<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1996
REGISTRATION NO. 333-06249
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RESIDENTIAL REINSURANCE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS 6719 N.A.
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
----------------------
P.O. BOX 1109
MIDLAND BANK TRUST BUILDING
MARY STREET
GRAND CAYMAN, CAYMAN ISLANDS, BRITISH WEST INDIES
(809) 949-7755
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------------
COPIES TO:
EDWARD M. DESEAR, ESQ. C. THOMAS KUNZ, ESQ.
ORRICK, HERRINGTON & SUTCLIFFE CLIFFORD W. LOSH, ESQ.
666 FIFTH AVENUE SKADDEN, ARPS, SLATE, MEAGHER & FLOM
NEW YORK, NEW YORK 10103 919 THIRD AVENUE
NEW YORK, NEW YORK 10022
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
RESIDENTIAL REINSURANCE LIMITED
CROSS REFERENCE SHEET
Cross-reference sheet furnished pursuant to Item 501(b) of Regulation
S-K showing location in the Prospectus of information required by the items of
Form S-1.
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
---------------- ----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Cover Page of Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................................. Inside Front and Outside Back Cover Pages;
Management's Discussion and Analysis of Financial
Condition
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............................... Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition
4. Use of Proceeds............................................... Use of Proceeds
5. Determination of Offering Price............................... Underwriting
6. Dilution...................................................... Not Applicable
7. Selling Security Holders...................................... Not Applicable
8. Plan of Distribution.......................................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered.................... Description of the Notes; Certain Terms of the
Indenture
10. Interests of Named Experts and Counsel........................ Not Applicable
11. Information with Respect to the Registrant.................... Prospectus Summary; Risk Factors; The Company;
Use of Proceeds; Capitalization of the Company;
Reinsurance Activity of the Company; Management
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................................ Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED __________ __, 1996
PROSPECTUS
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
$1,000,000
RESIDENTIAL REINSURANCE LIMITED
CLASS A FLOATING RATE NOTES DUE 1998
CLASS B FLOATING RATE NOTES DUE 1998
The Class A Floating Rate Notes due 1998 (the "Class A Notes") and the
Class B Floating Rate Notes due 1998 (the "Class B Notes" and, together with the
Class A Notes, the "Notes") of Residential Reinsurance Limited (the "Company")
will mature on January 2, 1998. The Company's obligation to pay the Principal
Amount (as defined) of the Notes will be reduced by the amount of any payment
made by the Company (each, a "Principal Reduction") under the Reinsurance
Agreement (the "Reinsurance Agreement") that the Company will enter into with
United Services Automobile Association and USAA Casualty Insurance Company
(collectively, the "Ceding Insurer"). In addition, if the Company establishes a
loss reserve for an amount that it believes will become payable under the
Reinsurance Agreement, based on a related loss reserve taken by the Ceding
Insurer in excess of the Trigger Amount (as defined), the Company's obligation
to pay the Principal Amount of the Notes will become contingent to the extent of
the amount of such loss reserve (each such occurrence, a "Contingent Principal
Event" and each such amount, a "Loss Reserve Amount") pending receipt of a Proof
of Loss Claim (as defined) under the Reinsurance Agreement. Upon the occurrence
of a Contingent Principal Event, interest will be payable on the Principal
Amount of the Notes prior to such Contingent Principal Event until any Principal
Reduction is made. The amount of any such Principal Reduction or Loss Reserve
Amount shall be allocated first among the holders of the Class B Notes on a pro
rata basis until the aggregate Principal Amount of the Class B Notes is reduced
to zero or becomes wholly contingent and then among the holders of the Class A
Notes on a pro rata basis until the aggregate Principal Amount of the Class A
Notes is reduced to zero or becomes wholly contingent. Interest on the Notes is
payable monthly on the first Business Day of each month, commencing on September
3, 1996. The Company will be required to redeem the Notes in whole at a
redemption price equal to the unpaid Principal Amount of the Notes (reduced by
any Principal Reductions) plus interest accrued to the date of redemption (a) on
July 1, 1997, unless the Ceding Insurer extends the period in which it may
present a Proof of Loss Claim under the Reinsurance Agreement or (b) on the
following Interest Payment Date, if the Ceding Insurer fails to pay any Premium
(as defined) when due under the Reinsurance Agreement. See "Description of the
Notes."
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER CONSIDERATIONS, THE
INFORMATION SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE
14.
----------------------
THE NOTES REPRESENT OBLIGATIONS OF THE COMPANY ONLY AND DO NOT
REPRESENT OBLIGATIONS OF THE CEDING INSURER OR ANY OF ITS AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A Note........ % % %
- --------------------------------------------------------------------------------
Per Class B Note % % %
- --------------------------------------------------------------------------------
Total(3)................ $ $ $
================================================================================
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company and the Ceding Insurer have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses, estimated at $ .
----------------------
The Notes are offered by the Underwriter, subject to prior sale, when,
as and if issued to and accepted by them, subject to approval of certain legal
matters by counsel for the Underwriter and certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that the delivery of the Notes
will be made in fully registered certificated form on or about , 1996.
-------------------------------
MERRILL LYNCH & CO.
-------------------------------
The date of this Prospectus is , 1996.
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
Until 90 days after the date of this Prospectus, all dealers effecting
transactions in the Notes, whether or not participating in this distribution,
may be required to deliver a Prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters or with respect to their unsold allotments or subscriptions.
Upon receipt of a request by an investor who has received an electronic
Prospectus from the Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
the Company or such Underwriter will promptly deliver, or cause to be delivered,
without charge, a paper copy of the Prospectus.
The Company does not intend to furnish Noteholders with annual reports
containing audited financial statements or quarterly reports containing
unaudited interim financial information for the first three fiscal quarters of
each fiscal year of the Company.
----------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF
THIS DOCUMENT. THE BUYER IN NORTH CAROLINA UNDERSTANDS THAT THE COMPANY IS NOT
LICENSED IN NORTH CAROLINA PURSUANT TO CHAPTER 58 OF THE NORTH CAROLINA GENERAL
STATUTES, NOR COULD IT MEET THE BASIC ADMISSIONS REQUIREMENTS IMPOSED BY SUCH
CHAPTER AT THE PRESENT TIME.
2
<PAGE> 5
AVAILABLE INFORMATION
Upon the offering of the Notes, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Securities and Exchange
Commission (the "Commission"). Such information can be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
Regional Offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Company has filed with the Commission a Registration Statement on
Form S-1 (herein, together with all amendments thereto, called the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto, to which reference
is hereby made. Statements contained in this Prospectus as to the contents of
any contract or other document are summaries which are not necessarily complete
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
herein being qualified in all respects by such reference. The Registration
Statement, including the exhibits thereto, may be inspected and copies thereof
can be obtained as described in the preceding paragraph. Such material may also
be accessed electronically at the Commission's site on the World Wide Web
located at http://www.sec.gov.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS
The Company is organized under the laws of the Cayman Islands. In
addition, all of the directors and officers of the Company, as well as certain
of the experts named herein, reside outside the United States, and certain of
the assets of the Company and all or a substantial portion of the assets of the
directors, officers and such experts are located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon such persons or to realize against them in courts of the
United States upon judgments of courts of the United States predicated upon
civil liabilities under the United States federal securities laws.
The Company has been advised by its Cayman Islands counsel, Maples and
Calder, that there is doubt as to whether the courts of the Cayman Islands would
enforce (i) judgments of United States courts obtained in actions against such
persons or the Company predicated upon the civil liability provisions of the
United States federal securities laws or (ii) original actions brought in the
Cayman Islands against such persons or the Company predicated solely upon United
States federal securities laws. There is no treaty in effect between the United
States and the Cayman Islands providing for such enforcement, and there are
grounds upon which Cayman Islands courts may not enforce judgments of United
States courts. Certain remedies available under the laws of United States
jurisdictions, including certain remedies under the United States federal
securities laws, would not be allowed in Cayman Islands courts as contrary to
public policy.
3
<PAGE> 6
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used herein are defined elsewhere in this Prospectus and certain insurance
terms are defined under "Certain Defined Terms."
<TABLE>
<S> <C>
Issuer........................................................ Residential Reinsurance Limited (the
"Company"), a company organized under the
laws of the Cayman Islands.
Securities Offered............................................ $500,000 original principal amount of Class
A Floating Rate Notes due 1998 (the "Class
A Notes") and $500,000 original principal
amount of Class B Floating Rate Notes (the
"Class B Notes") due 1998.
Interest Rate for the Class A Notes........................... One-month LIBOR (calculated as described
herein) plus ____% per annum.
Interest Rate for the Class B Notes........................... One-month LIBOR (calculated as described
herein) plus ____% per annum.
LIBOR......................................................... A rate per annum equal to the London
Interbank Offered Rate for one-month
Eurodollar deposits determined by the
Calculation Agent as described herein
("LIBOR").
Maturity Date................................................. January 2, 1998 (the "Maturity Date").
Interest Payment Dates........................................ The first day of each month or, if such day is
not a Business Day, the next succeeding
Business Day (each, an "Interest Payment
Date"), commencing on September 3, 1996.
Interest in respect of an Interest Payment Date
will accrue from and including the prior
Interest Payment Date (or the Closing Date in
the case of the first Interest Payment Date) to
but excluding such Interest Payment Date
(each, an "Interest Accrual Period"). Interest
on the Notes will be calculated on the basis of
the actual number of days elapsed and a 360-
day year.
Principal Reduction........................................... The Company's obligation to pay the
Principal Amount of a Note shall be reduced
by the amount of any payment by the
Company to United Services Automobile
Association, a reciprocal interinsurance
exchange organized under the laws of
Texas and USAA Casualty Insurance
Company, a Florida corporation
(collectively, the "Ceding Insurer"), of
any Reinsurance Amount owed
</TABLE>
4
<PAGE> 7
<TABLE>
<S> <C>
to the Ceding Insurer under the
Reinsurance Agreement (any such payment,
a "Principal Reduction"). The amount of
any such Principal Reduction shall be
allocated: first, among the holders of
the Class B Notes on a pro rata basis
until the aggregate Principal Amount of
the Class B Notes is reduced to zero, and
second, among the holders of the Class A
Notes on a pro rata basis until the
aggregate Principal Amount of the Class A
Notes is reduced to zero. "Principal
Amount" of any Note shall mean the
original principal amount of such Note
reduced by the amount of any Principal
Reduction allocated to such Note.
Contingent Principal Event.................................... If the Company establishes a loss reserve for
an amount that it believes will become
payable under the Reinsurance Agreement,
based on a related loss reserve in excess
of the Trigger Amount taken by the Ceding
Insurer, the Company's obligation to pay
the Principal Amount of the Notes will be
contingent to the extent of the amount of
each such loss reserve (each such
occurrence, a "Contingent Principal
Event" and each such amount, a "Loss
Reserve Amount") pending receipt of a
Proof of Loss Claim under the Reinsurance
Agreement. Any Loss Reserve Amount shall
be allocated: first, among the holders of
the Class B Notes on a pro rata basis
until the aggregate Notional Amount of
the Class B Notes becomes wholly
contingent, and second, among the holders
of the Class A Notes on a pro rata basis
until the aggregate Notional Amount of
the Class A Notes becomes wholly
contingent. "Notional Amount" of any Note
or class of Notes shall mean the
Principal Amount of such Note reduced by
any Loss Reserve Amount allocated to such
Note. When the Proof of Loss Claim
related to any Loss Reserve Amount is
received, such Loss Reserve Amount will
be reduced to the extent deemed
appropriate by the Company, and the
Principal Amount of the Notes will be
reduced, in the manner described above,
by the Principal Reduction reflected in
such Proof of Loss Claim. See
"--Principal Reduction."
Mandatory Redemption.......................................... The Company will be required to redeem the
Notes at a redemption price equal to the
Principal Amount of the Notes then
outstanding plus interest accrued to the
date
5
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
of redemption (a) on July 1, 1997 (the
"Mandatory Redemption Date") if the
Ceding Insurer does not elect to extend
the Claims Period for the Extended Claims
Made Period under the Reinsurance
Agreement, or (b) on the following
Interest Payment Date, if the Ceding
Insurer shall fail to pay any Premium
when due under the Reinsurance Agreement,
in which event the Regulation 114 Trust
shall thereupon be liquidated and the
assets held therein shall be distributed
to the Company for payment to holders of
the Notes. See "Reinsurance Activity of
the Company - The Regulation 114 Trust
Agreement and the Regulation 114 Trust."
Collateral for Notes; Limitations as to Enforcement........... The Notes will be secured pursuant to the
Indenture dated as of ___________ , 1996
(the "Indenture") between the Company and
The Chase Manhattan Bank, as trustee for
the holders of the Notes (the "Indenture
Trustee"). Under the Indenture the
Company has assigned and pledged to the
Indenture Trustee as security for the
payment of the Principal Amount of and
interest on the Notes all of the
Company's right, title and interest in
and to (a) the Reinsurance Agreement,
including the right to receive payments
of the Premium and all other monies due
or payable thereunder from the Ceding
Insurer; (b) subject to the prior
security interest therein of the Ceding
Insurer and to limitations as to
enforcement discussed herein, the
segregated securities account and all
investments therein established by the
Regulation 114 Trust Agreement in the
name of the Ceding Insurer[, for itself
and as agent for the Indenture Trustee
with respect to the junior lien of the
Noteholders in the assets of the
Regulation 114 Trust] (the "Securities
Account Collateral"); (c) the Interest
Rate Swap; (d) the Claims Review
Agreement; (e) the Loss Reserve
Specialist Agreement; and (f) all other
assets of the Company now or hereafter
arising. Notwithstanding the foregoing,
neither the Indenture Trustee nor any
Noteholder will have the right to enforce
or otherwise realize upon the Indenture
Trustee's security interest in the
Securities Account Collateral until all
of the Company's obligations under the
Reinsurance Agreement (including, without
limitation, its potential liability for
claims to be paid thereunder) have been
satisfied or terminated in accordance
with the terms thereof.
</TABLE>
6
<PAGE> 9
<TABLE>
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Investment of Assets.......................................... The Company will appoint an investment
manager who will direct the Regulation
114 Trustee to invest the principal
portion of the assets held in the
Regulation 114 Trust, which will
initially consist of the net proceeds of
sale of the Notes and certain other funds
available to the Company, in Permitted
Investments. The Permitted Investments
will be held by __________ (the
"Regulation 114 Trustee"), as trustee of
a trust established under Regulation 114
under the New York Insurance Law (the
"Regulation 114 Trust"). See "Reinsurance
Activity of the Company -- The Regulation
114 Trust Agreement and the Regulation
114 Trust." The principal portion of the
Permitted Investments will be available,
first, to satisfy any obligations of the
Company to the Ceding Insurer under the
Reinsurance Agreement, and, second, to
make payments under the Indenture in
respect of the Principal Amount of the
Notes. Investment earnings on the
Permitted Investments are the property of
the Company and do not form part of the
Regulation 114 Trust. Such investment
earnings will be available to make any
Net Swap Payment under the Interest Rate
Swap and payments of interest on the
Notes. The Notes are secured by a
security interest in the principal
portion of the Permitted Investments,
subject to the prior security interest of
the Ceding Insurer and to limitations as
to enforcement thereof. All Permitted
Investments will mature prior to the
immediately succeeding Interest Payment
Date.
Sources of Funds for Payment
of Principal Amount; Effective Subordination
of the Notes................................................. The Company's only source of funds for
payment of the Principal Amount of the
Notes will be the principal amount of
Permitted Investments available therefor.
Although the payment of the Principal
Amount of and interest on the Notes is
secured by substantially all of the
assets of the Company pursuant to the
Indenture, the Notes are effectively
subordinated to the obligations of the
Company to the Ceding Insurer under the
Reinsurance Agreement. Because the
obligations of the Company under the
Reinsurance Agreement are a prior claim
on the principal portion of the Permitted
Investments held in the Regulation 114
Trust, to the extent that there is an
Ultimate Net Loss in excess of the
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C>
Trigger Amount under the Reinsurance
Agreement, the Principal Amount of the
Notes will be reduced to the extent of
the amount of each payment by the Company
to the Ceding Insurer under the
Reinsurance Agreement and the Noteholders
will incur a loss on their investment in
the Notes. See "- Principal Reduction."
In addition, to the extent that the
Company establishes a loss reserve for an
amount that it believes will become
payable under the Reinsurance Agreement,
the Company's obligation to pay the
Principal Amount of the Notes will be
contingent to the extent of the amount of
any Loss Reserve Amount pending receipt
of a Proof of Loss Claim under the
Reinsurance Agreement. See "- Contingent
Principal Event."
Sources of Funds for
Payment of Interest......................................... The Company's sources of funds for
payments of interest on the Notes will be
its net investment earnings on the
Permitted Investments (plus any Net Swap
Receipts and minus any Net Swap Payments)
and the Premiums received under the
Reinsurance Agreement. It is anticipated
that the investment earnings on the
Permitted Investments will be less than
the amounts payable by the Company in
respect of interest on the Notes.
Accordingly, in the event of the failure
of the Ceding Insurer to pay any Premium
under the Reinsurance Agreement or the
Swap Counterparty to pay any Net Swap
Receipt under the Interest Rate Swap, the
Company would likely be unable to make
full payment of interest on the Notes.
Interest Rate Swap............................................ On the date of the initial issuance of the
Notes (the "Closing Date"), the Company
will enter into one or more interest rate
swap agreements (collectively, the
"Interest Rate Swap") with Merrill Lynch
Capital Services, Inc. (the "Swap
Counterparty"). Under the Interest Rate
Swap, one Business Day prior to each
Interest Payment Date the Swap
Counterparty will be obligated to pay to
the Indenture Trustee on behalf of the
Company interest at a rate equal to the
applicable one-month LIBOR for the
related Interest Accrual Period, less
___%, on the principal amount of the
Permitted Investments. In exchange for
such payment, the Indenture Trustee on
behalf
</TABLE>
8
<PAGE> 11
<TABLE>
<S> <C>
of the Company will pay to the Swap
Counterparty the investment earnings on
the Permitted Investments one Business
Day prior to each Interest Payment Date.
Such payments will be made on a net
basis. The net amount, if any, payable by
the Indenture Trustee on behalf of the
Company to the Swap Counterparty is
referred to herein as the "Net Swap
Payment," and the net amount, if any,
payable by the Swap Counterparty to the
Company is referred to herein as the "Net
Swap Receipt."
Reinsurance Agreement......................................... The Company will engage in the reinsurance
business by entering into the Reinsurance
Agreement with the Ceding Insurer,
pursuant to which the Company will
provide certain catastrophe excess of
loss reinsurance (see "Certain Defined
Terms" for a definition of "catastrophe
excess of loss reinsurance" and of
certain other reinsurance terms) in
respect of an Ultimate Net Loss in excess
of the Trigger Amount arising in the
Covered States due to the occurrence of a
single Loss Occurrence during the Loss
Occurrence Period. See "Reinsurance
Activity of the Company."
The coverage provided by the Company
under the Reinsurance Agreement is for
95% of the $1,052,632 layer of risk in
excess of the $1,000,000,000 of the
Ultimate Net Loss (the "Trigger Amount").
The Subject Business covers the risk of
the occurrence of a Category 3, 4 or 5
Hurricane in the Covered States (see
"Certain Defined Terms").
The period covered by the Reinsurance
Agreement will be the period from and
including the Closing Date to and
including June 30, 1997 (the "Loss
Occurrence Period"). The monthly premium
payable to the Company under the
Reinsurance Agreement (the "Premium")
will be due on or before the last
Business Day of the month, beginning in
August 1996 in an amount equal to
one-twelfth of the product of ___% and
$___________. In addition, the amount of
$_______ will be due on the Closing Date.
Further, if the Ceding Insurer elects to
extend the Claims Period for the Extended
Claims Made Period, then it will pay an
additional
</TABLE>
9
<PAGE> 12
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<S> <C>
Premium on the last Business Day of June
1997, as described in "Reinsurance
Activity of the Company - Extended Claims
Made Period."
Under the Reinsurance Agreement, the
Company will be obligated to indemnify
the Ceding Insurer for 95% of the
Ultimate Net Loss in excess of the
Trigger Amount caused by a single Loss
Occurrence during the Loss Occurrence
Period in the Covered States for which
the Ceding Insurer has liability under
the Subject Business; provided that the
liability of the Company is limited to
$1,000,000 (the "Maximum Recovery"). The
"Retained Share" of the Ceding Insurer of
Ultimate Net Loss in excess of the
Trigger Amount shall be 5% of such
Ultimate Net Loss. If there is more than
one Loss Occurrence that results in an
Ultimate Net Loss in excess of the
Trigger Amount during the Loss Occurrence
Period, the Ceding Insurer is entitled to
make a claim or claims under the
Reinsurance Agreement only in respect of
one such Loss Occurrence selected by the
Ceding Insurer in its sole discretion.
The Company will redeem the Notes on the
Mandatory Redemption Date if the Ceding
Insurer does not elect to extend the
Claims Period for the Extended Claims
Made Period under the Reinsurance
Agreement.
Proof of Loss Claims by the Ceding
Insurer under the Reinsurance Agreement
will be subjected to Agreed Upon
Procedures by KPMG Peat Marwick, Cayman
Islands ("KPMG Cayman Islands"), as the
claims reviewer engaged by the Company
(the "Claims Reviewer") and the amount of
Loss Reserves included in the calculation
of the Ultimate Net Loss on the
Commutation Date will be certified by
___________________, as the qualified
loss reserve specialist engaged by the
Company (the "Loss Reserve Specialist").
Neither the Claims Reviewer nor the Loss
Reserve Specialist is obligated in any
way to make payments under the Notes or
the Reinsurance Agreement. See
"Reinsurance Activity of the Company--
The Claims Review Agreement" and
"Reinsurance Agreement -- Loss Reserve
Specialist Agreement."
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Covered States................................................ Losses will arise only out of property damage
caused by a Loss Occurrence in one or
more of Alabama, Connecticut, Delaware,
District of Columbia, Florida, Georgia,
Louisiana, Maine, Maryland,
Massachusetts, Mississippi, New
Hampshire, New Jersey, New York, North
Carolina, Pennsylvania, Rhode Island,
South Carolina, Texas, Vermont and
Virginia.
The Indenture Trustee......................................... The Chase Manhattan Bank, as indenture
trustee (the "Indenture Trustee").
Administrator................................................. Midland Bank Trust Corporation (Cayman)
Limited (the "Administrator") will act as
administrator of the Company to perform
certain of the administrative obligations
of the Company under the Reinsurance
Agreement and the Indenture. The
Administrator will not be obligated in
any way to make payments under the Notes
or the Reinsurance Agreement.
Claims Reviewer............................................... KPMG Cayman Islands will act as the Claims
Reviewer on behalf of the Company to
perform certain agreed upon procedures to
review Proof of Loss Claims submitted by
the Ceding Insurer under the Reinsurance
Agreement. The Claims Reviewer will not
be obligated in any way to make payments
under the Notes or the Reinsurance
Agreement. See "Reinsurance Activity of
the Company -- Claims Review Agreement."
Loss Reserve Specialist....................................... ___________________ will act as the Loss
Reserve Specialist to subject any Loss
Reserve included by the Ceding Insurer on
the Final Proof of Loss Claim submitted
by the Ceding Insurer under the
Reinsurance Agreement to certain agreed
upon procedures. The Loss Reserve
Specialist will not be obligated in any
way to make payments under the Notes or
the Reinsurance Agreement. See
"Reinsurance Activity of the Company --
Loss Reserve Specialist Agreement."
Form.......................................................... The Notes will be issued in fully registered
certificated form.
Restrictions on Transfer...................................... The Notes are not being offered in, and may
not be acquired in or transferred into,
the States of _________, _________,
________ or ________, or to persons
resident in those States. The Indenture
Trustee will not register the transfer
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of any Note unless, at the time
registration of transfer is requested,
the Indenture Trustee is provided with a
certificate of the proposed transferee in
the form provided in the Indenture to the
effect that the proposed transfer is not
to be made in or into any of such States
and the proposed transferee is not a
resident of any of such States.
Certain U.S. Federal Income
Tax Consequences............................................ The Company was formed and intends to
operate in such a manner that it believes
would not cause it to be treated as
engaged in a trade or business within the
United States. The Company has received
an opinion from Skadden, Arps, Slate,
Meagher & Flom that, although the matter
is not free from doubt due to a lack of
relevant authority and the highly factual
nature of the analysis, the Company would
not be deemed to be so engaged. The
Company will not seek a ruling from the
U.S. Internal Revenue Service on this
issue and the IRS may assert a contrary
position. If the Company were found to be
engaged in a trade or business within the
United States, the Company would be
subject to U.S. income tax (at a rate up
to 35%), and the 30% branch profits tax,
on its income, resulting in an effective
U.S. federal income tax rate of up to
54.5%, and, such taxes would
substantially reduce any potential return
to the Noteholders on their respective
investments. Income with respect to the
Notes will be fully taxable to
Noteholders who are U.S. persons (as
determined for U.S. federal income tax
purposes). Although the matter is not
free from doubt, the Company intends to
treat the Notes as equity interests in it
for U.S. federal income tax purposes.
Each Noteholder by its purchase of Notes
will acknowledge and agree to such
treatment and will covenant to take no
action inconsistent with such treatment.
Due to an absence of specific authority
with respect to the characterization of
the Notes and the Company for U.S.
federal income tax purposes, the amount,
timing and character of income, gain, or
loss recognized with respect to a Note
could be different from that described
herein. DUE TO AN ABSENCE OF APPLICABLE
AUTHORITY AND TO THE HIGHLY FACTUAL
NATURE OF THE REQUIRED ANALYSES THAT
COULD AFFECT THE TAXATION OF THE COMPANY
AND THE
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NOTEHOLDERS, EACH NOTEHOLDER SHOULD
CONSULT ITS TAX ADVISORS REGARDING THE
TAX CONSEQUENCES TO IT OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF NOTES. See
"Risk Factors - United States Federal
Income Tax Risks" and "Certain Income Tax
Considerations."
ERISA Considerations.......................................... Although the Notes are denominated as debt,
it is likely that the Notes will be
treated as "equity interests" for
purposes of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"). Accordingly, the acquisition
of the Notes by an employee benefit plan
subject to ERISA or the Internal Revenue
Code of 1986, as amended (the "Code"),
could cause the underlying assets of the
Company (including the Permitted
Investments in the Regulation 114 Trust
and the Reinsurance Agreement) to be
treated as assets of an investing
employee benefit plan for purposes of
ERISA and the Code. In addition, the net
proceeds from the issuance of the Notes
will be held in the Regulation 114 Trust
and invested in Permitted Investments and
pledged to secure the Company's
obligations under the Reinsurance
Agreement with the Ceding Insurer, which
may be a Party-in-Interest or
Disqualified Person with respect to a
number of employee benefit plans or
retirement arrangements, which
transactions could constitute or result
in prohibited transactions. One or more
exemptions may be available with respect
to the imposition of liability in
connection with such prohibited
transactions. A fiduciary of any employee
benefit plan or other retirement
arrangement subject to ERISA or the Code
should carefully review with its legal
and other advisors whether the purchase
or holding of the Notes could give rise
to a transaction prohibited or otherwise
impermissible under ERISA or the Code.
Among other considerations, the fiduciary
should take into account whether the
fiduciary has the authority to make the
investment; whether the investment
constitutes a direct or indirect
transaction with a Party-in-Interest or
Disqualified Person; the composition of
the plan's portfolio with respect to
diversification by type of asset; and
whether an exemption from the imposition
of liability in connection
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with a prohibited transaction is
available. See "ERISA Considerations."
Risk Factors.................................................. Prospective investors should consider
carefully the information set forth under
the caption "Risk Factors," and all other
information set forth in this Prospectus,
before making any investment in the
Notes.
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<PAGE> 17
RISK FACTORS
RISK OF LOSS OF INVESTMENT
Ownership of the Notes involves a high degree of risk because the Notes are
effectively subordinated to the obligations of the Company under the Reinsurance
Agreement. The principal portion of the Permitted Investments in the Regulation
114 Trust that is payable at the maturity of such Permitted Investments will be
the primary source of funds available to the Company to pay the Principal Amount
of the Notes. The amounts available in the Regulation 114 Trust are intended to
secure the obligations of the Company to the Ceding Insurer under the
Reinsurance Agreement and are available, first, to pay any amounts owed by the
Company under the Reinsurance Agreement. The Company's obligation to pay the
Principal Amount of the Notes shall be reduced by any amounts owed by the
Company pursuant to the Reinsurance Agreement and, if the Company establishes a
loss reserve in respect of anticipated claims under the Reinsurance Agreement,
shall become contingent to the extent of any such Loss Reserve Amount. Any such
reduction or contingency shall be allocated first among the holders of the Class
B Notes on a pro rata basis until the aggregate Principal Amount of the Class B
Notes is reduced to zero or becomes wholly contingent, then among the holders of
the Class A Notes on a pro rata basis until the aggregate Principal Amount of
the Class A Notes is reduced to zero or becomes wholly contingent. See
"Effective Subordination of Class B Notes in Certain Circumstances."
Accordingly, the Notes are speculative and investors bear the risk that they
could lose all or part of the principal of and the interest on the Notes if the
Ceding Insurer incurs an Ultimate Net Loss with respect to the Subject Business
in excess of the Trigger Amount. See "Reinsurance Activity of the Company -
Certain Terms of the Reinsurance Agreement" and "Description of the Notes." The
future occurrence of a Loss Occurrence during the Loss Occurrence Period that
causes an Ultimate Net Loss with respect to the Subject Business in excess of
the Trigger Amount is inherently unpredictable. Such an event may occur and may
produce an Ultimate Net Loss to the Ceding Insurer on the Subject Business in
excess of the Trigger Amount.
EFFECTIVE SUBORDINATION OF CLASS B NOTES IN CERTAIN CIRCUMSTANCES
In the event of a Principal Reduction or a Contingent Principal Event, the
payment of the Principal Amount of the Class B Notes and interest thereon is
effectively subordinated to the prior payment of the Principal Amount of and
interest on the Class A Notes. Any Principal Reduction or reduction in the
Notional Amount of the Notes resulting from the payment by the Company of
amounts owed to the Ceding Insurer pursuant to the Reinsurance Agreement or from
the establishment of a Loss Reserve Amount shall be allocated: first, among the
holders of the Class B Notes on a pro rata basis until the aggregate Principal
Amount of the Class B Notes is reduced to zero or becomes wholly contingent and
second, among the holders of the Class A Notes on a pro rata basis until the
aggregate Principal Amount of the Class A Notes is reduced to zero or becomes
wholly contingent. See "Description of the Notes - Principal Reduction" and "-
Contingent Principal Event."
LIMITED LIQUIDITY
There is currently no secondary market for the Notes. The Underwriter
intends to make a market in the Notes, but is not obligated to do so. There is
no assurance that a secondary market will develop or, if it does develop, that
it will provide Noteholders with liquidity of investment or that it will
continue until the Principal Amount of the Notes are paid in full. In addition,
in the event of the declaration of a Hurricane, the liquidity of the Notes may
be materially impaired. The Notes are not being offered in, and may not be
acquired in or transferred into, the States of _____, ______, ______ or ______
or to persons resident in such States. The Indenture Trustee will not register
the transfer of any Note unless, at the time registration of transfer is
requested, the Indenture Trustee is provided with a certificate of the proposed
transferee the form provided in the Indenture to the effect that the proposed
transfer is not to occur in or into any of such States and that the proposed
transferee is not a resident of any such States.
RELIANCE ON CEDING INSURER AND SWAP COUNTERPARTY
The ability of the Company to pay interest on the Notes is, in part,
dependent on the payment by the Ceding Insurer of the Premium payable by the
Ceding Insurer to the Company under the Reinsurance Agreement and may, in part,
be dependent on the payment by the Swap Counterparty of any Net Swap Receipts
due to the Company under the Interest Rate Swap. Because the Company's sources
for payment of the interest on the Notes are (i) the
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<PAGE> 18
interest earnings on the Permitted Investments in the Regulation 114 Trust plus
any Net Swap Receipts and less any Net Swap Payments and (ii) the Premiums paid
pursuant to the Reinsurance Agreement, and because it is anticipated that the
interest earnings on the Permitted Investments may be less than the interest
payable on the Notes, any failure of the Ceding Insurer to pay the Premium or
the Swap Counterparty to pay any Net Swap Receipts, whether due to the
creditworthiness of the Ceding Insurer or the Swap Counterparty or for any other
reason, would likely result in the Company not having sufficient funds to pay
the full amount of interest on the Notes. In the event that the Ceding Insurer
fails to pay any Premium when due under the Reinsurance Agreement, the Company
shall be entitled to terminate the Reinsurance Agreement and redeem the Notes
and the assets in the Regulation 114 Trust will be distributed to the Company
for payment to holders of the Notes. See "Certain Terms of the Indenture
Mandatory Redemption" and "- Interest Rate Swap."
ABSENCE OF OPERATING HISTORY OF COMPANY; NO PRIOR EXPERIENCE FOR MANAGEMENT;
RELIANCE ON AGENTS
The Company is a recently formed Cayman Islands company the sole business
purpose of which will be to be licensed as an insurer under the laws of the
Cayman Islands and to enter into the Reinsurance Agreement. The Company has no
operating history, and the officers and directors of the Company have no prior
experience in the property catastrophe reinsurance business.
Certain of the business activities of the Company are to be carried out on
behalf of the Company by agents appointed by the Company for such purpose. For
example, to the extent the Ceding Insurer submits a Proof of Loss Claim in
respect of Paid Losses in connection with a Loss Occurrence covered by the
Reinsurance Agreement, such Proof of Loss Claim will be reviewed for the Company
by the Claims Reviewer in accordance with certain Agreed Upon Procedures set
forth in the Claims Review Agreement. See "Reinsurance Activity of the Company
- -- Claims Review Agreement." The Claims Reviewer will not audit any Proof of
Loss Claim but will only be responsible for applying the Agreed Upon Procedures.
There can be no assurance that applying such Agreed Upon Procedures to a Proof
of Loss Claim will bring to the attention of the Claims Reviewer other matters
which would have been brought to their attention had an audit of such Proof of
Loss Claim been undertaken. In addition, in connection with any Commutation of
the Reinsurance Agreement, the amount of any Loss Reserve included in a Final
Proof of Loss Claim submitted by the Ceding Insurer in respect of losses
incurred in connection with a Loss Occurrence covered by the Reinsurance
Agreement will be reviewed for reasonableness on behalf of the Company by the
Loss Reserve Specialist in accordance with certain procedures set forth in the
Reinsurance Agreement and the Loss Reserve Specialist Agreement. See
"Reinsurance Activity of the Company -- Commutation" and "Reinsurance Activity
of the Company -- Loss Reserve Specialist Agreement." The final Loss Reserve
Certificate delivered by the Loss Reserve Specialist shall be binding on the
Company and the Ceding Insurer for purposes of determining any liability of the
Company for Loss Reserves included in the calculation of the Ultimate Net Loss
under the Reinsurance Agreement. Accordingly, the amount of any Principal
Reduction in respect of the Notes is, in part, dependent on the analysis
performed by the Loss Reserve Specialist, which will be based upon estimates and
not actual claims paid. Further, to the extent that the Ceding Insurer notifies
the Company that it has established a loss reserve in excess of the Trigger
Amount and in respect of which it has not yet delivered a Proof of Loss Claim,
the Company will, without further verification, establish a Loss Reserve Amount
and the Company's obligation to pay the Principal Amount of all or part of the
Notes will become contingent pending receipt of a related Proof of Loss Claim.
However, the occurrence of any Contingent Principal Event will have no impact on
the Principal Amount of the Notes outstanding unless a related Proof of Loss
Claim is subsequently submitted by the Ceding Insurer under the Reinsurance
Agreement. See "Description of the Notes - Contingent Principal Event."
KPMG Cayman Islands has been appointed as the Claims Reviewer, and also
acts as the Company's independent auditor. KPMG Peat Marwick LLP, United States,
is the Ceding Insurer's independent public accountant.
UNPREDICTABILITY OF RISK
Under the Reinsurance Agreement, the Company will be obligated to indemnify
the Ceding Insurer for 95% of the Ceding Insurer's Ultimate Net Loss on the
Subject Business up to the Maximum Recovery, but only to the extent that such
Ultimate Net Loss exceeds the Trigger Amount. The Subject Business consists of
the Ceding Insurer's residential and personal property (excluding automobile)
insurance policies covering properties located in the Covered States. The
Company's liability under the Reinsurance Agreement is for a single Loss
Occurrence
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within the Loss Occurrence Period that results in an Ultimate Net Loss in excess
of the Trigger Amount. If there is more than one Loss Occurrence that results in
Ultimate Net Loss in excess of the Trigger Amount, the Ceding Insurer is
entitled to make a claim under the Reinsurance Agreement only in respect of one
such Loss Occurrence selected by the Ceding Insurer in its sole discretion.
Consequently, the Company is exposed to the occurrence and severity of Loss
Occurrences occurring in the Covered States during the Loss Occurrence Period.
No prediction can be made as to whether a Loss Occurrence that occurs in the
Covered States during the Loss Occurrence Period will result in a level of
Ultimate Net Loss that will exceed the Trigger Amount and therefore result in
the Company incurring a liability under the Reinsurance Agreement. The Notes are
effectively subordinated to the obligations of the Company under the Reinsurance
Agreement. Any obligation of the Company to make a payment to the Ceding Insurer
under the Reinsurance Agreement will result in the Noteholders incurring a loss
on their Notes.
EXPOSURE UNDER POLICIES
Under the Reinsurance Agreement, the Company will be obligated to indemnify
the Ceding Insurer for 95% of the Ceding Insurer's Ultimate Net Loss on the
Subject Business in excess of the Trigger Amount subject to the limitations
described herein and in the Reinsurance Agreement. The Policies of the Ceding
Insurer included within the Subject Business include Existing Policies, Renewals
and New Policies.
The exposure of the Ceding Insurer under the Policies during the Loss
Occurrence Period and, accordingly, the risk assumed by the Company under the
Reinsurance Agreement, can vary depending upon a number of factors. For example,
the coverage amount of any Policy may be increased or the related deductible may
be lowered. Although the Ceding Insurer has agreed during the term of the
Reinsurance Agreement not to propose deductibles lower than those in effect on
the date hereof unless required by applicable law, customers whose deductibles
on Policies are higher than the minimum offered by the Ceding Insurer, may at
any time, request that the deductible be lowered.
New Policies include two elements: (i) policies in the Covered States on
dwellings and/or personal property not previously insured by the Ceding Insurer;
and (ii) Existing Policies rewritten for a variety of reasons, including but not
limited to a move by the policyholder within the Covered States, divorce of the
policyholder or refinancing of the mortgage on the insured dwelling. Such
rewritten policies will reduce the number of existing policies. As a result, it
is not possible to precisely predict the number of New Policies to be entered
into by the Ceding Insurer during the Loss Occurrence Period. Although the
addition of New Policies will increase the exposure of the Company under the
Reinsurance Agreement, the Reinsurance Agreement limits the amount of Losses
that may be claimed in respect of New Policies to 9% of the amount of Losses
under Existing Policies and Renewals.This factor reflects the changing nature of
policies in force from time to time, due to new business and movement into and
out of the Covered States by policyholders insured by the Ceding Insurer.
Because the business of insurance is subject to significant regulation in
the Covered States, the ability of the Ceding Insurer to modify the policy terms
offered by the Ceding Insurer on a Renewal Policy or a New Policy from those
terms set forth in the Existing Policies may be prevented by applicable law in
the Covered States.
INVESTMENT EXPOSURE OF ASSETS HELD IN REGULATION 114 TRUST
The net proceeds from the sale of the Notes and certain other funds
available to the Company will be held in the Regulation 114 Trust and invested
in Permitted Investments. While the amounts held in the Regulation 114 Trust may
only be invested in certain commercial paper with a rating at the time of
investment or contractual commitment to investment therein from Standard &
Poor's Rating Services of at least A-1 and from Moody's Investor's Service, Inc.
of at least P-1, there can be no assurance that there will be no default with
respect to payments on such commercial paper. Any such default would adversely
affect the Company's ability to make payments of the Principal amount of the
Notes and interest thereon.
LIMITED RESOURCES OF THE COMPANY
The Company is thinly capitalized. Its net worth on the date hereof is
approximately $125,000. The net worth of the Company is not expected to increase
materially. The income expected to be received by the Company from the
investment of the Permitted Investments, the payment of the Premium and the
payment of any Net Swap
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Receipts is expected to be sufficient to make payment of the projected
liabilities of the Company. However, in the event of the occurrence of
unanticipated expenses or liabilities the Company might not have the resources
available to the Company to make payment of such expenses or liabilities. In the
event the expenses or liabilities exceeded the then net worth of the Company,
the Company could be forced to seek the protection of insolvency proceedings.
CAPITALIZATION OF THE COMPANY
The ordinary shares of the Company will be registered in the name of
Midland Bank Trust Corporation (Cayman) Limited as trustee for a Cayman Islands
charitable trust. Neither such trustee on behalf of the trust nor the trust
itself will be under any obligation to subscribe for additional ordinary shares
of the Company or to otherwise provide funds or capital to the Company.
REGULATION
The Company will be a licensed Cayman Islands reinsurance company. As such,
the Company will be subject to regulation and supervision in the Cayman Islands.
The applicable Cayman Islands statutes and regulations generally are designed to
protect insurers and ceding insurance companies rather than holders of debt of
the insurance company. Among other things, such statutes and regulations require
an insurance company to maintain minimum levels of capital and surplus; may (but
do not currently) impose restrictions on the amount and type of investments it
may hold; may (but do not currently) prescribe solvency standards that it must
meet; require approval of transfers of ownership of its capital shares; and
provide for the performance of certain periodic examinations of the insurance
company and its financial condition.
The Company will not be registered or licensed as an insurance company in
any jurisdiction in the United States. The Ceding Insurer is located in the
United States. The insurance laws of each state in the United States regulate
the sale of insurance and reinsurance within their jurisdiction by alien
reinsurers, such as the Company. The Company will conduct its business through
its offices in the Cayman Islands and will not maintain an office, and its
personnel will not solicit, advertise, settle claims or conduct other insurance
activities, in the United States. Accordingly, the Company does not believe it
will be in violation of the insurance laws of any jurisdiction in the United
States. There can be no assurance, however, that inquiries or challenges to the
Company's insurance activities will not be raised in the future. See
"Reinsurance Activity of the Company - Regulation."
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in the United States and various states within the
United States. In the past, there have been Congressional and other initiatives
in the United States regarding increased supervision and regulation of the
insurance industry, including proposals to supervise and regulate alien
reinsurers. It is not possible to predict the future impact, if any, of changing
law or regulation on the operations of the Company.
UNITED STATES FEDERAL INCOME TAX RISKS
The Company was formed and intends to operate in such a manner that it
believes would not cause it to be treated as engaged in a trade or business
within the United States. The Company has received an opinion of Skadden, Arps,
Slate, Meagher & Flom that, although the matter is not free from doubt due to a
lack of relevant authority and the highly factual nature of the analysis, the
Company would not be deemed to be so engaged. On this basis, the Company does
not expect to be required to pay United States income tax with respect to its
income. There can be no assurance, however, that the U.S. Internal Revenue
Service (the "IRS") will not contend, and that a court would not ultimately
hold, that the Company is engaged in a trade or business within the United
States. If the Company were deemed to be so engaged, it would, among other
things, be subject to U.S. federal income tax, as well as the branch profits
tax, on its income which is treated as effectively connected with the conduct of
that trade or business. The maximum federal tax rates currently are 35% for a
corporation's effectively connected income and 30% for the branch profits tax,
resulting in an effective maximum U.S. federal income tax rate of 54.5%. The
branch profits tax is imposed each year on a corporation's effectively connected
earnings and profits (with certain adjustments) deemed repatriated out of the
U.S. If imposed, such taxes would substantially reduce any potential return to
the Noteholders on their respective investments. In addition, if the Company
were treated as being engaged in a trade or business within the United States,
all or a portion of the interest on the Notes would be U.S. source income, which
could adversely affect certain Noteholders' foreign tax credit positions,
depending
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on their respective individual circumstances and could subject Noteholders who
are not U.S. persons to U.S. federal income tax with respect to the interest on
the Notes.
In addition, as described more fully below, there are a number of other
uncertainties relating to the U.S. federal income taxation of the Company and
Noteholders, which, depending on the ultimate resolution of such uncertainties,
could have adverse consequences to a Noteholder who is a U.S. person. See
"Certain Income Tax Considerations."
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
The Company is a Cayman Islands company and all its officers and directors,
as well as certain of the experts named herein, are residents of various
jurisdictions outside the United States. Certain of the assets of the Company
and all or a substantial portion of the assets of such officers and directors
and of the Company are or may be located in jurisdictions outside the United
States. Although the Company has irrevocably agreed that it may be served with
process in New York, New York with respect to actions based on violations of the
United States federal securities laws relating to offers and sales of the Notes
made hereby, it could be difficult for investors to effect service of process
within the United States on directors and officers of the Company or to recover
against the Company or such directors and officers on judgments of United States
courts predicated upon civil liabilities under the United States federal
securities laws.
The Company has been advised by its Cayman Islands counsel, Maples and
Calder, that there is doubt as to whether the courts of the Cayman Islands would
enforce (i) judgments of United States courts obtained in actions against such
persons or the Company predicated upon the civil liability provisions of the
United States federal securities laws or (ii) original actions brought in the
Cayman Islands against such persons or the Company predicated solely upon United
States federal securities laws. There is no treaty in effect between the United
States and the Cayman Islands providing for such enforcement, and there are
grounds upon which Cayman Islands courts may not enforce judgments of United
States courts. Certain remedies available under the laws of United States
jurisdictions, including certain remedies under the United States federal
securities laws, would not be allowed in Cayman Islands courts as contrary to
public policy.
CLAIMS SETTLEMENTS BY CEDING INSURER
The Company will be a reinsurance company which, under the Reinsurance
Agreement, agrees to indemnify the Ceding Insurer for 95% of the Ultimate Net
Loss in excess of the Trigger Amount on the Subject Business. Pursuant to the
Reinsurance Agreement, all loss settlements made by the Ceding Insurer, provided
they are within the conditions of the Policies and within the terms of the
Reinsurance Agreement, shall be unconditionally binding upon the Company. The
Company believes that the Ceding Insurer will settle such claims in good faith
and it is generally bound to accept the claims settlements agreed to by the
Ceding Insurer.
EFFECTIVE SUBORDINATION OF THE NOTES UPON EVENTS OF DEFAULT; LIMITATIONS ON
ENFORCEMENT
Notwithstanding that the Indenture Trustee and the holders of the Notes
have the right upon the occurrence of an Event of Default under the Indenture to
declare the Principal Amount of the Notes to be immediately due and payable and
to exercise certain remedial proceedings, so long as the Reinsurance Agreement
is in effect, the payment of the Notes and the exercise of such remedies will
effectively be subordinated to the rights of the Ceding Insurer under the
Reinsurance Agreement. Neither the Indenture Trustee nor the holder of any Note
will have access to the Permitted Investments or other assets held by the
Regulation 114 Trustee until termination of the Reinsurance Agreement (including
the Extended Claims Made Period, if the Claims Made Period is extended by the
Ceding Insurer) and after giving effect to the payment of any claim made
thereunder, except to the extent (i) of interest earnings on such Permitted
Investments, or (ii) that there are Excess Funds available in the Regulation 114
Trust.
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THE COMPANY
Residential Reinsurance Limited, a Cayman Islands company (the "Company"),
was formed on May 3, 1996, and will be licensed as a reinsurance company under
the laws of the Cayman Islands. The sole purpose of the Company will be to
engage in property catastrophe reinsurance under the Reinsurance Agreement
solely with the Ceding Insurer. The Company will not, and does not intend to, be
a licensed insurance or reinsurance company in any State of the United States or
in any jurisdiction other than the Cayman Islands. So long as the Notes are
outstanding the Company will not engage in any insurance or reinsurance
activities, or any other business activities, other than those contemplated by
the Reinsurance Agreement. See "Reinsurance Activity of the Company --
Regulation.
A Cayman Islands charitable trust unaffiliated with the Ceding Insurer, of
which the trustee is Midland Bank Trust Corporation (Cayman) Limited, will
subscribe for all the Company's shares. Following such subscription, the Company
will have a share capital of $120,000. The officers and directors of the Company
are non-U.S. citizens who are independent of, and not related to, the Ceding
Insurer. See "Management."
