to death in accordance with Section 7[(a)]* above,
(ii) within 45 days after the date of death (with the actual date of payment within such 45 day period to be determined by the Company), a pro rata bonus for the year of death in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less),
(iii) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive determined in accordance with the terms thereof,
(iv) for a period of six months following the Executives death, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executives dependents, if any, under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the dependents) as is then in existence for other executives during the coverage period; provided, that, if the Executives dependents cannot continue to participate in the
* Where applicable.
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Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executives dependents, or to the applicable taxing authority on their behalf, no later than the due date of such taxes), and
(v) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6, above, determined in accordance with the applicable terms and provisions of such programs.
(b) TERMINATION DUE TO DISABILITY. In the event the Executives employment hereunder is terminated due to his disability, as determined under the Companys long-term disability plan, the Executive shall be entitled to:
(i) a cash lump sum payment made, subject to Section 25 below, 60 days after the date of termination in an amount equal to the Base Salary as provided in Section 4, above, that would have been paid to the Executive had he remained employed through the end of the sixth month after the month in which the Executives employment terminates due to disability,
(ii) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to termination of employment in accordance with Section 7(a) above,
(iii) subject to Section 25 below, 60 days after the date of termination, a pro rata bonus for the year of termination in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less),
(iv) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof,
(v) for a period of six months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the
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applicable taxing authority on his behalf, no later than the due date of such taxes); provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and
(vi) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs.
(c) TERMINATION FOR CAUSE.
(i) The employment of the Executive under this Agreement may be terminated by the Company for Cause, such termination to be effective upon the Company giving the Executive written notice of termination in accordance with the provisions of this Agreement. For this purpose, Cause shall mean:
(A) conviction of the Executive of a felony involving moral turpitude, dishonesty or laws to which the Company or its Affiliates are subject in connection with the conduct of its or their business;
(B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (1) willful misconduct or (2) substantial and continual refusal by the Executive to perform the duties assigned to the Executive pursuant to the terms hereof; provided, however, that any act or failure to act by the Executive shall not constitute Cause for purposes of this Section 8(c)(i)(B) if such act or failure to act was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the overall best interests of the Company, as the case may be. The determination of whether the Executive acted in good faith and that he reasonably believed his action to be in the Companys overall best interest, as the case may be, will be in the reasonable judgment of the Compensation Committee; or
(C) the Executives continued willful refusal to obey any lawful policy or requirement duly adopted by the Board of Directors of the Company and the continuance of such refusal after receipt of written notice.
(ii) In the event of a termination for Cause under Section 8(c)(i), above, the Executive shall be entitled only to:
(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment for Cause, through the date on which termination for Cause occurs, to be paid in accordance with the Companys regular payroll practices,
(B) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof, and
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(C) the vested accrued benefits, if any, under employee benefit programs of the Company, as provided in Section 6, above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7, above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs; provided that the Executive shall not be entitled to any such benefits unless the terms and provisions of such programs expressly state that the Executive shall be entitled thereto in the event his employment is terminated for Cause (as defined in this Agreement or otherwise).
(d) TERMINATION WITHOUT CAUSE.
(i) Anything in this Agreement to the contrary notwithstanding, the Executives employment may be terminated by the Company without Cause as provided in this Section 8(d). A termination due to death or disability, as described in Section 8(a) or (b), above, or a termination for Cause, as described in Section 8(c), above, shall not be deemed a termination without Cause under this Section 8(d). For the avoidance of doubt, if a notice of non-renewal of this Agreement pursuant to Section 2 is issued by the Company, the termination of the Executives employment at the end of the term shall be considered a termination by the Company without Cause hereunder.
(ii) In the event the Executives employment is terminated by the Company without Cause (x) prior to a Change in Control (other than as provided in the last paragraph of Section 8(d)(iii), in which case the provisions of Section 8(d)(iii) shall apply in lieu of this Section 8(d)(ii)) or (y) following the Post-Change Period (as hereinafter defined), the Executive shall be entitled to:
(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment without Cause, through the date on which termination without Cause occurs, to be paid in accordance with the Companys regular payroll practices,
(B) provided the Executive executes, on or before the date that is fifty (50) days following the date of his termination of employment, a general release of claims against the Company and its Affiliates (as defined below) in form and substance satisfactory to the Company and does not revoke such release prior to the end of the seven day statutory revocation period, a cash lump sum payment made, subject to Section 25 below, sixty (60) days after termination of employment equal to (x) two times the Executives annual Base Salary, at the annual rate in effect in accordance with Section 4, above, immediately prior to such termination and (y) one times the higher of the targeted annual bonus for the year of such termination, if any, or the average of the Executives annual bonus payable by the Company for the three years immediately preceding the year of termination (or such shorter period during which the Executive has been employed by the Company),
(C) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement
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of business expenses incurred prior to termination of employment in accordance with Section 7(a) above,
(D) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof,
(E) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided, further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and
(F) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs.
(iii) In the event the Executives employment is terminated by (x) the Company without Cause within the twenty-four month period following a Change in Control (as defined in Exhibit A hereto) (the Post-Change Period) or (y) the Executive terminates his employment for Good Reason (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to the following, paid in the case of amounts set forth in (B), (C) and (D) below, subject to Section 25 below, 60 days after termination of employment:
(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment, through the date on which termination occurs, to be paid in accordance with the Companys regular payroll practices,
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(B) a cash lump sum payment equal to two times the Executives annual Base Salary, at the rate in effect in accordance with Section 4, above, or immediately prior to such termination or Change in Control, whichever is greater,
(C) a cash lump sum payment equal to two times the average annual bonus awarded to the Executive by the Company in the three years prior to the year in which the Change in Control occurs (or shorter period during which the Executive had been employed by the Company); provided such bonuses shall be at least equal to the targeted annual bonus, if any, for the year of such termination,
(D) an amount equal to (i) the higher of (x) the bonus actually awarded to the Executive by the Company for the year immediately preceding the year in which the Change in Control occurs or (y) the targeted amount of bonus, if any, that would have been awarded to the Executive in respect of the year in which the termination of employment occurs, multiplied by (ii) a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company in the year of termination of employment, and the denominator of which is 12,
(E) options to purchase equity securities of the Company or other rights with respect to equity securities of the Company held by the Executive shall immediately vest in full and shall continue to be exercisable for three years from the date of termination of employment, notwithstanding the Executives termination of employment, or the original full term of the option or other right, if shorter,
(F) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and
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(G) full and immediate vesting under the Companys retirement plans as of the date of termination, to the extent permitted by applicable law; provided, however , that if such full and immediate vesting cannot be provided under a qualified employer plan (within the meaning of Treas. Reg. Section 1.409A -1(a)(2)) under applicable law, then the present value of economically equivalent benefits, determined using reasonable assumptions and on an after-tax basis to the Executive, shall be paid in a cash lump sum to the Executive, subject to Section 25 below, 60 days after termination of employment.
Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled to the benefits described in (A)-(G) above, if the Executives employment with the Company is terminated by the Company (other than for Cause) within one year prior to the date on which a 409A Change in Control (as defined below) occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated or intended to effect the 409A Change in Control or (ii) otherwise arose in connection with or anticipation of the 409A Change in Control; provided , however , that in such event, amounts in excess of those otherwise payable to the Executive under Section 8(d)(ii) above will be payable hereunder only following the 409A Change in Control (and, subject to Section 25 be-low,10 days thereafter). For purposes hereof, a 409A Change in Control means a change in control event (as defined in Treas. Reg. Section 1.409A -3(i)(5)) with respect to the Company that also constitutes a Change in Control.
(iv) If, in situations where Section 8(d)(iii) does not apply, at any time during the term of the Executives employment hereunder and without the Executives written consent, duties are assigned to the Executive that are materially inconsistent with his position as described in Section 3 above, or the Company does not cure any material breach by it of any provision of Sections 4 through 7 of this Agreement within 30 calendar days following written notice of same by the Executive (which written notice must be given within 30 calendar days after such breach), the Executive shall have the right to terminate his employment within 30 calendar days of the Companys failure to rescind such assignment in accordance with the proviso below or of such failure to cure a breach, as the case may be, and such termination shall be deemed a termination by the Company without Cause under Section 8(d)(ii), above, provided , in the case of assignment of duties that are materially inconsistent with those set forth in Section 3 above, the Executive shall have given the Company written notice of such assignment within 30 calendar days of such assignment and shall not, within 30 calendar days thereafter, have had the assignment of inconsistent duties rescinded.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may voluntarily terminate his employment prior to the expiration of the term of this Agreement upon at least three months prior written notice to the Company. Such termination shall constitute a voluntary termination and, except as provided in Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company for Cause as provided in Section 8(c), above. A voluntary termination in accordance with this Section 8(e) shall not be deemed a breach of this Agreement. A termination of the Executives employment due to disability or death as described in Section 8(b) or 8(a), above, a termination by the Executive which the Executive is entitled to treat as a termination by the Company pursuant to Section 8(d), above, or a termination by the Executive under
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Section 8(d)(iv), above, shall not be deemed a voluntary termination within the meaning of this Section 8(e).
9. EXCISE TAX PAYMENTS.
(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit or accelerated vesting or exercisability of any award) by the Company, any acquirer or any party related to the Company or the acquirer to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a Payment) would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code of 1986, as amended (the Code) (or any successor provision or similar excise tax), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), (ii) the aggregate amount of the Executives Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code) is less than 3.25 times the Executives Base Amount (as defined in Section 280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by up to 20 percent, then the payments set forth in Section 8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and in no event by more than 20 percent in the aggregate) such that no Payment is subject to the Excise Tax.
(b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) the aggregate amount of the Executives Parachute Payments equals or exceeds 3.25 times the Executives Base Amount, (ii) the aggregate amount of the Executives Parachute Payments is less than 3.25 times the Base Amount but one or more Payments would be subject to the Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by 20 percent, or (iii) notwithstanding a reduction in payments pursuant to Section 9(a) above, an Excise Tax is payable by the Executive on one or more Payments, then, in any such case, Payments shall not be reduced and the Executive shall be entitled to receive an additional payment (a Gross-Up Payment) in an amount such that after payment by the Executive of all taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments.
(c) Subject to the provisions of Section 9(d), all determinations required to be made under this Section 9, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-Up Payment, shall be made by a nationally recognized public accounting firm selected by the Company (the Accounting Firm) which shall provide detailed supporting calculations both to the Company and the Executive within l5 business days of the date of termination of the Executives employment, if applicable, or such earlier time as is reasonably requested. The initial Gross-Up Payment, if any, as determined pursuant to this Section 9(c), shall be paid to the Executive within five business days of the receipt of the Accounting Firms determination. If the Accounting Firm determines that no Excise Tax is payable by
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the Executive, it shall furnish the Executive with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 9(c) shall be binding upon the Company and the Executive, subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments are referred to herein as the Gross-Up Underpayment). In the event that the Company exhausts its remedies pursuant to Section 9(d) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Company.
(d) The Executive shall notify the Company in writing of any claim by the United States Internal Revenue Service that, if successful, would require the payment by the Executive of any Excise Tax and, therefore, the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 30 business days after the Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires, in good faith, to contest such claim (which notice shall set forth the bases for such contest) and that it will bear the costs and provide the indemnification as required by this sentence, the Executive shall, in good faith:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall, in good faith, reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate, in good faith, in any proceedings relating to such claim;
provided , however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of all costs and expenses.
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Without limitation on the foregoing provisions of this Section 9(d), the Company shall, exercising good faith, control all proceedings taken in connection with such contest and, at its sole option (but in good faith), may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option (but in good faith), either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided , however , that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Companys complying with the requirements of Section 9(d)) promptly pay to the Company, as the case may be, the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Executive to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
Notwithstanding any provision herein to the contrary, the Executives failure to strictly comply with the notice provisions set forth in this Section 9, so long as such failure does not prevent the Company from contesting an excise tax claim, shall not adversely affect the Executives rights under this Section 9. Any amount advanced shall be deemed a nonrefundable payment to the extent a refundable advance would be a violation of the Sarbanes-Oxley Act. Anything in this Agreement to the contrary notwithstanding, except as otherwise provided in Treas. Reg. Section 1.409A -3(i)(1)(v), in no event shall any payment by the Company pursuant to this Section 9 be made later than the end of the Executives taxable year next following the Executives taxable year in which he remits the related taxes.
10. NO MITIGATION; NO OFFSET.
In the event of any termination of employment under Section 8, above, the Executive shall be under no obligation to mitigate damages or seek other employment, and, except as expressly set forth herein, there shall be no offset against amounts due the Executive under this
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Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.
11. NONCOMPETITION AND NONSOLICITATION.
The Executive represents and warrants that, to the best of his knowledge, he is not using the confidential or proprietary information of any other person in violation of any agreement or rights of others known to him. The Executive agrees that the products of the Company and its Affiliates shall constitute the exclusive property of the Company and its Affiliates.
For the avoidance of doubt, all trademarks, policy language or forms, products or services (including products and services under development), trade names, trade secrets, service marks, designs, computer programs and software, utility models, copyrights, know-how and confidential information, applications for registration of any of the foregoing and the right to apply for them in any part of the world (whether any of the foregoing shall be registered or unregistered) created or discovered or participated in by the Executive during the course of his employment (whether or not pursuant to the terms of this Agreement) or under the instructions of the Company or its Affiliates are and shall be the absolute property of the Company and its Affiliates, as appropriate. Without limiting the foregoing, the Executive hereby assigns to the Company any and all of the Executives right, title and interest, if any, pertaining to the insurance and reinsurance (including, without limitation, finite insurance and reinsurance), risk assumption, risk management, brokerage, financial and other products or services developed or improved upon by the Executive (including, without limitation, any related know-how) while employed by the Company or its Affiliates, including any patent, trademark, trade name, copyright, ownership or other right that may pertain thereto.
Since Executive has obtained and is likely to obtain in the course of Executives employment with the Company and its Affiliates knowledge of trade names, trade secrets, knowhow, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, Executive hereby undertakes that:
(i) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) encourage, entice, solicit or endeavor to encourage, entice or solicit away from employment with the Company or its Affiliates, or hire or cause to be hired, any officer or employee of the Company or its Affiliates (or any individual who was within the prior twelve months an officer or employee of the Company or its Affiliates), or encourage, entice, solicit or endeavor to encourage, entice or solicit any individual to violate the terms of any employment agreement or arrangement between such individual and the Company or any of its Affiliates;
(ii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) interfere with or disrupt or seek to interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twenty-four months immediately
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preceding such termination shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who during the period of twenty-four months immediately preceding such termination shall have supplied services to any such person, nor will Executive interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided; and
(iii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except solely as a less than one percent stockholder of a publicly traded company), engage in any activities in Bermuda, the United States or greater London if such activities are competitive with the businesses that (i) are then being conducted by the Company or its Affiliates and (ii) during the period of the Executives employment were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates.
The provisions of the immediately preceding sentence shall continue as long as the Executive is employed by the Company or its Affiliates and such provisions shall continue in effect after such employment is terminated for any reason until the first anniversary of such termination, provided that if such employment is terminated by the Company under Section 8(d)(iii) or by the Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii) shall automatically terminate upon such termination of employment, unless the Company elects, in writing, upon such termination to continue the provisions of clauses (ii) and (iii) in effect through the six-month anniversary of such termination of employment in which case the Company shall be obligated to pay the Executive, in addition to any of the Executives rights under Section 8(d)(iii), a lump sum payment equal to the sum of (x) six months of his Base Salary and (y) one half of the Executives average annual bonus payable by the Company or its subsidiaries for the three years (or shorter period of employment by any of such entities) immediately preceding the year of termination, and such lump sum payment shall, subject to Section 25 below, be made 60 days following his separation from service (as defined in Section 7(b) above) with the Company.
For purposes of this Agreement, an Affiliate of the Company includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company, and such term shall specifically include, without limitation, the Companys majority-owned subsidiaries.
The limitations on the Executive set forth in this Section shall also apply to any agent or other representative acting on behalf of Executive.
While the restrictions aforesaid are considered by both parties to be reasonable in all the circumstances it is recognized that restrictions of the nature in question may fail for reasons unforeseen and accordingly it is hereby declared and agreed that if any of such restrictions or the geographic or other scope thereof shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods (if any) thereof reduced and/or geographic or other area dealt with thereby reduced in scope then said
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restrictions shall apply with such modifications as may be necessary to make them valid and effective.
Nothing contained in this Section 11 shall limit in any manner any additional obligations to which Executive may be bound pursuant to any other agreement or any applicable law, rule or regulation and Section 11 shall apply, subject to its terms, after employment has terminated for any reason.
12. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior written consent of the Company, use for the Executives own benefit or the benefit of any other person or entity other than the Company and its Affiliates or disclose to any person, other than an employee of the Company or other person to whom disclosure is necessary to the performance by the Executive of her duties in the employ of the Company, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company or its Affiliates. Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by Executive during her employment, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application and this Section 12 shall apply in accordance with its terms after employment has terminated for any reason. The Executive acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee as evidenced by the signature of the Companys General Counsel.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied.
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14. GUARANTY AND AFFILIATE SERVICES.
(a) LIABILITY. Each of XL Insurance Ltd and XL Re Ltd (together, the Guarantors) hereby agrees to be jointly and severally liable together with the Company, for the performance of all obligations and duties, and the payment of all amounts, due to the Executive under this Agreement.
(b) RESPONSIBILITY. All of the other terms and provisions of this Agreement relating to the Executives employment by the Company shall likewise apply mutatis mu-tandis to the Executives employment by any of its Affiliates, it being understood that if the Executives employment with the Company is terminated, his employment with its Affiliates shall also be terminated and the Executive shall be required to resign immediately from all directorships and other positions held by the Executive in the Company and its Affiliates or in any other entities in respect of which the Executive was acting as a representative or designee of the Company or its Affiliates in connection with his employment.
15. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto.
16. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law.
17. INDEMNIFICATION.
The Executive shall be provided indemnification by the Company to the maximum extent permitted by applicable law and its charter documents against expenses incurred and damages paid or payable by the Executive with respect to claims based on actions or failures to act by the Executive in his capacity as an officer, director or employee of the Company or its Affiliates or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company or an Affiliate. In addition, he shall be covered by a directors and
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officers liability policy with coverage for all directors and officers of the Company in an amount equal to at least US $75,000,000. Such directors and officers liability insurance shall be maintained in effect for a period of six years following termination of the Executives employment for any reason other than pursuant to Section 8(c) or Section 8(e) hereof.
18. SETTLEMENT OF DISPUTES.
(a) Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executives employment with the Company or its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be resolved by binding arbitration held in New York City in accordance with the rules of the American Arbitration Association.
(b) Executive acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if Executive breaches his obligations under Section 11 or 12. Accordingly, Executive agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or prospective breach by Executive of his obligations under Section 11 or 12 in any Federal or state court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom, or, at the Companys or any Affiliates election, in any other jurisdiction in which Executive maintains his residence or his principal place of business. Executive hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and Executive agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of Executive known to the Company or its Affiliates, or in any other manner authorized by law. Executive further agrees that, in addition to any other remedies available to the Company or its Affiliates by operation of law or otherwise, because of any breach by Executive of his obligations under Section 11 or 12 he will forfeit any and all bonus and rights to any payments to which he might otherwise then be entitled by virtue hereof and such payments may be suspended so long as any good faith dispute with respect thereto is continuing; provided , however , that payments, benefits and other rights and privileges of the Executive under this Agreement following termination of the Executives employment during a Post-Change Period shall not be forfeited, suspended, offset, diminished or otherwise altered in any way on account of any breach or prospective breach of Section 11, Section 12 or any other provision of this Agreement alleged by the Company.
(c) Notwithstanding any other provision of this Agreement, the Executive may elect to resolve any dispute involving a breach or alleged breach of this Agreement following termination of the Executives employment during a Post-Change Period in any Federal or State court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom. The Company and the Guarantors hereby submit to the non-exclusive jurisdiction of all those courts for the purposes of any such actions or proceedings instituted by the Executive, and the Company and the Guarantors agree that process in any or all of such actions or proceedings may be served by registered mail or delivery, addressed to the Company as set forth in Section 20, or in any other manner authorized by law. The Company and the Guarantors shall pay all costs associated with any court proceeding under this Section 18(c) without regard to the outcome of such proceeding, including all legal fees and expenses of the Executive, who shall be
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reimbursed for all such costs within ten (10) days following written demand therefor by the Executive (which written demand shall be made no later than six (6) months following the end of the calendar year in which such costs were incurred).
(d) Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses: provided , however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in the proceeding. Following the final determination of the dispute in which the Executive has substantially prevailed, the Company shall reimburse all such reasonable costs within ten (10) days following written demand therefor (supported by documentation of such costs) by the Executive, and the Executive shall make such written demand within sixty (60) days following the final determination of the dispute; provided, however , that such payment shall be made no later than on or prior to the end of the calendar year following the calendar year in which the cost is incurred. Notwithstanding the foregoing, in the event a final determination of the dispute has not been made by December 20 of the year following the calendar year in which the cost is incurred, the Company shall, within ten (10) days after such December 20, reimburse such reasonable costs (supported by documentation of such costs) incurred in the prior taxable year; provided, however , that the Executive shall return such amounts to the Company within ten (10) business days following the final determination if the Executive did not substantially prevail in the dispute.
(e) The amount of any expenses eligible for payment under this Section 18 during a calendar year will not affect the amount of any expenses eligible for payment under this Section 18 in any other taxable year.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and the Guarantors. No waiver by any Party of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Except as set forth in Section 8(d)(iv) or Exhibit B, any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and the Guarantors, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of:
If to the Company:
XL Capital Ltd
One Bermudiana Road
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Hamilton HM11, Bermuda
Attn: General Counsel
If to the Executive:
To the last address delivered to
the Company by the Executive in
the manner set forth herein.
21. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
23. REFERENCE.
In the event of the Executives death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws.
25. SECTION 409A.
(a) It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible. No action or failure to act, pursuant to this Section 25 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Executive from the obligation to pay any taxes pursuant to Section 409A of the Code.
(b) Notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A -1(h)) to be a specified employee (within the meaning of Treas. Reg. Sec-
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tion 1.409A -1(i)), then with regard to any payment that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of his separation from service, or (ii) the date of his death (the Delay Period). Upon the expiration of the Delay Period, all payments delayed pursuant to this Section 25 (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid to the Executive in a lump sum, and any remaining payments due under this Agreement shall be paid in accordance with the normal payment dates specified for them herein. In no case will compliance with this Section by the Company constitute a breach of the Companys or the Guarantors obligations under this Agreement. Notwithstanding any provision of this Agreement to the contrary, for purposes of Sections 8(b) and 8(d) above, the Executive will be deemed to have terminated his employment on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A -1(h)) with the Company.
26. HEADINGS.
The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
27. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
XL CAPITAL LTD | ||
By: | ||
EXECUTIVE OFFICER | ||
By: | ||
GUARANTORS: | ||
XL INSURANCE LTD | ||
By: | ||
XL RE LTD | ||
By: |
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EXHIBIT A
CHANGE IN CONTROL
A Change in Control shall be deemed to have occurred:
(i) any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative) (a Person) or any group, as defined in Sections 13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than a group of which the Executive is a member or which has been organized by the Executive), becomes the beneficial owner, directly or indirectly, of securities of the Company representing, or acquires the right to control or direct, or to acquire through the conversion of securities or the exercise of warrants or other rights to acquire securities, 30% or more of either (I) the outstanding Ordinary Shares of the Company, (II) the outstanding securities of the Company having a right to vote in the election of directors, or (III) the combined voting power of the outstanding securities of the Company having a right to vote in the election of directors; or
(ii) if there shall be elected or appointed to the Board of Directors of the Company (the Board) any director or directors whose appointment or election by the Board or nomination for election by the Companys shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date of execution of this Agreement or whose election or appointment or nomination for election was previously so approved; or
(iii) upon consummation of a reorganization, scheme of arrangement, merger, consolidation, combination, amalgamation, corporate restructuring, liquidation, winding up, exchange of securities, or similar transaction (each, an Event), in each case, in respect of which the beneficial owners of the outstanding Company Ordinary Shares immediately prior to such Event do not, following such Event, beneficially own, directly or indirectly, more than 60% of each of the outstanding equity share capital, and the combined voting power of the then outstanding voting securities entitled to vote in the election of the directors, of the Company and any resulting entity, in substantially the same proportions as their ownership, immediately prior to such Event, of the Ordinary Shares and voting power of the Company; or
(iv) if there occurs an Event involving the Company as a result of which 25% of more of the members of the Board of the Company are not persons who were members of the Board immediately prior to the earlier of (x) the Event, (y) execution of an agreement, the consummation of which would result in the Event, or (z) announcement by the Company of an intention to effect the Event; or
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(v) if the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change in Control has occurred.
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EXHIBIT B
GOOD REASON
For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of the Executive:
(i) (A) The assignment to Executive of duties inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); or (B) any elimination, diminution or reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; and for purposes for this clause (i), the determination of whether there has been a reduction of duties or responsibilities or an assignment of duties inconsistent with the Executives position shall take into account the Executives duties, responsibilities and position with the ultimate parent of the parent/subsidiary group as a whole which includes the Company;
(ii) The (A) reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) payment of an annual bonus in an amount less than the lesser of (x) the most recent annual bonus paid prior to the Change in Control or (y) the greater of (I) the most recent target bonus, if any, established prior to the Change in Control or (II) the annual average bonus paid for the preceding three complete years prior to the Change in Control (or such lesser number of complete years as the Executive shall have been employed by the Company);
(iii) The failure by the Company or the Guarantors to obtain the specific written assumption of this Agreement by any successor or assign of the Company or the Guarantors or any person acquiring substantially all of the Companys or the Guarantors assets;
(iv) Any breach by the Company or the Guarantors of any provision of this Agreement or any agreements entered into pursuant thereto that remains uncured for 20 calendar days following written notice of same by the Executive;
(v) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring the Executive to be based at any office or location that is greater than 35 miles from the office or location at which the Executive was principally located immediately prior to the Change in Control;
(vi) During the Post-Change Period, (A) the failure to continue in effect any compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with at least the same aggregate economic opportunity on an after-tax basis available to the Executive immedi-
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ately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis both in terms of the amount of benefits provided and the level of his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits and coverage at least as favorable in the aggregate as those enjoyed by him under the Companys pension, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which he was participating at the time of the Change in Control; or
(vii) The failure by the Company to pay within 7 calendar days of the due date any amounts due under any benefit or compensation plan, including any deferred compensation plan.
Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission.
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SCHEDULE 1
As of June 30, 2009, the following Executive Officers were parties to this Form of Agreement:
Celia R. Brown
Kirstin R. Gould
Jacob D. Rosengarten
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Exhibit 10.5
2008 FORM OF AMENDMENT TO EMPLOYMENT AGREEMENT IN RESPONSE TO
INTERNAL REVENUE CODE SECTION 457A
AMENDMENT TO EMPLOYMENT AGREEMENT (Amendment) dated as of _____________, 2008 between XL Capital Ltd, a Cayman Islands corporation (the Company) and _____________ (the Executive).
WHEREAS, the Company and the Executive are parties to an Employment Agreement dated as of ______________ (the Agreement);
WHEREAS, the Company and the Executive wish to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company, the Guarantors (as defined in the Agreement) and the Executive hereby agree as follows:
1. The last paragraph of Section 8(d)(iii) is amended by deleting 10 days thereafter and replacing it with on the date of the 409A Change in Control.
2. The first sentence of Section 18(d) is amended to read in its entirety as follows:
Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses; provided , however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in a proceeding following her separation from service (as defined below) with the Company. |
3. Section 25(b) is amended to read in its entirety as follows:
(b) Without prejudice to the characterization of any other amounts payable under this Agreement, the parties hereto specifically intend that any amounts payable under Section 8(d)(ii)(A)-(C), Section 8(d)(iii)(A)-(D) and Section 11 will not be considered deferred compensation for purposes of Section 409A due to Treas. Reg. Section 1.409A-1(b)(4) or another applicable exception. However, notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of her separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-1(i)), then with regard to any payment or benefit that is considered deferred compensation under Section 409A payable on account of a separation from service that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account any ap- |
plicable exceptions to such requirement), such payment or benefit shall be made or provided on the date that is the earlier of (i) the expiration of the six (6)-month period measured from the date of the Executives separation from service, or (ii) the date of the Executives death (the Delay Period). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 25(b) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding any provision of this Agreement to the contrary, for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment, references to the Executives termination of employment (and corollary terms) with the Company shall be construed to refer to the Executives separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company. With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g ., payment shall be made within thirty (30) days after termination of employment), the actual date of payment within the specified period shall be within the sole discretion of the Company. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A. |
4. The definition of Good Reason in Exhibit B is amended to read in its entirety as follows:
For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of Executive: | ||
(i) (A) The assignment to Executive of duties materially inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); (B) any material diminution or material reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; (C) a material diminution in the authorities, duties or responsibilities of the supervisor to whom Ex- |
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ecutive is required to report; or (D) a material diminution in the budget over which Executive retains authority; | ||
(ii) The (A) material reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) material diminution in bonus opportunity that results in a material reduction in Executives compensation; | ||
(iii) Any material breach by the Company or the Guarantors of this Agreement or any material agreement entered into pursuant thereto; | ||
(iv) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring Executive to be based at any office or location that is greater than 35 miles from the office or location at which Executive was principally located immediately prior to the Change in Control; | ||
(v) During the Post-Change Period, the failure to continue in effect any material compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis as existed at the time of the Change in Control, which in any such case results in a material reduction in Executives compensation. | ||
Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of her intention to terminate her employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and the Company shall have thirty (30) days from such notice to remedy the condition, in which case Good Reason shall no longer exist with regard to such condition. Any failure to give such written notice within such period will result in a waiver by the Executive of her right to terminate for Good Reason as a result of such act or omission. Any termination hereunder shall occur within one hundred twenty (120) days after the Good Reason event occurs. |
5. Except as set forth herein, the Agreement shall continue in full force and effect in accordance with its terms.
6. All questions concerning the construction, validity and interpretation of this Amendment and the Agreement shall be construed and governed in accordance with the laws of the State of New York, without reference to the principles of conflict of laws thereof.
7. This Amendment may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.
XL CAPITAL LTD | ||
By: | ||
GUARANTORS: | ||
XL INSURANCE (BERMUDA) LTD | ||
(formerly XL INSURANCE LTD) | ||
By: | ||
XL RE LTD | ||
By: | ||
READ, ACCEPTED & AGREED | ||
________________________________________ | ||
Name of Executive Officer | ||
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SCHEDULE 1
As of June 30, 2009, the following Executive Officers were parties to this Form of Agreement:
Kirstin R. Gould
Celia R. Brown
Exhibit 10.6
2009 FORM OF EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the _____ day of __________, 2009, by and between, XL Capital Ltd, a Cayman Islands corporation (the Company), __________, 1 and _______________ (the Executive).
WHEREAS, the Company and the Executive each desire that the Executive become employed by the Company and that the terms and conditions of such employment be memorialized by a written agreement to be effective for two years following the Executives date of hire;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, _____________ 1 and the Executive (the Parties) agree as follows:
1. EMPLOYMENT.
The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the position and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
The stated term of employment under this Agreement shall commence on ___________ (the Date of the Agreement) and shall continue through the close of business on the second anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8, below. If the Executives employment by the Company continues following the expiration of the term of this Agreement, the Executives employment with the Company shall be at will, such that the Company may terminate the Executives employment at any time, with or without reason, and the Executive may resign at any time, with or without reason.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as ___________________ of the Company. In such position, the Executive shall have the duties, responsibilities and authority normally associated with the office, position and titles of such an officer of an insurance and reinsurance company, or holding company, whose shares are publicly traded in the United States. In carrying out his duties and responsibilities, the Executive shall report to the ______________________ of the Company. During the term of this Agreement, the Executive
1 Subsidiaries to be added if applicable.
shall devote his full business time to the business and affairs of the Company, and shall use his best efforts, skills and abilities to promote the Companys interests.
(b) PERFORMANCE OF SERVICES. The Executives services under this Agreement, which are global in nature, shall be performed at the location or locations reasonably requested by the Company. The Executive acknowledges that the Company may require the Executive to travel to the extent such travel is reasonably necessary to perform the services hereunder and that such travel may be extensive. To the extent reasonably requested by the Company, the Executive shall allocate greater business time to a location other than his principal business location, and if reasonably requested by the Company, the Executive shall relocate to such other locations. Any such relocation will not be considered to be a breach of this Agreement. In the event of a relocation under this Section, Executive will receive relocation assistance as provided in the Companys executive relocation policy then in effect.
4. BASE SALARY.
The Executive shall be paid an annual base salary by the Company equal to US$ ___________, payable in accordance with the Companys regular payroll practices. Commencing in April of 20__, such base salary shall be subject to annual review in accordance with the Companys practices for executives as in effect from time to time and may be increased at the discretion of the Compensation Committee of the Board of Directors of the Company (the Compensation Committee). The annual base salary in effect from time to time is referred to herein as the Base Salary.
5. BONUS. In addition to the Base Salary provided for in Section 4, above, the Executive shall be eligible for an annual bonus under the Companys Annual Incentive Compensation Plan as in effect from time to time, with an annual target bonus equal to ___% of Base Salary. The Executive may be awarded such annual bonuses thereunder as may be approved by the Compensation Committee based on corporate, individual and business unit performance measures, as appropriate, established or approved from time to time, by the Compensation Committee. Any annual bonus shall be paid in cash in a lump sum after the end of the calendar year for which the annual bonus is paid and no later than March 15 following such calendar year, unless deferred at the Executives option in accordance with the provisions of any applicable deferred compensation plan of the Company or its subsidiaries in effect from time to time. [The Executives minimum annual bonus for 20__ shall be $ _________. The Executive shall not have a right to a minimum bonus for any other year.] 2
6. EMPLOYEE BENEFIT PROGRAMS.
(a) GENERAL. During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the
2 If applicable.
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Company as are in effect from time to time and in which similarly situated senior executives of the Company are eligible to participate.
(b) [INITIAL STOCK OPTION GRANT. On ______________, and consistent with the Companys Guidelines for the Granting of Equity-Based Compensation, the Company will grant to the Executive, under its 1991 Performance Incentive Program, a nonqualified stock option to purchase ________ ordinary shares of the Company. The exercise price per share of the stock option will be equal to the fair market value per share on the date of grant. The stock option will vest __________________, provided the Executives employment continues through such vesting dates, and the term of the stock option will be for ten years from the date of grant, subject to earlier termination upon termination of the Executives employment as set forth in the applicable award agreement. The stock option will also be subject to the other terms of the applicable award agreement.] 3
7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS.
During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in the Companys travel and entertainment expense reimbursement programs and its executive fringe benefit plans and arrangements, all in accordance with the terms and conditions of such programs, plans and arrangements as in effect from time to time as applied to the Companys similarly situated executives in the same jurisdiction as the Executive.
8. TERMINATION OF EMPLOYMENT.
(a) TERMINATION WITHOUT CAUSE. Anything in this Agreement to the contrary notwithstanding, the Executives employment may be terminated by the Company without Cause. Except as otherwise set forth in Section 8(b) below, in the event the Executives employment is terminated by the Company prior to the second anniversary of the Date of the Agreement without Cause, the Executive shall be entitled to:
(A) unpaid Base Salary through the date on which termination without Cause occurs, to be paid in accordance with the Companys regular payroll practices;
(B) provided the Executive executes, on or before the date that is fifty (50) days following the date of his termination of employment, a general release of claims against the Company and its Affiliates (as defined below) in form and substance satisfactory to the Company and does not revoke such release prior to the end of the seven day statutory revocation period, a cash lump sum payment made, subject to Section 25 below, sixty (60) days after termination of employment equal to (x) two times the Executives annual Base Salary, and (y) one times the Executives targeted annual bonus for the year of such termination;
3 If applicable.
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(C) for a period of twelve months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease; and
(D) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7 above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs.
(b) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON AFTER CHANGE IN CONTROL. In the event the Executives employment is terminated prior to the second anniversary of the Date of the Agreement and following a Change in Control (as defined in Exhibit A hereto) (x) by the Company without Cause or (y) by the Executive for Good Reason (as defined in Exhibit B hereto), the Executive shall not be entitled to the payments and benefits provided for in Section 8(a) above, but he shall be entitled to the following:
(A) unpaid Base Salary through the date on which termination occurs, to be paid in accordance with the Companys regular payroll practices;
(B) a cash lump sum payment made, subject to Section 25 below, sixty (60) days after termination of employment equal to (x) two times the Executives annual Base Salary, and (y) two times the Executives targeted annual bonus for the year of such termination;
(C) for a period of twelve months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease; and
(D) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7 above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs.
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(c) OTHER TERMINATION. The Executive may terminate his employment prior to the expiration of the term of this Agreement upon at least three months prior written notice to the Company; provided, however , that any termination by the Executive for Good Reason in accordance with Section 8(b) above shall be effected in accordance with the notice and cure provisions set forth in Exhibit B hereto. In the event the Executives employment under this Agreement is terminated due to his disability (as determined under the Companys long-term disability plan), due to his death, by the Company for Cause (such termination for Cause to be effective upon the Company giving the Executive written notice of termination in accordance with this Agreement), or by the Executive (other than for Good Reason in accordance with Section 8(b) above), the Executive shall be entitled only to:
(A) unpaid Base Salary through the date on which termination occurs, to be paid in accordance with the Companys regular payroll practices; and
(B) the vested accrued benefits, if any, under employee benefit programs of the Company, as provided in Section 6, above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7 above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs.
For purposes of this Agreement, Cause shall mean: (A) conviction of the Executive of a felony involving moral turpitude, dishonesty or laws to which the Company or its Affiliates are subject in connection with the conduct of its or their business; (B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (1) willful misconduct or (2) refusal by the Executive to perform the duties assigned to the Executive pursuant to the terms hereof; or (C) the Executives refusal to obey any lawful policy or requirement duly adopted by the Board of Directors of the Company and the continuance of such refusal after receipt of written notice.
9. EXCISE TAX CUTBACK.
(a) Notwithstanding any other provision of this Agreement, in the event that the amount of payments or other benefits payable to the Executive under this Agreement (including, without limitation, the acceleration of any payment or the accelerated vesting of any payment or other benefit), together with any payments, awards or benefits payable under any other plan, program, arrangement or agreement maintained by the Company or one of its Affiliates, would constitute an excess parachute payment (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the Code)), the payments under Section 8(a)(B) or 8(b)(B), as applicable, of this Agreement shall be reduced (by the minimum possible amounts) until no amount payable to the Executive under this Agreement constitutes an excess parachute payment (within the meaning of Section 280G of the Code); provided , however , that no such reduction shall be made if the net after-tax payment (after taking into account federal, state, local or other income, employment and excise taxes) to which the Executive would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account federal, state, local or other income, employment and excise taxes) to the Executive resulting from the receipt of such payments with such reduction.
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(b) All determinations required to be made under this Section 9, including whether a payment would result in an excess parachute payment and the assumptions to be utilized in arriving at such determinations, shall be made by an accounting firm designated by the Company (the Accounting Firm) which shall provide detailed supporting calculations both to the Company and the Executive as requested by the Company or the Executive. All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company. Absent manifest error, all determinations made by the Accounting Firm under this Section 9 shall be final and binding upon the Company and the Executive.
10. NO MITIGATION; NO OFFSET.
In the event of any termination of employment under Section 8, above, the Executive shall be under no obligation to mitigate damages or seek other employment, and, except as expressly set forth herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.
11. EXECUTIVE REPRESENTATIONS.
The Executive hereby represents and warrants to the Company that (a) the execution, delivery and performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which he is bound, (b) except for agreements provided to the Company, the Executive is not a party to or bound by any employment agreement, noncompetition agreement, confidentiality agreement or similar agreement with any other person, and (c) upon the execution and delivery of this Agreement by the Company, this Agreement will be the valid and binding obligation of the Executive, enforceable in accordance with its terms. The Executive represents and warrants that he will not use the confidential or proprietary information of any other person in violation of any agreement or rights of others known to him.
12. EXECUTIVE COVENANTS.
The Executive agrees that the products of the Company and its Affiliates shall constitute their exclusive property. For the avoidance of doubt, all trademarks, policy language or forms, products or services (including products and services under development), trade names, trade secrets, service marks, designs, computer programs and software, utility models, copyrights, know-how and confidential information, applications for registration of any of the foregoing and the right to apply for them in any part of the world (whether any of the foregoing shall be registered or unregistered) created or discovered or participated in by the Executive during the course of his employment (whether or not pursuant to the terms of this Agreement) or under the instructions of the Company or its Affiliates are and shall be the absolute property of the Company and its Affiliates, as appropriate. Without limiting the foregoing, the Executive hereby assigns to the Company any and all of the Executives right, title and interest, if any, pertaining to the insurance and reinsurance (including, without limitation, finite insurance and reinsurance), risk assumption, risk management, brokerage, financial and other products or services developed or improved upon by the Executive (including, without limitation, any related know-how)
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while employed by the Company or its Affiliates, including any patent, trademark, trade name, copyright, ownership or other right that may pertain thereto.
Since the Executive is likely to obtain, in the course of the Executives employment with the Company and its Affiliates, knowledge of trade names, trade secrets, know-how, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, the Executive hereby undertakes that:
(i) the Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) encourage, entice, solicit or endeavor to encourage, entice or solicit away from employment with the Company or its Affiliates, or hire or cause to be hired, any officer or employee of the Company or its Affiliates (or any individual who was within the prior twelve months an officer or employee of the Company or its Affiliates), or encourage, entice, solicit or endeavor to encourage, entice or solicit any individual to violate the terms of any employment agreement or arrangement between such individual and the Company or any of its Affiliates;
(ii) the Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) interfere with or disrupt or seek to interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twenty-four months immediately preceding such termination shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who, during the period of twenty-four months immediately preceding such termination, shall have supplied services to any such person, nor will the Executive interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided; and
(iii) the Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except solely as a less than one percent stockholder of a publicly traded company), engage in any activities in Bermuda, the United States or greater London if such activities are competitive with the businesses that (i) are then being conducted by the Company or its Affiliates and (ii) during the period of the Executives employment were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates.
The provisions of the immediately preceding sentence shall continue in effect (I) as long as the Executive is employed by the Company or its Affiliates, and (II) if the Executives termination of employment occurs for any reason prior to the second anniversary of the Date of the Agreement, until the first anniversary of such termination of employment; provided that if such employment is terminated by the Company or the Executive in accordance with Section 8(b), the provisions of clauses (ii) and (iii) shall automatically terminate upon such termination of employment, unless the Company elects, in writing, upon such termination to continue
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the provisions of clauses (ii) and (iii) above in effect through the six-month anniversary of such termination of employment in which case the Company shall be obligated to pay the Executive, in addition to any of the Executives rights under Section 8(b), a lump sum payment equal to the sum of (x) six months of his Base Salary, and (y) one half of the Executives target annual bonus for the year of termination, and such lump sum payment shall, subject to Section 25 below, be made 60 days following his separation from service (within the meaning Treas. Reg. Section 1.409A-1(h)) with the Company.
For purposes of this Agreement, an Affiliate of the Company includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company, and such term shall specifically include, without limitation, the Companys majority-owned subsidiaries.
The limitations on the Executive set forth in this Section shall also apply to any agent or other representative acting on behalf of the Executive.
While the restrictions aforesaid are considered by the Parties to be reasonable in all the circumstances, it is recognized that restrictions of the nature in question may fail for reasons unforeseen, and accordingly it is hereby declared and agreed that if any of such restrictions, or the geographic or other scope thereof, shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods (if any) thereof reduced and/or geographic or other area dealt with thereby reduced in scope, then said restrictions shall apply with such modifications as may be necessary to make them valid and effective.
Nothing contained in this Section 12 shall limit in any manner any additional obligations to which the Executive may be bound pursuant to any other agreement or any applicable law, rule or regulation.
13. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior written consent of the Company, use for the Executives own benefit or the benefit of any other person or entity (other than the Company and its Affiliates) or disclose to any person, other than an employee of the Company or other person to whom disclosure is necessary to the performance by the Executive of his duties in the employ of the Company, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company or its Affiliates. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by the Executive during his employment, unless and until such information has become known to the public generally (other
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than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application and this Section 13 shall apply in accordance with its terms after employment has terminated for any reason. The Executive acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee as evidenced by the signature of the Companys General Counsel.
14. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied.
15. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto.
16. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law.
17. INDEMNIFICATION.
The Executive shall be provided indemnification by the Company to the maximum extent permitted by applicable law and its charter documents against expenses incurred and damages paid or payable by the Executive with respect to claims based on actions or failures to act by the Executive in his capacity as an officer, director or employee of the Company or its Af-
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filiates or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company or an Affiliate. In addition, he shall be covered by a directors and officers liability policy with coverage for all directors and officers of the Company in an amount equal to at least US $75,000,000. Such directors and officers liability insurance shall be maintained in effect for a period of six years following termination of the Executives employment for any reason other than termination by the Company for Cause or by the Executive (other than for Good Reason in accordance with Section 8(b) hereof).
18. SETTLEMENT OF DISPUTES.
(a) Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executives employment with the Company or its Affiliates shall, except as provided in Section 18(b), be resolved by binding arbitration held in New York City in accordance with the rules of the American Arbitration Association.
(b) The Executive acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if the Executive breaches his obligations under Section 12 or 13 hereof. Accordingly, the Executive agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or prospective breach by Executive of his obligations under Section 12 or 13 in any Federal or state court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom, or, at the Companys or any Affiliates election, in any other jurisdiction in which Executive maintains his residence or his principal place of business. The Executive hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and the Executive agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of the Executive known to the Company or its Affiliates, or in any other manner authorized by law. The Executive further agrees that, in addition to any other remedies available to the Company or its Affiliates by operation of law or otherwise, because of any breach by Executive of his obligations under Section 12 or 13 he will forfeit any and all bonus and rights to any payments to which he might otherwise then be entitled by virtue hereof and such payments may be suspended so long as any good faith dispute with respect thereto is continuing; provided , however , that payments, benefits and other rights and privileges of the Executive under this Agreement following termination of the Executives employment after a Change in Control shall not be forfeited, suspended, offset, diminished or otherwise altered in any way on account of any breach or prospective breach of Section 12, Section 13 or any other provision of this Agreement alleged by the Company.
(c) Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any Party of any breach by the other Party of any condition or provision of this
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Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Except as set forth in Exhibit B, any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of delivery, if delivered by hand, (b) on the date of transmission, if delivered by confirmed facsimile or electronic mail, (c) on the first business day following the date of deposit, if delivered by guaranteed overnight delivery service, or (d) on the fourth business day following the date mailed by United States registered or certified mail, return receipt requested, postage prepaid, in any case addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of:
If to the Company:
XL Capital Ltd
One Bermudiana Road
Hamilton HM11, Bermuda
Attn: General Counsel
fax:
email:
If to the Executive:
To the last address, fax number or email address delivered to the Company by the Executive in the manner set forth herein.
21. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
23. REFERENCE.
In the event of the Executives death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative.
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24. GOVERNING LAW.
This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws.
25. SECTION 409A.
(a) It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible. No action or failure to act, pursuant to this Section 25 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Executive from the obligation to pay any taxes, interest or penalties pursuant to Section 409A of the Code.
(b) Without prejudice to the characterization of any other amounts payable under this Agreement, the parties hereto specifically intend that any amounts payable under Section 8(a)(A) and (B), Section 8(b)(A) and (B) and Section 12 will not be considered deferred compensation for purposes of Section 409A due to Treas. Reg. Section 1.409A-1(b)(4) or another applicable exception. However, notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-1(i)), then with regard to any payment or benefit that is considered deferred compensation under Section 409A payable on account of a separation from service that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account any applicable exceptions to such requirement), such payment or benefit shall be made or provided on the date that is the earlier of (i) the expiration of the six (6)-month period measured from the date of the Executives separation from service, or (ii) the date of the Executives death (the Delay Period). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 25(b) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding any provision of this Agreement to the contrary, for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment, references to the Executives termination of employment (and corollary terms) with the Company shall be construed to refer to the Executives separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company. With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reim-
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bursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g ., payment shall be made within thirty (30) days after termination of employment), the actual date of payment within the specified period shall be within the sole discretion of the Company. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A.
26. HEADINGS.
The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
27. COUNTERPARTS.
This Agreement may be executed and delivered (including by facsimile or pdf transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
Executive | |||
XL CAPITAL LTD | |||
By: | |||
[ SUBSIDIARIES | |||
By: | |||
] | 4 |
4 If applicable.
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EXHIBIT A
CHANGE IN CONTROL
A Change in Control shall be deemed to have occurred:
(i) any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative) (a Person) or any group, as defined in Sections 13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than a group of which the Executive is a member or which has been organized by the Executive), becomes the beneficial owner, directly or indirectly, of securities of the Company representing, or acquires the right to control or direct, or to acquire through the conversion of securities or the exercise of warrants or other rights to acquire securities, 30% or more of either (I) the outstanding Ordinary Shares of the Company, (II) the outstanding securities of the Company having a right to vote in the election of directors, or (III) the combined voting power of the outstanding securities of the Company having a right to vote in the election of directors; or
(ii) if there shall be elected or appointed to the Board of Directors of the Company (the Board) any director or directors whose appointment or election by the Board or nomination for election by the Companys shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date of execution of this Agreement or whose election or appointment or nomination for election was previously so approved; or
(iii) upon consummation of a reorganization, scheme of arrangement, merger, consolidation, combination, amalgamation, corporate restructuring, liquidation, winding up, exchange of securities, or similar transaction (each, an Event), in each case, in respect of which the beneficial owners of the outstanding Company Ordinary Shares immediately prior to such Event do not, following such Event, beneficially own, directly or indirectly, more than 60% of each of the outstanding equity share capital, and the combined voting power of the then outstanding voting securities entitled to vote in the election of the directors, of the Company and any resulting entity, in substantially the same proportions as their ownership, immediately prior to such Event, of the Ordinary Shares and voting power of the Company; or
(iv) if there occurs an Event involving the Company as a result of which 25% of more of the members of the Board of the Company are not persons who were members of the Board immediately prior to the earlier of (x) the Event, (y) execution of an agreement, the consummation of which would result in the Event, or (z) announcement by the Company of an intention to effect the Event; or
(v) if the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change in Control has occurred.
EXHIBIT B
GOOD REASON
For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of the Executive:
(i) a material diminution in the Executives Base Salary;
(ii) a material diminution in the Executives authority, duties or responsibilities;
(ii) a material diminution in the authorities, duties or responsibilities of the supervisor to whom the Executive is required to report;
(iii) a material diminution in the budget over which the Executive retains authority;
(iv) notwithstanding the provisions of Section 3(b) of this Agreement, requiring the Executive to be based at any office or location that is greater than 35 miles from the office or location at which the Executive was principally located immediately prior to the Change in Control; or
(iii) any other action or inaction that constitutes a material breach by the Company of this Agreement.
Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and the Company shall have thirty (30) days from such notice to remedy the condition, in which case Good Reason shall no longer exist with regard to such condition. Any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission. Any termination hereunder shall occur no later than one hundred twenty (120) days after the Good Reason event occurs.
SCHEDULE 1
As of June 30, 2009, the following Executive Officers were parties to this Form of Agreement:
Elizabeth Reeves
Exhibit 10.7
AMENDED EMPLOYMENT
AGREEMENT
(dated as of
4/25,
2008)
AGREEMENT, made and entered into as of the date first above written, by and between, XL Capital Ltd, a Cayman Islands corporation (the Company), X.L. Global Services, Inc. (XLGS), and James H. Veghte (the Executive).
WHEREAS, the Executive has been in the employ of the Company and certain of its subsidiaries;
WHEREAS, the Company and the Executive previously entered into an Amended Employment Agreement, dated as of August 1, 2006;
WHEREAS, the Company and the Executive desire to continue such employment and to amend the terms and conditions of such employment as set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, the Guarantors (as hereinafter defined) and the Executive (the Parties) agree as follows:
1. EMPLOYMENT.
The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the position and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
The stated term of employment under this Agreement shall commence on the date first above written (the Date of the Agreement) and shall continue through the close of business on the first anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8, below, and extension as provided in the next succeeding sentence. On the first anniversary of the Date of the Agreement and on each anniversary thereafter, the stated term of employment shall be automatically extended for an additional one year unless the Company gives notice in writing to the Executive or the Executive gives notice in writing to the Company at least six months prior to such anniversary that the term is not to be so extended.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as the Chief Executive Officer-Reinsurance General Operations of the Company. In such position, the Executive shall have the duties, responsibilities and authority normally associated with the office, position and titles of such an officer of an insurance, reinsurance and financial services company, or holding company, whose shares are publicly traded in the United States. In carrying out his duties and responsibilities, the Executive shall report to the Chief Operating Officer of the Company. During the term of this Agreement, the Executive shall devote his full business time to the business
and affairs of the Company, and shall use his best efforts, skills and abilities to promote the Companys interests.
(b) PERFORMANCE OF SERVICES. The Executives services under this Agreement, which are global in nature, shall be performed at the location or locations reasonably requested by the Company. The Executive acknowledges that the Company may require the Executive to travel to the extent such travel is reasonably necessary to perform the services here-under and that such travel may be extensive. To the extent reasonably requested by the Company, the Executive shall allocate greater business time to a location other than his principal business location, and if reasonably requested by the Company, the Executive shall relocate to such other locations. Any such relocation will not be considered to be a breach of this Agreement.
4. BASE SALARY.
The Executive shall be paid a Base Salary by the Company equal to US$500,000, payable in accordance with the Companys regular pay practices. Such Base Salary shall be subject to annual review in accordance with the Companys practices for executives as in effect from time to time and may be increased at the discretion of the Compensation Committee of the Board of Directors of the Company (the Compensation Committee).
5. BONUSES.
In addition to the Base Salary provided for in Section 4, above, the Executive shall be eligible for an annual cash bonus under the Companys Annual Incentive Compensation Plan as in effect from time to time, with a bonus opportunity which is substantially similar to that of similarly situated executives. The Executive may be awarded such annual bonuses thereunder as may be approved by the Compensation Committee based on corporate, individual and business unit performance measures, as appropriate, established or approved from time to time, by the Compensation Committee. Any annual bonus shall be paid in cash in a lump sum after the end of the calendar year for which the annual bonus is paid and no later than March 15 following such calendar year, unless deferred at the Executives option in accordance with the provisions of any applicable deferred compensation plan of the Company or it subsidiaries in effect from time to time. Nothing in this Section 5 shall confer upon the Executive any right to a minimum annual bonus.
6. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company as are in effect from time to time and in which similarly situated senior executives of the Company are eligible to participate.
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7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. During the term of the Executives employment under this Agreement, the Executive shall be entitled to participate in the Companys travel and entertainment expense reimbursement programs and its executive fringe benefit plans and arrangements, all in accordance with the terms and conditions of such programs, plans and arrangements as in effect from time to time as applied to the Companys similarly situated executives.
8. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies during the term of employment hereunder, the Executives spouse, if the spouse survives the Executive, (or, if the Executives spouse does not survive him, the estate or other legal representative of the Executive) shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of Executives death, to be paid in accordance with the Companys regular payroll practices (as in effect at the time of death) through the end of the sixth month after the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to:
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(i) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to death in accordance with Section 7 above, |
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(ii) within 45 days after the date of death (with the actual date of payment within such 45 day period to be determined by the Company), a pro rata bonus for the year of death in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less), |
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(iii) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive determined in accordance with the terms thereof, |
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(iv) for a period of six months following the Executives death, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executives dependents, if any, under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the dependents) as is then in existence for other executives during the coverage period; provided, that, if the Executives dependents cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executives dependents, or to the applicable taxing authority on their behalf, no later than the due date of such taxes), and |
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(v) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6, above, determined in accordance with the applicable terms and provisions of such programs. |
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(b) TERMINATION DUE TO DISABILITY. In the event the Executives employment hereunder is terminated due to his disability, as determined under the Companys long-term disability plan, the Executive shall be entitled to: |
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(i) a cash lump sum payment made, subject to Section 25 below, 60 days after the date of termination in an amount equal to the Base Salary as provided in Section 4, above, that would have been paid to the Executive had he remained employed through the end of the sixth month after the month in which the Executives employment terminates due to disability, |
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(ii) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to termination of employment in accordance with Section 7 above, |
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(iii) subject to Section 25 below, 60 days after the date of termination, a pro rata bonus for the year of termination in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executives average annual bonus for the immediately preceding three years (or the period of the Executives employment with the Company, if less), |
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(iv) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof, |
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(v) for a period of six months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(vi) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs. |
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(c) TERMINATION FOR CAUSE. |
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(i) The employment of the Executive under this Agreement may be terminated by the Company for Cause, such termination to be effective upon the Company giving the Executive written notice of termination in accordance with the provisions of this Agreement. For this purpose, Cause shall mean: |
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(A) conviction of the Executive of a felony involving moral turpitude, dishonesty or laws to which the Company or its Affiliates are subject in connection with the conduct of its or their business; |
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(B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (1) willful misconduct or (2) substantial and continual refusal by the Executive to perform the duties assigned to the Executive pursuant to the terms hereof; provided, however, that any act or failure to act by the Executive shall not constitute Cause for purposes of this Section 8(c)(i)(B) if such act or failure to act was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the overall best interests of the Company, as the case may be. The determination of whether the Executive acted in good faith and that he reasonably believed his action to be in the Companys overall best interest, as the case may be, will be in the reasonable judgment of the General Counsel of the Company or, if the General Counsel shall have an actual or potential conflict of interest, the Compensation Committee; or |
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(C) the Executives continued willful refusal to obey any lawful policy or requirement duly adopted by the Board of Directors of the Company and the continuance of such refusal after receipt of written notice. |
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(ii) In the event of a termination for Cause under Section 8(c)(i), above, the Executive shall be entitled only to: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment for Cause, through the date on which termination for Cause occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof, and |
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(C) the vested accrued benefits, if any, under employee benefit programs of the Company, as provided in Section 6, above, and reimbursement of properly incurred unreimbursed business expenses under the business expense reimbursement program as described in Section 7, above, determined in accordance with the applicable terms and provisions of such employee benefit and expense reimbursement programs; provided that |
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the Executive shall not be entitled to any such benefits unless the terms and provisions of such programs expressly state that the Executive shall be entitled thereto in the event his employment is terminated for Cause (as defined in this Agreement or otherwise). |
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(d) TERMINATION WITHOUT CAUSE. |
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(i) Anything in this Agreement to the contrary notwithstanding, the Executives employment may be terminated by the Company without Cause as provided in this Section 8(d). A termination due to death or disability, as described in Section 8(a) or (b), above, or a termination for Cause, as described in Section 8(c), above, shall not be deemed a termination without Cause under this Section 8(d). For the avoidance of doubt, if a notice of non-renewal of this Agreement pursuant to Section 2 is issued by the Company, the termination of the Executives employment at the end of the term shall be considered a termination by the Company without Cause hereunder. |
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(ii) In the event the Executives employment is terminated by the Company without Cause (x) prior to a Change in Control (other than as provided in the last paragraph of Section 8(d)(iii), in which case the provisions of Section 8(d)(iii) shall apply in lieu of this Section 8(d)(ii)) or (y) following the Post-Change Period (as hereinafter defined), the Executive shall be entitled to: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment without Cause, through the date on which termination without Cause occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) provided the Executive executes, on or before the date that is fifty (50) days following the date of his termination of employment, a general release of claims against the Company and its Affiliates (as defined below) in form and substance satisfactory to the Company and does not revoke such release prior to the end of the seven day statutory revocation period, a cash lump sum payment made, subject to Section 25 below, sixty (60) days after termination of employment equal to (x) two times the Executives annual Base Salary, at the annual rate in effect in accordance with Section 4, above, immediately prior to such termination and (y) one times the higher of the targeted annual bonus for the year of such termination, if any, or the average of the Executives annual bonus payable by the Company for the three years immediately preceding the year of termination (or such shorter period during which the Executive has been employed by the Company), |
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(C) any annual bonus awarded in accordance with the Companys bonus program but not yet paid under Section 5, above, to be paid, subject to Section 25 below, at the time such bonus would otherwise be due under Section 5 above, and reimbursement of business expenses incurred prior to termination of employment in accordance with Section 7 above, |
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(D) the rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted |
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stock or other securities, held by the Executive, determined in accordance with the terms thereof, |
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(E) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided, further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(F) the vested accrued benefits, if any, under the employee benefit programs of the Company, as provided in Section 6 above, determined in accordance with the applicable terms and provisions of such programs. |
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(iii) In the event the Executives employment is terminated by (x) the Company without Cause within the twenty-four month period following a Change in Control (as defined in Exhibit A hereto) (the Post-Change Period) or (y) the Executive terminates his employment for Good Reason (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to the following, paid in the case of amounts set forth in (B), (C) and (D) below, subject to Section 25 below, 60 days after termination of employment: |
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(A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment, through the date on which termination occurs, to be paid in accordance with the Companys regular payroll practices, |
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(B) a cash lump sum payment equal to two times the Executives annual Base Salary, at the rate in effect in accordance with Section 4, above, or immediately prior to such termination or Change in Control, whichever is greater, |
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(C) a cash lump sum payment equal to two times the average annual bonus awarded to the Executive by the Company in the three years prior to the year in which the Change in Control occurs (or shorter period during which the Executive had been employed by the Company); provided such bonuses shall be at least equal to the targeted annual bonus, if any, for the year of such termination, |
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(D) an amount equal to (i) the higher of (x) the bonus actually awarded to the Executive by the Company for the year immediately preceding the year in which the Change in Control occurs or (y) the targeted amount of bonus, if any, that would have been awarded to the Executive in respect of the year in which the termination of employment occurs, multiplied by (ii) a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company in the year of termination of employment, and the denominator of which is 12, |
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(E) options to purchase equity securities of the Company or other rights with respect to equity securities of the Company held by the Executive shall immediately vest in full and shall continue to be exercisable for three years from the date of termination of employment, notwithstanding the Executives termination of employment, or the original full term of the option or other right, if shorter, |
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(F) for a period of twenty-four months following the termination of the Executives employment, continued medical benefit plan coverage (including dental and vision benefits if provided under the applicable plans) for the Executive (and the Executives dependents, if any) under the Companys medical benefit plans upon substantially the same terms and conditions (including cost of coverage to the Executive) as is then in existence for other executives during the coverage period; provided , that, if the Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on substantially the same after-tax basis as if continued participation had been permitted (and any payment made by the Company in respect of any taxes imposed with respect to such benefits shall be paid to the Executive, or to the applicable taxing authority on his behalf, no later than the due date of such taxes); provided, however , with respect to the participation by the Executive in the medical insurance plan hereunder, the following conditions shall be met: (i) the amount eligible for reimbursement or payment under any such plan in one calendar year may not affect the amount eligible for reimbursement or payment under such plan in any other calendar year (except that the plan may impose a limit on the amount that may be reimbursed or paid if such limit is imposed on all participants), and (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; provided further, however , that, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical benefits from such employer, the medical benefits described herein shall immediately cease, and |
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(G) full and immediate vesting under the Companys retirement plans as of the date of termination, to the extent permitted by applicable law; provided, however , that if such full and immediate vesting cannot be provided under a qualified employer plan (within the meaning of Treas. Reg. Section 1.409A-l(a)(2)) under applicable law, then |
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the present value of economically equivalent benefits, determined using reasonable assumptions and on an after-tax basis to the Executive, shall be paid in a cash lump sum to the Executive, subject to Section 25 below, 60 days after termination of employment. |
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Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled to the benefits described in (A)-(G) above, if the Executives employment with the Company is terminated by the Company (other than for Cause) within one year prior to the date on which a 409A Change in Control (as defined below) occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated or intended to effect the 409A Change in Control or (ii) otherwise arose in connection with or anticipation of the 409A Change in Control; provided , however , that in such event, amounts in excess of those otherwise payable to the Executive under Section 8(d)(ii) above will be payable hereunder only following the 409A Change in Control (and, subject to Section 25 below, 10 days thereafter). For purposes hereof, a 409A Change in Control means a change in control event (as defined in Treas. Reg. Section 1.409A-3(i)(5)) with respect to the Company that also constitutes Change in Control. |
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(iv) If, in situations where Section 8(d)(iii) does not apply, at any time during the term of the Executives employment hereunder and without the Executives written consent, duties are assigned to the Executive that are materially inconsistent with his position as described in Section 3 above, or the Company does not cure any material breach by it of any provision of Sections 4 through 7 of this Agreement within 30 calendar days following written notice of same by the Executive (which written notice must be given within 30 calendar days after such breach), the Executive shall have the right to terminate his employment within 30 calendar days of the Companys failure to rescind such assignment in accordance with the proviso below or of such failure to cure a breach, as the case may be, and such termination shall be deemed a termination by the Company without Cause under Section 8(d)(ii), above, provided , in the case of assignment of duties that are materially inconsistent with those set forth in Section 3 above, the Executive shall have given the Company written notice of such assignment within 30 calendar days of such assignment and shall not, within 30 calendar days thereafter, have had the assignment of inconsistent duties rescinded. |
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(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may voluntarily terminate his employment prior to the expiration of the term of this Agreement upon at least three months prior written notice to the Company. Such termination shall constitute a voluntary termination and, except as provided in Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company for Cause as provided in Section 8(c), above. A voluntary termination in accordance with this Section 8(e) shall not be deemed a breach of this Agreement. A termination of the Executives employment due to disability or death as described in Section 8(b) or 8(a), above, a termination by the Executive which the Executive is entitled to treat as a termination by the Company pursuant to Section 8(d), above, or a termination by the Executive under Section 8(d)(iv), above, shall not be deemed a voluntary termination within the meaning of this Section 8(e). |
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9. EXCISE TAX PAYMENTS. |
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit or accelerated vesting or exercisability of any award) by the Company, any acquirer or any party related to the Company or the acquirer to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a Payment) would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code of 1986, as amended (the Code) (or any successor provision or similar excise tax), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), (ii) the aggregate amount of the Executives Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code) is less than 3.25 times the Executives Base Amount (as defined in Section 280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by up to 20 percent, then the payments set forth in Section 8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and in no event by more than 20 percent in the aggregate) such that no Payment is subject to the Excise Tax. |
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(b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) the aggregate amount of the Executives Parachute Payments equals or exceeds 3.25 times the Executives Base Amount, (ii) the aggregate amount of the Executives Parachute Payments is less than 3.25 times the Base Amount but one or more Payments would be subject to the Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by 20 percent, or (iii) notwithstanding a reduction in payments pursuant to Section 9(a) above, an Excise Tax is payable by the Executive on one or more Payments, then, in any such case, Payments shall not be reduced and the Executive shall be entitled to receive an additional payment (a Gross-Up Payment) in an amount such that after payment by the Executive of all taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. |
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(c) Subject to the provisions of Section 9(d), all determinations required to be made under this Section 9, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-Up Payment, shall be made by a nationally recognized public accounting firm selected by the Company (the Accounting Firm) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executives employment, if applicable, or such earlier time as is reasonably requested. The initial Gross-Up Payment, if any, as determined pursuant to this Section 9(c), shall be paid to the Executive within five business days of the receipt of the Accounting Firms determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 9(c) shall be binding upon the Company and the Executive, subject only to payments pursuant to the following sentence based on a de- |
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termination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments are referred to herein as the Gross-Up Underpayment). In the event that the Company exhausts its remedies pursuant to Section 9(d) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Company. |
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(d) The Executive shall notify the Company in writing of any claim by the United States Internal Revenue Service that, if successful, would require the payment by the Executive of any Excise Tax and, therefore, the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 30 business days after the Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires, in good faith, to contest such claim (which notice shall set forth the bases for such contest) and that it will bear the costs and provide the indemnification as required by this sentence, the Executive shall, in good faith: |
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(i) give the Company any information reasonably requested by the Company relating to such claim, |
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(ii) take such action in connection with contesting such claim as the Company shall, in good faith, reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive, |
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(iii) cooperate with the Company in good faith in order effectively to contest such claim, and |
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(iv) permit the Company to participate, in good faith, in any proceedings relating to such claim; |
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provided , however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of all costs and expenses. |
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Without limitation on the foregoing provisions of this Section 9(d), the Company shall, exercising good faith, control all proceedings taken in connection with such contest and, at its sole option (but in good faith), may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option (but in good faith), either direct the Executive to pay the tax claimed and sue for a |
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refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided , however , that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Companys complying with the requirements of Section 9(d)) promptly pay to the Company, as the case may be, the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Executive to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. |
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Notwithstanding any provision herein to the contrary, the Executives failure to strictly comply with the notice provisions set forth in this Section 9, so long as such failure does not prevent the Company from contesting an excise tax claim, shall not adversely affect the Executives rights under this Section 9. Any amount advanced shall be deemed a nonrefundable payment to the extent a refundable advance would be a violation of the Sarbanes-Oxley Act. Anything in this Agreement to the contrary notwithstanding, except as otherwise provided in Treas. Reg. Section 1.409A-3(i)(l)(v), in no event shall any payment by the Company pursuant to this Section 9 be made later than the end of the Executives taxable year next following the Executives taxable year in which he remits the related taxes. |
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10. NO MITIGATION; NO OFFSET. |
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In the event of any termination of employment under Section 8, above, the Executive shall be under no obligation to mitigate damages or seek other employment, and, except as expressly set forth herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. |
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11. NONCOMPETITION AND NONSOLICITATION.
The Executive represents and warrants that, to the best of his knowledge, he is not using the confidential or proprietary information of any other person in violation of any agreement or rights of others known to him. The Executive agrees that the products of the Company and its Affiliates shall constitute the exclusive property of the Company and its Affiliates.
For the avoidance of doubt, all trademarks, policy language or forms, products or services (including products and services under development), trade names, trade secrets, service marks, designs, computer programs and software, utility models, copyrights, know-how and confidential information, applications for registration of any of the foregoing and the right to apply for them in any part of the world (whether any of the foregoing shall be registered or unregistered) created or discovered or participated in by the Executive during the course of his employment (whether or not pursuant to the terms of this Agreement) or under the instructions of the Company or its Affiliates are and shall be the absolute property of the Company and its Affiliates, as appropriate. Without limiting the foregoing, the Executive hereby assigns to the Company any and all of the Executives right, title and interest, if any, pertaining to the insurance and reinsurance (including, without limitation, finite insurance and reinsurance), risk assumption, risk management, brokerage, financial and other products or services developed or improved upon by the Executive (including, without limitation, any related know-how) while employed by the Company or its Affiliates, including any patent, trademark, trade name, copyright, ownership or other right that may pertain thereto.
Since Executive has obtained and is likely to obtain in the course of Executives employment with the Company and its Affiliates knowledge of trade names, trade secrets, know-how, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, Executive hereby undertakes that:
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(i) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) encourage, entice, solicit or endeavor to encourage, entice or solicit away from employment with the Company or its Affiliates, or hire or cause to be hired, any officer or employee of the Company or its Affiliates (or any individual who was within the prior twelve months an officer or employee of the Company or its Affiliates), or encourage, entice, solicit or endeavor to encourage, entice or solicit any individual to violate the terms of any employment agreement or arrangement between such individual and the Company or any of its Affiliates; |
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(ii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) interfere with or disrupt or seek to interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twenty-four months immediately preceding such termination shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who during the period of twenty-four months immediately preceding such termination shall |
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have supplied services to any such person, nor will Executive interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided; and |
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(iii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except solely as a less than one percent stockholder of a publicly traded company), engage in any activities in Bermuda, the United States or greater London if such activities are competitive with the businesses that (i) are then being conducted by the Company or its Affiliates and (ii) during the period of the Executives employment were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates. |
The provisions of the immediately preceding sentence shall continue as long as the Executive is employed by the Company or its Affiliates and such provisions shall continue in effect after such employment is terminated for any reason until the first anniversary of such termination, provided that if such employment is terminated by the Company under Section 8(d)(iii) or by the Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii) shall automatically terminate upon such termination of employment, unless the Company elects, in writing, upon such termination to continue the provisions of clauses (ii) and (iii) in effect through the six-month anniversary of such termination of employment in which case the Company shall be obligated to pay the Executive, in addition to any of the Executives rights under Section 8(d)(iii), a lump sum payment equal to the sum of (x) six months of his Base Salary and (y) one half of the Executives average annual bonus payable by the Company or its subsidiaries for the three years (or shorter period of employment by any of such entities) immediately preceding the year of termination, and such lump sum payment shall, subject to Section 25 below, be made 60 days following his separation from service (within the meaning Treas. Reg. Section 1.409A-l(h)) with the Company.
For purposes of this Agreement, an Affiliate of the Company includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company, and such term shall specifically include, without limitation, the Companys majority-owned subsidiaries.
The limitations on the Executive set forth in this Section shall also apply to any agent or other representative acting on behalf of Executive.
While the restrictions aforesaid are considered by both parties to be reasonable in all the circumstances it is recognized that restrictions of the nature in question may fail for reasons unforeseen and accordingly it is hereby declared and agreed that if any of such restrictions or the geographic or other scope thereof shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods (if any) thereof reduced and/or geographic or other area dealt with thereby reduced in scope then said restrictions shall apply with such modifications as may be necessary to make them valid and effective.
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Nothing contained in this Section 11 shall limit in any manner any additional obligations to which Executive may be bound pursuant to any other agreement or any applicable law, rule or regulation and Section 11 shall apply, subject to its terms, after employment has terminated for any reason.
12. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior written consent of the Company, use for the Executives own benefit or the benefit of any other person or entity other than the Company and its Affiliates or disclose to any person, other than an employee of the Company or other person to whom disclosure is necessary to the performance by the Executive of his duties in the employ of the Company, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company or its Affiliates. Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by Executive during his employment, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application and this Section 12 shall apply in accordance with its terms after employment has terminated for any reason. The Executive acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee as evidenced by the signature of the Companys General Counsel.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied.
14. GUARANTY AND AFFILIATE SERVICES.
(a) LIABILITY. Each of XL Insurance Ltd and XL Re Ltd (together, the Guarantors) hereby agrees to be jointly and severally liable together with the Company, for the performance of all obligations and duties, and the payment of all amounts, due to the Executive under this Agreement.
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(b) RESPONSIBILITY. All of the other terms and provisions of this Agreement relating to the Executives employment by the Company shall likewise apply mutatis mutandis to the Executives employment by any of its Affiliates, it being understood that if the Executives employment with the Company is terminated, his employment with its Affiliates shall also be terminated and the Executive shall be required to resign immediately from all directorships and other positions held by the Executive in the Company and its Affiliates or in any other entities in respect of which the Executive was acting as a representative or designee of the Company or its Affiliates in connection with his employment.
15. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto, including, without limitation, the Employment Agreement between the Company and the Executive dated as of August 1, 2006.
16. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law.
17. INDEMNIFICATION.
The Executive shall be provided indemnification by the Company to the maximum extent permitted by applicable law and its charter documents against expenses incurred and damages paid or payable by the Executive with respect to claims based on actions or failures to act by the Executive in his capacity as an officer, director or employee of the Company or its Affiliates or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company or an Affiliate. In addition, he shall be covered by a directors and officers liability policy with coverage for all directors and officers of the Company in an amount equal to at least US $75,000,000. Such directors and officers liability insurance shall be maintained in effect for a period of six years following termination of the Executives employment for any reason other than pursuant to Section 8(c) or Section 8(e) hereof.
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18. SETTLEMENT OF DISPUTES.
(a) Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executives employment with the Company or its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be resolved by binding arbitration held in New York City in accordance with the rules of the American Arbitration Association.
(b) Executive acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if Executive breaches his obligations under Section 11 or 12. Accordingly, Executive agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or prospective breach by Executive of his obligations under Section 11 or 12 in any Federal or state court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom, or, at the Companys or any Affiliates election, in any other jurisdiction in which Executive maintains his residence or his principal place of business. Executive hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and Executive agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of Executive known to the Company or its Affiliates, or in any other manner authorized by law. Executive further agrees that, in addition to any other remedies available to the Company or its Affiliates by operation of law or otherwise, because of any breach by Executive of his obligations under Section 11 or 12 he will forfeit any and all bonus and rights to any payments to which he might otherwise then be entitled by virtue hereof and such payments may be suspended so long as any good faith dispute with respect thereto is continuing; provided , however , that payments, benefits and other rights and privileges of the Executive under this Agreement following termination of the Executives employment during a Post-Change Period shall not be forfeited, suspended, offset, diminished or otherwise altered in any way on account of any breach or prospective breach of Section 11, Section 12 or any other provision of this Agreement alleged by the Company.
(c) Notwithstanding any other provision of this Agreement, the Executive may elect to resolve any dispute involving a breach or alleged breach of this Agreement following termination of the Executives employment during a Post-Change Period in any Federal or State court sitting in the City and State of New York or court sitting in Bermuda or the United Kingdom. The Company and the Guarantors hereby submit to the non-exclusive jurisdiction of all those courts for the purposes of any such actions or proceedings instituted by the Executive, and the Company and the Guarantors agree that process in any or all of such actions or proceedings may be served by registered mail or delivery, addressed to the Company as set forth in Section 20, or in any other manner authorized by law. The Company and the Guarantors shall pay all costs associated with any court proceeding under this Section 18(c) without regard to the outcome of such proceeding, including all legal fees and expenses of the Executive, who shall be reimbursed for all such costs within ten (10) days following written demand therefor by the Executive (which written demand shall be made no later than six (6) months following the end of the calendar year in which such costs were incurred).
(d) Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses: provided ,
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however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in the proceeding. Following the final determination of the dispute in which the Executive has substantially prevailed, the Company shall reimburse all such reasonable costs within ten (10) days following written demand therefor (supported by documentation of such costs) by the Executive, and the Executive shall make such written demand within sixty (60) days following the final determination of the dispute; provided, however , that such payment shall be made no later than on or prior to the end of the calendar year following the calendar year in which the cost is incurred. Notwithstanding the foregoing, in the event a final determination of the dispute has not been made by December 20 of the year following the calendar year in which the cost is incurred, the Company shall, within ten (10) days after such December 20, reimburse such reasonable costs (supported by documentation of such costs) incurred in the prior taxable year; provided, however , that the Executive shall return such amounts to the Company within ten (10) business days following the final determination if the Executive did not substantially prevail in the dispute.
(e) The amount of any expenses eligible for payment under this Section 18 during a calendar year will not affect the amount of any expenses eligible for payment under this Section 18 in any other taxable year.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and the Guarantors. No waiver by any Party of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Except as set forth in Section 8(d)(iv) or Exhibit B, any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and the Guarantors, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of:
If to the Company:
XL
Capital Ltd
One
Bermudiana Road
Hamilton
HM11, Bermuda
Attn:
General Counsel
If to the Executive:
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To
the last address delivered to
the
Company by the Executive in
the
manner set forth herein.
21. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.
23. REFERENCE.
In the event of the Executives death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws.
25. SECTION 409A.
(a) It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible. No action or failure to act, pursuant to this Section 25 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Executive from the obligation to pay any taxes pursuant to Section 409A of the Code.
(b) Notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-l(i)), then with regard to any payment that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of his separation from service, or (ii) the date of his death (the Delay Period). Upon the expiration of the Delay Period, all payments delayed pursuant to this Section 25 (whether they would have otherwise been payable in a
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single sum or in installments in the absence of such delay) shall be paid to the Executive in a lump sum, and any remaining payments due under this Agreement shall be paid in accordance with the normal payment dates specified for them herein. In no case will compliance with this Section by the Company constitute a breach of the Companys or the Guarantors obligations under this Agreement. Notwithstanding any provision of this Agreement to the contrary, for purposes of Sections 8(b) and 8(d) above, the Executive will be deemed to have terminated his employment on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) with the Company.
26. HEADINGS.
The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
27. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
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XL CAPITAL LTD |
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By: |
/s/ Kirstin R. Gould |
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JAMES H. VEGHTE |
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By: |
/s/ James H. Veghte |
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GUARANTORS: |
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XL INSURANCE LTD |
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By: |
/s/ Kirstin R. Gould |
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XL RE LTD |
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By: |
/s/ Kirstin R. Gould |
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EXHIBIT A
CHANGE IN CONTROL
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A Change in Control shall be deemed to have occurred: |
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(i) any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative) (a Person) or any group, as defined in Sections 13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than a group of which the Executive is a member or which has been organized by the Executive), becomes the beneficial owner, directly or indirectly, of securities of the Company representing, or acquires the right to control or direct, or to acquire through the conversion of securities or the exercise of warrants or other rights to acquire securities, 30% or more of either (I) the outstanding Ordinary Shares of the Company, (II) the outstanding securities of the Company having a right to vote in the election of directors, or (III) the combined voting power of the outstanding securities of the Company having a right to vote in the election of directors; or |
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(ii) if there shall be elected or appointed to the Board of Directors of the Company (the Board) any director or directors whose appointment or election by the Board or nomination for election by the Companys shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date of execution of this Agreement or whose election or appointment or nomination for election was previously so approved; or |
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(iii) upon consummation of a reorganization, scheme of arrangement, merger, consolidation, combination, amalgamation, corporate restructuring, liquidation, winding up, exchange of securities, or similar transaction (each, an Event), in each case, in respect of which the beneficial owners of the outstanding Company Ordinary Shares immediately prior to such Event do not, following such Event, beneficially own, directly or indirectly, more than 60% of each of the outstanding equity share capital, and the combined voting power of the then outstanding voting securities entitled to vote in the election of the directors, of the Company and any resulting entity, in substantially the same proportions as their ownership, immediately prior to such Event, of the Ordinary Shares and voting power of the Company; or |
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(iv) if there occurs an Event involving the Company as a result of which 25% of more of the members of the Board of the Company are not persons who were members of the Board immediately prior to the earlier of (x) the Event, (y) execution of an agreement, the consummation of which would result in the Event, or (z) announcement by the Company of an intention to effect the Event; or |
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(v) if the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change in Control has occurred. |
EXHIBIT B
GOOD REASON
For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of the Executive:
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(i) (A) The assignment to Executive of duties inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); or (B) any elimination, diminution or reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; and for purposes for this clause (i), the determination of whether there has been a reduction of duties or responsibilities or an assignment of duties inconsistent with the Executives position shall take into account the Executives duties, responsibilities and position with the ultimate parent of the parent/subsidiary group as a whole which includes the Company; |
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(ii) The (A) reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) payment of an annual bonus in an amount less than the lesser of (x) the most recent annual bonus paid prior to the Change in Control or (y) the greater of (I) the most recent target bonus, if any, established prior to the Change in Control or (II) the annual average bonus paid for the preceding three complete years prior to the Change in Control (or such lesser number of complete years as the Executive shall have been employed by the Company); |
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(iii) The failure by the Company or the Guarantors to obtain the specific written assumption of this Agreement by any successor or assign of the Company or the Guarantors or any person acquiring substantially all of the Companys or the Guarantors assets; |
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(iv) Any breach by the Company or the Guarantors of any provision of this Agreement or any agreements entered into pursuant thereto that remains uncured for 20 calendar days following written notice of same by the Executive; |
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(v) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring the Executive to be based at any office or location that is greater than 35 miles from the office or location at which the Executive was principally located immediately prior to the Change in Control; |
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(vi) During the Post-Change Period, (A) the failure to continue in effect any compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with at least the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis both in terms of the amount of benefits provided |
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and the level of his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits and coverage at least as favorable in the aggregate as those enjoyed by him under the Companys pension, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which he was participating at the time of the Change in Control; or |
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(vii) The failure by the Company to pay within 7 calendar days of the due date any amounts due under any benefit or compensation plan, including any deferred compensation plan. |
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Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission. |
-2-
Exhibit 10.8
AMENDMENT TO
AMENDED EMPLOYMENT AGREEMENT
AMENDMENT TO AMENDED EMPLOYMENT AGREEMENT (Amendment) dated as of December___, 2008 between XL Capital Ltd, a Cayman Islands corporation (the Company), X.L. Global Services, Inc. (XLGS), and Brian Nocco (the Executive).
WHEREAS, the Company, XLGS and the Executive are parties to an Amended Employment Agreement dated as of _________________ (the Agreement);
WHEREAS, the Company, XLGS and the Executive wish to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company, XLGS, the Guarantors (as defined in the Agreement) and the Executive hereby agree as follows:
1. The last paragraph of Section 8(d)(iii) is amended by deleting 10 days thereafter and replacing it with on the date of the 409A Change in Control.
2. The first sentence of Section 18(d) is amended to read in its entirety as follows:
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Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses; provided , however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in a proceeding following his separation from service (as defined below) with the Company. |
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3. Section 25(b) is amended to read in its entirety as follows: |
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(b) Without prejudice to the characterization of any other amounts payable under this Agreement, the parties hereto specifically intend that any amounts payable under Section 8(d)(ii)(A)-(C), Section 8(d)(iii)(A)-(D) and Section 11 will not be considered deferred compensation for purposes of Section 409A due to Treas. Reg. Section 1.409A-1(b)(4) or another applicable exception. However, notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-1(i)), then with regard to any payment or benefit that is considered deferred compensation under Section 409A payable on account of a separation from service that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account any applicable exceptions to such requirement), such payment or benefit shall be made or provided on the date that is the earlier of (i) the expiration of the six (6)-month |
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period measured from the date of the Executives separation from service, or (ii) the date of the Executives death (the Delay Period). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 25(b) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding any provision of this Agreement to the contrary, for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment, references to the Executives termination of employment (and corollary terms) with the Company shall be construed to refer to the Executives separation from service (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company. With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g ., payment shall be made within thirty (30) days after termination of employment), the actual date of payment within the specified period shall be within the sole discretion of the Company. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A. |
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4. The definition of Good Reason in Exhibit B is amended to read in its entirety as follows: |
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For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of Executive: |
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(i) (A) The assignment to Executive of duties materially inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); (B) any material diminution or material reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; (C) a material diminution in the authorities, duties or responsibilities of the supervisor to whom Ex- |
-2-
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ecutive is required to report; or (D) a material diminution in the budget over which Executive retains authority; |
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(ii) The (A) material reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) material diminution in bonus opportunity that results in a material reduction in Executives compensation; |
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(iii) Any material breach by the Company or the Guarantors of this Agreement or any material agreement entered into pursuant thereto; |
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(iv) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring Executive to be based at any office or location that is greater than 35 miles from the office or location at which Executive was principally located immediately prior to the Change in Control; |
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(v) During the Post-Change Period, the failure to continue in effect any material compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis as existed at the time of the Change in Control, which in any such case results in a material reduction in Executives compensation. |
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Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and the Company shall have thirty (30) days from such notice to remedy the condition, in which case Good Reason shall no longer exist with regard to such condition. Any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission. Any termination hereunder shall occur within one hundred twenty (120) days after the Good Reason event occurs. |
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5. Except as set forth herein, the Agreement shall continue in full force and effect in accordance with its terms. |
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6. All questions concerning the construction, validity and interpretation of this Amendment and the Agreement shall be construed and governed in accordance with the laws of the State of New York, without reference to the principles of conflict of laws thereof. |
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7. This Amendment may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement. |
-3-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.
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XL CAPITAL LTD |
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By: |
/s/ Kirstin R. Gould |
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XL GLOBAL SERVICES, INC. |
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By: |
/s/ ILLEGIBLE |
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GUARANTORS: |
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XL INSURANCE (BERMUDA) LTD |
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(formerly XL INSURANCE LTD) |
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By: |
/s/ Kirstin R. Gould |
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XL RE LTD |
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By: |
/s/ Kirstin R. Gould |
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READ, ACCEPTED & AGREED |
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/s/ Brian Nocco |
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Brian Nocco |
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-4-
Exhibit 10.9
AMENDMENT
TO
EMPLOYMENT AGREEMENT
AMENDMENT TO EMPLOYMENT AGREEMENT (Amendment) dated as of December __, 2008 between XL Capital Ltd, a Cayman Islands corporation (the Company), and Michael S. McGavick (the Executive).
WHEREAS, the Company and the Executive are parties to an Employment Agreement dated as of March 14, 2008 (the Agreement);
WHEREAS, the Company and the Executive wish to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company, the Guarantors (as defined in the Agreement) and the Executive hereby agree as follows:
1. The last paragraph of Section 8(d)(iii) is amended by deleting 10 days thereafter and replacing it with on the date of the 409A Change in Control.
2. The first sentence of Section 18(d) is amended to read in its entirety as follows:
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Each Party shall bear its own costs incurred in connection with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses; provided , however , that the Company shall bear all such costs of the Executive (to the extent such costs are reasonable) if the Executive substantially prevails in a proceeding following his separation from service (as defined below) with the Company. |
3. Section 25(b) is amended to read in its entirety as follows:
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(b) Without prejudice to the characterization of any other amounts payable under this Agreement, the parties hereto specifically intend that any amounts payable under Section 8(d)(ii)(A)-(C), Section 8(d)(iii)(A)-(D) and Section 11 will not be considered deferred compensation for purposes of Section 409A due to Treas. Reg. Section 1.409A-1(b)(4) or another applicable exception. However, notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his separation from service (within the meaning of Treas. Reg. Section 1.409A-1 (h)) with the Company to be a specified employee (within the meaning of Treas. Reg. Section 1.409A-l(i)), then with regard to any payment or benefit that is considered deferred compensation under Section 409A payable on account of a separation from service that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account any applicable exceptions to such requirement), such payment or benefit shall be made or provided on the date that is the earlier of (i) the expiration of the six (6)-month |
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period measured from the date of the Executives separation from service, or (ii) the date of the Executives death (the Delay Period). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 25(b) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding any provision of this Agreement to the contrary, for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment, references to the Executives termination of employment (and corollary terms) with the Company shall be construed to refer to the Executives separation from service (within the meaning of Treas. Reg. Section 1.409A-l(h)) with the Company. With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g ., payment shall be made within thirty (30) days after termination of employment), the actual date of payment within the specified period shall be within the sole discretion of the Company. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A. |
4. The definition of Good Reason in Exhibit B is amended to read in its entirety as follows:
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For purposes of this Agreement, Good Reason shall mean any of the following, unless done with the prior express written consent of Executive: |
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(i) (A) The assignment to Executive of duties materially inconsistent with Executives position (including duties, responsibilities, status, titles or offices as set forth in Section 3 hereof); (B) any material diminution or material reduction of Executives duties or responsibilities except in connection with the termination of Executives employment for Cause, disability or as a result of Executives death or by Executive other than for Good Reason; (C) a material diminution in the authorities, duties or responsibilities of the supervisor to whom Ex- |
-2-
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ecutive is required to report; or (D) a material diminution in the budget over which Executive retains authority; |
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(ii) The (A) material reduction in Executives Base Salary from the level in effect immediately prior to the Change in Control, or (B) material diminution in bonus opportunity that results in a material reduction in Executives compensation; |
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(iii) Any material breach by the Company or the Guarantors of this Agreement or any material agreement entered into pursuant thereto; |
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(iv) Notwithstanding the provisions of Section 3(b) of this Agreement, requiring Executive to be based at any office or location that is greater than 35 miles from the office or location at which Executive was principally located immediately prior to the Change in Control; |
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(v) During the Post-Change Period, the failure to continue in effect any material compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executives participation therein on substantially the same basis as existed at the time of the Change in Control, which in any such case results in a material reduction in Executives compensation. |
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Notwithstanding any provision in this Agreement to the contrary, the Executive must give written notice of his intention to terminate his employment for Good Reason within sixty (60) days after the act or omission which constitutes Good Reason, and the Company shall have thirty (30) days from such notice to remedy the condition, in which case Good Reason shall no longer exist with regard to such condition. Any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such act or omission. Any termination hereunder shall occur within one hundred twenty (120) days after the Good Reason event occurs. |
5. Except as set forth herein, the Agreement shall continue in full force and effect in accordance with its terms.
6. All questions concerning the construction, validity and interpretation of this Amendment and the Agreement shall be construed and governed in accordance with the laws of the State of New York, without reference to the principles of conflict of laws thereof.
7. This Amendment may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.
-3-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.
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XL CAPITAL LTD |
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By: |
/s/ Kirstin R. Gould |
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GUARANTORS: |
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XL INSURANCE (BERMUDA) LTD
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By: |
/s/ Kirstin R. Gould |
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XL RE LTD |
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By: |
/s/ Kirstin R. Gould |
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READ, ACCEPTED & AGREED |
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/s/ Michael S. McGavick |
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Michael S. McGavick |
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-4-
Exhibit 10.10
MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT
among
XL Capital Ltd; XL Insurance (Bermuda) Ltd;
XL Reinsurance America Inc.; X.L. Global
Services, Inc.; XL Services (Bermuda) Ltd and X.L. America, Inc.;
Security Capital Assurance Ltd; XL Financial
Assurance Ltd.; XL Capital Assurance Inc.; XL
Financial Administrative Services Inc.; SCA Bermuda Administrative Ltd.; XL
Capital
Assurance (U.K.) Limited; and Certain Portfolio Trusts that are Affiliates of
XL Capital
Assurance Inc. and may become party to this Agreement from time to time;
and
Counterparties to Credit Default Swap
Agreements with XL Capital Assurance Inc. and
Affiliates of XL Capital Assurance Inc. that may become party to this Agreement
from time to
time.
Dated as of July 28, 2008
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TABLE OF CONTENTS |
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Organization, Authority and Qualification of the SCA Parties |
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Disclosure Schedules; Supplementation and Amendment of Schedules |
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-4-
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EXHIBITS
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Exhibit No. |
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Description |
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1.01(a) |
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2001 Facultative Quota Share Commutation Agreement |
1.01(b) |
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Adverse Development Cover Commutation Agreement |
1.01(c) |
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Joinder Agreement |
1.01(d) |
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Excess of Loss Commutation Agreement |
1.01(e) |
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Facultative Master Certificate Commutation Agreement |
1.01(f) |
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Quota Share Treaty Commutation Agreement |
1.01(g) |
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Subscription Agreement |
1.01(h) |
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XL Stock Resale and Registration Rights Agreement |
1.01(i) |
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SCA Shareholder Entity Agreement |
1.01(j) |
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SCA Registration Rights Agreement |
1.01(k) |
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Transition Agreement Amendment |
2.06 |
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Securities Law Representations of the SCA Shareholder Entity |
6.18 |
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Form of SCA Shareholder Entity Trust Agreement |
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SCHEDULES |
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Schedule |
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Description |
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1.01(a) |
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MLI ABS CDO Credit Default Swap Agreements |
1.01(b) |
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Other Terminated Agreements |
1.01(c) |
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Knowledge of SCA |
1.01(d) |
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Terms of the Escrow Agreement |
2.01 |
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Commuted Reinsurance Agreements |
2.04 |
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Other Reinsurance to be Commuted or Amended |
2.05 |
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Schedule 2.05 Agreements |
2.06(a) |
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SCA Parties Receiving a Portion of the Cash Consideration Amount |
2.06(b) |
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SCA Parties Receiving a Portion of the Stock Consideration |
9.02 |
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Addresses for the CDS Counterparties |
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SCA PARTIES DISCLOSURE SCHEDULE |
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Section |
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Description |
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Section 3.02 |
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Conflicts |
Section 3.03 |
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Governmental Consents and Approvals |
Section 3.05 |
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Compliance with Laws |
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XL PARTIES DISCLOSURE SCHEDULE |
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Section |
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Description |
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Section 4.02 |
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Conflicts |
Section 4.03 |
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Governmental Consents and Approvals |
Section 4.04(a) |
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Capitalization |
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PREAMBLE
MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT, dated as of July 28, 2008, is entered into by and among:
(a) XL CAPITAL LTD, an exempted limited company incorporated under the Laws of Cayman Islands ( XL ), XL INSURANCE (BERMUDA) LTD (formerly known as X.L. Insurance Ltd), a Bermuda exempted company ( XLI ), XL REINSURANCE AMERICA INC., a New York insurance corporation ( XLRA ), X.L. GLOBAL SERVICES, INC., a service company incorporated under the Laws of Delaware ( XLGS ), XL SERVICES (BERMUDA) LTD, a service company incorporated under the Laws of Bermuda ( XLBS ) and X.L. AMERICA, INC., a company incorporated under the Laws of Delaware ( XLA );
(b) SECURITY CAPITAL ASSURANCE LTD, a Bermuda exempted company ( SCA ), XL FINANCIAL ASSURANCE LTD., a Bermuda exempted company ( XLFA ), XL CAPITAL ASSURANCE INC., a New York insurance company ( XLCA ), XL FINANCIAL ADMINISTRATIVE SERVICES INC., a company incorporated under the Laws of Delaware ( XLFAS ), SCA BERMUDA ADMINISTRATIVE LTD., a company incorporated under the Laws of Bermuda ( SCAB ), XL CAPITAL ASSURANCE (U.K.) LIMITED, an insurance company regulated by the Financial Services Authority and incorporated under the Laws of England and Wales ( XLCAUK ), and those portfolio trusts that are Affiliates of XLCA and become a Party to this Agreement from time to time pursuant to the execution of a joinder agreement in the form attached hereto as Exhibit 1.01(c) ; and
(c) Such counterparties to credit default swap agreements with XLCA or Affiliates of XLCA that may become a Party to this Agreement from time to time pursuant to the execution of a joinder agreement in the form attached hereto as Exhibit 1.01(c) .
RECITALS
WHEREAS, XLI is the record and beneficial owner of approximately forty-six percent (46%) of SCAs issued and outstanding common shares (the XL Owned SCA Common Shares );
WHEREAS, certain XL Parties and SCA Parties have entered into the Excess of Loss Agreement, the Adverse Development Cover, the Facultative Master Certificate and the 2001 Facultative Quota Share Treaty (all as defined in Article I );
WHEREAS, XLCA and XLFA previously entered into a Facultative Quota Share Reinsurance Treaty, dated as of October 6, 1999, as amended and restated by an Amended and Restated Facultative Quota Share Reinsurance Treaty, dated as of June 22, 2001, as further amended and restated by a Second Amended and Restated Facultative Quota Share Reinsurance Treaty, dated as of May 1, 2004, and as further amended and restated by a Third Amended and Restated Facultative Quota Share Reinsurance Treaty, dated as of June 29, 2006 and effective July 1, 2006 (the Quota Share Treaty );
WHEREAS, XLI guarantees the obligations of XLFA to XLCA under the Quota Share Treaty pursuant to the Reinsurance Agreement Guarantee, dated as of October 6, 1999, as amended as of June 22, 2001, as further amended as of May 1, 2004, and as further amended as of August 4, 2006 (the Guarantee );
WHEREAS, XLFA and XLCA wish to (i) commute the Quota Share Treaty and all individual risk cessions thereunder and (ii) fully and finally extinguish all rights and obligations thereunder and thereby render the Guarantee null and void;
WHEREAS, the XL Parties and the SCA Parties wish to (i) commute the Excess of Loss Agreement, the Adverse Development Cover, the Facultative Master Certificate and all individual risk cessions thereunder, and the 2001 Facultative Quota Share Treaty and all individual risk cessions thereunder and (ii) fully and finally extinguish all the Parties rights and obligations under all such agreements;
WHEREAS, the XL Parties and the SCA Parties have previously entered into those agreements listed on Schedule 1.01(b) and now wish to (i) terminate such agreements listed in Part I of Schedule 1.01(b) and (ii) fully and finally extinguish all the Parties rights and obligations under such agreements, except as may be explicitly set forth in this Agreement; and
WHEREAS, certain CDS Counterparties now and, on or prior to the Closing Date, additional CDS Counterparties may, wish to enter into this Agreement and agree to consent to the Transactions on the terms and conditions set forth in this Agreement relating to the restructuring of SCA and its Affiliates.
NOW, THEREFORE, in consideration of the payments, covenants, conditions, promises and releases contained herein, and for other fair and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
Section 1.01 Certain Defined Terms . For purposes of this Agreement:
1505 Application means an application filed under Section 1505 of the New York Insurance Laws.
2001 Facultative Quota Share Commutation Agreement means the 2001 Facultative Quota Share Commutation Agreement to be executed by XLFA and XLI and delivered at the Closing, in the form of Exhibit 1.01(a) .
2001 Facultative Quota Share Treaty means the Facultative Quota Share Reinsurance Agreement, dated as of August 17, 2001, as amended by Amendment No. 1 to the Facultative Quota Share Reinsurance Agreement, dated as of August 4, 2006, between XLFA and XLI.
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ABS CDO CDSs means the asset backed securities collateralized debt obligation credit default swaps between XLCA or an Affiliate of XLCA and a CDS Counterparty that are listed on an official schedule held by the SCA Parties and the CDS Financial Advisor.
Action means any judicial, administrative or arbitral action, suit, or proceeding by or before any Governmental Authority.
Adverse Development Cover means the Adverse Development Reinsurance Agreement, dated as of August 4, 2006, between XLCA and XLRA, and the Indemnification Agreement, dated as of August 4, 2006, between XLFA and XLI.
Adverse Development Cover Commutation Agreement means the Adverse Development Cover Commutation Agreement to be executed by XLCA, XLRA, XLFA and XLI delivered at the Closing, in the form of Exhibit 1.01(b) .
Affiliate means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person, provided , that none of the SCA Parties shall be deemed to be an Affiliate of any XL Party.
Agreement or this Agreement means this Master Commutation, Release and Restructuring Agreement among the Parties (including the Exhibits and Schedules hereto, the SCA Parties Disclosure Schedule and the XL Parties Disclosure Schedule) and all amendments or waivers hereto made in accordance with the provisions of Sections 9.07 or 9.08 and joinder agreements hereto made in accordance with the provisions of Sections 9.04 .
Ancillary Agreements means the 2001 Facultative Quota Share Commutation Agreement, the Excess of Loss Commutation Agreement, the Adverse Development Cover Commutation Agreement, the Facultative Master Certificate Commutation Agreement, the Quota Share Treaty Commutation Agreement, the Subscription Agreement, the XL Stock Resale and Registration Rights Agreement and the SCA Shareholder Entity Agreement.
Banco de Brasil Policy means the Financial Guaranty Insurance Policy No. CA00127A, dated December 27, 2001, issued by XLCA in favor of MLI, together with any endorsements thereto, relating to payments that are required to be paid by FF Trust 2 to MLI in accordance with the original terms of a Single Transaction ISDA Master Agreement and Schedule thereto, dated as of December 27, 2001 between FF Trust 2 and MLI.
BlackRock means BlackRock Financial Management, Inc.
BMA means the Bermuda Monetary Authority.
Business Day means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in Bermuda or New York.
CDS Counterparties means those counterparties to credit default swap agreements with XLCA or Affiliates of XLCA that may become a Party to this Agreement from time to time on or prior to Closing by way of executing a joinder agreement pursuant to
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Section 9.04 in the form of Exhibit 1.01(c) , either collectively or individually, as the context requires.
CDS Financial Advisor means FTI Consulting, Inc. or another advisor designated by the Required Consenting Counterparties.
Closing Date means the date of the Closing.
Control , Controlled , or Controlling , with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly, or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, as personal representative or executor, by contract, by credit arrangement or otherwise.
Collipulli Temuco Policy means the Financial Guaranty Insurance Policy No. 10030-X, together with any endorsements thereto, relating to up to UF 1,150,000 aggregate principal amount of outstanding borrowings under the Contrato de Apertura de Línea de Crédito, dated as of July 27, 2005, between Banco de Crédito e Inversiones and Ruta de la Araucanía Sociedad Concesionaria S.A. and issued pursuant to the Insurance and Reimbursement Agreement, dated as of November 29, 2005, between XLI and Banco de Crédito e Inversiones and Ruta de la Araucanía Sociedad Concesionaria S.A.
Credit Agreement means that certain Credit Agreement, dated as of August 1, 2006, among SCA, XLCA, and XLFA, the various lenders from time to time party thereto and Citibank, N.A., as administrative agent (as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof).
Declaration of Trust means a trust agreement in the form attached hereto as Exhibit 6.18 (with such reasonable changes thereto as the trustee of the SCA Shareholder Entity or its counsel may require and that are approved by counsel to the CDS Counterparties and counsel to the SCA Parties).
EIB means European Investment Bank, a non-profit bank owned by the Member States of the European Union and established under the Treaty of Rome.
EIB Guarantees means (i) the Financial Guaranty 10017-X, dated July 5, 2001, issued by XLI in favor of EIB (Algarve), (ii) the Financial Guaranty Number 10028-X, dated May 28, 2004, issued by XLI in favor of EIB (Autovia del Camino, S.A.), (iii) the Financial Guaranty Number 10029-X, dated October 28, 2004, issued by XLI in favor of EIB (Autovia del los Vinedos), (iv) the Financial Guaranty Number 10023-X, dated June 8, 2005, issued by XLI in favor of EIB (Transform School (North Lanarkshire) Funding plc), and (v) the Financial Guaranty Number 10019-X, dated May 4, 2005, issued by XLI in favor of EIB (Healthcare Support (Newcastle) Finance plc).
EIB Policies means (i) the Financial Guaranty Number CA00041A, dated July 5, 2001, issued by XLCA in favor of EIB, (ii) the Financial Guaranty Number CA00995A, dated May 28, 2004, issued by XLCA in favor of EIB and the Financial Guaranty Number UK0003A, dated May 28, 2004 issued by XLCAUK in favor of EIB, (iii) the Financial Guaranty Number
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CA01220A, dated October 28, 2004, issued by XLCA in favor of EIB and the Financial Guaranty Number UK0004A, dated October 28, 2004, issued by XLCAUK in favor of EIB, (iv) the Financial Guaranty Number CA02062A, dated June 8, 2005, issued by XLCA in favor of EIB and the Financial Guaranty Number UK0008A, dated June 8, 2005, issued by XLCAUK in favor of EIB and (v) the Financial Guaranty Number CA01937A, dated May 4, 2005 issued by XLCA in favor of EIB and the Financial Guaranty Number UK0007B, dated May 4, 2005, issued by XLCAUK in favor of EIB.
EIB Resolution Event means (i) commutation of all of the EIB Policies and full and final extinguishment of all Persons rights and obligations thereunder, (ii) a general release in form reasonably acceptable to the XL Parties by EIB of the XL Parties obligations with respect to all of the EIB Guarantees or (iii) the provision by a creditworthy entity reasonably acceptable to the XL Parties of a guaranty guaranteeing 100% of the XL Parties obligations under all of the EIB Guarantees.
Escrow Agent means HSBC Private Bank, Bermuda Trust Company Limited.
Escrow Agreement means the agreement pursuant to which the Escrow Agent will hold the XL Owned SCA Common Shares pursuant to terms substantially the same as those set forth in Schedule 1.01(d) , if the XL Owned SCA Common Shares are transferred to the Escrow Agent pursuant to Section 2.10 .
Excess of Loss Agreement means the Excess of Loss Reinsurance Agreement by and between XLFA and XLI, dated as of October 3, 2001.
Excess of Loss Commutation Agreement means the Excess of Loss Commutation Agreement to be executed by XLFA and XLI and delivered at the Closing, in the form of Exhibit 1.01(d) .
Facultative Master Certificate means the Facultative Master Certificate effective as of November 1, 2002, as amended and restated pursuant to the First Amended and Restated Facultative Master Certificate, effective as of August 4, 2006, and as further amended and restated pursuant to the Second Amended and Restated Facultative Master Certificate by and between XLRA and XLCA, dated as of March 1, 2007.
Facultative Master Certificate Commutation Agreement means the Facultative Master Certificate Commutation Agreement to be executed by XLCA and XLRA and delivered at the Closing, in the form attached hereto as Exhibit 1.01(e) .
Financial Statements means the GAAP Financial Statements, the XLCA Statutory Financial Statements and the XLFA Statutory Financial Statements.
Financial Security means Financial Security Assurance Inc.
Financial Security Commutations means the Financial Security Master Facultative Commutation and the commutations of the Other Financial Security Agreements.
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Financial Security Agreements means the Financial Security Master Facultative Agreement and the Other Financial Security Agreements.
Financial Security Guarantee means the Reinsurance Agreement Guarantee, dated November 3, 1998 and amended on July 5, 2006, issued by X.L. Insurance Company, Ltd (later renamed XLI), guaranteeing XLFAs obligations to Financial Security under the Financial Security Master Facultative Agreement.
Financial Security Master Facultative Agreement means the Amended and Restated Master Facultative Reinsurance Agreement, dated as of November 3, 1998, between Financial Security and XLFA; as amended by the First Amendment to the Master Facultative Reinsurance Agreement, dated as of November 3, 1998, between Financial Security and XLFA; as amended by the First Amendment to the Amended and Restated Master Facultative Reinsurance Agreement, dated as of July 6, 2006, between Financial Security and XLFA.
Financial Security Master Facultative Commutation means the commutation of the Financial Security Master Facultative Agreement pursuant to a commutation and release agreement.
GAAP means United States generally accepted accounting principles in effect from time to time.
GAAP Financial Statements means (i) the audited balance sheet of each of SCA, XLFA and XLCA for the fiscal year ended December 31, 2007 and the related audited statements of income, retained earnings, stockholders equity and changes in financial position, together with all related notes and schedules thereto and accompanied by the reports thereon of the SCA Parties accountants, and (ii) the unaudited balance sheet of each of SCA, XLFA and XLCA for the three month period ended March 31, 2008 and the related unaudited statements of income, retained earnings, stockholders equity and changes in financial position, together with all related notes and schedules thereto.
Governmental Authority means any federal, national, supranational, state, provincial, local, or similar government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.
Governmental Order means any order, writ, judgment, injunction, decree, stipulation, determination or award issued or entered by or with any Governmental Authority.
Jeffco Policies means (i) the Municipal Bond Insurance Policy Number CA00370A, together with any endorsements thereto, relating to $839,500,000 Jefferson County, Alabama, Sewer Revenue Refunding Warrants Series 2002-C, consisting of $74,450,000 Series 2002-C-1-A Warrants, $74,450,000 Series 2002-C-1-B Warrants, $74,450,000 Series 2002-C-1-C Warrants, $75,450,000 Series 2002-C-1-D Warrants, $73,700,000 Series 2002-C-2 Warrants, $98,300,000 Series 2002-C-3 Warrants, $73,700,000 Series 2002-C-4 Warrants, $98,300,000 Series 2002-C-5 Warrants, $147,600,000 Series 2002-C-6 Warrants and $49,100,000 Series 2002-C-7 Warrants; (ii) the Municipal Bond Insurance Policy Number CA00522A, together with any endorsements thereto, relating to $300,000,000 Jefferson County, Alabama Sewer Revenue Refunding Warrants, Series 2003-B, consisting of $55,000,000 Series 2003-B-2 Warrants,
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$25,000,000 Series 2003B-3 Warrants, $25,000,000 Series 2003B-4 Warrants, $75,000,000 Series 2003B-5 Warrants, $15,000,000 Series 2003B-6 and $105,000,000 Series 2003B-7 Warrants; and (iii) the Debt Service Reserve Insurance Policy Number CA01568A, together with any endorsements thereto, relating to up to $164,863,746.40 Parity Securities as defined in the Trust Indenture, dated as of February 1, 1997, between Jefferson County, Alabama and The Bank of New York (as successor to AmSouth Bank of Alabama), as trustee, as such Indenture has been supplemented and amended.
Knowledge of SCA means the actual knowledge after due inquiry of those Persons identified on Schedule 1.01(c) .
Law means any federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule (including any rules regarding discovery), code, order, requirement or rule of law (including common law).
