-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IkKMGaqRzIsrn5jKcIAA6oljGKqsWWbI3tl38OdjsH0gP6CNHl6+1r3smt+OYSeg nyRh2AWfxcdcIokbi8Qs7g== 0000912057-00-014665.txt : 20000331 0000912057-00-014665.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014665 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 980058718 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10804 FILM NUMBER: 584835 BUSINESS ADDRESS: STREET 1: CUMBERLAND HOUSE STREET 2: 1 VICTORIA ST CITY: HAMILTON HM11 BERMUD STATE: D2 BUSINESS PHONE: 4412928515 MAIL ADDRESS: STREET 1: CAHILL GORDON & REINDEL(IMMANUEL KOHN) STREET 2: 80 PINE STREET CITY: NEW YORKI STATE: NY ZIP: 10005 FORMER COMPANY: FORMER CONFORMED NAME: EXEL LTD DATE OF NAME CHANGE: 19950720 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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 incorporation or organization) Identification No.) CUMBERLAND HOUSE, 1 VICTORIA STREET, HM 11 HAMILTON, BERMUDA (Zip Code) (Address of principal executive offices)
(441) 292-8515 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Class A Ordinary Shares, Par New York Stock Exchange, Inc. Value $0.01 per Share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on March 17, 2000 was approximately $6.5 billion computed upon the basis of the closing sales price of the Ordinary Shares on that date. For purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of March 17, 2000 there were outstanding 121,350,631 Class A Ordinary Shares, $0.01 par value per share, and 3,115,873 Class B Ordinary Shares, $ 0.01 par value per share, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A RELATING TO THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 12, 2000 IS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. XL CAPITAL LTD TABLE OF CONTENTS
Page PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 14 Item 3. Legal Proceedings........................................... 14 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 17 Item 6. Selected Financial Data..................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 19 Item 8. Financial Statements and Supplementary Data................. 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................... 73 PART III Item 10. Directors and Executive Officers of the Registrant.......... 74 Item 11. Executive Compensation...................................... 74 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 74 Item 13. Certain Relationships and Related Transactions.............. 74 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 74
THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. A NON-EXCLUSIVE LIST OF THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS IS SET FORTH HEREIN UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS. PART I ITEM 1. BUSINESS RECENT DEVELOPMENTS On June 18, 1999, XL Capital Ltd (sometimes referred to as the "Company") merged with NAC Re Corp., a Delaware corporation, in a stock merger. Shareholders of NAC received 0.915 Company shares for each NAC share in a tax free exchange. Approximately 16.9 million of the Company's Class A ordinary shares were issued in this transaction. The NAC merger was accounted for as a pooling of interests under U.S. generally accepted accounting principles ("U.S. GAAP"). Accordingly, all prior period information contained in this document includes the results of NAC as though it had always been a part of the Company. Following the merger, the Company changed its fiscal year end from November 30(th) to December 31(st) as a conforming pooling adjustment. Consolidated financial information presented herein is based upon the new fiscal year end for all years presented. HISTORY The Company was incorporated with limited liability under the Cayman Islands Companies Act on March 16, 1998, as EXEL Merger Company. The Company was formed as a result of the merger of EXEL Limited and Mid Ocean Limited on August 7, 1998, and was renamed EXEL Limited on that date. The merger was accounted for as a purchase business combination. EXEL and Mid Ocean are companies that were incorporated in the Cayman Islands in 1986 and 1992, respectively. At class meetings held in August 1998, the shareholders of EXEL and Mid Ocean approved Schemes of Arrangement under Cayman Islands law pursuant to which EXEL and Mid Ocean became wholly-owned subsidiaries of the Company. Following the merger, Mid Ocean's two main operating subsidiaries, a reinsurance company and a Lloyd's managing agency with two dedicated corporate syndicates, were combined with the Company's liability insurance business. At a special general meeting held on February 1, 1999, the shareholders of the Company approved a resolution changing the name of the Company to XL Capital Ltd. The Company, through its subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial, and professional service firms, insurance companies and other enterprises on a worldwide basis. NAC was organized in 1985 and, through its subsidiaries, writes property and casualty insurance and reinsurance in the U.S., Canada and Europe. In 1999, the Company made the following investments: (1) The Company further expanded into the United States by completing the acquisition of both Intercargo Corporation and ECS, Inc. Intercargo is headquartered in Schaumburg, Illinois, and through its subsidiaries, underwrites specialty insurance products for companies engaged in international trade, including U.S. Customs bonds and marine cargo insurance. ECS is an underwriting manager headquartered in Exton, Pennsylvania, which specializes in environmental insurance coverages and risk management services. (2) The Company signed a joint venture agreement with Les Mutuelles du Mans Assurances Group to form a new French reinsurance company, Le Mans Re. The Company owns a 49% shareholding in the new company, which underwrites a worldwide portfolio comprising all classes of non-life reinsurance business together with a selective portfolio of life reinsurance business. (3) The Company made strategic minority investments in two investment management firms, Highfields Capital Management L.P., a global equity investment firm, and MKP Capital Management, a New York-based fixed income investment manager specializing in mortgage-backed securities. 1 In 1998, the Company made the following investments: (1) The Company entered into a joint venture with FSA Holdings Ltd. to write financial guaranty insurance and reinsurance. Under the terms of the joint venture, each of the Company and FSA formed a Bermuda insurance company in which it is the majority shareholder and made a minority investment in the company formed by its co-venturer. (2) The Company formed Reeve Court Insurance Ltd., a Bermuda company organized as a joint venture with that company's management for the purpose of providing life insurance to high net worth individuals. (3) The Company formed two companies now known as XL Insurance Company of New York and XL Capital Assurance. XL Insurance Company of New York is a property and casualty insurance company, and XL Capital Assurance is a financial guaranty insurance company. In 1997, the Company made the following investments: (1) The Company acquired GCR Holdings Limited, whose reinsurance subsidiary was amalgamated with the Company's reinsurance operations. (2) The Company acquired a 75% holding in Latin America Re, a Bermuda reinsurance company. (3) The Company formed Sovereign Risk Insurance, a Bermuda-based managing general agency, as a joint venture to write political risk insurance on a subscription basis on behalf of its shareholders. In 1996, the Company acquired 30% of Pareto Partners, a firm which specializes in foreign currency management and related services. OPERATIONS The Company is organized into four underwriting segments - insurance, reinsurance, Lloyd's Syndicates and financial services - and a corporate segment, which includes the investment operations of the Company. The descriptions of policies and coverages which follow are summary in nature. Only the terms and conditions of individual policies or contracts have legal effect, and nothing in this report constitutes an admission of coverage or other liability or interpretation of any particular policy provision. INSURANCE OPERATIONS The Company provides both excess and primary insurance globally through the following subsidiaries: XL Insurance, XL Europe, XL Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS and Intercargo. The Company provides third party general liability insurance, directors and officers liability insurance, professional liability insurance, employment practices liability insurance and integrated liability insurance, property insurance and other insurance covers including political risk insurance. The liability insurance is written on an excess basis and the loss experience is characterized as low frequency and high severity. The Company generally requires that disputes arising under the policies be settled by arbitration in London. General liability coverage is typically provided on an occurrence-reported policy form, with up to a maximum limit of $200 million per occurrence and in the annual aggregate. Policies typically cover occurrences causing unexpected and unintended personal injury, or property damage to third parties arising from events or conditions which commence at or subsequent to an inception date - or retroactive date, if applicable, but not prior to January 1, 1986 - and prior to the expiration of the policy, provided proper notice is given during the term of the policy or the discovery period. Traditional occurrence coverage is also available for restricted classes of risk and is generally written on a follow-form basis, i.e. the policy generally adopts the terms, conditions and exclusions of the underlying policy, currently up to a maximum of $50 million per occurrence in excess of a minimum attachment point of $25 million. 2 Directors and Officers coverage is written on a follow-form claims-made basis providing up to a maximum limit of $75 million on both a primary and excess basis. Professional liability risks are also generally written on a follow-form basis. Coverage is provided for certain categories of risk up to a maximum of $50 million with a minimum attachment of $20 million. Employment practices liability risks are written on a claims-made and reported policy. The policy covers claims brought by an employee against an insured for certain employment practices, up to a maximum of $100 million annual aggregate limit in excess of a minimum attachment point of $0.5 million. Property insurance risks are written on a follow-form basis, which usually provides coverage for all risks of physical damage and business interruption up to a maximum limit of $100 million per occurrence, with a sub-limit of up to $25 million for coverage in critical earthquake zones. Property insurance is written on both a pro rata and excess basis. Policies written on a pro rata basis can have losses attaching at lower levels, resulting in loss experiences that can be higher frequency and lower severity. The Company offers multi-year combined line coverages for traditional casualty coverages including general, directors and officers liability, professional liability and property coverage, in addition to a blended finite coverage for risks which traditionally have been difficult to place through pure risk transfer mechanisms. Primary program insurance risks written include specialty insurance such as auto warranty business, environmental insurance, U.S. Customs bonds and marine cargo insurance. REINSURANCE OPERATIONS The Company, through NAC Re and XL Mid Ocean Re, provides a broad range of property and casualty reinsurance products on a global basis. Business is written on both a proportional and excess of loss basis. The Company's casualty reinsurance is provided on a treaty and facultative basis and includes general liability, professional liability, automobile and workers' compensation, and commercial and personal property risks and specialty risks, including fidelity and surety and ocean marine. Business is written on an excess of loss basis, under which the Company indemnifies an insurer for a portion of the losses on insurance policies in excess of a specified loss amount, generally $1 million or more, and up to an amount per loss specified in the contract. It is also written on a pro rata basis under which the Company assumes from the primary insurer a percentage of loss specified in the treaty of each risk in the reinsured class. The Company's property business is primarily short-tail in nature and includes 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. A significant portion of business underwritten consists of large aggregate exposures to man-made and natural disasters, and generally, loss experience is characterized as low frequency and high severity. This may result in volatility in the Company's financial results. The Company endeavors to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requiring that its property catastrophe contracts provide for aggregate limits and varying attachment points. The Company's property catastrophe reinsurance account is generally "all risk" in nature. It is therefore exposed to losses from sources as diverse as windstorms, earthquakes, freezes, riots, floods, industrial explosions, fires or any number of other potential disasters. In accordance with market practice, the Company's policies generally exclude certain risks such as war, nuclear contamination or radiation. The Company's predominant exposure under such coverage is to property damage. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expenses from a single occurrence of a covered peril exceed the attachment point specified in the policy. Some of the Company's property catastrophe contracts limit coverage to one occurrence in any one policy year, but most contracts generally provide for one reinstatement. The Company also writes property risk excess of loss reinsurance. Risk excess of loss reinsurance responds to a loss of the reinsured on a single "risk" of the type reinsured rather than to aggregate losses for all covered risks as does catastrophe reinsurance. 3 The Company's property pro rata account includes proportional reinsurance of direct property insurance. The Company considers this business to be related to its catastrophe and other property exposures. In proportional reinsurance, the Company assumes a specified proportion of the risk on the specified coverage and receives an equal proportion of the premium. The ceding insurer receives a commission, based upon the premiums ceded to the Company, and the ceding insurer may also be entitled to receive a profit commission based upon the ratio of losses, loss adjustment expense and the Company's expenses to premium ceded. The Company is dependent upon the ceding insurer's underwriting, pricing and claims administration to yield an underwriting profit. In some instances, the Company may be entitled to the benefit of other reinsurance, known as common account reinsurance, purchased by the ceding company on an account reinsured by the Company on a proportional basis. The aviation portfolio is written on both a proportional and excess of loss basis. The exposures are mainly derived through proportional relationships on defined segments of account following market leaders in the field. Due to the highly technical nature of the satellite business, the exposures retained under this portfolio are acquired mostly through proportional reinsurances of specialist underwriters. Other reinsurance written by the Company includes political risk, nuclear accident, professional indemnity and life and annuity. LLOYD'S OPERATIONS The Company's Lloyd's operations are conducted by Brockbank and Denham. Brockbank operates through two subsidiaries, which are Lloyd's managing general agencies, Brockbank Syndicate Management and Brockbank Personal Lines. These Brockbank subsidiaries manage five syndicates, two of which are dedicated corporate syndicates whose capital is provided solely by the Company. During 1999, these dedicated corporate syndicates (syndicates 1209 and 2253) wrote a range of specialty lines, primarily of insurance but also reinsurance, in parallel with the other syndicates managed by Brockbank (syndicates 588, 861 and 253). Effective January 1, 2000, motor business is no longer written. Denham is a Lloyd's managing agency which manages one Lloyd's syndicate (syndicate 990), whose capital is partially provided by the Company and which writes casualty and non-marine physical damage insurance. As managing agencies, Brockbank and Denham receive fees and commissions in respect of the underwriting services they provide to syndicates. Corporate syndicate 1209 writes a wide range of classes across the property, casualty and marine, aviation and transport sectors to a globally diverse group of clients. Coverages range from global "all risks" programs for multinationals to tailored facilities for agents with small and medium sized businesses, with particular emphasis on North America and Europe. The syndicate's specie account includes fine art, cash in transit, financial institutions and jewelry. The syndicate's accident and health account is worldwide and comprises personal accident insurance and reinsurance, medical expenses and kidnap and ransom. The professional indemnity account includes professional and directors and officers liability and fidelity, with particular emphasis in the service sectors (financial institutions, lawyers, information technology, architects and engineers) in North America. Other business written by the Company's Lloyd's operations includes the bloodstock account and contingency coverages. Through the marine, hull and machinery account, syndicate 1209 has a significant involvement with many of the world's largest fleets. The syndicate's energy account comprises cover for all elements of the worldwide hydrocarbon industry. The syndicate writes a space account and is involved at every stage of major space launches and associated pre-launch operations. The marine liability account embraces all the major types of cover available, including pollution insurance, financiers' exposures and certificates of financial responsibility reinsurance, as well as the more traditional liability cover, such as charterers' liabilities. The syndicate writes a broad international cargo account, specializing in the technology sector and in large plant and project equipment. The syndicate also writes war and political risk cover for ships and aircraft, and also covers most political risks, including expropriation, confiscation, terrorism and trade disruption. Syndicate 1209's treaty reinsurance account provides high excess or catastrophe cover predominantly for direct insurers. This account is diverse and consists of protections for companies ranging from the large worldwide multi-line insurers to the small domestic industrial mutual insurers. Excess of loss coverage is provided for most lines of insurance. Syndicate 1209 also writes a book of non-proportional treaty reinsurance business. 4 Until December 1999, syndicate 2253 wrote an account of direct and broker based motor insurance in the United Kingdom, an account which was also written by syndicate 1209. This business was offered through two distribution channels: Admiral Insurance, a direct response motor operation, and Zenith Insurance, which offered motor insurance through a network of retail brokers. Admiral concentrated on the private car market. Zenith operated across a broader range of activities, covering areas such as taxis, motorcycles, agricultural vehicles and commercial fleets, as well as private cars. In December 1999, Brockbank sold Admiral and Zenith. The Company expects decreases in premiums, fee income and certain costs as a result of the sale, however it does not expect the overall profitability of its Lloyd's operations to be significantly affected by such sales. FINANCIAL SERVICES The Company, through XL Capital Products, provides credit enhancement coverages in the form of financial guaranty insurance and reinsurance and credit default swaps on asset-backed, municipal and select corporate risk obligations. Financial guaranty insurance generally guarantees payments of interest and principal on an issuer's obligations when due. Credit default swaps provide coverage for losses upon the occurrence of specified credit events set forth therein. The Company's underwriting policy is to credit enhance obligations and exposures that would otherwise be lower investment grades without the benefit of the Company's enhancement, although on an exception basis, the Company will consider underwriting high non-investment grade risks. Asset-backed obligations insured or reinsured by the Company are generally issued in structured transactions backed by pools of assets of specified types, such as residential mortgages, auto loans and other consumer receivables, equipment leases and corporate debt obligations, having an ascertainable cash flow or market value. Municipal obligations insured or reinsured consist mainly of general or special obligations of state and local governments, supported by the issuer's ability to charge fees for specified services or projects. Corporate risk-based obligations which the Company has underwritten include essential infrastructure projects and obligations backed by receivables from the future sales of commodities and other specified services. Obligations guaranteed or enhanced by the Company range in duration from a few years to 15 or more years, and premiums are either received on an installment basis or up front. The Company has adopted written underwriting guidelines for the various products and asset classes comprising the credit enhancement business, which include single and aggregate risk limitations on specified exposures. A credit committee including Bermuda-based executive officers of the Company provides final underwriting approval for each transaction. Par insured and notional amounts covered under the Company's guarantees and credit default swaps may be up to $500 million or more for certain risks, and the underlying risks include those of the Organization for Economic Cooperation and Development and emerging market issuers and assets. The Company has also underwritten two transactions whereby substantial loss reserves were assumed. In addition to the underwriting risks assumed, the Company also has embedded exposure in these transactions to investment performance return and ceded reserves. These transactions are actuarially expected to be of long duration. PREMIUMS See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 3 in the Notes to the Consolidated Financial Statements. REINSURANCE CEDED In many cases, the risks assumed by the Company are reinsured with other reinsurers. The benefits of ceding risks to other reinsurers include reducing exposure on individual risks, protecting against catastrophic risks and maintaining acceptable capital ratios. Reinsurance ceded does not legally discharge the Company from its liabilities in respect of the risk being reinsured. The following is a discussion of the types of reinsurance ceded by the Company. 5 INSURANCE OPERATIONS The Company purchases a quota share and an excess of loss reinsurance treaty to protect the general liability occurrence-notified business written. Under the terms of the current quota share treaty, the Company cedes 20% of each risk subject to a per risk maximum of $30 million. The aggregate maximum amount recoverable under this treaty is 300% of the total premium ceded. Effective April 1, 1999, the business covered by the treaty was extended to include employment practices liability business. The treaty is placed with eight reinsurers and no single reinsurer participates in excess of 20% of the program. All reinsurers are rated by A.M. Best as A or better and all reinsurers, except for one, are rated by S&P as BBB or better. The most significant reinsurers on this program are Hannover Re, St. Paul Re and Cigna. These companies are rated AA+, AA and BBB, respectively, by S&P, and have participations of 20%, 20% and 15%, respectively, on a reinsurance balance receivable and unpaid losses recoverable balance of $192 million as of December 31, 1999. Under the terms of the excess of loss reinsurance treaty, the Company is reinsured for $112.5 million excess of various per risk, aggregate and quota-share retentions. The maximum amount recoverable under this treaty is $250 million. The treaty is placed with eighteen reinsurers including four Lloyd's syndicates. No single reinsurer participates in excess of 20% of the program. All reinsurers are rated by S&P as A or better, and all reinsurers, except for one, are rated by A.M. Best as A or better. The most significant reinsurers on this program are American Re, ERC Frankona and PMA Re. These companies are rated AAA, AAA and A, respectively, by S&P, and have participations of 20%, 12.5% and 10%, respectively, on a reinsurance balance receivable and unpaid losses recoverable balance of $38 million as of December 31, 1999. The Company also purchases a variable surplus treaty to protect the property business written. Under the terms of the current treaty, the Company can cede a maximum of 50% of each risk subject to a per risk maximum of $25 million. The maximum amount recoverable under this treaty is $50 million. The treaty is placed with eight reinsurers and no single reinsurer participates in excess of 20% of the program. All reinsurers are rated by A.M. Best as A or better and by S&P as A- or better. The most significant reinsurers on this program are ERC Frankona, PMA Re and St. Paul Re. These companies are rated AAA, A and AA, respectively, by S&P, and have participations of 20%, 16% and 15%, respectively, on a reinsurance balance receivable and unpaid losses recoverable balance of $13 million as of December 31, 1999. The Company also purchases a quota share reinsurance treaty to protect the general liability occurrence business. At December 31, 1999, there were no losses under this treaty. REINSURANCE OPERATIONS Traditionally, the Company has purchased limited retrocession reinsurance on its property business with covers primarily originating from common account reinsurance on assumed business. Specific excess of loss protection is purchased for the London and Singapore branch operations, and a corporate multi-year program is purchased for its global property exposures. This protection gives total limits in various layers and excess of varying attachment points according to territorial exposure. The Company has co-reinsurance retentions within this program. In August 1998, the Company placed $200 million of retrocessional property catastrophe cover in a combination reinsurance and capital market swap transaction which covered hurricane and earthquake exposure in the U.S. and its territories and in the Caribbean. This cover was not renewed in 1999 and was replaced by a second event cover of $300 million excess of a retention of $500 million. The Company's casualty reinsurance program in 1999 covers multiple claims arising from two or more risks in a single occurrence or event. Workers' compensation business is reinsured at $195 million in excess of $5 million retention for any one occurrence. An additional casualty contingency cover is purchased for a total of $32 million excess of an initial retention of $5 million, which gradually increases up to an additional $3 million should gross losses exceed $30 million. In addition, the Company had coverage in 1999, 1998 and 1997 in the event that the accident year loss and loss expense ratio exceeded a pre-determined amount. At December 31, 1999, the Company had a reinsurance balance receivable and unpaid loss recoverable of $117 million due from Hannover Re (Ireland) Ltd, which is rated A+ by A.M. Best. 6 The Company had an intercompany stop loss agreement in place in 1999 under which a subsidiary in the reinsurance segment was covered by a subsidiary in the insurance segment for losses exceeding a specified loss ratio up to $100 million. The purpose of this agreement is to efficiently manage statutory surplus levels across the Company. The 1998 casualty reinsurance program was similar to that of 1999. Workers' compensation business is reinsured for $195 million in excess of $5 million retention for any one occurrence. An additional casualty contingency cover is purchased for a total of $25 million excess of an initial retention of $5 million. The Company's 1997 casualty reinsurance program was substantially similar to the 1998 program. The Company terminated two retrocessional programs effective January 1, 1997. Termination of these programs has resulted in an increase in net retention levels for the years 1996 and prior. As the casualty book of business matures, the increase in net retentions for these years may result in increased volatility in future years to the extent the actual frequency and severity of claims differs from management's current estimates. The Company believes its exposure to such volatility is within acceptable levels. LLOYD'S OPERATIONS The Company's Lloyd's operations have historically purchased reinsurance to protect the syndicates against extraordinary loss or loss involving one or more underwriting classes. The amount purchased is determined with reference to the syndicates' aggregate exposure and potential loss scenarios. COMPETITION The worldwide property and casualty insurance and reinsurance industry is highly competitive. The markets for the Company's insurance and reinsurance products are characterized by strong and, at times, intense price competition driven largely by the substantial amount of excess capacity currently present in the industry. The Company believes that such competitive forces will be present in the industry over the short to medium term. Some of the Company's competitors possess significantly greater financial and other resources than the Company. The Company generally competes on the basis of financial strength, coverage terms, claims paying rating and reputation, price and customer service. See Industry Overview included in the "Management's Discussion of Financial Condition and Results of Operations" for further discussion of current market conditions. UNDERWRITING AND MARKETING UNDERWRITING The insurance subsidiaries write liability and property coverage for a wide array of industry groups, including chemical, industrial, pharmaceutical, property owners, landlords and tenants, utilities, auto, consumer, rail, oil and construction with respect to third-party general liability and first-party property; industrial/manufacturing, utilities, chemical/pharmaceutical and financial institutions with respect to directors and officers liability; and lawyers, insurance brokers and insurance companies for professional liability. Although rates are influenced by a number of factors, including competition, the Company's rating methodology seeks to set rates individually for each insured in accordance with claims potential as measured by past experience and future expectations, the attachment point and amount of underlying insurance, the nature and scope of insured operations (including the industry group in which the insured operates), exposures to loss, and other specific risk factors relevant in the judgment of the underwriters and insurance market conditions. Underwriters separately evaluate each industry category and sub-groups within each category and premiums are set and adjusted for an insured based in large part on the industry group in which the insured is placed and the insured's risk relative to the other risks in that group. Each industry group is reviewed annually to take into account outstanding reported losses and new loss incident reports within each group. Rates may vary significantly according to the industry group of the insured as well as within the group. The reinsurance subsidiaries employ an analytical approach to underwriting designed to specify an adequate premium for a given exposure that is intended to be commensurate with the amount of capital they anticipate 7 placing at risk. Underwriting opportunities presented are evaluated based upon a number of factors including: the type and layer of risk to be assumed; actuarial evaluation of premium adequacy; the cedent's underwriting and claims experience; the cedent's financial condition and claims paying rating; exposure; and experience with the cedent and the line of business to be underwritten. In addition, the Company assesses a variety of other factors including: the reputation of the proposed cedent and the likelihood of establishing a long-term relationship with the cedent; the geographic area in which the cedent does business and its market share; a detailed assessment of catastrophe and risk exposures; historical loss data for the cedent and, where available, for the industry as a whole in the relevant regions, in order to compare the cedent's historical catastrophe loss experience to industry averages; and the perceived financial strength of the cedent. On-site underwriting reviews are performed where deemed necessary to determine the quality of a current or prospective cedent's underwriting operation. For the property catastrophe reinsurance business, the Company has developed underwriting guidelines under which it generally limits the amount of exposure it will directly underwrite for any one reinsured and the amount of the aggregate exposure to catastrophic losses in any geographic zone. The Company believes it has defined zones such that a single occurrence, such as an earthquake or hurricane, generally should not affect more than one zone. The definition of the Company's zones is subject to periodic review and change. The Company also generally seeks an attachment point for its property catastrophe reinsurance anticipated to be high enough to produce a low frequency of loss. The Company seeks to limit its aggregate exposure in the retrocessional and pro rata business because it is sometimes difficult to allocate risks associated with such business to specific geographic areas. The Company's Lloyd's operations underwrite a broad range of risks, and the factors taken into consideration in the underwriting process vary between class of business. An actuarial resource is available to underwriters to assist in the review and rating of risks. Underwriters operate within agreed guidelines, which establish maximum gross exposure by business area and geographic region. The daily acceptance of risk is performed by the active underwriter, the class underwriters and individuals with specific delegated authority. Underwriting authority limits are agreed between the active underwriter, the class underwriter and the managing agency's board of directors. Underwriters may delegate underwriting authority on a contractual basis to individuals who are approved and monitored. Brockbank Syndicates also participate on market facilities where underwriting authority is delegated to the lead insurer. For the financial services business, the Company has adopted written underwriting guidelines for the various products and asset classes comprising the credit enhancement business, which include single and aggregate risk limitations on specified exposures. A credit committee including Bermuda-based executive officers of the Company provides final underwriting approval for each transaction. As part of the underwriting process, all of the Company's insurance and reinsurance underwriting operations evaluated potential exposures to claims, losses and defense costs associated with Year 2000-related issues. Such claims, losses and costs, to the extent that they materialize, could have a material adverse affect on the Company's results of operations and financial condition. No significant matters had been notified to the Company as of March 17, 2000. For more information concerning the impact of Year 2000 issues on underwriting results, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Year 2000 Considerations" and " - Cautionary Note regarding Forward-Looking Statements" MARKETING Clients are referred to the Company's subsidiaries through a large number of brokers who receive from the insured or ceding company a brokerage commission usually equal to a percentage of gross premiums. In general, subsidiaries of the Company are not committed to accept business from any particular broker, and brokers do not have the authority to bind any subsidiary of the Company, except in the case where underwriting authority may be delegated to selected administrators. These administrators are subject to a financial and operational review prior to any delegation of authority and ongoing reviews are carried out as necessary. During 1999, 1998 and 1997, approximately 21%, 34% and 35% of the Company's consolidated gross written premiums were generated from or placed by Marsh & McLennan Companies. During 1999, 1998 and 1997, approximately 13%, 19% and 18% of the Company's consolidated gross written premiums were generated from or 8 placed by AON Corporation and its subsidiaries. Concentration in the insurance and reinsurance brokerage industry could have a material adverse effect on the Company's business and results of operations in the future. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-Looking Statements." No other broker accounted for more than 10% of gross premiums written in each of the three years ended December 31, 1999, 1998 and 1997. UNPAID LOSSES AND LOSS EXPENSES Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. Loss reserves are established due to the significant periods of time that may lapse between the occurrence, reporting and payment of a loss. To recognize liabilities for unpaid losses, the Company estimates future amounts needed to pay claims and related expenses with respect to insured events. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and do not represent any admission of liability with respect to any claim made against the Company's subsidiaries. The method of establishing case reserves for reported claims differs between the Company's operations. For the insurance operations, claims personnel determine whether to establish a "case reserve" for the estimated amount of the ultimate settlement, if any. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. A similar process is followed in the reinsurance and Lloyd's operations when the Company is a lead underwriter. Other reinsurance and Lloyd's business case reserves are established based upon reports received from insureds and reinsureds, supplemented by the Company's case reserve estimates. Periodically, adjustments to the case reserves may be made as additional information regarding the claims becomes known or payments are made. Most of the Company's incurred but not reported ("IBNR") loss reserves are derived from casualty business. Casualty business generally has a longer tail than the Company's other lines of business. IBNR is calculated in two steps. First, case reserve development is estimated with the use of the loss development factor method. Second, IBNR is estimated with a frequency and severity approach. Since coverage is usually triggered when a notice is submitted by the insured, IBNR losses exist only when claims with a loss notice develop into the relevant layers of coverage. The method estimates the ultimate number of claims (i.e., frequency) via the Bornhuetter-Ferguson technique. The severity component (average claim size) is developed via a single parameter, pareto loss distribution, adjusted for average attachment points and limits. The Company believes the methods presently adopted provide a reasonably objective result as it is based upon the Company's loss data rather than more theoretical models often used in the low frequency high layer business the Company writes. However, even such actuarially sound methods, when coupled with the nature of the risks written, can lead to subsequent adjustments to reserves that are both significant and irregular. Several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other insurance operations. Among these aspects are the differences in the policy forms from more traditional forms, the lack of complete historical loss data for losses of the same type intended to be covered by the policies, and the expectation that losses in excess of the attachment level of the Company's policies will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that losses and loss expenses will not exceed the total reserves. Claims relating to property catastrophe and property risk excess treaties will generally become known within approximately 18 to 24 months from the date of occurrence. Conversely, claims on the casualty business develop on average 5 to 8 years from the date of occurrence. Claims under a significant number of Lloyd's syndicate policies, with the exception of motor, will generally become known within 36 months of the date of the occurrence. Motor claims not involving personal injury will generally be known and paid within 12 months of the occurrence. 9 Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the accumulation of case reserves, loss expense reserves and IBNR. During the loss settlement period, additional facts regarding individual claims and trends usually will become known. As these become apparent, it often may become necessary to refine and adjust the reserves upward or downward from time to time. The final liability nonetheless may be significantly less than or greater than the prior estimates. The table below presents the development of unpaid loss and loss expense reserves for 1989 through 1999. The top line of the table shows the liability, net of reinsurance recoveries at the balance sheet date for each of the indicated years. This represents the estimated amounts of net loss and loss expenses arising in all prior years that are unpaid at the balance sheet date, including IBNR. The upper portion shows the re-estimated amount of the previously recorded reserve liability based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "Cumulative Redundancy (Deficiency)" line represents the aggregate change in the successive years with respect to that liability. The lower portion of the table reflects the cumulative paid losses relating to these reserves. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the tables below. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-Looking Statements." ANALYSIS OF CONSOLIDATED LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT NET OF REINSURANCE RECOVERIES (In Millions)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------------------------ ESTIMATED LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES, NET OF REINSURANCE RECOVERIES.................. $1,005 $1,268 $1,486 $1,795 $2,057 $2,482 $2,899 $3,166 $3,609 $4,303 $4,537 LIABILITY RE-ESTIMATED AS OF: One year later.............. 1,039 1,269 1,468 1,800 2,089 2,455 2,885 2,843 3,354 4,016 Two years later............. 1,030 1,128 1,388 1,830 2,089 2,383 2,546 2,704 3,038 Three years later........... 935 960 1,299 1,819 2,115 2,190 2,445 2,407 Four years later............ 783 910 1,303 1,891 1,972 2,085 2,214 Five years later............ 755 858 1,384 1,856 1,950 1,927 Six years later............. 775 871 1,384 1,820 1,752 Seven years later........... 789 884 1,392 1,644 Eight years later........... 811 945 1,245 Nine years later............ 867 795 Ten years later............. 724 CUMULATIVE REDUNDANCY (1)...... 281 473 241 151 305 555 685 759 571 287 CUMULATIVE PAID LOSSES, NET OF REINSURANCE RECOVERIES, AS OF: One year later.............. $ 159 $ 223 $ 194 $ 267 $ 256 $ 317 $ 445 $ 234 $ 458 $ 812 Two years later............. 349 307 393 468 521 709 667 576 932 Three years later........... 404 403 499 689 865 921 934 932 Four years later............ 459 456 632 937 1,033 1,110 1,143 Five years later............ 481 486 831 1,102 1,198 1,199 Six years later............. 504 585 924 1,253 1,273 Seven years later........... 598 597 974 1,319 Eight years later........... 598 633 1,020 Nine years later............ 611 662 Ten years later............. 621
(1) See "Management's Discussion and Analysis of Results of Operations and Financial Conditions" for further discussion. 10 The table below presents the claim development of the gross liability for unpaid losses and loss expenses for the years 1992 through 1999: ANALYSIS OF CONSOLIDATED LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT GROSS OF REINSURANCE RECOVERABLES (In Millions)
1992 1993 1994 1995 1996 1997 1998 1999 --------------------------------------------------------------------- ESTIMATED GROSS LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES:.................................. $1,977 $2,269 $2,760 $3,238 $3,623 $3,972 $4,897 $5,369 LIABILITY RE-ESTIMATED AS OF: One year later.................................. 1,996 2,309 2,764 3,244 3,221 3,763 4,735 Two years later................................. 2,037 2,323 2,721 2,872 3,164 3,496 Three years later............................... 2,043 2,373 2,494 2,793 2,902 Four years later................................ 2,134 2,198 2,414 2,572 Five years later................................ 2,067 2,208 2,268 Six years later................................. 2,065 2,022 Seven years later............................... 1,903 CUMULATIVE REDUNDANCY.............................. 74 247 492 666 721 476 162
The following table presents an analysis of paid and unpaid losses and loss expenses and a reconciliation of beginning and ending unpaid losses and loss expenses for the years indicated: RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES (in thousands)
1999 1998 1997 ------------------------------------ Unpaid losses and loss expenses at beginning of year........ $4,896,643 $3,972,376 $3,623,334 Unpaid losses and loss expenses recoverable................. (593,960) (363,716) (457,373) ------------------------------------ Net unpaid losses and loss expenses at beginning of year.... 4,302,683 3,608,660 3,165,961 Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: Current year............................................. 1,591,414 1,085,161 1,056,228 Prior year............................................... (287,110) (243,644) (317,379) ------------------------------------ Total net incurred loss and loss expenses............. 1,304,304 841,517 738,849 Interest incurred on experience reserves.................... - 1,798 866 Exchange rate effects....................................... (5,950) 718 (658) Net loss reserves acquired through purchase of subsidiaries.............................................. 30,003 580,879 34,593 Net loss and loss expenses paid in respect of losses occurring in: Current year............................................. 281,806 272,456 97,296 Prior year............................................... 811,696 458,433 233,655 ------------------------------------ Total net paid losses................................. 1,093,502 730,889 330,951 Net unpaid losses and loss expenses at end of year.......... 4,537,538 4,302,683 3,608,660 Unpaid losses and loss expenses recoverable................. 831,864 593,960 363,716 ------------------------------------ Unpaid losses and loss expenses at end of year.............. $5,369,402 $4,896,643 $3,972,376 ------------------------------------
11 Losses incurred in 1999 grew significantly over 1998 for a number of reasons. The Company acquired Mid Ocean and Brockbank in August 1998 and as a consequence only recognized the effect of their operations for five months in 1998. Incurred losses for these entities were approximately $475 million in 1999 compared to $260 million in 1998. The Company was also affected by a number of catastrophes in 1999 compared to 1998. The fourth quarter of 1999 generated approximately $135 million of catastrophic losses to the Company, of which the European storms in December account for the major part. The Company also experienced a number of smaller catastrophe losses in 1999 that totaled approximately $50 million. These losses included the Turkey earthquakes, the Sydney hailstorms and the Oklahoma tornadoes. By comparison, the Company incurred approximately $60 million in catastrophe losses relating to Hurricane Georges and the SwissAir disaster in 1998. These losses were incurred in the reinsurance operations. The Lloyd's operations experienced loss deterioration on the U.K. motor business written by Brockbank, principally relating to its 1998 and 1999 underwriting years of approximately $20 million. The motor business was sold, realizing a gain of approximately $40 million included in fee and other income in 1999. The Company retains residual liability on this business. 1999 incurred losses also include an increase of reinsurance loss reserves of $95 million for NAC Re when it merged with the Company in June 1999. In addition, the acquisition of Intercargo in June 1999 added approximately $30 million to total incurred losses. The decrease in prior year incurred losses is driven primarily by the Company's insurance liability excess of loss reserves. The basis for establishing IBNR is unlike most insurance companies due to the lack of industry data. Consequently, the Company estimates loss reserves through actuarial models based upon its own experience. When the Company commenced writing this type of business in 1986, limited data was available and the Company made its best estimate of loss reserves at that time. Over time, the amount of data has increased, providing a larger statistical base for estimating reserves. Redundancies in prior year loss reserves have occurred where loss experience has developed more favorably than expected. The increase in paid losses in 1999 and 1998 reflects the acquisition of Mid Ocean and Brockbank in 1998. In addition, the nature of the Company's high excess of loss liability and catastrophe business can result in loss payments that are both irregular and significant. Similarly, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies based upon historical experience. See generally "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-looking Statements". CLAIMS ADMINISTRATION Claims management for the insurance operations includes the review of initial loss reports, creation of claims files, administration of a claims database, generation of appropriate responses to claims reports, identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of claims counsel, establishment of case reserves, payment of claims, and notification to reinsurers. Claims management for the reinsurance operations includes the receipt of loss notifications, the establishment of loss reserves and approval of loss payments. Additionally, claims audits are conducted for both specific claims and overall procedures at the offices of selected ceding companies. Claims in respect of business written by the Lloyd's operations are primarily notified by various central market bureaus. Where a syndicate is a "leading" syndicate on a Lloyd's policy, its underwriters and claims adjusters will deal with the broker or insured on behalf of itself and the following market for any particular claim. This may involve appointing attorneys or loss adjusters. The claims bureaus and the leading syndicate advise movement in loss reserves to all syndicates participating on the risk. A claims department can, at times, adjust the case reserves it records from those advised by the bureaus. 12 INVESTMENTS Management oversees the Company's investment strategy, establishes guidelines for the various external managers and implements investment decisions with the assistance of such managers. The current investment strategy seeks to maximize investment income through a high-quality, diversified portfolio whilst focusing on preserving principal and maintaining liquidity. In this regard, at December 31, 1999, the Company's fixed income investment portfolio includes U.S. and non-U.S. sovereign government obligations, corporate bonds and other securities, 60% of which were rated Aa or AA or better by a nationally recognized rating agency. The Company also maintains a portfolio of equity securities. Under current investment guidelines, up to 30% of the Company's investment portfolio may be invested in equity securities. Insurance laws and regulations impose restrictions on the Company's investments whereby certain types of investments such as unquoted equity securities, investments in affiliates, real estate and collateral loans may not qualify as admitted assets. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at December 31, 1999, 1998 or 1997. For additional information concerning the Company's investments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Investment Operations". The following table reflects investment results for the Company for each of the five years in the period ended December 31, 1999:
NET PRE-TAX PRE-TAX ANNUALIZED AVERAGE INVESTMENT REALIZED EFFECTIVE YEAR ENDED DECEMBER 31 INVESTMENTS (1) INCOME (2) GAINS YIELD - ---------------------- ------------------------------------------------------ (U.S. DOLLARS IN THOUSANDS) 1999................................................ $8,981,833 $525,318 $ 94,356 5.85% 1998................................................ $7,762,931 $417,290 $211,204 5.38% 1997................................................ $6,274,946 $345,115 $410,658 5.50% 1996................................................ $5,813,455 $304,823 $174,593 5.24% 1995................................................ $5,203,710 $288,989 $131,840 5.55%
(1) Average of the beginning and ending amounts of investments and cash and cash equivalents net of pending trades for the period. Investment securities are carried at market value. (2) After investment expenses, excluding realized gains. RATINGS The Company's principal insurance and reinsurance subsidiaries have a claims paying rating of "AA" from S&P and "A+" from A.M. Best Company, Inc. An insurer rated "AA" by S&P has very strong financial security characteristics, differing only slightly from those rated higher. An insurer rated "A+" by A.M. Best has superior financial strength, operating performance and market profile when compared to standards established by A.M. Best, and have a very strong ability to meet their ongoing obligations to policyholders. REGULATION See Note 18 to the Consolidated Financial Statements. TAX MATTERS See Note 17 to the Consolidated Financial Statements. 13 EMPLOYEES At December 31, 1999, the Company and its subsidiaries employed approximately 1,300 employees. None of these employees are represented by a labor union, and the Company believes that its employee relations are excellent. ITEM 2. PROPERTIES The Company rents space for its principal executive offices under leases which expire up to June 2009. Total rent expense for the years ended December 31, 1999, 1998 and 1997 was approximately $13 million, $9 million and $7 million, respectively. In 1997, the Company acquired commercial real estate in Bermuda for the purpose of securing long-term office space to meet its anticipated needs. The Company is in the process of developing this property and constructing its worldwide headquarters. The total cost of this development, including the land, is expected to be approximately $110 million, of which $60 million has been spent through December 31, 1999. It is estimated that the development will be completed sometime in 2001. See Note 11 to the Consolidated Financial Statements for discussion of the Company's lease commitments. ITEM 3. LEGAL PROCEEDINGS The Company, through its subsidiaries, in common with the insurance and reinsurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of December 31, 1999, the Company was not a party to any material litigation or arbitration other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. 14 EXECUTIVE OFFICERS OF THE COMPANY The table below sets forth the names, ages and titles of the persons who were the executive officers of the Company for the year ended December 31, 1999.
NAME AGE POSITION - --------------------------------------------------------------------------------------------------------------- Brian M. O'Hara........................ 51 President, Chief Executive Officer and Director of the Company Robert R. Lusardi...................... 43 Executive Vice President and Chief Financial Officer of the Company Mark E. Brockbank...................... 47 Executive Vice President of the Company and Chief Executive Officer of Brockbank Nicholas M. Brown, Jr.................. 45 Executive Vice President of the Company and President and Chief Executive Officer of XL America K. Bruce Connell....................... 47 Executive Vice President of the Company and President and Chief Executive Officer of XL Capital Products Paul S. Giordano....................... 37 Executive Vice President, General Counsel and Secretary of the Company Christopher V. Greetham................ 55 Executive Vice President and Chief Investment Officer of the Company Henry C. V. Keeling.................... 44 Executive Vice President of the Company and President and Chief Executive Officer of XL Mid Ocean Re Fiona Luck............................. 42 Executive Vice President of the Company, Group Operations Clive R. Tobin......................... 47 Executive Vice President of the Company and President and Chief Executive Officer of XL Insurance
Brian M. O'Hara has been President and Chief Executive Officer of the Company since 1994 and a Director of the Company since 1986, having previously served as Vice Chairman of the Company from 1987. He is Chairman of XL Insurance and XL Mid Ocean Re and was Chief Executive Officer of XL Insurance until 1998, having previously served as Chairman, President and Chief Executive Officer from 1994, President and Chief Executive Officer from 1992, and as President and Chief Operating Officer from 1986. Robert R. Lusardi has been Executive Vice President and Chief Financial Officer of the Company since February 1998. Prior to joining the Company, Mr. Lusardi was Managing Director at Lehman Brothers from 1980 to 1998. Mark E. Brockbank has been Executive Vice President of the Company since August 1998. Mr. Brockbank has been employed at Lloyd's since 1974 when he joined Willis Faber Dumas as a marine broker. He became underwriter of syndicate 861 in 1983. He was appointed a Director of Brockbank Syndicate Management Ltd in 1983 and of The Brockbank Group plc in 1988. Nicholas M. Brown, Jr. has been Executive Vice President of the Company since July 1999. He was President and Chief Executive Officer of NAC Re Corp from January 1999, having previously served as President and Chief Operating Officer of NAC and President and Chief Executive Officer of NAC Re from 1996. Prior to joining NAC, Mr. Brown served as Executive Vice President and Chief Operating Officer of St. Paul Fire and Marine Insurance Company from 1994 to 1996, and as President of St. Paul Specialty from 1993 to 1994. From 1976 though 1993, he served in various positions at Aetna Life and Casualty Companies. K. Bruce Connell has been Executive Vice President of the Company since March 1998 and is President and Chief Executive Officer of XL Capital Products. Mr. Connell previously served as President and Chief Operating 15 Officer of XL Global Re from November 1997 to August 1998, President of XL Global Re since December 1995 and as Senior Vice President of XL Insurance from 1990 to 1995. Paul S. Giordano has been Executive Vice President and General Counsel of the Company since June 1999. Mr. Giordano served as Senior Vice President since January 1997 and was appointed Secretary of the Company on December 31, 1997. Mr. Giordano was associated with Cleary, Gottlieb, Steen and Hamilton and Clifford Chance in New York and London prior to joining the Company. Christopher V. Greetham has been Executive Vice President of the Company since December 1998 and has served as Chief Investment Officer of the Company since 1996. Prior to joining the Company, Mr. Greetham served as Senior Vice President and Chief Financial Officer of OIL Insurance Ltd from 1982 to 1996 and as Vice President of Bankers Trust Company from 1975 to 1982. Henry C.V. Keeling has been Executive Vice President of the Company and Chief Executive Officer of XL Mid Ocean Re since August 1998. Mr. Keeling was President and Chief Operating and Underwriting Officer of Mid Ocean Re from 1992 to 1998. He previously served as a director of Taylor Clayton (Underwriting Agencies) Ltd and deputy underwriter for syndicate 51 at Lloyd's from 1984 through 1992. Fiona Luck has been Executive Vice President of Group Operations of the Company since July 1999. Ms. Luck was previously employed at ACE Bermuda as Executive Vice President from 1998, and Senior Vice President from 1997. From 1992 to 1997, Ms. Luck was the Managing Director of the Marsh & McLennan Global Broking office in Bermuda. Clive R. Tobin has been Executive Vice President of the Company and President and Chief Executive Officer of XL Insurance since July 1999, having previously served as Executive Vice President of XL Insurance from 1998, and as a Senior Vice President of XL Capital Products from February 1999. Mr. Tobin previously served as President of Rockefeller Insurance Company and Acadia Risk Management Services, Inc from 1986 to 1995. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The Company's Class A ordinary shares, $0.01 par value, are listed on the New York Stock Exchange under the symbol XL. The following table sets forth the high and low closing sales prices per share of the Company's Class A ordinary shares per fiscal quarter, as reported on the New York Stock Exchange Composite Tape.
HIGH LOW ----------------- 1999: 1st Quarter............................................... $75.188 $56.750 2nd Quarter............................................... 66.500 56.750 3rd Quarter............................................... 57.688 42.188 4th Quarter............................................... 58.063 44.938 1998: 1st Quarter............................................... $77.500 $59.625 2nd Quarter............................................... 80.813 72.250 3rd Quarter............................................... 83.250 62.125 4th Quarter............................................... 77.688 63.938
Each Class A ordinary share has one vote, except that if, and so long as, the Controlled Shares of any person constitute ten percent (10%) or more of the issued Class A ordinary shares, the voting rights with respect to the Controlled Shares owned by such person shall be limited, in the aggregate, to a voting power of approximately 10%, pursuant to a formula specified in the Articles of Association. "Controlled Shares" shall include, among other things, all Class A ordinary shares for which such person is deemed to beneficially own directly, indirectly or constructively (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934). (b) The approximate number of record holders of Class A ordinary shares as of December 31, 1999 was 700. (c) In 1999, four regular quarterly dividends were paid at $0.44 per share to all shareholders of record on February 5, April 23, July 12 and September 24. The Company paid four regular quarterly dividends in 1998, three of $0.40 per share to all shareholders of record on February 6, April 16, and July 15 and one of $0.44 per share to all shareholders of record on September 28. The declaration and payment of future dividends by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial condition, business needs, capital and surplus requirements of the Company's operating subsidiaries and regulatory restrictions. As a holding company, the Company's principal source of income is dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of Bermuda, the United States, and the United Kingdom, including those promulgated by the Society of Lloyd's. See Note 18 to the Consolidated Financial Statements for further discussion. (d) Rights to purchase Class A Ordinary Shares were distributed as a dividend at the rate of one Right for each Class A ordinary share held of record as of the close of business on October 31, 1998. Each Right entitles holders of XL Class A ordinary shares to buy one ordinary share at an exercise price of $350. The Rights would be exercisable, and would detach from the Class A ordinary shares, only if a person or group were to acquire 20% or more of XL's outstanding Class A ordinary shares, or were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 20% or more of XL's Class A ordinary shares. Upon a person or group without prior approval of the Board acquiring 20% or more of XL's Class A ordinary shares, each Right would entitle 17 the holder (other than such an acquiring person or group) to purchase XL Class A ordinary shares (or, in certain circumstances, Class A ordinary shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price. XL will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Class A ordinary shares being authorized and unissued for issuance upon exercise of Rights. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data below includes the results of NAC for all years presented and is based upon the Company's new fiscal year end of December 31. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
1999 1998 1997 1996 1995 ---------------------------------------------------------------- (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) INCOME STATEMENT DATA: Net premiums earned................ $ 1,750,006 $ 1,324,291 $1,114,758 $1,038,643 $1,053,748 Net investment income.............. 525,318 417,290 345,115 304,823 288,989 Net realized gains on investments .................... 94,356 211,204 410,658 174,593 131,840 Equity in net income of affiliates ..................... 40,907 50,292 64,959 59,084 51,074 Losses and loss expenses (1)....... 1,304,304 841,517 738,849 739,058 772,096 Acquisition costs and operating expenses........................ 689,005 436,598 318,107 277,801 269,427 Interest expense................... 37,378 33,444 29,622 22,322 15,648 Amortization of intangible assets ......................... 49,141 26,881 7,403 368 368 Income before minority interest and income tax expense.............. 431,159 686,962 841,509 537,594 468,113 Net income......................... 470,509 656,330 809,029 516,471 450,080 PER SHARE DATA: Net income per share - basic(2)(3)............. $ 3.69 $ 5.86 $ 7.95 $ 4.81 $ 3.82 Net income per share - diluted(2)(3)........... $ 3.62 $ 5.68 $ 7.74 $ 4.73 $ 3.76 Weighted average shares Outstanding - basic (3)............ 127,601 112,034 101,708 107,339 117,833 Weighted average shares Outstanding - diluted (3).......... 130,304 116,206 105,005 109,908 120,496 Cash dividends per share (3)....... $ 1.76 $ 1.64 $ 1.36 $ 0.95 $ 0.71 BALANCE SHEET DATA: Total investments.................. $ 9,122,591 $ 9,057,892 $6,562,609 $5,647,589 $5,234,208 Cash and cash equivalents.......... 557,749 480,874 383,594 321,140 787,759 Investments in affiliates.......... 479,911 154,668 524,866 414,891 351,669 Total assets....................... 15,090,912 13,581,140 9,070,031 7,823,375 7,424,468 Unpaid losses and loss expenses ... 5,369,402 4,896,643 3,972,376 3,623,334 3,238,156 Notes payable and debt............. 410,726 613,873 453,866 323,858 299,927 Shareholders' equity............... 5,577,078 5,612,603 3,195,749 2,637,533 2,564,422 Book value per share (3)........... $ 43.64 $ 43.59 $ 31.55 $ 25.31 $ 22.85 Fully diluted book value per share (3) . $ 43.13 $ 43.20 $ 31.42 $ 25.24 $ 22.79 OPERATING RATIOS: Loss and loss expense ratio (1).... 69.1% 63.6% 66.3% 71.2% 73.3% Underwriting expense ratio (4)..... 34.3% 30.2% 27.9% 26.2% 25.6% Combined ratio (5)................. 103.4% 93.8% 94.2% 97.4% 98.9%
18 1) The loss and loss expense ratio is the calculated by dividing the losses and loss expenses incurred by the net premiums earned. In 1999, the loss and loss expense ratio excludes an increase to reserves of $95 million associated with the merger with NAC. 2) Net income per share is based on the weighted average number of ordinary shares and ordinary share equivalents outstanding for each period as required by Statement of Financial Accounting Standard No. 128. 3) All share and per share information has been retroactively restated to give effect to a one for one stock dividend paid to XL shareholders of record on July 26, 1996. Cash dividends per share have not been adjusted for the pooling effect of NAC. 4) The underwriting expense ratio is the sum of acquisition expenses and operating expenses divided by net premiums earned. Operating expenses relating to the corporate segment have not been included for purposes of calculating the underwriting expense ratio. 5) The combined ratio is the sum of the loss and loss expense ratio and the underwriting expense ratio. A combined ratio of under 100% indicates an underwriting profit and over 100% indicates an underwriting loss. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is a discussion of the Company's results of operations and financial condition. Prior period information presented is the combination of the results formerly presented by XL Capital and NAC, as required for a business combination accounted for by the pooling of interests method, which assumes NAC had always been a part of the Company. It is also based upon the Company's new fiscal year end of December 31. See Note 6 "Business Combinations" of the audited Consolidated Financial Statements for further details. The Company's results of operations and financial condition for 1998 were significantly impacted by the acquisition of Mid Ocean in August 1998, which was accounted for as a purchase business combination. This "Management's Discussion and Analysis of Results of Operations and Financial Condition" contains forward-looking statements which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward looking-statements. These statements are based upon current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements, and therefore you should not place undue reliance on them. See "--Cautionary Note Regarding Forward-Looking Statements" 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 audited Consolidated Financial Statements and notes thereto presented under Item 8. INDUSTRY OVERVIEW Abundant capacity and significant price competition continued to characterize the property and casualty insurance and reinsurance industry during 1999. Excess capital and limited opportunities for growth in traditional markets continued to generate merger and acquisition activity as companies attempt to maintain or improve market share and performance. Perhaps more than ever, the Company, together with the industry, faces a difficult challenge in generating profitable growth. 1999 was among the worst years for insured catastrophic losses. The industry suffered losses from, amongst other events, the Sydney hailstorms, the Oklahoma tornadoes, Hurricane Floyd and the European windstorms. Despite these losses, premium rates in 1999 did not increase significantly. 19 RESULTS OF OPERATIONS The following table presents an after tax analysis of the Company's net income for the years ended December 31, 1999, 1998 and 1997 (U.S. dollars in thousands except per share amounts):
1999 1998 1997 ------------------------------ Net operating income (excluding net realized gains on investments)........... $370,809 $457,402 $413,307 Net realized gains on investments......................... 99,700 198,928 395,722 ------------------------------ Net income................................................ $470,509 $656,330 $809,029 ------------------------------ Earnings per share - basic................................ $3.69 $5.86 $7.95 Earnings per share - diluted.............................. $3.62 $5.68 $7.74
Net income decreased in 1999 compared to 1998 as a result of a decrease in both net operating income and net realized gains on investments. The decrease in net operating income in 1999 from 1998 is due to a decrease in underwriting income. The primary reason for this decrease is losses incurred by the Company of $125 million after tax, or $0.97 per share, as a result of two major European windstorms in December 1999. Net operating income increased in 1998 over 1997 due to the acquisition of Mid Ocean in 1998. Net income decreased in 1998 compared to 1997 as a result of a decrease in net realized gains on investments. Basic and diluted earnings per share decreased in 1999 over 1998 and in 1998 over 1997 due to both a decrease in net income, and, following the acquisition of Mid Ocean, a net increase in the weighted average number of shares issued and outstanding. SEGMENTS The Company is organized into four underwriting segments - insurance, reinsurance, Lloyd's syndicates and financial services - and a corporate segment, which includes the investment operations of the Company. See Part 1 and Item 8, Note 3 to the Consolidated Financial Statements for further details. INSURANCE OPERATIONS The insurance business is written primarily by the following subsidiaries of the Company: XL Insurance, XL Europe, XL Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS and Intercargo. Insurance business written includes general liability, other liability (including directors and officers, professional and employment practices liability), program business, property, marine, aviation, satellite and other product lines (including U.S. Customs bonds, surety, political risk and specialty lines). The following table summarizes the underwriting profit (loss) for this segment (U.S. dollars in thousands):
% CHANGE % CHANGE 1999 99 VS 98 1998 98 VS 97 1997 ---------------------------------------------------- Net premiums earned............................ $463,069 12.9% $410,030 (4.4%) $428,774 Fee and other income........................... 7,584 (8.0%) 8,244 NM - Losses and loss expenses....................... 309,079 15.4% 267,823 (24.0%) 352,203 Acquisition costs.............................. 65,318 37.0% 47,688 (13.6%) 55,199 Operating expenses............................. 70,929 42.7% 49,702 33.5% 37,232 ---------------------------------------------------- Underwriting profit (loss)..................... $ 25,327 (52.3%) $ 53,061 NM $(15,860) ----------------------------------------------------
NM=Not Meaningful The overall increase in net premiums earned in the insurance segment in 1999 over 1998 is primarily a result of an increase in gross premiums written in the primary property, aviation and satellite, marine and other lines of business by the Company's subsidiaries in the U.S. See Note 3 to the Consolidated Financial Statements. Net 20 premiums earned in 1999 also reflect the purchase of Intercargo in May 1999, for which approximately $33 million was earned from the date of purchase. Partially offsetting this increase is a decrease in the general liability lines, where there was a reduction in the amount of gross premiums written due to increased competition. This decrease also accounts for the overall reduction in net premiums earned in 1998 over 1997. High levels of competition continued, particularly on a price basis and in coverage terms, although business retention has remained in excess of 80% for the last three years. Generally, the Company's response has been to move to higher attachment levels which result in lower premiums as the Company moves further away from risk. There was a small increase in the net premiums earned in 1999 over 1998 in the other liability business, which comprises mostly professional lines, despite a decrease in the amount of gross premiums written in 1999 compared to 1998. The increase in net premiums earned is primarily as a result of several tailored programs written in 1998, which are earned over a period greater than one year. There were also increases in net premiums earned in 1998 over 1997 in the property, marine, energy, aviation and satellite lines of business, mainly in the U.S. where there were expanded opportunities on existing accounts, as well as new business. The source of fee and other income differs between 1999 and 1998. During 1998, the Company assisted in structuring a transaction that resulted in fee income. These transactions tend to be irregular in nature and require an investment of Company resources that are included in operating expenses. During 1999, the Company purchased ECS, which underwrites business on behalf of third parties in exchange for commissions. This income will decline in the future as ECS underwrites business on behalf of the Company. The changes in the loss and loss expenses, acquisition costs and operating expenses as shown above are discussed below as part of the analysis of the Company's underwriting ratios. The decrease in the underwriting profit in 1999 over 1998 in this segment is due to higher loss and loss expense ratios in 1999 as reflected in the underwriting expense ratios set forth below. The following table represents the ratios for this segment for the three years ended December 31, 1999:
1999 1998 1997 ---------------------- Loss and loss expense ratio................................. 66.7% 65.4% 82.1% Underwriting expense ratio.................................. 29.4% 23.8% 21.6% ---------------------- Combined ratio.............................................. 96.1% 89.2% 103.7% ----------------------
The increase in the loss ratio in 1999 over 1998 is the result of two factors. The Company had an intercompany stop loss agreement in place in 1999 under which a subsidiary in the reinsurance segment was covered for losses exceeding a specified loss ratio up to $100 million. The purpose of this agreement is to efficiently manage statutory surplus levels across the Company. As a result of catastrophic losses which occurred in 1999, the full amount of losses of $100 million were included in the insurance segment and excluded from the reinsurance segment. The loss and loss expense ratio would have been 45.2% and the underwriting profit would have been $125 million had this stop loss agreement not been in place. Offsetting this loss in 1999 and also causing the decrease in the loss ratio in 1998 from 1997 was a reduction of insurance loss reserves established on the Company's liability lines due to updated actuarially determined reserve estimates. Due to the lack of industry data available, the Company estimates loss reserves based upon its own experience. Over time, the amount of data available has increased, providing a larger statistical base for estimating reserves and loss experience has developed more favorably than expected. In addition, reserves were reduced on specialty cover policies for the years 1995 through 1997, which expired in 1998 and for which there was an absence of expected losses on these policies. The increase in the expense ratio over each of the years presented is due to both the changes in the product mix towards U.S. primary business which tends to have higher acquisition costs, and the additional operating expenses incurred by the Company in establishing its start up operations in the U.S. and new lines of business. 21 REINSURANCE OPERATIONS The reinsurance business is written by XL Mid Ocean Re, which writes primarily property lines which are short-tail in nature, and NAC Re, which primarily writes long-tail casualty business. Business written in this segment includes casualty, property catastrophe, other property, marine, energy, aviation and satellite and other lines, including political risk and specialty lines. The following table summarizes the underwriting profit (loss) for this segment (U.S. dollars in thousands):
% CHANGE % CHANGE 1999 99 VS 98 1998 98 VS 97 1997 ---------------------------------------------------- Net premiums earned............................ $909,915 19.7% $760,409 10.8% $685,984 Losses and loss expenses....................... 597,269 31.1% 455,583 17.8% 386,646 Acquisition costs.............................. 224,359 31.2% 171,039 19.8% 142,818 Operating expenses............................. 103,264 20.7% 85,541 12.8% 75,829 ---------------------------------------------------- Underwriting (loss) profit..................... $(14,977) NM $ 48,246 (40.2%) $ 80,691 ----------------------------------------------------
The increase in net premiums earned in 1999 over 1998 is due to two factors: (i) the acquisition of Mid Ocean in August 1998 which results in only five months of net premiums earned included in 1998 compared to twelve months in 1999, and (ii) increases in gross premiums written and earned in the casualty reinsurance business in 1999 resulting primarily from a relatively small number of large reinsurance transactions. The increase in net premiums earned in 1998 over 1997 is primarily due to the acquisition of Mid Ocean. This increase was partially offset by declines in net premiums earned on the casualty business in 1998 over 1997 due to increased market competition and pricing and the Company's decision not to renew accounts that were deemed not to meet the Company's profitability standards. Operating expenses increased in 1999 over 1998 and in 1998 over 1997 due to the acquisition of Mid Ocean. The changes in the underwriting result in the reinsurance segment for each of the three years ended December 31 are due to changes in the underwriting ratios as illustrated below.