The Company's principal executive offices are located at P.O. Box 1109,
Midland Bank Trust Building, Mary Street, Grand Cayman, Cayman Islands, British
West Indies, and its telephone number is (809) 949-7755.
THE CEDING INSURER
United Services Automobile Association, a reciprocal interinsurance
exchange organized under the laws of Texas ("USAA") and USAA Casualty Insurance
Company, a Florida corporation ("USAA CIC"), are, collectively, the Ceding
Insurer. The Ceding Insurer currently has approximately 2.9 million
policyholders worldwide for all lines of business.
The Ceding Insurer and its various property and casualty subsidiaries
provide personal lines of insurance, which includes Automobile, Homeowners,
Dwelling, Renters, Condominium Owners, Pleasure Boat and Inland Marine Floater
insurance, to its policyholders. In addition, through its various wholly-owned
subsidiaries and affiliates, the Ceding Insurer offers insurance and financial
service products. The Ceding Insurer is the 5th largest private passenger
automobile and the 4th largest Homeowners insurer in the United States. The
Ceding Insurer's claims-paying ability rated A++ (Superior) by A.M. Best and
Company. The Ceding Insurer and its wholly-owned subsidiaries have their
principal offices in San Antonio, Texas and employ approximately 16,000 people.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be paid to the Company and
deposited by the Company with the Regulation 114 Trustee and invested in certain
commercial paper with a rating at the time of investment or contractual
commitment to invest therein, from Standard & Poor's Rating Services of A-1 and
from Moody's Investors Service, Inc. of P-1 (the "Permitted Investments") for
disposition in accordance with the Regulation 114 Trust Agreement. See
"Reinsurance Activity of the Company - The Regulation 114 Trust Agreement and
the Regulation 114 Trust."
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CAPITALIZATION OF THE COMPANY
The following table illustrates the capitalization of the Company as of the
Closing Date, giving effect to the issuance of the Notes on such date.
<TABLE>
<S> <C>
Dollars in thousands
Notes $
Shareholders' equity:
Ordinary Shares ($.__ par value, ___________ shares authorized,
_______________ shares issued and outstanding)
Additional paid-in capital
---------
Total shareholders' equity $
---------
Total capitalization $
=========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
Proceeds from the sale of the Notes will be paid to the Company and
deposited by the Company with the Regulation 114 Trustee and invested in
Permitted Investments. See "Use of Proceeds."
EXPENSES
The principal expense of the Company will consist of interest payments due
on the Notes. It is expected that substantially all of the remaining expenses of
the Company will consist of amounts payable for audit expenses, legal expenses
and fees of the Indenture Trustee, the Regulation 114 Trustee, the
Administrative Agent, the Claims Reviewer, the Loss Reserve Specialist and other
expenses related to the Notes, including any Net Swap Payments. It is
anticipated that, so long as there is not an Ultimate Net Loss in excess of the
Trigger Amount under the Reinsurance Agreement or any unexpected expenses or
liabilities in connection with the Company's activities, (i) interest earnings
on the Permitted Investments (plus any Net Swap Receipts and minus any Net Swap
Payments), (ii) scheduled payments of Premium under the Reinsurance Agreement
and (iii) the amount available at the maturity of the Permitted Investments upon
termination of the Regulation 114 Trust will provide sufficient funds to make
timely payment of all such expenses, and to pay principal of and interest on the
Notes when due.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of funds with respect to the Notes (in
addition to the amount available at the maturity of the Permitted Investments
upon termination of the Regulation 114 Trust) will be payments of the Premium
under the Reinsurance Agreement, interest earnings on the Permitted Investments
and any Net Swap Receipts. The Company will not have any additional source of
funds for payment of the Principal Amount of and interest on the Notes. It is
anticipated that, so long as there is not an Ultimate Net Loss in excess of the
Trigger Amount under the Reinsurance Agreement or any unexpected expenses or
liabilities in connection with the Company's activities, the Company will have
sufficient liquidity and capital resources to pay all amounts due on the Notes
and all of its other expenses.
RESULTS OF OPERATIONS
The Company's results of operations will depend principally on (i) whether
or not there is an Ultimate Net Loss in excess of the Trigger Amount under the
Reinsurance Agreement, (ii) the payment of the Premium under the Reinsurance
Agreement, (iii) the amount of interest earnings on the Permitted Investments,
(iv) the amount of any Net Swap Receipts and (v) the amount of its expenses,
including interest payments on the Notes, and its operating expenses.
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<PAGE> 24
EARNINGS TO FIXED CHARGES
Because the Company has had no operating history, no historical or pro
forma ratio of earnings to fixed charges has been included in this Prospectus.
SUBJECT BUSINESS
The "Subject Business" is a subset of the Ceding Insurer's overall
insurance portfolio and is comprised of Policies covering risks located in the
Covered States in the following lines of business: Homeowners, Dwelling,
Condominium Owners, Renters, Pleasure Boat and Inland Marine Floater. Each of
the Policies that comprise the Subject Business has exposure to loss from
various perils. However, the Reinsurance Agreement will only cover Losses in
respect of the Subject Business that arise from the peril of a Category 3, 4 or
5 Hurricane during the Loss Occurrence Period, subject to the limitations set
forth in the Reinsurance Agreement. See "Reinsurance Activity of the Company -
The Reinsurance Agreement." Losses to mobile homes are not included in the
Subject Business. The Company will be able to determine the cause and nature of
Loss from the information reported by the Ceding Insurer and thus determine
whether the Loss falls within the coverage provided under the Reinsurance
Agreement.
THE CEDING INSURER
USAA is one of the ten largest property and casualty insurers in the United
States in terms of written premium. USAA writes only personal lines property and
casualty insurance on a direct basis, with a minimal amount of reinsurance
assumed on a pool basis. While USAA's business includes a variety of personal
lines insurance products, the Reinsurance Agreement covers only Homeowners,
Dwelling, Condominium Owners, Renters, Pleasure Boat and Inland Marine Floater.
USAA CIC is a wholly-owned subsidiary of USAA, and is engaged in substantially
the same lines of business as USAA. See "- Insured Values in the Covered States"
for the percentages of the total business of the Ceding Insurer represented by
the above lines of business.
UNDERWRITING PROCESS - POLICY COVERAGE
HOMEOWNERS POLICY. The Ceding Insurer's Homeowners policies are written either
under the HO-84R Program, or the HO-93 Program, each of which is described under
"- Underwriting Management," below. Property coverage under the Ceding Insurer's
Homeowners policies is divided into the following categories:
Coverage A - Dwelling. Coverage A provides coverage for the dwelling, including
structures attached to the dwelling. The basic amount of Homeowners coverage
provided by Coverage A (the "Basic Dwelling Coverage Amount") is intended to be
equivalent to the replacement cost of the dwelling, determined on the basis of
information provided to the Ceding Insurer's underwriters by the policyholder.
Coverage B - Other Structures. Coverage B provides coverage for other structures
on the premises that are set apart from the dwelling by clear spaces, including
structures connected to the dwelling by only a fence, utility line, or similar
connection. The Coverage B limit of liability is 10% of the Basic Dwelling
Coverage Amount.
Coverage C - Personal Property. Coverage C provides coverage for personal
property owned or used by the insured. The Coverage C limit of liability varies
based on the policy type. See "Underwriting Management - HO- 93 Program."
Coverage D - Loss of Use. The Coverage D limit of liability varies by policy
type. See "Underwriting Management - HO-93 Program". Coverage D provides
coverage for (i) "additional living expenses," meaning the necessary increase in
living expenses incurred by the policyholder in order for the policyholder's
household to maintain its normal standard of living; and (ii) fair rental value
for that part of the residence premises rented to others, in each case less any
expenses that do not continue while the premises are not fit for occupancy.
While the Ceding Insurer's Homeowners policies provide various coverages
for personal liability to third parties, such coverages are not reinsured under
the Reinsurance Agreement and accordingly do not form part of the Subject
Business.
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<PAGE> 25
DWELLING POLICY. The Dwelling Policy includes five coverages:
Coverage A - Dwelling. Coverage A provides coverage for the dwelling, including
structures attached to the dwelling. The Basic Dwelling Coverage Amount is
intended to be equivalent to the replacement cost of the dwelling, determined on
the basis of information provided to the Ceding Insurer's underwriters by the
policyholder.
Coverage B - Other Structures. Coverage B provides coverage for other structures
on the premises which are set apart from the dwelling by clear space, including
structures connected to the dwelling by only a fence, utility line or similar
connection. The Coverage B limit of liability is 10% of the Basic Dwelling
Coverage Amount.
Coverage C - Personal Property. Coverage C provides coverage for the landlord's
furnishings. The amount of coverage is based on the amount requested by the
policyholder.
Coverage D - Fair Rental Value. Coverage D provides coverage for that part of
the dwelling rented to others, less any expenses that do not continue while such
part of the dwelling is not fit for occupancy (known as "fair rental value").
The Coverage D limit of liability is 10% of the Basic Dwelling Coverage Amount.
Coverage E - Additional Living Expenses. Coverage E provides coverage for any
additional living expenses. The Coverage E limit of liability is 10% of the
Basic Dwelling Coverage Amount.
CONDOMINIUM OWNERS POLICY. Condominium owners policies are written on either a
Homeowners Condominium policy or a Dwelling Condominium policy, which are
similar to the Homeowners policy or the Dwelling policy. Because the condominium
structure is insured under a master condominium policy (not written by the
Ceding Insurer), the Basic Dwelling Coverage Amount on either the Homeowners
Condominium policy or the Dwelling Condominium policy covers only building items
and additions to the structure added by the Ceding Insurer's policyholder. Under
the Homeowners Condominium form, Coverage B - Other Structures does not apply.
Under both the Homeowners Condominium and the Dwelling Condominium policies, the
Coverage C - Personal Property limit is based on the amount of coverage needed
by the policyholder and not a percentage of the Basic Dwelling Coverage Amount.
Under the Homeowners Condominium policy, coverage for fair rental value or
additional living expenses is 40% of the Coverage C - Personal Property amount
(20% in Texas) and is limited to expenses incurred within a 12-month period,
while the limit under the Dwelling Condominium policy is 10% of the Basic
Dwelling Coverage Amount, with no time limit.
RENTERS POLICY. The Renters policy provides coverage for personal property of
the insured. No coverage of the dwelling or other structures is provided. The
policyholder may choose coverage for either additional living expenses or fair
rental value, similar to that provided under the Homeowners policy.
Personal property coverage for renters is provided under one of four
policies, which differ based on the perils covered (either broad or special) and
the claims settlement method used (either replacement cost or actual cash
value). The term "actual cash value" refers to the present cash value of
property determined by taking the replacement cost and deducting for
depreciation due to physical wear and tear and obsolescence. The term
"replacement cost" refers to the cost, at the time of loss, of a new item
identical to the one damaged, destroyed or stolen. If an identical item is no
longer manufactured or cannot be obtained, replacement cost will be the cost of
a new item similar to the insured article and of like quality and usefulness. In
excess of 90% of the personal property coverage for Renters policies included in
the Subject Business is written on a replacement cost basis. The broad policy
includes coverage only for the perils named in the policy, while the special
policy provides coverage for all perils causing direct losses except those
specifically excluded. The peril of Hurricane is included in all Renters
policies. The principal forms of Renters policies are the following:
- The RP-2 policy provides broad personal property coverage on a named
perils, actual cash value basis. As of March 31, 1996, 6.23% of the
Ceding Insurer's Renters policies in the Covered States were written on
the RP-2 policy.
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<PAGE> 26
- The RP-3 policy provides broad personal property coverage on a named
perils, replacement cost basis. As of March 31, 1996, approximately
92.90% of the Ceding Insurer's Renters policies in the Covered States
were written on the RP-3 policy.
- The RP-4 policy provides special personal property coverage on an
all-risk, actual cash value basis. As of March 31, 1996, approximately
0.04% of the Ceding Insurer's Renters policies in the Covered States
were written on the RP-4 policy.
- The RP-5 policy provides special personal property coverage on an
all-risk, replacement cost basis. As of March 31, 1996, approximately
0.81% of the Ceding Insurer's Renters policies in the Covered States
were written on the RP-5 policy.
In accordance with Texas law, one of the insurers in the Ceding Insurer's
group insures renters on the Texas Homeowners Broad Form Tenants policy (HOB-T).
The HOB-T provides broad personal property coverage on an actual cash value
basis; however, policies with personal property limits of $12,000 or higher may
be written, at the insured's request, on a replacement cost basis. As of March
31, 1996, 96.9% of the HOB-T policies were written on a replacement cost basis.
PLEASURE BOAT POLICY. Coverage for pleasure use boats is provided by either a
Boatowners policy or a Yacht policy.
A Yacht policy is generally offered, depending upon the age of the boat, if
the boat has at least two of the following features: sleeping, cooking or
sanitary facilities. The age of the boat and its market value (as determined by
its owner) determine whether a condition and marine survey is needed to
determine the value of the boat (the "agreed value"). If a survey is not
required, the agreed value is established by using a boat pricing guide as a
comparison to the value requested by the owner. Under the Yacht policy, partial
losses are settled on a replacement cost basis, while total losses are settled
at the agreed value.
A Boatowners policy is generally offered on all boats which do not qualify
for a Yacht policy, with the value determined using a boat pricing guide. All
losses under the Boatowners policy are settled at actual cash value.
INLAND MARINE FLOATER POLICY. Coverage is provided for several classes of
articles, including fine arts, jewelry, furs, cameras and related equipment,
musical instruments, silverware, stamps and coins. Generally, the item is
insured for the bill of sale amount. A bill of sale or an appraisal, less than
three years old, is required for any item over $2,500, as well as for all fine
arts items. Individual jewelry items valued at $25,000 or more require an
appraisal by a certified or graduate gemologist.
Fine arts are insured for a specified amount, and losses are settled based
on that specified amount. In Texas, jewelry losses are handled in the same
manner. For the other classes, loss settlement is based on the cost to repair or
replace the item, subject to the amount of coverage listed on the policy for the
item.
UNDERWRITING MANAGEMENT
The pricing goal of the Ceding Insurer is to offer its policyholders the
lowest possible rates while assuring its financial strength. The Ceding
Insurer's pricing strategy is to set rates so that policyholders pay premiums
commensurate with the risk they represent.
The Ceding Insurer's underwriting program ensures, through an interface
with the claims system, that property business is monitored constantly based on
claims experience. Underwriters review business that has sustained a certain
level of losses to determine if underwriting action is needed and, if so, the
appropriate actions to take. Claims adjusters, while on site to investigate
claims, also look for situations of inadequate coverage and underwriting
hazards, and refer these cases to an underwriter for review. To ensure that
premiums are commensurate with the exposure insured, the Ceding Insurer
emphasizes "insurance to value," so that policies are written with adequate
limits which are automatically updated annually for increases in construction
costs.
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<PAGE> 27
The Ceding Insurer has undertaken various steps to reduce its exposure to
catastrophes, including Hurricanes, both in the Covered States and throughout
the United States. A major initiative to limit catastrophe exposure was the
development of a new Homeowners policy form (HO-93) to replace the existing
Homeowners policy form (HO-84R). The principal features of these policy forms
are described below.
HO-84R PROGRAM. Under the HO-84R policy form, dwellings meeting certain
eligibility requirements were eligible for the "Home Replacement Plus" ("HRP")
endorsement which provided payment of all dwelling replacement costs, regardless
of the policy's full Basic Dwelling Coverage Amount. The HRP endorsement also
provided personal property coverage in an amount equal to the policy's Basic
Dwelling Coverage Amount. Prior to 1993, approximately 50% of the Ceding
Insurer's Homeowners policies included the HRP endorsement.
To be eligible for the HRP endorsement, a dwelling must have:
- a minimum replacement cost of $50,000;
- a construction date of 1950 or later; and
- an Insurance Services Office Protection Class factor of 1 through 9.
HO-93 PROGRAM. In 1993, in an effort to better control losses on Homeowners
policies, the Ceding Insurer developed and began implementing new policy forms
for its Homeowners line of business. The HO-93 policy form has not been filed in
North Carolina or Texas, because each of those states prescribes Homeowners
policy forms which are different from the HO-93 form in certain respects,
described below.
Under the HO-93 program, two types of policy forms (the "Preferred
Contract" and the "Standard Contract") are offered. Both policy forms provide
(either as part of the policy, or by endorsement for additional premium) up to
50% additional coverage above the Basic Dwelling Coverage Amount. Except in
Connecticut and Florida, the additional coverage can be used, at the insured's
option, to pay for any or all of the following:
- unexpected rebuilding expenses;
- debris removal expenses in excess of the 5% of the Basic Dwelling
Coverage Amount, included in the policy as additional insurance;
and/or
- expenses to comply with changes to the community's building code
("building ordinance or law", or "BOL") in excess of the 5% of the
Basic Dwelling Coverage Amount, included in the policy as additional
insurance.
In Connecticut, the additional coverage can only be used to pay for
unexpected rebuilding expenses. Debris removal expenses are covered as
additional insurance up to 5% of the Basic Dwelling Coverage Amount. BOL
expenses are covered as additional insurance up to 5% of the Basic Dwelling
Coverage Amount, and additional BOL coverage of 25% of the Basic Dwelling
Coverage Amount can be purchased by the policyholder.
The Preferred Contract. The Preferred Contract is offered only for
dwellings built since 1950 with a minimum replacement cost of $70,000 and an ISO
protection class of 1 through 8, where 1 is the best rating.
- The Preferred Contract provides an additional 25% of the Basic
Dwelling Coverage Amount, with the insured having the option of
purchasing an additional 25% of the Basic Dwelling Coverage Amount
(for a total of 50%) for an additional premium.
- Other structures coverage equal to 10% of the Basic Dwelling Coverage
Amount is also included.
- Personal property coverage on a replacement cost basis is also
included in an amount equal to 75% of the Basic Dwelling Coverage
Amount.
- The Preferred Contract also provides additional living expenses
coverage, unlimited in dollar amount but limited to expenses incurred
within a 12-month period.
The Standard Contract. The Standard Contract limits replacement cost
coverage to the Basic Dwelling Coverage Amount, with the policyholder having the
option of purchasing an additional 25% or 50% of the Basic Dwelling Coverage
Amount for an additional premium.
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<PAGE> 28
- Other structures coverage equal to 10% of the Basic Dwelling Coverage
Amount is included.
- Personal property coverage on an actual cash value basis is included
in an amount equal to 50% of the Basic Dwelling Coverage Limit; the
policyholder has the option to purchase increased amounts of personal
property coverage and/or replacement cost coverage for personal
property for an additional premium.
- Additional living expense coverage, limited to 20% of the Basic
Dwelling Coverage Amount and limited to expenses incurred within a 12
month period, is included.
As of August 1, 1996, the HO-93 program has been approved in the District
of Columbia and every state (except North Carolina and Texas, where it was not
filed). As of August 1, 1996, it will have been fully implemented throughout the
Covered States (other than North Carolina and Texas) except for Connecticut,
Georgia and New York. The new program began to be implemented in New York on
December 1, 1995; in Georgia on May 1, 1996; and in Connecticut on August 15,
1996. The HRP endorsement remains in effect only on existing policies in
Connecticut, Georgia and New York not yet renewed under the HO-93 program. The
HRP endorsement will no longer apply to any policy in New York as of December 1,
1996, in Georgia as of May 1, 1997, and in Connecticut as of August 15, 1997.
In North Carolina, where the state insurance department promulgates the
permitted homeowners policy, approximately 62% of the Ceding Insurer's
policyholders currently have an endorsement similar to the HRP endorsement.
Beginning November 1, 1996, the Ceding Insurer's new and renewal policies in
North Carolina will no longer include this endorsement due to a change in the
state-promulgated policy. The Ceding Insurer will write additional dwelling
coverage of either 25% or 50% of the Basic Dwelling Coverage Amount at
additional premium. The North Carolina policy includes 10% of the Basic Dwelling
Coverage Amount for BOL expenses and 5% of the Basic Dwelling Coverage Amount
for debris removal expenses as additional insurance. The additional 25% and 50%
amounts do not include coverage for either BOL or debris removal.
The Texas Homeowners policy, which is mandated by the state insurance
department, includes coverage up to 5% of the Basic Dwelling Coverage Amount for
debris removal expenses as part of the policy and not as additional coverage. No
coverage is provided for BOL expenses. The Texas Homeowners policy does not
include guaranteed replacement cost coverage or the option of purchasing an
additional 25% or 50% of the Basic Dwelling Coverage Amount, so dwelling
replacement cost has been and continues to be limited to the Basic Dwelling
Coverage Amount.
UNDERWRITING PROCESS - DEDUCTIBLES AND POLICY LIMITS
DEDUCTIBLES. The Ceding Insurer offers various deductible options (ranging from
$100 to $2,500) to its policyholders in the Covered States. Split deductibles,
where different deductibles apply to the wind/hail (including Hurricane) peril
and to all other perils, have been introduced for Homeowners and Condominium
Owners policies in Florida and for Homeowners policies in Alabama, Louisiana,
Maryland, Mississippi and Virginia. Policies in these states are renewed with a
$1,000 wind/hail deductible; however, policyholders are allowed to reduce the
amount of the wind/hail deductible in return for a higher premium, or to
increase the amount of the deductible for a reduction in premium. In Texas, a 1%
deductible applies to certain policies. See "- Other Catastrophe Management
Steps."
During the Loss Occurrence Period under the Reinsurance Agreement, the
Ceding Insurer has no program to decrease the deductible amounts under the
Policies except at the request of the related policyholder or as required by law
or administrative regulation or direction. Although the Ceding Insurer has
agreed during the term of the Reinsurance Agreement not to propose deductibles
lower than those in effect on the date hereof unless required by applicable law,
customers whose deductibles on Policies are higher than the minimum offered by
the Ceding Insurer, may, at any time, request that the deductible be lowered,
and the Ceding Insurer will honor such request, provided that all other
underwriting criteria are met.
As of March 31, 1996, the approximate percentage of the Ceding Insurer's
Homeowners policyholders in states with split deductibles and a wind/hail
deductible of $1,000 or greater was:
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<TABLE>
<S> <C>
Alabama 21.4%
Florida 44.1%
Louisiana 45.3%
Maryland 5.6%
Mississippi 44.5%
Virginia 7.2%
</TABLE>
POLICY LIMITS - HOMEOWNERS POLICY. To ensure that each dwelling is insured for
the proper amount and that premiums are commensurate with the exposure insured,
the Ceding Insurer uses a concept known as "insurance to value." Insurance to
value is designed to maintain the Basic Dwelling Coverage Amount at 100% of the
amount needed to replace the dwelling. At the inception of a policy, the amount
of replacement cost is established jointly with the policyholder based on one or
more of the following:
- Inspection reports provided by third parties to the Ceding Insurer.
The inspection reports include pictures and outside diagrams on all
multiple-story dwellings with a replacement cost in excess of
$150,000 and all single-story dwellings with a replacement cost in
excess of $250,000.
- Information provided by the policyholder on the construction and
unique features of the dwelling is adjusted by factors obtained by
the Ceding Insurer from Boeckh, a division of Mitchell, a division of
Thomson Publishing Corporation. Boeckh bases its factors on prices
for labor, material, overhead and profit items throughout the United
States. These costs are localized, using three digit zip code areas,
to develop the factors used by the Ceding Insurer.
To maintain the proper amount of insurance, the Ceding Insurer requires an
inflation endorsement on all Homeowner policies written on either the Preferred
Contract, or the Standard Contract with the 25% or 50% endorsement. At renewal,
the Basic Dwelling Coverage Amount is adjusted to reflect the latest factors
from Boeckh. As of March 31, 1996, approximately 88% of the Ceding Insurer's
Homeowners policies in the Covered States include an inflation provision.
Underwriting information on a particular dwelling is obtained from the
applicant as well as, in some cases, outside sources, including a property loss
database and property inspection services. The property loss database, if
applicable, can be used by an underwriter to obtain information on prior losses
reported by other insurance companies and is used as a supplement to the
applicant's claims history with the Ceding Insurer.
POLICY LIMITS - DWELLING POLICY. Determination of the replacement cost of the
dwelling on the Dwelling policy is determined in the same manner as under the
Homeowners policy. As of March 31, 1996, over 80% of the Dwelling policies of
the Ceding Insurer in the Covered States include an inflation provision to
revise the Basic Dwelling Coverage Amount based on the latest factors from
Boeckh.
POLICY LIMITS - CONDOMINIUM OWNERS POLICY. The Basic Dwelling Coverage Amount,
under either the Homeowners Condominium policy or the Dwelling Condominium
policy, is based on the amount needed to cover "building items," meaning
additions made to the condominium unit by the policyholder. The limit of
liability for personal property is based on the amount requested by the
policyholder.
POLICY LIMITS - RENTERS POLICY (INCLUDING TEXAS HOB-T). The personal property
coverage limit is based on the amount requested by the policyholder, with
verification by the Ceding Insurer using on-line evaluation software.
POLICY LIMITS - PLEASURE BOAT POLICY. The underwriting criteria for boats
qualifying for the Yacht policy are more stringent than for boats written under
the Boatowners policy, in large part due to the difference in loss settlement
amounts. In all cases, the Ceding Insurer reviews the scope of operation of the
boat, as well as the operator's experience with boats of the size and power of
the boat proposed to be insured. For Yacht policies, additional information on
the navigational systems and engine is gathered through the condition and marine
surveys.
POLICY LIMITS - INLAND MARINE FLOATER POLICY. The Ceding Insurer views a variety
of factors in determining whether to insure items under the Inland Marine
Floater policy, such as police and fire protection, the past claim history of
the policyholder, and the intent of the policyholder (i.e., whether the item was
purchased to be held or
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re-sold). Depending on the value of items to be insured, the type of protections
taken by the policyholder to protect such items, such as an in-home safe or
central alarm system, are also considered. The amount of coverage of each
article is based on either a bill of sale or a written appraisal by a qualified
third party which is furnished to the Ceding Insurer by the policyholder.
POLICIES IN FORCE
The Policies comprising the Subject Business in the Covered States that
will be subject to the Reinsurance Agreement will consist of "Existing
Policies," "Renewals" and "New Policies."
Existing Policies are policies of Dwelling, Homeowners, Condominium Owners,
Renters, Pleasure Boat and Inland Marine Floater insurance covering property
within the Covered States, in force as of March 31, 1996, but shall exclude all
Dwelling and Homeowner's policies with a mobile home construction code. Existing
Policies that are cancelled, even if the coverage is subsequently rewritten as
New Policies, will no longer be included as Existing Policies.
Renewals are continuations of an Existing Policy under the same policy
numbers between 12:01 a.m., April 1, 1996 and 11:59 p.m., June 30, 1997,
including any and all modifications of such Existing Policies made by the Ceding
Insurer during the term thereof at the request of the policyholder (which may
include increasing or decreasing policy limits or deductibles), and any and all
modifications (which may include increasing or decreasing policy limits or
deductibles) made at the time of renewal by the Ceding Insurer pursuant to
Existing Policy endorsements and Policy program changes.
New Policies are policies of Dwelling, Homeowners, Condominium Owners,
Renters, Pleasure Boat and Inland Marine Floater insurance under a policy number
which was not in force on or before March 31, 1996 covering property within the
Covered States. The total amount of potential liability under the Reinsurance
Agreement for Losses under New Policies shall be limited to 9% of the amount of
Losses under Existing Policies and Renewals.
Policy modifications which may have an impact on coverage under the
Policies are as follows:
- Over 80% of the Ceding Insurer's Homeowners and Dwelling policies
include an inflation provisions, which increases the amount of the
Basic Dwelling Coverage Amount based on factors obtained from Boeckh.
The Ceding insurer applies these factors to policies at renewal and
adjusts the Basic Dwelling Coverage Amount to reflect the revised
replacement cost of the dwelling. As a result of the increase in the
Basic Dwelling Coverage Amount, the amount of coverage for personal
property, other structures and additional living expense is also
increased, as these coverages are based on a percentage of the Basic
Dwelling Coverage Amount. The foregoing applies only to Existing
Policies and Renewals.
- Policyholders may increase the Basic Dwelling Coverage Amount to
reflect the increased replacement cost resulting from additions to
the dwelling. Under the Homeowners and Dwelling Policies, certain
policy-holders are required to advise the Ceding Insurer of additions
to the dwelling with a replacement cost in excess of $5,000.
(Included in this group are policyholders with either the Preferred
Contract or the Standard Contract with either the additional 25% or
the 50% of the Basic Dwelling Coverage Amount.)
- Policyholders may increase or decrease the amount of the
deductible(s) on the policy. Although the Ceding Insurer has agreed
during the term of the Reinsurance Agreement not to propose
deductibles lower than those in effect on the date hereof unless
required by applicable law, customers whose deductibles on Policies
are higher than the minimum offered by the Ceding Insurer, may at any
time, request that the deductible be lowered, and the Ceding Insurer
[may] honor such request.
- Policyholders with dwellings eligible for the Preferred Contract who
are currently covered by the Standard Contract may choose to purchase
the Preferred Contract. The Preferred Contract includes certain
coverages not available under the Standard Contract.
- Policyholders may purchase endorsements which provide additional
coverage under the Policy. These endorsements include:
28
<PAGE> 31
(i) Replacement cost coverage for personal property in lieu of
actual cash value coverage. (Replacement cost coverage is
included in the Preferred Contract.)
(ii) Additional 25% or 50% of Basic Dwelling Coverage Amount.
(iii) Personal property coverage above the amount included in the
policy.
- Renters policies include a provision to increase the personal
property coverage amount at renewal to reflect the increase in
replacement cost.
Numerous other endorsements are available; however, the Company believes
that these endorsements would not significantly alter the coverage under the
policy for the peril of Hurricane.
INSURED VALUES IN THE COVERED STATES
The following tables set forth the aggregate insured value of the
Subject Business that is subject to the peril of Hurricane in the Covered
States, by line of insurance and by state.
CEDING INSURER INSURED VALUES(1)
IN THE COVERED STATES BY LINE OF INSURANCE
($BILLION)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF JUNE 30, 1995
-------------------- -------------------
% of Total % of Total
Insured Insured Insured Insured
Line of Insurance Values Values Line of Insurance Values Values
------------------ ------- --------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Homeowners $231.1 85.9% Homeowners $219.4 86.0%
Condominiums/Renters 14.4 5.3% Condominiums/Renters 13.2 5.1%
Dwelling 18.2 6.8% Dwelling 17.5 6.9%
Pleasure Boat/Inland 5.3 2.0% Pleasure Boat/Inland Marine 5.0 2.0%
Marine(2)
------ ----- ------ -----
Total $269.0 100.0% Total $255.1 100.0%
</TABLE>
(1) Ceding Insurer Insured Values in the Covered States represent the Ceding
Insurer's exposure to Hurricane loss in the Covered States for the
respective dates. The Insured Value for each policy, except for Pleasure
Boat Policy and Inland Marine Floater Policy, is calculated by summing the
limit of liability under each coverage as described in "Subject Business -
Underwriting Process - Policy Coverage", except that (i) for Coverage A
(i.e., dwelling coverage), the additional 25% or 50% exposure in excess of
the Basic Dwelling Coverage Amount under the Preferred Contract and certain
other policies with similar endorsements are not included; and (ii) for
Coverage D (i.e., loss of use coverage), the limit of liability is
calculated at 20% of the Basic Dwelling Coverage Amount for all forms of
Homeowners Policy, although additional exposure may arise under the
Preferred Contract to the extent incurred losses within a 12-month period
exceeds such amount. Effects of loss mitigation due to deductibles were not
taken into account in calculating the Insured Values.
(2) Insured Values under the Pleasure Boat and Inland Marine Floater lines of
insurance shown are calculated to be 2% of the sum of Insured Values under
Homeowners, Condominiums/Renters and Dwelling lines of insurance.
29
<PAGE> 32
CEDING INSURER INSURED VALUES(1)
IN THE COVERED STATES BY STATE
($ Billion)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF JUNE 30, 1995
-------------------- -------------------
Covered States Value % of Total Value % of Total
-------------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Northeast
Connecticut $10.4 3.9% $10.1 4.0%
Maine 1.8 0.7% 1.8 0.7%
Massachusetts 7.1 2.6% 6.7 2.6%
New Hampshire 2.9 1.1% 2.7 1.1%
New York 16.9 6.3% 15.7 6.2%
Rhode Island 2.3 0.9% 2.2 0.9%
Vermont 1.0 0.4% 0.9 0.4%
---- ---- ---- ----
Subtotal 42.4 15.9% 40.2 15.9%
Mid-Atlantic
Delaware 1.6 0.6% 1.5 0.6%
District of Columbia 2.2 0.8% 2.3 0.9%
Maryland 18.7 6.9% 18.2 7.1%
New Jersey 15.2 5.6% 14.4 5.7%
Pennsylvania 14.0 5.2% 13.2 5.1%
Virginia 43.5 16.2% 41.8 16.4%
---- ---- ---- ----
Subtotal 95.2 35.3% 91.5 35.8%
Southeast
Florida 35.5 13.2% 33.1 13.0%
Georgia 19.1 7.1% 17.5 6.8%
North Carolina 13.0 4.8% 12.1 4.7%
South Carolina 8.7 3.2% 8.1 3.2%
---- ---- ---- ----
Subtotal 76.3 28.3% 70.8 27.9%
Gulf
Alabama 5.6 2.1% 5.3 2.1%
Louisiana 4.7 1.7% 4.4 1.7%
Mississippi 1.6 0.6% 1.5 0.6%
Texas 43.3 16.1% 41.4 16.2%
----- ---- ---- ----
Subtotal 55.2 20.5% 52.6 20.6%
Total 269.0 100.0% 255.1 100.0%
</TABLE>
(1) Ceding Insurer Insured Values in the Covered States represents the Ceding
Insurer's exposure to Hurricane loss in the Covered States for the
respective dates. The Insured Value for each policy, except for Pleasure
Boat Policy and Inland Marine Floater Policy, is calculated by summing the
limit of liability under each coverage as described in "Subject Business -
Underwriting Process - Policy Coverage", except that (i) for Coverage A
(i.e., dwelling coverage), the additional 25% or 50% exposure arising from
the Basic Dwelling Coverage Amount under the Preferred Contract and certain
other policies with similar endorsements are not included; and (ii) for
Coverage D (i.e., loss of use coverage), the limit of liability is
calculated at 20% of the Basic Dwelling Coverage Amount for all forms of
Homeowners Policy, although additional exposure may arise under the
Preferred Contract to the extent incurred losses within a 12-month period
exceeds such amount. Effects of loss mitigation due to deductibles were not
taken into account in calculating the Insured Values.
(2) Insured Values for each state shown above are calculated to be the sum of
Insured Values under Homeowners, Condos/Renters and Dwelling lines of
insurance, plus the Insured Values under the Pleasure Boat and Inland
Marine Floater lines of insurance, which are calculated to be 2% of the sum
of Insured Values under Homeowners, Condos/Renters and Dwelling lines of
insurance.
30
<PAGE> 33
OTHER CATASTROPHE MANAGEMENT STEPS
The Ceding Insurer has also increased its use of residual market and state
funds.
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION ("FWUA"). The Ceding Insurer
excludes wind and hail (including Hurricane) coverage for new Homeowners and
Dwelling policies on dwellings in seven coastal Florida counties (Dade, Broward,
Monroe, Charlotte, Collier, Lee, and Sarasota) which are eligible for the FWUA.
Wind and hail (including Hurricane) coverage is obtained by the policyholder
from the FWUA, with the Ceding Insurer insuring the other perils.
TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION ("TCPIA"). As of January
1, 1991, the Ceding Insurer began excluding wind and hail (including Hurricane)
coverage on certain Homeowners and Dwelling policies (generally policies on
dwellings located close to the coastline) in the Texas coastal counties. This
coverage is obtained from the Texas Catastrophe Property Insurance Association,
with the Ceding Insurer insuring the other perils. For risks in these counties
where wind and hail coverage is not excluded, a 1% wind and hail deductible
applies.
CLAIMS MANAGEMENT
The Ceding Insurer's claims are settled using, to the extent possible,
in-house claims adjusters. In addition to the Ceding insurer's four regional
offices, twelve claims branch offices are located throughout the country, with
additional claims personnel working from their homes as required. The Ceding
Insurer utilizes an automated processing system to record claims activities.
This computer network, which links the home office and the field offices,
supports nearly 4 million claims transactions daily, including loss details,
payments, reserve adjustments, appraisal appointments and file status changes.
Claims adjusters use laptop computers and cellular phones to improve efficiency,
settle claims quickly and reduce loss adjustment expenses.
In 1991, the Ceding Insurer created a National Catastrophe Operations
("CAT") unit. The CAT unit facilitates and manages the Ceding Insurer's claims
response to man-made and natural disasters. The CAT unit is responsible for
establishing catastrophe policy, tracking severe weather and tropical storms,
planning the response, allocating resources (including the rapid deployment of
field adjusters, supplies and equipment when needed), reporting to senior
management, and coordinating with the Federal Emergency Management Agency and
various state insurance departments.
Tropical storms are the only event for which a detailed response can be
planned in advance. Potential Hurricanes are monitored through the Internet,
on-line weather products and satellite technology in order to provide advance
information.
In the event of a catastrophe such as a Hurricane, resources are pulled
from all areas to establish catastrophe site offices which become operational,
typically, within 72 hours. Cross training, resource sharing and in-place
agreements with five independent adjusting firms allow the Ceding Insurer to
increase its field adjuster staff in a short period of time and equip such staff
with the technology to determine coverage, estimate damage and authorize
emergency repairs to prevent further damage to the insured dwelling and its
contents.
Loss reports are taken by telephone and input into the claims system, which
assigns the file to an adjuster. Policy information is available to the adjuster
on-line. The claims system is used to document the coverage open, reserves set,
payments made, coverage closure, and claims activity. Data from the claims
system is transferred into the Ceding Insurer's financial system, which
aggregates the payments made and the amount of reserves set.
A claims replacement service is available to coordinate replacement of the
policyholders' personal property, serving to reduce claims payments. Further,
the Ceding Insurer has entered into contracts with independent property
restoration companies, which provide for contractors to work with claims
adjusters in restoring policyholders' property losses.
31
<PAGE> 34
To control legal expenses, the Ceding Insurer has established 12 staff
counsel offices throughout the country. The use of salaried attorneys and
support staff has proved a cost effective alternative to outside counsel in
locations where insured concentration is high. By focusing exclusively on the
Ceding Insurer's business, attorneys assigned to these offices develop expertise
in handling the type of litigation typically directed at the Ceding Insurer and
its policyholders.
CEDING INSURER UTILIZATION OF AIR MODEL
An important tool utilized in the Ceding Insurer's management of its
exposure to losses from catastrophic events (including Hurricanes) is the
computer-generated simulation of loss probabilities performed for the Ceding
Insurer by Applied Insurance Research, Inc. ("AIR"). AIR modeling data is used
by the Ceding Insurer in numerous aspects of its business, including policy
ratemaking and the determination of capital adequacy. AIR, formed in 1987, is an
independent consulting firm which develops catastrophe risk assessment and
management methodologies and techniques for the insurance industry. AIR has
provided catastrophe loss analysis services for over 65 primary insurance
companies and over 80 reinsurance companies. Most of these companies utilize
AIR's catastrophe risk assessment and management methodologies on an ongoing
basis.
The computer-generated simulations which are performed for the Ceding
Insurer by AIR are intended to estimate, among other things, the likelihood of
occurrence, expressed in probabilities, of total annual losses of specific
orders of magnitude (on both a per occurrence and an aggregate basis) given the
Ceding Insurer's exposure under insurance policies in force. Based upon these
simulations and other data and analyses performed by the Ceding Insurer, the
Ceding Insurer makes decisions regarding the management of its catastrophe
exposure, including establishment of policy limits, determinations with respect
to policy deductibles, and purchasing reinsurance. Additionally, the loss
probability estimates generated by AIR, in addition to other information, are
used by the Ceding Insurer in determining rate adequacy. Moreover, the Ceding
Insurer uses the AIR model to estimate the adequacy of its capital in light of
the probability of the occurrence of a Hurricane causing significant losses
under the Ceding Insurer's in-force policies. The Ceding Insurer is of the
opinion that such computer-generated simulations of loss probability are the
most important tool available in estimating its probable exposure to Hurricane
catastrophe loss.
The Ceding Insurer has selected AIR as its primary provider of risk
assessment modeling data based upon, among other things, the Ceding Insurer's
confidence in the methodology used by AIR, and the utility and sophistication of
the models produced by AIR and their cost. From time to time, the Ceding Insurer
reviews the alternative risk assessment models available in the marketplace. The
Ceding Insurer believes that the technique for producing risk assessment models
contains subjective elements, that different providers of these models are
likely to use somewhat different techniques in the creation of loss probability
simulations, and that such different techniques may result in different results
being produced by two different models working with the same raw data. There can
be no assurance that the Ceding Insurer will not elect in the future to use a
competitor's model in preference to that produced by AIR. If the Ceding Insurer
so elects, the data produced by a different model may vary, possibly materially,
from that produced by the AIR model.
The loss probabilities generated by the AIR model are not predictive of
future Hurricanes, nor of the magnitude of losses that may occur in the event of
the occurrence of a Hurricane. Furthermore, the computer-generated simulations
are based on an analysis of exposure data as to insurance policies in force at
any given time as determined by the Ceding Insurer and the actual policies in
force may vary, possibly materially, from the exposure data used in the
simulation. The loss probabilities generated by the AIR model are estimates used
by the Ceding Insurer in the conduct of its business as described above.
Potential investors in the Notes should not view the loss probabilities
generated by the AIR model as in any way predicting the likelihood of the
occurrence during the Loss Occurrence Period of a Hurricane of sufficient force
in the Covered States to result in Ultimate Net Losses in excess of the Trigger
Amount under the Reinsurance Agreement, and a corresponding Principal Reduction
of the Notes.
32
<PAGE> 35
HISTORICAL EXPERIENCE REGARDING LOSSES FROM
HURRICANES IN THE COVERED STATES
The Hurricane loss information set forth below is either historical
information or estimated information based, in part, on historical information
and is presented solely for illustrative purposes. It is not a prediction of the
range of possible losses that may occur in the future. A Hurricane of a larger
force than those shown below, or a Hurricane of similar or lesser force that has
a different path (e.g., one that travels over a more populated area, an area
with higher value dwellings or, in the case of information relating to the
Ceding Insurer, an area that has a higher concentration of holders of Policies
in the Subject Business), could produce a larger amount of losses than those
shown below. No assurance can be given that a Hurricane will not occur during
the Loss Occurrence Period of sufficient force in the Covered States to result
in Ultimate Net Losses in excess of the Trigger Amount under the Reinsurance
Agreement, and a corresponding Principal Reduction of the Notes.
33
<PAGE> 36
RESIDENTIAL REINSURANCE LIMITED
ESTIMATED LOSSES FROM HISTORICAL HURRICANES(1)
($ MILLIONS)
<TABLE>
<CAPTION>
AIR
AIR Estimated AIR
Estimated Ceding Estimated Estimated
Historical Landfall S.S. Industry Insurer Annual Company
Hurricanes Date Location(2) Category(3) Losses(4) Losses(5) Probability(6) Losses(7)
- ---------- ---- -------- -------- ------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Storm of
September, 1926 9/18/26 Florida, 4, 3 $24,318 546 2.8% 0
Alabama
Hurricane Hazel 10/15/54 North 4 7,671 474 3.6% 0
Carolina
Hurricane Andrew 8/15/92 Florida, 4, 3 16,361 465 3.6% 0
Louisiana
Storm of 1947 9/17/47 Florida, 4, 2 22,792 450 3.7% 0
Louisiana
Storm of 1928 9/17/28 Florida 4 18,164 434 3.9% 0
Storm of 1900 9/9/00 Texas 4 15,138 300 6.7% 0
New England, 1938 9/21/38 New York 3/4 12,194 259 8.3% 0
Hurricane Hugo 9/15/89 South 4 4,902 251 9.1% 0
Carolina
Storm of
September, 1945 9/15/45 Florida 3 12,694 225 10.0% 0
Storm of 1944 9/10/44 Florida 3 9,329 217 10.0% 0
</TABLE>
- -------------
(1) Hurricanes shown in this table represent the ten historical Hurricanes
during the period from 1900 to 1995, that, based on AIR estimates, would
have resulted in the greatest amount of losses under the Ceding Insurer's
policies in force in the Covered States had such Hurricanes occurred on
March 31, 1996.
(2) Each of the Storm of September 1926, Hurricane Andrew and the Storm of 1947
made two landfalls.
(3) Saffir-Simpson (S.S.) category is based on central barometric pressure. See
"Hurricanes and Insurance - Measuring Hurricane Intensity."
(4) AIR estimated industry losses are based on AIR estimates of total industry
claims that would result had the specified Hurricane occurred on December
31, 1995. The estimation process is based upon AIR's estimated industry
property values and computer simulations. The estimates do not include any
factor for demand surge. Although AIR believes such information reasonably
reflects aggregate claims that would result from the respective storm
characteristics, it is nonetheless provided for illustrative purposes only
and no representation is made as to its accuracy.
(5) AIR Estimated Ceding Insurer Losses are based on policies in force as of
March 31, 1996 and are the estimates of claims that would have resulted
from the specified Hurricane if it had occurred on March 31, 1996, given
the Ceding Insurer's exposure under policies in force at that time. These
estimates include the effects of demand surge, but exclude exposures under
Pleasure Boat and Inland Marine Floater Policies. These exposures may be
significantly different from exposures under policies in force at the time
of the actual event. Although AIR believes such information reasonably
reflects aggregate claims that would result from the respective storms'
characteristics, this information is provided for illustrative purposes
only and no representation is made as to its accuracy.
34
<PAGE> 37
(6) AIR Estimated Annual Probability is an estimate of the likelihood that the
level of losses associated with a given storm will be exceeded in any given
year. For example, the loss amount of $248 million is likely to be exceeded
10% of the time, or 1 year out of 10 on average. The Estimated Annual
Probability is based upon computer simulations performed by AIR, and is for
illustrative purposes only. No representation is made as to its accuracy.
(7) Estimated Company Losses is an estimate of the amount of Ultimate Net Loss
in excess of the Trigger Amount under the Reinsurance Agreement arising out
of each storm, based on Ceding Insurer Policies in force on March 31, 1996.
For a description of Hurricanes in respect of which the Company would incur
an Ultimate Net Loss under the Reinsurance Agreement, see the table headed
"Estimated Annual Occurrence Losses to Insured Values in Covered States"
under the caption "AIR Loss Assessment Analysis." The estimation process is
based upon computer simulations performed by AIR, and is for illustrative
purposes only. No representation is made as to its accuracy.
HURRICANE FREQUENCIES
IN THE COVERED STATES FOR 1900 - 1995(1)
<TABLE>
<CAPTION>
Hurricanes Per Year Frequency of Occurrence for 1900 - 1995(2)
------------------- ---------------------------------------
<S> <C>
0 32
1 31
2 20
3 5
4 6
5 1
</TABLE>
(1) "Hurricanes" in this table refer to tropical cyclones characterized by a
central barometric pressure less than 29.00 inches of mercury.
(2) Hurricane Frequencies In the Covered States For 1900 - 1995 include only
those Hurricanes which made landfall in the Covered States in the time
period from 1900 to 1995. Multiple landfalls for the same Hurricane are
counted as the same Loss Occurrence for purposes of the Reinsurance
Agreement. However, for the purpose of this table, a single Hurricane with
multiple landfalls appears multiple times. Each Hurricane landfall is a
separate event, i.e. a Hurricane that made two landfalls is counted as two
events in this table.