Lien means any lien, pledge, mortgage, deed of trust, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, proxy, voting trust or agreement, transfer restriction under any shareholder or similar agreement, encumbrance or any other restriction or limitation whatsoever.
Minimum Consenting CDS Counterparty Restructuring Threshold means (i) at least seventy-five percent (75%) in notional amount of the aggregate sum of the notional amounts of (A) the ABS CDO CDSs and (B) the collateralized debt obligation credit default swaps between XLCA or an Affiliate of XLCA and a CDS Counterparty that are listed on an official schedule held by the SCA Parties and the CDS Financial Advisor; (ii) at least sixty-six and two-thirds percent (66 2 / 3 %) in total notional amount of the ABS CDO CDSs; and (iii) at least sixty-six and two-thirds percent (66 2 / 3 %) in aggregate number of the CDS Counterparties.
MLI CDS Agreements means the eight asset backed securities collateralized debt obligation credit default swap agreements listed on Schedule 1.01(a) .
NYID means the New York State Insurance Department.
Other Financial Security Agreements means all agreements between any SCA Party and Financial Security, other than the Financial Security Master Facultative Agreement, as to which the obligations of such SCA Parties are secured by a letter of credit issued by the lenders pursuant to the Credit Agreement for the benefit of Financial Security on September 19, 2006, as heretofore amended, extended and renewed, bearing Citibank, N.A. reference number 61652611.
Other Terminated Agreements means those agreements listed on Schedule 1.01(b) .
Party means any party to this Agreement.
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Person means an individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
Quota Share Treaty Commutation means the commutation of the Quota Share Treaty pursuant to the Quota Share Treaty Commutation Agreement.
Quota Share Treaty Commutation Agreement means the Quota Share Treaty Commutation Agreement to be executed by XLFA and XLCA and delivered at the Closing, in the form of Exhibit 1.01(f) .
Reinsurance Guarantees means (i) the Guarantee, (ii) the Financial Security Guarantee and (iii) the EIB Guarantees.
Required Consenting CDS Counterparties means greater than 50% of the total notional amount of all the credit default swaps between XLCA or an Affiliate of XLCA and the CDS Counterparties.
SCA Parties means SCA, XLFA, XLCA, XLFAS, SCAB, XLCAUK and each of the portfolio trusts that executes a joinder agreement pursuant to Section 9.04 in the form attached hereto as Exhibit 1.01(c) , either collectively or individually, as the context requires.
SCA Registration Rights Agreement means a registration rights agreement for the XL Owned SCA Common Shares in substantially the form attached hereto as Exhibit 1.01(j) .
SCA Share Sale Proceeds means the proceeds, together with any interest that may accrue thereon, of any sale of the XL Owned SCA Common Shares as owned by the SCA Shareholder Entity and any cash dividends or distributions paid with respect to such shares during such time as the XL Owned SCA Common Shares are owned by the SCA Shareholder Entity.
SCA Shareholder Entity means a special purpose trust or other entity formed pursuant to the Declaration of Trust.
SCA Shareholder Entity Agreement means an agreement substantially in the form attached hereto as Exhibit 1.01(i) .
SCA Shareholder Entity Formation Conditions means (i) the selection of a trustee of the SCA Shareholder Entity mutually acceptable to the Required Consenting CDS Counterparties and the SCA Parties; (ii) the establishment of the SCA Shareholder Entity; (iii) the delivery by the SCA Shareholder Entity of a true and correct written copy of customary securities Law representations and agreements set forth on Exhibit 2.06 to the XL Parties (or to the Escrow Agent, with a copy to the XL Parties, if the XL Owned Common Shares have been transferred to the Escrow Agent pursuant to Section 2.10 ); and (iv) any required approval the NYID, the Delaware Insurance Department and the UK FSA of the SCA Shareholder Entitys acquisition of the XL Owned SCA Common Shares will have been obtained.
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SCA Shareholder Entity Formation Conditions Certificate means a certificate certified by the Secretaries of SCA, XLFA and XLCA stating that the SCA Shareholder Entity Formation Conditions have been satisfied.
Securities Act means the Securities Act of 1933, as amended.
Subscription Agreement means the Subscription Agreement to be executed by XLFA and XL and delivered at the Closing, in the form of Exhibit 1.01(g) .
Subsidiary or Subsidiaries means, with respect to a specified Person, any corporation, partnership, limited partnership, limited liability company or other entity as to which the specified Person, directly or indirectly (including through one or more Subsidiaries), owns a majority of the outstanding shares of stock or other ownership interests having voting power under ordinary circumstances to elect directors of such corporation or other Persons performing similar functions for such entity.
Third-Party Reinsurance Agreements means (i) the Financial Security Master Facultative Agreement, and all individual risk cessions thereunder and (ii) the EIB Policies.
Transaction Documents means this Agreement, the Ancillary Agreements and any certificate, Financial Statement, report, list, writing or other document delivered pursuant to this Agreement or the transactions contemplated by this Agreement.
Transactions means all transactions contemplated by this Agreement and the Ancillary Agreements.
Transfer means, with respect to a given security, any transaction whereby a Person (a) offers, pledges, sells or contracts to sell any option or contract to purchase, purchases any option or contract to sell, grants any option, right or warrant to purchase, lends, or otherwise transfers or disposes of, directly or indirectly, such security or any security convertible into, or exercisable or exchangeable for, any or all of such security; or (b) enters into any swap or other arrangement that transfers to another Person, in whole or in part, any of the economic consequences of ownership of any or all of the given security, whether any such transaction described in clause (a) or (b) is to be settled by delivery of any or all of the given security or any other security, in cash or otherwise. Notwithstanding the foregoing, in no event shall any transfer or other transaction solely between or among the SCA Parties constitute a Transfer .
Transition Agreement means the Transition Agreement, dated as of August 4, 2006 and amended on May 3, 2007, among XL, XLI, XLA and SCA.
Transition Agreement Amendment means the Transition Agreement Amendment No. 2 among XL, XLI, XLA and SCA in the form attached hereto as Exhibit 1.01(k) .
Triggered Enforcement Rights means a Partys right to accelerate, liquidate, close out, terminate, assess or demand damages or termination payments under, withhold or set off payments under, alter the payment terms of, demand collateral in respect of, or otherwise exercise remedies or enforcement rights in respect of one or more transactions (including swap
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transactions), agreements, policies, guarantees or treaties to which an SCA Party or an Affiliate thereof is a party, other than in respect of the Credit Agreement; provided , that, solely for purposes of Section 6.10(b) , the definition of Triggered Enforcement Rights includes the right of any counterparty to a credit default swap agreement with XLCA or Affiliates of XLCA to accelerate, liquidate, close out, terminate, assess or demand damages or termination payments under, withhold or set off payments under, alter the payment terms of, demand collateral in respect of, or otherwise exercise remedies or enforcement rights in respect of one or more transactions (including swap transactions), agreements, policies, guarantees or treaties to which an SCA Party or an Affiliate thereof is a party, other than in respect of the Credit Agreement.
UK FSA means the Financial Services Authority in the United Kingdom.
XLCA Statutory Financial Statements means the annual financial statements of XLCA filed with the NYID for the year ended December 31, 2007, the quarterly financial statements of XLCA filed with the NYID for the quarter ended March 31, 2008 and the Statement of Actuarial Opinion of XLCA filed with the NYID for the year ended December 31, 2007.
XLFA Redomestication means the discontinuance of XLFA as a company existing under the Laws of Bermuda and its continuation as a Delaware corporation and the contribution to XLCA by the SCA Parties of all of the common shares and Series A Redeemable Preferred Shares of XLFA.
XLFA Statutory Financial Statements means the annual financial statements of XLFA filed with the BMA for the year ended December 31, 2007, and the quarterly financial statements of XLFA filed with the BMA for the quarter ended March 31, 2008, each prepared in accordance with Bermuda statutory accounting principles applied on a basis consistent with past practices, and the Statement of Actuarial Opinion of XLFA filed with the BMA for the year ended December 31, 2007.
XL Parties means XL, XLI, XLRA, XLGS, XLBS and XLA, either collectively or individually, as the context requires.
XL Public Offering means an offering of XLs Class A Ordinary Shares, par value $0.01 per share, and equity security units, in each case, registered pursuant to the Securities Act.
XL Stock Resale and Registration Rights Agreement means the Resale Registration Rights Agreement to be executed by XLFA and XL and delivered at the Closing, in the form of Exhibit 1.01(h) .
XL/SCA Commutation Agreements means (i) the 2001 Facultative Quota Share Commutation Agreement, (ii) the Excess of Loss Commutation Agreement, (iii) the Adverse Development Cover Commutation Agreement and (iv) the Facultative Master Certificate Commutation Agreement.
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Section 1.02 Definitions . The following terms have the meanings set forth in the Sections set forth below:
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Definition |
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Location |
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Allocated Funds |
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Section 6.12 |
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Cash Consideration Amount |
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Section 2.06 |
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CDS Counterparty Restructuring |
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Section 6.12 |
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Challenging Action |
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Section 6.11(a) |
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Closing |
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Section 2.07 |
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Confidential Information |
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Section 6.01(b) |
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Consideration |
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Section 2.06 |
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Guarantee |
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Recitals |
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Losses |
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Section 9.11(a) |
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MLI |
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Section 3.10 |
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MLI Agreement |
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Section 3.10 |
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Providing Group |
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Section 6.01(b) |
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Quota Share Treaty |
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Recitals |
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Receiving Group |
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Section 6.01(b) |
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SCA |
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Preamble |
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SCA Indemnitees |
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Section 9.11(a) |
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SCAB |
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Preamble |
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SEC |
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Section 3.08(e) |
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Stock Consideration |
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Section 2.06 |
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XL |
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Preamble |
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XL Indemnitees |
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Section 9.11(b) |
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XL Owned SCA Common Shares |
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Recitals |
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XLA |
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Preamble |
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XLBS |
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Preamble |
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XLCA |
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Preamble |
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XLCAUK |
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Preamble |
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XLFA |
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Preamble |
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XLFAS |
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Preamble |
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XLGS |
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Preamble |
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XLI |
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Preamble |
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XLRA |
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Preamble |
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Section 1.03 Interpretation and Rules of Construction . In this Agreement, except to the extent otherwise provided or that the context otherwise requires:
(a) when a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference is to an Article or Section of, or a Schedule or Exhibit to, this Agreement unless otherwise indicated;
(b) the table of contents and headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement;
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(c) whenever the words include, includes or including are used in this Agreement, they are deemed to be followed by the words without limitation;
(d) the words hereof, herein and hereunder and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement;
(e) all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein;
(f) the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;
(g) any Law defined or referred to herein or in any agreement or instrument that is referred to herein means such Law or statute as from time to time amended, modified or supplemented, including by succession of comparable successor Laws;
(h) references to a Person are also to its successors and permitted assigns; and
(i) the use of or is not intended to be exclusive unless expressly indicated otherwise.
Subject to the terms and conditions of this Agreement, at or prior to the Closing:
Section 2.01 Commutation and Release of Reinsurance Agreements . The SCA Parties and the XL Parties shall (i) commute the agreements listed in Part I of Schedule 2.01 and (ii) fully and finally extinguish all the Parties rights and obligations under all such agreements pursuant to the XL/SCA Commutation Agreements.
Section 2.02 Termination of the Other Terminated Agreements . The SCA Parties and the XL Parties shall terminate the Other Terminated Agreements listed in Part I of Schedule 1.01(b) and, notwithstanding anything in any of the Other Terminated Agreements listed in Part I of Schedule 1.01(b) that provides that any term or condition survives termination, fully and finally extinguish all rights and obligations of the Parties under all such agreements.
Section 2.03 Commutation and Release of Quota Share Treaty . XLCA and XLFA shall (i) commute the Quota Share Treaty and (ii) fully and finally extinguish all rights and obligations under the Quota Share Treaty pursuant to the Quota Share Treaty Commutation Agreement.
Section 2.04 Commutation and Amendment of Other Reinsurance Agreements . (a) The SCA Parties intend to, but shall not be obligated to, commute or amend the reinsurance
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agreements the SCA Parties have with third parties that are identified on Schedule 2.04 ; provided , that until October 15, 2008, no commutation or amendment of any agreement listed on Schedule 2.04 may involve the payment of cash or other consideration by any SCA Party. For the avoidance of doubt, no commutation or amendment of any agreement listed on Schedule 2.04 shall involve the payment of Allocated Funds.
(b) Notwithstanding the foregoing, (i) the Financial Security Commutations, (ii) the commutations of each EIB Policy, (iii) the general releases in a form reasonably acceptable to the XL Parties of the XL Parties with respect to each EIB Guarantee or (iv) the provision by a creditworthy entity reasonably acceptable to the XL Parties of a guarantee guaranteeing 100% of the XL Parties obligations under each EIB Guarantee may involve payment of cash or other consideration payable at any time by any SCA Party.
Section 2.05 Mutual Releases. (a) As of the Closing Date:
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(i) each SCA Party, on behalf of itself and its respective Subsidiaries, hereby irrevocably and unconditionally releases and forever discharges each XL Party, its parents, Subsidiaries and Affiliates, and its respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, underwriters, and attorneys, from any and all past, present and future actions, causes of action, suits, debts, Liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any of the SCA Parties, suspected or unsuspected, reported or unreported, fixed or contingent, accrued or unaccrued, liquidated or unliquidated, whether grounded in Law or equity or sounding in tort or contract or otherwise, which the SCA Party now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising directly or indirectly out of, based upon, or in any way related to or in connection with (A) (1) the Financial Security Agreements; (2) the agreements, understandings, arrangements commuted or terminated pursuant to Sections 2.01 , 2.02 and 2.03 , and Other Terminated Agreements listed in Part II of Schedule 1.01(b) ; (3) any of the Reinsurance Guarantees; (4) any commutation of an EIB Policy; (5) the commutation or termination of any of the foregoing listed in clauses (1), (2), (3) and (4); or (6) any commutation or amendment of any agreement listed on Schedule 2.04 pursuant to or in accordance with this Agreement; (B) conduct or other matters occurring on or prior to the Closing, other than contractual obligations arising under written agreements between any XL Party and any SCA Party (including those described on Schedule 2.05 , but excluding those expressly commuted or terminated pursuant to this Agreement or any Ancillary Agreement) or (C) any tax liability, whether stemming from policies issued by Subsidiaries of SCA prior to SCAs IPO, after SCAs IPO or otherwise, that results from the XLFA Redomestication; provided , however , with respect to both clauses (A) and (B), the provisions of this paragraph shall not discharge any obligation of any of the XL Parties that has been undertaken or imposed by the express terms of this Agreement or any Ancillary Agreement. |
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(ii) each SCA Party hereby irrevocably and unconditionally releases and forever discharges each CDS Counterparty, its parents, Subsidiaries and Affiliates, and its respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, underwriters, and attorneys, from any and all past, present and future actions, causes of action, suits, debts, Liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any of the SCA Parties, suspected or unsuspected, reported or unreported, fixed or contingent, accrued or unaccrued, liquidated or unliquidated, whether grounded in Law or equity or sounding in tort or contract or otherwise, which the SCA Party now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising directly or indirectly out of, based upon, or in any way related to or in connection with (A) (1) the Financial Security Agreements; (2) the agreements, understandings, arrangements commuted or terminated pursuant to Sections 2.01 , 2.02 and 2.03 , and Other Terminated Agreements listed in Part II of Schedule 1.01(b) ; (3) any of the Reinsurance Guarantees; (4) the commutation or termination of any of the foregoing listed in clauses (1), (2) and (3); (5) any commutation of an EIB Policy, any general release by EIB of the XL Parties obligations with respect to an EIB Guarantee, or any guaranty by a creditworthy entity reasonably acceptable to the XL Parties of the XL Parties obligations under any EIB Guarantee, each in accordance with this Agreement; or (6) any commutation or amendment of any agreement listed on Schedule 2.04 pursuant to or in accordance with this Agreement or (B) conduct occurring on or prior to the Closing with respect to this Agreement and the Transactions; provided , however , with respect to both clauses (A) and (B), the provisions of this paragraph shall not discharge any obligation of any of the CDS Counterparties that has been undertaken or imposed by the express terms of this Agreement, any Ancillary Agreement or any other agreement to which such CDS Counterparty is a party. |
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(b) As of the Closing Date: |
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(i) each XL Party, on behalf of itself and its respective Subsidiaries, hereby irrevocably and unconditionally releases and forever discharges each SCA Party, its parents, Subsidiaries and Affiliates, and its respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, underwriters, and attorneys, from any and all past, present and future actions, causes of action, suits, debts, Liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any of the XL Parties, suspected or unsuspected, reported or unreported, fixed or contingent, whether grounded in Law or equity or sounding in tort or contract or otherwise, which the XL Party now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising directly or indirectly out of, based upon, or in any way related to or in connection with (A) (1) the Financial Security Agreements; (2) the agreements, |
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understandings, arrangements commuted or terminated pursuant to Sections 2.01 , 2.02 and 2.03 , and Other Terminated Agreements listed in Part II of Schedule 1.01(b) ; (3) any of the Reinsurance Guarantees; (4) any commutation of an EIB Policy; (5) the commutation or termination of any of the foregoing listed in clauses (1), (2), (3) and (4); or (6) any commutation or amendment of any agreement listed on Schedule 2.04 pursuant to or in accordance with this Agreement or (B) conduct or other matters occurring on or prior to the Closing, other than contractual obligations arising under written agreements between any XL Party and any SCA Party (including those described on Schedule 2.05 , but excluding those expressly commuted or terminated pursuant to this Agreement or any Ancillary Agreement); provided , however , with respect to both clauses (A) and (B), the provisions of this paragraph shall not discharge any obligation of any of the SCA Parties that has been undertaken or imposed by the express terms of this Agreement or any Ancillary Agreement. |
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(ii) each XL Party hereby irrevocably and unconditionally releases and forever discharges each CDS Counterparty, its parents, Subsidiaries and Affiliates, and its respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, underwriters, and attorneys, from any and all past, present and future actions, causes of action, suits, debts, Liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any of the XL Parties, suspected or unsuspected, reported or unreported, fixed or contingent, accrued or unaccrued, liquidated or unliquidated, whether grounded in Law or equity or sounding in tort or contract or otherwise, which the XL Party now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising directly or indirectly out of, based upon, or in any way related to or in connection with (A) (1) the Financial Security Agreements; (2) the agreements, understandings, arrangements commuted or terminated pursuant to Sections 2.01 , 2.02 and 2.03 , and Other Terminated Agreements listed in Part II of Schedule 1.01(b) ; (3) any of the Reinsurance Guarantees; (4) the commutation or termination of any of the foregoing listed in clauses (1), (2) and (3); (5) any commutation of an EIB Policy, any general release by EIB of the XL Parties obligations with respect to an EIB Guarantee, or any guaranty by a creditworthy entity reasonably acceptable to the XL Parties of the XL Parties obligations under any EIB Guarantee, each in accordance with this Agreement; or (6) any commutation or amendment of any agreement listed on Schedule 2.04 pursuant to or in accordance with this Agreement, or (B) conduct occurring on or prior to the Closing with respect to this Agreement and the Transactions; provided , however , with respect to both clauses (A) and (B), the provisions of this paragraph shall not discharge any obligation of any of the CDS Counterparties that has been undertaken or imposed by the express terms of this Agreement, any Ancillary Agreement or any other agreement to which such CDS Counterparty is a party. |
(c) As of the Closing Date, each CDS Counterparty hereby irrevocably and unconditionally releases and forever discharges each SCA Party, each XL Party, each of their respective parents, Subsidiaries and Affiliates, and each of their respective predecessors,
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successors, assigns, officers, directors, agents, employees, shareholders, representatives, underwriters, and attorneys, from any and all past, present and future actions, causes of action, suits, debts, Liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred, except those costs and expenses expressly agreed in writing to be paid by the SCA Parties) of any kind, character, description or nature whatsoever, known or unknown to any of the CDS Counterparties, suspected or unsuspected, reported or unreported, fixed or contingent, accrued or unaccrued, liquidated or unliquidated, whether grounded in Law or equity or sounding in tort or contract or otherwise, which the CDS Counterparty now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising directly or indirectly out of, based upon, or in any way related to or in connection with (A) (1) the Financial Security Agreements; (2) the agreements, understandings, arrangements commuted or terminated pursuant to Sections 2.01 , 2.02 and 2.03 , and Other Terminated Agreements listed in Part II of Schedule 1.01(b) ; (3) any of the Reinsurance Guarantees; (4) the commutation or termination of any of the foregoing listed in clauses (1), (2) and (3); (5) any commutation of an EIB Policy, any general release by EIB of the XL Parties obligations with respect to an EIB Guarantee, or any guaranty by a creditworthy entity reasonably acceptable to the XL Parties of the XL Parties obligations under any EIB Guarantee, each in accordance with this Agreement; or (6) commutation or amendment of any agreement listed on Schedule 2.04 pursuant to or in accordance with this Agreement; or (B) conduct occurring on or prior to the Closing with respect to this Agreement and the Transactions; provided , however , that nothing in this Section 2.05(c) releases any SCA Party or any XL Party from fraud or intentional misconduct; provided , further , that with respect to both clauses (A) and (B), the provisions of this paragraph shall not discharge any obligation of any of the SCA Parties or XL Parties that has been undertaken or imposed by the express terms of this Agreement, any Ancillary Agreement or any other written agreement under which such CDS Counterparty has any rights (whether as a party or otherwise) or otherwise amend existing credit default swaps to which such CDS Counterparty is a party.
(d) The Parties acknowledge and agree that (A) the SCA Parties shall not be responsible for the performance, or lack thereof, of any other Partys obligations pursuant to this Agreement or the Ancillary Agreements, (B) the XL Parties shall not be responsible for the performance, or lack thereof, of any other Partys obligations pursuant to this Agreement or the Ancillary Agreements and (C) a CDS Counterparty shall not be responsible for the performance, or lack thereof, of any other Partys obligations pursuant to this Agreement or the Ancillary Agreements.
(e) Waiver of Statutory Rights . In connection with the releases granted herein, each of the Parties hereby waives all rights conferred by the provisions of California Civil Code Section 1542 and/or any similar state or federal law. California Civil Code § 1542 provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST
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HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
The Parties understand and acknowledge the significance and consequence of their waiver of § 1542 of the California Civil Code, as well as any other federal or state statute or common law principle of similar effect, and acknowledge that this waiver is a material inducement to and consideration for each Partys execution of this Agreement; provided , however , the provisions of this paragraph shall not discharge any obligation of any of the Parties that has been undertaken or imposed by the express terms of this Agreement, any Ancillary or any other written agreement to which such Party is a party.
Section 2.06 Consideration . At the Closing, the XL Parties shall (i) pay to the SCA Parties an aggregate amount (inclusive of any amounts specified within the XL/SCA Commutation Agreements) equal to One Billion, Seven Hundred and Seventy-Five Million Dollars ($1,775,000,000) (the Cash Consideration Amount ), which will be paid to each of the SCA Parties in the amounts set forth on Schedule 2.06(a) ; (ii) issue and transfer to the SCA Parties, free and clear of any Liens, an aggregate of eight million (8,000,000) shares of XLs Class A Ordinary Shares, par value $0.01 per share (the Stock Consideration ), which will be transferred to each of the SCA Parties in the number of shares set forth on Schedule 2.06(b) , pursuant to the terms of the Subscription Agreement and the XL Stock Resale and Registration Rights Agreement; and (iii) subject to Section 2.10 , transfer to the SCA Shareholder Entity, free and clear of any Liens, all of the XL Owned SCA Common Shares to be held in accordance with the terms of the Declaration of Trust (the XL Owned SCA Common Shares, together with the Cash Consideration Amount and the Stock Consideration, the Consideration ).
Section 2.07 Closing . (a) Subject to (i) satisfaction or waiver of all conditions to the obligations of the parties set forth in Article VII (other than those conditions anticipated to occur at Closing) and (ii) the completion of an XL Public Offering, the closing of the commutations, terminations and releases that are the subject of this Agreement (the Closing ) will be held at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153 at 10:00 a.m., New York time, on the same Business Day as the completion of an XL Public Offering, or at such other place or at such other time or on such other date as the Parties may mutually agree upon in writing. Notwithstanding anything to the contrary contained herein, under no circumstances will the XL Parties have any obligation to consummate any of the Transactions required to be completed on or prior to the Closing until the completion of an XL Public Offering.
(b) All of the actions to be taken at Closing will be deemed to occur simultaneously, except that the Cash Consideration Amount to be received by XLFA shall be received prior to the XLFA Redomestication, and the commutation of the Quota Share Treaty shall occur after the XLFA Redomestication.
Section 2.08 Closing Deliveries by the SCA Parties . (a) At Closing, the SCA Parties shall deliver or cause to be delivered to the XL Parties:
(i) receipt for the Cash Consideration Amount and the Stock Consideration received by the applicable SCA Parties;
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(ii) the Subscription Agreement executed by each SCA Party which is a party thereto;
(iii) the XL Stock Resale and Registration Rights Agreement executed by each SCA Party which is a party thereto;
(iv) the 2001 Facultative Quota Share Commutation Agreement executed by each SCA Party which is a party thereto;
(v) the Excess of Loss Commutation Agreement executed by each SCA Party which is a party thereto;
(vi) the Adverse Development Cover Commutation Agreement executed by each SCA Party which is a party thereto;
(vii) the Facultative Master Certificate Commutation Agreement executed by each SCA Party which is a party thereto;
(viii) a true and complete original copy of a fully executed Quota Share Treaty Commutation Agreement;
(ix) the Transition Agreement Amendment executed by each SCA Party which is a party thereto; and
(x) an SCA Shareholder Entity Formation Conditions Certificate, if the SCA Shareholder Entity Formation Conditions have been satisfied.
(b) At Closing, the SCA Parties shall deliver or cause to be delivered to the XL Parties and the CDS Counterparties a true and complete copy, certified by the Secretary or Director of each of the SCA Parties, of the resolutions duly and validly adopted by the Boards of Directors (or, in the case of each portfolio trust that is an SCA Party, a direction letter authorized by its unitholder) of each of the SCA Parties evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the Transactions.
Section 2.09 Closing Deliveries by the XL Parties . (a) At Closing, the XL Parties shall deliver to the SCA Parties:
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(i) the Cash Consideration Amount by wire transfer in immediately available funds to a bank account or bank accounts of XLFA or XLCA (and, for the avoidance of doubt, no other entity) as SCA may direct, consistent with the allocation of the Cash Consideration Amount attached hereto as Schedule 2.06(a) , in writing to XL at least three days prior to Closing; |
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(ii) stock certificates evidencing the Stock Consideration registered in the names of those SCA Parties designated on Schedule 2.06(b), together with an executed share transfer form evidencing the transfer of the XL Owned SCA Common Shares; |
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(iii) the Subscription Agreement executed by each XL Party which is a party thereto; |
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(iv) the XL Stock Resale and Registration Rights Agreement executed by each XL Party which is a party thereto; |
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(v) the 2001 Facultative Quota Share Commutation Agreement executed by each XL Party which is a party thereto; |
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(vi) the Excess of Loss Commutation Agreement executed by each XL Party which is a party thereto; |
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(vii) the Adverse Development Cover Commutation Agreement executed by each XL Party which is a party thereto; |
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(viii) the Facultative Master Certificate Commutation Agreement executed by each XL Party which is a party thereto; and |
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(ix) the Transition Agreement Amendment executed by each XL Party which is a party thereto. |
(b) At Closing, the XL Parties shall deliver to the SCA Parties and the CDS Counterparties a true and complete copy, certified by the Secretary or Director of each of the XL Parties, of the resolutions duly and validly adopted by the Boards of Directors of each of the XL Parties evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the Transactions.
(c) At Closing, but subject to Section 2.10 , the XL Parties shall cause the XL Owned SCA Common Shares (together with certificates evidencing such XL Owned SCA Common Shares and stock powers duly endorsed in blank to be transferred to the SCA Shareholder Entity, which will be owned and managed pursuant to the terms of the Declaration of Trust.
Section 2.10 Escrow . Notwithstanding anything to the contrary contained in this Agreement, if XL does not receive an SCA Shareholder Entity Formation Conditions Certificate from the SCA Parties in accordance with Section 2.08(a) at or prior to the Closing, the XL Parties shall, at Closing, deposit with the Escrow Agent certificates evidencing all of the XL Owned SCA Common Shares, free and clear of any Liens, together with stock powers duly endorsed in blank, which are to be held by the Escrow Agent until released in accordance with the Escrow Agreement. From and after delivery of such certificates to the Escrow Agent at Closing, the XL Parties shall refrain from exercising, and hereby irrevocably disclaim, any and all voting, economic or other rights with respect to the XL Owned SCA Common Shares, and the XL Parties will have no liability or further obligations to the SCA Parties or the CDS Counterparties thereafter with respect to the XL Owned SCA Common Shares.
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REPRESENTATIONS AND WARRANTIES OF THE SCA PARTIES
The SCA Parties hereby jointly and severally represent and warrant to each of the XL Parties and CDS Counterparties as follows:
Section 3.01 Organization, Authority and Qualification of the SCA Parties . Each of the SCA Parties is a corporation, company or business entity duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization and has all necessary power and authority to enter into this Agreement and the Ancillary Agreements to which it may be a party, to carry out its obligations hereunder and thereunder and to consummate the Transactions. Except as set forth in Section 3.01 of the SCA Parties Disclosure Schedule, each of the SCA Parties is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary. The execution and delivery of this Agreement and the Ancillary Agreements to which each SCA Party is a party, the performance by each SCA Party of its obligations hereunder and thereunder and the consummation by each SCA Party of the Transactions have been duly authorized by all requisite action on the part of each SCA Party and its shareholders. This Agreement, the Transition Agreement Amendment, the SCA Shareholder Entity Agreement and each Transaction have been approved by an independent committee of SCAs Board of Directors that did not include any member that was nominated to SCAs Board by any of the XL Parties, and this Agreement and each Ancillary Agreement and Transaction to which each other SCA Party is a party has been approved by such SCA Partys Board of Directors (or, in the case of each portfolio trust that is an SCA Party, a direction letter authorized by its unitholder) or other appropriate authorizing body or Person. This Agreement has been, and, upon their execution, the Ancillary Agreements to which each SCA Party is a party shall have been, duly executed and delivered by each SCA Party, and, assuming due authorization, execution and delivery by each of the XL Parties and CDS Counterparties and receipt of all consents and approvals by Governmental Authorities as required by Law, this Agreement constitutes, and, upon their execution, the Ancillary Agreements shall constitute, legal, valid and binding obligations of the SCA Parties enforceable against each of the SCA Parties in accordance with their respective terms, subject to remedies under applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws affecting creditors rights.
Section 3.02 No Conflict . Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 3.03 , the execution, delivery and performance by each of the SCA Parties of this Agreement and the Ancillary Agreements to which it is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the Certificate of Incorporation or Bye-Laws (or similar organizational documents) of any SCA Party, (b) conflict with or violate any Law or Governmental Order applicable to any of the SCA Parties or any of their assets, properties or businesses or, (c) except as set forth in Section 3.02 of the SCA Parties Disclosure Schedule, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or
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cancellation of, any note, bond, mortgage, indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which any SCA Party is a party, which would adversely affect the ability of any SCA Party to carry out its obligations under this Agreement or any Ancillary Agreement or to consummate the Transactions.
Section 3.03 Governmental Consents and Approvals . (a) The execution, delivery and performance of this Agreement and each Ancillary Agreement to which any SCA Party is a party by the SCA Parties does not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to, any Governmental Authority, except as described in Section 3.03 of the SCA Parties Disclosure Schedule.
(b) The SCA Parties sought and obtained (other than with respect to obtaining confirmation from the NYID, the Delaware Insurance Department and the UK FSA that they do not object to the transfer of the XL Owned SCA Common Shares to the SCA Shareholder Entity, which confirmation will be sought and is anticipated to be obtained promptly after the completion of the documentation related to the Shareholder Entity) approval of this Agreement and each commutation or other Transaction to which XLCA is a party from the NYID on the grounds that (among other things) they are collectively, and each is individually, fair and equitable. The SCA Parties have obtained (other than with respect to obtaining confirmation from the NYID, the Delaware Insurance Department and the UK FSA that they do not object to the transfer of the XL Owned SCA Common Shares to the SCA Shareholder Entity, which confirmation will be sought and is anticipated to be obtained promptly after the completion of the documentation related to the Shareholder Entity) or completed all consents, approvals, authorizations, orders, actions, filings or notifications listed on Section 3.03 of the SCA Parties Disclosure Schedule. The SCA Parties have provided true and correct copies of such approvals to the XL Parties. To the Knowledge of SCA, approvals have not been rescinded, modified or amended in any way.
Section 3.04 Financial Information . (a) True and complete copies of the Financial Statements have been delivered by the SCA Parties to the XL Parties and CDS Counterparties. The Financial Statements (i) were prepared in accordance with the books of account and other financial records of the SCA Parties and (ii) present fairly the financial condition and results of operations of the SCA Parties as of the dates thereof or for the periods covered thereby. The GAAP Financial Statements have been prepared in accordance with GAAP applied on a basis consistent with past practices. The XLCA Statutory Financial Statements have been prepared in accordance with New York State statutory accounting principles applied on a basis consistent with past practices. The XLFA Statutory Financial Statements have been prepared in accordance with Bermuda statutory accounting principles applied on a basis consistent with past practices.
(b) True and complete copies of all pro forma balance sheets of the SCA Parties and any related statements of income, retained earnings, stockholders equity, changes in financial position and related notes and schedules thereto, prepared to reflect each of the SCA Parties financial condition after giving effect to the Transactions and provided to the NYID, have been delivered by the SCA Parties to the XL Parties and the CDS Counterparties.
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Section 3.05 Compliance with Laws . (a) There is no violation of Law by any SCA Party that has, or, if known by an appropriate Governmental Authority, could reasonably be expected to adversely affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the Transactions and (b) except as provided in Section 3.05 of the SCA Parties Disclosure Schedule, there is no Governmental Order that is applicable to any SCA Party that has or could reasonably be expected to adversely affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the Transactions.
Section 3.06 Effect of Commutations . As of the Closing, as a result of (i) commutation of the Quota Share Treaty pursuant to the Quota Share Commutation Agreement and (ii) commutation of the Financial Security Master Facultative Agreement, the Guarantee and the Financial Security Guarantee shall no longer have any force or effect and for all purposes shall be considered a nullity. If any of the EIB Policies are commutated, then each EIB Guarantee that guarantees XLCAs obligations under each commuted EIB Policy will no longer have any force or effect and will, for all purposes, be considered a nullity.
Section 3.07 Litigation . No Action by or against any of the SCA Parties is pending or, to the Knowledge of SCA, threatened, which could reasonably be expected to affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the Transactions.
Section 3.08 Placement of Stock Consideration . Each of the SCA Parties that will acquire a portion of the Stock Consideration:
(a) is acquiring the Stock Consideration for investment purposes only and not with a view to or for distributing or reselling such Stock Consideration or any part thereof, without prejudice, however, to such SCA Partys right, subject to the provisions of this Agreement, at all times to sell or otherwise dispose of all or any part of such Stock Consideration pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities or blue sky Laws. Each such SCA Party understands that it must bear the economic risk of this investment indefinitely, unless the Stock Consideration is registered pursuant to the Securities Act and any applicable state securities or blue sky Laws or an exemption from such registration is available. None of the SCA Parties has any intention of participating in the formulation, determination, or direction of the basic business decisions of any of the XL Parties;
(b) at the time it was first offered the Stock Consideration was, and at the date hereof is, an accredited investor as defined in Rule 501(a) under the Securities Act;
(c) understands that the Stock Consideration is being offered and provided as partial consideration to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities or blue sky Laws, and that the XL Parties are relying upon the truth and accuracy of, and such SCA Partys compliance with, the representations, warranties, agreements, acknowledgments and understandings of such SCA Party set forth herein in order to determine the availability of such exemptions and the eligibility of such SCA Party to acquire the Stock Consideration;
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(d) has, either alone or together with its representatives, such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Stock Consideration, and has so evaluated the merits and risks of such investment. Such SCA Party understands that an investment in the Stock Consideration involves a high degree of risk that could result in complete loss, is able to bear the economic risk of an investment in the Stock Consideration and, at the present time, is able to afford a complete loss of such investment;
(e) is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the acquisition of the Stock Consideration. Such SCA Party acknowledges that it has (i) access to XLs disclosures about its Class A Ordinary Shares made in XLs filings with the Securities and Exchange Commission ( SEC ), including its Annual Report on Form 10-K for its last completed fiscal year, its Quarterly Reports on Form 10-Q for its latest fiscal quarters, and any Current Report on Form 8-K filed by XL since the date of its last respective Annual Report on Form 10-K for its last completed fiscal year; (ii) access to information about XL and its financial condition, results of operations, business, properties, management and prospects contained in an offering memorandum related to the issuance of the Stock Consideration provided to the SCA Parties; and (iii) adequate access and opportunity to discuss the investment opportunity with the management of the XL Parties;
(f) in connection with its acceptance of the Stock Consideration, has not relied upon any representations made by, or other information (whether oral or written) furnished by or on behalf of, any of the XL Parties other than as set forth in this Agreement, the Ancillary Agreements or XLs filings with the SEC or an offering memorandum related to the issuance of the stock consideration provided to the SCA Parties.
(g) acknowledges that the Stock Consideration was offered and will be issued to the SCA Parties without any general solicitation or general advertising, including any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;
(h) understands that nothing in this Agreement or any other materials presented by or on behalf of XL to the SCA Parties in connection with the issuance of the Stock Consideration constitutes legal, tax or investment advice. Each SCA Party has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its receipt of the Stock Consideration; and
(i) if located or domiciled outside the United States, has complied with all Laws in each foreign jurisdiction in which it will receive or be the record or beneficial owner of the Stock Consideration.
Section 3.09 Regulatory Approvals . The NYID has approved in writing the terms of this Agreement and any Transaction to which XLCA is a party, including the Quota Share Treaty Commutation Agreement, pursuant to applicable Law, including Section 1505 of the New York Insurance Law. The BMA has approved in writing the terms of this Agreement as
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they relate to XLFA prior to the XLFA Redomestication. The UK FSA has been provided a copy of this Agreement and has raised no objection to XLCAUK entering into this Agreement, and the UK FSA has confirmed in writing that the 14-day waiting period applicable under the Letter of Undertaking, dated May 20, 2008, will not apply to XLCAUKs execution of this Agreement. A copy of each such written approval has been delivered to the XL Parties and the CDS Counterparties and such written approvals have not been withdrawn, rescinded, revoked, amended or altered in any way. The SCA Parties have provided the NYID, the BMA and the UK FSA with all information the SCA Parties deemed material and all information requested by the NYID, the BMA or the UK FSA. All information provided by the SCA Parties to the NYID, the BMA or the UK FSA was true, correct and complete in all material respects. Notwithstanding anything to the contrary, the NYID, the BMA and the UK FSA have not confirmed that they are not objecting to the transfer of the XL Owned SCA Common Shares to the SCA Shareholder Entity but the SCA Parties will seek to obtain such confirmations promptly and anticipate that such confirmations will be obtained promptly after the completion of the documentation related to the Shareholder Entity.
Section 3.10 MLI CDS Agreements . The SCA Parties have entered into an agreement with Merrill Lynch International ( MLI ) pursuant to which MLI will terminate the MLI CDS Agreements prior to or simultaneously with the Closing (the MLI Agreement ). A true and correct copy of the MLI Agreement has been delivered to the XL Parties. The MLI Agreement remains in full force and effect and has not been amended, waived, terminated or repealed in any way. The amount of consideration for the termination of the MLI CDS Agreements pursuant to the MLI Agreement is no greater than $500 million in the aggregate together with the release of all claims related to such MLI CDS Agreements.
Section 3.11 Financial Security Master Facultative Commutation Agreement . The SCA Parties have entered into an agreement with Financial Security pursuant to which the Financial Security Master Facultative Agreement will be commuted prior to, or simultaneously with, the Closing. A true and correct copy of the Financial Security Master Facultative Commutation Agreement has been delivered to the XL Parties. The Financial Security Master Facultative Commutation Agreement remains in full force and effect and has not been amended, waived, terminated or repealed in any way.
Section 3.12 Third-Party Agreements . None of the transactions contemplated by Section 2.04 and listed on Schedule 2.04 is between any SCA Party or any of its affiliates, officers, directors, employees, agents, counsel, sub-contractors or other representatives or related parties, on the one hand, and any other SCA Party or any of its affiliates, officers, directors, employees, agents, counsel, sub-contractors or other representatives or related parties, on the other hand.
Section 3.13 Brokers . Except for Rothschild & Sons Limited, whose fees will be paid exclusively by the SCA Parties, no broker, advisor, finder or investment banker is entitled to any brokerage, finders or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the SCA Parties.
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REPRESENTATIONS AND WARRANTIES OF THE XL PARTIES
The XL Parties hereby jointly and severally represent and warrant to each of the SCA Parties and the CDS Counterparties as follows:
Section 4.01 Organization and Authority of the XL Parties . Each of the XL Parties is a corporation, company or business entity duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization and has all necessary power and authority to enter into this Agreement and the Ancillary Agreements to which it may be a party, to carry out its obligations hereunder and thereunder and to consummate the Transactions. Each of the XL Parties is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary. The execution and delivery of this Agreement and the Ancillary Agreements to which each XL Party is a party, the performance by each XL Party of its obligations hereunder and thereunder, and the consummation by each XL Party of the Transactions have been duly authorized by all requisite action on the part of each XL Party. This Agreement has been, and, upon the execution of the Ancillary Agreements to which each XL Party is a party, shall have been, duly executed and delivered by each XL Party, and, assuming due authorization, execution and delivery by each of the SCA Parties and CDS Counterparties and receipt of all consents and approvals by Governmental Authorities as required by Law, this Agreement constitutes, and upon their execution, the Ancillary Agreements shall constitute, legal, valid and binding obligations of the XL Parties enforceable against each of the XL Parties in accordance with their respective terms, subject to remedies under applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws affecting creditors rights.
Section 4.02 No Conflict . Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.03 , the execution, delivery and performance by each of the XL Parties of this Agreement and the Ancillary Agreements to which it is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the Certificate of Incorporation or Bye-Laws (or similar organizational documents) of each XL Party, (b) conflict with or violate any Law or Governmental Order applicable to any XL Party or (c) except as set forth in Section 4.02 of the XL Parties Disclosure Schedule, conflict with, or result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any note, bond, mortgage, indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which any XL Party is a party, which would adversely affect the ability of any XL Party to carry out its obligations under this Agreement or any Ancillary Agreement and to consummate the Transactions.
Section 4.03 Governmental Consents and Approvals . (a) The execution, delivery and performance of this Agreement and each Ancillary Agreement to which it is a party by each of the XL Parties does not and will not require any consent, approval, authorization or
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other order of, action by, filing with or notification to any Governmental Authority, except as described in Section 4.03 of the XL Parties Disclosure Schedule.
(b) The XL Parties sought and obtained approval of this Agreement and each commutation or other Transaction to which XLRA is a party from the NYID on the grounds that (among other things) they are collectively, and each is individually, fair and equitable. The XL Parties have provided true and correct copies of such approval to the SCA Parties. To the knowledge of XLs executive officers, after due inquiry, such approval has not been rescinded, modified or amended in any way.
Section 4.04 Capitalization . (a) Section 4.04(a) of the XL Parties Disclosure Schedule sets forth the type and number of authorized equity securities of XL and the type and number of such equity securities that are issued and outstanding as at July 25, 2008.
(b) All issued and outstanding shares of XLs capital stock as at July 28, 2008 have been duly authorized for issuance, are validly issued and are fully paid and nonassessable. The Stock Consideration has been duly authorized and, upon issuance to the SCA Parties pursuant to the terms of this Agreement and the Subscription Agreement, will be validly issued, fully paid and nonassessable, free and clear of all Liens other than those contained in applicable securities Laws.
Section 4.05 XL Owned SCA Common Shares . XLI is the record and beneficial owner of the XL Owned SCA Common Shares, free and clear of any and all Liens other than restrictions on transfer imposed by applicable securities and insurance Laws, has all right, title and interest in and to the XL Owned SCA Common Shares and has all requisite power and authority to sell, assign, transfer and deliver the XL Owned SCA Common Shares, free and clear of all Liens other than restrictions on transfer contained in applicable securities or insurance Laws, or deposit with the Escrow Agent certificates evidencing all of the XL Owned SCA Common Shares, free and clear of any Liens, together with stock powers duly endorsed in blank pursuant to Section 2.10 , as the case may be, to the SCA Shareholder Entity.
Section 4.06 Litigation . No Action by or against any of the XL Parties is pending or, to the actual knowledge of each of the XL Parties after due inquiry, threatened, which could reasonably be expected to affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the Transactions.
Section 4.07 Regulatory Approvals . The NYID has approved in writing the terms of this Agreement and any Transaction to which XLRA is a party, including the Adverse Development Cover Commutation Agreement, pursuant to applicable Law, including Section 1505 of the New York State Insurance Laws. A copy of each such written approval has been delivered to the SCA Parties and the CDS Counterparties and such written approvals have not been withdrawn, rescinded, revoked, amended or altered. The XL Parties have provided the NYID, the BMA and the UK FSA with all information the XL Parties deemed material and all information requested by the NYID, the BMA or the UK FSA. All information provided by the XL Parties to the NYID, the BMA or the UK FSA was true, correct and complete in all material respects.
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Section 4.08 Brokers . Except for The Blackstone Group L.P. whose fees will be paid exclusively by the XL Parties, no broker, advisor, finder or investment banker is entitled to any brokerage, finders or other fee or commission in connection with the Transactions (other than in respect of the XL Public Offering) based upon arrangements made by or on behalf of the XL Parties.
REPRESENTATIONS AND WARRANTIES OF THE CDS COUNTERPARTIES
Each of the CDS Counterparties hereby represents and warrants as to itself only, and neither jointly nor jointly and severally with the other CDS Counterparties, to each of the XL Parties and SCA Parties as follows:
Section 5.01 Status . It is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, is in good standing.
Section 5.02 Powers . It has the power to execute this Agreement and any other documentation relating to this Agreement (including the Ancillary Agreements to which it is a party), to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver, and to perform its obligations under this Agreement, and it has taken all necessary action to authorize such execution, delivery and performance.
Section 5.03 No Violation or Conflict . Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets.
Section 5.04 Consents . All governmental and other consents that are required to have been obtained by it with respect to this Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with.
Section 5.05 Obligations Binding . Its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting creditors rights generally, and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at Law)).
Section 5.06 Absence of Litigation . There is no pending, and it has not received written threat of any action, suit or proceeding at Law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability of this Agreement against it or its ability to perform its obligations under this Agreement.
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Section 5.07 Consent to Transactions . It consents to the effect of the consummation of the covenants contained in this Agreement and the Ancillary Agreements, including (i) the commutation of the Quota Share Treaty pursuant to the Quota Share Commutation Agreement, (ii) the commutation of the Financial Security Master Facultative Agreement, (iii) the commutation of any EIB Policy in accordance with Section 6.05(c) and (iv) as a consequence of the foregoing, the effective nullity of the Guarantee and the Financial Security Guarantee and, if any EIB Policy is commuted, the EIB Guarantee that guarantees XLCAs obligation under such commuted EIB Policy, such that each has no further force or effect.
(b) For an abundance of clarity, the foregoing representations and warranties contained in Section 5.08(a) only reflect the best belief of the officer of the CDS Counterparty preparing the list or confirming a list prepared by SCA. The CDS Counterparty is not making any representation or warranty that is not qualified by the best belief of such officer, and it will not be bound by or subject to liability based on any inaccuracy contained in any such list that ultimately results from such officers best belief being inadvertently inaccurate.
Section 5.09 Brokers . Except for the CDS Financial Advisor and BlackRock, whose fees will be paid exclusively by the SCA Parties, no broker, advisor, finder or investment banker is entitled to any brokerage, finders or other fee or commission from it in connection with the Transactions based upon arrangements made by or on behalf of any of the CDS Counterparties.
Section 6.01 Public Disclosure and Confidentiality . (a) No SCA Party or XL Party shall make or permit any of its officers, employees, agents, counsel, sub-contractors or other representatives to make any public disclosure simultaneously with, or close in time to, the execution of this Agreement or the Closing, other than in conjunction with an XL Public
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Offering (such information disclosed in conjunction with an XL Public Offering to be pursuant to a Quarterly Report on Form 10-Q, a Current Report on Form 8-K, a prospectus supplement, or other material that complies with the requirements of the Securities Act, including any press release, other material or internet postings) regarding the existence or terms of this Agreement, to any person or company or to the public, without the prior written consent of the other Parties subject to this Section 6.01 , such consent not to be unreasonably withheld or delayed; provided , further , that XL and any of its officers, employees, agents, counsels, sub-contractors or other representatives (expressly including any investment banks) may make disclosures relating to the existence and terms of this Agreement and the Transactions to rating agencies and potential investors in connection with the marketing of an XL Public Offering, including, for the avoidance of doubt, information relating to the reinsurance agreements and guarantees being terminated pursuant to this Agreement such as exposures, valuations and other data; provided , further , that if a disclosure is required by Law, the SCA Party or the XL Party so required may make such disclosure so long as (i) it uses its reasonable best efforts to reasonably cooperate as to the timing and content of such disclosure to the extent reasonably practicable without violating any Law and (ii) other than with respect to press releases, securities filings and similar public disclosure or disclosures in conjunction with an XL Public Offering, it reasonably cooperates with any other SCA Party or XL Party seeking to obtain a protective order concerning such disclosure if such XL Party or SCA Party requesting cooperation shall pay for all reasonable fees and expenses, including legal fees, associated with such cooperation.
(b) Past Confidential Information . The SCA Parties and their officers, employees, agents, counsel, sub-contractors and other representatives, as a group, and the XL Parties and their officers, employees, agents, counsel, sub-contractors and other representatives, as a group, agree to keep confidential within their groups any information received prior to Closing from any Party in the other group pursuant to a confidentiality agreement, arrangement or understanding in place prior to Closing between the SCA Parties and the XL Parties that was commuted or terminated pursuant to Sections 2.01 , 2.02 or 2.03 of this Agreement or set forth in Part II of Schedule 1.01(b) ( Confidential Information ), including information about exposure, claims, mark or other information related to an individual CDS Counterparty; provided , that Confidential Information will not include any information that (i) was publicly available prior to its disclosure to a member of the group receiving the Confidential Information (a Receiving Group ), (ii) was known to a member of the Receiving Group prior to disclosure by a member of the group providing the Confidential Information (a Providing Group ) and was not received under obligations of confidentiality or from a Person obligated to keep such information confidential or (iii) is or becomes available to the Receiving Group on a nonconfidential basis from a source other than the Providing Group or its agents, provided , that such other Person is not bound by a confidentiality agreement with the Providing Group, provided , further , that XL and any of its officers, employees, agents, counsels, sub-contractors or other representatives (expressly including any investment banks) may make disclosures relating to the existence and terms of this Agreement and the transactions contemplated in this Agreement to rating agencies and investors in connection with the marketing of an XL Public Offering, including, for the avoidance of doubt, information relating to the reinsurance agreements and guarantees being terminated pursuant to this Agreement such as exposures, valuations and other data. In the event that any Party subject to this Section 6.01(b) , or such Partys agents, becomes legally compelled by deposition, subpoena, or other court or action by a Governmental Authority to disclose any of the Confidential Information covered by this Agreement, the Receiving Group with which such
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Party is associated is permitted to make such disclosure of Confidential Information as it determines is reasonably necessary, upon consultation with counsel, to comply with applicable Laws; provided , that such Receiving Group makes a reasonable effort to provide the Providing Group with prompt written notice to that effect and such Receiving Group reasonably cooperates with the Providing Group if the Providing Group seeks to obtain a protective order concerning such Confidential Information, provided , that the Providing Group pays for all of the Receiving Groups fees and expenses, including legal fees, associated with such cooperation. Notwithstanding anything contained in any other agreement, arrangement or understanding between the SCA Parties and the XL Parties, (i) the XL Parties may disclose Confidential Information, as reasonably needed, to any other XL Party, any nationally recognized rating agency then providing a financial strength rating for any XL Party or any officer, employee, agent, counselor, sub-contractor and other representative of any such agency or any XL Party, (ii) the SCA Parties may disclose Confidential Information, as reasonably needed, to any other SCA Party, any nationally recognized rating agency then providing a financial strength rating for any SCA Party, or any officer, employee, agent, counselor, sub-contractor and other representative of any such agency or any SCA Party and (iii) this Section 6.01(b) supersedes all prior confidentiality rights and obligations between the SCA Parties and the XL Parties with respect to Confidential Information, as defined above.
(c) Regulatory Compliance . The SCA Parties will provide the XL Parties, at the XL Parties sole cost and expense, upon reasonable notice and during normal business hours, all documents, files, books and records and reasonable access to, and will request reasonable cooperation from, all employees of the SCA Parties, as the XL Parties may reasonably request from time to time, for the limited use by the XL Parties in compliance with any legal, regulatory, accounting, or audit requirement or examination. The XL Parties will provide the SCA Parties, at the SCA Parties sole cost and expense, upon reasonable notice and during normal business hours, all documents, files, books and records and reasonable access to, and will request reasonable cooperation from, all employees of the XL Parties, as the SCA Parties may reasonably request from time to time, for the limited use by the SCA Parties in compliance with any legal, regulatory, accounting, or audit requirement or examination. The XL Parties and the SCA Parties will treat all information received pursuant to this Section 6.01(c) as if it were Confidential Information subject to Section 6.01(b) .
Section 6.02 Regulatory and Other Authorizations; Notices and Consents . The SCA Parties and the XL Parties shall use their reasonable best efforts to obtain and maintain all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for the execution and delivery of, and the performance of their obligations pursuant to, this Agreement and the Ancillary Agreements, and will reasonably cooperate with the other SCA Parties and XL Parties in promptly seeking to obtain all such authorizations, consents, orders and approvals. Each of the SCA Parties and XL Parties shall use reasonable best efforts to resolve objections, if any, as may be asserted by any Governmental Authority with respect to the Transactions under any Law. In connection therewith, if any Action is instituted (or threatened to be instituted) challenging any Transaction as violative of any Law, subject to and in accordance with Section 6.11 , the SCA Parties and the XL Parties shall use their reasonable best efforts and reasonably cooperate with one another to contest and resist any such Action and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits,
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prevents, or restricts consummation of the Transactions, including by pursuing all available avenues of administrative and judicial appeal, unless, by mutual agreement, the SCA Parties and the XL Parties decide that litigation is not in their respective best interests.
Section 6.03 Notice of Developments . Prior to the Closing, each Party shall promptly notify the other Parties in writing of all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which could reasonably be expected to result in any material breach of a representation or warranty or covenant of such Party contained in this Agreement or which could have the effect of making any material representation or warranty of such Party contained in this Agreement untrue or incorrect in any respect.
Section 6.04 MLI ABS CDO Credit Default Swap Agreements . Prior to the Closing, the SCA Parties shall not amend, alter, waive or repeal any of the terms of the MLI CDS Agreement without the prior written approval of the XL Parties.
Section 6.05 Third-Party Reinsurance Agreements . (a) The SCA Parties shall (i) provide the XL Parties with copies of all documents, files, books and records relating to any Third-Party Reinsurance Agreement for so long as it remains in force as reasonably requested by the XL Parties from time to time, and reasonable access to, and will request reasonable cooperation from, upon reasonable notice during normal business hours, all employees of the SCA Parties whose employment responsibilities are related to any Third-Party Reinsurance Agreement for so long as it remains in force and (ii) subject to any applicable Law, pay all claims under any Third-Party Reinsurance Agreement for so long as it remains in force as they become due, other than claims reasonably contested by the SCA Parties in good faith.