1999 1998 1997 ---------------------- Loss and loss expense ratio................................. 65.6% 60.0% 56.4% Underwriting expense ratio.................................. 36.0% 33.8% 31.9% ---------------------- Combined ratio.............................................. 101.6% 93.8% 88.3% ----------------------
The increase in the loss ratio in this segment in 1999 over 1998 was due to losses incurred by the Company from two major European windstorms which occurred in December 1999, together with other insured catastrophes in Sydney and Oklahoma, and from satellite losses earlier in the year. Property catastrophe business has loss experience which is generally categorized as low frequency but high severity in nature. This may result in volatility in the Company's financial results for any fiscal year or quarter. Property catastrophe losses generally are notified and paid within a short period of time from the covered event. In addition, there was an increase in the loss ratio in 1999 over 1998 in the casualty reinsurance business relating to reserve increases in accordance with actuarial estimates, caused to a large extent by the deterioration in premium rates. Actuarial assumptions are used to establish initial expected loss ratios employed in the actuarial methodologies from which the reserve for loss and loss expenses is derived. Such loss ratios are periodically adjusted to reflect comparisons with actual claims development, inflation and other considerations. Net losses incurred in this segment in 1999 reflect a reduction of $100 million relating to an intercompany reinsurance agreement with another of the Company's subsidiaries in the insurance segment. The loss and loss expense ratio would have been 76.6% and the underwriting loss would have been $115 million had this stop loss 22 agreement not been in place. Net losses incurred in 1999 also exclude an adjustment to reserves of $95 million following the merger with NAC. The increase in the loss ratio in 1998 over 1997 is due to losses relating to Hurricane Georges and SwissAir for approximately $60 million. The increase in the expense ratio in 1999 over 1998 is primarily due to an increase in profit commission payable to cedents of proportional business written by XL Mid Ocean Re. Profitability on some contracts written in earlier underwriting years has increased relative to original estimates, with the resulting increases in profit commissions payable. The Company's casualty business includes an element of asbestos and environmental claims on business written prior to 1986. The Company's reserving process includes a supplemental evaluation of claims liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. However, the Company's loss and loss expense reserves for such exposures, net of reinsurance, as of December 31, 1999, 1998, and 1997 is less than 1% of its total reserves. A reconciliation of the Company's gross and net liabilities for such exposures for the three years ending December 31, 1999 is set forth in Note 7 of the Notes to Consolidated Financial Statements. LLOYD'S SYNDICATES The Lloyd's operations comprise Brockbank and Denham, both of which were acquired in 1998. Brockbank provides underwriting and other services to five Lloyd's syndicates, two of which are dedicated corporate syndicates whose capital is provided by the Company. During 1999, these dedicated corporate syndicates wrote a range of specialty lines, primarily of insurance but also reinsurance, in parallel with other syndicates managed by Brockbank. Denham provides similar services to one corporate syndicate whose capital is partially provided by the Company and which specializes in liability coverages. The following table summarizes the underwriting profit for this segment (U.S. dollars in thousands):
1999 1998 ------------------- Net premiums earned......................................... $355,769 $153,852 Fee and other income........................................ 65,892 14,081 Losses and loss expenses.................................... 297,595 118,111 Acquisition costs........................................... 89,195 30,614 Operating expenses.......................................... 28,125 14,875 ------------------- Underwriting profit......................................... $ 6,746 $ 4,333 -------------------
The increase in 1999 over 1998 in this segment is a result of the Brockbank acquisition in August 1998. In addition, results for Denham were not significant in 1998. In 1999, fee and other income primarily relates to the sale by Brockbank of its two motor insurance businesses, Admiral and Zenith, resulting in a gain of $40.2 million. The Company expects there to be decreases in net premiums earned, fee income and certain costs next year as a result of this sale. However, the Company does not expect the overall profitability of its Lloyd's operations to be significantly affected by such sales. Excluding the gain on sale, fee and other income primarily relates to fees received from the management of Lloyd's syndicates and profit commissions which are earned based upon the estimated results of syndicates managed. 23 The following table presents the underwriting ratios for this segment:
1999 1998 --------------- Loss and loss expense ratio................................. 83.6% 76.8% Underwriting expense ratio.................................. 33.0% 29.6% --------------- Combined ratio.............................................. 116.6% 106.4% ---------------
Losses incurred by the corporate syndicates of Brockbank attach at lower levels and are therefore higher in frequency but lower in severity as compared to the losses relating to the reinsurance and insurance segments of the Company. The increase in the loss ratio in 1999 over 1998 is due to reserve increases related to adverse development on the U.K. motor business prior to the sale for which the Company still retains residual liability. FINANCIAL SERVICES The financial services business includes premiums received from credit enhancement by financial guaranty insurance and reinsurance policies and credit default swaps written in respect of asset-backed, municipal and corporate risk obligations. Fee income included in this segment is comprised primarily of income received from the two loss reserve transactions that were underwritten in 1999. Premiums received in respect of credit default swap transactions are also included as fee income and earned over the life of the policies. The following table summarizes the underwriting profit for this segment (U.S. dollars in thousands):
1999 ------- Net premiums earned......................................... $21,253 Fee and other income........................................ 26,924 Losses and loss expenses.................................... 5,361 Acquisition costs........................................... 2,108 Operating expenses.......................................... 16,670 ------- Underwriting profit......................................... $24,038 -------
Financial guaranty insurance premiums and credit default swap premiums are earned over the life of the exposure and certain transactions such as installment premiums are not recognized as premiums written until the premium is received. The following table presents the underwriting ratios for the financial services segment:
1999 ------ Loss and loss expense ratio................................. 25.2% Underwriting expense ratio.................................. 88.4% ------ Combined ratio.............................................. 113.6% ------
This segment writes business with an expected loss ratio of approximately 25%. The high expense ratio reflects the start up nature of this segment. 24 INVESTMENT OPERATIONS The following table illustrates the change in net investment income and net realized gains and losses for the three years ended December 31, 1999 (U.S dollars in thousands):
% CHANGE % CHANGE 1999 99 VS 98 1998 98 VS 97 1997 ---------------------------------------------------- Net investment income.......................... $525,318 25.9% $417,290 20.9% $345,115 Net realized investment gains.................. $ 94,356 NM $211,204 NM $410,658 Annualized effective yield..................... 5.85% - 5.38% - 5.50%
External investment professionals manage the Company's portfolio under the direction of management. At December 31, 1999, total investments and cash, net of the payable for investments purchased, were $9.1 billion, compared to $8.9 billion at December 31, 1998. This increase includes the reinvestment of investment income and realized gains, but is primarily due to the loss portfolio transfers discussed further in "--Financial Condition and Liquidity". This increase was net of any transfer of assets to limited investment partnerships, included in investments in affiliates. As the Company's long-tail casualty business matures over the next three to five years, it is possible that claims payments may increase due to the additional exposure to events which occurred in prior years but have not yet been paid. Funds available for investment may therefore be reduced as compared to prior years due to such increased claims payments. The Company's fixed income investments (including short-term investments and cash equivalents) at December 31, 1999 represented approximately 88% of investments available for sale and were managed by several independent investment managers with different strategies. Of the fixed income securities, approximately 87% are of investment grade, with 60% rated Aa or AA or better by a nationally recognized rating agency. The payable for investments purchased was $622.3 million at December 31, 1999 and $633.2 million at December 31, 1998. The payable balance at any one time is the result of a timing difference as it is the Company's policy to account for its investments on a trade basis. The increase in investment income in 1999 over 1998 is primarily due to an increase in the annualized effective yield on the portfolio. The increase in investment income in 1998 over 1997 is due to an increase in the average asset base, primarily due to the merger with Mid Ocean in August 1998 and the Company's positive operational cash flow. The investment income from the asset accumulation business assets transferred did not have a significant impact due to the timing of the transfers to the Company which occurred in the third and fourth quarters of 1999. Net realized gains in 1999 and 1998 reflect the strong performance of the equity market. In 1998, equity gains of $150.0 million were realized as some of the Company's equity managers locked in gains where they felt valuations had reached their targets. However, 1999 equity gains were offset by declining fixed income markets, which had been strong throughout most of 1998. Due to declining interest rates combined with widening spreads in the corporate and mortgage markets, the fixed income sector allowed the Company opportunities to increase the yield on its investment in 1999. As a result, the Company's investment managers will continue to pursue a total return strategy to take advantage of the higher yields. During 1997, both the fixed income and equity portfolios were restructured, resulting in the above-normal turnover of the portfolio and contributing to the significant gains realized during the year. Market conditions were also very strong during 1997. The Company also maintains a synthetic equity portfolio holding S&P 500 Index futures that realized net gains of $11.3 million and $23.2 million for the years ended December 31, 1999 and 1998, respectively. 25 OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses of the Company for the three years ended December 31, 1999 (U.S. dollars in thousands):
% CHANGE % CHANGE 1999 99 VS 98 1998 98 VS 97 1997 -------------------------------------------------- Equity in net income of affiliates................ $ 40,907 (18.7%) $50,292 (22.6%) $64,959 Amortization of intangible assets................. 49,141 NM 26,881 NM 7,403 Corporate operating expenses...................... 89,037 NM 37,139 NM 7,029 Interest expense.................................. 37,378 11.8% 33,444 12.9% 29,622 Minority interest................................. 220 NM 749 NM 308 Income tax (benefit) expense...................... (39,570) NM 29,883 (7.1%) 32,172
NM=Not Meaningful The decrease in equity in net income of affiliates in 1999 over 1998 and 1998 over 1997 is due to Mid Ocean. Partially offsetting the decrease in 1999 are earnings from new investments made in limited investment partnerships by the Company during 1999. In 1998, seven months of earnings from the Company's equity position in Mid Ocean were recognized, which ended in August 1998 upon the acquisition of the balance of the outstanding Mid Ocean shares. A full year's equity earnings from Mid Ocean were included in 1997. The increase in the amortization of intangible assets in 1999 over 1998 and 1998 over 1997 mainly relates to the goodwill arising from the Mid Ocean acquisition in 1998. In 1999, there is also additional goodwill amortization of approximately $4.0 million arising from acquisitions of ECS and Intercargo. Operating expenses in 1999 include $45.3 million of one-time charges related to the merger with NAC. In 1998, they include $17.5 million of one-time charges associated with the merger with Mid Ocean. Other increases are due to the increase in the corporate infrastructure necessary to support the growing worldwide operations of the Company. Increases in interest expense in 1999 over 1998 and 1998 over 1997 is due to the increase in the average long-term debt outstanding during the each of the years. In 1999, this was used to finance the acquisitions of ECS and Intercargo, and in both 1999 and 1998, the repurchase of shares. The changes in the income tax expense of the Company principally reflect the decline in the profitability of the U.S. operations for each year. In 1999, a deterioration of the casualty book for business underwritten prior to the merger with NAC resulted in a pre-tax net loss for U.S. operations, generating an income tax benefit for the year. See Note 17 to the Consolidated Financial Statements. FINANCIAL CONDITION AND LIQUIDITY As a holding company, the Company's assets consist primarily of its investments in subsidiaries and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of Bermuda, the United States, Ireland and the United Kingdom, including those promulgated by the Society of Lloyd's which are described more fully in Note 18 to the Consolidated Financial Statements. No assurance can be given that the Company or its subsidiaries will be permitted to pay dividends in the future. The Company's shareholders' equity at December 31, 1999 was $5.6 billion, of which $3.1 billion was retained earnings. Certain aspects of the Company's business are characterized as having low frequency and high severity exposures. This may result in volatility in both the Company's results and operational cash flows. However, the Company continues to generate significant positive cash flow from operating activities. 26 In 1999, 1998 and 1997, the total amount of net losses paid by the Company was $1,093.5 million, $730.9 million and $330.9 million, respectively. The increase is primarily due to the acquisition of Mid Ocean in August 1998. 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 by using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company's subsidiaries. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. Inflation can have an effect on the Company in that inflationary factors can increase damage awards and potentially result in larger claims. The Company's underwriting philosophy is to adjust premiums in response to inflation, although this may not always be possible due to competitive pressure. Inflationary factors are considered in determining the premium level on any multi-year policies at the time contracts are written. In 1999, the Company completed the purchase of Intercargo and ECS for a total of $222.8 million in cash. Both of these transactions are accounted for under the purchase method of accounting, and resulted in goodwill of $159.6 million. These transactions were financed in part through bank borrowings and internal funds. During 1999, the Company redistributed assets from investments available for sale and cash for the following investments: (1) The Company made minority investments in Highfields Capital Management LP and MKP Capital Management LP and into the funds they manage totaling $281.2 million. (2) The Company invested $97.0 million in a joint venture with Les Mutuelles du Mans Assurances Group to form a new French reinsurance company, Le Mans Re. (3) The Company invested a further $91.0 million in limited partnerships and other investments. These above investments account for the increase in investments in affiliates and other investments. The Company assumed two loss portfolio transfers during the second half of the year which are accounted for on a deposit basis. These reserves are included in deposit liabilities and policy benefit reserves with the corresponding assets held in investments available for sale. The Company has had several stock repurchase programs as part of its capital management. On January 22, 1999, the Board of Directors discontinued the Company's existing program with $148.8 million remaining and replaced it with an authorization to repurchase $500 million. During the first six months of 1999, the Company purchased 2.1 million shares at a cost of $126.8 million. In June 1999, the Board of Directors rescinded the Company's share repurchase program. On January 9, 2000 the Board of Directors authorized the repurchase of shares up to $500 million. The repurchase of shares was announced in conjunction with a small dividend increase of $0.04 per share per annum as part of the Company's capital management strategy. The Company has purchased 3.7 million shares up to March 17, 2000 at a cost of $165.8 million or $44.76 per share. As at December 31, 1999, the Company had bank and loan facilities available from a variety of sources, including commercial banks, totaling $2.36 billion comprising 364-day facilities, 5-year facilities, notes payable and other loans and letter of credit facilities. Debt and notes outstanding at December 31, 1999 were $410.7 million and letters of credit outstanding were $891.6 million. Letters of credit issued and outstanding, 66% of which were collateralized by the Company's investment portfolio, primarily support U.S. non-admitted business and the Company's Lloyd's capital requirements. During 1999 and 1998, borrowings under these facilities were $329 million and $655 million, respectively, and repayments under the facilities were $340 million and $495 million, respectively. The borrowings in 1999 27 facilitated the repurchase of shares and the purchase of Intercargo and ECS. In 1998, borrowings include $300 million to fund the cash election available to shareholders in connection with the Mid Ocean merger. Included in the 1998 notes payable and debt was $100 million 5.25% Convertible Subordinate Debentures due 2002, which were converted in June 1999 by the issue of 1.8 million shares out of treasury. Additional borrowings in 1998 were made to fund the Company's U.S. operations. The total pre-tax interest expense on notes and debt outstanding during the year ended December 31, 1999 and 1998 was $37.4 million and $33.4 million, respectively. Associated with the Company's bank and loan commitments are various loan covenants with which the Company was in compliance throughout the period. See Note 10 to the Consolidated Financial Statements for further details. YEAR 2000 ISSUES There was no significant impact of Year 2000 issues on the Company's technology systems. Total costs incurred by the Company in ensuring its technology systems were compliant through December 31, 1999 were not significant. The Company did not experience any significant disruption due to the impact of Year 2000 issues on its service providers. The Company is exposed to risks associated with Year 2000 issues based upon the underwriting exposures that it assumes. All insurance and reinsurance subsidiaries of the Company examined the potential exposure to Year 2000-related risks associated with the coverages that they provided. In some instances, Year 2000-related risks were expressly excluded from or included in certain coverages, and in other instances, coverage in respect of such risks is neither expressly excluded nor included. To the extent that Year 2000-related risks materialize, participants in the property and casualty insurance and reinsurance industry, including the Company, could pay or incur significant claims, losses or defense costs which could have a material adverse effect on the Company's results of operations and financial condition. In view of the apparent lack of significant Year 2000-related losses, the Company does not expect to have a material exposure to Year 2000-related coverage claims. See generally "--Cautionary Note Regarding Forward-Looking Statements". FINANCIAL RISK MANAGEMENT The Company is exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. The Company manages its market risks based on guidelines established by management. The Company enters into derivatives and other financial instruments primarily for risk management purposes. This risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis methods 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". The Company's investment portfolio consists of fixed income and equity securities, denominated in both U.S. and foreign currencies. Accordingly, earnings will be affected by changes in interest rates, equity prices and foreign currency exchange rates. An immediate 100 basis point adverse shift in the treasury yield curve would result in a decrease in total return of 5.8% or $438 million on the Company's fixed income portfolio as of December 31, 1999. In evaluating the impact of price changes of the equity portfolio, a 10% change in equity prices would affect total return by approximately $114 million. The Company has short-term debt and long-term debt outstanding. Interest rates on short-term debt are LIBOR based. Accordingly, any changes in interest rates will affect interest expense. 28 FOREIGN CURRENCY RISK MANAGEMENT The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore realized and unrealized gains and losses on them are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, a forward contract may not be entered into. At December 31, 1999, forward foreign exchange contracts with notional principal amounts totaling $339.3 million were outstanding. The fair value of these contracts as at December 31, 1999 was $341.1 million with unrealized gains of $1.8 million. Losses of $2.7 million were realized during the year. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at December 31, 1999 would have resulted in approximately $34.6 million in unrealized gains and $33.7 million in unrealized losses. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its foreign currency investments. These contracts are not designated as specific hedges, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At December 31, 1999, the value of such contracts outstanding was not significant. The Company attempts to hedge directly the foreign currency exposure of a portion of its foreign currency fixed maturity investments using forward foreign exchange contracts that generally have maturities of three months or less and are rolled over to provide continuing coverage for as long as the investments are held. Where an investment is sold, the related foreign exchange sale contract is closed by entering into an offsetting purchase contract. At December 31, 1999, the Company had, as hedges, foreign exchange contracts for the sale of $94.0 million and the purchase of $7.5 million of foreign currencies at fixed rates, primarily Euros (49% of net contract value), British pounds (18%) and New Zealand Dollars (16%). The market value of fixed maturities denominated in foreign currencies that were hedged and held by the Company as at December 31, 1999 was $85.2 million. Unrealized foreign exchange gains and losses on foreign exchange contracts hedging foreign currency fixed maturity investments are deferred and included as a component of shareholders' equity. As at December 31, 1999, unrealized deferred losses amounted to $2.0 million and were offset by corresponding increases in the dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at December 31, 1999, realized deferred losses amounted to $0.5 million. FINANCIAL MARKET EXPOSURE The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at December 31, 1999, the portfolio held $121.9 million in exposure to S&P 500 Index futures and underlying assets of $122.0 million. Based on this value, a 10% increase or decrease in the price of these futures would have resulted in exposure of $134.1 million and $109.7 million, respectively. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the year ended December 31, 1999, net realized gains from index futures totaled $11.3 million as a result of the 19.5% increase in the S&P Index during the twelve-month period. Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At December 31, 1999, bond and stock index futures outstanding were $241.1 million with underlying investments having a market value of $2.5 billion (all managers are prohibited by the Company's investment guidelines from leveraging their positions). A 10% appreciation or depreciation of these derivative instruments at this time would have resulted in unrealized gains and losses of $24.1 million, respectively. 29 RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to the Consolidated Financial Statements for a discussion on recent accounting pronouncements. CURRENT OUTLOOK The Company believes competition in the property casualty insurance and reinsurance industry will continue to be strong in 2000, exerting pressure on rates in general across many product lines. Although the Company believes some opportunities will exist in 2000 for growth in selected product lines, no assurances can be made that growth in these lines will be sufficient to offset the competitive pressures affecting the majority of the Company's product lines. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. This Form 10-K, the Company's Annual Report to Stockholders, any proxy statement, any Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company and the insurance and reinsurance sectors in general (both as to underwriting and investment matters). Statements which include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (ii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (iii) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reserving or investment practices anticipate based on historical experience or industry data; (iv) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments; (v) changes in regulation or tax laws applicable to the Company, its subsidiaries, brokers or customers; (vi) acceptance of the Company's products and services, including new products and services; (vii) changes in the availability, cost or quality of reinsurance; (viii) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (ix) the impact of the Year 2000-related issues on the Company's underwriting exposures; (x) loss of key personnel; (xi) the effects of mergers, acquisitions and divestitures; (xii) changes in rating agency policies or practices; (xiii) changes in accounting policies or practices; and (xiv) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors. 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 publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES PAGE - ------------------------------------------------------------ -------- Consolidated Balance Sheets as at December 31, 1999 and 1998...................................................... 32 Consolidated Statements of Income and Comprehensive income for the years ended December 31, 1999, 1998 and 1997...... 33 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 ............. 34 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 35 Notes to Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997.................... 36
30 XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1999 AND 1998 (U.S. dollars in thousands, except share amounts)
1999 1998 ------------------------- A S S E T S Investments: Fixed maturities, available for sale at fair value (amortized cost: 1999, $7,835,919; 1998, $7,433,724)... $ 7,581,151 $ 7,512,903 Equity securities, at fair value (cost: 1999, $863,020; 1998, $1,127,590)...................................... 1,136,180 1,299,098 Short-term investments, at fair value (amortized cost: 1999, $405,375; 1998, $246,085)........................ 405,260 245,891 ------------------------- Total investments................................... 9,122,591 9,057,892 Cash and cash equivalents................................... 557,749 480,874 Investments in affiliates (cost: 1999, $478,266; 1998, $141,590)................................................. 479,911 154,668 Other investments........................................... 165,613 44,085 Accrued investment income................................... 111,590 95,910 Deferred acquisition costs.................................. 275,716 204,271 Prepaid reinsurance premiums................................ 217,314 215,466 Premiums receivable......................................... 1,126,397 904,203 Reinsurance balances receivable............................. 149,880 124,771 Unpaid losses and loss expenses recoverable................. 831,864 593,960 Intangible assets (accumulated amortization: 1999, $118,663; 1998, $70,190)............................................ 1,626,946 1,502,828 Deferred tax asset, net..................................... 97,928 37,481 Other assets................................................ 327,413 164,731 ------------------------- Total assets........................................ $15,090,912 $13,581,140 ------------------------- L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Liabilities: Unpaid losses and loss expenses............................. $ 5,369,402 $ 4,896,643 Deposit liabilities and policy benefit reserves............. 837,893 - Unearned premiums........................................... 1,497,376 1,337,277 Notes payable and debt...................................... 410,726 613,873 Reinsurance balances payable................................ 387,916 183,660 Net payable for investments purchased....................... 622,260 633,181 Other liabilities........................................... 345,738 256,862 Minority interest........................................... 42,523 47,041 ------------------------- Total liabilities................................... $ 9,513,834 $ 7,968,537 ------------------------- Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 ordinary shares, par value $0.01 Issued and outstanding: Class A ordinary shares (1999, 124,691,541; 1998, 125,629,257)........................................... 1,247 1,256 Class B ordinary shares (1999, 3,115,873; 1998, 3,115,873)............................................. 31 31 Contributed surplus......................................... 2,520,136 2,508,062 Accumulated other comprehensive income...................... 19,311 235,185 Deferred compensation....................................... (28,797) (22,954) Retained earnings........................................... 3,065,150 2,891,023 ------------------------- Total shareholders' equity.......................... $ 5,577,078 $ 5,612,603 ------------------------- Total liabilities and shareholders' equity.......... $15,090,912 $13,581,140 -------------------------
See accompanying notes to Consolidated Financial Statements 31 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S. dollars in thousands, except share and per share amounts)
1999 1998 1997 ------------------------------------ Revenues: Net premiums earned....................................... $1,750,006 $1,324,291 $1,114,758 Net investment income..................................... 525,318 417,290 345,115 Net realized gains on sales of investments................ 94,356 211,204 410,658 Equity in net income of affiliates........................ 40,907 50,292 64,959 Fee and other income...................................... 100,400 22,325 - ------------------------------------ Total revenues...................................... 2,510,987 2,025,402 1,935,490 ------------------------------------ Expenses: Losses and loss expenses.................................. 1,304,304 841,517 738,849 Acquisition costs......................................... 380,980 249,341 198,017 Operating expenses........................................ 308,025 187,257 120,090 Interest expense.......................................... 37,378 33,444 29,622 Amortization of intangible assets......................... 49,141 26,881 7,403 ------------------------------------ Total expenses...................................... 2,079,828 1,338,440 1,093,981 ------------------------------------ Income before minority interest and income tax expense...... 431,159 686,962 841,509 Minority interest in net income of subsidiary............. 220 749 308 Income tax (benefit) expense.............................. (39,570) 29,883 32,172 ------------------------------------ Net income.................................................. $ 470,509 $ 656,330 $ 809,029 ------------------------------------ Change in net unrealized appreciation of investments........ (211,842) (15,414) 6,233 Foreign currency translation adjustments.................... (4,032) (872) (2,388) ------------------------------------ Comprehensive Income........................................ $ 254,635 $ 640,044 $ 812,874 ------------------------------------ Weighted average ordinary shares and ordinary share equivalents outstanding - basic........................... 127,601 112,034 101,708 ------------------------------------ Weighted average ordinary shares and ordinary share equivalents outstanding - diluted......................... 130,304 116,206 105,005 ------------------------------------ Earnings per ordinary share and ordinary share equivalent - basic........................................ $ 3.69 $ 5.86 $ 7.95 ------------------------------------ Earnings per ordinary share and ordinary share equivalent - diluted...................................... $ 3.62 $ 5.68 $ 7.74 ------------------------------------
See accompanying notes to Consolidated Financial Statements 32 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S. dollars in thousands)
1999 1998 1997 ------------------------------------ Ordinary Shares: Balance-beginning of year................................. $ 1,287 $ 1,013 $ 1,039 Issue of shares........................................... 1 15 6 Issue of shares - Mid Ocean acquisition................... - 291 - Exercise of stock options................................. 5 3 4 Repurchase of treasury shares............................. (15) (35) (36) ------------------------------------ Balance-end of year................................... 1,278 1,287 1,013 ------------------------------------ Contributed Surplus: Balance-beginning of year................................. 2,508,062 506,452 500,599 Issue of shares........................................... 15,951 101,502 18,917 Issue of shares Mid Ocean acquisition..................... - 2,093,426 - Exercise of stock options................................. 11,711 9,147 6,277 Repurchase of treasury shares............................. (15,588) (202,465) (19,341) ------------------------------------ Balance-end of year................................... 2,520,136 2,508,062 506,452 ------------------------------------ Accumulated other comprehensive income: Balance-beginning of year................................. 235,185 251,471 247,626 Net change in unrealized gains on investment portfolio, net of tax............................................. (213,482) (10,352) (8,302) Net change in unrealized gains on investment portfolio of affiliate.............................................. 1,640 (5,062) 14,535 Currency translation adjustments.......................... (4,032) (872) (2,388) ------------------------------------ Balance-end of year................................... 19,311 235,185 251,471 ------------------------------------ Deferred Compensation: Balance-beginning of year................................. (22,954) (18,263) (9,825) Issue of restricted shares................................ (13,603) (10,506) (13,675) Amortization.............................................. 7,760 5,815 5,237 ------------------------------------ Balance-end of year................................... (28,797) (22,954) (18,263) ------------------------------------ Retained Earnings: Balance-beginning of year................................. 2,891,023 2,455,076 1,898,094 Net income................................................ 470,509 656,330 809,029 Cash dividends paid....................................... (212,659) (156,482) (120,607) Repurchase of treasury shares............................. (83,723) (63,901) (131,440) ------------------------------------ Balance-end of year................................... 3,065,150 2,891,023 2,455,076 ------------------------------------ Total shareholders' equity.................................. $5,577,078 $5,612,603 $3,195,749 ------------------------------------
See accompanying notes to Consolidated Financial Statements 33 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S. dollars in thousands)
1999 1998 1997 --------------------------------------- Cash flows provided by operating activities: Net income............................................... $ 470,509 $ 656,330 $ 809,029 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains on sales of investments............... (94,356) (211,204) (410,658) Amortization of (discounts) premium on fixed maturities............................................ (14,429) (14,718) (2,170) Equity in net income of affiliates, net of cash received.............................................. (34,506) (24,973) (34,395) Amortization of deferred compensation.................... 7,657 5,815 5,237 Amortization of intangible assets........................ 49,141 26,881 7,403 Unpaid losses and loss expenses.......................... 411,396 323,857 314,449 Unearned premiums........................................ 131,767 52,161 (193,018) Premiums receivable...................................... (166,027) 4,245 151,203 Unpaid losses and loss expenses recoverable.............. (212,928) (221,177) 94,349 Prepaid reinsurance premiums............................. (1,848) (45,961) (49,328) Reinsurance balances receivable.......................... (25,109) (31,103) 16,419 Other.................................................... (25,632) 39,783 25,424 --------------------------------------- Total adjustments..................................... 25,126 (96,394) (75,085) --------------------------------------- Net cash provided by operating activities................ 495,635 559,936 733,944 Cash flows used in investing activities: Proceeds from sale of fixed maturities and short-term investments........................................... 15,664,591 15,765,103 12,385,521 Proceeds from redemption of fixed maturities and short-term investments................................ 134,565 516,418 187,441 Proceeds from sale of equity securities.................. 1,017,177 918,501 1,381,465 Purchases of fixed maturities and short-term investments........................................... (16,075,719) (16,460,877) (12,615,821) Purchases of equity securities........................... (803,728) (1,020,032) (1,147,601) Deferred (gains) losses on forward contracts............. (509) (12,163) 8,247 Investments in affiliates................................ (348,543) (1,126) (43,184) Acquisition of subsidiaries, net of cash acquired........ (173,206) 41,483 (660,137) Other investments........................................ (120,717) 4,411 (6,016) Deposit liabilities and policy benefit reserve........... 837,893 - - Other assets............................................. (35,133) 13,430 (54,353) --------------------------------------- Net cash provided (used) in investing activities............ 96,671 (234,852) (564,438) Cash flows used in financing activities: Issue of restricted shares............................... 69 514 387 Proceeds from exercise of stock options.................. 14,014 15,092 12,284 Repurchase of treasury shares............................ (99,344) (266,401) (154,720) Dividends paid........................................... (212,659) (156,481) (120,607) Proceeds from loans...................................... 328,700 655,000 530,000 Repayment of notes....................................... (100,000) - - Repayment of loans....................................... (339,735) (495,000) (400,000) Repayment of debentures.................................. (101,737) - - Minority interest........................................ (4,900) 19,988 26,226 --------------------------------------- Net cash used in financing activities....................... (515,592) (227,288) (106,430) Effects of exchange rate changes on cash on foreign currency cash balances............................................. 161 (516) (622) Increase in cash and cash equivalents....................... 76,875 97,280 62,454 Cash and cash equivalents-beginning of year................. $ 480,874 $ 383,594 $ 321,140 --------------------------------------- Cash and cash equivalents - end of year..................... $ 557,749 $ 480,874 $ 383,594 --------------------------------------- Taxes paid.................................................. $ 30,246 $ 31,200 $ 37,600 --------------------------------------- Interest paid............................................... $ 28,268 $ 32,800 $ 27,100 ---------------------------------------
See accompanying notes to Consolidated Financial Statements 34 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31 1999, 1998 and 1997 (U.S. dollars in thousands) 1. HISTORY XL Capital Ltd (sometimes referred to as the "Company") is a holding company organized under the laws of the Cayman Islands. XL was incorporated on March 16, 1998, as the successor to EXEL Limited, a Cayman Islands corporation organized in 1986, in connection with EXEL's merger with Mid Ocean Limited, a Cayman Islands corporation. The merger was accounted for as a purchase under U.S. generally accepted accounting principles ("GAAP") and as such, results of operations of Mid Ocean are included from August 1, 1998, the effective date of the merger. In the merger, all of the shares of EXEL and Mid Ocean were exchanged for shares in the Company according to two schemes of arrangement under Cayman Islands law. The Company operated under the name "EXEL Limited" from completion of the merger until February 1, 1999 when its current name was approved by the requisite vote of the Company's shareholders. References herein to XL Capital or the Company also shall include EXEL unless the context otherwise requires. Through its subsidiaries, the Company is a leading provider of insurance and reinsurance, including coverages relating to certain financial risks, to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. In 1999, XL Capital merged with NAC Re Corp, a Delaware corporation. The merger has been accounted for as a "pooling of interests" under U.S. GAAP. Under pooling of interests accounting, it is assumed that XL Capital and NAC have been merged from the date of incorporation of the Company, and accordingly, all prior period information contained in this document includes the results of NAC. NAC was organized in 1985 and, through its subsidiaries, writes property and casualty insurance and reinsurance in the U.S., Canada and Europe. Subsequent to the merger agreement, XL Capital amended its financial year from November 30 to December 31 as a conforming pooling adjustment and to facilitate year end reporting for its subsidiaries. XL Insurance, a company organized under the laws of Bermuda, and its subsidiaries are the Company's principal insurance subsidiaries. XL Insurance was formed in 1986 in response to a shortage of high excess liability coverage for Fortune 500 companies in the U.S. In 1990, XL Insurance formed XL Europe, an insurance company organized under the laws of Ireland to serve European clients and, in 1998, formed two companies now known as XL Insurance Company of New York and XL Capital Assurance. XL Mid Ocean Reinsurance is organized under the laws of Bermuda. On August 7, 1998, XL Mid Ocean Re was formed through the merger of XL Global Reinsurance and Mid Ocean Re. XL Global Re was formed in November 1997 through the merger of XL Reinsurance and Global Capital Reinsurance following EXEL's acquisition of GCR Holdings Limited, a Cayman Islands holding company, on June 12, 1997. XL Reinsurance commenced operations on December 1, 1995 to write specialty reinsurance business. Mid Ocean Re and Global Capital Re were organized in 1992 and 1993, respectively, initially to write property catastrophe reinsurance following severe hurricanes which struck the southeastern United States in the late 1980's and early 1990's. The Company further expanded into the U.S. in 1999 by completing the acquisition of both Intercargo Corporation and ECS, Inc. Intercargo, through its subsidiaries, underwrites specialty insurance products for companies engaged in international trade, including U.S. Customs bonds and marine cargo insurance. ECS is an underwriting manager, which specializes in environmental insurance coverages and risk management services. The Brockbank Group was acquired through the merger with Mid Ocean. Brockbank is a company organized under the laws of the United Kingdom and is a leading Lloyd's managing agency which provides underwriting and similar services to five Lloyd's syndicates. Two of these syndicates are dedicated corporate syndicates whose capital is provided solely by the Company and its subsidiaries. Mid Ocean acquired 51% of Brockbank in December 1995 and the remaining 49% in August 1997. The two corporate syndicates, which commenced operations on January 1, 1996, underwrite property, marine and energy, aviation, satellite, professional indemnity, U.K. motor and other specialty lines of insurance and reinsurance to a global client base. As a managing agency, Brockbank receives fees 35 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 1. HISTORY (CONTINUED) and commissions in respect of underwriting services it provides to syndicates. In the fourth quarter of 1999, Brockbank sold its two motor insurance businesses, Admiral and Zenith. The Company expects there to be decreases in premiums, fee income and certain costs, however it does not expect the overall profitability of its Lloyd's operations to be materially affected by such sales. Denham Syndicate Management Limited was acquired by NAC during 1998 and it also provides underwriting and similar services to one corporate syndicate, whose capital is partially provided by the Company. This syndicate writes a specialized book of international business, concentrating on long-tail casualty and non-marine physical damage. The Company participates in several joint ventures of strategic importance. In general, the Company has pursued a strategy of entering into joint ventures with organizations that possess expertise in lines of business that the Company wishes to write. The Company's principal joint ventures are in the areas of financial guaranty insurance, life insurance for high net worth individuals, Latin American reinsurance, political risk insurance and currency and related risk management. In July 1999, the Company entered into a joint venture with Les Mutuelles du Mans Assurances Group to form a new French reinsurance company, Le Mans Re. The Company owns a 49% shareholding in the new company, which underwrites a worldwide portfolio comprising all classes of non-life reinsurance business together with a selective portfolio of life reinsurance business. In 1999, the Company made strategic minority investments in two investment management firms. The Company acquired minority investments in Highfields Capital Management L.P., a global equity investment firm, and MKP Capital Management, a New York-based fixed income investment manager specializing in mortgage-backed securities. In 1998, the Company entered into a joint venture with FSA Holdings Ltd to write financial guaranty insurance and reinsurance. Under the terms of the joint venture, each of the Company and FSA formed a Bermuda insurance company in which it is the majority shareholder and made a minority investment in the company formed by its co-venturer. The Company formed Reeve Court Insurance, a Bermuda company organized as a joint venture with such company's management for the purpose of providing life insurance to high net worth individuals in 1998. In 1997, the Company acquired a 75% holding in Latin America Re, a Bermuda reinsurance company. The Company formed Sovereign Risk Insurance as a joint venture in 1997. Sovereign is a Bermuda-based managing general agency that writes political risk insurance on a subscription basis on behalf of its shareholders. In 1996, the Company acquired approximately 30% of Pareto Partners, a firm that specializes in foreign currency management and related services. 36 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. dollars in thousands) 2. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PREPARATION These consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). They include the merger with NAC, which occurred in June 1999, and which has been accounted for as a "pooling of interests" under U.S. GAAP. They are also based upon the Company's new fiscal year end of December 31. Results of operations, statements of position and cash flows include NAC as though it had always been a part of the Company. All material intercompany 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (B) PREMIUMS AND ACQUISITION COSTS Premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums assumed are estimated based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period they are determined. Premiums are earned on a monthly pro-rata basis over the period the coverage is provided. Unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. Premiums written and unearned premiums are presented after deductions for reinsurance ceded to other insurance companies. Financial guaranty insurance premiums are earned over the life of the exposure, and certain transactions such as installment premiums are not recognized as premiums written until the premium is received. Acquisition costs, which vary with and are primarily related to the acquisition of policies, primarily commissions paid to brokers, are deferred and amortized over the period the premiums are earned. Future earned premiums and the anticipated losses, investment income and other costs related to those premiums are also considered in determining the level of acquisition costs to be deferred. (C) REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance premiums ceded are expensed and the commissions recorded thereon are earned on a monthly pro-rata basis over the period the reinsurance coverage is provided. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Provision is made for estimated unrecoverable reinsurance. (D) INVESTMENTS Investments are considered available for sale and are carried at fair value. The fair value of investments is based upon quoted market values where available or by reference to broker or underwriter bid indications. The net unrealized appreciation or depreciation on investments, net of tax, is included in accumulated other comprehensive income. Any unrealized depreciation in value considered by management to be other than temporary is charged to income in the period that it is determined. 37 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Short-term investments comprise investments with a maturity equal to or greater than 90 days but less than one year. Equity securities include investments in open end mutual funds. All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of investments are determined on the basis of average cost or amortized cost. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments. Financial futures and forward currency contracts are carried at fair value, with the corresponding realized or unrealized gain or loss included in income, except in the instance of forward foreign currency contracts that are used to hedge currency risks on specific investments. Gains and losses from these contracts are deferred and included in shareholders' equity until the corresponding asset is sold. (E) CASH EQUIVALENTS Cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased. (F) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations whose functional currency is other than the U.S. dollar are translated at year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is recorded, net of applicable deferred income taxes, as a separate component of accumulated other comprehensive income in shareholders' equity. Other monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses recognized in income, unless the foreign currency exposure is directly hedged as discussed above. Revenue and expense transactions are translated at the average exchange rates prevailing during the year. (G) INVESTMENTS IN AFFILIATES Investments in which the Company has significant influence over the operations of its affiliates are carried under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss for such investments in its results of operations. (H) OTHER INVESTMENTS The Company accounts for its other investments on a cost basis as it has no significant influence over these entities. Investments are written down to their realizable value where management considers there is a permanent decrease in value. Income is recorded when received. (I) AMORTIZATION OF INTANGIBLE ASSETS Intangible assets recorded in connection with the Company's business combinations are amortized on a straight-line basis over the expected life of the related operations acquired. The Company evaluates the recoverability of its intangible assets whenever changes in circumstances warrant. If it is determined that an impairment exists, the excess of the unamortized balance over the fair value of the intangible asset will be charged to earnings at that time. 38 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (J) LOSSES AND LOSS EXPENSES Unpaid losses and loss expenses includes reserves for unpaid reported losses and loss expenses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses has been established by management based on amounts reported from insured or ceding companies and consultation with independent legal counsel, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. Certain workers' compensation case reserves are considered fixed and determinable and are subject to tabular reserving. Such tabular reserves are discounted using an interest rate of 7%. The Company recognizes as a component of loss reserves, the loss experience accounts of policyholders for policies written on a multi-year basis where experience accounts are a percentage of premiums net of related losses paid. Interest is earned on liable amounts and charged to investment income. In the event the insured cancels the policy, the return of the experience account is treated as a commutation if the Company was previously notified of a loss, or as a return premium if there has been no loss notification. The reserve for losses incurred but not reported has been estimated by management in consultation with independent actuaries and is based on loss development patterns determined by reference to the Company's underwriting practices, the policy form and the experience of the relevant industries. Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay any losses that fall within coverages assumed by the Company. However, there can be no assurance that losses will not exceed the Company's total reserves. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made. (K) DEPOSIT LIABILITIES AND POLICY BENEFIT RESERVES Short duration contracts entered into by the Company which are not deemed to transfer significant underwriting and/or timing risk are accounted for as deposits, whereby liabilities are recorded for the same amount of premium received. The Company will periodically re-assess the amount of the deposit liabilities. Changes are recorded in the period they are determined as either interest income where the contract does not transfer underwriting risk, or net losses and loss expenses incurred where the contract does not transfer significant timing risk. Policy benefit reserves relate to long duration contracts written by the Company which do not transfer significant mortality or morbidity risks, and are accounted for as deposits, and liabilities for estimated future policy benefits are established at the time such funds are received. (L) INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. (M) STOCK PLANS The Company accounts for stock compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation expense for stock option 39 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) grants and stock appreciation rights is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. (N) PER SHARE DATA Basic earnings per share is based on weighted average common shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options. (O) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of certain assets and liabilities are based on published market values, if available, or estimates of fair value of similar issues. Fair values are reported in Notes 4 and 10. (P) RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 2000. The Company has not yet completed its assessment of the effect of the adoption of this standard on results of operations, financial condition or liquidity, but believes it will not be significant. 3. SEGMENT INFORMATION The Company is organized into four underwriting segments - insurance, reinsurance, Lloyd's syndicates and financial services - in addition to a corporate segment that includes the investment operations of the Company. Certain business written by the Company has loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. INSURANCE OPERATIONS The insurance business is written primarily by the following: XL Insurance, XL Europe, XL Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS and Intercargo. Business written includes general liability, other liability including directors and officers, professional and employment practices liability, property, program business, marine, aviation, satellite and other product lines including U.S. Customs bonds, surety, political risk and specialty lines. REINSURANCE OPERATIONS The Company's reinsurance business is primarily written by NAC Re and XL Mid Ocean Re. Business written includes treaty and facultative reinsurance to primary insurers of casualty 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. The Company endeavors to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requires that its property catastrophe contracts provide for aggregate limits and varying attachment points. 40 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 3. SEGMENT INFORMATION (CONTINUED) LLOYD'S SYNDICATES The Lloyd's operations are comprised of Brockbank and Denham. Corporate syndicates write property, marine and energy, aviation and satellite, motor, professional indemnity, liability coverage and other specialty lines, primarily of insurance but also reinsurance. Effective January 1, 2000, the Company discontinued writing direct motor business. FINANCIAL SERVICES Financial services premiums are written by XL Insurance through XL Capital Products. Business written includes insurance and reinsurance solutions for complex financial risks. These include financial insurance and reinsurance, credit enhancement swaps and other collateralized transactions. While each of these are unique and are tailored for the specific needs of the insured, they are typically multi-year policies. Due to the nature of these types of policies, premium volume as well as profit margin can vary significantly from period to period. The Company has approached this market on a "net-line" basis, but may cede a portion of some policies to third parties from time to time. In 1999, the Company also commenced assuming large loss portfolios as part of its new asset accumulation strategy. The Company evaluates performance of each segment based on underwriting profit or loss. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, management does not consider the allocation of assets by segment. The following is an analysis of the underwriting profit or loss by segment together with a reconciliation of underwriting profit or loss to net income:
LLOYD'S FINANCIAL YEAR ENDED DECEMBER 31, 1999 INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL - ---------------------------- ------------------------------------------------------------- Net premiums earned.......................... $463,069 $909,915 $355,769 $21,253 $1,750,006 Fee and other income......................... 7,584 - 65,892 26,924 100,400 Net losses and loss expenses (1), (2)........ 309,079 597,269 297,595 5,361 1,209,304 Acquisition costs............................ 65,318 224,359 89,195 2,108 380,980 Operating expenses (3)....................... 70,929 103,264 28,125 16,670 218,988 ------------------------------------------------------------- Underwriting profit (loss)................... $ 25,327 $(14,977) $ 6,746 $24,038 $ 41,134 Net investment income........................ 525,318 Net realized gains on investments............ 94,356 Equity in net earnings of affiliates......... 40,907 Interest expense............................. 37,378 Amortization of intangible assets............ 49,141 Corporate operating expenses (3)............. 43,765 Loss reserve adjustment (1).................. 95,000 One time charges (3)......................... 45,272 Minority interest............................ 220 Income tax benefit........................... (39,570) ---------- Net income................................... $ 470,509 ---------- Loss and loss expense ratio.................. 66.7% 65.6% 83.6% 25.2% 69.1% Underwriting expense ratio................... 29.4% 36.0% 33.0% 88.4% 34.3% ------------------------------------------------------------- Combined ratio............................... 96.1% 101.6% 116.6% 113.6% 103.4% -------------------------------------------------------------
41 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 3. SEGMENT INFORMATION (CONTINUED) (1) Net losses and loss expenses exclude an increase to loss reserves of $95.0 million associated with the merger with NAC. (2) Net losses and loss expenses for the insurance segment include, and the reinsurance segment exclude, $100.0 million relating to an intercompany stop loss agreement. Total results are not affected. The loss and loss expense ratio would have been 45.2% and 76.6% and the underwriting profit (loss) would have been $125 million and $(115) million in the insurance and reinsurance segments, respectively, had this stop loss agreement not been in place. (3) Operating expenses exclude corporate operating expenses, shown separately, and one time charges of $45.3 million associated with the merger with NAC.
LLOYD'S FINANCIAL YEAR ENDED DECEMBER 31, 1998 INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL - ---------------------------- ------------------------------------------------------------- Net premiums earned........................... $410,030 $760,409 $153,852 $ - $1,324,291 Fee and other income.......................... 8,244 - 14,081 - 22,325 Net losses and loss expenses.................. 267,823 455,583 118,111 - 841,517 Acquisition costs............................. 47,688 171,039 30,614 - 249,341 Operating expenses (1)........................ 49,702 85,541 14,875 - 150,118 ------------------------------------------------------------- Underwriting profit........................... $ 53,061 $ 48,246 $ 4,333 $ - $ 105,640 Net investment income......................... 417,290 Net realized gains on investments............. 211,204 Equity in net earnings of affiliates.......... 50,292 Interest expense.............................. 33,444 Amortization of intangible assets............. 26,881 Corporate operating expenses (1).............. 19,679 One time charges (1).......................... 17,460 Minority interest............................. 749 Income tax expense............................ 29,883 ---------- Net income.................................... $ 656,330 ---------- Loss and loss expense ratio................... 65.4% 60.0% 76.8% N/A 63.6% Underwriting expense ratio.................... 23.8% 33.8% 29.6% N/A 30.2% ------------------------------------------------------------- Combined ratio................................ 89.2% 93.8% 106.4% N/A 93.8% -------------------------------------------------------------
(1) Operating expenses exclude corporate operating expenses, shown separately, and one time charges of $17.5 million associated with the merger with Mid Ocean. 42 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 3. SEGMENT INFORMATION (CONTINUED)
LLOYD'S FINANCIAL YEAR ENDED DECEMBER 31, 1997 INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL - ---------------------------- ------------------------------------------------------------- Net premiums earned........................... $428,774 $685,984 $ - $ - $1,114,758 Net losses and loss expenses.................. 352,203 386,646 - - 738,849 Acquisition costs............................. 55,199 142,818 - - 198,017 Operating expenses (1)........................ 37,232 75,829 - - 113,061 ------------------------------------------------------------- Underwriting profit (loss).................... $(15,860) $ 80,691 $ - $ - $ 64,831 Net investment income......................... 345,115 Net realized gains on investments............. 410,658 Equity in net earnings of affiliates.......... 64,959 Interest expense.............................. 29,622 Amortization of intangible assets............. 7,403 Corporate operating expenses (1).............. 7,029 Minority interest............................. 308 Income tax expense............................ 32,172 ---------- Net income.................................... $ 809,029 ---------- Loss and loss expense ratio................... 82.1% 56.4% N/A N/A 66.3% Underwriting expense ratio.................... 21.6% 31.9% N/A N/A 27.9% ------------------------------------------------------------- Combined ratio................................ 103.7% 88.3% N/A N/A 94.2% -------------------------------------------------------------
(1) Operating expenses exclude corporate operating expenses, shown separately. 43 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 3. SEGMENT INFORMATION (CONTINUED) SUPPLEMENTAL SEGMENT AND GEOGRAPHIC INFORMATION The following table is an analysis of the Company's gross premiums written, net premiums written and net premiums earned by line of business:
YEAR ENDED DECEMBER 31 ------------------------------------ GROSS PREMIUM WRITTEN: 1999 1998 1997 ------------------------------------ Casualty insurance.......................................... $ 297,899 $ 411,405 $ 376,837 Casualty reinsurance........................................ 481,392 311,057 348,402 Property catastrophe........................................ 147,372 80,420 (82,294) Other property.............................................. 424,666 315,013 258,957 Marine, energy, aviation and satellite...................... 212,452 108,701 84,021 Lloyd's syndicates.......................................... 591,520 162,773 - Other....................................................... 287,619 254,170 149,462 ------------------------------------ Total....................................................... $2,442,920 $1,643,539 $1,135,385 ------------------------------------ NET PREMIUM WRITTEN: 1998 1997 ------------------------------------ Casualty insurance.......................................... $ 232,614 $ 301,362 $ 265,296 Casualty reinsurance........................................ 419,000 268,460 322,135 Property catastrophe........................................ 128,863 71,380 (82,902) Other property.............................................. 311,312 231,690 191,026 Marine, energy, aviation and satellite...................... 152,783 82,484 68,111 Lloyd's syndicates.......................................... 423,880 145,691 - Other....................................................... 233,431 223,197 116,779 ------------------------------------ Total....................................................... $1,901,883 $1,324,264 $ 880,445 ------------------------------------ NET PREMIUM EARNED: 1998 1997 ------------------------------------ Casualty insurance.......................................... $ 272,677 $ 287,438 $ 363,967 Casualty reinsurance........................................ 331,778 282,245 321,394 Property catastrophe........................................ 133,420 122,583 43,519 Other property.............................................. 324,571 233,045 189,159 Marine, energy, aviation and satellite...................... 163,112 92,147 65,016 Lloyd's syndicates.......................................... 355,769 153,852 - Other....................................................... 168,679 152,621 131,703 ------------------------------------ Total....................................................... $1,750,006 $1,324,291 $1,114,758 ------------------------------------
44 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 3. SEGMENT INFORMATION (CONTINUED) The following table shows an analysis of the Company's net premiums written by geographical location of subsidiary:
NET PREMIUMS WRITTEN: 1999 1998 1997 ------------------------------------ Bermuda..................................................... $ 561,750 $ 534,092 $ 241,006 United States............................................... 684,468 497,364 541,362 Europe and other............................................ 655,665 292,808 98,077 ------------------------------------ Total....................................................... $1,901,883 $1,324,264 $ 880,445 ------------------------------------
MAJOR CUSTOMERS During 1999, 1998 and 1997, approximately 21%, 34% and 35% of the Company's consolidated gross written premiums were generated from or placed by Marsh & McLennan Companies. During 1999, 1998 and 1997, approximately 13%, 19% and 18% of the Company's consolidated gross written premiums were generated from or placed by AON Corporation and its subsidiaries. No other broker accounted for more than 10% of gross premiums written in each of the three years ended December 31, 1999. 4. INVESTMENTS Net investment income is derived from the following sources:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------------------------------ Fixed maturities, short-term investments and cash equivalents............................................... $538,169 $423,612 $346,373 Equity securities........................................... 11,835 19,596 21,046 ------------------------------ Total investment income................................... 550,004 443,208 367,419 Investment expenses......................................... 24,686 25,918 22,304 ------------------------------ Net investment income....................................... $525,318 $417,290 $345,115 ------------------------------
45 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 4. INVESTMENTS (CONTINUED) The following represents an analysis of realized and the change in unrealized appreciation on investments:
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------------------------------- Net realized gains (losses): Fixed maturities and short-term investments: Gross realized gains...................................... $ 116,226 $ 445,086 $ 203,278 Gross realized losses..................................... (214,196) (398,046) (167,146) --------------------------------- Net realized gains (losses)............................ (97,970) 47,040 36,132 Equity securities: Gross realized gains...................................... 254,779 613,186 400,751 Gross realized losses..................................... (62,453) (463,159) (26,225) --------------------------------- Net realized gains..................................... 192,326 150,027 374,526 Net realized gain on sale of investment in affiliate........ - 14,137 - --------------------------------- Net realized gains on investments...................... 94,356 211,204 410,658 --------------------------------- Change in unrealized appreciation: Fixed maturities and short-term investments............... (333,868) (37,741) 98,212 Equity securities......................................... 101,652 41,819 (102,152) Deferred gains on forward contracts....................... 762 (13,708) 8,247 Investment portfolio of affiliates........................ (11,438) (5,062) 14,535 Change in deferred income tax liability................... 31,050 (722) (12,609) --------------------------------- Net change in unrealized appreciation on investments........ (211,842) (15,414) 6,233 --------------------------------- Total net realized and change in unrealized appreciation on investments......................... $(117,486) $ 195,790 $ 416,891 ---------------------------------
46 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 4. INVESTMENTS (CONTINUED) The cost (amortized cost for fixed maturities and short-term investments), market value and related unrealized gains (losses) of investments are as follows:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 1999 COST GAINS LOSSES VALUE - ----------------- ------------------------------------------------- Fixed maturities: U.S. Government and Government agency............... $ 560,628 $ 1,011 $ (12,532) $ 549,107 Corporate........................................... 4,610,613 31,407 (234,730) 4,407,290 Mortgage-backed securities.......................... 1,118,104 682 (23,602) 1,095,184 U.S. States and political subdivisions of the States.............................................. 779,328 7,850 (17,402) 769,776 Non-U.S. Sovereign Government....................... 767,246 10,809 (18,261) 759,794 ------------------------------------------------- Total fixed maturities........................... $7,835,919 $ 51,759 $(306,527) $7,581,151 ------------------------------------------------- Short-term investments: U.S. Government and Government agency............... $ 82,475 - $ (63) $ 82,412 Corporate........................................... 315,834 229 (270) 315,793 Non-U.S. Sovereign Government....................... 7,066 - (11) 7,055 ------------------------------------------------- Total short-term investments..................... $ 405,375 $ 229 $ (344) $ 405,260 ------------------------------------------------- Total equity securities............................... $ 863,020 $377,302 $(104,142) $1,136,180 -------------------------------------------------
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 1998 COST GAINS LOSSES VALUE - ----------------- ------------------------------------------------- Fixed maturities: U.S. Government and Government agency............... $1,876,198 $ 19,878 $ (5,310) $1,890,766 Corporate........................................... 3,605,183 80,085 (83,383) 3,601,885 Mortgage-backed securities.......................... 1,027,383 13,353 (634) 1,040,102 U.S. States and political subdivisions of the States.............................................. 237,864 46,926 (666) 284,125 Non-U.S. Sovereign Government....................... 687,096 27,229 (18,299) 696,026 ------------------------------------------------- Total fixed maturities........................... $7,433,724 $187,471 $(108,292) $7,512,903 ------------------------------------------------- Short-term investments: U.S. Government and Government agency............... $ 27,816 $ 128 $ - $ 27,944 Corporate........................................... 200,204 69 (284) 199,989 Non-U.S. Sovereign Government....................... 18,065 - (107) 17,958 ------------------------------------------------- Total short-term investments..................... $ 246,085 $ 197 $ (391) $ 245,891 ------------------------------------------------- Total equity securities............................... $1,127,590 $242,798 $ (71,290) $1,299,098 -------------------------------------------------
47 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 4. 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.
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------------- ----------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ------------------------------------------------- Due after 1 through 5 years......................... $2,091,280 $2,025,736 $2,390,830 $2,397,734 Due after 5 through 10 years........................ 1,816,040 1,773,639 2,104,804 2,139,561 Due after 10 years.................................. 2,810,495 2,686,592 1,910,707 1,935,506 Mortgage-backed securities.......................... 1,118,104 1,095,184 1,027,383 1,040,102 ------------------------------------------------- $7,835,919 $7,581,151 $7,433,724 $7,512,903 -------------------------------------------------
At December 31, 1999 and 1998, approximately $89.4 million and $92.0 million, respectively, of securities were on deposit with various U.S. state or government insurance departments in order to comply with insurance regulations. Through its subsidiaries, the Company has two facilities available for the issuance of letters of credit collateralized against the Company's investment portfolio, which were up to a value of $791.4 million at December 31, 1999. At December 31, 1999 and 1998, approximately $591.0 million and $348.9 million, respectively, of letters of credit were issued and outstanding under these facilities. Included in cash and invested assets at December 31, 1999 and 1998 are approximately $16.6 million and $22.4 million, respectively, of assets held in a "holding company" escrow account arising from a tax allocation agreement between certain of the Company's U.S. subsidiaries. 5. INVESTMENTS IN AFFILIATES The following investments are accounted for on the equity basis: In 1999, the Company acquired minority investments in Highfields Capital Management L.P., a global equity investment firm, and MKP Capital Management, a New York-based fixed income investment manager specializing in mortgage-backed securities, and invested in the closed end funds they manage. In 1999, the Company signed a joint venture agreement with Les Mutuelles du Mans Assurances Group to form a new French reinsurance company, Le Mans Re. The Company owns a 49% shareholding in the new company, which underwrites a worldwide portfolio comprising all classes of non-life reinsurance business together with a selective portfolio of life reinsurance business. The Company owned 27.9% of the issued shares of Risk Capital Holdings as at December 31, 1999 and 1998. Risk Capital provides reinsurance and other forms of capital for insurance companies with capital needs that cannot be met by reinsurance alone. Subsequent to year end, this investment was sold. See Note 20 for further discussion. The Company owns 30% of Pareto Partners, a partnership engaged in the business of providing investment advisory and discretionary management services. 48 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 5. INVESTMENTS IN AFFILIATES (CONTINUED) In 1998, the Company and FSA formed FSA International, a Bermuda company. At December 31, 1999, the Company owned 20% of FSA International. The Company owned approximately 25% of Mid Ocean until July 31, 1998. Subsequent to this date, Mid Ocean was acquired by the Company and has been consolidated. 6. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (A) NAC RE CORP. On June 18, 1999, the Company merged with NAC in an all-stock transaction. Shareholders of NAC received 0.915 Company shares for each NAC share in a tax free exchange. Approximately 16.9 million of the Company's Class A ordinary shares were issued in this transaction. The merger transaction has been accounted for as a pooling of interests under U.S. GAAP. Following the merger, the Company changed its fiscal year end from November 30 to December 31 as a conforming pooling adjustment. No adjustments were necessary to conform NAC's accounting policies, although certain reclassifications were made to the NAC financial statements to conform to the Company's presentation. The following table presents a reconciliation of the total revenues, net income, and earnings per share of the Company as previously reported as adjusted for the change in fiscal year end, combined with the results of NAC:
CONSOLIDATED CONSOLIDATED CONSOLIDATED SHAREHOLDERS' DECEMBER 1998 TOTAL REVENUES NET INCOME EQUITY - ------------------------------------------------------------ --------------------------------------------- XL Capital - year end November 30, 1998 as previously reported.................................................. $1,217,648 $587,663 $4,817,880 Less one month December 31, 1997............................ 93,835 57,168 Add one month December 31, 1998............................. 202,210 29,785 43,998 --------------------------------------------- XL Capital - year end December 31, 1998 as adjusted before combination with NAC...................................... 1,326,023 560,280 4,861,878 NAC - year end December 31, 1998............................ 699,379 96,050 750,725 --------------------------------------------- Combined results - year end December 31, 1998............... $2,025,402 $656,330 $5,612,603 ---------------------------------------------
BASIC EARNINGS DILUTED EARNINGS PER SHARE PER SHARE --------------------------------- XL Capital - year end November 30, 1998 as previously reported.................................................. $6.32 $6.20 XL Capital - year end December 31, 1998 as adjusted before combination with NAC...................................... $5.88 $5.77 NAC - year end December 31, 1998 (1)........................ $5.74 $5.22 Weighted average combined earnings per share as adjusted.... $5.86 $5.68
(1) After giving effect to the exchange of 0.915 Company shares for each NAC Share 49 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 6. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED)
CONSOLIDATED CONSOLIDATED CONSOLIDATED SHAREHOLDERS' DECEMBER 1997 TOTAL REVENUES NET INCOME EQUITY - -------------- --------------------------------------------- XL Capital - year end November 30, 1997 as previously reported.................................................. $1,159,026 $676,961 $2,479,130 Less one month December 31, 1996............................ 57,743 20,777 - Add one month December 31, 1997............................. 93,835 57,168 59,558 --------------------------------------------- XL Capital-year end December 31, 1997 as adjusted before combination with NAC...................................... 1,195,118 713,352 2,538,688 NAC - year end December 31, 1997............................ 740,372 95,677 657,061 --------------------------------------------- Combined results - year end December 31, 1997............... $1,935,490 $809,029 $3,195,749 ---------------------------------------------
BASIC EARNINGS DILUTED EARNINGS PER SHARE PER SHARE --------------------------------- XL Capital - year end November 30, 1997 as previously reported.................................................. $7.95 $7.84 --------------------------------- XL Capital - year end December 31, 1997 as adjusted before Combination with NAC...................................... $8.40 $8.30 NAC - year end December 31, 1997 (1)........................ $5.69 $5.21 Weighted average combined earnings per share, as adjusted... $7.95 $7.74 ---------------------------------
(1) After giving effect to the exchange of 0.915 Company shares for each NAC Share. (B) ECS, INC AND INTERCARGO CORPORATION In 1999, the Company acquired ECS, an underwriting manager which specializes in environmental insurance coverages and risk management services. Commencing January 2000, ECS will underwrite policies on behalf of the Company's insurance and reinsurance subsidiaries. In 1999, the Company acquired Intercargo, which through its subsidiaries, underwrites specialty insurance products for companies engaged in international trade, including U.S. Customs bonds and marine cargo insurance. The Intercargo and ECS acquisitions have been accounted for under the purchase method of accounting. The combined purchase price was $222.8 million and the resulting goodwill of $159.6 million is being amortized over 20 years. Cash acquired as a result of the acquisition was $49.6 million. (C) MID OCEAN LIMITED In August 1998, the Company merged with Mid Ocean. Shareholders of Mid Ocean received 1.0215 Company shares for each Mid Ocean share subject to a cash election option which was taken up of $96 million. The merger with Mid Ocean was accounted for as a purchase under U.S. GAAP and results of operations of Mid Ocean are included from August 1, 1998. The total purchase price was $2.2 billion; the fair value of Mid Ocean's net assets not already owned by the Company was $0.9 billion with the balance of $1.3 billion representing goodwill which is 50 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 6. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED) being amortized over 40 years. On August 1, 1998, the consolidated balance sheet of Mid Ocean included the following items at fair value: Investments available for sale.............................. $1,668,224 Premiums receivable......................................... 445,540 Other assets................................................ 442,831 Total assets................................................ 2,556,595 Unpaid loss and loss expense reserves....................... 595,261 Unearned premium............................................ 458,994 Total liabilities........................................... 1,195,835 Shareholders' equity........................................ 1,360,760
Cash and cash equivalents totaling $137 million is included in other assets. Cash acquired as a result of this merger was $41 million. See Note 22 for further details. (D) GCR HOLDINGS LIMITED In June 1997, the Company acquired GCR Holdings Limited in an all-cash transaction. The acquisition was accounted for as a purchase under U.S. GAAP. The total purchase price was $667 million, the fair value of GCR's net assets was $402 million, with the balance of $265 million representing goodwill which is being amortized over 20 years. Cash and cash equivalents of approximately $7 million were acquired. 7. LOSSES AND LOSS EXPENSES Unpaid losses and loss expenses are comprised of:
YEAR ENDED DECEMBER 31 ------------------------------------ 1999 1998 1997 ------------------------------------ Reserve for reported losses and loss expenses............... $2,175,688 $2,062,046 $1,416,745 Reserve for losses incurred but not reported................ 3,193,714 2,834,597 2,555,631 ------------------------------------ Unpaid losses and loss expenses............................. $5,369,402 $4,896,643 $3,972,376 ------------------------------------ Losses and loss expenses incurred comprise: Loss and loss expense payments.............................. $1,392,024 $ 849,777 $ 560,542 Change in unpaid losses and loss expenses................... 303,140 285,775 344,580 Reinsurance recoveries...................................... (390,860) (294,035) (166,273) ------------------------------------ Losses and loss expenses incurred........................... $1,304,304 $ 841,517 $ 738,849 ------------------------------------
51 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 7. LOSSES AND LOSS EXPENSES (CONTINUED) The following table represents an analysis of paid and unpaid losses and loss expenses and a reconciliation of the beginning and ending unpaid loss and loss expenses for the years indicated:
1999 1998 1997 ------------------------------------ Unpaid losses and loss expenses at beginning of year........ $4,896,643 $3,972,376 $3,623,334 Unpaid losses and loss expenses recoverable................. (593,960) (363,716) (457,373) ------------------------------------ Net unpaid losses and loss expenses at beginning of year.... 4,302,683 3,608,660 3,165,961 Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: Current year.............................................. 1,591,414 1,085,161 1,056,228 Prior year................................................ (287,110) (243,644) (317,379) ------------------------------------ Total net incurred loss and loss expenses.............. 1,304,304 841,517 738,849 Interest incurred on experience reserves.................... - 1,798 866 Exchange rate effects....................................... (5,950) 718 (658) Net loss reserves acquired through purchase of subsidiaries.............................................. 30,003 580,879 34,593 Net loss and loss expenses paid in respect of losses occurring in: Current year.............................................. 281,806 272,456 97,296 Prior year................................................ 811,696 458,433 233,655 ------------------------------------ Total net paid losses.................................. 1,093,502 730,889 330,951 Net unpaid losses and loss expenses at end of year.......... 4,537,538 4,302,683 3,608,660 Unpaid losses and loss expenses recoverable................. 831,864 593,960 363,716 ------------------------------------ Unpaid losses and loss expenses at end of year.............. $5,369,402 $4,896,643 $3,972,376 ------------------------------------
Business written by the Company has loss experience characterized as low frequency but high severity in nature. This may result in volatility in the Company's financial results. Actuarial assumptions used to establish the liability for losses and loss expenses are periodically adjusted to reflect comparisons to actual loss and loss expense development, inflation and other considerations. Several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other insurance operations. Among these aspects are the differences in the policy forms from more traditional forms, the lack of complete historical loss data for losses of the same type intended to be covered by the policies and the expectation that losses in excess of the attachment level of the Company's policies generally will be characterized by low frequency and high severity, limiting the utility of claims experience of other insureds for similar claims. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that losses and loss expenses will not exceed the total reserves. Losses incurred in 1999 grew significantly over 1998 for a number of reasons. The Company acquired Mid Ocean and Brockbank in August 1998 and consequently, only recognized the effect of their operations for five months in 1998. Incurred losses for these entities were approximately $475 million in 1999 compared to $260 million in 1998. The Company was also affected by a number of catastrophes in 1999 compared to 1998. The fourth 52 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 7. LOSSES AND LOSS EXPENSES (CONTINUED) quarter of 1999 generated approximately $135 million of catastrophic losses to the Company, of which the European storms in December account for the major part. The Company also experienced a number of smaller catastrophe losses in 1999 that totaled approximately $50 million. These losses included the Turkey earthquakes, the Sydney hailstorms and the Oklahoma tornadoes. By comparison, the Company incurred approximately $60 million in catastrophe losses relating to Hurricane Georges and the SwissAir disaster in 1998. These losses were incurred in the reinsurance operations. The Lloyd's operations experienced loss deterioration on the U.K. motor business written by Brockbank, principally relating to its 1999 and 1998 underwriting years of approximately $20 million. 1999 incurred losses also include an increase to reinsurance loss reserves of $95 million for NAC when it merged with the Company in June 1999. In addition, the acquisition of Intercargo in June 1999 also added approximately $30 million to total incurred losses. The decrease in prior year incurred losses is driven primarily by the Company's insurance liability excess of loss reserves. The basis for establishing IBNR is unlike most insurance companies due to the lack of industry data. Consequently, the Company estimates loss reserves through actuarial models based upon its own experience. When the Company commenced writing this type of business in 1986, limited data was available and the Company made its best estimate of loss reserves at that time. Over time, the amount of data has increased, providing a larger statistical base for estimating reserves. Redundancies in prior year loss reserves have occurred where loss experience has developed more favorably than expected. The increase in paid losses in 1999 and 1998 reflects the acquisition of Mid Ocean and Brockbank in 1998. In addition, the source of the Company's high excess of loss liability and catastrophe business can result in loss payments that are both irregular and significant. Similarly, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience. See generally "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-looking Statements". The Company's net incurred losses and loss expenses includes a provision of $10.6 million, $1.2 million and $3.7 million in 1999, 1998 and 1997, respectively, for estimates of actual and potential non-recoveries from reinsurers. Such charges for non-recoveries relate mainly to reinsurance ceded for casualty business written prior to 1986. Included in unpaid losses and loss expenses at December 31, 1999, 1998 and 1997 is a reserve for potential non-recoveries from reinsurers of $25.8 million, $14.5 million and $13.8 million, respectively. Except for certain workers' compensation unpaid losses, the Company does not discount its liabilities for unpaid losses and loss expenses. The Company utilizes tabular reserving for workers' compensation unpaid losses that are considered fixed and determinable and discounts such losses using an interest rate of 7% for financial statements prepared in accordance with GAAP and a 5% interest rate for U.S. statutory accounting purposes. The tabular reserving methodology results in applying a uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular unpaid losses and loss expenses, net of reinsurance, at December 31, 1999, 1998 and 1997 were $85.7 million, $61.3 million and $42.4 million, respectively. The related discounted unpaid losses and loss expenses were $28.1 million, $20.7 million and $16.1 million as of December 31, 1999, 1998 and 1997, respectively. 53 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 7. LOSSES AND LOSS EXPENSES (CONTINUED) ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS The Company's reserving process includes a continuing evaluation of the potential impact on unpaid liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and incurred but not reported claims. A reconciliation of the opening and closing unpaid losses and loss expenses related to asbestos and environmental exposure claims for the years indicated is as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 --------------------------- Net unpaid losses and loss expenses at beginning of year.... $34,850 $32,767 $28,500 Net incurred loss and loss expenses......................... 4,416 5,541 8,067 Less net paid losses and loss expenses...................... 3,060 3,458 3,800 --------------------------- Net increase in unpaid losses and loss expenses............. 1,356 2,083 4,267 Net unpaid losses and loss expenses at end of year.......... 36,206 34,850 32,767 Unpaid losses and loss expenses recoverable at end of year...................................................... 49,022 43,211 37,905 --------------------------- Gross unpaid losses and loss expenses at end of year........ $85,228 $78,061 $70,672 ---------------------------
Incurred but not reported ("IBNR") losses, net of reinsurance, included in the above table was $16.1 million in 1999, $17.0 million in 1998 and $16.6 million in 1997. Unpaid losses recoverable are net of potential uncollectable amounts. As of December 31, 1999 and 1998, the Company had approximately 370 and 400 open claim files, respectively, for potential asbestos exposures and 245 and 760 open claim files, respectively, for potential environmental exposures. Approximately 46% and 51% of the open claim files for 1999 and 1998, respectively, are due to precautionary claim notices. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to receive coverage under the reinsurance contract. Such notices do not contain an incurred loss amount to the Company. The Company believes it has made reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues that would materially affect its estimate for losses and loss expenses. The estimation of loss and loss expense liabilities for asbestos and environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; ii) the lack of reliability of available historical claims data as an indicator of future claims development; iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As these uncertainties are resolved, additional reserve provisions, which could be material in amount, may be necessary. 54 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 8. REINSURANCE The Company utilizes reinsurance and retrocession agreements principally to increase aggregate capacity and to reduce the risk of loss on business assumed. The Company's reinsurance and retrocession agreements provide for recovery of a portion of loss and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements. A 20% quota share reinsurance policy exists with several U.S. reinsurers covering general liability insurance risks only. The maximum amount recoverable from the reinsurers is the ceded percentage of the original policy limit on a per occurrence basis, with an annual aggregate of 300% of the total premium ceded. There are a limited amount of retrocession agreements in place for the Company's short tail reinsurance business assumed for common account reinsurance on proportional contracts written and "high level" property catastrophe excess of loss protection. For the long tail casualty reinsurance business written, several reinsurance policies are in place to limit the Company's retention on any one claim and also for multiple claims arising from two or more risks in a single occurrence or event. The Company's Lloyd's syndicates have traditionally purchased a significant amount of reinsurance to protect against extraordinary loss or loss involving one or more of the lines of business written. Reinsurance is purchased on an excess of loss and quota share basis. The effect of reinsurance and retrocessional activity on premiums written and earned is shown below:
PREMIUMS WRITTEN PREMIUMS EARNED YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ----------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 -------------------------------------------------------------------------- Direct...................... 1,088,028 779,551 517,773 994,339 672,871 537,070 Assumed..................... 1,354,892 863,988 617,612 1,259,632 926,730 783,116 Ceded....................... (541,037) (319,275) (254,940) (503,965) (275,310) (205,428) -------------------------------------------------------------------------- Net......................... $1,901,883 $1,324,264 $ 880,445 $1,750,006 $1,324,291 $1,114,758 --------------------------------------------------------------------------
The Company recorded reinsurance recoveries on loss and loss expenses incurred of $390.9 million, $294.0 million and $166.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $228.9 million at December 31, 1999, collateralizing reinsurance recoverables with respect to certain retrocessionnaires. Increases in all of the above balances in 1999 over 1998 and in 1998 over 1997 is primarily due to the acquisition of Mid Ocean in 1998. 9. DEPOSIT LIABILITIES AND POLICY BENEFIT RESERVE During 1999, the Company entered into a contract that transfers insufficient risk to be accounted for as reinsurance under SFAS No. 113. This contract has been recorded as a deposit liability and is matched by an equivalent amount of investments. At December 31, 1999, total deposit liabilities are $310.4 million. In December 1999, the Company entered into a contract reinsuring a portfolio of life and annuity business that has been accounted for as an investment contract under SFAS No. 97, with a corresponding liability for estimated future policy benefits in the amount of $635.6 million. The Company has contracted to transfer liabilities of $108.1 million to a third party for an equivalent consideration 55 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 10. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS As at December 31, 1999, the Company had bank and loan facilities available from a variety of sources including commercial banks totaling $2.16 billion (1998: $2.24 billion) of which $410.7 million (1998: $613.9 million) was outstanding. In addition, $891.6 million (1998: $348.9 million) of letters of credit were outstanding, 66% of which were collateralized by the Company's investment portfolio, primarily supporting U.S. non-admitted business, intercompany quota share agreements between affiliates and the Company's Lloyd's capital requirements. The financing structure at December 31, 1999 was as follows:
FACILITY COMMITMENT IN USE/OUTSTANDING - ------ -------------------------------- DEBT: Company term note......................................... $ 11,000 $ 11,000 2 facilities of 364 day Revolvers - total................. 650,000 - 2 facilities of 5 year Revolvers - total.................. 350,000 299,700 7.15% Senior Notes due 2005............................... 100,000 100,000 -------------------------------- $1,111,000 $410,700 -------------------------------- LETTERS OF CREDIT: 7 facilities - total...................................... $1,246,500 $891,600 --------------------------------
The financing structure at December 31, 1998 was as follows: IN FACILITY COMMITMENT USE/OUTSTANDING - ------ ------------------------------ DEBT: Company term note......................................... $ 11,000 $ 11,000 3 facilities of 364 day Revolvers - total................. 700,000 113,000 2 facilities of 5 year Revolvers - total.................. 350,000 190,000 7.15% Senior Notes due 2005............................... 100,000 99,900 8% Senior Notes due 1999.................................. 100,000 100,000 5.25% Convertible Subordinated Debentures due 2002........ 100,000 100,000 ------------------------------ $1,361,000 $613,900 ------------------------------ LETTERS OF CREDIT: 3 facilities - total...................................... $ 876,000 $348,900 ------------------------------
The 364-day facilities are provided by a syndicate of banks where the borrowings are unsecured, and by a U.S. bank where the borrowings are collateralized and guaranteed. There were no borrowings outstanding at December 31, 1999. The weighted average interest rate on the funds borrowed during 1999 was approximately 5.41% and approximately 5.9% during 1998. Two syndicates of banks provide the two five-year facilities and borrowings are unsecured. The amounts of $299.7 million and $190.0 million outstanding at December 31, 1999 and 1998, respectively, relate primarily to the $300.0 million borrowed to finance the cash option election available to shareholders in connection with the Mid Ocean acquisition in August 1998. The 1999 outstanding amount also relates to the $109.7 million borrowed to finance the acquisition of ECS and Intercargo during 1999. The weighted average interest rate on funds borrowed during 1999 was approximately 5.43% and 5.7% during 1998. 56 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 10. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS (CONTINUED) In 1995, the Company issued $100.0 million of 7.15% Senior Notes due November 15, 2005 through a public offering at a price of $99.9 million. $100.0 million of 5.25% Convertible Subordinated Debentures due December 15, 2002 were issued in December 1992 through a private offering. The Debentures were called in June 1999 and converted to approximately 1.8 million of the Company's shares. $100.0 million of 8% Senior Notes due June 15, 1999 were issued in June 1992 through a public offering. These Notes were repaid in June 1999 through additional borrowings and internal funds. Total pre-tax interest expense on the borrowings described above was $37.4 million, $33.4 million and $29.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. Associated with the Company's bank and loan commitments are various loan covenants with which the Company was in compliance throughout the three year period. The Company has seven letter of credit facilities available at December 31, 1999, two from two syndicates of banks, three from U.K. banks and two from U.S. banks. Two syndicates of banks and a U.K. bank provided the three letter of credit facilities available at December 31, 1998. These facilities are used to collateralize certain reinsureds' premium and unpaid loss reserves with the Company and for Lloyd's capital requirements of the Company's corporate syndicates. Of the letters of credit outstanding at December 31, 1999, $591.0 million (1998: $348.9 million) were collateralized against the Company's investment portfolio and $300.6 million (1998: Nil) were unsecured. 11. COMMITMENTS AND CONTINGENCIES (A) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company invests in derivative instruments, such as foreign currency forward contracts and futures for purposes other than trading. These derivative instruments are used for foreign currency exposure management and to obtain exposure to specific financial markets. (I) FOREIGN CURRENCY EXPOSURE MANAGEMENT The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses recognized on them are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, then a forward contract will not be entered into. At December 31, 1999 and 1998, forward foreign exchange contracts with notional principal amounts totaling $339.3 million and $322.4 million, respectively, were outstanding. The fair value of these contracts as at December 31, 1999 was $341.1 million (1998: $316.2 million) with unrealized losses of $1.8 million (1998: $6.2 million). Losses of $2.7 million and gains of $17.0 million were realized during 1999 and 1998, respectively. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its foreign currency investments. These contracts are not designated as specific hedges for financial reporting purposes, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At December 31, 1999 and 1998, the value of such contracts outstanding was not significant. 57 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company attempts to hedge directly the foreign currency exposure of a portion of its foreign currency fixed maturity investments using forward foreign exchange contracts that generally have maturities of three months or less, and which are rolled over to provide continuing coverage for as long as the investments are held. Where an investment is sold, the related foreign exchange sale contract is closed by entering into an offsetting purchase contract. At December 31, 1999, the Company had, as hedges, foreign exchange contracts for the sale of $94.0 million and the purchase of $7.5 million of foreign currencies at fixed rates, primarily Euros (49% of net contract value), British pounds (18%) and New Zealand dollars (16%). The market value of fixed maturities denominated in foreign currencies that were hedged and held by the Company as at December 31, 1999 was $85.2 million. Unrealized foreign exchange gains or losses on foreign exchange contracts hedging foreign currency fixed maturity investments are deferred and included in shareholders' equity. As at December 31, 1999 and 1998, unrealized losses amounted to $2.0 million and $1.3 million, respectively, and were offset by corresponding increases in the U.S. dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at December 31, 1999 and 1998, realized losses amounted to $0.5 million and $0.7 million, respectively. The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Company's maximum credit exposure. (II) FINANCIAL MARKET EXPOSURE The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at December 31, 1999, the portfolio held $121.9 million (1998: $148.2 million) in exposure to S&P 500 Index futures and underlying assets of $122.0 million (1998: $149.6 million). The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the years ended December 31, 1999 and 1998, net realized gains from index futures totaled $11.3 million and $23.2 million, respectively. Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At December 31, 1999, bond and stock index futures outstanding were $241.1 million (1998: $235.6 million), with underlying investments having a market value of $2.5 billion (1998: $2.1 billion). All managers are prohibited by the Company's investment guidelines from leveraging their positions. (B) CONCENTRATIONS OF CREDIT RISK The Company's investment portfolio is managed by external managers in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification which limit the allowable holdings of any single issue. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at December 31, 1999 and 1998. (C) OTHER INVESTMENTS The Company has committed to invest in several limited partnerships as part of its overall corporate strategy. The primary purpose of these partnerships is to invest capital provided by the partners in various insurance and reinsurance ventures. The Company had invested $99.7 million and $33.0 million as at December 31, 1999 and 1998, respectively, with commitments to invest a further $131.8 million over the next ten years. The Company 58 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) received income from its investments of $9.4 million and $3.6 million for the years ended December 31 1999 and 1998, respectively. The Company continually reviews the performance of the partnerships to ensure there is no decrease in the values of its investments. The Company is a limited partner and, as such, does not actively participate in the management of the partnerships. (D) PROPERTIES The Company rents space for its principal executive offices under leases which expire up to 2009. Total rent expense for the years ended December 31, 1999, 1998 and 1997 was approximately $13 million, $9 million and $7 million, respectively. Future minimum rental commitments under existing leases are expected to be as follows: Year ending December 31: 2000 $ 15,927 2001 14,888 2002 11,513 2003 10,806 2004 10,533 Later years 72,487 -------- Total minimum future rentals $136,154 ========
In 1997, the Company acquired commercial real estate in Hamilton, Bermuda for the purpose of securing long-term office space to meet its anticipated needs. The Company is in the process of developing this property and constructing its worldwide headquarters. The total cost of the development, including the land, is expected to be approximately $110 million, of which $60 million has been spent to December 31, 1999. It is estimated that the development will be completed sometime in 2001. Upon completion of the development, it is expected that the Company's rental commitments will be reduced. (E) TAX MATTERS The Company is a Cayman Islands corporation and, except as described below, neither it nor its non-U.S. subsidiaries have paid United States corporate income taxes (other than withholding taxes on dividend income) on the basis that they are not engaged in a trade or business in the United States; however, because definitive identification of activities which constitute being engaged in trade or business in the United States is not provided by the Internal Revenue Code of 1986, regulations or court decisions, there can be no assurance that the Internal Revenue Service will not contend that the Company or its non-U.S. subsidiaries are engaged in trade or business in the United States. If the Company or its non-U.S. subsidiaries were considered to be engaged in trade or business in the United States (and, if the Company or such subsidiaries were to qualify for the benefits under the income tax treaty between the United States and Bermuda or Ireland, such businesses were attributable to a "permanent establishment" in the United States), the Company or such subsidiaries could be subject to U.S. tax at regular tax rates on its taxable income that is effectively connected with its U.S. trade or business plus an additional 30% "branch profits" tax on such income remaining after the regular tax, in which case there could be a material adverse effect on the Company's shareholders' equity and earnings. 59 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) (F) FINANCIAL GUARANTIES The Company insures and reinsures financial guaranties issued to support public and private borrowing arrangements. Financial guaranties are conditional commitments which guaranty the performance of a customer to a third party. The Company's potential liabilities in the event of nonperformance by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable ("insurance in force") on such insured obligation. At December 31, 1999, the Company's aggregate insurance in force was $5.2 billion. The Company manages its exposure to credit risk through a structured underwriting process which includes detailed credit analysis, review of and adherence to underwriting guidelines, surveillance policies and procedures and the use of reinsurance. 12. SHARE CAPITAL (A) AUTHORIZED AND ISSUED The authorized share capital is 999,990,000 ordinary shares of a par value of $0.01 each. Holders of Class A shares are entitled to one vote for each share held while Class B shares are not entitled to vote. In all other respects, Class A and B shares rank PARI PASSU. The following table is a summary of shares issued and outstanding:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------------------------------ Balance - beginning of year................................. 128,745 101,282 104,192 Exercise of options......................................... 443 425 503 Issue of restricted shares.................................. 107 289 173 Repurchase of shares........................................ (1,488) (3,443) (3,586) Issue of Class A shares..................................... - 27,076 - Issue of Class B shares..................................... - 3,116 - ------------------------------ Balance - end of year....................................... 127,807 128,745 101,282 ------------------------------
The issue of shares in 1998 was in exchange for Mid Ocean shares and FSA shares. (B) SHARE REPURCHASES The Company has had several stock repurchase plans in the past as part of its capital management. In June 1999, the Board of Directors rescinded the Company's share repurchase plans. On January 9, 2000 the Board of Directors authorized the repurchase of shares up to $500 million. (C) STOCK PLANS The Company's executive stock plan, the "1991 Performance Incentive Program", provides for grants of non- qualified or incentive stock options, restricted stock awards and stock appreciation rights ("SARs"). The plan is administered by the Company and the Compensation Committee of the Board of Directors. Stock options may be granted with or without SARs. Grant prices are established at the fair market value of the Company's common stock at the date of grant. Options and SARs have a life of 10 years and vest annually over three years from date of grant. 60 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 12. SHARE CAPITAL (CONTINUED) Restricted stock awards issued under the 1991 Performance Incentive Program plan vest over a five year period from the date of grant. These shares contained certain restrictions, for said period, relating to, among other things, forfeiture in the event of termination of employment and transferability. As the shares are issued, deferred compensation equivalent to the difference between the issue price and the estimated fair market value on the date of the grant is charged to shareholders' equity and subsequently amortized over the five-year restriction period. Restricted stock issued under the plan totaled 113,100 shares, 147,836 shares and 91,000 shares in 1999, 1998 and 1997, respectively. Restricted stock awards granted by NAC prior to the merger amounted to 3,627 shares, 23,700 shares and 65,300 shares for the same respective periods. Vesting for such shares generally occurs over a six year period. The Company also has stock plans in place for its non-employee directors. The "Stock and Option Plan" issues non-qualified options to the directors - 4,000 shares at the commencement of their directorship and 2,000 shares each year thereafter. On December 3, 1997, 5,000 options were granted to each director. All options vest immediately on the grant date. Effective April 11, 1997, all options granted to non-employee directors are granted under the 1991 Performance Incentive Program. Directors may also may make an irrevocable election preceding the beginning of each fiscal year to defer cash compensation that would otherwise be payable as his or her annual retainer in increments of $5,000. The deferred payments are credited in the form of shares calculated by dividing 110% of the deferred payment by the market value of the Company's stock at the beginning of the fiscal year. Each anniversary thereafter, 20% of these shares are distributed. Shares issued under the plan totaled nil, 2,737 and 3,048 in 1999, 1998 and 1997, respectively. A second stock plan, intended to replace the directors' "Retirement Plan for Non-Employee Directors," provides for the issuance of share units equal to the amount that would have been credited to the Retirement Plan, divided by the market price of the Company's stock on December 1 of each year. These units receive dividends in the form of additional units equal to the cash value divided by the market price on the payment date. Stock units totaling 1,217, 5,531 and 6,716 were provided for in 1999, 1998 and 1997, respectively. As a result of the merger with Mid Ocean during August 1998, 791,573 Mid Ocean options were converted to options of XL Capital. These are 10 year options that generally vest over 3 years. Following the merger with NAC, new option plans were created in the Company to adopt the NAC plans. Options generally have a five or six year vesting schedule, with the majority expiring 10 years from the date of grant; the remainder having no expiration. A stock plan is also maintained for non-employee directors. Options expire 10 years from the date of grant and are fully exercisable six months after their grant date. In 1999, the Company adopted the 1999 Performance Incentive Plan under which 1,250,000 options were available and issued to employees who were not directors or executive officers of the Company. (D) FAS 123 PRO FORMA DISCLOSURE The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." Had the Company adopted the accounting provisions of SFAS No. 123, compensation costs would have been determined based on the fair value of the stock option awards 61 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 12. SHARE CAPITAL (CONTINUED) granted in 1999, 1998 and 1997, and net income and earnings per share would have been reduced to the pro-forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------------------------------ Net income - as reported.................................... $470,509 $656,330 $809,029 Net income - pro-forma...................................... $437,592 $635,239 $798,140 Basic earnings per share - as reported...................... $ 3.69 $ 5.86 $ 7.95 Basic earnings per share - pro-forma........................ $ 3.43 $ 5.67 $ 7.85 Diluted earnings per share - as reported.................... $ 3.62 $ 5.68 $ 7.74 Diluted earnings per share - pro-forma...................... $ 3.36 $ 5.47 $ 7.60
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1999 1998 1997 --------------------------------- Dividend yield.............................................. 3.43% 1.81% 1.89% Risk free interest rate..................................... 5.90% 4.76% 5.51% Expected volatility......................................... 24.66% 24.72% 23.49% Expected lives.............................................. 7.5 years 9.2 years 9.0 years
Total stock based compensation recognized in net income was $7.7 million in 1999, $5.8 million in 1998 and $5.2 million in 1997. (E) OPTIONS Following is a summary of stock options and related activity:
1999 1998 1997 --------------------- -------------------- -------------------- AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------------------------------------------------------------------- Outstanding - beginning of year............... 7,685,414 $50.61 5,744,063 $35.28 5,271,579 $29.27 Granted....................................... 3,207,492 $57.06 1,749,885 $68.27 1,036,305 $57.20 Granted - Mid Ocean conversion................ - - 791,573 $72.44 - $ - Exercised..................................... (421,163) $27.57 (425,251) $30.06 (506,891) $19.99 Canceled...................................... (189,020) $55.25 (174,856) $40.12 (56,930) $40.97 ------------------------------------------------------------------- Outstanding - end of year..................... 10,282,723 $46.50 7,685,414 $46.79 5,744,063 $35.28 ------------------------------------------------------------------- Options exercisable........................... 5,287,657 4,288,434 3,043,676 ------------------------------------------------------------------- Options available for grant................... *1,028,853 * 2,455,190 * 4,082,135 -------------------------------------------------------------------
* Available for grant includes shares which may be granted on either stock options or restricted stock. 62 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 12. SHARE CAPITAL (CONTINUED) The following table summarizes information about the Company's stock options (including stock appreciation rights) for options outstanding as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ------------------------------------ AVERAGE AVERAGE REMAINING AVERAGE RANGE OF NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE EXERCISE PRICES OPTIONS (000S) PRICE LIFE (YEARS) OPTIONS (000S) PRICE - ----------------------- -------------------------------------------------------------------------------------------- $10.44 - $32.38........ 2,045 $22.30 3.7 2,023 $21.79 $32.92 - $50.00........ 4,548 $44.52 5.9 2,109 $39.40 $51.24 - $64.69........ 2,516 $56.58 7.6 776 $59.46 $73.00 - $79.25........ 1,231 $74.71 9.6 443 $74.74 -------------------------------------------------------------------------------------------- $10.44 - $79.25........ 10,340 $46.65 7.6 5,351 $38.58 --------------------------------------------------------------------------------------------
(F) VOTING XL's Articles of Association restrict the voting power of any person to less than 10% of total voting power. (G) SHARE RIGHTS PLAN Rights to purchase Ordinary Shares were distributed as a dividend at the rate of one Right for each outstanding Ordinary Share held of record as of the close of business on October 31, 1998. Each Right entitles holders of XL Ordinary Shares to buy one ordinary share at an exercise price of $350. The Rights would be exercisable, and would detach from the Ordinary Shares, only if a person or group were to acquire 20% or more of XL's outstanding Ordinary Shares, or were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 20% or more of XL's Ordinary Shares. Upon a person or group without prior approval of the Board acquiring 20% or more of XL's Ordinary Shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase XL Ordinary Shares (or, in certain circumstances, Ordinary Shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price. XL will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008. The Company has initially reserved 119,073,878 Ordinary Shares being authorized and unissued for issuance upon exercise of the Rights. 13. RETIREMENT PLANS The Company maintains both defined contribution and defined benefit retirement plans, which vary for each subsidiary. Plan assets are invested principally in equity securities and fixed maturities. The Company has a qualified defined contribution plan which is managed externally and whereby employees and the Company contribute a certain percentage of the employee's gross salary into the plan each month. The Company's contribution generally vests over 5 years. 63 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 13. RETIREMENT PLANS (CONTINUED) At NAC, a qualified non-contributory defined benefit pension plan exists to cover substantially all its U.S. employees. Benefits are based on years of service and compensation, as defined in the plan, during the highest consecutive three years of the employee's last ten years of employment. Under this plan, the Company's policy is to make annual contributions to the plan that are deductible for federal income tax purposes and that meet the minimum funding standards required by law. The contribution level is determined by utilizing the entry age cost method and different actuarial assumptions than those used for pension expense purposes. This plan also includes a non-qualified supplemental defined benefit plan designed to compensate individuals to the extent their benefits under the Company's qualified plan are curtailed due to Internal Revenue Code limitations. The projected benefit obligation, accumulated benefit obligation and fair value of the assets for this plan with accumulated benefit obligations in excess of the plan assets were $4.6 million, $2.5 million and Nil, respectively, as of December 31, 1999 and $5.0 million, $2.5 million and Nil, respectively as of December 31, 1998. The discount rates used in determining the actuarial present value of benefit obligations were 7.7% and 6.5% for 1999 and 1998, respectively. The rate of increase for future compensation levels was 6.5% for 1999 and 5.5% for 1998. The assumed rate of return on plan assets was 9.0% for both 1999 and 1998. NAC also maintains a qualified contributory defined contribution plan for substantially all its U.S. employees and a qualified non-contributory defined contribution plan for all its U.K. employees. The Company's expenses for its retirement plans is not considered to be significant. 14. OTHER COMPREHENSIVE INCOME The balances of each classification, net of deferred taxes, within accumulated other comprehensive income is as follows:
NET UNREALIZED FOREIGN CURRENCY APPRECIATION ON TRANSLATION ACCUMULATED OTHER INVESTMENTS ADJUSTMENTS COMPREHENSIVE INCOME --------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 Beginning balance................................. $ 230,068 $ 5,117 $ 235,185 Current year change............................... (211,842) (4,032) (215,874) --------------------------------------------------------- Ending balance.................................... $ 18,226 $ 1,085 $ 19,311 --------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 Beginning balance................................. $ 245,482 $ 5,989 $ 251,471 Current year change............................... (15,414) (872) (16,286) --------------------------------------------------------- Ending balance.................................... $ 230,068 $ 5,117 $ 235,185 --------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 Beginning balance................................. $ 239,249 $ 8,377 $ 247,626 Current year change............................... 6,233 (2,388) 3,845 --------------------------------------------------------- Ending balance.................................... $ 245,482 $ 5,989 $ 251,471 ---------------------------------------------------------
64 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 14. OTHER COMPREHENSIVE INCOME (CONTINUED) The related tax effects allocated to each component of other comprehensive income were as follows:
BEFORE TAX TAX EXPENSE NET OF TAX AMOUNT (BENEFIT) AMOUNT ------------------------------------- YEAR ENDED DECEMBER 31, 1999 Unrealized gains (losses) on investments: Unrealized gains arising during year...................... $(148,536) $(36,394) $(112,142) Less reclassification adjustment for gains realized in income................................................. 94,356 (5,344) 99,700 ------------------------------------- Net unrealized losses....................................... (242,892) (31,050) (211,842) Foreign currency translation adjustments.................... (6,308) (2,276) (4,032) ------------------------------------- Other comprehensive income.................................. $(249,200) $(33,326) $(215,874) ------------------------------------- YEAR ENDED DECEMBER 31, 1998 Unrealized gains (losses) on investments: Unrealized gains arising during year...................... $ 196,512 $ 12,998 $ 183,514 Less reclassification adjustment for gains realized in income................................................. 211,204 12,276 198,928 ------------------------------------- Net unrealized gains (losses)............................... (14,692) 722 (15,414) Foreign currency translation adjustments.................... (1,342) (470) (872) ------------------------------------- Other comprehensive income.................................. $ (16,034) $ 252 $ (16,286) YEAR ENDED DECEMBER 31, 1997 Unrealized gains (losses) arising during year............. $ 429,246 $ 27,291 $ 401,955 Less reclassification adjustment for gains realized in income................................................. 410,404 14,682 395,722 ------------------------------------- Net unrealized gains (losses)............................... 18,842 12,609 6,233 Foreign currency translation adjustments.................... (3,674) (1,286) (2,388) ------------------------------------- Other comprehensive income.................................. $ 15,168 $ 11,323 $ 3,845 -------------------------------------
15. CONTRIBUTED SURPLUS Under the laws of the Cayman Islands, the use of the Company's contributed surplus is restricted to the issue of fully paid shares (i.e. stock dividend or stock split) and the payment of any premium on the redemption of ordinary shares. 16. DIVIDENDS The following dividend information relates to the Company without inclusion of the pooling effect with NAC: In 1999, four regular quarterly dividends were paid at $0.44 per share to shareholders of record at February 5, April 23, July 12 and September 24. In 1998, four regular quarterly dividends were paid, three of $0.40 per share to shareholders of record at February 6, April 16 and July 15, and one of $0.44 per share to shareholders of record at September 28. In 1997, four regular quarterly dividends were paid, three of $0.32 per share to shareholders of record at February 6, April 22 and July 11, and one of $0.40 per share to shareholders of record at September 25. 65 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 17. TAXATION Under current Cayman Islands law, the Company is not subject to any taxes in the Cayman Islands on either income or capital gains. The Company has received an undertaking that, in the event of any such taxes being imposed, the Company will be exempted from Cayman Islands income or capital gains taxes until June 2018. The Company's U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined on the basis of the income of each of the Company's U.S. subsidiaries as if a tax return had been prepared on an individual Company basis. Should the U.S. subsidiaries pay a dividend to the Company, withholding taxes will apply. Bermuda presently imposes no income, withholding or capital gains taxes and the Bermuda subsidiaries are exempted until March 2016 from any such future taxes pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and Amended Act 1987. XL Europe has been approved to carry on business in the International Services Centre in Dublin. Under Section 39 of the Finance Act 1990, XL Europe is entitled to benefit from a 10% tax rate on profits (including investment income) until 2005. Brockbank, NAC Re International and XL Mid Ocean Re's London branch office are subject to United Kingdom corporation taxes. Other branches of the Company are subject to relevant local taxes. The income tax provision in the consolidated statement of income gives effect to the permanent differences between financial and taxable income as applied for each relevant subsidiary. Due to the fact that the Company and certain subsidiaries are not subject to direct U.S. income taxes and that certain U.S. subsidiaries have tax-exempt income, the Company's effective income tax rate for its U.S. operation is less than the statutory U.S. Federal tax rate. The tax charge (benefit) in each of the three years ended December 31, 1999 is comprised of amounts from the various taxable jurisdictions in which the Company operates. For all countries other than the U.S., there generally is no significant difference between the effective tax rate and the statutory rate in that jurisdiction. For U.S. operating income (loss), the effective rate differs from the statutory rate of 35% due primarily to tax-exempt investment income in all years and merger related costs in 1999. Significant components of the provision for income taxes attributable to operations were as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ----------------------------- CURRENT (BENEFIT) EXPENSE: U.S....................................................... $(27,098) $10,490 $ 43,754 Non U.S................................................... 9,664 14,680 11,745 ----------------------------- Total current (benefit) expense............................. (17,434) 25,170 55,499 ----------------------------- DEFERRED (BENEFIT) EXPENSE: U.S....................................................... (17,534) 4,729 (23,205) Non U.S................................................... (4,602) (16) (122) ----------------------------- Total Deferred (benefit) expense............................ (22,136) 4,713 (23,327) ----------------------------- TOTAL TAX (BENEFIT) EXPENSE............................... $(39,570) $29,883 $ 32,172 -----------------------------
66 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 17. TAXATION (CONTINUED) The U.S. subsidiaries current U.S. taxable income for the years ended December 31, 1999 and 1997 is based on regular taxable income. The current U.S. tax expense for the year ended December 31, 1998 is based on alternative minimum taxable income. U.S. and Non-U.S. taxes paid in the years ended December 31, 1999, 1998 and 1997 were approximately $30 million, $31 million and $38 million, respectively. The Company's current tax liability is included in "other liabilities" in the accompanying financial statements and amounted to $11 million in 1999 and $26 million in 1998. Significant components of the Company's deferred tax assets and liabilities, which principally relate to U.S. subsidiaries, as of December 31, 1999 and 1998 were as follows:
YEAR ENDED DECEMBER 31 ------------------- 1999 1998 ------------------- DEFERRED TAX ASSET: Net unpaid loss reserve discount.......................... $ 81,672 $ 84,008 Net unearned premiums..................................... 10,264 19,888 Unrealized depreciation on investments.................... 11,995 -- Compensation liabilities.................................. 8,960 6,978 Other..................................................... 12,516 3,331 ------------------- Deferred tax asset, gross of valuation allowance............ 125,407 114,205 Valuation allowance......................................... (11,995) - ------------------- Deferred tax asset, net of valuation allowance.............. 113,412 114,205 ------------------- DEFERRED TAX LIABILITY: Deferred policy acquisition costs......................... $ 6,850 $ 33,896 Unrealized appreciation on investments.................... - 31,050 Currency translation adjustments.......................... 566 2,755 Other..................................................... 8,068 9,023 ------------------- Deferred tax liability...................................... 15,484 76,724 ------------------- NET DEFERRED TAX ASSET...................................... $ 97,928 $ 37,481 -------------------
Shareholders' equity at December 31, 1999 and 1998 reflects tax benefits of $1.5 million and $5.6 million, respectively, related to compensation expense deductions for stock options exercised for one of the Company's U.S. subsidiaries. 18. STATUTORY FINANCIAL DATA The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is restricted by applicable laws of Bermuda, Ireland, U.S. and United Kingdom, including Lloyd's. The Company relies primarily on cash dividends from XL Insurance and Mid Ocean. 67 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 18. STATUTORY FINANCIAL DATA (CONTINUED) BERMUDA Under The Insurance Act, 1978, (as amended by the Insurance Act Amendment 1995) amendments thereto and related regulations of Bermuda, XL Insurance and XL Mid Ocean Re are required to prepare statutory financial statements and to file in Bermuda a statutory financial return. The Act also requires these companies to maintain certain measures of solvency and liquidity during the year. XL Insurance's and XL Mid Ocean Re's statutory capital and surplus, statutory net income and the minimum statutory capital and surplus required by the Act were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- XL INSURANCE XL MID OCEAN RE ---------------------------------- ---------------------------------- 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------- Statutory net income.......... $ 83,019 $ 309,244 $189,281 $ 155,534 $ 108,290 $ 57,995 ----------------------------------------------------------------------- Statutory capital and surplus..................... $1,381,299 $1,255,284 $882,366 $2,062,421 $1,966,200 $512,367 ----------------------------------------------------------------------- Minimum statutory capital and surplus Required by the Act......................... $ 338,609 $ 307,205 $310,240 $ 196,254 $ 100,000 $100,000 -----------------------------------------------------------------------
The primary difference between statutory net income and statutory capital and surplus for the Company's subsidiaries, as shown above, and net income and shareholders' equity presented in accordance with GAAP are deferred acquisition costs. Under the Act, XL Insurance and XL Mid Ocean Re are classified as a Class 4 insurer and reinsurer, respectively. Therefore they are restricted to the payment of dividends in any one financial year of 25% of the prior year's statutory capital and surplus, unless their directors attest that such dividends will not cause the company to fail to meet its relevant statutory requirements. XL Insurance and XL Mid Ocean Re have not been affected by this. UNITED STATES The Company's U.S. insurance and reinsurance subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business. Consolidated statutory net income and surplus of NAC Re, as reported to the insurance regulatory authorities, differs in certain respects from the amounts as prepared in accordance with GAAP. The main differences between statutory net income and GAAP income relates to deferred acquisition costs and deferred income taxes. The main differences between statutory surplus and shareholders' equity, in addition to deferred acquisition costs and deferred income tax net assets, are intangible assets, unrealized appreciation on investments, and any unauthorized/authorized reinsurance charges. 68 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 18. STATUTORY FINANCIAL DATA (CONTINUED) The following table shows statutory net income and GAAP net income (loss) and consolidated statutory surplus and consolidated shareholders' equity of NAC Re.