35
<PAGE> 38
HURRICANE FREQUENCIES IN THE
COVERED STATES FOR 1900 - 1995 BY S.S. CATEGORY(1)
<TABLE>
<CAPTION>
S.S. Category(2)
---------------------
Covered States 3 4 5 Total Hurricanes
---------------- --- --- --- ----------------
<S> <C> <C> <C> <C>
Northeast
- ---------
Connecticut 0 0 0 0
Maine 0 0 0 0
Massachusetts 1 0 0 1
New Hampshire 0 0 0 0
Rhode Island 1 0 0 1
Vermont 0 0 0 0
New York 4 1 0 5
Mid-Atlantic
- ------------
Delaware 0 0 0 0
District of Columbia 0 0 0 0
Maryland 0 0 0 0
New Jersey 0 0 0 0
Pennsylvania 0 0 0 0
Virginia 0 0 0 0
Southeast
- ---------
Florida 15 7 1 23
Georgia 0 0 0 0
North Carolina 6 2 0 8
South Carolina 1 1 0 2
Gulf
- ----
Alabama 1 0 0 1
Louisiana 4 3 0 7
Mississippi 3 0 1 4
Texas 11 6 0 17
-- -- -- --
Total 47 20 2 69
</TABLE>
(1) Multiple landfalls for the same Hurricane are counted as the same Loss
Occurrence for the purposes of the Reinsurance Agreement. However, for
the purpose of this table, a single Hurricane with multiple landfalls
appears multiple times. Each Hurricane landfall is a separate event,
i.e. a Hurricane that made two landfalls is counted as two events in
this table. Hurricane Andrew, for example, made landfall in both
Florida and Louisiana, and accordingly is included in the Total
Hurricanes occurring in each state.
(2) Saffir-Simpson (S.S.) category based on central barometric pressure as
reported in NOAA Technical Report NWS-23 and other information provided
by the National Hurricane Center. The S.S. category can be different if
based on wind speed rather than central barometric pressure. Note also
that when a Hurricane's central barometric pressure was on the boundary
between two categories, the Hurricane was assigned to the higher
category. This may lead to differences between the tables in this
document and other published meteorological information. Since the S.S.
category is not used in the loss estimation process, the differences in
categorization methods do not affect the loss estimates for the Ceding
Insurer.
36
<PAGE> 39
HURRICANE FREQUENCIES IN THE
COVERED STATES FOR 1900-1995 BY DECADES(1)
<TABLE>
<CAPTION>
S.S. Category
-------------------------
Period 3 4 5 Total
-------- --- --- --- ------
<C> <C> <C> <C> <C>
1900-1909 1 1 0 2
1910-1919 5 2 0 7
1920-1929 6 2 0 8
1930-1939 4 2 1 7
1940-1949 7 3 0 10
1950-1959 9 1 0 10
1960-1969 5 4 1 10
1970-1979 4 2 0 6
1980-1989 3 2 0 5
1990-1995 3 1 0 4
-- -- -- --
Total 47 20 2 69
</TABLE>
(1) Hurricane Frequencies In the Covered States For 1900 - 1995 include
only those Hurricanes which made landfall in the Covered States in the
time period from 1900 to 1995. During that same time period, an
additional /2/ Hurricanes made landfall outside the Covered States,
both in the State of Hawaii. Multiple landfalls for the same Hurricane
are counted as the same Loss Occurrence for purposes of the Reinsurance
Agreement. However, for the purpose of this table, a single Hurricane
with multiple landfalls appears multiple times. Each Hurricane landfall
is a separate event, i.e. a Hurricane that made two landfalls is
counted as two events in this table.
(2) Saffir-Simpson (S.S.) category based on central barometric pressure as
reported in NOAA Technical Report NWS-23 and other information provided
by the National Hurricane Center. The S.S. category can be different if
based on wind speed rather than central barometric pressure. Note also
that when a Hurricane's central barometric pressure was on the boundary
between two categories, the Hurricane was assigned to the higher
category. This may lead to differences between the tables in this
document and other published meteorological information. Since the S.S.
category is not used in the loss estimation process, the differences in
categorization methods do not affect the loss estimates for the Ceding
Insurer.
HURRICANES AND INSURANCE
GENERAL
Hurricanes are a phenomenon of specific regions because certain
climatic conditions are necessary in order for a Hurricane to form and maintain
itself. Two primary (although non-exclusive) conditions are essential: specific
minimum water temperature and the relative absence of vertical shear winds.
Water temperatures must exceed 80 degrees fahrenheit and be distributed over a
large reservoir of water having a minimum depth of approximately 200 feet. There
must be a relative absence of vertical shear winds, which are winds that change
appreciably in either magnitude or direction over this large region of warm
water. The above conditions are typically found in the North Atlantic between
the 10 and 40 degree latitudes in the late summer and early fall.
In addition to the warm water temperature and absence of vertical shear
winds, several other factors have been identified which may help to shape the
particular characteristics of Hurricane activity, including west African
rainfall and El Nino.
Certain recent research has suggested a link between rainfall in
portions of western Africa, including the Sahel, and the frequency of intense
(Category 3,4 and 5) Hurricanes which approach or cross the U.S. east coast.
While the physical mechanism for this linkage is still under investigation, the
large majority of "Hurricane free" years since 1960 have been associated with
drier than normal conditions in these African regions. By contrast, the 1940's
and 1950's, a period of intense storm activity along the U.S. east coast were
periods of much higher than normal precipitation in these African regions. There
have been signs that rainfall in western Africa is gradually
37
<PAGE> 40
reverting to a wetter regime. If so, and to the extent this theory is
correct, it is possible that intense Hurricanes may once again become more
frequent along the U.S. east coast.
In the general circulation of the atmosphere, the warm and moist air of
the tropics pushes up to meet the cooler air masses of the temperate zones. Due
to the rotation of the earth, the cooler air will tend to flow with an
east-to-west bias in the northern hemisphere, whereas the warmer air tends to
flow with a west-to-east bias. When the air masses collide, the warm moist air
can be pushed vertically upward and will then lose heat through evaporation.
While losing heat, this air becomes lighter and so continues to rise, losing
even more heat through evaporation. These rising warm air currents create a
depression in the form of a drop in air pressure. The warm air of the
surrounding region as well as the cooler air will then flow into this
depression, and because of the inward spiraling motion of the colliding air
fronts, an eddy current develops. Within the central core, or eye, of a
Hurricane, there is relative calm. However, a band of strong winds and heavy
precipitation (the "radius of maximum winds") develops outside the eye at the
eyewall. The wind flow in the earth's boundary layer (the layer near the
surface) is turbulent, with constant fluctuations about the mean wind speed.
Shorter period fluctuations, typically of 10 seconds or less duration, are
called gusts. The wind flow within tropical storms is typified by gusty winds.
Due to the turbulence generated by flow over and around obstacles, the winds
over land and especially in urban areas may be gustier than over the open ocean.
There is evidence that gust factors in Hurricanes are somewhat higher than in
other intense wind storms.
MEASURING HURRICANE INTENSITY
The severity of a Hurricane is often measured by the Saffir-Simpson
index. This index ranges from zero to five, with five being the most severe. The
following paragraphs are summaries of the characteristics of category 3, 4 and 5
storms using the Saffir-Simpson index.
A category 3 Hurricane has winds of 111 to 130 mph or central
barometric pressure between 27.91 and 28.47 inches. A Hurricane of this
magnitude causes damage to shrubs and trees, blowing foliage off the trees and
uprooting some large trees. Practically all poorly constructed signs are blown
down. There is some roofing material damage, some window and door damage, and
some structural damage to small residences and utility buildings. There may be
serious flooding at the coast with many smaller structures near the coast
destroyed. Larger structures are damaged by battering of floating debris.
Evacuation of low-lying residences within several blocks of the shoreline may be
required.
A category 4 Hurricane has winds of 131-155 mph or central barometric
pressure between 27.17 and 27.88 inches. In a category 4 Hurricane, shrubs and
trees are blown down, as are essentially all signs. There is extensive roofing
material damage, extensive window and door damage, and complete failure of roof
structures on many small residences. Major damage occurs to lower floors of
structures near the shore due to flooding and battering action, and there is
major erosion of beach areas. Massive evacuation of all residences within 500
yards of the shoreline, and of single-story residences on low ground within 2
miles of the shoreline, may be required. Hurricane Hugo provided evidence of how
far inland Hurricane-force winds can reach. Cities as far from the coast as
Charlotte, North Carolina (approximately 200 miles) sustained major damage from
Hugo's winds.
A category 5 Hurricane would have winds greater than 155 mph or central
barometric pressure less than 27.17 inches. At this level, shrubs and trees are
down, roofing damage is considerable, and all signs are down. Very severe and
extensive window and door damage will occur. Complete failure of roof structures
on many residences and industrial buildings will occur. There will be extensive
glass failures, some complete building failures, and small buildings overturned
and blown over or away. Storm surge would cause major damage to lower floors of
all structures located less than 15 feet above sea level and within 500 yards of
the shoreline, and extensive flooding inland. Massive evacuation of residential
areas situated on low ground within 5 to 10 miles of the shoreline may be
required.
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<PAGE> 41
HURRICANE LOSS ESTIMATION
The AIR Hurricane Model
Since 1900, over 100 Hurricanes have affected the Gulf and East Coast
of the U.S. and caused significant property losses. Standard actuarial
techniques utilized by insurers typically rely on past losses to project future
losses. However, the loss information from these historical Hurricanes cannot be
used to estimate current or future Hurricane loss potential. The reasons for
this include: (i) intense Hurricanes are relatively rare in any specific
geographic location; (ii) the number of exposed properties, the geographical
distribution of these properties and the property values may change
dramatically; (iii) building materials and designs change, and new structures
become more or less vulnerable to Hurricanes than old structures; and (iv)
changes in building repair costs also affect the dollar damages that will result
from Hurricanes.
Because historical Hurricane loss information cannot be used to
estimate future Hurricane loss potential, AIR has developed an alternative
estimation methodology based on certain simulation techniques. This approach
involves the construction of computer programs that incorporate in detail the
meteorological characteristics of Hurricanes and simulate the property losses
caused by such storms on exposed properties. All meteorological data
incorporated by AIR in its computer programs are obtained from various agencies
of the National Oceanic and Atmospheric Administration ("NOAA"), including the
National Hurricane Center.
The process of estimating property losses in this manner is referred to
as "Hurricane modeling." The AIR model itself is a system of computer programs
that provides a mathematical representation of the Hurricane phenomenon in order
to study and understand the underlying processes and the potential damages that
can occur. The modeling is performed on a "probabilistic" basis, meaning that
the results of the model are expressed in terms of probabilities. A set of
results is expressed in terms of a probability distribution, also called a "loss
distribution", which, given specific insurance exposures under policies in
force, provides a spectrum of possible losses and the relative likelihood of
occurrence of various levels of loss. THE LOSS DISTRIBUTION IS NOT A PREDICTION
OF FUTURE LOSSES. The loss distribution is solely intended to be illustrative of
the range of possible losses and the likelihood of occurrence of such possible
losses.
No model is, or could be, an exact representation of reality. The AIR
Hurricane model relies on various assumptions, some of which are subjective
assumptions which might not be used in models provided by other modelers, and
some of which that are subject to uncertainty, and there can be no assurance
that AIR's statistical modeling will prove to be accurate. Accordingly, the loss
estimates produced by the AIR Hurricane model are themselves subject to
uncertainty. AIR reviews these model assumptions in view of new meteorological
and other data and information to refine the loss estimates as such information
becomes available. Such refinements may materially alter, and have in the past
materially altered, the loss estimates generated by the model.
The loss probabilities generated by the AIR model are not predictive of
future Hurricanes, nor of the magnitude of losses that may occur in the event of
the occurrence of a Hurricane. Furthermore, the computer-generated simulations
are based on an analysis of exposure data as to insurance policies in force at
any given time as determined by the Ceding Insurer and the actual policies in
force may vary, possibly materially, from the exposure data used in the
simulation. The loss probabilities generated by the AIR model are estimates used
by the Ceding Insurer in the conduct of its business as described above.
Potential investors in the Notes should not view the loss probabilities
generated by the AIR model as in any way predicting the likelihood of the
occurrence during the Loss Occurrence Period of a Hurricane of sufficient force
in the Covered States to result in Ultimate Net Loss in excess of the Trigger
Amount under the Reinsurance Agreement, and a corresponding Principal Reduction
of the Notes.
Overview of AIR's Hurricane Modeling Methodology
The loss estimation methodology employed by AIR is based on scientific
knowledge in meteorology and wind engineering. In order to estimate the
probability distribution of Hurricane losses (by region, state or county) the
AIR Hurricane model simulates thousands of hypothetical Hurricanes, and
estimates the property damages that would result from each such Hurricane.
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<PAGE> 42
AIR employs Monte Carlo simulation, a well known statistical technique,
to generate simulated storms. Monte Carlo simulation involves repeating a
simulation process, using in each simulation a generated set of values of the
random variables generated in accordance with the corresponding variable
probability distributions. In the AIR model, the random variables are the
primary meteorological parameters described below, and the corresponding
probability distributions are estimated based on historical meteorological data
for each parameter. By repeating the simulation process, a sample of over 12,000
storms is generated, each corresponding to a different set of random values
assigned to the meteorological parameters. A sample from a Monte Carlo
simulation is similar to a sample of experimental observations. Therefore, the
results of such simulations may be treated statistically and used to assess
probabilities.
To estimate the long term loss potential due to Hurricanes for the
Ceding Insurer in the Covered States, ten thousand "years" of Hurricane
experience were simulated, with each "year" representing a possible scenario for
the coming year. The first step of the AIR Hurricane model is to generate the
number of Hurricanes estimated to make landfall in the simulated year. In order
to estimate potential property damage from the simulated Hurricanes, the AIR
Hurricane model next simulates the time profile of wind speeds at each location
affected by each simulated storm. The model estimates the windfield for each
storm using certain meteorological parameters including: landfall location,
barometric pressure at the center of the storm, radius of maximum winds, forward
speed and track direction, each as more fully described below. Local site
conditions are also accounted for in estimating wind speeds at standard heights.
Storm Characteristics and Associated Probabilities
HURRICANE FREQUENCY. The number of Hurricanes for each year of a
simulation is generated from an annual frequency distribution. The parameters of
this distribution are estimated using the actual hurricane occurrences for
ninety-four years spanning the period 1900-1993. The sample includes landfalling
hurricanes with central barometric pressures less than 29.00 inches.
LANDFALL LOCATION. Exposed values and loss estimates can vary greatly
depending on where a Hurricane makes landfall. There are 3,100 possible landfall
points in the AIR Hurricane simulation model, one at each nautical mile of
"smoothed" coastline from Texas to Maine. The cumulative probability
distribution of landfall locations is developed for each 50-nautical mile long
segment of the coastline. The actual number of historical Hurricane occurrences
is then tabulated for the 50-nautical mile segments. The actual number of
occurrences for each segment is then smoothed using a statistical technique that
is common in climatological studies. At each segment of the coastline, there is
a resulting probability of a Hurricane making landfall which is used in the AIR
Hurricane model.
The chart below shows the number of Hurricanes that have actually made
landfall along the Florida coast at each of eighteen fifty-nautical mile
segments beginning at the border with Alabama, along with the smoothed frequency
distribution used in the AIR model. The smoothed frequency distribution ensures
that every coastal segment has a probability of a Hurricane occurrence that is
greater than zero. Therefore, the fact that no Hurricane has made landfall at a
particular segment in the past does not mean that no Hurricane for such a
segment is simulated in the AIR Hurricane model. Accordingly, the AIR model
allows for the possibility of a Hurricane making landfall anywhere along the
Gulf and East Coast, including areas where the losses resulting from such a
Hurricane would be likely to result in Losses under the Reinsurance Agreement in
excess of the Trigger Amount.
ACTUAL CUMULATIVE FREQUENCY VERSUS SMOOTHED FREQUENCY
COAST OF FLORIDA
[Graph to come]
Once a landfall location is generated for a hypothetical simulated
storm, values are generated for each of the remaining meteorological variables.
For purposes of estimating the probability distributions of these other
variables, the coastline from Texas to Maine is divided into 31 one hundred
nautical mile segments. Numbers are generated from the probability distributions
of these random variables to assign values to the variables for each simulated
Hurricane. Actual historical storm data for each of these segments is applied to
the statistical distributions
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<PAGE> 43
that are used to generate values for the simulated storms. The variables
generated for each simulated Hurricane are as follows:
CENTRAL BAROMETRIC PRESSURE. Central barometric pressure is the lowest
sea-level barometric pressure at the center of the Hurricane. This variable is
the primary determinant of Hurricane wind speed. Wind speeds typically increase
as the central barometric pressure decreases (or more precisely, as the
difference between the central and peripheral pressure increases).
RADIUS OF MAXIMUM WINDS. The strongest winds in a Hurricane are
typically found some distance away from the center of the storm. This distance
is known as the "radius of maximum winds," and it can range from 5 to over 50
nautical miles. A storm making landfall along the coast at higher latitudes will
be characterized by a larger radius of maximum winds. A more intense storm
typically has a smaller radius of maximum winds.
FORWARD SPEED. Forward speed is the rate at which a Hurricane moves
from point to point. Faster moving storms will typically go farther inland and
cause more damage inland than slower moving storms, and accordingly forward
speed is an important variable in the AIR Hurricane model.
TRACK DIRECTION. Track direction, which is the storm path following
landfall, is important to determine which properties and structures are in the
path of the hurricane.
Data Sources and Data Analysis
The meteorological sources used to develop the AIR Hurricane simulation
model are the databases, information, and publications available from various
agencies of the NOAA, including the National Weather Service ("NWS") and the
National Hurricane Center. Original data on historical Hurricanes are gathered
from various sources such as barograph traces from land stations and ships,
actual wind records from NWS stations, aircraft reconnaissance flight data,
radar data, and miscellaneous pressure and wind reports. This raw data is
analyzed and synthesized by the NWS to develop databases of the primary
meteorological characteristics of each historical storm. It is the final
synthesized data that is used for the development of the AIR Hurricane model.
Note that the original data can be conflicting and is not necessarily
consistent. NOAA scientists use judgment to develop their best estimates of the
characteristics of each storm. AIR makes no independent verification checks on
the meteorological data.
AIR then uses maximum likelihood estimation to fit various probability
distributions to the meteorological data on historical Hurricanes. Standard
goodness-of-fit tests are used to quantify the quality of the fitted
distributions. The distributions employed by the AIR Hurricane model are
standard statistical distributions that are representative of the underlying
distributions of the meteorological data, however, it is possible that none of
the fitted distributions exactly represent the true underlying distributions of
the meteorological data.
Hurricane Wind Speed Estimation
Once the storm characteristics and landfall point are generated, the
simulated storm is propagated along its track. As the storm moves inland, the
wind speeds begin to dissipate due to "filling" and surface terrain effects. In
order to estimate the property losses resulting from the simulated storms, the
AIR Hurricane model first generates the time profile of wind speeds at each
location affected by the storm. The distance from coast and surface terrain are
factored into the calculation of wind speed at each location. Damages are
eventually estimated using what is known as "fastest mile wind speeds."
MAXIMUM WIND SPEED. The maximum over-water wind speed for each
simulated storm is calculated and then converted to various other wind speed
measures.
ASYMMETRY FACTOR. An asymmetry factor, which results from the combined
rotations of the earth and the storm, is added to the winds on the right of the
Hurricane track and subtracted from winds on the left of the track. The
asymmetry factor is calculated as a function of the Hurricane forward speed.
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<PAGE> 44
FILLING EQUATIONS. After a Hurricane makes landfall, the storm begins
to "fill," meaning that the wind speeds begins to dissipate. The Hurricane model
filling equations are a function of geographic region and time since landfall.
These equations enable the estimation of wind speeds at any geographical point
at any point in time. The wind speed at the eye of the storm at any point in
time is dependent upon the hours since landfall.
ADJUSTMENT OF WIND SPEEDS FOR SURFACE FRICTION. Each location is
assigned an adjustment factor to account for local terrain effects. Local
terrain effects can introduce surface friction that will tend to dissipate wind
speeds.
Calculation of Damages
Once the peak wind speeds and duration are estimated for each location,
damages are estimated for residential exposures falling into various distinct
construction classifications. Damages are also estimated separately by each line
of business included in the Subject Business, and by all forms of coverage
described under "Subject Business -- Underwriting Process." Deductibles and
other information about the Ceding Insurer's Policies are also factored into the
damage calculation.
To estimate damages, mathematical relationships are utilized that
incorporate the engineering relationships between wind speed, duration, and
property damage. As wind speeds increase, the damage rate accelerates. Minor
damage begins to occur when wind speeds exceed 50 mph. At winds speeds of 75
mph, damage is still minor to most types of properties except mobile homes. As
wind speeds approach 100 mph, damage becomes extensive, and as wind speeds
exceed 150 mph, damage to most types of residential properties is severe.
The effects of duration are also relevant to the estimates of damages
in that the longer a property experiences severe wind speeds, the greater the
damage that is likely to result.
The Hurricane damageability relationships contained in the AIR
Hurricane model are unique to that Model and have been derived and refined over
a period of ten years. They incorporate engineering studies published by wind
engineers and other experts both within and outside of AIR. These damageability
relationships also incorporate the results of post-Hurricane field surveys
performed by AIR and other structural engineers as well as detailed analyses of
actual loss data provided by AIR client companies. Because wind damage to
buildings and other property is an area of uncertainty, these relationships are
continually refined and validated. AIR also attempts to account for the
effectiveness of the local building codes in the damage estimation process.
AIR LOSS ESTIMATION ANALYSIS
The Company has engaged AIR to perform certain risk assessment analyses
using data provided by the Ceding Insurer. The Company has not engaged any other
risk management consultant to perform such services, nor does it intend to. The
Ceding Insurer has provided AIR with a record of its Subject Business within the
Covered States as of March 31, 1996. This exposure data was entered into the AIR
Hurricane simulation model. To estimate the Hurricane loss potential for the
Company, 10,000 annual scenarios of potential Hurricanes were simulated
incorporating over 12,000 hypothetical Hurricanes in the Covered States. The
characteristics of the Hurricanes which were generated were superimposed on the
geographical distribution of exposures under the Subject Business to estimate
the resulting losses. The losses presented below represent estimates for annual
occurrence losses to structures, contents and for loss of use for the exposure
data provided by the Ceding Insurer in the Covered States. In addition, also
shown are estimated probability distributions of annual occurrence losses for
the Covered States. Annual occurrence losses and the associated probabilities
reflect losses and probabilities of loss from a single Hurricane in a given
year. The probabilities are expressed in the table as return periods and annual
probabilities and should be interpreted as follows:
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<PAGE> 45
<TABLE>
<CAPTION>
Estimated Average Estimated Annual
Return Period Probability Definition
- -------------------- ---------------------- ----------------------------------------
<S> <C> <C>
10 years 10% This loss amount shows the 90th percentile of the
annual loss distribution. It is the 1000th worst
simulated loss. Since this loss amount was exceeded in
only 999 years out of the simulated 10,000, this amount
is likely to be exceeded only 10 percent of the time or
in one year out of 10 on average.
20 years 5% This loss amount shows the 95th percentile of the
annual loss distribution. It is the 500th worst
stimulated loss. Since this loss amount was exceeded in
only 499 years out of the simulated 10,000, this amount
is likely to be exceeded only 5 percent of the time or
in one year out of 20 on average.
50 years 2% This loss amount shows the 98th percentile of the
annual loss distribution. It is the 200th worst
simulated loss. Since this loss amount was exceeded in
only 199 years out of the simulated 10,000, this amount
is likely to be exceeded only 2 percent of the time or
in one year out of 50 on average.
92 years 1.09% This loss amount shows the 98.9th percentile of the
annual loss distribution. It is the 109th worst
simulated loss. Since this loss amount was exceeded in
only 108 years out of the simulated 10,000, this amount
is likely to be exceeded only 1.09 percent of the time
or in one year out of 92 on average.
100 years 1% This loss amount shows the 99th percentile of the
annual loss distribution. It is the 100th worst
simulated loss. Since this loss amount was exceeded in
only 99 years out of the simulated 10,000, this amount
is likely to be exceeded only 1 percent of the time or
in one year out of 100 on average.
147 years 0.7% This loss amount shows the 99.3rd percentile of the
annual loss distribution. It is the 68th worst
simulated loss. Since this loss amount was exceeded in
only 67 years out of the simulated 10,000, this amount
is likely to be exceeded only 0.7 percent of the time
or in one year out of 147 on average.
250 years 0.4% This loss amount shows the 99.6th percentile of the
annual loss distribution. It is the 40th worst
simulated loss. Since this loss amount was exceeded in
only 39 years out of the simulated 10,000, this amount
is likely to be exceeded only 0.4 percent of the time
or in one year out of 250 on average.
</TABLE>
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<PAGE> 46
Estimated Annual Occurrence Losses
to Insured Values in the Covered States(1) (2) (3)
<TABLE>
<CAPTION>
Estimated Occurrence Losses by Policy Category
---------------------------------------------------------------------------------------------------------
($ Thousands)
Ceding
Estimated Insurer Total
Average Total Estimated Estimated
Return Period Estimated Company Annual
(Yrs.) Homeowners Dwelling Condominium Renters Loss(4)(5) Losses Probability
<S> <C> <C> <C> <C> <C> <C> <C>
10 205,713 20,464 7,688 6,171 240,952 0 10.0%
20 348,484 34,685 15,963 11,615 410,105 0 5.0%
50 633,276 60,894 32,590 21,338 735,009 0 2.0%
92 840,907 79,159 52,877 31,208 999,800 0 1.1%
100 904,425 81,202 56,427 32,560 1,038,834 38,834 1.0%
147 1,054,082 95,666 73,103 39,147 1,253,496 253,496 0.7%
250 1,252,480 117,758 96,469 46,731 1,494,446 494,446 0.4%
</TABLE>
(1) The estimated probability distribution of annual occurrence losses is based
upon computer simulations performed on behalf of the Company by AIR as more
fully described in "Hurricanes and Insurance - Hurricane Loss Estimation"
and Appendix __. The loss probabilities generated by the AIR model are not
predictive of future Hurricanes. Rather, these probabilities are estimates
used by the Ceding Insurer in the conduct of its business. Potential
investors in the Notes should not view the loss probabilities generated by
the AIR model as in any way predicting the likelihood that a Hurricane may
or may not occur of sufficient force in the Covered States to result in
Ultimate Net Losses in excess of the Trigger Amount under the Reinsurance
Agreement, and a corresponding Principal Reduction of the Notes.
(2) The estimated annual occurrence losses are calculated based on the Ceding
Insurer's policies in force as of March 31, 1996 and the exposure
represented by those policies. These estimates are presented for
illustrative purposes only, and do not represent a prediction as to whether
or not a Hurricane may occur of sufficient force in the Covered States to
result in an Ultimate Net Loss in excess of the Trigger Amount under the
Reinsurance Agreement, and a corresponding Principal Reduction of the
Notes.
(3) Adjustments have been made for estimated demand surge as a result of a
catastrophic Hurricane. The demand surge factor is estimated based on total
simulated industry losses resulting from each simulated catastrophic
Hurricane associated with the estimated average return period specific to
the Ceding Insurer's policies in force and then applied to simulated Ceding
Insurer losses. The demand surge factor for each of the estimated average
return periods is:
<TABLE>
<CAPTION>
Estimated Average
Return Period Demand Surge Factor
------------- -------------------
<S> <C>
10 10%
20 6%
50 11%
92 18%
100 21%
147 21%
250 22%
-----
</TABLE>
In the simulation, the Hurricane causing the 20-year return period loss to
the Ceding Insurer's policy in force caused relatively smaller industry
losses (than other return period losses). Accordingly, the demand surge
factor for the specific simulation is lower than the other demand surge
factors shown. Amounts do not include the 2% factor for Pleasure Boat or
Inland Marine Floater Policies, or the 2% factor for loss adjustment
expenses. See "Reinsurance Activity of the Company - the Reinsurance
Agreement - "Policies" defined."
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<PAGE> 47
(4) Estimated occurrence losses of the various policy categories are not
additive across for any given estimated average return period because the
columns are individually sorted.
REINSURANCE ACTIVITY OF THE COMPANY
THE REINSURANCE AGREEMENT
The following summary of the terms of the Reinsurance Agreement is
qualified in its entirety by reference to the Reinsurance Agreement, a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. So long as the Notes are outstanding, the Company will not
enter into any reinsurance agreement other than the Reinsurance Agreement with
the Ceding Insurer.
General
Pursuant to the Reinsurance Agreement, the Company will be obligated to
indemnify the Ceding Insurer for 95% of the Ultimate Net Loss in excess of the
Trigger Amount which may accrue to the Ceding Insurer under any and all Policies
issued by the Ceding Insurer as the result of any single Loss Occurrence as to
which the Ceding Insurer in its discretion elects to make a claim under the
Reinsurance Agreement and which arises during the Loss Occurrence Period. The
obligation to indemnify the Ceding Insurer is subject to certain exceptions,
exclusions and limitations, including (i) the Company shall have no liability
for the Ultimate Net Loss of the Ceding Insurer due to a Loss Occurrence except
to the extent that the aggregate of such Ultimate Net Loss for such Loss
Occurrence exceeds the Trigger Amount, and (ii) the total amount recoverable
from the Company under the Reinsurance Agreement is limited to $1,000,000.
The Company's obligations relate solely to the occurrence of a single
Loss Occurrence where the Ceding Insurer's Ultimate Net Loss due to such Loss
Occurrence exceeds the Trigger Amount. By way of example, the Company would have
no liability under the Reinsurance Agreement if two or more Loss Occurrences
occurred during the Loss Occurrence Period and the Ultimate Net Loss of the
Ceding Insurer for any single one of such Loss Occurrences were less than
$1,000,000,000 notwithstanding that the aggregate of such Ultimate Net Loss was
in excess of $1,000,000,000. In addition, if two or more Loss Occurrences
occurred during the Loss Occurrence Period and the Ultimate Net Loss of the
Ceding Insurer for each of such Loss Occurrences was in excess of
$1,000,000,000, the Company's obligations under the Reinsurance Agreement would
extend to only one of such Loss Occurrences. In the latter example, the Ceding
Insurer would have the right to select which of such Loss Occurrences would be
the subject of its claims against the Company under the Reinsurance Agreement.
Loss Occurrence Period
The Loss Occurrence Period under the Reinsurance Agreement shall be
from 12:01 a.m. (Cayman Islands time), August __, 1996 until 11:59 p.m. (Cayman
Islands time), June 30, 1997. If the Loss Occurrence Period shall expire while a
Loss Occurrence is in progress, subject to the conditions to coverage contained
in the Reinsurance Agreement, the Company shall be liable for its proportion of
the entire Ultimate Net Loss in excess of the Trigger Amount caused by such Loss
Occurrence.
"Policies" Defined
The term "Policies" means all policies of insurance issued by the
Ceding Insurer under (i) Existing Policies, (ii) Renewals, and (iii) New
Policies.
Existing Policies shall mean policies of insurance covering property
within the Covered States as Dwelling, Homeowners, Condominium Owners,
Renters, Pleasure Boat and Inland Marine Floater, in force as of March
31, 1996, but shall exclude all Dwelling and Homeowner's policies with
a mobile home construction code. Existing Policies that are cancelled,
even if the coverage is subsequently rewritten, will no longer be
included as Existing Policies.
Renewals shall mean continuations of an Existing Policy under the same
policy numbers between 12:01 a.m., April 1, 1996 and 11:59 p.m., June
30, 1997, including any and all modifications of such Existing
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<PAGE> 48
Policies made by the Ceding Insurer during the term thereof at the
request of the policyholder (which may include increasing or decreasing
policy limits or deductibles), and any and all modifications (which may
include increasing or decreasing policy limits or deductibles) made at
the time of renewal by the Ceding Insurer pursuant to Existing Policy
endorsements and Policy program changes. Although the Ceding Insurer
has agreed during the term of the Reinsurance Agreement not to offer
deductibles lower than those in effect on the date hereof unless
required by applicable law, customers whose deductibles on Policies are
higher than the minimum offered by the Ceding Insurer, may at any time,
request that the deductible be lowered, and the Ceding Insurer will
honor such request, provided that all other underwriting criteria are
met.
New Policies shall mean policies of Dwelling, Homeowners, Condominium
Owners, Renters, Pleasure Boat and Inland Marine Floater insurance
under a policy number which was not in force on or before March 31,
1996 covering property within the Covered States. The total amount of
potential liability under the Reinsurance Agreement for Losses under
New Policies shall be limited to nine percent (9%) of the amount of
Losses under Existing Policies and Renewals.
Covered States
The Covered States are: Alabama, Connecticut, Delaware, District of
Columbia, Florida, Georgia, Louisiana, Maine, Massachusetts, Maryland,
Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, South Carolina, Texas, Vermont and Virginia.
Retention and Limit
The Reinsurance Agreement is a claims made agreement for a single Loss
Occurrence to the extent of the Ultimate Net Loss in excess of the Trigger
Amount. If there is more than one Hurricane that results in Ultimate Net Loss in
excess of the Trigger Amount, the Ceding Insurer is entitled to make a claim
under the Reinsurance Agreement only in respect of one such Hurricane selected
by the Ceding Insurer in its sole discretion. No claim shall be made upon the
Company unless and until the Ceding Insurer has provided the Company with a
Proof of Loss Claim notifying the Company of the Ceding Insurer's claim under
the Reinsurance Agreement. Any Proof of Loss Claim shall be submitted by the
Ceding Insurer to the Company and the Claims Reviewer. Proof of Loss Claims will
be subjected to certain agreed-upon procedures by the Claims Reviewer on behalf
of the Company, and any Loss Reserves included in the Final Proof of Loss Claim
will be reviewed by the Loss Reserve Specialist. See "- Claims Review
Procedure", "Claims Review Agreement" and "Loss Reserve Specialist Agreement"
below. The total amount recoverable from the Company under the Reinsurance
Agreement shall not exceed $1,000,000 (the "Maximum Recovery").
Net Retained Lines
The Ceding Insurer may carry reinsurance in addition to the reinsurance
provided pursuant to the Reinsurance Agreement. Any recoveries under such
additional reinsurance, as well as any recoveries from the Florida Hurricane
Catastrophe Fund or any similar fund or source, shall be disregarded for all
purposes of the Reinsurance Agreement, including for the purpose of determining
the amount of any Ultimate Net Losses and whether the Trigger Amount under the
Reinsurance Agreement has been reached and shall inure to the sole benefit of
the Ceding Insurer.
Other Liabilities Excluded
The Reinsurance Agreement does not cover any liability of the Ceding
Insurer other than in respect of its direct underwriting. Any other liability of
the Ceding Insurer, including liabilities for reinsurance assumed, is excluded
from the protection of the Reinsurance Agreement and cannot be taken into
account in determining the Ultimate Net Loss.
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<PAGE> 49
Premium
The Premium payable to the Company for the term of the Reinsurance
Agreement shall equal (i) ____% of the Maximum Recovery from the Company payable
in monthly installments, due on or before the last Business Day of the month
beginning in August 1996, and (ii) $_________ payable on the Closing Date. The
Ceding Insurer may extend the time for presentations and approval of a Proof of
Loss Claim for a Loss Occurrence upon payment of the additional premium
described in "Extended Claims Made Period" below.
Claims
The Ceding Insurer may present Proof of Loss Claims under the
Reinsurance Agreement for Paid Losses only once per month during the Loss
Occurrence Period and during any Extended Claims Made Period. In addition, the
Ceding Insurer may present one Final Proof of Loss Claim under the Reinsurance
Agreement for Loss Reserves, which Final Proof of Loss Claim will be presented
on or before November 30, 1997.
Extended Claims Made Period
The Ceding Insurer may extend the time for presentation of Proof of
Loss Claims for a Loss Occurrence (the "Claims Period") for a period beginning
at 11:59 p.m. (Cayman Island time) on June 30, 1997 and ending at 11:59 p.m.
(Cayman Island time) on December 31, 1997 (the "Extended Claims Made Period"),
at the Ceding Insurer's option, by the payment of additional Premium to the
Company. However, any Loss Occurrence must still commence prior to 11:59 p.m. on
June 30, 1997 in order for the Losses arising out of such Loss Occurrence to be
covered under the Reinsurance Agreement. The additional Premium required for the
Extended Claims Made Period will be an amount equal to __% of (i) the Maximum
Recovery, less (ii) the aggregate of any payments previously made under the
Reinsurance Agreement by the Company that constitutes part of the Ultimate Net
Loss on or before 11:59 p.m. (Cayman Island time) on June 30, 1997.
Losses
All loss settlements paid by the Ceding Insurer, provided they are
within the conditions of the Policies and within the terms of the Reinsurance
Agreement, shall be unconditionally binding upon the Company. A Proof of Loss
Claim as to any losses actually paid by the Ceding Insurer ("Paid Losses") shall
be furnished by the Ceding Insurer to the Company and the Claims Reviewer not
later than the fifteenth day of the month in which the Proof of Loss Claim is
submitted (the "Claim Date"). The Ceding Insurer shall have the right to file
additional Proof of Loss Claims with respect to Paid Losses once per month
during the term of the Reinsurance Agreement, including during any Extended
Claims Made Period, and a Final Proof of Loss Claim shall be submitted in
connection with any Commutation of the Reinsurance Agreement on or before
November 30, 1997.
Claims Review Procedure
The Claims Reviewer shall provide to the Ceding Insurer a Claims Review
Letter in respect of each Proof of Loss Claim submitted under the Reinsurance
Agreement not later than the last business day of each month in which a Proof of
Loss Claim is submitted to the Company. The Claims Reviewer shall be, initially,
KPMG Cayman Islands. The Claims Reviewer will be provided with access to the
claims files of the Ceding Insurer during the period between the Claim Date and
the last business day of the month in which a Proof of Loss Claim is submitted
to the Company. The Claims Reviewer shall perform Agreed Upon Procedures (as
defined under "Claims Review Agreement", below) on the Proof of Loss Claims in
relation to the Paid Losses of the Ceding Insurer, and will report the results
from those procedures to the Company. The Ceding Insurer shall submit to the
Regulation 114 Trustee for payment a Proof of Loss Claim reflecting the results
of the Claims Review Letter and, unless otherwise permitted or required under
the Reinsurance Agreement, the Regulation 114 Trustee shall pay the Ceding
Insurer the amount reflected on such Proof of Loss Claim. If the Claims Review
Letter is not received by the Ceding Insurer on or before the last Business Day
of the month in which the applicable Claim Date occurs, the Ceding Insurer shall
be entitled to submit the original Proof of Loss Claim to the Regulation 114
Trustee and receive payment of the entire amount of the original Proof of Loss
Claim. Any adjustment reflected in a Claims Review Letter subsequently provided
to the Ceding Insurer shall be reflected in a subsequent Proof of Loss Claim or
the Final Proof of Loss Claim, if any. The Ceding Insurer shall not be obligated
to pay interest in respect of any
47
<PAGE> 50
overpayment to the Ceding Insurer due to the failure to receive a Claims Review
Letter not later than the last Business Day of the month in which the Claim Date
occurs. See "The Claims Review Agreement."
Commutation
At the expiration of the Extended Claims Made Period, the Company and
the Ceding Insurer shall settle all claims and obligations under the Reinsurance
Agreement by the Company paying its proportional share and the Ceding Insurer
accepting such payment in the amount of 95% of the Ceding Insurer's Ultimate Net
Loss in excess of the Trigger Amount as certified by the Loss Reserve Specialist
(less any amounts previously paid under the Reinsurance Agreement). This
settlement of claims and obligations is referred to as "Commutation."
The Ceding Insurer shall be entitled to deliver to the Company a Final
Proof of Loss Claim, which may include a claim for Loss Reserves as well as for
Paid Losses (unlike Proof of Loss Claims delivered prior to the Final Proof of
Loss Claim, which may include only Paid Losses) not later than November 30,
1997. If the Ceding Insurer intends to submit a Final Proof of Loss Claim which
includes a claim for Loss Reserves on November 30, 1997, then from and after
November [15], 1997, the Ceding Insurer shall provide access to the Loss Reserve
Specialist to review and discuss the Ceding Insurer's method of calculating Loss
Reserves, including the actuarial assumptions and any other reserving
techniques, for the purposes of rendering the Loss Reserve Certificate described
under "Loss Reserve Specialist Agreement," below.
The Loss Reserve Specialist shall prepare the Loss Reserve Certificate
which shall either (i) state that the Loss Reserve specified by the Ceding
Insurer in the Final Proof of Loss Claim is reasonable, or (ii) specify a Loss
Reserve that the Loss Reserve Specialist believes, in its professional judgment,
is reasonable for use in the Final Proof of Loss Claim. A preliminary Loss
Reserve Certificate shall be delivered by the Loss Reserve Specialist to the
Ceding Insurer on or before December [20], 1997, and, if the Ceding Insurer
requests, the Loss Reserve Specialist will meet with representatives of the
Ceding Insurer at its offices in San Antonio, Texas to discuss any question of
the Ceding Insurer in respect of such preliminary Loss Reserve Certificate. The
Ceding Insurer and the Loss Reserve Specialist shall discuss such questions in
good faith with the goal of resolving any disagreements in good faith prior to
December [30], 1997.
Any Loss Reserve Certificate that specifies a Loss Reserve calculated
by the Loss Reserve Specialist (the "Specialist's Loss Reserve") that is lower
than the Loss Reserve calculated by the Ceding Insurer shall also specify that
the Specialist's Loss Reserve (i) is computed and fairly stated in accordance
with United States generally accepted loss reserving standards and principles,
(ii) is based upon actuarial assumptions that are relevant to the provisions of
the Policies, (iii) is established using reserving techniques applied on a
consistent basis throughout the periods covered except as otherwise stated
therein or as required by the rules and regulations of the relevant insurance
regulatory bodies, and (iv) is in compliance with the requirements of the
insurance laws, rules and regulations of the relevant insurance regulatory
bodies.
The Loss Reserve Specialist shall deliver a final Loss Reserve
Certificate to the Ceding Insured on or before December [31], 1997. If the
preliminary Loss Reserve Certificate and the Final Loss Reserve Certificate are
delivered to the Ceding Insurer within the time periods required and the Final
Loss Reserve Certificate specifies, pursuant to clause (ii) of the immediately
preceding paragraph, a Loss Reserve that is lower than the Loss Reserve used by
the Ceding Insurer in its Final Proof of Loss Claim, then the lower Loss Reserve
in the Final Loss Reserve Certificate shall be binding on the Company and the
Ceding Insurer and shall be the Loss Reserve for all purposes of the Reinsurance
Agreement. If the Loss Reserve Specialist fails for any reason to make timely
delivery to the Ceding Insurer of the preliminary or the Final Loss Reserve
Certificate, the Loss Reserve specified by the Ceding Insurer in its Final Proof
of Loss Claim shall be binding on the Company and the Ceding Insurer for all
purposes of the Reinsurance Agreement. The Loss Reserve Specialist shall rely as
to the data on which the Loss Reserves are based entirely on information
provided by the Ceding Insurer, and shall not conduct any independent
investigation or audit of such data. See "Loss Reserve Specialist Agreement"
below.
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<PAGE> 51
Regulation 114 Trust
Pursuant to the Reinsurance Agreement, the Company is required to
establish the Regulation 114 Trust Account. The Company is required to deposit
into the Regulation 114 Trust Account on the Closing Date an amount equal to the
Maximum Recovery. The Company will utilize the net proceeds of sale of the Notes
to make such deposit. The amount on deposit in the Regulation 114 Trust
Agreement shall at all times be invested in Permitted Investments. See "The
Regulation 114 Trust Agreement and the Regulation 114 Trust."
The New York Insurance Law requires that the Reinsurance Agreement
include a provision that assets deposited in the Regulation 114 Trust Account
may be withdrawn by the Ceding Insurer, at any time after a Loss Occurrence, and
shall be utilized by the Ceding Insurer or any successor, including any
liquidator, rehabilitator, receiver or conservator of the Ceding Insurer, for
the following purposes only: (i) to reimburse the Ceding Insurer for its share
of premiums returned to the owners of Policies reinsured under the Reinsurance
Agreement on account of cancellations of such policies; (ii) to reimburse the
Ceding Insurer for its share of surrenders and benefits of Losses paid by the
Ceding Insurer pursuant to the provisions of the Policies reinsured under the
Reinsurance Agreement; and (iii) to fund an account in an amount at least equal
to the deduction for reinsurance ceded from its liabilities for Policies ceded
under the Reinsurance Agreement (such account to include, but not be limited to,
amounts for Loss Reserves, including Incurred But Not Reported Losses, loss
adjustment expenses contributing to the Ultimate Net Loss, and unearned
premiums); and (iv) to pay to the Ceding Insurer any claims due under the
Reinsurance Agreement. Although New York Insurance Law requires that the
Reinsurance Agreement provide that the Ceding Insurer have the ability to
withdraw assets from the Regulation 114 Trust for application to the purposes
set forth in the preceding sentence, the Reinsurance Agreement does not
otherwise obligate the Company to pay certain of the liabilities covered by such
purposes and the Ceding Insurer has acknowledged to the Company that it has no
intent to withdraw assets from the Regulation 114 Trust for any purpose other
than to provide security for the express obligations of the Company to the
Ceding Insurer under the Reinsurance Agreement. Accordingly, in the event that
any amount is withdrawn from the Regulation 114 Trust Account by the Ceding
Insurer other than (i) to pay Losses, (ii) upon Commutation, in accordance with
the procedure described under "Commutation" above, or (iii) to make certain
advances as permitted under the Reinsurance Agreement, the Ceding Insurer shall
pay to the Indenture Trustee on the last Business Day of each month interest on
the amount of the withdrawal, from the date of the last Interest Payment Date,
at a per annum rate equal to the [Published Citibank 30-Day Commercial Paper
Rate plus 2 percent], calculated on the basis of the actual number of days
elapsed and a 360 day year. See "The Regulation 114 Trust Agreement and the
Regulation 114 Trust."
Currency
All amounts due to either party under the Reinsurance Agreement shall
be payable in United States currency.
Federal Excise Tax
The Ceding Insurer has agreed to pay the Federal Excise Tax on the
Premium payable under the Reinsurance Agreement to the extent such premium is
subject to Federal Excise Tax.
Access to Ceding Insurer's Records
The Company or its designated representatives (including the Claims
Reviewer and the Loss Reserve Specialist) shall have free access at any
reasonable time to all records of the Ceding Insurer which pertain in any way to
the Reinsurance Agreement.
Arbitration
Any dispute arising out of the Reinsurance Agreement shall be submitted
to the decision of a board of arbitration composed of two arbitrators and an
umpire, meeting in New York, New York, unless otherwise agreed.
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<PAGE> 52
Certain Covenants
The Company has agreed that it will not amend, supplement or modify
Article XI of the Indenture or any provision of the Indenture that subjects a
provision of the Indenture to Section 11.1 thereof, or any provision of the
Indenture that requires the consent of the Ceding Insurer, without the prior
written consent of the Ceding Insurer.
The Company has further agreed that (i) it will not engage in any
business other than the business contemplated by the Reinsurance Agreement, and
activities incidental thereto, (ii) it will not issue, incur, assume, guarantee
or otherwise become liable, directly or indirectly, for any indebtedness except
for its liabilities under the Reinsurance Agreement, the Notes, the Interest
Rate Swap and the other documents related to the Reinsurance Agreement, (iii) it
will not, except as contemplated by the Indenture and such other documents
related to the Reinsurance Agreement, make any loan or advance or credit to, or
guarantee, endorse or otherwise become contingently liable, directly or
indirectly, in connection with the obligations, stocks, or dividends of, or own,
purchase, repurchase or acquire any stock, obligations, assets or securities of,
or any other interests in, or make any capital contributions to, any other
person, and (iv) it will not make any expenditure for capital assets.
THE REGULATION 114 TRUST AGREEMENT AND
THE REGULATION 114 TRUST
The following summary of the terms of the Regulation 114 Trust
Agreement is qualified in its entirety by reference to the Regulation 114 Trust
Agreement, which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
The Regulation 114 Trust Agreement will be among the Company, as
grantor thereunder, the Ceding Insurer, as beneficiary thereunder, and ________,
as trustee (in such capacity, the "Regulation 114 Trustee"). The Regulation 114
Trust Agreement has been structured to comply with Regulation 114 under the New
York Insurance Law and the regulations promulgated by the New York
Superintendent of Insurance thereunder. To the extent that the Regulation 114
Trust Agreement complies with such Section and such regulations, the Ceding
Insurer will be entitled to include as a reinsurance receivable on the asset
side of its statutory balance sheet the amounts payable by the Company to the
Ceding Insurer pursuant to the Reinsurance Agreement.
Pursuant to the Regulation 114 Trust Agreement, the Regulation 114
Trustee has established a trust account for the benefit of the Ceding Insurer,
[for itself and as agent for the Indenture Trustee with respect to the junior
interest of the Noteholders in the assets of the Regulation 114 Trust] (the
"Trust Account"). The Company will utilize the net proceeds of sale of the Notes
to deposit $_______ with the Regulation 114 Trustee for deposit into the Trust
Account on the Closing Date. The purpose of the Regulation 114 Trust is to
provide security for the obligations of the Company to the Ceding Insurer under
the Reinsurance Agreement.