(b) Prior to the Closing, the SCA Parties shall not amend, alter, waive or repeal any of the terms of the Financial Security Master Facultative Commutation Agreement without the prior written approval of the XL Parties.
(c) The SCA Parties shall use their commercially reasonable efforts to commute each of the EIB Policies and fully and finally extinguish each Persons rights and obligations thereunder pursuant to commutation and release agreements in forms reasonably satisfactory to the XL Parties or effectuate another EIB Resolution Event; provided , however , that the use of such commercially reasonable efforts shall not require the SCA Parties to pay amounts in excess of those set forth in a letter delivered concurrently herewith to the XL Parties and the CDS Financial Advisor. Until an EIB Resolution Event occurs, XLCA shall (i) refrain from novating or assigning the EIB Policies to any Person, provided , that it may reinsure the EIB Policies as it sees fit and (ii) refrain from selling, leasing, assigning, reinsuring or transferring in any way (whether in one transaction or a series of related transactions) a majority of its assets to any Person, unless either (A) the EIB Policies are sold, leased, assigned, reinsured or transferred (as the case may be) with all or substantially all of such assets to the Person purchasing, leasing, reinsuring, or receiving all or substantially all of such assets or (B) the XL Parties provide their consent, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, nothing in this paragraph shall in any way restrict or limit the SCA Parties from selling, leasing, assigning, reinsuring, transferring or otherwise disposing of, in any manner (whether in one or more transactions) the public finance business of the SCA Parties.
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Section 6.06 Ownership of Insurance Instruments . (a) On and as of the date hereof, and on the Closing Date (at a time prior to the Closing) and as of the Closing, the SCA Parties shall provide written notice to the XL Parties setting forth, to the Knowledge of SCA, the then current aggregate notional value of all credit default swap agreements with XLCA or Affiliates of XLCA of which the CDS Counterparties have either represented in writing to the SCA Parties in accordance with Section 5.08 or confirmed in writing to the SCA Parties in accordance with Section 5.08 , as being a party thereto and a beneficial owner thereof.
(b) Each CDS Counterparty, in respect of itself, agrees that, prior to Closing, it will not sell or transfer in any way any right to or title in any credit default swap agreement with XLCA or an Affiliate of XLCA in which such CDS Counterparty has beneficial ownership, or to which it is party, unless the transferee agrees to become a Party to this Agreement pursuant to Section 9.04 by signing a joinder agreement immediately upon consummation of any such sale or transfer.
Section 6.07 Compliance with Securities Laws . If any SCA Party is or becomes the record or beneficial owner of any or all of the Stock Consideration, it will comply with all Laws applicable to the Transfer of any or all of the Stock Consideration.
Section 6.08 Passive Investor . For a period of two years from the Closing, none of the SCA Parties will take any action to participate in the formulation, determination or direction of the basic business decisions of any of the XL Parties.
Section 6.09 XL Owned SCA Common Shares Covenant . If any CDS Counterparty becomes the record or beneficial owner of any or all of the XL Owned SCA Common Shares, it will comply with all Laws applicable to the Transfer of any or all of the XL Owned SCA Common Shares.
Section 6.10 Forbearance . The Parties covenant and agree with each other and their respective Affiliates, successors and assigns, that:
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(ii) none of the XL Parties shall hereinafter, for any reason whatsoever, demand, claim, file suit or initiate any Action against any of the SCA Parties or the CDS Counterparties in respect of any rights released pursuant to Section 2.05(b) ; and |
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(iii) none of the CDS Counterparties shall hereinafter, for any reason whatsoever, demand, claim, file suit or initiate any Action against any of the SCA Parties or the XL Parties in respect of any rights released pursuant to Section 2.05(c) . |
(b) Subsequent to the date hereof and until the earlier of (i) October 15, 2008 or (ii) the termination of this Agreement pursuant to Section 8.01 , no CDS Counterparty will exercise any Triggered Enforcement Right to the extent triggered (or argued by any CDS
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Counterparty to be triggered) as a result of the fact that any of the SCA Parties or any of their Affiliates (A) is or is becoming insolvent (either because its financial condition is such that the sum of its debts is greater than the fair market value of its assets, or because the fair saleable value of its assets is less than the amount required to pay its probable liabilities on its existing debts as they mature), (B) has or will have unreasonably small capital with which to engage in its business, (C) has or will have incurred debts beyond its ability to pay as they become due, (D) does not have or will not have an excess of required reserves and other liabilities over admitted assets, (E) has or will have insufficient assets to reinsure all outstanding risks with other solvent authorized assuming insurers after paying all accrued claims owed, (F) has a credit rating that has been downgraded or withdrawn by any rating agency, or has sold credit protection or provided a guarantee with respect to an asset-backed security or other reference obligation and the credit rating with respect to such asset-backed security or other reference obligation has been downgraded or withdrawn by any rating agency, (G) is a party to an agreement with or for the benefit of a CDS Counterparty where a cross-default or termination event has occurred or to the extent it results from the occurrence of an event described in clauses (A) through (F), or (H) has admitted in writing to any set of circumstances described in clauses (A) through (G); provided , that if any counterparty to a credit default swap agreement with XLCA or Affiliates of XLCA exercises a Triggered Enforcement Right in respect of such credit default swap as a result of the occurrence of an event described in clauses (A) through (E) or (H) (but solely with respect to clauses (A) through (E)), and the CDS Counterparties representing the Minimum Consenting CDS Counterparty Restructuring Threshold so elect in writing, this Section 6.10(b) shall no longer apply to any CDS Counterparty; provided , further that this sentence shall not apply with respect to any such Triggered Enforcement Right (x) withdrawn by such counterparty or deemed ineffective by a Governmental Authority within five (5) Business Days or (y) if the current payment obligation of the SCA Parties arising from the exercise of such Triggered Enforcement Right does not exceed $35 million with respect to any given counterparty. The SCA Parties shall give notice to the CDS Counterparties promptly after receiving notice of the exercise of a Triggered Enforcement Right.
(c) Subsequent to the date hereof and until the earlier of (i) Closing or (ii) the termination of this Agreement pursuant to Section 8.01 , the XL Parties will not exercise any Triggered Enforcement Rights to the extent triggered as a result of the fact that any of the SCA Parties or any of their Affiliates (A) is or is becoming insolvent (either because its financial condition is such that the sum of its debts is greater than the fair market value of its assets or because the fair saleable value of its assets is less than the amount required to pay its probable liabilities on its existing debts as they mature), (B) has or will have unreasonably small capital with which to engage in its business and (C) has or will have incurred debts beyond its ability to pay as they become due, (D) does not have or will not have an excess of required reserves and other liabilities over admitted assets, (E) has or will have insufficient assets to reinsure all outstanding risks with other solvent authorized assuming insurers after paying all accrued claims owed, (F) has a credit rating that has been downgraded or withdrawn by any rating agency, or has sold credit protection or provided a guarantee with respect to an asset-backed security or other reference obligation and the credit rating with respect to such asset-backed security or other reference obligation has been downgraded or withdrawn by any rating agency, (G) is a party to an agreement with or for the benefit of a CDS Counterparty where a cross-default or termination event has occurred or to the extent it results from the occurrence of an event described in clauses
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(A) through (F), or (H) has admitted in writing to any set of circumstances described in clauses (A) through (G).
(d) For the avoidance of doubt, nothing herein shall restrict or impair the exercise of Triggered Enforcement Rights by any CDS Counterparty or by any XL Party in the event that any of the SCA Parties or any of their Affiliates institutes or has instituted against it a proceeding relating to its insolvency, bankruptcy, rehabilitation, liquidation, or reorganization under any bankruptcy or insolvency Law or other similar Law affecting creditors rights, or has a petition presented relating to its winding-up, rehabilitation, insolvency, bankruptcy, reorganization or liquidation, regardless of whether or not such proceeding or petition (i) results in a judgment of insolvency or bankruptcy or the entry of an order against it relating to any rehabilitation, insolvency, bankruptcy, reorganization or liquidation or (ii) is not dismissed, discharged, stayed or restrained. Further, for the avoidance of doubt, the CDS Counterparties may submit claims on account of their credit default swaps, policies or other agreements with any SCA Party to the SCA Parties as they become due in the ordinary course, other than claims subject to forbearance pursuant to Section 6.10(b) .
Section 6.11 Control of Litigation and Cooperation . (a) As between the SCA Parties and the XL Parties, the XL Parties shall have the right (but not the obligation) to control and direct, through counsel of its own choosing, the defense and settlement of any Action against any SCA Party brought by any Person that challenges the validity or enforceability of this Agreement or any Ancillary Agreement, including any fraudulent conveyance Action or any other Action under any bankruptcy or insolvency Law or other similar Law affecting creditors rights (a Challenging Action ). The SCA Parties and the XL Parties shall promptly provide written notice to each other and the CDS Counterparties upon becoming aware of any Challenging Action or threatened Challenging Action. Subject to the first sentence of this Section 6.11(a) , the SCA Parties shall be entitled to participate fully in the defense of such Challenging Action with internal counsel or with outside counsel (at the SCA Parties own expense).
(b) The SCA Parties shall actively and in good faith reasonably cooperate in any defense of a Challenging Action controlled by the XL Parties. Such cooperation by the SCA Parties shall include (i) providing to the XL Parties, upon their reasonable request, all documents and information necessary to, or which could assist in, the defense, appeal or settlement of any such Challenging Action, (ii) making the SCA Parties employees (and using its commercially reasonable efforts to make the SCA Parties former employees) and representatives available to be interviewed by the XL Parties upon reasonable notice and at reasonable times and (iii) offering truthful deposition and trial testimony upon the request of the XL Parties.
(c) The XL Parties and the SCA Parties shall actively and in good faith reasonably cooperate in the defense of any third-party Actions other than Challenging Actions brought or made against any such Party relating to the subject matter of, or any Transactions consummated or to be consummated under, this Agreement or any Ancillary Agreement. Such cooperation shall include (i) providing to any such Party against which any such Action is made, upon such Partys reasonable request, all documents and information necessary to, or which could assist in, the defense, appeal or settlement of any such Action, (ii) making its employees (and using its commercially reasonable efforts to make its former employees) and representatives
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available to be interviewed by the Party against which any such Action is made upon reasonable notice and at reasonable times, (iii) offering truthful deposition and trial testimony upon the request of the Party against which any such Action is made and (iv) otherwise consulting with the Party against which any such Action is made and, to the extent the Action is made against more than one Party, coordinating, to the extent feasible, the handling and defense of any such Action; provided , however , that nothing herein shall require disclosure by any such Party of any information subject to the attorney-client privilege or in conflict with any contractual confidentiality restriction to which such Party is bound, except when a protective order issued by a Governmental Authority would reasonably ensure Confidentiality of the disclosed.
Section 6.12 CDS Counterparty Restructuring . Following the Closing Date (except to the extent the Allocated Funds, as defined below, are paid to or for the benefit of the CDS Counterparties pursuant to clause (i) or (ii) of this Section 6.12 ), XLCA shall segregate and hold an aggregate amount of Eight Hundred and Twenty Million Dollars ($820,000,000) in cash (together with any SCA Share Sale Proceeds and the premiums or other payments described in the last sentence of this Section 6.12 ) separately in an interest bearing account or otherwise invested as may be agreed in writing between the SCA Parties and the Required Consenting CDS Counterparties (together with any interest earned thereon, the Allocated Funds ), it being understood that such interest bearing account or other investment vehicle described in this sentence will be maintained at Wilmington Trust Company, or, if maintained with a CDS Counterparty or an Affiliate of a CDS Counterparty, such CDS Counterparty shall have waived in writing its rights of set-off with respect to, and any security interest or other lien on, the Allocated Funds, solely for purposes of (i) commuting, terminating, amending and/or otherwise restructuring, as applicable, existing agreements (a CDS Counterparty Restructuring ) pursuant to an agreement among the applicable SCA Parties and CDS Counterparties representing not less than the Minimum Consenting CDS Counterparty Restructuring Threshold and (ii) after October 15, 2008, the payment of any actual claims or losses on existing agreements and insurance policies issued to or for the benefit of CDS Counterparties and, it being understood that, such funds shall not be used for any other purpose, except that, in the event that XLCA becomes subject to a rehabilitation or liquidation proceeding, the Allocated Funds shall no longer be separately held or segregated or limited in use to the purpose stated above and shall be part of the general assets of XLCA. XLCA shall provide quarterly reports to the CDS Counterparties setting forth an accounting, in reasonable detail, with respect to the Allocated Funds and any investments maintained therein; provided , that nothing in this Section 6.12 , including the creation of the Allocated Funds, shall (i) in any way limit the rights or claims of the CDS Counterparties, the liabilities of the SCA Parties in respect of such claims, or the rights of the CDS Counterparties in respect of other assets of the SCA Parties or (ii) constitute a waiver of any defense the SCA Parties may have with respect to any such claims or liabilities. Notwithstanding anything else herein, no CDS Counterparty has any obligation to participate in the CDS Counterparty Restructuring, including, for the avoidance of doubt, commuting, terminating, amending and/or otherwise restructuring, as applicable, existing agreements. The premiums or other payments that a CDS Counterparty makes in respect of its credit default swap agreements with XLCA or Affiliates of XLCA during the period that such CDS Counterparty forbears from exercising any Triggered Enforcement Right under such credit default swap pursuant to Section 6.10(b) shall be included in the Allocated Funds. After the Closing, the SCA Parties and the CDS Counterparties will negotiate in good faith in an effort to reach agreement
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on a CDS Counterparty Restructuring on or prior to October 15, 2008 that is fair and equitable to both the SCA Parties and the CDS Counterparties.
Section 6.13 Restriction on Commutations . Until October 15, 2008, the SCA Parties shall not effect any commutations, settlements, restructurings or terminations of policies or contracts not expressly contemplated by this Agreement that involve the payment of any consideration by the SCA Parties, without the consent of CDS Counterparties representing the Minimum Consenting CDS Counterparty Restructuring Threshold, provided , that during such period the SCA Parties may effect any action (including commutations) related to the EIB Policies in accordance with Section 6.05 , may consummate the Financial Security Commutations, and may effect commutations, settlements, restructurings and terminations (i) that involve cash payments not in excess of an aggregate amount set forth in a letter delivered concurrently herewith to the XL Parties and the CDS Financial Advisor during such period (of which (A) an amount set forth in such letter may not be used for the commutation, settlement, restructuring or termination of any policy or contract other than JeffCo Policies and (B) no more than an amount set forth in such letter may be for CDS policies and contracts); provided , however , that no such commutation, settlement, restructuring or termination (other than with respect to JeffCo Policies) may involve payment by the SCA Parties of cash, debt or other consideration in excess of the reserves (including case and unearned premium reserves) related to the risks being commuted; (ii) of the reinsurance contracts provided in Schedule 2.04 (in accordance with Section 2.04 ); (iii) that are settlements required pursuant to the express terms of insurance policies and contracts of the SCA Parties; and (iv) that are for cash collateralization of up to $24 million of letters of credit issued under the Credit Agreement; provided , that such outstanding letters of credit shall be extended for one year; provided , further , that until October 15, 2008, prior to effecting any commutation, settlement, restructuring or termination permitted under Section 6.13(i) or (ii) : (w) XLCA shall provide the CDS Financial Advisor reasonable advance notice and such information as may be reasonably necessary to evaluate such proposed commutation, settlement, restructuring or termination (which advance notice and information shall be supplied to the CDS Financial Advisor not later than five (5) Business Days prior to consideration of such commutation, settlement, restructuring or termination by XLCAs board of directors as provided below); (x) at the option of the CDS Financial Advisor, and no later than five (5) Business Days after being provided such notice and information by XLCA regarding such proposed commutation, settlement, restructuring or termination, the CDS Financial Advisor may provide XLCA with a written response to such proposed commutation, settlement, restructuring or termination; (y) XLCA shall provide such written response to its board of directors for consideration at the XLCA board of directors meeting at which such commutation, settlement, restructuring or termination will be presented for approval; and (z) will obtain the approval of the XLCA board of directors for such commutation, settlement, restructuring or termination after so providing such response to the board. For the avoidance of doubt, no such commutation, settlement, restructuring or amendment shall involve the payment of Allocated Funds except to the extent provided in Section 6.12 .
Section 6.14 Treatment of Public Finance Business . The SCA Parties and the CDS Counterparties understand that the approval by the NYID of any CDS Counterparty Restructuring will require addressing XLCAs public finance business to the satisfaction of the NYID. The SCA Parties and the CDS Counterparties hereby agree to negotiate in good faith in an effort to reach an agreement on the appropriate treatment of such public finance business in
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connection with the CDS Counterparty Restructuring (it being understood that failure to reach such agreement, notwithstanding good faith negotiations, shall not constitute a default hereunder or give rise to any cause of action against any Party hereto). Without the consent of CDS Counterparties representing the Minimum Consenting CDS Counterparty Restructuring Threshold, the SCA Parties shall not transfer or otherwise dispose of such public finance business prior to October 15, 2008, except for reinsurance cessions for risk management purposes not intended to effectuate a transfer of the business in whole or any substantial part or to the extent it is agreed between the NYID and the SCA Parties that to transfer such public finance business is necessary and/or in the public interest (as to which the CDS Counterparties reserve all rights to challenge or object).
Section 6.15 Further Action . Subject to the next sentence, each of the Parties shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, to do or cause to be done all things necessary, proper or advisable under applicable Law, and to execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and the Ancillary Agreements to which it is a party and to consummate and make effective the Transactions reasonably as requested by the Parties, including the matters contemplated by Section 6.18 . Notwithstanding anything to the contrary herein or otherwise, the Parties agree that the XL Parties have (i) complete and sole discretion whether or not any XL Public Offering will be completed and (ii) no obligation to the SCA Parties or the CDS Counterparties to complete any XL Public Offering.
Section 6.16 Resignation of XL Nominees . The XL Parties shall use their reasonable best efforts to cause those four members of the SCA Board of Directors nominated by any of the XL Parties to resign from SCAs Board of Directors effective as of the Closing. From and after the Closing, XL shall refrain from exercising any rights granted to it under SCAs Bye-Laws.
Section 6.17 Disclosure Schedules; Supplementation and Amendment of Schedules . The SCA Parties may, at their option, include in the Schedules items that are not material in order to avoid any misunderstanding, and such inclusion, or any references to dollar amounts, shall not be deemed to be an acknowledgement or representation that such items are material, to establish any standard of materiality or to define further the meaning of such terms for purposes of this Agreement. Information disclosed in the Schedules shall constitute a disclosure for all purposes under this Agreement notwithstanding any reference to a specific section, and all such information shall be deemed to qualify the entire Agreement and not just such section. From time to time, prior to the Closing, the SCA Parties shall have the right to supplement or amend the Schedules with respect to any matter arising hereafter or discovered after the delivery of the Schedules pursuant to this Agreement. No such supplement or amendment shall have any effect on the satisfaction of the condition to closing set forth in Section 7.01(a) ; provided , however , if the Closing shall occur, then the Parties (other than the SCA Parties) shall be deemed to have waived any right or claim pursuant to the terms of this Agreement or otherwise, including pursuant to Section 9.11 hereof, with respect to any and all matters disclosed pursuant to any such supplement or amendment prior to the Closing.
Section 6.18 SCA Shareholder Entity . The SCA Parties and the CDS Counterparties agree to cause the SCA Shareholder Entity to be promptly created, and in no
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event later than ten (10) days after the Closing, by taking all actions reasonably necessary to cause a trustee to enter into the Declaration of Trust. SCA and the SCA Shareholder Entity shall enter into the SCA Shareholder Entity Agreement and the SCA Registration Rights Agreement concurrent with or promptly after creation of the SCA Shareholder Entity. If the XL Owned SCA Common Shares are transferred to the Escrow Agent pursuant to Section 2.10 , then SCA and XLCA shall promptly, but in no event later than two (2) Business Days following the satisfaction of the SCA Shareholder Entity Formation Conditions, deliver a written notice to the Escrow Agent conforming to the requirements of the Escrow Agreement directing the Escrow Agreement to release all of the XL Owned SCA Common Shares (together with the related certificates and stock powers) to the SCA Shareholder Entity. The vacancies on the board of directors of SCA created by the resignations as of the Closing of the four directors of SCA nominated by the XL Parties shall be filled by appointment of the initial nominees of the SCA Shareholder Entity to the board of directors of SCA in accordance with the SCA Shareholder Entity Agreement. Each of the SCA Parties and the Required Consenting CDS Counterparties will use their reasonable best efforts to take all appropriate action and will cooperate fully with each other and their respective officers, directors, employees, agents, counsel, accountants and other designees in connection with any steps required to be taken to satisfy each of the SCA Shareholder Entity Formation Conditions. Furthermore, the SCA Parties and the CDS Counterparties shall work together in good faith to achieve the goals of the SCA Parties and the CDS Counterparties as set forth in this Agreement and any Ancillary Agreement to which an SCA Party and a CDS Counterparty is a party, and those described in this Section 6.18 . Notwithstanding Sections 9.07 and 9.08 , the SCA Shareholder Entity Formation Conditions may be amended and modified from time to time upon the written agreement of SCA and the Required Consenting CDS Counterparties.
Section 6.19 Portfolio Trust . The SCA Parties will direct each portfolio trust that is a party to a credit default swap agreement with a CDS Counterparty to execute a joinder agreement in the form attached hereto as Exhibit 1.01(c) and become a Party to this Agreement promptly upon receiving notice that such CDS Counterparty became a Party, and in no event later than the earlier of (i) the Closing or (ii) three (3) Business Days after such CDS Counterparty became a Party.
Section 6.20 BlackRock . The SCA Parties shall reasonably cooperate with BlackRock, including providing BlackRock with reasonable access to information and reasonable access to, and will request reasonable cooperation from, personnel of the SCA Parties, in order to permit BlackRock to complete its work as early in the month of August 2008 as is reasonably practicable.
Section 6.21 XLFA Merger . As soon as practicable following the later of (i) the Closing and (ii) the occurrence of the XLFA Redomestication, XLFA as continued in Delaware or its successor pursuant to the XLFA Redomestication shall merge into and with XLCA.
Section 6.22 Collipulli Temuco and Banco de Brasil Policies . (a) (i) The SCA Parties will provide the XL Parties with copies of all documents, files, books and records relating to either the Collipulli Temuco Policy or the Banco de Brasil Policy as reasonably requested by the XL Parties from time to time, and reasonable access to, and will request reasonable cooperation from, upon reasonable notice and during normal business hours, all employees of the
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SCA Parties whose employment responsibilities are related to either the Collipulli Temuco Policy or the Banco de Brasil Policy.
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(ii) The XL Parties will provide the SCA Parties with copies of all documents, files, books and records relating to either the Collipulli Temuco Policy or the Banco de Brasil Policy as reasonably requested by the SCA Parties from time to time, and reasonable access to, and will request reasonable cooperation from, upon reasonable notice and during normal business hours, all employees of the XL Parties whose employment responsibilities are related to either the Collipulli Temuco Policy or the Banco de Brasil Policy. |
(b) The XL Parties will reasonably cooperate with the SCA Parties in connection with the remediation of the Collipulli Temuco Policy and will cause XLI to issue a replacement policy for the Collipulli Temuco Policy to the new liquidity provider on substantially the same terms as the XLI policy currently in force.
(c) Upon written direction of the SCA Parties, and only upon written direction of the SCA Parties, the XL Parties will exercise any right, power or authority provided to it with respect to the Collipulli Temuco transaction, including the giving of consents, providing appropriate waivers and taking any other actions related to the performance and enforcement of its rights under the financing documents; provided , that the XL Parties are not required to take any action that will be in violation of any Law, and may take any action required by, or necessary to be in compliance with, any applicable Law.
Section 6.23 XLFA Redomestication . Prior to the Closing, the SCA Parties shall pre-clear the certificate that will effect the XLFA Redomestication with the Delaware Secretary of State and provide evidence of such pre-clearance to the other parties hereto. At the Closing, after XLFA receives the Cash Consideration Amount to be received by it under Section 2.08 , the SCA Parties shall cause such pre-cleared certificate to be filed with the Secretary of State of Delaware, thereby effecting the XLFA Redomestication.
Section 7.01 Conditions to Obligations of the SCA Parties . The obligations of the SCA Parties to consummate the Transactions are subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants . (i) The representations and warranties of the XL Parties contained in this Agreement (A) that are not qualified by materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, (ii) the
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covenants and agreements contained in this Agreement to be complied with by the XL Parties on or before the Closing will have been complied with in all material respects, (iii) the representations and warranties of the CDS Counterparties contained in this Agreement (A) that are not qualified by materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, and (iv) the covenants and agreements contained in this Agreement to be complied with by the CDS Counterparties on or before the Closing will have been complied with in all material respects;
(b) No Proceeding or Litigation . No Action will have been commenced by any Governmental Authority against any of the Parties seeking to restrain or materially and adversely alter the Transactions which, in the reasonable, good faith determination of the Board of Directors of each of the SCA Parties, after consulting with legal counsel, is likely to render it impossible or unlawful to consummate such transactions;
(c) Outside Date . 10:00 a.m., New York time, on August 5, 2008, shall have passed;
(d) Closing Deliveries . All closing documents required to be delivered under Section 2.08 and Section 2.09 hereof shall have been delivered;
(e) Financial Security Commutations . The Financial Security Commutations shall have been consummated prior to or simultaneously with the Closing;
(f) MLI CDS Agreements . Termination of the MLI CDS Agreements will have occurred prior to, or will occur simultaneously with, the Closing;
(g) Effectiveness of Board Resignations . All four directors of SCA designated by the XL Parties shall have tendered their resignations effective as of the Closing;
(h) Consents . None of the consents listed in Section 3.03 of the SCA Parties Disclosure Schedule or Section 4.03 of the XL Parties Disclosure Schedule have been withdrawn, rescinded, revised, amended or altered in any way; and
(i) Officers Certificate . Receipt of a certificate simultaneously with the Closing of a duly authorized officer of each of the XL Parties certifying in respect of such XL Party as to the matters set forth in Sections 7.01(a)(i) and 7.01(a)(ii) .
Section 7.02 Conditions to Obligations of the XL Parties . The obligations of the XL Parties to consummate the Transactions are subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants . (i) The representations and warranties of the SCA Parties contained in this Agreement (A) that are not qualified by
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materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, (ii) the covenants and agreements contained in this Agreement to be complied with by the SCA Parties on or before the Closing will have been complied with in all material respects, (iii) the representations and warranties of the CDS Counterparties contained in this Agreement (A) that are not qualified by materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, and (iv) the covenants and agreements contained in this Agreement to be complied with by the CDS Counterparties on or before the Closing will have been complied with in all material respects;
(b) Financial Security Commutations . The Financial Security Commutations shall have been consummated prior to or simultaneously with the Closing;
(c) No Proceeding or Litigation . No Action will have been commenced by any Governmental Authority against any of the Parties seeking to restrain or materially and adversely alter the Transactions which, in the reasonable, good faith determination of the Board of Directors of each of the XL Parties, after consulting with legal counsel, is likely to render it impossible or unlawful to consummate such transactions;
(d) Consents . None of the consents listed in Section 3.03 of the SCA Parties Disclosure Schedule or Section 4.03 of the XL Parties Disclosure Schedule have been withdrawn, rescinded, revised, amended or altered in any way;
(e) Closing Deliveries . The closing documents required to be delivered under Section 2.08 and Section 2.09 hereof shall have been delivered;
(f) MLI CDS Agreements . Termination of the MLI CDS Agreements will have occurred prior to, or will occur simultaneously with, the Closing; and
(g) Officers Certificate . Receipt of a certificate simultaneously with the Closing of a duly authorized officer of each of the SCA Parties certifying in respect of such SCA Party as to the matters set forth in Sections 7.02(a)(i) and 7.02(a)(ii) .
Section 7.03 Conditions to Obligations of the CDS Counterparties . The obligations of each CDS Counterparty to consummate the Transactions are subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants . (i) The representations and warranties of the SCA Parties contained in this Agreement (A) that are not qualified by
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materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, (ii) the covenants and agreements contained in this Agreement to be complied with by the SCA Parties on or before the Closing will have been complied with in all material respects, (iii) the representations and warranties of the XL Parties contained in this Agreement (A) that are not qualified by materiality will have been true and correct in all material respects when made and will be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, and (B) that are qualified by materiality will have been true and correct when made and will be true and correct as of the Closing with the same force and effect as if made as of the Closing, except to the extent such representations and warranties are as of another date, in which case such representations and warranties will be true and correct as of that date, and (iv) the covenants and agreements contained in this Agreement to be complied with by the XL Parties on or before the Closing will have been complied with in all material respects;
(b) No Proceeding or Litigation . No Action will have been commenced by any Governmental Authority against any of the Parties seeking to restrain or materially and adversely alter the Transactions which, in the reasonable, good faith determination of the CDS Counterparties, after consulting with legal counsel, is likely to render it impossible or unlawful to consummate such Transactions;
(c) Effectiveness of Board Resignations . All four directors of SCA designated by the XL Parties shall have tendered their resignations effective as of the Closing; and
(d) Closing Deliveries . The closing documents required to be delivered under Section 2.08 and Section 2.09 hereof shall have been delivered.
Section 7.04 Frustration of Closing Conditions . None of the XL Parties, the SCA Parties or any CDS Counterparty may rely on the failure of any condition set forth in Section 7.01 , Section 7.02 or Section 7.03 , as the case may be, to be satisfied if such failure was primarily caused by such Partys or Parties breach of any provision of this Agreement or failure to use its or their reasonable best efforts to consummate the Transactions in accordance with the terms of this Agreement.
Section 8.01 Termination . This Agreement may be terminated at any time prior to the Closing:
(a) by the XL Parties, provided , that they are not in breach of this Agreement, if between the date hereof and the Closing Date if: (i) any of the representations and warranties of any of the SCA Parties or the CDS Counterparties contained in this Agreement, (A) that are
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not qualified by materiality, were not true and correct in all material respects when made, or, (B) that are qualified by materiality, were not true and correct when made; (ii) any of the SCA Parties or the CDS Counterparties failed to comply in any material respect with the covenants or agreements contained in this Agreement to be complied with by it; or (iii) any of the SCA Parties makes a general assignment for the benefit of its creditors or any proceeding is instituted by or against any of the SCA Parties seeking to adjudicate any one of them as bankrupt or insolvent, seeking the liquidation, winding up or reorganization of any one of them, or seeking any arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency, rehabilitation or reorganization as to any one of them; provided , however , that prior to termination for any breach of this Agreement described in the preceding subsection (i) or (ii), the XL Parties must provide written notice of such breach to the SCA Parties and such breach must remain outstanding without material cure for fifteen (15) days after delivery of such notice;
(b) by the SCA Parties, provided , that they are not in breach of this Agreement, if between the date hereof and the Closing Date if: (i) any of the representations and warranties of any of the XL Parties or the CDS Counterparties contained in this Agreement, (A) that are not qualified by materiality, were not true and correct in all material respects when made, or, (B) that are qualified by materiality, were not true and correct when made; (ii) any of the XL Parties or the CDS Counterparties failed to comply in any material respect with the covenants or agreements contained in this Agreement to be complied with by it; or (iii) any of the XL Parties makes a general assignment for the benefit of its creditors or any proceeding is instituted by or against any XL Party seeking to adjudicate any one of them as bankrupt or insolvent, seeking the liquidation, winding up or reorganization of any one of them, or seeking any arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency, rehabilitation or reorganization as to any one of them; provided , however , that prior to termination for any breach of this Agreement described in the preceding subsection (i) or (ii) , the SCA Parties must provide written notice of such breach to the XL Parties and such breach must remain outstanding without material cure for fifteen (15) days after delivery of such notice;
(c) by the SCA Parties, as a group, or the XL Parties, as a group, if the Closing shall not have occurred on or prior to August 15, 2008; provided , however , that the right to terminate this Agreement under this Section 8.01(c) shall not be available to the SCA Parties, as a group, or the XL Parties, as a group, if failure to fulfill any obligation under this Agreement by any member of such group shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(d) by any Party, in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Transactions, and such order, decree, ruling or other action shall have become final and non-appealable; or
(e) by the mutual written consent of the SCA Parties and the XL Parties.
Section 8.02 Effect of Termination . In the event of termination of this Agreement as provided in Section 8.01 , this Agreement shall forthwith become void and there
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shall be no continuing obligations on the part of any Party hereto except (a) as set forth in Sections 6.01 , 9.01 , 9.11 , 9.12 , 9.13 and 9.14 , and (b) that nothing herein shall relieve any Party from liability for any breach of this Agreement prior to its termination.
Section 8.03 CDS Counterparty Withdrawal . If the Closing does not take place on or prior to August 15, 2008, a CDS Counterparty may withdraw from this Agreement and such CDS Counterparty shall have no obligations or rights hereunder or in connection with the Transactions (including under Sections 2.05(c) and 6.10(b) and notwithstanding any provision to the contrary in Section 9.08 or otherwise), by providing notice of such withdrawal to all Parties by August 20, 2008, and after such withdrawal, such CDS Counterparty will no longer be deemed to be a CDS Counterparty for purposes of this Agreement and any Ancillary Agreement.
Section 9.01 Expenses . Except as otherwise specified in this Agreement or any other written agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the Transactions, shall be paid by the Party incurring such costs and expenses, whether or not the Closing shall have occurred.
Section 9.02 Notices . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by an internationally recognized overnight courier service, by facsimile or electronic mail (upon electronic confirmation of delivery), or by registered or certified mail (postage prepaid, return receipt requested), to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 9.02 ):
(a) if to any of the SCA Parties:
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c/o XL Capital Assurance Inc. |
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1221 Avenue of the Americas |
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New York, NY 10020-1001 |
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212.478.3579 |
Electronic Mail: |
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susan.comparato@scafg.com |
Attention: |
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Susan Comparato, General Counsel |
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with a copy to: |
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Address: |
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Weil, Gotshal & Manges |
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767 Fifth Avenue |
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New York, NY 10153 |
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212.310.8007 |
Electronic Mail: |
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gary.holtzer@weil.com |
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Attention: |
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Gary T. Holtzer |
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(b) if to any of the XL Parties:
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Address: |
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c/o XL Capital Ltd |
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XL House |
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One Bermudiana Road |
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Hamilton |
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Bermuda, HM 11 |
Facsimile: |
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441.294.7307 |
Electronic Mail: |
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kirstin.gould@xlgroup.com |
Attention: |
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Kirstin Gould, General Counsel |
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with a copy to: |
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Address: |
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Cadwalader, Wickersham & Taft LLP |
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One World Financial Center |
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New York, NY 10281 |
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212.504.6666 |
Electronic Mail: |
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louis.bevilacqua@cwt.com |
Attention: |
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Louis J. Bevilacqua |
(c) if to the CDS Counterparties, to the address, facsimile or electronic mail address listed on Schedule 9.02 hereto, which shall be kept on file by XL, and updated by XL from time to time (with copies of updates provided to the SCA Parties and Davis Polk & Wardwell at the address listed below) based on the execution and delivery of joinder agreements by additional CDS Counterparties in accordance with Section 9.04 below:
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with a copy to: |
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Address: |
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Davis Polk & Wardwell |
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450 Lexington Avenue |
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New York, NY 10017 |
Facsimile: |
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212.450.3092 |
Electronic Mail: |
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donald.bernstein@dpw.com |
Attention: |
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Donald S. Bernstein |
Section 9.03 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced under any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect for so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to either Party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an
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acceptable manner so that the Transactions are consummated as originally contemplated to the greatest extent possible.
Section 9.04 Joinder of CDS Counterparties and Additional SCA Parties . Any counterparty to a credit default swap agreement with XLCA or an Affiliate of XLCA or any portfolio trust that is an Affiliate of XLCA may become a Party to this Agreement prior to the Closing by executing a joinder agreement in the form attached hereto as Exhibit 1.01(c) . Upon execution and delivery of each joinder agreement pursuant to its terms, each party will be deemed to be a CDS Counterparty or an SCA Party (as applicable) for all purposes related hereto and shall be deemed, without limitation, to have made the releases set forth in Section 2.05(c) hereof (with respect to the CDS Counterparties) or in Section 2.05(a) hereof (with respect to the SCA Parties).
Section 9.05 Entire Agreement . This Agreement and the Ancillary Agreements constitute the entire agreement of the Parties with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between any of the Parties with respect to the subject matter hereof and thereof.
Section 9.06 Assignment . This Agreement may not be assigned by operation of Law or otherwise without the express written consent of all Parties (which consent may be granted or withheld in the sole discretion of each of the Parties) and any such assignment or attempted assignment without such consent shall be void.
Section 9.07 Amendment . This Agreement may not be amended, altered, supplemented or modified except (a) by an instrument in writing signed by, or on behalf of, all Parties, or (b) by a waiver in accordance with Section 9.08 ; provided , that, notwithstanding anything to the contrary in this Section 9.07 or in Section 9.08 below, the following sections and definitions set forth in this Agreement may not be amended, altered, supplemented, modified or waived without the unanimous consent of the CDS Counterparties: the definitions of XLFA Redomestication, Minimum Consenting CDS Counterparty Restructuring Threshold and Required Consenting CDS Counterparties, and Sections 2.05 , 2.06 , 2.07(b) , 2.10 , 6.03 , 6.04 , 6.05 , 6.06 , 6.07 , 6.10(b) , 6.10(d) , 6.12 , 6.13 , 6.14 , 6.16 , 6.18 , 6.20 , 6.21 , 6.23 , 9.07 and 9.08 .
Section 9.08 Waiver . Subject to the provisions in Section 9.07 above, which provide that, notwithstanding anything to the contrary in Section 9.07 or this Section 9.08 , the following sections and definitions set forth in this Agreement may not be amended, altered, supplemented, modified or waived without the unanimous consent of the CDS Counterparties: the definitions of XLFA Redomestication, Minimum Consenting CDS Counterparty Restructuring Threshold and Required Consenting CDS Counterparties, and Sections 2.05 , 2.06 , 2.07(b) , 2.10 , 6.03 , 6.04 , 6.05 , 6.06 , 6.07 , 6.10(b) , 6.10(d) , 6.12 , 6.13 , 6.14 , 6.16 , 6.18 , 6.20 , 6.21 , 6.23 , 9.07 and 9.08 , the SCA Parties, acting unanimously as a group, and the XL Parties, acting unanimously as a group, may (a) extend the time for the performance of any of the obligations that one or more members of another group owes to one or more of its members, (b) waive any right that one or more of its members may have due to inaccuracies in the representations and warranties made by any member of another group or contained in any Transaction Document or (c) waive compliance with any of the agreements of any member of another group, solely as they relate to the members of such waiving group, or conditions to the
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obligations of the members of such waiving group contained herein. Any such extension, waiver or amendment shall be valid only if set forth in an instrument in writing signed by all of the SCA Parties and XL Parties to be bound thereby. Any such extension, waiver or amendment will promptly be provided to all CDS Counterparties in writing and, if any CDS Counterparty objects to such extension, waiver or amendment, such CDS Counterparty will have five (5) Business Days from receipt of such extension, waiver or amendment to provide written notice to all other Parties that it intends to withdraw from this Agreement. If such CDS Counterparty provides such timely notice, it will be deemed to have withdrawn as a Party to this Agreement on the date that such waiver, extension or amendment becomes effective and the terms hereof shall have no further force or effect with regard to such CDS Counterparty; provided , that (i) any release made by any CDS Counterparty withdrawing as a party to this Agreement pursuant to this Section 9.08 and any release made by any SCA Party or any XL Party with respect to such withdrawing CDS Counterparty, in each case to the extent such releases shall have become effective prior to the time of such withdrawal, shall in each case remain in full force and effect after such withdrawal, and (ii) following such withdrawal, subject to the preceding clause (i) , such withdrawing CDS Counterparty shall cease to have any other obligations or rights hereunder or in connection with the Transactions (including under Sections 2.05(c) and 6.10(b)) , and after such withdrawal, such CDS Counterparty will no longer be deemed to be a CDS Counterparty for purposes of this Agreement or any Ancillary Agreement. If the CDS Counterparty does not provide such timely notice, it shall be deemed to have approved the waiver, extension or amendment. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition or as a waiver of any other term or condition of this Agreement. The failure of any Party hereto to assert any of its rights hereunder shall not constitute a waiver of any other rights. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section 9.09 No Third-Party Beneficiaries . This Agreement shall be binding upon and inure solely to the benefit of the Parties and, except as provided in Section 2.05 , their respective successors and permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit, remedy or right of action of any nature whatsoever, arising directly or indirectly out of, based upon, or in any way related to or in connection with this Agreement or the Ancillary Agreements.
Section 9.10 Rights and Remedies . Each Party acknowledges and agrees that each Party would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any material breach of this Agreement by another Party could not be adequately compensated by monetary damages alone. Accordingly, in addition to any other right or remedy to which such Party may be entitled, at Law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking. For the avoidance of doubt, any liability of any CDS Counterparty that may arise in connection with this Agreement shall neither be joint nor joint and several with any other CDS Counterparty.
Section 9.11 Indemnification . (a) The XL Parties shall jointly and severally indemnify and hold harmless each of the SCA Parties, and their respective Subsidiaries,
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Affiliates, officers, directors, employees, agents, successors and permitted assigns (collectively, SCA Indemnitees ), for and against any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties (including attorneys and consultants fees and expenses) actually suffered or incurred (including any action, claim, suit or other proceeding brought or otherwise initiated by any of them) ( Losses ) by any such SCA Indemnitee arising out of or resulting from the breach of any provision of this Agreement prior to Closing by any of the XL Parties.
(b) The SCA Parties shall jointly and severally indemnify and hold harmless each of the XL Parties, and their respective Subsidiaries, Affiliates, officers, directors, employees, agents, successors and permitted assigns (collectively, XL Indemnitees ), for and against any and all Losses incurred by any such XL Indemnitee arising out of or resulting from (i) the breach of any provision of this Agreement prior to Closing by any of the SCA Parties or (ii) any action taken pursuant to the written direction of the SCA Parties under Section 6.22 or prohibited to be taken pursuant to Section 6.22 .
Section 9.12 No Survival . None of the representations and warranties other than those contained in Sections 3.01 (other than as to enforceability for reasons other than fraud, ultra vires action, improper authorization, or failure to be duly organized, validly existing or in good standing in any applicable jurisdiction), 3.02 , 3.03 , 4.01 , 4.02 , 4.03 , 4.04 , 4.05 , 5.01 , 5.02 and 5.03 shall survive the Closing. The representations and warranties contained in Sections 3.01 (other than as to enforceability for reasons other than fraud, ultra vires action, improper authorization, or failure to be duly organized, validly existing or in good standing in any applicable jurisdiction), 3.02 , 3.03 , 4.01 , 4.02 , 4.03 , 4.04 , 4.05 , 5.01 , 5.02 and 5.03 shall survive for the statute of limitations for contracts of the nature of this Agreement.
Section 9.13 Several Liability of the CDS Counterparties . For the avoidance of doubt, the obligations of the CDS Counterparties under this Agreement shall be several and not joint and several.
Section 9.14 Governing Law and Jurisdiction . This Agreement shall be interpreted under and governed by the Laws of the State of New York without giving effect to conflicts of law provisions thereof. In the event that there is a dispute between or among the Parties arising under this Agreement, other than with respect to events arising under the 2001 Facultative Quota Share Commutation Agreement or the Excess of Loss Commutation Agreement, the Parties (i) agree that the exclusive forum to seek remedy shall be to institute a legal proceeding in the courts of the State of New York located in the City and County of New York, (ii) hereby expressly submit to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waive any claim of lack of personal jurisdiction and improper venue and any claim that such courts are an inconvenient forum and (iii) agree that the prevailing Parties shall be entitled to recover their reasonable attorneys fees, costs and disbursements from the other Parties (in addition to any other relief to which the prevailing Parties may be entitled). Each Party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address provided to the Parties in accordance with Section 9.02, such service to become effective ten (10) days after such mailing.
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Section 9.15 Waiver of Jury Trial . Each of the Parties hereby waives to the fullest extent permitted by applicable Law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under, or in connection with this Agreement or the Transactions. Each of the Parties hereby (i) certifies that no representative, agent or attorney of any other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce the foregoing waiver and (ii) acknowledges that it has been induced to enter into this Agreement and the Transactions, as applicable, by, among other things, the mutual waivers and certifications in this Section 9.15 .
Section 9.16 Fully Negotiated Agreement . Each Party has had the opportunity to negotiate the terms, consult with counsel, and modify the provisions of this Agreement and the Ancillary Agreements. Therefore, the terms of this Agreement and the Ancillary Agreements shall be considered and interpreted without any presumption, inference or rule requiring construction or interpretation of any provision of this Agreement against the interests of the drafter of the Agreement.
Section 9.17 Currency . Unless otherwise specified in this Agreement, all references to currency, monetary values and dollars set forth herein shall mean United States (U.S.) Dollars and all payments hereunder shall be made in United States Dollars.
Section 9.18 Counterparts . This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement. A facsimile or Portable Document Format copy of a signature shall have the same force and effect as an original signature.
[NO FURTHER TEXT ON THIS PAGE]
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IN WITNESS WHEREOF, the SCA Parties, XL Parties and CDS Counterparties have caused this Agreement to be executed as of the date first written above.
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XL CAPITAL LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Executive Vice President and Chief of Staff |
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XL INSURANCE (BERMUDA) LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Executive Vice President and Chief of Staff |
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XL REINSURANCE AMERICA INC. |
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By: |
/s/ Steven P. Agosta |
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Name: Steven P. Agosta |
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Title: Vice President, General Counsel and Secretary |
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X.L. GLOBAL SERVICES, INC. |
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By: |
/s/ Kenneth P. Meagher |
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Name: Kenneth P. Meagher |
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Title: Assistant Secretary |
[SIGNATURE PAGE COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL SERVICES (BERMUDA) LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Deputy Chairman |
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X.L. AMERICA, INC. |
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By: |
/s/ Richard G. McCarty |
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Name: Richard G. McCarty |
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Title: Senior Vice President, General Counsel and Secretary |
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SECURITY CAPITAL ASSURANCE LTD |
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By: |
/s/ Claude LeBlanc |
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Name: Claude LeBlanc |
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Title: Executive Vice President |
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XL FINANCIAL ASSURANCE LTD. |
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By: |
/s/ Thomas Currie |
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Name: Thomas Currie |
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Title: Senior Vice President |
[SIGNATURE PAGE COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL CAPITAL ASSURANCE INC. |
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By: |
/s/ Susan Comparato |
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Name: Susan Comparato |
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Title: Senior Vice President and General Counsel |
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XL FINANCIAL ADMINISTRATIVE SERVICES INC. |
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By: |
/s/ Susan Comparato |
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Name: Susan Comparato |
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Title: Managing Director and Secretary |
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SCA BERMUDA ADMINISTRATIVE LTD. |
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By: |
/s/ Thomas Currie |
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Name: Thomas Currie |
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Title: Senior Vice President |
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XL CAPITAL ASSURANCE (U.K.) LIMITED |
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By: |
/s/ Fredrick B. Hnat |
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Name: Fredrick B. Hnat |
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Title: Managing Director and Chief Operating Officer |
[SIGNATURE PAGE COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
EXHIBIT 1.01(a)
FORM OF 2001 FACULTATIVE QUOTA SHARE COMMUTATION AGREEMENT
Exhibit 1.01(a)
COMMUTATION AND RELEASE AGREEMENT
This Commutation and Release Agreement (the Agreement ) dated as of ________, 2008, is made by and between XL Financial Assurance Ltd, a company domiciled in Bermuda (the Company ) and XL Insurance (Bermuda) Ltd, formerly known as XL Insurance Ltd, a company also domiciled in Bermuda (the Reinsurer ). The Reinsurer and the Company are hereinafter referred to collectively as the Parties .
RECITALS
WHEREAS , the Parties previously entered into a Facultative Quota Share Reinsurance Treaty dated August 17, 2001, as amended, pursuant to which the Reinsurer agreed to reinsure certain liabilities of the Company (the Reinsurance Agreement ); and
WHEREAS , the Parties are parties to that certain Master Commutation, Release and Restructuring Agreement, dated as of July __, 2008, by and among the Company, the Reinsurer, Security Capital Assurance Ltd and the other parties thereto (the Master Transaction Agreement ), pursuant to which the Company and the Reinsurer have agreed to enter into this Agreement; and
WHEREAS , the Parties agree that it is in each of their best interests to freely and voluntarily enter into this Agreement and to fully and forever release and discharge each other from their respective existing and future liabilities and obligations, including contingent and uncertain liabilities, both known and unknown, under the Reinsurance Agreement and the individual risk cessions thereunder and to compromise, resolve and settle all amounts due, or which may become due, between each other arising out of, in respect of, or relating to the Reinsurance Agreement and/or the individual risk cessions thereunder; and
WHEREAS , Company and Reinsurer, or their affiliates, may be parties to agreements other than the Reinsurance Agreement, and it is the intent of the Parties that this Agreement will not have any effect upon such other agreements.
NOW, THEREFORE , in consideration of the covenants, conditions, promises and releases contained herein, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
PAYMENT
(a) The Reinsurer shall pay to the Company the sum of Twenty Five Million Dollars ($25,000,000.00) (the Commutation Amount ) via direct wire transfer, in immediately available funds, in accordance with the payment instructions set forth on Schedule A hereto on the Closing Date (as such term is defined in the Master Transaction Agreement). The date on which the Commutation Amount is paid and received shall be referred to hereinafter as the Effective Date .
Exh. 1.01(a)-1
(b) The Company shall accept the Commutation Amount in full satisfaction of all of the Reinsurers liabilities and obligations under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE II
RELEASE
(a) Upon the Reinsurers payment of the Commutation Amount to the Company, the Company, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors, and employees, hereby irrevocably and unconditionally releases and forever discharges the Reinsurer, its parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Company now has, owns or holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Reinsurer, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity, or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(a) shall not discharge obligations of the Reinsurer, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(b) Contemporaneous with the payment of the Commutation Amount to the Company, the Reinsurer, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the Company, its shareholders, parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Reinsurer now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Company, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(b) shall not discharge obligations of the
Exh. 1.01(a)-2
Company, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(c) The Parties understand that it is possible that unknown losses or claims may exist, or that present or future losses or claims may be underestimated in amounts or severity. Furthermore, the Parties expressly accept and assume the risk that the factual or legal assumptions made by any Party in connection with this Agreement may be found hereafter to be different from the true facts or law, and the Parties agree that this Agreement shall be and shall remain in full force and effect notwithstanding such differences in facts or law. Each Party expressly takes all of the foregoing into account in determining the amount of consideration to be given and paid for the giving of this Agreement, and a portion of the said consideration, having been bargained for between the Parties with the knowledge of the possibility of such unknown losses and claims, is given in exchange for the full accord, satisfaction and discharge of all such losses and claims.
(d) Full payment of the Commutation Amount shall be in complete accord, satisfaction, settlement and commutation of any and all past, current and future liabilities and obligations that each Party owes or may owe to the other arising directly or indirectly out of or related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder and that upon payment of the Commutation Amount, the Reinsurance Agreement shall be terminated as of the Effective Date and neither Party shall have any further obligation or liability to the other Party under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE III
NON-RELIANCE
(a) This Agreement fully and finally resolves the rights, duties and obligations of the Company and the Reinsurer under the Reinsurance Agreement, and neither Party shall:
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(i) have any remedy in respect of any representation, warranty or undertaking of the other that is not specifically set forth in this Agreement, the Master Transaction Agreement, or the Ancillary Agreements commuting the reinsurance agreements listed in Part I of Schedule 2.01 of the Master Transaction Agreement, whether or not relied upon by the other Party; or |
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(ii) seek to reopen or set aside this Agreement or the Reinsurance Agreement on any basis whatsoever, including, without limitation, that this Agreement or the Reinsurance Agreement is void or voidable due to a mistake or change in law or a unilateral or mutual mistake of fact in any way related to this Agreement or the Reinsurance Agreement. |
(b) The Company and the Reinsurer have voluntarily entered into this Agreement based: (i) upon their own independent assessment of the relevant facts and their rights and obligations under the Reinsurance Agreement and (ii) except as expressly set forth in Article III and Article IV of the Master Transaction Agreement, not upon any representations that were made or disclosures that were made by the other Party, their affiliates, officers,
Exh. 1.01(a)-3
directors, shareholders, employees, representatives, agents, attorneys or their respective heirs, administrators, predecessors, successors and assigns. Each Party acknowledges that it has carefully read, and that it understands the scope and effect of this Agreement and has had a full and fair opportunity to consult with, and seek the advice and recommendations of its attorneys, actuaries and other professional advisors prior to its execution of this Agreement.
(c) This Agreement and the negotiations and proceedings leading to this Agreement shall not form the basis of any claim by either Party against the other Party or against any officer, director, consultant, professional or shareholder of the other Party, except with respect to an action for enforcement of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
ARTICLE IV
EXCLUSIVE BENEFIT OF THE PARTIES AND BINDING EFFECT
The rights, duties and obligations set forth herein shall inure to the benefit of and be binding upon the Company and the Reinsurer as they are identified in this Agreement and their parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys and this Agreement is not intended to confer any rights or benefits upon persons or entities other than the foregoing parties.
ARTICLE V
COMPROMISE
This Agreement sets forth a compromise and shall never at any time for any purpose be considered as an admission of liability or responsibility on the part of any party hereto regarding any aspect of the Reinsurance Agreement. Neither this Agreement nor any of its terms shall be admissible in any action, arbitration, or proceeding other than one to enforce the terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements), including, but not limited to, the releases provided in Article II .
ARTICLE VI
FURTHER ASSURANCES
The Parties, without further consideration, shall execute and deliver such other documents and take such other action as may be necessary to effect this Agreement.
ARTICLE VII
MISCELLANEOUS
(a) Should any part, term or provision of this Agreement, except Article I or Article II , be declared or determined to be illegal or invalid pursuant to a final and unappealable order of a court of competent jurisdiction, the validity of the remaining parts, terms and provisions shall not be affected thereby and such illegal or invalid part, term or provision shall be deemed not to be part of this Agreement. If either Article I or Article II is determined by a court
Exh. 1.01(a)-4
of competent jurisdiction or regulatory authority to be unenforceable, either Party, at its option, shall be entitled to rescind this Agreement, and the Reinsurer shall be entitled to repayment of the Commutation Amount immediately upon such rescission. Upon such rescission, the Reinsurance Agreement and all rights, obligations and liabilities of the Parties under the Reinsurance Agreement shall be reinstated as if this Agreement had never been executed. Notwithstanding the foregoing, the releases given pursuant to Article II shall remain in full force and effect as to the Parties officers, directors, agents, employees, shareholders, representatives, advisors and attorneys.
(b) This Agreement and the Master Transaction Agreement (including the Ancillary Agreements) set forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understanding between them pertaining to the subject matter hereof. A facsimile copy of a signature shall have the same force and effect as an original signature.
(c) This Agreement may not be amended, altered, supplemented or modified, except by written agreement signed by the Parties.
(d) This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement.
(e) For purposes of this Agreement, a Business Day is any day other than a Saturday, Sunday or a public holiday in Bermuda.
(f) This Agreement shall be governed by and construed in accordance with the laws of Bermuda without regard to principles of conflicts of law or choice of law and the Parties submit to the exclusive jurisdiction of the Supreme Court of Bermuda in respect of all disputes arising out of or in connection with this Agreement.
(g) All notices under this Agreement shall be in writing and shall be deemed to be duly given and received (i) upon delivery if delivered by certified mail; or (ii) on the next Business Day if sent by overnight courier (iii) on the date sent by facsimile if sent during the recipients normal business hours or, if sent by facsimile outside such hours, on the next Business Day; provided, that such notices are sent to a Party to its Address for Notices set forth on Schedule B hereto or to such other address as either Party may have furnished to the other in writing.
(h) For all purposes this Agreement shall be deemed to have been drafted jointly by both Parties.