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------------------------------ NET INCOME: Statutory net income........................................ $ 8,948 $101,862 $ 70,292 ------------------------------ GAAP net income (loss)...................................... $ (1,060) $ 98,586 $ 99,692 ------------------------------ SHAREHOLDERS' EQUITY: Consolidated statutory surplus.............................. $440,102 $737,114 $702,222 ------------------------------ GAAP Consolidated shareholder's equity...................... $700,725 $750,725 $657,061 ------------------------------
NAC Re is subject to New York insurance law, which imposes certain restrictions on the payment of cash dividends and tax reimbursements. Generally, NAC Re may pay cash dividends only out of statutory earned surplus. However, the maximum amount of dividends that may be paid in any twelve month period without the prior approval of the New York Insurance Department is the lesser of net investment income or 10% of statutory surplus as such terms are defined in the New York insurance law. Statutory earned surplus at December 31, 1999 is $(27.7) million and consequently, NAC Re cannot make a dividend distribution. In addition, the Company was required to make a commitment to New York State insurance regulators not to pay dividends out of NAC Re for two years without prior regulatory approval. Statutory earned surplus at December 31, 1998 was $231.9 million and the maximum amount NAC Re was able to pay without such regulatory approval, based on 10% of statutory surplus as of December 31, 1998 was approximately $73.7 million. Brockbank, via Lloyd's, is a licensed insurer in the states of Illinois, Kentucky and the U.S. Virgin Islands ("USVI"). It is also an eligible surplus lines writer in all states other than Kentucky and USVI, and an accredited reinsurer in every state other than Michigan, Kansas and Arizona. Brockbank Insurance Services, Inc., is licensed in California as a fire and casualty broker, surplus lines broker and special lines surplus lines broker. The insurance laws of each state of the U.S. and of many foreign countries regulate the sale of insurance within their jurisdiction by alien insurers, such as XL Insurance and XL Mid Ocean Re. The Company believes it is not in violation of the insurance laws of any state in the U.S. or any foreign country. From time to time, various proposals for federal legislation within the United States have been circulated which could require the Company to, amongst other things, register as a surplus lines insurer. The Company believes that generally it could meet and comply with the requirements to be registered as a surplus lines insurer and such compliance would not have a material impact on the ability of the Company to conduct its business. There can be no assurances, however, that the activities of the Company will not be challenged in the future or that the Company will be able to successfully defend against such challenges or that legislation will not be enacted that will affect the Company's ability to conduct its business. IRELAND XL Europe is permitted to cover risks throughout the European Community (subject to certain restrictions) pursuant to the "Third Directive" relating to non-life insurance. Its head office is in Ireland and it is subject to regulation under Irish regulatory authority. The principal legislation and regulations governing the insurance activities of Irish insurance companies are the Insurance Acts 1909 to 1990 (the "Irish Acts") and a comprehensive network of 69 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 18. STATUTORY FINANCIAL DATA (CONTINUED) regulations and statutory provisions empowering the making of regulations of which the most relevant are the European Communities (Non-Life Insurance) Regulations, 1976, the European Communities (Non-Life Insurance Accounts) Regulations, 1995, the European Communities (Non-Life Insurance) Framework Regulations, 1994 and related administrative rules (the "Irish Regulations".) XL Europe's insurance activities are subject to extensive regulation in Ireland, principally under the Irish Acts and Irish Regulations, which impose on insurers headquartered in Ireland minimum solvency and reserve standards and auditing and reporting requirements and grant to the Minister of State for Science, Technology and Commerce (the"Irish Minister") wide powers to supervise, investigate and intervene in the affairs of such insurers. The Irish Minister's powers and functions are exercised through the medium of the Department of Enterprise, Trade and Employment. UNITED KINGDOM The United Kingdom Financial Services Authority ("U.K. FSA") regulates reinsurance entities that are "effecting and carrying on" insurance business in the United Kingdom. Both XL Mid Ocean Re, through its London branch and NAC Re, through its London subsidiary, "effect and carry on" business in the United Kingdom and are therefore regulated by the U.K. FSA. LLOYD'S The Company, Brockbank and Denham are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council"). Unlike other financial markets in the U.K., Lloyd's is not subject to direct U.K. government regulation through The Financial Services Act of 1986 but, instead, is self regulating by virtue of the Lloyd's Act of 1982 through the bye-laws, regulations and codes of conduct written by the Council, which governs the market. It is expected that the new Financial Services Authority will take a supervisory regulatory role during 2000. Under the Council, there are two boards, the Market Board and the Regulatory Board. The former is led by a number of the working members of the Council and is responsible for strategy and the provision of services such as premium and claims handling, accounting and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders and capital providers. Under the regulations, the approval of the Council has to be obtained before any person can be a "major shareholder" or "controller" of a corporate Name or managing agency. The Company has been approved as both a "major shareholder" and a "controller" of its corporate Names (the "CCVs") and managing agencies. As a "controller", the Company is required to give certain undertakings, directed principally towards ensuring that there is no direct interference in the conduct of the business of the relevant managing agency, but there are no provisions in the Lloyd's Act of 1982, the bye-laws or the regulations which provide for any liabilities of the CCVs or the Brockbank group as a whole to be met by the Company. In addition, a managing agency is required to comply with various capital and solvency requirements and to submit to regular monitoring and compliance procedures. The CCVs, as corporate members of Lloyd's are each required to commit a specified amount approximately equal to 50% of their underwriting capacity on the syndicates to support its underwriting on those syndicates. The Lloyd's Act of 1982 generally restricts certain direct or indirect equity cross-ownership between a Lloyd's broker and a Lloyd's managing agent. 70 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 18. STATUTORY FINANCIAL DATA (CONTINUED) OTHER REGULATION The Company is subject to regulation in Australia, Singapore, Madrid, Latin America and Germany as a result of its representative offices and branches in such jurisdictions. 19. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per share:
YEAR ENDED DECEMBER 31: ------------------------------ 1999 1998 1997 ------------------------------ BASIC EARNINGS PER SHARE: Net income.................................................. $470,509 $656,330 $809,029 Weighted average ordinary shares outstanding................ 127,601 112,034 101,708 Basic earnings per share.................................... $ 3.69 $ 5.86 $ 7.95 ------------------------------ DILUTED EARNINGS PER SHARE: Net income.................................................. $470,509 $656,330 $809,029 Add back after-tax interest on convertible debentures....... 1,752 3,504 3,504 ------------------------------ Adjusted net income......................................... $472,261 $659,834 $812,533 ------------------------------ Weighted average ordinary shares outstanding - basic........ 127,601 112,034 101,708 Average stock options outstanding (1)....................... 1,872 2,152 1,277 Conversion of convertible debentures (2).................... 831 2,020 2,020 ------------------------------ Weighted average ordinary shares outstanding - diluted...... 130,304 116,206 105,005 ------------------------------ Diluted earnings per share.................................. $ 3.62 $ 5.68 $ 7.74 ------------------------------
(1) Net of shares repurchased under the treasury stock method. (2) 1998 and 1997 reflect the assumed conversion of the NAC 5.25% Convertible Subordinated Debentures due 2000. The Debentures were called in June 1999 and the actual conversion is reflected in 1999. 20. SUBSEQUENT EVENTS On January 17, 2000, the Company entered into a stock repurchase agreement with Risk Capital Holdings. Under this agreement, in exchange for its shares in Risk Capital and $3.6 million in cash, the Company will receive the effective remaining ownership in Latin America Re and 1.4 million shares and 100,000 warrants in Annuity & Life Re, in which the Company has an existing 7% position. The total value of the transaction was $62.8 million. 71 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 21. UNAUDITED QUARTERLY FINANCIAL DATA The following is a summary of the unaudited quarterly financial data for 1999 and 1998 based upon the Company's amended year end of December 31 and the pooling with NAC:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------------------------------- 1999 Net premiums earned..................................... $386,753 $414,386 $488,729 $460,138 Net investment income................................... 135,680 132,593 126,560 130,485 Net realized gains on interest.......................... 67,476 17,584 (12,671) 21,967 Equity in net income (loss) of affiliates............... (7,307) 16,642 15,372 16,200 Fee and other income.................................... 10,551 3,870 28,800 57,179 ----------------------------------------- Total revenues.......................................... $593,153 $585,075 $646,790 $685,968 ----------------------------------------- Income before income tax expense and minority interest.. $214,114 $ 28,886 $139,427 $ 48,732 ----------------------------------------- Net Income.............................................. $209,811 $ 62,708 $137,402 $ 60,588 ----------------------------------------- Net income per share and share equivalent - basic....... $ 1.63 $ 0.49 $ 1.08 $ 0.57 ----------------------------------------- Net income per share and share equivalent - diluted..... $ 1.58 $ 0.48 $ 1.07 $ 0.56 ----------------------------------------- 1998 Net premiums earned..................................... $274,149 $264,568 $384,136 $401,438 Net investment income................................... 92,923 87,183 111,320 125,864 Realized gains on investments........................... 77,349 58,400 28,476 46,979 Equity in net income tax expense........................ 15,501 20,721 17,451 (3,381) Fee and other income.................................... 4,172 1,437 8,567 8,149 ----------------------------------------- Total revenues.......................................... $464,094 $432,309 $549,950 $579,049 ----------------------------------------- Income before income tax expense and minority interest.. $193,833 $171,313 $148,882 $172,934 ----------------------------------------- Net income.............................................. $186,301 $165,422 $140,271 $164,336 ----------------------------------------- Net income per share and share equivalent - basic....... $ 1.84 $ 1.63 $ 1.20 $ 1.28 ----------------------------------------- Net income per share and share equivalent - diluted..... $ 1.78 $ 1.58 $ 1.17 $ 1.25 -----------------------------------------
72 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands) 22. UNAUDITED CONDENSED PRO FORMA FINANCIAL INFORMATION Unaudited condensed pro forma financial information shown below relates to the Company's acquisition of Mid Ocean in August 1998 and is based upon the assumption that Mid Ocean had been a part of the Company's operations since January 1, 1997.
PRO FORMA PRO FORMA 1998 1997 ----------------------- Net premiums earned......................................... $1,588,791 $1,607,768 Net investment income....................................... 494,389 443,031 Net realized gains on sale of investments................... 260,608 378,213 Equity in earnings (loss) of affiliates..................... (1,897) 3,748 Fee and other income........................................ 28,006 24,710 ----------------------- Total revenues............................................ 2,369,887 2,457,470 ----------------------- Losses and loss expenses.................................... 921,018 966,909 Acquisition costs and operating expenses.................... 514,877 450,893 Interest expense............................................ 44,839 46,311 Amortization of intangible assets........................... 45,464 37,560 ----------------------- Total expenses............................................ 1,526,198 1,501,673 ----------------------- Income before minority interest and income tax expense...... 843,689 955,797 Minority interest and income tax............................ 34,535 45,653 ----------------------- Net income................................................ $ 809,154 $ 910,144 ----------------------- Net income per share Basic..................................................... $ 6.33 $ 7.08 Diluted................................................... $ 6.13 $ 6.89 Weighted average shares outstanding (000's) Basic..................................................... 127,883 128,550 Diluted................................................... 132,036 132,173
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or any disagreements with accountants regarding accounting and financial disclosure within the twenty-four months ending December 31, 1999. 73 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE -------- (a) Financial Statements, Financial Statement Schedules and Exhibits. - Report of PricewaterhouseCoopers LLP on Financial Statements and Financial Statement Schedules....................................... 79 - Report of Ernst and Young LLP on Financial Statements and Financial Statement Schedules.... 80
1. FINANCIAL STATEMENTS Included in Part II--See Item 8 of this report. 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report:
SCHEDULE NUMBER PAGE ------------------- - Consolidated Summary of Investments - Other than Investments in Related Parties, as of December 31, 1999.................................................... I 81 - Condensed Financial Information of Registrant, as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998, and 1997....................... II 82 - Reinsurance, for the years ended December 31, 1999, 1998 and 1997................................................ IV 85 - Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 1999, 1998 and 1997..................................... VI 86
74 Other Schedules have been omitted as they are not applicable to the Company. 3. EXHIBITS 3.1 Memorandum of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean limited dated July 2, 1998. 3.2 Articles of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean Limited dated July 2, 1998. 4.1 Rights Agreement, dated as of September 11, 1998 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to the Company's Current Report on Form 8-K dated October 21, 1998. 10.1 Money Accumulation Savings Program, incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.2 1991 Performance Incentive Program, incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.3 1991 Management's incentive Plan, incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.4 First Amendment to the 1991 Performance Incentive Program, incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.5 Retirement Plan for Non-employee Directors of XL Capital Ltd, as amended, incorporated by reference Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.6.1 XL Capital Ltd Directors Stock and Option Plan, as amended, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.6.2 Fourth Amendment to EXEL Limited Directors Stock and Option Plan, incorporated by reference to Exhibit 10.6.2 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.7 XL Capital Ltd Stock Plan for Non-employee Directors, incorporated by reference to Exhibit 10.6 to the Company's Annual report on Form 10-K for the year ended November 30, 1996. 10.8 (Intentionally omitted) 10.9.1 Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan, incorporated by reference to Exhibit 10.9.1 to the Company's Annual report on form 10-K (No. 1-10804) for the year ended November 30, 1998 10.9.2 Amendment to Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan, incorporated by reference to Exhibit 10.9.2 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.10.1 Mid Ocean Ltd. Stock & Deferred Compensation Plan for Non-employee Directors, incorporated by reference to Exhibit 10.10.1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.10.2 Form of Severance Contract between NAC Re Corp. and the executive officers of NAC Re incorporated herein by reference to the Company's Annual Report on Form 10-K of NAC Re for the year ended December 30, 1988. 10.10.3 1997 incentive and capital Accumulation Plan incorporated by reference to Exhibit A to the NAC Re definitive Proxy Statement filed with the Securities and Exchange Commission.
75 10.11.1 Mark E. Brockbank Employment Agreement, incorporated by reference to Exhibit 10.11.1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.11.2 Henry C.V. Keeling Employment Agreement, incorporated by reference to Exhibit 10.11.2 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.11.4 Robert J. Newhouse, Jr. Employment Agreement, incorporated by reference to Exhibit 1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.11.5 Michael A. Butt Employment Agreement, incorporated by reference to Exhibit 10.11.5 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.12.1 Amendment to Brockbank Service Agreement, incorporated by reference to Exhibit 10.12.1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.12.2 Amendment to Keeling Service Agreement, incorporated by reference to Exhibit 10.12.2 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.12.3 Amendment to Newhouse Service Agreement, incorporated by reference to Exhibit 10.12.3 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.12.4 Amendment to Butt Service Agreement, incorporated by reference to Exhibit 10.12.4 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.13.1 Robert J. Newhouse Consulting Agreement, incorporated by reference to Exhibit 10.13.1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.13.2 Ronald L. Bornheutter Consulting Agreement dated as of July 1, 1999. 10.13.3 Ronald L. Bornheutter Settlement Agreement dated as of June 30, 1999. 10.13.4 Employment Contract with Nicholas M. Brown, Jr. dated as of June 30, 1998, incorporated herein by reference to NAC Re's quarterly report on Form 10Q for June 30, 1998. 10.13.5 Amended and Restated Employment Agreement with Nicholas M. Brown, Jr., dated as of June 18, 1999. 10.14.1 Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.1 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.2 Amendment No. 1 to Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.2 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.3 Amendment No. 2 to Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank. 10.14.4 Amendment No. 3 to Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank. 10.14.5 Credit Agreement (364-Day) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.3 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.6 Amendment No. 1 to Credit Agreement (364-Day) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.4 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30,1998. 10.14.7 Loan Agreement between XL America, Inc. and Three Rivers Funding Corporation, incorporated by reference to Exhibit 10.14.5 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30,1998.
76 10.14.8 Letter of Credit Facility and Reimbursement Agreement by and among XL Insurance Company, Ltd. et al. and Mellon Bank, N.A., incorporated by reference to Exhibit 10.14.6 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30,1998. 10.14.9 First Amendment to Letter of Credit Facility Reimbursement Agreement by and among XL Insurance Company, Ltd. et al. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.7 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30,1998. 10.14.10 Second Amendment to Letter of Credit Facility Reimbursement Agreement by and among XL Insurance Company, Ltd. et al. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.8 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30,1998. 10.14.11 Short Term Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit (b)(1) of Amendment No. 2 to the Schedule 14D-1 (the "GCR Schedule 14D-1") of EXEL Limited filed with respect to GCR Holdings Company Limited, incorporated by reference to Exhibit 10.14.9 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.12 First Amendment to Short Term Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.10 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.13 Second Amendment to Short Term Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.11 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.14 Third Amendment to Short Term Revolving Credit Agreement between XL Insurance company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.12 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.15 Fourth Amendment to Short Term Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.13 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.16 Revolving Credit Agreement Between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit (b)(2) of the GCR Schedule 14D-1, incorporated by reference to Exhibit 10.14.14 to the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1998. 10.14.17 First Amendment to Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.15 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.14.18 Second Amendment to Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank N.A., incorporated by reference to Exhibit 10.14.16 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.14.19 Third Amendment to Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.20 Fourth Amendment to Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.21 Fifth Amendment to Revolving Credit Agreement between XL Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.22 Short Term Revolving Credit Agreement between XL Capital Ltd et al and Mellon Bank, N.A. 10.14.23 First Amendment to Short Term Revolving Credit Agreement between XL Capital Ltd et al. and Mellon Bank, N.A.
77 10.14.24 Letter of Credit Facility and Reimbursement Agreement dated as of June 30, 1999 by and among XL Insurance Ltd et al. and Mellon Bank, N.A. 10.14.25 First Amendment to Letter of Credit Facility and Reimbursement Agreement dated as of June 30, 1999 by and among XL Insurance Ltd et al. and Mellon Bank, N.A. 10.14.26 Letter of Credit Facility and Reimbursement Agreement dated as of December 30, 1999 by and among XL Insurance Ltd et al. and Mellon Bank, N.A. 10.14.27 First Amendment to Letter of Credit Facility and Reimbursement Agreement dated as of December 30, 1999 by and among XL Insurance Ltd et al. and Mellon Bank, N.A. 10.14.28 Letter of Credit Agreement dated as of December 17, 1999 by and among XL Insurance Ltd, XL Mid Ocean Reinsurance Ltd and The Chase Manhattan Bank. 10.14.29 Letter of Credit Facility Agreement dated as of December 17, 1999 by and among XL Capital Ltd et al. and ING Bank, N.V. (London Branch) 10.14.30 Amendment No. 1 to Letter of Credit Facility Agreement dated as of December 17, 1999 by and among XL Capital Ltd et al. and ING Bank, N.V. (London Branch) 11.1 Statement regarding computation of per share earnings. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Ernst & Young LLP 27.1 Financial Data Schedule.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1999. 78 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of XL Capital Ltd.: In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheets, the related consolidated statements of income and comprehensive income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of XL Capital Ltd. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in Item 14(a) of this Form 10-K, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements and schedules in accordance with generally accepted auditing standards in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We did not audit the financial statements or financial statement schedules of NAC Re Corp. as at December 31, 1998, which statements reflect total assets of $3.2 billion as of December 31, 1998 and total revenues of $699.4 million and $740.4 million for the years ended December 31, 1998 and 1997, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for NAC Re Corp. for those dates, is based solely on the report of the other auditors. We previously audited and reported on the consolidated balance sheets, the related consolidated statements of income and comprehensive income, of shareholders' equity and of cash flows and the supplemental schedules of XL Capital Ltd. and its subsidiaries as at and for the two years ended November 30, 1998 prior to their restatement for the 1999 pooling of interests and change in fiscal year. We also audited the combination of the accompanying consolidated balance sheet as of December 31, 1998 and the consolidated statements of income and comprehensive income, of shareholders' equity and of cash flows for the two years ended December 31, 1998, after restatement for the 1999 pooling of interest. In our opinion, such consolidated statements have been properly combined on the basis described in Note 6 of the consolidated financial statements. PRICEWATERHOUSECOOPERS LLP New York, New York February 9, 2000 79 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of NAC Re Corporation: We have audited the consolidated balance sheet of NAC Re Corporation and subsidiaries as of December 31, 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998 (not presented separately herein). Our audits also included the financial statements schedules listed in the Index at Item 14 of the 1998 NAC Re Corporation annual report on Form 10-K (not presented separately herein). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NAC Re Corporation and subsidiaries at December 31, 1998, and the consolidated results of their operations and cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all respects, the information set forth therein. Ernst & Young LLP New York, New York February 3, 1999 Except for Note 15, as to which the date is February 15, 1999 80 XL CAPITAL LTD SUPPLEMENTAL SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1999 (U.S dollars in thousands)
AMOUNT AT WHICH SHOWN COST OR IN THE AMORTIZED MARKET BALANCE TYPE OF INVESTMENT COST (1) VALUE SHEET - ----------------- ------------------------------------- Fixed Maturities: Bonds and notes: U.S. government and government agencies and authorities......................................... $ 560,628 $ 558,202 $ 558,202 U.S states and political subdivisions of the States.... 779,328 769,776 769,776 Non-U.S. sovereign governments......................... 767,245 759,794 759,794 Mortgage-backed securities............................. 1,118,105 1,086,089 1,086,089 All other corporate.................................... 4,610,613 4,407,290 4,407,290 ------------------------------------- Total fixed maturities.............................. $7,835,919 $7,581,151 $7,581,151 ------------------------------------- Equity Securities:.......................................... $ 863,020 $1,136,180 $1,136,180 ------------------------------------- Short-term investments...................................... $ 405,375 $ 405,260 $ 405,260 ------------------------------------- Total investments........................................... $9,104,314 $9,122,591 $9,122,591 -------------------------------------
(1) Investments in fixed maturities and short-term investments are shown at amortized cost. 81 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS--PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (U.S. dollars in thousands)
1999 1998 ----------------------- A S S E T S Portfolio Investments: Fixed maturities at fair value (amortized cost: 1999, $101,233; 1998, $244,713).............................. $ 99,816 $ 245,713 Short-term investments at fair value (amortized cost: 1999, $43,563; 1998, $5,569)........................... 43,499 5,698 ----------------------- Total portfolio investments............................ 143,315 251,411 Cash and cash equivalents................................... 125,619 148,681 Investments in subsidiaries on an equity basis.............. 6,296,880 5,983,598 Investments in limited partnership.......................... 39,352 20,378 Accrued investment income................................... 539 1,967 Other assets................................................ 9,026 3,888 ----------------------- Total assets........................................... $6,614,731 $6,409,923 ----------------------- L I A B I L I T I E S Amount due to subsidiaries.................................. 909,610 $ 679,799 Accounts payable and accrued liabilities.................... 128,043 117,521 ----------------------- Total liabilities...................................... $1,037,653 $ 797,320 ----------------------- S H A R E H O L D E R S' E Q U I T Y Ordinary shares............................................. $ 1,278 $ 1,287 Contributed surplus......................................... 2,520,136 2,508,062 Accumulated other comprehensive income...................... 19,311 235,185 Deferred compensation....................................... (28,797) (22,954) Retained earnings........................................... 3,065,150 2,891,023 ----------------------- Total shareholders' equity............................. 5,577,078 $5,612,603 ----------------------- Total liabilities and shareholders' equity............. $6,614,731 $6,409,923 -----------------------
82 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF INCOME AND COMPREHENSIVE INCOME--PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S. dollars in thousands)
1999 1998 1997 ------------------------------ Net investment income....................................... $ 1,890 $ 2,738 $ 64 Net realized gains (losses)................................. (278) 458 - Equity in net income of subsidiaries (Dividends were Nil, $117,900 and $186,548 in 1999, 1998 and 1997, respectively.............................................. 560,166 632,521 749,554 Equity in net income of affiliate........................... - 49,878 62,135 Income from limited partnership............................. 4,947 3,599 4,342 ------------------------------ Total revenues.............................................. 566,725 689,194 816,095 Operating expenses.......................................... 96,216 32,864 7,066 ------------------------------ Net income.................................................. 470,509 $656,330 $809,029 ------------------------------ Change in net unrealized appreciation on investments........ (3,084) 1,603 - ------------------------------ Comprehensive income........................................ $467,425 $657,933 $809,029 ------------------------------
83 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS - PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S dollars in thousands)
1999 1998 1997 --------------------------------- Cash flows provided by operating activities: Net income................................................ $ 470,509 $ 656,330 $ 809,029 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains from sale of shares in affiliate.... - (458) - Equity in net income of subsidiaries net of dividends........................................... (557,317) (503,838) (553,607) Equity in net income of affiliate net of dividends..... - (31,410) (34,849) Accrued investment income.............................. 1,428 (1,967) - Amount due from subsidiaries........................... 229,811 651,753 37,151 Accounts payable and accrued liabilities............... 10,522 116,402 (444) Amortization of intangible assets...................... 31,348 10,494 - Amortization of deferred compensation.................. 7,657 5,815 5,237 Amortization of discounts on fixed maturities.......... 366 335 - Other assets........................................... (5,138) (631) (64) --------------------------------- Total adjustments................................... (281,323) 246,495 (546,576) --------------------------------- Net cash provided by operating activities........... 189,186 902,825 262,453 --------------------------------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term Investments............................................ 118,756 198,893 - Proceeds from redemption of fixed maturities and short-term investments................................. 107,885 53,325 - Purchases of fixed maturities and short term investments............................................ (121,995) (501,957) - Investment in limited partnership......................... (18,974) (1,129) 203 --------------------------------- Net cash provided (used in) by investing activities.... 85,672 (250,868) 203 --------------------------------- Cash flows used in financing activities: Issuance of restricted shares............................. 69 514 387 Proceeds from exercise of options......................... 14,014 15,092 12,284 Dividends paid............................................ (212,659) (156,481) (120,607) Repurchase of treasury shares............................. (99,344) (362,401) (154,720) --------------------------------- Net cash used in financing activities............... (297,920) (503,276) (262,656) --------------------------------- Net change in cash and cash equivalents............. (23,062) $ 148,681 - Cash and cash equivalents - beginning of year............... $ 148,681 - - --------------------------------- Cash and cash equivalents - end of year..................... $ 125,619 $ 148,681 - ---------------------------------
84 XL CAPITAL LTD SCHEDULE IV--REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S dollars in thousands)
CEDED ASSUMED GROSS TO OTHER FROM OTHER NET AMOUNT COMPANIES COMPANIES AMOUNT ------------------------------------------------- 1999................................................ $1,088,028 $541,037 $1,354,892 $1,901,883 ------------------------------------------------- 1998................................................ $ 779,551 $319,275 $ 863,988 $1,324,264 ------------------------------------------------- 1997................................................ $ 517,773 $254,940 $ 617,612 $ 880,445 -------------------------------------------------
85 XL CAPITAL LTD SCHEDULE VI SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (U.S dollars in thousands)
LOSSES AND LOSS EXPENSES INCURRED RELATED TO RESERVES ------------------------ PAID DEFERRED FOR LOSSES RESERVES FOR NET LOSSES ACQUISITION AND LOSS UNEARNED NET EARNED INVESTMENT CURRENT PRIOR AND LOSS COSTS EXPENSES PREMIUMS PREMIUMS INCOME YEAR (1) YEAR (2) EXPENSES --------------------------------------------------------------------------------------------------------- 1999................. $275,716 $5,369,402 $1,497,376 $1,750,006 $525,318 $1,591,414 $(287,110) $1,093,502 --------------------------------------------------------------------------------------------------------- 1998................. $204,271 $4,896,643 $1,337,277 $1,324,291 $417,290 $1,085,161 $(243,617) $ 730,889 --------------------------------------------------------------------------------------------------------- 1997................. $113,566 $3,972,376 $ 824,369 $1,114,758 $345,115 $1,056,228 $(317,379) $ 330,951 --------------------------------------------------------------------------------------------------------- AMORTIZATION OF DEFERRED NET ACQUISITION PREMIUMS COSTS WRITTEN ------------------------- 1999................. $380,980 $1,901,883 ------------------------- 1998................. $249,341 $1,324,264 ------------------------- 1997................. $198,017 $ 880,445 -------------------------
86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XL CAPITAL LTD By /s/ BRIAN M. O'HARA --------------------------------------------- Brian M. O'Hara PRESIDENT AND CHIEF EXECUTIVE OFFICER
March 17,2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ BRIAN M. O'HARA President, Chief Executive ------------------------------------------------ Officer and Director March 17, 2000 Brian M. O'Hara (Principal Executive Officer) Executive Vice President and Chief /s/ ROBERT R. LUSARDI Financial Officer (Principal ------------------------------------------------ Financial March 17, 2000 Robert R. Lusardi Officer and Principal Accounting Officer) /s/ MICHAEL ESPOSITO JR. ------------------------------------------------ Director and Chairman of the March 17, 2000 Michael Esposito, Jr. Board of Directors /s/ RONALD L. BORNHUETTER ------------------------------------------------ Director March 17, 2000 Ronald L. Bornhuetter /s/ MICHAEL A. BUTT ------------------------------------------------ Director March 17, 2000 Michael A. Butt /s/ ROBERT CLEMENTS ------------------------------------------------ Director March 17, 2000 Robert Clements /s/ SIR BRIAN CORBY ------------------------------------------------ Director March 17, 2000 Sir Brian Corby /s/ ROBERT R. GLAUBER ------------------------------------------------ Director March 17, 2000 Robert R. Glauber
87
SIGNATURES TITLE DATE ---------- ----- ---- /s/ ROBERT V. HATCHER, JR. ------------------------------------------------ Director March 17, 2000 Robert V. Hatcher, Jr. /s/ IAN R. HEAP ------------------------------------------------ Director March 17, 2000 Ian R. Heap /s/ PAUL JEANBART ------------------------------------------------ Director March 17, 2000 Paul Jeanbart /s/ JOHN LOUDON ------------------------------------------------ Director March 17, 2000 John Loudon /s/ DANIEL MCNAMARA ------------------------------------------------ Director March 17, 2000 Daniel McNamara /s/ ROBERT J. NEWHOUSE, JR. ------------------------------------------------ Director March 17, 2000 Robert J. Newhouse, Jr. /s/ ROBERT S. PARKER ------------------------------------------------ Director March 17, 2000 Robert S. Parker /s/ CYRIL RANCE ------------------------------------------------ Director March 17, 2000 Cyril Rance /s/ ALAN Z. SENTER ------------------------------------------------ Director March 17, 2000 Alan Z. Senter /s/ JOHN T. THORNTON ------------------------------------------------ Director March 17, 2000 John T. Thornton /s/ ELLEN E. THROWER ------------------------------------------------ Director March 17, 2000 Ellen E. Thrower /s/ JOHN WEISER ------------------------------------------------ Director March 17, 2000 John Weiser
88 EX-10.13-2 2 EXHIBIT 10.13.2 Exhibit 10.13.2 CONSULTING AGREEMENT This CONSULTING AGREEMENT ("Agreement"), made and entered into as of July 1, 1999, by and between NAC RE CORPORATION, a Delaware corporation (the "Company"), and RONALD L. BORNHUETTER ("Bornhuetter"). WHEREAS, Bornhuetter has terminated his employment with the Company effective as of the date hereof; and WHEREAS, the Company wishes to continue to avail itself of the services of Bornhuetter as a Consultant to the Company, and Bornhuetter is willing to continue to perform services in that capacity on behalf of the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company and Bornhuetter (each individually, a "Party," and collectively, the "Parties") agree as follows: 1. GENERAL. The Company engages Bornhuetter as a consultant for the period as set forth in Section 2 to provide the services as set forth in Section 3, subject to the other terms and conditions set forth in this Agreement. 2. TERM OF SERVICE. The term of Bornhuetter's service under this Agreement shall commence as of July 1, 1999 (the "Effective Date") and shall terminate on the second anniversary of the Effective Date unless there is an earlier termination of Bornhuetter's service pursuant to Section 7 (the "Term of Service"). 3. SERVICES. During the Term of Service, it is the intention of the Parties that Bornhuetter serve as a consultant to the Company. As a consultant, Bornhuetter shall perform such consulting duties and render such advice, including, but not by way of limitation, duties and advice relating to integration of the Company with XL Capital Ltd. ("XL") following the Company's merger with a subsidiary of XL and international reinsurance matters, as the Chief Executive Officer (the "CEO") of XL may reasonably specify. The CEO may request Bornhuetter to render such services for up to 20 days per calendar quarter, subject to Bornhuetter's reasonable convenience and his other business commitments. Bornhuetter shall serve as a member of the Board of Directors of XL, if appointed thereto, and of such other boards as may be mutually agreed upon by the Parties. Bornhuetter's services shall be rendered in New York, Connecticut and such other locations as may be mutually agreed upon by the Parties. 4. FEES. During the Term of Service, Bornhuetter shall receive a base annual fee of $250,000 (the "Base Annual Fee") payable in 12 monthly installments of $20,833.33 each at the end of each month, together with any applicable directors' fees. 5. BUSINESS EXPENSES. (a) DOCUMENTED EXPENSES. Bornhuetter shall be entitled to receive prompt and full reimbursement for all reasonable business expenses (other than office and secretarial expenses) incurred by him in rendering services to the Company under this Agreement, provided that Bornhuetter shall provide documentation of such expenses in accordance with the usual practices of the Company. Such reimbursement shall include up to $10,000 per year for expenses related to Bornhuetter's actuarial society activities. (b) OFFICE ALLOWANCE. In addition, the Company shall pay Bornhuetter an allowance of $10,000 per year for office and secretarial expenses. 6. INDEPENDENT CONTRACTOR STATUS. As a Consultant, Bornhuetter's status shall be that of independent contractor. Bornhuetter acknowledges that the Company will not withhold any federal, state or local taxes from the fees to be paid hereunder. 7. TERMINATION OF SERVICE. (a) TERMINATION BY THE COMPANY OTHER THAN DUE TO DEATH, DISABILITY OR FOR CAUSE. In the event the Company terminates Bornhuetter's service for any reason other than death, as provided in Section 7(b), Disability, as provided in Section 7(c), or Cause, as provided in Section 7(d), the Company shall pay to Bornhuetter the monthly sum of $20,833.33 until June 30, 2001. (b) TERMINATION DUE TO DEATH. In the event Bornhuetter's service is terminated due to his death, the Company shall pay to his designated beneficiary or other legal representative the monthly installment of the Base Annual Fee for the month in which Bornhuetter's death occurs, as well as any unreimbursed business expenses. The Company shall have no further obligation to pay advisory fees under this Agreement. (c) TERMINATION DUE TO DISABILITY. In the event Bornhuetter's service is terminated due to his Disability, the Company shall pay Bornhuetter the monthly installment of the Base Annual Fee for the month in which termination occurs, as well as any unreimbursed business expenses. The Company shall have no further obligation to pay advisory fees under this Agreement. For this purpose, "Disability" shall mean any physical or mental disability which renders Bornhuetter incapable of carrying out his duties or responsibilities under this Agreement, provided that Bornhuetter shall not be considered to have suffered such disability unless he shall have been unable to carry out such duties or responsibilities for a period of at least 180 consecutive days. A determination of Disability will be subject to the certification of a qualified medical doctor appointed by the Company and reasonably acceptable to Bornhuetter. (d) TERMINATION VOLUNTARILY OR FOR CAUSE. In the event Bornhuetter terminates his service under this Agreement voluntarily or Bornhuetter's service is terminated by the Company for Cause, the Company shall pay Bornhuetter the monthly installment of the Base Annual Fee for the month in which termination occurs, prorated to the date of termination, as well as any unreimbursed business expenses and the office expense allowance described in Section 5(b), pro rated to the date of termination. The Company shall have no further obligation to pay advisory fees under this Agreement. Termination for Cause shall mean a termination of Bornhuetter's service following his commission of a felony, a termination because Bornhuetter, in carrying out his duties hereunder, has engaged in willful gross misconduct resulting in material harm to the Company, or a termination because Bornhuetter has breached Section 8 or Section 9 of this Agreement. A voluntary termination shall be deemed to include (i) the failure or refusal by Bornhuetter to accept an appointment to the Board of Directors of XL or any affiliate of XL or the Company and (ii) Bornhuetter's resignation from the Board of Directors of XL or from the Board of Directors of the Company or any affiliate of XL or the Company without the consent of the Board of Directors of XL. 8. NON-COMPETITION AND NON-SOLICITATION. (a) NON-COMPETE. Bornhuetter shall not engage in competition with the Company so long as he is serving as a director of XL, the Company or any affiliate of XL or the Company. Bornhuetter may resign as director at any time, in which case the provisions of Section 7(d) shall apply. Exception will be made for his providing actuarial services and for any opportunities for which he received written consent from the Company. "Competition" shall mean engaging in any activity for a Competitor, whether as an employee, consultant, officer or director, or shareholder (except as a less than one percent shareholder of a publicly traded company) or otherwise. A "Competitor" shall mean any corporation or other entity which competes with the Company's business, as determined on the Effective Date. Bornhuetter's actuarial activities shall not be considered a violation of this Section 8. (b) NON-SOLICIT. During the Term of Service, Bornhuetter shall not induce any employees of the Company, XL or any of their affiliates to terminate their employment, nor shall Bornhuetter solicit or encourage any customers or any corporation or other entity in a joint venture relationship with the Company, XL or any of their affiliates, to terminate their or its relationship with the Company, XL or any of their affiliates or to violate any agreement with any of them. (c) TERMINATION OF NON-COMPETE/NON-SOLICIT. The provisions of Sections 8(a) and 8(b) shall terminate upon the earlier to occur of (i) 24 months from the Effective Date or (ii) Bornhuetter's resignation from the Board of Directors of XL, the Company, or any affiliate of XL or the Company. 9. CONFIDENTIAL INFORMATION AND TRADE SECRETS. Bornhuetter hereby acknowledges that he has had and in the future may have access to and become acquainted with various trade secrets and proprietary information of the Company, XL and their affiliates not available to competitors of the Company, XL and their affiliates including, without limitation, information relating to their products, product development, trade secrets, customers, suppliers, finances, management, operations and business plans and strategies. Bornhuetter covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with the rendering by him of services to the Company under this Agreement or except as may be required by a court of law, a governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with jurisdiction to order him to divulge, disclose or make accessible such information; provided, however, that Bornhuetter agrees that, before making such disclosure, he shall promptly notify the Company and shall cooperate with the Company in seeking a protective order and/or other appropriate restrictions on disclosure. All management studies, business or strategic plans and budgets of or relating to the Company, XL and their affiliates and all notebooks and other printed, typed or written materials, documents and data containing the information described in this Section 9 that were furnished to Bornhuetter during his employment with the Company or are furnished to Bornhuetter in his capacity as a consultant shall, as between Bornhuetter and the Company, be the sole and exclusive property of the Company and all of such materials shall be returned to the Company promptly following the termination of Bornhuetter's service under this Agreement. 10. COOPERATION IN LITIGATION. Bornhuetter shall cooperate and generally make himself available, subject to the provisions of Section 3, to give testimony and assistance in connection with any litigation, arbitration proceeding, government hearing or investigation involving the Company, XL or any of their affiliates. The Company shall reimburse Bornhuetter, or advance to him all reasonable expenses incurred in connection with his testimony, cooperation or assistance under this Section 10. Such expenses shall include reasonable out-of-pocket travel expenses and reasonable fees and disbursements for independent counsel for Bornhuetter, if Bornhuetter reasonably determines, based on an opinion of counsel furnished to the Company prior to incurring such fees and expenses, which opinion is reasonably satisfactory to the Company, that the litigation, arbitration proceeding, government hearing or investigation is of a nature which requires that he have independent representation. Such expenses shall be reimbursed or advanced promptly after Bornhuetter's submission to the Company of statements in such reasonable detail as the Company may require. 11. ARBITRATION; EQUITABLE RELIEF. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration, to be held in New York, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each Party shall bear his or its own costs of the arbitration or litigation, including, without limitation, his or its attorneys' fees. Nothing herein shall prevent the Company from seeking equitable relief in court in connection with any breach or proposed breach by the Executive of the provisions of Sections 8 and 9. For the purpose of any such equitable relief, the Executive hereby submits to the exclusive jurisdiction of the courts of the state of New York and the federal courts of the United States of America located in such state and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for such equitable relief, that he is not subject thereto. Executive agrees that service of process in such action, suit or proceeding shall be deemed in every respect effective service of process upon him if given in the manner set forth in Section 13 or if effected by any legally permitted method of service. 12. ASSIGNMENT. This Agreement shall be binding on and inure to the benefit of the Parties hereto and their respective heirs, personal representatives, successors and assigns. 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 pursuant to a merger or consolidation in which the Company is not the surviving entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. None of Bornhuetter's rights or obligations under this Agreement may be assigned or transferred by him other than his rights to compensation and benefits, which may be transferred only by will or operation of law or pursuant to Section 19 below. 13. NOTICE. Any written notice required to be given by one Party to the other Party hereunder shall be deemed effected if delivered by messenger or overnight courier or mailed by registered mail, return receipt requested: To the Company at: One Greenwich Plaza Greenwich, CT 06836-2568 Attention: General Counsel To Bornhuetter at: 29 Old Stone Bridge Road Cos Cob, CT 06807 or such other address as may be stated in notice given as hereinbefore provided. 14. GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the laws of the State of New York, without regard to the principles of conflicts of law. 15. SEVERABILITY. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. 16. SURVIVORSHIP. Wherever appropriate to the intention of the Parties, the respective rights and obligations of the Parties shall survive any termination or expiration of the Term of Service. 17. AMENDMENT/WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Bornhuetter and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Bornhuetter or an authorized officer of the Company, as the case may be. 18. HEADINGS. The headings of the sections and subsections 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. 19. BENEFICIARIES. Bornhuetter shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Bornhuetter's death by giving the Company written notice thereof. In the event of Bornhuetter's death or a judicial determination of his incompetence, reference in this Agreement to Bornhuetter shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and Bornhuetter has hereunto set his hand as of the day and year first above written. NAC RE CORPORATION By: --------------------------------------- ------------------------------------------- Ronald L. Bornhuetter EX-10.13-3 3 EXHIBIT 10.13.3 Exhibit 10.13.3 SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is made and entered into as of June 30, 1999, by and between RONALD L. BORNHUETTER ("Executive"), NAC RE CORPORATION, a Delaware corporation, and NAC REINSURANCE CORPORATION, a New York corporation (together, the "Company"). STATEMENT OF PURPOSE Executive has been employed by the Company under the terms of that certain Employment Agreement between Executive and the Company dated October 30, 1996 (the "Employment Agreement"). The Employment Agreement provides that Executive will be entitled to receive certain payments and benefits if his employment is terminated. Executive's employment with the Company ceased effective as of June 30, 1999. The Company and Executive wish to confirm in this Agreement that Executive has terminated his employment for Good Reason pursuant to Section 8(c) of the Employment Agreement and to specify the termination payments and other benefits that will be provided to Executive under the Employment Agreement and certain other documents, contracts and plans, as well as certain other consideration, and to settle in full all matters and claims, contractual and non-contractual, relating to Executive's employment with the Company. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. RESIGNATION; RETIREMENT. Executive hereby resigns from his position as Chief Executive Officer of the Company and resigns his membership on the Board of Directors of the Company and his position as Chairman thereof, effective June 18, 1999. Executive agrees that he will resign from any and all offices and directorships of any and all affiliates of the Company promptly following the request of such Board of Directors. Effective as of June 30, 1999 (the "Termination Date"), Executive shall cease to be an employee of the Company or any affiliate. For the purposes of all Company benefit plans and programs, including, without limitation, the Supplemental Pension pursuant to Section 5 of the Employment Agreement, such termination of employment shall be treated as a retirement. 2. TERMINATION PAYMENTS AND BENEFITS. Executive shall receive the following payments and benefits as a result of his termination of employment: -2- (a) LUMP SUM CASH SEVERANCE. On or before July 15, 1999, the Company shall pay to Executive a lump sum cash severance payment and accrued bonus obligations in the aggregate amount of $4,659,812, representing the following: Amount pursuant to Section 8(b)(i)(B) $3,946,785 of the Employment Agreement Annual Incentive Plan $144,394 Long-term Incentive Plan $568,633 (b) STOCK OPTIONS. All of Executive's currently outstanding stock options, listed on Exhibit A hereto, are fully vested and exercisable, have been converted into options to purchase the number of shares of common stock of XL Capital Ltd. ("XL") reflected in Exhibit A, and shall remain exercisable until the expiration of the exercise period provided in the applicable option agreement (but in no event beyond its maximum stated term), as provided in Exhibit A. (c) SUPPLEMENTAL PENSION. In accordance with Section 5 of the Employment Agreement, the Company shall pay to Executive $162,892 per year in equal monthly installments commencing August 1, 1999. Such benefit shall be paid to Executive for his lifetime and, following his death, 50% of such amount shall continue to be paid to his surviving spouse for her lifetime commencing on the first day of the month immediately after the date of Executive's death. Funding of the benefit under this Section 2(c) shall be provided through a "Rabbi Trust" established by the Company. The Company will maintain the assets of the trust at a level at least equal to the lump sum value of future payments, determined using the following accepted actuarial principles and assumptions: for mortality, the UP 1984 Mortality Table, and for interest, the applicable interest rate, as then in effect, used by the Pension Benefit Guaranty Corporation to value immediate annuities in connection with the termination of a single-employer plan under the Employee Retirement Income Security Act of 1974, as amended. To the extent the assets held in the trust exceed the foregoing lump sum value, the excess amount shall be returned to the Company or shall remain in the trust for the contingency of future increases in the lump sum value, as elected by the Company. (d) CONTINUATION OF MEDICAL, VISION AND DENTAL BENEFITS. The Company shall provide Executive and his spouse with medical, vision and dental benefits on the same basis as such benefits were provided prior to the Termination Date, by purchasing and maintaining equivalent medical, vision and dental coverage on Executive's behalf, for a period of 36 months commencing July 1, 1999. After July 2002, the Company shall use its best efforts to continue the eligibility of Executive and his spouse in its group insurance benefits; provided, however, that the costs of such benefits shall be borne by Executive. -3- (e) CONTINUATION OF LIFE INSURANCE BENEFIT. Commencing July 1, 1999 and continuing until June 30, 2002, the Company shall maintain for the benefit of Executive life insurance coverage with an aggregate death value of $750,000. Commencing July 1, 2002, the Company shall purchase and maintain at its expense for the remainder of Executive's life, and for Executive's benefit, life insurance coverage having an aggregate death value of $100,000. Executive shall be the owner of and shall have the right to designate or change the beneficiary or beneficiaries of the insurance described in this Section 2(e), and such insurance shall be provided in a form whereby Executive may create an irrevocable trust as the owner of such insurance. (f) OTHER BENEFITS. Executive is a participant in the benefit plans listed in Exhibit B hereto. This Agreement shall not change the terms of such plans or the benefits earned by or due to Executive thereunder for services rendered to the Company through the Termination Date. The benefits earned by or due to Executive in accordance with the terms of such plans shall be paid or provided by the Company or such plans (as the case may be) when due (whether such due date is on, before or after the Termination Date), and full payments and provision of benefits shall discharge fully all obligations of the Company and such plans with respect to Executive's benefits under such plans. In addition, the Company shall pay to Executive a lump sum amount equal to $48,293.21 (the value of 19.5 vacation days based on six months of employment in 1999), payable in accordance with the Company's general practices for reimbursement for unpaid vacation days. 3. TAX WITHHOLDING AND REPORTING. The Company shall be entitled to withhold from the benefits and payments described herein all income and employment taxes required to be withheld by applicable law. 4. RELEASE OF THE COMPANY. Executive, on behalf of himself and his heirs, personal representatives, successors and assigns, hereby releases and forever discharges the Company, its affiliates, and each and every one of their respective present and former directors, officers, employees, agents, successors and assigns from and against any and all claims, demands, damages, actions, causes of action, costs and expenses, which Executive now has, may ever have had or may have hereafter upon or by reason of any matter, cause or thing occurring, done or omitted to be done prior to the date of this Agreement, that constitute "Employment-Related Claims" or rights and claims Executive has or might have under the Worker Adjustment and Retraining Notification Act, the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), Title VII of the Civil Rights Act of 1964, as amended, and the Americans with Disabilities Act of 1990, as amended; PROVIDED, HOWEVER, that this release shall not apply to any claims which Executive may have for the payments or provision of the benefits under this Agreement or programs described or referenced in this Agreement, including the Exhibits hereto, and that -4- this release shall not apply to any rights Executive may have to obtain contribution in the event of the entry of judgment against him as a result of any act or failure to act for which both Executive and the Company are jointly responsible. For purposes of this Agreement, "Employment -- Related Claims" means all rights and claims Executive has or may have related to his employment by or status as an employee, officer or director of the Company or any of its affiliates or to the termination of that employment or status or to any employment practices and policies of the Company or its affiliates. Executive acknowledges and agrees that he has read this release in its entirety and that this release is a general release of all known and unknown claims, including rights and claims arising under ADEA. Executive and the Company further acknowledge and agree that: (i) This release does not release, waive or discharge any rights or claims that may arise for actions or omissions which occur after the date of this Agreement; (ii) Executive is entering into this Agreement and releasing, waiving and discharging rights or claims only in exchange for consideration which he is not already entitled to receive; (iii) Executive has been advised, and is being advised by this release, to consult with an attorney before executing this Agreement; (iv) Executive has been advised, and is being advised by this release, that he has up to twenty-one (21) days within which to consider this release; and (v) Executive is aware that this release will not become effective or enforceable until seven (7) days following his execution of this Agreement and that he may revoke this release at any time during such period by delivering (or causing to be delivered) to the Company at the address provided in Section 11 hereof written notice of his revocation of this release no later than 5:00 p.m. eastern time on the seventh (7th) full date following his execution of this Agreement. 5. RELEASE OF EXECUTIVE. In consideration of Executive's entering into this Agreement, the Company, for itself, its officers and directors, its affiliates and their respective predecessors, successors and assigns hereby releases and forever discharges Executive and his heirs, personal representatives, successors and assigns from and against any and all claims, demands, damages, actions, causes of action, costs and expenses, of whatever kind or nature, in law, equity or otherwise, -5- which the Company or any of said entities now has, may ever have had or may have hereafter upon or by reason of any matter, cause or thing occurring, done or omitted to be done prior to the date of this Agreement, including without limitation all rights and claims the Company or any of said entities or any third parties (including officers, directors and employees of the Company or its affiliates) have or might have as a result of Executive's status as an officer, director or employee of the Company or any of said entities or the termination of that status; PROVIDED, HOWEVER, that this release shall not apply to any claims the Company may have which arise out of or relate to the conviction of Executive for the commission of a crime involving dishonesty with respect to the Company, its affiliates or their respective predecessors. As of the date of this Agreement, the Company has no knowledge of any potential claim against Executive arising out of any of the events described above. 6. INDEMNIFICATION. The Company and/or its affiliates shall indemnify and hold harmless Executive, his heirs and his personal representatives to the fullest extent permitted by applicable law, as now or hereafter in effect, with respect to any acts, omissions or events that occurred while Executive was an employee of the Company or any affiliate or served the Company, any affiliate or any other corporation or enterprise of any kind in any capacity at the request of the Company or any affiliate (an "Enterprise"). Without limiting the generality of the foregoing, such indemnification shall include the prompt payment or reimbursement to Executive for (a) all of Executive's reasonable expenses, including attorneys' fees and court costs, actually and reasonably incurred in connection with the defense of any action, suit or proceeding or in connection with any appeal thereof, to which Executive may be a party by reason of any action taken or failure to act under or in connection with his service for the Company, any affiliate or an Enterprise, and (b) all amounts required to be paid in settlement or in satisfaction of a judgment in connection with any such action, suit or proceeding; provided, however, that the Company and any affiliate shall not be required to indemnify or hold harmless Executive, his heirs or personal representatives in any matter whatsoever in the event and to the extent that there is a final and nonappealable judgment by a court of competent jurisdiction that the liability incurred by Executive resulted from his gross negligence, fraud or willful malfeasance. 7. GROSS-UP PAYMENT. In the event that any payments or benefits (the "Severance Payments") provided for in this Agreement (including, but not limited to, the rights provided under Section 2(b)) are subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Severance Payments and any federal, state and local income taxes and Excise Tax (including interest and penalties) upon the pay- -6- ment provided for in this Section 7, shall be equal to the Severance Payments. The determination whether any payments made pursuant to this Agreement are subject to the Excise Tax shall be based on the opinion of tax counsel selected by the Executive and reasonably acceptable to the Company. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal, state and local income taxes at the highest marginal rate of income taxation applicable to any individual residing in the jurisdiction in which the Executive resides in the calendar year in which the Gross-Up Payment is to be made. In the event that the Excise Tax is subsequently determined to be less than the amount initially determined hereunder, the Executive shall promptly repay to the Company the portion of the Gross-Up Payment attributable to such reduction. In the event that the Excise Tax is subsequently determined to exceed the amount initially determined hereunder, the Company shall promptly make an additional Gross-Up Payment in respect of such excess. 8. CONFIDENTIALITY. (a) For the period during which this Agreement has not been publicly disclosed by the Company, Executive hereby covenants and agrees to keep in full confidence all information concerning this Agreement except (i) to the extent disclosure is or may be required by a statute (or regulation thereunder), by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information, (ii) to the extent disclosure to Executive's legal counsel and personal financial advisors is reasonably necessary in connection with Executive's consideration of the terms of this Agreement or Executive's personal financial dealings, or (iii) to members of his immediate family. (b) The Company hereby covenants and agrees to keep in full confidence all information concerning this Agreement except (i) to the extent disclosure is or may be required by a statute (or regulation thereunder), by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order the Company to divulge, disclose or make accessible such information, (ii) to the extent disclosure to the Company's legal counsel and auditors is reasonably necessary or (iii) to those persons within the Company, who as reasonably determined by the Company, must know about it in carrying out their duties. (c) Executive and the Company acknowledge and agree that each shall be entitled to enforce specifically the covenants in this Section 8 by seeking an injunction to prevent violation thereof in addition to any other remedies available at law or in equity. -7- 9. MUTUAL NONDISPARAGEMENT. Executive shall not intentionally make any public statements, encourage others to make statements or release information intended to disparage or defame the Company or any of its affiliates or any of their respective directors or officers. The Company shall not intentionally make any public statements, encourage others to make statements or release information intended to disparage or defame Executive's reputation. Notwithstanding the foregoing, nothing in this Section 9 shall prohibit any person from making truthful statements when required by order of a court or other body having jurisdiction. 10. ARBITRATION; EQUITABLE RELIEF. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration, to be held in New York, New York, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each party shall bear his or its own costs of the arbitration or litigation, including, without limitation, his or its attorneys' fees. Nothing herein shall prevent either party from seeking equitable relief in court in connection with any breach or proposed breach of the provisions of Sections 8 and 9. For the purpose of any such equitable relief, the parties hereby submit to the exclusive jurisdiction of the courts of the state of New York and the federal courts of the United States of America located in such state and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for such equitable relief, that he or it is not subject thereto. The parties agree that service of process in such action, suit or proceeding shall be deemed in every respect effective service of process upon him or it if given in the manner set forth in Section 11, or if effected by any legally permitted method of service. 11. NOTICES. All notices, requests, demands or other communications under this Agreement shall be in writing and shall be deemed effected when delivered by messenger or overnight courier or by registered mail, return receipt requested, to the party to whom such notice is being given as follows: To the Company at: One Greenwich Plaza Greenwich, CT 06836-2568 Attention: General Counsel To Executive at: 29 Old Stone Bridge Road Cos Cob, CT 06807 -8- or such other address as may be stated in notice given as hereinbefore provided. Either party may change his or its address or the name of the person to whose attention the notice or other communication shall be directed from time to time by serving notice thereof upon the other party as provided herein. 12. ENTIRE AGREEMENT. This Agreement, together with the attachments to it, the agreements, plans, contracts, documents and programs described or referenced herein, and the Consulting Agreement between the Company and Executive effective as of July 1, 1999, constitutes the entire agreement between the Company and Executive, and supersedes and invalidates any previous agreements or contracts not so described or referenced herein, including, without limitation, the Employment Agreement, such that the Company shall have no further liability or responsibility under the Employment Agreement. No representations, inducements, promises or agreements, oral or otherwise, which are not embodied herein, shall be of any force or effect. 13. MISCELLANEOUS. This Agreement, and the rights and obligations of the parties hereto, shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. If any provision hereof is unenforceable, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such unenforceable provision had never comprised a part hereof, the remaining provisions hereof shall remain in full force and effect, and the court construing the Agreement shall add as a part hereof a provision as similar in terms and effect to such unenforceable provision as may be enforceable, in lieu of the unenforceable provision. As used in this Agreement, the term "affiliate" means a corporation which is a member of the same controlled group of corporations (within the meaning of Section 1563(a) of the Code) as the Company. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing and signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same or any prior or subsequent time. The headings of the sections and subsections 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. -9- 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. -10- IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has caused this Agreement to be executed by its duly authorized representative, all as of the date first above written. NAC RE CORPORATION By: --------------------------------------------- NAC REINSURANCE CORPORATION By: --------------------------------------------- ------------------------------------------------- Ronald L. Bornhuetter EXHIBIT A STATUS OF RONALD BORNHUETTER'S OPTIONS (ASSUMING RETIREMENT AND TERMINATION UPON THE CHANGE IN CONTROL ("CC") 6/30/99 CONVERTED TO OPTIONS TO PURCHASE XL SHARES)
- ---------------------- --------------------------- --------------------------- -------------------------- LAST DATE DATE XL SHARES PLAN TO EXERCISE - ---------------------- --------------------------- --------------------------- -------------------------- 9/88 154,406 1989 Plan 6/30/00 12/90 21,960 1989 Plan 6/30/00 9/91 19,215 1989 Plan 6/30/00 3/92 22,875 1989 Plan 6/30/00 9/92 19,215 1989 Plan 6/30/00 - ---------------------- --------------------------- --------------------------- -------------------------- 9/93 29,280 1993 Plan 9/7/031 8/94 10,522 1993 Plan 6/30/04 9/95 34,312 1993 Plan 6/30/04 9/96 22,875 1993 Plan 6/30/04 10/96 60,390 1993 Plan 6/30/04 10/96 31,110 1993 Plan 6/30/04 - ---------------------- --------------------------- --------------------------- -------------------------- 6/97 31,110 1997 Plan 6/30/04 6/98 31,110 1997 Plan 6/30/04 - ---------------------- --------------------------- --------------------------- --------------------------
- ---------- 1 Exercisable no later than option expiration date EXHIBIT B RONALD BORNHUETTER
BENEFIT PLAN CONTINUING BENEFITS - ---------------------------------------------- ----------------------------------------------------- 401(k) Employee Savings Plan Basic match ceases June 30, 1999; 1999 discretionary match to be contributed March 31, 2000 Non-qualified Excess Saving Plan Basic match ceases June 30, 1999; 1999 discretionary match to be accrued March 31, 2000 Pension - NAC Re Corp. Retirement Program Payments of $41,364 per year, commencing July 1, 1999, assuming 50% joint and survivor annuity benefit - NAC Re Corp. Benefits Equalization Payments of $173,352 per year, commencing July 1, 1999, assuming 50% joint and survivor annuity benefit Stock Purchase Plan Eligibility discontinued. Refund of $21,250 to be paid July 15, 1999 Car lease Lease to be transferred to individual name as of June 30, 1999
EX-10.13-5 4 EXHIBIT 10.13.5 Exhibit 10.13.5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, made as of June 18, 1999, by and among XL Capital Ltd ("AXL"), Dasher Acquisition Corp. ("ACQUISITION"), NAC Re Corporation ("NAC RE") and NAC Reinsurance Corporation ("NAC") (collectively, NAC Re and NAC shall be referred to as the "COMPANY" or the "EMPLOYER"), and Nicholas M. Brown, Jr. ("EXECUTIVE"). W I T N E S S E T H WHEREAS, as of June 10, 1998, the Company and the Executive entered into an employment agreement (the "AGREEMENT"); and WHEREAS, XL, Acquisition and the Company have entered into an Agreement and Plan of Merger (the "MERGER AGREEMENT"); and WHEREAS, XL, Acquisition and the Company wish to have the Executive continue his employment under the Agreement through the consummation of the merger transactions contemplated by the Merger Agreement (such consummation date hereafter referred to as the "CIC DATE") and thereafter, as modified in certain respects, and the Executive wishes to continue such employment. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein and other good and valuable consideration, the parties hereto hereby agree to continue Executive's employment in accordance with the terms of the Agreement, which continues in full force and effect, and hereby amend and restate the Agreement in its entirety as follows effective as of the CIC Date: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms shall have the following meanings when used in this Agreement with initial capital letters: (a) "ANNUAL INCENTIVE PLAN" shall mean: (i) prior to the CIC Date, the NAC Re Corp. Amended and Restated Annual Incentive Plan ("NAC RE AIP") as referred to in Exhibit 10.11 of the NAC Re Corp. 1997 Annual Report on Form 10-K ("FORM 10-K"); following the CIC Date and prior to February 28, 2002, either the NAC Re AIP or the annual incentive plan maintained by XL for its senior executives ("XL AIP"), as designated by the Executive prior to November 1 of each year; and (iii) on or after February 28, 2002, the XL AIP. -2- (b) "BOARD" shall mean, prior to the CIC Date, the Board of Directors of NAC Re Corp., and following the CIC Date, the Board of Directors of XL and the Board of Directors of XL America, Inc. (c) "CAUSE" shall mean Executive's willful breach of duty in the course of his employment or Executive's habitual neglect of his employment duties in a manner that materially impacts the business or reputation of Employer unless such breach or neglect is of a nature that reasonably can be corrected and is corrected within sixty (60) days following written notice to Executive in respect thereof. For purposes of this Section 1(c), no act or failure to act on Executive's part shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of Employer. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 1(c) and specifying the particulars thereof in detail. (d) "CHANGE IN CONTROL" shall mean, through the CIC Date, a change in control of NAC Re Corp. A Change in Control of NAC Re Corp. shall be deemed to have occurred on the CIC Date. In the event XL has, as of the CIC Date, or thereafter enters into, with any of its senior executives agreements with respect to the change in control of XL which provide for greater benefits than due under Section 7(c) hereof in such situation on a change in control of XL, a similar agreement shall be offered to Executive to receive such amounts in lieu of the amounts due hereunder. (e) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (f) "COMMON STOCK," prior to the CIC Date, shall mean the common stock, ten cents (104) par value, of NAC Re Corp., and after the CIC Date, shall mean the common stock, one cent ($.01) par value, of XL Capital Ltd. (g) "COMPENSATION" shall mean the sum of (i) Executive's annual base salary pursuant to Section 5(a) hereof and (ii) Executive's annual bonus at target pursuant to Section 5(b) hereof. (h) "COMPENSATION COMMITTEE" shall mean the Compensation Committee of the Board. -3- (i) "DISABILITY" shall mean permanent and total disability as such term is defined in the Employer's long term disability plan in effect on the Effective Date. Any question as to the existence of Disability upon which Executive and Employer cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, such selection shall be made by any adult member of Executive's immediate family or Executive's legal representative), and approved by Employer, said approval not to be unreasonably withheld. The determination of such physician made in writing to Employer and to Executive shall be final and conclusive for all purposes of this Agreement. (j) "EFFECTIVE DATE" shall mean June 10, 1998. This Amendment and Restatement of the Employment Agreement shall be effective as of the CIC Date. (k) "FINAL AVERAGE COMPENSATION" shall mean Executive's highest average annual Compensation earned during any consecutive thirty-six (36) complete months (or lesser actual period of receiving Compensation) during the period of sixty (60) complete months (or lesser actual period of receiving Compensation) immediately preceding Executive's termination of employment with Employer. (l) "GOOD REASON" shall mean, for all purposes other than with respect to all restricted Common Stock which has been issued to Executive but is unvested as of the CIC Date and all options to acquire Common Stock or stock appreciation rights ("SARS") which have been granted to Executive but remain unvested as of the CIC Date (the "EXECUTIVE EQUITY RIGHTS"), the occurrence, without (other than with respect to (iv)) Executive's express written consent, of any of the following circumstances: (i) the assignment to Executive of any duties inconsistent with his offices and status as of the Effective Date (or any offices and status to which Executive has been promoted at the time), or a substantial diminution in the nature or status of Executive' s responsibilities (other than as the result of the Company no longer being a public company); (ii) the failure of Employer to retain Executive as Chief Executive Officer of NAC Re or in any other capacities set forth in Section 2 hereof or a failure to maintain Executive as the most senior executive with regard to the operations of XL, Employer and their affiliates in North America with the powers, authorities and duties commensurate with such positions, subject to Executive's obligations to report to the CEO of XL (in his capacity as Executive Vice President of XL), the Board of Employer, the Board of Directors of XL and the Board of Directors of XL America, Inc.; -4- (iii) a reduction in Executive's annual base salary as in effect on the Effective Date, on January 1, 1999, or as the same may be increased from time to time; (iv) an election by the Executive, on at least 30 days' written notice given at any time after July 31, 2001, to terminate his employment between September 1, 2001, and February 28, 2002 inclusive, for any reason (or no reason); (v) the relocation of the office in which Executive is located on the Effective Date to a location more than forty-five (45) miles therefrom; (vi) a material reduction in the aggregate benefits and compensation provided to Executive under employee pension and welfare benefit plans and incentive compensation, stock option and stock ownership plans from that which existed immediately prior to the CIC Date, or a failure to provide cash and equity incentives at a level comparable to similarly situated executives of XL; (vii) the failure of Employer to obtain a satisfactory agreement from any successor (other than any successor resulting from the transactions contemplated by the Merger Agreement) to assume and agree to perform this Agreement, as contemplated in Section 11 hereof; (viii) termination of Executive's employment as a result of his death or Disability prior to March 1, 2002; (ix) any purported termination of Executive's employment by Employer for Cause for which Executive is not given notice of such termination in accordance with Section 1(c) hereof; for purposes of this Agreement, no such purported termination shall be effective; (x) any other material breach of this Agreement by Employer or XL, including but not limited to any material breach of Section 2(b) hereof; (xi) Brian O'Hara ceasing to be Chief Executive Officer of XL, Brian O'Hara not being Chief Executive Officer of the parent entity in the group of entities controlling, controlled by, or under common control with XL, or Executive being required to report to anyone other than the Chief Executive Officer of XL (in Executive's capacity as Executive Vice President of XL), the Board of the Employer, the Board of Directors of XL or the Board of Directors of XL America, Inc.; (xii) the failure of either Employer or XL to make normal equity grants to Executive for 1999 in accordance with past practices of NAC Re and XL, as the case may be, based on Executive's level of position; provided, however, that such -5- XL grant may be reduced by a number of shares equal to the product of (A) the number of shares subject to the 1999 NAC Re grant (as converted to XL options) multiplied by (B) a fraction, the numerator of which shall be the number of days from the date of the 1999 XL grant through the first anniversary of the 1999 NAC Re grant and the denominator of which shall be 365. Notwithstanding anything in this Section 1(l) to the contrary, neither of the following shall constitute "GOOD REASON": (A) any diminution of duties resulting from the fact that NAC Re ceases to be a publicly traded, independent reinsurance company as a result of the consummation of the transactions contemplated by the Merger Agreement, and (B) any change in duties resulting from failure to continue the Executive as Co-Chairman, or Chairman, of the management committees specified in Section 2(d) of this Agreement if such committees are discontinued, provided that he is offered similar titles and responsibilities with the replacements (if any) therefor. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. Executive may terminate his employment for Good Reason (other than pursuant to paragraphs (ii), (iv) (v) or (viii), with regard to which the remainder of this paragraph shall not apply) only if Executive shall provide the Company with not less than sixty (60) days' written notice of intent to terminate for Good Reason, which notice shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for Executive's termination for Good Reason, and the Company shall not have cured or remedied its violation within sixty (60) days following its receipt of such written notice. If within sixty (60) days following the date on which such notice of termination is given, Employer notifies Executive that a dispute exists concerning the grounds for termination, the date of termination for determining the timing of any obligation under this Agreement shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by arbitration pursuant to Section 15 hereof; provided, further, that the date of termination shall be extended by a dispute only if such notice of dispute is given in good faith and Employer pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, Employer will continue to pay Executive his full Compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary) and continue Executive as a participant in all other incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(1), unless resolution of such dispute is unreasonably delayed by Executive. Amounts paid under this Section 1(1) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. -6- Notwithstanding the above, for all purposes relating to the Executive Equity Rights (as such term is defined in this Section 1(l), the definition of "GOOD REASON" shall not be amended as of the CIC Date but shall remain as defined prior to this amendment and restatement, which definition is set forth in Appendix "A" to this Amended and Restated Employment Agreement. (m) "GRANT DATE" shall mean the date on which the Board or the Compensation Committee approves the grant of a non-qualified option to purchase Common Stock (or a stock appreciation right) or the award of restricted Common Stock to Executive (n) "LONG-TERM INCENTIVE PLAN" shall mean: (i) with respect to grants made thereunder prior to the CIC Date, the NAC Re Corp. Long-Term Incentive Plan ("NAC RE LTIP") as referred to in Exhibit 10.12 to the Form 10-K; (ii) with respect to grants made thereunder following the CIC Date and prior to February 28, 2002, either the NAC Re LTIP or the long-term incentive plan maintained by XL for its senior executives ("XL LTIP"), as designated by Executive prior to November 1 of each year; and (iii) with respect to grants made thereunder on or after February 28, 2002, the XL LTIP. (o) "TERM" shall mean the term provided in Section 4 hereof. (p) "CIC DATE" shall mean the consummation date of the merger transactions referred to in the Merger Agreement. (q) "MATERIAL CAUSE" shall mean Executive's willful (as defined in Section 1(c)) actions or inactions intended to result in material damage to XL or the Employer. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Material Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 1(q) and specifying the particulars thereof in detail. (r) "MERGER AGREEMENT" shall mean the Agreement and Plan of Merger among XL Capital Ltd ("XL"), NAC Re Acquisition Corp. ("ACQUISITION"), and NAC Re Corporation ("NAC RE") dated as of February 15, 1999. 2. EMPLOYMENT; DUTIES. (a) Commencing on the CIC Date, Executive shall be employed as the Employer's, XL's and their affiliates' most senior executive with regard to property and casualty -7- insurance and reinsurance operations in North America (subject to his obligations to report to the CEO of XL (in his capacity as Executive Vice President of XL), the Board of the Employer, the Board of XL and the Board of XL America, Inc.), including but not limited to: (a) Chief Executive Officer, President and Chairman of the Board of NAC Re, and (in his discretion) of its principal operating subsidiaries; (b) Executive Vice President of XL; (c) President and CEO of XL America, Inc.; and (d) Co-chairman of the XL Reinsurance Executive Management Board and Chairman of the XL North American Insurance Executive Management Board (with continuation in these chairmanships subject to future changes in XL's business and management structures, provided he is given similar titles and responsibilities with the replacements, if any, therefor. (b) As CEO of XL America, Inc., Executive will have management and profit and loss responsibility for all current and future North American property and casualty insurance and reinsurance operations and related service businesses except to the extent that all or part of such responsibility is allocated to other executives of XL or its subsidiaries with the express written consent of Executive. As CEO of XL America, Inc. and NAC Re, Executive will have full management and supervisory responsibility for all current and future employees of XL America, Inc. and NAC Re and NAC Re's principal operating subsidiaries, except to the extent such responsibilities are reasonably delegated to others or shared with individuals outside of NAC Re or XL America, Inc., respectively, with the express written consent of Executive. 3. DIRECTORSHIPS. Executive has been appointed to, and shall continue to serve on, the Boards of Directors of NAC Reinsurance Corporation, Greenwich Insurance Company, and Indian Harbor Insurance Company. It is agreed that Executive will be considered for membership on the XL Board of Directors if the current practice of restricting membership to one member of management is revised. 4. TERM. The term of this Agreement shall commence on the Effective Date and shall continue through June 30, 2003, unless terminated earlier pursuant to Section 7 hereof. 5. COMPENSATION AND BENEFITS DURING THE TERM. (a) Base Salary: Executive's annual base salary shall be FIVE HUNDRED AND FIFTEEN THOUSAND DOLLARS ($515,000.00), and shall be SIX HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($625,000), effective January 1, 1999, and shall be reviewed annually for increase commencing March 2000 in conjunction with normal salary administration. (b) Annual Bonus Opportunity. During the Term, Executive shall participate in the Annual Incentive Plan at the following levels of annual base salary earned during -8- each such year based on corporate performance in accordance with the terms of the Annual Incentive Plan and the determination of the Compensation Committee: (i) NAC Re AIP: 45% (0-90% opportunity); (ii) XL AIP: comparable to that of other senior executives of comparable position at XL. (c) Long-Term Bonus Opportunity: During the Term, Executive shall participate in the Long-Term Incentive Plan at the following target levels of annual base salary earned during the applicable performance period; provided, however, that for any performance period in which Executive has not received annual base salary during the entire period, annual base salary during any partial year shall be annualized: (i) NAC Re LTIP: prior to January 1, 1999 - 55% (0-110% opportunity); effective with respect to measurement periods ending after January 1, 1999 - 60% (0-120% opportunity); (ii) XL LTIP: comparable to that of other senior executives of comparable position at XL. (d) Special Stock Option Grant: (i) On or prior to the Effective Date, Executive shall be granted stock appreciation rights ("SARS"), which will automatically convert into non-qualified options on November 11, 1998, with respect to one hundred and twenty five thousand (125,000) shares of Common Stock, twenty percent (20%) of which shall vest on each of the five (5) anniversaries of the Grant Date, provided that Executive is employed by Employer on those dates. The exercise price of the foregoing SARs shall be the fair market value of a share of Common Stock on the Grant Date. (ii) Nothing herein shall have the effect of modifying or superseding the terms of any SARs or stock option grants or restrictive stock grants to which the Executive may be entitled pursuant to his prior employment contract. (iii) Options or SARs granted pursuant to this Agreement shall be subject to the terms and conditions of the Company's stock option plans and shall expire, unless exercised, ten (10) years following the Grant Date. -9- (iv) Upon the consummation of the merger transactions contemplated by the Merger Agreement, each outstanding stock option into which an SAR granted under this section shall have been converted, and all other outstanding SAR, stock option, or restricted stock grants then held by Executive or to which he may then be entitled pursuant to a prior employment contract, shall be deemed to constitute an option or other equity grant with respect to common stock of XL Capital, Ltd upon the terms set forth in Section 1.6 of the Merger Agreement. To the extent necessary to cause the condition set forth in Section 6.1(g) of the Merger Agreement to be satisfied, the Executive hereby waives the rights he may have, if any, to receive a lump sum cash amount with respect to any outstanding Stock Options. (e) Annual Stock Option Grant: Executive shall be given the opportunity to be granted additional options or SARs with respect to shares of Common Stock with an underlying market value at the time of grant of 100-125% of Executive's annual base salary at the time of grant in accordance with and commencing upon Employer's next regular grant of options following the Effective Date; provided, however, that nothing contained in this Section 5(f) shall confer upon Executive any right to such additional options or SARs. Following the CIC Date, any opportunity for a grant of options or other equity grants, including grants of SARs and restricted stock, will be in respect of common stock of XL Capital Ltd, in accordance with the terms set forth in Section 1.6 of the Merger Agreement and the relevant plans and policies of XL applicable to senior executives of XL at a level comparable to Executive; provided, however, that nothing contained in this Section 5(e) shall confer upon Executive any right to such options or other equity grants. (f) Supplemental Retirement Benefit: (i) If Executive's employment terminates with Employer and its affiliates on or after his attaining age fifty (50), Executive shall be paid a lifetime annual retirement benefit, commencing within thirty (30) days following the date of such retirement, equal to fifty percent (50%) of Executive's Final Average Compensation, reduced by benefits from any defined benefit pension plans maintained by Employer or its affiliates and any defined benefit pension plans maintained by any previous employers. Any retirement benefit that is payable prior to age sixty (60) shall be reduced by five percent (5%) per year for each year prior to age sixty (60); e.g. at age fifty (50) the benefit would equal twenty five percent (25%) of Executive's Final Average Compensation. The benefit will be paid to Executive for his lifetime and, upon his death, fifty percent (50%) of his benefit will be paid to his surviving spouse, if any, for her lifetime. In the event of the Executive's death after age fifty (50) but prior to retirement, a benefit shall be paid to the Executive's surviving spouse, if any, for her lifetime -10- equal to the benefit which would have been payable to the spouse assuming Executive had retired the day preceding the date of death and then died. (ii) If Executive's employment terminates with Employer and its affiliates during the term of this contract but prior to his attaining age fifty (50), for the purpose of allowing Executive to vest in the retirement benefit as set forth in (i) above, Employer or its affiliates shall provide Executive with additional service credit, in addition to actual service credit for purposes of determining the eligibility for the retirement benefit in subsection (i), above, equal to four (4) years service credit plus service credit equal to the greater of three (3) years credit or credit for the balance of the contract term. In the event of Executive's death during the term of this contract but prior to attaining age fifty (50), a benefit shall be paid to the Executive's surviving spouse, if any, assuming the Executive had terminated employment the day preceding the date of his death and then died. (iii) (1) If Executive's employment terminates with Employer and its affiliates due to his Disability, a supplemental disability benefit shall be payable under the terms of this Agreement. The amount of such supplemental disability benefit shall equal the difference between (x) fifty percent (50%) of Executive's Final Average Compensation and (y) the benefit received by Executive under the long term disability plan of Employer or its affiliates. Such supplemental benefit shall be payable at the same time and under the same terms as the long term disability plan benefit. This supplemental disability benefit shall cease when benefits under the long term disability plan cease. (iv) (2) Upon cessation of disability benefits at age sixty-five (65), the Executive will become eligible for a retirement benefit under paragraph (i) of this Section 5 (f). In the event supplemental disability benefits cease prior to age (65) and the Executive does not return to work with the Company or its affiliates, for purposes of this Section 5 (f) the Executive shall be considered to have terminated employment or died, as appropriate, as of the date supplemental disability benefits ceased. (v) The calculation of the benefits payable pursuant to this Section 5(f) shall be performed by the actuary for the defined benefit pension plan(s) of the Employer or its affiliates, if any, otherwise by an independent actuary selected by the Employer or its affiliates, whose calculation shall be final and binding on all persons. The benefits payable pursuant to this Section 5(f) shall be unfunded and the Executive will not be considered to have received a taxable economic benefit prior to the time at which benefits are actually payable hereunder. Accordingly, the Employer or its affiliates shall not be required to segregate any of its assets for the benefit of the Executive -11- and the Executive shall have only a contractual right against the Employer or its affiliates for the benefits payable hereunder. (g) Relocation: Employer has relocated Executive to New Canaan, Connecticut in accordance with Employer's relocation policy. As such, Employer has agreed to pay to Executive a mortgage subsidy of $20,260 per year through December 2002. Employer shall pay to Executive, with respect to any payments in connection with relocation that are subject to federal, state or local taxation, an additional amount so that Executive shall incur no such taxes with respect to such payments. (h) Pension and Welfare Benefit Programs: Executive shall be entitled to participate, on a basis and to the extent consistent with Executive's senior executive position (and on a basis no less favorable than other senior executives), in any employee pension or welfare benefit plan, employee stock purchase plan and other so-called fringe benefit programs from time to time in effect for the benefit of employees of Employer generally and/or for any group of employees of which Executive is a member, provided that Executive meets the eligibility requirements of any such plan or program. Executive shall continue to receive short-term and long-term disability coverage, life insurance, medical insurance and dental insurance reasonably comparable to that in effect as of the Effective Date. (i) Other Executive Benefits: (1) During the Term, Employer shall (i) provide Executive with an automobile of a make and model commensurate with Executive's position and shall pay all costs of insurance, maintenance and operation for such automobile; (ii) provide Executive with reasonable financial planning and tax services; and (iii) reimburse Executive for reasonable club dues and initiation fees at a club of Executive's choice which is important to the conduct of the business of Employer and which is used for business purposes. (2) During the Term, Employer shall, subject to Executive's reasonable cooperation in doing so, obtain and pay all costs of a life insurance policy in the amount of $4,000,000 with respect to which Executive shall be the insured and shall have the right to designate a beneficiary, and shall fully gross up Executive for any income tax on the provision of such life insurance and the gross-up payment. (3) During the Term through February 28, 2002, Employer, through insurance or out of its own assets, shall provide that Executive shall receive a lump sum payment of $4,000,000 at such time as he shall incur a Disability for the first time and shall fully gross up Executive for any income taxes on the providing of such benefit (other than on the payment of the benefit) and the gross-up payment. (j) VACATION: During the Term, Executive shall be entitled to no less than five (5) weeks paid vacation per year. -12- (k) SIGNING BONUS: Upon the execution of this Amended and Restated Employment Agreement and consummation of the merger transaction contemplated by the Merger Agreement, Executive shall be entitled to a special sign-on bonus in the amount of $1,000,000, which shall be paid as soon as practicable thereafter. 6. OTHER ACTIVITIES. During the Term, Executive is expected to devote to Employer's business his full business time and attention so as to assure full and efficient performance of Executive's duties hereunder. During the Term, Executive shall not, without Employer's prior written consent, engage or participate, directly or indirectly, in any other business as a sole proprietor, partner, employee, officer, shareholder, trustee, paid advisor or paid consultant or accept appointment or election as a director or in any other fiduciary or honorary capacity in any other business, venture or project; provided, however, that nothing in this Agreement shall preclude Executive from devoting nonbusiness time and efforts to charitable, social and civic matters to the extent that such activities do not interfere with Executive's performance of his duties under this Agreement and provided, further, however, that Executive shall not be precluded from making investments as described in the proviso to the first sentence of Section 8(a) hereof. 7. TERMINATION. Executive's employment under this Agreement may be terminated by Employer at any time without prior notice, subject to the requirement of prior notice if such termination is for Cause. Executive's employment under this Agreement may be terminated by Executive upon not less than two (2) months' prior notice, other than in the case of termination on account of Executive's unforeseen health problems, Disability or Good Reason. If Executive's employment under this Agreement is terminated, the following provisions shall apply: (a) Termination of Employment after February 28, 2002 by Employer for a Reason other than Cause or by Executive for Good Reason: If, before the end of the Term and after February 28, 2002, Employer terminates Executive's employment for a reason other than Cause, or if Executive terminates employment on account of Good Reason, Employer shall pay to Executive, within thirty (30) days following the date of such termination, a lump sum amount equal to the sum of (i) Executive's then annual base salary plus (ii) the amounts that would be paid to Executive under the Annual Incentive Plan and the Long-Term Incentive Plan at Executive's targets for the year or performance period, as the case may be, during which such termination occurs, which sum is multiplied by three (3). (b) Termination of Employment after February 28, 2002, by Employer for Cause, by Executive other than for Good Reason, or on account of Death or Disability, or at any time by Employer for Material Cause: If Executive's employment is terminated (i) after February 28, 2002, by Employer for Cause, by Executive other than for Good Reason, or on account of Executive's death or Disability, or (ii) by Employer at any time for Material Cause, -13- Executive, or his estate in the case of his death, shall receive from Employer, within thirty (30) days following the date of termination, a lump sum amount equal to Executive's annual base salary which is accrued but unpaid as of the date of termination and any amounts, if any, due under Sections 5(i)(2) and (3) hereof. (c) Termination of Employment as a result of Death or Disability, by Employer other than for Cause or Material Cause, or by Executive for Good Reason, in each case prior to March 1, 2002: (1) If, prior to March 1, 2002, Executive's employment is terminated as a result of death or Disability, by Employer other than for Material Cause, or by Executive for Good Reason, Employer shall pay to Executive, within thirty (30) days following such termination, a lump sum amount equal to the sum of (w) Executive's annual base salary which is accrued but unpaid as of the date of termination, plus (x) the portions, if any, of amounts under the Annual Incentive Plan and Long-Term Incentive Plan that were earned by Executive but unpaid as of the date of termination, which, in the event bonuses are discretionary, will be determined in good faith, without regard to the termination, based on the level of bonuses for comparable executives, plus (y) the greater of 2.99 and the number of years including fractions thereof, remaining from the CIC Date until June 30, 2003, times the sum of (I) Executive's then annual base salary plus (II) the amounts that would be paid to Executive under the Annual Incentive Plan and the Long-Term Incentive Plan at Executive's targets as in effect immediately prior to the CIC Date, as increased until the date of payment of the amount described above in this Section 7(c)(y), at an annual compounded rate of 8%, plus (z) any amounts, if any, due under Sections 5(i)(2) and (3) hereof. In no event shall the sums of (I) and (II) be less than $1,218,250. (2) In addition, if, prior to March 1, 2002, Executive's employment is terminated by Employer other than for Cause (but not as a result of death or Disability) or by Executive for Good Reason, Executive shall vest in all issued but unvested restricted Common Stock and granted but unvested options to acquire Common Stock or stock appreciation rights then held by Executive. The parties acknowledge that solely for purposes of this Section 7(c)(2) (but not any other part of this Section 7), Executive's rights to terminate for Good Reason pursuant to Section (l)(iv) of Appendix A as a result of the consummation of the merger transactions contemplated by the Merger Agreement are not waived and shall continue throughout the Term. (d) Non-Exclusivity of Rights: Nothing in this Agreement shall prevent or limit Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by Employer for which Executive may qualify, nor shall this Agreement limit or otherwise affect rights that Executive may have under any stock option or other agreements with Employer. Amounts or benefits that are vested or that Executive is otherwise entitled to receive under any plan or program of Employer at, or subsequent to, the date of termination of Executive's employment shall be payable in accordance with such plan or pro- -14- gram; provided, however, that any compensation and benefits received by Executive pursuant to this Agreement shall be in lieu of (but, if necessary to give effect to this provision, shall be reduced by) any and all compensation and benefits that Executive is entitled to receive or may become entitled to receive under any reduction in force or severance pay plan, program or practice that Employer now has in effect or may hereafter put into effect and shall be applied toward satisfying any severance pay and benefits required under federal or state law to be paid or provided to Executive. (e) Excise Tax Gross Up: If an excise tax under Section 4999 of the Code or any comparable tax that is in excess of ordinary federal income taxes, as may be in effect from time to time, is imposed on amounts paid to Executive hereunder, or otherwise in connection with or relating to the transactions contemplated by the Merger Agreement or any future transaction involving XL or its affiliates, then Executive shall be reimbursed by Employer in an amount equal to such excise tax and any further tax due on amounts reimbursed hereunder, upon request, at th1e time Executive is required to make a payment thereof. 