The funds credited to the Trust Account are required to be invested and
reinvested by the Regulation 114 Trustee in Permitted Investments selected by
the Regulation 114 Trustee in its sole discretion. All Permitted Investments are
required to mature on the last business day of the month in which they are
acquired.
In the Regulation 114 Trust Agreement, the Company has granted to the
Ceding Insurer a first priority perfected security interest in the Permitted
Investments and each other item of property included or intended to be included
in the Regulation 114 Trust Account.
Withdrawals from the Regulation 114 Trust Accounts may, as required by
the New York Insurance Law, be withdrawn by the Ceding Insurer at any time after
a Loss Occurrence, for the following purposes only: (i) to reimburse the Ceding
Insurer for its share of premiums returned to the owners of Policies reinsured
under the Rein- surance Agreement on account of cancellations of such policies;
(ii) to reimburse the Ceding Insurer for its share of surrenders and benefits of
Losses paid by the Ceding Insurer pursuant to the provisions of the Policies
reinsured under the Reinsurance Agreement; and (iii) to fund an account in an
amount at least equal to the deduction for reinsurance ceded from its
liabilities for Policies ceded under the Reinsurance Agreement (such account to
include, but not be limited to, amounts for Loss Reserves, including Incurred
But Not Reported Losses, loss adjustment expenses contributing to the Ultimate
Net Loss, and unearned premiums); and (iv) to pay to the Ceding Insurer any
claims due under the Reinsurance Agreement. Any amounts in excess of an amount
(the "Trust Account Required
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<PAGE> 53
Amount") equal to the greater of (i) 100% of the actual amount required to fund
the Maximum Recovery under the Reinsurance Agreement, [less the amount of any
Losses for which a Proof of Loss Claim or a Final Proof of Loss Claim has been
submitted under the Reinsurance Agreement], and (ii) one hundred and two percent
(102%) of the Company's outstanding obligations under the Reinsurance Agreement,
may be withdrawn to make payments to the Company. In addition, if the Ceding
Insurer receives notification of the termination of the Regulation 114 Trust
Account and the Company's entire obligations under the Reinsurance Agreement
remain unliquidated and discharged ten days prior to such termination date,
amounts in the Regulation 114 Trust equal to one hundred and two percent (102%)
of the outstanding obligations of the Company under the Reinsurance Agreement
may be withdrawn and paid into a separate bank account and maintained in trust
for the benefit of the Ceding Insurer.
All dividends, earned discount and other income resulting from the
investment of assets in the Regulation 114 Trust Account shall be the property
of the Company. On the Business Day prior to each Interest Payment Date the
Regulation 114 Trustee will transfer to the Indenture Trustee on behalf of
Company, from amounts available in the Regulation 114 Trust Account, an amount
equal to the income (including earned discount) on the Permitted Investments for
such month to make payments of the Net Swap Payment under the Interest Rate Swap
and to make payments under the Indenture in respect of Interest on the Notes;
provided that the Regulation 114 Trustee shall not make any such transfer in the
event that after giving effect thereto the amount remaining on deposit in the
Regulation 114 Trust Account would be less than the Trust Account Required
Amount.
In addition, the Company may on any Interest Payment Date or on the
Mandatory Redemption Date request that the Regulation 114 Trustee remit Excess
Funds to or at the direction of the Company. "Excess Funds" on any Interest
Payment Date or the Mandatory Redemption Date, shall mean the excess, if any, of
the funds on deposit in the Regulation 114 Trust Account (after giving effect to
the transfer described in the immediately preceding paragraph and any payments
of claims under the Reinsurance Agreement) over the Trust Account Required
Amount. It is not expected that Excess Funds, if any, will be available prior to
the Mandatory Redemption Date; if claims are made under the Reinsurance
Agreement, Excess Funds, if any, may not be available until the Maturity Date.
Upon termination of the Regulation 114 Trust, the Regulation 114
Trustee shall transfer to the Company for deposit with the Indenture Trustee for
the benefit of the Noteholders all of the funds remaining to the credit of the
Regulation 114 Trust Account. The Regulation 114 Trust will terminate upon the
termination of the Reinsurance Agreement, as may be extended by the Extended
Claims Made Period.
ADMINISTRATIVE SERVICES AGREEMENT
The Administrative Services Agreement will be between the Company and
Midland Bank Trust Corporation (Cayman) Limited, as Administrator. Pursuant to
the Administrative Services Agreement, the Administrator is obligated to provide
the Company with such services as are necessary and appropriate for the
Company's business in the Cayman Islands. Such services are directed to the
administration of the Company's insurance business and include, among other
things, general banking and investment services, record keeping, filing and
correspondence with any regulatory authorities and correspondence dealing with
claims under the Reinsurance Agreement.
In consideration of such services, the Company is required to pay a
specified fee of $_____ to the Administrator on the Closing Date. In addition,
the Company is obligated to indemnify the Administrator and certain related
parties for damages or expenses incurred pursuant to rendering services under
the Administrative Services Agreement.
CLAIMS REVIEW AGREEMENT
The Claims Review Agreement will be between the Company and KPMG Cayman
Islands, as Claims Reviewer. Pursuant to the Claims Review Agreement, the Claims
Reviewer is obligated to review according to the Agreed Upon Procedures (as
defined below) all Proof of Loss Claims submitted by the Ceding Insurer to the
Company for payment in accordance with the terms and conditions of the
Reinsurance Agreement. The Claims Reviewer must submit a Claims Review Letter to
the Company with respect to each submitted Proof of Loss Claim, which shall
include any discrepancies noted in the application of such Agreed Upon
Procedures.
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<PAGE> 54
The Claims Reviewer has agreed to perform certain agreed upon
procedures (the "Agreed Upon Procedures") in accordance with standards
established by the American Institute of Certified Public Accountants. The
Agreed Upon Procedures include the following with respect to each Proof of Claim
submitted by the Ceding Insurer:
(a) The Claims Reviewer will recalculate the total Losses paid under
Existing Policies and Renewal Policies as of the Proof of Loss Date;
(b) The Claims Reviewer will recalculate the total Losses paid under
New Policies as of the Proof of Loss Date; and
(c) The Claims Reviewer will select a statistically valid sample of the
total claims reflected in paragraphs (a) and (b) above using a confidence level
of 95% and a level of precision of plus or minus 5% and have performed the
following procedures with respect to such sample:
(1) Verified that the underlying Policy was in force at the
time of loss and is accurately classified as an Existing Policy, a
Renewal or a New Policy on Schedule 1 to the Proof of Loss Claim;
(a) verified that the coverage type of the Policy is
included in the Reinsurance Agreement;
(b) noted that the policy period of the Policy
includes the date of the Loss Occurrence,
(c) verified that the Proof of Loss Claim accurately
reflected the claim as a claim under (x) an Existing Policy or
Renewal or (y) a New Policy,
(2) Compared the paid Loss with the supporting documentation
of the Ceding Insurer in the Ceding Insurer's claim files in accordance
with the following procedures:
(a) noted the claim file contained proof that the
Loss resulted from the Loss Occurrence specified on the Proof
of Loss Claim,
(b) noted that the claim file contained proof that
the location of the insured property was in a Covered State,
and
(c) compared documentation in the Ceding Insurer's
claim file to actual loss payments to determine that payments
were made for perils covered under the Reinsurance Agreement.
In the event any discrepancies are discovered by the Claims Reviewer in
its performance of the Agreed Upon Procedures, the Claims Reviewer is required
to include in its Claims Review a description thereof.
The Claims Review Agreement provides that the Claims Reviewer makes no
representation that the Agreed Upon Procedures are sufficient for the purposes
for which the Claims Review is provided to the Company.
In consideration for such services, the Company shall pay a specified
fee of $________ to the Claims Reviewer on the Closing Date. In addition, the
Company is obligated to indemnify the Claims Reviewer and certain related
parties for damages or expenses incurred pursuant to rendering services under
the Claims Review Agreement.
In addition to its position as Claims Reviewer, KPMG Cayman Islands
acts as the independent auditor to the Company. KPMG Peat Marwick LLP, United
States, is the Ceding Insurer's independent public accountant.
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<PAGE> 55
LOSS RESERVE SPECIALIST AGREEMENT
The Loss Reserve Specialist Agreement will be between the Company and
_________________, as Loss Reserve Specialist. Pursuant to the Loss Reserve
Specialist Agreement, the Loss Reserve Specialist must perform all acts and
things reasonably necessary or otherwise required to establish the final amount
of Loss Reserves to be included in the calculation of Ultimate Net Loss upon
Commutation of the Reinsurance Agreement. Specifically, among other duties, the
Loss Reserve Specialist is obligated to analyze the Loss Reserves set forth in
any final Proof of Loss Claim to determine their validity and compensability
under the terms of the Reinsurance Agreement, including verification of the
amount and the actuarial analysis underlying the establishment thereof and to
deliver the preliminary Loss Reserve Certificate and the Final Loss Reserve
Certificate discussed under "Commutation" above.
In consideration of such services, the Company shall pay a specified
fee of $_______ to the Loss Reserve Specialist on the Closing Date. In addition,
the Company is obligated to indemnify the Loss Reserve Specialist and certain
related parties for damages or expenses incurred pursuant to rendering services
under such Agreement.
CAYMAN ISLANDS INSURANCE REGULATIONS
The Company is registered as an unrestricted Class B insurer in the
Cayman Islands and accordingly is subject to the provisions of the Insurance Law
(1995 Revision) and Regulations issued pursuant thereto (together, the
"Insurance Law"). The Insurance Law provides that no person shall carry on
insurance business (as defined in the Insurance Law) in or from within the
Cayman Islands unless licensed under the Insurance Law by the Governor in
Council of the Cayman Islands (the "Governor"). The Governor, in determining
whether to grant a license, has broad discretion to act as he thinks fit in the
public interest. The Governor is required by the Insurance Law to satisfy
himself that the grant of a license will not be against the public interest and
may grant a license subject to such conditions as appear to him necessary or
desirable.
The Insurance Law imposes on insurers licensed in the Cayman Islands
minimum net worth standards and auditing and reporting requirements and grants
to the Governor and the Inspector of Financial Services powers to supervise,
investigate and intervene in the affairs of insurers. Significant aspects of the
Cayman Islands insurance regulatory framework under the Insurance Law include:
Net Worth Requirements. The net worth requirements are as follows:
i) A net worth of at least $120,000 is required where general
business only is written;
ii) A net worth of $240,000 is required if long-term business only
is written;
iii) A net worth of $360,000 is required if general and long-term
business is written.
These figures are minimums and a greater net worth may be required
depending on the nature of a business plan. The required minimum net worth must
be maintained at all times. The Company will write only general business (i.e.,
the Reinsurance Agreement) and, accordingly, is required to maintain a net worth
of $120,000.
The initial net worth must usually be in cash although a mix of cash,
other assets, guarantees or letters of credit may be acceptable.
Shareholders, Directors and Officers. Full details of the shareholders
(including ultimate beneficial ownership), directors and officers must be
supplied to the Financial Services Supervision Department of the Cayman Islands.
Any changes therein must be notified to the Financial Services Supervision
Department of the Cayman Islands.
Type of Business. Full disclosure must be made to the Financial
Services Supervision Department of the Cayman Islands of the nature of and the
manner in which the business is to be written, and any changes therein must be
notified in advance to and be approved by the authorities. With very limited
exceptions no domestic business in the Cayman Islands may be written by the
holder of a class "B" license.
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<PAGE> 56
Records. Full and proper records of the business of an insurer
(including the license itself) must be maintained at a designated office in the
Cayman Islands. Approval may be obtained for these records to be held outside
the Cayman Islands but, as a matter of policy, such approval is not granted. In
the case of the Company, such records will be kept at the offices of Midland
Trust Corporation (Cayman) Limited.
Insurance Manager. A licensed insurance manager must be appointed at
whose offices the records referred to in the preceding paragraph will normally
be held. Insurance management services for the Company will be provided by
Midland Bank Trust Corporation (Cayman) Limited (the "Administrator") pursuant
to the Administrative Services Agreement. The Administrative Services Agreement
provides that the Administrator will be entitled to receive a specified fee of
$___________ on the Closing Date. The Administrator and its directors, officers
and employees will be indemnified by the Company against any liabilities,
actions, proceedings, claims, demands, costs or expenses whatsoever which they
may incur in connection with services performed pursuant to such Administrative
Services Agreement, except as a result of the negligence, willful default,
dishonesty or fraud of the Administrator or any of its directors, officers or
employees.
Auditors. Auditors (who should maintain an office in the Cayman
Islands) must be appointed and the financial statements of the insurer audited
annually by such auditors. The auditors of the Company will be KPMG Cayman
Islands.
Representative in the Cayman Islands. A principal representative
resident in the Cayman Islands and authorized to accept service of process and
documents on behalf of the Company in the Cayman Islands must be appointed. Such
principal representative is Maples and Calder, attorneys-at-law, the Company's
Cayman Islands legal counsel.
Fees. An initial license fee of $5,488.00 is payable in respect of a
class B license. A similar fee is payable in January of each year thereafter.
Annual Certificate of Compliance. After issue of the license, the
annual audited accounts need not be filed with the Financial Services
Supervision Department of the Cayman Islands although they can be called for and
it is usual therefore to file them. However, the auditors must file a written
statement that the accounts have been prepared in accordance with stated
generally accepted accounting principles (in the case of the Company, those of
the United States) and indicate whether or not their certificate is unqualified.
In addition, the auditors, a licensed insurance manager or other approved person
must sign and file an annual compliance certificate to the effect that the
insurer has carried on business only in accordance with the information set out
in the license application and that any changes in the nature of the business
have been notified to and have been approved by the Financial Services
Supervision Department of the Cayman Islands.
Investments. The Cayman Islands authorities have the power to prescribe
that investments of a specified class require the prior approval of the
Financial Services Supervision Department of the Cayman Islands and that any
investments of such class already made be realized within a specified period.
Although no absolute assurance on this can be given for the future, this power
has never been exercised to date.
Ratios and Margins. The Financial Services Supervision Department of
the Cayman Islands has the power by regulation to prescribe, establish and vary
"capital and liquidity margins and ratios". None have been formally prescribed
(apart from the net worth requirements described above) at present. However, a
license holder is expected to conduct its business in a prudent manner and to
act accordingly.
Exemptions. The Financial Services Supervision Department of the Cayman
Islands has a general power to exempt "any person or class of persons or
business or class of business from any provision of the Law".
The foregoing requirements are intended to be only a summary of certain
of the requirements of the Insurance Law and do not summarize, and are not
intended to summarize, all the requirements to which the Company will be subject
under the Insurance Law.
There are not any exchange controls in the Cayman Islands.
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INVESTMENTS
All assets of the Company, other than assets held in the Regulation 114
Trust Account, will be invested at the discretion of the Administrator.
MANAGEMENT
The table below sets forth the names and titles of the persons who are
the directors and officers of the Company. Because the Company's only activity
will be the performance of its obligations under the Reinsurance Agreement and
the Indenture and the Administrator will be obligated to cause the performance
of such obligations on behalf of the Company pursuant to the Administrative
Services Agreement, it is expected that the directors and officers of the
Company, in such capacity, will not participate in the management of the
operations of the Company. The directors and officers of the Company are all
employees of the Administrator, however, and as such will participate in the
management of the operations of the Company. None of such persons will be
compensated by the Company or beneficially own any shares of the Company. The
Company has no salaried employees.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas Clark 44 Director
Anthony B. Stelling / / Director and Chief Executive Officer
Nicholas Clements / / Director, Chief Financial Officer and Treasurer
</TABLE>
Thomas Clark - Director of the Company and Assistant Director Client
Services of the Administrator
Bachelor of Science (B.Sc.), Associate of the Chartered Insurance
Institute, London (A.C.I.I.), 22 years experience in the insurance
field; 5 years with the Guardian Royal Exchange Group in England, 2
years with Barclays Insurance Services Company (broking subsidiary of
Barclays Bank plc) and 15 years in the Cayman Islands with Insurance
Managers, the last 11 with Midland Bank Trust Corporation (Cayman)
Limited. A member of the Executive Committee of the Cayman Insurance
Manager's Association since 1991; currently its Secretary.
Anthony B. Stelling - Director and Chief Executive Officer of the
Company and Director of the Administrator
Associate of the Chartered Insurance Institute, London (A.C.I.I.) 31
years experience in the insurance field; 14 years with the
International Departments of the Prudential Assurance Company Limited
in London and overseas, 1 year with an A.I.G. subsidiary in Belgium and
the last 16 years in Cayman - 4 of them as the manager of another
Cayman Islands Insurance Manager. Executive Director of Midland Bank
Trust Corporation (Cayman) Limited since it started. A founding member
of the Executive Committee of the Cayman Insurance Manager's
Association; Vice Chairman 1986-88 and Chairman 1988-90; retired from
the Executive Committee 1991.
Nicholas Clements - Director, Chief Financial Officer and Treasurer of
the Company and Assistant Manager Insurance Services of the
Administrator
Bachelor of Science (Economics), Member of the Institute of Chartered
Accountants in England and Wales. 8 1/2 years working for various firms
of Chartered Accountants in England, New Zealand and the Cayman
Islands. Last 2 1/2 years working for Midland Bank Trust Corporation
(Cayman) Limited managing captive insurance companies.
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<PAGE> 58
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary describes certain terms of the
Notes and the Indenture. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Notes and the Indenture. The Chase Manhattan Bank, a New York banking
corporation, will be the Indenture Trustee.
The original aggregate Principal Amount of the Class A Notes will be
$500,000 and the original aggregate Principal Amount of the Class B Notes will
be $500,000. The Notes will initially be represented by one or more Notes, in
each case registered in the name of the initial holder thereof. The Notes will
be available for purchase in denominations of $10,000 and integral multiples of
$1,000 in excess thereof in certificated form only.
PAYMENTS OF INTEREST
With respect to each Interest Payment Date, interest on the outstanding
Principal Amount of the Class A Notes will accrue at a per annum rate of
one-month LIBOR plus __% and interest on the outstanding Principal Amount of the
Class B Notes will accrue at a per annum rate of one-month LIBOR plus __%, in
each case from and including the preceding Interest Payment Date or, in the case
of the month in which the Notes are issued, from and including the Closing Date,
to but excluding such Interest Payment Date (each, an "Interest Accrual
Period"). Interest will be payable on the first day of each month (or, if such
day is not a Business Day, on the next succeeding Business Day) (each, an
"Interest Payment Date"), commencing on September 3, 1996. Interest will be
calculated on the basis of the actual number of days elapsed and a 360-day year.
"LIBOR" for each Interest Period will be determined by the Calculation
Agent as follows:
(i) On the second London Banking Day prior to the Interest Reset Date
for such Interest Period (a "LIBOR Determination Date"), the Calculation Agent
shall determine the arithmetic mean of the offered rates for deposits in U.S.
dollars for the period of one month, commencing on such Interest Reset Date,
which appear on the Reuters Screen LIBO Page at approximately 11:00 a.m., London
time, on such LIBOR Determination Date. For purposes of calculating LIBOR,
"London Banking Day" means any business day on which dealings in deposits in
United States dollars are transacted in the London interbank market and "Reuters
Screen LIBO Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks). If at least two such offered rates appear on the Reuters Screen
LIBO Page, "LIBOR" for such Interest Reset Period will be the arithmetic mean of
such offered rates as determined by the Calculation Agent.
(ii) If fewer than two offered rates appear on the Reuters Screen LIBO
Page on such LIBOR Determination Date, the Calculation Agent will request the
principal London offices of each of four major banks in the London interbank
market selected by such Calculation Agent to provide such Calculation Agent with
its offered quotations for deposits in U.S. dollars for one month, commencing on
such Interest Reset Date, to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a
principal amount equal to an amount of not less than $1,000,000 that is
representative of a single transaction in such market at such time. If at least
two such quotations are provided, "LIBOR" for such Interest Reset Period will be
the arithmetic mean of such quotations. If fewer than two such quotations are
provided, "LIBOR" for such Interest Reset Period will be the arithmetic mean of
rates quoted by three major banks in The City of New York selected by the
Calculation Agent at approximately 11:00 a.m., New York City time, on such LIBOR
Determination Date for loans in U.S. dollars to leading European banks, for one
month, commencing on such Interest Reset Date, and in a principal amount equal
to an amount of not less than $1,000,000 that is representative of a single
transaction in such market at such time; provided, however, that if the banks
selected as aforesaid by such Calculation Agent are not quoting rates as
mentioned in this sentence, "LIBOR" for such Interest Period will be the same as
LIBOR for the immediately preceding Interest Period.
The "Calculation Agent" shall be The Chase Manhattan Bank.
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The "Interest Reset Date" shall be the first day of each Interest
Period.
INTEREST RATE SWAP
On the Closing Date, the Company will enter into one or more interest
rate swap agreements (collectively, the "Interest Rate Swap") with Merrill Lynch
Capital Services, Inc. (the "Swap Counterparty"). Under the Interest Rate Swap,
one Business Day prior to each Interest Payment Date the Swap Counterparty will
be obligated to pay to the Indenture Trustee on behalf of the Company interest
at a rate equal to the applicable one-month LIBOR for the related Interest
Accrual Period, less __%, on the principal amount of the Permitted Investments.
In exchange for such payment, the Indenture Trustee on behalf of the Company
will pay to the Swap Counterparty the investment earnings on the Permitted
Investments one Business Day prior to each Interest Payment Date. Such payments
will be made on a net basis.
PAYMENTS OF PRINCIPAL
The Principal Amount of the Notes will be due on January 2, 1998.
PRINCIPAL REDUCTION
A Principal Reduction with respect to the Notes shall occur upon the
delivery to the Indenture Trustee of a notice that shall advise the Indenture
Trustee of payment by the Company of any amount owed under the Reinsurance
Agreement. The amount of the Principal Reduction shall be equal to the amount
paid under the Reinsurance Agreement. The amount of any such Principal Reduction
shall be allocated as follows:
(i) first, pro rata among the Holders of Class B Notes until
the aggregate Principal Amount of the Class B Notes shall be reduced to zero;
and
(ii) then, pro rata among the Holders of Class A Notes until
the aggregate Principal Amount of the Class A Notes shall be reduced to zero.
CONTINGENT PRINCIPAL EVENT
If the Company establishes a loss reserve for an amount that it
believes will become payable under the Reinsurance Agreement, based on a related
loss reserve in excess of the Trigger Amount taken by the Ceding Insurer, the
Company's obligation to pay the Principal Amount of the Notes will be contingent
to the extent of the amount of each such loss reserve (each such occurrence, a
"Contingent Principal Event" and each such amount, a "Loss Reserve Amount")
pending receipt of a Proof of Loss Claim under the Reinsurance Agreement. Any
Loss Reserve Amount shall be allocated: first, among the holders of the Class B
Notes on a pro rata basis until the aggregate Notional Amount of the Class B
Notes becomes wholly contingent, and second, among the holders of the Class A
Notes on a pro rata basis until the aggregate Notional Amount of the Class A
Notes becomes wholly contingent. "Notional Amount" of any Note or class of Notes
shall mean the Principal Amount of such Note reduced by any Loss Reserve Amount
allocated to such Note. When the Proof of Loss Claim related to any Loss Reserve
Amount is received, such Loss Reserve Amount will be reduced to the extent
deemed appropriate by the Company, and the Principal Amount of the Notes will be
reduced, in the manner described above, by the Principal Reduction reflected in
such Proof of Loss Claim. See "- Principal Reduction".
MANDATORY REDEMPTION
The Company will be required to redeem the Notes in whole at a
redemption price equal to the Principal Amount of the Notes then outstanding
together with interest accrued thereon to the date of redemption (a) on the
Mandatory Redemption Date, if the Ceding Insurer does not elect to extend the
Claims Period for the Extended Claims Made Period under the Reinsurance
Agreement, or (b) on the following Interest Payment Date, if the Ceding Insurer
shall fail to pay any Premium when due under the Reinsurance Agreement, in which
event the Regulation 114 Trust shall thereupon be liquidated and the assets held
therein shall be distributed to the Company for payment to holders of the Notes.
See "Reinsurance Activity of the Company - The Regulation 114 Trust Agreement
and the Regulation 114 Trust."
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COLLATERAL
Pursuant to the Indenture the Company will assign and pledge and cause
to be assigned and pledged to the Indenture Trustee, for its benefit and the
benefit of the holders of the Notes, as security interest in all of the
Company's right, title and interest in (a) the Reinsurance Agreement, including
the right to receive payments of Premium and all other monies due or payable
thereunder from the Ceding Insurer; (b) subject to the prior security interest
therein of the Ceding Insurer, the Permitted Investments in the Regulation 114
Trust (the "Securities Account Collateral"); (c) the Interest Rate Swap; (d) the
Claims Review Agreement; (e) the Loss Reserve Specialist Agreement; and (f) all
other assets of the Company now or hereafter arising.
Notwithstanding the above paragraph, the grant by the Company of all
its right, title and interest in, to and under the Securities Account Collateral
is junior and subordinate to the right, title and interest in, to and under the
Securities Account Collateral of the Ceding Insurer and the liens and security
interests of the Ceding Insurer in the Securities Account Collateral shall be
senior and prior to the liens and security interest of the Indenture Trustee in
the Securities Account Collateral irrespective of the time of the execution,
delivery or issuance of any thereof or the filing or recording for perfection of
any thereof or the filing of any financing statement or continuation statement
relating to any thereof. The liens and security interests of the Ceding Insurer
in the Securities Account Collateral are intended to secure its rights under the
Reinsurance Agreement to the payment of amounts owed by the Company under the
Reinsurance Agreement in the event of a Loss Occurrence and to provide security
for the funding for the Maximum Recovery during the Loss Occurrence Period and
Extended Claims Made Period.
Until the Company's obligations under the Reinsurance Agreement have
been fully discharged, neither the Indenture Trustee nor the Noteholders shall
assert, collect or enforce their security interest in the Securities Account
Collateral or any part thereof or take any action to foreclose or realize upon
the Securities Account Collateral or any part thereof or enforce the Indenture
or have any right of subrogation, reimbursement, contribution or indemnity
whatsoever from the Securities Account Collateral.
CERTAIN COVENANTS
The Indenture will contain certain covenants, including the ones
summarized below, which covenants will be applicable (unless they are waived) so
long as any of the Notes are outstanding.
Limitation on Debt
The Indenture provides that the Company shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for its liabilities under the Indenture, the Reinsurance
Agreement, the Regulation 114 Trust Agreement, the Interest Rate Swap, the
Administrative Services Agreement, the Loss Reserve Specialist Agreement and
other documents and certificates delivered in connection therewith, as the same
may from time to time be amended, supplemented or otherwise modified and in
effect.
Limitation on Restricted Payments
The Indenture provides that the Company shall not, directly or
indirectly, (i) make any distribution (by reduction of capital or otherwise),
whether in cash, property, securities or a combination thereof, to any owner of
an equity interest in the Company or otherwise with respect to any ownership or
equity interest or security in or of the Company, (ii) redeem, purchase, retire
or otherwise acquire for value any such ownership or equity interest or security
or (iii) set aside or otherwise segregate any amounts for any such purpose.
NO LIMITATIONS ON HOLDING OF NOTES
There are no limitations imposed by foreign law, the Company's charter
or any other of the Company's constituent documents that limit the rights of
nonresidents of the Cayman Islands or foreign owners to hold the Notes.
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NO TAX TREATIES
There is no reciprocal tax treaty between the Cayman Islands and the
United States regarding withholding.
CERTAIN TERMS OF THE INDENTURE
MODIFICATION OF INDENTURE
The Company and the Indenture Trustee may, with the consent of the
holders of a majority of the outstanding Notes, execute a supplemental indenture
to add provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will: (i) change the due date of any
installment of the Principal Amount of or interest on any Note or reduce the
principal amount thereof or the interest rate specified thereon or change any
place of payment where or the coin or currency in which any Note or any interest
thereon is payable; (ii) impair the right to institute suit for the enforcement
of certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
holders of which is required for any such supplemental indenture or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Company or
an affiliate thereof; (v) decrease the percentage of the aggregate Principal
Amount of Notes required to amend the sections of the Indenture which specify
the applicable percentage of aggregate Principal Amount of the Notes necessary
to amend the Indenture or certain other related agreements; or (vi) permit the
creation of any lien (other than the Ceding Insurer's senior and prior security
interest in the Securities Account Collateral pursuant to the Regulation 114
Trust) ranking prior to or on a parity with the lien of the Indenture with
respect to any of the assets of the Company or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any such
collateral or deprive the holder of any Note of the security afforded by the
lien of the Indenture.
The Company and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Noteholders, for the purpose
of, among other things, adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of modifying in any manner
the rights of the Noteholders; provided that such action will not materially and
adversely affect the interest of any Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
"Events of Default" under the Indenture will consist of: (i) a default
for five days or more in the payment of any interest on any Note; (ii) a default
in the payment of the Principal Amount of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Company made in the Indenture and the continuation of any such
default for a period of 60 days after notice thereof is given to the Company by
the Indenture Trustee or to the Company and the Indenture Trustee by the holders
of at least 25% in principal amount of Notes then outstanding; (iv) any
representation or warranty made by the Company in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 60 days after notice thereof is given to the Company by the
Indenture Trustee or to the Company and the Indenture Trustee by the holders of
at least 25% in principal amount of the Notes then outstanding; (v) certain
events of bankruptcy, insolvency, receivership or liquidation of the Company;
(vi) any payment is required to be made by the Company to the Ceding Insurer
under the Reinsurance Agreement; or (vii) the incurrence by the Company of any
liability, other than pursuant to the Reinsurance Agreement, in excess of
$______, and such liability remaining unsatisfied for ___ days or more.
If an Event of Default should occur and be continuing, the Indenture
Trustee or holders of a majority in Principal Amount of Notes then outstanding
may declare the Principal Amount of the Notes to be immediately due
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and payable. Any such declaration may, under certain circumstances, be rescinded
by the holders of a majority in Principal Amount of Notes then outstanding.
If the Notes are due and payable following an Event of Default, subject
to the "No Petition" agreement described below, the Indenture Trustee may
institute proceedings to collect amounts due or foreclose on Company property or
exercise remedies as a secured party.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default occurs and is continuing, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
Notes, if the Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the holders of a majority in Principal
Amount of Notes then outstanding may, in certain cases, waive any default with
respect thereto, except a default in the payment of Principal Amount or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the holders of outstanding
Notes.
No holder of a Note will have the right to institute any proceeding
with respect to the Indenture unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes have
made written request to the Indenture Trustee to institute such proceeding in
its own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60-day
period by the holders of a majority in Principal Amount of outstanding Notes.
Neither the Indenture Trustee in its individual capacity, nor any of
its owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the Principal Amount of or
interest on the Notes or for the agreements of the Company contained in the
Indenture.
Notwithstanding that the Indenture Trustee and the holders of the Notes
have the right upon the occurrence of an Event of Default under the Indenture to
declare the Principal Amount of the Notes to be immediately due and payable and
to exercise certain remedial proceedings, so long as the Reinsurance Agreement
is in effect, the payment of the Notes and the exercise of such remedies will
effectively be subordinated to the rights of the Ceding Insurer under the
Reinsurance Agreement. Neither the Indenture Trustee nor the holder of any Note
will have access to the Permitted Investments or other assets held by the
Regulation 114 Trustee until termination of the Reinsurance Agreement, except to
the extent (i) of interest earnings on such Permitted Investments, or (ii) that
there are Excess Funds available in the Regulation 114 Trust.
The Company shall deliver to the Indenture Trustee, on or before July
1, 1997, a certificate of an officer of the Company as to the Company's
compliance with all conditions and covenants under the Indenture throughout such
year.
CERTAIN COVENANTS
The Indenture will provide that the Company may not consolidate with or
merge into any other entity.
The Company will not, among other things, (i) except as expressly
permitted by the Indenture, the Reinsurance Agreement or certain related
documents with respect to the Company (collectively, the "Related Documents"),
sell, transfer, exchange or otherwise dispose of any of the assets of the
Company, (ii) dissolve or liquidate in whole or in part, (iii) permit the
validity or effectiveness of the Indenture to be impaired or permit any person
to be released from any covenants or obligations with respect to the Notes under
the Indenture except as may be expressly permitted thereby, or (iv) except as
contemplated by the Regulation 114 Trust, permit any lien, charge,
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excise, claim, security interest, mortgage or other encumbrance to be created on
or extend to or otherwise arise upon or burden the assets of the Company or any
part thereof, or any interest therein or the proceeds thereof.
The Company may not engage in any activity other than as specified
under "The Company" herein. The Company will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture or otherwise in accordance with the Related Documents.
NO PETITION
By its acquisition of a Note, each holder agrees that neither it nor
the Indenture Trustee on its behalf may commence, or join with any other holder
in the commencement of, a bankruptcy, reorganization, insolvency or similar
proceeding under any federal, state or foreign law until the expiration of one
year and one day from the termination of the Reinsurance Agreement.
LIST OF NOTEHOLDERS
Three or more holders of the Notes or one or more holders of the Notes
evidencing not less than 25% of the aggregate outstanding Principal Amount of
the Notes may, by written request to the Indenture Trustee, obtain access to the
list of all Noteholders maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or under the Notes. The Indenture Trustee may elect not to afford the
requesting Noteholders access to the list of Noteholders if it agrees to mail
the desired communication or proxy, on behalf of and at the expense of the
requesting Noteholders, to all Noteholders.
ANNUAL COMPLIANCE STATEMENT
The Company will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a brief report relating to its eligibility and qualification to
continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the Company to the Indenture Trustee in its individual
capacity, the property and funds physically held by the Indenture Trustee as
such and any action taken by it that materially affects the Notes and that has
not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee will be The Chase Manhattan Bank, a New York
banking corporation. The Indenture Trustee may resign at any time, in which
event the Company will be obligated to appoint a successor trustee. The Company
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, the Company will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture Trustee
and appointment of a successor trustee does not become effective until
acceptance of the appointment by the successor trustee.
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DEFINITIVE NOTES
The Notes will be issued in fully registered, certificated form to
Noteholders or their respective nominees.
TRANSFER RESTRICTIONS
The Notes are not being offered in, and may not be acquired in or
transferred into, the States of , , or , or to persons resident in those States.
The Indenture Trustee will not register the transfer of any Note unless, at the
time registration of transfer is requested, the Indenture Trustee is provided
with a certificate of the proposed transferee in the form provided in the
Indenture to the effect that the proposed transfer is not to occur in or into
any of such States and the proposed transferee is not a resident of any of such
States.
CERTAIN INCOME TAX CONSIDERATIONS
The following is a summary of certain United States income tax
consequences relating to the taxation of the Company and of U.S. persons and
non-U.S. persons who are initial purchasers of Notes and the Cayman Islands
taxation of the Company and of persons not resident in the Cayman Islands for
exchange control purposes that are initial purchasers of Notes. This summary is
based on current law, which is subject to change, possibly retroactively, or to
differing interpretations. This summary is general in nature and does not
purport to deal with all aspects of U.S. federal income taxation that may be
relevant to the Noteholders in light of their personal investment circumstances
nor, except for certain limited discussions of particular topics, to certain
types of holders who may be subject to special treatment under certain income
tax laws (e.g., financial institutions, broker-dealers, life insurance companies
and tax-exempt organizations). There can be no assurance that the United States
tax consequences of an investment in Notes to an investor will be favorable or
that such consequences will be as described herein. Subsequent changes or
developments in the law or administrative actions may have an adverse effect on
one or more of the tax consequences sought by the Company. The discussion does
not address the Cayman Islands taxation of investors in Notes that are resident
in the Cayman Islands or the taxation of investors in the Notes by any
jurisdiction other than the United States or the Cayman Islands, and such tax
consequences may be significantly different from the tax consequences discussed
herein.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISORS AS TO
THE UNITED STATES FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES
TO IT OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES.
CAYMAN ISLANDS TAXATION
TAXATION OF THE COMPANY
Based on the advice of Maples and Calder, Cayman Islands counsel to the
Company ("Special Cayman Islands Tax Counsel") under current Cayman Islands law,
there is no Cayman Islands income or corporate tax, withholding tax, capital
gains tax or capital transfer tax payable by the Company with respect to its
income.
TAXATION OF THE NOTEHOLDERS
Special Cayman Islands Tax Counsel has advised the Company that there
are no Cayman Islands withholding or other taxes on interest, principal or other
amounts paid by the Company under the Notes.
The Company has obtained an undertaking under the Tax Concessions Law
(Revised) of the Cayman Islands:
(i) that no law which is subsequently enacted in the
Cayman Islands imposing any tax to be levied on
profits or income or gains or appreciation shall
apply to the Company or its operations; and
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(ii) that any such tax and any tax in the nature of estate
duty or inheritance tax shall not be payable on the
shares, debentures or other obligations of the
Company.
This undertaking is for a period of twenty years from ____________________,
1996.
U.S. TAXATION
This information is directed to prospective purchasers of
Notes who are citizens or residents of the United States, including domestic
corporations and partnerships, and who hold the Notes as "capital assets" within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"). Potential purchasers of Notes should be aware that the tax
characterization of a number of significant aspects of the Company's activities
are uncertain due to an absence of applicable authority and to the highly
factual nature of the required analyses. Accordingly, each Noteholder should
consult its tax advisors regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein.
TAXATION OF THE COMPANY
Consequences of Being Engaged in a U.S. Trade or Business. The Company
was formed and intends to operate in a manner that it believes would not cause
it to be treated as engaged in a trade or business within the United States. In
this regard, the Company has received the opinion of Skadden, Arps, Slate,
Meagher & Flom, special United States tax counsel to the Company ("Special U.S.
Tax Counsel"), which opinion is based on certain representations regarding the
Offering and the transactions related thereto by the Company, the Underwriter
and the Ceding Insurer, that, although the matter is not free from doubt, the
Company would not be deemed to be so engaged. Noteholders should understand that
the determination of whether a person is so engaged is based on a highly factual
analysis, there is no direct guidance as to which activities constitute being
engaged in a trade or business within the United States, and it is unclear how a
court would construe the existing indirect authorities. The opinion of Special
U.S. Tax Counsel is not binding on the IRS, no ruling will be sought from the
IRS regarding this, or any other, aspect of the issuance of the Notes, and,
accordingly, there can be no assurances that the IRS will not contend, and that
a court will not ultimately hold, that the Company is engaged in a trade or
business within the United States. A foreign corporation deemed to be so engaged
would be subject to U.S. federal income tax, as well as the branch profits tax,
on its income which is treated as effectively connected with the conduct of that
trade or business. Such income tax, if imposed, would be based on effectively
connected income computed in a manner generally analogous to that applied to the
income of a domestic corporation, except that a foreign corporation would be
entitled to deductions and credits for a taxable year only if the return for
that year is filed timely (which, based on current intentions, the Company will
likely not have done). The maximum federal tax rates currently are 35% for a
corporation's effectively connected income and 30% for the branch profits tax,
resulting in an effective maximum U.S. federal income tax rate of 54.5%. The
branch profits tax is imposed each year on a corporation's effectively connected
earnings and profits (with certain adjustments) deemed repatriated out of the
U.S., which, in the Company's case, would be all of its net profits.
Withholding on "FDAP" Items; Insurance Excise Tax. Foreign corporations
not engaged in a trade or business within the United States are nonetheless
subject to U.S. federal income tax on certain "fixed or determinable annual or
periodic gains, profits and income" derived from sources within the United
States as enumerated in Section 881(a) of the Code (such as dividends and, in
certain circumstances, certain interest on investments). The Company does not
currently anticipate having any such gains, profits or income. The Premiums
received under the Reinsurance Agreement will, however, be subject to a 1%
United States excise tax.
TAXATION OF NOTEHOLDERS
CLASSIFICATION OF THE NOTES. There are no authorities that directly
address the characterization of an instrument like the Notes for U.S. federal
income tax purposes. Although the matter is not free from doubt, the Company
intends to treat the Notes as equity interests in it for U.S. federal income tax
purposes, and this summary assumes such treatment, except as otherwise
indicated. Moreover, each Noteholder by its purchase of Notes will acknowledge
and agree to such treatment and will covenant to take no action inconsistent
with such treatment.
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Subject to the passive foreign investment company, controlled foreign
corporation and related party insurance income rules, all of which are discussed
below:
(i) INTEREST PAYMENTS. A Noteholder that is (A) a citizen or resident
of the United States, (B) a domestic corporation or (C) otherwise subject to
U.S. federal income taxation on a net basis in respect of a Note (a "U.S.
Noteholder") will be required to include in income (with no dividends received
deduction available to corporate U.S. Noteholders) interest payments as
dividends to the extent of the current or accumulated earnings and profits of
the Company, as determined for U.S. federal income tax purposes. Interest
payments on the Notes, to the extent they exceed the current or accumulated
earnings and profits of the Company, will not be dividends for U.S. federal
income tax purposes and will generally reduce the U.S. Noteholder's tax basis in
the Notes (and, to the extent they exceed a U.S. Noteholder's basis would
generate capital gain).
(ii) DISPOSITIONS. No gain or loss will be recognized by a U.S.
Noteholder until the sale or other taxable disposition of a Note. Any such gain
or loss recognized, including upon the redemption of the Notes for an amount
less than their principal amounts, generally will be capital gain or loss,
except possibly to the extent attributable to accrued Interest. Some or all of
any gain recognized by a U.S. Noteholder owning at least 10% of the Notes,
either directly or indirectly under certain constructive ownership rules, may be
treated as ordinary income.
CLASSIFICATION OF THE COMPANY AS A PASSIVE FOREIGN INVESTMENT COMPANY.
The Company may be a passive foreign investment company ("PFIC"). The adverse
U.S. federal income tax consequences to U.S. Noteholders, described below under
"Failure to Make the QEF Election," can generally be avoided by the making of a
qualified electing fund election ("QEF Election") for the first taxable year in
which the Note is acquired by a U.S. Noteholder.
QEF Election. The Company will comply with certain reporting
requirements and provide to U.S. Noteholders the information required to enable
them to make a QEF Election. A U.S. Noteholder who makes such an election with
the timely filing of the federal income tax return for the taxable year in which
the Notes were acquired (an "Electing Noteholder") would be required to include
in income the Noteholder's proportionate share of the Company's ordinary
earnings and net capital gains, if any, regardless of whether such amounts are
actually distributed. This amount should generally be the same as the amount of
cash paid to a Noteholder as Interest, except to the extent the Company has
deductions for U.S. federal income tax purposes that result from the deduction
of non-cash items such as would be the case, for example, if the Company elected
to amortize all or a portion of the placement fees, legal, audit, trustee fees
and expenses incurred in connection with the formation of the Company. To the
extent of such excess, an Electing Noteholder may recognize capital gain upon
redemption of its Notes.
An Electing Noteholder's tax basis in the Notes represented by the Note
will be (i) increased to reflect any earnings of the Company taxed to such
Noteholder on account of the QEF Election and (ii) decreased to reflect any
distributions by the Company in respect of such Notes. Any gain or loss on the
sale or other disposition of Notes will be capital gain or loss, and will be
long-term capital gain or loss if the Electing Noteholder has held the Note for
at least 12 months.
Because the Company intends to make current distributions in amounts
not less than all ordinary earnings, Electing Noteholders generally will be
subject to the same amount of federal income tax to which they would be subject
if they did not make the QEF Election, except with respect to the non-cash
deductions discussed above. Importantly, Electing Noteholders will avoid the
adverse federal income tax consequences of PFIC status, discussed in the
following paragraph, if they make the QEF election for the 1996 taxable year.
ACCORDINGLY, EACH U.S. NOTEHOLDER SHOULD CONSIDER MAKING THE QEF ELECTION FOR
1996.
Failure to Make the QEF Election. Each U.S. Noteholder who fails to
make the QEF Election (a "Non-electing Noteholder") may be subject to adverse
federal income tax consequences. In particular, any gain recognized on the sale
or other disposition of Notes would be recharacterized as ordinary income and
would further be treated as having been recognized pro rata over such
Noteholder's entire holding period. In addition, the amount of gain treated as
having been recognized in prior taxable years would be subject to tax at the
highest tax rate in effect for such years, with interest thereon calculated by
reference to the interest rate generally applicable to
64
<PAGE> 67
underpayments with respect to tax liabilities from such prior taxable years. In
addition, a transfer by gift or a pledge of the Notes could cause the
Non-electing Noteholder to recognize taxable income, and no step-up in tax basis
to the fair market value at such time would be available upon the death of any
individual U.S. Noteholder. These and other adverse consequences under the PFIC
rules, however, can be avoided by the making of a timely QEF Election.
CLASSIFICATION OF THE COMPANY AS A CONTROLLED FOREIGN CORPORATION.
Under the attribution rules of the Code, the Company may be a "controlled
foreign corporation" ("CFC") for U.S. federal income tax purposes. A CFC is a
foreign corporation of which "United States shareholders" collectively own more
than 50% (more than 25% for certain insurance companies) of the total combined
voting power or total value of the corporation's stock for an uninterrupted
period of 30 days or more during any tax year. A "United States shareholder" is
generally any U.S. person who owns (directly, indirectly or through the
operation of certain broad constructive ownership rules) 10% or more of the
total combined voting power of the foreign corporation. Under the rules relating
to CFCs, any U.S. Noteholder that has a 10% or greater pro rata interest in the
Notes would be required to include in income on a current basis its pro rata
share of undistributed earnings, if any, of the Company. Because Electing
Noteholders will be required to include currently such amounts of income in any
event, classification of the Company as a CFC is not likely to have a material
adverse effect on Electing Noteholders. Any Non-electing Noteholder who might,
directly, indirectly or through attribution, acquire 10% or more of the Notes
should consider the possible application of the CFC rules and consult its tax
advisor with respect thereto.
RELATED PERSON INSURANCE INCOME RULES. Certain special provisions of
the Code will apply to the Company and the Noteholders if both (i) 25% or more
of the value or voting power of the Company's equity (as determined for U.S.
income tax purposes) is, as is anticipated, held (directly or indirectly through
foreign entities) by United States persons, and (ii)(A) the Company has gross
related person insurance income ("RPII") greater than or equal to 20% of its
gross insurance income and (B) 20% or more of either the voting power or the
value of the Company's equity is owned directly or indirectly through foreign
entities by persons (directly or indirectly) insured or reinsured by the Company
or persons related to such insureds or reinsureds. RPII is income (investment
income and premium income) from the direct or indirect insurance or reinsurance
of any United States person who holds equity of the Company (directly or
indirectly through foreign entities) or a person related to such a United States
holder of equity of the Company. While there can be no assurance, the Company
does not anticipate that it will become subject to the RPII provisions.
Moreover, although there is no authority as to how Noteholders would calculate
their allocable share of the RPII, the Company believes that a Noteholder
generally should not be required to include any more RPII annually than the
aggregate amount of Interest accrued as of the end of such year, because the
Noteholders are not entitled to any additional income.
OTHER. Interest paid with respect to the Notes by the Company to U.S.
corporate Noteholders will not be eligible for the dividends received deduction
provided by section 243 of the Code. The Interest will be non-U.S. source income
for purposes of the Code, unless the Company is determined to be engaged in a
trade or business within the United States, in which case the Interest will be
treated as arising from sources within the United States.
ALTERNATE CHARACTERIZATION. As indicated above, there is no authority
addressing the U.S. income tax characterization of an instrument like the Notes.
Accordingly, characterizations other than that described above are possible. If
the Notes were not treated as equity interests in the Company, they would most
likely be treated as indebtedness that provide one or more contingent payments.
In that case, recently finalized regulations regarding such indebtedness (the
"Contingent Debt Regulations") would, unless the Note's contingency were found
to be "either remote or incidental," apply to the Notes and Noteholders. Even if
the Contingent Debt Regulations were to apply, however, U.S. Noteholders should
generally not be required to accrue income in larger amounts than the amount of
interest paid or accrued on the Notes if the Notes are redeemed in whole on the
Mandatory Redemption Date. If all or a portion of the Notes are not redeemed on
the Mandatory Redemption Date, a U.S. Noteholder, even if a cash method
taxpayer, could be required to accrue interest on the Notes in an amount larger
than the amount of interest paid after such Date; such a U.S. Noteholder should,
however, also generally be entitled to an offsetting deduction to the extent of
such excess. Potential Noteholders should understand that there is no authority
interpreting the Contingent Debt Regulations and their potential application to
the Notes is unclear. Accordingly, Noteholders are urged to consult their tax
advisors regarding the potential application of the Contingent Debt Regulations
to the Notes.