(i) This Agreement is an agreement solely between the Company and the Reinsurer. No right of action against the Reinsurer shall accrue to any insured, policyholder, or other contracting party of the Company unless granted herein by virtue of this Agreement.
Exh. 1.01(a)-5
IN WITNESS WHEREOF, the Parties have executed this Agreement by their respective authorized officers as of the day and year first written below.
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Dated: |
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XL FINANCIAL ASSURANCE LTD |
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XL INSURANCE (BERMUDA) LTD |
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Exh. 1.01(a)-6
SCHEDULE A
WIRE TRANSFER INSTRUCTIONS
Transfer instructions for remitting funds to XL Financial Assurance Ltd
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
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Rebecca OConnell (VP & Assistant Treasurer) at SCA |
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rebecca.oconnell@xlgroup.com |
Exh. 1.01(a)-7
SCHEDULE B
ADDRESS FOR NOTICE
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TO THE COMPANY: |
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XL Financial Assurance Ltd |
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A.S. Cooper Building |
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26 Reid Street, 4th Floor |
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Hamilton, Bermuda HM 11 |
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Attn: President |
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Facsimile: 441-296-4351 |
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and |
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XL Capital Assurance Inc. |
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1221 Avenue of the Americas |
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New York, New York 10022 |
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Attn: General Counsel |
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Facsimile: 212-478-3579 |
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TO THE REINSURER: |
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XL Insurance (Bermuda) Ltd |
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XL House |
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One Bermudiana Road |
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Hamilton HM 11 |
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Bermuda |
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Attention: General Counsel |
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Facsimile: 441-295-2840 |
Exh. 1.01(a)-8
EXHIBIT 1.01(b)
FORM OF ADVERSE DEVELOPMENT COVER COMMUTATION AGREEMENT
Exhibit 1.01(b)
COMMUTATION AND RELEASE AGREEMENT
This Commutation and Release Agreement (the Agreement ) dated as of ________, 2008, is made by and among XL Capital Assurance Inc., a company domiciled in New York ( XLCA ), XL Financial Assurance Ltd, a company domiciled in Bermuda ( XLFA ), XL Reinsurance America Inc., a company also domiciled in New York ( XLRA ), and XL Insurance (Bermuda) Ltd, formerly known as XL Insurance Ltd, a company also domiciled in Bermuda ( XLI ). XLCA and XLFA are hereinafter referred to collectively as the SCA Companies ; XLRA and XLI are hereinafter referred to collectively as the XL Companies ; and the SCA Companies and the XL Companies are hereinafter referred to collectively as the Parties .
RECITALS
WHEREAS , XLCA and XLRA previously entered into an Adverse Development Reinsurance Agreement effective as of August 4, 2006, pursuant to which XLRA agreed to reinsure certain liabilities of XLCA (the Reinsurance Agreement ); and
WHEREAS, XLFA and XLI previously entered into an Indemnification Agreement, dated August 4, 2006, pursuant to which XLI agreed to indemnify XLFA in respect of future adverse development as respect certain of its liabilities (the Indemnification Agreement , the Reinsurance Agreement and the Indemnification Agreement are hereinafter referred to collectively as the Adverse Development Cover ); and
WHEREAS , the Parties are parties to that certain Master Commutation, Release and Restructuring Agreement, dated as of July __, 2008, by and among the SCA Companies, the XL Companies, Security Capital Assurance Ltd and the other parties thereto (the Master Transaction Agreement ), pursuant to which the Parties have agreed to enter into this Agreement; and
WHEREAS , the Parties agree that it is in each of their best interests to freely and voluntarily enter into this Agreement and to fully and forever release and discharge each other from their respective existing and future liabilities and obligations, including contingent and uncertain liabilities, both known and unknown, under the Adverse Development Cover and to compromise, resolve and settle all amounts due, or which may become due, between each other arising out of, in respect of, or relating to the Adverse Development Cover; and
WHEREAS , the Parties or their affiliates, may be parties to agreements other than the Adverse Development Cover, and it is the intent of the Parties that this Agreement will not have any effect upon such other agreements.
NOW, THEREFORE , in consideration of the covenants, conditions, promises and releases contained herein, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
Exh. 1.01(b)-1
ARTICLE I
PAYMENT
(a) The XL Companies shall pay to the SCA Companies the sum of Sixty Five Million, Three Hundred Thousand Dollars ($65,300,000.00) (the Commutation Amount ) via direct wire transfer, in immediately available funds, in accordance with the payment instructions set forth on Schedule A hereto on the Closing Date (as such term is defined in the Master Transaction Agreement) as follows: (i) XLI shall pay to XLFA the sum of Fifty Eight Million, Three Hundred Thousand Dollars ($58,300,000.00); and (ii) XLRA shall pay to XLCA the sum of Seven Million Dollars ($7,000,000.00). The date on which the Commutation Amount is paid and received shall be referred to hereinafter as the Effective Date .
(b) The SCA Companies shall accept the Commutation Amount in full satisfaction of all of the XL Companies liabilities and obligations under the Adverse Development Cover.
ARTICLE II
RELEASE
(a) Upon the XL Companies payment of the Commutation Amount to the SCA Companies, the SCA Companies, on behalf of themselves and their shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the XL Companies, their parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any or all of the Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the SCA Companies now have, own or hold or claim to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the XL Companies, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Adverse Development Cover, whether grounded in law or equity, or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(a) shall not discharge obligations of the XL Companies, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(b) Contemporaneous with the payment of the Commutation Amount to the SCA Companies, the XL Companies, on behalf of themselves and their shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the SCA Companies, their shareholders, parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights,
Exh. 1.01(b)-2
agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to any or all of the Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the XL Companies now have, own, hold or claim to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the SCA Companies, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Adverse Development Cover, whether grounded in law or equity or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(b) shall not discharge obligations of the SCA Companies, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(c) The Parties understand that it is possible that unknown losses or claims may exist, or that present or future losses or claims may be underestimated in amounts or severity. Furthermore, the Parties expressly accept and assume the risk that the factual or legal assumptions made by any Party in connection with this Agreement may be found hereafter to be different from the true facts or law, and the Parties agree that this Agreement shall be and shall remain in full force and effect notwithstanding such differences in facts or law. Each Party expressly takes all of the foregoing into account in determining the amount of consideration to be given and paid for the giving of this Agreement, and a portion of the said consideration, having been bargained for between the Parties with the knowledge of the possibility of such unknown losses and claims, is given in exchange for the full accord, satisfaction and discharge of all such losses and claims.
(d) Full payment of the Commutation Amount shall be in complete accord, satisfaction, settlement and commutation of any and all past, current and future liabilities and obligations that each Party owes or may owe to the other arising directly or indirectly out of or related to or in connection with the Adverse Development Cover and that upon payment of the Commutation Amount, the Adverse Development Cover shall be terminated as of the Effective Date and no Party shall have any further obligation or liability to the other Party under the Adverse Development Cover.
ARTICLE III
NON-RELIANCE
(a) This Agreement fully and finally resolves the rights, duties and obligations of the Parties under the Adverse Development Cover, and no Party shall:
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(i) have any remedy in respect of any representation, warranty or undertaking of the other that is not specifically set forth in this Agreement, the Master Transaction Agreement, or the Ancillary Agreements commuting the reinsurance agreements listed in Part I of Schedule 2.01 of the Master Transaction Agreement, whether or not relied upon by the other Party; or |
Exh. 1.01(b)-3
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(ii) seek to reopen or set aside this Agreement or the Adverse Development Cover on any basis whatsoever, including, without limitation, that this Agreement or the Adverse Development Cover are void or voidable due to a mistake or change in law or a unilateral or mutual mistake of fact in any way related to this Agreement or the Adverse Development Cover. |
(b) The SCA Companies and the XL Companies have voluntarily entered into this Agreement based: (i) upon their own independent assessment of the relevant facts and their rights and obligations under the Adverse Development Cover and (ii) except as expressly set forth in Article III and Article IV of the Master Transaction Agreement, not upon any representations that were made or disclosures that were made by the other Party, their affiliates, officers, directors, shareholders, employees, representatives, agents, attorneys or their respective heirs, administrators, predecessors, successors and assigns. Each Party acknowledges that it has carefully read, and that it understands the scope and effect of this Agreement and has had a full and fair opportunity to consult with, and seek the advice and recommendations of its attorneys, actuaries and other professional advisors prior to its execution of this Agreement.
(c) This Agreement and the negotiations and proceedings leading to this Agreement shall not form the basis of any claim by a Party against another Party or against any officer, director, consultant, professional or shareholder of the another Party, except with respect to an action for enforcement of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
ARTICLE IV
EXCLUSIVE BENEFIT OF THE PARTIES AND BINDING EFFECT
The rights, duties and obligations set forth herein shall inure to the benefit of and be binding upon the SCA Companies and the XL Companies as they are identified in this Agreement and their parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys and this Agreement is not intended to confer any rights or benefits upon persons or entities other than the foregoing parties.
ARTICLE V
COMPROMISE
This Agreement sets forth a compromise and shall never at any time for any purpose be considered as an admission of liability or responsibility on the part of any party hereto regarding any aspect of the Adverse Development Cover. Neither this Agreement nor any of its terms shall be admissible in any action, arbitration, or proceeding other than one to enforce the terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements), including, but not limited to, the releases provided in Article II .
Exh. 1.01(b)-4
ARTICLE VI
FURTHER ASSURANCES
The Parties, without further consideration, shall execute and deliver such other documents and take such other action as may be necessary to effect this Agreement.
ARTICLE VII
MISCELLANEOUS
(a) Should any part, term or provision of this Agreement, except Article I or Article II , be declared or determined to be illegal or invalid pursuant to a final and unappealable order of a court of competent jurisdiction, the validity of the remaining parts, terms and provisions shall not be affected thereby and such illegal or invalid part, term or provision shall be deemed not to be part of this Agreement. If either Article I or Article II is determined by a court of competent jurisdiction or regulatory authority to be unenforceable, any Party, at its option, shall be entitled to rescind this Agreement, and the XL Companies shall be entitled to repayment of the Commutation Amount immediately upon such rescission. Upon such rescission, the Adverse Development Cover and all rights, obligations and liabilities of the Parties under the Adverse Development Cover shall be reinstated as if this Agreement had never been executed. Notwithstanding the foregoing, the releases given pursuant to Article II shall remain in full force and effect as to the Parties officers, directors, agents, employees, shareholders, representatives, advisors and attorneys.
(b) This Agreement and the Master Transaction Agreement (including the Ancillary Agreements) set forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understanding between them pertaining to the subject matter hereof. A facsimile copy of a signature shall have the same force and effect as an original signature.
(c) This Agreement may not be amended, altered, supplemented or modified, except by written agreement signed by the Parties.
(d) This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement.
(e) For purposes of this Agreement, a Business Day is any day other than a Saturday, Sunday or a public holiday in New York.
(f) This Agreement shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of law or choice of law and the Parties submit to the exclusive jurisdiction of the Supreme Court of the State of New York in respect of all disputes arising out of or in connection with this Agreement.
(g) All notices under this Agreement shall be in writing and shall be deemed to be duly given and received (i) upon delivery if delivered by certified mail; or (ii) on the next Business Day if sent by overnight courier (iii) on the date sent by facsimile if sent during the
Exh. 1.01(b)-5
recipients normal business hours or, if sent by facsimile outside such hours, on the next Business Day; provided, that such notices are sent to a Party to its Address for Notices set forth on Schedule B hereto or to such other address as either Party may have furnished to the other in writing.
(h) For all purposes this Agreement shall be deemed to have been drafted jointly by the Parties.
(i) This Agreement is an agreement solely between the SCA Companies and the XL Companies. No right of action against the XL Companies shall accrue to any insured, policyholder, or other contracting party of the SCA Companies unless granted herein by virtue of this Agreement.
Exh. 1.01(b)-6
IN WITNESS WHEREOF , the Parties have executed this Agreement by their respective authorized officers as of the day and year first written below.
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Dated: |
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XL CAPITAL ASSURANCE INC. |
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XL FINANCIAL ASSURANCE LTD |
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XL REINSURANCE AMERICA INC. |
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XL INSURANCE (BERMUDA) LTD |
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XL INSURANCE LTD |
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Exh. 1.01(b)-7
SCHEDULE A
WIRE TRANSFER INSTRUCTIONS
Transfer instructions for remitting funds to XL Capital Assurance Inc.
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
Rebecca
OConnell (VP & Assistant Treasurer) at SCA
Phone: (212) 478-3629
Fax: (212) 478-3587
E-mail: rebecca.oconnell@xlgroup.com
Transfer instructions for remitting funds to XL Financial Assurance Ltd
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
Rebecca
OConnell (VP & Assistant Treasurer) at SCA
Phone: (212) 478-3629
Fax: (212) 478-3587
E-mail: rebecca.oconnell@xlgroup.com
Exh. 1.01(b)-8
SCHEDULE B
ADDRESS FOR NOTICE
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TO XLCA: |
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XL Capital Assurance Inc. |
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1221 Avenue of the Americas |
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New York, New York 10022 |
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Attn: General Counsel |
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Facsimile: 212-478-3579 |
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TO XLFA: |
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XL Financial Assurance Ltd |
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A.S. Cooper Building |
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26 Reid Street, 4th Floor |
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Hamilton, Bermuda HM 11 |
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Attn: President |
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Facsimile: 441-296-4351 |
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and |
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XL Capital Assurance Inc. |
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1221 Avenue of the Americas |
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New York, New York 10022 |
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Attn: General Counsel |
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Facsimile: 212-478-3579 |
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TO XLRA: |
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XL Reinsurance America Inc. |
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Seaview House |
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70 Seaview Avenue |
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Attention: General Counsel |
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Facsimile: 203-964-5309 |
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TO XLI: |
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XL Insurance (Bermuda) Ltd |
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XL House |
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One Bermudiana Road |
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Hamilton HM 11 |
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Attention: General Counsel |
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Facsimile: 441-295-2840 |
Exh. 1.01(b)-9
EXHIBIT 1.01(c)
FORM OF JOINDER AGREEMENT
Exhibit 1.01(c)
JOINDER AGREEMENT
JOINDER AGREEMENT (this Joinder Agreement ), dated as of _____, 2008, is entered into pursuant to the Master Commutation, Release and Restructuring Agreement (as amended, supplemented or otherwise modified from time to time, the Master Agreement ), dated as of July __, 2008, among XL CAPITAL LTD, an exempted limited company incorporated under the Laws of the Cayman Islands ( XL ), XL INSURANCE (BERMUDA) LTD, (formerly known as X.L. Insurance Ltd) a Bermuda exempted company ( XLI ), XL REINSURANCE AMERICA INC., a New York insurance corporation ( XLRA ), X.L. GLOBAL SERVICES, INC., a service company incorporated under the Laws of Delaware ( XLGS ), XL SERVICES (BERMUDA) LTD, a service company incorporated under the Laws of Bermuda ( XLBS ), X.L. AMERICA, INC., a company incorporated under the Laws of Delaware ( XLA ), SECURITY CAPITAL ASSURANCE LTD, a Bermuda exempted company ( SCA ), XL FINANCIAL ASSURANCE LTD., a Bermuda exempted company ( XLFA ), XL CAPITAL ASSURANCE INC., a New York insurance company ( XLCA ), XL FINANCIAL ADMINISTRATIVE SERVICES INC., a company incorporated under the Laws of Delaware ( XLFAS ), SCA BERMUDA ADMINISTRATIVE LTD., a company incorporated under the Laws of Bermuda ( SCAB ), XL CAPITAL ASSURANCE (U.K.) LIMITED, an insurance company regulated by the Financial Services Authority and incorporated under the Laws of England and Wales ( XLCAUK ), those portfolio trusts that may become a Party to the Agreement from time to time, and such counterparties to credit default swap agreements with Affiliates of XLCA that may become Party to the Agreement from time to time. Unless otherwise defined herein, capitalized terms used herein and defined in the Master Agreement and shall have the meanings given to them in the Master Agreement.
RECITALS:
WHEREAS, the party hereto wishes to enter into the Master Agreement;
NOW, THEREFORE, IT IS AGREED:
1. Joinder to the Master Agreement . The party hereto confirms that it has received a copy of the Master Agreement and such other documents and information as it has deemed appropriate to conduct its own analysis and make its own decision to enter into this Joinder Agreement and agrees to:
(a) join the Master Agreement as a [CDS Counterparty/portfolio trust Affiliate of XLCA that is an SCA Party] thereunder with the same force and effect as if originally named therein as a CDS Counterparty and, without limiting the generality of the foregoing, hereby expressly accepts and assumes all rights and obligations of a [CDS Counterparty/SCA Party] thereunder, including the releases entered into by such party pursuant to Section 2.05 of the Master Agreement;
(b) be bound by, and hereby confirms, all covenants, agreements, consents, submissions, appointments, benefits and acknowledgments attributable to a [CDS Counterparty/SCA Party] in the Master Agreement; and
Exh. 1.01(c)-1
(c) perform all obligations required of it as a [CDS Counterparty/SCA Party] by the Master Agreement.
2. Representations and Warranties . Each [CDS Counterparty/SCA Party] hereby represents and warrants that the representations and warranties with respect to it contained in, or made by it in, [Article V/III] of the Master Agreement, are true and correct in all material respects on the date hereof (after giving effect to this Joinder Agreement) as if made on and as of the date hereof (except that any applicable representation or warranty that by its terms is made as of an earlier date is true and correct as of such earlier date).
3. Effective Date . The effective date of this Joinder Agreement shall be the date hereof (the Effective Date ). Upon execution, the party hereto shall promptly provide delivery of an executed copy of this Joinder Agreement to the XL Parties, the SCA Parties and Davis Polk & Wardwell as counsel to the CDS Counterparties along with all disclosure schedules and information required to be delivered pursuant to the Master Agreement. This Joinder Agreement shall become effective upon delivery to XL.
4. Governing Law . This Joinder Agreement shall be interpreted under and governed by the Laws of the State of New York, without giving effect to conflicts of law provisions thereof.
5. Signature Pages . A facsimile or Portable Document Format copy of a signature shall have the same force and effect as an original signature.
[SIGNATURE FOLLOWS IMMEDIATELY HEREAFTER]
Exh. 1.01(c)-2
IN WITNESS WHEREOF, the party hereto has caused this Joinder Agreement to be duly executed and delivered by its proper and duly authorized officers as of this [___] day of [_______], 2008.
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Exh. 1.01(c)-3
EXHIBIT 1.01(d)
FORM OF EXCESS OF LOSS COMMUTATION AGREEMENT
Exhibit 1.01(d)
COMMUTATION AND RELEASE AGREEMENT
This Commutation and Release Agreement (the Agreement ) dated as of _____, 2008, is made by and between XL Financial Assurance Ltd, a company domiciled in Bermuda (the Company ) and XL Insurance (Bermuda) Ltd, formerly known as XL Insurance Ltd, a company also domiciled in Bermuda ( the Reinsurer ). The Reinsurer and the Company are hereinafter referred to collectively as the Parties .
RECITALS
WHEREAS , the Parties previously entered into a reinsurance agreement entitled the Excess of Loss Reinsurance Agreement executed on October 3, 2001, as amended, pursuant to which the Reinsurer agreed to reinsure certain liabilities of the Company (the Reinsurance Agreement ); and
WHEREAS , the vast majority of the Reinsurers exposure under the Reinsurance Agreement is attributable to a Facultative Quota Share Reinsurance Treaty dated as of October 6, 1999 as amended and restated by an Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of June 22, 2001, as further amended and restated by a Second Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of May 1, 2004, and as further amended and restated by a Third Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of June 29, 2006 (the Quota Share ) pursuant to which the Company reinsures certain liabilities of XL Capital Assurance Inc. ( XLCA ); and
WHEREAS , the Parties and XLCA are parties to that certain Master Commutation, Release and Restructuring Agreement, dated as of July __, 2008, by and among the Company, the Reinsurer, Security Capital Assurance Ltd and other parties thereto (the Master Transaction Agreement ), pursuant to which (a) the Company and the Reinsurer have agreed to enter into this Agreement; and (b) XLCA and the Company have agreed to commute the Quota Share and fully and finally extinguish all of the parties rights and obligations under the Quota Share (the Quota Share Commutation ); and
WHEREAS , the Reinsurer believes it is entitled to terminate the Reinsurance Agreement upon thirty (30) days notice and to seek reimbursement of the monies it previously paid under the Reinsurance Agreement based upon its belief that the Company used an improper Threshold Amount for purposes of calculating the Liability Amount under the Reinsurance Agreement, and the Company believes that the Reinsurer has no such entitlement and confirms its position that it had used the proper Threshold Amount for purposes of calculating the Liability Amount under the Reinsurance Agreement (the Dispute ); and
WHEREAS , the Parties agree that it is in each of their best interests to freely and voluntarily enter into this Agreement and the Master Transaction Agreement and to settle the Dispute and to fully and forever release and discharge each other from their respective existing and future liabilities and obligations, including contingent and uncertain liabilities, both known and unknown, under the Reinsurance Agreement and to compromise, resolve and settle all amounts due, or which may become due, between each other arising out of, in respect of, or relating to the Reinsurance Agreement; and
Exh. 1.01(d)-1
WHEREAS , the Company has agreed that it will pay the Commutation Amount it receives under this Agreement as part of the consideration it pays to XLCA under the Quota Share Commutation;
WHEREAS , the Company and the Reinsurer, or their affiliates, may be parties to agreements other than the Reinsurance Agreement, and it is the intent of the Parties that this Agreement will not have any effect upon such other agreements.
NOW, THEREFORE , in consideration of the covenants, conditions, promises and releases contained herein, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
PAYMENT
(a) The Reinsurer shall pay to the Company the sum of One Hundred Million Dollars ($100,000,000.00) (the Commutation Amount ) via direct wire transfer, in immediately available funds, in accordance with the payment instructions set forth on Schedule A hereto on the Closing Date (as such term is defined in the Master Transaction Agreement). The date on which the Commutation Amount is paid and received shall be referred to hereinafter as the Effective Date .
(b) The Company shall accept the Commutation Amount in full satisfaction of all of the Reinsurers liabilities and obligations under the Reinsurance Agreement.
ARTICLE II
RELEASE
(a) Upon the Reinsurers payment of the Commutation Amount to the Company, the Company, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the Reinsurer, its parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Company now has, owns or holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Reinsurer, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement, whether grounded in law or equity, or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(a) shall not discharge
Exh. 1.01(d)-2
obligations of the Reinsurer, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(b) Contemporaneous with the payment of the Commutation Amount to the Company, the Reinsurer, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the Company, its shareholders, parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Reinsurer now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Company, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement, whether grounded in law or equity or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(b) shall not discharge obligations of the Company, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(c) The Parties understand that it is possible that unknown losses or claims may exist, or that present or future losses or claims may be underestimated in amounts or severity. Furthermore, the Parties expressly accept and assume the risk that the factual or legal assumptions made by any Party in connection with this Agreement may be found hereafter to be different from the true facts or law, and the Parties agree that this Agreement shall be and shall remain in full force and effect notwithstanding such differences in facts or law. Each Party expressly takes all of the foregoing into account in determining the amount of consideration to be given and paid for the giving of this Agreement, and a portion of the said consideration, having been bargained for between the Parties with the knowledge of the possibility of such unknown losses and claims, is given in exchange for the full accord, satisfaction and discharge of all such losses and claims.
(d) Full payment of the Commutation Amount shall be in complete accord, satisfaction, settlement and commutation of any and all past, current and future liabilities and obligations that each Party owes or may owe to the other arising directly or indirectly out of or related to or in connection with the Reinsurance Agreement and that upon payment of the Commutation Amount, the Reinsurance Agreement shall be terminated as of the Effective Date and neither Party shall have any further obligation or liability to the other Party under the Reinsurance Agreement.
Exh. 1.01(d)-3
ARTICLE III
NON-RELIANCE
(a) This Agreement fully and finally resolves the rights, duties and obligations of the Company and the Reinsurer under the Reinsurance Agreement, and neither Party shall:
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(i) have any remedy in respect of any representation, warranty or undertaking of the other that is not specifically set forth in this Agreement, the Master Transaction Agreement, or the Ancillary Agreements commuting the reinsurance agreements listed in Part I of Schedule 2.01 of the Master Transaction Agreement, whether or not relied upon by the other Party; or |
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(ii) seek to reopen or set aside this Agreement or the Reinsurance Agreement on any basis whatsoever, including, without limitation, that this Agreement or the Reinsurance Agreement is void or voidable due to a mistake or change in law or a unilateral or mutual mistake of fact in any way related to this Agreement or the Reinsurance Agreement. |
(b) The Company and the Reinsurer have voluntarily entered into this Agreement based: (i) upon their own independent assessment of the relevant facts and their rights and obligations under the Reinsurance Agreement and (ii) except as expressly set forth in Article III and Article IV of the Master Transaction Agreement, not upon any representations that were made or disclosures that were made by the other Party, their affiliates, officers, directors, shareholders, employees, representatives, agents, attorneys or their respective heirs, administrators, predecessors, successors and assigns. Each Party acknowledges that it has carefully read, and that it understands the scope and effect of this Agreement and has had a full and fair opportunity to consult with, and seek the advice and recommendations of its attorneys, actuaries and other professional advisors prior to its execution of this Agreement.
(c) This Agreement and the negotiations and proceedings leading to this Agreement shall not form the basis of any claim by either Party against the other Party or against any officer, director, consultant, professional or shareholder of the other Party, except with respect to an action for enforcement of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
ARTICLE IV
EXCLUSIVE BENEFIT OF THE PARTIES AND BINDING EFFECT
The rights, duties and obligations set forth herein shall inure to the benefit of and be binding upon the Company and the Reinsurer as they are identified in this Agreement and their parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys and this Agreement is not intended to confer any rights or benefits upon persons or entities other than the foregoing parties.
Exh. 1.01(d)-4
ARTICLE V
COMPROMISE
This Agreement sets forth a compromise and shall never at any time for any purpose be considered as an admission of liability or responsibility on the part of any party hereto regarding any aspect of the Reinsurance Agreement. Neither this Agreement nor any of its terms shall be admissible in any action, arbitration, or proceeding other than one to enforce the terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements), including, but not limited to, the releases provided in Article II .
ARTICLE VI
FURTHER ASSURANCES
The Parties, without further consideration, shall execute and deliver such other documents and take such other action as may be necessary to effect this Agreement.
ARTICLE VII
MISCELLANEOUS
(a) Should any part, term or provision of this Agreement, except Article I or Article II , be declared or determined to be illegal or invalid pursuant to a final and unappealable order of a court of competent jurisdiction, the validity of the remaining parts, terms and provisions shall not be affected thereby and such illegal or invalid part, term or provision shall be deemed not to be part of this Agreement. If either Article I or Article II is determined by a court of competent jurisdiction or regulatory authority to be unenforceable, either Party, at its option, shall be entitled to rescind this Agreement, and the Reinsurer shall be entitled to repayment of the Commutation Amount immediately upon such rescission. Upon such rescission, the Reinsurance Agreement and all rights, obligations and liabilities of the Parties under the Reinsurance Agreement shall be reinstated as if this Agreement had never been executed. Notwithstanding the foregoing, the releases given pursuant to Article II shall remain in full force and effect as to the Parties officers, directors, agents, employees, shareholders, representatives, advisors and attorneys.
(b) This Agreement and the Master Transaction Agreement (including the Ancillary Agreements thereto) set forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understanding between them pertaining to the subject matter hereof. A facsimile copy of a signature shall have the same force and effect as an original signature.
(c) This Agreement may not be amended, altered, supplemented or modified, except by written agreement signed by the Parties.
Exh. 1.01(d)-5
(d) This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement.
(e) For purposes of this Agreement, a Business Day is any day other than a Saturday, Sunday or a public holiday in Bermuda.
(f) This Agreement shall be governed by and construed in accordance with the laws of Bermuda without regard to principles of conflicts of law or choice of law and the Parties submit to the exclusive jurisdiction of the Supreme Court of Bermuda in respect of all disputes arising out of or in connection with this Agreement.
(g) All notices under this Agreement shall be in writing and shall be deemed to be duly given and received (i) upon delivery if delivered by certified mail; or (ii) on the next Business Day if sent by overnight courier (iii) on the date sent by facsimile if sent during the recipients normal business hours or, if sent by facsimile outside such hours, on the next Business Day; provided, that such notices are sent to a Party to its Address for Notices set forth on Schedule B hereto or to such other address as either Party may have furnished to the other in writing.
(h) For all purposes this Agreement shall be deemed to have been drafted jointly by the Parties.
(i) This Agreement is an agreement solely between the Company and the Reinsurer. No right of action against the Reinsurer shall accrue to any insured, policyholder, or other contracting party of the Company unless granted herein by virtue of this Agreement.
Exh. 1.01(d)-6
IN WITNESS WHEREOF , the Parties have executed this Agreement by their respective authorized officers as of the day and year first written below.
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Dated: |
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XL FINANCIAL ASSURANCE LTD |
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By: |
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Name: |
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Title: |
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Dated: |
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XL INSURANCE (BERMUDA) LTD |
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FORMERLY KNOWN AS XL |
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INSURANCE LTD |
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By: |
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Name: |
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Title: |
Exh. 1.01(d)-7
SCHEDULE A
WIRE TRANSFER INSTRUCTIONS
Transfer instructions for remitting funds to XL Financial Assurance Ltd
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
Rebecca
OConnell (VP & Assistant Treasurer) at SCA
Phone: (212) 478-3629
Fax: (212) 478-3587
E-mail: rebecca.oconnell@xlgroup.com
Exh. 1.01(d)-8
SCHEDULE B
ADDRESS FOR NOTICE
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TO THE COMPANY: |
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XL Financial Assurance Ltd |
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A.S. Cooper Building |
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26 Reid Street, 4th Floor |
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Hamilton, Bermuda HM 11 |
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Attn: President |
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Facsimile: 441-296-4351 |
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and |
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XL Capital Assurance Inc. |
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1221 Avenue of the Americas |
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New York, New York 10022 |
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Attn: General Counsel |
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Facsimile: 212-478-3579 |
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TO THE REINSURER: |
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XL Insurance (Bermuda) Ltd |
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XL House |
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One Bermudiana Road |
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Hamilton HM 11 |
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Bermuda |
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Attention: General Counsel |
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Facsimile: 441-295-2840 |
Exh. 1.01(d)-9
EXHIBIT 1.01(e)
FORM OF FACULTATIVE MASTER CERTIFICATE COMMUTATION AGREEMENT
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Exhibit 1.01(e)
EXHIBIT 1.01(f)
FORM OF QUOTA SHARE TREATY COMMUTATION AGREEMENT
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Exhibit 1.01(f)
EXHIBIT 1.01(g)
FORM OF SUBSCRIPTION AGREEMENT
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Exhibit 1.01(g)
EXHIBIT 1.01(h)
FORM OF XL STOCK RESALE AND REGISTRATION RIGHTS AGREEMENT
[Intentionally omittedsuperseded by the
Amended and Restated Registration Rights Agreement
dated as of August 5, 2008]
Exhibit 1.01(h)
EXHIBIT 1.01(i)
FORM OF SCA SHAREHOLDER ENTITY AGREEMENT
Exhibit 1.01(i)
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT (this Agreement ) dated August [__], 2008, is entered into between [HSBC Private Bank, Bermuda Trust Company Limited] (the Trustee ), a Bermuda exempted company as trustee of the special purpose trust (the Trust ) established by the Declaration of Trust defined below and known as [name of trust] (the SCA Shareholder Entity ), and Security Capital Assurance Ltd, a Bermuda exempted company ( SCA ).
WHEREAS, SCA has entered into the Master Commutation, Release and Restructuring Agreement dated as of July [__], 2008 (the Master Restructuring Agreement ) among SCA, XL Capital Assurance Inc. ( XLCA ), XL Financial Assurance Ltd., XL Financial Administrative Services Inc., SCA Bermuda Administrative Ltd., XL Capital Assurance (U.K.) Limited and those Portfolio Trusts a party thereto, XL Capital Ltd., XL Insurance (Bermuda) Ltd. ( XLI ), XL Reinsurance America Inc., X.L. Global Services Inc., XL Services (Bermuda) Limited and X.L. America, Inc. and the consenting counterparties party thereto (the Consenting Counterparties );
WHEREAS, the parties to the Master Restructuring Agreement have agreed that 30,069,049 Common Shares (as hereinafter defined), which represent approximately 46% of the outstanding Common Shares and all of the Common Shares beneficially owned by XLI as of the date of this Agreement (the SCA Shares ), shall be transferred to the SCA Shareholder Entity, which shall hold the SCA Shares in accordance with the terms of that certain Declaration of Trust dated as of the date hereof (the Declaration of Trust ) establishing the SCA Shareholder Entity; and
WHEREAS, the parties to the Master Restructuring Agreement have agreed that in connection with the transfer of the SCA Shares to the SCA Shareholder Entity, certain rights afforded to XLI under the Bye-Laws (as hereinafter defined) and under that certain transition agreement entered into on August 4, 2006 between XLI, SCA and the other parties thereto shall be transferred to the SCA Shareholder Entity.
NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows:
SECTION 1 . Definitions.
(a) Act means the Companies Act 1981 of Bermuda, as amended from time to time.
(b) Affiliate means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, the term control (including its correlative meanings, the terms controlling, controlled by and under common control with) shall mean 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 securities, by contract or otherwise. For purposes of this Agreement, no Consenting Counterparty shall be deemed to be an Affiliate of
Exh. 1.01(i)-1
the SCA Shareholder Entity and the SCA Shareholder Entity shall not be deemed to be an Affiliate of SCA or any of its Subsidiaries.
(c) Business Day means any day excluding Saturday, Sunday and any day on which banks in New York, New York or Hamilton, Bermuda have the option or are required by law or other governmental action to close.
(d) Bye-Laws means the Amended and Restated Bye-Laws of SCA, as amended from time to time.
(e) Common Shares means the common shares, $0.01 par value per common share, of SCA, and any share capital into which such common shares shall have been converted or any share capital resulting from a reclassification of such common shares.
(f) Finance and Risk Oversight Committee means the finance and risk oversight committee of the SCA Board.
(g) Independent means, with respect to any director or nominee for director, an individual who is both (i) independent (as defined in the corporate governance rules of the listing standards of the New York Stock Exchange) of (A) SCA and its subsidiaries and (B) each Consenting Counterparty and the SCA Shareholder Entity assuming for purposes of this clause (B) that such independence standard were applied to, and such individual were a director of, each such Consenting Counterparty and the SCA Shareholder Entity and (ii) not a director, officer or employee of the SCA Shareholder Entity or any Consenting Counterparty, or an officer or employee of SCA or any of its Affiliates.
(h) Material Subsidiary means at any time, (i) XLCA and (ii) any subsidiary of SCA which at such time is a significant subsidiary under Regulation S-X of the Securities Exchange Act of 1934, as amended.
(i) New York Stock Exchange means the New York Stock Exchange Inc.
(j) Person means an individual, corporation, partnership, association, trust, limited liability company or any other entity or organization, including a government or political subdivision or an agency, unit or instrumentality thereof.
(k) Representatives means with respect to any Person, such Persons Affiliates and its and their respective officers, directors, employees, accountants, counsel, consultants, advisors, agents and representatives.
(l) SCA Board means the board of directors of SCA.
(m) SCA Board Nominee means an individual who was nominated for election by the SCA Board (and who is not an SCA Shareholder Entity Nominee).
(n) Voting Restriction Termination Event means the time at which the SCA Shareholder Entitys and its Affiliates aggregate ownership of the then outstanding Common Shares is first equal to or less than 35%.
Exh. 1.01(i)-2
SECTION 2 . Corporate Governance.
(a) Voting of SCA Shares . The SCA Shareholder Entity will vote the SCA Shares at each annual or special meeting of stockholders of SCA at which directors are to be elected, or execute proxies or written consents, as the case may be, in favor of (i) each SCA Shareholder Entity Nominee then standing for election and (ii) with respect to each other open board seat then standing for election that is not required to be filled by an SCA Shareholder Entity Nominee pursuant to Section 2(b) below, an individual that is Independent or, at the SCA Shareholder Entitys election, an SCA Board Nominee; provided that in exercising its discretion pursuant to the foregoing clause (ii), the SCA Shareholder Entity will vote the SCA Shares so that a majority of the SCA Board is at all times Independent; provided, however , that the SCA Shareholder Entity shall not vote in favor of any individual who, to the SCA Shareholder Entitys knowledge (after reasonable inquiry), is either receiving or entitled to receive, directly or indirectly, any compensation or entitlement to indemnification, or is named or entitled to be named as a beneficiary under any D&O insurance policy, for service on the SCA Board, any SCA Board committees or any SCA subsidiary boards or committees from the Consenting Counterparties or the SCA Shareholder Entity.
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(b) SCA Shareholder Entity Nominees . |
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(i) Until the occurrence of a Voting Restriction Termination Event, the SCA Shareholder Entity will have the right to nominate for the SCA Board (i) for so long as the SCA Board consists of nine or fewer directors, such number of nominees as would equal one nominee less than a majority of the directors and (ii) for so long as the SCA Board consists of ten or more directors, such number of nominees as would equal two nominees less than a majority of the directors (the SCA Shareholder Entity Nominees ); provided that until the occurrence of a Voting Restriction Termination Event, the SCA Shareholder Entity shall at all times be entitled to nominate at least one nominee to the SCA Board. Such SCA Shareholder Entity Nominees will be allocated among the classes of the SCA Board as follows: (i) two to the Class I directors and (ii) one each to the Class II directors and Class III directors (or as substantially equivalent thereto if for any reason the SCA Board consists of more or fewer than nine directors), in each case, as such classes of directors are described in paragraph (3) of Section 8 of the Bye-Laws. For the avoidance of doubt, so long as the SCA Board consists of eleven directors, the SCA Shareholder Entity will have the right to nominate four of the eleven directors. If, for any reason, there is a vacancy in the SCA Board, which vacancy is of a director so nominated by the SCA Shareholder Entity, SCA shall replace that directorship as soon as practicable with a nominee selected by the SCA Shareholder Entity. Similarly, if there is a vacancy created by an increase in the number of directors, then such vacancy shall be filled in a manner consistent with the SCA Shareholder Entitys rights set forth in this Section 2(b)(i). Moreover, if the size of the SCA Board is at any time reduced, the SCA Shareholder Entity shall cause such number of SCA Shareholder Entity Nominees, if any, in excess of those to which the SCA Shareholder Entity is entitled based on the reduced size of the SCA Board to resign from the SCA Board and any directorships they hold with subsidiaries of SCA. All SCA Shareholder Entity Nominees shall be Independent and shall be designated for nomination in accordance with Section 1.2.3 of Schedule B of the Declaration of Trust. SCA shall, subject to Section 2(b)(vi), take all action reasonably |
Exh. 1.01(i)-3
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necessary to appoint the initial SCA Shareholder Entity Nominees to the SCA Board as promptly as practicable following the execution and delivery hereof. |
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(ii) SCA shall include the SCA Shareholder Entity Nominees in each slate of directors proposed, recommended or nominated for election by SCA or the SCA Board, and will use the same efforts to cause the election of such nominees as it uses for the SCA Board Nominees in connection with that election (it being understood that for so long as the SCA Board shall remain classified under the Act, this Section 2(b)(ii) shall apply to only the SCA Shareholder Entity Nominees assigned to the appropriate class then up for election). |
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(iii) SCA agrees that each SCA Shareholder Entity Nominee shall be entitled to receive compensation and indemnification from SCA and its subsidiaries, and to be covered by D&O insurance policies of SCA and its subsidiaries, on the same terms as the SCA Board Nominees who are Independent. The SCA Shareholder Entity agrees that no SCA Shareholder Entity Nominee shall receive, directly or indirectly, any compensation or entitlement to indemnification, or be named as a beneficiary under any D&O insurance policy, for service on the SCA Board, any SCA Board committees or any SCA subsidiary boards or committees from the Consenting Counterparties or the SCA Shareholder Entity. |
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(iv) Notwithstanding any provision of SCAs Corporate Governance Guidelines and any confidentiality undertaking by the SCA Shareholder Entity or any SCA Shareholder Entity Nominee to the contrary, the parties acknowledge and agree that each SCA Shareholder Entity Nominee (i) is hereby authorized to disclose information to the SCA Shareholder Entity and its Representatives, (ii) is under no obligation to communicate any information received from the SCA Shareholder Entity or any of its Representatives to the SCA Chairman or any other Person and (iii) is authorized to initiate communications, directly or indirectly, with the SCA Shareholder Entity and its Representatives without any requirement to first pre-clear such communications with the SCA Chairman or any other Person, in each case, to the extent such SCA Shareholder Entity Nominee determines in good faith that the taking or the failure to take any such actions will not be inconsistent with his or her fiduciary duties to SCA under applicable law. For the avoidance of doubt, the provisions of the immediately preceding sentence shall not apply to disclosures to or communications with the Consenting Counterparties or their Representatives. SCA shall, effective as of the date hereof, amend SCAs Corporate Governance Guidelines to extent necessary so that SCAs Corporate Governance Guidelines do not contain any provisions inconsistent with the second preceding sentence. |
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(v) Until the occurrence of a Voting Restriction Termination Event, the SCA Shareholder Entity will not form or join a group within the meaning of Section 13(d)(3) of the Exchange Act with any other Person, including without limitation any of the Consenting Counterparties, for the purpose of seeking to elect more than the number of SCA Shareholder Entity Nominees to which it is then entitled under Section 2(b)(i); provided that, subject to Section 2(a), the foregoing shall in no way prohibit the SCA Shareholder Entity from voting any securities of SCA in its discretion (including in |
Exh. 1.01(i)-4
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connection with any election contest) or otherwise independently exercising its rights as a stockholder of SCA. |
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(vi) The SCA Shareholder Entity agrees not to nominate any individual that SCAs Nominating & Governance Committee, after having the opportunity to conduct a reasonable inquiry, reasonably determines in the good faith discharge of its fiduciary duties (i) does not meet the requirements set forth in the penultimate sentence of Section 2(b)(i) or would be a party to or benefit from any arrangement that would violate the last sentence of Section 2(b)(iii) or (ii) does not meet the suitability criteria of the SCA Board, which criteria shall be consistently applied to individuals presented as SCA Shareholder Entity Nominees to the same extent as those presented as Independent SCA Board Nominees. |
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(c) Committees; Subsidiary Boards . |
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(i) Until the occurrence of the Voting Restriction Termination Event, (i) the SCA Shareholder Entity will have the right to designate one member of the SCA Compensation Committee and (ii) the Compensation Committee of the SCA Board shall consist of at least five members which number of members shall not be changed without the SCA Shareholder Entitys prior consent (subject to any restrictions imposed by applicable law, rule or regulation). |
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(ii) Until the occurrence of the Voting Restriction Termination Event, (i) SCA will maintain a Finance and Risk Oversight Committee whose charter shall be substantially in its current form (with such changes thereto as may be agreed by a majority of the members of the Finance and Risk Oversight Committee and the SCA Board), (ii) the Finance and Risk Oversight Committee shall consist of at five members which number of members shall not be changed without the SCA Shareholder Entitys prior consent, and (iii) two of the members of such Committee shall be SCA Shareholder Entity Nominees. |
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(iii) Other than the Audit Committee, a Compensation Committee, a Nominating & Governance Committee and a Finance and Risk Oversight Committee, SCA shall establish no other committees of the SCA Board without the prior written consent of at least a majority of the SCA Shareholder Entity Nominees then in office (which shall not unreasonably be withheld). |
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(iv) Subject to applicable law (including the Act) and New York Stock Exchange regulations, until the occurrence of the Voting Restriction Termination Event, upon the request of the SCA Shareholder Entity, SCA and the SCA Board shall take all actions necessary so that the composition of the board of directors, general partner, managing member (or controlling committee thereof) or any other board or committee serving a similar function with respect to each of SCAs Material Subsidiaries (each a Subsidiary Board ) shall be proportionate to the composition requirements of the SCA Board such that the SCA Shareholder Entity shall have the same proportional representation (rounded to the nearest whole number of directors, but in no event less |
Exh. 1.01(i)-5
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than one) on each such Subsidiary Board and committee thereof as it has on the SCA Board. |
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(v) In each case where the SCA Shareholder Entity has the right to designate one or more members to any committee of the SCA Board, any Subsidiary Board or any committee thereof in accordance with this Section 2(c), the SCA Board shall select the SCA Shareholder Entity Nominee or SCA Shareholder Entity Nominees, as the case may be, to serve on such Subsidiary Board or committee in the same manner as Independent SCA Board Nominees are selected to serve on such Subsidiary Board or committee. |
(d) Notice of SCA Board Meetings . In addition to any other notice required by the Act or the Bye-Laws, SCA shall give each SCA Shareholder Entity Nominee the same notice and information provided to any other member of the SCA Board with respect to each meeting of the SCA Board or any committee thereof (even if such SCA Shareholder Entity Nominee is not a member of such committee), at the same time such notice is first made available to any such other member of the SCA Board; provided that if such notice and information is given by means other than email, SCA shall, simultaneously with the giving of such notice and information by such other means, deliver such notice and information to each SCA Shareholder Entity Nominee by email to the email address of such SCA Shareholder Entity Nominee provided to SCA.
(e) Approval of Certain Matters . In addition to any other actions or approvals required under the Act or the Bye-Laws, each of SCA and the Shareholder Entity Nominee agree that until the occurrence of the Voting Restriction Termination Event, (i) the acquisition, sale, lease or transfer of all or substantially all of the assets of SCA, (ii) the discontinuance or redomestication of SCA out of Bermuda to another jurisdiction, (iii) mergers or amalgamations and (iv) the liquidation, dissolution or winding-up of SCA shall, in each case, require, as a condition to consummation thereof, the approval by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the votes cast in accordance with the provisions of the Bye-Laws; provided that this Section 2(e) shall not apply to the approval of any of the Transactions (as such term is defined in the Master Restructuring Agreement).
SECTION 3 . Certain Additional Agreements.
(a) No Voting Reduction of SCA Shares . SCA hereby acknowledges and agrees that for purposes of Section 44 of the Bye-Laws, (x) clause (ii) of paragraph (1) of Section 44 of the Bye-Laws applies to the transfer of the SCA Shares by XLI to the SCA Shareholder Entity and, in accordance with such clause, no reduction in votes contemplated by Section 44 of the Bye-Laws shall occur with respect to the SCA Shares or any other Common Shares acquired by the SCA Shareholder Entity (or any Affiliate thereof) for so long as the SCA Shareholder Entity (or any Affiliate thereof) continues to hold such shares, (y) the Master Restructuring Agreement shall be deemed to constitute for all purposes of Section 44 of the Bye-Laws the notice required to be delivered by XLI to the SCA Board pursuant clause (ii) of paragraph (1) of Section 44 of the Bye-Laws in connection with the transfer of the SCA Shares and no other condition as to the applicability of such clause is required to be satisfied and (z) the SCA Shareholder Entity (and its Affiliates) are entitled to the full benefit of clause (ii) of paragraph (1) of Section 44 of the Bye-Laws (including as to the applicability of such benefit to Section 45 of the Bye-Laws).
Exh. 1.01(i)-6
(b) Applicability of Paragraph (2) of Bye-Law 44 . The SCA Shareholder Entity agrees that paragraph (2) of Section 44 of the Bye-Laws shall apply to the SCA Shareholder Entity on a mutatis mutandis basis as though the SCA Shareholder Entity were XL for purposes of such paragraph.
(c) Information Rights . Until the occurrence of the Voting Restriction Termination Event, SCA shall furnish or make available to the SCA Shareholder Entity, promptly after such information becomes available to SCA:
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(i) such annual budget, business plans and financial forecasts as are customarily provided to the SCA Board; |
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(ii) following the end of each fiscal quarter and fiscal year of SCA, such consolidated financial statements and operations reports of SCA (including audit reports with respect to fiscal years) as are customarily provided to the SCA Board; and |
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(iii) all information that is provided to members of the Finance and Risk Oversight Committee in their capacity as such. |
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(d) Access . Until the occurrence of the Voting Restriction Termination Event, SCA will, and will cause its subsidiaries, officers, directors and employees to, afford that SCA Shareholder Entity and its Representatives the opportunity to discuss SCAs and its subsidiaries affairs, finances and accounts with SCAs and its subsidiaries officers from time to time as the SCA Shareholder Entity may reasonably request, in each event, only to the extent necessary or reasonably appropriate to accomplish the reasonable purpose of the proposed inspection. |
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(e) Confidentiality . |
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(i) The SCA Shareholder Entity shall not, and shall not permit any of its Representatives to, disclose any information of a known confidential nature received from SCA or any of its subsidiaries in connection with the SCA Shareholder Entitys investment in SCA ( Confidential Information ). The SCA Shareholder Entity may disclose Confidential Information to its Representatives so long as such Representatives are informed by the SCA Shareholder Entity of the confidential nature of such information and provided that in any event the SCA Shareholder Entity will be responsible for any breach of this Section 3(e) by its Representatives. For the avoidance of doubt, the SCA Shareholder Entity shall not disclose any Confidential Information to the Consenting Counterparties or any of their respective Representatives; provided that a Person that serves as an accountant, counsel, consultant, advisor, agent and/or other representative to both a Consenting Counterparty and the SCA Shareholder Entity shall not be deemed to be a Representative of such Consenting Counterparty if (A) such Person is not acting as a Representative of such Consenting Counterparty in connection with the transactions contemplated by the Master Restructuring Agreement and (B) internal information barriers customary for the applicable industry are established as may be reasonably necessary to prevent the unauthorized disclosure of Confidential Information between such Person and any Person serving as a Representative to such Consenting |
Exh. 1.01(i)-7
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Counterparty with respect to the transactions contemplated by the Master Restructuring Agreement. |
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(ii) Confidential Information shall not include information (A) that is or becomes generally known on a non-confidential basis from a source other than the SCA Shareholder Entity or its Representatives, (B) that has become available to the SCA Shareholder Entity on a non-confidential basis from a source that is not, to the SCA Shareholder Entitys knowledge, under an obligation of confidentiality or (C) that has been developed by or on behalf of the SCA Shareholder Entity or any of its Representatives independently of any disclosure from SCA or its subsidiaries. |
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(iii) If the SCA Shareholder Entity or any of its Representatives is legally requested or required under an order or subpoena issued by a court, administrative agency or arbitration panel, or to comply with regulatory or ratings agency requests or requirements (through oral examination, interrogatories, requests for information or documents, civil investigation demand or other legal, administrative or arbitration processes) to disclose any Confidential Information, such Person being so requested or required to disclose such Confidential Information shall use reasonable efforts to give SCA such request or requirement prompt written notice of the request, requirement, subpoena or order to permit (to the extent reasonable) SCA (if it so elects at its expense) to seek an appropriate protective order preventing or limiting disclosure or waive compliance with the provisions of this Section 3(e). If, in the absence of such protective order or waiver, the SCA Shareholder Entity or any of its Representatives is compelled to disclose Confidential Information, such Person may disclose such Confidential Information without liability hereunder. |
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(iv) The SCA Shareholder Entity agrees that money damages would not be a sufficient remedy for any breach of this Section 3(e) and that, in addition to all other remedies, SCA shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach. |
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(v) The SCA Shareholder Entity acknowledges that any information provided to the SCA Shareholder Entity or any of its Representatives by SCA pursuant to Section 3(c) or Section 3(d) may constitute material non-public information and that its possession of such information may subject the SCA Shareholder Entity to the restrictions imposed by federal and state securities laws on Persons in possession of material non-public information. |
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(f) Constituent Documents . |
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(i) SCA shall take or cause to be taken all lawful action necessary or appropriate to ensure that none of SCAs Memorandum of Association, Bye-Laws, Corporate Governance Guidelines and any other similar documents of SCA and any of the corresponding constituent documents of SCAs subsidiaries contain any provisions inconsistent with this Agreement or which would in any way nullify or impair the terms of this Agreement or the rights of the SCA Shareholder Entity hereunder. |
Exh. 1.01(i)-8
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(ii) Until the occurrence of the Voting Restriction Termination Event, SCA shall not, without the prior written consent of the SCA Shareholder Entity, amend, alter or repeal its Memorandum of Association, Bye-Laws, Corporate Governance Guidelines and any other similar document of SCA in any manner adverse to the SCA Shareholder Entity. |
SECTION 4 . Miscellaneous.
(a) Interpretation . In this Agreement, the SCA Shareholder Entity shall be deemed to be the Trust, the Trustee (or any trustee or trustees of the Trust) acting in its capacity as such trustee, in each case as the context may require to be most protective of the interests of SCA.
(b) Termination . This Agreement (except for the provisions of Sections 3(a) and 3(e)) shall terminate upon the occurrence of the Voting Restriction Termination Event at which time the SCA Shareholder Entity shall cause the SCA Shareholder Entity Nominees to resign from the SCA Board and all directorships they hold in subsidiaries of SCA.
(c) Amendment and Waiver . This Agreement may not be amended except by an instrument in writing signed on behalf of each of the SCA and the SCA Shareholder Entity. Any party hereto may waive any right of such party hereunder by an instrument in writing signed by such party and delivered to the other party. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms.
(d) Severability . If any provision of this Agreement shall be declared by any court of competent jurisdiction to be illegal, void or unenforceable, all other provisions of this Agreement shall not be affected and shall remain in full force and effect.
(e) Entire Agreement . This Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, that may have related to the subject matter hereof in any way.
(f) Successors and Assigns . Neither this Agreement nor any right or obligation hereunder is assignable in whole or in part by any party without the prior written consent of the other party hereto; provided , that the SCA Shareholder Entity may assign any or all its rights under this Agreement to one or more of its Affiliates; provided , further , that no such assignment shall relieve the SCA Shareholder Entity of any of its obligations hereunder and all Common Shares held by any subsidiary or Affiliate of the SCA Shareholder Entity shall be deemed to be held by the SCA Shareholder Entity for all purposes under this Agreement.
(g) Counterparts; Execution by Facsimile Signature . This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. This Agreement may be executed by facsimile signature(s).
Exh. 1.01(i)-9
(h) Public Announcement . No party to this Agreement shall make, or cause to be made, any press release or public announcement or otherwise communicate with any news media in respect of this Agreement or the transactions contemplated hereby without the prior consent of the other party and the parties shall cooperate as to the timing of any such press release or public announcement; provided , however , that this provision does not apply to any disclosures required by law.
(i) Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next Business Day or (iii) one Business Day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the addresses set forth below or such other address or facsimile number as a party may from time to time specify by notice to the other parties hereto:
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If to SCA: |
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A.S. Cooper Building |
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26 Reid Street, 4th Floor |
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Hamilton HM 11 |
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Bermuda |
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Attention: General Counsel |
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Fax: (441) 296-4351 |
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with a copy (which shall not constitute notice) to: |
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Weil, Gotshal & Manges LLP, |
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767 Fifth Avenue |
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New York, New York 10153 |
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Attention: Gary Holtzer |
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Fax: (212) 310-8007 |
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If to the SCA Shareholder Entity: |
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[ ___________________ ] |
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[ ___________________ ] |
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Attention: [ __________ ] |
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Fax: [ _______________ ] |
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with a copy (which shall not constitute notice) to: |
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[ ___________________ ] |
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[ ___________________ ] |
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Attention: [ __________ ] |
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Fax: [ _______________ ] |
Exh. 1.01(i)-10
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(j) Governing Law; Consent to Jurisdiction . |
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(i) This Agreement shall be governed in all respects by the laws of the State of New York, without regard to its conflicts of laws principles. |
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(ii) Each of the parties hereto agrees that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in any Federal or state court located in the Borough of Manhattan in the City of New York, New York, and each of the parties hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 4(i) shall be deemed effective service of process on such party. |
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(iii) Each of the parties hereto hereby irrevocably and unconditionally waives trial by jury in any legal Action or proceeding in relation to this Agreement and for any counterclaim therein. |
(k) Headings . The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.