8. NON-COMPETITION; CONFIDENTIAL INFORMATION. (a) Executive agrees that during the Term, and if Executive's employment is terminated by Executive other than for Good Reason, for a period of twelve (12) months following the date of termination of this Agreement, Executive shall not (i) engage anywhere within the geographical areas in which NAC Re Corp. and its subsidiaries or affiliates (for purposes of this Section 8, the "NAC RE GROUP") have conducted their business operations as of the Effective Date or at any time prior to the date of termination of Executive's employment directly or indirectly, alone or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization, in the business conducted by the NAC Re Group as a material component of its reinsurance operations, in direct competition with the NAC Re Group; provided, however, that it is acknowledged and agreed that this Section 8(a)(i) does not prohibit Executive from engaging in the reinsurance business where the Executive is only incidentally engaged in any activity which is a material component of the operations of the NAC Re Group; and Executive further agrees that during the Term, and if Executive's employment is terminated by Executive other than for Good Reason, for a period of twenty-four (24) months following the date of termination of this Agreement Executive shall not (ii) divert to any competitor of the NAC Re Group any customer of the NAC Re Group; provided, however, that Executive may invest in stocks, bonds, or other securities of any similar business (but without otherwise participating in such similar business) if (A) such stocks, bonds, or other securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act; and (B) his investment does not exceed, in the case of any class of the capital stock of any one issuer, one percent (1%) of the issued and outstanding shares, or, in the case of other securities, one percent (1%) of the aggregate principal amount thereof issued and outstanding. If at any time the provisions of -15- this Section 8 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 8 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Executive agrees that this Section 8, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein. Nothing in this Section 8 shall prevent or restrict Executive from engaging in any business or industry other than those designated herein in any capacity. (b) Executive also agrees that, during the Term, and if Executive's employment is terminated by Executive other than for Good Reason, for a period of twenty-four (24) months following the date of termination of this Agreement, Executive shall not solicit any officer, employee or consultant of the NAC Re Group to leave their employ for other employment; (c) Executive shall not at any time after the date of termination of employment reveal to anyone other than authorized representatives of the NAC Re Group, or use for Executive's own benefit, any trade secrets, customer information or other information that has been designated as confidential by the NAC Re Group or is understood by Executive to be confidential without the written authorization of the Board in each instance, unless such information is or becomes available to the public or is otherwise public knowledge or in the public domain for reasons other than Executive's acts or omissions. (d) If Executive materially breaches any of the obligations under this Section 8, Employer shall have no further compensation or benefit obligations pursuant to this Agreement or pursuant to the Annual Incentive Plan or the Long-Term Incentive Plan but shall remain obligated for compensation and benefits for periods prior to such breach as provided in any other plans, policies or practices then applicable to Executive in accordance with the terms thereof. Executive hereby acknowledges that Employer's remedies at law for any breach of Executive's obligations under this Section 8 would be inadequate, and Executive and Employer agree that in addition to any other remedies provided for herein or otherwise available at law, temporary and permanent injunctive relief may be granted in any proceeding which may be properly brought by Employer to enforce the provisions of this Section 8 without the necessity of proof of actual damages. 9. NO MITIGATION OBLIGATION; NO SET-OFF OR COUNTERCLAIMS. In no event shall Executive be obligated to seek other employment by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement. Any amounts that may be earned by Executive other than from Employer shall not reduce Employer's obligation to make any payments hereunder. The amounts payable by Employer hereunder shall not be subject to any right of set-off that Employer may assert against Executive. -16- 10. TAXES. Employer may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Employer is required to withhold pursuant to any law, regulation or ruling. Executive shall bear all expense of, except as otherwise contemplated herein, and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder. 11. SUCCESSORS AND BINDING AGREEMENT. (a) Employer will require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Employer, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Employer is required to perform it. Failure of Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from Employer in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which Executive's employment with Employer was terminated. As used in this Agreement "Employer" shall include any successor to Employer's business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Except as provided above, Employer may not assign this Agreement. As of the CIC Date, XL agrees to guarantee payment of the obligations of the Employer under this Agreement. Such guarantee shall be a guarantee of payment, not collections. With respect to such guarantee, XL and Executive agree to resolve any disputes as provided in Section 15 hereof and as part of the same arbitration in which Executive and Employer participate. (b) This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive dies while any amount is still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 12. NOTICES. For the purpose of this Agreement notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, provided that all notices to Employer shall be directed to the attention of the Office of the General Counsel of NAC Re Corp., or to such other address as either party may have furnished to the other in -17- writing in accordance herewith, except that notice of change of address shall be effective only upon receipt: Employer: NAC Re Corp. Office of the General Counsel One Greenwich Plaza P.O. Box 2568 Greenwich, CT 06386-2568 Executive: Nicholas M. Brown, Jr., 297 Smith Ridge Road New Canaan, Connecticut 06840 XL Capital Ltd or Dasher Acquisition Corp.: XL Capital Ltd Cumberland House One Victoria Street Hamilton HM 11 Bermuda Attn: General Counsel 13. GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 14. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. ARBITRATION. Any dispute arising out of or in any way relating to this Agreement or Executive's employment with Employer, including, without limitation, any claims Executive may assert under the Age Discrimination in Employment Act of 1967, as amended, shall be resolved by arbitration in Connecticut through the Stamford, Connecticut office of the American Arbitration Association in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association except to the extent such provisions are modified as hereinafter provided. The arbitration proceeding shall be conducted -18- by three (3) arbitrators. Executive and Employer shall each designate one (1) arbitrator, each of whom shall be an attorney admitted to practice in one or more states who has ten (10) or more years of experience in employment matters, and the arbitrators so selected shall thereafter designate a third arbitrator (who shall be a member of the National Academy of Arbitrators) by mutual agreement. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of this Agreement. The decision of the arbitrators shall be final and binding on Employer and Executive. Employer and Executive shall each pay their own legal fees associated with arbitration proceedings hereunder, but the fees of the arbitrators and any other costs associated with such arbitration proceedings shall be shared equally, provided, however, that in connection with any arbitration arising out of the failure of Employer to pay all or any part of the payments due hereunder on account of a termination prior to January 1, 2002, Employer shall reimburse Executive his legal fees and disbursements, as well as his share of the cost of the arbitrators and the other arbitration costs, if Executive should prevail on any material matter in the arbitration. 16. MERGER. This Agreement (coupled with other ancillary written agreements to which Employer and Executive are a party such as stock option and restricted stock agreements) expresses in full the understanding of Employer and Executive, and all promises, representations, understandings, arrangements and prior agreements with regard to Executive's employment by Employer are merged herein. 17. WAIVER. Failure by either party hereto to insist upon strict adherence to any one or more of the covenants or terms contained herein, on one or more occasions, shall not be construed to be a waiver nor deprive such party of the right to require strict compliance with the same thereafter. 18. AMENDMENTS. No amendments hereto, or waivers or releases of obligations or liabilities hereunder, shall be effective unless agreed to in writing by all parties hereto. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 20. INDEMNIFICATION. XL and the Employer shall indemnify and hold Executive harmless to the fullest extent permitted by applicable law with regard to any action or inaction taken by Executive as a director or officer of Employer or XL or the affiliates of either following the CIC Date. XL and Employer shall cover Executive under director and officer liability insurance to the highest level either covers any other officer or director following the CIC Date and both during and after the Term hereof, so long as Executive may be subject to any liability for actions or inactions he took following the CIC Date while a director or offi- -19- cer of Employer or XL or affiliates of either, but no longer than six (6) years following the end of the Term except as to any claim made prior thereto. In addition, each of XL and Employer agree that the Executive shall be entitled to the rights, benefits and remedies afforded under Section 5.11 of the Merger Agreement and may enforce the same against XL and the Employer. -20- IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Employment Agreement to be executed as of the year and day first above written, to be effective as of the CIC Date, and this Amended and Restated Employment Agreement shall in no event take effect in the event of the termination and abandonment of the Merger Agreement. XL Capital Ltd NAC Re Corporation By: By: ------------------------ ------------------------ Dasher Acquisition Corp. NAC Reinsurance Corporation By: By: ------------------------ ------------------------ ---------------------------- Nicholas M. Brown, Jr. APPENDIX "A" As stated in Section 1(l) of the Agreement, for all purposes with respect to the Executive Equity Rights (as such term is defined in Section 1(l) of the Agreement), the definition of "GOOD REASON" shall remain as set forth in Section 1(l) of the Agreement prior to the execution of this Amended and Restated Employment Agreement, which definition is set forth below: A(l) "GOOD REASON" shall mean the occurrence, without Executive's express written consent, of any of the following circumstances unless, in the case of paragraphs (i), (vi), (vii), (viii) or (ix), such circumstances are fully corrected within sixty (60) days following Executive's written notice to Employer in respect thereof: A(i) the assignment to Executive of any duties inconsistent with his offices and status as of the Effective Date (or any offices and status to which Executive has been promoted at the time), or a substantial diminution in the nature or status of Executive's responsibilities; A(ii) the failure of Employer to retain Executive as Chief Executive Officer of NAC Re Corp. or to appoint Executive as Chairman of the Board as set forth in sections 2 and 3 hereof; A(iii) a reduction in Executive's annual base salary as in effect on the Effective Date, on January 1, 1999 or as the same may be increased from time to time; A(iv) in the event of a Change in Control, any circumstances in which Executive is not Chief Executive Officer of a publicly traded, independent reinsurance company; for the purposes of this provision, "independent reinsurance company" is deemed to mean that a single shareholder or group, other than an investment advisor holding shares for others, does not own 20% or more of the Company's stock; A(v) the relocation of the office in which Executive is located on the Effective Date to a location more than forty-five (45) miles therefrom; A(vi) a material reduction in the aggregate benefits and compensation provided to Executive under Employer's employee pension and welfare benefit plans and incentive compensation, stock option and stock ownership plans; A-1 A(vii) the failure of Employer to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 11 hereof; A(viii) the failure to Employer to offer to renew Executive's employment contract, within eighteen (18) months preceding its expiration, with terms which are at least as favorable as those set forth herein; or A(ix) any purported termination of Executive's employment by Employer for Cause for which Executive is not given notice of such termination in accordance with Section 1(c) hereof; for purposes of this Agreement, no such purported termination shall be effective. "EXECUTIVE'S continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. In the event of a termination of Executive's employment by Executive for Good Reason, Executive shall provide Employer not less than sixty (60) days' notice of such termination. Such notice shall indicate that such termination is for Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for Executive's termination for Good Reason. If within sixty (60) days following the date on which such notice of termination is given, Employer notifies Executive that a dispute exists concerning the grounds for termination, the date of termination for determining the timing of any obligation under this Agreement shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by arbitration pursuant to Section 15 hereof; provided, further, that the date of termination shall be extended by a dispute only if such notice of dispute is given in good faith and Employer pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, Employer will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary) and continue Executive as a participant in all other incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(l), unless resolution of such dispute is unreasonably delayed by Executive. Amounts paid under this Section 1(l) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement." A-2 EX-10.14-3 5 EXHIBIT 10.14.3 Exhibit 10.14.3 EXECUTION COUNTERPART AMENDMENT NO. 2 TO CREDIT AGREEMENT (5-YEAR) AMENDMENT NO. 2 dated as of June 30, 1999, between MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company"); each of the other Obligors identified under the caption "OBLIGORS" on the signature pages hereto; each of the lenders that is a signatory hereto (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN BANK, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, the Banks and the Administrative Agent are parties to a Credit Agreement (5-Year) dated as of September 2, 1997, as amended by Amendment No. 1 dated as of August 5, 1998 (the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company in an aggregate principal amount not exceeding $100,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, including adding XL Capital, XL Insurance and XL Mid Ocean (as such terms are defined below) as borrowers and guarantors thereunder and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 2, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Effective as of the Amendment Date as provided in Section 5 below, the Credit Agreement is hereby amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement is hereby amended by adding the following new definitions (to the extent not already included in said Section 1.01) and inserting the same in the appropriate alphabetical locations and amending the following definitions (to the extent already included in said Section 1.01), as follows: "Borrower" shall mean each of the Company, XL Capital, XL Insurance and XL Mid Ocean. Amendment No. 2 to Credit Agreement (5-Year) -2- "Borrowers' Jurisdiction" shall mean (a) Bermuda, (b) the Cayman Islands and (c) any other country (i) where any Borrower is licensed or qualified to do business or (ii) from which payments hereunder are made by any Borrower. "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of XL Capital and its consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1998, in the book value of any asset owned by XL Capital or a consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Designated Lender" shall mean, with respect to any Designating Lender, an Eligible Designee designated by it pursuant to Section 11.06(j) hereof as a Designated Lender for purposes of this Agreement. "Designating Lender" shall mean, with respect to each Designated Lender, the Bank that designated such Designated Lender pursuant to Section 11.06(j) hereof. "Eligible Designee" shall mean a special purpose corporation that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's or P-1 or the equivalent thereof by another recognized rating service. "Guarantor" shall mean each of the Company, XL Capital, XL Insurance and XL Mid Ocean. "Indebtedness" shall mean, for any Person: (a) indebtedness created, incurred or assumed by such Person for borrowed money or obligations of such Person evidenced by bonds, debentures, promissory notes or similar instruments; (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business; (c) Capital Lease Obligations of Amendment No. 2 to Credit Agreement (5-Year) -3- such Person; (d) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (e) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person (other than letters of credit and banker's acceptances arising in the ordinary course of such Person's business); and (f) Guarantees by such Person of Indebtedness of others; provided that insurance payment liabilities, as such, and liabilities in the ordinary course of such person's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts (other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness. "Obligors" shall mean each Borrower and each Guarantor. "Total Funded Debt" shall mean, at any time, all Indebtedness of XL Capital and its Subsidiaries which would at such time be classified in whole or in part as a liability on consolidated balance sheet of XL Capital in accordance with GAAP. "XL Capital" shall mean XL Capital Ltd, a corporation duly organized and validly existing under the laws of the Cayman Islands. "XL Insurance" shall mean XL Insurance Ltd, a limited liability company duly organized and validly existing under the laws of Bermuda. "XL Mid Ocean" shall mean XL Mid Ocean Reinsurance Ltd, a limited liability company duly organized and validly existing under the laws of Bermuda. 2.03. The following definitions in Section 1.01 of the Credit Agreement are hereby amended as follows: (i) The definitions of "Affiliate", "Business Day", "ERISA Affiliate" and "ERISA Plan" are amended by deleting the references therein to "the Company" and replacing them with "any Borrower". (ii) The definitions of "Administrative Agent's Account", "Agreed Foreign Currency", "Applicable Lending Office", "Eurocurrency Loans", "Foreign Benefit Plan" and "Material Subsidiary" are amended by deleting the references therein to "the Company" and replacing them with "the Borrowers". Amendment No. 2 to Credit Agreement (5-Year) -4- (iii) The definitions of "Board of Directors", "Board Resolution", "Interest Period" and "Officer" are amended by deleting the references therein to "the Company" and replacing them with "the relevant Borrower". (iv) The definitions of "Change of Control", "Deferred Acquisition Expenses", "Fiscal Dates", "Material Adverse Effect", "Net Worth" and "Total Debt" are amended by deleting the references therein to "the Company" and replacing them with "XL Capital". 2.04 Section 1.01 of the Credit Agreement is hereby amended by deleting the definition of "Assumed Reinsurance" and "Tangible Net Worth". 2.05 The Credit Agreement is hereby amended by deleting each reference therein to "Mid Ocean Reinsurance" and replacing it with "XL Mid Ocean". 2.06. The Credit Agreement is hereby amended as follows by: (i) deleting each reference to "Company Jurisdiction" and replacing it with "Borrowers' Jurisdiction"; (ii) deleting each reference to "the Company" in Sections 2.01, 4.01(a), 4.01(b), 4.02, 4.05, 4.07(d), 7.03, 7.04, 7.06, 9(a), 9(b), 9(c), 9(e), 9(f), 9(g), 9(h), 10.03, 10.04, 11.06(g), 11.06(h) and 11.06(i) and replacing it with "any Borrower"; (iii) deleting each reference to "the Company" in Sections 1.02(b), 2.02, 2.03, 2.04, 2.07, 2.08, 2.09, 3.01, 3.02, 4.07(c), 5.01(b), 5.01(c), 5.01(d), 5.02, 5.05(b), 6.02, 7.09, 7.16, 8.01(g), 8.01(h), 8.01(i), 10.05, 10.06, 10.08, 11.03, 11.06(b), 11.06(c), 11.06(f), 11.12, 11.14(a) and 11.07, and replacing it with "each Borrower"; (iv) deleting the first reference to "The Company" in Section 4.01(c) and replacing it with "Each Borrower" and deleting the subsequent references to "the Company" in such Section and replacing them with "such Borrower"; (v) deleting the first, second and third references to "the Company" in Section 4.06 and replacing them with "any Borrower", deleting the subsequent references to "the Company" in such Section and replacing them with "such Borrower" and deleting the reference to "such Company" and replacing it with "such Borrower"; Amendment No. 2 to Credit Agreement (5-Year) -5- (v) deleting the first reference to "The Company" in Section 4.07(a) and replacing it with "Each Borrower" and the subsequent references to "the Company" in such Section and replacing them with "such Borrower"; (vi) deleting the first reference to "The Company" in Section 4.07(b) and replacing it with "any Borrower" and the subsequent references to "the Company" in such Section and replacing them with "such Borrower"; (vii) deleting the first reference to "The Company" in Section 5.01(a) and replacing it with "Each Borrower", deleting the second and third references to "the Company" in such Section and replacing them with "such Borrower", deleting the reference to "such Company" in such Section and replacing it with "such Borrower" and deleting the reference to "any Company" in such Section and replacing it with "any Borrower"; (viii) deleting the first reference to "the Company" in Section 5.03 and replacing it with "any Borrower" and deleting the second reference to the "Company" in such Section and replacing it with "such Borrower"; (ix) deleting the first reference to "The Company" in Section 5.04 and replacing it with "Each Borrower" and deleting the second reference to "the Company" in such Section and replacing it with "such Borrower"; (x) deleting the first reference to "The Company agrees" in Section 5.05(a) and replacing it with "The Borrowers agree", deleting the third and fifth references to "the Company" in such Section and replacing them with "such Borrower", and replacing the second, fourth, sixth and seventh references to "the Company" in such Section and replacing them with "any Borrower"; (xi) deleting the first and third references to "the Company" in Section 5.06 and replacing them with "any Borrower" and deleting the second and fourth references to "the Company" in such Section and replacing them with "such Borrower"; (xii) deleting the first and second references to "the Company" in Section 6.01(a) and replacing them with "each Borrower" and deleting the third and fourth references to the "Company" and replacing them with "such Borrower"; Amendment No. 2 to Credit Agreement (5-Year) -6- (xiii) deleting the first reference to "the Company" in Section 6.01(b) and replacing it with "XL Capital", deleting the second reference to "the Company" and replacing it with "Mid Ocean Limited, XL Mid Ocean and XL Insurance", deleting the third reference to "the Company" and replacing it with "the Borrowers" and deleting the fourth reference to "the Company" and replacing it with "each Borrower"; (xiv) deleting all references to the Company in the final unnumbered paragraph of Section 6.01 and replacing them with "the Borrowers"; (xv) deleting the reference to "the Company" in the first sentence of Section 7 and replacing it with "the relevant Borrower"; (xvi) deleting the reference to "the Company" in Sections 7.01 and 7.12 and replacing it with "the relevant Borrower"; (xvii) deleting the first, third, fourth and fifth references to "the Company" in Section 7.05 and replacing them with "each Borrower" and deleting the second reference to "the Company" in such Section and replacing it with "such Borrower"; (xviii) deleting each reference to "the Company nor any of its Subsidiaries" in Sections 7.08, 7.10 and 7.11 and replacing them with "any Borrower nor any of its Subsidiaries"; (xix) deleting the first three references to "the Company" in Section 9(d) and replacing them with "any Borrower" and deleting the last reference to "the Company" in such Section and replacing it with "such Borrower"; (xx) deleting the first reference to "the Company" in the last paragraph of Section 9 and replacing it with "any Borrower" and deleting each other reference to "the Company" in such paragraph and replacing them with "the Borrowers"; (xxi) deleting the first reference to "the Company" in Section 10.01 and replacing it with "any Borrower" and deleting the second reference to "the Company" in such Section and replacing it with "each Borrower"; (xxii) deleting the reference to "any Company" in Section 11.02 and replacing it with "any Borrower"; Amendment No. 2 to Credit Agreement (5-Year) -7- (xxiii) deleting the first two references to "the Company" in Section 11.04 and replacing them with "each Borrower" and deleting the last reference to "the Company" in such Section and replacing it with "any Borrower"; (xxiv) deleting the first reference to "the Company" in Section 11.06(e) and replacing it with "any Borrower" and deleting the remaining references to "the Company" in such Section and replacing them with "each Borrower"; (xxv) deleting each reference to "the Company" in the first paragraph of Section 11.10 and replacing it with "each Borrower" and deleting the reference to "the Company" in the second paragraph of Section 11.10 and replacing it with "any Borrower"; (xxvi) deleting each reference to "the Company" in Sections 11.11 and 11.13 and replacing it with "the Borrowers"; and (xxvii) deleting the first reference to "The Company" in Section 11.14(b) and replacing it with "Each Borrower" and deleting the remaining references to "the Company" in such Section and replacing them with "the relevant Borrower". 2.07. Section 7 of the Credit Agreement is hereby amended by adding, immediately following Section 7.17, a new Section 7.18 to read as follows: "7.18. Year 2000 Compliance. XL Capital has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by XL Capital or any of its Subsidiaries (or material suppliers, vendors and customers other than those affecting customers that may give rise to claims under insurance policies issued by XL Capital or any Subsidiary of XL Capital) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to any date after December 31, 1999 (the "Year 2000 Problem") and (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis. Based on the foregoing, XL Capital believes that all computer applications of XL Capital and its Subsidiaries that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect." Amendment No. 2 to Credit Agreement (5-Year) -8- 2.08. Section 8.01(a) of the Credit Agreement is hereby amended in its entirety as follows: "(a) Within 60 days after the end of each of the first three quarterly fiscal periods of each fiscal year of XL Capital, consolidated statements of operations and cash flows of XL Capital and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheet of XL Capital and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period (except, in the case of the balance sheet, to the last day of) in the preceding fiscal year (it being understood that delivery to the Banks of XL Capital's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(a) so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this Section 8.01(a)), accompanied by an Officer's Certificate, which certificate shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of XL Capital and its Subsidiaries in accordance with generally accepted accounting principles (except for the absence of footnotes), consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments);". 2.09. Section 8.01(b) of the Credit Agreement is hereby amended in its entirety as follows: "(b) as soon as practicable and in any event within 100 days after the end of each fiscal year of XL Capital, consolidated statements of operations and cash flows of XL Capital and its Subsidiaries for such fiscal year and the related consolidated balance sheet of XL Capital and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year (it being understood that delivery to the Banks of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(b) so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this Section 8.01(b)), and accompanied by a report thereon of Price WaterhouseCoopers LLP or any other independent certified public accountants of recognized national standing, which report shall state (without a "going concern" or like qualification or exception and without qualification or exception as to the scope of its audit) that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of XL Capital and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles in the Amendment No. 2 to Credit Agreement (5-Year) -9- United States of America; and with 100 days after the end of each fiscal year of each of the Borrowers and within 60 days after the end of each fiscal quarter of each such fiscal year, a certificate dated as of the end of such fiscal year or quarter, signed on behalf of each Borrower by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Default has occurred and is continuing or exists, or if an Event of Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Borrower, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 8.06 hereof and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate;" 2.10. Sections 8.01(c), (d), (e) and (f) of the Credit Agreement are deleted in their entirety and replaced with the words "[Intentionally omitted]"; and the unnumbered sentence at the end of Section 8.01 of the Credit Agreement is deleted in its entirety. 2.11. Clause (j) of Section 8.05 of the Credit Agreement is hereby redesignated as clause (k) and clauses (h) and (i) of Section 8.05 of the Credit Agreement are hereby amended in their entirety and a new clause (j) is hereby added to read as follows: "(h) Liens securing reimbursement obligations of any of the Borrowers or their Subsidiaries with respect to letters of credit; (i) Liens securing Indebtedness incurred so long as such Indebtedness does not exceed $400,000,000 in the aggregate at any one time outstanding; (j) Liens securing Indebtedness outstanding on June 30, 1999 and listed in Schedule 8.05(j) hereof; and" 2.12. Section 8.06 of the Credit Agreement is hereby amended to read in its entirety as follows: "8.06 Certain Financial Covenants. (a) Consolidated Tangible Net Worth. XL Capital will not, at any time, permit its Consolidated Tangible Net Worth to be less than $2,566,000,000. (b) Ratio of Total Funded Debt to Consolidated Tangible Net Worth. XL Capital will not permit the ratio of (i) the sum of (x) Total Funded Debt plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are Amendment No. 2 to Credit Agreement (5-Year) -10- unsecured) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries to (ii) Consolidated Tangible Net Worth to be greater than 0.35 at any time." 2.13. Section 8 of the Credit Agreement is hereby amended by adding, immediately following Section 8.13, a new Section 8.14 to read as follows: "8.14. Year 2000 Compliance. Promptly after any Borrower's discovery or determination thereof, notice (in reasonable detail) that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant (as defined in Section 7.18 hereof), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect." 2.14. Section 8.12 of the Credit Agreement is hereby deleted in its entirety and replaced with "[Intentionally omitted]", and each reference to "Section 8.12" in the Credit Agreement is hereby deleted. 2.15. Section 11.06(a) shall be amended to read in its entirety as follows: "(a) No Borrower may assign any of its rights or obligations hereunder without the prior consent of all the Banks and the Administrative Agent." 2.16. Section 11.06 of the Credit Agreement is hereby amended by adding thereto a new paragraph (j) as follows: "(j) Designated Lenders. Notwithstanding anything to the contrary contained herein, any Bank (a "Designating Lender") may grant to an Eligible Designee identified as such (and as a Designated Lender) in writing from time to time by such Designating Lender to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Designating Lender would otherwise be obligated to make to any Borrower pursuant to this Agreement; provided that nothing herein shall constitute a commitment by such Designated Lender to make any Loan, (ii) if a Designated Lender elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Designating Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by a Designated Lender hereunder shall utilize the Commitment of the Designating Lender to the same extent, and as if, such Loan were made by such Designating Lender. Each party hereto hereby agrees that no Designated Lender shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Designating Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall Amendment No. 2 to Credit Agreement (5-Year) -11- survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any Designated Lender, it will not institute against, or join any other Person in instituting against, such Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. As to any Loans or portion thereof made by it, each Designated Lender shall have all the rights that a Bank making such Loans or portion thereof would have had under this Agreement and otherwise; provided that (i) its voting rights under this Agreement shall be exercised solely by its Designating Lender, (ii) its Designating Lender shall be deemed to hold its relevant Note as agent for such Designated Lender to the extent of the Loans or portion thereof funded by such Designated Lender and (iii) the designation of a Designated Lender and the funding of Loans by a Designated Lender shall in no event (x) subject any of the Borrowers to any delay in the making of a Loan, (y) cause or give rise to any obligation of any of the Borrowers to indemnify or hold harmless such Designated Lender or any other Person (including without limitation pursuant to Sections 5.05 and 11.03 hereof) except to the extent such obligation would have arisen in favor of the Designating Lender or another Person if the Designating Lender (rather than such Designated Lender) had made all of such Designated Lender's Loans and such Designated Lender had not been designated as such hereunder, or (z) render the performance of any provisions of the Agreement illegal, void or unenforceable under any provision of law. Each Designating Lender shall act as administrative agent for its Designated Lender and give and receive notices and other communications on behalf of its Designated Lender. Any payments for the account of any Designated Lender shall be paid to its Designating Lender as administrative agent for such Designated Lender and neither the Borrowers nor the Administrative Agent shall be responsible for any Designating Lender's application of such payments. In addition, any Designated Lender may (i) with notice to, but without the prior written consent of, XL Capital and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Designating Lender or to any financial institutions (consented to by XL Capital and the Administrative Agent) providing liquidity and/or credit support to or for the account of such Designated Lender to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans or portions thereof to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such Designated Lender. This Section 11.06(j) may not be amended without the written consent of each Designating Lender which has designated a Designated Lender." 2.17. The Credit Agreement is hereby amended by adding a new Section 12 to read as follows: Amendment No. 2 to Credit Agreement (5-Year) -12- "Section 12. Guarantee. 12.01. The Guarantee. Each Guarantor hereby jointly and severally guarantees to each Bank and the Administrative Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Banks to each of the Borrowers (other than such Guarantor in its capacity as a Borrower hereunder) and all other amounts from time to time owing to the Banks or the Administrative Agent by such Borrowers under this Agreement, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). Each Guarantor hereby further jointly and severally agrees that if any such Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, such Guarantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. 12.02. Obligations Unconditional. The obligations of the Guarantors under Section 12.01 hereof are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Borrowers under this Agreement or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 12 that the obligations of the Guarantors hereunder shall be absolute and unconditional, joint and several, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantors hereunder, which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or any other agreement or instrument referred to herein shall be done or omitted; or Amendment No. 2 to Credit Agreement (5-Year) -13- (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or any other agreement or instrument referred to herein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with. The Guarantors hereby expressly waive diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Bank exhaust any right, power or remedy or proceed against any Borrower under this Agreement or any other agreement or instrument referred to herein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 12.03. Reinstatement. The obligations of the Guarantors under this Section 12 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Guarantors jointly and severally agree that they will indemnify the Administrative Agent and each Bank on demand for all reasonable costs and expenses (including fees of counsel) incurred by the Administrative Agent or such Bank in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 12.04. Subrogation. The Guarantors hereby jointly and severally agree that until the payment and satisfaction in full of all Guaranteed Obligations and the expiration and termination of the Commitments of the Banks under this Agreement they shall not exercise any right or remedy arising by reason of any performance by them of their guarantee in Section 12.01 hereof, whether by subrogation or otherwise, against any Borrower or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 12.05. Remedies. The Guarantors jointly and severally agree that, as between the Guarantors and the Banks, the obligations of the Borrowers under this Agreement may be declared to be forthwith due and payable as provided in Section 9 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in Section 9 hereof) for purposes of Section 12.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from -14- becoming automatically due and payable) as against any Borrower and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by any Borrower) shall forthwith become due and payable by the Guarantors for purposes of Section 12.01 hereof. 12.06. Instrument for the Payment of Money. Each Guarantor hereby acknowledges that the guarantee in this Section 12 constitutes an instrument for the payment of money, and consents and agrees that any Bank or the Administrative Agent, at its sole option, in the event of a dispute by such Guarantor in the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3213. 12.07. Continuing Guarantee. The guarantee in this Section 12 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 12.08. Rights of Contribution. The Guarantors hereby agree, as between themselves, that if any Guarantor shall become an Excess Funding Guarantor (as defined below) by reason of the payment by such Guarantor of any Guaranteed Obligations, each other Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the next sentence), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, debts and liabilities of such Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of such Guaranteed Obligations. The payment obligation of a Guarantor to any Excess Funding Guarantor under this Section 12.08 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Article and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes of this Section 12.08, (i) "Excess Funding Guarantor" means, in respect of any Guaranteed Obligations, a Guarantor that has paid an amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii) "Excess Payment" means, in respect of any Guaranteed Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations and (iii) "Pro Rata Share" means, for any Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate present fair saleable value of all properties of such Guarantor (excluding any shares of stock of any other Guarantor) exceeds the amount of all the debts and liabilities of such Guarantor (including contingent, subordinated, unmatured -15- and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder and any obligations of any other Guarantor that have been Guaranteed by such Guarantor) to (y) the amount by which the aggregate fair saleable value of all properties of all of the Guarantors exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Guarantors under this Section 12) of all of the Guarantors, determined (A) with respect to any Guarantor that is a party hereto on the date hereof, as of the date hereof, and (B) with respect to any other Guarantor, as of the date such Guarantor becomes a Guarantor hereunder. 12.09. General Limitation on Guarantee Obligations. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Guarantor under Section 12.01 hereof would otherwise, taking into account the provisions of Section 12.08 hereof, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under Section 12.01 hereof, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Guarantor, any Bank, the Administrative Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding." 2.18. Exhibits and Schedules. (i) Exhibit E to the Credit Agreement is hereby replaced in its entirety with Exhibit E attached to this Amendment No. 2, and each reference in the Credit Agreement to such Exhibit E shall be deemed to refer to the Exhibit E attached to this Amendment No. 2. (ii) Schedule 8.05(j) attached to this Amendment No. 2 shall be deemed attached to and made a part of the Credit Agreement. Section 3. Addition of Borrowers and Guarantors. Mid Ocean Limited hereby agrees to become and be a Guarantor under, and each of XL Capital, XL Insurance and XL Mid Ocean hereby agrees to become and be a Borrower and a Guarantor under, and as defined, in the Credit Agreement (as amended hereby) and agrees to be bound by the terms of the Credit Agreement (as so amended) as a Guarantor and/or Borrower, as the case may be. Section 4. Representations and Warranties. Each Obligor hereby represents and warrants to the Administrative Agent and the Banks that (i) the representations and warranties set Amendment No. 2 to Credit Agreement (5-Year) -16- forth in Section 7 of the Credit Agreement are, both on the date hereof and as of the Amendment Date (as defined in Section 5 below), true and complete as if made on each such date (and after giving effect to this Amendment No. 2) and as if each reference in said Section 7 to "this Agreement" includes reference to this Amendment No. 2 and (ii) both immediately prior to and as of the date hereof, no Default shall have occurred and be continuing. Section 5. Conditions Precedent. The amendments to the Credit Agreement under Section 2 above shall become effective upon fulfillment on or prior to a date (prior to July 31, 1999) designated in writing to the Administrative Agent by XL Capital (the "Amendment Date") of each of the following conditions precedent: (a) Corporate Documents. Receipt by the Administrative Agent of certified copies of the organizational documents of each Obligor and of all corporate authority for each Obligor (including, without limitation, board of director resolutions and evidence of the incumbency and specimen signature of officers) with respect to the execution, delivery and performance of this Agreement and each other document to be delivered by each Obligor from time to time in connection herewith and with the Loans hereunder (and each of the Administrative Agent and each Bank may conclusively rely on such certificate of incumbency until it receives notice in writing from such Obligor to the contrary). (b) Opinions of Counsel to the Company. Receipt by the Administrative Agent of opinions of (i) Cahill Gordon & Reindel, (ii) Conyers, Dill & Pearman, (iii) Paul S. Giordano, Esq. and (iv) Hunter & Hunter, respectively, the Borrowers' and/or Guarantors' counsel in form and substance satisfactory to the Administrative Agent (and the Obligors hereby instruct each such counsel to deliver such opinions to the Banks and the Administrative Agent). (c) Representations and Warranties. The representations and warranties contained in Section 4 above shall be true and correct, and receipt by the Administrative Agent of a certificate of each Obligor to that effect. (d) Payments. Evidence (satisfactory to the Administrative Agent) of payment of all fees and expenses payable to the Administrative Agent and/or the Banks in connection with this Amendment No. 2 as heretofore agreed. (e) Other Documents. Receipt by the Administrative Agent of such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. Amendment No. 2 to Credit Agreement (5-Year) -17- Section 6. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. This Amendment No. 2 shall be governed by, and construed in accordance with, the law of the State of New York. Amendment No. 2 to Credit Agreement (5-Year) -18- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered as of the day and year first above written. OBLIGORS MID OCEAN LIMITED as Borrower and as Guarantor By /s/Brian M. O'Hara -------------------------------- Title: Chairman XL CAPITAL LTD as Borrower and as Guarantor By /s/Brian M. O'Hara -------------------------------- Title: President & Chief Executive Officer XL INSURANCE LTD as Borrower and as Guarantor By /s/Brian M. O'Hara -------------------------------- Title: Chairman XL MID OCEAN REINSURANCE LTD as Borrower and as Guarantor By /s/Brian M. O'Hara -------------------------------- Title: Chairman Amendment No. 2 to Credit Agreement (5-Year) -19- BANKS THE CHASE MANHATTAN BANK, Individually and as Administrative Agent By /s/ Donald Rands -------------------------------- Title: Vice President CITIBANK N.A. By /s/ Michael Taylor -------------------------------- Title: Vice President DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ Clinton M. Johnson -------------------------------- Title: Director By /s/ John S. McGill -------------------------------- Title: Director MELLON BANK, N.A. By /s/ Karla Maloof -------------------------------- Title: Vice President ROYAL BANK OF CANADA By /s/ Y.J. Bernard -------------------------------- Amendment No. 2 to Credit Agreement (5-Year) -20- Title: Manager THE BANK OF BERMUDA LIMITED By /s/ Michael Collins -------------------------------- Title: Senior Vice President CREDIT LYONNAIS NEW YORK BRANCH By /s/ Sebastian Rocco -------------------------------- Title: Senior Vice President STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson -------------------------------- Title: Vice President BANQUE NATIONALE DE PARIS By /s/ PhilTruesdale -------------------------------- Title: Vice President By /s/ -------------------------------- Title: Vice President THE BANK OF NOVA SCOTIA By /s/ -------------------------------- Amendment No. 2 to Credit Agreement (5-Year) -21- Title: Senior Relationship Manager Amendment No. 2 to Credit Agreement (5-Year) EXHIBIT E [Form of Promissory Note] PROMISSORY NOTE ___________, 1999 FOR VALUE RECEIVED, [INSERT NAME OF BORROWER], a corporation organized under the laws of the ________________ (the "Borrower") promises to pay to __________________ (the "Bank"), for account of its respective Applicable Lending Offices provided for by the Credit Agreement referred to below, at the Administrative Agent's Account for the respective Currencies of the Loans evidenced hereby, such amount as shall equal the aggregate unpaid principal amount of the Loans made by the Bank to the Borrower under the Credit Agreement, in the respective Currencies in which such Loans are denominated and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such account, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, Currency, interest rate and duration of Interest Period (if applicable) of each Loan made by the Bank to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Loans made by the Bank. This Note evidences Loans made by the Bank to the Borrower under the Credit Agreement (5-Year) dated as of September 2, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") between each of the Borrowers party thereto (including the Borrower), each of the Guarantors party thereto, the lenders named therein (including the Bank), and The Chase Manhattan Bank, as Administrative Agent, providing for Loans in an aggregate principal amount not to exceed $100,000,000. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. Promissory Note The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06 of the Credit Agreement, this Note may not be assigned by the Bank to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. [NAME OF OBLIGOR] By_________________________ Title: Promissory Note SCHEDULE OF LOANS This Note evidences Loans made under the within-described Credit Agreement to the Borrower, on the dates, in the principal amounts, of the Types, bearing interest at the rates and having Interest Periods (if applicable) of the durations set forth below, subject to the payments and prepayments of principal set forth below: Prin- cipal Maturity Unpaid Amount Type Date Amount Prin- Notation Date of of Interest of Paid or cipal Made Made Loan Loan Currency Rate Loan Prepaid Amount by ---- ---- ---- -------- ---- ---- ------- ------ -- Promissory Note Schedule 8.05(j) (Permitted Liens) Liens securing Indebtedness (not in excess of $150,000,000) now or hereafter incurred under the Loan Agreement between X.L. America, Inc., as Borrower, and X.L. Insurance Company, Ltd. and X.L. Investments, Ltd., as Guarantors, and Three Rivers Funding Corporation, dated as of December 22, 1998. Promissory Note EX-10.14-4 6 EXHIBIT 10.14.4 Exhibit 10.14.4 EXECUTION COUNTERPART AMENDMENT NO. 3 TO CREDIT AGREEMENT (5-YEAR) AMENDMENT NO. 3 dated as of February 25, 2000, between MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company"); each of the other Obligors identified under the caption "OBLIGORS" on the signature pages hereto; each of the lenders that is a signatory hereto (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN BANK, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, the Banks and the Administrative Agent are parties to a Credit Agreement (5-Year) dated as of September 2, 1997, as amended by Amendment No. 1 dated as of August 5, 1998 and Amendment No. 2 dated as of June 30, 1999 (the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Borrowers in an aggregate principal amount not exceeding $100,000,000. The Obligors, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects and accordingly the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 3, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Effective as of the Amendment Date as provided in Section 4 below, the Credit Agreement is hereby amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement is hereby amended by adding the following new definition and inserting the same in the appropriate alphabetical location as follows: "Asset Accumulation Lien" means a Lien on amounts received, and on actual or imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Obligor's or any of their Subsidiary's business as an insurance or reinsurance company or corporate member of The Council of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien Amendment No. 3 to Credit Agreement (5-Year) -2- secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien. "Consolidated Net Worth" shall mean, at any time, the consolidated stockholders' equity of a Borrower and its consolidated Subsidiaries. 2.03. Section 8.01 of the Credit Agreement is hereby amended by adding at the end thereof a new paragraph (j) thereof to read as follows: "(j) Information Regarding Asset Accumulation Liens. At the time of furnishing each certificate furnished pursuant to paragraph (b) of this Section 8.01, a statement, certified as true and correct by a principal financial officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation Liens (it being understood that the reports required by paragraphs (a) and (b) of this Section 8.01 shall satisfy the requirement of this clause (A) of this paragraph (j) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital." 2.04. Section 8.05 of the Credit Agreement is hereby amended by relettering clause (k) thereof as clause (l) and adding a new clause (k) to read as follows: "(k) Asset Accumulation Liens; and" 2.05. Clause (b) of Section 8.06 of the Credit Agreement is hereby amended to read in its entirety as follows: "(b) Ratio of Total Adjusted Funded Debt to Consolidated Capital. XL Capital will not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than 0.35 to 1 at any time. As used herein, the term "Total Adjusted Funded Debt" shall mean, at any time, the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an Affiliate)." Amendment No. 3 to Credit Agreement (5-Year) -3- Section 3. Representations and Warranties. Each Obligor hereby represents and warrants to the Administrative Agent and the Banks that (i) the representations and warranties set forth in Section 7 of the Credit Agreement are, both on the date hereof and as of the Amendment Date (as defined in Section 4 below), true and complete as if made on each such date (and after giving effect to this Amendment No. 3) and as if each reference in said Section 7 to "this Agreement" includes reference to this Amendment No. 3 and (ii) both immediately prior to and as of the date hereof, no Default has occurred and is continuing. Section 4. Condition Precedent. The amendments to the Credit Agreement under Section 2 above shall become effective upon the execution and delivery of this Amendment No. 3 to the Administrative Agent (the "Amendment Date"). Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New York. Amendment No. 3 to Credit Agreement (5-Year) -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed and delivered as of the day and year first above written. OBLIGORS MID OCEAN LIMITED as Borrower and as Guarantor By /s/ H.C.V. Keeling ----------------------------------------- Title: President XL CAPITAL LTD as Borrower and as Guarantor By /s/ Brian M. O'Hara ----------------------------------------- Title: President & CEO XL INSURANCE LTD as Borrower and as Guarantor By /s/ Christopher Coelho ----------------------------------------- Title: Chief Financial Officer XL MID OCEAN REINSURANCE LTD as Borrower and as Guarantor By /s/ H.C.V. Keeling ----------------------------------------- Title: President & CEO Amendment No. 3 to Credit Agreement (5-Year) -5- BANKS THE CHASE MANHATTAN BANK, Individually and as Administrative Agent By /s/ Donald Rands ----------------------------------------- Title: Vice President CITIBANK N.A. By /s/ Michael Taylor ----------------------------------------- Title: Vice President DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ John S. McGill ----------------------------------------- Title: Director By /s/ Alan Krouk ----------------------------------------- Title: Assistant Vice President MELLON BANK, N.A. By /s/ Karla Maloof ----------------------------------------- Title: Vice President ROYAL BANK OF CANADA By /s/ Y.J. Bernard ----------------------------------------- Title: Manager Amendment No. 3 to Credit Agreement (5-Year) -6- THE BANK OF BERMUDA LIMITED By /s/ ----------------------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By /s/ Sebastian Rocco ----------------------------------------- Title: Senior Vice President STATE STREET BANK AND TRUST COMPANY By /s/ ----------------------------------------- Title: Vice President BANQUE NATIONALE DE PARIS By /s/ Phil Truesdale ----------------------------------------- Title: Vice President By /s/ ----------------------------------------- Title: Vice President THE BANK OF NOVA SCOTIA By /s/ John Hopmans ----------------------------------------- Title: Managing Director Amendment No. 3 to Credit Agreement (5-Year) EX-10.14-19 7 EXHIBIT 10.14.19 Exhibit 10.14.19 THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of December 4, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Mid Ocean Reinsurance Company, Ltd. (successor to X.L. Global Reinsurance Company, Ltd.) (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: WHEREAS, the Borrowers, the Guarantors, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, and the Second Amendment thereto, dated as of August 3, 1998, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows: (a) Section 2.04(c) of the Credit Agreement is hereby amended by deleting the words "One, two, three, six or twelve months ('Euro-Rate Funding Period')" appearing under the column heading "Available Funding Periods" appearing therein and insertin in lieu of such words under such column heading the following: "One, two, three, six or twelve months or, if acceptable to all Banks, one or two weeks ('Euro-Rate Funding Period')". (b) Section 6.03(e) of the Credit Agreement is hereby amended to read as follows: (e) Liens securing Indebtedness permitted by Section 6.08(b) or Section 6.08(c) hereof covering assets whose market value is not materially greater than an amount equal to the amount of the Indebtedness secured thereby, plus a commercially reasonable margin. (c) Section 6.08(b) of the Credit Agreement is hereby amended by deleting the word "Unsecured" appearing at the beginning thereof. SECTION 2. Effect of Amendment. The Credit Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:_________________________________________ Title:______________________________________ X.L. MID OCEAN REINSURANCE COMPANY, LTD. (successor to X.L. Global Reinsurance Company, Ltd.), as a Borrower By:_________________________________________ Title:______________________________________ EXEL ACQUISITION LTD., as a Guarantor -2- By:_________________________________________ Title:______________________________________ MELLON BANK, N.A., as a Bank and as Agent By:_________________________________________ Title:______________________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:_________________________________________ Title:______________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:_________________________________________ Title:______________________________________ By:_________________________________________ Title:______________________________________ THE BANK OF NOVA SCOTIA, as a Bank By:_________________________________________ Title:______________________________________ THE CHASE MANHATTAN BANK, as a Bank By:_________________________________________ Title:______________________________________ THE BANK OF BERMUDA LIMITED, as a Bank -3- By:_________________________________________ Title:______________________________________ ROYAL BANK OF CANADA, as a Bank By:_________________________________________ Title:______________________________________ BANQUE NATIONALE DE PARIS, as a Bank By:_________________________________________ Title:______________________________________ By:_________________________________________ Title:______________________________________ BANK OF AMERICA NT&SA, as a Bank By:_________________________________________ Title:______________________________________ CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:_________________________________________ Title:______________________________________ By:_________________________________________ Title:______________________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:_________________________________________ Title:______________________________________ By:_________________________________________ -4- Title:______________________________________ -5- EX-10.14-20 8 EXHIBIT 10.14.20 Exhibit 10.14.20 FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of June 30, 1999 (this "Amendment"), by and among XL Insurance Ltd (formerly known as X.L. Insurance Company, Ltd.) and XL Mid Ocean Reinsurance Ltd (formerly known as X.L. Mid Ocean Reinsurance Company, Ltd., and successor to X.L. Global Reinsurance Company, Ltd.) (the "Original Borrowers"), XL Insurance Ltd and EXEL Acquisition Ltd. (the "Original Guarantors"), XL Capital Ltd, a corporation organized under the laws of the Cayman Islands, British West Indies ("XL Capital"), MELLON BANK, N.A., as Agent (the "Agent"), and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: WHEREAS, the Original Borrowers, the Original Guarantors, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, and the Second Amendment thereto, dated as of August 3, 1998, and the Third Amendment thereto, dated as of December 4, 1998, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Original Borrowers; and WHEREAS, XL Capital is the parent company of the Original Borrowers and the Original Guarantors and XL Capital desires to become a Borrower and a Guarantor under the Credit Agreement; WHEREAS, XL Mid Ocean Reinsurance Ltd ("XL Mid Ocean") desires to become a Guarantor under the Credit Agreement; WHEREAS, the Original Borrowers and XL Capital have requested the Banks to make certain additional changes to the Credit Agreement; WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows: (a) The Credit Agreement is hereby amended (i) by replacing the term "X.L. Insurance" each place it appears in the Agreement with the term "XL Insurance", (ii) by replacing the term "X.L. Reinsurance" each place it appears in the Credit Agreement with the term "XL Mid Ocean", (iii) by replacing the term "EXEL Limited" each place it appears in the Agreement with the term "XL Capital" and (iv) by replacing the term "EXEL Limited's" each time it appears in the Agreement with the term "XL Capital's". (b) Section 1.01 of the Credit Agreement is hereby amended by deleting the respective definitions of the terms "Guarantors", "EXEL Limited", "X.L. Insurance", and "X.L. Reinsurance" appearing therein and by adding thereto, in appropriate alphabetical sequence, the following definitions: "Borrowers" shall mean XL Insurance, XL Mid Ocean and XL Capital and "Borrower" shall mean any one of them. "Designated Lender" means, with respect to any Designating Lender, an Eligible Designee designated by it pursuant to Section 9.13(f) as a Designated Lender for purposes of this Agreement. "Designating Lender" means, with respect to each Designated Lender, the Bank that designated such Designated Lender pursuant to Section 9.13(f). "Eligible Designee" means a special purpose corporation that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary -2- course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's Ratings Group or the equivalent thereof by another generally recognized rating service. "Guarantors" shall mean XL Insurance, XL Mid Ocean, XL Capital and EXEL Acquisition Ltd. and "Guarantor" shall mean any one of them. "XL Capital" shall mean XL Capital Ltd, a corporation formed under the laws of the Cayman Islands, British West Indies, which was formerly known as EXEL Limited and which is a Borrower and a Guarantor under this Agreement. "XL Insurance" shall mean XL Insurance Ltd, a Bermuda limited liability corporation and a Borrower and a Guarantor under this Agreement. "XL Mid Ocean" shall mean XL Mid Ocean Reinsurance Ltd, a Bermuda limited liability corporation and a Borrower and a Guarantor under this Agreement. (c) Section 1.02 of the Credit Agreement, titled Construction, is hereby amended by adding at the end thereof the following: As used herein, the phrase "neither Borrower" shall be deemed to mean "no Borrower", the phrase "either Borrower" shall be deemed to mean "any Borrower", the phrase "neither Guarantor" shall be deemed to mean "no Guarantor" and the phrase "either Guarantor" shall be deemed to mean "any Guarantor". (d) New Exhibit A-3 (form of XL Capital promissory note) to the Credit Agreement is hereby added in the form attached to this Fourth Amendment and Section 2.01(c) of the Credit Agreement is hereby amended to read as follows: (c) Revolving Credit Notes. The obligation of each Borrower to repay the amount of the Loans made to it by each Bank and to pay interest -3- thereon shall be evidenced in part by promissory notes of the Borrowers, one to each Bank, dated the Closing Date (in the case of XL Insurance and XL Mid Ocean) or dated the date of effectiveness of the Fourth Amendment to this Agreement (in the case of XL Capital) (the "Notes") in substantially the form attached hereto as Exhibit A-1 (in the case of XL Insurance), Exhibit A-2 (in the case of XL Mid Ocean) and Exhibit A-3 (in the case of XL Capital), with the blanks appropriately filled, payable to the order of such Bank in a face amount equal to such Bank's Committed Amount as of the date of such Fourth Amendment. (e) The Credit Agreement is hereby amended by adding, immediately following Section 3.14, a new Section 3.15 to read as follows: 3.15. Year 2000 Compliance. XL Capital has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by XL Capital or any of its Subsidiaries (or material suppliers, vendors and customers other than risks affecting customers that may give rise to claims under insurance policies issued by XL Capital or any Subsidiary of XL Capital) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "Year 2000 Problem") and (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis. Based on the foregoing, XL Capital believes that all computer applications of XL Capital and its Subsidiaries that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. -4- (f) Sections 5.01(a) and 5.01(b) of the Credit Agreement are hereby amended to read as follows: (a) Annual Reports. As soon as practicable and in any event within 100 days after the close of each fiscal year of such Borrower, audited consolidated statements of income, retained earnings and cash flows of such Borrower and its consolidated Subsidiaries, for such fiscal year and a consolidated audited balance sheet of such Borrower and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP or, in the case of XL Insurance and XL Mid Ocean, SAP, setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Borrower and not unacceptable to the Required Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Banks (it being understood that delivery of XL Capital's Report on Form 10-K filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(a) to deliver the annual financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(a)). (b) Quarterly Statements. Within sixty days after the end of the first, second and third quarterly accounting periods in each fiscal year of such Borrowers, copies of the unaudited consolidated balance sheets of such Borrower and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated income statements of such Borrower and its consolidated Subsidiaries for the elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP or, in the case of XL Insurance and XL Mid Ocean, SAP, subject to year-end audit adjustments and certified by the principal financial officer of such Borrower to have been prepared in accordance with generally accepted accounting principles consistently -5- applied by such Borrower except as explained in such certificate (it being understood that delivery of XL Capital's Report on Form 10-Q filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(b) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(b)). (g) Section 5.01 of the Credit Agreement is hereby further amended by adding at the end thereof a new paragraph (i) to read as follows: (i) Year 2000 Compliance. Promptly after any Borrower's discovery or determination thereof, notice (in reasonable detail) that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant (as defined in Section 3.15), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. (h) Section 6.03 of the Credit Agreement is hereby amended (i) by deleting the period and inserting the phrase "; or" at the end of paragraph (e) thereof, deleting the phrase "; or" and inserting a period at the end of paragraph (f) thereof and deleting paragraph (g) thereof and (ii) by deleting, in Section 6.03(e), the phrase "Section 6.08(b) or Section 6.08(c) hereof" and inserting in lieu thereof the phrase "Section 6.08(b), Section 6.08(c) or Section 6.08(g) hereof". (i) Section 6.05 of the Credit Agreement if hereby amended by deleting the phrase "net premiums earned from insurance operations" appearing therein and inserting in lieu thereof the phrase "net premiums earned from insurance or reinsurance operations". (j) Sections 6.06, 6.07, 6.08 and 6.09 of the Credit Agreement are hereby amended to read as follows: 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. XL Capital will not permit its ratio of (i) the sum of (x) Total Funded Debt plus (y) the aggregate undrawn face -6- amount of all letters of credit (as to which reimbursement obligations are unsecured) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries to (ii) Consolidated Tangible Net Worth to be greater than 0.35 at any time. 6.07. Consolidated Tangible Net Worth. XL Capital will not permit its Consolidated Tangible Net Worth to be less than $2,566,000,000.00 at any time. 6.08. Indebtedness. No Borrower shall, nor shall any Borrower permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Banks pursuant to this Agreement and the other Loan Documents; (b) Other Secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Borrower or any Subsidiary in an aggregate principal amount (for all Borrowers and Subsidiaries) not exceeding $400,000,000 at any time outstanding; (c) Secured reimbursement obligations of any Borrower or any Subsidiary with respect to letters of credit not exceeding $800,000,000 in the aggregate for all Borrowers and Subsidiaries; (d) Unsecured Indebtedness, so long as upon the incurrence thereof no Event of Default or Potential Default would occur or exist; (e) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Borrower or any Subsidiary; (f) Indebtedness incurred in transactions described in Section 6.03(f); and -7- (g) Indebtedness described in Schedule 6.08(g) hereto. 6.09. Claims Paying Ratings. Each of XL Insurance and XL Mid Ocean shall maintain at all times a claims-paying rating of at least "A" from Standard & Poor's Ratings Group and from A.M. Best Company. (k) Section 9.13 of the Credit Agreement is hereby amended by adding thereto, as a new paragraph (f) thereof, the following: (f) Designated Lenders. Notwithstanding anything to the contrary contained herein, any Bank (a "Designating Lender") may grant to an Eligible Designee identified as such (and as a Designated Lender) in writing from time to time by such Designating Lender to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Granting Bank would otherwise be obligated to make to any Borrower pursuant to this Agreement; provided that nothing herein shall constitute a commitment by such Designated Lender to make any Loan and (ii) if a Designated Lender elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Designating Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by a Designated Lender hereunder shall utilize the Committed Amount of the Designating Lender to the same extent, and as if, such Loan were made by such Designating Lender. Each party hereto hereby agrees that no Designated Lender shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Designating Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any Designated Lender, it will not institute against, or join any other person in -8- instituting against, such Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. As to any Loans or portion thereof made by it, each Designated Lender shall have all the rights that a Bank making such Loans or portion thereof would have had under this Agreement and otherwise; provided that (i) its voting rights under this Agreement shall be exercised solely by its Designating Lender, (ii) its Designating Lender shall be deemed to hold its relevant Note as agent for its Designated Lender to the extent of the Loans or portion thereof funded by such Designated Lender and (iii) the designation of a Designated Lender and the funding of Loans by a Designated Lender shall in no event (x) subject any of the Borrowers to any delay in the making of a Loan, (y) cause or give rise to any obligation of any of the Borrowers to indemnify or hold harmless such Designated Lender or any other person (including without limitation pursuant to Sections 2.11 and 9.04 of this Agreement) except to the extent such obligation would have arisen in favor of the Designating Lender or another person if the Designating Lender (rather than such Designated Lender) had made all of such Designated Lender's Loans and such Designated Lender had not been designated as such hereunder, or (z) render the performance of any provision of the Agreement illegal, void or unenforceable under any provision of law. Each Designating Lender shall act as administrative agent for its Designated Lender and give and receive notices and other communications on behalf of its Designated Lender. Any payments for the account of any Designated Lender shall be paid to its Designating Lender as administrative agent for such Designated Lender and neither the Borrowers nor either Agent shall be responsible for any Designating Lender's application of such payments. In addition, any Designated Lender may (i) with notice to, but without the prior written consent of, XL Capital and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Designating Lender or to any -9- financial institutions (consented to by XL Capital and the Administrative Agent) providing liquidity and/or credit support to or for the account of such Designated Lender to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans or portions thereof to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such Designated Lender. This section may not be amended without the written consent of each Designating Lender which has designated a Designated Lender. (l) In Section 1.01 of the Credit Agreement, the introductory paragraph of the definition of the term "Indebtedness" is hereby amended to read as follows: "Indebtedness" of a Person shall mean (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company or corporate member of Lloyds or as a provider of financial services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (m) Section 7.01(e) is hereby amended to read as follows: (e) Any Borrower or any Subsidiary of any Borrower shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 or more or any obligation for borrowed money under the Short Term Revolving Credit Agreement, dated as of June 30, 1999, as amended, to which each of the Borrowers is a party, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement under which any such obligation in principal amount of $10,000,000.00 or more is -10- created or contained in such Short Term Revolving Credit Agreement, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement or to cause or permit the holder or holders of any obligation under such Short Term Revolving Credit Agreement to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such Short Term Revolving Credit Agreement; (n) Section 2.01(a) of the Credit Agreement is hereby amended by adding thereto, as a new last sentence thereof, the following: Notwithstanding anything to the contrary in this Agreement, XL Capital shall not request any Loan to be made to it, and no Loan shall be made to XL Capital, until all of the Banks have executed and delivered the Fourth Amendment to this Agreement or have otherwise consented in writing to XL Capital becoming a Borrower hereunder. SECTION 2. Addition of XL Capital as Borrower and Guarantor and of XL Mid Ocean as Guarantor. Each of XL Mid Ocean and XL Capital hereby agrees to become and be a Guarantor under, and as defined in, the Credit Agreement (as amended hereby) and agrees to be bound by the terms of the Credit Agreement (as so amended) as a Guarantor. XL Capital hereby agrees to become and be a Borrower under, and as defined in, the Credit Agreement (as amended hereby) and agrees to be bound by the terms of the Credit Agreement (as so amended) as a Borrower. SECTION 3. Conditions to Effectiveness. This Fourth Amendment shall become effective upon the execution hereof by the Original Borrowers, the Original Guarantors, XL Capital Ltd, the Required Banks and the Agent and upon the fulfillment on or prior to a date (prior to July 31, 1999) designated in writing to the Agent by XL Capital (the "Amendment Date") of the following additional conditions (it being understood that no Loans under the Credit Agreement as amended hereby shall be made to XL Capital until all the Banks have executed this Amendment or have -11- otherwise consented in writing to XL Capital becoming a Borrower under the Credit Agreement as amended hereby): (a) Proceedings and Incumbency. There shall have been delivered to the Agent with sufficient copies for each Bank a certificate with respect to each Borrower (which term shall include for all purposes of this Section XL Capital Ltd) in form and substance satisfactory to the Agent dated the Amendment Date and signed on behalf of each Borrower or EXEL Acquisition, as the case may be, by the Secretary or an Assistant Secretary of such Borrower, certifying as to: (a) true copies of all corporate action taken by such Borrower relative to this Amendment, and the other Loan Documents applicable to it, and (b) the names, true signatures and incumbency of the officer or officers of such Borrower authorized to execute and deliver this Agreement and the other Loan Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) Organizational Documents. There shall have been delivered to the Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation and by-laws for XL Capital and (ii) a certificate of good standing for XL Capital certified by the appropriate Official Body of the Cayman Islands, British West Indies. (c) Opinions of Counsel. There shall have been delivered to the Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Amendment Date, of Cahill Gordon & Reindel, Conyers, Dill & Pearman, Paul S. Giordano, Esq., and Hunter & Hunter, respectively, the Borrowers' and Guarantors' counsel, in form satisfactory to the Agent, which together are substantially to the effects, but with reference to this Amendment and the Credit Agreement as amended hereby, set forth in the opinions delivered by counsel to the Borrowers and the Guarantors on the Closing Date. (d) Details, Proceedings, Notes and other Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory to the Required Banks, and each Bank shall have received all such counterpart originals or certified or other copies of the Loan Documents (including a Note issued -12- by XL Capital for each Bank meeting the requirements of Section 2.03 of the Credit Agreement as hereby amended) and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as any Bank have reasonably requested. (e) Fees and Expenses. The Borrowers shall have paid all fees and other compensation to be paid by them hereunder on or prior to the Amendment Date. (f) Representation and Warranties. The representations and warranties contained in Article III of the Credit Agreement shall be true on and as of the Amendment Date with the same effect as though made on and as of the Amendment Date, after giving effect to this Fourth Amendment (it being understood that references in such Article III to the Credit Agreement shall be deemed for this purpose to be references to this Fourth Amendment and to the Credit Agreement as amended hereby) and the Agent shall have received a certificate of each Borrower and each Guarantor to such effect. SECTION 4. Effect of Amendment. The Credit Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 5. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 6. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. -13- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. XL INSURANCE LTD as Borrower and as Guarantor By: /s/ Brian M. O'Hara ----------------------------------- Title: Chairman -------------------------------- XL MID OCEAN REINSURANCE LTD, as Borrower and as Guarantor By: /s/ Brian M. O'Hara ----------------------------------- Title: Chairman -------------------------------- EXEL ACQUISITION LTD., as a Guarantor By: /s/ Brian M. O'Hara ----------------------------------- Title: Chairman -------------------------------- XL CAPITAL LTD, as Borrower and as Guarantor By: /s/ Brian M. O'Hara ----------------------------------- Title: President & Chief Executive Officer -------------------------------- -14- MELLON BANK, N.A., as a Bank and as Agent By: /s/ Karla K. Maloof ----------------------------------- Title: Vice President -------------------------------- BANK OF TOKYO - MITSUBISHI LTD., as a Bank By: ___________________________________ Title: ________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By: /s/ Clinton M. Johnson ----------------------------------- Title: Director -------------------------------- By: /s/ John S. McGill ----------------------------------- Title: Director -------------------------------- THE BANK OF NOVA SCOTIA, as a Bank By: /s/ J.R. Trimble -------------------------------- Title: Senior Relationship Manager ----------------------------- -15- THE CHASE MANHATTAN BANK, as a Bank By: /s/ Donald Rands ----------------------------------- Title: Vice President -------------------------------- THE BANK OF BERMUDA LIMITED, as a Bank By: /s/ Michael W. Collins ----------------------------------- Title: Senior Vice President -------------------------------- ROYAL BANK OF CANADA, as a Bank By: /s/ V. Abdelmessih ---------------------------------- Title: Senior Account Manager -------------------------------- BANQUE NATIONALE DE PARIS, as a Bank By: /s/ Phil Truesdale ---------------------------------- Title: Vice President ------------------------------- By:/s/ Veronique Marcus --------------------------------- Title: Vice President ------------------------------ -16- BANK OF AMERICA NT&SA, as a Bank By: /s/ Nita Savage ----------------------------------- Title: Vice President -------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By: /s/ Sebastian Rocco ----------------------------------- Title: Senior Vice President -------------------------------- By: ___________________________________ Title: ________________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By: ___________________________________ Title: ________________________________ By: ___________________________________ Title: ________________________________ -17- EX-10.14-21 9 EXHIBIT 10.14.21 Exhibit 10.14.21 02.24.00 FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of February 25, 2000 (this "Amendment"), by and among XL Insurance Ltd, XL Mid Ocean Reinsurance Ltd, EXEL Acquisition Ltd. and XL Capital Ltd, as Guarantors and, except in the case of EXEL Acquisition, as Borrowers (the Guarantors and the Borrowers being referred to herein collectively as the "XL Parties"), MELLON BANK, N.A., as Agent (the "Agent"), and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: WHEREAS, the XL Parties, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, the Second Amendment thereto, dated as of August 3, 1998, the Third Amendment thereto, dated as of December 4, 1998 and the Fourth Amendment thereto, dated as of June 30, 1999, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the XL Parties have requested the Banks to make certain additional changes to the Credit Agreement; WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement is hereby amended by adding thereto, in appropriate alphabetical sequence, the following definitions: "Asset Accumulation Lien" means a Lien on amounts received, and on actual and imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Borrower's or Subsidiary's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien. "Total Adjusted Funded Debt" shall have the meaning given that term in Section 6.06 hereof. (b) Section 5.01 of the Credit Agreement is hereby amended by adding at the end thereof a new paragraph (j) thereof to read as follows: (j) Information Regarding Asset Accumulation Liens. At the time of furnishing each certificate furnished pursuant to paragraph (c) of this Section 5.01, a statement, certified as true and correct by a principal financial officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation Liens (it being understood that the reports required by paragraphs (a) and (b) of this Section 5.01 shall satisfy the requirement of this clause (A) of this paragraph Fifth Amendment -2- (j) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital. (c) Section 6.03 of the Credit Agreement is hereby amended by deleting the period at the end of paragraph (f) thereof and replacing it with the phrase "; or" and by adding at the end of such Section a new paragraph (g) to read as follows: (g) Asset Accumulation Liens. (d) Section 6.06 of the Credit Agreement is hereby amended as follows: 6.06. Ratio of Total Adjusted Funded Debt to Consolidated Capital. XL Capital will not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than 0.35 at any time. As used herein, the term "Total Adjusted Funded Debt" shall mean, at any time, the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an Affiliate). SECTION 2. Conditions to Effectiveness. This Fifth Amendment shall become effective upon the execution and delivery hereof by the XL Parties, the Required Banks and the Agent. SECTION 3. Effect of Amendment. The Credit Agreement, as amended by this Amendment, is in all respects ratified, Fifth Amendment -3- approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 4. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 5. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. Fifth Amendment -4- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. XL INSURANCE LTD as Borrower and as Guarantor By: /s/ Clive R. Tobin ------------------------------------- Title: President ---------------------------------- XL MID OCEAN REINSURANCE LTD, as Borrower and as Guarantor By: /s/ Henry C.V. Keeling ------------------------------------- Title: President ---------------------------------- EXEL ACQUISITION LTD., as a Guarantor By: /s/ Brian M. O'Hara ------------------------------------- Title: Director ---------------------------------- XL CAPITAL LTD, as Borrower and as Guarantor By: /s/ Brian M. O'Hara ------------------------------------- Title: President & CEO ---------------------------------- Fifth Amendment -5- MELLON BANK, N.A., as a Bank and as Agent By: /s/ Karla Maloof ------------------------------------- Title: Vice President ---------------------------------- BANK OF TOKYO - MITSUBISHI LTD., as a Bank By: _____________________________________ Title: __________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By: /s/ John S. McGill ------------------------------------- Title: Director ---------------------------------- By: /s/ Alan Krouk ------------------------------------- Title: Assistant Vice President ---------------------------------- THE BANK OF NOVA SCOTIA, as a Bank By: /s/ John Hopmans ------------------------------------- Title: Managing Director ---------------------------------- Fifth Amendment -6- THE CHASE MANHATTAN BANK, as a Bank By: /s/ Donald Rands ------------------------------------- Title: Vice President ---------------------------------- THE BANK OF BERMUDA LIMITED, as a Bank By: /s/ ------------------------------------- Title: Vice President ---------------------------------- ROYAL BANK OF CANADA, as a Bank By: /s/ ------------------------------------- Title: Senior Manager ---------------------------------- BANQUE NATIONALE DE PARIS, as a Bank By: /s/ Phil Truesdale ------------------------------------- Title: Vice President ---------------------------------- By: /s/ Veronique Marcus ------------------------------------- Title: Vice President ---------------------------------- Fifth Amendment -7- BANK OF AMERICA, N.A. as a Bank By: /s/ Debra Basler ------------------------------------- Title: Vice President ---------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By: /s/ Sebastian Rocco ------------------------------------- Title: Senior Vice President ---------------------------------- By: _____________________________________ Title: __________________________________ BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE,INC., as a Bank By: _____________________________________ Title: __________________________________ By: _____________________________________ Title: __________________________________ FLEET NATIONAL BANK, as a Bank By: /s/ Anson Harris ------------------------------------- Title: Vice President ---------------------------------- Fifth Amendment -8- EX-10.14-22 10 EXHIBIT 10.14.22 Exhibit 10.14.22 070299 $500,000,000 SHORT TERM REVOLVING CREDIT AGREEMENT BETWEEN XL CAPITAL LTD, XL INSURANCE LTD and XL MID OCEAN REINSURANCE LTD, as Borrowers and Guarantors AND THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Administrative Agent AND THE CHASE MANHATTAN BANK, as Syndication Agent DATED AS OF June 30, 1999 SHORT TERM REVOLVING CREDIT AGREEMENT, dated and effective as of June 30, 1999, by and between XL CAPITAL LTD ("XL Capital"), a corporation organized under the laws of the Cayman Islands, British West Indies, XL INSURANCE LTD ("XL Insurance"), a Bermuda limited liability corporation, and XL MID OCEAN REINSURANCE LTD, a Bermuda limited liability corporation ("XL Mid Ocean"), as borrowers and as guarantors, (XL Capital, XL Insurance and XL Mid Ocean are sometimes referred to hereinafter individually as "Borrower" and collectively as the "Borrowers" and sometimes referred to hereinafter individually as "Guarantor" and collectively as the "Guarantors"), the Banks (as defined further below) parties hereto from time to time, MELLON BANK, N.A., as Administrative Agent for the Banks hereunder (in such capacity, together with successors in such capacity, the "Administrative Agent") and THE CHASE MANHATTAN BANK, as Syndication Agent for the Banks hereunder (in such capacity, together with successors in such capacity, the "Syndication Agent") (the Administrative Agent and the Syndication Agent being hereinafter sometimes referred to collectively as the "Agents" and individually as "Agent"). PRELIMINARY STATEMENT WHEREAS, the Banks have agreed to make available to the Borrowers a Short Term Revolving Credit Facility upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Borrowers, each Agent and each Bank agree as follows. ARTICLE I DEFINITIONS: CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Alternate Base Rate" and "Alternate Base Rate Option" shall have the meaning assigned those terms in Section 2.04(a)(i) hereof. "Alternate Base Rate Loan" shall mean any Loan bearing interest under the Alternate Base Rate Option. "Alternate Base Rate Portion" of any Loan or Loans shall mean at any time the portion, including the whole, of such Loan or Loans bearing interest at such time under the Alternate Base Rate Option. "Affiliate" shall mean an entity which is directly or indirectly controlled by a Borrower or which controls a Borrower or which is under common control with any of the Borrowers. "Agreement" shall mean this Agreement as amended, modified or supplemented from time to time. "Applicable Margin" shall have the meaning given that term in Section 2.04(b) hereof. "Assets" at any time shall mean the assets of any Borrower, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "Banks" shall mean the parties listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and Bank shall mean any of them. "Base Rate" shall have the meaning given that term in Section 2.04(a)(i) hereof. "Bermuda Companies Law" shall mean The Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law " shall mean The Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or of Bermuda or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or Bermuda. "Capitalized Lease Obligation" shall mean any lease obligation which is required to be capitalized in accordance with GAAP. "Change in Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities & Exchange Commission) of more than 40% of the voting securities of XL Capital; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital; or (c) a majority of the members of XL Capital's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated for election by its shareholders. "Closing Date" shall mean July 2, 1999, or such later date prior to August 1, 1999 as may be specified by XL Capital by one day's written notice to the Administrative Agent. "Co-Agents" shall mean The Bank of Nova Scotia, Citibank, N. A., Credit Lyonnais New York Branch and Deutsche Bank AG. "Committed Amount" shall have the meaning given that term in Section 2.01(a) hereof. "Commitment" of any Bank shall mean such Bank's Committed Amount and the "Commitments" of the Banks shall mean the Committed Amounts of the Banks. "Consolidated Net Worth" shall mean at any date the consolidated stockholders' equity of a Borrower and its consolidated Subsidiaries. -2- "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of a Borrower and its consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1998, in the book value of any asset owned by the applicable Borrower or a consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Corresponding Source of Funds" shall mean in the case of any Euro-Rate Loan, the proceeds of hypothetical receipts by a Notional Euro-Rate Funding Office of one or more Dollar deposits in the interbank Eurodollar market at the beginning of the Euro-Rate Funding Period applicable to such Loan, having maturities approximately equal to such Maturity Period and in an aggregate amount approximately equal to such Loan. "Designated Lender" means, with respect to any Designating Lender, an Eligible Designee designated by it pursuant to Section 9.13(f) as a Designated Lender for purposes of this Agreement. "Designating Lender" means, with respect to each Designated Lender, the Bank that designated such Designated Lender pursuant to Section 9.13(f). "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Eligible Designee" means a special purpose corporation that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's Ratings Services or the equivalent thereof by another generally recognized rating service. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "Euro-Rate" and "Euro-Rate Option" shall have the meanings assigned to those terms in Section 2.04(a)(ii) hereof. "Euro-Rate Loan" shall mean any Loan bearing interest under the Euro-Rate Option. -3- "Euro-Rate Portion" of any Loan or Loans shall mean at any time the portion, including the whole, of such Loan or Loans bearing interest at any time under the Euro-Rate Option. "Event of Default" shall mean any of the Events of Default described in Article VII hereof. "Expiration Date" shall mean June 28, 2000. "Facility Fee" shall have the meaning given that term in Section 2.02(a) hereof. "Funding Periods" shall have the meaning given that term in Section 2.04(c) hereof. "Funding Breakage Date" shall have the meaning given that term in Section 2.10(b) hereof. "Funding Segment" of the Euro-Rate Portion of the Loans at any time shall mean the entire principal amount of such Portion to which at the time in question there is applicable a particular Funding Period beginning on a particular day and ending on a particular day. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "Guaranteed Obligations" shall have the meaning given that term in Section 10.01 hereof. "Guarantors" shall mean XL Capital, XL Insurance and XL Mid Ocean and "Guarantor" shall mean any one of them. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set -forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Indebtedness" of a Person shall mean (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company or corporate member of Lloyds or as a provider of financial services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; -4- (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capitalized Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed; and (vi) all Guaranty Equivalents of such Person. "Insurance Subsidiary" means any, present or future, direct or indirect Subsidiary of any Borrower that offers insurance products, including but not limited to XL Europe. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Lien" shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Loan" or "Loans" shall mean a loan or loans made by any Bank to any of the Borrowers under this Agreement. "Loan Document" or "Loan Documents" shall mean this Agreement, any Note and any other documents or instruments executed and delivered in connection herewith or therewith. "London Business Day" shall mean a Business Day (as herein defined) which is also a day for dealing in deposits in Dollars by and among banks in the London interbank market. "Material Adverse Effect" shall mean the occurrence of an event (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), which has or could reasonably be expected to have a materially adverse effect on: (a) the assets, business, financial condition or operations of a Borrower and its Subsidiaries taken as a whole; or (b) the ability of a Borrower to perform any of its payment or other material obligations under this Agreement or the applicable Note; or (c) the legality, validity, binding effect or enforceability against a Borrower of any Loan Document that by its terms purports to bind such Borrower. "Notes" shall mean the promissory notes of the respective Borrowers executed and delivered under this Agreement, together with all extensions, renewals, refinancings or refundings in whole or part and "Note" shall mean any one of the Notes. "Notional Euro-Rate Funding Office" shall have the meaning given to that term in Section 2.12(a) hereof. "Obligations" shall mean the obligations of any Borrower to repay the aggregate unpaid principal amount of all loans, and pay all interest accrued thereon, all Facility Fees accruing and all -5- other liabilities of such Borrower arising pursuant to the terms of this Agreement or the other Loan Documents. "Office," when used in connection with the Administrative Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Administrative Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Administrative Agent to the Borrowers and the Banks. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Option" shall mean the Alternate Base Rate Option or the Euro-Rate Option, as the case may be. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Portion" shall mean the Alternate Base Rate Portion or the Euro-Rate Portion, as the case may be. "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Private Act" shall mean separate legislation enacted in Bermuda with the intention that such legislation applies specifically to a Borrower in whole or in part. "Pro Rata" shall mean from or to each Bank in proportion to its percentage of the aggregated Committed Amounts of all of the Banks. "Register" shall have the meaning given that term in Section 9.13(d) hereof. "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, commencing September 30, 1999. "Required Banks" shall mean at any time Banks which have respective Committed Amounts equal to or greater than 51% of the aggregate Committed Amounts of all Banks or, if the obligations of the Banks to make loans shall have terminated, Banks which have outstanding Loans in a principal amount equal to or greater than 51% of the aggregate principal amount of all Loans outstanding at such time. "SAP" shall mean, as to each Borrower and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Official Body for such Borrower's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Default reports by insurance corporations of the same type as such Borrower or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. "Standard Notice" shall mean an irrevocable notice provided to the Administrative Agent on a Business Day which is (i) the same Business Day in the case of any Alternate Base Rate Loan; and -6- (ii) at least three London Business Days in advance in the case of any Euro-Rate Loan. Standard Notice must be provided no later than: 10:00 o'clock a.m., Pittsburgh time, on the last day permitted for such notice. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Administrative Agent. "Subsidiary" of a Borrower at any time shall mean any corporation (or similar entity) of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by a Borrower or one or more Subsidiaries. "Total Exposure" of any Bank at any time shall mean the sum of the outstanding principal amount of all of such Bank's Loans, whether such Loans are made to XL Insurance, XL Capital or XL Mid Ocean. "Total Funded Debt" of a Person at any time shall mean all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. "Transfer Supplement" shall have the meaning given that term in Section 9.13(c)(iv) hereof. "Treasury Rate" as of any Funding Breakage Date shall mean the rate per annum determined by the applicable Bank (which determination shall be conclusive) to be the semiannual equivalent yield to maturity (expressed as a semiannual equivalent and decimal and, in the case of United States Treasury bills, converted to a bond equivalent yield) for the United States Treasury securities maturing on the last day of the corresponding Funding Period and trading in the secondary market in reasonable volume (or if no such securities mature on such date, the rate determined by standard securities interpolation methods as applied to the series of securities maturing as close as possible to, but earlier than, such date, and the series of such securities maturing as close as possible to, but later than, such date). "XL Capital" shall mean XL Capital Ltd, a corporation organized under the laws of the Cayman Islands, British West Indies. "XL Insurance" shall mean XL Insurance Ltd, a Bermuda limited liability corporation. "XL Mid Ocean" shall mean XL Mid Ocean Reinsurance Ltd, a Bermuda limited liability corporation. 1.02 Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or. " References in this Agreement to "determination" by either Agent include good faith estimates by such Agent (in the case of quantitative determinations) and good faith belief of such Agent (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States of America at the -7- Relevant Date, subject to the provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more financial covenants in this Agreement shall have occurred (or in the opinion of the Required Banks would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP could or would materially change a Borrower's financial results or position from that reflected in such Borrower's financial statements prior to such change, such Borrower shall notify the Bank as soon as practicable. ARTICLE II THE CREDITS 2.01. Revolving Credit Loans. (a) Revolving Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Bank, severally and not jointly, agrees to make loans ("Loans") to a Borrower at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Loans may be outstanding to more than one of the Borrowers at any time). A Bank shall have no obligation to make any Loan if, after such Loan is made, such Bank's Total Exposure would exceed such Bank's Committed Amount. Each Bank's "Committed Amount" at any time shall be equal to the amount set forth as its "Initial Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(c) hereof at such time, and subject to transfer to or from another Bank as provided in Section 9.13 hereof. (b) Nature of Credit. Within the limits of time and amount set forth in this Section 2.01, and subject to the provisions of this Agreement, the Borrowers may borrow, repay and reborrow Loans hereunder. (c) Revolving Credit Notes. The obligation of the Borrowers to repay the unpaid principal amount of the Loans made to it by each Bank and to pay interest thereon shall be evidenced in part by promissory notes of the Borrowers, one to each Bank, dated the Closing Date (the "Notes") in substantially the form attached hereto as Exhibit A-1 (in the case of XL Insurance), Exhibit A-2 (in the case of XL Mid Ocean) or Exhibit A-3 (in the case of XL Capital), with the blanks appropriately filled, payable to the order of such Bank in a face amount equal to such Bank's Initial Committed Amount. -8- (d) Maturity. To the extent not due and payable earlier, the Loans shall be due and payable on the Expiration Date. 2.02. Facility Fee; Initial Fee, Reduction of the Committed Amounts. (a) Facility Fee. XL Capital agrees to pay to the Administrative Agent for the account of each Bank a facility fee (the "Facility Fee") for each day during the period from the Closing Date to and including the Expiration Date calculated (based on a year of 360 days and actual days elapsed), at a per annum rate equal to seven basis points (0.07%), payable on such Bank's Committed Amount (whether used or unused) in effect on such day. Such fee shall be payable quarterly on the last day of each March, June, September and December after the Closing Date, and on the Expiration Date, for the preceding period for which such fee has not been paid. (b) Initial Fee. XL Capital agrees to pay on the Closing Date to the Administrative Agent for the account of each Bank an initial fee equal to five basis points (0.05%), payable on such Bank's Committed Amount on the Closing Date. (c) Reduction of the Committed Amounts. XL Capital may at any time or from time to time reduce Pro Rata the Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the sum of the unpaid principal amount of the Loans then outstanding plus the principal amount of all Loans not yet made as to which notice has been given by the Borrower under Section 2.03 hereof. Any reduction of the Committed Amounts shall be in an aggregate minimum amount of $20,000,000 and in an amount which is an integral multiple of $10,000,000. Reduction of the Committed Amounts shall be made by providing not less than three Business Days' notice (which notice shall be irrevocable) to such effect to the Administrative Agent, which will promptly advise the Banks of such notice. After the date specified in such notice the Facility Fee shall be calculated upon the Committed Amounts as so reduced. 