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<PAGE> 68
INFORMATION REPORTING AND BACK-UP WITHHOLDING. Regardless of whether
the Notes are characterized as indebtedness or equity, information reporting to
the IRS by paying agents and custodians located in the United States will be
required with respect to payments on the Notes to U.S. persons. Thus, a holder
of Notes may be subject to backup withholding at the rate of 31% with respect to
amounts paid by such persons, unless such holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (ii) provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The backup withholding tax is not
an additional tax and may be credited against a holder's regular Federal income
tax liability.
TAXATION OF NON-U.S. NOTEHOLDERS. A Noteholder that is not a U.S.
Noteholder will not be subject to U.S. income or withholding tax on income or
gain from the Notes, assuming that the Company is not determined to be engaged
in a trade or business within the United States. Nonresident alien individuals
will not be subject to U.S. estate tax with respect to the Notes.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF OWNING THE NOTES.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code, impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
(c) any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (d) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under ERISA
and "Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest with respect to a Plan by virtue of such
Investment. ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA and prohibits certain transactions between a Plan and
Parties-in-Interest or Disqualified Persons with respect to such Plans.
The net proceeds from the issuance of the Notes will be held in the
Regulation 114 Trust and invested in Permitted Investments and pledged to secure
the Company's obligations under the Reinsurance Agreement with the Ceding
Insurer, which, pursuant to the Supreme Court's decision in Harris Trust, may be
a Party-in-Interest or Disqualified Person with respect to a number of employee
benefit plans by virtue of such Plans' investment of assets in the Ceding
Insurer's general account or by other means. In addition, the Indenture Trustee,
by virtue of its own activities or those of its affiliates, may be a
Party-in-Interest or Disqualified Person with respect to a number of Plans. If
the Notes are acquired by a Plan with respect to which the Ceding Insurer or the
Trustee is a Party-in-Interest or Disqualified Person, such transaction would be
deemed to be a direct or indirect violation of the Prohibited Transaction rules
of ERISA and the Code unless such transaction were subject to one or more
statutory or administrative exemptions such as Prohibited Transaction Class
Exemption ("PTCE") 90-1, which exempts certain transactions between insurance
company pooled separate accounts and Parties-in-Interest or Disqualified
Persons; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties-in-Interest or Disqualified Persons; PTCE 84-14,
which exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;" PTCE 95-60, which exempts certain transactions
between insurance company general accounts and Parties-in-Interest or
Disqualified Persons; or PTCE 96-23, which exempts certain transactions effected
on behalf of a Plan by an "in-house asset manager." Even if the conditions
specified in one or more of these or other exemptions are met, the scope of
relief provided by those or other exemptions may not necessarily cover all acts
that might be construed as prohibited transactions.
Accordingly, prior to making an investment in such Notes, a Plan
investor should determine whether the Ceding Insurer or the Indenture Trustee is
a Party-in-Interest or Disqualified Person with respect to such Plan and, if so,
whether such transaction is subject to one or more statutory or administrative
exemptions, including those described above.
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<PAGE> 69
Prior to making an investment in the Notes, prospective Plan investors
should consult with their legal advisers concerning the impact of ERISA and the
Code and the potential consequences of such investment with respect to their
specific circumstances. Moreover, each Plan fiduciary should take into account,
among other considerations, whether the fiduciary has the authority to make the
investment; whether the investment constitutes a direct or indirect transaction
with a Party-in-Interest; the composition of the Plan's portfolio with respect
to diversification by type of asset; and whether under the general fiduciary
standards of investment procedure and diversification an investment in the Notes
is appropriate for the Plan, taking into account the overall investment policy
of the Plan and the composition of the Plan's investment portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement
(the "Purchase Agreement") between the Company and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (the "Underwriter"), the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Company, the
Notes.
In the Purchase Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Notes if any of the
Notes are purchased. The Underwriter has advised the Company that it does not
intend to sell any Notes to discretionary accounts.
The Underwriter has advised the Company that the Underwriter proposes
initially to offer the Notes to the public at the initial public offering prices
set forth on the cover page of this Prospectus and to certain dealers at such
prices less a concession not in excess of ___% of the Principal Amount of the
Class A Notes and not in excess of ____% of the Principal Amount of the Class B
Notes. The Underwriter may allow, and such dealers may re-allow, a discount not
in excess of ___% of the Principal Amount of the Class A Notes or ____% of the
Principal Amount of the Class B Notes on sales to certain other dealers. After
the initial public offering, the public offering prices, concessions and
discounts may be changed.
Pursuant to the Purchase Agreement and an Indemnity Agreement between
the Ceding Insurer and the Underwriter, the Company and the Ceding Insurer,
respectively, have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriter may be required to make in respect thereof.
EXPERTS
The balance sheet of the Company appearing in this Prospectus and the
Registration Statement has been audited by KPMG Cayman Islands, independent
auditors, to the extent indicated in their report thereon also appearing
elsewhere herein and in the Registration Statement. Such balance sheet has been
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The statistical data modeling and explanations thereof included in this
Prospectus and the Registration Statement under the headings "Subject Business -
Ceding Insurer Utilization of AIR Model"; "Hurricanes and Insurance - Hurricane
Loss Estimation"; "Reinsurance Activity of the Company - AIR Risk Assessment
Analysis" have been included in reliance upon AIR as experts in such matters.
LEGAL MATTERS
Certain legal matters in connection with the Notes will be passed upon
for the Company by Orrick Herrington & Sutcliffe, New York, New York and by
Skadden, Arps, Slate, Meagher & Flom, New York, New York, each of whom will rely
as to Cayman Islands law upon the opinion of Maples and Calder, George Town,
Grand Cayman, Cayman Islands, British West Indies. Certain legal matters will be
passed upon for the Underwriter by Skadden, Arps, Slate, Meagher & Flom, New
York, New York. Certain Cayman Islands tax matters have been passed upon by
Maples and Calder. The description of United States tax laws will be passed upon
by Skadden, Arps, Slate, Meagher & Flom, New York, New York.
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APPENDIX A - CERTAIN DEFINED TERMS
Actual Cash Value The present cash value of property
determined by taking the replacement
cost and deducting for depreciation due
to physical wear and tear and
obsolescence.
Alien reinsurer A reinsurance company that is organized
under the laws of a non-U.S.
jurisdiction.
Basic Dwelling Coverage Amount The Coverage A limit of liability stated
on the policy declarations.
Catastrophe excess of loss reinsurance A form of excess of loss reinsurance
that, subject to a specified limit,
indemnifies the ceding insurer for the
amount of loss in excess of a specified
retention with respect to an
accumulation of losses resulting from a
catastrophic event or a series of
catastrophic events. For purposes of the
Reinsurance Agreement, the Catastrophe
excess of loss reinsurance provided
thereunder is provided on a single loss,
single occurrence basis.
Cede; Cedent; Ceding Insurer When a party reinsures its liability
with another, it "cedes" business and is
referred to as the "cedent" or "ceding
insurer."
Condominium Insurance Insurance that provides coverage for
building items and personal property.
Includes liability coverage. See
"Subject Business".
Commutation The negotiated as agreed final
settlement of all rights, duties, and
obligations of the parties in a
reinsurance agreement.
demand surge Price inflation due to abnormally high
demand of building labor and materials
relative to the available supply
following a catastrophic Hurricane.
Dwelling Insurance Insurance that provides dwelling
coverage; does not include liability
coverage. Generally issued to non-owner
occupied properties; can also be issued
to owner-occupied properties where
liability coverage is not needed. See
"Subject Business".
Excess of loss reinsurance A generic term describing reinsurance
that indemnifies the reinsured against
all or a specified portion of losses on
underlying insurance policies in excess
of a specified amount, which is called a
"level" or "retention." Also known as
non-proportional reinsurance, excess of
loss reinsurance is written in layers. A
reinsurer or group of reinsurers accepts
a band of coverage up to a specified
amount. The total coverage purchased by
the cedent is referred to as a "program"
and will typically be placed with
predetermined reinsurers in
prenegotiated layers. Any liability
exceeding the outer limit of the program
reverts to
A-1
<PAGE> 71
the ceding insurer, which also bears the
credit risk of a reinsurer's insolvency.
Generally accepted accounting Accounting principles as set forth in
principles ("GAAP") opinions of the Accounting Principles
Board of the American Institute of
Certified Public Accountants and/or
statements of the Financial Accounting
Standards Board and/or their respective
successors and which are applicable in
the circumstances as of the date in
question.
Homeowners Insurance Insurance that provides dwelling,
personal property and liability coverage
to owner-occupied properties where
liability coverage is needed. See
"Subject Business".
Hurricane A storm or story system that has been
declared by the National Hurricane
Center of the National Weather Service
to be a category 3, 4 or 5 Hurricane.
The duration of the Hurricane includes
the time period:
(i) Beginning at the time a hurricane
"watch" or "warning" (whether or
not the Hurricane is then a
category 3, 4 or 5 Hurricane) is
issued by the National Hurricane
Center of the National Weather
Service for any part of any one or
more Covered States;
(ii) continuing for the time period
thereafter during which the
hurricane conditions exist,
regardless of the category rating;
and
(iii) ending 72 hours following the
cancellation of the last "watch"
or "warning" condition issued by
the National Hurricane Center, of
the National Weather Service for
any part of any one or more
Covered States.
Incurred but not reported (IBNR) Reserves for estimated losses that have
been incurred by insurers and reinsurers
but not yet reported to the insurer or
reinsurer including unknown future
developments on losses which are known
to the insurer or reinsurer.
Insurance Service Office (ISO) The Insurance Services Office, or ISO,
is an insurer-supported, national
not-for-profit corporation providing a
wide range of advisory services to
property-casualty insurance companies.
One of these services is development of
Protection Classes, which are based on a
community's water system supply and
distribution, fire department apparatus,
staffing and training, and fire alarm
receiving and dispatching. Protection
Classes range from 1 to 10, with 1
indicating the best fire protection. The
Ceding Insurer is a member of ISO and
authorized to use its Protection Classes
in rating policies.
Layer The interval between the retention or
attachment point and the maximum limit
of indemnity for which a reinsurer is
responsible.
A-2
<PAGE> 72
Loss The sum of (i) claims paid by the Ceding
Insurer under Policies resulting from a
Loss Occurrence (exclusive of claims
under Pleasure Boat and Inland Marine
Floater business) and (ii) any Loss
Reserves. "Loss/es" does not include
claims under personal liability
coverages or medical payments to others
coverages.
Loss Occurrence A Hurricane commencing during the Loss
Occurrence Period causing Losses under
one or more Policies in one or more
Covered States by the peril of windstorm
during such Hurricane, including ensuing
damage to the interior of a building, or
to property inside a building caused by
rain, snow, sleet, hail, sand, or dust
if the direct force of the windstorm
first damages the building, causing an
opening through which rain, snow, sleet,
hail, sand, or dust enters and causes
damage.
Loss adjustment expenses The expenses of settling losses,
including legal and other fees, and the
portion of general expenses allocated to
loss settlement costs.
Loss Reserve The liability established by the Ceding
Insurer to reflect the estimated unpaid
Losses (including incurred but not
reported losses and excluding claims
under Pleasure Boat and Inland Marine
Floater business) that the Ceding
Insurer will ultimately be required to
pay under the Policies and shall not
include loss adjustment expenses.
Permitted Investments Certain commercial paper with a 30-day
maturity and a rating, at the time of
investment or contractual commitment to
invest therein, from Standard & Poor's
Rating Services of A-1 and from Moody's
Investors Service, Inc. of P-1.
Proof of Loss Claim A letter from the Ceding Insurer to the
Company and the Indenture Trustee in the
form of Exhibit B attached to the
Reinsurance Agreement.
Reinsurance An arrangement in which an insurance
company, the reinsurer, agrees to
indemnify another insurance or
reinsurance company, the ceding insurer,
against all or a portion of the
insurance or reinsurance risks
underwritten by the ceding insurer under
one or more policies. Reinsurance can
provide a ceding insurer with several
benefits, including a reduction in net
liability on individual risks and
catastrophe protection from large or
multiple losses. Reinsurance also
provides a ceding insurer with
additional underwriting capacity by
permitting it to accept larger risks and
write more business than would be
possible without a concomitant increase
in capital and surplus, and facilitates
the maintenance of acceptable financial
ratios by the ceding insurer.
Reinsurance does not legally discharge
the primary insurer from its liability
with respect to its obligations to the
insured.
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<PAGE> 73
Renters Insurance Insurance that provides personal
property and liability coverage. See
"Subject Business".
Replacement Cost The cost, at the time of loss, of a new
item identical to the one damaged,
destroyed or stolen. If an identical
item is no longer manufactured or cannot
be obtained, replacement cost will be
the cost of a new item which is similar
to the insured article and of like
quality and usefulness.
Retained Share The pro rata retention by the Ceding
Insurer of 5% of Ultimate Net Loss in
excess of the Trigger Amount.
Trigger Amount The first $1,000,000,000 of Ultimate Net
Losses.
Ultimate Net Loss The "Ultimate Net Loss" for a Loss
Occurrence shall be determined by:
Step 1 - Calculating all Losses under
Existing Policies and Renewals; and
Step 2 - Calculating all Losses under
New Policies; and
Step 3 - Calculating 9% of the amount
determined in Step 1; and
Step 4 - Adding the amount determined in
Step 1 and the lesser of the amounts
determined in Step 2 or Step 3; and
Step 5 - Multiplying the amount
determined in Step 4 by 102%,
representing a factor for Pleasure Boat
and Inland Marine Floater Policies; and
Step 6 - Multiplying the total amount
determined in Step 5 by 102%,
representing a factor for all loss
adjustment expenses in respect of such
Loss Occurrence.
Underwriting The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
accept all or part of the coverage
requested and determining the applicable
premiums.
Windstorm Wind, wind gusts, hail, rain, tornadoes
or cyclones caused by, resulting from or
occurring during a Hurricane which
results in direct physical loss or
damage to property.
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<PAGE> 74
APPENDIX B - INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
actual cash value ................................................... 23, A-1
additional living expenses .......................................... 22
Administrator ....................................................... 11, 54
AIR ................................................................. 32
Agreed Upon Procedures .............................................. 52
agreed value ........................................................ 24
Alien reinsurer ..................................................... A-1
Basic Dwelling Coverage Amount ...................................... 22, A-1
BOL ................................................................. 25
building ordinance or law ........................................... 25
Calculation Agent ................................................... 56
capital and liquidity margins and ratios ............................ 54
Catastrophe excess of loss reinsurance .............................. A-1
CAT ................................................................. 31
Cede ................................................................ A-1
Cedent .............................................................. A-1
Ceding Insurer ...................................................... 1, 4, A-1
CFC ................................................................. 65
Claim Date .......................................................... 47
Claims Period ....................................................... 47
Claims Reviewer ..................................................... 11
Class A Notes ....................................................... 1,4
Class B Notes ....................................................... 1,4
Closing Date ........................................................ 8
Code ................................................................ 13, 60
Commission .......................................................... 3
Commutation ......................................................... 48, A-1
Company ............................................................. 1, 4, 20
Condominium Insurance ............................................... A-1
Contingent Debt Regulations ......................................... 65
Contingent Principal Event .......................................... 1, 5, 57
demand surge ........................................................ A-1
Disqualified Persons ................................................ 63
Dwelling Insurance .................................................. A-1
Electing Noteholder ................................................. 64
ERISA ............................................................... 13, 66
Events of Default ................................................... 59
Excess Funds ........................................................ 51
Excess of loss reinsurance .......................................... A-1
Exchange Act ........................................................ 3
Existing Policies ................................................... 28
Extended Claims Made Period ......................................... 45
FWUA ................................................................ 31
Generally accepted accounting principles ("GAAP") ................... A-2
Governor ............................................................ 53
Homeowners Insurance ................................................ A-2
HRP ................................................................. 25
Hurricane ........................................................... 34, A-2
Hurricane modeling .................................................. 39
IBNR ................................................................ A-2
Incurred but not reported ........................................... A-2
Indenture ........................................................... 6
Indenture Trustee ................................................... 6, 11
</TABLE>
B-1
<PAGE> 75
<TABLE>
<S> <C>
Insurance Law ....................................................... 51
Insurance Service Office ............................................ A-2
Insurance to value .................................................. 27
Interest Accrual Period ............................................. 4, 56
Interest Payment Date ............................................... 4, 56
Interest Rate Swap .................................................. 8, 57
Interest Reset Date ................................................. 56
IRS ................................................................. 18
KPMG Cayman Islands ................................................. 10
Layer ............................................................... A-2
LIBOR ............................................................... 4, 56
LIBOR Determination Date ............................................ 56
London Banking Day .................................................. 56
Loss ................................................................ A-3
Loss Adjustment Expenses ............................................ A-3
Loss Occurrence ..................................................... A-3
Loss Occurrence Period .............................................. 9
Loss Reserve Amount ................................................ 5, 55
Loss Reserve Specialist ............................................. 11
Loss reserve ........................................................ A-2
Mandatory Redemption Date ........................................... 6
Maturity Date ....................................................... 4
Maximum Recovery .................................................... 10, 44
Net Swap Payment .................................................... 9
Net Swap Receipt .................................................... 9
New Policies ........................................................ 28
NOAA ................................................................ 39
Non-electing Noteholder ............................................. 64
Notes ............................................................... 1
Notional Amount ..................................................... 51, 55
NWS ................................................................. 41
Paid Losses ......................................................... 47
Parties-in-Interest ................................................. 66
Permitted Investments ............................................... 20, A-3
PFIC ................................................................ 64
Plan ................................................................ 66
Policies ............................................................ 44
Preferred Contract .................................................. 25
Premium ............................................................. 9
Principal Amount .................................................... 5
Principal Reduction ................................................. 1, 5
program ............................................................. A-1
Proof of Loss Claim ................................................. A-3
PTCE ................................................................ 66
Purchase Agreement .................................................. 67
QEF Election ........................................................ 64
Registration Statement .............................................. 3
Regulation 114 Trust ................................................ 7
Regulation 114 Trustee .............................................. 7, 50
Reinsurance ......................................................... A-3
Reinsurance Agreement ............................................... 1
Related Documents ................................................... 60
Renewals ............................................................ 28
Renters Insurance ................................................... A-4
replacement cost .................................................... 23, A-4
Retained Share ...................................................... 10, A-4
</TABLE>
B-2
<PAGE> 76
<TABLE>
<S> <C>
Retention ........................................................... A-1
RPII ................................................................ 62
Securities Act ...................................................... 3
Securities Account Collateral ....................................... 6, 58
Special Cayman Islands Tax Counsel .................................. 60
Special U.S. Tax Counsel ............................................ 60
Specialist's Loss Reserve ........................................... 48
Standard Contract ................................................... 25
Subject Business .................................................... 22
Swap Counterparty ................................................... 8, 57
TCPIA ............................................................... 31
Trigger Amount ...................................................... 9, A-4
Trust Account ....................................................... 50
Trust Account Required Amount ....................................... 50
Ultimate Net Loss ................................................... A-4
Underwriter ......................................................... 67
Underwriting ........................................................ A-4
United States shareholder ........................................... 65
USAA ................................................................ 20
USAA CIC ............................................................ 20
U.S. Noteholder ..................................................... 64
Windstorm ........................................................... A-4
</TABLE>
B-3
<PAGE> 77
FINANCIAL STATEMENTS OF THE COMPANY
[TO COME]
F-1
<PAGE> 78
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering covered hereby. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer or solicitation by anyone in any state in which such offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus, nor
any sale made hereunder shall, under any circumstances, create any implications
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information ................................................. 3
Enforceability of Civil Liabilities
Under United States Federal
Securities Laws ..................................................... 3
Summary of Terms ...................................................... 4
Risk Factors .......................................................... 15
The Company ........................................................... 20
The Ceding Insurer .................................................... 20
Use of Proceeds ....................................................... 20
Capitalization of the Company ......................................... 21
Management's Discussion and Analysis of
Financial Condition ................................................. 21
Subject Business ...................................................... 22
Hurricanes and Insurance .............................................. 37
AIR Loss Estimation Analysis .......................................... 42
Reinsurance Activity of the Company ................................... 45
Management ............................................................ 55
Description of the Notes .............................................. 56
Certain Terms of the Indenture ........................................ 59
Certain Income Tax Considerations ..................................... 62
ERISA Considerations .................................................. 66
Underwriting .......................................................... 67
Experts ............................................................... 67
Legal Matters ......................................................... 67
Certain Defined Terms ................................................. A-1
Index of Defined Terms ................................................ B-1
Index to Financial Statements ......................................... F-1
</TABLE>
Until _______, 1996 (90 days after the date of this Prospectus), all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
RESIDENTIAL REINSURANCE
LIMITED
$1,000,000
Class A Floating Rate Notes
Class B Floating Rate Notes
---------------------------
PROSPECTUS
---------------------------
Merrill Lynch & Co.
, 1996
----------
================================================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered which will be paid solely by
the Registrant. All the amounts shown are estimates, except the Commission
registration fee:
<TABLE>
<S> <C>
SEC Registration Fee ................................. $345
NASD Fee ............................................. 600
Trustee Fees and Expenses ............................ *
Printing and Engraving Expenses ...................... *
Legal Fees and Expenses .............................. *
Accounting Fees and Expenses ......................... *
Blue Sky Fees and Expenses ........................... *
Miscellaneous Expenses ............................... *
----
Total ........................................... $945
====
</TABLE>
- ---------------
*To be filed by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Cayman Islands law does not specifically limit the extent to which a company's
articles of association may provide for the indemnification of officers and
directors, except to the extent that such provision may be held by the Cayman
Islands courts to be contrary to public policy (e.g., for purporting to provide
indemnification against the consequences of committing a crime). In addition, an
officer or director may not be able to enforce indemnification for his own
dishonesty, fraud or wilful neglect or default.
Article 123 of the Articles of Association of the Registrant, filed as Exhibit
3.2 to this Registration Statement, contains provisions providing for the
indemnification by the Registrant of an officer, director or trustee of the
Registrant for all actions, proceedings, claims, costs, charges, losses, damages
and expenses which they incur or sustain by reason of any act done or omitted in
or about the execution of their duty in their respective offices or trusts,
except such (if any) as they shall incur or sustain by or through their own
wilful neglect or default, respectively.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
II-1
<PAGE> 80
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Form of Purchase Agreement.*
3.1 Memorandum of Association.*
3.2 Articles of Association.*
4.1 Form of Indenture.
4.2 Form of Note (included in Exhibit 4.1).
4.3 Form of Reinsurance Agreement.
4.4 Form of Administrative Services Agreement.
4.5 Form of Claims Review Agreement.
4.6 Form of Regulation 114 Trust Agreement.*
4.7 Form of Indemnity Agreement.*
4.8 Form of Loss Reserve Specialist Agreement.
4.9 Form of Interest Rate Swap Agreement.*
5.1 Opinion of Orrick, Herrington & Sutcliffe as to the legality of the
Notes.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to certain U.S.
federal tax matters.*
8.2 Opinion of Maples and Calder as to certain Cayman Islands tax matters
(included in Exhibit 5.1).*
23.1 Consent of KPMG Peat Marwick.*
23.2 Consent of Orrick, Herrington & Sutcliffe (included in Exhibit 5.1).
23.3 Consent of Maples and Calder (included in Exhibit 8.2).*
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit
8.1).*
23.5 Consent of Applied Insurance Research, Inc.*
25 Statement of Eligibility under the Trust Indenture Act of 1939 of the
Trustee (bound separately).
- ---------------------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Purchase Agreement Notes in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-2
<PAGE> 81
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to its By-Laws, the Purchase Agreement or otherwise,
the Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
3. The Registrant hereby undertakes that:
a. For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the Registration Statement as of the time it was
declared effective.
b. For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and this offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in George
Town, Grand Cayman, Cayman Islands, British West Indies on July 30, 1996.
Residential Reinsurance Limited
By: /s/Thomas Clark
---------------------------
Name: Thomas Clark
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director and Chief Executive Officer July 30, 1996
- -------------------------
Anthony B. Stelling
* Director, Chief Financial Officer and Treasurer July 30, 1996
- -------------------------
Nicholas Clements
/s/ Thomas Clark
- -------------------------
Thomas Clark Director July 30, 1996
</TABLE>
AUTHORIZED REPRESENTATIVE
/s/ Ruth K. Lavelle
- -------------------------------------
Name: Puglisi & Associates
As the duly authorized representative
of Residential Reinsurance Limited in the United States
Date: July 30, 1996
* By: /s/ Thomas Clark
------------------------------
Name: Thomas Clark
Attorney-in-Fact
II-4
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
1.1 Form of Purchase Agreement.*
3.1 Memorandum of Association.*
3.2 Articles of Association.*
4.1 Form of Indenture.
4.2 Form of Note (included in Exhibit 4.1).
4.3 Form of Reinsurance Agreement.
4.4 Form of Administrative Services Agreement.
4.5 Form of Claims Review Agreement.
4.6 Form of Regulation 114 Trust Agreement.*
4.7 Form of Indemnity Agreement.*
4.8 Form of Loss Reserve Specialist Agreement.
4.9 Form of Interest Rate Swap Agreement.*
5.1 Opinion of Orrick, Herrington & Sutcliffe as to the
legality of the Notes.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to
certain U.S. federal tax matters.*
8.2 Opinion of Maples and Calder as to certain Cayman Islands
tax matters (included in Exhibit 5.1).*
23.1 Consent of KPMG Peat Marwick.*
23.2 Consent of Orrick, Herrington & Sutcliffe (included in
Exhibit 8.1).
23.3 Consent of Maples and Calder (included in Exhibit 8.2).*
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included
in Exhibit 8.1)*
23.5 Consent of Applied Insurance Research, Inc.*
25 Statement of Eligibility under the Trust Indenture Act of
1939 of the Trustee (bound separately).
</TABLE>
- ---------------------
* To be filed by amendment.
<PAGE> 1
================================================================================
EXHIBIT 4.1
INDENTURE
between
RESIDENTIAL REINSURANCE LIMITED,
as Issuer
and
THE CHASE MANHATTAN BANK,
as Indenture Trustee
Dated as of August __, 1996
---------------------------
$
-----------
Class A Floating Rate Notes
Class B Floating Rate Notes
----------------------------
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE............................. 2
SECTION 1.1. Definitions................................................................. 2
SECTION 1.2. Incorporation by Reference of Trust
Indenture Act............................................................... 13
SECTION 1.3. Rules of Construction....................................................... 14
ARTICLE II
THE NOTES............................................. 14
SECTION 2.1. Form........................................................................ 14
SECTION 2.2. Execution, Authentication and
Delivery.................................................................... 15
SECTION 2.3. Temporary Notes............................................................. 16
SECTION 2.4. Tax Treatment............................................................... 17
SECTION 2.5. Registration; Registration of Transfer
and Exchange................................................................ 17
SECTION 2.6. Mutilated, Destroyed, Lost or Stolen
Notes....................................................................... 19
SECTION 2.7. Persons Deemed Owner........................................................ 20
SECTION 2.8. Payment of Interest and Principal;
Defaulted Interest.......................................................... 21
SECTION 2.9. Cancellation................................................................ 23
SECTION 2.10. Release of Collateral....................................................... 23
SECTION 2.11. Definitive Notes............................................................ 23
SECTION 2.12. Authenticating Agents....................................................... 24
ARTICLE III
COVENANTS............................................. 25
SECTION 3.1. Payment of Principal and Interest........................................... 25
SECTION 3.2. Maintenance of Office or Agency by Issuer;
The Chase Manhattan Bank as Noteholders'
Presentment Agent........................................................... 25
SECTION 3.3. Money for Payments To Be Held in
Trust....................................................................... 26
SECTION 3.4. Existence................................................................... 30
SECTION 3.5. Protection of Trust Estate.................................................. 30
SECTION 3.6. Opinions as to Trust Estate................................................. 30
SECTION 3.7. Performance of Obligations.................................................. 31
SECTION 3.8. Negative Covenants.......................................................... 32
SECTION 3.9. Annual Statement as to Compliance........................................... 33
SECTION 3.10. Issuer May Consolidate, etc., Only
on Certain Terms............................................................ 34
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 3.11. Successor of Transferee..................................................... 36
SECTION 3.12. No Other Business........................................................... 37
SECTION 3.13. No Borrowing................................................................ 37
SECTION 3.14. Guarantees, Loans, Advances and Other
Liabilities................................................................. 37
SECTION 3.15. Capital Expenditures........................................................ 37
SECTION 3.16. Further Instruments and Acts................................................ 37
SECTION 3.17. Restricted Payments......................................................... 37
SECTION 3.18. Notice of Events of Default................................................. 38
SECTION 3.19. Removal of Administrator, Claims
Reviewer and Loss Reserve Specialist........................................ 38
SECTION 3.20. Maintenance of Books and Records............................................ 38
ARTICLE IV
SATISFACTION AND DISCHARGE..................................... 38
SECTION 4.1. Satisfaction and Discharge of
Indenture................................................................... 38
SECTION 4.2. Application of Trust Money.................................................. 40
SECTION 4.3. Repayment of Monies Held by Paying
Agent....................................................................... 40
ARTICLE V
REMEDIES.............................................. 40
SECTION 5.1. Events of Default........................................................... 40
SECTION 5.2. Acceleration of Maturity; Rescission
and Annulment............................................................... 42
SECTION 5.3. Collection of Indebtedness and Suits
for Enforcement by Indenture Trustee........................................ 43
SECTION 5.4. Remedies; Priorities........................................................ 47
SECTION 5.5. Optional Preservation of the Trust
Estate...................................................................... 49
SECTION 5.6. Limitation of Suits......................................................... 49
SECTION 5.7. Unconditional Rights of Noteholders
To Receive Principal and Interest........................................... 50
SECTION 5.8. Restoration of Rights and Remedies.......................................... 51
SECTION 5.9. Rights and Remedies Cumulative.............................................. 51
SECTION 5.10. Delay or Omission Not a Waiver.............................................. 51
SECTION 5.11. Control by Noteholders...................................................... 51
SECTION 5.12. Waiver of Past Defaults..................................................... 52
SECTION 5.13. Undertaking for Costs....................................................... 53
SECTION 5.14. Waiver of Stay or Extension Laws............................................ 53
SECTION 5.15. Action on Notes............................................................. 54
SECTION 5.16. Performance and Enforcement of Certain
Obligations................................................................. 54
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VI
THE INDENTURE TRUSTEE....................................... 55
SECTION 6.1. Duties of Indenture Trustee................................................. 55
SECTION 6.2. Rights of Indenture Trustee................................................. 57
SECTION 6.3. Individual Rights of Indenture
Trustee..................................................................... 58
SECTION 6.4. Indenture Trustee's Disclaimer.............................................. 58
SECTION 6.5. Notice of Defaults.......................................................... 58
SECTION 6.6. Reports by Indenture Trustee to
Holders..................................................................... 58
SECTION 6.7. Compensation and Indemnity.................................................. 59
SECTION 6.8. Replacement of Indenture Trustee............................................ 60
SECTION 6.9. Successor Indenture Trustee by
Merger...................................................................... 61
SECTION 6.10. Appointment of Co-Indenture Trustee or
Separate Indenture Trustee.................................................. 62
SECTION 6.11. Eligibility; Disqualification............................................... 63
SECTION 6.12. Preferential Collection of Claims
Against Issuer.............................................................. 64
SECTION 6.13. Indenture Trustee to Act from an Office
Outside the United States................................................... 64
ARTICLE VII
NOTEHOLDERS' LISTS AND REPORTS................................... 64
SECTION 7.1. Issuer To Furnish Indenture Trustee
Names and Addresses of Noteholders.......................................... 64
SECTION 7.2. Preservation of Information; Communica-
tions to Noteholders........................................................ 64
SECTION 7.3. Reports by Issuer........................................................... 65
SECTION 7.4. Reports by Indenture Trustee................................................ 66
ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES................................ 66
SECTION 8.1. Collection of Money......................................................... 66
SECTION 8.2. Note Payment Account........................................................ 67
SECTION 8.3. General Provisions Regarding
Accounts.................................................................... 67
SECTION 8.4. Release of Trust Estate..................................................... 68
SECTION 8.5. Opinion of Counsel.......................................................... 68
SECTION 8.6. Expense Account............................................................. 69
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IX
SUPPLEMENTAL INDENTURES...................................... 69
SECTION 9.1. Supplemental Indentures Without
Consent of Noteholders...................................................... 69
SECTION 9.2. Supplemental Indentures with Consent
of Noteholders.............................................................. 71
SECTION 9.3. Execution of Supplemental Indentures........................................ 74
SECTION 9.4. Effect of Supplemental Indenture............................................ 74
SECTION 9.5. Conformity with Trust Indenture Act......................................... 74
SECTION 9.6. Reference in Notes to Supplemental
Indentures.................................................................. 75
ARTICLE X
REDEMPTION OF NOTES........................................ 75
SECTION 10.1. Redemption.................................................................. 75
SECTION 10.2. Form of Redemption Notice................................................... 76
SECTION 10.3. Notes Payable on Redemption Date............................................ 77
ARTICLE XI
COLLATERAL AND SECURITY...................................... 77
SECTION 11.1. Enforcement................................................................. 77
SECTION 11.2. Bankruptcy, Etc............................................................. 77
SECTION 11.3. Lien Subordination.......................................................... 78
SECTION 11.4. Issuer's Obligations Absolute............................................... 79
SECTION 11.5. Termination of Subordination................................................ 79
ARTICLE XII
MISCELLANEOUS........................................... 81
SECTION 12.1. Compliance Certificates and Opinions,
etc......................................................................... 81
SECTION 12.2. Form of Documents Delivered to
Indenture Trustee........................................................... 83
SECTION 12.3. Acts of Noteholders......................................................... 84
SECTION 12.4. Notices, etc., to Indenture Trustee,
Issuer and Rating Agencies.................................................. 85
SECTION 12.5. Notices to Noteholders; Waiver.............................................. 86
SECTION 12.6. Alternate Payment and Notice
Provisions.................................................................. 87
SECTION 12.7. Conflict with Trust Indenture Act........................................... 87
SECTION 12.8. Effect of Headings and Table of
Contents.................................................................... 88
SECTION 12.9. Successors and Assigns...................................................... 88
SECTION 12.10. Separability................................................................ 88
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 12.11. Benefits of Indenture....................................................... 88
SECTION 12.12. Legal Holiday............................................................... 88
SECTION 12.13. Governing Law............................................................... 88
SECTION 12.14. Counterparts................................................................ 88
SECTION 12.15. Recording of Indenture...................................................... 89
SECTION 12.16. Corporate Obligation........................................................ 89
SECTION 12.17. No Petition................................................................. 89
SECTION 12.18. Inspection.................................................................. 89
SECTION 12.19. Agent for Service; Submission to
Jurisdiction................................................................ 90
SECTION 12.20. Waiver of Immunities........................................................ 91
EXHIBIT A..................................................................................... A-1
EXHIBIT B..................................................................................... B-1
EXHIBIT C..................................................................................... C-1
EXHIBIT D..................................................................................... D-1
SCHEDULE A.................................................................................... SA-1
SCHEDULE B.................................................................................... SB-1
</TABLE>
vi
<PAGE> 8
INDENTURE, dated as of August __, 1996 (as amended, supplemented or
otherwise modified and in effect from time to time, this "Indenture"), between
RESIDENTIAL REINSURANCE LIMITED, a company incorporated under the laws of the
Cayman Islands (the "Issuer"), and THE CHASE MANHATTAN BANK, a New York banking
corporation, as trustee and not in its individual capacity (in such capacity,
the "Indenture Trustee").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Issuer's Class A Floating
Rate Notes and Class B Floating Rate Notes (collectively, the "Notes"):
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at the Closing Date,
as Indenture Trustee for the benefit of the Holders of the Notes, all of the
Issuer's right, title and interest in, to and under, whether now owned or
existing or hereafter acquired or arising (a) the Reinsurance Agreement,
including the right to receive payments of Premium and all other monies due or
payable thereunder from the Ceding Insurer; (b) the segregated securities
account and all investments thereunder established by the Regulation 114 Trust
Agreement in the name of [ ] as trustee for the benefit of the Ceding
Insurer[, for itself and as agent for the Trustee with respect to the junior
lien of the Noteholders in the assets of the Regulation 114 Trust] (the
"Securities Account Collateral"); (c) the Interest Rate Swap; (d) the Claims
Review Agreement, (e) the Loss Reserve Specialist Agreement; (f) all other
assets of the Issuer now or hereafter arising; and (g) all present and future
claims, demands, causes of action and choses in action in respect of any or all
of the foregoing and all payments on or under and all proceeds of every kind and
nature whatsoever in respect of any or all of the foregoing, including all
proceeds of the conversion thereof, voluntary or involuntary, into cash or other
liquid property, all cash proceeds, accounts, documents, instruments, general
intangibles, chattel papers and other property which at any time constitute all
or part of or are included in the proceeds of any of the foregoing
(collectively, the "Collateral").
<PAGE> 9
The foregoing Grant is made in trust to secure the payment of principal
of and interest on, and any other amounts owing in respect of, the Notes,
equally and ratably without prejudice, priority or distinction, and to secure
compliance with the provisions of this Indenture, all as provided in this
Indenture.
The Indenture Trustee, as Indenture Trustee on behalf of the Holders of
the Notes, acknowledges such Grant, accepts the trusts under this Indenture in
accordance with the provisions of this Indenture and agrees to perform its
duties required in this Indenture to the best of its ability to the end that the
interests of the Holders of the Notes may be adequately and effectively
protected.
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1.(a) Definitions. Except as otherwise specified herein or as
the context may otherwise require, the following terms have the respective
meanings set forth below for all purposes of this Indenture.
"Act" shall have the meaning specified in Section 12.3(a).
"Administration Agreement" shall mean the Administration Agreement,
dated as of August __, 1996, by and among the Administrator and the Issuer, as
the same may from time to time be amended, supplemented or otherwise modified
and in effect.
"Administrator" shall mean Midland Bank Trust Corporation (Cayman)
Limited, or any successor Administrator under the Administration Agreement.
"Affiliate" shall mean, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect to
any Person shall mean the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the
2
<PAGE> 10
terms "controlling" and "controlled" shall have meanings correlative to the
foregoing.
"Allocated Expenses" shall mean the expenses set forth on Schedule B
hereof.
"Articles of Association" shall mean the Articles of Association of the
Issuer.
"Authenticating Agent" shall have the meaning specified in Section
2.12.
"Authorized Officer" shall mean any officer of the Issuer who is
authorized to act for or on behalf of the Issuer in matters relating to the
Issuer and who is identified on the list of Authorized Officers delivered by the
Issuer to the Indenture Trustee on the Closing Date (as such list may be
modified or supplemented from time to time thereafter) and, for so long as the
Administration Agreement is in full force and effect, any officer of the
Administrator who is authorized to act for the Administrator in matters relating
to the Issuer and to be acted upon by the Administrator pursuant to the
Administration Agreement.
"Basic Documents" shall mean this Indenture, the Articles of
Association, the Regulation 114 Trust Agreement, the Reinsurance Agreement, the
Interest Rate Swap, the Administration Agreement, the Claims Review Agreement,
the Loss Reserve Specialist Agreement and other documents and certificates
delivered in connection therewith as the same may from time to time be amended,
supplemented or otherwise modified and in effect.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions or trust companies in The City of New York or
Grand Cayman, British West Indies are authorized or obligated by law, regulation
or executive order to remain closed.
"Ceding Insurer" shall mean, collectively, United Services Automobile
Association, a reciprocal interinsurance exchange organized under the laws of
Texas and USAA Casualty Insurance Company, a Florida corporation.
3
<PAGE> 11
"Claims Review Agreement" shall mean the Claims Review Agreement, dated
as of August __, 1996, by and between the Issuer and the Claims Reviewer, as the
same may from time to time be amended, supplemented or otherwise modified and in
effect.
"Claims Reviewer" shall mean ____________ or any successor Claims
Reviewer under the Claims Review Agreement.
"Claims Period" shall have the meaning set forth in the Reinsurance
Agreement.
"Class A Floating Rate Notes" shall mean the Class A Floating Rate
Notes, substantially in the Form of Exhibit A.
"Class B Floating Rate Notes" shall mean the Class B Floating Rate
Notes, substantially in the form of Exhibit B.
"Closing Date" shall mean August __, 1996.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral" shall have the meaning specified in the Granting Clause of
this Indenture.
"Commutation Amount" shall mean any amount owed by the Issuer to the
Ceding Insurer upon any commutation of the Reinsurance Agreement pursuant to
Article 9 of the Reinsurance Agreement.
"Contingent Principal Event" shall occur if the Issuer establishes a
Loss Reserve Amount, in which event the Issuer's obligation to pay the Principal
Amount of the Notes shall become contingent pursuant to Section 2.8(e) to the
extent of the such Loss Reserve Amount pending receipt of a Proof of Loss Claim
under the Reinsurance Agreement.
"Corporate Trust Office" shall mean the principal office of the
Indenture Trustee at which at any particular time its corporate trust business
shall be administered, which office at the date of execution of this Indenture
is located at ____________________________
4
<PAGE> 12
_____________________________, Attention: ______________, or at such other
address as the Indenture Trustee may designate from time to time by notice to
the Noteholders and the Issuer, or the principal corporate trust office of any
successor Indenture Trustee at the address designated by such successor
Indenture Trustee by notice to the Noteholders and the Issuer.
"Covered States" shall have the meaning set forth in the Reinsurance
Agreement.
"Default" shall mean any occurrence that is, or with notice or the
lapse of time or both would become, an Event of Default.
"Definitive Notes" shall have the meaning specified in Section 2.11.
"Event of Default" shall have the meaning specified in Section 5.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officer" shall mean, with respect to any corporation, the
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
President, Executive Vice President, any Vice President, the Secretary or the
Treasurer of such corporation and, with respect to any partnership, any general
partner thereof.
"Expense Account" shall mean the Expense Account of the Issuer
established pursuant to Section 8.6.
"Extended Claims Made Period" shall have the meaning set forth in the
Reinsurance Agreement.
"Grant" shall mean to mortgage, pledge, bargain, sell, warrant,
alienate, remise, release, convey, assign, transfer, create, and to grant a lien
upon and a security interest in and right of set-off against, and to deposit,
set over and confirm pursuant to this Indenture. A Grant of the Collateral or of
any other agreement, Contract or instrument shall include all rights, powers and
options (but none of the obligations) of the granting party thereunder,
including the immediate and continuing right to claim for, collect, receive and
give receipt for
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principal and interest payments in respect of the Collateral and all other
monies payable thereunder, to give and receive notices and other communications,
to make waivers or other agreements, to exercise all rights and options, to
bring Proceedings in the name of the granting party or otherwise, and generally
to do and receive anything that the granting party is or may be entitled to do
or receive thereunder or with respect thereto.
"Holder" or "Noteholder" shall mean the Person in whose name a Note is
registered on the Note Register.
"Hurricane" shall have the meaning set forth in the Reinsurance
Agreement.
"Indenture Trustee" shall mean The Chase Manhattan Bank, a New York
banking corporation, as Indenture Trustee under this Indenture, or any successor
Indenture Trustee under this Indenture.
"Independent" shall mean, when used with respect to any specified
Person, that such Person (a) is in fact independent of the Issuer, any other
obligor on the Notes, the Ceding Insurer and any Affiliate of any of the
foregoing Persons, (b) does not have any direct financial interest or any
material indirect financial interest in the Issuer, any such other obligor, the
Ceding Insurer or any Affiliate of any of the foregoing Persons and (c) is not
connected with the Issuer, any such other obligor, the Ceding Insurer or any
Affiliate of any of the foregoing Persons as an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions.
"Independent Certificate" shall mean a certificate or opinion to be
delivered to the Indenture Trustee under the circumstances described in, and
otherwise complying with, the applicable requirements of Section 12.1, made by
an Independent appraiser or other expert appointed by an Issuer Order and
approved by the Indenture Trustee in the exercise of reasonable care, and such
opinion or certificate shall state that the signer has read the definition of
"Independent" in this Indenture and that the signer is Independent within the
meaning thereof.
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"Interest Accrual Period" shall mean, with respect to any Payment Date,
the period from and including the previous Payment Date (or, in the case of the
first Payment Date, August __, 1996) to but excluding such Payment Date.
"Interest Rate Swap" shall mean, collectively, the one or more interest
rate swap agreements, dated as of August __, 1996, between the Issuer and
Merrill Lynch Capital Services, Inc., as Swap Counterparty.
"Issuer" shall mean Residential Reinsurance Limited unless a successor
replaces it and, thereafter, means the successor and for purposes of any
provision contained herein and required by the TIA, each other obligor on the
Notes.
"Issuer Order" and "Issuer Request" shall mean a written order or
request signed in the name of the Issuer by any one of its Authorized Officers
and delivered to the Indenture Trustee.
"Lien" shall mean any mortgage, pledge, security interest, conditional
sale or other title retention agreement or similar lien.
"Loss Occurrence" shall have the meaning set forth in the Reinsurance
Agreement.
"Loss Reserve Amount" shall mean the amount of each loss reserve
established by the Company for an amount that it believes will become payable
under the Reinsurance Agreement, based on a related loss reserve taken by the
Company in excess of the Trigger Amount.
"Loss Reserve Specialist" shall mean ____________ or any successor Loss
Reserve Specialist under the Loss Reserve Specialist Agreement.
"Loss Reserve Specialist Agreement" shall mean the Loss Reserve
Specialist Agreement, dated as of August __, 1996 by and between the Issuer and
the Loss Reserve Specialist, as the same may from time to time be amended,
supplemented or otherwise modified and in effect.
"Mandatory Redemption Date" shall mean July 1, 1997.
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"Maturity Date" shall mean January 2, 1998.
"Moody's" shall mean Moody's Investors Service, Inc.
"Net Swap Payment" shall mean the net amount, if any, payable by the
Indenture Trustee on behalf of the Issuer to the Swap Counterparty.
"Net Swap Receipt" shall mean the net amount, if any, payable by the
Trustee on behalf of the Swap Counterparty to the Issuer.
"New York Insurance Law" shall mean Chapter 28 of the Consolidated Laws
of the State of New York.
"Note" shall mean a Class A Floating Rate Note or a Class B Floating
Rate Note.
"Note Payment Account" shall mean the Note Payment Account of the
Indenture Trustee established pursuant to Section 8.2.
"Note Register" and "Note Registrar" shall have the respective meanings
specified in Section 2.5.
"Notional Amount" of any Note shall mean the Principal Amount of such
Note reduced by any Loss Reserve Amount allocated to such Note.
"Officer's Certificate" shall mean a certificate signed by any
Authorized Officer of the Issuer, under the circumstances described in, and
otherwise complying with, the applicable requirements of Section 12.1, and
delivered to the Indenture Trustee. Unless otherwise specified, any reference in
this Indenture to an Officer's Certificate shall be to an Officer's Certificate
of any Authorized Officer of the Issuer.
"Opinion of Counsel" shall mean one or more written opinions of counsel
who may, except as otherwise expressly provided in this Indenture, be employees
of or counsel to the Issuer or the Ceding Insurer and who shall be satisfactory
to the Indenture Trustee, and which opinion or opinions shall be addressed to
the Indenture Trustee as Indenture Trustee, shall comply with any
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applicable requirements of Section 12.1 and shall be in form and substance
satisfactory to the Indenture Trustee.