(l) No Third Party Beneficiaries . This Agreement is solely for the benefit of the parties hereto and shall not be deemed to confer upon third parties (including stockholders or members of any party hereto) any remedy, claim, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.
(m) Specific Performance . Each party hereto acknowledges that the remedies at law of the other parties for a breach or threatened breach of this Agreement would be inadequate and, in recognition of this fact, any party to this Agreement, without posting any bond, and in addition to all other remedies that may be available, shall be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available.
[signature page follows]
Exh. 1.01(i)-11
IN WITNESS WHEREOF, the parties hereto have executed this Shareholders Agreement as of the date first written above.
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SECURITY CAPITAL ASSURANCE LTD. |
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By: |
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Name: |
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Title: |
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[SCA SHAREHOLDER ENTITY] |
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By: |
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Name: |
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Title: |
Exh. 1.01(i)-12
EXHIBIT 1.01(j)
FORM OF SCA REGISTRATION RIGHTS AGREEMENT
Exhibit 1.01(j)
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of August [__], 2008, by and between Security Capital Assurance Ltd., a Bermuda exempted company (the Company ), and [ HSBC Private Bank, Bermuda Trust Company Limited] (the Trustee ), a Bermuda exempted company as trustee of the special purpose trust (the Trust ) established by that certain Declaration of Trust dated as of the date hereof and known as [name of trust] (the SCA Shareholder Entity ).
WHEREAS, pursuant to that certain Master Commutation, Release and Restructuring Agreement, dated as of July [__], 2008, by and among the Company, XL Capital Assurance Ltd., XL Financial Assurance Ltd., XL Capital Ltd. and the other parties thereto (the Master Transaction Agreement ), among other things, the Company has agreed to provide the SCA Shareholder Entity certain rights as set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and obligations hereinafter set forth (and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the Company), the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Certain Defined Terms . As used herein, the following terms shall have the following meanings:
Action means any legal, administrative, regulatory or other suit, action, claim, audit, assessment, arbitration or other proceeding, investigation or inquiry.
Affiliate shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this definition, control (including its correlative meanings, controlled by and under common control with) when used with respect to any Person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
Agreement means this Registration Rights Agreement as it may be amended, supplemented, restated or modified from time to time.
Beneficial Ownership by a Person of any securities includes ownership by any Person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares (i) voting power which includes the power to vote, or to direct the voting of, such security; and/or (ii) investment power which includes the power to dispose, or to direct the disposition, of such security; and shall otherwise be interpreted in accordance with the term beneficial ownership as defined in Rule 13d-3 adopted by the SEC under the Exchange Act. The term Beneficially Own shall have a correlative meaning.
Exh. 1.01(j)-1
Business Day means any day, other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated to close.
Common Shares means the Common Shares, $0.01 par value per share, of the Company.
Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC from time to time thereunder.
Form S-3 means such form under the Securities Act as is in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.
Governmental Entity shall mean any court, administrative agency or commission or other governmental authority or instrumentality, whether federal, state, local or foreign and any applicable industry self-regulatory organization.
Holders means the SCA Shareholder Entity and any Transferee of Registrable Securities that agrees to be bound by the terms of this Agreement pursuant to Section 3.6 hereof (and Holder means any of such Persons).
Holders Representative means the SCA Shareholder Entity or any or any other Holder designated by the SCA Shareholder Entity as the Holders Representative.
Issuer Free Writing Prospectus means an issuer free writing prospectus, as defined in Rule 433 under the Securities Act, relating to an offer of the Registrable Securities.
Law means any statute, law, code, ordinance, rule or regulation of any Governmental Entity.
Other Securities means Common Shares other than Registrable Securities.
Person means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivisions thereof or any group (within the meaning of Section 13(d)(3) of the Exchange Act) comprised of two or more of the foregoing.
Prospectus means the prospectus included in any Registration Statement (including a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A or Rule 430B promulgated under the Securities Act), as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, any Issuer Free Writing Prospectus related thereto, and all other amendments and supplements to such prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such prospectus.
Exh. 1.01(j)-2
Registrable Securities means (a) all Common Shares held by the SCA Shareholder Entity as of the date of this Agreement, and (b) any securities issued directly or indirectly with respect to such shares described in clause (a) because of stock splits, stock dividends, reclassifications, recapitalizations, mergers, consolidations, or similar events. As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, or (ii) such securities shall have been disposed of pursuant to Rule 144, or (iii) following any transfer of such securities to a Transferee, such securities are eligible to be sold to the public without volume limitations pursuant to Rule 144, it being understood that in the event that such securities cease to be eligible to be sold to the public without volume limitations pursuant to Rule 144 as a result of any act or failure to act of the Company, then subject to clauses (i) and (ii) above such securities will again be Registrable Securities hereunder until such time as such securities are eligible to be sold to the public without volume limitations pursuant to Rule 144.
Registration Statement means any registration statement of the Company under the Securities Act which permits the public offering of any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.
Rule 144 means Rule 144 under the Securities Act (or any successor provision).
SEC means the United States Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated by the SEC from time to time thereunder.
Selling Holder means each Holder of Registrable Securities included in a registration pursuant to Article II.
Shelf Registration Statement means a Registration Statement of the Company filed with the SEC on Form S-3 for an offering to be made on a continuous or delayed basis pursuant to Rule 415 under the Securities Act covering Registrable Securities. To the extent the Company is a well-known seasoned issuer (as defined in Rule 405 under the Securities Act), a Shelf Registration Statement shall be deemed to refer to an automatic shelf registration statement (as defined in Rule 405 under the Securities Act) on Form S-3.
A Subsidiary of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person.
Transferee means any of (i) the transferee of all or any portion of the Registrable Securities held by the SCA Shareholder Entity or (ii) the subsequent transferee of all or any
Exh. 1.01(j)-3
portion of the Registrable Securities held by any such transferee; provided , that no Transferee shall be entitled to any benefits of a Transferee hereunder unless such Transferee executes and delivers to the Company an instrument substantially in the form provided as Exhibit A attached hereto.
Section 1.2 Terms Generally . The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words include, includes and including shall be deemed to be followed by the phrase without limitation, unless the context expressly provides otherwise. All references herein to Articles, Sections, paragraphs, subparagraphs, clauses or Exhibits shall be deemed references to Articles, Sections, paragraphs, subparagraphs or clauses of, or Exhibits to, this Agreement, unless the context requires otherwise. Unless otherwise expressly defined, terms defined in this Agreement have the same meanings when used in any Exhibit hereto. Unless otherwise specified, the words this Agreement, herein, hereof, hereto and hereunder and other words of similar import refer to this Agreement as a whole (including the Exhibits) and not to any particular provision of this Agreement. The term or is not exclusive. The word extent in the phrase to the extent shall mean the degree to which a subject or other thing extends, and such phrase shall not mean simply if. Unless expressly stated otherwise, any Law defined or referred to herein means such Law as from time to time amended, modified or supplemented, including by succession of comparable successor Laws and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
ARTICLE II
REGISTRATION
RIGHTS
Section 2.1 Demand Registrations . (a) Subject to Section 2.1(h), at any time and from time to time, the Holders Representative shall have the right by delivering a written notice to the Company (a Demand Notice ) to require the Company to, pursuant to the terms of this Agreement, register under and in accordance with the provisions of the Securities Act the number of Registrable Securities Beneficially Owned by Holders and requested by such Demand Notice to be so registered (a Demand Registration ); provided , however , that a Demand Notice may only be made if the amount of Registrable Securities requested to be registered is either (i) at least 20% of the aggregate number of Registrable Securities then held by all Holders or (ii) reasonably expected to generate aggregate gross proceeds on sale (prior to deducting underwriting discounts and commissions and offering expenses) of at least $10 million. A Demand Notice shall also specify the expected method or methods of disposition of the applicable Registrable Securities. Following receipt of a Demand Notice, the Company shall use its reasonable best efforts to file, as promptly as reasonably practicable, but not later than, 60 days with respect to any underwritten offering, or 30 days with respect to any other offering, after receipt by the Company of such Demand Notice (subject to paragraph (e) of this Section 2.1), a Registration Statement relating to the offer and sale of the Registrable Securities requested to be included therein by the Holders thereof in accordance with the methods of distribution elected by such Holders (a Demand Registration Statement ) and shall use its
Exh. 1.01(j)-4
reasonable best efforts to cause such Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing thereof.
(b) No securities shall be included under any Demand Registration Statement related to an underwritten offering without the written consent of the Holders Representative, except Registrable Securities requested to be included therein pursuant to Section 2.1(a). Subject to the preceding sentence, if any of the Registrable Securities to be registered pursuant to a Demand Registration are to be sold in a firm commitment underwritten offering, and the managing underwriter(s) of such underwritten offering advise the Holders in writing that it is their good faith opinion that the total number or dollar amount of Registrable Securities proposed to be sold in such offering, together with any Other Securities proposed to be included by holders thereof which are entitled to include securities in such Registration Statement, exceeds the total number or dollar amount of such securities that can be sold without having an adverse effect on the price, timing or distribution of the Registrable Securities to be so included together with all such Other Securities, then there shall be included in such firm commitment underwritten offering the number or dollar amount of Registrable Securities and such Other Securities that in the opinion of such managing underwriter(s) can be sold without so adversely affecting such offering, and such number of Registrable Securities and Other Securities shall be allocated for inclusion as follows:
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(i) first, the Registrable Securities for which inclusion in such demand offering was requested by the Holders, pro rata (if applicable), based on the number of Registrable Securities Beneficially Owned by each such Holder; and |
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(ii) second, among any holders of Other Securities, pro rata , based on the number of Other Securities Beneficially Owned by each such holder. |
(c) The Holders collectively shall be entitled to request no more than three Demand Registrations pursuant to this Section 2.1; provided , however , that (i) in no event shall the Company be required to effect more than one Demand Registration in any three-month period and (ii) subject to Section 2.1(h), in case the Company shall receive from the Holders Representative a Demand Notice requesting that the Company effect a registration on Form S-3 (provided that the Company is eligible to effect such registration on Form S-3 at such time), the Company shall be obligated to effect any such Demand Registration without regard to the number of Demand Registrations made.
(d) In the event of a Demand Registration, the Company shall use its reasonable best efforts to maintain the continuous effectiveness of the applicable Registration Statement for a period of at least 180 days after the effective date thereof or such shorter period in which all Registrable Securities included in such Registration Statement have actually been sold. For the avoidance of doubt, the foregoing sentence is not intended to limit the obligation of the Company to maintain the continuous effectiveness of the Short-Form Registration contemplated by Section 2.2 as required by Section 2.2.
(e) The Company shall be entitled to postpone (but not more than once in any six-month period), for a reasonable period of time, together with any postponement under Section 2.2(c), not in excess of 60 days (and not for periods exceeding, in the aggregate, 90 days
Exh. 1.01(j)-5
during any twelve-month period), the filing or initial effectiveness of, or suspend the use of, a Demand Registration Statement if the Company delivers to the Holders Representative a certificate signed by both the Chief Executive Officer and Chief Financial Officer of the Company certifying that, in their good faith judgment, such registration, offering or use would reasonably be expected to materially adversely affect or materially interfere with any bona fide and imminent material financing of the Company or any imminent material transaction under consideration by the Company or would require the disclosure of information that has not been, and is not otherwise required to be, disclosed to the public, the premature disclosure of which would materially adversely affect the Company. Such certificate shall contain, if requested by the Holders Representative (and subject to their entering into a customary confidentiality obligation as to such information), a reasonably detailed statement of the reasons for such postponement or suspension and an approximation of the anticipated delay. If the Company so postpones the filing of a Registration Statement, the Holders Representative will have the right to withdraw the request for registration by giving written notice to the Company within ten days of the anticipated termination date of the postponement period, as provided in the notice delivered to the Holders Representative and such withdrawn registration will not count as a Demand Registration.
(f) The Holders Representative shall have the right to notify the Company that it has determined that the Registration Statement relating to a Demand Registration be abandoned or withdrawn, in which event the Company shall promptly abandon or withdraw such Registration Statement.
(g) No request for registration will count for the purposes of the limitations in Section 2.1(c) if: (A) the Holders Representative determines in good faith to withdraw the proposed registration prior to the effectiveness of the Registration Statement relating to such request due to marketing conditions or regulatory reasons relating to the Company, (B) the Registration Statement relating to such request is not declared effective within 60 days of the date such Registration Statement is first filed with the SEC (other than solely by reason of the applicable Holders having refused to proceed), (C) the Registration Statement is not maintained effective for the period required pursuant to this Section 2.1(d), (D) prior to the sale of at least 90% of the Registrable Securities included in the applicable registration relating to such request, such registration is adversely affected by any stop order, injunction or other order or requirement of the SEC or other Governmental Entity or court, (E) more than 10% of the Registrable Securities requested by the Holders to be included in the registration are not so included pursuant to Section 2.1(b), or (F) the conditions to closing specified in any underwriting agreement or purchase agreement entered into in connection with the registration relating to such request are not satisfied (other than as a result of a material default or breach thereunder by the applicable Holders). Notwithstanding anything to the contrary, the Company will pay all expenses (in accordance with Section 2.9) in connection with any request for registration pursuant to this Agreement regardless of whether or not such request counts toward the limitation set forth above.
(h) Notwithstanding anything else to the contrary in this Section 2.1, if, prior to any request for registration pursuant to this Section 2.1, (i) the Company shall have filed a Shelf Registration Statement covering all of the Registrable Securities in accordance with Section 2.2, (ii) the plan of distribution set forth in such Shelf Registration Statement includes
Exh. 1.01(j)-6
underwritten offerings and (iii) the Shelf Registration Statement is effective when the Holders Representative would otherwise make a request for registration under this Section 2.1, the Company shall not be required to separately register any Registrable Securities (including, for the avoidance of doubt, any request that the Company effect a registration on Form S-3 pursuant to clause (ii) of Section 2.1(c)) in response to such request, and such request shall be deemed to be a request that the Company cooperate in effecting a Takedown of the Registrable Securities pursuant to such Shelf Registration Statement. Subject to Section 2.2(e), the Company may also register Other Securities on any such Shelf Registration Statement.
Section 2.2 Shelf Registration . (a) As promptly as practicable (but no later than 60 days) after the Company becomes eligible to effect a registration on Form S-3 (and provided that the Company is eligible to effect such registration at such time), the Company shall file with the SEC a Shelf Registration Statement providing for the registration and sale of all of the Registrable Securities by the Holders and shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective under the Securities Act as soon as reasonably practicable thereafter (provided that the Company is eligible to effect such registration at such time).
(b) Subject to the Company being eligible to do so under the Securities Act, the Company shall use its reasonable best efforts to keep such Shelf Registration Statement continuously effective under the Securities Act in order to permit the Prospectus forming a part thereof to be usable by Holders until the earlier of (i) all Common Shares held by all Holders are no longer Registrable Securities and (ii) the date as of which all Registrable Securities have been sold pursuant to the Shelf Registration Statement or another Registration Statement has been filed under the Securities Act (but in no event prior to the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder) (such period of effectiveness, the Shelf Period ). Subject to Section 2.2(c), the Company shall not be deemed to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the Shelf Period if the Company voluntarily takes any action or omits to take any action that would result in Holders of Registrable Securities covered thereby not being able to offer and sell any Registrable Securities pursuant to such Shelf Registration Statement during the Shelf Period, unless such action or omission is required by applicable Law.
(c) The Company shall be entitled to postpone (but not more than once in any six-month period), for a reasonable period of time, together with any postponement under Section 2.1(e), not in excess of 60 days (and not for periods exceeding, in the aggregate, 90 days during any twelve-month period), the filing or initial effectiveness of, or suspend the use of, a Shelf Registration Statement if the Company delivers to the Holders Representative a certificate signed by both the Chief Executive Officer and Chief Financial Officer of the Company certifying that, in their good faith judgment, such registration, offering or use would reasonably be expected to materially adversely affect or materially interfere with any bona fide material financing of the Company or any material transaction under consideration by the Company or would require the disclosure of information that has not been, and is not otherwise required to be, disclosed to the public, the premature disclosure of which would materially adversely affect the Company. Such certificate shall contain, if requested by the Holders Representative (and subject to their entering into a customary confidentiality obligation as to such information), a reasonably
Exh. 1.01(j)-7
detailed statement of the reasons for such postponement or suspension and an approximation of the anticipated delay.
(d) Upon a written request from any Holder (an Initiating Holder ) to effect an offering under the Shelf Registration Statement (a Takedown ), provided that the Company is eligible to utilize such Registration Statement at such time, the Company will, as soon as practicable, (x) deliver a written notice relating to the proposed Takedown to all other Holders and (y) promptly (and in any event not later than twenty days after receiving such Initiating Holders request) supplement the Prospectus included in the Shelf Registration Statement as would permit or facilitate the sale and distribution of all or such portion of such Initiating Holders Registrable Securities as are specified in such request together with the Registrable Securities requested to be included in such Takedown by any other Holders who notify the Company in writing within ten business days after receipt of such written notice from the Company. If the Company and/or the holders of any Other Securities request inclusion of Other Securities in a Takedown, such Other Securities shall be included in the Takedown if, and only if, inclusion of such Other Securities would not be reasonably likely to delay in any material respect the timely effectuation of the Takedown or the sale of Registrable Securities pursuant to the Takedown. In the case of a request for or effectuation of a Takedown, all references in this Agreement to the effective date of a Registration Statement shall be deemed to refer to the date of pricing of such Takedown and all references to registration shall be deemed to refer to the Takedown.
(e) If any of the Registrable Securities to be sold pursuant to a Shelf Registration Statement are to be sold in a firm commitment underwritten offering, and the managing underwriter(s) of such underwritten offering advise the Holders in writing that it is their good faith opinion that the total number or dollar amount of Registrable Securities proposed to be sold in such offering, together with any Other Securities proposed to be included by holders thereof which are entitled to include securities in such Registration Statement, exceeds the total number or dollar amount of such securities that can be sold without having an adverse effect on the price, timing or distribution of the Registrable Securities to be so included together with all such Other Securities, then there shall be included in such firm commitment underwritten offering the number or dollar amount of Registrable Securities and such Other Securities that in the opinion of such managing underwriter(s) can be sold without so adversely affecting such offering, and such number of Registrable Securities and Other Securities shall be allocated for inclusion as follows:
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(i) first, the Registrable Securities for which inclusion in such underwritten offering requested by the Holders, pro rata (if applicable), based on the number of Registrable Securities Beneficially Owned by each such Holder; and |
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(ii) second, among any holders of Other Securities, pro rata , based on the number of Other Securities Beneficially Owned by each such holder of Other Securities. |
Section 2.3 Piggyback Registrations . (a) If, other than pursuant to Section 2.1 or Section 2.2, the Company proposes or is required to file a registration statement under the Securities Act with respect to an offering of Common Shares, whether or not for sale for its own account (other than a registration statement (i) on Form S-4, Form S-8 or any successor forms
Exh. 1.01(j)-8
thereto, (ii) filed solely in connection with any employee benefit or dividend reinvestment plan, or (iii) so long as a Shelf Registration Statement is effective and available pursuant to Section 2.2 hereof, filed solely in connection with the issuance or resale of Common Shares issuable upon conversion, exercise or exchange of any securities of the Company or any of its Subsidiaries, where such convertible, exercisable or exchangeable securities were issued in, or as part of, a financing transaction), in a manner that would permit registration of Registrable Securities for sale to the public under the Securities Act, then the Company shall give prompt written notice of such proposed filing at least 30 days before the anticipated filing date (the Piggyback Notice ) to the Holders. The Piggyback Notice shall offer the Holders the opportunity to include in such registration statement the number of Registrable Securities as they may request (a Piggyback Registration ). Subject to Section 2.3(b) hereof, the Company shall include in each such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after notice has been given to the Holders, to permit the distribution of such Registrable Securities in accordance with the methods of distribution elected by such Holders. The Holders shall be permitted to withdraw all or part of the Registrable Securities from a Piggyback Registration at any time at least two Business Days prior to the effective date of the Registration Statement relating to such Piggyback Registration. The Company shall use its reasonable best efforts to maintain the effectiveness of the Registration Statement for a Piggyback Registration for a period of at least 180 days after the effective date thereof or such shorter period in which all Registrable Securities included in such Registration Statement have actually been sold. No Piggyback Registration shall count towards registrations required under Section 2.1.
(b) If any of the securities to be registered pursuant to the registration giving rise to the Holders rights under this Section 2.3 are to be sold in an underwritten offering, the Holders shall be permitted to include all Registrable Securities requested to be included in such registration in such offering on the same terms and conditions as any Other Securities included therein; provided , however , that if such offering involves a firm commitment underwritten offering and the managing underwriter(s) of such underwritten offering advise the Company in writing that it is their good faith opinion that the total amount of Registrable Securities requested to be so included, together with all Other Securities that the Company and any other Persons having rights to participate in such registration intend to include in such offering, exceeds the total number or dollar amount of such securities that can be sold without having an adverse effect on the price, timing or distribution of the Registrable Securities to be so included together with all Other Securities, then there shall be included in such firm commitment underwritten offering the number or dollar amount of Registrable Securities and such Other Securities that in the opinion of such managing underwriter(s) can be sold without so adversely affecting such offering, and such number of Registrable Securities and Other Securities shall be allocated for inclusion as follows:
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(i) first, all Other Securities being sold by the Company for its own account or by any Person (other than a Holder) exercising a contractual right to demand registration; |
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(ii) second, all Registrable Securities requested to be included by the Holders, pro rata (if applicable), based on the number of Registrable Securities Beneficially Owned by each such Holder; and |
Exh. 1.01(j)-9
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(iii) third, among any other holders of Other Securities requesting such registration, pro rata , based on the number of Other Securities Beneficially Owned by each such holder of Other Securities. |
Section 2.4 Registration Procedures . If and whenever the Company is required to use its reasonable best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Article II, the Company shall effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall cooperate in the sale of the securities and shall, as expeditiously as possible (to the extent applicable, in the case of a Takedown):
(a) Prepare and file with the SEC a Registration Statement or Registration Statements on such form which shall be available for the sale of the Registrable Securities by the Holders or the Company in accordance with the intended method or methods of distribution thereof, and use its reasonable best efforts to cause such Registration Statement to become effective and to remain effective as provided herein; provided , however , that before filing a Registration Statement or Prospectus or any amendments or supplements thereto (excluding documents that would be incorporated or deemed to be incorporated therein by reference), the Company shall furnish or otherwise make available to the Selling Holders, their counsel and the managing underwriter(s), if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review and comment of such counsel, and such other documents reasonably requested by such counsel, including any comment letter from the SEC, and, if requested by such counsel, provide such counsel reasonable opportunity to participate in the preparation of such Registration Statement and each Prospectus included therein and such other opportunities to conduct a reasonable investigation within the meaning of the Securities Act, including reasonable access to the Companys books and records, officers, accountants and other advisors. The Company shall not file any such Registration Statement or Prospectus or any amendments or supplements thereto (excluding such documents that, upon filing, would be incorporated or deemed to be incorporated by reference therein) with respect to any registration pursuant to Section 2.1, 2.2 or 2.3 to which any Holder (if such Registration Statement includes Registrable Securities of such Holder), its counsel, or the managing underwriter(s), if any, shall reasonably object, in writing, on a timely basis, unless, in the opinion of the Company, such filing is necessary to comply with applicable Law.
(b) Prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement continuously effective during the period provided herein and comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement, and cause the related Prospectus to be supplemented by any Prospectus supplement or Issuer Free Writing Prospectus as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the securities covered by such Registration Statement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Securities Act.
(c) Notify each Selling Holder and the managing underwriter(s), if any, promptly, and (if requested by any such Person) confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement, Issuer Free Writing Prospectus or post-effective
Exh. 1.01(j)-10
amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other Governmental Entity for amendments or supplements to a Registration Statement or related Prospectus or Issuer Free Writing Prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company contained in any agreement (including any underwriting agreement contemplated by Section 2.4(o) below) cease to be true and correct, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (vi) of the happening of any event that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference or any Issuer Free Writing Prospectus related thereto untrue in any material respect or that requires the making of any changes in such Registration Statement, Prospectus, documents or Issuer Free Writing Prospectus so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of any Prospectus or Issuer Free Writing Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(d) Use its reasonable best efforts to avoid the issuance of any order suspending the effectiveness of a Registration Statement or any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, or, if issued, to obtain the withdrawal or lifting of any such order or suspension at the reasonably earliest practicable date.
(e) If requested by the managing underwriter(s), if any, or the Holders of a majority of the Registrable Securities being sold in connection with an underwritten offering, promptly include in a Prospectus supplement, post-effective amendment or Issuer Free Writing Prospectus such information as the managing underwriter(s), if any, or such Holders may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such Prospectus supplement, such post-effective amendment or Issuer Free Writing Prospectus as soon as practicable after the Company has received such request.
(f) Furnish or make available to each Selling Holder, and each managing underwriter, if any, without charge, such number of conformed copies of the Registration Statement and each post-effective amendment thereto, including financial statements (but excluding schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits, unless requested in writing by such Holder, counsel or managing underwriter(s)), and such other documents, as such Holders or such managing underwriter(s) may reasonably request, and upon request a copy of any and all transmittal letters or other correspondence to or received from, the SEC or any other Governmental Entity relating to such offering.
Exh. 1.01(j)-11
(g) Deliver to each Selling Holder, and the managing underwriter(s), if any, without charge, as many copies of the Prospectus or Prospectuses (including each form of Prospectus and any Issuer Free Writing Prospectus related to any such Prospectuses) and each amendment or supplement thereto as such Persons may reasonably request in connection with the distribution of the Registrable Securities; and the Company, subject to Section 2.5(b), hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the Selling Holders and the managing underwriter(s), if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any such amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its reasonable best efforts to register or qualify or cooperate with the Selling Holders, the managing underwriter(s), if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Selling Holder or managing underwriter(s) reasonably requests in writing and to keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and to take any other action that may be necessary or advisable to enable such Selling Holders to consummate the disposition of such Registrable Securities in such jurisdiction; provided , however , that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified, (ii) subject itself to material taxation in any such jurisdiction where it is not then so subject, or (iii) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Selling Holders and the managing underwriter(s), if any, to facilitate the timely preparation and delivery of certificates (not bearing any legends) representing Registrable Securities to be sold after receiving written representations from each Selling Holder that the Registrable Securities represented by the certificates so delivered by such Selling Holder will be transferred in accordance with the Registration Statement, and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriter(s), if any, or the Selling Holders may request at least two Business Days prior to any sale of Registrable Securities.
(j) Use its reasonable best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other Governmental Entities within the United States, except as may be required solely as a consequence of the nature of such Selling Holders business, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals, as may be necessary to enable the seller or sellers thereof or the managing underwriter(s), if any, to consummate the disposition of such Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 2.4(c)(ii), (c)(iii), (c)(iv), (c)(v) or (c)(vi) above, prepare a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference or an Issuer Free Writing Prospectus related thereto, or file any other required document so that, as thereafter delivered to the Selling Holders,
Exh. 1.01(j)-12
such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(l) Prior to the effective date of the Registration Statement relating to the Registrable Securities, provide a CUSIP number for the Registrable Securities.
(m) Provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such Registration Statement from and after a date not later than the effective date of such Registration Statement.
(n) To the extent that the Common Shares are then listed on any national securities exchange, use reasonable best efforts to cause all Registrable Securities covered by such Registration Statement to be authorized to be listed on such national securities exchange, provided, however, that the Company shall have no obligation under this Section 2.3(n) if at the time of such registration the Company or Common Shares do not satisfy all criteria imposed by such national securities exchange to maintain such listing.
(o) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith or by the managing underwriter(s), if any, to expedite or facilitate the disposition of such Registrable Securities, and in connection therewith, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, (i) make such representations and warranties to the Selling Holders and the managing underwriter(s), if any, with respect to the business of the Company and its Subsidiaries, and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers in underwritten offerings, and, if true, confirm the same if and when requested, (ii) use its reasonable best efforts to furnish to the Selling Holders of such Registrable Securities opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriter(s), if any, and counsels to the Selling Holders of the Registrable Securities), addressed to each Selling Holder of Registrable Securities and each of the managing underwriter(s), if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such counsel and managing underwriter(s), (iii) use its reasonable best efforts to obtain comfort letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any Subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement) who have certified the financial statements included in such Registration Statement, addressed to each Selling Holder of Registrable Securities (unless such accountants shall be prohibited from so addressing such letters by applicable standards of the accounting profession or such action is otherwise inconsistent with the then current practice in the accounting profession) and each of the managing underwriter(s), if any, such letters to be in customary form and covering matters of the type customarily covered in comfort letters in connection with underwritten offerings, (iv) if an underwriting agreement is entered into, the
Exh. 1.01(j)-13
same shall contain customary indemnification provisions and procedures, except as otherwise agreed by the Holders of a majority of the Registrable Securities being sold in connection therewith and the managing underwriter(s), if any, and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith, their counsel and the managing underwriter(s), if any, to evidence the continued validity of the representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement, or as and to the extent required thereunder.
(p) Upon execution of a customary confidentiality agreement, make available for inspection by a representative of the Selling Holders, the managing underwriter(s), if any, and any attorneys or accountants retained by such Selling Holders or managing underwriter(s), at the offices where normally kept, during reasonable business hours, financial and other records, pertinent corporate documents and properties of the Company and its Subsidiaries, and cause the officers, directors and employees of the Company and its Subsidiaries to supply all information in each case reasonably requested by any such representative, managing underwriter(s), attorney or accountant in connection with such Registration Statement.
(q) Cause its officers to use their reasonable best efforts to support the marketing of the Registrable Securities covered by the Registration Statement (including, without limitation, by participation in road shows and appearing before rating agencies) taking into account the Companys business needs.
(r) Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC and any applicable national securities exchange, and make available to its security holders, as soon as reasonably practicable (but not more than 18 months) after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act.
Section 2.5 Certain Additional Agreements .
(a) The Company may require each Selling Holder to furnish to the Company in writing such information required in connection with such registration regarding such Selling Holder and the distribution of such Registrable Securities as the Company may, from time to time, reasonably request in writing and the Company may exclude from such registration the Registrable Securities of any Selling Holder who fails to furnish such information within a reasonable time after receiving such request.
(b) Each Selling Holder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.4(c)(iii) or (c)(vi) hereof, such Holder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such Holders receipt of the copies of the supplemented or amended Prospectus contemplated by Section 2.4(k) hereof, or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated or deemed
Exh. 1.01(j)-14
to be incorporated by reference in such Prospectus; provided, however, that (i) in no event shall such discontinuance exceed the time period set forth in Section 2.1(e) hereof, and (ii) the Company shall extend the time periods under Section 2.1 and Section 2.3 with respect to the length of time that the effectiveness of a Registration Statement must be maintained by the amount of time the Holder is required to discontinue disposition of such securities.
(c) The Company covenants and agrees that, so long as any Holder holds any Registrable Securities in respect of which any registration rights provided for in this Article II remain in effect, the Company will not, directly or indirectly, grant to any Person or agree to or otherwise become obligated in respect of rights of registration in the nature or substantially in the nature of those set forth in this Article II that would have priority over the Registrable Securities with respect to the inclusion of such securities in any registration by the Company (other than rights granted to a new registration rights holder after the date hereof to exercise a contractual right to demand registration that have terms no more favorable than the demand registration rights granted to the Holders in this Agreement), without the prior written consent of the Holders Representative. The Company has not entered into and will not enter into any agreement that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted prior to the date hereof to the holders of any of the Companys other issued and outstanding securities under any such agreements.
(d) E ach Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it or an exemption therefrom in connection with sale of Registrable Securities pursuant to the Registration Statement.
Section 2.6 Indemnification .
(a) Indemnification by the Company . The Company shall indemnify and hold harmless, to the fullest extent permitted by Law, each Selling Holder whose Registrable Securities are covered by a Registration Statement or Prospectus, the officers, directors, partners (limited and general), members, managers, shareholders, accountants, attorneys, agents and employees of each of them, each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) each such Selling Holder and the officers, directors, partners (limited and general), members, managers, shareholders, accountants, attorneys, agents and employees of each such controlling Person, each underwriter (including any Holder that is deemed to be an underwriter pursuant to any SEC comments or policies), if any, and each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) such underwriter (collectively, Holder Indemnitees ), from and against any and all losses, claims, damages, liabilities, expenses (including, without limitation, costs of preparation and reasonable attorneys fees and any other reasonable fees or expenses incurred by such party in connection with any investigation or Action), judgments, fines, penalties, charges and amounts paid in settlement (collectively, Losses ), as incurred, arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in any applicable Registration Statement (or in any preliminary or final Prospectus contained therein, any document incorporated by reference therein or Issuer Free Writing Prospectus related thereto) amendment of or supplement to any of the foregoing or other
Exh. 1.01(j)-15
document incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein (in the case of a final or preliminary Prospectus, in light of the circumstances under which they were made) a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or of the Exchange Act in connection with any such registration, qualification, or compliance; provided, that the Company will not be liable to a Selling Holder or underwriter, as the case may be, in any such case to the extent that any such Loss arises out of or is based on any untrue statement or omission by such Selling Holder or underwriter, as the case may be, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement (or in any preliminary or final Prospectus contained therein, any document incorporated by reference therein or Issuer Free Writing Prospectus related thereto), amendment of or supplement to any of the foregoing or other document in reliance upon and in conformity with written information furnished to the Company by such Selling Holder or underwriter specifically for inclusion in such document; and provided, further, that the Company will not be liable to any Person who participates as an underwriter in any underwritten offering or sale of Registrable Securities, or to any Person who is a Selling Holder in any non-underwritten offering or sale of Registrable Securities, or any other Person, if any, who controls such underwriter or Selling Holder within the meaning of the Securities Act, under the indemnity agreement in this Section 2.6 with respect to any preliminary Prospectus or the final Prospectus (including any amended or supplemented preliminary or final Prospectus), as the case may be, to the extent that any such loss, claim, damage or liability of such underwriter, Selling Holder or controlling Person results from the fact that such underwriter or Selling Holder sold Registrable Securities to a Person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final Prospectus as then amended or supplemented, whichever is most recent, if the Company has previously furnished copies thereof to such underwriter or Selling Holder and such final Prospectus, as then amended or supplemented, has corrected any such misstatement or omission. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder Indemnitee or any other Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that the Company may otherwise have to each Holder Indemnitee.
(b) Indemnification by Selling Holders . In connection with any Registration Statement in which a Selling Holder is participating by registering Registrable Securities, such Selling Holder shall furnish to the Company in writing such information as the Company reasonably requests specifically for use in connection with any Registration Statement or Prospectus and agrees, severally and not jointly with any other Person, to indemnify and hold harmless, to the fullest extent permitted by Law, the Company, the officers and directors of the Company, and each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Company, and each underwriter, if any, and each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) such underwriter (collectively, Company Indemnitees ), from and against all Losses, as incurred, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement (or in any preliminary or final Prospectus contained therein, any document incorporated by reference therein or Issuer Free Writing Prospectus related thereto) or any amendment of or supplement to any of the foregoing or any other document incident to such registration, or any omission (or alleged omission) to
Exh. 1.01(j)-16
state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a final or preliminary Prospectus, in light of the circumstances under which they were made) not misleading, in each case solely to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement (or in any preliminary or final Prospectus contained therein, any document incorporated by reference therein or Issuer Free Writing Prospectus related thereto), offering circular, or any amendment of or supplement to any of the foregoing or other document in reliance upon and in conformity with written information furnished to the Company by such Selling Holder expressly for inclusion in such document. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of its directors, officers or controlling Persons. The Company may require as a condition to its including Registrable Securities in any Registration Statement filed hereunder that the holder thereof acknowledge its agreement to be bound by the provisions of this Agreement (including Section 2.6) applicable to it.
(c) Conduct of Indemnification Proceedings . If any Person shall be entitled to indemnity hereunder (an indemnified party ), such indemnified party shall give prompt notice to the party from which such indemnity is sought (the indemnifying party ) of any claim or of the commencement of any Action with respect to which such indemnified party seeks indemnification or contribution pursuant hereto; provided, however, that the delay or failure to so notify the indemnifying party shall not relieve the indemnifying party from any obligation or liability except to the extent that the indemnifying party has been actually prejudiced by such delay or failure. The indemnifying party shall have the right, exercisable by giving written notice to an indemnified party promptly after the receipt of written notice from such indemnified party of such claim or Action, to assume, at the indemnifying partys expense, the defense of any such Action, with counsel reasonably satisfactory to such indemnified party; provided, however, that an indemnified party shall have the right to employ separate counsel in any such Action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless: (i) the indemnifying party agrees to pay such fees and expenses; (ii) the indemnifying party fails reasonably promptly to assume, or in the event of a conflict of interest, as determined after receiving written advice from outside counsel, cannot assume, the defense of such Action or fails to employ counsel reasonably satisfactory to such indemnified party, in which case the indemnified party shall also have the right to employ counsel and to assume the defense of such Action; or (iii) in the indemnified partys reasonable judgment, after receiving written advice from outside counsel, a conflict of interest between such indemnified and indemnifying parties may exist in respect of such Action; provided, further, however, that the indemnifying party shall not, in connection with any one such Action or separate but substantially similar or related Actions in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one firm of attorneys (together with appropriate local counsel) at any time for all of the indemnified parties, or for fees and expenses that are not reasonable. Whether or not such defense is assumed by the indemnifying party, such indemnified party will not be subject to any liability for any settlement made without its written consent (but such consent will not be unreasonably withheld or delayed). No indemnifying party will be subject to any liability for any settlement made without its written consent (but such consent will not be unreasonably withheld or delayed). The indemnifying party shall not consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by all claimants or plaintiffs to such
Exh. 1.01(j)-17
indemnified party of a release, in form and substance reasonably satisfactory to the indemnified party, from all liability in respect of such claim or litigation.
(d) Contribution .
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(i) If the indemnification provided for in this Section 2.6 is unavailable to an indemnified party in respect of any Losses (other than in accordance with its terms), then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party, on the one hand, and indemnified party, on the other hand, shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been taken by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent any such action, statement or omission. |
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(ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2.6(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. |
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(iii) No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. |
(e) Limitation on Holder Liability . Notwithstanding anything to the contrary contained in this Agreement, an indemnifying party that is a Holder shall not be required to indemnify or contribute any amount in excess of the amount by which the net proceeds received by such Holder from the sale of the Registrable Securities sold by such Holder in the applicable offering exceeds the amount of any damages that such indemnifying party has otherwise been required to pay by reason of the applicable untrue or alleged untrue statement or omission or alleged omission.
Section 2.7 Rule 144; Rule 144A . The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 or 144A under the Securities Act), and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 or 144A or Regulation S under the Securities Act, as such Rules may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, the
Exh. 1.01(j)-18
Company will deliver to such Holder a written statement as to whether it has complied with such requirements and, if not, the specifics thereof.
Section 2.8 Underwritten Registrations . (a) If any offering of Registrable Securities is an underwritten offering, the Holders Representative shall have the right to select the investment banker or investment bankers and managers to administer the offering, subject to approval by the Company, not to be unreasonably withheld or delayed. The Company shall have the right to select the investment banker or investment bankers and managers to administer any incidental or piggyback registration.
(b) No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell the Registrable Securities or Other Securities it desires to have covered by the registration on the basis provided in any underwriting arrangements in customary form (including pursuant to the terms of any over-allotment or green shoe option requested by the managing underwriter, provided that no such Person will be required to sell more than the number of Registrable Securities that such Person has requested the Company to include in any registration), and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements, provided that such Person (other than the Company) shall not be required to make any representations or warranties other than those related to title and ownership of shares and as to the accuracy and completeness of statements made in a Registration Statement, Prospectus or other document in reliance upon and in conformity with written information furnished to the Company or the managing underwriter(s) by such Person and, provided further , that such Persons (other than the Companys) liability in respect of such representations and warranties shall not exceed such Persons net proceeds from the offering.
Section 2.9 Registration Expenses . The Company shall pay all reasonable documented expenses incident to the Companys performance of or compliance with its obligations under this Article II, including, without limitation, (i) all registration and filing fees (including fees and expenses (A) with respect to filings required to be made with the SEC, all applicable securities exchanges and/or the Financial Industry Regulatory Authority and (B) of compliance with securities or Blue Sky laws including any fees and disbursements of counsel for the underwriter(s) in connection with Blue Sky qualifications of the Registrable Securities pursuant to Section 2.4(h)), (ii) printing expenses (including expenses of printing certificates for Registrable Securities in a form eligible for deposit with The Depository Trust Company and of printing Prospectuses if the printing of Prospectuses is requested by the managing underwriter(s), if any, or by the Holders of a majority of the Registrable Securities included in any Registration Statement), (iii) messenger, telephone and delivery expenses of the Company, (iv) fees and disbursements of counsel for the Company, (v) expenses of the Company incurred in connection with any road show, and (vi) fees and disbursements of all independent certified public accountants (including, without limitation, the expenses of any comfort letters required by this Agreement) and any other Persons, including special experts retained by the Company. In addition, the Company shall bear all of its internal expenses (including all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange on which similar securities issued by the Company are then listed and rating agency fees and the fees and expenses of any Person, including special experts,
Exh. 1.01(j)-19
retained by the Company. In addition, the Company shall pay the reasonable documented fees and disbursements of one firm of counsel (and, if needed, one firm of local counsel) for the SCA Shareholder Entity (but no Transferee or any other Person) in connection with registrations under Article II, but the Company shall not be obligated to pay any underwriting discounts attributable to sales of Registrable Securities by any Holder including the SCA Shareholder Entity.
Section 2.10 Securities Held by the Company or its Subsidiaries . Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, in the event that the Company or any of its Subsidiaries holds Registrable Securities, such Registrable Securities shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.
ARTICLE III
MISCELLANEOUS
Section 3.1 Conflicting Agreements . Each party represents and warrants that it has not granted and is not a party to any proxy, voting trust or other agreement that is inconsistent with or conflicts with any provision of this Agreement.
Section 3.2 Termination . This Agreement shall terminate at such time as there are no Registrable Securities, except for the provisions of Sections 2.6, 2.7, 2.9 and this Article III, which shall survive such termination.
Section 3.3 Amendment and Waiver . This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Company and the SCA Shareholder Entity (or, in the case of an amendment at any time when the SCA Shareholder Entity is not the sole Holder, signed on behalf of each of (i) the Company and (ii) the Holders of a majority of the aggregate number of Registrable Securities then held by all Holders). Any party hereto may waive any right of such party hereunder by an instrument in writing signed by such party and delivered to the other parties (or, in the case of a waiver of any rights of the Holders at any time when the SCA Shareholder Entity is not the sole Holder, by an instrument in writing signed by the Holders of a majority of the aggregate number of Registrable Securities then held by all Holders and delivered to the Company and the Holders Representative). The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms.
Section 3.4 Severability . If any provision of this Agreement shall be declared by any court of competent jurisdiction to be illegal, void or unenforceable, all other provisions of this Agreement shall not be affected and shall remain in full force and effect.
Section 3.5 Entire Agreement . Except as otherwise expressly set forth herein, this Agreement and the Master Transaction Agreement, together with the several agreements and other documents and instruments referred to herein or therein or annexed hereto or thereto, embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or
Exh. 1.01(j)-20
representations by or among the parties, written or oral, that may have related to the subject matter hereof in any way.
Section 3.6 Successors and Assigns . Neither this Agreement nor any right or obligation hereunder is assignable in whole or in part by any party without the prior written consent of the other party hereto; provided that the SCA Shareholder Entity may transfer its rights and obligations hereunder (in whole or in part) to any Transferee (and any Transferee may transfer such rights and obligations to any subsequent Transferee) without the prior written consent of the Company. Any such assignment shall be effective upon receipt by the Company of (x) written notice from the transferring Holder stating the name and address of any Transferee and identifying the number of shares of Registrable Securities being acquired by the Transferee and with respect to which the rights under this Agreement are being transferred and the nature of the rights so transferred and (y) a written agreement in substantially the form attached as Exhibit A hereto from such Transferee to be bound by the applicable terms of this Agreement.
Section 3.7 Counterparts; Execution by Facsimile Signature . This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. This Agreement may be executed by facsimile signature(s).
Section 3.8 Remedies . (a) Each party hereto acknowledges that monetary damages would not be an adequate remedy in the event that any of the covenants or agreements in this Agreement is not performed in accordance with its terms, and it is therefore agreed that, in addition to and without limiting any other remedy or right it may have, the non-breaching party will have the right to an injunction, temporary restraining order or other equitable relief in any court of competent jurisdiction enjoining any such breach or threatened breach and enforcing specifically the terms and provisions hereof. Each party hereto agrees to waive any requirement for the securing or posting of any bond in connection with such remedy.
(b) All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise or beginning of the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party.
Section 3.9 Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next Business Day or (iii) one Business Day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the addresses set forth below or such other address or facsimile number as a party may from time to time specify by notice to the other parties hereto:
If to the Company: Security Capital Assurance Ltd., 1221 Avenue of the Americas, New York NY 10020-1001; Attention: General Counsel; Fax: (212) 478-3587; and with a copy (which shall not constitute notice) to: Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153; Attention: Joseph Verdesca; Fax: (212) 310-8007.
Exh. 1.01(j)-21
If to the SCA Shareholder Entity: __________, [insert address]; Attention: __________; Fax: (___) ___-_____; and with a copy (which shall not constitute notice) to: [insert law firm and address]; Attention: __________; Fax: (___) ____-_____.
Section 3.10 Governing Law; Consent to Jurisdiction . (a) This Agreement shall be governed in all respects by the laws of the State of New York, without regard to its conflicts of laws principles.
(b) Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any Federal or state court located in the Borough of Manhattan in the City of New York, New York in the event any dispute arises out of this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (iii) agrees that it will not bring any Action relating to this Agreement in any court other than a Federal or state court located in the Borough of Manhattan in the City of New York, New York.
(c) Each of the parties hereto hereby irrevocably and unconditionally waives trial by jury in any legal Action or proceeding in relation to this Agreement and for any counterclaim therein.
Section 3.11 Interpretation . In this Agreement, the SCA Shareholder Entity shall be deemed to be the Trust, the Trustee (or any trustee or trustees of the Trust) acting in its capacity as such trustee, in each case as the context may require to be most protective of the interests of the Company.
[signature page follows]
Exh. 1.01(j)-22
IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first written above.
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SECURITY CAPITAL ASSURANCE LTD. |
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[SCA SHAREHOLDER ENTITY] |
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Exh. 1.01(j)-23
EXHIBIT A
JOINDER
Reference is made to the Registration Rights Agreement dated as of [________], 2008 (as amended from time to time, the Registration Rights Agreement ) among Security Capital Assurance Ltd., a Bermuda exempted company, ______________ [a Bermuda exempted company [limited by guarantee]], and each other person who shall have become a party to the Registration Rights Agreement in accordance with the terms thereof.
By execution of this Joinder, the undersigned agrees to become a party to the Registration Rights Agreement and to be bound by the terms, conditions, restrictions and provisions thereof as a Holder thereunder, entitled to all of the rights available thereto and subject to all of the burdens imposed thereon.
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Name: |
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Address for Notices: |
With Copies to: |
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Signature: |
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Exh. 1.01(j)-24
EXHIBIT 1.01(k)
FORM OF TRANSITION AGREEMENT AMENDMENT
Exhibit 1.01(k)
AMENDMENT NO. 2 TO TRANSITION AGREEMENT
AMENDMENT NO. 2 dated as of [______], 2008 (this Amendment No. 2 ) among XL Capital Ltd., a Cayman Islands company ( XL Capital ), XL Insurance (Bermuda) Ltd., a Bermuda company ( XLI ), X.L. America, Inc., a Delaware corporation ( XLA ), and Security Capital Assurance Ltd., a Bermuda company ( SCA and collectively with XL Capital, XLI, and XLA, the Parties ).
WHEREAS, on August 4, 2006, the Parties entered into a certain transition agreement, as amended on May 3, 2007 (the Transition Agreement ); and
WHEREAS, the Parties have entered into that certain Master Commutation, Release and Restructuring Agreement dated as of July __, 2008 (the Master Restructuring Agreement ) among SCA, XL Capital Assurance Inc., XL Financial Assurance Ltd., XL Financial Administrative Services Inc., SCA Bermuda Administrative Ltd., XL Capital Assurance (U.K.) Limited and those Portfolio Trusts a party thereto, XL Capital, XLI, XL Reinsurance America Inc., X.L. Global Services Inc., XL Services (Bermuda) Limited and XLA and the consenting counterparties party thereto, pursuant to which the Parties have agreed to amend the Transition Agreement.
NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein and in the Master Restructuring Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties agree as follows:
Section 1. Definitions . Capitalized terms not otherwise defined in this Amendment No. 1 shall have the meanings ascribed to them in the Transition Agreement.
Section 2. Amendments. Articles III, VII, and IX of the Transition Agreement are hereby amended as follows:
2.1 The second and third paragraphs of Section 3.3 shall be stricken and deleted in their entirety, including any other references to such paragraphs of such section as it appears in the Transition Agreement.
2.2 Section 7.1 of the Transition Agreement shall be stricken and deleted in its entirety, including any other references to such section as it appears in the Transition Agreement.
2.3 The second sentence of Section 7.5(b) and the second sentence of Section 7.5(c) of the Transition Agreement shall be stricken and deleted in their entirety, including any other references to such sections as it appears in the Transition Agreement.
2.4 Section 7.7 of the Transition Agreement shall be stricken and deleted in its entirety, including any other references to such section as it appears in the Transition Agreement.
2.5 Section 7.8 of the Transition Agreement shall be stricken and deleted in its entirety, including any other references to such section as it appears in the Transition Agreement.
Exh. 1.01(k)-1
2.6 Section 9.12 of the Transition Agreement shall be stricken and deleted in its entirety, including any other references to such section as it appears in the Transition Agreement.
Section 3. Voting Restriction Termination Event . The Parties hereby acknowledge and agree that upon transfer of all of the SCA common shares owned by the XL Group to the SCA Shareholder Entity (as defined in the Master Restructuring Agreement) or upon deposit of certificates evidencing all of the SCA common shares owned by the XL Group with the Escrow Agent (as defined in the Master Restructuring Agreement) pursuant to the terms of the Master Restructuring Agreement, a Voting Restriction Termination Event will be deemed to occur.
Section 4. Miscellaneous .
4.1 Except as provided herein, the Transition Agreement shall remain unchanged and in full force and effect.
4.2 This Amendment No. 2 may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same amendatory instrument. This Amendment No. 2 may be executed by facsimile signature(s).
4.3 This Amendment No. 2 shall be governed by, and construed in accordance with, the laws of the state of New York, without regard to its conflict of laws principles. The Parties consent to the non-exclusive jurisdiction of the courts of New York.
4.4 The Parties hereby forever waive and release each other and their respective subsidiaries, affiliates, predecessors, and successors in interest, and all of their current, past, and future officers, directors, partners, principals, agents, insurers, servants, employees, representatives, attorneys, and advisors, acting in their capacities as such, from any and all claims, liabilities, causes of action, demands, and damages of whatever kind or nature and whether known or unknown arising under the Transition Agreement prior to the Closing Date (as defined in the Master Restructuring Agreement).
[Signature Page to Follow]
Exh. 1.01(k)-2
IN WITNESS HEREOF, the Parties have caused this Amendment No. 2 to the Transition Agreement to be duly executed and delivered as of the day and year first written above.
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XL Capital Ltd. |
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XL Insurance (Bermuda) Ltd. |
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X.L. America, Inc. |
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Security Capital Assurance Ltd. |
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Exh. 1.01(k)-3
EXHIBIT 2.06
CUSTOMARY SECURITIES LAW REPRESENTATIONS
Exhibit 2.06
CUSTOMARY SECURITIES LAW REPRESENTATIONS
Capitalized terms used, but not otherwise defined herein, have the same meaning as defined in the Agreement to which this document is attached as Exhibit 2.06 .
The SCA Shareholder Entity represents, warrants and agrees as follows:
(a) Investment Purpose . The SCA Shareholder Entity is obtaining the XL Owned SCA Common Shares for investment purposes only and not with a view to or for distributing or reselling such XL Owned SCA Common Shares or any part thereof, without prejudice, however, to its right, subject to any transfer restrictions, to sell or otherwise dispose of all or any part of the XL Owned SCA Common Shares pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities or blue sky laws.
(b) Compliance with Securities Act . The SCA Shareholder Entity agrees that any sale of the XL Owned SCA Common Shares shall be made in compliance with the registration requirements of the Securities Act or any applicable exemption therefrom.
(c) Reliance on Exemptions . The SCA Shareholder Entity understands that the XL Owned SCA Common Shares are being offered and issued to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities or blue sky laws, and, assuming that the transfer of the XL Owned SCA Common Shares to the SCA Shareholder Entity in accordance with the terms of the Agreement is made in compliance with the Securities Act, the SCA Shareholder Entity agrees that any subsequent sale of the XL Owned SCA Common Shares by it will not cause such transfer by the XL Parties to violate the provisions of the Securities Act.
(d) Authorization; Enforceability . This Agreement has been duly and validly authorized by the SCA Shareholder Entity. This Agreement has been duly executed and delivered on behalf of the SCA Shareholder Entity, and constitutes the valid and binding agreement of the SCA Shareholder Entity enforceable in accordance with their terms, subject, in each case, to applicable bankruptcy, insolvency, reorganization or similar laws affecting generally the enforcement of creditors rights and subject to a courts discretionary authority with respect to the granting of specific performance or other equitable remedies.
(e) No Conflicts . The execution and performance of this Agreement does not conflict with any agreement to which the SCA Shareholder Entity is a party or is bound thereby, any court order or judgment addressed to the SCA Shareholder Entity, or the constituent documents of the SCA Shareholder Entity.
(f) Interpretation . Any reference to the SCA Shareholder Entity for purposes of this letter shall be deemed to be the relevant trust and/or the trustee(s) thereof acting in its(their) capacities as such trustee(s), in each case as the context may require to be most protective of the XL Parties, including for purposes of such trustee(s) representations and warranties as to their power and authority as trustee(s) and the non-contravention of the trusts governing instruments.
Exh. 2.06-1
EXHIBIT 6.18
FORM OF SCA SHAREHOLDER ENTITY TRUST AGREEMENT
Exhibit 6.18
DATED [___________], 2008
* Subject to further review and comment by the parties, including by the trustee and its counsel
[_____________]
[Draft 30/07/2008]
DEED CONSTITUTING
The [__________] Purpose Trust
THIS DECLARATION OF TRUST dated [__________] 2008 is made BY [____________], a company incorporated under the laws of Bermuda whose registered office is at [___________], Bermuda (the First Trustee).