2.03. Making of Loans. Whenever a Borrower desires that the Banks make Loans, XL Capital shall provide Standard Notice to the Administrative Agent setting forth the following information (a separate notice being required for each such type of Loans): (a) Whether the proposed Loans are to be made to XL Insurance, to XL Capital or to XL Mid Ocean; (b) The date, which shall be a Business Day, on which such proposed Loans are to be made; (c) The aggregate principal amount of such proposed Loans, which shall be the sum of the principal amounts selected pursuant to clause (d) of this Section 2.06, and which shall be an integral multiple of $1,000,000.00 not less than $10,000,000.00; (d) The interest rate Option or Options selected in accordance with Section 2.04(a) hereof and the principal amounts selected in accordance with Section 2.04(d) hereof of the Alternate Base Rate Portion and each Funding Segment of the Euro-Rate Portion of such proposed Loans; and (e) With respect to each such Funding Segment of such proposed Loans, the Funding Period to apply to such Funding Segment, selected in accordance with Section 2.04(c) hereof. Standard Notice having been so provided, the Administrative Agent shall promptly notify each Bank of the information contained therein and of the amount of such Bank's Loan. Unless any applicable condition specified in Article IV hereof has not been satisfied, on the date specified in such Standard Notice each Bank shall make the proceeds of its Loan available to the Administrative Agent at the Administrative Agent's Office, no later than 12:00 o'clock Noon, Pittsburgh time, in funds immediately available at such Office. The Administrative Agent will make the funds so received available to the applicable Borrower in funds immediately available at the Administrative Agent's Office. -9- 2.04. Interest Rates. (a) Optional Bases of Borrowing. The unpaid principal amount of the Loans shall bear interest for each day until due on one or more bases selected by the Borrower from among the interest rate Options set forth below. Subject to the provisions of this Agreement the applicable Borrower may select different Options to apply simultaneously to different Portions of its Loans and may select different Funding Segments to apply simultaneously to different parts of the Euro-Rate Portion of such Loans. The aggregate number of Funding Segments applicable to the Euro-Rate Portion of the Loans at any time shall not exceed six. (i) Alternate Base Rate Option: The Alternate Base Rate Option is a rate per annum (the "Alternate Base Rate") (computed on the basis of a year of 365 or 366 days, as the case may be) for each day equal to the higher of: (A) the Base Rate for such day or (B) the Federal Funds Effective Rate for such day plus 0.50% per annum. "Base Rate" as used herein shall mean the interest rate per annum announced from time to time by the Administrative Agent as its prime rate. "Federal Funds Effective Rate" for any day shall mean the rate per annum (rounded upward to the nearest 1/100 of 1 %) determined by the Administrative Agent (which determination shall be conclusive) to be the rate per annum announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, that if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced. Changes in the Alternate Base Rate shall take effect on the date the Administrative Agent announces a change in the Base Rate or the Federal Reserve Bank announces a change in the Federal Funds Effective Rate, as the case may be; (ii) Euro-Rate Option: The Euro-Rate Option is a rate per annum (based on a year of 360 days and actual days elapsed) for each day equal to the Euro-Rate for such day plus the Applicable Margin for such day. "Euro-Rate" for any day, as used herein, shall mean for each Funding Segment of the Euro-Rate Portion corresponding to a proposed or existing Euro-Rate Funding Period the rate per annum determined by the Administrative Agent by dividing (the resulting quotient to be rounded upward to the nearest 1/100 of 1%) (A) the rate of interest (which shall be the same for each day in such Euro-Rate Funding Period) determined in good faith by the Administrative Agent in accordance with its usual procedures (which determination shall be conclusive) to be the average of the rates per annum for deposits in Dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such Euro-Rate Funding Period for delivery on the first day of such Euro-Rate Funding Period in amounts comparable to such Funding Segment and having maturities comparable to such Funding Period by (B) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The "Euro-Rate" may also be expressed by the following formula: [average of the rates offered to major money ] [center banks in the London interbank market ] Euro-Rate = [determined by the Administrative Agent per subsection (A) ] ------------------------------------------------------------- [1.00 - Euro-Rate Reserve Percentage ] "Euro-Rate Reserve Percentage" for any day shall mean the percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Administrative Agent (which determination shall be conclusive), which is in effect on such day as -10- prescribed by the Board of Governors of the Federal Reserve System (or any successor) representing the maximum reserve requirement (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities") of a member bank in such System. The Euro-Rate shall be adjusted automatically as of the effective date of each change in the Euro-Rate Reserve Percentage. The Euro-Rate Option shall be calculated in accordance with the foregoing whether or not any Bank is actually required to hold reserves in connection with its eurocurrency funding or, if required to hold such reserves, is required to hold reserves at the "Euro-Rate Reserve Percentage" as herein defined. The Administrative Agent shall give prompt notice to the applicable Borrower and to the Banks of the Euro-Rate determined or adjusted in accordance with the definition of the Euro-Rate, which determination or adjustment shall be conclusive if made in good faith. (b) Applicable Margin. "Applicable Margin" shall mean 0.380% plus the Utilization Rate for such day. "Utilization Rate" shall mean (x) 0.125% for any day on which the aggregate outstanding principal amount of all Loans under this Agreement exceeds 66% of the sum of the Committed Amounts of all Banks on such day, (y) 0.05% for any day on which the aggregate outstanding principal amount of all Loans under this Agreement exceeds 33%, but is less than or equal to 66%, of the sum of the Committed Amounts of all Banks on such day and (z) zero for each other day. (c) Funding Periods. At any time when a Borrower shall select, convert to or renew the Euro-Rate Option to apply to any part of the Loans, such Borrower shall specify one or more periods (the "Funding Periods") during which each such Option shall apply, such Funding Periods being as set forth below: Interest Rate Option Available Funding Periods - -------------------- ------------------------- Euro-Rate Option One, two, three, six or twelve months or, if acceptable to all Banks, one or two weeks ("Euro-Rate Funding Period"); provided, that: (i) Each Euro-Rate Funding Period shall begin on a London Business Day, and the term "month", when used in connection with a Euro-Rate Funding Period, shall be construed in accordance with prevailing practices in the interbank eurodollar market at the commencement of such Euro-Rate Funding Period, as determined in good faith by the Administrative Agent (which determination shall be conclusive); and (ii) A Borrower may not select a Funding Period that would end after the Expiration Date. (d) Transactional Amounts. Every selection of, conversion from, conversion to or renewal of an interest rate Option and every payment or prepayment of any Loans shall be in a principal amount such that after giving effect thereto the aggregate principal amount of the Alternate Base Rate Portion of the Loans, or the aggregate principal amount of each Funding Segment of the Euro-Rate Portion of the Loans, shall be as set forth below: Portion or Funding Segment Allowable Aggregate Principal Amounts - -------------------------- ------------------------------------- Alternate Base Rate Portion and $10,000,000 plus an integral Each Funding Segment of the multiple of $1,000,000. Euro-Rate Portion -11- (e) Euro-Rate Unascertainable; Impracticability. If (i) on any date on which a Euro-Rate would otherwise be set the Administrative Agent (in the case of clauses (A) or (B) below) or any Bank (in the case of clause (C) below) shall have determined in good faith (which determination shall be conclusive) that: (A) adequate and reasonable means do not exist for ascertaining such Euro-Rate, (B) a contingency has occurred which materially and adversely affects the interbank eurodollar market, or (C) the effective cost to such Bank of funding a proposed Funding Segment of the Euro-Rate Portion from a Corresponding Source of Funds shall exceed the Euro-Rate applicable to such Funding Segment, or (ii) at any time any Bank shall have determined in good faith (which determination shall be conclusive) that the making, maintenance or funding of any part of the Euro-Rate Portion has been made impracticable or unlawful by compliance by such Bank or a Notional Euro-Rate Funding Office in good faith with any applicable Law or guideline or interpretation or administration thereof by any Official Body charged with the interpretation or administration thereof or with any applicable request or directive of any such Official Body (whether or not having the force of law); then, and in any such event, the Administrative Agent or such Bank, as the case may be, may notify the Borrowers of such determination (and any Bank giving such notice shall notify the Administrative Agent, which shall advise the other Banks of such notice). Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of each of the Banks to allow the Borrowers to select, convert to or renew the Euro-Rate Option shall be suspended until the Administrative Agent or such Bank, as the case may be, shall have later notified the Borrowers (and any Bank giving such notice shall notify the Administrative Agent) of the Administrative Agent's or such Bank's determination in good faith (which determination shall be conclusive) that the circumstance giving rise to such previous determination no longer exist. If any Bank notifies the Borrowers of a determination under subsection (ii) of this Section 2.04(e), the Euro-Rate Portion of the Loans of such Bank (the "Affected Bank") shall automatically be converted to the Alternate Base Rate Option as of the date specified in such notice (and accrued interest thereon shall be due and payable on such date). If at the time the Administrative Agent or a Bank makes a determination under subsection (i) or (ii) of this Section 2.04(e) and XL Capital previously has notified the Administrative Agent that a Borrower wishes to select, convert to or renew the Euro-Rate Option with respect to any proposed Loans but such Loans have not yet been made, such notification shall be deemed to provide for selection of, conversion to or renewal of the Alternate Base Rate Option instead of the Euro-Rate Option, with respect to such Loans or, in the case of a determination by a Bank, such Loans of such Bank. 2.05. Conversion or Renewal of Interest Rate Options. (a) Conversion or Renewal. Subject to the provisions of Section 2.10(b) hereof, and if no Event of Default or Potential Default shall have occurred and be continuing or shall exist, a Borrower may convert any part of its Loans from any interest rate Option or Options to one or more different interest rate Options and may renew the Euro-Rate Option as to any Funding Segment of the Euro-Rate Portion: (i) At any time with respect to conversion from the Alternate Base Rate Option; or -12- (ii) At the expiration of any Funding Period with respect to conversions from or renewals of the Euro-Rate Option as to the Funding Segment corresponding to such expiring Funding Period. Whenever a Borrower desires to convert or renew any interest rate Option or Options, XL Capital shall provide to the Administrative Agent Standard Notice setting forth the following information (and the Agent shall promptly advise the Banks of such information): (w) The date, which shall be a Business Day, on which the proposed conversion or renewal is to be made; (x) The principal amounts selected in accordance with Section 2.04(d) hereof of the Alternate Base Rate Portion and each Funding Segment of the Euro-Rate Portion to be converted from or renewed; (y) The interest rate Option or Options selected in accordance with Section 2.04(a) hereof and the principal amounts selected in accordance with Section 2.04(d) hereof of the Alternate Base Rate Portion and each Funding Segment of the Euro-Rate Portion to be converted to; and (z) With respect to each Funding Segment to be converted to or renewed, the Funding Period selected in accordance with Section 2.04(c) hereof to apply to such Funding Segment. Standard Notice having been so provided, after the date specified in such Standard Notice, interest shall be calculated upon the principal amount of the Loans as so converted or renewed. Interest on the principal amount of any part of the Loans converted or renewed (automatically or otherwise) shall be due and payable on the conversion or renewal date. (b) Failure to Convert or Renew. Absent due notice from XL Capital of conversion or renewal in the circumstances described in Section 2.05(a)(ii) hereof, any part of the Euro-Rate Portion for which such notice is not received shall be converted automatically to the Alternate Base Rate Option on the last day of the expiring Funding Period. 2.06. Prepayments Generally. Whenever a Borrower desires or is required to prepay any part of its Loans, XL Capital shall provide Standard Notice to the Administrative Agent setting forth the following information (and the Agent shall promptly advise the Banks of such information): (a) Whether such prepayment is to be applied to the Loans outstanding to XL Insurance, XL Capital or XL Mid Ocean; (b) The date, which shall be a Business Day, on which the proposed prepayment is to be made; (c) The total principal amount of such prepayment, which shall be the sum of the principal amounts selected pursuant to clause (d) of this Section 2.06; and (d) The principal amounts selected in accordance with Section 2.04(d) hereof of the Alternate Base Rate Portion and each part of each Funding Segment of the Euro-Rate Portion to be prepaid. Standard Notice having been so provided, on the date specified in such Standard Notice, the principal amounts of the Alternate Base Rate Portion and each part of the Euro-Rate Portion specified in such notice, together with interest on each such principal amount to such date, shall be due and payable. 2.07. Optional Prepayments. Each Borrower shall have the right at its option from time to time to prepay its Loans in whole or part without premium or penalty (subject, however, to Section 2.10(b) hereof): -13- (a) At any time with respect to any part of the Alternate Base Rate Portion, provided, however, that such prepayment shall be in a principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof; or (b) At the expiration of any Funding Period with respect to prepayment of the Euro-Rate Portion with respect to any part of the Funding Segment corresponding to such expiring Funding Period, provided, however, that such prepayment shall be in a principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. Any such prepayment shall be made in accordance with Section 2.06 hereof. 2.08. Interest Payment Dates. Interest on the Alternate Base Rate Portion shall be due and payable on each Regular Payment Date. Interest on each Funding Segment of the Euro-Rate Portion shall be due and payable on the last day of the corresponding Euro-Rate Funding Period and, if such Euro-Rate Funding Period is longer than three months, also every third month during such Funding Period. After maturity of any part of the Loans (by acceleration or otherwise), interest on such part of the Loans shall be due and payable on demand. 2.09. Pro Rata Treatment; Payments Generally; Interest on Overdue Amounts. (a) Pro Rata Treatment. Each borrowing and conversion and renewal of interest rate Options hereunder shall be made, and all payments made in respect of principal, interest, and Facility Fees due from the Borrowers hereunder or under the Notes shall be applied, Pro Rata from and to each Bank, except for payments of interest involving an Affected Bank as provided in Section 2.04(e) hereof and payments to a Bank subject to a withholding deduction under Section 2.11(c) hereof. The failure of any Bank to make a Loan shall not relieve any other Bank of its obligation to lend hereunder, but neither either Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan. (b) Payments Generally. All payments and prepayments to be made by a Borrower in respect of principal, interest, fees, indemnity, expenses or other amounts due from such Borrower hereunder or under any Loan Document shall be payable in Dollars at 12:00 o'clock Noon, Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature, except for payments to a Bank subject to a withholding deduction under Section 2.11(c) hereof. Except for payments under Sections 2.10 and 9.04 hereof, such payments shall be made to the Administrative Agent at its Office in Dollars in funds immediately available at such Office, and payments under Sections 2.10 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Borrowers from time to time in funds immediately available at such account. Any payment or prepayment received by the Administrative Agent or such Bank after 12:00 o'clock Noon, Pittsburgh time, on any day shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent shall distribute to the Banks all such payments received by it from a Borrower as promptly as practicable after receipt by the Administrative Agent. (c) Interest on Overdue Amounts. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) principal, interest, fees, indemnity, expenses or any other amounts due from the Borrowers hereunder or under any other Loan Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to the following: (i) In the case of any part of the Euro-Rate Portion of any Loans, (A) until the end of the applicable then-current Funding Period at a rate per annum 2% above the rate otherwise applicable to such part, and (B) thereafter in accordance with the following clause (ii); and -14- (ii) In the case of any other amount due from a Borrower hereunder or under any Loan Document, 2% above the then-current Alternate Base Rate Option applicable to Loans. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Loan Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.10. Additional Compensation in Certain Circumstances. (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank or any Notional Euro-Rate Funding Office to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by the Borrowers of principal, interest, facility fee or other amounts due from the Borrowers hereunder or under the Notes (except for taxes on the overall net income or overall gross receipts of such Bank or such Notional Euro-Rate Funding Office imposed by the jurisdictions (federal, state and local) in which the Bank's principal office or Notional Euro-Rate Funding Office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank or any Notional Euro-Rate Funding Office (other than requirements expressly included herein in the determination of the Euro-Rate hereunder), (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or any Notional Euro-Rate Funding Office, or (B) otherwise applicable to the obligations of any Bank or any Notional Euro-Rate Funding Office under this Agreement, or (iv) imposes upon any Bank or any Notional Euro-Rate Funding Office any other condition or expense with respect to this Agreement, the Notes or its making, maintenance or funding of any Loan, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank, any Notional Euro-Rate Funding Office or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement, the Notes or the making, maintenance or funding of any Loan (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material (such Bank being deemed for this purpose to have made, maintained or funded each Funding Segment of the Euro-Rate Portion from a Corresponding Source of Funds), such Bank may from time to time notify the Borrowers of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive) to be necessary to compensate such Bank or such Notional Euro-Rate Funding Office for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Borrower to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Alternate Base Rate Option applicable to Loans. A certificate by such Bank as to the amount due and payable under this Section 2.10(a) from time to time and the method of calculating such amount shall be conclusive. Each Bank agrees that it will use good faith -15- efforts to notify the Borrowers of the occurrence of any event that would give rise to a payment under this Section 2.10(a); provided, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Borrowers' obligations hereunder. (b) Funding Breakage. In addition to all other amounts payable hereunder, if and to the extent for any reason any part of any Funding Segment of any Euro-Rate Portion of the Loans becomes due (by acceleration or otherwise), or is paid, prepaid or converted to another interest rate Option (whether or not such payment, prepayment or conversion is mandatory or automatic and whether or not such payment or prepayment is then due), on a day other than the last day of the corresponding Funding Period (the date such amount so becomes due, or is so paid, prepaid or converted, being referred to as the "Funding Breakage Date"), the applicable Borrower shall pay each Bank an amount ("Funding Breakage Indemnity") determined by such Bank as follows: (i) first, calculate the following amount: (A) the principal amount of such Funding Segment of the Loans owing to such Bank which so became due, or which was so paid, prepaid or converted, times (B) the greater of (x) zero or (y) the rate of interest applicable to such principal amount on the Funding Breakage Date minus the Treasury Rate as of the Funding Breakage Date, times (C) the number of days from and including the Funding Breakage Date to but not including the last day of such Funding Period, times (D) 1/360; (ii) the Funding Breakage Indemnity to be paid by such Borrower to such Bank shall be the amount equal to the present value as of the Funding Breakage Date (discounted at the Treasury Rate as of such Funding Breakage Date, and calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) of the amount described in the preceding clause (i) (which amount described in the preceding clause (i) is assumed for purposes of such present value calculation to be payable on the last day of the corresponding Funding Period). Such Funding Breakage Indemnity shall be due and payable on demand, and each Bank shall, upon making such demand, notify the Administrative Agent of the amount so demanded. In addition, such Borrower shall, on the due date for payment of any Funding Breakage Indemnity, pay to such Bank an additional amount equal to interest on such Funding Breakage Indemnity from the Funding Breakage Date to but not including such due date at the Alternate Base Rate Option applicable to Loans (calculated on the basis of a year of 360 days and actual days elapsed). The amount payable to each Bank under this Section 2.10(b) shall be determined in good faith by such Bank, and such determination shall be conclusive. 2.11. Taxes. (a) Payments Net of Taxes. All payments made by the Borrowers under this Agreement or any other Loan Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of each Agent and each Bank, income or franchise taxes imposed on such Agent or such Bank by the jurisdiction under the laws of which such Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Bank or Agent and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which make or book Loans are located or any political subdivision or taxing authority thereof or therein -16- (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless the Borrower is required to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to either Agent or any Bank under this Agreement or any other Loan Document, the applicable Borrower shall pay the relevant amount of such Taxes and the amounts so payable to such Agent or such Bank shall be increased to the extent necessary to yield to such Agent or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Loan Documents. Whenever any Taxes are paid by a Borrower with respect to payments made in connection with this Agreement or any other Loan Document, as promptly as possible thereafter, such Borrower shall send to the Administrative Agent for its own account or for the account of the other Agent or such Bank, as the case may be, a certified copy of an original official receipt received by such Borrower showing payment thereof. If a Bank or either Agent determines in its sole discretion in good faith that it has received a refund in respect of any Taxes as to which it has been indemnified by a Borrower, or with respect to which a Borrower has paid additional amounts pursuant to this Section 2.11, such Bank or Agent shall promptly after the date of such receipt pay over the amount of such refund to such Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by a Borrower under this Section 2.11 with respect to Taxes giving rise to such refund and only to the extent that such Bank or Agent has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of such Bank or Agent (including additional Taxes attributable to such refund, as determined by such Bank or Agent) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund). A Borrower receiving any such payment from a Bank or Agent shall, upon demand, pay to such Bank or Agent any amount paid over to such Borrower by such Bank or Agent (plus penalties, interest or other charges) in the event such Bank or Agent is required to repay any portion of such refund to such Official Body. Nothing in this Section 2.11(a) shall entitle a Borrower to have access to the records of any Bank or Agent, including, without limitation, tax returns. (b) Indemnity. Each Borrower hereby indemnifies each Agent and each of the Banks for the full amount of all Taxes attributable to payments by or on behalf of such Borrower hereunder or under any of the other Loan Documents, any Taxes paid by such Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by such Agent or such Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by such Agent or Bank in notifying the Borrower or in making payment after payment was received from the Borrower), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Bank or such Agent, as the case may be, makes written demand therefor. (c) Withholding and Backup Withholding. Each Bank or Agent that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date any payment is due to be made to it hereunder or under any other Loan Document, it will furnish to the Borrowers and the Administrative Agent (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Bank or Agent is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Bank which so delivers to the Borrowers and the Administrative Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Borrowers and the Administrative -17- Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Borrowers and the Administrative Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank or Agent is entitled to receive payments under this Agreement or any other Loan Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank or Agent advises the Borrowers and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. 2.12. Funding by Branch, Subsidiary or Affiliate. (a) Notional Funding. Each Bank shall have the right from time to time, prospectively or retrospectively, without notice to the Borrowers, to deem any branch, subsidiary or affiliate of such Bank to have made, maintained or funded any part of the Euro-Rate Portion at any time. Any branch, subsidiary or affiliate so deemed shall be known as a "Notional Euro-Rate Funding Office." Such Bank shall deem any part of the Euro-Rate Portion of the Loans or the funding therefor to have been transferred to a different Notional Euro-Rate Funding Office if such transfer would avoid or cure an event or condition described in Section 2.04(e)(ii) hereof or would lessen compensation payable by a Borrower under Section 2.10(a) hereof, and if such Bank determines in its sole discretion that such transfer would be practicable and would not have a material adverse effect on such part of the Loans, such Bank or any Notional Euro-Rate Funding Office (it being assumed for purposes of such determination that each part of the Euro-Rate Portion is actually made or maintained by or funded through the corresponding Notional Euro-Rate Funding Office). Notional Euro-Rate Funding Offices may be selected by such Bank without regard to such Bank's actual methods of making, maintaining or funding Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to time to make or maintain any part of the Euro-Rate Portion by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such part of the Euro-Rate Portion. Such Bank shall have the right to (i) hold any applicable Note payable to its order for the benefit and account of such branch, subsidiary or affiliate or (ii) request the applicable Borrower to issue one or more promissory notes in the principal amount of such Euro-Rate Portion, in substantially the form attached hereto as Exhibit A-1, A-2 or A-3, as the case may be, with the blanks appropriately filled, payable to such branch, subsidiary or affiliate and with appropriate changes reflecting that the holder thereof is not obligated to make any additional Loans to such Borrower. Each Borrower agrees to comply promptly with any request under subsection (ii) of this Section 2.12(b). If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Euro-Rate Portion hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Euro-Rate Portion and to any note payable to the order of such branch, subsidiary or affiliate to the same extent as if such part of the Euro-Rate Portion were made or maintained and such note were a Note payable to such Bank's order. 2.13. Extensions of Expiration Date. The Borrowers may, at their option, give the Administrative Agent written notice (an "Extension Request") not more than 90 days, nor less than 60 days, prior to the then effective Expiration Date, of the Borrowers' desire to extend the then effective Expiration Date to a date which is not later than 364 days after the "Reset Date". The "Reset Date" means the date which is 30 days prior to the then effective Expiration Date. The Administrative Agent shall promptly inform the Banks of such Extension Request. Each Bank that agrees with such Extension Request shall deliver to the Administrative Agent its express written consent thereto no later than the Reset Date. No extension shall -18- become effective unless agreed to by the Required Banks on or prior to the Reset Date. If all Banks have not in writing expressly consented to any such Extension Request by the Reset Date, then the Administrative Agent shall so notify the Borrowers and the Borrowers, at their option, may, as of the then effective Expiration Date, (i) replace any Bank which has not agreed to such Extension Request (a "Nonextending Bank") with another commercial lending institution reasonably satisfactory to the Administrative Agent (a "Replacement Bank") by giving notice of the name of such Replacement Bank to the Administrative Agent not later than five Business Days prior to the then effective Expiration Date or (ii) pay the Loans of such Nonextending Bank. Upon notice from the Administrative Agent, such Nonextending Bank shall, as of the then effective Expiration Date, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13 hereof. If the Required Banks shall have consented to such Extension Request, then, on the then effective Expiration Date, after payment by the Borrower (or, if applicable, by a Replacement Bank) of all amounts payable hereunder to each Nonextending Bank, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Notice. The Administrative Agent shall promptly after any such extension advise the Banks of any decrease in the aggregate Committed Amounts of the Banks and of the respective Committed Amounts of all Banks. Each Bank may agree or not agree to any such Extension Request in its sole and absolute discretion and any Bank not agreeing (or not responding) to an Extension Request shall not be deemed to have extended the Expiration Date regardless of whether a Replacement Bank is obtained. ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants that: 3.01. Organization and Qualification. Such Borrower and each of its Subsidiaries are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation; each of such Borrower and each of its Subsidiaries has the power and authority to own its properties and assets, and to carry on its business as currently conducted and is qualified to do business in those jurisdictions in which its ownership of property or the nature of its business activities is such that failure to receive or retain such qualification would have a Material Adverse Effect. A list of such Borrower's Subsidiaries setting forth their respective jurisdictions of incorporation is set forth in Schedule 3.01 hereto. Such Borrower is not subject to any Private Act other than the X.L. Insurance Company, Ltd. Act, 1989, a copy of which has been provided to the Administrative Agent. 3.02. Corporate Power and Authorization. Such Borrower has corporate power and authority to, make and carry out this Agreement and any other Loan Document to which it is a party to make the borrowings provided for herein, to execute and deliver this Agreement and, in the case of such Borrower, the applicable Notes and to perform its obligations hereunder and under any such Loan Documents and all such action has been duly authorized by all necessary corporate proceedings on its part. 3.03. Financial Information. Such Borrower has furnished to the Administrative Agent with sufficient copies for each Bank copies of the audited consolidated financial statements of such Borrower and its consolidated Subsidiaries including a consolidated balance sheet and related statements of income and retained earnings for the fiscal year ending November 30, 1998. Such financial statements fairly present the financial position of such Borrower and its consolidated Subsidiaries as of the date of such reports and the consolidated results of their operations and cash flows for the fiscal period then -19- ended in conformity with GAAP applied on a consistent basis, and such consolidated financial statements have been examined and reported upon by independent, certified public accountants. 3.04. Litigation. Except as disclosed to the Banks in writing prior to the Closing Date (including by disclosure in the financial statements delivered to the Banks referred to in Section 3.03 hereof), there is no litigation or governmental proceeding by or against such Borrower or any of its Subsidiaries pending or, to its knowledge, threatened, which could reasonably be expected (in light of reserves, and total shareholders' equity of such Borrower and after taking into account the nature of such Borrower's business and activities) to have a Material Adverse Effect if adversely determined. 3.05. No Adverse Changes. Since November 30, 1998, there has been no occurrence or event which has had a Material Adverse Effect. 3.06. No Conflicting Laws or Agreements; Consents and Approvals. (a) Neither the execution and delivery of this Agreement or any other Loan Document, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of such Borrower or of any applicable Law or of any material agreement or instrument to which such Borrower is a party or by which it is bound or to which it is subject, or constitute a default thereunder or result in the creation or imposition of any Lien of any nature whatsoever upon any of the property of such Borrower pursuant to the terms of any such agreement or instrument. (b) No authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or advisable in connection with (i) execution and delivery of this Agreement or any other Loan Document, (ii) the consummation of the transactions herein or therein contemplated, or (iii) the performance of or compliance with the terms and conditions hereof or thereof. 3.07. Execution and Binding Effect. This Agreement has been duly and validly executed and delivered by such Borrower. This Agreement constitutes, and the applicable Notes when duly executed and delivered by such Borrower pursuant to the provisions hereof will constitute, legal, valid and binding obligations of such Borrower enforceable in accordance with the terms thereof except, as to the enforcement of remedies, for limitations imposed by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (excluding Laws with respect to fraudulent conveyance), (ii) Laws limiting the right of specific performance or (iii) general principles of equity. 3.08. Taxes. All tax returns required to be filed by such Borrower have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon such Borrower or upon its properties, income or sales which are due and payable have been paid. The reserves and provisions for taxes, if any, on the books of such Borrower are adequate for all open years and for its current fiscal period as determined in accordance with GAAP. 3.09. Use of Proceeds. Such Borrower will use the proceeds from any borrowing hereunder for general corporate purposes (which may include acquisitions and may include refinancing of other indebtedness). Such Borrower will make no borrowing hereunder for the purpose of buying or carrying any "margin stock" as such term is used in Regulation U of the Board of Governors of the Federal Reserve System in violation of such regulation. Such Borrower is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.10. Permits, Licenses and Rights. Such Borrower and each Subsidiary of such Borrower own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties -20- and to carry on their respective businesses as currently conducted and currently planned to be conducted without, to the best knowledge of such Borrower, conflict with the rights of others. 3.11. Accurate and Complete Disclosure. All information provided by or on behalf of any Borrower to either Agent or any Bank pursuant to or in connection with the Loan Documents and the transactions contemplated thereby is true and accurate in all material respects on the date such information is dated (or, if not dated, on the date such information was received by such Agent or such Bank, as the case may be) and such information, taken as a whole, which was provided on or prior to the time this representation is made or remade, does not, to the best knowledge of the Borrowers, omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. 3.12. Absence of Violations. Such Borrower and each Affiliate of such Borrower is not in violation of a any charter document, corporate minute or resolution, any instrument or agreement, in each case binding on it or affecting its property, or any Law, in a manner which could have a Materially Adverse Effect. 3.13. Environmental Matters. Such Borrower and each of its Subsidiaries is and has been in full compliance with all applicable Environmental Laws. Such Borrower and each of its Subsidiaries have all approvals by Official Bodies charged with the enforcement of Environmental Laws that are necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as currently proposed to be owned and operated. 3.14. Not an Investment Company. Such Borrower is not an Investment Company required to be registered under the Investment Company Act of 1940. 3.15. Year 2000 Compliance. XL Capital has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by XL Capital or any of its Subsidiaries (or material suppliers, vendors and customers other than risks affecting customers that may give rise to claims under insurance policies issued by XL Capital or any Subsidiary of XL Capital) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "Year 2000 Problem") and (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis. Based on the foregoing, XL Capital believes that all computer applications of XL Capital and its Subsidiaries that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. ARTICLE IV CONDITIONS OF LENDING 4.01. Effectiveness. The effectiveness of this Agreement and the closing of the transactions contemplated hereby shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a certificate with respect to each Borrower in form and substance -21- satisfactory to the Administrative Agent dated the Closing Date and signed on behalf of each Borrower by the Secretary or an Assistant Secretary of such Borrower, certifying as to: (a) true copies of all corporate action taken by such Borrower relative to this Agreement, and the other Loan Documents applicable to it, including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Borrower authorized to execute and deliver this Agreement and the other Loan Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) Organizational Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation and by-laws for each Borrower and (ii) a certificate of good standing for each Borrower and any subsidiary of such Borrower certified by the appropriate Official Body of Bermuda or of the Cayman Islands, British West Indies, as the case may be. (c) Opinions of Counsel. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Cahill Gordon & Reindel, Conyers, Dill & Pearman, Hunter & Hunter and Paul S. Giordano, Esq., respectively, the Borrowers' and Guarantors' counsel, which together are substantially to the effects set forth in Exhibit C. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of the Loan Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank have reasonably requested. (e) Fees and Expenses. The Borrowers shall have paid all fees and other compensation to be paid by it hereunder on or prior to the Closing Date. (f) Representation and Warranties. The representation and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Termination of Commitments under Prior Agreements. The commitments of the respective banks under the Short Term Revolving Credit Agreement, dated as of June 6, 1997, as amended, to which XL Insurance and XL Mid Ocean are parties, and the Credit Agreement (364-day), dated as of September 2, 1997, as amended to which Mid Ocean Limited is a party, shall have been terminated and arrangements satisfactory to the Agents shall have been made to pay all amounts owing to the respective banks thereunder with the proceeds of Loans hereunder or with other funds of the Borrowers. 4.02. Borrowings. The obligations of each Bank to make any Loan hereunder are subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Borrower of its obligations to be performed hereunder on or before the date of such Loans and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Default and Potential Defaults. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Loan hereunder with the same effect as though made on and as of each such date, and on the date of each Loan hereunder no Event of Default and no Potential Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Loans to be made on such date. Failure of the Administrative Agent to receive notice from the applicable Borrower to the contrary before any Loan is made or deemed made hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the -22- date of such Loan with the same effect as though made on and as of such date and (ii) on the date of such Loan no Event of Default or Potential Default has occurred and is continuing or exists or will occur or exist after giving effect to such Loan. (b) Commitment. The fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Committed Amounts. ARTICLE V AFFIRMATIVE COVENANTS The Borrowers hereby covenant to each Agent and each Bank as follows: 5.01. Reporting and Information Requirements. Each Borrower shall deliver to the Administrative Agent with sufficient copies for each Bank: (a) Annual Reports. As soon as practicable and in any event within 100 days after the close of each fiscal year of such Borrower, audited consolidated statements of income, retained earnings and cash flows of such Borrower and its consolidated Subsidiaries, for such fiscal year and a consolidated audited balance sheet of such Borrower and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP or, in the case of XL Insurance and XL Mid Ocean, SAP, setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Borrower and not unacceptable to the Required Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Banks (it being understood that delivery of XL Capital's Report on Form 10-K filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(a) to deliver the annual financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(a)). (b) Quarterly Statements. Within sixty days after the end of the first, second and third quarterly accounting periods in each fiscal year of such Borrowers, copies of the unaudited consolidated balance sheets of such Borrower and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated income statements of such Borrower and its consolidated Subsidiaries for the elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP or, in the case of XL Insurance and XL Mid Ocean, SAP, subject to year-end audit adjustments and certified by the principal financial officer of such Borrower to have been prepared in accordance with generally accepted accounting principles consistently applied by such Borrower except as explained in such certificate (it being understood that delivery of XL Capital's Report on Form 10-Q filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(b) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(b)). (c) Compliance Certificates. Within 100 days after the end of each fiscal year of the Borrowers and within sixty days after the end of each of the first three quarters of each fiscal year, a certificate dated as of the end of such fiscal year or quarter, signed on behalf of each Borrower by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Default or Potential Default has occurred and is continuing or exists, or if an Event of Default or Potential Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Borrower, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Article VI hereof, and (iii) stating that the signer has -23- reviewed this Agreement and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate. (d) Further Information. All such other information and in such form as any Bank may reasonably request in writing. (e) Notice of Event of Default. Immediately upon becoming aware of any Event of Default or Potential Default, written notice thereof, together with a written statement of the president or a principal financial officer of the applicable Borrower setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Borrowers. (f) Notice of Material Adverse Change. Promptly upon becoming aware thereof, written notice of any event or occurrence constituting or which could reasonably be expected to have a Material Adverse Effect. (g) Notice of Material Proceedings. Promptly upon becoming aware thereof, written notice of the commencement, existence or threat of any proceeding or a material change in any existing material proceeding by or before any Official Body against or affecting such Borrower which, if adversely decided, could have a Material Adverse Effect. (h) Notice of Certain Material Changes. Promptly upon adoption thereof, notice of each material change in any Borrower's investment policy, underwriting policy or other business policy. (i) Year 2000 Compliance. Promptly after any Borrower's discovery or determination thereof, notice (in reasonable detail) that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant (as defined in Section 3.15), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. 5.02. Preservation of Existence and Franchises. Each Borrower shall, and shall cause each of its Subsidiaries to, maintain its corporate existence, rights and franchises in full force and effect in its jurisdiction of incorporation. Each Borrower shall, and shall cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 5.03. Insurance. Each Borrower shall, and shall cause each of its Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or a similar business having similar properties similarly situated. 5.04. Maintenance of Properties. Each Borrower shall, and shall cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and shall make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times, provided, however, that the foregoing shall not impose on such Borrower or any Subsidiary of such Borrower any obligation in respect of any property leased by such Borrower or such Subsidiary in addition to such Borrower's obligations under the applicable document creating such Borrower's or such Subsidiary's lease or tenancy. 5.05. Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities. Each Borrower shall, and shall cause each of its Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; -24- (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Section 6.03 hereof) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Borrower in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Borrower or such Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Borrower need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP and SAP shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.06. Financial Accounting Practices. Such Borrower shall, and shall cause each of its Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 hereof in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 5.07. Compliance with Applicable Laws. Each Borrower shall, and shall cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Borrower or any Subsidiary of such Borrower shall not be deemed to be in violation of this Section 5.07 as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Materially Adversely Effect or (ii) otherwise impair the ability of such Borrower to perform its obligations under this Agreement or the Notes issued by it. 5.08. Use of Proceeds. Each Borrower shall use the proceeds of all Loans hereunder for its general corporate purposes (which may include funding acquisitions and paying dividends). 5.09. Continuation Of and Change In Business. Each Borrower and its Subsidiaries shall continue to engage in substantially the same business and activities it currently engages in on the date of this Agreement. 5.10. Visitation. Each Borrower shall permit such Persons as any Bank may reasonably designate to visit and inspect any of the properties of such Borrower, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Borrower at such times as such Bank may reasonably request. Each Borrower hereby authorizes its financial management to discuss with any Bank the affairs of such Borrower. -25- ARTICLE VI NEGATIVE COVENANTS Each Borrower covenants to each Agent and to each Bank as follows: 6.01. Mergers and Acquisitions. (a) No Borrower shall merge with or into or consolidate with any other Person, or agree to do any of the foregoing, except that if no Event of Default or Potential Event of Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto: (i) any Borrower may merge with any other corporation, including a Subsidiary, if such Borrower shall be the surviving corporation; and (ii) if the written consent of the Required Banks is obtained, any Borrower may merge into or consolidate with any other corporation if the corporation into which such Borrower is merged or which is formed by such consolidation shall expressly assume all obligations of such Borrower under this Agreement. (b) No Borrower shall acquire the stock or other equity interests, or all or any substantial portion of the properties or assets of any other Person, or agree to do any of the foregoing, unless such Person is engaged primarily in the insurance business or the financial services business. 6.02. Dispositions of Assets. No Borrower shall, and nor shall it permit any Subsidiary to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Section 6.02 as a "transaction" and any series of related transactions constituting but a single transaction), any of its properties or Assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Transactions in the ordinary course of business involving current assets or other assets classified on the Borrower's balance sheet as available for sale. (b) Sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate, exceed $50,000,000 in any calendar year; or (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Borrower or its Subsidiaries. 6.03. Liens. No Borrower shall, nor shall it permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired or agree or become liable to do so, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03(a) hereto; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 5.05 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of such Section 5.05; -26- (c) Liens on property securing all or part of the purchase price thereof to such Borrower and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Borrower (and extension, renewal and replacement Liens upon the same property), provided -- (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Borrower, as applicable, shall not exceed 100% (if such obligations are not subject when created to United States income taxes) or 90% (in all other cases) of the lesser of the fair market value of such property at such time or the actual purchase price of such property; (d) Zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Borrower; (e) Liens securing Indebtedness permitted by Section 6.08(b), Section 6.08 (c) and Section 6.08(g) hereof covering assets whose market value is not materially greater than the amount of the Indebtedness secured thereby, plus a commercially reasonable margin; or (f) Liens on cash and securities of a Borrower or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of the Borrowers' investment policy as in effect on the date of this Agreement. 6.04. Transactions With Affiliates. No Borrower shall, nor shall it permit any Subsidiary to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Borrower, or directly or indirectly agree to do any of the foregoing, except transactions among the Borrowers and their wholly-owned Subsidiaries and transactions with Affiliates in good faith in the ordinary course of such Borrower's business consistent with past practice and on terms no less favorable to such Borrower or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. Business. No Borrower will, nor will it permit any Subsidiary to, engage (directly or indirectly) in any businesses other than the businesses substantially the same as those in which such Borrower and its Subsidiaries are engaged on the Closing Date and any businesses reasonably related thereto or in the financial services industry. No Borrower will permit, at any time, its net premiums earned from insurance or reinsurance operations to comprise less than 50% of gross revenues of such Borrower (on a consolidated basis exclusive of net gains and losses from investments and investment income). 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. XL Capital will not permit its ratio of (i) the sum of (x) Total Funded Debt plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are unsecured) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries to (ii) Consolidated Tangible Net Worth to be greater than 0.35 at any time. 6.07. Consolidated Tangible Net Worth. XL Capital will not permit its Consolidated Tangible Net Worth to be less than $2,566,000,000.00 at any time. 6.08. Indebtedness. No Borrower shall, nor shall any Borrower permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: -27- (a) Indebtedness to the Banks pursuant to this Agreement and the other Loan Documents; (b) Secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Borrower or any Subsidiary in an aggregate principal amount (for all Borrowers and Subsidiaries) not exceeding $400,000,000 at any time outstanding; (c) Other secured reimbursement obligations of any Borrower or any Subsidiary with respect to letters of credit not exceeding $800,000,000 in the aggregate at any time outstanding for all Borrowers and Subsidiaries; (d) Unsecured Indebtedness, so long as upon the incurrence thereof no Event of Default or Potential Default would occur or exist; (e) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Borrower or any Subsidiary; and (f) Indebtedness incurred in transactions described in Section 6.03(f); and (g) Indebtedness described on Schedule 6.08(g) hereto. 6.09. Claims Paying Ratings. Each of XL Insurance and XL Mid Ocean shall maintain at all times a claims-paying rating of at least "A" from Standard & Poor's Ratings Services and from A.M. Best Company. 6.10. Private Act. No Borrower shall become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII EVENTS OF DEFAULT 7.01. Events of Default. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Any Borrower shall default in the payment when due of the principal of any Loan; (b) Any Borrower shall default in the payment when due of any interest, Facility Fee, or any other fee or amount payable hereunder which default shall continue for a period of three days from the due date thereof; (c) Any Borrower shall default in the observance, performance or fulfillment of any covenant contained in Article VI hereof; (d) Any Borrower shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of twenty days after written notice thereof to such Borrower from the Administrative Agent or the holder of any Note issued hereunder; (e) Any Borrower or any Subsidiary of any Borrower shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 -28- or more or any obligation for borrowed money under the Revolving Credit Agreement, dated as of June 6, 1997, as amended, to which each of the Borrowers is a party, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement under which any such obligation in principal amount of $10,000,000.00 or more is created or contained in such Revolving Credit Agreement, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement or to cause or permit the holder or holders of any obligation under such Revolving Credit Agreement to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such Revolving Credit Agreement; (f) One or more judgments for the payment of money shall have been entered against any Borrower which judgments exceed $50,000,000 in the aggregate and such judgments shall remain undischarged or uncontested or appealed in good faith for a period of thirty consecutive days; (g) Any representation or warranty herein made by any Borrower, or any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made or furnished; (h) XL Capital shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of capital stock of XL Insurance and of XL Mid Ocean, except for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law; (i) A Change in Control shall occur; (j) The guarantee contained in Article X hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of each Guarantor or any Guarantor or any Person acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee itself or the transactions contemplated by this Agreement and the Notes, or any other Person shall assert any of the foregoing; (k) A decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Borrower a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Borrower under the Bermuda Companies Law or the companies laws of the Cayman Islands, British West Indies, or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Borrower or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged and unstayed for a period of sixty days; or (l) Any Borrower shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law or the companies laws of the Cayman Islands, British West Indies or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by such Borrower in furtherance of any of the aforesaid purposes; then, (i) as to any Event of Default specified under subsections (a) through (j) of this Article VII, the Banks shall be under no further obligation to make Loans hereunder and the Administrative Agent by written request of the Required Banks may, by written notice to the Borrowers, declare the unpaid balance of all Loans then outstanding and interest accrued thereon and all other liabilities of the -29- Borrowers hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable, without presentment, demand, protest or notice or any kind, all of which are hereby expressly waived; and (ii) as to any Event of Default specified under subsections (k) or (l) of this Article VII, the Banks shall be under no further obligation to make Loans hereunder and the unpaid balance of all Loans outstanding hereunder and interest accrued thereon and all other liabilities of the Borrowers hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. ARTICLE VIII THE AGENTS 8.01. Appointment. Each Bank hereby appoints Mellon Bank, N.A. to act as Administrative Agent for such Bank under this Agreement and the other Loan Documents and appoints The Chase Manhattan Bank to act as Syndication Agent for such Bank under this Agreement and the other Loan Documents. Each Bank hereby irrevocably authorizes each Agent to take such action on behalf of such Bank under the provisions of this Agreement and the other Loan Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of such Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Administrative Agent and The Chase Manhattan Bank agrees to act as Syndication Agent, in each case on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Loan Documents, subject to its right to resign as provided in Section 8.10 hereof. Each Bank hereby irrevocably authorizes each Agent to execute and deliver each of the Loan Documents and to accept delivery of such of the other Loan Documents as may not require execution by such Agent. Each Bank agrees that the rights and remedies granted to an Agent under the Loan Documents shall be exercised exclusively by such Agent, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. 8.02. General Nature of Each Agent's Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Loan Document: (a) Neither Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and no implied duties or responsibilities on the part of either Agent shall be read into this Agreement or any Loan Document or shall otherwise exist. (b) The duties and responsibilities of each Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and neither Agent shall have a fiduciary relationship in respect of any Bank. (c) Each Agent is and shall be solely the agent of the Banks. Neither Agent assumes, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Loan Documents). (d) Neither Agent shall be under any obligation to take any action hereunder or under any other Loan Document if such Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Loan Document, or may require such Agent to qualify to do business in any jurisdiction where it is not then so qualified. -30- 8.03. Exercise of Powers. Each Agent shall take any action of the type specified in this Agreement or any other Loan Document as being within such Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Loan Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, each Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Loan Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case such Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. Neither Agent shall have any liability to any Person as a result of (x) either Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other applicable Person or set of Persons), (y) either Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or not such Agent has discretionary power to take such action, or (z) either Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Loan Document: (a) Neither Agent shall be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Loan Document, unless caused by its own gross negligence or willful misconduct. (b) Neither Agent shall be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Loan Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Loan Document, (iii) any failure of any Loan Party or Bank to perform any of their respective obligations under this Agreement or any other Loan Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Loan Documents or otherwise from time to time. (c) Neither Agent shall be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of any Borrower, (ii) the business, operations, condition (financial or otherwise) or prospects of any Borrower or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) Neither Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Loan Document to be furnished by such Agent to such Bank. 8.05. Administration by the Agents. (a) Each Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Loan Document) purportedly made by or on behalf of the proper party or parties, and neither Agent shall have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) Each Agent may consult with legal counsel (including, without limitation, in-house counsel for such Agent or in-house or other counsel for any Borrower), independent public accountants and any other -31- experts selected by it from time to time, and neither Agent shall be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) Each Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to either Agent in accordance with the requirements of this Agreement or any other Loan Document. Whenever either Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Borrower or Bank, such matter may be established by a certificate of such Borrower or Bank, as the case may be, and each Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Loan Document). (d) Each Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against such Agent by reason of taking or continuing to take any such action. (e) Each Agent may perform any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact. Neither Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) Neither Agent shall be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless such Agent has received notice from a Bank or any Borrower referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If an Agent receives such a notice, such Agent shall give prompt notice thereof to the other Agent and each Bank. 8.06. Bank Not Relying on Agent or Other Banks. Each Bank acknowledges as follows: (a) Neither either Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by either Agent or any other Bank shall be deemed to constitute any representation or warranty by such Agent or such other Bank to it. (b) It has, independently and without reliance upon either Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Loan Documents. (c) It will, independently and without reliance upon either Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Loan Documents. 8.07. Indemnification. Each Bank agrees to reimburse and indemnify each Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Borrower and without limitation of the obligations of the Borrowers to do so), pro rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the fees and disbursements of counsel for such Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against such Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Loan, provided that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount on demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the Federal Funds Effective Rate. -32- 8.08. Each Agent in its Individual Capacity. With respect to its Commitments and the Obligations owing to it, each Agent shall have the same rights and powers under this Agreement and each other Loan Document as any other Bank and may exercise the same as though it were not an Agent, and the terms "Banks," "holders of Notes" and like terms shall include each Agent in its individual capacity as such. Each Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, and engage in any other business with, any Borrower and any stockholder, subsidiary or affiliate of any Borrower, as though such Agent were not an Agent hereunder. 8.09. Holders of Notes. The Administrative Agent may deem and treat the Bank which is payee of a Note as the owner and holder of such Note for all purposes hereof unless and until a Transfer Supplement with respect to the assignment or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 9.13 hereof. Any authority, direction or consent of any Person who at the time of giving such authority, direction or consent is shown in the Register as being a Bank shall be conclusive and binding on each present and subsequent holder, transferee or assignee of any Note or Notes payable to such Bank or of any Note or Notes issued in exchange therefor. 8.10. Successor Agent. Either Agent may resign at any time by giving 10 days' prior written notice thereof to the Banks and the Borrowers. Either Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to the Agents, the other Banks and the Borrowers. Upon any such resignation or removal of the Administrative Agent, the Required Banks shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent. Each successor Administrative Agent shall be a commercial bank or trust company organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Administrative Agent of its appointment as Administrative Agent hereunder, such successor Administrative Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Administrative Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Loan Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was an Agent under this Agreement. If and so long as no successor Administrative Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Administrative Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to the Administrative Agent shall be given to each Bank, and all payments to be made to the Administrative Agent shall be made directly to the Borrower or Bank for whose account such payment is made. 8.11. Additional Administrative Agents. If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Administrative Agent and the Borrowers shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Administrative Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Administrative Agent, to act as co-Administrative Agent or agent with such powers of the Administrative Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Administrative Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Administrative Agent under this Agreement or any other Loan Document. 8.12. Calculations. Neither Agent shall be liable for any calculation, apportionment or distribution of payments made by either Agent in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to which -33- they are determined to be entitled or, if the amount due was not paid by the appropriate Borrower, to recover such amount from the appropriate Borrower. 8.13. Agent's Fee. The Borrower agrees to pay to each Agent, for its individual account, a nonrefundable Agent's fee in an amount and at such time or times as such Agent and the Borrower have heretofore agreed. 8.14. Funding by Administrative Agent. Unless the Administrative Agent shall have been notified in writing by any Bank not later than the close of business on the day before the day on which Loans are requested by the Borrower to be made that such Bank will not make its ratable share of such Loans, the Administrative Agent may assume that such Bank will make its ratable share of the Loans, and in reliance upon such assumption the Administrative Agent may (but in no circumstances shall be required to) make available to the applicable Borrower a corresponding amount. If and to the extent that any Bank fails to make such payment to the Administrative Agent on such date, such Bank shall pay such amount on demand (or, if such Bank fails to pay such amount on demand, such Borrower shall pay such amount on demand), together with interest, for the Administrative Agent's own account, for each day from and including the date of the Administrative Agent's payment to and including the date of repayment to the Administrative Agent (before and after judgment) at the rate or rates per annum applicable to such Loans. All payments to the Administrative Agent under this Section shall be made to the Administrative Agent at its Office in Dollars in funds immediately available at such Office, without set-off, withholding, counterclaim or other deduction of any nature. ARTICLE IX MISCELLANEOUS 9.01. No Implied Waiver etc. No delay or failure of either Agent or any Bank, or the holder of any Note in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agents, the Banks and any holder of the Notes are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of an Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described in Article VII hereof shall occur, the holder of any Note shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of the Note held by it any debt owing by such holder to the applicable Borrower, including without limitation any funds in any deposit account maintained by such Borrower with such holder, and such holder shall have and there is hereby created in favor of such holder a security interest in all deposit accounts maintained by such Borrower with such holder. Any sums obtained by the holder of any Note issued hereunder by way of counterclaim, set-off, banker's lien or other lien for application upon any Note held by it shall be shared pro rata with the holders of the other Notes. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, covenants and agreements of the Borrowers and the Guarantors contained herein or made in writing in connection -34- herewith shall survive the execution and delivery of this Agreement, the making of Loans hereunder and the issuance of the Notes. 9.04. Expenses and Fees; Indemnity. (a) Each Borrower agrees to pay or cause to be paid and to save the Agents and (in the case of clause (iii) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs, incurred by the Agents or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Loan Documents, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Loan Document, and (iii) the enforcement or preservation of rights under this Agreement or any Loan Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of an outstanding Loan or any other amount owing hereunder or thereunder by either Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Loan Documents). Notwithstanding the foregoing, the Borrowers shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Borrower hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by either Agent or any Bank to be payable in connection with this Agreement or any other Loan Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and the Borrower agrees to save each Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Borrower hereby agrees to reimburse and indemnify each Agent and each Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Loan Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Loan (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Borrower or any exercise by either Agent or any Bank of any of its rights or remedies under this Agreement or any other Loan Document; any breach of any representation or warranty, covenant or agreement of any Borrower); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Borrowers under this Section 9.04, or any other indemnification obligation of the Borrowers hereunder or under any other Loan Document, are unenforceable for any reason, the Borrowers hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, the Borrowers shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. 9.05. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the -35- validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder or under the Notes shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.07. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Administrative Agent at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: Susan Whitewood, Facsimile No. 412-234-8087, with a copy to Mellon Bank Loan Administration, Three Mellon Bank Center, Pittsburgh, Pennsylvania 15259, Facsimile No. 412-209-6134; if to the Syndication Agent at 270 Park Avenue, 20th Floor, New York, New York 10017, Attention: Donald Rands and if to X.L. Capital, at Cumberland House, One Victoria Street, Hamilton HM11 Bermuda, Attention: William Robbie, fax no. (441) 292-8618, with a copy to Paul Giordano, Esq. at the same address and fax number, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from either Agent or any Bank or providing information to either Agent or any Bank, XL Capital shall act as the agent for XL Insurance and XL Mid Ocean. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT RELATED HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles. -36- 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Borrowers shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement and the Notes. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Borrowers, the Banks, the Agents, all future holders of the Notes and their respective successors and assigns, except that no Borrower may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of the Agents and all of the Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitments and the Loans owing to it and any Notes held by it); provided, that (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of each Borrower and the Administrative Agent, unless an Event of Default has occurred and is continuing, in which case the consent of the Borrowers shall not be required, (ii) any such Bank's obligations under this Agreement and the other Loan Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Loan Documents, (v) such Participant shall be bound by the provisions of Section 9.18 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Loan Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of principal, interest rates, fees and maturity. -37- The Borrowers agree that any such Participant shall be entitled to the benefits of Sections 2.09 and 9.04 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or any portion of its Commitments and Loans owing to it and any Note held by it) to any Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment to a Purchasing Bank which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Administrative Agent, unless an Event of Default has occurred and is continuing or exists, in which case the consent of XL Capital shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Loan Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Commitments and Loans then outstanding, (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Administrative Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, together with any Notes subject to such assignment (the "Transferor Bank Notes") and a processing and recording fee of $2,500; and, upon receipt thereof, the Administrative Agent shall accept such Transfer Supplement; provided, however, that no such processing and recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank . Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Administrative Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Administrative Agent's Office on the Transfer Effective Date specified in such Transfer Supplement. (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. -38- On or prior to the Transfer Effective Date specified in an Transfer Supplement, the Borrowers, at their expense, shall execute and deliver to the Administrative Agent (for delivery to the Purchasing Bank) new Notes evidencing such Purchasing Bank's assigned Commitments or Loans and (for delivery to the transferor Bank) replacement Notes in the principal amount of the Loans or Commitments retained by the transferor Bank (such Notes to be in exchange for, but not in payment of, those Notes then held by such transferor Bank). Each such Note shall be dated the date and be substantially in the form of the predecessor Note. The Administrative Agent shall mark the predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest and accrued fees shall be paid to the Purchasing Bank at the same time or times provided in the predecessor Notes and this Agreement. (d) Register. The Administrative Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Loans owing to, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Borrowers, the Administrative Agent and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by any Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Borrower authorizes each Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Borrowers and their affiliates which has been or may be delivered to such Person by or on behalf of the Borrowers in connection with this Agreement or any other Loan Document or such Person's credit evaluation of the Borrowers and their affiliates. At the request of any Bank, each Borrower, at such Borrower's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. (f) Designated Lenders. Notwithstanding anything to the contrary contained herein, any Bank (a "Designating Lender") may grant to an Eligible Designee identified as such (and as a Designated Lender) in writing from time to time by such Designating Lender to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Designating Lender would otherwise be obligated to make to any Borrower pursuant to this Agreement; provided that nothing herein shall constitute a commitment by such Designated Lender to make any Loan and (ii) if a Designated Lender elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Designating Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by a Designated Lender hereunder shall utilize the Committed Amount of the Designating Lender to the same extent, and as if, such Loan were made by such Designating Lender. Each party hereto hereby agrees that no Designated Lender shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Designating Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any Designated Lender, it will not institute against, or join any other person in instituting against, such Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. As to any Loans or portion thereof made by it, each Designated Lender shall have all the rights that a Bank making such Loans or portion thereof would have had under this Agreement and otherwise; provided that (i) its voting rights under this Agreement shall be exercised solely by its Designating Lender, (ii) its Designating Lender shall be deemed to hold its relevant Note as agent for its Designated Lender to the extent of the Loans or portion thereof funded by such Designated Lender and (iii) the designation of a Designated Lender and the funding of Loans by a Designated Lender shall in no event (x) subject any of the Borrowers to any delay in the making of a Loan, (y) cause or give rise to any obligation of any of the Borrowers to indemnify or hold harmless such Designated Lender or any other person (including without limitation pursuant to Sections 2.11 and 9.04 of this Agreement) except to the extent such obligation would have arisen in favor of the -39- Designating Lender or another person if the Designating Lender (rather than such Designated Lender) had made all of such Designated Lender's Loans and such Designated Lender had not been designated as such hereunder, or (z) render the performance of any provision of the Agreement illegal, void or unenforceable under any provision of law. Each Designating Lender shall act as administrative agent for its Designated Lender and give and receive notices and other communications on behalf of its Designated Lender. Any payments for the account of any Designated Lender shall be paid to its Designating Lender as administrative agent for such Designated Lender and neither the Borrowers nor either Agent shall be responsible for any Designating Lender's application of such payments. In addition, any Designated Lender may (i) with notice to, but without the prior written consent of, XL Capital and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Designating Lender or to any financial institutions (consented to by XL Capital and the Administrative Agent) providing liquidity and/or credit support to or for the account of such Designated Lender to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans or portions thereof to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such Designated Lender. This section may not be amended without the written consent of each Designating Lender which has designated a Designated Lender. 9.14. Amendments and Waivers. Neither this Agreement nor any Loan Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Administrative Agent and the Borrowers may from time to time amend, modify or supplement the provisions of this Agreement or any other Loan Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Borrower, either Agent or any Bank. Any such amendment, modification or supplement made by the Borrowers and the Administrative Agent in accordance with the provisions of this Section shall be binding upon the Borrowers, each Bank and each Agent. The Administrative Agent shall enter into such amendments, modifications or supplements from time to time as directed by the Required Banks, and only as so directed, provided, that no such amendment, modification or supplement may be made which will: (a) Increase the Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Bank affected thereby; (b) Reduce the principal amount of or extend the payment of principal of any Loan, or reduce the rate of interest or extend the time for payment of interest borne by any Loan or extend the time for payment of or reduce the amount of any Facility Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Loan Document, without the written consent of each Bank affected thereby; (c) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (d) Amend or waive any of the provisions of Article VIII hereof with respect to either Agent, or impose additional duties upon either Agent or otherwise adversely affect the rights, interests or obligations of either Agent, without the written consent of such Agent; or (e) Amend or waive any of the provisions of Article X or release any Guarantor from its obligations hereunder; and provided further, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. -40- 9.15. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Banks or any of them under this Agreement or any other Loan Document or for the payment of damages in respect of any breach of this Agreement or any other Loan Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks harmless against any deficiency in terms of Dollars in the amounts received by the Banks arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank is able to purchase Dollars with the amount of the Judgment Currency actually received by the Banks on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Borrowers hereunder and shall apply irrespective of any indulgence granted by the Banks. 9.16. Records. The unpaid principal amount of the Loans owing to each Bank, the unpaid interest accrued thereon, the interest rate or rates applicable to such unpaid principal amount, the duration of such applicability, each Bank's Committed Amount and the accrued and unpaid Facility Fees shall at all times be ascertained from the records of the Administrative Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agents and the Banks agree to keep confidential any information relating to the Borrowers received by it pursuant to or in connection with this Agreement which is (a) information which the Agents and the Banks reasonably expect that the applicable Borrower would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent either Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Borrowers to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by either Agent or any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Borrower (vi) in connection with the exercise of any right or remedy hereunder or under any other Loan Document, (vii) as expressly contemplated by this Agreement or any other Loan Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Borrowers to be bound by the obligation of confidentiality in this Agreement or the other Loan Documents if such prospective purchaser is a financial institution or has been consented to by the Borrower, which consent will not be withheld if such purchaser is not a competitor of the Borrower or an affiliate of a competitor of the Borrower. 9.18. Sharing of Collections. The Banks hereby agree among themselves that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of the Loans, interest thereon, or any other Obligation contemplated by this Agreement or the other Loan Documents to be made by the Borrowers pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the -41- purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. Each Borrower hereby consents to and confirms the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder. ARTICLE X GUARANTEE 10.01. The Guarantee. Each of XL Insurance, XL Capital and XL Mid Ocean (the "Guarantors") guarantees to the Agents and the Banks as hereinafter provided the prompt payment of the Obligations of each of the Borrowers (other than itself) (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise), such Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Loan Documents, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 10.02. Obligations Unconditional. The obligations of each Guarantor under this Article are absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Loan Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Borrower for amounts paid under this Guarantee until such time as the Banks have been paid in full, the Committed Amounts under the Credit Agreement have been reduced to zero and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Loan Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Loan Documents, or any other agreement or instrument referred to in the Loan Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Loan Documents, or any other agreement or instrument referred to in the -42- Loan Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, either Agent or any Bank as security for any of the Guaranteed Obligations shall be void or voidable, or shall fail to attach or be perfected; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Agents, the Banks or any of them exhaust any right, power or remedy or proceed against any Person under any of the Loan Documents, or any other agreement or instrument referred to in the Loan Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 10.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agents and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by either Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 10.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agents and the Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 10.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 10.01. 10.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 10.06. No Restrictions. Except for restrictions under the Loan Documents, no Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Borrower, or (y) make loans or advances to any Borrower or (z) transfer any of its properties or assets to any Borrower. -43- IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. XL INSURANCE LTD By: /s/ Brian M. O'Hara -------------------------------------- (Signature) Name: Brian M. O'Hara ------------------------------------ Title: Chairman ------------------------------------ XL MID OCEAN REINSURANCE LTD By: /s/ Brian M. O'Hara -------------------------------------- (Signature) Name: Brian M. O'Hara ------------------------------------ Title: Chairman ------------------------------------ XL CAPITAL LTD By: /s/ Brian M. O'Hara -------------------------------------- (Signature) Name: Brian M. O'Hara ------------------------------------ Title: President & Chief Executive Officer ------------------------------------ -44- MELLON BANK, N.A., as a Bank and as Administrative Agent By: /s/ Karla K. Maloof -------------------------------------- (Signature) Name: Karla K. Maloof ------------------------------------ Title: Vice President ------------------------------------ Notice Address: Institutional Banking Department One Mellon Bank Center, Room 4401 Pittsburgh, PA 15258 Attn: Susan Whitewood Facsimile No. 412-234-8087 with a copy to: Mellon Bank Loan Administration Three Mellon Bank Center Pittsburgh, PA 15259 Facsimile No. 412-209-6134 Initial Committed Amount: $65,000,000 -45- THE CHASE MANHATTAN BANK, as a Bank and as Syndication Agent By: /s/ Donald L. Rands -------------------------------------- (Signature) Name: Donald L. Rands ------------------------------------ Title: Vice President ------------------------------------ Notice Address: 270 Park Avenue, 20th Floor New York, New York 10017 Attn: Donald Rands Initial Committed Amount: $65,000,000 -46- THE BANK OF NOVA SCOTIA By: /s/ J.R. Trimble -------------------------------------- (Signature) Name: J.R. Trimble ------------------------------------ Title: Senior Relationship Manager ------------------------------------ Notice Address: New York Branch One Liberty Plaza New York, New York 10006 Attn: Jim Trimble Initial Committed Amount: $55,000,000 -47- CITIBANK, N.A. By: /s/ Michael Taylor -------------------------------------- (Signature) Name: Michael Taylor ------------------------------------ Title: Vice President ------------------------------------ Notice Address: Cottons Centre, Hays Lane London SE1 2QT Attn: Michael A. L. Taylor Initial Committed Amount: $55,000,000 -48- CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Sebastian Rocco -------------------------------------- (Signature) Name: Sebastian Rocco ------------------------------------ Title: Senior Vice President ------------------------------------ Notice Address: 1301 Avenue of the Americas New York, New York 10019 Attn: Jimmy Tse Initial Committed Amount: $55,000,000 -49- DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES By: /s/ John S. McGill /s/ Clinton M. Johnson -------------------------------------------- (Signature) Name: John S. McGill Clinton M. Johnson ------------------------------------------ Title: Director Director ------------------------------------------ Notice Address: 31 West 52nd Street New York, New York 10019 Attn: Clinton M. Johnson Initial Committed Amount: $55,000,000 -50- BANK OF AMERICA NT&SA By: /s/ Nita Savage -------------------------------------- (Signature) Name: Nita Savage ------------------------------------ Title: Vice President ------------------------------------ Notice Address: 231 S.LaSalle Street-10th Floor Chicago, IL 60697 Attn: Nita Savage Initial Committed Amount: $25,000,000 -51- THE BANK OF BERMUDA LIMITED By: /s/ Michael W. Collins -------------------------------------- (Signature) Name: Michael W. Collins ------------------------------------ Title: Senior Vice President ------------------------------------ Notice Address: 6 Front Street Hamilton HM 11, Bermuda Attn: Hanne Frost Initial Committed Amount: $25,000,000 -52- BANQUE NATIONALE DE PARIS By: /s/ Phil Truesdale /s/ Veronique Marcus ------------------------------------------------- (Signature) Name: Phil Truesdale Veronique Marcus ----------------------------------------------- Title: Chairman ----------------------------------------------- Notice Address: 499 Park Avenue New York, NY 10022 Attn: Phil Truesdale Initial Committed Amount: $25,000,000 -53- FLEET NATIONAL BANK By: /s/ Anson Harris --------------------------------------- (Signature) Name: Anson Harris ------------------------------------- Title: Vice President ------------------------------------- Notice Address: Mail Stop CTMO 0250 777 Main Street Hartford, CT 06115-2001 Attn: Anson T. Harris Initial Committed Amount: $25,000,000 -54- STATE STREET BANK AND TRUST COMPANY By: /s/ Edward M. Anderson ----------------------------------- (Signature) Name: Edward M. Anderson --------------------------------- Title: --------------------------------- Notice Address: 2 Avenue De Lafayette 2nd Floor-LCC2N Boston, MA 02111 Attn: Edward M. Anderson Initial Committed Amount: $25,000,000 -55- ROYAL BANK OF CANADA By: /s/ V. Abdelmessih ----------------------------------- (Signature) Name: V. Abdelmessih --------------------------------- Title: Senior Account Manager -------------------------------- Notice Address: New York Branch One Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Manager, Loans Administration Facsimile No.: (212)428-2372 with a copy to One Liberty Plaza, 4th Floor New York, NY 10006-1404 Attn: Vivian Abdelmessih Facsimile No: (212) 428-6201 Initial Committed Amount: $25,000,000 -56- EX-10.14-23 11 EXHIBIT 10.14.23 Exhibit 10.14.23 02.24.00 FIRST AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT THIS FIRST AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT, dated as of February 25, 2000 (this "Amendment"), by and among XL Capital Ltd, XL Insurance Ltd, XL Mid Ocean Reinsurance Ltd, as Borrowers and Guarantors (the "Borrowers"), X.L. America, Inc., a Delaware corporation ("XL America" and, collectively with the Borrowers, the "XL Parties"), Mellon Bank, N.A., as Administrative Agent (the "Administrative Agent"), The Chase Manhattan Bank, as Syndication Agent (the "Syndication Agent"), and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: WHEREAS, the Borrowers, the Banks, the Administrative Agent and the Syndication Agent are parties to a Short Term Revolving Credit Agreement, dated as of June 30, 1999 (the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, XL America is a subsidiary of XL Capital and of XL Insurance and the XL Parties desire that XL America become a Borrower under the Credit Agreement; WHEREAS, the XL Parties have requested the Banks to make certain additional changes to the Credit Agreement; WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by adding thereto, in appropriate alphabetical sequence, the following definitions: "Asset Accumulation Lien" means a Lien on amounts received, and on actual and imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Borrower's or Subsidiary's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien. "Borrowers" shall mean XL Capital, XL Insurance, XL Mid Ocean and XL America and "Borrower" shall mean any one of them. "Total Adjusted Funded Debt" shall have the meaning given that term in Section 6.06 hereof. "XL America" shall mean X.L. America, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of XL Capital. (b) The definition of the term "Total Exposure" appearing in Section 1.01 of the Credit Agreement is hereby amended by adding thereto, immediately following the phrase "to XL Insurance," appearing therein, the phrase "to XL America,". (c) Section 2.03(a) of the Credit Agreement is hereby amended by adding thereto, immediately following the phrase "to XL Insurance," appearing therein, the phrase "to XL America,". -2- (d) Section 2.06(a) of the Credit Agreement is hereby amended by adding thereto, immediately following the phrase "to XL Insurance," appearing therein, the phrase "XL America,". (e) Section 5.01 of the Credit Agreement is hereby amended by adding at the end thereof a new paragraph (j) thereof to read as follows: (j) Information Regarding Asset Accumulation Liens. At the time of furnishing each certificate furnished pursuant to paragraph (c) of this Section 5.01, a statement, certified as true and correct by a principal financial officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation Liens (it being understood that the reports required by paragraphs (a) and (b) of this Section 5.01 shall satisfy the requirement of this clause (A) of this paragraph (j) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital. (f) Section 6.03 of the Credit Agreement is hereby amended by deleting the period at the end of paragraph (f) thereof and replacing it with the phrase "; or" and by adding at the end of such Section a new paragraph (g) to read as follows: (g) Asset Accumulation Liens. (g) Section 6.06 of the Credit Agreement is hereby amended to read as follows: -3- 6.06. Ratio of Total Adjusted Funded Debt to Consolidated Capital. XL Capital will not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than 0.35 at any time. As used herein, the term "Total Adjusted Funded Debt" shall mean, at any time, the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital or any of its consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an Affiliate). (h) Section 7.01(h) of the Credit Agreement is amended by adding thereto, immediately after the phrase "voting shares of capital stock", the phrase "of XL America,". (i) Section 9.07 of the Credit Agreement is hereby amended by adding thereto, immediately after the phrase "as the agent for" appearing in the last sentence thereof, the phrase "XL America,". SECTION 2. Addition of XL America as Borrower. XL America hereby agrees to become and be a Borrower under, and as defined in, the Credit Agreement (as amended hereby) and agrees to be bound by the terms of the Credit Agreement (as so amended) as a Borrower. SECTION 3. Conditions to Effectiveness. This First Amendment shall become effective upon the execution and delivery hereof by the XL Parties, the Required Banks and the Administrative Agent, provided, however, that no Loans under the Credit Agreement as amended hereby shall be made to XL America until (i) all the Banks have executed this Amendment or have otherwise consented in writing to XL America becoming a Borrower under the Credit Agreement as amended hereby and (ii) the following additional conditions shall have been fulfilled on or prior to a date (prior to March 31, 2000) designated in writing to the Administrative Agent by XL Capital (the "XL America Amendment Date"): -4- (a) Proceedings and Incumbency. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a certificate with respect to XL America in form and substance satisfactory to the Administrative Agent dated on or about the XL America Amendment Date and signed on behalf of XL America by its Secretary or an Assistant Secretary, certifying as to: (a) true copies of all corporate action taken by XL America relative to this Amendment and the other Loan Documents applicable to it and (b) the names, true signatures and incumbency of the officer or officers of XL America authorized to execute and deliver this Amendment and the other Loan Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) Organizational Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank (i) certified copies of the certificate of incorporation and by-laws for XL America and (ii) a certificate of good standing for XL America certified by the Secretary of State of Delaware. (c) Opinions of Counsel. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a written opinion addressed to the Banks, dated on or about the XL America Amendment Date, of Cahill Gordon & Reindel, the Borrowers' U.S. counsel, in form satisfactory to the Administrative Agent, which is substantially to the effects (insofar as XL America is concerned), but with reference to this Amendment and the Credit Agreement as amended hereby, set forth in the opinions delivered by counsel to the Borrowers on the Closing Date. (d) Details, Proceedings, Notes and other Documents. All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be satisfactory to the Administrative Agent and each Bank shall have received all such counterpart originals or certified or other copies of the Loan Documents (including a Note issued by XL America for each Bank in substantially the form of Exhibit A-1 to the Credit Agreement, with appropriate changes) and such other documents and proceedings in connection with such transactions, in form and substance -5- satisfactory to it, as the Administrative Agent or any Bank have reasonably requested. (e) Expenses. The Borrowers shall have paid all expenses and other compensation to be paid by them hereunder on or prior to the XL America Amendment Date. (f) Representation and Warranties. The representations and warranties contained in Article III of the Credit Agreement shall be true on and as of the XL America Amendment Date with the same effect as though made on and as of the XL America Amendment Date, after giving effect to this First Amendment (it being understood that references in such Article III to the Credit Agreement shall be deemed for this purpose to be references to this First Amendment and to the Credit Agreement as amended hereby) and the Administrative Agent shall have received a certificate of XL Capital and, insofar as is applicable to it, XL America, to such effect. SECTION 4. Effect of Amendment. The Credit Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 5. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 6. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. XL INSURANCE LTD as Borrower and as Guarantor By: /s/ Christopher Coelho ---------------------------------------- Title: Chief Financial Officer ------------------------------------- -6- XL MID OCEAN REINSURANCE LTD, as Borrower and as Guarantor By: /s/ Henry C.V.Keeling ---------------------------------------- Title: President & CEO ------------------------------------- XL CAPITAL LTD, as Borrower and as Guarantor By: /s/ Brian M. O'Hara ---------------------------------------- Title: President & CEO ------------------------------------- X.L. AMERICA, INC. as Borrower By: /s/ Richard H. Miller ---------------------------------------- Title: Chief Financial Officer ------------------------------------- -7- MELLON BANK, N.A., as a Bank and as Administrative Agent By: /s/ Karla Maloof ---------------------------------------- Title: Vice President ------------------------------------- THE CHASE MANHATTAN BANK, as a Bank and as Syndication Agent By: /s/ Donald Rands ---------------------------------------- Title: Vice President ------------------------------------- THE BANK OF NOVA SCOTIA, as a Bank By: /s/ John Hopmans ---------------------------------------- Title: Managing Director ------------------------------------- CITIBANK, N.A., as a Bank By: /s/ Michael Taylor ---------------------------------------- Title: Vice President ------------------------------------- -8- CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By: /s/ Sebastian Rocco ---------------------------------------- Title: Senior Vice President ------------------------------------- By: ________________________________________ Title: _____________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By: /s/ John S. McGill ---------------------------------------- Title: Director ------------------------------------- By: ________________________________________ Title: _____________________________________ BANK OF AMERICA, N.A., as a Bank By: /s/ Debra Basler ---------------------------------------- Title: Vice President ------------------------------------- THE BANK OF BERMUDA LIMITED, as a Bank By: /s/ ---------------------------------------- Title: Vice President ------------------------------------- -9- BANQUE NATIONALE DE PARIS, as a Bank By: /s/ Phil Truesdale ---------------------------------------- Title: Vice President ------------------------------------- By: /s/ ---------------------------------------- Title: Vice President ------------------------------------- FLEET NATIONAL BANK, as a Bank By: /s/ Anson Harris ---------------------------------------- Title: Vice President ------------------------------------- STATE STREET BANK AND TRUST COMPANY, as a Bank By: /s/ Edward M. Anderson ---------------------------------------- Title: Vice President ------------------------------------- ROYAL BANK OF CANADA, as a Bank By: /s/ ---------------------------------------- Title: Senior Manager ------------------------------------- -10- EX-10.14-24 12 EXHIBIT 10.14.24 Exhibit 10.14.24 070299 $300,000,000 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT BETWEEN XL INSURANCE LTD, XL CAPITAL LTD, XL EUROPE, XL MID OCEAN REINSURANCE LTD, and THE BROCKBANK GROUP Plc, as Account Parties, AND XL INSURANCE LTD, XL CAPITAL LTD, XL MID OCEAN REINSURANCE LTD and XL INVESTMENTS LTD, as Guarantors, AND THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Issuing Bank and as Agent AND MELLON BANK, N.A. and DEUTSCHE BANK SECURITIES INC., as Arrangers DATED AS OF June 30, 1999 Table of Contents Section Title Page - ------- ----- ---- ARTICLE I DEFINITIONS; CONSTRUCTION........................ 1 1 1.01 Certain Definitions.............................. 10 1.02 Construction..................................... 10 1.03 Accounting Principles............................ 10 ARTICLE II THE LETTER OF CREDIT FACILITY.................... 10 2.01 Letters of Credit................................ 10 2.02 Commitment Fee; Reduction of the Committed Amounts.......................................... 12 2.03 Procedure for Issuance and Amendment of Letters of Credit........................................ 12 2.04 Letter of Credit Participating Interests......... 14 2.05 Letter of Credit Drawings and Reimbursements..... 15 2.06 Equalization..................................... 16 2.07 Obligations Absolute............................. 16 2.08 Further Assurances............................... 16 2.09 Letter of Credit Applications.................... 16 2.10 Certain Provisions Relating to the issuing Bank.. 17 2.11 Payments Generally; Interest and Interest on Overdue Amounts.................................. 18 2.12 Additional Compensation in Certain Circumstances. 18 2.13 Taxes............................................ 19 2.14 Extensions of Expiration Date.................... 21 2.15 Tranches......................................... 21 ARTICLE III REPRESENTATIONS AND WARRANTIES................... 24 3.01 Organization and Qualification................... 24 3.02 Corporate Power and Authorization................ 24 3.03 Financial Information............................ 25 3.04 Litigation....................................... 25 3.05 No Adverse Changes............................... 25 3.06 No Conflicting Laws or Agreements; Consents and Approvals........................................ 25 3.07 Execution and Binding Effect..................... 25 3.08 Taxes............................................ 25 3.09 Use of Proceeds.................................. 26 3.10 Permits, Licenses and Rights..................... 26 3.11 Accurate and Complete Disclosure................. 26 3.12 Absence of Violations............................ 26 3.13 Environmental Matters............................ 26 3.14 Not an Investment Company........................ 26 3.15 Year 2000 Compliance 26 ARTICLE IV CONDITIONS....................................... 27 4.01 Effectiveness.................................... 27 4.02 Issuance of Letters of Credit.................... 28 i ARTICLE V AFFIRMATIVE COVENANTS............................ 28 5.01 Reporting and Information Requirements........... 29 5.02 Preservation of Existence and Franchises......... 30 5.03 Insurance........................................ 30 5.04 Maintenance of Properties........................ 30 5.05 Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities...................................... 30 5.06 Financial Accounting Practices................... 31 5.07 Compliance with Applicable Laws.................. 31 5.08 Use of Proceeds.................................. 31 5.09 Continuation Of and Change In Business........... 31 5.10 Visitation....................................... 31 ARTICLE VI NEGATIVE COVENANTS............................... 31 6.01 Mergers and Acquisitions......................... 31 6.02 Dispositions of Assets........................... 32 6.03 Liens............................................ 32 6.04 Transactions With Affiliates..................... 33 6.05 Business......................................... 33 6.06 Ratio of Total Funded Debt to Consolidated Tangible Net Worth............................... 33 6.07 Consolidated Tangible Net Worth.................. 34 6.08 Indebtedness..................................... 34 6.09 Claims-Paying Ratings............................ 34 6.10 Private Act...................................... 34 ARTICLE VII EVENTS OF DEFAULT................................ 34 7.01 Events of Default................................ 34 ARTICLE VIII THE AGENT........................................ 36 8.01 Appointment...................................... 36 8.02 General Nature of Agent's Duties................. 36 8.03 Exercise of Powers............................... 37 8.04 General Exculpatory Provisions................... 37 8.05 Administration by the Agent...................... 38 8.06 Bank Not Relying on Agent or Other Banks......... 39 8.07 Indemnification.................................. 39 8.08 Agent in its Individual; Capacity................ 39 8.09 Successor Agent.................................. 39 8.10 Additional Agents................................ 40 8.11 Calculations..................................... 40 8.12 Agent's Fee...................................... 40 ARTICLE IX MISCELLANEOUS.................................... 40 9.01 No Implied Waiver etc............................ 40 9.02 Set-Off.......................................... 40 9.03 Survival of Provisions........................... 41 9.04 Expenses and Fees; Indemnity..................... 41 9.05 Severability..................................... 42 ii 9.06 Holidays......................................... 42 9.07 Notices, etc..................................... 42 9.08 Forum Selection and Consent to Jurisdiction...... 42 9.09 Waiver of Jury Trial............................. 42 9.10 Governing Law.................................... 43 9.11 Validity and Enforceability...................... 43 9.12 Counterparts..................................... 43 9.13 Successors and Assigns; Participations; Assignments...................................... 43 9.14 Amendments and Waivers........................... 45 9.15 Judgment Currency................................ 45 9.16 Records.......................................... 47 9.17 Confidentiality.................................. 47 9.18 Sharing of Collections 47 ARTICLE X GUARANTEE........................................ 47 10.01 The Guarantee.................................... 47 10.02 Obligations Unconditional........................ 48 10.03 Reinstatement.................................... 49 10.04 Remedies......................................... 49 10.05 Continuing Guarantee............................. 49 10.06 No Restrictions.................................. 49 Exhibit A Form of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Form of Opinions of Counsel Exhibit D Form of Compliance Certificate Exhibit E [Intentionally Omitted] Exhibit F Letter of Credit Application Schedule 2.01(b) Form of Evergreen Provision Schedule 3.01 Subsidiaries Schedule 6.03(a) Liens iii LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of June 30, 1999, by and between XL INSURANCE LTD, a Bermuda limited liability corporation ("XL Insurance"), XL CAPITAL LTD, a corporation organized under the laws of the Cayman Islands, British West Indies ("XL Capital"), XL EUROPE, a company incorporated under the laws of Ireland ("XL Europe"), XL MID OCEAN REINSURANCE LTD, a Bermuda limited liability corporation ("XL Mid Ocean"), THE BROCKBANK GROUP Plc, an English limited company ("Brockbank Group") (XL Insurance, XL Capital, XL Europe, XL Mid Ocean and Brockbank Group are referred to hereinafter individually as an "Account Party" and collectively as the "Account Parties"), XL INVESTMENTS LTD, a Bermuda limited liability corporation ("XL Investments") (XL Insurance, XL Mid Ocean, XL Investments and XL Capital are referred to herein individually as a "Guarantor" and collectively as the "Guarantors"), the Banks (as defined further below) parties hereto from time to time, MELLON BANK, N.A., a national banking association, as Issuing Bank (the "Issuing Bank"), MELLON BANK, N.A., a national banking association, as Agent for the Banks and the Issuing Bank hereunder (in such capacity, together with successors in such capacity, the "Agent") and MELLON BANK, N.A. and DEUTSCHE BANK SECURITIES, INC., as Arrangers (collectively in such capacity, the "Arrangers"). PRELIMINARY STATEMENT WHEREAS, XL Insurance, XL Mid Ocean, XL Investments, XL Europe, Venton Underwriting Group Limited (a former affiliate of XL Insurance), certain banks and Mellon Bank, N.A., as Issuing Bank and Agent, entered into the Letter of Credit Facility and Reimbursement Agreement, dated as of February 27, 1998, as amended by the First and Second Amendments thereto (as so amended, the "Prior Agreement"); and WHEREAS, the parties hereto desire that the Prior Agreement be terminated and replaced the same with this Agreement; and WHEREAS, the Banks have agreed to make available to the Account Parties a Letter of Credit Facility upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties, the Guarantors, the Agent, the Arrangers the Issuing Bank and each Bank agree as follows. ARTICLE I DEFINITIONS: CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account Parties" and "Account Party" shall have the meaning assigned those terms in the preamble hereof. "Affiliate" shall mean an entity which is directly or indirectly controlled by an Account Party or which controls an Account Party or which is under common control with any of the Account Parties. "Aggregate Letter of Credit Undrawn Availability" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "Aggregate Letter of Credit Unreimbursed Draws" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "Agreement" shall mean this Letter of Credit Facility and Reimbursement Agreement as amended, modified or supplemented from time to time. "Applicable Interest Rate" as used herein, (i) with respect to obligations denominated in Dollars, shall mean the Prime Rate and (ii) with respect to obligations denominated in Pounds, shall mean 0.5% per annum in excess of the rate appearing on the Telerate Screen page 3740 or 3750 or any equivalent successor to such page or other page as appropriate on the Telerate Service or such other service as may, from time to time, display the British Bankers' Association Interest Settlement Rate for deposits in Pounds. "Assets" at any time shall mean the assets of any Credit Party, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "Bank Parties" shall mean the Banks, the Issuing Bank, the Arrangers and the Agent. "Banks" shall mean the parties (other than the Credit Parties but including the Issuing Bank) listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and "Bank" shall mean any of them. "Bermuda Companies Law" shall mean The Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law " shall mean The Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or of Bermuda or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or Bermuda. "Capitalized Lease Obligation" shall mean any lease obligation which is required to be capitalized in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "Change in Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities and Exchange Commission) of more than 40% of the voting securities of XL Capital; (b) 2 the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital; or (c) a majority of the members of XL Capital's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated for election by its shareholders. "Closing Date" shall mean July 2, 1999 or such later date prior to August 1, 1999, as may be specified by XL Capital by one day's written notice to the Agent. "Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Commitment Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. "Consolidated Net Worth" shall mean at any date the consolidated stockholders' equity of XL Capital and its Consolidated Subsidiaries. "Consolidated Subsidiaries" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with GAAP. "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of XL Capital and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1998, in the book value of any asset owned by XL Capital or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Continuing Letter of Credit Agreement" shall mean the letter of credit agreement executed and delivered by the Account Parties substantially in the form of Exhibit A hereto. "Conversion to Tranche System" shall have the meaning assigned to that term in Section 2.15 hereof. "Credit Parties" means the Account Parties and the Guarantors and "Credit Party" means any of them. "Credit Subsidiary" shall mean a Person which is Subsidiary of both (i) a Credit Party and (ii) a party to the Syndicated Revolving Credit Agreements. "Current Expiration Date" shall have the meaning assigned to that term in Section 2.14 hereof. "Custodian" shall mean Mellon Bank, N.A., or any successor, in its capacity as Custodian for XL Investments and XL Mid Ocean pursuant to the Master Custody Agreement, dated as of June 30, 1998, as amended, restated or otherwise modified from time to time, or any successor custodian appointed in accordance with Section 6.11 of the Pledge Agreement. "Designated Accounts" shall have the meaning given that term in the Pledge Agreement. 3 "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Dollar Equivalent" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock A.M., Pittsburgh time on the date of determination, based upon the quoted spot rates of the Issuing Bank at which its applicable branch or office offers to exchange Dollars for such currency in the foreign exchange market and "Dollar Equivalent" of an amount denominated in Dollars shall mean such amount of Dollars. "Dollar Equivalent Amount" of any Pledged Security shall mean (i) with respect to any Pledged Security denominated in a currency other than Dollars, the Dollar Equivalent of the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement and (ii) with respect to a Pledged Security denominated in Dollars, the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "Event of Default" shall mean any of the Events of Default described in Article VII hereof. "Existing Letters of Credit" shall mean the letters of credit issued and, immediately prior to the Closing Date, outstanding as "Letters of Credit" under the Prior Agreement. "Expiration Date" shall mean the Business Day immediately preceding the first anniversary of the Closing Date, as the same may be extended in accordance with Section 2.14 hereof. "Extension Request" shall have the meaning set forth in Section 2.14 hereof. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "Guaranteed Obligations" shall have the meaning assigned to that term in Section 10.01 hereof. "Guarantors" shall mean XL Insurance, XL Capital, XL Mid Ocean and XL Investments and "Guarantor" shall mean any one of them. 4 "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Indebtedness" of a Person shall mean (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company or corporate member of Lloyds or as a provider of financial services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capitalized Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed; and (vi) all Guaranty Equivalents of such Person. "Insurance Subsidiary" means any, present or future, direct or indirect Subsidiary of any Account Party that offers insurance products, including but not limited to certain of the Account Parties. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Letter of Credit" shall mean each letter of credit issued by the Issuing Bank for the account of one or more of the Account Parties pursuant to this Agreement and each of the Existing Letters of Credit, each as amended, modified or supplemented from time to time. 5 "Letter of Credit Application" shall have the meaning given that term in Section 2.03(a)(ii) hereof. "Letter of Credit Exposure" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent), (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount (determined as a Dollar Equivalent) of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "Letter of Credit Fee" shall have the meaning given that term in Section 2.01(d) hereof. "Letter of Credit Participating Interest" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Committed Amount" shall have the meaning given that term in Section 2.01(a) hereof. "Letter of Credit Participating Interest Commitment" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Percentage" and "Letter of Credit Participating Interest Commitment Percentage" for each Bank shall mean a fraction, expressed as percentage, the numerator of which is such Bank's Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Letter of Credit Participating Interest Committed Amounts of all of the Banks. "Letter of Credit Reimbursement Obligation" with respect to a Letter of Credit means the obligation of the applicable Account Party to reimburse the Issuing Bank for drawings on a Letter of Credit, together with interest thereon, and "Letter of Credit Reimbursement Obligations" shall mean all such obligations with respect to all Letters of Credit. "Letter of Credit Undrawn Availability" with respect to a Letter of Credit at any time shall mean the maximum amount (determined as a Dollar Equivalent) available to be drawn under such Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing (including, without limitation, the amount of drafts presented but not yet paid). "Letter of Credit Unreimbursed Draw" with respect to a Letter of Credit at any time shall mean the amount at such time of a payment made by the Issuing Bank under such Letter of Credit, to the extent not repaid by the applicable Account Party. "Level One Day" shall mean each day during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 35% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Two Day" shall mean each day (which is not a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 50% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Three Day" shall mean each day (which is not a Level Two Day or a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the 6 market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 75% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Four Day" shall mean each day (which is not a Level Three Day, a Level Two Day or a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 100% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Five Day" shall mean each day during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is 100% or more of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities. "Lien" shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Material Adverse Effect" shall mean the occurrence of an event (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), which has or could reasonably be expected to have a materially adverse effect on: (a) the assets, business, financial condition or operations of a Credit Party and its Subsidiaries taken as a whole; or (b) the ability of a Credit Party to perform any of its payment or other material obligations under this Agreement; or (c) the legality, validity, binding effect or enforceability against a Credit Party of any Transaction Document that by its terms purports to bind such Credit Party. "Nonextending Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Obligations" shall mean, collectively, the Letter of Credit Reimbursement Obligations and the obligations of each and every Account Party to pay all fees, indemnities and all other liabilities of such Account Party arising pursuant to the terms of this Agreement or the other Transaction Documents. "Office," when used in connection with the Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Agent to the Account Parties and the Banks. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Permitted Liens" shall mean the Liens described in paragraphs (a) through (g) of Section 6.03. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Pledge Agreement" shall mean the Pledge Agreement, dated as of June 30, 1999, between the Agent, XL Investments and XL Mid Ocean, as amended or modified from time to time. 7 "Pledged Securities" shall have the meaning given that term in the Pledge Agreement. "Pledged Securities Available Amount" at any time shall mean the amount which is equal to 90% of the value of the Qualifying Pledged Securities (as determined as a Dollar Equivalent Amount at such time). "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Pound," "Pounds" and the symbol "(pound)" shall mean the lawful money of the United Kingdom. "Prime Rate" shall mean the interest rate per annum announced from time to time by the Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Agent to other borrowers and is not solely based or dependent upon the interest rate which the Agent may charge any particular borrower or class of borrower). "Prior Agreement" has the meaning ascribed to that term in the preambles to this Agreement. "Private Act" shall mean separate legislation enacted in Bermuda with the intention that such legislation applies specifically to a Credit Party in whole or in part. "Pro Rata" shall have the meaning assigned to that term in Section 2.15 hereof. "Purchasing Bank" shall have the meaning assigned to that term in Section 9.13(c) hereof. "Qualifying Pledged Securities" shall mean (i) direct claims (including securities, loans and leases) on, and the portions of claims that are directly and unconditionally guaranteed by, the central government of any OECD country or any U.S. Government Agency, as such terms are used in Appendix A, Section III(C), Category I to Regulation H, as promulgated by the Board of Governors of the Federal Reserve System and (ii) claims on, and the portions of claims that are guaranteed by, U. S. Government-sponsored agencies and claims on, and the portions of claims guaranteed by, certain multilateral lending institutions in which the U. S. government is a shareholder or contributing member or shares of money market mutual funds investing solely in U.S. Government Securities, as such terms are used in Appendix A, Section III(C), Category II to such Regulation H; provided, however, that those securities or obligations referred to in clauses (i) and, (ii) above shall not be counted towards the Collateral Value Requirement under the Pledge Agreement unless such securities or obligations have a twenty percent or lower risk capital weighting under such Regulation H, as amended from time to time. "Register" shall have the meaning given that term in Section 9.13(d) hereof. "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "Replacement Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Required Banks" shall mean at any time Banks which have at least 51% of the aggregate Letter of Credit Participating Interests in Letters of Credit outstanding at such time. 8 "Required Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Required Pledged Securities" shall mean at any time Qualifying Pledged Securities 90% of the market value of which (expressed as a Dollar Equivalent Amount) is equal to, but not greater than, the sum of the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent) at such time and the Aggregate Letter of Credit Undrawn Availability at such time. "SAP" shall mean, as to each Account Party and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Official Body (including, in the case of Brockbank Group, the Lloyds council) for such Account Party's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Default reports by insurance corporations of the same type as such Account Party or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. "Standard Notice" shall mean an irrevocable notice provided to the Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Agent. "Stated Amount" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "Subsidiary" of a Person at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by such Person or one or more Subsidiaries of such Person. "Syndicated Revolving Credit Agreements" shall mean the Revolving Credit Agreement, dated as of June 6, 1997, among XL Insurance, XL Mid Ocean, EXEL Acquisition Ltd., XL Capital, the banks parties thereto and Mellon Bank, N. A., as Agent, as amended or extended from time to time, and the Short Term Revolving Credit Agreement, dated as of June 30, 1999, among XL Insurance, XL Mid Ocean, XL Capital, the banks parties thereto and Mellon Bank, N. A. and The Chase Manhattan Bank, as Agents, as amended or extended from time to time, and such one or more other agreements as are replacements for one or both of such Agreements. "Total Funded Debt" of a Person at any time shall mean all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. "Tranche 1 Bank", "Tranche 1 Letter of Credit", "Tranche 1 Letter of Credit Participating Interest Percentage", "Tranche 2 Bank", "Tranche 2 Letter of Credit", "Tranche 2 Letter of Credit Participating Interest Commitment Percentage", "Tranche 2 Letter of Credit Participating Interest Commitment", "Tranche 2 Letter of Credit Participating Interest Committed Amount", "Tranche 2 Letter of Credit Participating Interest Commitment Percentage", "Tranche 3 Letter of Credit", "Tranche 4 Letter of Credit" and "Tranche X" shall have the respective meanings assigned to those terms in Section 2.15 hereof. "Transaction Document" or "Transaction Documents" shall mean this Agreement, the Pledge Agreement, each Letter of Credit and any other documents or instruments executed and delivered in connection herewith or therewith. 9 "Transfer Supplement" shall have the meaning given that term in Section 9.13(c)(iv) hereof. "Valuation Date" shall mean the last Business Day of each month. "Zero Percent Risk-Capital Securities" means Pledged Securities which have a 0% risk-capital weighting for bank regulatory capital purposes. 1.02. Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or. " References in this Agreement to "determination" by the Agent include estimates by the Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by the Agent in good faith and without gross negligence (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States of America, or with respect to Brockbank Group, the United Kingdom, and with respect to XL Europe, the Republic of Ireland, at the Relevant Date, subject to the other provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more financial covenants of this Agreement shall have occurred (or in the opinion of the Required Banks would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP would have materially changed an Account Party's reported financial results or position from that reflected in such Account Party's financial statements most recently prepared prior to such change, such Account Party shall notify the Agent as soon as practicable. ARTICLE II THE LETTER OF CREDIT FACILITY 2.01. Letters of Credit. 10 (a) Letter of Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Issuing Bank agrees to issue (or, in the case of Existing Letters of Credit, maintain outstanding) Letters of Credit for the account of an Account Party at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Issuing Bank shall have no obligation to issue any Letters of Credit if, after such Letters of Credit are issued, the Letter of Credit Exposure upon such issuance would exceed the lesser of (x) the aggregate of the Banks' Letter of Credit Participating Interest Committed Amounts and (y) the Pledged Securities Available Amount. Each Bank's "Letter of Credit Participating Interest Committed Amount" at any time shall be equal to the amount set forth as its "Initial Letter of Credit Participating Interest Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(b) hereof at such time, and subject to transfer to or from another Bank as provided in Section 9.13 hereof. (b) Terms of Letters of Credit. The Account Parties shall not request to be issued, and the Issuing Bank shall have no obligation to issue, any Letter of Credit except within the following limitations: (i) each Letter of Credit shall have an expiration date no later than 12 months after the date of issuance thereof; provided, however, that (x) one or more Letters of Credit with aggregate Stated Amounts for all such Letters of Credit (determined as a Dollar Equivalent) of up to an amount equal to 60% of the aggregate of the Banks' Letter of Credit Participating Interest Committed Amounts may have an expiration date no later than five years from the date of issuance and (y) any Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Letter of Credit shall be denominated in Dollars or Pounds and (iii) each Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) Form of Letters of Credit. The Issuing Bank shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice. The Issuing Bank may not object to a letter of credit on account of the fact that it may be presented for drawing at the Issuing Bank's branch in London, England (or, if the Issuing Bank no longer maintains such a branch at the time of issuance of a Letter of Credit, at such other location in London, England as may be commercially reasonable). It is contemplated that one or more Letters of Credit which are requested to be issued by, and which are issued for the account of, XL Capital, XL Insurance or XL Mid Ocean, respectively, may be stated to be issued for the account of NAC Re Corporation, ECS, Inc., or Latin American Reinsurance Company, Ltd., in which XL Capital, XL Insurance or XL Mid Ocean, as the case may be, has a direct or indirect ownership interest, provided that, notwithstanding the fact that the name of XL Capital, XL Insurance or XL Mid Ocean, as the case may be, may not appear on the face of any such Letter of Credit, XL Capital, XL Insurance or XL Mid Ocean, as the case may be, shall be the Account Party with respect to such Letter of Credit and shall have all Letter of Credit Reimbursement Obligations and other obligations hereunder with respect thereto. (d) Letter of Credit Fee. Each Account Party shall pay or cause to be paid to the Agent for the account of each Bank, in accordance with its Letter of Credit Participating Interest Commitment Percentage , a fee (the "Letter of Credit Fee") for Letters of Credit (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.15% for each Level Five Day, 0.165% for each Level Four Day, 0.18% for each Level Three Day, 0.23% for each Level Two Day and 0.28% for each Level One Day. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. If any Letter of Credit Fee payment is made on a day which is not a Valuation Date, the amount of such Letter of Credit Fee attributable to the period from the preceding Valuation Date until such day shall be determined by 11 reference to the rate applicable on such preceding Valuation Date, subject to retroactive adjustment on the next succeeding Valuation Date. The Agent shall provide to XL Capital on a monthly basis a certificate, showing in reasonable detail (with reference to the valuation report as of the last business day of the applicable month provided by the Custodian to the Agent pursuant to the Custodian's Acknowledgments (as defined in the Pledge Agreement)) the Agent's calculation of the Letter of Credit Fee. (e) Purpose of Letters of Credit. The Account Parties agree that each Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit, to provide credit enhancement for contract performance guarantees or for similar bonding requirements, all in the ordinary course of business of such Account Party. The provisions of this Section 2.01(e) represent only an obligation of the Account Parties to the Issuing Bank and the Banks; the Issuing Bank shall have no obligation to the Banks to ascertain the purpose of any Letter of Credit, and, without limiting the generality of the provisions of Section 2.04(b) hereof, the rights and obligations of the Banks and the Issuing Bank among themselves shall not be impaired or affected by a breach of this Section 2.01(e). (f) Administration Fees. Each Account Party shall pay to the Agent, for the sole account of the Issuing Bank, such other administration, maintenance, amendment, drawing and negotiation fees as are customarily charged by the Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Bank to XL Insurance) or are otherwise agreed between the Issuing Bank and the Account Parties. 2.02. Commitment Fee; Reduction of the Committed Amounts. (a) Commitment Fee. XL Insurance agrees to pay to the Agent for the account of each Bank a commitment fee (the "Commitment Fee") for each day during the period from the Closing Date to and including the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.07% payable on the unused portion of such Bank's Letter of Credit Participating Interest Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (b) Reduction of the Committed Amounts. XL Capital may at any time or from time to time reduce Pro Rata the Letter of Credit Participating Interest Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the Letter of Credit Exposure. Any reduction of the Letter of Credit Participating Interest Committed Amounts shall be in an aggregate minimum amount of $25,000,000 and in an amount which is an integral multiple of $5,000,000. Reduction of the Letter of Credit Participating Interest Committed Amounts shall be made by providing not less than five Business Days' notice (which notice shall be irrevocable) to such effect to the Agent, which will promptly advise the Banks of such notice. After the date specified in such notice, the Commitment Fee shall be calculated upon the Letter of Credit Participating Interest Committed Amounts as so reduced. 2.03. Procedure for Issuance and Amendment of Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Business Days' notice, the Issuing Bank to issue a Letter of Credit by: (i) delivering to the Issuing Bank and the Agent a written request to such effect, specifying the date on which such Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Issuing Bank a completed application, in the form annexed hereto as Exhibit F, or in such other form as is from time to time be required by the Issuing 12 Bank in accordance with its customary practice with respect to its customers generally (a "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Issuing Bank shall promptly notify the Agent (by telephone or otherwise), and furnish the Agent with the proposed form of Letter of Credit to be issued. The Agent shall, promptly upon receiving such notice, notify the Banks of such proposed Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Letter of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Banks have given notice to the Agent to cease issuing Letters of Credit pursuant to Section 2.03(c)(ii) hereof, the Agent shall notify the Issuing Bank (in writing or by telephone promptly confirmed in writing) that the Issuing Bank is not authorized to issue such Letter of Credit. If the Issuing Bank issues a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Agent thereof and furnish a copy thereof to the Agent. (b) Request for Extension or Increase. An Account Party may from time to time request the Issuing Bank to extend the expiration date of an outstanding Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new Letter of Credit in substitution for the outstanding Letter of Credit). (c) Limitations on Issuance, Extension and Amendment. (i) As between the Issuing Bank, on the one hand, and the Agent and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing a Letter of Credit after receiving authorization from the Agent as provided in Section 2.03(a) hereof, notwithstanding any subsequent notices to the Issuing Bank, any knowledge of an Event of Default (unless the Issuing Bank shall have received a notice specifying that such Event of Default is an "Event of Default" under this Agreement) or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, the Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Stated Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. (ii) As between the Agent, on the one hand, and the Banks, on the other hand, the Agent shall not authorize issuance of any Letter of Credit if the Agent shall have received, at least two Business Days before authorizing such issuance, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Agent direct the Issuing Bank to cease to issue Letters of Credit. Absent such notice, or unless the Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Agent shall be justified and fully protected, as against the Banks, in authorizing the Issuing Bank to issue such Letter of Credit, notwithstanding any subsequent notices to the Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Agent, or any other event, condition or circumstance whatsoever. 13 2.04. Letter of Credit Participating Interests. (a) Generally. Concurrently with the issuance of each Letter of Credit, the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank's Pro Rata share, in all of the Issuing Bank's rights and obligations in, to or under such Letter of Credit, the related Letter of Credit Application, the Letter of Credit Reimbursement Obligations, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "Letter of Credit Participating Interest", it being understood that the Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Letter of Credit Participating Interests of the other Banks). Each Bank irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank's "Letter of Credit Participating Interest Commitment". Amounts other than Letter of Credit Reimbursement Obligations and Letter of Credit Fees payable from time to time under or in connection with a Letter of Credit or Letter of Credit Application shall be for the sole account of the Issuing Bank. On the date that any Purchasing Bank becomes a party to this Agreement in accordance with Section 9.13(c) hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such Purchasing Bank acquired its interest hereunder shall be proportionately reallocated between such Purchasing Bank and such transferor Bank (and, to the extent such transferor Bank is the Issuing Bank, the Purchasing Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). (b) Maximum Amounts of Funding of Participations. (i) This Section 2.04(b)(i) is applicable if the Conversion to Tranche System has not occurred. No Bank will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Letter of Credit if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit to exceed such Bank's Letter of Credit Participating Interest Committed Amount, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. (ii) This Section 2.04(b)(ii) is applicable if the Conversion to Tranche System has occurred. No Tranche 1 Bank, Tranche 2 Bank or Tranche X Bank, as the case may be, will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Tranche 1 Letter of Credit, Tranche 2 Letter of Credit or Tranche X Letter of Credit, as the case may be, if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit under such applicable Tranche to exceed such Bank's Letter of Credit Participating Interest Committed Amount under such applicable Tranche, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent Amount of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. (c) Obligations Absolute. Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each Letter of Credit issued in accordance herewith, its obligation to make the payments specified in Section 2.05 hereof, and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such payment shall not relieve any other Bank of its funding obligation 14 hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder. 2.05. Letter of Credit Drawings and Reimbursements. (a) Account Party's Reimbursement Obligation. Each Account Party hereby agrees to reimburse the Issuing Bank, by making payment to the Agent for the account of the Issuing Bank in accordance with Section 2.11(a) hereof on the date of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account (or, if later, the date which is one Business Day after notice of such payment or of the drawing giving rise to such payment is given to XL Capital), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. Each Account Party agrees that it will make such payment to the Agent for the account of the Issuing Bank in the same currency as the currency of the payment by the Issuing Bank under such Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Agent, for the account of the Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by the Issuing Bank until paid (before and after judgment) in accordance with Section 2.11(a) hereof, at the rate per annum set forth in Section 2.11(b) hereof. (b) Payment by Banks on Account of Unreimbursed Draws. If the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.05(a) hereof, the Issuing Bank will promptly notify the Agent thereof (which notice may be by telephone), and the Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Agent's close of business on the date such notice is given (if notice is given by 2:00 o'clock P.M., Pittsburgh time) or 10:00 o'clock A.M., Pittsburgh time the following day (if notice is given after 2:00 o'clock P.M., Pittsburgh time) , each Bank will pay to the Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank's Pro Rata share of the unreimbursed portion of such payment by the Issuing Bank, provided such notice is given no later than 2:00 o'clock P.M., Pittsburgh time and subject to Section 2.04(b). Each Bank agrees that such payment to the Agent for the account of the Issuing Bank shall be in the same currency as the currency of the payment by the Issuing Bank under the Letter of Credit. If and to the extent that any Bank fails to make such payment to the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank's own account, for each day from and including the date of the Issuing Bank's payment to and including the date of repayment to the Issuing Bank (before and after judgment) at rate per annum for each day from and including the date of such payment by the Issuing Bank to and including the second Business Day thereafter equal to the Applicable Interest Rate. (c) Distributions to Banks. If, at any time, after there occurs a Letter of Credit Unreimbursed Draw and the Issuing Bank has received from any Bank such Bank's share of such Letter of Credit Unreimbursed Draw, and the Issuing Bank receives any payment or makes any application of funds on account of the Letter of Credit Reimbursement Obligation arising from such Letter of Credit Unreimbursed Draw, the Issuing Bank will pay to the Agent, for the account of such Bank , such Bank's Pro Rata share of such payment. (d) Rescission. If any amount received by the Issuing Bank on account of any Letter of Credit Reimbursement Obligation shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such matter has been adjudicated), each such Bank will, promptly upon notice from the Agent or the Issuing Bank, pay over to the Agent for the account of the Issuing Bank its Pro Rata share of such amount, together with its Pro Rata share of any interest or penalties payable with respect thereto. 15 2.06 Equalization. If any Bank receives any payment or makes any application on account of its Letter of Credit Participating Interest, such Bank shall forthwith pay over to the Issuing Bank, in Dollars and in like kind of funds received or applied by it the amount in excess of such Bank's ratable share of the amount so received or applied. 2.07. Obligations Absolute. The payment obligations of the Account Parties and of the Banks under Section 2.05 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of this Agreement, any Letter of Credit or any Transaction Document against an Account Party; (b) the existence of any claim, set-off, defense or other right which any Account Party, any Guarantor or any other Person may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or transferee may be acting), the Issuing Bank, any Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or any unrelated transaction; (c) any draft, certificate, statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, or payment by the Issuing Bank under the Letter of Credit in any other circumstances in which conditions to payment are not met, except any such wrongful payment resulting solely from the gross negligence or willful misconduct of the Issuing Bank; or (e) any other event, condition or circumstance whatever, whether or not similar to any of the foregoing, except if the same results solely from the gross negligence or willful misconduct of the Issuing Bank. Each Account Party bears the risk of, and neither the Issuing Bank, any of its directors, officers, employees or agents, nor any Bank, shall be liable or responsible for any of, the foregoing matters, the use which may be made of any Letter of Credit, or acts or omissions of the beneficiary or any transferee in connection therewith, except for such person's gross negligence or willful misconduct. 2.08. Further Assurances. Each Account Party and each Guarantor hereby agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Bank more fully to effect the purposes of this Agreement and the issuance of the Letters of Credit hereunder. 2.09. Letter of Credit Applications. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, the Continuing Letter of Credit Agreement and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Bank and the Banks under, this Agreement, the Transaction Documents, and applicable Law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Application shall inure to the benefit of each Bank to the extent of its Letter of Credit Participating Interest Commitment Percentage as fully as if such Bank was a party to such Letter of Credit Application. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 16 2.10. Certain Provisions Relating to the Issuing Bank. (a) General. The Issuing Bank shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Bank Party or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide the Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document. (b) Administration. The Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Issuing Bank has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Issuing Bank receives such a notice, the Issuing Bank shall give prompt notice thereof to the Agent. (c) Indemnification of Issuing Bank by Banks. Each Bank hereby agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the Account Parties and without limitation of the obligations of the Account Parties to do so), Pro Rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Letter of Credit, provided, that no Bank shall be liable for any 17 portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction. (d) Issuing Bank in its Individual Capacity. With respect to its commitment hereunder and the Obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the terms "Banks," "holders of Notes" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Issuing Bank were not the Issuing Bank hereunder. 2.11. Payments Generally; Interest and Interest on Overdue Amounts. (a) Payments Generally. All payments to be made by an Account Party in respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars at 12:00 o'clock Noon, Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.12, 2.13 and 9.04 hereof, such payments shall be made to the Agent at its Office in Dollars in funds immediately available at such Office. Payments under Sections 2.12, 2.13 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Agent or such Bank after 12:00 o'clock Noon, Pittsburgh time, on any day shall be deemed to have been received on the next succeeding Business Day. The Agent shall distribute to the Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Agent. (b) Interest and Interest on Overdue Amounts. Interest on Letter of Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be equal to the then-current Applicable Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.05(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.12. Additional Compensation in Certain Circumstances. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts of such Bank imposed by the jurisdictions (federal, state and local) in which the Bank's principal office is located), 18 (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or (B) otherwise applicable to the obligations of any Bank under this Agreement, or (iv) imposes upon any Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material, such Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive) to be necessary to compensate such Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Prime Rate. A certificate by such Bank as to the amount due and payable under this Section 2.12 from time to time and the method of calculating such amount shall be conclusive. Each Bank agrees that it will use good faith efforts to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.12; provided, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. 2.13. Taxes. (a) Payments Net of Taxes. All payments made by the Account Parties under this Agreement or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of the Agent and each Bank, income or franchise taxes imposed on the Agent or such Bank by the jurisdiction under the laws of which the Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which issue Letters of Credit are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless an Account Party is required to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to the Agent or any Bank under this Agreement or any other Transaction Document, the applicable Account Party shall pay the relevant 19 amount of such Taxes and the amounts so payable to the Agent or such Bank shall be increased to the extent necessary to yield to the Agent or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Taxes are paid by an Account Party with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by such Account Party showing payment thereof. If the Agent or a Bank determines in its sole discretion in good faith that it has received a refund in respect of any Taxes as to which it has been indemnified by an Account Party, or with respect to which an Account Party has paid additional amounts pursuant to this Section 2.13, the Agent or such Bank shall promptly after the date of such receipt pay over the amount of such refund to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by an Account Party under this Section 2.13 with respect to Taxes giving rise to such refund and only to the extent that the Agent or such Bank has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of the Agent or such Bank (including additional Taxes attributable to such refund, as determined by the Agent or such Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund). An Account Party receiving any such payment from the Agent or a Bank shall, upon demand, pay to the Agent or such Bank any amount paid over to such Account Party by the Agent or such Bank (plus penalties, interest or other charges) in the event the Agent or such Bank is required to repay any portion of such refund to such Official Body. Nothing in this Section 2.13(a) shall entitle an Account Party to have access to the records of the Agent or any Bank, including, without limitation, tax returns. (b) Indemnity. Each Account Party hereby indemnifies the Agent and each of the Banks for the full amount of all Taxes attributable to payments by or on behalf of such Account Party hereunder or under any of the other Transaction Documents, any Taxes paid by the Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by the Agent or such Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by the Agent or Bank in notifying an Account Party or in making payment after payment was received from an Account Party), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Bank or the Agent, as the case may be, makes written demand therefor. (c) Withholding and Backup Withholding. Each Bank that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties and the Agent (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Bank which so delivers to the Account Parties and the Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties and the Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or 20 becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties and the Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Account Parties and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. 2.14. Extensions of Expiration Date. XL Insurance may, at its option, give the Agent and the Issuing Bank written notice (an "Extension Request") at any time not more than ninety days, nor less than forty-five days, prior to the Expiration Date in effect at such time (the "Current Expiration Date") of XL Insurance's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. The Agent shall promptly inform the Banks of such Extension Request. Each Bank which agrees to such Extension Request shall deliver to the Agent its express written consent thereto no later than thirty days prior to the Current Expiration Date. No extension shall become effective unless the express written consent thereto by the Required Commitment Banks and the Issuing Bank is received by the Agent on or before the thirtieth day prior to the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks, but not all Commitment Banks, have expressly consented in writing to such Extension Request by such thirtieth day, then the Agent shall so notify XL Insurance and XL Insurance may, effective as of the Current Expiration Date, take one or both of the following actions: (i) replace any Commitment Bank which has not agreed to such Extension Request (a "Nonextending Bank") with another commercial lending institution satisfactory to the Issuing Bank (a "Replacement Bank") by giving notice of the name of such Replacement Bank to the Agent and the Issuing Bank not later than five Business Days prior to the then Current Expiration Date and (ii) elect to implement a Conversion to Tranche System as contemplated by Section 2.15 hereof (or, if the Conversion to Tranche System has previously been implemented, elect to implement a Supplement to Tranche System as contemplated by Section 2.15 hereof). In the event that a Nonextending Bank is to be replaced by a Replacement Bank, such Nonextending Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. If the Issuing Bank and the Required Commitment Banks shall have consented to such Extension Request, then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Request. The Agent shall promptly after any such extension advise the Banks of any changes in the Letter of Credit Participating Interest Committed Amounts and the Letter of Credit Participating Interest Commitment Percentages, as well as any changes effected by the election of the Conversion to Tranche System or a Supplement to Tranche System. 2.15. Tranches. (a) Certain Definitions. As used in this Agreement the following terms have the meanings ascribed thereto: "Commitment Banks" at any time means Banks which have Letter of Credit Participating Interest Commitments at such time and "Commitment Bank" means any one of them. "Conversion to Tranche System" means the election by XL Capital, at a time when XL Capital has made an Extension Request pursuant to Section 2.14 21 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify Letters of Credit as Tranche 1 Letters of Credit and Tranche 2 Letters of Credit, all in accordance with Section 2.15(b) hereof. "L/C Termination Date" means, with respect to a Letter of Credit, the date which is stated therein to be the last day on which the beneficiary thereof may draw thereon. "Pro Rata" means: (i) until the first Special Expiration Date, from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages and (ii) thereafter, (x) with respect to Tranche 1 Letters of Credit, from and to the Tranche 1 Banks in accordance with their respective Tranche 1 Letter of Credit Participating Interest Percentages, (y) with respect to Tranche 2 Letters of Credit and Tranche 2 Letter of Credit Participating Interest Commitments, from and to the Tranche 2 Banks in accordance with their respective Tranche 2 Letter of Credit Participating Interest Commitment Percentages and (z) with respect to each additional Tranche of Letters of Credit (i.e., Tranche 3 Letters of Credit, Tranche 4 Letters of Credit, and so on), if any, from and to the Banks which have Letter of Credit Participating Interest Commitments or Letter of Credit Participating Interests, as applicable, with respect to such Tranche in accordance with their respective related Letter of Participating Interest Percentages. "Required Commitment Banks" at any time means Commitment Banks which have, in the aggregate, Letter of Credit Participating Interest Committed Amounts in excess of 50% of the total outstanding Letter of Credit Participating Interest Committed Amounts at such time. "Special Expiration Date" means the Expiration Date which is in effect at a time when each of the following has occurred: (i) XL Capital has made an Extension Request pursuant to Section 2.14 hereof, (ii) such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, and (iii) XL Capital has elected to implement a Conversion to Tranche System or a Supplement to Tranche System. "Supplement to Tranche System" means the election by XL Capital, at a time when the Conversion to Tranche System has been previously made and when XL Capital has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify additional Letters of Credit as Tranche X Letters of Credit. "Tranche 1 Bank" shall mean each Bank which is a Bank immediately prior to the first Special Expiration Date. "Tranche 1 Letter of Credit" means each Letter of Credit which is issued prior to the first Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such first Special Expiration Date. 22 "Tranche 1 Letter of Credit Participating Interest Percentage" for each Tranche 1 Bank means such Bank's Letter of Credit Participating Interest Percentage immediately prior to the first Special Expiration Date. "Tranche 2 Bank" shall mean each Bank which has a Tranche 2 Letter of Credit Participating Interest Commitment. "Tranche 2 Letter of Credit" means each Letter of Credit which is issued prior to the second Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such second Special Expiration Date and shall not include any Tranche 1 Letter of Credit (it being understood that a Letter of Credit may change from a Tranche 1 Letter of Credit to a Tranche 2 Letter of Credit as a result of the extension, after the first Special Expiration Date, of its L/C Termination Date). "Tranche 3 Letter of Credit" and "Tranche 4 Letter of Credit" have the meanings set forth in the definition of the term "Tranche X". "Tranche X" shall mean Tranche 3 if there are existing Tranche 2 Letters of Credit but not Tranche 3 Letters of Credit, Tranche 4 if there are existing Tranche 3 Letters of Credit but not Tranche 4 Letters of Credit, and so on in consecutive integral succession. The terms "Tranche X Bank", "Tranche X Letter of Credit Participating Interest Commitment", "Tranche X Letter of Credit Participating Interest Committed Amount" and "Tranche X Letter of Credit Participating Interest Percentage" shall have comparable meanings. The term "Tranche X Letter of Credit" shall have a comparable meaning, but such meaning shall be consistent with the following: (i) the term "Tranche 3 Letter of Credit" means each Letter of Credit which is issued prior to the third Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such third Special Expiration Date and shall not include any Tranche 1 Letter or Credit or any Tranche 2 Letter of Credit; (ii) the term "Tranche 4 Letter of Credit" means each Letter of Credit which is issued prior to the fourth Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such fourth Special Expiration Date and shall not include any Tranche 1 Letter of Credit, any Tranche 2 Letter of Credit or any Tranche 3 Letter of Credit; (iii) the terms "Tranche 5 Letter of Credit", "Tranche 6 Letter of Credit", and so on shall have comparable meanings (it being understood that a Letter of Credit can change from one Tranche to another as a result of an extension of its L/C Termination Date). (b) Conversion to Tranche System. If XL Capital elects the Conversion to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate as of the Special Expiration Date related to such Extension Request, but such Nonextending Banks (other than Nonextending Banks which have been replaced as contemplated by Section 2.14 hereof) shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Tranche 1 Letters of Credit and shall retain their respective Letter of Credit Participating Interests in and with respect to Tranche 1 Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche 2 Letter of Credit Participating Interest Commitment" and 23 the Letter of Credit Participating Interested Committed Amount of such Lender shall be its "Tranche 2 Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche 2 Letter of Credit Participating Interest Commitment Percentage" for each Tranche 2 Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche 2 Bank's Tranche 2 Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Tranche 2 Letter of Credit Participating Interest Committed Amounts of all of the Tranche 2 Banks. (c) Supplement to Tranche System. If XL Capital elects a Supplement to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate, but such Nonextending Banks shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Letters of Credit under existing Tranches and shall retain their respective Letter of Credit Participating Interests in and with respect to existing Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche X Letter of Credit Participating Interest Commitment" and the Letter of Credit Participating Interested Committed Amount of such Lender shall be its "Tranche X Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche X Letter of Credit Participating Interest Commitment Percentage" for each Tranche X Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche X Bank's Tranche X Letter of Credit Participating Interest Committed, Amount and the denominator of which is the aggregate Tranche X Letter of Credit Participating Interest Committed Amounts of all of the Tranche X Banks, all as contemplated by the definition of the term "Tranche X" contained in paragraph (a) of this Section 2.15. ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Credit Party represents and warrants that: 3.01. Organization and Qualification. Such Credit Party and each of its Credit Subsidiaries is a corporation duly organized, validly existing and (unless the concept of good standing is not known to the law of the relevant jurisdiction) in good standing under the laws of their respective jurisdictions of incorporation and has the power and authority to own its properties and assets, and to carry on its business as presently conducted and is qualified to do business in those jurisdictions in which its ownership of property or the nature of its business activities is such that failure to receive or retain such qualification would have a Material Adverse Effect. A list of such Credit Party's Credit Subsidiaries setting forth their respective jurisdictions of incorporation is set forth in Schedule 3.01 hereto. Such Credit Party is not subject to any Private Act, except, with respect to XL Insurance, the X.L. Insurance Company, Ltd. Act, 1989, a copy of which has been provided to the Agent. 3.02. Corporate Power and Authorization. Such Credit Party and any Subsidiary of such Credit Party which is also a Credit Party has corporate power and authority to make and carry out this Agreement and any other Transaction Document to which it is a party, to execute and deliver this Agreement and each such Transaction Document, to perform its obligations hereunder and under any such Transaction Documents and, in the case of each Credit Party which is an Account Party, to request the issuance of Letters of Credit as provided for herein. All such action has been duly authorized by all necessary corporate proceedings on the part of such Credit Party. 24 3.03. Financial Information. Such Credit Party (other than Brockbank Group) has furnished to Agent, with sufficient copies for each Bank, copies of the audited consolidated financial statements of such Credit Party and its consolidated Subsidiaries including a consolidated and consolidating balance sheet and related statements of income and retained earnings for the fiscal year ending November 30, 1998. Such financial statements fairly present the financial position of such Credit Party and its consolidated Subsidiaries as of the date of such reports and the consolidated and consolidating results of their operations and cash flows for the fiscal period then ended in conformity with GAAP or SAP, applied on a consistent basis, and such consolidated financial statements have been examined and reported upon by independent, certified public accountants. 3.04. Litigation. Except as disclosed to the Banks in writing prior to the Closing Date (including by disclosure in the financial statements delivered to the Banks referred to in Section 3.03 hereof), there is no litigation or governmental proceeding by or against such Credit Party or any of its Subsidiaries pending or, to its knowledge, threatened, which could reasonably be expected (in light of reserves, and total shareholders' equity of such Credit Party and after taking into account the nature of such Credit Party's business and activities) to have a Material Adverse Effect if adversely determined. 3.05. No Adverse Changes. Since November 30, 1998, there has been no occurrence or event which has had a Material Adverse Effect. 3.06. No Conflicting Laws or Agreements; Consents and Approvals. (a) Neither the execution and delivery of this Agreement or any other Transaction Document, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of such Credit Party or of any applicable Law or of any material agreement or instrument to which such Credit Party is a party or by which it is bound or to which it is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, except Permitted Liens, of any nature whatsoever upon any of the property of such Credit Party pursuant to the terms of any such agreement or instrument. (b) Except for the filing of the Pledge Agreement with the Registrar of Companies in Bermuda, no authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or advisable in connection with (i) execution and delivery of this Agreement or any other Transaction Document, (ii) the consummation of the transactions herein or therein contemplated, or (iii) the performance of or compliance with the terms and conditions hereof or thereof. 3.07. Execution and Binding Effect. This Agreement (and, in the case of XL Investments and XL Mid Ocean, the Pledge Agreement) has been duly and validly executed and delivered by such Credit Party. This Agreement and each Transaction Document to which it is a party constitutes legal, valid and binding obligations of such Credit Party enforceable in accordance with the terms thereof except, as to the enforcement of remedies, for limitations imposed by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (excluding Laws with respect to fraudulent conveyance), (ii) Laws limiting the right of specific performance or (iii) general principles of equity. 3.08. Taxes. All tax returns required to be filed by each Credit Party have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon such Credit Party or upon its properties, income or sales which are due and payable have been paid. The reserves and provisions for taxes, if any, on the books of such Credit Party are adequate for all open years and for its current fiscal period as determined in accordance with GAAP. 25 3.09. Use of Proceeds. Such Credit Party will use any Letter of Credit issued hereunder for its account for general corporate purposes. Such Credit Party will make no request for a Letter of Credit hereunder for the purpose of directly or indirectly buying or carrying any "margin stock" as such term is used in Regulation U of the Board of Governors of the Federal Reserve System in violation of such regulation. Such Credit Party is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.10. Permits, Licenses and Rights. Such Credit Party and each Credit Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others. 3.11. Accurate and Complete Disclosure. All information provided by or on behalf of any Credit Party to the Agent or any Bank pursuant to or in connection with this Agreement or the other Transaction Documents and the transactions contemplated hereby and thereby is true and accurate in all material respects on the date such information is dated (or, if not dated, on the date such information was received by the Agent or such Bank, as the case may be) and such information, taken as a whole, which was provided on or prior to the time this representation is made or remade, does not, to the best knowledge of the Credit Parties, omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. 3.12. Absence of Violations. Such Credit Party and each Affiliate of such Credit Party is not in violation of any charter document, corporate minute or resolution, any instrument or agreement, in each case binding on it or affecting its property, or any Law, in a manner which could have a Materially Adverse Effect. 3.13. Environmental Matters. Such Credit Party and each of its Credit Subsidiaries is and has been in full compliance with all applicable Environmental Laws. Such Credit Party and each of its Credit Subsidiaries have all approvals by Official Bodies charged with the enforcement of Environmental Laws that are necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated. 3.14. Not an Investment Company. Such Credit Party is not an Investment Company required to be registered under the Investment Company Act of 1940. 3.15. Year 2000 Compliance. XL Capital has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by XL Capital or any of its Subsidiaries (or material suppliers, vendors and customers other than those affecting customers that may give rise to claims under insurance policies issued by XL Capital or any Subsidiary of XL Capital) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "Year 2000 Problem") and (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis. Based on the foregoing, XL Capital believes that all computer applications of XL Capital and its Subsidiaries that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 26 ARTICLE IV CONDITIONS 4.01. Effectiveness. The obligation of the Issuing Bank to issue Letters of Credit and to permit the commencement of the maintenance of Existing Letters of Credit as Letters of Credit hereunder shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the Agent with sufficient copies for each Bank a certificate with respect to each Credit Party in form and substance satisfactory to the Agent dated the Closing Date and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of such Credit Party certifying as to: (a) true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) Organizational Documents. There shall have been delivered to the Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and (ii) a certificate of good standing for each Credit Party (other than XL Europe) certified by the appropriate Official Body of its place of organization. (c) Opinions of Counsel. There shall have been delivered to the Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Messrs. Cahill Gordon & Reindel, Messrs. Conyers, Dill & Pearman, Hunter & Hunter and Paul S. Giordano, Esq., respectively, the Account Parties' and Guarantors' counsel, which together are substantially to the effects set forth in Exhibit C, and opinions of counsel qualified to practice in each jurisdiction, other than Bermuda and the United States, under the laws of which an Account Party is organized substantially to such effects to the extent that the laws of such jurisdiction are relevant. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank have reasonably requested. (e) Fees and Expenses. Each Account Party shall have paid all fees and other compensation to be paid by it hereunder on or prior to the Closing Date. (f) Representation and Warranties. The representation and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Pledge Agreement. The Pledge Agreement shall have been delivered to the Agent, with sufficient copies for each Bank, duly executed by XL Investments and XL Mid Ocean. The Custodian's Acknowledgments, as defined in the Pledge Agreement, shall have been delivered to 27 the Agent duly executed by the Custodian and by XL Investments and XL Mid Ocean, respectively. (h) Letter of Credit Agreement. The Continuing Letter of Credit Agreement shall have been delivered to the Agent, with sufficient copies for each Bank, duly executed by each Account Party. (i) Prior Agreement. The "Letter of Credit Committed Amounts" of the "Banks" under and as defined in the Prior Agreement shall have been reduced to zero and, on the Closing Date, there shall be no unreimbursed drawings under letters of credit issued under the Prior Agreement or other amounts remaining payable by the Account Parties thereunder and the Issuing Bank and the Agent shall provide documentation to the other parties to the Prior Agreement to the effect that no letters of credit are outstanding under the Prior Agreement (as the Existing Letters of Credit shall have become Letters of Credit hereunder), that the security interests relating to the Prior Agreement are released and that all fees payable under the Prior Agreement have ceased to accrue. 4.02. Issuance of Letters of Credit. The obligation of the Issuing Bank to issue any Letters of Credit hereunder (and to permit the commencement of the maintenance of Existing Letters of Credit as Letters of Credit hereunder) is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Account Party of its obligations to be performed hereunder on or before the date of such Letters of Credit (or, in the case of Existing Letters of Credit, the Closing Date) and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Default and Potential Defaults. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Letter of Credit issued hereunder with the same effect as though made on and as of each such date, and on the date of each Letter of Credit issued hereunder no Event of Default and no Potential Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Letter of Credit to be issued on such date. Failure of the Agent to receive notice from the applicable Account Party to the contrary before any Letter of Credit is issued hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Letter of Credit with the same effect as though made on and as of such date and (ii) on the date of such Letter of Credit no Event of Default or Potential Default has occurred and is continuing or exists or will occur or exist after giving effect to such Letter of Credit. (b) Commitment. The fact that, immediately after the issuance of such Letter of Credit, the Letter of Credit Undrawn Availability (determined as Dollar Equivalents) and the aggregate of the Letter of Credit Unreimbursed Draws (determined as Dollar Equivalents) will not exceed the lesser of (x) the aggregate amount of the Letter of Credit Participating Interest Committed Amounts and (y) the Pledged Securities Available Amount. ARTICLE V AFFIRMATIVE COVENANTS Each Credit Party, as applicable, hereby covenants to the Agent, the Issuing Bank and each other Bank as follows: 28 5.01. Reporting and Information Requirements. Each Credit Party shall deliver to the Agent with sufficient copies for each Bank: (a) Annual Reports. As soon as practicable and in any event within 100 days (or in the case of Brockbank Group eight months) after the close of each fiscal year, audited consolidated statements of income, retained earnings and cash flows of such Credit Party and its consolidated Subsidiaries, for such fiscal year and a consolidated audited balance sheet of such Credit Party and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP or, in the case of Credit Parties which are Insurance Subsidiaries, SAP, setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Credit Party and not unacceptable to the Required Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Banks (it being understood that delivery of XL Capital's Report on Form 10-K filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(a) to deliver the annual financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(a)). (b) Quarterly Statements. Within sixty days after the end of the first, second and third quarterly accounting periods in each fiscal year of XL Capital, copies of the unaudited consolidated balance sheets of XL Capital and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated income statements of XL Capital and its consolidated Subsidiaries for the elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP subject to year-end audit adjustments and certified by the principal financial officer of XL Capital to have been prepared in accordance with generally accepted accounting principles consistently applied by XL Capital except as explained in such certificate (it being understood that delivery of XL Capital's Report on Form 10-Q filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(b) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(b)). (c) Compliance Certificates. Within 100 days after the end of each fiscal year of the Credit Parties and within sixty days after the end of each of the first three quarters of each fiscal year, a certificate in the form of Exhibit D hereto dated as of the end of such fiscal year or quarter, signed on behalf of each Credit Party by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Default or Potential Default has occurred and is continuing or exists, or if an Event of Default or Potential Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Credit Party, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Article VI hereof, and (iii) stating that the signer has reviewed this Agreement and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate. (d) Further Information. All such other information and in such form as any Bank may reasonably request in writing. (e) Notice of Event of Default. Immediately upon becoming aware of any Event of Default or Potential Default, written notice thereof, together with a written statement of the president or a principal financial officer of the applicable Credit Party setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Credit Parties. (f) Notice of Material Adverse Change. Promptly upon becoming aware thereof, written notice of any event or occurrence constituting or which could reasonably be expected to have a Material Adverse Effect. 29 (g) Notice of Material Proceedings. Promptly upon becoming aware thereof, written notice of the commencement, existence or threat of any proceeding or a material change in any existing material proceeding by or before any Official Body against or affecting such Credit Party which, if adversely decided, could have a Material Adverse Effect. (h) Notice of Certain Material Changes. Promptly upon adoption thereof, notice of each material change in any Credit Party's investment policy, underwriting policy or other business policy. (i) Year 2000 Compliance. Promptly after any Credit Party's discovery or determination thereof, notice (in reasonable detail) that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant (as defined in Section 3.15), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. The Credit Parties hereby authorize and direct the Agent to, and the Agent agrees to, furnish to the Banks no less frequently than quarterly a statement of value with respect to the Designated Accounts (and the Pledged Securities) provided by the Custodian under the Custody Agreement referred to in the Pledge Agreement, which statement shall include, or be accompanied by, information as to the risk weighting of the Required Pledged Securities. 5.02. Preservation of Existence and Franchises. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, maintain its corporate existence, rights and franchises in full force and effect in its jurisdiction of incorporation, which jurisdiction shall continue to be, in the case of each Credit Party, the jurisdiction under the laws of which such Credit Party is organized as of the date hereof. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 5.03. Insurance. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or a similar business having similar properties similarly situated. 5.04. Maintenance of Properties. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and shall make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times, provided, however, that the foregoing shall not impose on such Credit Party or any Subsidiary of such Credit Party any obligation in respect of any property leased by such Credit Party or such Subsidiary in addition to such Credit Party's obligations under the applicable document creating such Credit Party's or such Subsidiary's lease or tenancy. 5.05. Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and 30 (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Section 6.03 hereof) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Account Party in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law or any similar Law applicable to any Credit Party, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Credit Party or such Credit Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Credit Party need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP and SAP shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.06. Financial Accounting Practices. Such Credit Party shall, and shall cause each of its Credit Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 hereof in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 5.07. Compliance with Applicable Laws. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Credit Party or any Credit Subsidiary of such Credit Party shall not be deemed to be in violation of this Section 5.07 as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Materially Adversely Effect or (ii) otherwise impair the ability of such Credit Party to perform its obligations under this Agreement. 5.08. Use of Proceeds. Each Account Party shall use the Letters of Credit issued hereunder for its general corporate purposes. 5.09. Continuation Of and Change In Business. Each Credit Party and its Subsidiaries shall continue to engage in substantially the same business and activities it currently engages in on the date of this Agreement. 5.10. Visitation. Each Credit Party shall permit such Persons as any Bank may reasonably designate to visit and inspect any of the properties of such Credit Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Credit Party at such times as such Bank may reasonably request. Each Credit Party hereby authorizes its financial management to discuss with any Bank the affairs of such Credit Party. ARTICLE VI NEGATIVE COVENANTS Each Credit Party covenants to the Agent and to each Bank as follows: 6.01. Mergers and Acquisitions. (a) Such Credit Party shall not merge with or into or consolidate with any other Person, or agree to do any of the foregoing, except that if no Event of Default 31 or Potential Event of Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto: (i) any Credit Party may merge with any other corporation, including a Subsidiary, if such Credit Party shall be the surviving corporation; and (ii) if the written consent of the Required Banks is obtained, any Credit Party may merge into or consolidate with any other corporation if the corporation into which such Credit Party is merged or which is formed by such consolidation shall expressly assume all obligations of such Credit Party under this Agreement. (b) Such Credit Party shall not acquire the stock or other equity interests, or all or any substantial portion of the properties or assets of any other Person, or agree to do any of the foregoing, unless such Person is engaged primarily in the insurance business or the financial services business. 6.02. Dispositions of Assets. Such Credit Party shall not, and shall not permit any Credit Subsidiary to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Section 6.02 as a "transaction" and any series of related transactions constituting but a single transaction), any of its properties or Assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Transactions in the ordinary course of business involving current assets or other assets classified on such Credit Party's balance sheet as available for sale; (b) Sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate, exceed $50,000,000 in any calendar year for all Credit Parties in the aggregate; or (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Credit Party or its Credit Subsidiaries. 6.03. Liens. Such Credit Party shall not, and shall not permit any Credit Subsidiary to, at any time create, incur, assume or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired or agree or become liable to do so, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03(a) hereto; provided, however, that no such Lien may at any time exist upon the Pledged Securities; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 5.05 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of such Section 5.05; (c) Liens on property securing all or part of the purchase price thereof to such Credit Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Credit Party (and extension, renewal and replacement Liens upon the same property), provided -- (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and 32 (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Credit Party, as applicable, shall not exceed 100% (if such obligations are not subject when created to United States income taxes) or 90% (in all other cases) of the lesser of the fair market value of such property at such time or the actual purchase price of such property; provided, however, that no such Lien may at any time exist upon the Pledged Securities; (d) Zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Credit Party; (e) Liens securing Indebtedness permitted by Section 6.08 hereof covering assets whose market value is not materially greater than an amount equal to the amount of the Indebtedness secured thereby, plus a commercially reasonable margin provided, however, that no such Lien may at any time exist upon the Required Pledged Securities; (f) Liens on cash and securities of such Credit Party or its Credit Subsidiaries incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of such Credit Parties' investment policy as in effect on the date of this Agreement; provided, however, that no such Lien may at any time exist upon the Pledged Securities; or (g) Liens in favor of the Bank Parties created pursuant to the Pledge Agreement. 6.04. Transactions With Affiliates. Such Credit Party shall not, and shall not permit any Credit Subsidiary to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Credit Party, or directly or indirectly agree to do any of the foregoing, except transactions among such Credit Party and its wholly-owned Credit Subsidiaries and transactions with Affiliates in good faith in the ordinary course of such Credit Party's business consistent with past practice and on terms no less favorable to such Credit Party or any Credit Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. Business. Such Credit Party will not, and will not permit any Subsidiary to, engage (directly or indirectly) in any businesses other than the businesses substantially the same as those in which such Credit Party and its Subsidiaries are engaged on the Closing Date and any businesses reasonably related thereto or in the financial services industry. Each Account Party which is an insurance company will not permit, at any time, its net premiums earned from insurance or reinsurance operations to comprise less than 50% of gross revenues of such Account Party (on a consolidated basis exclusive of net gains and losses from investments and investment income). XL Investments shall not conduct or be engaged in any business other than the business of holding investments provided to it by XL Insurance, XL Mid Ocean and the affiliates of XL Capital and the proceeds thereof. 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. XL Capital will not permit its ratio of (i) the sum of (x) Total Funded Debt plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are unsecured) issued for the account of, or as to which reimbursement obligations are guaranteed by, XL Capital or any of its Consolidated Subsidiaries to (ii) Consolidated Tangible Net Worth to be greater than 0.35 at any time. 33 6.07. Consolidated Tangible Net Worth. XL Capital will not permit its Consolidated Tangible Net Worth to be less than $2,566,000,000.00 at any time. 6.08. Indebtedness. Such Credit Party shall not, and shall not permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Banks pursuant to this Agreement and the other Transaction Document; (b) Other Indebtedness, so long as upon the incurrence thereof no Event of Default or Potential Default would occur or exist; (c) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Credit Party or any Subsidiary of any Credit Party; and (d) Indebtedness incurred in transactions described in Section 6.03(f). 6.09. Claims-Paying Ratings. Each of XL Insurance and XL Mid Ocean shall maintain at all times a claims-paying rating of at least "A" from Standard & Poor's Ratings Services and from A.M. Best Company. 6.10. Private Act. Such Credit Party shall not become subject to a Private Act except, in the case of XL Insurance, the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII EVENTS OF DEFAULT 7.01. Events of Default. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Any Account Party shall default in the payment when due of any reimbursement obligation with respect to any Letter of Credit; (b) Any Account Party shall default in the payment when due of any Letter of Credit Fee, Commitment Fee, or any other fee or amount payable hereunder which default shall continue for a period of three days from the due date thereof; (c) Any Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Article VI hereof; (d) Any Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of twenty days after written notice thereof to such Credit Party from the Agent; (e) Any Credit Party or any Subsidiary of any Credit Party shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 or more beyond any period of grace provided with respect thereto, or (ii) in the 34 performance of any other agreement, term or condition contained in any such agreement under which any such obligation in principal amount of $10,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement; (f) One or more judgments for the payment of money shall have been entered against any Credit Party which judgments exceed $50,000,000 in the aggregate and such judgments shall remain undischarged or uncontested or appealed in good faith for a period of thirty consecutive days; (g) Any representation or warranty herein made by any Credit Party, or any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made (or deemed made) or furnished; (h) XL Insurance shall cease to own, beneficially and of record, directly or indirectly, 100% of the outstanding voting shares of common stock of XL Investments; (i) XL Capital shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of common stock of each other Credit Party, except for a nominal number of shares owned by nominee shareholders required by the applicable laws of the jurisdiction where such Credit Party is incorporated; (j) A Change in Control shall occur; (k) The guarantee contained in Article X hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of XL Insurance , XL Investments, XL Capital or XL Mid Ocean or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee itself or the transactions contemplated by this Agreement, or any other Person shall assert any of the foregoing, or the Pledge Agreement shall terminate or cease, in whole or in part, to be a legally valid and binding obligation of XL Investments or XL Mid Ocean, or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of the Pledge Agreement itself or the transactions contemplated thereby (including the security interest granted thereunder); (l) A decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Credit Party a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Credit Party under the Bermuda Companies Law, or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Credit Party or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged and unstayed for a period of sixty days; (m) Any Credit Party shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law, or the companies laws of the Cayman Islands, British West Indies or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or examiner (in the case of XL Europe) or trustee or assignee in bankruptcy or insolvency of it or of a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by such Credit Party in furtherance of any of the aforesaid purposes; or 35 (n) The Pledged Securities Available Amount shall at any time be less than the Letter of Credit Exposure; then, the Issuing Bank shall be under no further obligation to issue Letters of Credit hereunder and the Agent may, and upon written request of the Required Banks shall, exercise any or all remedies available to it under the Pledge Agreement or otherwise. ARTICLE VIII THE AGENT 8.01. Appointment. (a) Each Bank hereby appoints Mellon Bank, N.A. to act as Agent for such Bank under this Agreement and the other Transaction Documents. Each Bank hereby irrevocably authorizes the Agent to take such action on behalf of such Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Agent on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to its right to resign as provided in Section 8.10 hereof. Each Bank hereby irrevocably authorizes the Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Agent. Each Bank agrees that the rights and remedies granted to the Agent under the Transaction Documents shall be exercised exclusively by the Agent, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. (b) Each Bank agrees that Mellon Bank, N. A. may act as collateral agent in connection with a Future Collateral Allocation Transaction. As used herein, the term "Future Collateral Allocation Transaction" means a transaction which includes, among other things, the following elements: (i) a Credit Party shall have arranged one or more separate financing transactions with credit providers (which may, but need not, include any of the Banks) for which securities entitlements in the Designated Accounts serve as collateral at a time when securities entitlements in the Designated Accounts serve as collateral for the Obligations under this Agreement; (ii) Mellon Bank, N. A. shall have agreed to serve as collateral agent both for the Issuing Bank, the Agent and the Banks under this Agreement and the Pledge Agreement and for the parties providing the separate financing described in clause (i) of this paragraph; (iii) arrangements shall have been made pursuant to which specific securities entitlements within the Designated Accounts are allocated as collateral for the Obligations under this Agreement and other specific securities entitlements within the Designated Accounts are allocated as collateral for such other financings; and (iv) the Required Banks and the Issuing Bank shall have approved all of such arrangements and the documents implementing the same, including amendments to this Agreement and the Pledge Agreement. The granting by a Credit Party to a person other than Mellon Bank, N. A. of a security interest in securities entitlements which are maintained in a Designated Account but which do not constitute Collateral (as defined in the Pledge Agreement) shall not be a "Future Collateral Allocation Transaction" and, accordingly, shall not require approval of the Required Banks but shall be subject to the applicable provisions of the Custodian's Acknowledgments, as defined in the Pledge Agreement. (c). The Arrangers shall have no duties or obligations in such capacity under this Agreement. 8.02. General Nature of Agent's Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Transaction Document: 36 (a) The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. (b) The duties and responsibilities of the Agent under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Agent shall not have a fiduciary relationship in respect of any Bank. (c) The Agent is and shall be solely the agent of the Banks. The Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Transaction Documents). (d) The Agent shall be under no obligation to take any action hereunder or under any other Transaction Document if the Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require the Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. Exercise of Powers. The Agent shall take any action of the type specified in this Agreement or any other Transaction Document as being within the Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, the Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case the Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. The Agent shall not have any liability to any Person as a result of (x) the Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other applicable Person or set of Persons), (y) the Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or not the Agent has discretionary power to take such action, or (z) the Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Transaction Document: (a) The Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) The Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document, (iii) any failure of any Credit Party or Bank to perform any of their respective obligations under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or 37 other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. (c) The Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) The Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by the Agent to such Bank. 8.05. Administration by the Agent. (a) The Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Agent may consult with legal counsel (including, without limitation, in-house counsel for the Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and the Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever the Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Credit Party or Bank, such matter may be established by a certificate of such Credit Party or Bank, as the case may be, and the Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) The Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Agent by reason of taking or continuing to take any such action. (e) The Agent may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) The Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Agent has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Agent receives such a notice, the Agent shall give prompt notice thereof to each Bank. 38 8.06. Bank Not Relying on Agent or Other Banks. Each Bank acknowledges as follows: (a) neither the Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by the Agent or any other Bank shall be deemed to constitute any representation or warranty by the Agent or such other Bank to it; (b) it has, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. Indemnification. Each Bank agrees to reimburse and indemnify the Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the obligations of the Credit Parties to do so), ratably in accordance with their respective Letter of Credit Participating Interests, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for the Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, provided that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of the Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount after a proper demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by the Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. 8.08. Agent in its Individual Capacity. With respect to its commitments hereunder and the Obligations owing to it, the Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Agent, and the terms "Banks" and like terms shall include the Agent in its individual capacity as such. The Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Agent were not the Agent hereunder. 8.09. Successor Agent. The Agent may resign at any time by giving 10 days' prior written notice thereof to the Banks and the Account Parties. The Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to the Agent, the other Banks and the Account Parties. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties 39 of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to the Agent shall be given to each Bank, and all payments to be made to the Agent shall be made directly to the Account Parties or Bank for whose account such payment is made. 8.10. Additional Agents. If the Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Agent and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Agent, to act as co-Agent or agent with such powers of the Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Agent under this Agreement or any other Transaction Document. 8.11. Calculations. The Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party, to recover such amount from the appropriate Account Party. 8.12. Agent's Fee. XL Insurance agrees to pay to the Agent, for its individual account, a nonrefundable Agent's fee in an amount and at such time or times as the Agent and XL Insurance have heretofore agreed. ARTICLE IX MISCELLANEOUS 9.01. No Implied Waiver etc. No delay or failure of the Agent or any Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agent and the Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of the Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described in Article VII hereof shall occur, each Bank shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations any debt owing by such Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such 40 Bank, and such Bank shall have and there is hereby created in favor of such Bank a security interest in all deposit accounts maintained by such Credit Party with such Bank, subject to Liens permitted under 6.03(f). Any sums obtained by any Bank by way of counterclaim, set-off, banker's lien or other lien for application upon any Letter of Credit Reimbursement Obligation shall be shared pro rata with the other Banks. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the issuance of any Letter of Credit hereunder. 9.04. Expenses and Fees; Indemnity. (a) Each Account Party agrees to pay or cause to be paid and to save the Agent and (in the case of clause (iii) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by the Agent or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iii) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by the Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Account Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and an Account Party agrees to save the Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party hereby agrees to reimburse and indemnify the Agent and each Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by the Agent or any Bank of any of its rights or remedies under this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the 41 extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties under this Section 9.04, or any other indemnification obligation of the Account Parties hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. 9.05. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.07. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Agent at One Mellon Bank Center, Room 4401, Pittsburgh, Pennsylvania 15258, Attention: Susan Whitewood, fax no. (412) 234-8087, with a copy to Loan Administration, Three Mellon Bank Center, Pittsburgh, PA 15259 fax no. (412) 209-6134; if to the Issuing Bank at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: Letter of Credit Department with a copy to Institutional Banking, Room 4401, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: Susan Whitewood; and if to any Credit Party, to XL Capital Ltd, Cumberland House, One Victoria Street, Hamilton HM11 Bermuda, Attn:William Robbie, fax no. (441) 292-5226, with a copy to XL Investments Ltd, XL Investments, Ltd, Richmond House, 12 Par-la-Ville Road, Hamilton HM08 Bermuda, Attn: Chief Investment Officer, fax no. (441) 296-4268, and, in the case of notices to The Brockbank Group Plc, with a copy to Susan Newman, fax no (441) 296-3570, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from the Agent or any Bank or providing information to the Agent or any Bank, XL Insurance shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH 42 LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT RELATED HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles. 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Account Parties, the Banks, the Agent, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of the Agent and all of the Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or a portion of its Letter of Credit Participating Interest Commitment and Letter of Credit Participating Interests); provided, that (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Insurance and the Agent, unless an Event of Default has occurred and is continuing, in which case the consent of the Account Parties shall not be required, 43 (ii) any such Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Transaction Documents, (v) such Participant shall be bound by the provisions of Section 9.18 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Participating Interest Commitments, Letter of Credit Participating Interests, fees payable hereunder and the Expiration Date. Each Account Party agrees that any such Participant shall be entitled to the benefits of Sections 2.09 and 9.04 with respect to its participation in the Commitments and the Letters of Credit outstanding from time to time; provided, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests to any Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment to a Purchasing Bank which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Issuing Bank, unless an Event of Default has occurred and is continuing or exists, in which case the consent of XL Capital shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests then outstanding, 44 (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Agent shall accept such Transfer Supplement; provided, however, that no such processing and recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank . Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Agent's Office on the Transfer Effective Date specified in such Transfer Supplement. (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. (d) Register. The Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Letter of Credit Participating Interest Commitment of, and the amount of the Letter of Credit Participating Interests of, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Agent and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by any Account Party or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Credit Party authorizes the Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of the Credit Parties and their affiliates. At the request of any Bank, a Credit Party, at such Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. Amendments and Waivers. Neither this Agreement nor any Transaction Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agent and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, the Agent or any Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agent in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Bank and the Agent. The Agent shall enter into such amendments, modifications or supplements from time to 45 time as directed by the Required Banks, and only as so directed, provided, that no such amendment, modification or supplement may be made which will: (a) Increase the Letter of Credit Participating Interest Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Commitment Bank affected thereby; (b) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Bank affected thereby; (c) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (d) Amend or waive any of the provisions of Article VII hereof, or impose additional duties upon the Agent or otherwise adversely affect the rights, interests or obligations of the Agent, without the written consent of the Agent; (e) Amend or waive any of the provisions of Article X or release any Guarantor from its obligations hereunder without the written consent of all the Banks; or (f) Amend the definition of Qualifying Pledged Securities or of Required Pledged Securities (as each such term is defined herein and in the Pledge Agreement) or release all or (except in accordance with the terms of the Pledge Agreement) any material part of the Collateral under the Pledge Agreement or release XL Investments or XL Mid Ocean from all of their respective obligations as the Grantors thereunder, without the written consent of all of the Banks; and provided further, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. Implementation of a Future Collateral Allocation Transaction (as defined in Section 8.01(b) hereof) shall require the consent of the Required Banks, the Issuing Bank and the Agent, but shall not require the consent of all of the Banks. 9.15. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Banks, the Agent or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks and the Agent harmless against any deficiency in terms of Dollars in the amounts received by the Banks or the Agent, as the case may be, arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank or the Agent, as the case may be, is able to purchase Dollars with the amount of the Judgment Currency actually received by such Bank or the Agent, as the case may be, on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties hereunder and shall apply irrespective of any indulgence granted by the Banks. 46 9.16. Records. The amount of outstanding Letters of Credit, each Bank's Letter of Credit Participating Interest Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agent and the Banks agree to keep confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which the Agent and the Banks reasonably expect that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent the Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by the Agent or any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective purchaser is a financial institution or has been consented to by the Account Parties, which consent will not be withheld if such purchaser is not a competitor of any Account Party or an affiliate of a competitor of any Account Party. 9.18. Sharing of Collections. The Banks hereby agree among themselves that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Account Parties hereby consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder." ARTICLE X GUARANTEE 10.01. The Guarantee. Each of the Guarantors hereby irrevocably, unconditionally and absolutely guarantees to the Agent and the Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each 47 Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 10.02. Obligations Unconditional. The obligations of each Guarantor under this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party, for amounts paid under this Article X until such time as the Banks have been paid in full, no Letter of Credit is outstanding, the Letter of Credit Participating Interest Commitments under this Agreement have been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain irrevocable, absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Agent or any Bank as security for any of the Guaranteed Obligations shall be void or voidable, or shall fail to attach or be perfected or the Agent or any Bank shall fail to realize on any collateral security; or 48 (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Agents, the Banks or any of them exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. 10.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agent and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 10.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agent and the Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 10.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 10.01. 10.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 10.06. No Restrictions. Except for restrictions under the Transaction Documents, no Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party, (y) make loans or advances to any Account Party, or (z) transfer any of its properties or assets to any Account Party. 49 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. XL INSURANCE LTD, as an Account Party and a Guarantor By: /s/ Brian M. O'Hara ------------------------------ (Signature) Name: Brian M. O'Hara ---------------------------- Title: Chairman ---------------------------- XL MID OCEAN REINSURANCE LTD, as an Account Party and a Guarantor By: /s/ Brian M. O'Hara ------------------------------ (Signature) Name: Brian M. O'Hara ---------------------------- Title: Chairman ---------------------------- XL EUROPE, as an Account Party By /s/ Brian M. O'Hara ------------------------------- (Signature) Name: ---------------------------- Title: ---------------------------- THE BROCKBANK GROUP Plc, as an Account Party By: /s/ K. I. Allen ------------------------------ (Signature) Name: K. I. Allen ---------------------------- Title: Finance Director ---------------------------- XL INVESTMENTS LTD, as a Guarantor By: /s/ Brian M. O'Hara ------------------------------ (Signature) Name: Brian M. O'Hara ---------------------------- Title: Chairman ---------------------------- XL CAPITAL LTD, as an Account Party and a Guarantor By: /s/ Brian M. O'Hara ------------------------------ (Signature) Name: Brian M. O'Hara ---------------------------- Title: President & Chief Executive Officer ------------------------------------ 50 MELLON BANK, N.A., as a Bank, as Issuing Bank, as Arranger and as Agent By: /s/ Karla K. Maloof ------------------------------ (Signature) Name: Karla K. Maloof ---------------------------- Title: Vice President ---------------------------- Notice Address: Institutional Banking Department One Mellon Bank Center, Room 4401 Pittsburgh, PA 15258 Attn: Susan Whitewood Telephone: (412) 234-7112 Facsimile: (412) 234-8087 with a copy to: Manager, Letter of Credit Operations Three Mellon Bank Center, 23rd Floor Pittsburgh, PA 15259 Initial Letter of Credit Participating Interest Committed Amount: $47,500,000 51 DEUTSCHE BANK SECURITIES INC., as Arranger By: /s/ John S. McGill /s/ Clinton M. Johnston ------------------------------------------------ (Signature) Name: John S. McGill Clinton M. Johnson ----------------------------------------------- Title: Director Director ---------------------------------------------- Notice Address: 31 West 52nd Street New York, NY 10019 Attn: Clinton M. Johnson DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: /s/ John S. McGill /s/ Clinton M. Johnston ------------------------------------------------ (Signature) Name: John S. McGill Clinton M. Johnson ---------------------------------------------- Title: Director Director ---------------------------------------------- Notice Address: 31 West 52nd Street New York, NY 10019 Attn: Clinton M. Johnson Initial Letter of Credit Participating Interest Committed Amount: $47,500,000 52 THE BANK OF NOVA SCOTIA By: /s/ J.R. Trimble ------------------------------ (Signature) Name: J.R. Trimble ---------------------------- Title: Senior Relationship Manager ---------------------------- Notice Address: One Liberty Place New York, NY 10006 Attn: James R. Trimble Initial Letter of Credit Participating Interest Committed Amount: $40,000,000 53 CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Sebastian Rocco ------------------------------ (Signature) Name: Sebastian Rocco ---------------------------- Title: Senior Vice President ---------------------------- Notice Address: 1301 Avenue of the Americas 12th Floor New York, NY 10019 Attn: Jimmy Tse Initial Letter of Credit Participating Interest Committed Amount: $40,000,000 54 BANK OF AMERICA NT&SA By: /s/ Nita Savage ------------------------------ (Signature) Name: Nita Savage ---------------------------- Title: Vice President ---------------------------- Notice Address: Insurance Division, 10th Floor 231 South LaSalle Street Chicago, IL 60697 Attn: Nita Savage Initial Letter of Credit Participating Interest Committed Amount: $25,000,000 55 THE BANK OF BERMUDA LIMITED By: /s/ Michael W. Collins ------------------------------ (Signature) Name: Michael W. Collins ---------------------------- Title: Senior Vice President ---------------------------- Notice Address: 6 Front Street Hamilton HM 11, Bermuda Attn: Hanne Frost Initial Letter of Credit Participating Interest Committed Amount: $25,000,000 56 BANQUE NATIONALE DE PARIS By: /s/ Phil Truesdale /s/ Veronique Marcus ------------------------------------------------------ (Signature) Name: Phil Truesdale Veronique Marcus ---------------------------------------------------- Title: Vice President Vice President --------------------------------------------------- Notice Address: 499 Park Avenue New York, NY 10022 Attn: Phil Truesdale Initial Letter of Credit Participating Interest Committed Amount: $25,000,000 57 FLEET NATIONAL BANK By: /s/ Anson Harris -------------------------------------- (Signature) Name: Anson Harris ------------------------------------ Title: Vice President ----------------------------------- Notice Address: Mail Stop CTMO 0250 777 Main Street Hartford, CT 06115-2001 Attn: Anson T. Harris Initial Letter of Credit Participating Interest Committed Amount: $25,000,000 58 ROYAL BANK OF CANADA By: /s/ /V. Abdelmessih -------------------------------------- (Signature) Name: V. Abdelmessih ------------------------------------ Title: Senior Account Manager ----------------------------------- Notice Address: New York Branch One Liberty Plaza, 4th Floor New York, NY 10006-1404 Attn: Manager, Letters of Credit Department Facsimile No.: (212) 428-3015 with a copy to: One Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Vivian Abdelmessih Facsimile No.: (212) 428-6201 Initial Letter of Credit Participating Interest Committed Amount: $25,000,000 59 EX-10.14-25 13 EXHIBIT 10.14.25 Exhibit 10.14.25 02.24.00 FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT THIS FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of February 25, 2000 (this "Amendment"), by and among XL Insurance Ltd, XL Capital Ltd, XL EUROPE LTD (formerly know as XL Europe), XL Mid Ocean Reinsurance Ltd, THE BROCKBANK GROUP Plc and XL INVESTMENTS LTD (collectively, the "XL Parties"), MELLON BANK, N.A., as Issuing Bank (in such capacity, the "Issuing Bank") and as Agent ( in such capacity, the "Agent"), and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: WHEREAS, the XL Parties, the Banks, the Issuing Bank and the Agent are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of June 30, 1999 (the "Reimbursement Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to extend credit to certain of the XL Parties by participating in letters of credit issued for the account of such XL Parties by the Issuing Bank; and WHEREAS, the XL Parties have requested the Banks to make certain additional changes to the Reimbursement Agreement, including changes to permit XL Europe to become a Grantor under the Pledge Agreement; and WHEREAS, the Banks are willing to amend the Reimbursement Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Reimbursement Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Reimbursement Agreement. (a) The definition of the term "Custodian" appearing in Section 1.01 of the Reimbursement Agreement is hereby amended by inserting therein, immediately after the phrase "as Custodian for" appearing therein, the phrase "XL Europe,". (b) The definition of the term "Pledge Agreement" appearing in Section 1.01 of the Reimbursement Agreement is hereby amended by inserting therein, immediately before the period at the end thereof, the phrase "including by the First Amendment thereto adding XL Europe as a Grantor thereunder". (c) Section 1.01 of the Reimbursement Agreement is hereby amended by adding thereto, in appropriate alphabetical sequence, the following definitions: "Asset Accumulation Lien" means a Lien on amounts received, and on actual and imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Credit Party's or Subsidiary's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien. "Total Adjusted Funded Debt" shall have the meaning given that term in Section 6.06 hereof. "XL Europe" shall mean XL Europe Ltd, a company incorporated under the laws of Ireland and formerly known as XL Europe. (d) Section 3.07 of the Reimbursement Agreement is hereby amended by inserting therein, immediately after the phrase "in the case of" appearing in the first sentence thereof of, the phrase "XL Europe (from and after the date of the First Amendment to the Pledge Agreement),". Secured LC Facility-First Amendment -2- (e) Section 5.01 of the Reimbursement Agreement is hereby amended by adding at the end thereof a new paragraph (j) thereof to read as follows: (j) Information Regarding Asset Accumulation Liens. At the time of furnishing each certificate furnished pursuant to paragraph (c) of this Section 5.01, a statement, certified as true and correct by a principal financial officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation Liens (it being understood that the reports required by paragraphs (a) and (b) of this Section 5.01 shall satisfy the requirement of this clause (A) of this paragraph (j) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital. (f) Section 6.03 of the Reimbursement Agreement is hereby amended by deleting the period at the end of paragraph (g) thereof and replacing it with the phrase "; or" and by adding at the end of such Section a new paragraph (h) to read as follows: (h) Asset Accumulation Liens. (g) Section 7.01(k) of the Reimbursement Agreement is hereby amended by inserting therein, immediately after the phrase "binding obligation of" the second time it appears therein, the phrase "XL Europe,". (h) Section 9.14(f) of the Reimbursement Agreement is hereby amended by inserting therein, immediately after the phrase "release XL Investments or XL Mid Ocean" appearing therein, the phrase "or XL Europe". Secured LC Facility-First Amendment -3- (i) Section 6.06 of the Reimbursement Agreement is hereby amended as follows: 6.06. Ratio of Total Adjusted Funded Debt to Consolidated Capital. XL Capital will not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than 0.35 at any time. As used herein, the term "Total Adjusted Funded Debt" shall mean, at any time, the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital or any of its Consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an Affiliate). SECTION 2. Direction to enter into Amendments. The Required Banks and the Issuing Bank hereby authorize and direct the Agent to enter into the following amendments to Transaction Documents which are entered into by the relevant Credit Parties: (i) an amendment to the Pledge Agreement whereby XL Europe becomes a Grantor thereunder, whereby securities entitlements pledged by XL Europe under the Pledge Agreement and otherwise meeting the requirements of the Pledge Agreement shall be "Pledged Securities" under the Pledge Agreement and whereby wording changes necessary to reflect three, rather than two, Grantors under the Pledge Agreement are made, the effectiveness of such amendment to be conditioned upon the satisfaction of conditions, to be stated in such amendment, which are substantially similar to those applicable to XL Investments and XL Mid Ocean as Grantors under the Pledge Agreement under Section 4.01(a), 4.01(b)(i), 4.01(c), 4.01(d), 4.01(f) and 4.01(g) of the Reimbursement Agreement and (ii) an amendment to one of the Custodian's Acknowledgments referred to in the Pledge Agreement, or an additional Custodian's Acknowledgement substantially in the form of the Custodian's Acknowledgments referred to in the Pledge Agreement and previously delivered to the Agent, covering custodial securities accounts maintained by XL Europe under the Master Custody Agreement referred to in the Pledge Agreement. Secured LC Facility-First Amendment -4- SECTION 3. Conditions to Effectiveness. This First Amendment shall become effective upon the execution and delivery hereof by the XL Parties, the Required Banks, the Issuing Bank and the Agent. SECTION 4. Effect of Amendment. The Reimbursement Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 5. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 6. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. XL INSURANCE LTD, as an Account Party and a Guarantor By: /s/ Clive R. Tobin --------------------------------- (Signature) Name: Clive R. Tobin ------------------------------- Title: President ------------------------------ Secured LC Facility-First Amendment -5- XL MID OCEAN REINSURANCE LTD, as an Account Party and a Guarantor By: /s/ Henry Keeling --------------------------------- (Signature) Name: H.C.V. Keeling ------------------------------- Title: President ------------------------------ XL EUROPE LTD, as an Account Party By: /s/ J. Walker Rainey --------------------------------- (Signature) Name: J. Walker Rainey ------------------------------- Title: Chief Financial Officer ------------------------------ THE BROCKBANK GROUP Plc, as an Account Party By: /s/ James T. Gerry --------------------------------- (Signature) Name: James T. Gerry ------------------------------- Title: Director ------------------------------ XL INVESTMENTS LTD, as a Guarantor By: /s/ C.V. Greetham --------------------------------- (Signature) Name: C.V. Greetham ------------------------------- Title: Senior V.P. & CEO ------------------------------ XL CAPITAL LTD, as an Account Party and a Guarantor By: /s/ Brian M. O'Hara --------------------------------- (Signature) Name: Brian M. O'Hara ------------------------------- Title: President & CEO ------------------------------ Secured LC Facility-First Amendment -6- MELLON BANK, N.A., as a Bank, as Issuing Bank and as Agent By: /s/ Karla Maloof --------------------------------- (Signature) Name: Karla Maloof ------------------------------- Title: Vice President ------------------------------ DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: /s/ John S. McGill --------------------------------- (Signature) Name: John S. McGill ------------------------------- Title: Director ------------------------------ By: /s/ Alan Krouk --------------------------------- (Signature) Name: Alan Krouk ------------------------------- Title: Assistant Vice President ------------------------------ THE BANK OF NOVA SCOTIA By: /s/ John Hopmans --------------------------------- (Signature) Name: John Hopmans ------------------------------- Title: Managing Director ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Sebastian Rocco --------------------------------- (Signature) Name: Sebastian Rocco ------------------------------- Title: Senior Vice President ------------------------------ Secured LC Facility-First Amendment -7- BANK OF AMERICA, N.A. By: /s/ Debra Basler --------------------------------- (Signature) Name: Debra Basler ------------------------------- Title: Vice President ------------------------------ THE BANK OF BERMUDA LIMITED By: /s/H. Frost --------------------------------- (Signature) Name: H. Frost ------------------------------- Title: Vice President ------------------------------ BANQUE NATIONALE DE PARIS By: /s/ Phil Truesdale --------------------------------- (Signature) Name: Phil Truesdale ------------------------------- Title: Vice President ------------------------------ By: /s/ Veronique Marcus --------------------------------- (Signature) Name: Veronique Marcus ------------------------------- Title: Vice President ------------------------------ FLEET NATIONAL BANK By: /s/ Anson Harris --------------------------------- (Signature) Name: Anson Harris ------------------------------- Title: Vice President ------------------------------ ROYAL BANK OF CANADA By: /s/ V. Abdelmessih --------------------------------- (Signature) Name: V. Abdelmessih ------------------------------- Title: Senior Manager ------------------------------ Secured LC Facility-First Amendment -8- EX-10.14-26 14 EXHIBIT 10.14.26 Exhibit 10.14.26 $150,000,000 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT AMONG XL INSURANCE LTD and XL MID OCEAN REINSURANCE LTD, as Account Parties, AND XL CAPITAL LTD, XL INSURANCE LTD and XL MID OCEAN REINSURANCE LTD, as Guarantors, AND MELLON BANK, N.A., DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, FIRST UNION NATIONAL BANK, FLEET NATIONAL BANK and BANK ONE, NA (MAIN OFFICE CHICAGO) as Issuing Banks AND MELLON BANK, N.A., as Agent and as Arranger AND FLEET NATIONAL BANK, as Documentation Agent DATED AS OF December 30, 1999 Table of Contents Section Title Page - ------- ----- ---- ARTICLE I DEFINITIONS; CONSTRUCTION........................ 1 1.01 Certain Definitions.............................. 1 1.02 Construction..................................... 7 1.03 Accounting Principles............................ 7 ARTICLE II THE LETTER OF CREDIT FACILITY.................... 8 2.01 Letters of Credit................................ 8 2.02 Commitment Fee; Reduction of the Committed Amounts.......................................... 9 2.03 Procedure for Issuance and Amendment of Letters of Credit........................................ 9 2.04 Certain Provisions in Letters of Credit.......... 10 2.05 Account Party's Reimbursement Obligations........ 11 2.06 Extensions of Expiration Date.................... 11 2.07 Obligations Absolute............................. 11 2.08 Further Assurances............................... 12 2.09 Letter of Credit Applications.................... 12 2.10 Certain Provisions Relating to the Issuing Banks. 12 2.11 Payments Generally; Interest and Interest on Overdue Amounts.................................. 13 2.12 Additional Compensation in Certain Circumstances. 14 2.13 Taxes............................................ 15 ARTICLE III REPRESENTATIONS AND WARRANTIES................... 16 3.01 Organization and Qualification................... 16 3.02 Corporate Power and Authorization................ 17 3.03 Financial Information............................ 17 3.04 Litigation....................................... 17 3.05 No Adverse Changes............................... 17 3.06 No Conflicting Laws or Agreements; Consents and Approvals........................................ 17 3.07 Execution and Binding Effect..................... 17 3.08 Taxes............................................ 18 3.09 Use of Proceeds.................................. 18 3.10 Permits, Licenses and Rights..................... 18 3.11 Accurate and Complete Disclosure................. 18 3.12 Absence of Violations............................ 18 3.13 Environmental Matters............................ 18 3.14 Not an Investment Company........................ 18 3.15 Year 2000 Compliance............................. 18 ARTICLE IV CONDITIONS....................................... 19 4.01 Effectiveness.................................... 19 4.02 Issuance of Letters of Credit.................... 20 ARTICLE V AFFIRMATIVE COVENANTS............................ 20 5.01 Reporting and Information Requirements........... 20 i 5.02 Preservation of Existence and Franchises......... 22 5.03 Insurance........................................ 22 5.04 Maintenance of Properties........................ 22 5.05 Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities...................................... 22 5.06 Financial Accounting Practices................... 23 5.07 Compliance with Applicable Laws.................. 23 5.08 Use of Proceeds.................................. 23 5.09 Continuation Of and Change In Business........... 23 5.10 Visitation....................................... 23 ARTICLE VI NEGATIVE COVENANTS............................... 23 6.01 Mergers and Acquisitions......................... 23 6.02 Dispositions of Assets........................... 24 6.03 Liens............................................ 24 6.04 Transactions With Affiliates..................... 25 6.05 Business......................................... 25 6.06 Ratio of Total Funded Debt to Consolidated Tangible Net Worth............................... 25 6.07 Consolidated Tangible Net Worth.................. 25 6.08 Indebtedness..................................... 25 6.09 Claims-Paying Ratings............................ 26 6.10 Private Act...................................... 26 ARTICLE VII EVENTS OF DEFAULT................................ 26 7.01 Events of Default................................ 26 ARTICLE VIII THE AGENT........................................ 28 8.01 Appointment...................................... 28 8.02 General Nature of Agent's Duties................. 28 8.03 Exercise of Powers............................... 28 8.04 General Exculpatory Provisions................... 29 8.05 Administration by the Agent...................... 29 8.06 Issuing Bank Not Relying on Agent or Other Issuing Banks.................................... 30 8.07 Indemnification.................................. 30 8.08 Agent in its Individual Capacity................. 31 8.09 Successor Agent.................................. 31 8.10 Additional Agents................................ 31 8.11 Calculations..................................... 31 8.12 Documentation Agent.............................. 32 ARTICLE IX MISCELLANEOUS.................................... 32 9.01 No Implied Waiver etc............................ 32 9.02 Set-Off.......................................... 32 9.03 Survival of Provisions........................... 32 9.04 Expenses and Fees; Indemnity..................... 32 9.05 Severability; Inconsistent Provisions............ 33 9.06 Holidays......................................... 33 9.07 Notices, etc..................................... 33 9.08 Forum Selection and Consent to Jurisdiction...... 34 9.09 Waiver of Jury Trial............................. 34 9.10 Governing Law.................................... 34 ii 9.11 Validity and Enforceability...................... 34 9.12 Counterparts..................................... 34 9.13 Successors and Assigns; Participations; Assignments...................................... 34 9.14 Amendments and Waivers........................... 37 9.15 Judgment Currency................................ 37 9.16 Records.......................................... 38 9.17 Confidentiality.................................. 38 9.18 Sharing of Collections 38 ARTICLE X GUARANTEE........................................ 39 10.01 The Guarantee.................................... 39 10.02 Obligations Unconditional........................ 39 10.03 Reinstatement.................................... 40 10.04 Remedies......................................... 40 10.05 Continuing Guarantee............................. 40 10.06 No Restrictions.................................. 40 Exhibit A Forms of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Form of Opinions of Counsel Exhibit D Form of Compliance Certificate Exhibit E Forms of Letter of Credit Application Exhibit F Form of First Set of Related Letters of Credit Schedule 2.01(b) Form of Evergreen Provision Schedule 3.01 Subsidiaries Schedule 6.03(a) Liens iii LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of December 30, 1999, by and between XL INSURANCE LTD, a Bermuda limited liability corporation ("XL Insurance") and XL MID OCEAN REINSURANCE LTD, a Bermuda limited liability corporation ("XL Mid Ocean"), as Account Parties; XL CAPITAL LTD, a corporation organized under the laws of the Cayman Islands, British West Indies ("XL Capital"), XL Insurance and XL Mid Ocean, as Guarantors; Mellon Bank, N.A., a national banking association ("Mellon"), Deutsche Bank, AG, New York and/or Cayman Islands Branches, First Union National Bank, Fleet National Bank and Bank One, NA (Main Office Chicago), as Issuing Banks; Mellon, as Agent for the Issuing Banks hereunder and as Arranger; and Fleet National Bank, as Documentation Agent. PRELIMINARY STATEMENT WHEREAS, the Issuing Banks have agreed to make available to the Account Parties a Letter of Credit Facility upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties, the Guarantors, the Agent, the Arranger and each Issuing Bank agree as follows. ARTICLE I DEFINITIONS: CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account Parties" shall mean XL Insurance and XL Mid Ocean and "Account Party" shall mean one of them. "Affiliate" shall mean an entity which is directly or indirectly controlled by an Account Party or which controls an Account Party or which is under common control with any of the Account Parties. "Agent" means Mellon, in its capacity as Agent hereunder. "Aggregate Letter of Credit Undrawn Availability" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "Aggregate Letter of Credit Unreimbursed Draws" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "Agreement" shall mean this Letter of Credit Facility and Reimbursement Agreement as amended, modified or supplemented from time to time. "Applicable Interest Rate" as used herein shall mean the Prime Rate. -9- "Arranger" means Mellon, in its capacity as Arranger hereunder. "Assets" at any time shall mean the assets of any Credit Party, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "Bank Parties" shall mean the Issuing Banks, the Arranger and the Agent. "Bermuda Companies Law" shall mean The Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law" shall mean The Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or of Bermuda or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or Bermuda. "Capitalized Lease Obligation" shall mean any lease obligation which is required to be capitalized in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "Change in Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities and Exchange Commission) of more than 40% of the voting securities of XL Capital; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital; or (c) a majority of the members of XL Capital's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated for election by its shareholders. "Closing Date" shall mean December 30, 1999. "Commitment Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. "Consolidated Net Worth" shall mean at any date the consolidated stockholders' equity of XL Capital and its Consolidated Subsidiaries. "Consolidated Subsidiaries" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with GAAP. "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of XL Capital and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1998, in the book value of any asset owned by XL Capital or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated 2 future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Continuing Letter of Credit Agreements" shall mean the letter of credit agreement executed and delivered by the Account Parties, one for each Issuing Bank which requires such an agreement, substantially in the form set forth on Exhibit A hereto and "Continuing Letter of Credit Agreement" shall mean one of them. "Credit Parties" means the Account Parties and the Guarantors and "Credit Party" means any of them. "Current Expiration Date" shall have the meaning assigned to that term in Section 2.06 hereof. "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "Event of Default" shall mean any of the Events of Default described in Article VII hereof. "Expiration Date" shall mean the Business Day immediately preceding the first anniversary of the Closing Date, as the same may be extended in accordance with Section 2.06 hereof. "Extension Request" shall have the meaning set forth in Section 2.06 hereof. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "Guaranteed Obligations" shall have the meaning assigned to that term in Section 10.01 hereof. "Guarantors" shall mean XL Capital , XL Insurance and XL Mid Ocean and "Guarantor" shall mean any one of them. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any 3 Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Indebtedness" of a Person shall mean (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company or corporate member of Lloyds or as a provider of financial services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capitalized Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed; and (vi) all Guaranty Equivalents of such Person. "Insurance Subsidiary" means any, present or future, direct or indirect Subsidiary of any Account Party that offers insurance products, including but not limited to certain of the Account Parties. "Issuing Banks" shall mean Mellon, Deutsche Bank, AG, New York and/or Cayman Islands Branches, First Union National Bank, Fleet National Bank and Bank One, NA (Main Office Chicago), subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Issuing Banks, and "Issuing Bank" shall mean any of them. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "LC Request" shall have the meaning assigned to such term in Section 2.03(a)(i) hereof. "LC Request Amount" shall have the meaning assigned to such term in Section 2.03(a)(i) hereof. 4 "Letter of Credit" shall mean each letter of credit issued by an Issuing Bank for the account of one or more of the Account Parties pursuant to this Agreement, each as amended, modified or supplemented from time to time. "Letter of Credit Application" shall have the meaning given that term in Section 2.03(a)(ii) hereof. "Letter of Credit Committed Amount" shall have the meaning given that term in Section 2.01(a) hereof. "Letter of Credit Commitment" shall mean, with respect to an Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit hereunder. "Letter of Credit Commitment Percentage" for each Issuing Bank shall mean a fraction, expressed as percentage, the numerator of which is such Issuing Bank's Letter of Credit Committed Amount and the denominator of which is the aggregate Letter of Credit Committed Amounts of all of the Issuing Banks. "Letter of Credit Exposure" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws, (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "Letter of Credit Fee" shall have the meaning given that term in Section 2.01(d) hereof. "Letter of Credit Reimbursement Obligation" with respect to a Letter of Credit means the obligation of the applicable Account Party to reimburse the applicable Issuing Bank for drawings on such Letter of Credit, together with interest thereon, and "Letter of Credit Reimbursement Obligations" shall mean all such obligations with respect to all Letters of Credit. "Letter of Credit Undrawn Availability" with respect to a Letter of Credit at any time shall mean the maximum amount available to be drawn under such Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing (including, without limitation, the amount of drafts presented but not yet paid). "Letter of Credit Unreimbursed Draw" with respect to a Letter of Credit at any time shall mean the amount at such time of a payment made by the applicable Issuing Bank under such Letter of Credit, to the extent not repaid by the applicable Account Party. "Lien" shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Material Adverse Effect" shall mean the occurrence of an event (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), which has or could reasonably be expected to have a materially adverse effect on: (a) the assets, business, financial condition or operations of a Credit Party and its Subsidiaries taken as a whole; or (b) the ability of a Credit Party to perform any of its payment or other material obligations under this Agreement; or (c) the legality, validity, binding effect or enforceability against a Credit Party of any Transaction Document that by its terms purports to bind such Credit Party. "Obligations" shall mean, collectively, the Letter of Credit Reimbursement Obligations and the obligations of each and every Account Party to pay all fees, indemnities and all other 5 liabilities of such Account Party arising pursuant to the terms of this Agreement or the other Transaction Documents. "Office," when used in connection with the Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Agent to the Account Parties and the Issuing Banks. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Permitted Liens" shall mean the Liens described in paragraphs (a) through (g) of Section 6.03. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Prime Rate" shall mean the interest rate per annum announced from time to time by the Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Agent to other borrowers and is not solely based or dependent upon the interest rate which the Agent may charge any particular borrower or class of borrower). "Private Act" shall mean separate legislation enacted in Bermuda with the intention that such legislation applies specifically to a Credit Party in whole or in part. "Pro Rata" means from and to the Issuing Banks in accordance with their respective Letter of Credit Commitment Percentages. "Purchasing Bank" shall have the meaning assigned to that term in Section 9.13(c) hereof. "Register" shall have the meaning given that term in Section 9.13(d) hereof. "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "Related Letters of Credit" shall mean the Letters of Credit which together make up a Set of Related Letters of Credit and "Related Letter of Credit" means one of them. "Required Issuing Banks" shall mean at any time Issuing Banks which have at least 51% of the aggregate Letter of Credit Commitments outstanding at such time. "SAP" shall mean, as to each Account Party and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Official Body for such Account Party's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Default reports by insurance corporations of the same type as such Account Party or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. 6 "Set of Related Letters of Credit" shall mean collectively the Letters of Credit issued by the Issuing Banks at substantially the same time in response to an LC Request, each having a face value equal to the applicable Issuing Bank's Pro Rata share of the applicable LC Request Amount. "Standard Notice" shall mean an irrevocable notice provided to the Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Agent. "Stated Amount" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "Subsidiary" of a Person at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by such Person or one or more Subsidiaries of such Person. "Total Funded Debt" of a Person at any time shall mean all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. "Transaction Document" or "Transaction Documents" shall mean this Agreement, each Letter of Credit and any other documents or instruments executed and delivered in connection herewith or therewith. "Transfer Supplement" shall have the meaning given that term in Section 9.13(c)(iv) hereof. "Valuation Date" shall mean the last Business Day of each month. 1.02. Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". References in this Agreement to "determination" by the Agent include estimates by the Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by the Agent in good faith and without gross negligence (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States of America, at the Relevant Date, subject to the other provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. 7 (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more financial covenants of this Agreement shall have occurred (or in the opinion of the Required Issuing Banks would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP would have materially changed an Account Party's reported financial results or position from that reflected in such Account Party's financial statements most recently prepared prior to such change, such Account Party shall notify the Agent as soon as practicable. ARTICLE II THE LETTER OF CREDIT FACILITY 2.01. Letters of Credit. (a) Letter of Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Issuing Bank agrees to issue Letters of Credit (each of which shall be requested by the applicable Account Party to be one of a Set of Related Letters of Credit) for the account of an Account Party at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time); provided, however, that the failure of an Issuing Bank to issue a Letter of Credit which is requested by the applicable Account Party to be one of a Set of Related Letters of Credit shall not relieve any other Issuing Bank of its obligation to issue a Letter of Credit which is requested by the applicable Account Party to be one of such Set of Related Letters of Credit. No Issuing Bank shall be obligated to issue any Letter of Credit if, after such Letter of Credit is issued, such Issuing Bank's Letter of Credit Exposure upon such issuance would exceed the Issuing Bank's Letter of Credit Committed Amount. Each Issuing Bank's "Letter of Credit Committed Amount" at any time shall be equal to the amount set forth as its "Initial Letter of Credit Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(b) hereof at such time, and subject to transfer to or from another Issuing Bank as provided in Section 9.13 hereof. (b) Terms of Letters of Credit. The Account Parties shall not request to be issued, and no Issuing Bank shall be obligated to issue, any Letter of Credit except within the following limitations: (i) each Letter of Credit shall have an expiration date no later than 12 months after the date of issuance thereof; provided, however, that any Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Letter of Credit shall be denominated in Dollars, (iii) each Letter of Credit shall be payable only against sight drafts (and not time drafts); and (iv) each Letter of Credit shall contain the words required by, and shall otherwise comply with, Section 2.04 hereof. (c) Form of Letters of Credit. No Issuing Bank shall be obligated to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to any of the Issuing Banks in the exercise of its reasonable judgment consistent with its customary practice. 8 (d) Letter of Credit Fee. Each Account Party shall pay or cause to be paid to the Agent for the account of each Issuing Bank a fee (the "Letter of Credit Fee") for Letters of Credit (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party by such Issuing Bank for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.35%. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. (e) Purpose of Letters of Credit. The Account Parties agree that each Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit, to support the Account Parties' reinsurance program with NAC Re Corporation in the ordinary course of business of such Account Party. (f) Administration Fees. Each Account Party shall pay to the Agent, for the account of each Issuing Bank, such other administration, maintenance, amendment, drawing and negotiation fees as are customarily charged by such Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Banks to XL Insurance) or are otherwise agreed between such Issuing Bank and the Account Parties. (g) Arrangement Fee. XL Capital agrees to pay to Mellon an arrangement fee in the amount and at the time previously agreed between XL Capital and Mellon. 2.02. Commitment Fee; Reduction of the Committed Amounts. (a) Commitment Fee. XL Insurance agrees to pay to the Agent for the account of each Issuing Bank a commitment fee (the "Commitment Fee") for each day during the period from the Closing Date to and including the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.07% payable on the unused portion of such Issuing Bank's Letter of Credit Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (b) Reduction of the Committed Amounts. XL Capital may at any time or from time to time reduce Pro Rata the Letter of Credit Committed Amounts of the Issuing Banks to an aggregate amount (which may be zero) not less than the Letter of Credit Exposure. Any reduction of the Letter of Credit Committed Amounts shall be in an aggregate minimum amount of $5,000,000 and in an amount which is an integral multiple of $1,000,000. Reduction of the Letter of Credit Committed Amounts shall be made by providing not less than five Business Days' notice (which notice shall be irrevocable) to such effect to the Agent, which will promptly advise the Issuing Banks of such notice. After the date specified in such notice, the Commitment Fee shall be calculated upon the Letter of Credit Committed Amounts as so reduced. 2.03. Procedure for Issuance and Amendment of Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Business Days' notice, the Issuing Banks to issue a Set of Related Letters of Credit by: (i) delivering to the Agent a written request to such effect (an "LC Request"), specifying the date on which such Set of Related Letters of Credit is to be issued, the expiration date thereof, the aggregate amount requested (the "LC Request Amount") and the Stated Amount of each Related Letter of Credit (which Stated Amount shall be equal to the applicable Issuing Bank's Pro Rata share of the LC Request Amount), and 9 (ii) delivering to each Issuing Bank a completed application, in the form annexed hereto as Exhibit E, or in such other form as is from time to time be required by each such Issuing Bank in accordance with its customary practice with respect to its customers generally (a "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Agent shall promptly notify each Issuing Bank and furnish to each Issuing Bank the proposed form of Letter of Credit to be issued and the Stated Amount and term of such proposed Letter of Credit to be issued by such Issuing Bank. The Agent shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Set of Related Letters of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Issuing Banks have given notice to the Agent to cease issuing Letters of Credit pursuant to Section 2.03(c) hereof or the the Agent shall have received written notice from an Account Party that the conditions set forth in Section 4.02(a) are not satisfied, the Agent shall notify each Issuing Bank (in writing or by telephone promptly confirmed in writing) that such Issuing Bank is not obligated to issue such Letter of Credit. If an Issuing Bank issues a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Agent thereof and furnish a copy thereof to the Agent. (b) Request for Extension or Increase. An Account Party may from time to time, by a request sent to the Agent, request the Issuing Banks to extend (or request the Issuing Banks to permit the extension, by failing to provide a nonrenewal notice to the beneficiary, of) the expiration date of a Set of Related Letters of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amounts of or the amounts available to be drawn on such Related Letters of Credit; provided however, that any such increase (or decrease, as the case may be) shall be made Pro Rata. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of replacement Related Letters of Credit (except only that the Issuing Banks may, if they all so elect, issue a notice of extension or increase with respect to an outstanding Set of Related Letters of Credit in lieu of issuing a new Set of Related Letters of Credit in substitution for an outstanding Set of Related Letters of Credit). (c) Limitations on Issuance. As between the Agent, on the one hand, and the Issuing Banks, on the other hand, the Agent shall not authorize issuance of any Letter of Credit if the Agent shall have received, at least two Business Days before authorizing such issuance, from the Required Issuing Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Agent direct the Issuing Banks to cease to issue Letters of Credit. Absent such notice, or unless the Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Agent shall be justified and fully protected, as against the Issuing Banks, in authorizing an Issuing Bank to issue such a Letter of Credit, notwithstanding any subsequent notices to the Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Agent, or any other event, condition or circumstance whatsoever. 2.04. Certain Provisions in Letters of Credit. (a) The first Set of Related Letters of Credit issued hereunder shall be in substantially the form set forth on Exhibit F hereto. (b) Each Letter of Credit requested to be issued hereunder shall be requested to contain the following language, with the blanks appropriately filled: This letter of credit is being issued at substantially the same time as each of ________________________ [name other Issuing Banks] is issuing its letter of credit to the Beneficiary for the account of the Account Party (this letter of credit and all such other letters of credit being referred to collectively as the "Related Letters of Credit") and the aggregate stated amount of the Related Letters of Credit is $_____________. 10 In addition, each Letter or Credit shall provide that drawings on such Letter of Credit must be accompanied by a certificate of the beneficiary thereof which states as follows: Concurrently with this drawing, Beneficiary is drawing on each other Related Letter of Credit referred to in the letter of credit to which this drawing relates. The respective amounts of all such concurrent drawings on the Related Letters of Credit (including the letter of credit to which this drawing relates) are ratable in accordance with the respective stated amounts of the respective Related Letters of Credit. 2.05. Account Party's Reimbursement Obligations. Each Account Party hereby agrees to reimburse each Issuing Bank, by making payment to the Agent for the account of such Issuing Bank in accordance with Section 2.11(a) hereof on the date of each payment made by such Issuing Bank under any Letter of Credit issued for such Account Party's account (or, if later, the date which is one Business Day after notice of such payment or of the drawing giving rise to such payment is given to XL Capital), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. Each Account Party agrees that it will make such payment to the Agent for the account of the applicable Issuing Bank in the same currency as the currency of the payment by such Issuing Bank under such Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Agent, for the account of the applicable Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by such Issuing Bank until paid (before and after judgment) in accordance with Section 2.11(a) hereof, at the rate per annum set forth in Section 2.11(b) hereof. If the Agent receives payment on account of Letter of Credit Reimbursement Obligations in an amount less than the full amount of Letter of Credit Reimbursement Obligations then outstanding and owing to the Issuing Banks, the amount so received will be applied by the Agent ratably in accordance with the respective amounts of Letters of Credit Reimbursement Obligations owing to the respective Issuing Banks. 2.06 Extensions of Expiration Date. XL Capital may, at its option, give the Agent and the Issuing Banks written notice (an "Extension Request") at any time not more than ninety days, nor less than thirty days, prior to the Expiration Date in effect at such time (the "Current Expiration Date") of XL Capital's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. Each Issuing Bank which agrees to such Extension Request shall deliver to the Agent its express written consent thereto no later than fifteen days prior to the Current Expiration Date. No extension shall become effective unless the express written consent thereto by all of the Issuing Banks is received by the Agent on or before the fifteenth day prior to the Current Expiration Date. If all of the Issuing Banks shall have consented to such Extension Request, then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Request. 2.07. Obligations Absolute. The payment obligations of the Account Parties under Section 2.05 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of this Agreement, any Letter of Credit or any Transaction Document against an Account Party; (b) the existence of any claim, set-off, defense or other right which any Account Party, any Guarantor or any other Person may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or transferee may be acting), any Issuing Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or any unrelated transaction; (c) any draft, certificate, statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; 11 (d) payment by an Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, or payment by an Issuing Bank under the Letter of Credit in any other circumstances in which conditions to payment are not met, except any such wrongful payment resulting solely from the gross negligence or willful misconduct of such Issuing Bank; or (e) any other event, condition or circumstance whatever, whether or not similar to any of the foregoing, except if the same results solely from the gross negligence or willful misconduct of an Issuing Bank. Each Account Party bears the risk of, and neither the Issuing Banks, nor any of their directors, officers, employees or agents, shall be liable or responsible for any of, the foregoing matters, the use which may be made of any Letter of Credit, or acts or omissions of the beneficiary or any transferee in connection therewith, except for such person's gross negligence or willful misconduct. 2.08. Further Assurances. Each Account Party and each Guarantor hereby agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by any Issuing Bank more fully to effect the purposes of this Agreement and the issuance of the Letters of Credit hereunder. 2.09. Letter of Credit Applications. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the respective Issuing Banks under, any Continuing Letter of Credit Agreement and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Banks under, this Agreement, the Transaction Documents, and applicable Law. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 2.10. Certain Provisions Relating to the Issuing Banks. (a) General. No Issuing Bank shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of any Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Banks to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and no Issuing Bank shall have a fiduciary relationship in respect of any Bank Party or any other Person. No Issuing Bank shall be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. No Issuing Bank shall be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. No Issuing Bank shall be under any obligation, either initially or on a continuing basis, to provide the Agent or any other Bank Party with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. No Issuing Bank shall be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document. (b) Administration. Each Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and no Issuing 12 Bank shall have any duty to verify the identity or authority of any Person giving such notice or other communication. Each Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for such Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and no Issuing Bank shall be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever any Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and such Issuing Bank may conclusively rely upon such certificate. No Issuing Bank shall be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless such Issuing Bank has received notice from a Bank Party or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If any Issuing Bank receives such a notice, such Issuing Bank shall give prompt notice thereof to the Agent. (c) Issuing Bank in its Individual Capacity. Each Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though such Issuing Bank were not an Issuing Bank hereunder. 2.11. Payments Generally; Interest and Interest on Overdue Amounts. (a) Payments Generally. All payments to be made by an Account Party in respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars at 12:00 o'clock Noon, Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.12, 2.13 and 9.04 hereof, such payments shall be made to the Agent at its Office in Dollars in funds immediately available at such Office. Payments under Sections 2.12, 2.13 and 9.04 hereof shall be made to the applicable Issuing Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Agent or such Issuing Bank after 12:00 o'clock Noon, Pittsburgh time, on any day shall be deemed to have been received on the next succeeding Business Day. The Agent shall distribute to the Issuing Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Agent. (b) Interest and Interest on Overdue Amounts. Interest on Letter of Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be equal to the then-current Applicable Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.05(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.12. Additional Compensation in Certain Circumstances. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by 13 any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Issuing Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts of such Issuing Bank imposed by the jurisdictions (federal, state and local) in which such Issuing Bank's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, any Issuing Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Issuing Bank or (B) otherwise applicable to the obligations of any Issuing Bank under this Agreement, or (iv) imposes upon any Issuing Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Issuing Bank or, in the case of clause (iii) hereof, any Person controlling an Issuing Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Issuing Bank's or controlling Person's capital, taking into consideration such Issuing Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Issuing Bank deems to be material, such Issuing Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Issuing Bank (which determination shall be conclusive) to be necessary to compensate such Issuing Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Issuing Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Prime Rate. A certificate by such Issuing Bank as to the amount due and payable under this Section 2.12 from time to time and the method of calculating such amount shall be conclusive. Each Issuing Bank agrees that it will use good faith efforts to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.12; provided, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Issuing Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. 2.13. Taxes. (a) Payments Net of Taxes. All payments made by the Account Parties under this Agreement or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of the Agent and each Issuing Bank, income or franchise taxes imposed on the Agent or such Issuing Bank by the jurisdiction under the laws of which the Agent or such Issuing Bank is organized or any political subdivision or taxing authority thereof or 14 therein or as a result of a connection between such Issuing Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Issuing Bank, income or franchise taxes imposed by any jurisdiction in which such Issuing Bank's lending offices which issue Letters of Credit are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless an Account Party is required to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to the Agent or any Issuing Bank under this Agreement or any other Transaction Document, the applicable Account Party shall pay the relevant amount of such Taxes and the amounts so payable to the Agent or such Issuing Bank shall be increased to the extent necessary to yield to the Agent or such Issuing Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Taxes are paid by an Account Party with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party shall send to the Agent for its own account or for the account of such Issuing Bank, as the case may be, a certified copy of an original official receipt received by such Account Party showing payment thereof. If the Agent or an Issuing Bank determines in its sole discretion in good faith that it has received a refund in respect of any Taxes as to which it has been indemnified by an Account Party, or with respect to which an Account Party has paid additional amounts pursuant to this Section 2.13, the Agent or such Issuing Bank shall promptly after the date of such receipt pay over the amount of such refund to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by such Account Party under this Section 2.13 with respect to Taxes giving rise to such refund and only to the extent that the Agent or such Issuing Bank has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of the Agent or such Issuing Bank (including additional Taxes attributable to such refund, as determined by the Agent or such Issuing Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund). An Account Party receiving any such payment from the Agent or an Issuing Bank shall, upon demand, pay to the Agent or such Issuing Bank any amount paid over to such Account Party by the Agent or such Issuing Bank (plus penalties, interest or other charges) in the event the Agent or such Issuing Bank is required to repay any portion of such refund to such Official Body. Nothing in this Section 2.13(a) shall entitle an Account Party to have access to the records of the Agent or any Issuing Bank, including, without limitation, tax returns. (b) Indemnity. Each Account Party hereby indemnifies the Agent and each of the Issuing Banks for the full amount of all Taxes attributable to payments by or on behalf of such Account Party hereunder or under any of the other Transaction Documents, any Taxes paid by the Agent or such Issuing Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by the Agent or such Issuing Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by the Agent or such Issuing Bank in notifying an Account Party or in making payment after payment was received from an Account Party), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Issuing Bank or the Agent, as the case may be, makes written demand therefor. (c) Withholding and Backup Withholding. Each Issuing Bank that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties and the Agent 15 (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Issuing Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Issuing Bank which so delivers to the Account Parties and the Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties and the Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties and the Agent, certifying in the case of a Form 1001 or Form 4224 that such Issuing Bank is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Issuing Bank from duly completing and delivering any such letter or form with respect to it and such Issuing Bank advises the Account Parties and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Credit Party represents and warrants that: 3.01. Organization and Qualification. Such Credit Party and each of its Subsidiaries is a corporation duly organized, validly existing and (unless the concept of good standing is not known to the law of the relevant jurisdiction) in good standing under the laws of their respective jurisdictions of incorporation and has the power and authority to own its properties and assets, and to carry on its business as presently conducted and is qualified to do business in those jurisdictions in which its ownership of property or the nature of its business activities is such that failure to receive or retain such qualification would have a Material Adverse Effect. A list of such Credit Party's Subsidiaries setting forth their respective jurisdictions of incorporation is set forth in Schedule 3.01 hereto. Such Credit Party is not subject to any Private Act, except, with respect to XL Insurance, the X.L. Insurance Company, Ltd. Act, 1989, a copy of which has been provided to the Agent. 3.02. Corporate Power and Authorization. Such Credit Party and any Subsidiary of such Credit Party which is also a Credit Party has corporate power and authority to make and carry out this Agreement and any other Transaction Document to which it is a party, to execute and deliver this Agreement and each such Transaction Document, to perform its obligations hereunder and under any such Transaction Documents and, in the case of each Credit Party which is an Account 16 Party, to request the issuance of Letters of Credit as provided for herein. All such action has been duly authorized by all necessary corporate proceedings on the part of such Credit Party. 3.03. Financial Information. Such Credit Party has furnished to Agent, with sufficient copies for each Issuing Bank, copies of the audited consolidated financial statements of such Credit Party and its consolidated Subsidiaries including a consolidated and consolidating balance sheet and related statements of income and retained earnings for the fiscal year ending December 31, 1998. Such financial statements fairly present the financial position of such Credit Party and its consolidated Subsidiaries as of the date of such reports and the consolidated and consolidating results of their operations and cash flows for the fiscal period then ended in conformity with GAAP or SAP, applied on a consistent basis, and such consolidated financial statements have been examined and reported upon by independent, certified public accountants. 3.04. Litigation. Except as disclosed to the Issuing Banks in writing prior to the Closing Date (including by disclosure in the financial statements delivered to the Issuing Banks referred to in Section 3.03 hereof), there is no litigation or governmental proceeding by or against such Credit Party or any of its Subsidiaries pending or, to its knowledge, threatened, which could reasonably be expected (in light of reserves, and total shareholders' equity of such Credit Party and after taking into account the nature of such Credit Party's business and activities) to have a Material Adverse Effect if adversely determined. 3.05. No Adverse Changes. Since December 31, 1998, there has been no occurrence or event which has had a Material Adverse Effect. 3.06. No Conflicting Laws or Agreements; Consents and Approvals. (a) Neither the execution and delivery of this Agreement or any other Transaction Document, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of such Credit Party or of any applicable Law or of any material agreement or instrument to which such Credit Party is a party or by which it is bound or to which it is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, except Permitted Liens, of any nature whatsoever upon any of the property of such Credit Party pursuant to the terms of any such agreement or instrument. (b) No authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or advisable in connection with (i) execution and delivery of this Agreement or any other Transaction Document, (ii) the consummation of the transactions herein or therein contemplated, or (iii) the performance of or compliance with the terms and conditions hereof or thereof. 3.07. Execution and Binding Effect. This Agreement has been duly and validly executed and delivered by such Credit Party. This Agreement and each Transaction Document to which it is a party constitutes legal, valid and binding obligations of such Credit Party enforceable in accordance with the terms thereof except, as to the enforcement of remedies, for limitations imposed by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (excluding Laws with respect to fraudulent conveyance), (ii) Laws limiting the right of specific performance or (iii) general principles of equity. 3.08. Taxes. All tax returns required to be filed by such Credit Party have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon such Credit Party or upon its properties, income or sales which are due and payable have been paid. The reserves and provisions for taxes, if any, on the books of such Credit Party are adequate for all open years and for its current fiscal period as determined in accordance with GAAP. 17 3.09. Use of Proceeds. Such Credit Party will use any Letter of Credit issued hereunder for its account solely to support the Account Parties' reinsurance program with NAC Re Corporation in the ordinary course of business. Such Credit Party will make no request for a Letter of Credit hereunder for the purpose of directly or indirectly buying or carrying any "margin stock" as such term is used in Regulation U of the Board of Governors of the Federal Reserve System in violation of such regulation. Such Credit Party is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.10. Permits, Licenses and Rights. Such Credit Party and each Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others. 3.11. Accurate and Complete Disclosure. All information provided by or on behalf of any Credit Party to the Agent or any Issuing Bank pursuant to or in connection with this Agreement or the other Transaction Documents and the transactions contemplated hereby and thereby is true and accurate in all material respects on the date such information is dated (or, if not dated, on the date such information was received by the Agent or such Issuing Bank, as the case may be) and such information, taken as a whole, which was provided on or prior to the time this representation is made or remade, does not, to the best knowledge of the Credit Parties, omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. 3.12. Absence of Violations. Such Credit Party and each Affiliate of such Credit Party is not in violation of any charter document, corporate minute or resolution, any instrument or agreement, in each case binding on it or affecting its property, or any Law, in a manner which could have a Materially Adverse Effect. 3.13. Environmental Matters. Such Credit Party and each of its Subsidiaries is and has been in full compliance with all applicable Environmental Laws. Such Credit Party and each of its Subsidiaries have all approvals by Official Bodies charged with the enforcement of Environmental Laws that are necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated. 3.14. Not an Investment Company. Such Credit Party is not an Investment Company required to be registered under the Investment Company Act of 1940. 3.15. Year 2000 Compliance. XL Capital has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by XL Capital or any of its Subsidiaries (or material suppliers, vendors and customers other than those affecting customers that may give rise to claims under insurance policies issued by XL Capital or any Subsidiary of XL Capital) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "Year 2000 Problem") and (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis. Based on the foregoing, XL Capital believes that all computer applications of XL Capital and its Subsidiaries that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 18 ARTICLE IV CONDITIONS 4.01. Effectiveness. The respective obligations of the Issuing Banks to issue Letters of Credit shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the Agent with sufficient copies for each Issuing Bank a certificate with respect to each Credit Party in form and substance satisfactory to the Agent dated the Closing Date and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of such Credit Party certifying as to: (i) true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it including but not limited to that described in Section 3.02 hereof (with respect to the Guarantors, such corporate action shall include board findings satisfactory to the Arranger's Bermuda counsel) and (ii) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it. Each Issuing Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Issuing Bank. (b) Organizational Documents. There shall have been delivered to the Agent with sufficient copies for each Issuing Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and (ii) a certificate of good standing for each Credit Party certified by the appropriate Official Body of its place of organization. (c) Opinions of Counsel. There shall have been delivered to the Agent with sufficient copies for each Issuing Bank written opinions addressed to the Issuing Banks, dated the Closing Date, of Messrs. Cahill Gordon & Reindel, Messrs. Conyers, Dill & Pearman, Hunter & Hunter and Paul S. Giordano, Esq., respectively, the Account Parties' and Guarantors' counsel, which together are substantially to the effects set forth in Exhibit C, and opinions of counsel qualified to practice in each jurisdiction, other than Bermuda and the United States, under the laws of which an Account Party is organized substantially to such effects to the extent that the laws of such jurisdiction are relevant. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Issuing Bank, and each Issuing Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Issuing Bank have reasonably requested. (e) Fees and Expenses. Each Account Party shall have paid all fees and other compensation to be paid by it hereunder on or prior to the Closing Date. (f) Representations and Warranties. The representations and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Letter of Credit Agreement. Each Continuing Letter of Credit Agreement shall have been delivered to the Agent, with sufficient copies for each Issuing Bank, duly executed by each Account Party. 19 4.02. Issuance of Letters of Credit. The obligation of the Issuing Banks to issue any Letters of Credit hereunder is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Account Party of its obligations to be performed hereunder on or before the date of such Letters of Credit and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Default and Potential Defaults. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Letter of Credit issued hereunder with the same effect as though made on and as of each such date, and on the date of each Letter of Credit issued hereunder no Event of Default and no Potential Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Letter of Credit to be issued on such date. Failure of the Agent to receive notice from the applicable Account Party to the contrary before any Letter of Credit is issued hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Letter of Credit with the same effect as though made on and as of such date and (ii) on the date of such Letter of Credit no Event of Default or Potential Default has occurred and is continuing or exists or will occur or exist after giving effect to such Letter of Credit. (b) Commitment. The fact that, immediately after the issuance of such Letter of Credit, the Letter of Credit Undrawn Availability and the aggregate of the Letter of Credit Unreimbursed Draws will not exceed the aggregate amount of the Letter of Credit Committed Amounts. ARTICLE V AFFIRMATIVE COVENANTS Each Credit Party, as applicable, hereby covenants to the Agent and each Issuing Bank as follows: 5.01. Reporting and Information Requirements. Each Credit Party shall deliver to the Agent with sufficient copies for each Issuing Bank: (a) Annual Reports. As soon as practicable and in any event within 100 days after the close of each fiscal year, audited consolidated statements of income, retained earnings and cash flows of such Credit Party and its consolidated Subsidiaries, for such fiscal year and a consolidated audited balance sheet of such Credit Party and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP or, in the case of Credit Parties which are Insurance Subsidiaries, SAP, setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Credit Party and not unacceptable to the Required Issuing Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Issuing Banks (it being understood that delivery of XL Capital's Report on Form 10-K filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(a) to deliver the annual financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(a)). (b) Quarterly Statements. Within sixty days after the end of the first, second and third quarterly accounting periods in each fiscal year of XL Capital, copies of the unaudited consolidated balance sheets of XL Capital and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated income statements of XL Capital and its consolidated Subsidiaries for the 20 elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP subject to year-end audit adjustments and certified by the principal financial officer of XL Capital to have been prepared in accordance with generally accepted accounting principles consistently applied by XL Capital except as explained in such certificate (it being understood that delivery of XL Capital's Report on Form 10-Q filed with the Securities and Exchange Commission shall satisfy the requirement of this Section 5.01(b) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be in such report is substantially the same as the financial information required by this Section 5.01(b)). (c) Compliance Certificates. Within 100 days after the end of each fiscal year of the Credit Parties and within sixty days after the end of each of the first three quarters of each fiscal year, a certificate in the form of Exhibit D hereto dated as of the end of such fiscal year or quarter, signed on behalf of each Credit Party by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Default or Potential Default has occurred and is continuing or exists, or if an Event of Default or Potential Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Credit Party, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Article VI hereof, and (iii) stating that the signer has reviewed this Agreement and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate. (d) Further Information. All such other information and in such form as any Issuing Bank may reasonably request in writing. (e) Notice of Event of Default. Immediately upon becoming aware of any Event of Default or Potential Default, written notice thereof, together with a written statement of the president or a principal financial officer of the applicable Credit Party setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Credit Parties. (f) Notice of Material Adverse Change. Promptly upon becoming aware thereof, written notice of any event or occurrence constituting or which could reasonably be expected to have a Material Adverse Effect. (g) Notice of Material Proceedings. Promptly upon becoming aware thereof, written notice of the commencement, existence or threat of any proceeding or a material change in any existing material proceeding by or before any Official Body against or affecting such Credit Party which, if adversely decided, could have a Material Adverse Effect. (h) Notice of Certain Material Changes. Promptly upon adoption thereof, notice of each material change in any Credit Party's investment policy, underwriting policy or other business policy. (i) Year 2000 Compliance. Promptly after any Credit Party's discovery or determination thereof, notice (in reasonable detail) that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant (as defined in Section 3.15), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. 5.02. Preservation of Existence and Franchises. Each Credit Party shall, and shall cause each of its Subsidiaries to, maintain its corporate existence, rights and franchises in full force and effect in its jurisdiction of incorporation, which jurisdiction shall continue to be, in the case of each Credit Party, the jurisdiction under the laws of which such Credit Party is organized as of the date hereof. Each Credit Party shall, and shall cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 21 5.03. Insurance. Each Credit Party shall, and shall cause each of its Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or a similar business having similar properties similarly situated. 5.04. Maintenance of Properties. Each Credit Party shall, and shall cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and shall make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times, provided, however, that the foregoing shall not impose on such Credit Party or any Subsidiary of such Credit Party any obligation in respect of any property leased by such Credit Party or such Subsidiary in addition to such Credit Party's obligations under the applicable document creating such Credit Party's or such Subsidiary's lease or tenancy. 5.05. Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities. Each Credit Party shall, and shall cause each of its Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Section 6.03 hereof) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Account Party in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law or any similar Law applicable to any Credit Party, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Credit Party or such Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Credit Party need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP and SAP shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.06. Financial Accounting Practices. Such Credit Party shall, and shall cause each of its Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 hereof in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 5.07. Compliance with Applicable Laws. Each Credit Party shall, and shall cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Credit Party or any Subsidiary of such Credit Party shall not be deemed to be in violation of this Section 5.07 as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Materially Adversely Effect or (ii) otherwise impair the ability of such Credit Party to perform its obligations under this Agreement. 22 5.08. Use of Proceeds. Each Account Party shall use the Letters of Credit issued hereunder solely to support the Account Parties' reinsurance program with NAC Re Corporation in the ordinary course of business of such Account Party. 5.09. Continuation Of and Change In Business. Each Credit Party and its Subsidiaries shall continue to engage in substantially the same business and activities it currently engages in on the date of this Agreement. 5.10. Visitation. Each Credit Party shall permit such Persons as any Issuing Bank may reasonably designate to visit and inspect any of the properties of such Credit Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Credit Party at such times as such Issuing Bank may reasonably request. Each Credit Party hereby authorizes its financial management to discuss with any Issuing Bank the affairs of such Credit Party. ARTICLE VI NEGATIVE COVENANTS Each Credit Party covenants to the Agent and to each Issuing Bank as follows: 6.01. Mergers and Acquisitions. (a) Such Credit Party shall not merge with or into or consolidate with any other Person, or agree to do any of the foregoing, except that if no Event of Default or Potential Event of Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto: (i) any Credit Party may merge with any other corporation, including a Subsidiary, if such Credit Party shall be the surviving corporation; and (ii) if the written consent of the Required Issuing Banks is obtained, any Credit Party may merge into or consolidate with any other corporation if the corporation into which such Credit Party is merged or which is formed by such consolidation shall expressly assume all obligations of such Credit Party under this Agreement. (b) Such Credit Party shall not acquire the stock or other equity interests, or all or any substantial portion of the properties or assets of any other Person, or agree to do any of the foregoing, unless such Person is engaged primarily in the insurance business or the financial services business. 6.02. Dispositions of Assets. Such Credit Party shall not, and shall not permit any Subsidiary to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Section 6.02 as a "transaction" and any series of related transactions constituting but a single transaction), any of its properties or Assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Transactions in the ordinary course of business involving current assets or other assets classified on such Credit Party's balance sheet as available for sale; (b) Sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate, exceed $50,000,000 in any calendar year for all Credit Parties in the aggregate; or 23 (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Credit Party or its Subsidiaries. 6.03. Liens. Such Credit Party shall not, and shall not permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired or agree or become liable to do so, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03(a) hereto; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 5.05 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of such Section 5.05; (c) Liens on property securing all or part of the purchase price thereof to such Credit Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Credit Party (and extension, renewal and replacement Liens upon the same property), provided -- (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Credit Party, as applicable, shall not exceed 100% (if such obligations are not subject when created to United States income taxes) or 90% (in all other cases) of the lesser of the fair market value of such property at such time or the actual purchase price of such property; (d) Zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Credit Party; (e) Liens securing Indebtedness permitted by Section 6.08 hereof covering assets whose market value is not materially greater than an amount equal to the amount of the Indebtedness secured thereby, plus a commercially reasonable margin; or (f) Liens on cash and securities of such Credit Party or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of such Credit Parties' investment policy as in effect on the date of this Agreement. 6.04. Transactions With Affiliates. Such Credit Party shall not, and shall not permit any Subsidiary to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Credit Party, or directly or indirectly agree to do any of the foregoing, except transactions among such Credit Party and its wholly-owned Subsidiaries and transactions with Affiliates in good faith in the ordinary course of such Credit Party's business consistent with past practice and on terms no less favorable to such Credit Party or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. Business. Such Credit Party will not, and will not permit any Subsidiary to, engage (directly or indirectly) in any businesses other than the businesses substantially the same as those 24 in which such Credit Party and its Subsidiaries are engaged on the Closing Date and any businesses reasonably related thereto or in the financial services industry. Each Account Party which is an insurance company will not permit, at any time, its net premiums earned from insurance or reinsurance operations to comprise less than 50% of gross revenues of such Account Party (on a consolidated basis exclusive of net gains and losses from investments and investment income). 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. XL Capital will not permit its ratio of (i) the sum of (x) Total Funded Debt plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are unsecured) issued for the account of, or as to which reimbursement obligations are guaranteed by, XL Capital or any of its Consolidated Subsidiaries to (ii) Consolidated Tangible Net Worth to be greater than 0.35 at any time. 6.07. Consolidated Tangible Net Worth. XL Capital will not permit its Consolidated Tangible Net Worth to be less than $2,566,000,000.00 at any time. 6.08. Indebtedness. Such Credit Party shall not, and shall not permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Issuing Banks pursuant to this Agreement and the other Transaction Document; (b) Other Indebtedness, so long as upon the incurrence thereof no Event of Default or Potential Default would occur or exist; (c) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Credit Party or any Subsidiary of any Credit Party; and (d) Indebtedness incurred in transactions described in Section 6.03(f). 6.09. Claims-Paying Ratings. Each of XL Insurance and XL Mid Ocean shall maintain at all times a claims-paying rating of at least "A" from Standard & Poor's Ratings Services and from A.M. Best Company. 6.10. Private Act. Such Credit Party shall not become subject to a Private Act except, in the case of XL Insurance, the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII EVENTS OF DEFAULT 7.01. Events of Default. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Any Account Party shall default in the payment when due of any reimbursement obligation with respect to any Letter of Credit; 25 (b) Any Account Party shall default in the payment when due of any Letter of Credit Fee, Commitment Fee, or any other fee or amount payable hereunder which default shall continue for a period of three days from the due date thereof; (c) Any Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Article VI hereof; (d) Any Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of twenty days after written notice thereof to such Credit Party from the Agent; (e) Any Credit Party or any Subsidiary of any Credit Party shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 or more beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement under which any such obligation in principal amount of $10,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement; (f) One or more judgments for the payment of money shall have been entered against any Credit Party which judgments exceed $50,000,000 in the aggregate and such judgments shall remain undischarged or uncontested or appealed in good faith for a period of thirty consecutive days; (g) Any representation or warranty herein made by any Credit Party, or any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made (or deemed made) or furnished; (h) XL Insurance shall cease to own, beneficially and of record, directly or indirectly, 100% of the outstanding voting shares of common stock of XL Investments; (i) XL Capital shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of common stock of each other Credit Party, except for a nominal number of shares owned by nominee shareholders required by the applicable laws of the jurisdiction where such Credit Party is incorporated; (j) A Change in Control shall occur; (k) The guarantee contained in Article X hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of XL Insurance, XL Capital or XL Mid Ocean or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee itself or the transactions contemplated by this Agreement, or any other Person shall assert any of the foregoing; (l) A decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Credit Party a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Credit Party under the Bermuda Companies Law, or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Credit Party or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged and unstayed for a period of sixty days; or 26 (m) Any Credit Party shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law, or the companies laws of the Cayman Islands, British West Indies or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or examiner or trustee or assignee in bankruptcy or insolvency of it or of a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by such Credit Party in furtherance of any of the aforesaid purposes. If an Event of Default shall occur then the Issuing Banks shall be under no further obligation to issue Letters of Credit hereunder and the Agent may, and upon written request of the Required Issuing Banks shall, exercise any or all remedies available to it. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, the Agent may, and upon the request of the Required Issuing Banks shall, make demand upon the applicable Account Party to, and forthwith upon such demand the applicable Account Party will, pay to the Agent as cash collateral for the ratable benefit of the Issuing Banks, in same day funds at the Agent's office designated in such demand, an amount equal to the aggregate Letter of Credit Undrawn Availability of all Letters of Credit issued for the account of such Account Party. If at any time during the continuance of an Event of Default the Agent determines that such funds are subject to any right or claim of any Person other than the Agent and the Issuing Banks or that the total amount of such funds is less than the aggregate Letter of Credit Undrawn Availability of all Letters of Credit issued for the account of an Account Party, such Account Party will, forthwith upon demand by the Agent, pay to the Agent as additional cash collateral for the ratable benefit of the Issuing Banks an amount equal to the excess of (a) such aggregate Letter of Credit Undrawn Availability over (b) the total amount of funds, if any, that the Agent determines to be free and clear of any such right or claim. Upon the drawing of any Letters of Credit, such funds shall be applied to reimburse the Issuing Banks, ratably, to the extent permitted by applicable law. ARTICLE VIII THE AGENT 8.01. Appointment. (a) Each Issuing Bank hereby appoints Mellon Bank, N.A. to act as Agent for such Issuing Bank under this Agreement and the other Transaction Documents. Each Issuing Bank hereby irrevocably authorizes the Agent to take such action on behalf of such Issuing Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Agent on behalf of the Issuing Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to its right to resign as provided in Section 8.10 hereof. Each Issuing Bank hereby irrevocably authorizes the Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Agent. Each Issuing Bank agrees that the rights and remedies granted to the Agent under the Transaction Documents shall be exercised exclusively by the Agent, and that no Issuing Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. (b) The Arranger shall have no duties or obligations in such capacity under this Agreement. 8.02. General Nature of Agent's Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Transaction Document: 27 (a) The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. (b) The duties and responsibilities of the Agent under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Agent shall not have a fiduciary relationship in respect of any Issuing Bank. (c) The Agent is and shall be solely the agent of the Issuing Banks. The Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Issuing Banks as provided in this Agreement and the other Transaction Documents). (d) The Agent shall be under no obligation to take any action hereunder or under any other Transaction Document if the Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require the Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. Exercise of Powers. The Agent shall take any action of the type specified in this Agreement or any other Transaction Document as being within the Agent's rights, powers or discretion in accordance with directions from the Required Issuing Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, the Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Issuing Banks (or some other Person or set of Persons), in which case the Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Issuing Banks. The Agent shall not have any liability to any Person as a result of (x) the Agent acting or refraining from acting in accordance with the directions of the Required Issuing Banks (or other applicable Person or set of Persons), (y) the Agent refraining from acting in the absence of instructions to act from the Required Issuing Banks (or other applicable Person or set of Persons), whether or not the Agent has discretionary power to take such action, or (z) the Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Transaction Document: (a) The Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) The Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document, (iii) any failure of any Credit Party or Issuing Bank to perform any of their respective obligations under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. 28 (c) The Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) The Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Issuing Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by the Agent to such Issuing Bank. 8.05. Administration by the Agent. (a) The Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Agent may consult with legal counsel (including, without limitation, in-house counsel for the Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and the Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever the Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Credit Party or Issuing Bank, such matter may be established by a certificate of such Credit Party or Issuing Bank, as the case may be, and the Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) The Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Agent by reason of taking or continuing to take any such action. (e) The Agent may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) The Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Agent has received notice from an Issuing Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Agent receives such a notice, the Agent shall give prompt notice thereof to each Issuing Bank. 8.06. Issuing Bank Not Relying on Agent or Issuing Banks. Each Issuing Bank acknowledges as follows: (a) neither the Agent nor any other Issuing Bank has made any representations or 29 warranties to it, and no act taken hereafter by the Agent or any other Issuing Bank shall be deemed to constitute any representation or warranty by the Agent or such other Issuing Bank to it; (b) it has, independently and without reliance upon the Agent or any other Issuing Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon the Agent or any other Issuing Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. Indemnification. Each Issuing Bank agrees to reimburse and indemnify the Agent, in its capacity as Agent, and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the obligations of the Credit Parties to do so), ratably in accordance with their respective Letter of Credit Committed Amounts, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for the Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, provided that no Issuing Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of the Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Issuing Bank fails to pay any such amount after a proper demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by the Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. 8.08. Agent in its Individual Capacity. With respect to its commitments hereunder and the Obligations owing to it, the Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Issuing Bank and may exercise the same as though it were not the Agent, and the terms "Issuing Banks" and like terms shall include the Agent in its individual capacity as such. The Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Agent were not the Agent hereunder. 8.09. Successor Agent. The Agent may resign at any time by giving 10 days' prior written notice thereof to the Issuing Banks and the Account Parties. The Agent may be removed by the Required Issuing Banks at any time by giving 10 days' prior written notice thereof to the Agent, the other Issuing Banks and the Account Parties. Upon any such resignation or removal, the Required Issuing Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Agent may, on behalf of the Issuing Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or 30 conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Agent shall be sufficiently given if given by the Required Issuing Banks, all notices or other communications required or permitted to be given to the Agent shall be given to each Issuing Bank, and all payments to be made to the Agent shall be made directly to the Account Parties or Issuing Bank for whose account such payment is made. 8.10. Additional Agents. If the Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Issuing Banks, the Agent and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Agent, to act as co-Agent or agent with such powers of the Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Agent under this Agreement or any other Transaction Document. 8.11. Calculations. The Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Issuing Bank to whom payment was due but not made shall be to recover from the other Issuing Banks any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party, to recover such amount from the appropriate Account Party. 8.12. Documentation Agent. Fleet National Bank shall not, in the capacity of Documentation Agent (as opposed to the capacity of Issuing Bank) have any duties or rights hereunder. ARTICLE IX MISCELLANEOUS 9.01. No Implied Waiver etc. No delay or failure of the Agent or any Issuing Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agent and the Issuing Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of the Agent or an Issuing Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described in Article VII hereof shall occur, each Issuing Bank shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations any debt owing by such Issuing Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such 31 Issuing Bank, and such Issuing Bank shall have and there is hereby created in favor of such Issuing Bank a security interest in all deposit accounts maintained by such Credit Party with such Issuing Bank, subject to Liens permitted under 6.03(f). Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the issuance of any Letter of Credit hereunder. 9.04. Expenses and Fees; Indemnity. (a) Each Account Party agrees to pay or cause to be paid and to save the Agent and (in the case of clause (iii) below) each of the Issuing Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by the Agent or such Issuing Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iii) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by the Agent or any Issuing Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of an Issuing Bank (in its capacity as such) which were incurred by such Issuing Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Issuing Bank by one or more of the other Issuing Banks. Each Account Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Agent or any Issuing Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and an Account Party agrees to save the Agent and each Issuing Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party hereby agrees to reimburse and indemnify the Agent and each Issuing Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by the Agent or any Issuing Bank of any of its rights or remedies under this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties under this Section 9.04, or any other indemnification obligation of the Account Parties hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties hereby agree to make the 32 maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of an Issuing Bank (in its capacity as such) which were incurred by such Issuing Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Issuing Bank by one or more of the other Issuing Banks. 9.05. Severability; Inconsistent Provisions. In the event any one or more of the provisions contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. In the event of any inconsistency between the terms of this Agreement and the terms of any Letter of Credit Application or Continuing Letter of Credit Agreement, the terms of this Agreement shall control. 9.06. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.07. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to an Issuing Bank, at such Issuing Bank's address on the signature pages hereof, if to the Agent at One Mellon Bank Center, Room 4401, Pittsburgh, Pennsylvania 15258, Attention: Karla Maloof, fax no. (412) 234-8087, with a copy to Loan Administration, Three Mellon Bank Center, Pittsburgh, PA 15259 fax no. (412) 209-6134; and if to any Credit Party, to XL Capital Ltd, Cumberland House, One Victoria Street, Hamilton HM11 Bermuda, Attn:William Robbie, fax no. (441) 292-5226, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from the Agent or any Issuing Bank or providing information to the Agent or any Issuing Bank, XL Insurance shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT 33 HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT RELATED HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND EACH ISSUING BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles. 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Account Parties, the Issuing Banks, the Agent, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of the Agent and all of the Issuing Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Issuing Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents; provided, that (i) any such participation sold to a Participant which is not an Issuing Bank, an affiliate of an Issuing Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Agent, unless an Event of Default has occurred and is continuing, in which case the consent of XL Capital shall not be required, (ii) any such Issuing Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Issuing Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Issuing Bank in connection with such Issuing Bank's rights and obligations under this Agreement and each of the other Transaction Documents, (v) such Participant shall be bound by the provisions of Section 9.18 hereof, and the Issuing Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, 34 (vi) no Participant (unless such Participant is an affiliate of such Issuing Bank, or is itself a Issuing Bank) shall be entitled to require such Issuing Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Issuing Bank may agree with such Participant that such Issuing Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Commitments, Letter of Credit Committed Amounts, fees payable hereunder and the Expiration Date. Each Account Party agrees that any such Participant shall be entitled to the benefits of Sections 2.09 and 9.04 with respect to its participation in the Commitments and the Letters of Credit outstanding from time to time; provided, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Issuing Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Issuing Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Commitments to any Issuing Bank, any affiliate of an Issuing Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment to a Purchasing Bank which is not an Issuing Bank, an affiliate of an Issuing Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Agent, unless an Event of Default has occurred and is continuing or exists, in which case the consent of XL Capital shall not be required, (ii) if an Issuing Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of such Issuing Bank's Letter of Credit Commitments and Letter of Credit Exposure then outstanding, (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Issuing Bank and of all of the transferor Issuing Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Issuing Bank and the Purchasing Bank shall execute and deliver to the Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Agent shall accept such Transfer Supplement; provided, however, that no such processing and recording fee shall be due if such assignment is to an affiliate of an Issuing Bank or a Federal Reserve Bank . Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the 35 close of business at the Agent's Office on the Transfer Effective Date specified in such Transfer Supplement. (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of an Issuing Bank hereunder, and (y) the transferor Issuing Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Issuing Bank's rights and obligations under this Agreement, such transferor Issuing Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. (d) Register. The Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Issuing Banks and the Letter of Credit Commitment of, and the amount of the Letter of Credit Committed Amount of, each Issuing Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Agent and the Issuing Banks may treat each person whose name is recorded in the Register as an Issuing Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by any Account Party or any Issuing Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Credit Party authorizes the Agent and each Issuing Bank to disclose to any Participant or Purchasing Bank (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of the Credit Parties and their affiliates. At the request of any Issuing Bank, a Credit Party, at such Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. Amendments and Waivers. Neither this Agreement nor any Transaction Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agent and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, the Agent or any Issuing Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agent in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Issuing Bank and the Agent. The Agent shall enter into such amendments, modifications or supplements from time to time as directed by the Required Issuing Banks, and only as so directed, provided, that no such amendment, modification or supplement may be made which will: (a) Increase the Letter of Credit Committed Amount of any Issuing Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Issuing Bank affected thereby; (b) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Issuing Bank affected thereby; (c) Change the definition of "Required Issuing Banks" or amend this Section 9.14, without the written consent of all the Issuing Banks; 36 (d) Amend or waive any of the provisions of Article VII hereof, or impose additional duties upon the Agent or otherwise adversely affect the rights, interests or obligations of the Agent, without the written consent of the Agent; or (e) Amend or waive any of the provisions of Article X or release any Guarantor from its obligations hereunder without the written consent of all the Issuing Banks; and provided further, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. 9.15. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Issuing Banks, the Agent or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Issuing Banks and the Agent harmless against any deficiency in terms of Dollars in the amounts received by the Issuing Banks or the Agent, as the case may be, arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Issuing Bank or the Agent, as the case may be, is able to purchase Dollars with the amount of the Judgment Currency actually received by such Issuing Bank or the Agent, as the case may be, on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties hereunder and shall apply irrespective of any indulgence granted by the Issuing Banks. 9.16. Records. The amount of outstanding Letters of Credit, each Issuing Bank's Letter of Credit Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agent and the Issuing Banks agree to keep confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which the Agent and the Issuing Banks reasonably expect that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent the Agent or any Issuing Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Agent or such Issuing Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by the Agent or any Issuing Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Issuing Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Issuing Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective 37 purchaser is a financial institution or has been consented to by the Account Parties, which consent will not be withheld if such purchaser is not a competitor of any Account Party or an affiliate of a competitor of any Account Party. 9.18. Sharing of Collections. The Issuing Banks hereby agree among themselves that if any Issuing Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party Pro Rata to all Issuing Banks in greater proportion than any such amount received by any other Issuing Bank, then the Issuing Bank receiving such proportionately greater payment shall notify each other Issuing Bank and the Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Issuing Banks. The Issuing Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Issuing Banks a participation in the applicable Obligations owed to such other Issuing Banks in such amount as shall result in a ratable sharing by all Issuing Banks of such excess amount (and to such extent the receiving Issuing Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Issuing Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Issuing Bank making such purchase. The Account Parties hereby consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were an Issuing Bank hereunder. ARTICLE X GUARANTEE 10.01. The Guarantee. Each of the Guarantors hereby irrevocably, unconditionally and absolutely guarantees to the Agent and the Issuing Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 10.02. Obligations Unconditional. The obligations of each Guarantor under this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or 38 defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party, for amounts paid under this Article X until such time as the Issuing Banks have been paid in full, no Letter of Credit is outstanding, the Letter of Credit Commitments under this Agreement have been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Issuing Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain irrevocable, absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Agent or any Issuing Bank as security for any of the Guaranteed Obligations shall be void or voidable, or shall fail to attach or be perfected or the Agent or any Issuing Bank shall fail to realize on any collateral security; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Agents, the Issuing Banks or any of them exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. 10.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agent and the Issuing Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agent or any Issuing Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted 39 a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 10.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agent and the Issuing Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 10.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 10.01. 10.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 10.06. No Restrictions. Except for restrictions under the Transaction Documents, no Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party, (y) make loans or advances to any Account Party, or (z) transfer any of its properties or assets to any Account Party. 40 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. XL INSURANCE LTD, as an Account Party and a Guarantor By: /s/ Christopher Coelho ------------------------------------ (Signature) Name: Christopher Coelho ---------------------------------- Title: Chief Financial Officer --------------------------------- XL MID OCEAN REINSURANCE LTD, as an Account Party and a Guarantor By: /s/ Henry C.V. Keeling ------------------------------------ (Signature) Name: Henry C.V. Keeling ---------------------------------- Title: President & CEO --------------------------------- XL CAPITAL LTD, as a Guarantor By: /s/ Brian M. O'Hara ------------------------------------ (Signature) Name: Brian M. O'Hara ---------------------------------- Title: President & Chief Executive Officer ----------------------------------- MELLON BANK, N.A., as an Issuing Bank, as Arranger and as Agent By: /s/ Susan M. Whitewood ------------------------------------ (Signature) Name: Susan M. Whitewood ---------------------------------- Title: Vice President --------------------------------- Notice Address: Institutional Banking Department One Mellon Bank Center, Room 4401 Pittsburgh, PA 15258 Attn: Karla Maloof Telephone: (412) 236-4147 Facsimile: (412) 234-8087 with a copy to: Manager, Letter of Credit Operations Three Mellon Bank Center, 23rd Floor 41 Pittsburgh, PA 15259 Initial Letter of Credit Committed Amount: $30,000,000 42 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as an Issuing Bank By: /s/ John S. McGill /s/ Clinton M. Johnson ----------------------------------------------- (Signature) Name: John S. McGill Clinton M. Johnson --------------------------------------------- Title: Director Managing Director -------------------------------------------- Notice Address: 31 West 52nd Street New York, NY 10019 Attn: John McGill Telephone: (212) 469-8101 Facsimile: (212) 469-8366 Initial Letter of Credit Committed Amount: $30,000,000 FIRST UNION NATIONAL BANK, as an Issuing Bank By: /s/ Gail M. Golightly ------------------------------------ (Signature) Name: Gail M. Golightly ---------------------------------- Title: Senior Vice President --------------------------------- Notice Address: Additional notice to: 301 South College Street International Trade Operations 1 First Union Center 10th Floor Attn: Standby L/C Unit Charlotte, NC 28288 8739 Research Drive - URP4 Attn: Butch Mayer Charlotte, NC 28262-0742 Telephone: (704) 374-6628 Telephone: (704) 593-7892 Facsimile: (704) 383-7611 Facsimile: (704) 593-7937 Initial Letter of Credit Committed Amount: $30,000,000 43 FLEET NATIONAL BANK, as an Issuing Bank By: /s/ Anson Harris ------------------------------------ (Signature) Name: Anson Harris ---------------------------------- Title: Vice President --------------------------------- Notice Address: Mail Stop CTMO 0250 777 Main Street Hartford, CT 06115-2001 Attn: Anson T. Harris Telephone: (860) 986-7518 Facsimile: (860) 986-1264 Initial Letter of Credit Committed Amount: $30,000,000 BANK ONE, NA (MAIN OFFICE CHICAGO), as an Issuing Bank By: /s/ Gretchen Roetzer ------------------------------------ (Signature) Name: Gretchen Roetzer ---------------------------------- Title: Commercial Banking Officer --------------------------------- Notice Address: Insurance Division - Suite 0085 1 Bank One Plaza Chicago, IL 60670-0085 Attn: Gretchen Roetzer Telephone: (312) 732-8068 Facsimile: (312) 732-4033 with a copy to: 153 West 51st Street New York, NY 10019 Attn: Sam Bridges Telephone: (212) 373-1142 Facsimile: (212) 373-1439 Initial Letter of Credit Committed Amount: $30,000,000 44 EX-10.14-27 15 EXHIBIT 10.14.27 Exhibit 10.14.27 02.24.00 [Unsecured LC Agreement] FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT THIS FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of February 25, 2000 (this "Amendment"), by and among XL Insurance Ltd, XL Capital Ltd and XL Mid Ocean Reinsurance Ltd (collectively, the "XL Parties"), MELLON BANK, N.A., DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, FIRST UNION NATIONAL BANK, FLEET NATIONAL BANK and BANK ONE, NA (MAIN OFFICE CHICAGO) as Issuing Banks (the "Issuing Banks") and MELLON BANK, N.A., as Agent (the "Agent"). W I T N E S S E T H: WHEREAS, the XL Parties, the Issuing Banks and the Agent are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of December 30, 1999 (the "Reimbursement Agreement"), pursuant to which the Issuing Banks have agreed, on the terms and subject to the conditions described therein, to extend credit to certain of the XL Parties by issuing letters of credit for the account of such XL Parties; and WHEREAS, the XL Parties have requested the Issuing Banks to make certain additional changes to the Reimbursement Agreement; WHEREAS, the Issuing Banks are willing to amend the Reimbursement Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Reimbursement Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Reimbursement Agreement. (a) Section 1.01 of the Reimbursement Agreement is hereby amended by adding thereto, in appropriate alphabetical sequence, the following definitions: "Asset Accumulation Lien" means a Lien on amounts received, and on actual and imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Credit Party's or Subsidiary's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien. "Total Adjusted Funded Debt" shall have the meaning given that term in Section 6.06 hereof. (b) Section 5.01 of the Reimbursement Agreement is hereby amended by adding at the end thereof a new paragraph (j) thereof to read as follows: (j) Information Regarding Asset Accumulation Liens. At the time of furnishing each certificate furnished pursuant to paragraph (c) of this Section 5.01, a statement, certified as true and correct by a principal financial officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation Liens (it being understood that the reports required by paragraphs (a) and (b) of this Section 5.01 shall satisfy the requirement of this clause (A) of this paragraph Unsecured LC Facility-First Amendment -2- (j) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital. (c) Section 6.03 of the Reimbursement Agreement is hereby amended by deleting the period at the end of paragraph (f) thereof and replacing it with the phrase "; or" and by adding at the end of such Section a new paragraph (g) to read as follows: (g) Asset Accumulation Liens. (d) Section 6.06 of the Reimbursement Agreement is hereby amended as follows: 6.06. Ratio of Total Adjusted Funded Debt to Consolidated Capital. XL Capital will not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than 0.35 at any time. As used herein, the term "Total Adjusted Funded Debt" shall mean, at any time, the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital or any of its Consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an Affiliate). SECTION 2. Conditions to Effectiveness. This First Amendment shall become effective upon the execution and delivery hereof by the XL Parties, the Required Issuing Banks and the Agent. Unsecured LC Facility-First Amendment -3- SECTION 3. Effect of Amendment. The Reimbursement Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 4. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 5. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. XL INSURANCE LTD, as an Account Party and a Guarantor By: /s/ Clive R. Tobin -------------------------- (Signature) Name: Clive R. Tobin ------------------------ Title: President ----------------------- XL MID OCEAN REINSURANCE LTD, as an Account Party and a Guarantor By: /s/ Henry C.V. Keeling -------------------------- (Signature) Name: Henry C.V. Keeling ------------------------ Title: President ----------------------- XL CAPITAL LTD, as a Guarantor By: /s/ Brian M. O'Hara -------------------------- (Signature) Name: Brian M. O'Hara ------------------------ Title: President & CEO ----------------------- Unsecured LC Facility-First Amendment -4- MELLON BANK, N.A., as an Issuing Bank and as Agent By: /s/ Karla Maloof -------------------------- (Signature) Name: Karla Maloof ------------------------ Title: Vice President ----------------------- DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as an Issuing Bank By: /s/ John S. McGill -------------------------- (Signature) Name: John S. McGill ------------------------ Title: Director ----------------------- By: /s/ Alan Krouk -------------------------- (Signature) Name: Alan Krouk ------------------------ Title: Assitant Vice President ----------------------- FIRST UNION NATIONAL BANK, as an Issuing Bank By: /s/ Robert C. Mayer, Jr. ------------------------- (Signature) Name: Robert C. Mayer, Jr. -------------------- Title: Senior Vice President -------------------- FLEET NATIONAL BANK, as an Issuing Bank By: /s/ Anson Harris -------------------------- (Signature) Name: Anson Harris ------------------------ Title: Vice President ----------------------- BANK ONE, NA (MAIN OFFICE CHICAGO), as an Issuing Bank By: /s/ Gretchen Roetzer -------------------------- (Signature) Name: Gretchen Roetzer ------------------------ Title: Corporate Banking Officer ----------------------- Unsecured LC Facility-First Amendment -5- EX-10.14-28 16 EXHIBIT 10.14.28 Exhibit 10.14.28 ================================================================================ [LOGO] U.S. $100,000,000 LETTER OF CREDIT AGREEMENT dated as of December 17, 1999 Between XL INSURANCE LTD AND XL MID OCEAN REINSURANCE LTD, as Applicants and THE CHASE MANHATTAN BANK, Issuing Bank ================================================================================ TABLE OF CONTENTS Page ARTICLE I Definitions SECTION 1.01. Defined Terms............................................... 1 SECTION 1.03. Terms Generally ............................................ 1 SECTION 1.04. Accounting Terms; GAAP...................................... 4 ARTICLE II The Letters of Credit SECTION 2.01. Commitment.................................................. 5 SECTION 2.02. Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions.............................. 5 SECTION 2.03. Termination and Reduction of Commitments.................... 7 SECTION 2.04. Fees........................................................ 7 SECTION 2.05. Interest.................................................... 8 SECTION 2.06. Increased Costs............................................. 8 SECTION 2.07 Taxes....................................................... 9 SECTION 2.08. Payments Generally.......................................... 10 ARTICLE III Representations and Warranties SECTION 3.01. Representations and Warranties.............................. 10 ARTICLE IV Conditions SECTION 4.01. Effective Date.............................................. 11 SECTION 4.02. Each Credit Event........................................... 11 ARTICLE V Covenants SECTION 5.01. Covenants................................................... 12 ARTICLE VI Events of Default........................ 12 ARTICLE VII Miscellaneous SECTION 7.01. Notices..................................................... 14 SECTION 7.02. Waivers; Amendments......................................... 14 SECTION 7.03. Expenses; Indemnity; Damage Waiver.......................... 14 SECTION 7.04. Successors and Assigns...................................... 15 SECTION 7.05. Survival.................................................... 16 SECTION 7.06. Counterparts; Integration; Effectiveness.................... 16 SECTION 7.07. Severability................................................ 17 SECTION 7.08. Right of Setoff............................................. 17 SECTION 7.09. Governing Law; Jurisdiction; Consent to Service of Process.. 17 SECTION 7.10. WAIVER OF JURY TRIAL........................................ 18 SECTION 7.11. Headings.................................................... 18 SECTION 7.12. Confidentiality............................................. 18 -2- LETTER OF CREDIT AGREEMENT dated as of December 17, 1999, among XL INSURANCE LTD ("XL Insurance"), a Bermuda limited liability corporation, and XL MID OCEAN REINSURANCE LTD ("XL Mid Ocean"), a Bermuda limited liability corporation (XL Mid Ocean, together with XL Insurance, the "Applicants"), and THE CHASE MANHATTAN BANK, as Issuing Bank (as defined herein). The parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Rate, respectively. "Application" has the meaning assigned to it in Section 2.02 hereof. "Assessment Rate" means, for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by the Federal Deposit Insurance Corporation of time deposits made in dollars at the offices of such member in the United States. "Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Commitment Termination Date and the date of termination of the Commitment. "Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Basic Documents" means this Agreement and any Application. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Official Body after the date of this Agreement or (c) compliance by the Issuing Bank or the Issuing Bank (or, for purposes of Section 2.06(b), by any lending office of the Issuing Bank or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Official Body made or issued after the date of this Agreement. "Commitment" means the commitment of the Issuing Bank to issue Letters of Credit, as such commitment may be (a) reduced from time to time pursuant to Section 2.03 and (b) reduced or increased from time to time pursuant to assignments by the Issuing Bank pursuant to Section 7.04. The initial amount of the Issuing Bank's Commitment is $100,000,000. "Commitment Termination Date" means December 16, 2000. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "dollars" or "$" refers to lawful money of the United States of America. "Effective Date" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 7.02). "Events of Default" has the meaning assigned to such term in Article VI. "Excluded Taxes" means, with respect to the Issuing Bank, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which the Issuing Bank is organized or in which its principal office is located and (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Applicants are located. "Existing Revolver" means that certain $500,000,000 Short Term Revolving Credit Agreement dated as of June 30, 1999 among the Applicants, XL Capital Ltd, the Banks party thereto, Mellon Bank, N. A., as Administrative Agent, and the Issuing Bank, as Syndication Agent, as in effect on the date hereof. "Federal Funds Rate" means, with respect to any amount, the rate per annum at which U. S. Dollar deposits with an overnight maturity and in a comparable amount are offered by the Bank in the Federal funds market at approximately 2:00 p.m. New York City time. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of an Applicant. "GAAP" means generally accepted accounting principles in the United States of America. "Indemnified Taxes" means Taxes other than Excluded Taxes. 2 "Indemnitee" has the meaning ascribed to such term in Section 7.03(b). "Issuing Bank" means The Chase Manhattan Bank. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "LC Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Applicants at such time. "Letter of Credit" means any standby or commercial letter of credit issued pursuant to this Agreement. "Material Adverse Effect" means, with respect to an Applicant, a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of such Applicant and its Subsidiaries taken as a whole, (b) the ability of such Applicant to perform any of its obligations under this Agreement or (c) the rights of or benefits available to the Issuing Banks under the Basic Documents. "Official Body" means any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Participant " has the meaning ascribed to such term in Section 7.04(c). "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Official Body or other entity. "Prime Rate" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "SAP" means, as to each Applicant, the statutory accounting practices prescribed or permitted by the relevant Official Body for such Applicant's domicile for the preparation of such Applicant's financial statements and other default reports by insurance corporations of the same type as such Applicant in effect on the date such statements or reports are to be prepared. 3 "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any subsidiary of an Applicant. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Official Body. "Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System of the United States of America through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of such Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Issuing Bank from three negotiable certificate of deposit dealers of recognized standing selected by it. "Transactions" means the execution, delivery and performance by the Applicants of this Agreement and the issuance of Letters of Credit hereunder. SECTION 1.02. Terms Generally. The definitions of terms herein shall apply equally to 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". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, and (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement. SECTION 1.03. Accounting Terms; GAAP and SAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed, as the context requires, in accordance with GAAP or SAP, as the context may require, as in effect from time to time; provided that, if the Applicants notify the Issuing Bank that the Applicants request an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or SAP or in the application thereof on the operation of such provision (or if the Issuing Bank notifies the Applicants that the Issuing Bank requests an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or SAP or in the 4 application thereof, then such provision shall be interpreted on the basis of GAAP or SAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision shall have been amended in accordance herewith. ARTICLE II The Letters of Credit SECTION 2.01. Commitment. Subject to the terms and conditions set forth herein, the Issuing Bank agrees to issue (or extend, modify or amend) Letters of Credit for the accounts of the Applicants from time to time during the Availability Period in an aggregate principal amount not to exceed the Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Applicants may reduce or cancel Letters of Credit or request the renewal of Letters of Credit or the issuance of new Letters of Credit. The Letters of Credit shall be used for general corporate purposes. SECTION 2.02. Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. (a) To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), an Applicant shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance (which shall be a Business Day), amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (b) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. An Applicant also shall submit a letter of credit application (an "Application") on the Issuing Bank's standard form in connection with any request for a Letter of Credit; provided that in the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any Application, the terms and conditions of this Agreement shall control. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the relevant Applicant shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension the LC Exposure shall not exceed the Commitment. (b) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Commitment Termination Date. (c) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Applicant thereof shall reimburse such LC Disbursement by paying to the Issuing Bank an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if such Applicant shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by such Applicant prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that such Applicant receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that 5 such Applicant receives such notice, if such notice is not received prior to such time on the day of receipt. (d) Obligations Absolute. The Applicants' obligations to reimburse LC Disbursements as provided in paragraph (c) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank in good faith under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, an Applicant's obligations hereunder. Neither the Issuing Bank, nor any of its Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Applicants to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Applicants to the extent permitted by applicable law) suffered by the Applicants that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (e) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the relevant Applicant by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve such Applicant of its obligation to reimburse the Issuing Bank with respect to any such LC Disbursement. (g) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the relevant Applicant shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that such Applicant reimburses such LC Disbursement, at the Alternative Base Rate; provided that, if such Applicant fails to reimburse such LC Disbursement when due pursuant to paragraph (c) of this Section, then Section 2.05 shall apply. 6 (h) Cash Collateralization. If any Event of Default shall occur and be continuing, then on or prior to the Business Day following the Business Day on which the Applicants receive notice from the Issuing Bank demanding the deposit of cash collateral pursuant to this paragraph, the Applicants shall deposit in an account with the Issuing Bank an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Applicants described in clause (e) of Article VI. Such deposit shall be held by the Issuing Bank as collateral for the payment and performance of the obligations of the Applicants under this Agreement. The Issuing Bank shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Issuing Bank and at the Applicants' risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Issuing Bank to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Applicants for the LC Exposure at such time. If the Applicants are required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount, including interest or any profits thereon, if any, (to the extent not applied as aforesaid) shall be returned to the Applicants within three Business Days after all Events of Default have been cured or waived. SECTION 2.03. Termination and Reduction of Commitment. (a) Unless previously terminated, the Commitment shall terminate on the Commitment Termination Date. (b) The Applicants may at any time terminate, or from time to time reduce, the Commitment; provided that (i) each reduction of the Commitment shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Applicants shall not terminate or reduce the Commitment if the sum of the LC Exposure would exceed the Commitment. (c) The Applicants shall notify the Issuing Bank of any election to terminate or reduce the Commitment under paragraph (b) of this Section at least two Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. SECTION 2.04. Fees. (a) The Applicants jointly and severally agree to pay to the Issuing Bank a facility fee, which shall accrue at a rate per annum equal to 0.07% on the daily amount of the Commitment (used or unused) of the Issuing Bank during the period from and including the Effective Date to but excluding the date on which the Commitment terminates. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitment terminates, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) Each Applicant agrees to pay to the Issuing Bank a commission with respect to each Letter of Credit issued for its account, which shall accrue at the a rate per annum equal to 0.35% on the average daily amount of the Issuing Bank's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which the Commitment terminates and the date on which the Issuing Bank ceases to have any LC Exposure, as well as the Issuing Bank's standard reasonable fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of 7 drawings thereunder. Commissions accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Commitment terminates and any such fees accruing after the date on which the Commitment terminates shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 Business Days after demand. Commissions shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) All fees payable hereunder shall be paid on the dates due, in immediately available funds. Fees paid shall not be refundable under any circumstances. SECTION 2.05. Interest. If any principal of or interest on any LC Disbursement or any fee or other amount payable by the Applicants hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to 2% plus the Alternative Base Rate and be payable upon demand. All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.06. Increased Costs. (a) If any Change in Law shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Issuing Bank, and the result of any of the foregoing shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Applicants jointly and severally agree to pay to the Issuing Bank on demand such additional amount or amounts as will compensate the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on the Issuing Bank's capital or on the capital of the Issuing Bank's holding company, if any, as a consequence of this Agreement, or the Letters of Credit issued by the Issuing Bank, to a level below that which the Issuing Bank or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration the Issuing Bank's policies and the policies of the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Applicants jointly and severally agree to pay to the Issuing Bank on demand such additional amount or amounts as will compensate the Issuing Bank or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of the Issuing Bank setting forth the amount or amounts determined in good faith as necessary to compensate the Issuing Bank or its holding company, as specified in paragraph (a) or (b) of this Section, and containing a reasonable description of the facts and circumstances regarding the demand shall be delivered to the Applicants and shall be conclusive absent manifest error. The Applicants shall pay the Issuing Bank the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of the Issuing Bank's right to demand such compensation; provided 8 that the Applicants shall not be required to compensate the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that the Issuing Bank notifies the Applicants of the Change in Law giving rise to such increased costs or reductions and of the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.07. Taxes. (a) Subject to the immediately succeeding sentence, any and all payments by or on account of any obligation of any Applicant hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes imposed by Bermuda or any other jurisdiction in which such Applicant conducts its business; provided that if such Applicant shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Issuing Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Applicant shall make such deductions and (iii) such Applicant shall pay the full amount deducted to the relevant Official Body in accordance with applicable law. No additional sums will be payable pursuant to the immediately preceding sentence by an Applicant hereunder to the Issuing Bank with respect to any Indemnified Tax or Other Tax which would not have been imposed, payable or due: (i) but for the existence of any present or former connection between the Issuing Bank and Bermuda or any other jurisdiction in which such Applicant conducts its business (including, without limitation, the Issuing Bank being or having or maintaining or having maintained a permanent establishment or being or having been engaged in business in, Bermuda or any other jurisdiction in which such Applicant conducts its business); or (ii) but for the failure of the Issuing Bank to promptly comply with a request by the Applicant to satisfy any certification, identification or other reporting requirements, whether imposed by statute, treaty, regulation or administrative practices, concerning nationality, residence or connection with any applicable taxing jurisdiction. The obligation to pay additional sums in respect of Indemnified Taxes or Other Taxes shall not apply to any Tax which is payable otherwise than by deduction or withholding. (b) If the Issuing Bank determines in its sole discretion in good faith that it has received a refund in respect of any Indemnified Taxes as to which it has been idemnified by an Applicant, or with respect to which an Applicant has paid additional amounts pursuant to this Section 2.07, the Issuing Bank shall promptly after the date of such receipt pay over the amount of such refund to such Applicant (but only to the extent of indemnity payments made, or additional amounts paid, by such Applicant under this Section 2.07 with respect to Indemnified Taxes giving rise to such refund and only to the extent that the Issuing Bank has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of the Issuing Bank (including additional Indemnified Taxes attributable to such refund, as determined by the Issuing Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund). An Applicant receiving any such payment from the Issuing Bank shall, upon demand, pay to the Issuing Bank any amount paid over to such Applicant by the Issuing Bank (plus penalties, interest or other charges) in the event the Issuing Bank is required to repay any portion of such refund to such Official Body. Nothing in the Section 2.07 shall entitle an Applicant to have access to the records of the Issuing Bank including, without limitation, tax returns. (c) In addition, each Applicant shall pay any Other Taxes to the relevant Official Body in accordance with applicable law. (d) Each Applicant shall indemnify the Issuing Bank, promptly after receipt of written demand 9 therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Issuing Bank on to the relevant Official Body in accordance with applicable law or with respect to any payment by or on account of any obligation of such Applicant hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section 2.07) and any penalties and interest arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Official Body. A certificate as to the amount of such payment or liability delivered to an Applicant by the Issuing Bank shall be conclusive absent manifest error. (e) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by an Applicant or by the Issuing Bank, as the case may be, to an Official Body, such Applicant or Issuing Bank shall deliver to the other party hereto the original or a certified copy of a receipt issued by such Official Body evidencing such payment, a copy of the return reporting such payment or other reasonable evidence of such payment. SECTION 2.08. Payments Generally. (a) The Applicants shall make each payment required to be made by them hereunder prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Issuing Bank, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Issuing Bank at its offices at 270 Park Avenue, New York, New York 10017. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Issuing Bank to pay fully all amounts of unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder and (ii) second, towards payment of unreimbursed LC Disbursements then due hereunder. ARTICLE III Representations and Warranties Section 3.01. Representations and Warranties. Each Applicant represents and warrants that each of the representations and warranties contained in Article III of the Existing Revolver, which provisions, together with the related definitions, as in effect on the date hereof are hereby incorporated in this Section 3.01 by reference (mutatis mutandis) for the benefit of the Issuing Bank and shall continue for the purposes of this Agreement regardless of the termination of the Existing Revolver or the Issuing Bank's participation therein, or any amendment of, or consent to any deviation from or other modification of, the Existing Revolver; provided that for the purposes of this Section 3.01 references in Article III of the Existing Revolver to (a) the "Borrower" shall be deemed to be references to each Applicant hereunder, (b) "this Agreement", the "Loan Documents," the "Notes" and "hereunder" or other words of similar import shall be deemed to be references to this Agreement and any other Basic Document, (c) the "Administrative Agent," "any Agent" and the "Banks" shall be deemed to be references to the Issuing Bank, (d) "borrowing" shall be deemed to be references to the Letters of Credit and (e) "Closing Date" shall be deemed to be a reference to the Effective Date; provided further that for the purposes of this Section 3.01, references in Section 3.01 of the Existing Revolver to Schedule 3.01 shall be disregarded. 10 ARTICLE IV Conditions SECTION 4.01. Effective Date. The obligation of the Issuing Bank to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 7.02): (a) The Issuing Bank (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Issuing Bank (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Issuing Bank shall have received a favorable written opinion(s) (addressed to the Issuing Bank and dated the Effective Date) of counsel for the Applicants, in form and substance satisfactory to the Issuing Bank and covering such other matters relating to the Applicants, this Agreement or the Transactions as the Issuing Bank may reasonably request. The Applicants hereby request such counsel to deliver such opinion. (c) The Issuing Bank shall have received such documents and certificates as the Issuing Bank or its counsel may reasonably request relating to the organization, existence and good standing of each Applicant, the authorization of the Transactions and any other legal matters relating to such Applicant, this Agreement or the Transactions, all in form and substance satisfactory to the Issuing Bank and its counsel. (d) The Issuing Bank shall have received a certificate, dated the Effective Date and signed by the President, any Vice President or the Financial Officer of each Applicant, confirming compliance as of the Effective Date with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (e) The Issuing Bank shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Applicants hereunder. The Issuing Bank shall notify the Applicants promptly of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligation of the Issuing Bank to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 8.02) at or prior to 3:00 p.m., New York City time, on December 31, 1999 (and, in the event such conditions are not so satisfied or waived, the Commitment shall terminate at such time). SECTION 4.02. Each Credit Event. The obligation of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Applicants set forth in this Agreement shall be true and correct on and as of the date of the date of issuance, amendment, renewal or extension of such Letter of Credit. (b) At the time of and immediately after giving effect to the issuance, amendment, renewal or extension of such Letter of Credit, no Default shall have occurred and be continuing. 11 Unless the Issuing Bank receives notice from the applicable Applicant to the contrary before any such issuance, amendment, renewal or extension is made, each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Applicants on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Covenants Section 5.01. Covenants. So long as any amount owing under this Agreement shall remain unpaid, the Issuing Bank shall have any Commitment thereunder, or any Letter of Credit shall remain outstanding, the Applicants shall comply with and be bound by each of the covenants applicable to them contained in Articles V and VI of the Existing Revolver, which provisions, together with the related definitions, as in effect on the date hereof are hereby incorporated in this Section 5.01 by reference (mutatis mutandis) for the benefit of the Issuing Bank and shall continue for the purposes of this Agreement regardless of the termination of the Existing Revolver or the Issuing Bank's participation therein, or any amendment of, or consent to any deviation from or other modification of, the Existing Revolver; provided that for the purposes of this Section 5.01 references in Articles V and VI of the Existing Revolver to (a) the "Borrower" shall be deemed to be references to each Applicant hereunder, (b) the "Required Banks," the, each or any "Bank," "Agent," or the "Administrative Agent" shall be deemed to be references to the Issuing Bank hereunder, (c) "this Agreement" or "hereunder" or other words of similar import shall be deemed to be references to this Agreement and any other Basic Documents, (d) the "Loans" or the "Notes" shall be deemed to be references to the Letters of Credit and (e) "Event of Default" and "Potential Default" shall be deemed to be references to an Event of Default and Default, respectively. ARTICLE VI Events of Default If any of the following events ("Events of Default") shall occur: (a) any Applicant shall fail to pay any principal of any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable; (b) any Applicant shall fail to pay any interest, fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three days from the due date thereof; (c) any representation or warranty made or deemed made by or on behalf of any Applicant in or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, shall prove to have been false or misleading when made or deemed made in any material respect; (d) any Applicant shall fail to observe or perform (i) any covenant, condition or agreement contained in Section 5.01 hereof, or (ii) any other term, covenant or agreement contained in this Agreement or incorporated herein by reference on its part to be performed or observed if the failure to 12 perform or observe such other term, covenant or agreement shall remain unremedied for thirty days after written notice thereof shall have been given to the Applicants by the Issuing Bank; (e) any Applicant or any of its Subsidiaries shall fail to pay any principal of or premium or interest on or any other obligation for borrowed money in a principal amount of at least $10,000,000 in the aggregate or any obligation for borrowed money under the Existing Revolver or the Revolving Credit Agreement dated as of June 6, 1997, as amended, to which each Applicant is party, in each case when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such borrowed money obligations or the Existing Revolver or such Revolving Credit Agreement; or any other event shall occur or condition shall exist under an agreement or instrument relating to any obligation for borrowed money in the principal amount of $10,000,000 or more or contained in the Existing Revolver or such Revolving Credit Agreement and shall continue after the applicable grace period, if any, specified in such agreement or instrument, the Existing Revolver or such Revolving Credit Agreement if the effect of such event or condition is to accelerate, or to permit the acceleration of, the scheduled maturity of any such obligations; or any such obligations shall be declared due and payable, or required to be prepaid (other than by scheduled required prepayment), prior to the stated maturity thereof; (f) any Applicant shall admit in writing its inability to pay its debts generally as they become due, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Applicant seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of its or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against any Applicant (but not instituted by any Applicant), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, any Applicant or for any substantial part of its property) shall occur; (g) XL Capital Ltd. shall cease to own, beneficially and of record, directly or indirectly, all of the outstanding voting shares of capital stock either Applicant, except for nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law; (h) any judgment or order for the prepayment of money in excess of $50,000,000 in the aggregate shall be rendered against any Applicant and such judgment or order shall remain undischarged or uncontested or appealed in good faith for a period of 30 consecutive days; (i) a Change of Control (as defined in the Existing Revolver) shall occur; then, and in every such event (other than an event with respect to any Applicant described in clause (f) of this Article), and at any time thereafter during the continuance of such event, the Issuing Bank may by notice to the Applicants, take either or both of the following actions, at the same or different times: (i) terminate the Commitment, and thereupon the Commitment shall terminate immediately, and (ii) declare all fees and other obligations of the Applicants accrued hereunder to be due and payable, and thereupon all such fees and other obligations shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Applicants; and in case of any event with respect to the Applicants described in clause (f) of this Article, 13 the Commitment shall automatically terminate and all fees and other obligations of the Applicants accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Applicants. ARTICLE VII Miscellaneous SECTION 7.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to XL Insurance, to it at Cumberland House, One Victoria Street, P.O. Box HM 2245, Hamilton, HMJX Bermuda, Attention of William Robbie (Telecopy No. (441) 292-8618, with a copy to Paul Giordano, Esq. at the same address and telecopy number); (b) if to XL Mid Ocean, to it at Cumberland House, One Victoria Street, P.O. Box HM 2245, Hamilton, HMJX Bermuda, Attention of William Robbie (Telecopy No. (441) 292-8618, with a copy to Paul Giordano, Esq. at the same address and telecopy number); (b) if to the Issuing Bank, to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Donald Rands (Telephone No. (212) 270-5528; Telecopy No. (212) 270-1001), with a copy to Daniel Serrao, Chase Securities Inc. 270 Park Avenue, New York, New York 10017 (Telephone No. (212) 270-6565; Telecopy No. (212) 270-1001); Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 7.02. Waivers; Amendments. (a) No failure or delay by the Issuing Bank in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Issuing Bank hereunder are cumulative and are not exclusive of any rights or remedies that it would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Applicants therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Issuing Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Applicants and the Issuing Bank. SECTION 7.03. Expenses; Indemnity; Damage Waiver. (a) The Applicants jointly and severally agree to pay (i) all reasonable out-of-pocket expenses incurred by the Issuing Bank and its 14 Affiliates, including the reasonable fees (or internal cost allocations, in the case of internal legal counsel for the Issuing Bank), charges and disbursements of counsel for the Issuing Bank, in connection with the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all reasonable out-of-pocket expenses incurred by the Issuing Bank, including the reasonable fees, charges and disbursements of any counsel for the Issuing Bank in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Letters of Credit issued hereunder, including all such reasonable out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Letters of Credit. (b) The Applicants jointly and severally agree to indemnify the Issuing Bank and each Related Party of the Issuing Bank (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent permitted by applicable law, the Applicants shall not assert, and hereby waive, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Letter of Credit or the use of the proceeds thereof. (d) All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 7.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that no Applicant may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Issuing Bank (and any attempted assignment or transfer by such Applicant without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of the Issuing Bank) any legal or equitable right, remedy or claim under or by reason of this Agreement. 15 (b) The Issuing Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment or LC Exposure); provided that, except in the case of an assignment to an Affiliate of the Issuing Bank, the Applicants must give their prior written consents to such assignment (which consents shall not be unreasonably withheld). (c) The Issuing Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, without the consent of the Applicants, sell participations to one or more banks or other entities (a "Participant") in all or a portion of the Issuing Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the LC Exposure owing to it); provided that (i) the Issuing Bank's obligations under this Agreement shall remain unchanged, (ii) the Issuing Bank shall remain solely responsible to the Applicants for the performance of such obligations and (iii) the Applicants shall continue to deal solely and directly with the Issuing Bank in connection with the Issuing Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Issuing Bank sells such a participation shall provide that the Issuing Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that the Issuing Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 7.02(b) that affects such Participant. Subject to paragraph (d) of this Section, the Applicants agree that each Participant shall be entitled to the benefits of Sections 2.06 and 2.07 to the same extent as if it were the Issuing Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 7.08 as though it were the Issuing Bank. (d) A Participant shall not be entitled to receive any greater payment under Section 2.06 or 2.07 than the Issuing Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Applicants' prior written consents. (e) The Issuing Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Issuing Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release the Issuing Bank from any of its obligations hereunder or substitute any such pledgee or assignee for the Issuing Bank as a party hereto. SECTION 7.05. Survival. All covenants, agreements, representations and warranties made by the Applicants herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Issuing Bank and shall survive the execution and delivery of this Agreement and the issuance of any Letters of Credit, and shall continue in full force and effect as long as any amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitment has not expired or terminated. The provisions of Sections 2.06 and Article VII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the expiration or termination of the Letters of Credit and the Commitment or the termination of this Agreement or any provision hereof. 16 SECTION 7.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement constitutes the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Issuing Bank and when the Issuing Bank shall have received counterparts hereof which, when taken together, bear the signature of the Applicants, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 7.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 7.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, the Issuing Bank and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by the Issuing Bank or such Affiliate to or for the credit or the account of any Applicant against any of and all the obligations of such Applicant now or hereafter existing under this Agreement held by the Issuing Bank, irrespective of whether or not the Issuing Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of the Issuing Bank under this Section are in addition to other rights and remedies (including other rights of setoff) which the Issuing Bank may have. SECTION 7.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) Each Applicant hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Issuing Bank may otherwise have to bring any action or proceeding relating to this Agreement against any Applicant or its properties in the courts of any jurisdiction. (c) Each Applicant hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent 17 permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each Applicant irrevocably consents to service of process in the manner provided for notices in Section 7.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 7.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) 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 (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 7.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 7.12. Confidentiality. The Issuing Bank agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Applicant or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Issuing Bank on a nonconfidential basis from a source other than an Applicant. For the purposes of this Section, "Information" means all information received from any Applicant relating to such Applicant or its business, other than any such information that is available to the Issuing Bank on a nonconfidential basis prior to disclosure by such Applicant; provided that, in the case of information received from such Applicant after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of 18 Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. XL INSURANCE LTD By: /s/ Christopher Coelho ----------------------------------- Name: Christopher Coelho Title: Chief Financial Officer XL MID OCEAN REINSURANCE LTD By: /s/ Henry C.V. Keeling ----------------------------------- Name: Henry C.V. Keeling Title: President & Chief Executive Officer THE CHASE MANHATTAN BANK By: /s/ Donald Rands ----------------------------------- Name: Donald Rands Title: Vice President 19 EX-10.14-29 17 EXHIBIT 10.14.29 Exhibit 10.14.29 [Letterhaed of ING Barings] XL Capital Ltd; Cumberland House One Victoria Street P.O. Box HM 2245 Hamilton HMJX Bermuda XL Insurance Ltd; and Cumberland House One Victoria Street P.O. Box HM 2245 Hamilton HMJX Bermuda XL Mid Ocean Reinsurance Ltd Cumberland House One Victoria Street P.O. Box HM 2245 Hamilton HMJX Bermuda 17 December 1999 Dear Sirs, We, ING Bank N.V., acting through our London Branch at 60 London Wall, London EC2M 5TQ, (the "Bank") are pleased to confirm our agreement with you, XL Capital Ltd, XL Insurance Ltd and XL Mid Ocean Reinsurance Ltd (each an "Account Party" and collectively the "Account Parties") to make available an uncommitted Letter of Credit facility together with its related schedules (the "Facility") under the terms and conditions provided below. 1. Definitions (a) "Anniversary Date" shall mean each anniversary after the Date of Issuance. (b) "Business Day" means a day on which the relevant London financial markets are open for the transaction of business contemplated hereby and, a day on which banks are open for business in the place of payment. (c) "Event of Default" means the events of default set out in Clause 12 hereof. (d) "Expiry Date" means the expiry date of a Letter of Credit from time to time which shall be an initial period of 5 years in respect of Letters of Credit issued in favour of The Council of Lloyd's , subject to an annual extension of 365 days in each case. (e) "Letter of Credit" means any Letter of Credit issued by the Bank pursuant to the terms of this Facility. (f) "Material Indebtedness" means any indebtedness of the Account Party in an aggregate principal amount exceeding USD15,000,000 (fifteen million United States Dollars). 1 (g) "Subsidiary" has the meaning ascribed to it by Section 736 of the Companies Act 1985 (as amended from time to time). 2. Type and Amount of Facility Type: Issuance of Reinsurance Letters of Credit in favour of The Council of Lloyd's substantially in the form of the Fourth Schedule attached to this Facility Amount: Up to a maximum aggregate of USD150,000,000, (in words: one hundred and fifty million United States Dollars) Account Parties: XL Capital Ltd; XL Insurance Ltd; or XL Mid Ocean Reinsurance Ltd Beneficiaries: To be advised Initial Term of each Letter of Credit: Five years for each Letter of Credit issued in favour of the Council of Lloyd's Date of Issuance: on or before 31st January 2000 Issuing Fee: 35 basis points per annum Purpose: to cover Funds at Lloyd's Requirements 3. Availability of Facility (a) When an Account Party wishes the Bank to issue Letters of Credit on its behalf, the Account Party shall give to the Bank at least two Business Days irrevocable written notice in the form attached at Third Schedule hereto ("Drawdown Notice") of its request referring to the Facility and specifying the currency and the amount of the Letter of Credit and the date upon which such Letter of Credit is to expire unless extended as provided in the terms of the Letter of Credit. (b) This Facility is of an uncommitted nature. Accordingly, there is no obligation on the Bank to agree to any request made by the Account Party pursuant to Clause 3(a). In the event that the Bank declines to comply with any such request, it shall have no further effect. (c) If there is any inconsistency between the terms of any Drawdown Notice and the terms of this Facility, the terms of this Facility shall prevail. 2 (d) Each Account Party shall be jointly and severally liable for the liabilities of each of the other Account Parties hereunder. 4. Fees The Account Parties will pay the Bank, in respect of each Letter of Credit, an opening fee payable quarterly in arrears in the currency of each Letter of Credit, computed on the basis of actual days between the Date of Issuance and the Anniversary Date and upon a 360 day year at 35 basis points per annum on the maximum amount of the Bank's liability under the Letter of Credit. 5. The Account Parties liabilities in relation to Letters of Credit 5.1 Reimbursement Each relevant Account Party shall: (a) pay to the Bank on demand an amount equal to and in the same currency as all sums paid by the Bank under or in connection with any Letter of Credit issued pursuant to this Facility with any sums payable by the Account Party hereunder); and (b) indemnify the Bank on demand against all actions, charges, claims, costs, damages, demands, expenses, taxes, duties, losses and proceedings (other than actions, charges, claims, costs, damages, demands, taxes, duties, losses and proceedings resulting from negligence or wilful default on the part of the Bank) which may be brought or preferred against the Bank or which the Bank may suffer or incur arising out of or in connection with any Letter of Credit issued hereunder or any amendment or variation in the terms of that Letter of Credit in connection with the enforcement or the preservation of the Bank's rights hereunder. 5.2 Authorisations The Bank is irrevocably authorised to make any payments and comply with any demands which may be claimed from or made upon the Bank under, in connection with or by reason of any Letter of Credit issued pursuant to the terms hereof on the first demand being made. The Bank may make these demands or comply with these payments: (a) without any reference to or further authority from the relevant Account Party; (b) without requiring proof that the amounts so demanded are or were due; and (c) notwithstanding that an Account Party may dispute the validity of demand or payment or that any demand is made after the stated expiry date (if any) of the relevant Letter of Credit. 5.3 Binding effect of payments Any payment which the Bank shall make in accordance with (or which is apparently or purporting to be in accordance with) any Letter of Credit issued hereunder shall be binding upon, and shall be accepted by, the Company as conclusive evidence that the Bank was liable to make such payment. 3 5.4 Defences It shall not be a defence to a claim by the Bank against an Account Party hereunder that the Bank could have resisted any claim by the beneficiary of the relevant Letter of Credit. 5.5 Risk Any Letter of Credit issued hereunder or any communication shall be sent at the relevant Account Party's risk and cost and each Account Party shall hold the Bank harmless from any liability (other than liability resulting from negligence or wilful default on the part of the Bank) for any loss or damage arising out of any delay, loss in transit, errors in translation, coding or decoding or omissions, variations, mutilations or other errors in transmission of those letters, facsimile, cables or telex messages. 6. Default Interest (a) If an Account Party fails to pay any amount payable by it hereunder on the due date thereof, the Account Party shall on demand from time to time pay interest on such overdue amount from the due date up to the date of receipt of actual payment (both before and after judgement) at a rate determined by the Bank from time to time to be 2 % above the offered rate quoted by leading banks in the London Interbank Market at or about 11.00 a.m. (London time) on the appropriate quotation date for deposits of a similar amount to, and in the currency of, the unpaid amount, and for such interest period as the Bank may consider appropriate. Such interest shall be compounded daily. (b) Interest shall be calculated on the basis of a 360 day year and for the actual number of days elapsed in the period of question. 7. Payments All payments to be made by an Account Party hereunder shall be made to the Bank in US Dollar funds for value on the due date to Chase Manhattan Bank N.A. New York, for the account of ING Bank N.V. London Branch, Account No.001-1-938123 or in other currencies to an account as instructed by the Bank, without set-off or counter-claim and free of and without deduction for any taxes, levies, withholdings or imposts imposed by any governmental or taxing authority in Bermuda or the Cayman Islands whatsoever. If any deductions whatsoever are required to be made, each Account Party hereby agrees to indemnify the Bank against the same and will pay such additional amounts as the Bank may certify as necessary to ensure receipt by the Bank of the full amount it would have received hereunder but for such deduction. In the event of such payment the Account Parties will deliver promptly to the Bank such tax receipts or other documentation as it may reasonably require. No such additional amounts will be payable with respect to a payment made to the Bank with respect to any tax or other amount which would not have been imposed, payable or due: (i) but for the existence for any present or former connection between the Bank and Bermuda or the Cayman Islands (including without limitation, the Bank being or having or maintaining or having maintained a permanent establishment or being or having been engaged in business in, Bermuda or the Cayman Islands); or (ii) but for the failure to comply with a request by an Account Party to 4 satisfy any certification, identification or other reporting requirements, whether imposed by statute, treaty, regulation or administrative practices, concerning nationality, residence or connection with any applicable taxing jurisdiction. The obligation to pay additional amounts in respect of taxes shall not apply to any tax which is payable otherwise than by deduction or withholding. 8. Increased Costs If the result of any present or future law, regulation, treaty or official directive (whether or not having the force of law) or any change therein or in the interpretation or application thereof or compliance by the Bank with any request of any relevant authority is directly or indirectly to increase the cost to the Bank of the transactions contemplated hereby, or is to reduce any amount receivable by the Bank or the effective return to the Bank hereunder whether by way of change in the manner in which the Bank allocates capital to the Account Parties' obligations hereunder or otherwise, each Account Party will, forthwith on demand, which demand shall include a description of the facts and circumstances regarding such a demand, pay to the Bank such amounts as the Bank shall certify as necessary to compensate it for such additional cost or reduction. 9. Collateralisation or cancellation of Letters of Credit issued to The Council of Lloyd's The Bank may, in its absolute discretion, serve notice on an Account Party and an Account Party may serve notice on the Bank, at least thirty days before each anniversary of the date of issuance of a Letter of Credit (an "Anniversary Date") issued in favour of The Council of Lloyd's, that the Bank or the Account Party, respectively, does not wish to extend such Letter of Credit beyond its Expiry Date. On receipt of such notice by the relevant Account Party or on service of such notice by the relevant Account Party on the Bank, the Account Party undertakes to either (i) provide the Bank on or before the Anniversary Date with collateral equal to 110% of the face value of such Letters of Credit in the form of AA rated Corporate Bonds or OECD bonds together with a charge or other security over such collateral in a form satisfactory to the Bank or (ii) to ensure that the Letter of Credit is cancelled on or before the Anniversary Date. Failure by an Account Party to comply with this clause 9 shall constitute an Event of Default in accordance with clause 12 hereof. 10. Representations and Warranties Each Account Party represents and warrants on the date of this Facility and on each date that any amount under this Facility is or may be outstanding as if warranted on each such date that: (a) it is duly incorporated and validly existing under the laws of the jurisdiction of its incorporation; and (b) the obligations expressed to be assumed by it in this Facility are legal and valid obligations binding on it and enforceable in accordance with its terms, subject to any reservations or qualifications noted in any legal opinion, is within its powers and does not conflict with any law or document, except 5 where such conflicts would not be reasonably expected to have a material adverse effect on the ability of the Account Party to perform any of its obligations under this Facility; and (c) no authorisations or consents whatsoever in relation to this Facility are required, except for such authorisations or consents the failure to have or obtain would not be reasonably expected to have a material adverse effect on the ability of the Account Party to perform any of its obligations under this Facility; and (d) neither this Facility nor use of the Facility will contravene any agreement to which an Account Party or any of its Subsidiaries is a party or entitle any person to exercise any rights against such Account Party's or any of its Subsidiaries' assets pursuant to any such agreement in any way which is reasonably likely to have a material adverse effect; and (e) any Letter of Credit issued under this Facility and the obligations evidenced hereby and thereby are and will at all times be direct and unconditional general obligations of the relevant Account Party, and rank and will at all times rank in right of payment and otherwise at least pari passu with all other unsecured indebtedness of such Account Party, whether now existing or hereafter outstanding; and (f) no Event of Default is outstanding or would reasonably be expected to result from the issuance of any Letter(s) of Credit under this Facility; and (g) no litigation, arbitration or administrative proceedings are current, pending or threatened which may have a material adverse effect on the ability of the Account Party to perform any of its obligations under this Facility, except for claims which the relevant Account Party has proved to the reasonable satisfaction of the Bank, are frivolous or vexatious or are being contested in good faith by appropriate proceedings which are reasonably likely to be successful; and (h) all information supplied by or on behalf of each Account Party to the Bank prior to the date of this Facility was true, complete and accurate in all material respects of its date and did not omit any information known to any Account Party which if disclosed might reasonably be expected to adversely affect the Bank's decision to enter into this Facility. 11. Covenants 11.1 Change of Business a) No Account Party will , nor will any Account Party permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the nature conducted by such Account Party and its Subsidiaries on the date of this Facility and businesses reasonably related thereto or in the financial services industry. b) No Account Party will change in any material respect any of the underwriting standards applied by such Account Party on the date hereof. 11.2 Notice of Default Each Account Party shall notify the Bank of the occurrence of any Event of Default promptly upon its occurrence. 6 11.3 Pari Passu Each Account Party shall procure that its obligations under this Facility do and will rank at least pari passu with all its other present and future unsecured obligations except for obligations which are mandatorily preferred by law applying to companies generally. 11.4 Negative Pledge No Account Party shall, and each Account Party shall procure that none of its Subsidiaries shall, create or permit to subsist (save as created in favour of the Bank) any mortgage, charge, lien, hypothecation or other encumbrance over any of its assets (collectively "Liens") other than Liens arising by operation of law in the ordinary course of business except for: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount of the Lien theretofore existing); (b) Liens arising from taxes, assessments, charges, levies or claims that are not yet due or that remain payable without penalty; (c) Zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other Liens that do not in the aggregate materially detract from the value of the property or asset to, or materially impair its use in the business of, such Account Party or its Subsidiaries; (d) Liens pursuant to the Pledge Agreement, dated as of 30 June 1999, between XL Investments Ltd and XL Mid Ocean Reinsurance Ltd in favour of Mellon Bank, N.A., as Agent; (e) Liens pursuant to the Pledge Agreement, dated as of 22 December 1999, made by XL Investments Ltd in favour of Three Rivers Funding Corporation; and (f) any other encumbrances securing an aggregate indebtedness of up to USD1,000,000,000. 11.5 Ownership Each of XL Insurance Ltd and XL Mid Ocean Reinsurance Ltd is and will continue to be wholly owned, either directly or indirectly by XL Capital Ltd, except for a nominal number of shares owned by nominee shareholders as required pursuant to Bermuda Company Law. 11.6 Financial Undertakings XL Capital Ltd will ensure that its Consolidated Tangible Net Worth shall not be less than USD2,700,000,000 to be increased annually at the end of each year by the sum of (i) 25% of cumulative positive quarterly net income plus (ii) 75% of the proceeds of any issue of the Account Party capital stock at any time. XL Capital Ltd shall ensure that its ratio of Total Funded Debt to Consolidated Tangible Net Worth shall not exceed 0.35 at any time. For the purposes of this clause 11.6 "Consolidated Tangible Net Worth" means at any time the consolidated stockholders' equity of XL Capital Ltd and its Consolidated Subsidiaries less their 7 consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1998, in the book value of any asset owned by XL Capital Ltd or a consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. For the purpose of this clause 11.6 "Total Funded Debt" means at any time all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. For the purpose of this clause 11.6 "Indebtedness" means (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such person's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts (in each case other than in connection with the provision of financing to such person or any of such person's affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such person; (ii) all obligations (including contingent liabilities) of such person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such person; (iv) any amount secured by a Lien on property owned by such person (whether or not assumed) and capitalised lease obligations of such person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such capitalised lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed); and (vi) all guaranty equivalents of such person. Calculation of these items shall be in accordance with generally accepted accounting principles in the United States of America consistently applied. 11.7 Additional Indebtedness No Account Party shall incur any additional indebtedness other than: (a) the indebtedness pursuant to the Short Term Revolving Credit Agreement dated as of 30 June 1999 between the Account Parties and Mellon Bank, N.A. as Administrative Agent and the other financial institutions as set forth therein; (b) the indebtedness pursuant to the Letter of Credit Facility and Reimbursement Agreement, dated as of 30 June 1999, between the Account Parties, et al., Mellon Bank, N.A. as Issuing Bank and as Agent, and the other financial institutions as set forth therein; (c) the indebtedness pursuant to the Credit Agreement (5-Year), dated as of 2 September 1997 and as amended thereafter, between the Account Parties, et al., The Chase Manhattan Bank as Administrative Agent and the other financial institutions as set forth therein; 8 (d) the indebtedness pursuant to the Revolving Credit Agreement, dated as of 6 June 1997 and as amended thereafter, between the Account Parties, et al., Mellon Bank, N.A., as Agent, and the other financial institutions as set forth therein; (e) the indebtedness pursuant to the Loan Agreement between XL America, Inc. as borrower, XL Insurance Ltd and XL Investments Ltd as guarantors and Three Rivers Funding Corporation, as Lender, dated as of December 22, 1998 (with related waivers); (f) the indebtedness pursuant to the 5-year Credit Agreement, dated as of 27 June 1996 between the Account Parties, et al., and The Bank of Bermuda Limited; (g) the indebtedness incurred pursuant to the public offering by NAC Re Corp of its 7.15% Senior Notes (10 year) due 15 November 2005; (h) other secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Account Party or any Subsidiary of an Account Party in an aggregate principal amount (for all Account Parties and their Subsidiaries) not exceeding $400,000,000 at any time outstanding; (i) other secured reimbursement obligations of any Account Party or any Subsidiary of an Account Party with respect to letters of credit not exceeding $1,000,000,000 in the aggregate at any time outstanding for all Account Parties and Subsidiaries; (j) unsecured Indebtedness, so long as upon the incurrrence thereof no Event of Default would occur or exist; (k) accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Account Party or any Subsidiary of any Account Party; and (l) Indebtedness incurred in transactions where Liens on cash and securities of an Account Party or its Subsidiaries are incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of such Account Party's investment policy as in effect on the date hereof. 11.8 Disposal of Assets No Account Party shall dispose of any of its assets in any calendar year other than; (a) transactions in the ordinary course of business involving current assets or other assets classified on such Account Party's balance sheet as available for sale; (b) sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate, exceed $50,000,000 in any calendar year; or (c) dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Account Party or its Subsidiaries. 11.9 Information Each Account Party will promptly deliver to the Bank such financial or other information as the Bank may from time to time reasonably request in writing. 9 12. Events of Default If, a) an Account Party fails to repay any amount when due under this Facility, unless such failure to pay is resulting from difficulties with the banking system or an administrative error on the part of the relevant Account Party and payment is made within three Business Days of the due date; or b) any representation or warranty made or deemed made by or on behalf of an Account Party in this Facility or in a certificate or financial statement furnished pursuant to the terms hereof shall prove to have been incorrect when made or deemed made; or c) an Account Party shall fail to comply with or perform any covenant, condition or agreement contained in this Facility and such failure to comply shall not be remedied for a period of 20 days after written notice thereof to such Account Party from the Bank; or d) any amount (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness of an Account Party fails to be paid when and as the same shall become due and payable (giving effect to any applicable grace periods and extensions thereof) unless such failure to pay is caused by technical difficulties with the banking system or an administrative error on the part of the relevant Account Party and payment is made within three Business Days of the due date; or e) any event or condition occurs that results in any Material Indebtedness of an Account Party becoming due prior to its scheduled maturity or that enables or permits the holder of any Material Indebtedness to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity (giving effect to any applicable grace periods and extensions thereof) and the relevant Account Party has not satisfied the Bank that such event or condition is the subject of a bona dispute which is being contested in good faith and by appropriate proceedings; or f) an Account Party goes into liquidation or is dissolved, or a meeting of the members or creditors of such Account Party is convened for the purpose of considering a resolution for (or to petition for) its winding up or for its administration or any such resolution is passed; or g) any Account Party is unable or deemed unable to pay its debts as they fall due, and it or another person on its behalf commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its indebtedness or makes a general assignment for the benefit of or a composition with its creditors; h) any Account Party takes any corporate action or other steps by any Account Party or other person are taken or legal proceedings are started for the winding-up, dissolution, administration or re-organisation (whether by way of voluntary arrangement, scheme of arrangement or otherwise) of such Account Party or for the appointment of a liquidator, receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer for it or any or all of its revenues and assets; i) any execution or distress is levied against, or an encumbrancer takes possession of, the whole or any part of, the property, undertaking or assets of any Account Party or any event occurs 10 which (in the opinion of the Bank) under the laws of any jurisdiction has a similar or analogous effect; j) it is or becomes illegal for the Bank or an Account Party to make or maintain any of its obligations under the facility, subject to any qualifications or reservations in any legal opinion; or k) a Change of Control occurs at XL Capital Ltd. For the purposes of this Section 12 (l) "Change of Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities and Exchange Commission) or more than 40% of the voting securities of XL Capital Ltd; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital Ltd; or (c) a majority of the members of XL Capital Ltd's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated for election by its shareholders; and l) XL Insurance Ltd and/or XL Mid Ocean Reinsurance Ltd shall cease to have a claims-paying rating of at least "A" from Standard & Poor's Ratings Group Services and from A.M. Best Company then, and at any time thereafter, the Bank may by written notice: (i) terminate its obligations under this Facility and (ii) require the Account Party to provide collateral acceptable to the Bank and equal to the face value of each Letter of Ccredit (as determined by the Bank) issued hereunder, together with payment of all amounts outstanding hereunder (where upon the Account Party shall do so). 13. Conditions Precedent The Bank's obligation to make the Facility available in accordance with the terms of this Facility is subject to it having received the following in form and substance satisfactory to it: (i) a certified copy of each Account Party's constitutive documents; (ii) a certified true copy of a resolution of the Board of Directors of each of the Account Parties (substantially in the form of the First Schedule hereto) (a) approving the Facility (b) authorising a specified person(s), on its behalf, to sign this Facility and (c) authorising a specified person(s) to give instructions to the Bank in connection with the Facility; (iii) a certified copy of specimen signatures for each of the Account Parties; (iv) an original copy of this Facility duly executed by the parties hereto confirming acceptance of this Facility on the terms and conditions set out herein; (v) written opinions of counsel in such forms and covering such matters as is reasonably satisfactory to the Bank. 11 The Bank agrees that the documents mentioned above may be delivered after the date of this Agreement but not later than 31st January, 2000. 14. Set Off Following the occurrence of an Event of Default, the Bank may apply any credit balance to which any Account Party is then entitled from the Bank in or towards satisfaction of any sums then due and payable by an Account Party to the Bank hereunder (whether by way of collateralisation or otherwise), and may arrange foreign exchange transactions to effect this. Nothing in this paragraph shall be construed so as to constitute a charge. 15. Miscellaneous Payments Each Account Party will pay on demand of the Bank: (a) all funding breakage costs of the Bank, determined in good faith by the Bank, and any stamp duties in connection with this Facility; (b) such amount as is necessary to indemnify the Bank against the consequences of any non-compliance by the Account Party and any action taken by the Bank with regard to this Facility pursuant to any instructions given or purported to be given over the telephone to any officer of the Account Party; (c) all reasonable costs (including without limitation reasonable legal fees) incurred by the Bank in connection with the preparation, negotiation and enforcement of this Facility; (d) losses flowing from any judgement or claim being payable in a different currency from that agreed under this Facility. 16. Standard Conditions The Uniform Customs and Practice for Documentary Credits (1993 Revision) (International Chamber of Commerce Publication No. 500) and/or any subsequent amendment shall in all respects apply to all Letters of Credit and shall be deemed to be incorporated into this Facility, subject to clause 17 below. 17. Waivers No failure or delay by the Bank in exercising any right, power or privilege under this Facility shall operate as a waiver or prejudice any other or further exercise by the Bank of any of its rights or remedies under this Facility . The rights and remedies under this Facility are cumulative and not exclusive of any rights or remedies provided by law. 12 18. Market Practice Relevant market practices shall be in accordance with the Bank's usual relevant practice as certified by the Bank. 19. Transfers The provisions of this Facility shall be binding upon and inure to the benefit of the Account Parties, the Bank and their respective successors and assigns, except that no Account Party may assign or otherwise transfer the benefit or burden of its rights or obligations under the Facility without the prior written consent of the Bank (which consent shall not be unreasonably withheld). The Bank may, in the ordinary course of its banking business and in accordance with applicable law,assign, and/or transfer and/or sell participations in all or in part of its rights and/or obligations under the Facility, provided that any such assignment, transfer and/or sale of a participation shall be made only with the consent of XL Capital Ltd (which consent shall not be unreasonably withheld), unless an Event of Default has occurred and is continuing or exists, in which case the consent of XL Capital Ltd shall not be required The Bank may disclose to a proposed assignee, transferee or sub-participant any publicly available information in its possession. 20. Notices (a) All notices or other communications to be made or delivered by one person to another under or in connection with this Facility shall be given in writing or by facsimile. A notice will be deemed to be given: (i) if in writing, when deemed to have been delivered when left at that address or, as the case may be, ten days after being deposited in the post postage prepaid in an envelope addressed to it at that address; and (ii) if by facsimile, when transmission has been completed. However, a notice given in accordance with the above, but received on a non-working day or after 4:00 p.m. in the place of receipt, will only be deemed to be given on the next Business Day in that place (b) The address and facsimile number of each party to this Facility for all notices or demands under or in connection with this Facility are those notified in writing by that party prior to the date of this Facility to the other parties or any other notified by that party for the purpose to the other parties by not less than 5 Business Days' notice. 21. Counterparts This Facility may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a single copy of this Facility. 13 22. Governing Law 22.1 This Facility is governed by English law. 22.2 The Account Parties agree for the benefit of the Bank, and without prejudice to the right of the Bank to take proceedings before any other court of competent jurisdiction, that (i) the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding that may arise out of or in connection with this Facility and for such purposes irrevocably submits to the jurisdiction of those courts and (ii) irrevocably appoints XL Mid Ocean Reinsurance Ltd of 12 Fenchurch Avenue, 5th Floor, London EC3M 5BS as its agent for service of process in connection with any proceedings in the English courts and agrees that any such process will be sufficiently and effectively served on it if delivered to that agent at that address, or in any other manner permitted by law. If you agree to the above, please sign and return to us the enclosed copy of this Facility by 31 December 1999, after which date this offer shall lapse. Yours faithfully for and on behalf of ING Bank N.V. London Branch /s/ /s/ ---------------------------------- ---------------------------------- Authorised Signatory Authorised Signatory We confirm our acceptance to the terms and conditions set out above. For and on behalf of XL Capital Ltd Signed Brian M. O'Hara Dated December 21, 1999 We confirm our acceptance to the terms and conditions set out above. For and on behalf of XL Insurance Ltd Signed Christopher Coelho Dated December 22, 1999 14 We confirm our acceptance to the terms and conditions set out above. For and on behalf of XL Mid Ocean Reinsurance Ltd Signed H.C.V. Keeling Dated December 23, 1999 15 FIRST SCHEDULE DRAFT BOARD RESOLUTION I, ______________________ a Director/Secretary of ______________________ (the "Company") hereby certify that the following is a true copy of an extract of the minutes of a meeting of the Board of Directors of the Company which was duly called and held on ______________________ 199[ ] and at which a duly qualified quorum was present throughout and entitled to vote. 1. There was produced to the meeting an agreement (the "Facility Agreement") dated [__________] between ING Bank N.V. London branch (the "Bank") and the Company whereby the Bank would make available to the Company an uncommitted facility (the "Facility") on the terms and conditions therein contained. 2. The terms of the Facility Agreement were carefully considered and IT WAS RESOLVED that the Facility Agreement, be and are hereby approved. 3. IT WAS RESOLVED that [____________________] be and he is hereby authorised, for and on behalf of the Company, to sign and deliver the Facility Agreement together with such changes and amendments thereto as [he] [they] may in [his] [their] sole discretion think fit. 4. IT WAS RESOLVED that the following be and they are hereby authorised to give instructions to the Bank in connection with the Facility Agreement and the Bank be and it is hereby authorised to act in accordance with such instructions:- [List of authorised signatories for Facility] 16 SECOND SCHEDULE INTENTIONALLY OMITTED 17 THIRD SCHEDULE DRAWDOWN NOTICE We refer to the facility agreement (the "Facility Agreement") dated between ING Bank N.V. London Branch, ( the "Bank"), and XL Capital Ltd, XL Insurance Ltd and XL Mid Ocean Reinsurance Ltd, together the "Account Parties". We confirm that all of the terms and conditions of the Facility Agreement continue to be met and hereby irrevocably request the following drawdown: Beneficiary Name: --------------------------- Letter of Credit Amount and Currency: --------------------------- Issuance Date of Letter of Credit: --------------------------- Maturity Date of Letter of Credit: --------------------------- For and on behalf of XL Capital Ltd Signed Dated ------------------------- ---------------------- XL Insurance Ltd Signed Dated ------------------------- ---------------------- XL MidOcean Reinsurance Ltd 18 Signed Dated ------------------------- ---------------------- 19 FOURTH SCHEDULE THE COUNCIL OF LLOYD'S LETTERS OF CREDIT LETTER OF CREDIT The Council of Lloyd's Lloyds' of London One Lime Street London EC3M 7HA Documentary Credit Ref- Gentlemen, Irrevocable Standby Letter of Credit no. Re: _______________________ ("the Applicant") We are pleased to inform you that by order of the Applicant we, ING Bank NV, London, have opened our Clean Irrevocable Credit no. ______ in your favour for a sum not to exceed the aggregate of GBP _________________ (Pounds Sterling _________________) effective from _________________. The initial expiry date of this credit shall be _________________. This credit will be extended automatically for a further year, without written amendment, on the first day of January of every future year from the commencement date, so that it is always valid for a minimum period of five years unless at least thirty days prior to ---------------------------------- of the first year of the then current validity period, notice is given in writing by us, sent by registered mail to you for the attention of the Manager, Membership Department, at the above address, that this Letter of Credit will not be extended beyond the then current expiry date. All charges are for the Applicant's account. Funds under this credit are available to you in London upon presentation of your sight draft(s) drawn on us at the above address mentioning our Credit no. - -------------. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) (International Chamber of Commerce Publication No. 500) ("UCP"). This Letter of Credit shall be governed by and interpreted in accordance with English law and we hereby irrevocably submit to the jurisdiction of the High Court of Justice in England. In the event of a conflict between UCP and English Law, English Law shall prevail. We hereby engage with you that we will honour draft(s) drawn under and in compliance with the terms and conditions of this Letter of Credit. 20 Yours Faithfully, For and on behalf of ING BANK N.V. London branch 21 EX-10.14-30 18 EXHIBIT 10.14.30 Exhibit 10.14.30 [Letterhead of ING Barings] AMENDMENT NO. 1 AMENDMENT NO. 1, dated as of February 25, 2000 (this "Agreement") is made by and among XL Capital Ltd, XL Insurance Ltd and XL Mid Ocean Reinsurance Ltd (the "Account Parties") and ING Bank N.V. London Branch, as issuing bank (the "Bank") under the letter of credit facility referred to below. W I T N E S S E T H: WHEREAS, the Account Parties and the Bank are parties to a Letter of Credit facility, dated as of December 17, 1999 (the "Facility"), pursuant to which the Bank has agreed, on the terms and subject to the conditions described therein, to make available an uncommitted letter of credit facility to the Account Parties; and WHEREAS, the Account Parties and the Bank desire to amend the Facility as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Facility; NOW THEREFORE, in consideration of the premises and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments. 1.1 Section 11.4 of the Facility is hereby amended (i) by deleting the word "and" at the end of paragraph (e) thereof; (ii) by relettering the existing paragraph (f) thereof as paragraph (g); and (iii) by inserting between paragraph (e) thereof and the new paragraph (g) thereof a new paragraph (f) to read as follows: "(f) Asset Accumulation Liens (for the purposes of this Facility, an "Asset Accumulation Lien" means a Lien on amounts received, and on actual and imputed investment income on such amounts received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Account Party's or Subsidiary's business as an insurance or reinsurance company or corporate member of Lloyd's or as a provider of financial services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities; provided, that in no case shall an Asset Accumulation Lien secure Indebtedness and any Lien which secures Indebtedness shall not be an Asset Accumulation Lien); and" 1.2 Section 11.6 of the Facility is hereby amended as follows: (a) The second paragraph of Section 11.6 is hereby deleted and in lieu thereof the following covenant is substituted: "XL Capital Ltd shall not permit its ratio of (i) Total Adjusted Funded Debt to (ii) the sum of Total Adjusted Funded Debt plus Consolidated Net Worth to be greater than .35 at any time." (b) The following paragraphs are hereby inserted immediately above the last paragraph appearing in Section 11.6: "For the purpose of this Facility "Consolidated Net Worth" means at any time the consolidated stockholders' equity of XL Capital Ltd and its Consolidated Subsidiaries." "For the purpose of this Facility "Consolidated Subsidiaries" of a person means at any time those Subsidiaries of such person the accounts of which are consolidated with the accounts of such person in accordance with generally accepted accounting principles in the United States of America." "For the purpose of this Facility "Total Adjusted Funded Debt" means at any time the sum of (x) Total Funded Debt at such time plus (y) the aggregate undrawn face amount of all letters of credit (as to which reimbursement obligations are not secured by marketable securities with a value at least equal to the face amount of such letters of credit) issued for the account of, or guaranteed by, XL Capital Ltd or any of its Consolidated Subsidiaries at such time (irrespective of whether the beneficiary thereof is an affiliate)." (c) Paragraph five, which contains the definition of Indebtedness, is hereby amended by deleting from the first sentence thereof the words "clause 11.6" and replacing them with the word "Facility". 1.3 Section 11.7 is hereby amended by deleting the word "indebtedness" in each of paragraphs (a) through (g), inclusive, and replacing it in each paragraph with the word "Indebtedness". 1.4 Section 11 is hereby amended by adding Section 11.10 to read as follows: 11.10 Information Regarding Asset Accumulation Liens Within 100 days after the end of each fiscal year of the Account Parties and within sixty days after the end of each of the first three quarters of each fiscal year, the Account Parties shall deliver to the Bank a statement, certified as true and correct by a principal financial officer of XL Capital Ltd, setting forth on a consolidated basis for XL Capital Ltd and its Consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (A) the aggregate book value of assets which are subject to Asset Accumulation Liens and the aggregate book value of liabilities which are secured by Asset Accumulation -2- Liens and (B) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital." SECTION 2. Effect. This Agreement shall become effective upon execution and delivery hereof by the Bank and the Account Parties. This Agreement shall not constitute a waiver or modification of any provision of the Facility except the provisions specifically referred to in Section 1 hereof, and then only to the extent specifically set forth in such Section 1 hereof. SECTION 3. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with English Law. SECTION 4. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. -3- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ING BANK N.V. LONDON BRANCH, as Bank /s/ /s/ - ------------------------------------- ------------------------------------- Authorized Signatory Authorized Signatory ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: XL CAPITAL LTD, as an Account Party By: /s/ Brian M. O'Hara --------------------------------- (Signature) Name: Brian M. O'Hara Title: President an Chief Executive Officer XL INSURANCE LTD, as an Account Party By: /s/ Christopher Coelho --------------------------------- (Signature) Name: Christopher Coelho Title: Chief Financial Officer XL MID OCEAN REINSURANCE LTD, as an Account Party By: /s/ H.C.V. Keeling --------------------------------- (Signature) Name: H.C.V. Keeling Title: President -4- EX-11.1 19 EXHIBIT 11.1 EXHIBIT 11.1 XL CAPITAL LTD COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT (U.S. dollars in thousands, except share and per share amounts)
1999 1998 1997 ------------------------------ BASIC EARNINGS PER SHARE: Net income................................................ $470,509 $656,330 $809,029 Weighted average ordinary shares outstanding.............. 127,601 112,034 101,708 Basic earnings per share.................................. $ 3.69 $ 5.86 $ 7.95 ------------------------------ DILUTED EARNINGS PER SHARE: Net income................................................ $470,509 $656,333 $809,029 Add back after-tax interest on convertible debentures..... 1,752 3,504 3,504 ------------------------------ Adjusted net income....................................... $472,261 $659,834 $812,533 ------------------------------ Weighted average ordinary shares outstanding.............. 127,601 112,034 101,708 Average stock options outstanding (1)..................... 1,872 2,152 1,277 Assumed conversion of convertible debentures (2).......... 831 2,020 2,020 ------------------------------ Weighted average ordinary shares outstanding.............. 130,304 116,206 105,005 ------------------------------ Diluted earnings per share................................ $ 3.62 $ 5.68 $ 7.74 ------------------------------
(1) Net of shares repurchased under the treasury stock method. (2) 1998 and 1997 reflect the assumed conversion of the NAC Re 5.25% Convertible Subordinated Debentures due 2000. The Debentures were called in June 1999 and the actual conversion is reflected in 1999. 89 EX-21.1 20 EXHIBIT 21.1 Exhibit 21.1
NAIC # FEIN # ------ ------ XL CAPITAL LTD - CAYMAN 98-0191089 - ----------------------- EXEL HOLDINGS LIMITED - CAYMAN XL INSURANCE LTD - BERMUDA XL FINANCIAL ASSURANCE LTD. (85%) - BERMUDA XL CAPITAL PRODUCTS LTD - BERMUDA XL INVESTMENTS LTD - BERMUDA X.L. Investment Private Trustee Ltd. - BERMUDA XL Investments (Barbados) Inc. - BARBADOS First Cumberland Bank, Inc. - BARBADOS Garrison Investments Inc. - BARBADOS Risk Capital Holdings Inc. (28%) - DE 06-1424716 Kensington Investments Inc. - BARBADOS XLB Partners Inc. - BARBADOS IBC Cumberland Holdings, Inc. - DE 98-0174616 Cumberland California, Inc. - DE 98-0174621 Pareto Hughes Research (30%) - DE 95-4590570 Pareto Partners (30%) - CA 13-3609837 Cumberland New York, Inc. - DE 98-0174619 Pareto (30%) - NY 95-4627346 InQuisLogic Ltd. - BARBADOS InQuisLogic Inc. - DE 06-1542517 RiskConnect Ltd. - BARBADOS RiskConnect Inc. - DE FINANCIAL SECURITY ASSURANCE INTERNATIONAL LTD. (80%) - BERMUDA XL GLOBAL SERVICES (BERMUDA) LTD. - BERMUDA XL HOLDINGS BARBADOS LTD. - BARBADOS X.L. America Inc. - DE 06-1516268 Brockbank Insurance Services Inc. - CA Global Credit Analytics, Inc. - DE XL Global Services, Inc. - DE 06-1527321 NAC RE CORPORATION - DE 20583 13-3297840 NAC Re International Holdings Ltd - UK NAC Reinsurance International Limited - UK Denham Syndicate Management Ltd - UK Stonebridge Underwriting Ltd - UK NAC Re International Services Co., Ltd - UK NAC REINSURANCE CORPORATION (A - 76%) - NY NAC Re Investment Holdings, Inc. - DE 06-1529606 Greenwich Insurance Company (A - 5%) - CA 22322 95-1479095 Indian Harbor Insurance Company (A - 5%) - ND 36940 06-1346380 XL Insurance Company of New York, Inc. (A - 5%) - NY 40193 13-3787296 XL Capital Assurance, Inc. (A - 7%) - NY 11007 06-1529345 Intercargo Corporation - DE 36-3414667 International Advisory Services Inc. - IL 36-3081634 XL Specialty Insurance Company - IL 37885 85-0277191 Intercargo Insurance Company HK Ltd. - HK Intercargo International Limited - BVI AA-004102 ECS INC. - PA 23-2152934 ECS ALTERNATIVE MARKET SERVICES, INC. - PA 23-2741979 ECS HOLDINGS, INC. - DE 23-2683777 ECS International, Inc. - DE 23-2683775 ECS Asesores en Seguros Medioambientales, S.A.R.L. - SPAIN The ECS Group, Ltd - UK 2711579 ECS Underwriting Ltd. - UK 2549841 Environmental Compliance Svcs Ltd. - UK 2551297 Consulting Services International Ltd. - UK 2551297 ECS Asesores en Aseguramiento de Riesgos Ambientales S.A. de C.V. - MEXICO Risk & Insurance Services, Inc. - BARBADOS ECS Reinsurance Company Inc. - BARBADOS 98-0086637 ECS UNDERWRITING, INC. - PA 23-2901851 ECS CLAIMS ADMINISTRATORS, INC. - PA 23-2614107 ECS RISK CONTROL, INC. - PA 23-2321718 ECS CHILD CARE CENTER, INC. - PA 23-2866192 SOVEREIGN RISK INSURANCE LTD. (50%) - BERMUDA X.L. ONE LTD. - BERMUDA XL Europe (50%) - REPUBLIC OF IRELAND X.L. TWO LTD. - BERMUDA XL Europe (50%) - REPUBLIC OF IRELAND XL Australia Pty Ltd - AUSTRALIA XL Prevent Ltd - UK Le Mans Re (A - 49%) - FRANCE IPT COMPLIANCE LIMITED - UK EXEL CUMBERLAND LIMITED - UK Pareto Partners (30%) - UK Pareto Australia - AUSTRALIA Vision Loyal Ltd. (30%) - UK INQUISCAPITAL HOLDINGS (BERMUDA) LIMITED - BERMUDA InQuisLogic (Bermuda) Limited - BERMUDA RiskConnect Limited - BERMUDA ANNUITY LIFE & RE (HOLDINGS) LTD (6%) - BERMUDA EXEL ACQUISITION LTD. - CAYMAN GCR HOLDINGS LIMITED - CAYMAN (IN LIQUIDATION) REEVE COURT INSURANCE COMPANY (.04%) - BERMUDA REEVE COURT HOLDINGS LTD. (50%) - BERMUDA X.L. PROPERTY HOLDINGS LTD. - BERMUDA MID OCEAN LIMITED (100%)- CAYMAN MID OCEAN HOLDINGS LIMITED - BERMUDA XL Mid Ocean Reinsurance Ltd - BERMUDA Sunshine State Holdings Corporation (24%) - FL The Shipowners Insurance and Guaranty Company Ltd. (4.6%) - BERMUDA Global Capital Underwriting Ltd. - UK LARC Holdings Ltd. - BERMUDA Latin America Reinsurance Company Ltd. - BERMUDA Ridgewood Holdings Company - BERMUDA Admiral Group Limited (10%) The Brockbank Group Plc - UK Brockbank Holdings Limited - UK Baltusrol Holdings Ltd - BERMUDA County Down Limited - CORPORATE MEMBER SYNDICATE 2253 Dornoch Limited - CORPORATE MEMBER SYNDICATE 1209 Brockbank Underwriting Limited - UK Brockbank Personal Lines Limited - SYNDICATES 253/2253 Cassidy Brockbank Limited (DORMANT) Brockbank Syndicate Management Limited - SYNDICATES 588/861/1209 Brockbank Syndicate Services Limited Sextant International Limited (20%) A. Company is a member on NAC Reinsurance, Intercargo Pooling Agreement with individual company pooling %'s noted.
EX-23.1 21 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Form 10-K of our report dated February 9, 2000, on our audits of the financial statements and financial statement schedules of XL Capital Ltd as at December 31, 1999 which states that we did not audit the financial statements and financial statement schedules of NAC Re Corp. as at December 31, 1998 and that our opinion, in so far as it relates to the amounts included for NAC Re Corp. for those dates, is based solely on the report of other auditors, which report is included herein. We further consent to the incorporation by reference in the registration statements of XL Capital Ltd on Form S-3 (File No. 33-76170), Form S-8 (File No. 33-86826), Form S-8 and S-3 (File No. 33-86824) and Form S-8 (File No. 33-81451) of our report dated February 9, 2000 on our audits of the financial statements and financial statement schedules of XL Capital Ltd. PRICEWATERHOUSECOOPERS LLP New York, New York March 17, 2000 90 EX-23.2 22 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the use of our report, on the consolidated financial statements of NAC Re Corporation for the year ended December 31, 1998, dated February 3, 1999 except for Note 15, as to which the date is February 15, 1999 in this Annual Report on Form 10K of XL Capital Ltd. ERNST & YOUNG LLP New York, New York March 17, 2000 91 EX-27.1 23 EXHIBIT 27.1
7 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 7,986,411 0 0 1,136,180 0 0 9,122,591 557,749 831,864 275,716 15,090,912 5,369,402 1,497,376 837,893 0 410,726 0 0 1,278 5,575,800 15,090,912 1,750,006 525,318 94,356 141,307 1,304,304 380,980 394,544 431,159 (39,570) 470,509 0 0 0 470,509 3.69 3.62 4,302,683 1,591,414 (287,110) 281,806 811,696 4,537,538 (287,110)
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