"Outstanding" shall mean, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture except:
(i) Notes theretofore cancelled by the Note Registrar or
delivered to the Note Registrar for cancellation;
(ii) Notes or portions thereof the payment for which money in
the necessary amount has been theretofore deposited with the Indenture
Trustee or any Paying Agent in trust for the Holders of such Notes
(provided, however, that if such Notes are to be redeemed, notice of
such redemption has been duly given pursuant to this Indenture or
provision for such notice has been made, satisfactory to the Indenture
Trustee); and
(iii) Notes or portions thereof to the extent that all or a
portion of the principal of such Notes has been subject to a Principal
Reduction;
(iv) Notes in exchange for or in lieu of which other Notes
have been authenticated and delivered pursuant to this Indenture unless
proof satisfactory to the Indenture Trustee is presented that any such
Notes are held by a bona fide purchaser;
provided, that in determining whether the Holders of the requisite Principal
Amount of the Notes Outstanding have given any request, demand, authorization,
direction, notice, consent, or waiver hereunder or under any Basic Document,
Notes owned by the Issuer, any other obligor upon the Notes, or any Affiliate of
the foregoing Persons shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Indenture Trustee shall be protected in
relying on any such request, demand, authorization, direction, notice, consent,
or waiver, only Notes that a Responsible Officer of the Indenture Trustee knows
to be so owned shall be so disregarded. Notes so owned that have been pledged in
good
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faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Indenture Trustee the pledgee's right so to act with respect
to such Notes and that the pledgee is not the Issuer, any other obligor upon the
Notes or any Affiliate of any of the foregoing Persons.
"Outstanding Amount" shall mean the aggregate Principal Amount of all
Notes Outstanding at the date of determination.
"Paying Agent" shall mean the [non-U.S. branch of the] Indenture
Trustee or any other Person that (i) meets the eligibility standards for the
Indenture Trustee specified in Section 6.11, (ii) is authorized by the Indenture
Trustee to make payments to and distributions from the Note Payment Account,
including payment of principal of or interest on the Notes on behalf of the
Issuer, and (iii) shall perform all of the functions required by this Indenture
from a location outside of the United States.
"Payment Date" shall mean the first (1st) day of each calendar month
or, if such day is not a Business Day, the next succeeding Business Day.
"Permitted Investments" means the investments listed in Schedule A
hereto.
"Person" shall mean any individual, corporation, estate, partnership,
joint venture, association, joint stock company, limited liability company,
trust (including any beneficiary thereof), unincorporated organization, or
government or any agency or political subdivision thereof.
"Policies" shall have the meaning set forth in the Reinsurance
Agreement.
"Predecessor Note" shall mean, with respect to any particular Note,
every previous Note evidencing all or a portion of the same debt as that
evidenced by such particular Note and, for purposes of this definition, any Note
authenticated and delivered under Section 2.6 in lieu of a mutilated, lost,
destroyed or stolen Note shall be deemed to evidence the same debt as the
mutilated, lost, destroyed or stolen Note.
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"Premium" shall have the meaning set forth in the Reinsurance
Agreement.
"Principal Amount" of any Note shall mean the original principal amount
of such Note reduced by the amount of any Principal Reduction allocated to such
Note.
"Principal Reduction" shall mean a reduction in the Issuer's obligation
to pay the principal of a Note pursuant to Section 2.8(d) as a result of the
payment by the Issuer to the Ceding Insurer of any Reinsurance Amount owed to
the Ceding Insurer under the Reinsurance Agreement.
"Principal Reduction Notice" shall mean a notice in the form of Exhibit
D hereto.
"Proceeding" shall mean any suit in equity, action at law or other
judicial or administrative proceeding.
"Proof of Loss Claim" shall have the meaning set forth in the
Reinsurance Agreement.
"Rating Agency" shall mean [Moody's and Standard & Poor's]. If no such
organization or successor is any longer in existence, "Rating Agency" shall be a
nationally recognized statistical rating organization or other comparable Person
designated by the Issuer, notice of which designation shall be given to the
Indenture Trustee.
"Rating Agency Condition" shall mean, with respect to any action, that
each Rating Agency shall have been given prior notice thereof and that each of
the Rating Agencies shall have notified the Ceding Insurer, the Indenture
Trustee, the Regulation 114 Trustee and the Issuer that such action shall not
result in a reduction or withdrawal of the then current rating assigned to the
Notes.
"Record Date" shall mean, with respect to a Payment Date or Redemption
Date, the close of business on the fifteenth (15th) day prior to such Payment
Date or Redemption Date.
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"Redemption Date" shall mean (i) in the case of a redemption of the
Notes pursuant to Section 10.1(a), the Mandatory Redemption Date, or (ii) in the
case of a redemption of Notes pursuant to Section 10.1(b), the first Payment
Date following the failure by the Ceding Insurer to make a Premium payment under
the Reinsurance Agreement.
"Redemption Price" shall mean an amount equal to the Principal Amount
of the Notes redeemed plus accrued and unpaid interest thereon.
"Registered Holder" shall mean the Person in whose name a Note is
registered on the Note Register on the applicable Record Date.
"Regulation 114 Trust Account" shall mean the Trust Account established
pursuant to the Regulation 114 Trust Agreement.
"Regulation 114 Trust Agreement" shall mean that certain Regulation 114
Trust Agreement, dated August __, 1996, among the Ceding Insurer, the Regulation
114 Trust Trustee and the Issuer.
"Regulation 114 Trust" shall mean the Trust established in accordance
with the requirements of Regulation 114 under the New York Insurance Law
pursuant to the Regulation 114 Trust Agreement.
"Regulation 114 Trust Trustee" shall mean ____________________, a
___________ banking corporation, not in its individual capacity but solely as
Regulation 114 Trust Trustee under the Regulation 114 Trust Agreement, or any
successor Regulation 114 Trust Trustee under the Regulation 114 Trust Agreement.
"Reinsurance Agreement" shall mean that certain Catastrophe Excess
Quota Share Reinsurance Agreement, dated August __, 1996, between the Ceding
Insurer and the Issuer as in effect on the date hereof.
"Reinsurance Amount" shall mean (i) the amount owed by the Issuer to
the Ceding Insurer as a result of the delivery by the Ceding Insurer to the
Issuer of a Proof of Loss Claim under the Reinsurance Agreement, the amount of
which has been reviewed by the Claims Reviewer
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and (ii) any Commutation Amount, the amount of which has been reviewed by the
Loss Reserve Specialist.
"Relevant UCC" shall mean, unless the context otherwise requires, the
Uniform Commercial Code as in effect in the relevant jurisdiction, as amended
from time to time.
"Responsible Officer" shall mean, with respect to the Indenture
Trustee, any officer of the Indenture Trustee located outside the United States
with direct responsibility for the administration of this Indenture and also,
with respect to a particular matter, any other officer to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Account Collateral" shall have the meaning specified in the
Granting Clause of this Indenture.
"Standard & Poor's" shall mean Standard & Poor's Ratings Service.
"State" shall mean any of the fifty States of the United States of
America or the District of Columbia.
"Swap Counterparty" shall mean Merrill Lynch Capital Services, Inc., as
swap counterparty under the Interest Rate Swap.
"Trigger Amount" shall have the meaning set forth in the Reinsurance
Agreement.
"Trust Estate" shall mean all money, instruments, rights and other
property that are subject or intended to be subject to the Lien and security
interest of this Indenture for the benefit of the Noteholders (including,
without limitation, all property and interests Granted to the Indenture
Trustee), including all proceeds thereof.
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"Trust Indenture Act" or "TIA" shall mean the Trust Indenture Act of
1939, as amended, unless otherwise specifically provided.
"Ultimate Net Loss" shall have the meaning set forth in the Reinsurance
Agreement.
SECTION 1.2. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" shall mean the Securities and Exchange Commission.
"indenture securities" shall mean the Notes.
"indenture security holder" shall mean a Noteholder.
"indenture to be qualified" shall mean this Indenture.
"indenture trustee" or "institutional trustee" shall mean the Indenture
Trustee.
"obligor" on the indenture securities shall mean the Issuer and any
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined in the TIA,
defined by TIA reference to another statute or defined by Commission rule have
the meaning assigned to them by such definitions.
SECTION 1.3. Rules of Construction. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted
accounting principles as in effect from time to time;
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(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the
plural include the singular;
(vi) all references to "$" are to United States dollars unless
otherwise stated;
(vii) any agreement, instrument or statute defined or referred
to herein or in any instrument or certificate delivered in connection
herewith means such agreement, instrument or statute as from time to
time amended, modified or supplemented and includes (in the case of
agreements or instruments) references to all attachments thereto and
instruments incorporated therein; references to a Person are also to
its permitted successors and assigns.
ARTICLE II
THE NOTES
SECTION 2.1. Form. (a) The Class A Floating Rate Notes and the Class B
Floating Rate Notes, together with the Indenture Trustee's certificate of
authentication, shall be substantially in the forms set forth in Exhibit A and
Exhibit B hereto, respectively, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may, consistently herewith,
be determined by the officers executing such Notes, as evidenced by their
execution thereof. Any portion of the text of any Note may be set forth on the
reverse thereof, with an appropriate reference thereto on the face of the Note.
(b) The Definitive Notes shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods (with or without steel
engraved borders), all as determined by the officers executing such Notes, as
evidenced by their execution of such Notes.
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(c) Each Note shall be dated the date of its authentication. The terms
of the Class A Floating Rate Notes and the Class B Floating Rate Notes set forth
respectively in Exhibit A and Exhibit B are part of the terms of this Indenture
and are incorporated herein by reference.
(d) Each Note shall bear legends substantially to the following effect:
THIS NOTE MAY NOT BE ACQUIRED IN OR TRANSFERRED INTO, OR BE ACQUIRED BY
OR TRANSFERRED TO ANY PERSON RESIDENT IN, THE STATES OF [ ], [ ],
[ ] AND [ ]. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE, THE HOLDER
WILL BE REQUIRED TO DELIVER TO THE INDENTURE TRUSTEE A CERTIFICATE IN
THE FORM ATTACHED AS EXHIBIT C TO THE INDENTURE TO THE EFFECT THAT THE
PROPOSED TRANSFER IS NOT TO OCCUR IN OR INTO ANY OF SUCH STATES AND
THAT THE PROPOSED TRANSFEREE IS NOT A RESIDENT OF ANY OF SUCH STATES.
AS SET FORTH HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT
ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF.
SECTION 2.2. Execution, Authentication and Delivery. (a) The Notes
shall be executed on behalf of the Issuer by any of its Authorized Officers. The
signature of any such Authorized Officer on the Notes may be manual or
facsimile.
(b) Notes bearing the manual or facsimile signature of individuals who
were at any time Authorized Officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
(c) The Indenture Trustee shall, upon Issuer Order, authenticate and
deliver Class A Floating Rate Notes for original issue in an aggregate Principal
Amount of $______________ and Class B Floating Rate Notes for original issue in
an aggregate Principal Amount of $____________ . The aggregate Principal Amount
of Notes Outstanding at any time may not exceed such amounts except as provided
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in Section 2.6. The Issuer Order shall be accompanied by a certificate of each
proposed initial Holder in the form of Exhibit C hereto.
(d) Each Note shall be dated the date of its authentication. The Notes
shall be issuable as registered Notes in minimum denominations of $10,000 and
integral multiples of $_______ in excess thereof.
(e) No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Indenture Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Note shall be conclusive
evidence, and the only evidence, that such Note has been duly authenticated and
delivered hereunder.
SECTION 2.3. Temporary Notes. (a) Pending the preparation of definitive
Notes, the Issuer may execute, and upon receipt of an Issuer Order the Indenture
Trustee shall authenticate and deliver, temporary Notes that are printed,
lithographed, typewritten, mimeographed or otherwise produced, of the tenor of
the Definitive Notes in lieu of which they are issued and with such variations
not inconsistent with the terms of this Indenture as the officers executing such
Notes may determine, as evidenced by their execution of such Notes.
If temporary Notes are issued, the Issuer shall cause Definitive Notes
to be prepared without unreasonable delay. After the preparation of Definitive
Notes, the temporary Notes shall be exchangeable for Definitive Notes upon
surrender of the temporary Notes at the office or agency of the Issuer to be
maintained as provided in Section 3.2, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes, the Issuer shall
execute, and the Indenture Trustee shall authenticate and deliver in exchange
therefor, a like Principal Amount of Definitive Notes of authorized
denominations. Until so exchanged, the temporary Notes shall in all respects be
entitled to the same benefits under this Indenture as Definitive Notes.
SECTION 2.4. Tax Treatment. (a) The Issuer will treat the Notes as
equity for United States federal
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income tax purposes, and by accepting a Note, Holders hereby acknowledge and
agree to such treatment and covenant to take no action inconsistent with such
treatment.
(b) The Issuer will provide the "PFIC Annual Information Statement"
referred to in IRS Notice 88-125, or any such other or additional information
that the U.S. Internal Revenue Service shall require in connection with being or
becoming a shareholder of a "qualified electing fund" as defined in Section 1295
of the Code (such Statement or other or additional information, the "QEF
Information") to any Holder that requests the QEF Information by December 30 of
any year in which the Notes are outstanding. The Issuer will use reasonable
efforts to provide the QEF Information to such a Holder by March 1 of the
immediately succeeding year; provided, however, that if the Issuer will not be
able to provide such information by such March 1, the Issuer shall notify the
requesting Holder in writing, on or prior to that date, that the Issuer will
provide the QEF Information on or before a later specified date, which date will
be no later than August 15 of such year.
SECTION 2.5. Registration; Registration of Transfer and Exchange. (a)
The Issuer shall cause to be kept and maintained, in a location outside of the
United States, a register (the "Note Register") in which, subject to such
reasonable regulations as it may prescribe, the Issuer shall provide for the
registration of Notes and the registration of transfers of Notes. The Indenture
Trustee initially shall be the "Note Registrar" for the purpose of registering
Notes and transfers of Notes as herein provided, which functions the Indenture
Trustee will perform only from an office outside of the United States. Upon any
resignation of any Note Registrar, the Issuer shall promptly appoint a successor
or, if it elects not to make such an appointment, assume the duties of Note
Registrar.
(b) If a Person other than the Indenture Trustee is appointed by the
Issuer as Note Registrar, (i) the Issuer shall give the Indenture Trustee prompt
written notice of the appointment of such Note Registrar and of the location,
and any change in the location, of the Note Register; provided that the Note
Register will always be kept and maintained in a location outside of
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the United States, (ii) the Indenture Trustee shall have the right to inspect
the Note Register at all reasonable times and to obtain copies thereof, and
(iii) the Indenture Trustee shall have the right to rely upon a certificate
executed on behalf of the Note Registrar by an Executive Officer thereof as to
the names and addresses of the Holders of the Notes and the Principal Amounts
and number of such Notes.
(c) Upon surrender for registration of transfer of any Note at the
office or agency of the Issuer to be maintained as provided in Section 3.2, if
(i) the Note Registrar is in receipt of a certificate of each designated
transferee in the form of Exhibit C hereto and (ii) the requirements of Section
8-401(l) of the Relevant UCC are met, the Issuer shall execute, and the
Indenture Trustee shall authenticate and the Noteholder shall obtain from the
Indenture Trustee, in the name of the designated transferee or transferees, one
or more new Notes in any authorized denomination, of a like aggregate Principal
Amount.
(d) At the option of a Holder, Notes may be exchanged for other Notes
in any authorized denominations, of a like aggregate Principal Amount, upon
surrender of the Notes to be exchanged at such office or agency. Whenever any
Notes are so surrendered for exchange, if the requirements of Section 8-401(l)
of the Relevant UCC are met, the Issuer shall execute, the Indenture Trustee
shall authenticate, and the Noteholder shall obtain from the Indenture Trustee,
the Notes which the Noteholder making such exchange is entitled to receive.
(e) All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Issuer, evidencing the same debt,
and entitled to the same benefits under this Indenture as the Notes surrendered
upon such registration of transfer or exchange.
(f) Every Note presented or surrendered for registration of transfer or
exchange shall be duly endorsed by, or be accompanied by a written instrument of
transfer in form satisfactory to the Indenture Trustee duly executed by, the
Holder thereof or such Holder's attorney duly authorized in writing, with such
signature
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guaranteed by an "eligible guarantor institution" meeting the requirements of
the Note Registrar.
(g) No service charge shall be made to a Holder for any registration of
transfer or exchange of Notes, but the Issuer may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 2.3 or 9.6 not involving any transfer.
(h) The preceding provisions of this Section 2.5 notwithstanding, the
Issuer shall not be required to make and the Note Registrar need not register
transfers or exchanges of Notes selected for redemption or of any Note for a
period of [five (5)] days preceding the due date for any payment with respect to
such Note.
SECTION 2.6. Mutilated, Destroyed, Lost or Stolen Notes. (a) If (i) any
mutilated Note is surrendered to the Indenture Trustee, or the Indenture Trustee
receives evidence to its satisfaction of the destruction, loss or theft of any
Note, and (ii) there is delivered to the Indenture Trustee such security or
indemnity as may be required by it to hold the Issuer and the Indenture Trustee
harmless, then, in the absence of notice to the Issuer, the Note Registrar or
the Indenture Trustee that such Note has been acquired by a bona fide purchaser,
and provided that the requirements of Section 8-405 of the Relevant UCC are met,
the Issuer shall execute, and upon its request the Indenture Trustee shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Note, a replacement Note; provided, however, that if
any such destroyed, lost or stolen Note, but not a mutilated Note, shall have
become or within seven (7) days shall be due and payable, or shall have been
called for redemption, instead of issuing a replacement Note, the Issuer may pay
such destroyed, lost or stolen Note when so due or payable or upon the
Redemption Date without surrender thereof. If, after the delivery of such
replacement Note or payment of a destroyed, lost or stolen Note pursuant to the
proviso to the preceding sentence, a bona fide purchaser of the original Note in
lieu of which such replacement Note was issued presents for payment such
original Note, the Issuer and the Indenture Trustee shall be entitled to
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recover such replacement Note (or such payment) from the Person to whom it was
delivered or any Person taking such replacement Note from such Person to whom
such replacement Note was delivered or any assignee of such Person, except a
bona fide purchaser, and shall be entitled to recover upon the security or
indemnity provided therefor to the extent of any loss, damage, cost or expense
incurred by the Issuer or the Indenture Trustee in connection therewith.
(b) Upon the issuance of any replacement Note under this Section 2.6,
the Issuer may require the payment by the Holder of such Note of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other reasonable expenses (including the fees and
expenses of the Indenture Trustee) connected therewith.
(c) Every replacement Note issued pursuant to this Section 2.6 in
replacement of any mutilated, destroyed, lost or stolen Note shall constitute an
original additional contractual obligation of the Issuer, whether or not the
mutilated, destroyed, lost or stolen Note shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Notes duly issued hereunder.
(d) The provisions of this Section 2.6 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.7. Persons Deemed Owner. Prior to due presentment for
registration of transfer of any Note, the Issuer, the Indenture Trustee and any
agent of the Issuer or the Indenture Trustee may treat the Person in whose name
any Note is registered (as of the day of determination) as the owner of such
Note for the purpose of receiving payments of principal of and interest, if any,
on such Note and for all other purposes whatsoever, whether or not such Note be
overdue, and none of the Issuer, the Indenture Trustee or any agent of the
Issuer or the Indenture Trustee shall be affected by notice to the contrary.
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SECTION 2.8. Payment of Interest and Principal; Defaulted Interest. (a)
The Principal Amount of the Class A Floating Rate Notes shall accrue interest as
set forth in Exhibit A hereto and the Principal Amount of the Class B Floating
Rate Notes shall accrue interest as set forth in Exhibit B hereto, and such
interest shall be payable on each Payment Date as specified therein, subject to
Section 3.1. Any installment of interest payable on any Note that is punctually
paid or duly provided for by the Issuer on the applicable Payment Date shall be
paid by the Paying Agent to the Person in whose name such Note (or one or more
Predecessor Notes) is registered on the Record Date. The funds represented by
any such checks returned undelivered shall be held in accordance with Section
3.3.
(b) The Principal Amount of each Note shall be payable on the Maturity
Date or the Redemption Date, as the case may be, as provided in the form of the
Note set forth in Exhibit A or Exhibit B hereto, as applicable. Notwithstanding
the foregoing, the entire Principal Amount of the Notes shall be due and
payable, if not previously paid or reduced to zero by a Principal Reduction, on
the date on which an Event of Default shall have occurred and be continuing, if
the Indenture Trustee or the Holders of Notes representing not less than a
majority of the Principal Amount of the Notes Outstanding have declared the
Notes to be immediately due and payable in the manner provided in Section 5.2.
All payments of Principal Amounts on the Class A Floating Rate Notes shall be
made pro rata to the Noteholders entitled thereto and all payments on the Class
B Floating Rate Notes shall be made pro rata to the Noteholders entitled
thereto. The Indenture Trustee shall notify the Person in whose name a Note is
registered at the close of business on the Record Date preceding the Maturity
Date or Redemption Date, as applicable, on which the Issuer expects that the
Principal Amount of such Note shall be paid. Such notice shall be mailed or
transmitted by facsimile prior to such Maturity Date or Redemption Date, as
applicable, and shall specify that such principal payment shall be payable only
upon presentation and surrender of such Note and shall specify the place where
such Note may be presented and surrendered for payment of such installment.
Notices in connection with redemption of Notes shall be mailed to Noteholders as
provided in Section 10.2.
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(c) If the Issuer defaults in a payment of interest on the Notes, the
Issuer shall, on the Payment Date following such default, pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) at the
applicable [interest rate for the Interest Accrual Period with respect to which
the default occurred] in any lawful manner. The Issuer shall pay such defaulted
interest to the Persons who are Noteholders on the Record Date for such
following Payment Date.
(d) A Principal Reduction with respect to the Notes shall occur upon
delivery to the Indenture Trustee by the Administrator of a Principal Reduction
Notice which shall advise the Indenture Trustee of the payment by the Issuer of
a Reinsurance Amount under the Reinsurance Agreement and shall specify the
amount of such Reinsurance Amount. The amount of such Principal Reduction shall
be allocated as follows:
(i) first, pro rata among the Holders of Class B Floating Rate Notes
until the aggregate Principal Amount of the Class B Floating Rate Notes shall be
reduced to zero; and
(ii) then, pro rata among the Holders of Class A Floating Rate Notes
until the aggregate Principal Amount of The Class A Floating Rate Notes shall be
reduced to zero.
The Indenture Trustee shall notify the Persons in whose name the Notes are
registered of the occurrence of a Principal Reduction and of the amount of such
Principal Reduction allocable to each $1,000 of original principal amount of the
Class A Floating Rate Notes and of the Class B Floating Rate Notes. Such notice
shall be mailed by first class mail, postage prepaid, or transmitted by
facsimile promptly following receipt of such Principal Reduction Notice.
(e) Upon the occurrence of a Contingent Principal Event, the Company's
obligation to pay the Principal Amount of the Notes shall become contingent to
the extent of the Loss Reserve Amount pending receipt of a Proof of Loss Claim
under the Reinsurance Agreement. The amount of any such Loss Reserve Amount
shall be allocated:
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(i) first, among the holders of the Class B Notes on a pro rata basis until
the aggregate Notional Amount of the Class B Notes becomes wholly contingent,
and
(ii) second, among the holders of the Class A Notes on a pro rata basis
until the aggregate Notional Amount of the Class A Notes becomes wholly
contingent.
When the Proof of Loss Claim related to a Loss Reserve Amount is received, such
Loss Reserve Amount and the related reduction in the Notional Amount of the
Notes shall be reduced to the extent deemed appropriate by the Company, and the
Principal Amount of the Notes shall be reduced by the Principal Reduction
reflected in such Proof of Loss Claim.
(f) Interest and principal due on any Payment Date on the Notes shall
be payable by United States dollar check mailed first-class postage prepaid by a
Paying Agent located outside the United States, such check in each case to be
mailed to the Person entitled thereto at his address as it appears on the Note
Register on the Record Date.
SECTION 2.9. Cancellation. All Notes surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Indenture Trustee, be delivered to the Indenture Trustee
and shall be promptly cancelled by the Indenture Trustee. The Issuer may at any
time deliver to the Indenture Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Issuer may have acquired in any
manner whatsoever, and all Notes so delivered shall be promptly cancelled by the
Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for
any Notes cancelled as provided in this Section 2.9, except as expressly
permitted by this Indenture. All cancelled Notes may be held or disposed of by
the Indenture Trustee in accordance with its standard retention or disposal
policy as in effect at the time unless the Issuer shall direct by an Issuer
Order that they be destroyed or returned to it, provided, that such Issuer Order
is timely and the Notes have not been previously disposed of by the Indenture
Trustee.
SECTION 2.10. Release of Collateral. Subject to Section 8.4 and the
terms of the Basic Documents, the
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Indenture Trustee shall release property from the Lien of this Indenture only
upon receipt of an Issuer Request accompanied by an Officer's Certificate, an
Opinion of Counsel and Independent Certificates in accordance with TIA Sections
314(c) and 314(d)(1) or an Opinion of Counsel in lieu of such Independent
Certificates to the effect that the TIA does not require any such Independent
Certificates.
SECTION 2.11. Definitive Notes. The Notes, upon original issuance,
shall be issued in the form of definitive, fully registered and certificated
Notes (the "Definitive Notes") to be delivered to the initial Holders thereof by
the Issuer.
SECTION 2.12. Authenticating Agents. The Indenture Trustee may appoint
one or more Persons located outside of the United States (each, an
"Authenticating Agent") with power to act on its behalf and subject to its
direction in the authentication of Notes in connection with issuance, transfers
and exchanges under Sections 2.2, 2.3, 2.5 and 2.6, as fully to all intents and
purposes as though each such Authenticating Agent had been expressly authorized
by those Sections to authenticate such Notes; provided that any such
Authenticating Agent will perform such functions from within the United States
only to the extent the Indenture Trustee is so permitted under this Indenture.
For all purposes of this Indenture, the authentication of Notes by an
Authenticating Agent pursuant to this Section 2.12 shall be deemed to be the
authentication of Notes "by the Indenture Trustee."
Any corporation into which any Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, consolidation or conversion to which any Authenticating Agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of any Authenticating Agent, shall be the successor
of such Authenticating Agent hereunder, without the execution or filing of any
further act on the part of the parties hereto or such Authenticating Agent or
such successor corporation.
Any Authenticating Agent may at any time resign by giving written
notice of resignation to the Indenture
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Trustee. The Indenture Trustee may at any time terminate the agency of any
Authenticating Agent by giving written notice of termination to such
Authenticating Agent. Upon receiving such notice of resignation or upon such a
termination, the Indenture Trustee may appoint a successor Authenticating Agent
and shall give written notice of any such appointment to the Owner Trustee.
The Issuer shall pay each Authenticating Agent from time to time
reasonable compensation for its services. The provisions of Sections 2.9 and 6.4
shall be applicable to any Authenticating Agent.
ARTICLE III
COVENANTS
SECTION 3.1. Payment of Principal and Interest. (a) The Issuer shall
duly and punctually pay the Principal Amount of and interest, if any, on the
Notes in accordance with the terms of the Notes and this Indenture. Without
limiting the foregoing, the Issuer acknowledges that it has assigned to the
Indenture Trustee (i) the right to receive Premium payments under the
Reinsurance Agreement and Net Swap Receipts under the Interest Rate Swap, and
(ii) the right to receive the permitted investments held in the Regulation 114
Trust Account and net investment earnings thereon in accordance with the terms
of the Regulation 114 Trust Agreement, subject to the prior security interest of
the Ceding Insurer therein. Such payments shall, after payment by the non-U.S.
branch of the Indenture Trustee of any Net Swap Payment payable under the
Interest Rate Swap, be directed by the Indenture Trustee to a Note Payment
Account established and maintained for the benefit of the Noteholders pursuant
to Section 8.2. The Note Payment Account shall be maintained at a branch of the
Indenture Trustee located outside of the United States. All amounts in the Note
Payment Account on a Payment Date, Redemption Date, or Maturity Date, as the
case may be, shall be remitted by such non-U.S. branch of the Indenture Trustee
to the Paying Agent at a location outside of the United States for payment to
the Expense Account and to Noteholders on such Payment Date, Redemption Date, or
Maturity Date, as the case may be. [consider whether the remittance to the
Paying Agent can take place on the
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Business Day prior to the Payment Date] Amounts properly withheld under the Code
by any Person from a payment to any Noteholder of interest and/or principal
shall be considered as having been paid by the Issuer to such Noteholder for all
purposes of this Indenture.
(b) The Indenture Trustee hereby appoints [non-U.S branch of the
Indenture Trustee] as the initial Paying Agent for amounts due on the Notes.
SECTION 3.2. Maintenance of Office or Agency by Issuer, The Chase
Manhattan Bank as Noteholders' Presentment Agent. The Issuer hereby appoints the
London branch of the Indenture Trustee as its agent for surrender of Notes for
registration and transfer or exchange, and acceptance of notices and demands to
be delivered to or upon the Issuer in respect of the Notes or this Indenture.
The Chase Manhattan Bank agrees to act, on behalf of Noteholders, as presentment
agent for the Noteholders (in this capacity, the "Noteholders' Presentment
Agent"). The Noteholders' Presentment Agent, acting through its New York branch,
will accept Notes surrendered for registration and transfer or exchange and
notices or demands to be delivered to or upon the Issuer in respect of the Notes
or the Indenture and shall forward the same to the London branch of the
Indenture Trustee as agent for the Issuer. Nothing herein shall prevent any
Noteholder from dealing directly with the London branch of the Indenture Trustee
as agent for the Issuer and no Note, demand or notice presented or delivered to
the Noteholders' Presentment Agent shall be effective against the Issuer until
received by the London branch of the Indenture Trustee as agent of the Issuer.
SECTION 3.3. Money for Payments To Be Held in Trust. (a) As provided in
Section 8.2, all payments of amounts due and payable with respect to any Notes
that are to be made from amounts withdrawn from the Note Payment Account shall
be made on behalf of the Issuer by the Paying Agent, and no amounts so withdrawn
from the Note Payment Account for payments of Notes shall be paid over to the
Issuer, except as provided in this Section 3.3.
(b) On or before each Payment Date, Redemption Date and Maturity Date,
the amount deposited in the Note Payment Account as set forth in Section 3.1
shall be an
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aggregate sum sufficient to pay the amounts then becoming due under the Notes
and an additional amount of $______ to pay the Allocated Expenses, such sum to
be held in trust for the benefit of the Persons entitled thereto, and the
Indenture Trustee shall promptly notify the Noteholders, the Issuer and the
Paying Agent if such amounts are not sufficient for such purpose.
(c) On each Payment Date, Redemption Date and Maturity Date amounts
shall be withdrawn from the Note Payment Account on behalf of the Issuer and
paid in the following order of priority:
(i) the amount of $_____ shall be paid to the Expense Account;
(ii) all amounts then becoming due under the Notes shall be
paid;
(iii) if there has been any Principal Reduction, to Holders of
the Class A Floating Rate Notes and of the Class B Floating Rate Notes
in the order of priority set forth in paragraphs (x) and (y) below; and
(iv) any remaining amount shall be paid to the Issuer.
Notwithstanding anything in the preceding sentence, if the Ceding Insurer pays
additional Premium to the Issuer pursuant to Article 12B of the Reinsurance
Agreement, after payment of the sum of $_____ to the Expense Account, all such
additional Premium shall be retained by the Indenture Trustee in the Note
Payment Account and held in trust for the benefit of the Noteholders and
invested as provided in Section 8.3. After the payment of such additional
Premium, payments of interest on the Notes shall be made on each Payment Date,
in each case from the Note Payment Account and all remaining amounts shall be
held in the Note Payment Account either until such amount is required to be paid
to the Ceding Insurer pursuant to the Reinsurance Agreement or, if it is not
required to be so paid, such amount shall be paid in the following order of
priority:
(x) to the extent that any of the Class A Floating Rate Notes
have been subject to a
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Principal Reduction, to Holders of such Notes on a pro rata basis until
the aggregate amount of payments of principal made to such holders is
equal to the original Principal Amount thereof and such Holders have
received the same amount of interest on such Notes as they would have
if the original Principal Amount thereof had not been subject to a
Principal Reduction;
(y) to the extent that any of the Class B Floating Rate Notes
have been subject to a Principal Reduction, to Holders of such Notes on
a pro rata basis until the aggregate amount of payments of principal
made to such holders is equal to the original Principal Amount thereof
and such Holders have received the same amount of interest on such
Notes as they would have if the original Principal Amount thereof had
not been subject to a Principal Reduction; and
(z) any remaining amount shall be paid to the Issuer.
(d) The Issuer shall cause each Paying Agent to execute and deliver to
the Indenture Trustee an instrument in which such Paying Agent shall agree with
the Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it
hereby so agrees), subject to the provisions of this Section 3.3, that such
Paying Agent shall:
(i) hold all sums held by it for the payment of amounts due
with respect to the Notes in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(ii) give the Indenture Trustee notice of any default by the
Issuer (or any other obligor upon the Notes) of which it has actual
knowledge in the making of any payment required to be made with respect
to the Notes;
(iii) at any time during the continuance of any such default,
upon the written request
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of the Indenture Trustee, forthwith pay to the Indenture Trustee all
sums so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith pay to
the Indenture Trustee all sums held by it in trust for the payment of
Notes if at any time it ceases to meet the standards required to be met
by a Paying Agent at the time of its appointment; and
(v) comply with all requirements of the Code and any state or
local tax law with respect to the withholding from any payments made by
it on any Notes of any applicable withholding taxes imposed thereon and
with respect to any applicable reporting requirements in connection
therewith.
(e) The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, by Issuer
Order direct any Paying Agent to pay to the Indenture Trustee all sums held in
trust by such Paying Agent, such sums to be held by the Indenture Trustee upon
the same trusts as those upon which the sums were held by such Paying Agent; and
upon such payment by any Paying Agent to the Indenture Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
(f) Subject to applicable laws with respect to escheat of funds, any
money held by the Indenture Trustee or any Paying Agent in trust for the payment
of any amount due with respect to any Note and remaining unclaimed for two (2)
years after such amount has become due and payable shall be discharged from such
trust and be paid to the Issuer on Issuer Request; and the Holder of such Note
shall thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof (but only to the extent of the amounts so paid to the Issuer),
and all liability of the Indenture Trustee or such Paying Agent with respect to
such trust money shall thereupon cease; provided, however, that the Indenture
Trustee or such Paying Agent, before being required to make any such repayment,
shall at the expense and direction of the Issuer cause to be published once, in
a newspaper published in the English language, customarily
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published on each Business Day and of general circulation in The City of New
York, notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than thirty (30) days from the date of such
publication, any unclaimed balance of such money then remaining shall be repaid
to the Issuer. The Indenture Trustee shall also adopt and employ, at the expense
and direction of the Issuer, any other reasonable means of notification of such
repayment (including, but not limited to, mailing notice of such repayment to
Holders whose Notes have been called but have not been surrendered for
redemption or whose right to or interest in monies due and payable but not
claimed is determinable from the records of the Indenture Trustee or of any
Paying Agent, at the last address of record for each such Holder).
SECTION 3.4. Existence. The Issuer shall keep in full effect its
existence, rights and franchises as a company under the laws of the Cayman
Islands, British West Indies (unless it becomes, or any successor Issuer
hereunder is or becomes, organized under the laws of any other jurisdiction, in
which case the Issuer shall keep in full effect its existence, rights and
franchises under the laws of such other jurisdiction) and shall obtain and
preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Notes, the Collateral and each other
instrument or agreement included in the Trust Estate.
SECTION 3.5. Protection of Trust Estate. The Issuer shall from time to
time execute and deliver all such supplements and amendments hereto and all such
financing statements, continuation statements, instruments of further assurance
and other instruments, and shall take such other action necessary or advisable
to:
(i) maintain or preserve the Lien and security interest (and
the priority thereof) of this Indenture or carry out more effectively
the purposes hereof;
(ii) perfect, publish notice of or protect the validity of any
Grant made or to be made by this Indenture;
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(iii) enforce any of the Collateral; and
(iv) preserve and defend title to the Collateral and the
rights of the Indenture Trustee and the Noteholders in such Collateral
against the claims of all Persons.
The Issuer hereby designates the Indenture Trustee its agent and
attorney-in-fact to execute any financing statement, continuation statement or
other instrument required to be executed pursuant to this Section 3.5.
SECTION 3.6. Opinions as to Trust Estate. (a) On the Closing Date, the
Issuer shall furnish to the Indenture Trustee an Opinion of Counsel either
stating that, in the opinion of such counsel, such action has been taken with
respect to the recording and filing of this Indenture, any indentures
supplemental hereto, and any other requisite documents, and with respect to the
execution and filing of any financing statements and continuation statements, as
are necessary to perfect and make effective the Lien and security interest of
this Indenture and reciting the details of such action, or stating that, in the
opinion of such counsel, no such action is necessary to make such Lien and
security interest effective.
(b) On or before June 30, 1997, the Issuer shall furnish to the
Indenture Trustee an Opinion of Counsel either stating that, in the opinion of
such counsel, such action has been taken with respect to the recording, filing,
re-recording and refiling of this Indenture, any indentures supplemental hereto
and any other requisite documents and with respect to the execution and filing
of any financing statements and continuation statements as is necessary to
maintain the Lien and security interest created by this Indenture and reciting
the details of such action or stating that in the opinion of such counsel no
such action is necessary to maintain such lien and security interest. Such
Opinion of Counsel shall also describe the recording, filing, re-recording and
refiling of this Indenture, any indentures supplemental hereto and any other
requisite documents and the execution and filing of any financing statements and
continuation statements that shall, in the opinion of such counsel, be required
to maintain the Lien and secu-
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rity interest of this Indenture until the Maturity Date or the Redemption Date,
as the case may be.
SECTION 3.7. Performance of Obligations. (a) The Issuer shall not take
any action and shall use its best efforts not to permit any action to be taken
by others that would release any Person from any of such Person's material
covenants or obligations under any instrument or agreement included in the Trust
Estate or that would result in the amendment, hypothecation, subordination,
termination or discharge of, or impair the validity or effectiveness of, any
such instrument or agreement, except as expressly provided in this Indenture and
the other Basic Documents.
(b) The Issuer may contract with other Persons to assist it in
performing its duties under this Indenture, and any performance of such duties
by a Person identified to the Indenture Trustee in an Officer's Certificate of
the Issuer shall be deemed to be action taken by the Issuer. Initially, the
Issuer has contracted with the Administrator to assist the Issuer in performing
its duties under this Indenture.
(c) The Issuer shall punctually perform and observe all its obligations
and agreements contained in this Indenture, the Basic Documents and in the
instruments and agreements included in the Trust Estate, including, but not
limited to, filing or causing to be filed all financing statements and
continuation statements required to be filed under the Relevant UCC by the terms
of this Indenture in accordance with and within the time periods provided for
herein and therein. Except as otherwise expressly provided therein, the Issuer
shall not waive, amend, modify, supplement or terminate any Basic Document or
any provision thereof without the consent of the Indenture Trustee or the
Holders of at least a majority of the Principal Amount of the Notes Outstanding.
(d) Without derogating from the absolute nature of the assignment
granted to the Indenture Trustee under this Indenture or the rights of the
Indenture Trustee hereunder, the Issuer hereby agrees that it shall not, without
the prior written consent of the Indenture Trustee or the Holders of at least a
majority in Principal Amount of the Notes Outstanding, amend, modify,
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waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the terms of any
Collateral (except to the extent otherwise provided in the Basic Documents).
SECTION 3.8. Negative Covenants. So long as any Notes are Outstanding,
the Issuer shall not:
(i) except as expressly permitted by this Indenture, sell,
transfer, exchange or otherwise dispose of any of the properties or
assets of the Issuer, including those included in the Trust Estate,
unless directed to do so by the Indenture Trustee;
(ii) except for Principal Reductions required by this
Indenture, claim any credit on, or make any deduction from the
principal or interest payable in respect of, the Notes (other than
amounts properly withheld from such payments under the Code or other
applicable tax law);
(iii) dissolve or liquidate in whole or in part; or
(iv) (A) permit the validity or effectiveness of this
Indenture to be impaired, or permit the lien of this Indenture to be
amended, hypothecated, subordinated, terminated or discharged, or
permit any Person to be released from any covenants or obligations with
respect to the Notes under this Indenture except as may be expressly
permitted hereby, (B) except for the Lien of the Ceding Insurer set
forth in Section 11.2, permit any Lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Issuer or any part
thereof or any interest therein or the proceeds thereof or (C) except
for the Lien of the Ceding Insurer set forth in Section 11.2, permit
the Lien of this Indenture not to constitute a valid first priority
(other than with respect to any tax, mechanics' or
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other lien) security interest in the Trust Estate.
SECTION 3.9. Annual Statement as to Compliance. The Issuer shall, from
its office outside of the United States, deliver to the Indenture Trustee, on or
prior to June 30, 1997, an Officer's Certificate stating, as to the Authorized
Officer signing such Officer's Certificate, that:
(i) a review of the activities of the Issuer during such year
and of its performance under this Indenture has been made under such
Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based
on such review, the Issuer has complied with all conditions and
covenants under this Indenture throughout such year, or, if there has
been a default in its compliance with any such condition or covenant,
specifying each such default known to such Authorized Officer and the
nature and status thereof.
SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms. (a)
The Issuer shall not consolidate or merge with or into any other Person, unless:
(i) the Person (if other than the Issuer) formed by or
surviving such consolidation or merger (i) shall be a Person organized
and existing under the laws of the Cayman Islands or another
jurisdiction that is not a part of the United States of America or any
State and shall not be subject to United States income taxation on any
of its income on a net basis, (ii) shall be regulated as an insurance
company by the Cayman Islands or by such other jurisdiction, (iii)
shall be engaged primarily and predominantly in the writing of
insurance policies or the reinsurance of risks on insurance policies
underwritten by insurance companies, (iv) shall not be "investment
company" as defined in the Investment Company Act of 1940, as amended
and (v) shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form satisfactory
to
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the Indenture Trustee, the due and punctual payment of the principal of
and interest on all Notes and the performance or observance of every
agreement and covenant of this Indenture on the part of the Issuer to
be performed or observed, all as provided herein;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) the Rating Agency Condition shall have been satisfied
with respect to such transaction;
(iv) any action that is necessary to maintain the Lien and
security interest created by this Indenture shall have been taken; and
(v) the Issuer shall have delivered to the Indenture Trustee
an Officer's Certificate and an Opinion of Counsel each stating that
such consolidation or merger and such supplemental indenture comply
with this Article III and that all conditions precedent herein provided
for relating to such transaction have been complied with (including any
filing required by the Exchange Act).
(b) Other than as specifically contemplated by the Basic Documents, the
Issuer shall not convey or transfer all or substantially all of its properties
or assets, including those included in the Trust Estate, to any Person, unless:
(i) the Person that acquires by conveyance or transfer all or
substantially all of the properties and assets of the Issuer the
conveyance or transfer of which is hereby restricted shall (A) not be a
United States citizen or a Person organized and existing under the laws
of the United States of America or any State and not be subject to
United States income tax on any of its income on a net basis, (B) not
be an "investment company" as defined in the Investment Company Act of
1940, as amended (C) expressly assume, by an indenture
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supplemental hereto, executed and delivered to the Indenture Trustee,
in form satisfactory to the Indenture Trustee, the due and punctual
payment of the principal of and interest on all Notes and the
performance or observance of every agreement and covenant of this
Indenture on the part of the Issuer to be performed or observed, all as
provided herein, (D) expressly agree by means of such supplemental
indenture that all right, title and interest so conveyed or transferred
shall be subject and subordinate to the rights of Holders of the Notes,
(E) unless otherwise provided in such supplemental indenture, expressly
agrees to indemnify, defend and hold harmless the Issuer against and
from any loss, liability or expense arising under or related to this
Indenture and the Notes, and (F) expressly agrees by means of such
supplemental indenture that such Person (or if a group of Persons, then
one specified Person) shall make all filings with the Commission (and
any other appropriate Person) required by the Exchange Act in
connection with the Notes;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) the Rating Agency Condition shall have been satisfied
with respect to such transaction;
(iv) any action that is necessary to maintain the lien and
security interest created by this Indenture shall have been taken; and
(v) the Issuer shall have delivered to the Indenture Trustee
an Officer's Certificate and an Opinion of Counsel each stating that
such conveyance or transfer and such supplemental indenture comply with
this Article III and that all conditions precedent herein provided for
relating to such transaction have been complied with (including any
filing required by the Exchange Act).
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SECTION 3.11. Successor of Transferee. (a) Upon any consolidation or
merger of the Issuer in accordance with Section 3.10(a), the Person formed by or
surviving such consolidation or merger (if other than the Issuer) shall succeed
to, and be substituted for, and may exercise every right and power of, the
Issuer under this Indenture with the same effect as if such Person had been
named as the Issuer herein.
(b) Upon a conveyance or transfer of all or substantially all of the
assets and properties of the Issuer pursuant to Section 3.10(b), the Issuer
shall be released from every covenant and agreement of this Indenture to be
observed or performed on the part of the Issuer with respect to the Notes
immediately upon the delivery of written notice to the Indenture Trustee stating
that the Issuer is to be so released.
SECTION 3.12. No Other Business. The Issuer shall not engage in any
business other than the business contemplated by the Reinsurance Agreement and
activities incidental thereto.
SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for its liabilities under the Reinsurance Agreement, the
Notes, the Interest Rate Swap and the other Basic Documents.
SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities. Except
as contemplated by this Indenture and the other Basic Documents, the Issuer
shall not make any loan or advance or credit to, or guarantee (directly or
indirectly or by an instrument having the effect of assuring another's payment
or performance on any obligation or capability of so doing or otherwise),
endorse or otherwise become contingently liable, directly or indirectly, in
connection with the obligations, stocks or dividends of, or own, purchase,
repurchase or acquire (or agree contingently to do so) any stock, obligations,
assets or securities of, or any other interest in, or make any capital
contribution to, any other Person.
SECTION 3.15. Capital Expenditures. The Issuer shall not make any
expenditure (by long-term or
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operating lease or otherwise) for capital assets (either realty or personalty).
SECTION 3.16. Further Instruments and Acts. Upon request of the
Indenture Trustee, the Issuer shall execute and deliver such further instruments
and do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
SECTION 3.17. Restricted Payments. Except as otherwise expressly
provided herein or in the Basic Documents, the Issuer shall not, directly or
indirectly, (i) make any distribution (by reduction of capital or otherwise),
whether in cash, property, securities or a combination thereof, to any owner of
an equity interest in the Issuer or otherwise with respect to any ownership or
equity interest or security in or of the Issuer, (ii) redeem, purchase, retire
or otherwise acquire for value any such ownership or equity interest or security
or (iii) set aside or otherwise segregate any amounts for any such purpose.
SECTION 3.18. Notice of Events of Default. The Issuer shall, from its
Grand Cayman office, give the Indenture Trustee and the Rating Agencies prompt
written notice of each Event of Default hereunder and of each default on the
part of any party to the Reinsurance Agreement or the Regulation 114 Trust
Agreement with respect to any of the provisions thereof.
SECTION 3.19. Removal of Administrator, Claims Reviewer and Loss
Reserve Specialist. For so long as any Notes are Outstanding, the Issuer shall
not remove the Administrator, the Claims Reviewer or the Loss Reserve Specialist
without cause unless the Rating Agency Condition shall have been satisfied in
connection therewith.
SECTION 3.20. Maintenance of Books and Records. The Issuer shall
maintain and implement administrative and operating procedures reasonably
necessary in the performance of its obligations hereunder and the Issuer shall
keep and maintain at all times, or cause to be kept and maintained at all times
in its Grand Cayman office, all documents, books, records, accounts and other
information reasonably necessary or advisable for the performance of its
obligations hereunder.
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ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.1. Satisfaction and Discharge of Indenture. This Indenture
shall cease to be of further effect with respect to the Notes except as to (i)
rights of registration of transfer and exchange, (ii) substitution of mutilated,
destroyed, lost or stolen Notes, (iii) rights of Noteholders to receive payments
of principal thereof and interest thereon, (iv) Sections 3.3, 3.4, 3.5, 3.8,
3.10, 3.12 and 3.13 hereof, (v) the rights, obligations and immunities of the
Indenture Trustee hereunder (including the rights of the Indenture Trustee under
Section 6.7 and the obligations of the Indenture Trustee under Section 4.3), and
(vi) the rights of Noteholders as beneficiaries hereof with respect to the
property so deposited with the Indenture Trustee payable to all or any of them,
and the Indenture Trustee, on demand of and at the expense of the Issuer, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture with respect to the Notes, when:
(A) any of
(1) all Notes theretofore authenticated and delivered (other than (i)
Notes that have been destroyed, lost or stolen and that have been replaced
or paid as provided in Section 2.6 and (ii) Notes for whose payment money
has theretofore been deposited in trust or segregated and held in trust by
the Issuer and thereafter repaid to the Issuer or discharged from such
trust, as provided in Section 3.3) have been delivered to the Indenture
Trustee for cancellation; or
(2) all Notes not theretofore delivered to the Indenture Trustee for
cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be irrevocably deposited with the Indenture Trustee
cash or direct obligations of or obligations guaranteed by the United States
of America (which will mature prior to the date such amounts are payable),
in trust for such purpose, in an amount sufficient to pay and discharge the
entire indebtedness on such Notes not theretofore delivered to the Indenture
Trustee for cancellation when due
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to the Maturity Date or Redemption Date, as the case may be; or
(3) the Principal Amount has been reduced to zero as the result of
payments thereon and/or one or more Principal Reductions;
(B) the Issuer has paid or caused to be paid all other sums payable
hereunder and under any of the other Basic Documents by the Issuer;
(C) the Issuer has delivered to the Indenture Trustee an Officer's
Certificate, an Opinion of Counsel and (if required by the TIA or the
Indenture Trustee) an Independent Certificate from a firm of certified
public accountants, each meeting the applicable requirements of Section
12.1(a) and, subject to Section 12.2, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with; and
(D) [the Issuer has delivered to the Indenture Trustee an Opinion of
Counsel to the effect that the satisfaction and discharge of the Notes
pursuant to this Section 4.1 will not cause any Noteholder to be treated as
having sold or exchanged any of its Notes for purposes of Section 1001 of
the Code.]