BACKGROUND
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The First Trustee wishes to create a purpose trust within the meaning of the Trusts (Special Provisions) Act 1989, in the terms set out below and wishes to declare that it holds the Trust Fund upon the trusts and subject to the powers and provisions set out below. |
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(B) |
Further money investments or other property may be paid or transferred to the Trustees to hold on the trusts set out below. |
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Simultaneously with the execution of this deed, the Company (as defined below) has entered into a deed of covenant and indemnity in favour of the First Trustee in the form set out in Schedule D. |
OPERATIVE PROVISIONS
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NAME |
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This Trust shall be known as [__________] or by such other title as the Trustees may from time to time determine in writing. |
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DEFINITIONS AND CONSTRUCTION |
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In this Trust where the context admits the following definitions and rules of construction shall apply: |
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2.1 |
affiliate means, with respect to any person, any other person directly or indirectly Controlling, Controlled by or under common Control with such person, provided that none of the SCA Parties shall be deemed to be an affiliate of any XL Party. Control, Controlled, or Controlling, with respect to the relationship between or among two or more persons, means the possession, directly or indirectly, or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a person, whether through the ownership of voting securities, as trustee, as personal representative or executor, by contract, by credit arrangement or otherwise. |
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2.2 |
assets shall be construed according to the widest generality and any reference in this Trust to any asset other than money shall include the proceeds of sale of that asset. |
Exh. 6.18-1
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2.3 |
charitable purposes means purposes and objects recognised as charitable by the Governing Law. |
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2.4 |
charity means any trust, foundation, institution, corporation or unincorporated body in any part of the world established exclusively for charitable purposes. |
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2.5 |
the Company shall mean Security Capital Assurance Ltd, a Bermuda exempted company. |
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2.6 |
the Consenting Counterparties means such counterparties to credit default swap agreements with affiliates of XLCA that may become party to the Master Restructuring Agreement from time to time in accordance with the terms thereof. |
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2.7 |
the Consenting Counterparty Restructuring Agreement means that certain agreement entered into after the date hereof among the SCA Parties and Consenting Counterparties representing not less than the Minimum Consenting CDS Counterparty Restructuring Threshold (as such term is defined in the Master Restructuring Agreement) to give effect to the CDS Counterparty Restructuring (as such term is defined in the Master Restructuring Agreement). |
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2.8 |
the Consenting Counterparties Enforcer means the Consenting Counterparties or the Consenting Counterparties Enforcer for the time being of this Trust as appointed in accordance with the provisions of Schedule C. |
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2.9 |
corporation or corporate body means any body, public or private, incorporated anywhere in the world and includes any company or corporation whether limited by shares or by guarantee and any other legal entity or organisation, such as without limitation, a limited partnership, a general partnership, limited liability company or a limited duration company. |
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2.10 |
the Enforcers shall be the persons named in Schedule C or such additional or other person or persons who is or are for the time being occupying the office of Enforcers pursuant to the provisions of Schedule C. |
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2.11 |
the Governing Law means, subject to any change effected by clause 9, the law of Bermuda which law shall govern all matters of validity, construction, effect and administration of this Trust. |
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2.12 |
the Master Restructuring Agreement means the Master Commutation, Release and Restructuring Agreement dated as of July [ ], 2008 among the Company, XLCA, XLI, the Consenting Counterparties and the other parties thereto, as amended, supplemented or otherwise modified from time to time. |
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2.13 |
person means any individual or corporation and shall be taken to include any charity (whether or not incorporated) and any non-charitable unincorporated body. |
Exh. 6.18-2
Exh. 6.18-3
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2.25 |
trust corporation has the meaning, if any, given to that term under the Governing Law. |
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2.26 |
the Trustees means the First Trustee or the trustee or trustees for the time being of this Trust. |
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2.27 |
the Trust Fund means:- |
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2.27.1 |
the Shares; |
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2.27.2 |
all assets paid or transferred to, or so as to be under the control of the Trustees as additions to the Trust Fund; |
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2.27.3 |
all accumulations (if any) of income added to the Trust Fund; and |
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2.27.4 |
the assets from time to time representing the above. |
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2.28 |
XLCA means XL Capital Assurance Inc., a New York insurance company. |
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2.29 |
The XLCA Enforcer means XLCA or the XLCA Enforcer for the time being of this Trust as appointed in accordance with the provisions of Schedule C. |
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2.30 |
XLI means XL Insurance (Bermuda) Ltd (formerly known as X.L. Insurance Ltd), a Bermuda exempted company. |
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2.31 |
XL Party has the meaning set forth in the Master Restructuring Agreement. |
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2.32 |
Words denoting the singular shall include the plural and vice versa. |
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2.33 |
Words denoting any gender shall include both the other genders. |
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2.34 |
References to any statutory provision shall include any statutory modification or re-enactment of such provision. |
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2.35 |
Clause headings are included for reference and shall not affect the interpretation of this deed. |
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3. |
PURPOSES |
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3.1 |
Subject to the provisions of Clause 4 and Clause 5, the Trustees shall hold the Trust Fund and the income of the Trust Fund on trust to pay or apply all or any part or parts of the Trust Fund and the income of the Trust Fund, at such time or times and in such manner, for or towards or in furtherance of the following purposes as the Trustees may in their discretion think fit. |
Exh. 6.18-4
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3.2 |
The purposes of this Trust are:- |
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3.2.1 |
To subscribe for or otherwise acquire, whether by purchase or receipt of a contribution or gift, ownership or effective control of the Shares and to take such actions as are necessary or appropriate, consistent with the terms of this Trust as determined in the Trustees discretion exercised in good faith, to maximise the value of the Trust Fund for; |
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(a) |
XLCA prior to the Restructuring Effective Time; and |
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(b) |
the Consenting Counterparties in accordance with the Consenting Counterparty Restructuring Agreement from and after the Restructuring Effective Time. |
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3.2.2 |
Without limiting the foregoing to engage in the following activities: |
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(a) |
to own, hold, manage and/or dispose of the Trust Fund in accordance with the terms of this Trust; |
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(b) |
to pay any dividends or distributions arising from the Trust Fund and any proceeds of any sale or other disposition of any or all of the Trust Fund to (a) prior to the Restructuring Effective Time, XLCA, which dividends, distribution or payment to XLCA shall be treated as SCA Share Sale Proceeds for purposes of Section 6.12 of the Master Restructuring Agreement, or (b) from and after the Restructuring Effective Time, as set forth in the Consenting Counterparty Restructuring Agreement; and |
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(c) |
to perform or cause to be performed all of the other obligations of the Trustees under this Trust. |
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3.2.3 |
To exercise the Trustees rights as shareholder of the Company and provide such support and assistance as considered advisable by the Trustees in accordance with Clause 1.2.3 of Schedule B and Clause 1.2.4 of Schedule B but otherwise in their absolute discretion and any other actions that in the sole judgement and absolute discretion of the Trustees are necessary, advisable or desirable to accomplish the foregoing or are incidental thereto. |
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3.2.4 |
To exercise the voting rights attaching to the Shares as may be appropriate to carry out the purposes of this Trust. |
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4. |
PAYMENT OF DIVIDENDS AND ACCUMULATION OF INCOME |
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4.1 |
If the Company pays or issues dividends or makes other distributions relating to the Trust Fund or if any other income arises from the Trust Fund, the Trustees shall accept and receive such dividends, distributions and other income. Upon receipt of any such dividends, distributions or other income and subject to the provisions of |
Exh. 6.18-5
Exh. 6.18-6
Exh. 6.18-7
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Governing Law shall be changed to the law of some other jurisdiction, state or territory in any part of the world. |
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9.2 |
So often as any declaration shall be made the Trustees may make such consequential alterations or additions in or to the trusts, powers and provisions of this Trust as the Trustees may consider necessary or desirable to ensure that the trusts, powers and provisions of this Trust shall (mutatis mutandis) be as valid and effective under the new Governing Law as they are under the original Governing Law of this Trust. |
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9.3 |
Subject to the power to change the forum for the administration of this Trust contained below, the forum for the administration of this Trust shall be the courts of the Governing Law. |
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9.4 |
The Trustees may at any time or times declare by writing (with the written consent of the Enforcers) that from the date of the declaration (and subject to any future declaration in exercise of this power) the forum for the administration of this Trust shall be the courts of any jurisdiction in the world, whether or not such courts are of the jurisdiction which is for the time being the Governing Law of this Trust. |
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9.5 |
The Trustees may carry on the general administration of this Trust in any jurisdiction in the world, whether or not the jurisdiction is for the time being the Governing Law of this Trust or the courts of the jurisdiction are for the time being the forum for the administration of these trusts and whether or not the Trustees or any of them are for the time being resident and/or domiciled in, or incorporated in and/or carrying on business in, or otherwise connected with, the jurisdiction. |
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10. |
IRREVOCABLE TRUST AND POWER TO VARY |
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This Trust is irrevocable provided however that, subject to the provisions of Clause 11, the Trustees may in writing (but only with the written consent of the Enforcers) vary, add to, alter or amend any or all of the provisions of this Trust (including, without limitation, the purposes in clause 3) as the Trustees in their absolute discretion think fit. |
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11. |
BENEFICIAL OWNERSHIP AND PROHIBITED TRANSFERS OR SALES |
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11.1 |
Notwithstanding any provision of this Trust to the contrary the Trustees shall be obligated at all times prior to the Termination Date to retain beneficial ownership of the Shares until they are sold or otherwise disposed of in accordance with the terms of this Trust. |
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11.2 |
Notwithstanding any provision of this Trust to the contrary, the Trustees may not, under any circumstances, transfer any of the Shares to any SCA party, any Consenting Counterparty or any of their respective affiliates prior to the Termination Date. |
Exh. 6.18-8
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11.3 |
Notwithstanding any provision of this Trust to the contrary no sale or other disposition of the Shares may be made prior to October 15, 2008, except as set forth in the Consenting Counterparty Restructuring Agreement. |
IN WITNESS whereof the First Trustee has executed and delivered this instrument as its deed on the date shown on page one.
Exh. 6.18-9
SCHEDULE A
In furtherance of the Purposes and subject to Clause 8.2 and Clause 8.3 above but not further or otherwise the Trustees shall have the following additional powers:-
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1. |
Incorporation by Reference |
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Further administrative powers incorporated by reference to the Trusts (Special Provisions) Act 1989, as amended. |
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2. |
Further Powers |
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2.1 |
to construct, maintain, improve or alter any buildings or works (so far as necessary for carrying out the purposes of the this Trust) on land comprised in the Trust Fund; |
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2.2 |
to sell, lease, demise, let, license and generally manage and deal with any land or buildings or interest therein in such manner as the Trustees shall think fit; |
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2.3 |
to borrow money subject to such consents as may be required by law on such terms as to interest repayment or otherwise as the Trustees may think fit without security or (subject as aforesaid) upon the security of the whole or any part or parts of the Trust Fund and to use such money so borrowed for any purpose for which capital of the Trust Fund may be used; |
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2.4 |
to seek the advice of any person who is in the opinion of the Trustees qualified to advise on the management of any land comprised in the Trust Fund or the making and changing of investments of this Trust; |
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2.5 |
to employ any person firm or company not being a Trustee to manage or assist in managing the Trust Fund upon such reasonable terms as the Trustees think fit and to pay a secretary and other such officials or staff not being a trustee as the Trustees may in their discretion from time to time determine and to enter into agreements and to fix such reasonable salaries as the Trustees may deem proper and to enter into any service agreements which they shall consider to be necessary including the power to determine any such employment upon such terms as the Trustees may decide and to make all reasonable and necessary provisions for the payment of pensions and superannuation to or on behalf of employees and their widows or widowers and dependants; |
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2.6 |
to apply capital or income in insuring any buildings or other property to their full value; |
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2.7 |
when making grants of any funds to any charities to accept as a good discharge in respect of any such funds the receipt of the treasurer or secretary or other authorized officer for the time being of such charities; |
Exh. 6.18-10
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2.8 |
in respect of any property subject to the trust hereof to vest the same in any corporation or any other person or persons (whether or not being one or more of the Trustees) as nominee or nominees for the Trustees; |
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2.9 |
to make contributions as they may think fit or otherwise to assist (and whether out of capital or income) towards the purposes of this Trust; |
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2.10 |
to pay and discharge any rent rates taxes costs of insurance improvements repairs or other outgoings payable from time to time in respect of any property held subject to these trusts and to pay and discharge all expenses incurred in the exercise of any powers conferred upon the Trustees by, or in conformity with, the provisions of this deed or by any transfer to the Trustees upon these trusts of any freehold leasehold or other property any legal or other administrative expenses payable from time to time in connection with these trusts or with any property held on such trusts; |
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2.11 |
to invest any moneys for the time being comprised in the Trust Fund and also in the hands of the Trustees and for the time being unapplied in the names or under the control of the Trustees in or upon any investments authorised by this deed with power to vary or transpose investments for or into others of any nature so authorised; |
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2.12 |
to do all such lawful acts or things as shall further the attainment of the purposes of this Trust and so far as may be necessary to do such acts or things in collaboration with any person. |
Exh. 6.18-11
SCHEDULE B
Rights and Immunities of the Trustees
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1. |
Width of discretions |
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1.1 |
Every power by this Trust or by law conferred on the Trustees shall confer an absolute discretion. |
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1.2 |
In amplification of the foregoing; |
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1.2.1 |
subject to the provisions of Clause 11.3 above, the Trustees shall have the exclusive power and authority in their sole discretion, exercised in good faith in accordance with the Purposes, to sell (and to determine the terms and conditions of such a sale), all or a portion of the Shares in one or more private or public transactions in accordance with the applicable laws, whether in whole or in part; |
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1.2.2 |
subject to the provisions of Clause 1.2.3 of this Schedule, the Trustees shall have the exclusive right and obligation to vote the Shares and at all times prior to the Termination Date the Trustees shall have full power and authority, and are empowered to vote (or give written consent in person or by proxy, at all meetings of shareholders of the Company), the Shares as they in their sole judgement, believe to be in accordance with the Purposes and to do any and all other things and take any and all other actions as fully as any shareholder of the Company might do if personally present at a meeting of the shareholders of the Company or otherwise, all to the fullest extent permitted by law; |
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1.2.3 |
if at any time the Trustees shall have the right pursuant to the SCA Shareholder Agreement to nominate one or more nominees to the Companys board of directors, the Trustees shall nominate such person or persons in accordance with the procedures set forth on Schedule E; |
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1.2.4 |
the Trustees shall not amend or modify the SCA Shareholder Agreement or the Registration Rights Agreement without the prior written consent of the Enforcers; and |
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1.2.5 |
subject to the above the Trustees shall have the exclusive power and authority in their sole discretion exercised in good faith in accordance with the Purposes, to exercise, direct and enforce any and all rights that the Trustees may have under the SCA Shareholder Agreement (including the determination as to whether to assert any claim, commence any action or settle, dismiss or continue the prosecution of any such action). |
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1.3 |
The Trustees may exercise any power by this Trust or by law conferred by majority. Any trustee who is not a member of such majority (including a dissenting |
Exh. 6.18-12
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trustee) shall be obliged to join in any deed or writing made, or act to be done, in the name of the Trustees pursuant to a majority decision of the Trustees if requested by the majority of the Trustees to do so. |
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2. |
Release or restriction of powers |
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The Trustees may release or restrict the future exercise of any power by this Trust or by law conferred on the Trustees notwithstanding the fiduciary nature of such power. Any release or restriction shall bind any future trustee unless the contrary is expressly stated. |
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3. |
Indemnity |
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3.1 |
Each Trustee shall be entitled to a full indemnity out of the capital and/or income of the Trust Fund in respect of any costs, expenses or any other liabilities of whatsoever nature (including any taxes and associated penalties and interest for which they are personally liable and any liability which may be payable to an Outgoing Trustee (as defined below)) incurred by the trustee in or about the professed execution of the trusts and powers of this Trust, but not in respect of any costs, expenses or any other liabilities incurred by any trustee in acting or omitting to act in a manner in which the trustee is not entitled to the protection of the exclusion of liability provisions contained in this Trust. |
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3.2 |
Any of the Trustees (including an Outgoing Trustee as defined below) shall be entitled to assert a lien over any of the capital and/or income of the Trust Fund in order to secure his right of indemnity or, at his election, to release any capital and/or income of the Trust Fund subject to the recipient and/or the continuing trustee (as the case may be) granting to the trustee (and the trustees successors and assigns) a charge over the released assets securing the right of indemnity and/or an express indemnity. |
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3.3 |
Without prejudice to the entitlement of a retiring or removed trustee to request that the trustee be granted an express indemnity on retirement or removal, the rights of indemnity conferred by this Trust shall endure following the retirement or removal, death or (as the case may be) liquidation of a trustee (an Outgoing Trustee) to the intent that an Outgoing Trustee and his personal representatives or (as the case may be) its liquidator shall be entitled to assert the same rights of indemnity in respect of costs, expenses or other liabilities of whatsoever nature (including any taxes for which the Outgoing Trustee is personally liable) as the Outgoing Trustee would have been entitled to assert had the Outgoing Trustee remained in office as a trustee of this Trust at the time when the right of indemnity is asserted. |
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4. |
Exclusion of liability |
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4.1 |
In the professed execution of the trusts and powers of this Trust, no trustee or member or officer or employee of any corporation which is a trustee of this Trust shall be liable for any loss to the Trust Fund or the income of the Trust Fund arising |
Exh. 6.18-13
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by reason of any improper investment made or retained in good faith, or for the negligence or fraud of any agent, nominee, delegate or sub-delegate appointed by or with the authority of the Trustees or any of them (notwithstanding that the appointment of the agent, nominee, delegate or sub-delegate was not strictly necessary or expedient), or by reason of any mistake or omission made in good faith by any trustee, or by reason of any other matter or thing whatsoever undertaken in good faith, except: |
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4.1.1 |
deliberate fraud or other deliberate wrongdoing; |
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4.1.2 |
wilful misconduct or wilful neglect; and |
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4.1.3 |
in the case of a professional trustee or a corporate trustee in business as a trustee, reckless misconduct on the part of the particular trustee who it is sought to make liable. |
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4.2 |
Without prejudice to the generality of the foregoing: |
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4.2.1 |
in any case where the Trustees have appointed and reasonably relied in good faith on a person or persons to manage investments, the Trustees shall not be liable for any loss arising out of the failure of the investment policy implemented by or at the direction of that person or those persons; and |
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4.2.2 |
the exclusion of liability provided for above shall extend to any matter or thing arising out of any trustee, or any member or officer or employee of a corporate trustee, acting in good faith as a member or officer or employee of any corporation incorporated or acquired pursuant to the powers of the Trustees. |
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5. |
Supervision of officers of corporations |
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The Trustees shall not be bound or required to interfere in the management or conduct of the business of any corporation and may waive any requirement for the appointment of auditors or for the preparation of accounts even though the Trustees control the whole or the majority of the securities of such corporation (or of its parent corporation). So long as the Trustees shall have no notice of any act of dishonesty or misappropriation of assets or other deliberate misconduct on the part of the officers or employees having the management of any corporation, the Trustees shall be at liberty to leave the conduct of its business (including the payment or non-payment of dividends) wholly to its officers or employees. |
Exh. 6.18-14
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6. |
Charging clauses |
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6.1 |
Any of the Trustees who shall be an individual engaged in any profession or business either alone or in partnership: |
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6.1.1 |
may be appointed to act as a trustee on a like charging basis to that provided for in relation to corporate trustees below; and |
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6.1.2 |
subject to that, shall be entitled to charge and be paid all professional or other proper charges for business done or time spent or services rendered by the trustee or his firm in connection with this Trust, whether or not within the usual scope of his or his firms profession or business and including acts which a trustee not being in any profession or business could have done personally. |
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6.2 |
Any of the Trustees which shall be a trust corporation or other corporate trustee shall be entitled to charge and be paid the fees for its services as may be agreed at the time of its appointment by the Enforcers and the terms and conditions relating to fees may include provision for the subsequent variation of the fees from time to time with the agreement of the Enforcers. In the absence of an agreement, any trust corporation or corporate trustee shall be entitled to charge and be paid fees for its services in accordance with its usual scale or schedule of fees from time to time in effect. |
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7. |
Incidental profits |
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7.1 |
Any trustee or any member or officer or employee of any corporate trustee of this Trust may act as an officer or employee of any corporation (or of any subsidiary of such corporation) the securities of which are comprised in the Trust Fund and may retain any remuneration or other benefits received by virtue of the office or employment notwithstanding that any votes or other rights attaching to the securities have been instrumental in procuring or maintaining that person in the remunerated office or employment. |
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7.2 |
Any trustee or any member or officer or employee of any corporate trustee of this Trust or any corporation in the same group of corporations as any corporate trustee of this Trust shall be entitled to retain any brokerage or commission paid by any broker, agent or insurance office to that person (or his firm) in connection with the acquisition or dealing with any assets or the effecting of, or payment of, any premium on any policy subject or intended to become subject to this Trust. |
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7.3 |
Any trustee or any firm or corporation of which a trustee is a member or officer or employee or any corporation in the same group of corporations as any corporate trustee of this Trust which carries on the business of banking or providing investment services may act as banker or investment adviser (as the case may be) to this Trust on the same terms as are offered to any ordinary customer without being liable to account for any profits arising therefrom. |
Exh. 6.18-15
Exh. 6.18-16
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12.2 |
No retirement shall take effect unless following the retirement there will be at least one trustee (or the greater number of trustees as may be required by any mandatory provision of the Governing Law) remaining in office. |
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Separate Bodies Of Trustees |
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13. |
Appointment of separate bodies of trustees |
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13.1 |
A separate person or body of persons may be appointed to act as the Trustees in relation to any specified share or part of the Trust Fund and the income of the Trust Fund. |
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13.2 |
If and so long as one or more shares or parts of the Trust Fund and the income of the Trust Fund have a separate person or body of persons acting as the Trustees in relation to such assets, the provisions of this schedule shall apply to each such person or body of persons as if references to the share or part of the Trust Fund and the income of the Trust Fund in question were substituted for references to the Trust Fund and the income of the Trust Fund. |
Exh. 6.18-17
SCHEDULE C
Exh. 6.18-18
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5. |
Resignation of the XLCA Enforcer |
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5.1 |
Subject to the provisions of Clause 5.2 of this Schedule, any person serving as an XLCA Enforcer or appointed to be an XLCA Enforcer: |
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5.1.1 |
may resign by writing to that effect which may be signed in advance of assuming office as an XLCA Enforcer; |
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5.1.2 |
shall, as soon as is practicable, supply the Trustees and all other Enforcers in office at that time with a copy of the resignation; |
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5.1.3 |
shall, in the case of any prospective resignation, as soon as is practicable supply the Trustees and all other Enforcers in office at that time with a copy of the resignation. |
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5.2 |
No XLCA Enforcer may resign if as a consequence there would be no XLCA Enforcer. |
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6. |
The Consenting Counterparties Enforcer |
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The provisions of Clauses 2 to 5 of this Schedule shall apply to the Consenting Counterparties Enforcer as if those clauses had been repeated verbatim herein provided that all references to the XLCA Enforcer or the XLCA Enforcers shall be deemed to refer to the Consenting Counterparties Enforcer or the Consenting Counterparties Enforcers respectively. |
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Rights and Immunities of the Enforcer |
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7. |
Width of discretions |
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Every power conferred on the Enforcers shall confer an absolute and non-fiduciary discretion and no person shall be entitled to compel control or otherwise interfere with the exercise by the Enforcers of any such power. |
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8. |
Statutory Power to Enforce |
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The Enforcers, XLCA and any person appointed by a majority of the Consenting Counterparties are each appointed by this Trust as a person entitled to make application to the Supreme Court for an order relating to the enforcement of this Trust in accordance with the provisions of Section 12B of the Trusts (Special Provisions) Act 1989. |
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9. |
Release or restriction of powers |
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9.1 |
The Enforcers may by writing release or restrict the future exercise of any power conferred on the Enforcer. Any release or restriction shall bind any persons appointed in the future to be Enforcers unless the contrary is expressly stated. |
Exh. 6.18-19
Exh. 6.18-20
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Trustees as may be specified in those terms and conditions for the purpose of approving any variation. In the absence of agreement, it shall be entitled to charge and be paid fees for its services in accordance with its usual scale or schedule of fees from time to time in effect. |
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13. |
Incidental profits |
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13.1 |
Any Enforcer or any member or officer or employee of any corporate Enforcer of this Trust may act as an officer or employee of any corporation (or of any subsidiary of such corporation) the securities of which are comprised in the Trust Fund and may retain any remuneration or other benefit which is received by virtue of such office or employment notwithstanding that any votes or other rights attaching to the securities have been instrumental in procuring or maintaining that person in such remunerated office or employment. |
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13.2 |
Any Enforcer or any member or officer or employee of any corporate Enforcer of this Trust or any corporation in the same group of corporations as any corporate Enforcer of this Trust shall be entitled to retain any brokerage or commission paid by any broker, agent or insurance office to that person (or his firm) in connection with the acquisition or dealing with any assets or the effecting of, or payment of, any premium on any policy subject or intended to become subject to this Trust. |
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13.3 |
Any Enforcer or any firm or corporation of which an Enforcer is a member or officer or employee or any corporation in the same group of corporations as any corporate Enforcer of this Trust which carries on the business of banking or providing investment services may act as banker or investment adviser (as the case may be) to this Trust on the same terms as are offered to any ordinary customer without being liable to account for any profits arising therefrom. |
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14. |
Conflicts of interest |
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Any Enforcer may join in exercising any of the powers by this Trust or by law conferred on the Enforcers notwithstanding that he or it may have some other interest (either personally or in some fiduciary capacity) in the manner or result of exercising the power. |
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All Incidental Powers |
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15. |
All incidental powers |
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15.1 |
The Enforcers shall have and be entitled to exercise all powers otherwise enjoyed by an absolute beneficial owner which the Enforcers consider necessary or expedient in order to carry out the functions of the office of the Enforcers under this Trust including (without prejudice to the generality of the foregoing) similar powers to those conferred on the Trustees by Schedule A concerning agents and disputes. |
Exh. 6.18-21
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15.2 |
The provisions in Schedule A concerning confidentiality shall apply to the Enforcers as if references to the Enforcers had been substituted for references to the Trustees therein. |
Exh. 6.18-22
SCHEDULE D
Form of Covenant and Indemnity
THIS DEED OF COVENANT AND INDEMNITY dated [__________], 2008 (the Commencement Date) is made by [_______________] (the Company) in favour of [______________], a Bermuda exempted company (the Trustee).
BACKGROUND
Exh. 6.18-23
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payable by the Covenantees or any of them in connection with the Trustees role as trustee of the Trust) other than Excepted Liabilities. |
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2. |
COVENANT AND INDEMNITY |
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The Company hereby covenants with the Covenantees: |
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2.1 |
To pay the Agreed Fee to the Trustee [on the Commencement Date in consideration of the Trustee providing the service of acting as trustee of the Trust for the period beginning with the Commencement Date and ending on the Termination Date/on the Commencement date and monthly/quarterly/annually thereafter in advance for the period commencing on the date when payment is due and ending one month/one quarter/one year after that date]. |
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2.2 |
At all times fully and effectually to indemnify the Covenantees in respect of any Liabilities which are not otherwise paid to the Covenantees from the property of the Trust pursuant to the provisions of the Trust Deed.. |
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3. |
GOVERNING LAW |
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This Deed shall be governed by the law of Bermuda and the Company submits to the exclusive jurisdiction of the Courts of Bermuda. |
Exh. 6.18-24
IN WITNESS whereof the Company has executed and delivered this instrument as its deed on the date shown above.
THE COMMON SEAL OF THE COMPANY ) was hereunto affixed in the presence of: )
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Director |
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Director/Officer |
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The COMMON SEAL of |
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[ ] |
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was hereunto affixed in the presence of |
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Director |
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Director / Officer |
Exh. 6.18-25
SCHEDULE E
SCA Shareholder Entity Nominee Nomination Procedures
If at any time the Trustees shall have the right pursuant to the SCA Shareholder Agreement to nominate one or more SCA Shareholder Entity Nominees (as such term is defined in the SCA Shareholder Agreement) to the Companys board of directors, the Trustees shall nominate such person or persons in accordance with the following procedures:
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1. |
With respect to each open board seat for which the Trustees shall have the right to nominate an SCA Shareholder Entity Nominee, the XLCA Enforcer and the Consenting Counterparties Enforcer or their respective designees shall each have the right to submit the names of up to two individuals as candidates to fill such board seat (each, a Proposed Nominee). |
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2. |
The XLCA Enforcer and the Consenting Counterparties Enforcer shall upon the Trustees request, jointly submit within a reasonable period of time requested by the Trustees a single consolidated list of their respective Proposed Nominees. The consolidated list shall be a blind written submission containing no information regarding which Enforcer has submitted a particular name. |
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3. |
Each written submission with respect to a Proposed Nominee: |
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(a) |
shall set forth the following information: |
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(i) |
the name, age, business address and residence address of such Proposed Nominee; |
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(ii) |
the principal occupation or employment of such Proposed Nominee, and such other biographical information regarding the Proposed Nominee as the submitting enforcer deems relevant; |
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(iii) |
the number of shares of capital stock of the Company or any Consenting Counterparty which are owned of record and beneficially by such Proposed Nominee; and |
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(b) |
shall include a completed and signed written director questionnaire (in the form provided by the Secretary of the Company) with respect to the background, independence and qualification of such Proposed Nominee. |
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4. |
The Enforcers shall, upon the Trustees request, endeavor to provide the Trustees with such other information reasonably requested by the Trustees with respect to any Proposed Nominee, which information shall be made available to the Trustees in the same blind manner as the initial written submissions are submitted to the Trustees. |
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5. |
With respect to each open board seat for which the Trustees shall have the right to nominate an SCA Shareholder Entity Nominee, the Trustees shall then choose among the |
Exh. 6.18-26
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Proposed Nominees the person the Trustees deem, in their sole and absolute discretion, to be the most qualified director of the Company. |
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6. |
The Trustees shall submit the name of each Proposed Nominee selected in accordance with paragraph 5 above to the Companys Nominating & Corporate Governance Committee in accordance with Section 2(b)(vi) of the SCA Shareholder Agreement, but only to the extent such Proposed Nominee first executes a written representation and agreement (in the form provided by the Secretary of the Company) stating that he or she (A) meets the criteria set forth in the definition of Independent in the SCA Shareholder Agreement and (B) is not and will not become a party to any agreement, arrangement or understanding that would violate the last sentence of Section 2(b)(iii) of the SCA Shareholder Agreement. [Confirmation from the Consenting Counterparties Enforcer under discussion] |
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7. |
If the Companys Nominating & Corporate Governance Committee does not object to the Proposed Nominee submitted to such committee solely on the basis provided for in Section 2(b)(vi) of the SCA Shareholder Agreement within 10 business days after submission of such Proposed Nominees name to such committee, such Proposed Nominee shall become an SCA Shareholder Entity Nominee in accordance with the SCA Shareholder Agreement. If the Companys Nominating & Corporate Governance Committee objects to the Proposed Nominee, the Trustees may select another Proposed Nominee from the submitted list of Proposed Nominees or, at its option, request that the Enforcers submit additional names for consideration in accordance with the procedures described above. |
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8. |
In performing the Trustees duties hereunder, the Trustees shall be entitled to rely upon any document submitted in connection with the written submissions described above including the completed and signed written director questionnaires and the signed written representation and agreements, and the Trustees shall not be required to investigate the truth or accuracy of any statement contained in any such document. |
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9. |
The Trustees shall not be liable for any error of judgment, or any action taken, in selecting the SCA Shareholder Entity Nominees so long as the SCA Shareholder Entity Nominees are selected by the Trustees from among the Proposed Nominees in good faith. |
Exh. 6.18-27
SCHEDULE 1.01(a)
MLI ABS CDO CREDIT DEFAULT SWAP AGREEMENTS
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1. |
West Trade Funding CDO II Ltd., executed on January 25, 2007, between MLI and Portfolio CDS Trust 138; |
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2. |
Silver Marlin CDO I Ltd., executed on April 11, 2007, between MLI and Portfolio CDS Trust 153; |
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3. |
Tazlina Funding CDO II, Ltd., executed on June 4, 2007, between MLI and Portfolio CDS Trust 164; |
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4. |
West Trade Funding CDO III Ltd., executed on June 4, 2007, between MLI and Portfolio CDS Trust 165; |
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5. |
Jupiter High-Grade CDO VI, Ltd., executed on June 15, 2007, between MLI and Portfolio CDS Trust 170; |
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6. |
Robeco High Grade CDO I, Ltd., executed on June 29, 2007, between MLI and Portfolio CDS Trust 172; |
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7. |
Biltmore CDO 2007-1, Ltd., executed on August 10, 2007, between MLI and Portfolio CDS Trust 186; and |
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8. |
Ipswich Street CDO Ltd., executed on December 14, 2006, between MLI and Portfolio CDS Trust 129. |
Sch. 1.01(a)-1
SCHEDULE 1.01(b)
OTHER TERMINATED AGREEMENTS
Part I
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1. |
Indemnification Agreement, dated August 4, 2006, between XLCA and XLA; |
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2. |
Master Services Agreement, dated August 4, 2006, between XLA and XLFAS; |
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3. |
Master Services Agreement, dated August 4, 2006, between XL and SCAB; |
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4. |
Master Services Agreement, dated August 4, 2006, between XLGS and XLFAS; and |
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5. |
Master Services Agreement, dated August 4, 2006, between XLBS and SCAB. |
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Part II |
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1. |
Master Services Agreement, dated July 1, 2006, between XLCAUK, in respect of its Spanish Branch and XL Services UK Limited, in respect of its Spanish Branch; |
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2. |
Master Services Agreement, dated August 4, 2006, between XLCAUK and XL Services UK Limited; and |
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3. |
General Services Agreement, dated as of October 22, 2004, between XLCA and XL Financial Products Ltd., a company formed under the laws of England. |
Sch. 1.01(b)-1
SCHEDULE 1.01(c)
KNOWLEDGE OF SCA
Paul Giordano: President and Chief Executive Officer, SCA
Elizabeth Keys: Senior Vice President and Chief Financial Officer, SCA
Claude LeBlanc: Executive Vice President, Corporate Development and Strategy, SCA
Susan Comparato: General Counsel, SCA; Senior Vice President, General Counsel, XLCA
Edward Hubbard: President and Chief Operating Officer, XLCA
Michael Rego: Executive Vice President and Chief Operating Officer, XLFA
Sch. 1.01(c)-1
SCHEDULE 1.01(d)
TERMS OF ESCROW AGREEMENT
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Certificates evidencing all of the XL Owned SCA Common Shares free and clear of any Liens, together with a stock power duly endorsed in blank will be deposited with the Escrow Agent and held by the Escrow Agent until release in accordance with the Escrow Agreement. |
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If the Escrow Agent receives a certificate signed by the Secretaries of SCA and XLCA stating that the SCA Shareholder Entity Formation Conditions have been satisfied and directing the Escrow Agent to deliver the XL Owned SCA Common Shares (together with the related certificates and stock powers) to the SCA Shareholder Entity, then the Escrow Agent shall immediately deliver all of the XL Owned SCA Common Shares (together with the related certificates and stock powers) to the SCA Shareholder Entity. |
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The Escrow Agreement will be otherwise drafted to meet applicable regulatory requirements. |
Sch. 1.01(d)-1
SCHEDULE 2.01
COMMUTED REINSURANCE AGREEMENTS
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Schedule 2.01
SCHEDULE 2.04
REINSURANCE AGREEMENTS WITH THIRD PARTIES
THAT MAY BE COMMUTED
Master Facultative Retrocession Agreement, effective as of September 15, 2003, between XLFA and RAM Reinsurance Company Limited; and Amended and Restated Variable Comprehensive Automatic Treaty, effective as of January 1, 2006, between XLFA and RAM Reinsurance Company Ltd.
Master Facultative Retrocession Agreement, effective as of December 1, 2004, between XLFA and BluePoint Re, Limited; and Variable Comprehensive Automatic Treaty Retrocession Agreement, effective as of January 1, 2006, between XLFA and BluePoint Re.
Master Facultative Retrocession Agreement, effective as of January 1, 2003, between XLFA and ACE Capital Re International Ltd.
Variable Comprehensive Automatic Treaty Retrocession Agreement, effective as of January 1, 2007, between XLFA and Assured Guaranty Re Ltd.
Master Facultative Retrocession Agreement, effective as of December 19, 2000, between XLFA and Radian Reinsurance Inc.
Master Facultative Retrocession Agreement, effective as of October 25, 2002, between XLFA and CDC IXIS Financial Guaranty North America, Inc.
Master Facultative Retrocession Agreement, effective as of May 1, 2003, between XLFA and AMBAC Assurance Corporation.
Master Facultative Retrocession Agreement, effective as of June 1, 2001, between XLFA and Partner Reinsurance Company, Ltd., Zurich Branch.
Sch. 2.04-1
SCHEDULE 2.05
SCHEDULE 2.05 AGREEMENTS
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1. |
Facultative Quota Share Reinsurance Treaty, dated December 31, 1999, as amended, between XLFA and XLI, which was terminated by agreement of the parties, dated July 20, 2006. |
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2. |
Underwriting Agreement, dated July 28, 2006, between XLI, SCA and the Underwriters (as defined therein). |
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3. |
Underwriting Agreement, dated May 15, 2007, between XLI, SCA and the Underwriters (as defined therein). |
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4. |
General Services Agreement, dated as of August 4, 2006, between XLFAS and XLI (surveillance). |
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5. |
The following agreements relating to third-party payment undertaking agreements entered into by certain Affiliate(s) of XL: |
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(a) |
Fixed and Floating Charge Agreement, dated December 31, 2001, between XLI and XLFA. |
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(b) |
Reimbursement Agreement, dated December 31, 2001, between XLI and XLFA. |
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(c) |
Fixed and Floating Charge Agreement, dated September 30, 2002, between XLI and XLFA. |
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(d) |
Reimbursement Agreement, dated September 30, 2002, between XLI and XLFA. |
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(e) |
Fixed and Floating Charge Agreement, dated December 18, 2003, between XLI and XLFA. |
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(f) |
Reimbursement Agreement, dated December 18, 2003, between XLI and XLFA. |
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6. |
The following agreements relating to third-party guaranteed investment contracts entered into by certain Affiliate(s) of XL: |
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(a) |
Securities Account Control Agreement, dated July 20, 2006, among XL Asset Funding Company I LLC, XLCA and Mellon Bank, N.A. |
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(b) |
Insurance and Indemnity Agreement, dated October 13, 2006, among XLCA, XL Asset Funding Company I LLC, and XL Life and Annuity Holding Company. |
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(c) |
Premium Letter Agreement, dated October 13, 2006, among XLCA, XL Asset Funding Company I LLC, and XL Life and Annuity Holding Company. |
Sch. 2.05-1
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(d) |
Collateral Pledge, Security and Management Agreement, dated October 13, 2006, between XLCA, XL Asset Funding Company I LLC, XL Life and Annuity Holding Company, and Mellon Bank, N.A. |
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(e) |
Omnibus Amendment Agreement, dated November 30, 2007, between XLCA, XL Asset Funding Company I LLC, and XL Life and Annuity Holding Company. |
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(f) |
UCC Financing Statement, dated October 13, 2006 between XL Asset Funding Company I LLC (as debtor) and XLCA (as secured party). |
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7. |
Transition Agreement, dated August 4, 2006, among XL, XLI, XLA and SCA, as amended on May 3, 2007, and as further amended as of the Closing Date. |
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8. |
The following agreements relating to total return swaps: |
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(a) |
Detroit Metropolitan Wayne County Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated October 18, 2005. |
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(b) |
Raleigh-Durham, NC Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated October 18, 2005. |
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(c) |
Metropolitan Washington Airports Authority |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated October 12, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated October 18, 2005. |
Sch. 2.05-2
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(d) |
San Diego County Regional Airport Authority |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated December 6, 2005. |
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(e) |
City of Chicago - Chicago Midway Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated December 6, 2005. |
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(f) |
City of Chicago - Chicago OHare International Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated December 6, 2005. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated December 6, 2005. |
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(g) |
Dallas Fort Worth International Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated January 13, 2006. |
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(h) |
Milwaukee County Wisconsin |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
Sch. 2.05-3
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated January 13, 2006. |
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(i) |
State of Alaska International Airports System |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated January 13, 2006. |
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(j) |
Rhode Island Economic Development Corp Airport |
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(i) |
Insurance and Indemnity Agreement between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(ii) |
Premium letter between XLCA and XL Asset Funding Company I LLC, dated January 13, 2006. |
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(iii) |
Letter of Agreement between XLCA and XL Asset Funding Company I LLC for Economic Risk of Loss, dated January 13, 2006. |
Sch. 2.05-4
SCHEDULE 2.06(a)
SCA PARTIES RECEIVING A PORTION OF THE CASH CONSIDERATION AMOUNT
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Sch. 2.06(a)-1
SCHEDULE 2.06(b)
SCA PARTIES RECEIVING A PORTION OF THE STOCK CONSIDERATION
[Intentionally omittedsuperseded by
Amendment No. 1 to Master Transaction Agreement]
Sch. 2.06(b)-1
SCHEDULE 9.02
ADDRESSES FOR THE CDS COUNTERPARTIES
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Australia and New Zealand Banking Group Limited |
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Address: |
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40 Bank Street, Canary Wharf |
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London El4 5EJ |
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Phone: |
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+44-20-3229-2816 |
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Fax: |
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+44-20-3229-2378 |
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Email: |
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bill.holmes@anz.com |
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Attention: |
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William Holmes, Credit Executive |
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With a copy to: |
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Address: |
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Australia and New Zealand Banking Group Limited |
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1177 Avenue of the Americas |
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New York, NY 10036 |
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Phone: |
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(212) 801-9769 |
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Fax: |
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(212) 536-9299 |
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|
Email: |
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wendy.tso@anz.com |
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Attention: |
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Wendy Tso, Vice President |
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Bank of America, N.A. |
||||
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Address: |
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901 Main Street, 66th Floor |
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Dallas, TX 75202 |
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Fax: |
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(214) 290-8314 |
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Attention: |
|
John W. Woodiel, Senior Vice President |
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Barclays Bank PLC |
||||
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Address: |
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200 Park Avenue |
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|
New York, NY 10166 |
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Email: |
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mark.manski@barcap.com |
|
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Attention: |
|
Mark Manski |
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|
Calyon |
||||
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Address: |
|
1301 Avenue of the Americas |
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|
New York, NY 10019 |
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Fax: |
|
(212) 261-3431 |
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Email: |
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david.perl@us.calyon.com |
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|
vanessche@us.calyon.com |
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Attention: |
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Capital Markets Legal David Perl |
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DAS John-Charles van Essche |
Sch. 9.02-1
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With a copy to: |
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Address: |
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Calyon London Branch, Head of Legal |
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5 Appold Street |
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London EC2A 2DA |
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Fax: |
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+44 20 7214 6670 |
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Canadian Imperial Bank of Commerce |
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Address: |
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199 Bay Street, Commerce Court West, 6th floor |
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Toronto, Ontario, M5L 1A2, Canada |
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Fax: |
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(416) 214-8749 |
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Attention: |
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Frank deVries, Vice-President |
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With a copy to: |
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Address: |
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199 Bay Street, Commerce Court West, 11th floor |
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Toronto, Ontario, M5L 1A2, Canada |
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Fax: |
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(416) 304-4573 |
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Attention: |
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Frank Vivacqua, Assistant General Counsel |
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Deutsche Bank AG London Branch |
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Address: |
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60 Wall Street, 11th Floor |
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New York, NY 10005 |
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Fax: |
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(212) 797-5695 |
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Attention: |
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Keith Braun, Managing Director, Workout |
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With a copy to: |
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Fax: |
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(732) 578-5271 |
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Attention: |
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Robert Lee, Director, Legal |
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Dexia Bank Belgium SA |
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Address: |
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44 boulevard Pacheco |
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1000 Brussels |
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Email: |
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Geert.Gielens@dexia.com |
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Attention: |
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Geert Gielens |
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With a copy to: |
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Address: |
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Legal Department - Securities & Financial Markets |
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Fax: |
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+32 2 222 2568 |
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Email: |
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Heidi.Wynants@dexia.com |
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Bernhard.Ardaen@dexia.com |
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Attention: |
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Heidi Wynants |
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Bernhard Ardaen |
Sch. 9.02-2
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Dresdner Bank AG, London Branch |
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Address: |
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30 Gresham Street |
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London EC2P 2XY, England |
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Fax: |
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+44 870 889 6904 |
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Attention: |
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Transaction Legal Team |
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With a copy to: |
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Fax: |
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(212) 969-7944 |
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Attention: |
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Ivor Wolk |
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Hypo Public Finance Bank AG |
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Address: |
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3 Harbourmaster Place, IFSC |
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Dublin 1, Ireland |
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Fax: |
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+353 1 611 6183 |
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Attention: |
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Heather Nesbitt |
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With a copy to: |
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Fax: |
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(212) 905-4700 |
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Attention: |
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Nancy Henderson, NY, USA |
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and: |
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Fax: |
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+49 89 20 30 07 772 |
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Attention: |
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Tom Glynn, Munich, Germany |
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Lehman Brothers Inc. |
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Address: |
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745 Seventh Avenue, 8th Floor |
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New York, NY 10019 |
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Fax: |
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(646) 758-2211 |
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Attention: |
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Daniel J. Sullivan |
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Natixis |
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Address: |
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810 Seventh Avenue |
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New York, New York 10019 |
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Fax: |
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(212) 299-0030 |
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Attention: |
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Joshua Laterman |
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With a copy to: |
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Fax: |
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(212) 299-0030 |
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Attention: |
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Jeremy Newel1 |
Sch. 9.02-3
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Nomura International plc |
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Address: |
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1 St Martins le-Grand |
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London EC1A 4NP, England |
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Fax: |
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+44 207 521 2391 |
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Attention: |
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Matthew Wadhams/Robert Eveleigh, Transaction Legal Derivatives |
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With a copy to: |
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Address: |
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Shearman & Sterling LLP |
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Fax: |
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(212) 848-7179 |
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Attention: |
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Douglas Bartner |
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Royal Bank of Canada |
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Address: |
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200 Royal Bank Plaza |
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200 Bay St., 2nd Floor, Toronto |
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Ontario, Canada M5J 2W7 |
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Fax: |
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(416) 842-4334 |
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Email: |
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matthew.gilchrist@rbccm.com |
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Attention: |
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Matthew Gilchrist |
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The Royal Bank of Scotland |
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Address: |
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The Royal Bank of Scotland plc |
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c/o Greenwich Capital Markets, Inc. |
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600 Steamboat Road |
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Greenwich, CT 06830 |
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Fax: |
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(203) 422-4096 |
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Attention: |
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Legal Department (Andrew Kwok) |
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Société Générale |
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Address: |
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1221 Avenue of the Americas |
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New York, New York 10020 |
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Fax: |
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(212) 278-7614 |
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Attention: |
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Edith Hornick |
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With a copy to: |
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Address: |
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Luskin, Stern & Eisler LLP |
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Fax: |
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(212) 293-2705 |
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Attention: |
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Richard Stern |
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UBS AG, London branch |
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Address: |
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677 Washington Boulevard |
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Stamford, Connecticut 06901 |
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Fax: |
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(203) 719-0680 |
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Attention: |
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Bryan Murtagh |
Sch. 9.02-4
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With a copy to: |
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Address: |
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1285 Avenue of the Americas, 11th Floor |
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New York, NY 10019-6031 |
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Fax: |
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(212) 713-1153 |
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Attention: |
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Jamie Tramontana |
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and: |
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Address: |
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Pillsbury Winthrop Shaw Pittman LLP |
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1540 Broadway |
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New York, NY 10036-4039 |
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Fax: |
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(212) 858-1500 |
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Attention: |
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Rick B. Antonoff |
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Wachovia Bank, National Association |
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Fax: |
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(267) 321-6903 |
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Attention: |
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Helen Wessling |
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With a copy to: |
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Fax: |
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(704) 374-4881 |
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Attention: |
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Gene Wood |
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and: |
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Fax: |
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(704) 383-1383 |
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Attention:: |
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Doug Mundell |
Sch. 9.02-5
SCA PARTIES DISCLOSURE SCHEDULE
This document (the SCA Parties Disclosure Schedule ) has been delivered by the SCA Parties to the XL Parties and the CDS Counterparties concurrently with the execution of the Master Commutation, Release and Restructuring Agreement (the Agreement ), dated as of July 28, 2008, by and among the XL Parties, the SCA Parties and the CDS Counterparties. Capitalized terms used, but not otherwise defined, in the SCA Parties Disclosure Schedule shall have the meanings set forth in the Agreement.
Any matter that is disclosed in any section of the SCA Parties Disclosure Schedule will be deemed to be a disclosure for all purposes of the Agreement to the extent that the relevance of such matter to other sections of the Agreement is reasonably apparent.
The disclosure of any matter in any section of the SCA Parties Disclosure Schedule will expressly not be deemed to constitute an admission by any Party to the Agreement, or to otherwise imply, that any such matter is material for the purposes of the Agreement or otherwise, or that any such matter is required to be disclosed pursuant to the Agreement or otherwise.
The heading and title references in the SCA Parties Disclosure Schedule are for convenience purposes only, do not constitute a part of the SCA Parties Disclosure Schedule and shall not be deemed to limit or affect anything contained herein.
SCA PARTIES DISCLOSURE SCHEDULE
SECTION 3.02
CONFLICTS
Financial Guaranty Facultative Reinsurance Agreement, effective October 24, 2007, between MBIA Insurance Corporation, Armonk, New York, and XLCA.
Comprehensive Automatic Treaty Reinsurance Agreement, effective July 1, 2003, as amended by Amendment No. 1 to the Comprehensive Automatic Treaty Reinsurance Agreement, effective July 1, 2003, between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S.A., Paris France; and/or any other monoline insurance or reinsurance company subsidiary of MBIA Inc. listed in Exhibit 1 attached thereto and XLFA.
Facultative Reinsurance Agreement, dated as of December 1, 2006, between Financial Guaranty Insurance Company and XLFA.
Financial Guaranty Master Facultative Reinsurance Agreement, effective January 1, 2005, between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S.A., Paris, France; and/or MBIA UK Insurance Limited, London, England; and/or any other insurance or reinsurance company subsidiary of MBIA Inc. listed in Exhibit 1 attached thereto and XLFA.
Credit Agreement, dated as of August 1, 2006, among SCA, XLCA, XLFA, the various lenders from time to time party thereto and Citibank, N.A., as administrative agent (as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof).
Section 3.02-1
SECTION 3.03
GOVERNMENTAL CONSENTS AND APPROVALS
Approval of the New York Insurance Department
Approval of the Bermuda Monetary Authority
Approval of the United Kingdom Financial Services Authority
Approval of the Delaware Insurance Department
Section 3.03-1
SECTION 3.05
COMPLIANCE WITH LAWS
An Undertaking of XLFA, dated as of April 11, 2008, addressed to the Bermuda Monetary Authority.
A letter, dated as of May 20, 2008, from XLCAUK to Financial Services Authority, Re: XL Capital Assurance (U.K.) Limited.
Section 3.05-1
XL PARTIES DISCLOSURE SCHEDULE
This document (the XL Parties Disclosure Schedule ) has been delivered by the XL Parties to the SCA Parties and the CDS Counterparties concurrently with the execution of the Master Commutation, Release and Restructuring Agreement (the Agreement ), dated as of July 28, 2008, by and among the XL Parties, the SCA Parties and the CDS Counterparties. Capitalized terms used, but not otherwise defined, in the XL Parties Disclosure Schedule shall have the meanings set forth in the Agreement.
Any matter that is disclosed in any section of the XL Parties Disclosure Schedule will be deemed to be a disclosure for all purposes of the Agreement to the extent that the relevance of such matter to other sections of the Agreement is reasonably apparent.
The disclosure of any matter in any section of the XL Parties Disclosure Schedule will expressly not be deemed to constitute an admission by any Party to the Agreement, or to otherwise imply, that any such matter is material for the purposes of the Agreement or otherwise, or that any such matter is required to be disclosed pursuant to the Agreement or otherwise.
The heading and title references in the XL Parties Disclosure Schedule are for convenience purposes only, do not constitute a part of the XL Parties Disclosure Schedule and shall not be deemed to limit or affect anything contained herein.
XL PARTIES DISCLOSURE SCHEDULE
SECTION 4.02
CONFLICTS
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1. |
Credit Agreement among XL, XLA, XLI, and XL RE LTD (collectively, the Account Parties ); JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the Administrative Agent ); and the Lenders party thereto, with respect to the Credit Agreement, dated as of June 21, 2007, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Account Parties, the Administrative Agent and the other institutions from time to time party thereto as Lenders. |
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2. |
Credit Agreement among XL, XLA, XLI, and XL RE LTD (collectively, the Obligors ); JPMORGAN CHASE BANK, N.A. (as successor to Bear Stearns Corporate Lending Inc.), as administrative agent (in such capacity, the Administrative Agent ); and the Lenders party thereto, with respect to the Credit Agreement, dated as of August 3, 2005, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Obligors, the Administrative Agent and the other institutions from time to time party thereto as Lenders. |
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3. |
Five-Year Credit Agreement among XL, XLA, XLI, and XL RE LTD (collectively, the Account Parties ); JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the Administrative Agent ); and the Lenders party thereto, with respect to the Credit Agreement, dated as of June 22, 2005, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Account Parties, the Administrative Agent and the other institutions from time to time party thereto as Lenders. |
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4. |
Letter of Credit Facility among XL (the Account Party ), the Guarantors (collectively, with the Account Party, the Obligors ), and CITIBANK INTERNATIONAL PLC, as agent and trustee for the Lenders (in such capacity, the Agent ), with respect to the Letter of Credit Facility and Reimbursement Agreement, dated November 14, 2007, (as may be amended, supplemented or otherwise modified from time to time, the Facility Agreement ) entered into among the Obligors, the Agent and the other institutions from time to time party thereto as Lenders. |
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5. |
Note Purchase Agreement, dated April 12, 2001, among XL, XLA, XLI, XL RE LTD, and each of the Purchasers named therein. |
Section 4.02-1
SECTION 4.03
GOVERNMENTAL CONSENTS AND APPROVALS
Approval of the New York State Insurance Department
Section 4.03-1
SECTION 4.04(a)
XL CAPITALIZATION
XL has authorized 999,990,000 Ordinary Shares. As of July 25, 2008, there were 179,059,101 outstanding Class A Ordinary Shares, $0.01 par value per share.
XL has outstanding options to purchase 12,027,578 Class A Ordinary Shares, $0.01 par value per share.
1,000,000 Series E Preference Ordinary Shares are issued and outstanding.
Section 4.04(a)-1
AMENDMENT
NO. 1 TO MASTER COMMUTATION, RELEASE AND
RESTRUCTURING AGREEMENT
Dated as of August 1, 2008
AMENDMENT NO. 1 TO MASTER COMMUTATION,
RELEASE AND
RESTRUCTURING AGREEMENT
AMENDMENT NO. 1 dated as of August 1, 2008 (this Amendment No. 1 ) among XL CAPITAL LTD, an exempted limited company incorporated under the Laws of Cayman Islands, XL INSURANCE (BERMUDA) LTD (formerly known as X.L. Insurance Ltd), a Bermuda exempted company, XL REINSURANCE AMERICA INC., a New York insurance corporation, X.L. GLOBAL SERVICES, INC., a service company incorporated under the Laws of Delaware, XL SERVICES (BERMUDA) LTD, a service company incorporated under the Laws of Bermuda, X.L. AMERICA, INC., a company incorporated under the Laws of Delaware, SECURITY CAPITAL ASSURANCE LTD, a Bermuda exempted company, XL FINANCIAL ASSURANCE LTD., a Bermuda exempted company, XL CAPITAL ASSURANCE INC., a New York insurance company, XL FINANCIAL ADMINISTRATIVE SERVICES INC., a company incorporated under the Laws of Delaware, SCA BERMUDA ADMINISTRATIVE LTD., a company incorporated under the Laws of Bermuda, XL CAPITAL ASSURANCE (U.K.) LIMITED, an insurance company regulated by the Financial Services Authority and incorporated under the Laws of England and Wales, and those portfolio trusts that are Affiliates of XLCA and become a Party to the Master Agreement from time to time pursuant to the execution of a joinder agreement.
WHEREAS, on July 28, 2008, the parties hereto (the Parties ) entered into a certain Master Commutation, Release and Restructuring Agreement (the Master Agreement );
WHEREAS, the Parties wish to reallocate the Stock Consideration and the Cash Consideration Amount pursuant to Schedule 2.01 ; and
WHEREAS, the Parties wish to take such actions necessary to give effect to such reallocation;
NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein and in the Master Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties agree as follows:
Section 1. Definitions. Capitalized terms not otherwise defined in this Amendment No. 1 shall have the meanings ascribed to them in the Master Agreement.