SECTION 4.2. Application of Trust Money. All monies deposited with the
Indenture Trustee pursuant to Section 4.1 hereof shall be held in trust and
applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent, as the
Indenture Trustee may determine, to the Holders of the particular Notes for the
payment or redemption of which such monies have been deposited with the
Indenture Trustee, of all sums due and to become due thereon for the Principal
Amount and interest, but such monies need not be segregated from other funds
except to the extent required herein or in the Regulation 114 Trust Agreement or
required by law or any of the other Basic Documents.
SECTION 4.3. Repayment of Monies Held by Paying Agent. In connection
with the satisfaction and discharge of this Indenture with respect to the Notes,
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all monies then held by any Paying Agent other than the Indenture Trustee under
the provisions of this Indenture with respect to such Notes shall, upon demand
of the Issuer, be paid to the Indenture Trustee to be held and applied according
to Section 3.3 and thereupon such Paying Agent shall be released from all
further liability with respect to such monies.
ARTICLE V
REMEDIES
SECTION 5.1. Events of Default. "Event of Default," wherever used
herein, means the occurrence of any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) default in the payment of any interest on any Note when
the same becomes due and payable, and such default shall continue for a
period of five (5) days or more; or
(ii) default in the payment of the Principal Amount of any
Note when the same becomes due and payable; or
(iii) default in the observance or performance of any covenant
or agreement of the Issuer made in this Indenture, or any
representation or warranty of the Issuer made in this Indenture or in
any certificate or other writing delivered pursuant hereto or in
connection herewith proving to have been incorrect in any material
respect as of the time when the same shall have been made, and such
default shall continue or not be cured, or the circumstance or
condition in respect of which such misrepresentation or warranty was
incorrect shall not have been eliminated or otherwise cured, for a
period of sixty (60) days [or in the case of a materially incorrect
representation and warranty thirty (30) days], after there shall have
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been given, by registered or certified mail, to the Issuer by the
Indenture Trustee or to the Issuer and the Indenture Trustee by the
Holders of not less than 25% of the Principal Amount of the Notes
Outstanding, a written notice specifying such default or incorrect
representation or warranty and requiring it to be remedied and stating
that such notice is a notice of Default hereunder; or
(iv) the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Issuer or any
substantial part of the Trust Estate in an involuntary case under any
applicable federal, state or foreign bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Issuer or for any substantial part of the Trust Estate,
or ordering the winding-up or liquidation of the Issuer's affairs, and
such decree or order shall remain unstayed and in effect for a period
of sixty (60) consecutive days;
(v) the commencement by the Issuer of a voluntary case under
any applicable federal, state or foreign bankruptcy, insolvency or
other similar law now or hereafter in effect, or the consent by the
Issuer to the entry of an order for relief in an involuntary case under
any such law, or the consent by the Issuer to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial
part of the Trust Estate, or the making by the Issuer of any general
assignment for the benefit of creditors, or the failure by the Issuer
generally to pay its debts as such debts become due, or the taking of
any action by the Issuer in furtherance of any of the foregoing;
(vi) the Issuer shall incur any liability, other than pursuant
to the Reinsurance Agreement, in excess of $__, and such liability
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shall remain unsatisfied for a period of __( ) consecutive days.
The Issuer shall deliver to the Indenture Trustee, within five (5) days
after the occurrence thereof, written notice in the form of an Officer's
Certificate of any event which with the giving of notice and the lapse of time
would become an Event of Default under clause (iii), its status and what action
the Issuer is taking or proposes to take with respect thereto.
SECTION 5.2. Acceleration of Maturity; Rescission and Annulment. (a) If
an Event of Default should occur and be continuing, then and in every such case
the Indenture Trustee or the Holders of Notes representing not less than a
majority of the Principal Amount of the Notes Outstanding may declare all the
Notes to be immediately due and payable, by a notice in writing to the Issuer
(and to the Indenture Trustee if given by Noteholders), and upon any such
declaration the unpaid Principal Amount of such Notes, together with accrued and
unpaid interest thereon through the date of acceleration, shall become
immediately due and payable, subject to the provisions of Section 11.1.
(b) At any time after a declaration of acceleration of maturity has
been made and before a judgment or decree for payment of the amount due has been
obtained by the Indenture Trustee as hereinafter provided in this Article V, the
Holders of Notes representing a majority of the Principal Amount of the Notes
Outstanding, by written notice to the Issuer and the Indenture Trustee, may
rescind and annul such declaration and its consequences if:
(i) the Issuer has paid or deposited with the Indenture
Trustee a sum sufficient to pay:
(A) all payments of the Principal Amount of and interest on all Notes
and all other amounts that would then be due hereunder or upon such Notes, if
the Event of Default giving rise to such acceleration had not occurred; and
(B) all sums paid or advanced by the Indenture Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of the
Indenture
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Trustee and its agents and counsel and other amounts due and owing to the
Indenture Trustee pursuant to Section 6.7; and
(ii) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration,
have been cured or waived as provided in Section 5.12.
No such rescission shall affect any subsequent default or impair any right
consequent thereto.
SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by
Indenture Trustee. (a) Subject to the provisions of Section 11.1, the Issuer
covenants that if (i) default is made in the payment of any interest on any Note
when the same becomes due and payable, and such default continues for a period
of five (5) days, or (ii) default is made in the payment of the Principal Amount
of any Note when the same becomes due and payable, the Issuer shall, upon demand
of the Indenture Trustee, pay to the Indenture Trustee, for the benefit of the
Holders of the Notes, the whole amount then due and payable on such Notes for
the Principal Amount and interest, with interest upon the overdue principal and,
to the extent payment at such rate of interest shall be legally enforceable,
upon overdue installments of interest [at the rate borne by the Notes] and in
addition thereto such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee and its agents and counsel
and other amounts due and owing to the Indenture Trustee pursuant to Section
6.7.
(b) Subject to the provisions of Section 11.1, in case the Issuer shall
fail forthwith to pay such amounts upon such demand, the Indenture Trustee, in
its own name and as trustee of an express trust, may institute a Proceeding for
the collection of the sums so due and unpaid, and may prosecute such Proceeding
to judgment or final decree, and may enforce the same against the Issuer or
other obligor upon such Notes and collect in the manner provided by law out of
the property of the Issuer or other obligor upon such Notes, wherever situated,
the monies adjudged or decreed to be payable.
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(c) Subject to the provisions of Section 11.1, if an Event of Default
occurs and is continuing, the Indenture Trustee may, as more particularly
provided in Section 5.4, in its discretion, proceed to protect and enforce its
rights and the rights of the Noteholders, by such appropriate Proceedings as the
Indenture Trustee shall deem most effective to protect and enforce any such
rights, whether for the specific enforcement of any covenant or agreement in
this Indenture or in aid of the exercise of any power granted herein, or to
enforce any other proper remedy or legal or equitable right vested in the
Indenture Trustee by this Indenture or by law.
(d) Subject to the provisions of Section 11.1, in case there shall be
pending, relative to the Issuer or any other obligor upon the Notes or any
Person having or claiming an ownership interest in the Trust Estate, Proceedings
under any applicable federal, state or foreign bankruptcy, insolvency or other
similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Issuer or its property or such other
obligor or Person, or in case of any other comparable judicial Proceedings
relative to the Issuer or other obligor upon the Notes, or to the creditors or
property of the Issuer or such other obligor, the Indenture Trustee,
irrespective of whether the Principal Amount of any Notes shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Indenture Trustee shall have made any demand pursuant to the
provisions of this Section, shall be entitled and empowered, by intervention in
such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount
of the Principal Amount and interest owing and unpaid in respect of the
Notes, and to file such other papers or documents as may be necessary
or advisable in order to have the claims of the Indenture Trustee
(including any claim for reasonable compensation to the Indenture
Trustee and each predecessor Indenture Trustee, and their respective
agents, attorneys and counsel, and all other amounts due and owing to
the Trustee pursuant
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to Section 6.7) and of the Noteholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to
vote on behalf of the Holders of Notes in any election of a trustee, a
standby trustee or Person performing similar functions in any such
Proceedings;
(iii) to collect and receive any monies or other property
payable or deliverable on any such claims and to pay all amounts
received with respect to the claims of the Noteholders and of the
Indenture Trustee on their behalf; and
(iv) to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims
of the Indenture Trustee or the Holders of Notes allowed in any
judicial proceedings relative to the Issuer, its creditors and its
property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make
payments to the Indenture Trustee and, in the event that the Indenture Trustee
shall consent to the making of payments directly to such Noteholders, to pay to
the Indenture Trustee such amounts as shall be sufficient to cover reasonable
compensation to the Indenture Trustee, each predecessor Indenture Trustee and
their respective agents, attorneys and counsel, and all other amounts due and
owing to the Trustee pursuant to Section 6.7.
(e) Nothing herein contained shall be deemed to authorize the Indenture
Trustee to authorize or consent to or vote for or accept or adopt on behalf of
any Noteholder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof or to
authorize the Indenture Trustee to vote in respect of the claim of any
Noteholder in any such proceeding except, as aforesaid, to vote for the election
of a trustee in bankruptcy or similar Person.
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(f) Subject to the provisions of Article XI, all rights of action and
of asserting claims under this Indenture, or under any of the Notes, may be
enforced by the Indenture Trustee without the possession of any of the Notes or
the production thereof in any trial or other Proceedings relative thereto, and
any such action or Proceedings instituted by the Indenture Trustee shall be
brought in its own name as trustee of an express trust, and any recovery of
judgment, subject to the payment of the expenses, disbursements and compensation
of the Indenture Trustee, each predecessor Indenture Trustee and their
respective agents and attorneys, shall be for the ratable benefit of the Holders
of the Notes.
(g) In any Proceedings brought by the Indenture Trustee (and also any
Proceedings involving the interpretation of any provision of this Indenture to
which the Indenture Trustee shall be a party), the Indenture Trustee shall be
held to represent all the Noteholders, and it shall not be necessary to make any
Noteholder a party to any such Proceedings.
SECTION 5.4. Remedies; Priorities. (a) If an Event of Default shall
have occurred and be continuing, the Indenture Trustee may do one or more of the
following (subject to Section 5.5 and Section 11.1):
(i) institute Proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the
Notes or under this Indenture with respect thereto, whether by
declaration or otherwise, enforce any judgment, obtained, and collect
from the Issuer and any other obligor upon such Notes monies adjudged
due;
(ii) institute Proceedings from time to time for the complete
or partial foreclosure of this Indenture with respect to the Trust
Estate;
(iii) exercise any remedies of a secured party under the
Relevant UCC and take any other appropriate action to protect and
enforce the rights and remedies of the Indenture Trustee and the
Noteholders; and
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(iv) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private sales called and
conducted in any manner permitted by law;
provided, however, that the Indenture Trustee may not sell or otherwise
liquidate the Trust Estate following an Event of Default, other than an Event of
Default described in Section 5.1(i) or (ii), unless (A) the Holders of 100% of
the Principal Amount of the Notes Outstanding consent thereto, (B) the proceeds
of such sale or liquidation are sufficient to pay in full the Principal Amount
of and the accrued interest on the outstanding Notes or (C) the Indenture
Trustee determines that the Trust Estate will not continue to provide sufficient
funds for the payment of the Principal Amount of and interest on the Notes as
they would have become due if the Notes had not been declared due and payable,
and the Indenture Trustee obtains the consent of Holders of 66-2/3% of the
Principal Amount of the Notes Outstanding. In determining such sufficiency or
insufficiency with respect to clauses (B) and (C) above, the Indenture Trustee
may, but need not, obtain and rely upon an opinion of an Independent investment
banking or accounting firm of national reputation as to the feasibility of such
proposed action and as to the sufficiency of the Trust Estate for such purpose.
(b) If the Indenture Trustee collects any money or property pursuant to
this Article V, it shall pay out the money or property in the following order:
(i) first, to the Indenture Trustee for amounts due under
Section 6.7;
(ii) second, to the Expense Account for payment of the
Allocated Expenses;
(iii) third, to Noteholders for amounts due and unpaid on the
Notes in respect of interest, ratably, without preference or priority
of any kind (other than with regard to whether the Notes are Class A
Floating Rate Notes or Class B Floating Rate Notes and consequent
differences in the Principal Amount thereof), according to the amounts
due and payable on the Class A Floating Rate Notes and the Class B
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Floating Rate Notes, respectively, for interest; and
(iv) fourth, to Holders of the Class A Floating Rate Notes and
Holders of the Class B Floating Rate Notes in payment of the Principal
Amount thereof due and unpaid on the Notes, ratably, without preference
or priority of any kind (other than with regard to whether the Notes
are Class A Floating Rate Notes or Class B Floating Rate Notes and
consequent differences in the Principal Amount thereof), according to
the Principal Amount due and payable on the Class A Floating Rate Notes
and the Class B Floating Rate Notes, until the Principal Amount of the
Notes is reduced to zero.
The Indenture Trustee may fix a record date and payment date for any payment to
Noteholders pursuant to this Section 5.4. At least fifteen (15) days before such
record date, the Issuer shall mail to each Noteholder and the Indenture Trustee
a notice that states the record date, the payment date and the amount to be
paid.
SECTION 5.5. Optional Preservation of the Trust Estate. Subject to the
provisions of Section 11.1, if the Notes have been declared to be due and
payable under Section 5.2 following an Event of Default, and such declaration
and its consequences have not been rescinded and annulled, the Indenture Trustee
may, but need not, elect to maintain possession of the Trust Estate and apply
proceeds as if there had been no declaration of acceleration. It is the desire
of the parties hereto and the Noteholders that there be at all times sufficient
funds for the payment of the Principal Amount of and interest on the Notes, and
the Indenture Trustee shall take such desire into account when determining
whether or not to maintain possession of the Trust Estate. In determining
whether to maintain possession of the Trust Estate, the Indenture Trustee may,
but need not, obtain and rely upon an opinion of an Independent investment
banking or accounting firm of national reputation as to the feasibility of such
proposed action and as to the sufficiency of the Trust Estate for such purpose.
SECTION 5.6. Limitation of Suits. Subject to the provisions of Section
11.1, no Holder of any Note
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shall have any right to institute any Proceeding, judicial or otherwise, with
respect to this Indenture or for the appointment of a receiver or trustee, or
for any other remedy hereunder, unless:
(a) such Holder has previously given written notice to the Indenture
Trustee of a continuing Event of Default;
(b) the Holders of not less than 25% of the Principal Amount of the
Notes Outstanding have made written request to the Indenture Trustee to
institute such Proceeding in respect of such Event of Default in its own name as
Indenture Trustee hereunder;
(c) such Holder or Holders have offered to the Indenture Trustee
reasonable indemnity against the costs, expenses and liabilities to be incurred
in complying with such request;
(d) the Indenture Trustee for sixty (60) days after its receipt of such
notice, request and offer of indemnity has failed to institute such Proceedings;
and
(e) no direction inconsistent with such written request has been given
to the Indenture Trustee during such 60-day period by the Holders of a majority
of the Principal Amount of the Notes Outstanding.
It is understood and intended that no one or more Holders of Notes
shall have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Notes or to obtain or to seek to obtain priority or preference
over any other Holders or to enforce any right under this Indenture, except in
the manner herein provided.
In the event the Indenture Trustee shall receive conflicting or
inconsistent requests and indemnity from two or more groups of Holders of Notes,
each representing less than a majority of the Principal Amount of the Notes
Outstanding, the Indenture Trustee in its sole discretion may determine what
action, if any, shall be taken, notwithstanding any other provisions of this
Indenture. Notwithstanding any provision of this Section
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5.6, the Indenture Trustee shall not take any action inconsistent with Section
11.1.
SECTION 5.7. Unconditional Rights of Noteholders To Receive Principal
and Interest. Notwithstanding any other provisions in this Indenture, the Holder
of any Note shall have the right, which is absolute and unconditional, to
receive payment of the Principal Amount of and interest, if any, on such Note on
or after the respective due dates thereof expressed in such Note or in this
Indenture (or, in the case of redemption, on or after the Redemption Date) and
to institute suit for the enforcement of any such payment, and such right shall
not be impaired without the consent of such Holder; provided, however, that the
right of Holders to receive payments of the Principal Amount on the Notes is
subject to Section 11.1 and to the terms of the Reinsurance Agreement and the
Regulation 114 Trust Agreement providing for payment of Ultimate Net Loss in
excess of the Trigger Amount to the Ceding Insurer.
SECTION 5.8. Restoration of Rights and Remedies. If the Indenture
Trustee or any Noteholder has instituted any Proceeding to enforce any right or
remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Indenture
Trustee or to such Noteholder, then and in every such case the Issuer, the
Indenture Trustee and the Noteholders shall, subject to any determination in
such Proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Indenture
Trustee and the Noteholders shall continue as though no such Proceeding had been
instituted.
SECTION 5.9. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Indenture Trustee or to the Noteholders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
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SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of
the Indenture Trustee or any Holder of any Note to exercise any right or remedy
accruing upon any Default or Event of Default shall impair any such right or
remedy or constitute a waiver of any such Default or Event of Default or any
acquiescence therein. Every right and remedy given by this Article V or by law
to the Indenture Trustee or to the Noteholders may be exercised from time to
time, and as often as may be deemed expedient, by the Indenture Trustee or by
the Noteholders, as the case may be.
SECTION 5.11. Control by Noteholders. Subject to the provisions of
Section 11.1, the Holders of a majority of the Principal Amount of the Notes
Outstanding shall have the right to direct the time, method and place of
conducting any Proceeding for any remedy available to the Indenture Trustee with
respect to the Notes or exercising any trust or power conferred on the Indenture
Trustee; provided that:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture;
(b) subject to the express terms of Section 5.4, any direction to the
Indenture Trustee to sell or liquidate the Trust Estate shall be by Holders of
Notes representing not less than 100% of the Principal Amount of the Notes
Outstanding;
(c) if the conditions set forth in Section 5.5 have been satisfied and
the Indenture Trustee elects to retain the Trust Estate pursuant to such
Section, then any direction to the Indenture Trustee by Holders of Notes
representing less than 100% of the Principal Amount of the Notes Outstanding to
sell or liquidate the Trust Estate shall be of no force and effect; and
(d) the Indenture Trustee may take any other action deemed proper by
the Indenture Trustee that is not inconsistent with such direction.
Notwithstanding the rights of Noteholders set forth in this Section,
subject to Section 6.1, the Indenture Trustee need not take any action that it
determines might involve it in costs, expenses and liabilities for which it will
not be adequately indemnified or might
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materially adversely affect the rights of any Noteholders not consenting to such
action.
SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the
acceleration of the maturity of the Notes as provided in Section 5.2, the
Holders of Notes representing not less than a majority of the Principal Amount
of the Notes Outstanding may waive any past Default or Event of Default and its
consequences except a Default (a) in the payment of principal of or interest on
any of the Notes or (b) in respect of a covenant or provision hereof that cannot
be amended, supplemented or modified without the consent of the Holder of each
Note. In the case of any such waiver, the Issuer, the Indenture Trustee and the
Holders of the Notes shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereto.
Upon any such waiver, such Default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured and not to have occurred, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereto.
SECTION 5.13. Undertaking for Costs. All parties to this Indenture
agree, and each Holder of any Note by such Holder's acceptance thereof shall be
deemed to have agreed, that any court may in its discretion require, in any suit
for the enforcement of any right or remedy under this Indenture, or in any suit
against the Indenture Trustee for any action taken, suffered or omitted by it as
Indenture Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorney's fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.13 shall not apply to (a) any suit instituted by
the Indenture Trustee, (b) any suit instituted by any Noteholder or group of
Noteholders, in each case holding in the aggregate more than 10% of the
Principal Amount of the Notes Outstanding of (c) any suit instituted by any
Noteholder for the en-
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forcement of the payment of the Principal Amount of or interest on any Note on
or after the respective due dates expressed in such Note and in this Indenture
(or, in the case of redemption, on or after the Redemption Date).
SECTION 5.14. Waiver of Stay or Extension Laws. The Issuer covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, or plead or in any manner whatsoever, claim or take the benefit or
advantage of, any stay or extension law wherever enacted, now or at any time
hereafter in force, that may affect the covenants or the performance of this
Indenture, and the Issuer (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
shall not hinder, delay or impede the execution of any power herein granted to
the Indenture Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.
SECTION 5.15. Action on Notes. The Indenture Trustee's right to seek
and recover judgment on the Notes or under this Indenture shall not be affected
by the seeking, obtaining or application of any other relief under or with
respect to this Indenture. Neither the lien of this Indenture nor any rights or
remedies of the Indenture Trustee or the Noteholders shall be impaired by the
recovery of any judgment by the Indenture Trustee against the Issuer or by the
levy of any execution under such judgment upon any portion of the Trust Estate
or upon any of the assets of the Issuer. Any money or property collected by the
Indenture Trustee shall be applied in accordance with Section 5.4(b).
SECTION 5.16. Performance and Enforcement of Certain Obligations. (a)
Promptly following a request from the Indenture Trustee to do so, the Issuer
shall take all such lawful action as the Indenture Trustee may request to compel
or secure the performance and observance by the Ceding Insurer, the Claims
Reviewer, the Loss Reserve Specialist and the Regulation 114 Trustee, as
applicable, of each of their obligations to the Issuer under or in connection
with the Reinsurance Agreement, the Claims Review Agreement, the Loss Reserve
Specialist Agreement or the Regulation 114 Trust Agreement, and to exercise any
and all rights, remedies, powers and privileges lawfully available to the Issuer
under or in con-
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nection with the Reinsurance Agreement, the Claims Review Agreement, the Loss
Reserve Specialist Agreement and the Regulation 114 Trust Agreement to the
extent and in the manner directed by the Indenture Trustee, including the
transmission of notices of default on the part of the Ceding Insurer, the Claims
Reviewer, the Loss Reserve Specialist or the Regulation 114 Trustee thereunder
and the institution of legal or administrative actions or proceedings to compel
or secure performance by the Ceding Insurer, the Claims Reviewer, the Loss
Reserve Specialist or the Regulation 114 Trustee of each of their obligations
under the Reinsurance Agreement, the Claims Review Agreement, the Loss Reserve
Specialist Agreement and the Regulation 114 Trust Agreement.
(b) If an Event of Default has occurred and is continuing, the
Indenture Trustee may, and at the direction (which direction shall be in writing
or by telephone, confirmed in writing promptly thereafter) of the Holders of
66-2/3% of the Principal Amount of the Notes Outstanding shall, exercise all
rights, remedies, powers, privileges and claims of the Issuer against the Ceding
Insurer, the Claims Reviewer, the Loss Reserve Specialist or the Regulation 114
Trustee under or in connection with the Reinsurance Agreement, the Claims Review
Agreement, the Loss Reserve Specialist Agreement or the Regulation 114 Trust
Agreement, including the right or power to take any action to compel or secure
performance or observance by the Ceding Insurer, the Claims Reviewer, the Loss
Reserve Specialist or the Regulation 114 Trustee, as the case may be, of each of
their obligations to the Issuer thereunder and to give any consent, request,
notice, direction, approval, extension, or waiver under the Reinsurance
Agreement, the Claims Review Agreement, the Loss Reserve Specialist Agreement or
the Regulation 114 Trustee Agreement, as the case may be, and any right of the
Issuer to take such action shall be suspended.
ARTICLE VI
THE INDENTURE TRUSTEE
SECTION 6.1. Duties of Indenture Trustee. (a) If an Event of Default
has occurred and is continuing, the Indenture Trustee shall exercise the rights
and powers vested in it by this Indenture and use the same
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degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Indenture Trustee undertakes to perform such
duties and only such duties as are specifically set forth in
this Indenture and no implied covenants or obligations shall
be read into this Indenture against the Indenture Trustee; and
(ii) in the absence of bad faith on its part, the
Indenture Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the
Indenture Trustee and, if required by the terms of this
Indenture, conforming to the requirements of this Indenture;
however, the Indenture Trustee shall examine the certificates
and opinions to determine whether or not they conform to the
requirements of this Indenture.
(c) The Indenture Trustee may not be relieved from liability
for its own negligent action, its own negligent failure to act or its own
willful misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section 6.1;
(ii) the Indenture Trustee shall not be liable for
any error of judgment made in good faith by a Responsible
Officer unless it is proved that the Indenture Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Indenture Trustee shall not be liable with
respect to any action it takes or omits to take in good faith
in accordance with a direction received by it pursuant to
Section 5.11.
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(d) Every provision of this Indenture that in any way relates
to the Indenture Trustee is subject to paragraphs (a), (b), (c) and (g) of this
Section 6.1.
(e) The Indenture Trustee shall not be liable for interest on
any money received by it except as the Indenture Trustee may agree in writing
with the Issuer.
(f) Money held in trust by the Indenture Trustee need not be
segregated from other funds except to the extent required by law or the terms of
this Indenture.
(g) No provision of this Indenture shall require the Indenture
Trustee to expend or risk its own funds or otherwise incur financial liability
in the performance of any of its duties hereunder or in the exercise of any of
its rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Indenture Trustee
shall be subject to the provisions of this Section 6.1 and to the provisions of
the TIA.
(i) The Indenture Trustee shall not be charged with knowledge
of any Event of Default unless either (1) a Responsible Officer shall have
actual knowledge of such Event of Default or (2) written notice of such Event of
Default shall have been given to the Indenture Trustee in accordance with the
provisions of this Indenture.
SECTION 6.2. Rights of Indenture Trustee. (a) The Indenture
Trustee may rely on any document believed by it to be genuine and to have been
signed or presented by the proper Person. The Indenture Trustee need not
investigate any fact or matters stated in the document.
(b) Before the Indenture Trustee acts or refrains from acting,
it may require an Officer's Certificate or an Opinion of Counsel. The Indenture
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on an Officer's Certifi-
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cate or Opinion of Counsel unless it is proved that the Indenture Trustee was
negligent in such reliance.
(c) The Indenture Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by or
through agents or attorneys or a custodian or nominee, and the Indenture Trustee
shall not be responsible for any misconduct or negligence on the part of, or for
the supervision of, any such agent, attorney, custodian or nominee appointed
with due care by it hereunder.
(d) The Indenture Trustee shall not be liable for any action
it takes or omits to take in good faith which it believes to be authorized or
within its rights or powers; provided, however, that such action or omission by
the Indenture Trustee does not constitute willful misconduct, negligence or bad
faith.
(e) The Indenture Trustee may consult with counsel, and the
advice or opinion of counsel with respect to legal matters relating to this
Indenture and the Notes shall be full and complete authorization and protection
from liability in respect to any action taken, omitted or suffered by it
hereunder in good faith and in accordance with the advice or opinion of such
counsel.
SECTION 6.3. Individual Rights of Indenture Trustee. The
Indenture Trustee, in its individual or any other capacity, may become the owner
or pledgee of Notes and may otherwise deal with the Issuer or its Affiliates
with the same rights it would have if it were not Indenture Trustee. Any Paying
Agent, Note Registrar, co-registrar or co-paying agent hereunder may do the same
with like rights.
SECTION 6.4. Indenture Trustee's Disclaimer. The Indenture
Trustee (i) shall not be responsible for, and makes no representation, as to the
validity or adequacy of this Indenture or the Notes and (ii) shall not be
accountable for the Issuer's use of the proceeds from the Notes, or responsible
for any statement of the Issuer in this Indenture or in any document issued in
connection with the sale of the Notes or in the Notes other than the Indenture
Trustee's certificate of authentication.
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SECTION 6.5. Notice of Defaults. If a Default occurs and is
continuing and if it is known to a Responsible Officer of the Indenture Trustee,
the Indenture Trustee shall mail to each Noteholder notice of such Default
within thirty (30) days after it occurs. Except in the case of a Default in
payment of principal of or interest on any Note (including payments pursuant to
the mandatory redemption provisions of such Note), the Indenture Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of
Noteholders.
SECTION 6.6. Reports by Indenture Trustee to Holders. The
Indenture Trustee shall deliver, from an office located outside of the United
States, to each Noteholder such information as may be required to enable such
Holder to prepare its federal and state income tax returns.
SECTION 6.7. Compensation and Indemnity. (a) The Issuer shall,
or shall cause the Administrator, to pay to the Indenture Trustee from time to
time reasonable compensation for its services. Any such payments shall be made
from and to a bank account maintained outside of the United States. The
Indenture Trustee's compensation shall not be limited by any law on compensation
of a trustee of an express trust. The Issuer shall, or shall cause the
Administrator to, reimburse the Indenture Trustee for all reasonable
out-of-pocket expenses incurred or made by it, including costs of collection, in
addition to the compensation for its services. Such expenses shall include the
reasonable compensation and expenses, disbursements and advances of the
Indenture Trustee's agents, counsel, accountants and experts. The Issuer shall,
or shall cause the Administrator to, indemnify the Indenture Trustee against any
and all loss, liability or expense (including attorneys' fees) incurred by it in
connection with the administration of this trust and the performance of its
duties hereunder. The Indenture Trustee shall notify the Issuer and the
Administrator promptly of any claim for which it may seek indemnity. Failure by
the Indenture Trustee to so notify the Issuer and the Administrator shall not
relieve the Issuer of its obligations hereunder. The Issuer shall, or shall
cause the Administrator to, defend any such claim, and the Indenture Trustee may
have separate counsel and the
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Issuer shall, or shall cause the Administrator to, pay the fees and expenses of
such counsel. Neither the Issuer nor the Administrator need reimburse any
expense or indemnity against any loss, liability or expense incurred by the
Indenture Trustee through the Indenture Trustee's own willful misconduct,
negligence or bad faith.
(b) The Issuer's payment obligations to the Indenture Trustee
pursuant to this Section 6.7 shall survive the resignation or removal of the
Indenture Trustee and the discharge of this Indenture. When the Indenture
Trustee incurs expenses after the occurrence of a Default specified in Section
5.1(iv) or (v) with respect to the Issuer, the expenses are intended to
constitute expenses of administration under any applicable federal, state or
foreign bankruptcy, insolvency or similar law.
SECTION 6.8. Replacement of Indenture Trustee. (a) No
resignation or removal of the Indenture Trustee, and no appointment of a
successor Indenture Trustee, shall become effective until the acceptance of
appointment by the successor Indenture Trustee pursuant to this Section 6.8. The
Indenture Trustee may resign at any time by so notifying the Issuer. The Holders
of a majority in Principal Amount of the Notes Outstanding may remove the
Indenture Trustee without cause by so notifying the Indenture Trustee and the
Issuer and may appoint a successor Indenture Trustee. The Issuer shall remove
the Indenture Trustee if:
(i) the Indenture Trustee fails to comply with
Section 6.11;
(ii) the Indenture Trustee is adjudged a bankrupt or
insolvent;
(iii) a receiver or other public officer takes charge
of the Indenture Trustee or its property; or
(iv) the Indenture Trustee otherwise becomes
incapable of acting.
If the Indenture Trustee resigns or is removed or if a vacancy exists in the
office of Indenture Trustee for any reason (the Indenture Trustee in such event
being re-
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ferred to herein as the retiring Indenture Trustee), the Issuer shall promptly
appoint a successor Indenture Trustee.
(b) Any successor Indenture Trustee shall deliver a written
acceptance of its appointment to the retiring Indenture Trustee and to the
Issuer. Thereupon, the resignation or removal of the retiring Indenture Trustee
shall become effective, and the successor Indenture Trustee shall have all the
rights, powers and duties of the Indenture Trustee under this Indenture. The
successor Indenture Trustee shall mail a notice of its succession to
Noteholders. The retiring Indenture Trustee shall promptly transfer all property
held by it as Indenture Trustee to the successor Indenture Trustee.
(c) If a successor Indenture Trustee does not take office
within sixty (60) days after the retiring Indenture Trustee resigns or is
removed, the retiring Indenture Trustee, the Issuer or the Holders of a majority
in Principal Amount of the Notes Outstanding may petition any court of competent
jurisdiction for the appointment of a successor Indenture Trustee. If the
Indenture Trustee fails to comply with Section 6.11, any Noteholder may petition
any court of competent jurisdiction for the removal of the Indenture Trustee and
the appointment of a successor Indenture Trustee.
(d) Notwithstanding the replacement of the Indenture Trustee
pursuant to this Section 6.8, the Issuer's obligations under Section 6.7 shall
continue for the benefit of the retiring Indenture Trustee.
SECTION 6.9. Successor Indenture Trustee by Merger. (a) If the
Indenture Trustee consolidates with, merges or converts into, or transfers all
or substantially all its corporate trust business or assets to, another
corporation or banking association, the resulting, surviving or transferee
corporation or banking association without any further act shall be the
successor Indenture Trustee; provided, that such corporation or banking
association shall be otherwise qualified and eligible under Section 6.11 and
Section 6.13. The Indenture Trustee shall provide the Rating Agencies with prior
written notice of any such transaction.
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(b) In case at the time such successor or successors by
merger, conversion or consolidation to the Indenture Trustee shall succeed to
the trusts created by this Indenture any of the Notes shall have been
authenticated but not delivered, any such successor to the Indenture Trustee may
adopt the certificate of authentication of any predecessor trustee, and deliver
such Notes so authenticated, and in case at that time any of the Notes shall not
have been authenticated, to any successor to the Indenture Trustee may
authenticate such Notes either in the name of any predecessor hereunder or in
the name of the successor to the Indenture Trustee. In all such cases such
certificates shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Indenture Trustee shall
have.
SECTION 6.10. Appointment of Co-Indenture Trustee or Separate
Indenture Trustee. (a) Notwithstanding any other provisions of this Indenture,
at any time, for the purpose of meeting any legal requirement of any
jurisdiction in which any part of the Trust Estate may at the time be located,
the Indenture Trustee shall have the power and may execute and deliver an
instrument to appoint one or more Persons to act as a co-trustee or co-trustees,
or separate trustee or separate trustees, of all or any part of the Trust, and
to vest in such Person or Persons, in such capacity and for the benefit of the
Noteholders, such title to the Trust Estate, or any part hereof, and, subject to
the other provisions of this Section , such powers, duties, obligations, rights
and trusts as the Indenture Trustee may consider necessary or desirable. No
co-trustee or separate trustee hereunder shall be required to meet the terms of
eligibility as a successor trustee under Section 6.11 and no notice to
Noteholders of the appointment of any co-trustee or separate trustee shall be
required under Section 6.8 hereof.
(b) Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions and
conditions:
(i) all rights, powers, duties and obligations
conferred or imposed upon the Indenture Trustee shall be
conferred or imposed upon and exercised or performed by the
Indenture Trustee and such separate trustee or co-trustee
jointly
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(it being understood that such separate trustee or co-trustee
shall not be authorized to act separately without the
Indenture Trustee joining in such act), except to the extent
that under any law of any jurisdiction in which any particular
act or acts are to be performed the Indenture Trustee shall be
incompetent or unqualified to perform such act or acts, in
which event such rights, powers, duties and obligations
(including the holding of title to the Trust Estate or any
portion thereof in any such jurisdiction) shall be exercised
and performed singly by such separate trustee or co-trustee,
but solely at the direction of the Indenture Trustee;
(ii) no trustee hereunder shall be personally
liable by reason of any act or omission of any other trustee
hereunder; and
(iii) the Indenture Trustee may at any time accept
the resignation of or remove any separate trustee or
co-trustee.
(c) Any notice, request or other writing given to the
Indenture Trustee shall be deemed to have been given to each of the then
separate trustees and co-trustees, as effectively as if given to each of them.
Every instrument appointing any separate trustee or co-trustee shall refer to
this Indenture and the conditions of this Article VI. Each separate trustee and
co-trustee, upon its acceptance of the trusts conferred, shall be vested with
the estates or property specified in its instrument of appointment, either
jointly with the Indenture Trustee or separately, as may be provided therein,
subject to all the provisions of this Indenture, specifically including every
provision of this Indenture relating to the conduct of, affecting the liability
of, or affording protection to, the Indenture Trustee. Every such instrument
shall be filed with the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time
constitute the Indenture Trustee its agent or attorney-in-fact with full power
and authority, to the extent not prohibited by law, to do any lawful act under
or in respect of this Agreement on its behalf and in its name. If any separate
trustee or co-trustee shall die,
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become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Indenture Trustee, to the extent permitted by law, without the appointment of a
new or successor trustee.
SECTION 6.11. Eligibility; Disqualification. The Indenture
Trustee shall at all times satisfy the requirements of TIA Section 310(a). The
Indenture Trustee or its parent shall have a combined capital and surplus of at
least $50,000,000 as set forth in its most recent published annual report of
condition and shall have a long-term debt rating of investment grade by each of
the Rating Agencies or shall otherwise be acceptable to each of the Rating
Agencies. The Indenture Trustee shall comply with TIA Section 310(b).
SECTION 6.12. Preferential Collection of Claims Against
Issuer. The Indenture Trustee shall comply with TIA Section 311(a), excluding
any creditor relationship listed in TIA Section 311(b). An Indenture Trustee who
has resigned or been removed shall be subject to TIA Section 311(a) to the
extent indicated.
SECTION 6.13. Indenture Trustee to Act from an Office Outside
the United States. Except as otherwise expressly permitted under this Indenture
or expressly required by applicable law, the Indenture Trustee (and any
successor Indenture Trustee, co-trustee or separate trustee) shall perform all
the functions and activities required of or permitted to it under this Indenture
(as they relate to the Issuer, the Notes or the Noteholders) from an office
outside of the United States.
ARTICLE VII
NOTEHOLDERS' LISTS AND REPORTS
SECTION 7.1. Issuer To Furnish Indenture Trustee Names and
Addresses of Noteholders. The Issuer shall furnish or cause to be furnished,
from and at a location outside of the United States, to the Indenture Trustee
(a) not more than five (5) days after each Record Date, a list, in such form as
the Indenture Trustee may reasonably require, of the names and addresses of the
Holders of Notes as of such Record Date and (b) at such
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other times as the Indenture Trustee may request in writing, within thirty (30)
days after receipt by the Issuer of any such request, a list of similar form and
content as of a date not more than ten (10) days prior to the time such list is
furnished; provided, however, that so long as the Indenture Trustee is the Note
Registrar, no such list shall be required to be furnished by the Issuer. The
Indenture Trustee shall maintain such list at a location outside of the United
States.
SECTION 7.2. Preservation of Information; Communications to
Noteholders. (a) The Indenture Trustee shall preserve, at a location outside of
the United States, in as current a form as is reasonably practicable, the names
and addresses of the Holders of Notes contained in the most recent list
furnished to the Indenture Trustee as provided in Section 7.1 and the names and
addresses of Holders of Notes received by the Indenture Trustee in its capacity
as Note Registrar. The Indenture Trustee may destroy any list furnished to it as
provided in such Section 7.1 upon receipt of a new list so furnished.
(b) Noteholders may communicate pursuant to TIA Section 312(b)
with other Noteholders with respect to their rights under this Indenture or
under the Notes.
(c) The Issuer, the Indenture Trustee and the Note Registrar
shall have the protection of TIA Section 312(c).
SECTION 7.3. Reports by Issuer. (a) The Issuer shall:
(i) file with the Indenture Trustee, within fifteen
(15) days after the Issuer is required to file the same with
the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from
time to time by rules and regulations prescribe) that the
Issuer may be required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act;
(ii) file with the Indenture Trustee and the
Commission in accordance with the rules and
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regulations prescribed from time to time by the Commission
such additional information, documents and reports with
respect to compliance by the Issuer with the conditions and
covenants of this Indenture as may be required from time to
time by such rules and regulations; and
(iii) supply to the Indenture Trustee (and the
Indenture Trustee shall transmit by mail to all Noteholders
described in TIA Section 313(c)) such summaries of any
information, documents and reports required to be filed by the
Issuer pursuant to clauses (i) and (ii) of this Section 7.3(a)
and by rules and regulations prescribed from time to time by
the Commission.
(b) Unless the Issuer otherwise determines, the fiscal year of
the Issuer shall correspond to the calendar year.
SECTION 7.4. Reports by Indenture Trustee. (a) If required by
TIA Section 313(a), [not later than June 30, 1997], the Indenture Trustee shall
mail to each Noteholder as required by TIA Section 313(c) a brief report dated
as of such date that complies with TIA Section 313(a). The Indenture Trustee
also shall comply with TIA Section 313(b).
(b) A copy of each report at the time of its mailing to
Noteholders shall be filed by the Indenture Trustee with the Commission and each
stock exchange, if any, on which the Notes are listed. The Issuer shall notify
the Indenture Trustee if and when the Notes are listed on any stock exchange.
ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES
SECTION 8.1. Collection of Money. Except as otherwise
expressly provided herein, the Indenture Trustee may demand payment or delivery
of, and shall receive and collect, directly and without intervention or
assistance of any fiscal agent or other intermediary, all money and other
property payable to or receivable by the
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Indenture Trustee pursuant to this Indenture, the Reinsurance Agreement, the
Interest Rate Swap and the Regulation 114 Trust Agreement, provided, however,
that all such receipts and collections shall be remitted outside of the United
States. The Indenture Trustee shall apply all such money received by it as
provided in this Indenture. Except as otherwise expressly provided in this
Indenture, and subject to the provisions of Section 11.1, if any default occurs
in the making of any payment or performance under any agreement or instrument
that is part of the Trust Estate, the Indenture Trustee may take such action as
may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate Proceedings. Any such action shall be
without prejudice to any right to claim a Default or Event of Default under this
Indenture and any right to proceed thereafter as provided in Article V
hereunder.
SECTION 8.2. Note Payment Account. On or prior to the Closing
Date, a branch of the Indenture Trustee located outside of the United States
shall establish and maintain, for the benefit of the Noteholders, a Note Payment
Account, which shall be a segregated trust account maintained at a location
outside of the United States. Any and all funds at any time on deposit in, or
otherwise to the credit of, the Note Payment Account shall be held in trust by
such branch of the Indenture Trustee located outside of the United States for
the benefit of the Noteholders. The only permitted withdrawal from or
application of funds on deposit in, or otherwise to the credit of, the Note
Payment Account shall be in accordance with Sections 3.1 and 3.3, as applicable.
The Indenture Trustee agrees to give the Issuer, the Noteholders immediate
notice if the Note Payment Account or any funds on deposit therein, or otherwise
to the credit of the Note Payment Account, shall become subject to any writ,
order, judgment, warrant of attachment, execution or similar process. Except as
set forth in Sections 3.3 and 8.3, the Issuer shall not have any legal,
equitable or beneficial interest in the Note Payment Account.
SECTION 8.3. General Provisions Regarding Accounts. (a) To the
extent that funds are held in the Note Payment Account and are not required to
be paid out within two Business Days, such funds shall be invested by the
non-U.S. branch of the Indenture Trustee in the Per-
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mitted Investments. On or before each Payment Date, all income or other gain
(net of losses and investment expenses) from investments of monies deposited in
the Note Payment Account shall be withdrawn by the non-U.S. branch of the
Indenture Trustee from such account and remitted to the Paying Agent for payment
in accordance with Section 3.3.
(b) Neither the Indenture Trustee nor the non-U.S. branch
thereof shall in any way be held liable by reason of any insufficiency in the
Note Payment Account resulting from any loss on any Permitted Investment
included therein, except for losses attributable to the Indenture Trustee's
failure to make payments on such Permitted Investments issued by the Indenture
Trustee, in its commercial capacity as principal obligor and not as trustee, in
accordance with their terms.
SECTION 8.4. Release of Trust Estate. (a) Subject to the
payment of its fees and expenses pursuant to Section 6.7, the Indenture Trustee
may, and when required by the provisions of this Indenture shall, execute
instruments to release property from the Lien of this Indenture, or convey the
Indenture Trustee's interest in the same, in a manner and under circumstances
that are not inconsistent with the provisions of this Indenture. No party
relying upon an instrument executed by the Indenture Trustee as provided in this
Article VIII shall be bound to ascertain the Indenture Trustee's authority,
inquire into the satisfaction of any conditions precedent or see to the
application of any monies.
(b) The Indenture Trustee shall, at such time as there are no
Notes Outstanding and all sums due the Indenture Trustee pursuant to Section 6.7
have been paid in full, release any remaining portion of the Trust Estate that
secured the Notes from the Lien of this Indenture and release to the Issuer or
any other Person entitled thereto any funds then on deposit in the Trust
Accounts. The Indenture Trustee shall release property from the Lien of this
Indenture pursuant to this Section 8.4(b) only upon receipt of an Issuer Request
accompanied by an Officer's Certificate, an Opinion of Counsel and (if required
by the TIA) Independent Certificates in accordance with TIA Sections 314(c) and
314(d)(1) meeting the applicable requirements of Section 12.1.
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(c) If at any time the Issuer is liable to pay a Reinsurance
Amount, the Indenture Trustee shall release such of the Securities Account
Collateral from the Lien of this Indenture, or convey the Indenture Trustee's
interest in the same, as is equal to the value of such Reinsurance Amount.
(d) Subject to the payment of its fees and expenses pursuant
to Section 6.7, if at any time any of the Allocated Expenses are due and
payable, the Indenture Trustee shall release such of the Expense Account from
the Lien of this Indenture, or convey the Indenture Trustee's interest in the
same, as is equal to the value of the Allocated Expenses then due.
SECTION 8.5. Opinion of Counsel. The Indenture Trustee shall
receive at least seven (7) days notice when requested by the Issuer to take any
action pursuant to Section 8.4(a), accompanied by copies of any instruments
involved, and the Indenture Trustee shall also require, as a condition to such
action, an Opinion of Counsel, in form and substance satisfactory to the
Indenture Trustee, stating the legal effect of any such action, outlining the
steps required to complete the same, and concluding that all conditions
precedent to the taking of such action have been complied with and such action
will not materially and adversely impair the security for the Notes or the
rights of the Noteholders in contravention of the provisions of this Indenture;
provided, however, that such Opinion of Counsel shall not be required to express
an opinion as to the fair value of the Trust Estate. Counsel rendering any such
opinion may rely, without independent investigation, on the accuracy and
validity of any certificate or other instrument delivered to the Indenture
Trustee in connection with any such action.
SECTION 8.6. Expense Account. On or prior to the Closing Date,
the Issuer shall establish and maintain outside of the United States, an Expense
Account, which shall be a segregated trust account. Any and all funds at any
time on deposit in, or otherwise to the credit of, the Expense Account shall be
held in trust and shall only be withdrawn therefrom to pay the Allocated
Expenses.