Section 2. Amendments. Articles I and II, Exhibits 1.01(e) , 1.01(f) , 1.01(g) , and 1.01(h) and Schedules 2.01 , 2.06(a) and 2.06(b) of the Master Agreement are hereby amended as follows:
2.1 The definition of Subscription Agreement in Section 1.01 of the Master Agreement will be stricken and deleted in its entirety and replaced with the following text:
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Subscription Agreements means the subscription agreement to be executed by XLFA and XL and delivered at the Closing, in the form of Exhibit 1.01(g-1) , and the subscription agreement to be executed by |
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XLCA and XL and delivered at the Closing in the form of Exhibit 1.01(g-2) . |
2.2 Section 2.08(ii) of the Master Agreement will be stricken and deleted in its entirety and replaced with the following text:
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the Subscription Agreements executed by each SCA Party which is a party thereto; |
2.3 Section 2.09(iii) of the Master Agreement will be stricken and deleted in its entirety and replaced with the following text:
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the Subscription Agreements executed by each XL Party which is a party thereto; |
2.4 The contents of Exhibit 1.01(e) to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Exhibit 1.01(e-1) attached hereto.
2.5 The contents of Exhibit 1.01(f) to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Exhibit 1.01(f-1) attached hereto.
2.6 The contents of Exhibit 1.01(g) to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Exhibits 1.01(g-1) attached hereto.
2.7 The contents of Exhibit 1.01(g-2) attached hereto will be added as Exhibit 1.01(g-2) to the Master Agreement.
2.8 The contents of Exhibit 1.01(h) to the Master Agreement shall be stricken and deleted in their entirety and replaced with Exhibits 1.01(h-1) attached hereto.
2.9 The contents of Schedule 2.01 to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Schedule 2.01-1 attached hereto.
2.10 The contents of Schedule 2.06(a) to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Schedule 2.06(a)-1 attached hereto.
2.11 The contents of Schedule 2.06(b) to the Master Agreement shall be stricken and deleted in their entirety and replaced with the contents of Schedule 2.06(b)-1 attached hereto.
Section 3. Miscellaneous .
3.1 This Amendment No. 1 may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement. A facsimile or Portable Document Format copy of a signature shall have the same force and effect as an original signature.
-2-
3.2 This Amendment No. 1 is to be interpreted under and governed by the Laws of the State of New York without giving effect to conflicts of law provisions thereof. In the event that there is a dispute between or among the Parties arising under this Amendment No. 1, the Parties (i) agree that the exclusive forum to seek remedy shall be to institute a legal proceeding in the courts of the State of New York located in the City and County of New York, (ii) hereby expressly submit to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waive any claim of lack of personal jurisdiction and improper venue and any claim that such courts are an inconvenient forum and (iii) agree that the prevailing Parties shall be entitled to recover their reasonable attorneys fees, costs and disbursements from the other Parties (in addition to any other relief to which the prevailing Parties may be entitled). Each Party hereby irrevo cably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address provided to the Parties in accordance with Section 9.02, of the Master Agreement, such service to become effective ten (10) days after such mailing.
3.3 Each of the Parties hereby waives to the fullest extent permitted by applicable Law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under, or in connection with this Amendment No. 1. Each of the Parties hereby (i) certifies that no representative, agent or attorney of any other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce the foregoing waiver and (ii) acknowledges that it has been induced to enter into this Amendment No. 1 by, among other things, the mutual waivers and certifications in this Section 3.3 .
3.4 Each Party has had the opportunity to negotiate the terms, consult with counsel, and modify the provisions of this Amendment No. 1. Therefore, the terms of this Amendment No. 1 will be considered and interpreted without any presumption, inference or rule requiring construction or interpretation of any provision of this Amendment No. 1 against the interests of the drafter of this Amendment No. 1.
[Signature Page to Follow]
-3-
IN WITNESS HEREOF, the Parties have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first written above.
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XL CAPITAL LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Executive Vice President and Chief of Staff |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL INSURANCE (BERMUDA) LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Director |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL REINSURANCE AMERICA INC. |
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By: |
/s/ Steven P. Agosta |
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Name: Steven P. Agosta |
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Title: Vice President, General Counsel and Secretary |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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X.L. GLOBAL SERVICES, INC. |
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By: |
/s/ Kenneth P. Meagher |
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Name: Kenneth P. Meagher |
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Title: Assistant Secretary |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL SERVICES (BERMUDA) LTD |
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By: |
/s/ Fiona Luck |
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Name: Fiona Luck |
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Title: Deputy Chairman |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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X.L. AMERICA, INC. |
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By: |
/s/ Richard G. McCarty |
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Name: Richard G. McCarty |
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Title: Senior Vice President, General Counsel and Secretary |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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SECURITY CAPITAL ASSURANCE LTD |
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By: |
/s/ Claude Le Blanc |
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Name: Claude Le Blanc |
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Title: EVP |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL FINANCIAL ASSURANCE LTD. |
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By: |
/s/ Tom Cume |
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Name: Tom Cume |
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Title: SVP |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL CAPITAL ASSURANCE INC. |
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By: |
/s/ Susan Comparato |
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Name: Susan Comparato |
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Title: SVP & General Counsel |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL FINANCIAL ADMINISTRATIVE SERVICES INC. |
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By: |
/s/ Susan Comparato |
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Name: Susan Comparato |
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Title: Managing Director & Secretary |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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SCA BERMUDA ADMINISTRATIVE LTD. |
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By: |
/s/ Tom Cume |
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Name: Tom Cume |
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Title: SVP |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
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XL CAPITAL ASSURANCE (U.K.) LIMITED |
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By: |
/s/ Fredrick B. Hnat |
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Name: |
Fredrick B. Hnat |
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Title: |
Managing Director & Chief Operating Officer |
[AMENDMENT NO. 1 TO THE MASTER COMMUTATION, RELEASE AND RESTRUCTURING AGREEMENT]
EXHIBIT 1.01(e-1)
FORM OF FACULTATIVE MASTER CERTIFICATE COMMUTATION AGREEMENT
Exhibit 1.01(e-1)
COMMUTATION AND RELEASE AGREEMENT
This Commutation and Release Agreement (the Agreement ) dated as of August 5, 2008, is made by and between Syncora Guarantee Inc. (formerly known as XL Capital Assurance Inc.), a company domiciled in New York (the Company ) and XL Reinsurance America Inc., a company also domiciled in New York (the Reinsurer ). The Reinsurer and the Company are hereinafter referred to collectively as the Parties .
RECITALS
WHEREAS , the Parties previously entered into a Facultative Master Certificate effective as of November 1, 2002, which was amended and restated pursuant to the First Amended and Restated Facultative Master Certificate, effective as of August 4, 2006, and which was further amended and restated pursuant to the Second Amended and Restated Facultative Master Certificate, effective as of March 1, 2007, pursuant to which the Reinsurer agreed to reinsure certain liabilities of the Company (together, the Reinsurance Agreement ); and
WHEREAS , the Parties are parties to that certain Master Commutation, Release and Restructuring Agreement, dated as of July 28, 2008, by and among the Company, the Reinsurer, Security Capital Assurance Ltd and the other parties thereto (the Master Transaction Agreement ), pursuant to which the Company and the Reinsurer have agreed to enter into this Agreement; and
WHEREAS , the Parties agree that it is in each of their best interests to freely and voluntarily enter into this Agreement and to fully and forever release and discharge each other from their respective existing and future liabilities and obligations, including contingent and uncertain liabilities, both known and unknown, under the Reinsurance Agreement and the individual risk cessions thereunder and to compromise, resolve and settle all amounts due, or which may become due, between each other arising out of, in respect of, or relating to the Reinsurance Agreement and/or the individual risk cessions thereunder; and
WHEREAS , Company and Reinsurer, or their affiliates, may be parties to agreements other than the Reinsurance Agreement, and it is the intent of the Parties that this Agreement will not have any effect upon such other agreements.
NOW, THEREFORE , in consideration of the covenants, conditions, promises and releases contained herein, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
PAYMENT
(a) XL Capital Ltd shall, on behalf of the Reinsurer, issue to the Company Five Million, Seven Hundred and Seventy-Six Thousand, Six Hundred and Twenty-One (5,776,621) of Class A Ordinary Shares of XL Capital Ltd (the Commutation Amount ) on the
Exh. 1.01(e-1)-1
Closing Date (as such term is defined in the Master Transaction Agreement). The date on which the Commutation Amount is paid and received shall be referred to hereinafter as the Effective Date.
(b) The Company shall accept the Commutation Amount in full satisfaction of all of the Reinsurers liabilities and obligations under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE II
RELEASE
(a) Upon the Reinsurers payment of the Commutation Amount to the Company, the Company, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors, and employees, hereby irrevocably and unconditionally releases and forever discharges the Reinsurer, its parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Company now has, owns or holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Reinsurer, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity, or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(a) shall not discharge obligations of the Reinsurer, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(b) Contemporaneous with the payment of the Commutation Amount to the Company, the Reinsurer, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the Company, its shareholders, parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Reinsurer now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective
Exh. 1.01(e-1)-2
Date, against the Company, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(b) shall not discharge obligations of the Company, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(c) The Parties understand that it is possible that unknown losses or claims may exist, or that present or future losses or claims may be underestimated in amounts or severity. Furthermore, the Parties expressly accept and assume the risk that the factual or legal assumptions made by any Party in connection with this Agreement may be found hereafter to be different from the true facts or law, and the Parties agree that this Agreement shall be and shall remain in full force and effect notwithstanding such differences in facts or law. Each Party expressly takes all of the foregoing into account in determining the amount of consideration to be given and paid for the giving of this Agreement, and a portion of the said consideration, having been bargained for between the Parties with the knowledge of the possibility of such unknown losses and claims, is given in exchange for the full accord, satisfaction and discharge of all such losses and claims.
(d) Full payment of the Commutation Amount shall be in complete accord, satisfaction, settlement and commutation of any and all past, current and future liabilities and obligations that each Party owes or may owe to the other arising directly or indirectly out of or related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder and that upon payment of the Commutation Amount, the Reinsurance Agreement shall be terminated as of the Effective Date and neither Party shall have any further obligation or liability to the other Party under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE III
NON-RELIANCE
(a) This Agreement fully and finally resolves the rights, duties and obligations of the Company and the Reinsurer under the Reinsurance Agreement, and neither Party shall:
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(i) have any remedy in respect of any representation, warranty or undertaking of the other that is not specifically set forth in this Agreement, the Master Transaction Agreement, or the Ancillary Agreements commuting the reinsurance agreements listed in Part I of Schedule 2.01 of the Master Transaction Agreement, whether or not relied upon by the other Party; or |
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(ii) seek to reopen or set aside this Agreement or the Reinsurance Agreement on any basis whatsoever, including, without limitation, that this Agreement or the Reinsurance Agreement is void or voidable due to a mistake or change in law or a unilateral or mutual mistake of fact in any way related to this Agreement or the Reinsurance Agreement. |
Exh. 1.01(e-1)-3
(b) The Company and the Reinsurer have voluntarily entered into this Agreement based: (i) upon their own independent assessment of the relevant facts and their rights and obligations under the Reinsurance Agreement and (ii) except as expressly set forth in Article III and Article IV of the Master Transaction Agreement, not upon any representations that were made or disclosures that were made by the other Party, their affiliates, officers, directors, shareholders, employees, representatives, agents, attorneys or their respective heirs, administrators, predecessors, successors and assigns. Each Party acknowledges that it has carefully read, and that it understands the scope and effect of this Agreement and has had a full and fair opportunity to consult with, and seek the advice and recommendations of its attorneys, actuaries and other professional advisors prior to its execution of this Agreement.
(c) This Agreement and the negotiations and proceedings leading to this Agreement shall not form the basis of any claim by either Party against the other Party or against any officer, director, consultant, professional or shareholder of the other Party, except with respect to an action for enforcement of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
ARTICLE IV
EXCLUSIVE BENEFIT OF THE PARTIES AND BINDING EFFECT
The rights, duties and obligations set forth herein shall inure to the benefit of and be binding upon the Company and the Reinsurer as they are identified in this Agreement and their parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys and this Agreement is not intended to confer any rights or benefits upon persons or entities other than the foregoing parties.
ARTICLE V
COMPROMISE
This Agreement sets forth a compromise and shall never at any time for any purpose be considered as an admission of liability or responsibility on the part of any party hereto regarding any aspect of the Reinsurance Agreement. Neither this Agreement nor any of its terms shall be admissible in any action, arbitration, or proceeding other than one to enforce the terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements), including, but not limited to, the releases provided in Article II .
ARTICLE VI
FURTHER ASSURANCES
The Parties, without further consideration, shall execute and deliver such other documents and take such other action as may be necessary to effect this Agreement.
Exh. 1.01(e-1)-4
ARTICLE VII
MISCELLANEOUS
(a) Should any part, term or provision of this Agreement, except Article I or Article II , be declared or determined to be illegal or invalid pursuant to a final and unappealable order of a court of competent jurisdiction, the validity of the remaining parts, terms and provisions shall not be affected thereby and such illegal or invalid part, term or provision shall be deemed not to be part of this Agreement. If either Article I or Article II is determined by a court of competent jurisdiction or regulatory authority to be unenforceable, either Party, at its option, shall be entitled to rescind this Agreement, and the Reinsurer shall be entitled to repayment of the Commutation Amount immediately upon such rescission. Upon such rescission, the Reinsurance Agreement and all rights, obligations and liabilities of the Parties under the Reinsurance Agreement shall be reinstated as if this Agreement had never been executed. Notwithstanding the foregoing, the releases given pursuant to Article II shall remain in full force and effect as to the Parties officers, directors, agents, employees, shareholders, representatives, advisors and attorneys.
(b) This Agreement and the Master Transaction Agreement (including the Ancillary Agreements) set forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understanding between them pertaining to the subject matter hereof. A facsimile copy of a signature shall have the same force and effect as an original signature.
(c) This Agreement may not be amended, altered, supplemented or modified, except by written agreement signed by the Parties.
(d) This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement.
(e) For purposes of this Agreement, a Business Day is any day other than a Saturday, Sunday or a public holiday in New York.
(f) This Agreement shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of law or choice of law and the Parties submit to the exclusive jurisdiction of the Supreme Court of the State of New York in respect of all disputes arising out of or in connection with this Agreement.
(g) All notices under this Agreement shall be in writing and shall be deemed to be duly given and received (i) upon delivery if delivered by certified mail; or (ii) on the next Business Day if sent by overnight courier (iii) on the date sent by facsimile if sent during the recipients normal business hours or, if sent by facsimile outside such hours, on the next Business Day; provided, that such notices are sent to a Party to its Address for Notices set forth on Schedule B hereto or to such other address as either Party may have furnished to the other in writing.
Exh. 1.01(e-1)-5
(h) For all purposes this Agreement shall be deemed to have been drafted jointly by the Parties.
(i) This Agreement is an agreement solely between the Company and the Reinsurer. No right of action against the Reinsurer shall accrue to any insured, policyholder, or other contracting party of the Company unless granted herein by virtue of this Agreement.
[ Signature Page to follow ]
Exh. 1.01(e-1)-6
IN WITNESS WHEREOF , the Parties have executed this Agreement by their respective authorized officers as of the day and year first written below.
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Dated: |
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SYNCORA GUARANTEE INC. |
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FORMERLY KNOWN AS |
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XL CAPITAL ASSURANCE INC. |
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By: |
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Name: |
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Title: |
[SIGNATURE PAGE FACULTATIVE MASTER CERTIFICATE COMMUTATION AGREEMENT]
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Dated: |
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XL REINSURANCE AMERICA INC. |
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By: |
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Name: |
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[SIGNATURE PAGE FACULTATIVE MASTER CERTIFICATE COMMUTATION AGREEMENT]
SCHEDULE A
WIRE TRANSFER INSTRUCTIONS
Transfer instructions for remitting funds to Syncora Guarantee Inc. (formerly known as XL Capital Assurance Inc.)
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
Rebecca
OConnell (VP & Assistant Treasurer) at SCA
Phone: (212) 478-3629
Fax: (212) 478-3587
E-mail: rebecca.oconnell@scafg.com
SCHEDULE B
ADDRESS FOR NOTICE
TO THE COMPANY:
Syncora
Guarantee Inc.
1221 Avenue of the Americas
New York, New York 10022
Attn: General Counsel
Facsimile: 212-478-3579
TO THE REINSURER:
XL Reinsurance
America Inc.
Seaview House
70 Seaview Avenue
Stamford, CT 06902-6040
Attention: General Counsel
Facsimile: 203-964-5309
EXHIBIT 1.01(f-1)
FORM OF QUOTA SHARE TREATY COMMUTATION AGREEMENT
Exhibit 1.01(f-1)
COMMUTATION AND RELEASE AGREEMENT
This Commutation and Release Agreement (the Agreement ) dated as of August 5, 2008, is made by and between Syncora Guarantee Inc., a company domiciled in New York formerly known as XL Capital Assurance Inc. (the Company ), and Syncora Guarantee Re Ltd., a company organized in Delaware, formerly domiciled in Bermuda and known as XL Financial Assurance Ltd (the Reinsurer ). The Reinsurer and the Company are hereinafter referred to collectively as the Parties .
RECITALS
WHEREAS , the Parties previously entered into a Facultative Quota Share Reinsurance Treaty dated as of October 6, 1999 as amended and restated by an Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of June 22, 2001, as further amended and restated by a Second Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of May 1, 2004, and as further amended and restated by a Third Amended and Restated Facultative Quota Share Reinsurance Treaty dated as of June 29, 2006 (together, the Reinsurance Agreement ); and
WHEREAS , XL Insurance (Bermuda) Ltd, formerly known as XL Insurance Ltd, a company domiciled in Bermuda ( XLIB ) guarantees the obligations of the Reinsurer to the Company under the Second Amended and Restated Facultative Quota Share Reinsurance Treaty;
WHEREAS , XLIB reinsures the Reinsurer pursuant to an Excess of Loss Reinsurance Agreement executed on October 3, 2001 (the Excess of Loss Reinsurance Agreement ) that covers certain business assumed by the Reinsurer under the Reinsurance Agreement; and
WHEREAS , the Parties and XLIB are parties to that certain Master Commutation, Release and Restructuring Agreement, dated as of July 28, 2008, by and among the Company, the Reinsurer, Security Capital Assurance Ltd and other parties thereto (the Master Transaction Agreement ), pursuant to which (a) the Company and the Reinsurer have agreed to enter into this Agreement; and (b) XLIB and the Reinsurer have agreed to commute the Excess of Loss Reinsurance Agreement and fully and finally extinguish all of the parties rights and obligations under the Excess of Loss Reinsurance Agreement (the Excess of Loss Commutation );
WHEREAS , XL Capital Ltd ( XL Capital ) is the ultimate parent of XLIB;
WHEREAS , XLIB has agreed pursuant to the Master Transaction Agreement to pay the sum of One Billion, Five Hundred and Eighty-Four Million, Seven Hundred Thousand Dollars ($1,584,700,000.00) to the Reinsurer and XL Capital has agreed to issue and transfer to the Reinsurer 2,223,379 of its Class A Ordinary Shares (together, the XL Consideration ) on the express condition that the Company and the Reinsurer commute the Reinsurance Agreement and the individual risk cessions thereunder and fully and finally extinguish the parties rights and obligations under the Reinsurance Agreement and/or the individual risk cessions thereunder; and
Exh. 1.01(f-1)-1
WHEREAS , the Reinsurer has agreed that it will pay the Commutation Amount (as that term is defined in the Excess of Loss Commutation) it received under the Excess of Loss Commutation as part of the consideration it pays to the Company under this Agreement;
WHEREAS , the Parties agree that it is in each of their best interests to freely and voluntarily enter into this Agreement and to fully and forever release and discharge each other from their respective existing and future liabilities and obligations, including contingent and uncertain liabilities, both known and unknown, under the Reinsurance Agreement and the individual risk cessions thereunder and to compromise, resolve and settle all amounts due, or which may become due, between each other arising out of, in respect of, or relating to the Reinsurance Agreement and/or the individual risk cessions thereunder; and
WHEREAS , Company and Reinsurer, or their affiliates, may be parties to agreements other than the Reinsurance Agreement, and it is the intent of the Parties that this Agreement will not have any effect upon such other agreements.
NOW, THEREFORE , in consideration of the covenants, conditions, promises and releases contained herein, and for other valuable consideration including but not limited to the XL Consideration that XLIB and XL Capital agreed to pay on the express condition that Company and Reinsurer commute the Reinsurance Agreement and the individual risk cessions thereunder, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
PAYMENT
(a) The Reinsurer shall on the Closing Date (as such term is defined in the Master Transaction Agreement): transfer to the Company the following, having an aggregate value of Three Billion, Nine Hundred and Twenty-Six Million Dollars ($3,926,000,000.00) (i) the XL Capital shares it received as part of the XL Consideration, valued at market value as of market close on the immediately preceding trading day, (ii) withdrawal by the Company and retention for its own account of all assets from the trust account established pursuant to the Reinsurance Agreement, such assets to be valued at market value as of market close on August 1, 2008, and (iii) the balance in cash via direct wire transfer, in immediately available funds, in accordance with the payment instructions set forth on Schedule A hereto (collectively, the Commutation Amount ). The date on which the Commutation Amount is paid and received shall be referred to hereinafter as the Effective Date .
(b) The Company shall accept the Commutation Amount in full satisfaction of all of the Reinsurers liabilities and obligations under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE II
RELEASE
(a) Upon the Reinsurers payment of the Commutation Amount to the Company, the Company, on behalf of itself and its shareholders, parents, affiliates and
Exh. 1.01(f-1)-2
subsidiaries, and their respective officers, directors, and employees, hereby irrevocably and unconditionally releases and forever discharges the Reinsurer, its parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Company now has, owns or holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Reinsurer, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity, or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(a) shall not discharge obligations of the Reinsurer, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(b) Contemporaneous with the payment of the Commutation Amount to the Company, the Reinsurer, on behalf of itself and its shareholders, parents, affiliates and subsidiaries, and their respective officers, directors and employees, hereby irrevocably and unconditionally releases and forever discharges the Company, its shareholders, parents, subsidiaries and affiliates, and their respective predecessors, successors, assigns, officers, directors, agents, employees, shareholders, representatives, and attorneys from any and all present and future actions, causes of action, suits, debts, liens, contracts, rights, agreements, obligations, promises, liabilities, claims, counterclaims, demands, damages, controversies, losses, costs and expenses (including attorneys fees and costs actually incurred) of any kind, character, description or nature whatsoever, known or unknown to either or both Parties, suspected or unsuspected, reported or unreported, fixed or contingent, which the Reinsurer now has, owns, holds or claims to have, own, or hold, or at any time heretofore had, owned, or held or claimed to have had, owned, or held, or may hereafter have, own, or hold or claim to have, own, or hold, arising out of conduct or matters occurring on, prior to or subsequent to the Effective Date, against the Company, arising directly or indirectly out of, based upon, or in any way related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder, whether grounded in law or equity or sounding in tort or contract or otherwise; provided , however , that the provisions of this Article II(b) shall not discharge obligations of the Company, which have been undertaken or imposed by the express terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
(c) The Parties understand that it is possible that unknown losses or claims may exist, or that present or future losses or claims may be underestimated in amounts or severity. Furthermore, the Parties expressly accept and assume the risk that the factual or legal assumptions made by any Party in connection with this Agreement may be found hereafter to be different from the true facts or law, and the Parties agree that this Agreement shall be and shall remain in full force and effect notwithstanding such differences in facts or law. Each Party expressly takes all of the foregoing into account in determining the amount of consideration to be
Exh. 1.01(f-1)-3
given and paid for the giving of this Agreement, and a portion of the said consideration, having been bargained for between the Parties with the knowledge of the possibility of such unknown losses and claims, is given in exchange for the full accord, satisfaction and discharge of all such losses and claims.
(d) Full payment of the Commutation Amount shall be in complete accord, satisfaction, settlement and commutation of any and all past, current and future liabilities and obligations that each Party owes or may owe to the other arising directly or indirectly out of or related to or in connection with the Reinsurance Agreement and/or the individual risk cessions thereunder and that upon payment of the Commutation Amount, the Reinsurance Agreement shall be terminated as of the Effective Date and neither Party shall have any further obligation or liability to the other Party under the Reinsurance Agreement and/or the individual risk cessions thereunder.
ARTICLE III
NON-RELIANCE
(a) This Agreement fully and finally resolves the rights, duties and obligations of the Company and the Reinsurer under the Reinsurance Agreement, and neither Party shall:
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(i) have any remedy in respect of any representation, warranty or undertaking of the other that is not specifically set forth in this Agreement, the Master Transaction Agreement, or the Ancillary Agreements commuting the reinsurance agreements listed in Part I of Schedule 2.01 of the Master Transaction Agreement, whether or not relied upon by the other Party; or |
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(ii) seek to reopen or set aside this Agreement or the Reinsurance Agreement on any basis whatsoever, including, without limitation, that this Agreement or the Reinsurance Agreement is void or voidable due to a mistake or change in law or a unilateral or mutual mistake of fact in any way related to this Agreement or the Reinsurance Agreement. |
(b) The Company and the Reinsurer have voluntarily entered into this Agreement based: (i) upon their own independent assessment of the relevant facts and their rights and obligations under the Reinsurance Agreement and (ii) except as expressly set forth in Article III and Article IV of the Master Transaction Agreement, not upon any representations that were made or disclosures that were made by the other Party, their affiliates, officers, directors, shareholders, employees, representatives, agents, attorneys or their respective heirs, administrators, predecessors, successors and assigns. Each Party acknowledges that it has carefully read, and that it understands the scope and effect of this Agreement and has had a full and fair opportunity to consult with, and seek the advice and recommendations of its attorneys, actuaries and other professional advisors prior to its execution of this Agreement.
(c) This Agreement and the negotiations and proceedings leading to this Agreement shall not form the basis of any claim by either Party against the other Party or against any officer, director, consultant, professional or shareholder of the other Party, except with
Exh. 1.01(f-1)-4
respect to an action for enforcement of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements).
ARTICLE IV
COMPROMISE
This Agreement sets forth a compromise and shall never at any time for any purpose be considered as an admission of liability or responsibility on the part of any party hereto regarding any aspect of the Reinsurance Agreement. Neither this Agreement nor any of its terms shall be admissible in any action, arbitration, or proceeding other than one to enforce the terms of this Agreement or the Master Transaction Agreement (including the Ancillary Agreements), including, but not limited to, the releases provided in Article II .
ARTICLE V
FURTHER ASSURANCES
The Parties, without further consideration, shall execute and deliver such other documents and take such other action as may be necessary to effect this Agreement.
ARTICLE VI
MISCELLANEOUS
(a) This Agreement and the Master Transaction Agreement (including the Ancillary Agreements) set forth the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understanding between them pertaining to the subject matter hereof. A facsimile copy of a signature shall have the same force and effect as an original signature.
(b) This Agreement may not be amended, altered, supplemented or modified, except by written agreement signed by the Parties.
(c) This Agreement may be executed and delivered in multiple counterparts, each of which, when so executed and delivered, shall be an original, but such counterparts shall together constitute but one and the same instrument and agreement.
(d) For purposes of this Agreement, a Business Day is any day other than a Saturday, Sunday or a public holiday in New York.
(e) This Agreement shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of law or choice of law and the Parties submit to the exclusive jurisdiction of the Supreme Court of the State of New York in respect of all disputes arising out of or in connection with this Agreement.
(f) All notices under this Agreement shall be in writing and shall be deemed to be duly given and received (i) upon delivery if delivered by certified mail; or (ii) on the next Business Day if sent by overnight courier (iii) on the date sent by facsimile if sent during the recipients normal business hours or, if sent by facsimile outside such hours, on the next
Exh. 1.01(f-1)-5
Business Day; provided, that such notices are sent to a Party to its Address for Notices set forth on Schedule B hereto or to such other address as either Party may have furnished to the other in writing.
(g) For all purposes this Agreement shall be deemed to have been drafted jointly by the Parties.
(h) This Agreement is an agreement solely between the Company and the Reinsurer. No right of action against the Reinsurer shall accrue to any insured or policyholder of the Company.
[ Signature Page to follow ]
Exh. 1.01(f-1)-6
IN WITNESS WHEREOF , the Parties have executed this Agreement by their respective authorized officers as of the day and year first written below.
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Dated: |
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SYNCORA GUARANTEE INC. |
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FORMERLY KNOWN AS |
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XL CAPITAL ASSURANCE INC. |
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By: |
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Name: |
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[SIGNATURE PAGE QUOTA SHARE TREATY COMMUTATION AGREEMENT]
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Dated: |
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SYNCORA GUARANTEE RE LTD. |
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FORMERLY KNOWN AS |
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XL FINANCIAL ASSURANCE LTD |
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By: |
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[SIGNATURE PAGE QUOTA SHARE TREATY COMMUTATION AGREEMENT]
SCHEDULE A
WIRE TRANSFER INSTRUCTIONS
Transfer instructions for remitting funds to Syncora Guarantee Inc. (formerly known as XL Capital Assurance Inc.)
[Intentionally omitted]
Please send e-mail / fax containing details of the transfer to:
[Intentionally omitted]
Rebecca
OConnell (VP & Assistant Treasurer) at SCA
Phone: (212) 478-3629
Fax: (212) 478-3587
E-mail: rebecca.oconnell@scafg.com
SCHEDULE B
ADDRESS FOR NOTICE
TO THE COMPANY:
Syncora
Guarantee Inc.
1221 Avenue of the Americas
New York, New York 10022
Attn: General Counsel
Facsimile: 212-478-3579
TO THE REINSURER:
Syncora
Guarantee Re Ltd.
A.S. Cooper Building
26 Reid Street, 4th Floor
Hamilton, Bermuda HM 11
Attn: President
Facsimile: 441-296-4351
EXHIBIT 1.01(g-1)
FORM OF XLFA SUBSCRIPTION AGREEMENT
Exhibit 1.01(g-1)
XL CAPITAL LTD
SUBSCRIPTION AGREEMENT
This SUBSCRIPTION AGREEMENT (this Agreement ), dated as of August 5, 2008, by and between XL Capital Ltd, a Cayman Islands exempted limited company (the Company ), and Syncora Guarantee Re Ltd. (formerly known as XL Financial Assurance Ltd), a Bermuda exempted company (the Subscriber ).
WHEREAS, the Company and the Subscriber are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the Securities Act );
WHEREAS, this Agreement is being entered into for the purpose of setting forth the terms, conditions and agreements between the Company and the Subscriber in connection with the Companys issuance to the Subscriber of 2,223,379 shares (the Shares ) of its Class A Ordinary Shares, par value $0.01 per share ( Common Stock ), pursuant to the Master Commutation, Release and Restructuring Agreement dated as of July 28, 2008 among the Company, Security Capital Assurance Ltd, XL Financial Assurance Ltd, XL Capital Assurance Inc. and the other parties thereto (the Master Agreement ); and
WHEREAS, on the Closing Date (as defined below), the parties hereto and Syncora Guarantee Inc. (formerly known as XL Capital Assurance Inc.) will execute and deliver a Registration Rights Agreement (the Registration Rights Agreement ), substantially in the form attached hereto as Exhibit A , pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and intending to be legally bound, the Company and the Subscriber hereby agree as follows:
1. SUBSCRIPTION FOR SHARES; CLOSING .
(a) Subject to the terms and conditions herein and in reliance upon the respective representations, warranties and covenants contained herein, the Subscriber hereby subscribes for the Shares and the Company hereby agrees to issue the Shares as consideration for the Subscriber and certain of its affiliates entering into the Master Agreement and related transactions contemplated thereby, as set forth therein.
(b) The issuance of the Shares shall be effected on the Closing Date (defined below) by the Company executing and delivering to the Subscriber, duly registered in its name, a duly executed stock certificate evidencing the Shares being purchased by it. The closing of the purchase and sale of the Shares pursuant to this Section 1(b) will take place at the time and location set forth for the closing in Section 2.07 of the Master Agreement or at such other time
Exh. 1.01(g-1)-1
and location as the Company and the Subscriber shall otherwise mutually agree (the Closing Date ).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .
The Company represents and warrants, as of the date hereof and as of the Closing Date, that:
(a) Incorporation and Good Standing . The Company is duly organized, validly existing and in good standing under the laws of the Cayman Islands and has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted.
(b) Authorization . The board of directors of the Company (the Board ) has authorized the execution, delivery and performance of this Agreement and the transactions contemplated hereby and the Company has the requisite power, authority and legal capacity to execute, deliver and perform this Agreement and the transactions contemplated hereby. No other corporate action is necessary to authorize such execution, delivery and performance, and upon such execution and delivery by the Company, this Agreement shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as enforceability may be (i) limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors rights, or (ii) subject to general principles of equity. The Board has authorized the issuance and delivery of the Shares in accordance with this Agreement.
(c) Authorization of Shares . The Shares to be issued and sold by the Company pursuant to this Agreement, when issued and paid for in accordance with the provisions hereof, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock free and clear of all liens and the issuance of the Shares will not be subject to any preemptive or similar rights.
(d) Non-Contravention . Except as set forth on Schedule 2(d) and except with respect to any filings made in connection with exemptions from registration under state or federal securities laws, the creation, authorization, issuance, offer and sale of the Shares do not require any consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company or the vote, consent or approval in any manner of the holders of any security of the Company as a condition to the execution and delivery of this Agreement or the creation, authorization, issuance, offer and sale of the Shares. Except as set forth on Schedule 2(d), the execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder will not violate (i) the terms and conditions of the Memorandum and Articles of Association of the Company, or any material agreement to which the Company is a party or by which it is bound or (ii) subject to the accuracy of the Subscribers representations and warranties contained in Section 3 hereof, any federal or state securities law.
(e) No General Solicitation . The Company has not engaged in a general solicitation of the public for sale of the Shares in violation of the Securities Act, and the offering and sale of the Shares are exempt from registration under the Securities Act.
Exh. 1.01(g-1)-2
(f) Capitalization . As of December 31, 2007, the Company had the authorized capitalization as set forth in the Companys Annual Report on Form 10-K for its most recent fiscal year, and all of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, and were issued in compliance with federal and state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. All of the Companys options, warrants and other rights to purchase or exchange any securities for shares of the Companys capital stock have been duly authorized and validly issued and were issued in compliance with federal and state securities laws. The Company has not, in the twelve months preceding the date hereof, received notice (written or oral) from the NYSE to the effect that the Company is not in compliance with its listing or maintenance requirements.
(g) No Integration . There has been no sale, offer for sale, solicitation of an offer to buy or negotiation by the Company or any of its subsidiaries in respect of any security that would be integrated with the Shares issued pursuant to this Agreement in a manner that would require the registration of the Shares under the Securities Act.
(h) Listing . The Common Stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 and prior to the Closing Date, the Shares will be approved for listing on the NYSE, subject to official notice of issuance.
(i) No Registration . Assuming the accuracy of the representations and warranties of the Subscriber contained in Section 3 and its compliance with the agreements set forth herein, it is not necessary, in connection with the issuance and sale of the Shares to the Subscriber in the manner contemplated by this Agreement, to register the Shares under the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER .
The Subscriber represents and warrants, as of the date hereof and as of the Closing Date, that:
(a) Investment Purpose . The Subscriber is obtaining the Shares for investment purposes only and not with a view to or for distributing or reselling such Shares or any part thereof, without prejudice, however, to the Subscribers right, subject to the provisions of this Agreement (including, without limitation, Section 5 ), to sell or otherwise dispose of all or any part of the Shares pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities or blue sky laws. The Subscriber understands that it may bear the economic risk of this investment indefinitely.
(b) Institutional Accredited Investor Status . The Subscriber was at the time it was first offered the Shares, and at the date hereof is, an institutional accredited investor as defined in Rule 501(a) under the Securities Act.
(c) Reliance on Exemptions . The Subscriber understands that the Shares are being offered and issued to it in reliance upon specific exemptions from the registration
Exh. 1.01(g-1)-3
requirements of United States federal and state securities or blue sky laws, including Section 4(2) of the Securities Act and that the Company is relying upon the truth and accuracy of, and the Subscribers compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of the Subscriber to acquire the Shares.
(d) Knowledge . The Subscriber has, either alone or together with its representatives, such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the ownership of the Shares, and has so evaluated the merits and risks of such investment. The Subscriber understands that ownership of the Shares involves a high degree of risk, is able to bear the economic risk of ownership of the Shares and, at the present time, is able to afford a complete loss with respect to such ownership.
(e) Access to Information . The Subscriber acknowledges that it has access to and has reviewed the Companys disclosures about its Common Stock made in its filings with the SEC including the Companys Annual Report on Form 10-K for its latest fiscal year, the Companys Quarterly Report on Form 10-Q for its latest fiscal quarter, and any Current Report on Form 8-K filed by the Company since the date of such Quarterly Report on Form 10-Q and has access to information about the Company and its subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects contained in the Companys public filings with the SEC, and acknowledges that such information is sufficient to enable it to evaluate its investment.
(f) No Reliance . In connection with its acceptance of the Shares, the Subscriber has not relied upon any representations made by, or other information (whether oral or written) furnished by or on behalf of, the Company other than as set forth in this Agreement, the Master Agreement or any Ancillary Agreements (as defined in the Master Agreement).
(g) No General Solicitation . The Subscriber acknowledges that the Shares were offered and will be issued to the Subscriber without any general solicitation or general advertising, including, but not limited to, any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
(h) No Advice Provided . The Subscriber understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Subscriber in connection with the issuance of the Shares constitutes legal, tax or investment advice. The Subscriber has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its receipt of the Shares.
(i) Authorization; Enforceability . This Agreement has been duly and validly authorized by the Subscriber. This Agreement has been duly executed and delivered on behalf of the Subscriber, and constitutes the valid and binding agreement of the Subscriber enforceable in accordance with their terms, subject, in each case, to applicable bankruptcy, insolvency, reorganization or similar laws affecting generally the enforcement of creditors rights and subject
Exh. 1.01(g-1)-4
to a courts discretionary authority with respect to the granting of specific performance or other equitable remedies.
(j) No Conflicts . The execution and performance of this Agreement does not conflict with any agreement to which the Subscriber is a party or is bound thereby, any court order or judgment addressed to the Subscriber, or the constituent documents of the Subscriber.
4. TRANSFER RESTRICTIONS
(a) Restrictions . The Subscriber recognizes and agrees that (i) the Shares will be subject to a Holding Period (as defined in the Registration Rights Agreement) and other restrictions on transferability pursuant to this Agreement and the Registration Rights Agreement and (ii) as a result of the foregoing, the marketability of the Shares will be severely limited. The Subscriber agrees that it will not Transfer (as such term is defined in the Registration Rights Agreement) the Shares in any manner that will violate such restrictions under this Agreement, the Registration Rights Agreement, the Securities Act or any state securities laws, the rules and regulations of the SEC or any other state or municipality having jurisdiction thereof.
(b) Legends . The Subscriber understands and agrees that the Shares will bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against the transfer of the certificates for the Shares):
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND WITHOUT A VIEW TO DISTRIBUTION AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE ACT ), OR UNDER STATE SECURITIES LAWS. NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION THEREIN MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS AND, IN THE CASE OF CLAUSE (B), IF REQUESTED BY THE ISSUER, UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. THIS SECURITY IS ALSO SUBJECT TO SIGNIFICANT RESTRICTIONS ON TRANSFER (WHICH INCLUDES A RIGHT OF FIRST OFFER) PURSUANT TO THE TERMS OF A REGISTRATION RIGHTS AGREEMENT AMONG THE ISSUER, THE HOLDER AND SYNCORA GUARANTEE INC. (FORMERLY KNOWN AS XL CAPITAL ASSURANCE INC.) DATED AUGUST 5, 2008 AND MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH AGREEMENT.
5. MISCELLANEOUS
(a) Headings . The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof.
Exh. 1.01(g-1)-5
(b) Notices . All communications under this Agreement shall be in writing and shall be delivered by hand or facsimile or mailed by overnight courier or by registered mail or certified mail, postage prepaid:
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(i) if to the Company, XL Capital Ltd, One Bermudiana Road, Hamilton HM 11, Bermuda, Attention: General Counsel, Fax: 441-295-2840 or at such other address or facsimile number as may have been furnished in writing. |
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(ii) if to the Subscriber, c/o Syncora Guarantee Inc., 1221 Avenue of the Americas, New York, New York 10020-1001, Fax: 212-478-3579; Attention: Susan Comparato, General Counsel; or at such other address or facsimile number as may have been furnished in writing. |
Any notice so addressed shall be deemed to be given: if delivered by hand or facsimile, on the date of such delivery, if a business day and delivered during regular business hours, otherwise the first business day thereafter; if mailed by courier, on the first business day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing.
(c) Survival . All representations, warranties and covenants made by the Subscriber and the Company herein shall be considered to have been relied upon by the Company or the Subscriber, as the case may be, and shall survive all deliveries to you of the Shares, or regardless of any investigation made by the Company or the Subscriber, as the case may be, or on the Companys or the Subscribers behalf.
(d) Assignment; No Third Party Beneficiaries . This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. It is understood that the Subscriber may assign this Agreement or any of their rights or obligations hereunder to any affiliate, provided , however , that any assignment of the obligations under this Agreement shall not release the assignor from any of its obligations under this Agreement. Nothing in this Agreement shall confer upon any person not a party to this Agreement any rights or remedies of any nature or kind whatsoever under or by reason of this Agreement.
(e) Entire Agreement . This Agreement, the Master Agreement and the Registration Rights Agreement constitute the entire understandings of the parties hereto and supersede all prior agreements or understandings with respect to the subject matter hereof among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of each of the parties hereto.
(f) Severability . In the event that any part or parts of this Agreement shall be held illegal or unenforceable by any court or administrative body of competent jurisdiction, such determination shall not effect the remaining provisions of this Agreement which shall remain in full force and effect.
(g) Counterparts . This Agreement may be executed in any number of counterparts (including by facsimile), each of which shall be deemed an original and all of which together shall be considered one and the same agreement.
Exh. 1.01(g-1)-6
(h) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State.
(i) Jurisdiction . The parties to this Agreement irrevocably submit to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement. To the fullest extent permitted by applicable law, the parties to this Agreement irrevocably waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(j) Specific Performance . The Company and the Subscriber hereby declare that it is impossible to measure in money the damages which will accrue to the parties hereto by reason of the failure of any party hereto to perform any of its obligations set forth in this Agreement. Therefore, the Company and the Subscriber shall have the right to specific performance of such obligations, and if any party hereto shall institute any action or proceeding to enforce the provisions hereof, the Company and the Subscriber hereby waive the claim or defense that the party instituting such action or proceeding has an adequate remedy at law.
[Signature Page to Follow]
Exh. 1.01(g-1)-7
IN WITNESS WHEREOF, the Subscriber and the Company have caused this Agreement to be duly executed as of the date first written above.
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SYNCORA GUARANTEE RE LTD. |
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FORMERLY KNOWN AS |
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XL FINANCIAL ASSURANCE LTD |
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By: |
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Name: |
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Title: |
[SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT]
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Accepted and Agreed |
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as of the date first written above: |
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XL CAPITAL LTD |
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By: |
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Name: |
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[SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT]
Schedule 2(d) Non-Contravention
1. Credit Agreement among XL CAPITAL LTD, X.L. AMERICA, INC., XL INSURANCE (BERMUDA) LTD, XL RE LTD (together with XL, XLA and XLI, the Account Parties ), JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the Administrative Agent ), and the Lenders party thereto, with respect to the Credit Agreement, dated as of June 21, 2007, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Account Parties, the Administrative Agent and the other institutions from time to time party thereto as Lenders.
2. Credit Agreement among XL CAPITAL LTD ( XL ), X.L. AMERICA, INC. ( XLA ), XL INSURANCE (BERMUDA) LTD ( XLI ), XL RE LTD (together with XL, XLA and XLI, the Obligors ), JPMORGAN CHASE BANK, N.A. (as successor to Bear Stearns Corporate Lending Inc.), as administrative agent (in such capacity, the Administrative Agent ) and the Lenders party thereto, with respect to the Credit Agreement, dated as of August 3, 2005, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Obligors, the Administrative Agent and the other institutions from time to time party thereto as Lenders.
3. Credit Agreement among XL CAPITAL LTD ( XL ), X.L. AMERICA, INC. ( XLA ), XL INSURANCE (BERMUDA) LTD ( XLI ), XL RE LTD (together with XL, XLA and XLI, the Account Parties ), JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the Administrative Agent ) and the Lenders party thereto, with respect to the Credit Agreement, dated as of June 22, 2005, (as may be amended, supplemented or otherwise modified from time to time, the Credit Agreement ) entered into among the Account Parties, the Administrative Agent and the other institutions from time to time party thereto as Lenders.
4. Credit Agreement among XL CAPITAL LTD ( XL ) (the Account Party ), the Guarantors (collectively, with the Account Party, the Obligors ), and CITIBANK INTERNATIONAL PLC, as agent and trustee for the Lenders (in such capacity, the Agent ), with respect to the Letter of Credit Facility and Reimbursement Agreement, dated November 14, 2007, (as may be amended, supplemented or otherwise modified from time to time, the Facility Agreement ) entered into among the Obligors, the Agent and the other institutions from time to time party thereto as Lenders.
5. Note purchase agreement dated April 12, 2001 among X.L. America, Inc., XL Capital Ltd, XL Insurance Ltd, XL Re Ltd and each of the purchasers listed therein. Such notes will be defeased on the Closing Date.
EXHIBIT 1.01(g-2)
FORM OF XLCA SUBSCRIPTION AGREEMENT
Exhibit 1.01(g-2)
XL CAPITAL LTD
SUBSCRIPTION AGREEMENT
This SUBSCRIPTION AGREEMENT (this Agreement ), dated as of August 5, 2008, by and between XL Capital Ltd, a Cayman Islands exempted limited company (the Company ), and Syncora Guarantee Inc. (formerly known as XL Capital Assurance Inc.), a New York insurance company (the Subscriber ).
WHEREAS, the Company and the Subscriber are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the Securities Act );
WHEREAS, this Agreement is being entered into for the purpose of setting forth the terms, conditions and agreements between the Company and the Subscriber in connection with the Companys issuance to the Subscriber of 5,776,621 shares (the Shares ) of its Class A Ordinary Shares, par value $0.01 per share ( Common Stock ), pursuant to the Master Commutation, Release and Restructuring Agreement dated as of July 28, 2008 among the Company, Security Capital Assurance Ltd, XL Financial Assurance Ltd, XL Capital Assurance Inc. and the other parties thereto (the Master Agreement ); and
WHEREAS, on the Closing Date (as defined below), the parties hereto and Syncora Guarantee Re Ltd. (formerly known as XL Financial Assurance Ltd) will execute and deliver a Registration Rights Agreement (the Registration Rights Agreement ), substantially in the form attached hereto as Exhibit A , pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and intending to be legally bound, the Company and the Subscriber hereby agree as follows:
1. SUBSCRIPTION FOR SHARES; CLOSING .
(a) Subject to the terms and conditions herein and in reliance upon the respective representations, warranties and covenants contained herein, the Subscriber hereby subscribes for the Shares and the Company hereby agrees to issue the Shares as consideration for the Subscriber and certain of its affiliates entering into the Master Agreement and related transactions contemplated thereby, as set forth therein.
(b) The issuance of the Shares shall be effected on the Closing Date (defined below) by the Company executing and delivering to the Subscriber, duly registered in its name, a duly executed stock certificate evidencing the Shares being purchased by it. The closing of the purchase and sale of the Shares pursuant to this Section 1(b) will take place at the time and location set forth for the closing in Section 2.07 of the Master Agreement or at such other time
Exh. 1.01(g-2)-1
and location as the Company and the Subscriber shall otherwise mutually agree (the Closing Date ).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .
The Company represents and warrants, as of the date hereof and as of the Closing Date, that:
(a) Incorporation and Good Standing . The Company is duly organized, validly existing and in good standing under the laws of the Cayman Islands and has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted.
(b) Authorization . The board of directors of the Company (the Board ) has authorized the execution, delivery and performance of this Agreement and the transactions contemplated hereby and the Company has the requisite power, authority and legal capacity to execute, deliver and perform this Agreement and the transactions contemplated hereby. No other corporate action is necessary to authorize such execution, delivery and performance, and upon such execution and delivery by the Company, this Agreement shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as enforceability may be (i) limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors rights, or (ii) subject to general principles of equity. The Board has authorized the issuance and delivery of the Shares in accordance with this Agreement.
(c) Authorization of Shares . The Shares to be issued and sold by the Company pursuant to this Agreement, when issued and paid for in accordance with the provisions hereof, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock free and clear of all liens and the issuance of the Shares will not be subject to any preemptive or similar rights.
(d) Non-Contravention . Except as set forth on Schedule 2(d) and except with respect to any filings made in connection with exemptions from registration under state or federal securities laws, the creation, authorization, issuance, offer and sale of the Shares do not require any consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company or the vote, consent or approval in any manner of the holders of any security of the Company as a condition to the execution and delivery of this Agreement or the creation, authorization, issuance, offer and sale of the Shares. Except as set forth on Schedule 2(d), the execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder will not violate (i) the terms and conditions of the Memorandum and Articles of Association of the Company, or any material agreement to which the Company is a party or by which it is bound or (ii) subject to the accuracy of the Subscribers representations and warranties contained in Section 3 hereof, any federal or state securities law.
(e) No General Solicitation . The Company has not engaged in a general solicitation of the public for sale of the Shares in violation of the Securities Act, and the offering and sale of the Shares are exempt from registration under the Securities Act.
Exh. 1.01(g-2)-2
(f) Capitalization . As of December 31, 2007, the Company had the authorized capitalization as set forth in the Companys Annual Report on Form 10-K for its most recent fiscal year, and all of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, and were issued in compliance with federal and state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. All of the Companys options, warrants and other rights to purchase or exchange any securities for shares of the Companys capital stock have been duly authorized and validly issued and were issued in compliance with federal and state securities laws. The Company has not, in the twelve months preceding the date hereof, received notice (written or oral) from the NYSE to the effect that the Company is not in compliance with its listing or maintenance requirements.
(g) No Integration . There has been no sale, offer for sale, solicitation of an offer to buy or negotiation by the Company or any of its subsidiaries in respect of any security that would be integrated with the Shares issued pursuant to this Agreement in a manner that would require the registration of the Shares under the Securities Act.
(h) Listing . The Common Stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 and prior to the Closing Date, the Shares will be approved for listing on the NYSE, subject to official notice of issuance.
(i) No Registration . Assuming the accuracy of the representations and warranties of the Subscriber contained in Section 3 and its compliance with the agreements set forth herein, it is not necessary, in connection with the issuance and sale of the Shares to the Subscriber in the manner contemplated by this Agreement, to register the Shares under the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER .
The Subscriber represents and warrants, as of the date hereof and as of the Closing Date, that:
(a) Investment Purpose . The Subscriber is obtaining the Shares for investment purposes only and not with a view to or for distributing or reselling such Shares or any part thereof, without prejudice, however, to the Subscribers right, subject to the provisions of this Agreement (including, without limitation, Section 5 ), to sell or otherwise dispose of all or any part of the Shares pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities or blue sky laws. The Subscriber understands that it may bear the economic risk of this investment indefinitely.
(b) Institutional Accredited Investor Status . The Subscriber was at the time it was first offered the Shares, and at the date hereof is, an institutional accredited investor as defined in Rule 501(a) under the Securities Act.
(c) Reliance on Exemptions . The Subscriber understands that the Shares are being offered and issued to it in reliance upon specific exemptions from the registration
Exh. 1.01(g-2)-3
requirements of United States federal and state securities or blue sky laws, including Section 4(2) of the Securities Act and that the Company is relying upon the truth and accuracy of, and the Subscribers compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of the Subscriber to acquire the Shares.
(d) Knowledge . The Subscriber has, either alone or together with its representatives, such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the ownership of the Shares, and has so evaluated the merits and risks of such investment. The Subscriber understands that ownership of the Shares involves a high degree of risk, is able to bear the economic risk of ownership of the Shares and, at the present time, is able to afford a complete loss with respect to such ownership.
(e) Access to Information . The Subscriber acknowledges that it has access to and has reviewed the Companys disclosures about its Common Stock made in its filings with the SEC including the Companys Annual Report on Form 10-K for its latest fiscal year, the Companys Quarterly Report on Form 10-Q for its latest fiscal quarter, and any Current Report on Form 8-K filed by the Company since the date of such Quarterly Report on Form 10-Q and has access to information about the Company and its subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects contained in the Companys public filings with the SEC, and acknowledges that such information is sufficient to enable it to evaluate its investment.
(f) No Reliance . In connection with its acceptance of the Shares, the Subscriber has not relied upon any representations made by, or other information (whether oral or written) furnished by or on behalf of, the Company other than as set forth in this Agreement, the Master Agreement or any Ancillary Agreements (as defined in the Master Agreement).
(g) No General Solicitation . The Subscriber acknowledges that the Shares were offered and will be issued to the Subscriber without any general solicitation or general advertising, including, but not limited to, any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
(h) No Advice Provided . The Subscriber understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Subscriber in connection with the issuance of the Shares constitutes legal, tax or investment advice. The Subscriber has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its receipt of the Shares.
(i) Authorization; Enforceability . This Agreement has been duly and validly authorized by the Subscriber. This Agreement has been duly executed and delivered on behalf of the Subscriber, and constitutes the valid and binding agreement of the Subscriber enforceable in accordance with their terms, subject, in each case, to applicable bankruptcy, insolvency, reorganization or similar laws affecting generally the enforcement of creditors rights and subject
Exh. 1.01(g-2)-4
to a courts discretionary authority with respect to the granting of specific performance or other equitable remedies.
(j) No Conflicts . The execution and performance of this Agreement does not conflict with any agreement to which the Subscriber is a party or is bound thereby, any court order or judgment addressed to the Subscriber, or the constituent documents of the Subscriber.
4. TRANSFER RESTRICTIONS
(a) Restrictions . The Subscriber recognizes and agrees that (i) the Shares will be subject to a Holding Period (as defined in the Registration Rights Agreement) and other restrictions on transferability pursuant to this Agreement and the Registration Rights Agreement and (ii) as a result of the foregoing, the marketability of the Shares will be severely limited. The Subscriber agrees that it will not Transfer (as such term is defined in the Registration Rights Agreement) the Shares in any manner that will violate such restrictions under this Agreement, the Registration Rights Agreement, the Securities Act or any state securities laws, the rules and regulations of the SEC or any other state or municipality having jurisdiction thereof.
(b) Legends . The Subscriber understands and agrees that the Shares will bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against the transfer of the certificates for the Shares).
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND WITHOUT A VIEW TO DISTRIBUTION AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE ACT ), OR UNDER STATE SECURITIES LAWS. NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION THEREIN MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS AND, IN THE CASE OF CLAUSE (B), IF REQUESTED BY THE ISSUER, UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. THIS SECURITY IS ALSO SUBJECT TO SIGNIFICANT RESTRICTIONS ON TRANSFER (WHICH INCLUDES A RIGHT OF FIRST OFFER) PURSUANT TO THE TERMS OF A REGISTRATION RIGHTS AGREEMENT AMONG THE ISSUER, THE HOLDER AND SYNCORA GUARANTEE RE LTD. (FORMERLY KNOWN AS XL FINANCIAL ASSURANCE LTD) DATED AUGUST 5, 2008 AND MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH AGREEMENT.
5. MISCELLANEOUS
(a) Headings . The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof.
Exh. 1.01(g-2)-5
(b) Notices . All communications under this Agreement shall be in writing and shall be delivered by hand or facsimile or mailed by overnight courier or by registered mail or certified mail, postage prepaid:
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