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ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.1. Supplemental Indentures Without Consent of
Noteholders. Without the consent of the Holders of any Notes but with prior
notice to the Rating Agencies, the Issuer and the Indenture Trustee, when
authorized by an Issuer Order, at any time and from time to time, may enter into
one or more indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act as in force at the date of the execution
thereof), in form satisfactory to the Indenture Trustee, for any of the
following purposes:
(i) to correct or amplify the description of any
property at any time subject to the lien of this Indenture, or
better to assure, convey and confirm unto the Indenture
Trustee any property subject or required to be subjected to
the lien of this Indenture, or to subject to the lien of this
Indenture additional property;
(ii) to evidence the succession, in compliance with
the applicable provisions hereof, of another Person to the
Issuer, and the assumption by any such successor of the
covenants of the Issuer herein and in the Notes contained;
(iii) to add to the covenants of the Issuer, for the
benefit of the Holders of the Notes, or to surrender any right
or power herein conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or
pledge any property to or with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement
any provision herein or in any supplemental indenture that may
be inconsistent with any other provision herein or in any
supplemental indenture or to make any other provisions with
respect to matters or questions arising under this Indenture
which will not be
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inconsistent with other provisions of the Indenture;
(vi) to evidence and provide for the acceptance of
the appointment hereunder by a successor trustee with respect
to the Notes and to add to or change any of the provisions of
this Indenture as shall be necessary to facilitate the
administration of the trusts hereunder by more than one
trustee, pursuant to the requirements of Article VI; or
(vii) to modify, eliminate or add to the provisions
of this Indenture to such extent as shall be necessary to
affect the qualification of this Indenture under the TIA or
under any similar federal statute hereafter enacted and to add
to this Indenture such other provisions as may be expressly
required by the TIA;
provided, however, that (i) such action shall not, as evidenced by an Opinion of
Counsel, adversely affect in any material respect the interests of any
Noteholder, (ii) the Rating Agency Condition shall have been satisfied with
respect to such action and (iii) such action shall not, as evidenced by an
Opinion of Counsel, have any material adverse impact on the income taxation of
any Notes Outstanding or any Noteholder. The Indenture Trustee is hereby
authorized to join in the execution of any such supplemental indenture and to
make any further appropriate agreements and stipulations that may be therein
contained; provided that no modification of Article XI or Section 8.4(c) and no
modification that makes a provision of this Indenture that is subject to Section
11.1 on the Closing Date no longer subject to Section 11.1 or that otherwise
modifies the subordination provisions in respect of the Securities Account
Collateral in this Indenture on the Closing Date shall be made without the
written consent of the Ceding Insurer.
SECTION 9.2. Supplemental Indentures with Consent of
Noteholders. The Issuer and the Indenture Trustee, when authorized by an Issuer
Order, also may, with prior notice to the Rating Agencies and with the consent
of the Holders of not less than a majority of the Principal Amount of the Notes
Outstanding, by Act of such Holders delivered to the Issuer and the Indenture
Trust-
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ee, enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, this Indenture or modifying in any manner the rights of the
Holders of the Notes under this Indenture; provided that no modification of
Article XI and no modification that makes a provision of this Indenture that is
subject to Section 11.1 on the Closing Date no longer subject to Section 11.1 or
that otherwise modifies the subordination provisions in respect of the
Securities Account Collateral in this Indenture on the Closing Date shall be
made without the written consent of the Ceding Insurer; provided further, that
(i) the Rating Agency Condition shall have been satisfied with respect to such
action and (ii) such action shall not, as evidenced by an Opinion of Counsel,
have any material adverse impact on the United States federal income taxation of
any Notes Outstanding or any Noteholder; and provided, further, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Note affected thereby:
(i) change the Maturity Date or the date of payment
of interest on any Note, or reduce the Principal Amount
thereof, the interest rate thereon or the Redemption Price
with respect thereto, change the provisions of this Indenture
relating to the application of collections on, or the proceeds
of the sale of, the Trust Estate to payment of principal of or
interest on the Notes, or change any place of payment where,
or the coin or currency in which, any Note or the interest
thereon is payable, or impair the right to institute suit for
the enforcement of the provisions of this Indenture requiring
the application of funds available therefor, as provided in
Article V, to the payment of any such amount due on the Notes
on or after the respective due dates thereof (or, in the case
of redemption, on or after the Redemption Date);
(ii) reduce the percentage of the Principal Amount of
the Notes Outstanding, the consent of the Holders of which is
required for any such supplemental indenture, or the consent
of the Holders of which is required for any
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waiver of compliance with certain provisions of this Indenture
or certain defaults hereunder and their consequences provided
for in this Indenture;
(iii) modify or alter the provisions of the proviso
to the definition of the term "Outstanding";
(iv) reduce the percentage of the Principal Amount of
the Notes Outstanding required to direct the Indenture Trustee
to sell or liquidate the Trust Estate pursuant to Section 5.4
if the proceeds of such sale would be insufficient to pay the
Principal Amount and accrued but unpaid interest on the Notes;
(v) modify any provision of this Indenture specifying
a percentage of the aggregate Principal Amount of the Notes
necessary to amend this Indenture or the other Basic Documents
except to increase any percentage specified herein or to
provide that certain additional provisions of this Indenture
or the Basic Documents cannot be modified or waived without
the consent of the Holder of each Outstanding Note affected
thereby;
(vi) modify any of the provisions of this Indenture
in such manner as to affect the calculation of the amount of
any payment of interest or Principal Amount due on any Note on
any Payment Date, Redemption Date or Maturity Date (including
the calculation of any of the individual components of such
calculation) or to affect the rights of the Holders of Notes
to the benefit of any provisions for the mandatory redemption
of the Notes contained herein; or
(vii) except as contemplated by the Granting Clause
of this Indenture, permit the creation of any Lien ranking
prior to or on a parity with the Lien of this Indenture with
respect to any part of the Trust Estate or, except as
otherwise permitted or contemplated herein, terminate the Lien
of this Indenture on any such collateral at any time subject
hereto
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or deprive the Holder of any Note of the security provided
by the Lien of this Indenture.
The Indenture Trustee may in its discretion determine whether or not any Notes
would be affected by any supplemental indenture and any such determination shall
be conclusive upon the Holders of all Notes, whether theretofore or thereafter
authenticated and delivered hereunder. The Indenture Trustee shall not be liable
for any such determination made in good faith.
It shall not be necessary for any Act of Noteholders under
this Section 9.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
Promptly after the execution by the Issuer and the Indenture
Trustee of any supplemental indenture pursuant to this Section 9.2, the
Indenture Trustee shall mail to the Holders of the Notes to which such amendment
or supplemental indenture relates a notice setting forth in general terms the
substance of such supplemental indenture. Any failure of the Indenture Trustee
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture.
SECTION 9.3. Execution of Supplemental Indentures. In
executing, or permitting the additional trusts created by, any supplemental
indenture permitted by this Article IX or the modification thereby of the trusts
created by this Indenture, the Indenture Trustee shall be entitled to receive,
and subject to Sections 6.1 and 6.2, shall be fully protected in relying upon,
an Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture and that all conditions precedent
to the execution and delivery of such supplemental indenture have been
satisfied. The Indenture Trustee may, but shall not be obligated to, enter into
any such supplemental indenture that affects the Indenture Trustee's own rights,
duties, liabilities or immunities under this Indenture or otherwise.
SECTION 9.4. Effect of Supplemental Indenture. Upon the
execution of any supplemental indenture pursuant
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to the provisions hereof, this Indenture shall be and shall be deemed to be
modified and amended in accordance therewith with respect to the Notes affected
thereby, and the respective rights, limitations of rights, obligations, duties,
liabilities and immunities under this Indenture of the Indenture Trustee, the
Issuer and the Holders of the Notes shall thereafter be determined, exercised
and enforced hereunder subject in all respects to such modifications and
amendments, and all the terms and conditions of any such supplemental indenture
shall be and be deemed to be part of the terms and conditions of this Indenture
for any and all purposes.
SECTION 9.5. Conformity with Trust Indenture Act. Every
amendment of this Indenture and every supplemental indenture executed pursuant
to this Article IX shall conform to the requirements of the Trust Indenture Act
as then in effect so long as this Indenture shall then be qualified under the
Trust Indenture Act.
SECTION 9.6. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article IX may, and if required by the Indenture
Trustee shall, bear a notation in form approved by the Indenture Trustee as to
any matter provided for in such supplemental indenture. If the Issuer or the
Indenture Trustee shall so determine, new Notes so modified as to conform, in
the opinion of the Indenture Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Indenture Trustee in exchange for Outstanding Notes.
ARTICLE X
REDEMPTION OF NOTES
SECTION 10.1. Redemption. (a) The Issuer shall redeem the
Notes in whole on the Mandatory Redemption Date if the Ceding Insurer does not
elect to extend the Claims Period for the Extended Claims Made Period under the
Reinsurance Agreement. The Issuer shall furnish the Rating Agencies and the
Noteholders notice of any such redemption. If the Notes are to be redeemed
pursuant to this Section 10.1(a), the Issuer shall fur-
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nish notice of such election to the Indenture Trustee not later than [five (5)]
days prior to the Redemption Date and the Issuer shall deposit by 10:00 A.M.
(New York City time) on the Redemption Date with the Indenture Trustee at its
branch outside of the United States in the Note Payment Account the Redemption
Price for the Principal Amount of the Notes to be redeemed, whereupon all such
Notes shall be due and payable on the Redemption Date.
(b) In the event that the Ceding Insurer shall have failed to
make any payment of Premium to the Issuer when due in accordance with the terms
of the Reinsurance Agreement, the Issuer shall redeem the Notes on the next
Payment Date. If the Notes are to be redeemed pursuant to this Section 10.1(b),
the Issuer shall, to the extent practicable, furnish notice of such event to the
Indenture Trustee not later than one (1) day prior to the Redemption Date, and
the Issuer shall deposit by 10:00 a.m. (New York City time) on the Redemption
Date with the Indenture Trustee at its branch outside of the United States in
the Note Payment Account the Redemption Price for the Principal Amount of Notes
then Outstanding, whereupon all such Notes shall be due and payable on the
Redemption Date.
SECTION 10.2. Form of Redemption Notice. Notice of redemption
under Section 10.1(a) shall be given by the Indenture Trustee by first-class
mail, postage prepaid, or by facsimile, mailed or transmitted promptly following
receipt of notice from the Issuer pursuant to Section 10.1(a), but not later
than ten (10) days prior to the applicable Redemption Date, to each Holder of
Notes as of the close of business on the Record Date preceding the applicable
Redemption Date, at such Holder's address or facsimile number appearing in the
Note Register.
All notices of redemption shall state:
(i) the Principal Amount of Notes to be
redeemed;
(ii) the Redemption Date;
(iii) the Redemption Price; and
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(iv) the place where such Notes are to be
surrendered for payment of the Redemption
Price (which shall be an office or agency
of the Issuer or Indenture Trustee to be
maintained outside the United States).
Notice of redemption of the Notes shall be given by the Indenture Trustee in the
name and at the expense of the Issuer. Failure to give notice of redemption, or
any defect therein, to any Holder of any Note shall not impair or affect the
validity of the redemption of any other Note.
SECTION 10.3. Notes Payable on Redemption Date. The Principal
Amount of the Notes to be redeemed shall, following notice of redemption as
required by Section 10.2 (in the case of redemption pursuant to Section
10.1(a)), on the Redemption Date become due and payable at the Redemption Price
and (unless the Issuer shall default in the payment of the Redemption Price) no
interest shall accrue on the Redemption Price for any period after the date to
which accrued interest is calculated for purposes of calculating the Redemption
Price.
ARTICLE XI
COLLATERAL AND SECURITY
SECTION 11.1. Enforcement. The Indenture Trustee will not take
or omit to take any action or assert any claim with respect to the Securities
Account Collateral or otherwise which is inconsistent with the provisions of
this Indenture. Until the Issuer's obligations under the Reinsurance Agreement
have been fully discharged, neither the Indenture Trustee nor the Noteholders
shall assert, collect or enforce the Securities Account Collateral or any part
thereof or take any action to foreclose or realize upon the Securities Account
Collateral or any part thereof or enforce this Indenture or have any right of
subrogation, reimbursement, restitution, contribution or indemnity whatsoever
from the Securities Account Collateral.
SECTION 11.2. Bankruptcy, Etc. (a) Subject to Section 11.2(c),
at any meeting of creditors of the
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Issuer or in the event of any case or proceeding, voluntary or involuntary, for
the distribution, division or application of all or part of the assets of the
Issuer or the proceeds thereof, whether such case or proceeding be for the
liquidation, dissolution, winding up or rehabilitation of the Issuer or its
business, a receivership, insolvency or bankruptcy case or proceeding, an
assignment for the benefit of creditors or a proceeding by or against the Issuer
for relief under Cayman Islands bankruptcy, insolvency or insurance law or any
other bankruptcy, reorganization, insolvency or insurance law or any other law
relating to the relief of debtors or insurance companies, readjustment of
indebtedness, reorganization, arrangement, composition or extension or marshal-
ling of assets or otherwise, the Ceding Insurer is hereby irrevocably authorized
at any such meeting or in any such proceeding to receive or collect the
Securities Account Collateral and apply the Securities Account Collateral to the
Issuer's obligations under the Reinsurance Agreement, until all of the Issuer's
obligations under the Reinsurance Agreement shall have been paid in full in
cash, rendering to the Indenture Trustee any surplus to which the Indenture
Trustee is then entitled.
(b) Subject to Section 11.2(c), at any such meeting of
creditors or in the event of any such case or proceeding, the Indenture Trustee
shall, subject to the terms of the Regulation 114 Trust Agreement and the
Reinsurance Agreement, retain the right to vote and otherwise act with respect
to the Securities Account Collateral (including, without limitation, the right
to vote to accept or reject any plan of partial or complete liquidation,
reorganization, arrangement, composition or extension), provided that the
Indenture Trustee shall not vote with respect to any such plan or take any other
action in any way so as to contest (i) the validity of any of the Issuer's
obligations under the Reinsurance Agreement or any collateral therefor, (ii) the
relative rights and duties of the Ceding Insurer under the Reinsurance
Agreement with respect to any of such collateral or (iii) the Indenture
Trustee's obligations and agreements set forth in this Indenture.
(c) Neither Section 11.2(a) nor Section 11.2(b) shall limit or
otherwise affect the provisions of the Reinsurance Agreement or the Regulation
114 Trust Agreement, and the Indenture Trustee takes the Grant to
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it of the Issuer's right, title and interest in the Reinsurance Agreement, the
Regulation 114 Trust Agreement and the Securities Account Collateral subject to
the provisions of such agreements.
SECTION 11.3. Lien Subordination. Notwithstanding any term
of this Indenture, the Issuer and the Indenture Trustee, on behalf of the
Noteholders, agree that the Grant by the Issuer of all its right, title and
interest in, to and under the Securities Account Collateral is junior and
subordinate to the right, title and interest in, to and under the Securities
Account Collateral of the Ceding Insurer and that the liens and security
interests of the Ceding Insurer in the Securities Account Collateral shall be
senior and prior in right of priority to the liens and security interest of the
Indenture Trustee in the Securities Account Collateral irrespective of the
time of the execution, delivery or issuance of any thereof or the filing or
recording for perfection of any thereof or the filing of any financing
statement or continuation statement relating to any thereof. The Indenture
Trustee hereby agrees, upon request of the Ceding Insurer at any time and from
time to time, to execute such other documents or instruments as may be requested
by the Ceding Insurer further to evidence of public record or otherwise the
senior priority of the Issuer's obligations under the Reinsurance Agreement,
as contemplated hereby. The Indenture Trustee further agrees to maintain on
its books and records such notations as the Ceding Insurer may reasonably
request to reflect the subordination contemplated hereby and to perfect or
preserve the rights of the Ceding Insurer hereunder. A copy of this Indenture
may be filed as a financing statement in any Relevant UCC recording office.
SECTION 11.4. Issuer's Obligations Absolute. Nothing contained
in this Indenture shall impair, as between the Issuer and the Indenture Trustee,
the obligation of the Issuer to pay to the Indenture Trustee all amounts payable
in respect of the Notes as and when the same shall become due and payable in
accordance with the terms thereof, or prevent the Indenture Trustee (except as
expressly otherwise provided in Section 11.1, 11.2 or 11.3) from exercising all
rights, powers and remedies otherwise permitted by this Indenture and by
applicable law upon a default in the payment of the Notes or under
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this Indenture, all, however, subject to the rights of the Ceding Insurer as set
forth in this Indenture.
SECTION 11.5. Termination of Subordination. All provisions of
this Indenture related to the Securities Account Collateral shall continue in
full force and effect, and the obligations and agreements of the Indenture
Trustee and the Issuer thereunder shall continue to be fully operative, until
all of the Issuer's obligations under the Reinsurance Agreement shall have been
paid and satisfied in full in cash and such full payment and satisfaction shall
be final and not avoidable. To the extent that the Issuer or the Regulation 114
Trust makes any payment on the Issuer's obligations under the Reinsurance
Agreement that is subsequently invalidated, declared to be fraudulent or
preferential or set aside or is required to be repaid to a trustee, receiver or
any other party under any bankruptcy, insolvency or reorganization act, state,
federal or Cayman Islands law, common law or equitable cause (such payment being
hereinafter referred to as a "Voided Payment"), then to the extent of such
Voided Payment, that portion of the Issuer's obligations under the Reinsurance
Agreement that had been previously satisfied by such Voided Payment shall be
revived and continue in full force and effect as if such Voided Payment had
never been made. In the event that a Voided Payment is recovered from the Ceding
Insurer, [an event of default shall be deemed to have existed and to be
continuing under the Reinsurance Agreement] from the date of the Ceding
Insurer's initial receipt of such Voided Payment until the full amount of such
Voided Payment is restored to the Ceding Insurer. During any continuance of any
such event of default, this Indenture shall be in full force and effect with
respect to the Notes. To the extent that the Indenture Trustee has received any
payments with respect to the Notes subsequent to the date of the Ceding
Insurer's initial receipt of such Voided Payment and such payments have not been
invalidated, declared to be fraudulent or preferential or set aside or are
required to be repaid to a trustee, receiver, or any other party under any
bankruptcy act, state, federal or Cayman Islands law, common law or equitable
cause, the Indenture Trustee shall be obligated and hereby agrees that any such
payment so made or received shall be deemed to have been received in trust for
the benefit of the Ceding Insurer, and the Indenture Trustee hereby agrees to
pay to the Ceding Insurer, upon demand,
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the full amount so received by the Indenture Trustee during such period of time
to the extent necessary fully to restore to the Ceding Insurer the amount of
such Voided Payment. Upon the payment and satisfaction in full in cash of all of
the Issuer's obligations under the Reinsurance Agreement, which payment shall be
final and not avoidable, all provisions of this Indenture relating to the
Securities Account Collateral will automatically terminate without any
additional action by any party hereto.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1. Compliance Certificates and Opinions, etc. (a)
Upon any application or request by the Issuer to the Indenture Trustee to take
any action under any provision of this Indenture, the Issuer shall furnish to
the Indenture Trustee (i) an Officer's Certificate stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with, (ii) an Opinion of Counsel stating that in the
opinion of such counsel all such conditions precedent, if any, have been
complied with and (iii) (if required by the TIA) an Independent Certificate from
a firm of certified public accountants meeting the applicable requirements of
this Section 12.1, except that, in the case of any such application or request
as to which the furnishing of such documents is specifically required by any
provision of this Indenture, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(A) a statement that each signatory of such certificate or
opinion has read or has caused to be read such covenant or condition
and the definitions herein relating thereto;
(B) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
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(C) a statement that, in the opinion of each such signatory,
such signatory has made such examination or investigation as is
necessary to enable such signatory to express an informed opinion as to
whether or not such covenant or condition has been complied with; and
(D) a statement as to whether, in the opinion of each such
signatory, such condition or covenant has been complied with.
(b)(i) Prior to the deposit of any Collateral or other
property or securities with the Indenture Trustee that is to be made the basis
for the release of any property or securities subject to the lien of this
Indenture, the Issuer shall, in addition to any obligation imposed in Section
12.1(a) or elsewhere in this Indenture, furnish to the Indenture Trustee an
Officer's Certificate certifying or stating the opinion of each person signing
such certificate as to the fair value (within ninety (90) days of such deposit)
to the Issuer of the Collateral or other property or securities to be so
deposited.
(ii) Whenever the Issuer is required to furnish to the
Indenture Trustee an Officer's Certificate certifying or stating the opinion of
any signer thereof as to the matters described in clause (i) above, the Issuer
shall also deliver to the Indenture Trustee an Independent Certificate as to the
same matters, if the fair value to the Issuer of the securities to be so
deposited and of all other such securities made the basis of any such withdrawal
or release since the commencement of the then-current fiscal year of the Issuer,
as set forth in the certificates delivered pursuant to clause (i) above and this
clause (ii), is ten percent (10%) or more of the Principal Amount of the Notes
Outstanding, but such a certificate need not be furnished with respect to any
securities so deposited, if the fair value thereof to the Issuer as set forth in
the related Officer's Certificate is less than $25,000 or less than one percent
(1%) of the Principal Amount of the Notes Outstanding.
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(iii) Whenever any property or securities are to be
released from the lien of this Indenture, the Issuer shall
also furnish to the Indenture Trustee an Officer's Certificate
certifying or stating the opinion of each person signing such
certificate as to the fair value (within ninety (90) days of
such release) of the property or securities proposed to be
released and stating that in the opinion of such person the
proposed release will not impair the security under this
Indenture in contravention of the provisions hereof.
(iv) Whenever the Issuer is required to furnish to
the Indenture Trustee an Officer's Certificate certifying or
stating the opinion of any signer thereof as to the matters
described in clause (iii) above, the Issuer shall also furnish
to the Indenture Trustee an Independent Certificate as to the
same matters if the fair value of the property or securities
and of all other property, other than property as contemplated
by clause (v) below or securities released from the lien of
this Indenture since the commencement of the then-current
calendar year, as set forth in the certificates required by
clause (iii) above and this clause (iv), equals ten percent
(10%) or more of the Principal Amount of the Notes
Outstanding, but such certificate need not be furnished in the
case of any release of property or securities if the fair
value thereof as set forth in the related Officer's
Certificate is less than $25,000 or less than one percent (1%)
of the Principal Amount of the then Outstanding Notes.
(v) Notwithstanding Section 2.10 or any other
provisions of this Section 11.1, the Issuer may, without
compliance with the requirements of the other provisions of
this Section 12.1, [make payments of fees] as and to the
extent permitted or required by the Basic Documents.
SECTION 12.2. Form of Documents Delivered to Indenture
Trustee. (a) In any case where several matters are required to be certified
by, or covered by an
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opinion of, any specified Person, it is not necessary that all such matters be
certified by, or covered by the opinion of, only one such Person, or that they
be so certified or covered by only one document, but one such Person may certify
or give an opinion with respect to some matters and one or more other such
Persons as to other matters, and any such Person may certify or give an opinion
as to such matters in one or several documents.
(b) Any certificate or opinion of an Authorized Officer of the
Issuer may be based, insofar as it relates to legal matters, upon a certificate
or opinion of, or representations by, counsel, unless such officer knows, or in
the exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which such officer's
certificate or opinion is based are erroneous. Any such certificate of an
Authorized Officer or Opinion of Counsel may be based, insofar as it relates to
factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Regulation 114 Trust Trustee, the Ceding Insurer, the
Administrator or the Issuer, stating that the information with respect to such
factual matters is in the possession of the Regulation 114 Trust Trustee, the
Ceding Insurer, the Administrator or the Issuer, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
(c) Where any Person is required to make, give or execute two
or more applications, requests, comments, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
(d) Whenever in this Indenture, in connection with any
application or certificate or report to the Indenture Trustee, it is provided
that the Issuer shall deliver any document as a condition of the granting of
such application, or as evidence of the Issuer's compliance with any term
hereof, it is intended that the truth and accuracy, at the time of the granting
of such application or at the effective date of such certificate or report (as
the case may be), of the facts and opinions stated in such document shall in
such case be conditions precedent to the right of the Issuer to have such
application granted or to the sufficiency of such certificate or report. The
foregoing shall not, however, be construed to affect the Indenture Trustee's
right to rely
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upon the truth and accuracy of any statement or opinion contained in any such
document as provided in Article VI.
SECTION 12.3. Acts of Noteholders. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Noteholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Noteholders in person or by agents duly appointed in writing; and except as
herein otherwise expressly provided such action shall become effective when such
instrument or instruments are delivered to the Indenture Trustee, and, where
it is hereby expressly required, to the Issuer. Such instrument or instruments
(and the action embodied herein and evidenced thereby) are herein sometimes
referred to as the "Act" of -- the Noteholders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.1) conclusive in favor of the Indenture Trustee and
the Issuer, if made in the manner provided in this Section 12.3.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved in any manner that the Indenture
Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note
Register.
(d) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Notes shall bind the Holder
of every Note issued upon the registration thereof or in exchange therefor or in
lieu thereof, in respect of anything done, omitted or suffered to be done by the
Indenture Trustee or the Issuer in reliance thereon, whether or not notation of
such action is made upon such Note.
SECTION 12.4. Notices, etc., to Indenture Trustee, Issuer and
Rating Agencies. Any request, demand, authorization, direction, notice, consent,
waiver or Act of Noteholders or other documents provided or permitted by this
Indenture shall be in writing and if such request, demand, authorization,
direction, notice,
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consent, waiver or act of Noteholders is to be made upon, given or furnished to
or filed with:
(i) the Indenture Trustee by any Noteholder or by the
Issuer shall be sufficient for every purpose hereunder if
made, given, furnished or filed in writing to or with the
Indenture Trustee at its Corporate Trust office; or
(ii) the Issuer by the Indenture Trustee or by any
Noteholder shall be sufficient for every purpose hereunder if
in writing and mailed first-class, postage prepaid to the
Issuer addressed to: ____________________, with a copy to the
Administrator at _______________________________________, or
at any other address previously furnished in writing to the
Indenture Trustee by the Issuer or the Administrator. The
Issuer shall promptly transmit any notice received by it from
the Noteholders to the Indenture Trustee.
Notices required to be given to the Rating Agencies by the
Issuer or the Indenture Trustee shall be in writing, personally delivered,
telecopied or mailed by certified mail, return receipt requested, to (i) in the
case of Moody's, at the following address: Moody's Investors Service, Inc.,
__________ Department, 99 Church Street, New York, New York 10007, telecopy:
(212) and (ii) in case of Standard & Poor's, at the following address:
Standard & Poor's Ratings Services, 26 Broadway (15th Floor), New York, New York
10004, attention of __________________ Department, telecopy: (212) .
SECTION 12.5. Notices to Noteholders; Waiver. (a) Where this
Indenture provides for notice to Noteholders of any event, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class, postage pre-paid to each Noteholder affected by such
event, at his address as it appears on the Note Register, not later than the
latest date, and not earlier than the earliest date, prescribed for the giving
of such notice. In any case where notice to Noteholders is given by mail,
neither the failure to mail such notice nor any defect in any notice so mailed
to any particular Noteholder shall
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affect the sufficiency of such notice with respect to other Noteholders, and any
notice that is mailed in the manner herein provided shall conclusively be
presumed to have been duly given.
(b) Where this Indenture provides for notice in any manner,
such notice may be waived in writing by any Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Noteholders shall be filed with
the Indenture Trustee but such filing shall not be a condition precedent to the
validity of any action taken in reliance upon such a waiver.
(c) In case, by reason of the suspension of regular mail
service as a result of a strike, work stoppage or similar activity, it shall be
impractical to mail notice of any event to Noteholders when such notice is
required to be given pursuant to any provision of this Indenture, then any
manner of giving such notice as shall be satisfactory to the Indenture Trustee
shall be deemed to be a sufficient giving of such notice.
(d) Where this Indenture provides for notice to the Rating
Agencies, failure to give such notice shall not affect any other rights or
obligations created hereunder, and shall not under any circumstance constitute a
Default or Event of Default.
SECTION 12.6. Alternate Payment and Notice Provisions.
Notwithstanding any provision of this Indenture or any of the Notes to the
contrary, the Issuer may enter into any agreement with any Holder of a Note
providing for a method of payment, or notice by the Indenture Trustee or any
Paying Agent to such Holder, that is different from the methods provided for in
this Indenture for such payments or notices. The Issuer shall furnish to the
Indenture Trustee a copy of each such agreement and the Indenture Trustee shall
cause payments to be made and notices to be given in accordance with such
agreements.
SECTION 12.7. Conflict with Trust Indenture Act. If any
provision hereof limits, qualifies or conflicts with another provision hereof
that is required to be included in this Indenture by any of the provisions of
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the Trust Indenture Act, such required provision shall control.
The provisions of TIA Sections 310 through 317 that impose
duties on any Person (including the provisions automatically deemed included
herein unless expressly excluded by this Indenture) are a part of and govern
this Indenture, whether or not physically contained herein.
SECTION 12.8. Effect of Headings and Table of Contents. The
Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 12.9. Successors and Assigns. All covenants and
agreements in this Indenture and the Notes by the Issuer shall bind its
successors and assigns, whether so expressed or not. All agreements of the
Indenture Trustee in this Indenture shall bind its successors, co-trustees and
agents.
SECTION 12.10. Separability. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality, and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 12.11. Benefits of Indenture. Subject to Sections 9.1
and 9.2, nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder, and the Noteholders, and any other party secured hereunder, and any
other Person with an ownership interest in any part of the Trust Estate, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 12.12. Legal Holiday. In any case where the date on
which any payment is due shall not be a Business Day, then (notwithstanding any
other provision of the Notes or this Indenture) payment need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the date on which nominally due, and no interest shall
accrue for the period from and after any such nominal date.
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SECTION 12.13. Governing Law. This Indenture shall be
construed in accordance with the laws of the State of New York.
SECTION 12.14. Counterparts. This Indenture may be executed in
any number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
SECTION 12.15. Recording of Indenture. If this Indenture is
subject to recording in any appropriate public recording offices, such recording
is to be effected by the Issuer and at its expense accompanied by an Opinion
of Counsel (which may be counsel to the Indenture Trustee or any other counsel
reasonably acceptable to the Indenture Trustee) to the effect that such
recording is necessary either for the protection of the Noteholders or any other
Person secured hereunder or for the enforcement of any right or remedy granted
to the Indenture Trustee under this Indenture.
SECTION 12.16. Corporate Obligation. No recourse may be taken,
directly or indirectly, with respect to the obligations of the Issuer or the
Indenture Trustee on the Notes or under this Indenture or any certificate or
other writing delivered in connection herewith or therewith, against (i) the
Indenture Trustee in its individual capacity, or (ii) any partner, owner,
beneficiary, agent, officer, director, employee or agent of the Indenture
Trustee in its individual capacity, any holder of equity in the Issuer or the
Indenture Trustee or in any successor or assign of the Indenture Trustee in its
individual capacity, except as any such Person may have expressly agreed (it
being understood that the Indenture Trustee has no such obligations in their
individual capacity), and except that any such partner, owner or equity holder
shall be fully liable, to the extent provided by applicable law, for any unpaid
consideration for stock, unpaid capital contribution or failure to pay any
installment or call owing to such entity.
SECTION 12.17. No Petition. The Indenture Trustee, by entering
into this Indenture, and each Noteholder, by accepting a Note, hereby covenants
and agrees that it will not at any time institute against the Issuer, or join in
any institution against the Issuer of,
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any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any federal, state or foreign bankruptcy
or similar law in connection with any obligations relating to the Notes, this
Indenture or any of the Basic Documents until the expiration of one year and one
day from the termination of the Reinsurance Agreement.
SECTION 12.18. Inspection. The Issuer agrees that, with
reasonable prior notice, it will permit any representative of the Indenture
Trustee, during the Issuer's normal business hours, to examine all the books of
account, records, reports and other papers of the Issuer, to make copies and
extracts therefrom, to cause such books to be audited by Independent certified
public accountants, and to discuss the Issuer's affairs, finances and accounts
with the Issuer's officers, employees, and Independent certified public
accountants, all at such reasonable times and as often as may be reasonably
requested. The Indenture Trustee shall and shall cause its representatives to
hold in confidence all such information except to the extent disclosure may be
required by law (and all reasonable applications for confidential treatment are
unavailing) and except to the extent that the Indenture Trustee may reasonably
determine that such disclosure is consistent with its obligations hereunder.
SECTION 12.19. Agent for Service; Submission to Jurisdiction.
By the execution and delivery of this Indenture, the Issuer (i) acknowledges
that it has, by separate written instrument, irrevocably designated and
appointed CT Corporation System, 1633 Broadway, New York, NY 10019 as its
authorized agent upon which process may be served in any suit or proceeding
arising out of or relating to the Notes or this Indenture that may be instituted
in any federal or New York state court located in The City of New York, or
brought by the Indenture Trustee (whether in its individual capacity or in its
capacity as Indenture Trustee hereunder), and acknowledges that CT Corporation
System has accepted such designation, (ii) submits to the jurisdiction of any
such court in any such suit or proceeding, and (iii) agrees that service of
process upon CT Corporation System and written notice of said service to the
Issuer (mailed or delivered to the Issuer's Secretary at its principal office in
Grand Cayman, Cayman Islands, British West Indies as specified in Section 12.4
hereof), shall be
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deemed in every respect effective service of process upon the Issuer in any such
suit or proceeding. The Issuer further agrees to take any and all action,
including the execution and filing of any and all such documents and
instruments, as may be necessary to continue such designation and appointment of
CT Corporation System in full force and effect so long as this Indenture shall
be in full force and effect.
SECTION 12.20. Waiver of Immunities. To the extent that the Issuer has
or hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service of notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise) with respect to itself
or its property, the Issuer hereby irrevocably waives such immunity in respect
of its obligations under this Indenture and the Notes, to the extent permitted
by law.
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IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have
caused this Indenture to be duly executed by their respective officers,
thereunto duly authorized and duly attested, all as of the day and year first
above written.
RESIDENTIAL REINSURANCE LIMITED
By:____________________________
Name:
Title:
THE CHASE MANHATTAN BANK
not in its individual
capacity but solely as Indenture
Trustee
By:____________________________
Name:
Title:
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STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
BEFORE ME, the undersigned authority, a Notary Public in and
for said county and state, on this day personally appeared , known to me to be
the person and officer whose name is subscribed to the foregoing instrument and
acknowledged to me that the same was the act of the said RESIDENTIAL REINSURANCE
LIMITED, an [insurance company organized under the laws of the Cayman Islands],
for the purpose and consideration therein expressed, and in the capacities
therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this __ day of August,
1996.
____________________________
Notary Public in and for the
State of New York.
[Seal]
My commission expires:
__________________________
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STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
BEFORE ME, the undersigned authority, a Notary Public in and
for said county and state, on this day personally appeared ,
known to me to be the person and officer whose name is subscribed to the
foregoing instrument and acknowledged to me that the same was the act of [NAME],
a _______ banking corporation, and that such person executed the same as the act
of said corporation for the purpose and consideration therein stated.
Then personally appeared and acknowledged that the foregoing
instrument executed by him/her as of The Chase Manhattan Bank to be his/her free
act and deed and the free act and deed of [Indenture Trustee].
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this ___ day of
August, 1996.
____________________________
Notary Public in and for the
State of New York.
[Seal]
My commission expires:
___________________________
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EXHIBIT A
[FORM OF CLASS A NOTE]
THIS NOTE MAY NOT BE ACQUIRED IN OR TRANSFERRED INTO, OR BE ACQUIRED BY OR
TRANSFERRED TO ANY PERSON RESIDENT IN, THE STATES OF [ ], [ ], [ ] AND [ ]. IN
CONNECTION WITH ANY TRANSFER OF THIS NOTE, THE HOLDER WILL BE REQUIRED TO
DELIVER TO THE INDENTURE TRUSTEE A CERTIFICATE IN THE FORM ATTACHED AS EXHIBIT C
TO THE INDENTURE TO THE EFFECT THAT THE PROPOSED TRANSFER IS NOT TO OCCUR IN OR
INTO ANY OF SUCH STATES AND THAT THE PROPOSED TRANSFEREE IS NOT A RESIDENT OF
ANY OF SUCH STATES.
AS SET FORTH HEREIN, BOTH THE OUTSTANDING PRINCIPAL AMOUNT AND THE NOTIONAL
AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE
HEREOF.
REGISTERED $_____
No. CUSIP NO.__________
RESIDENTIAL REINSURANCE LIMITED
CLASS A FLOATING RATE NOTES
RESIDENTIAL REINSURANCE LIMITED, a company incorporated and
existing under the laws of the Cayman Islands (herein referred to as the
"Issuer"), for value received, hereby promises to pay to ___________, or
registered assigns, the principal sum of _____________________ DOLLARS, as such
amount may be reduced by any Principal Reduction, on January 2, 1998, together
with interest on each payment date at the per annum rate specified on the
reverse hereof on the Principal Amount of this Note outstanding on the previous
Payment Date after giving effect to any payments and/or Principal Reduction made
on such previous Payment Date (or on the Closing Date in the case of the first
Payment Date).
Payment Dates: The first day of each month, or if such day is
not a Business Day, the next succeeding Business Day, commencing on September 3,
1996 and ending on the earlier of the date on which the Principal Amount of this
Note is reduced to zero through a Principal Reduction, the Maturity Date or the
Redemption Date.
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Record Dates: the fifteenth (15th) day preceding any Payment
Date.
Additional provisions of this Note are set forth on the other
side of this Note. Capitalized terms used and not otherwise defined herein are
defined in the Indenture, dated as of August __, 1996 (as amended, supplemented
or otherwise modified and in effect from time to time, the "Indenture") between
RESIDENTIAL REINSURANCE LIMITED and THE CHASE MANHATTAN BANK, a New York
corporation, as Indenture Trustee (in such capacity, the "Indenture Trustee").
Unless the certificate of authentication hereon has been
executed by the Indenture Trustee whose name appears below by manual signature,
this Note shall not be entitled to any benefit under the Indenture referred to
on the reverse hereof, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be signed, manually or in facsimile, by its Authorized Officer, as of the date
set forth below.
Date:
RESIDENTIAL REINSURANCE LIMITED
By:___________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes designated above and referred to in the
within-mentioned Indenture.
Date:
THE CHASE MANHATTAN BANK
not in its individual capacity
but solely as Indenture Trustee
By: ___________________________
Authorized Officer
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[Form of Reverse Side of Note]
Class A Floating Rate Note due 1998
1. Interest
The Issuer shall pay interest on this Note on each Payment
Date at a per annum rate equal to the Applicable LIBOR Rate plus __%, on the
Principal Amount of this Note outstanding on the previous Payment Date after
giving effect to any payments and/or Principal Reduction made on such previous
Payment Date (or on the Closing Date in the case of the first Payment Date). The
Issuer shall pay interest on each Payment Date until the Principal Amount of
this Note is paid or made available for payment or reduced to zero on account of
payments and/or Principal Reductions, subject to certain limitations contained
in Section 3.1 of the Indenture. Interest on this Note will accrue for each
Payment Date from and including the previous Payment Date (or, in the case of
the initial Payment Date, from August __, 1996) to but excluding such Payment
Date (an "Interest Accrual Period"). Interest will be computed on the basis of
the actual number of days elapsed and a 360-day year. The Principal Amount of
and interest on this Note shall be paid in the manner specified below.
"Principal Amount" of any Note shall mean the original
principal amount of such Note reduced by the amount of any Principal Reduction
allocated to such Note.
"Principal Reduction" shall mean a reduction in the Issuer's
obligation to pay the principal of a Note pursuant to the Indenture as a result
of the payment by the Issuer to the Ceding Insurer under the Reinsurance
Agreement.
"LIBOR" for each Interest Accrual Period (the "Applicable
LIBOR Rate") will be determined by the Calculation Agent as follows: (i) On the
second London Banking Day prior to the Interest Reset Date for such Interest
Accrual Period (a "LIBOR Determination Date"), the Calculation Agent shall
determine the arithmetic mean of the offered rates for deposits in U.S. dollars
for the period of one month, commencing on such Interest Reset Date, which
appear on the Reuters Screen LIBOR Page at approximately 11:00 a.m., London time
on such LIBOR Determination Date. For purposes of calculating LIBOR, "London
Banking Day"
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means any Business Day on which dealings in deposits in United States dollars
are transacted in the London interbank market and "Reuters Screen LIBO Page"
means the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks). If at
least two such offered rates appear on the Reuters Screen LIBO Page, "LIBOR" for
such Interest Accrual Period will be the arithmetic mean of such offered rates
as determined by the Calculation Agent. (ii) If fewer than two offered rates
appear on the Reuters Screen LIBO Page on such LIBOR Determination Date, the
Calculation Agent will request the principal London offices of each of four
major banks in the London interbank market selected by such Calculation Agent to
provide such Calculation Agent with its offered quotations for deposits in U.S.
dollars for one month, commencing on such Interest Reset Date, to prime banks in
the London interbank market at approximately 11:00 a.m., London time, on such
LIBOR Determination Date and in a Principal Amount equal to an amount of not
less than $1,000,000 that is representative of a single transaction in such
market at such time. If at least two such quotations are provided, "LIBOR" for
such Interest Accrual Period will be the arithmetic mean of such quotations. If
fewer than two such quotations are provided, "LIBOR" for such Interest Accrual
Period will be the arithmetic means of rates quoted by three major banks in The
City of New York selected by the Calculation Agent at approximately 11:00 a.m.,
New York City time, on such LIBOR Determination Date for loans in U.S. dollars
to leading European banks, for one month, commencing on such Interest Reset
Date, and in a Principal Amount equal to an amount of not less than $1,000,000
that is representative of a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid by such Calculation
Agent are not quoting rates as mentioned in this sentence, "LIBOR" for such
Interest Accrual Period will be the same as LIBOR for the immediately preceding
Interest Accrual Period.
"Interest Reset Date" shall be the first day of each Interest
Accrual Period.
"Calculation Agent" shall mean The Chase Manhattan Bank.
2. Indenture
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This Note is one of a duly authorized issue of Notes of the
Issuer, designated as its Class A Floating Rate Notes (herein called the "Class
A Floating Rate Notes"), issued under the Indenture, to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights and obligations thereunder of the Issuer, the Indenture
Trustee and the Holders of such Notes. Also issued under the Indenture are the
Class B Floating Rate Notes (the "Class B Floating Rate Notes" and, together
with the Class A Floating Rate Notes, the "Notes"). The Notes are subject to all
terms of the Indenture.
3. Collateral
The Notes are and will be equally and ratably secured by the
Collateral pledged as security therefor as provided in the Indenture subject to
the prior security interest of the Ceding Insurer pursuant to the Indenture and
limitations on enforcement in Section 11.1 thereof.
4. Repayment of Principal
The entire unpaid Principal Amount of this Note shall be due
and payable on the Maturity Date. Notwithstanding the foregoing, the entire
unpaid Principal Amount of the Notes shall be due and payable on the date on
which an Event of Default shall have occurred and be continuing and the
Indenture Trustee or the Holders of the Notes representing not less than a
majority of the Principal Amount of the Outstanding Notes have declared the
Notes to be immediately due and payable in the manner provided in Section 5.2 of
the Indenture. All principal payments on the Notes shall be subject to the terms
of the Reinsurance Agreement and any resulting Principal Reduction of the
Principal Amount of the Notes in accordance with Section 2.8(d) of the
Indenture. All principal payments on the Notes shall be made pro rata to the
Noteholders entitled thereto; provided that the Principal Amount of the Class B
Floating Rate Notes shall be reduced on a pro rata basis to zero by means of
Principal Reductions before any Principal Reductions are made with respect to
any Class A Floating Rate Notes; and provided further that, following any
Contingent Principal Event and the establishment of any Loss Reserve Amount, the
Notional Amount of the Class B Floating Rate Notes shall be reduced on a pro
rata basis until all such Notes are wholly contingent before any
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reductions are made with respect to the Notional Amount of any Class A Floating
Rate Notes.
5. Method of Payment
Payments of interest on this Note due and payable on each
Payment Date, together with any repayment of the Principal Amount, to the extent
not in full payment of this Note, shall be made by check mailed to the Person
whose name appears as the Registered Holder of the Note (or one or more
Predecessor Notes) on the Note Register as of the close of business on each
Record Date. Such checks shall be mailed to the Person entitled thereto at the
address of such Person as it appears on the Note Register as of the applicable
Record Date without requiring that this Note be submitted for notation of
payment. All payments shall be made by the Paying Agent from a location outside
of the United States. Any reduction in the Principal Amount of this Note
effected by any Principal Reduction or by any payments made on any Payment Date
or any Redemption Date shall be binding upon all future Holders of this Note and
of any Note issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof, whether or not noted hereon. If funds are expected to
be available, as provided in the Indenture, for payment in full of the then
remaining unpaid Principal Amount of this Note on a Payment Date, then the
Indenture Trustee, in the name of and on behalf of the Issuer, will notify the
Person who was the Registered Holder hereof as of the Record Date preceding such
Payment Date by notice mailed or transmitted by facsimile prior to such Payment
Date, and the amount then due and payable shall be payable only upon
presentation and surrender of this Note at an office of the Indenture Trustee
located outside of the United States or the Indenture Trustee's agent appointed
for such purposes located outside of the United States.
[The Issuer shall pay interest on overdue installments of
interest at the Applicable LIBOR Rate for the Interest Accrual Period for which
the interest payment is overdue to the extent lawful.]
The Principal Amount of and interest on this Note are payable
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts. All payments
made by the Issuer with respect to this Note shall be applied first
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to interest due and payable on this Note as provided above and then to the
unpaid Principal Amount of this Note.
6. Redemption
As provided in the Indenture, the Notes shall be redeemed, in
whole, (a) on the Mandatory Redemption Date, if the Ceding Insurer does not
elect to extend the Claims Period for the Extended Claims Made Period under the
Reinsurance Agreement or (b) on the following Payment Date, if the Ceding
Insurer shall fail to pay any Premium when due under the Reinsurance Agreement.
7. Transfers
As provided in the Indenture, and subject to certain
limitations set forth therein, the transfer of this Note may be registered on
the Note Register upon surrender of this Note for registration of transfer,
together with a duly executed Transfer Certificate in the form attached as
Exhibit C to the Indenture, at the office or agency designated by the Issuer
pursuant to the Indenture, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Indenture Trustee duly
executed by, the Holder hereof or such Holder's attorney duly authorized in
writing, with such signature guaranteed by an "eligible guarantor institution"
meeting the requirements of the Note Registrar, and thereupon one or more new
Notes of authorized denominations and in the same aggregate Principal Amount
will be issued to the designated transferee or transferees. No service charge
will be charged for any registration of transfer or exchange of this Note, but
the transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any such registration
of transfer or exchange.
8. Corporate Obligation
Each Noteholder or Note Owner, by its acceptance of a Note or,
in the case of a Note Owner, a beneficial interest in a Note, covenants and
agrees that no recourse may be taken, directly or indirectly, with respect to
the obligations of the Issuer or the Indenture Trustee on the Notes or under the
Indenture or any certificate or other writing delivered in connection therewith,
against (i) the Indenture Trustee in its individual capacity, or (ii) any
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partner, owner, beneficiary, agent, officer, director or employee of the
Indenture Trustee, each in its individual capacity, any holder of equity in the
Issuer or the Indenture Trustee or in any successor or assign of the Indenture
Trustee, each in its individual capacity, except as any such Person may have
expressly agreed and except that any such partner, owner or equity holder shall
be fully liable, to the extent provided by applicable law, for any unpaid
consideration for stock, unpaid capital contribution for stock, unpaid capital
contribution or failure to pay any installment or call owing to such entity.
9. No Petition
Each Noteholder or Note Owner, by acceptance of a Note or, in
the case of a Note Owner, a beneficial interest in a Note, covenants and agrees
by accepting the benefits of the Indenture that such Noteholder or Note Owner
will not at any time institute against the Issuer, or join in any institution
against the Issuer of, any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings under any federal, state or foreign bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or the Basic Documents.
10. Tax Treatment
(a) The Issuer will treat the Class A Floating Rate Notes as
equity for United States federal income tax purposes, and by accepting a Class A
Floating Rate Note, Holders hereby acknowledge and agree to such treatment and
covenant to take no action inconsistent with such treatment.
(b) The Issuer will provide the "PFIC Annual Information
Statement" referred to in IRS Notice 88-125, or any such other or additional
information that the U.S. Internal Revenue Service shall require in connection
with being or becoming a shareholder of a "qualified electing fund" as defined
in Section 1295 of the Code (such Statement or other or additional information,
the "QEF Information") to any Holder that requests the QEF Information by
December 30 of any year in which the Notes are outstanding. The Issuer will use
reasonable efforts to provide the QEF Information to such a Holder by March 1 of
the immediately
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succeeding year; provided, however, that if the Issuer will not be able to
provide such information by such March 1, the Issuer shall notify the requesting
Holder in writing, on or prior to that date, that the Issuer will provide the
QEF Information on or before a later specified date, which date will be no later
than August 15 of such year.
11. Persons Deemed Owner
Prior to the due presentment for registration of transfer of
this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the
Indenture Trustee may treat the Person in whose name this Note (as of the day of
determination or as of such other date as may be specified in the Indenture) is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and none of the Issuer, the Indenture Trustee or any such agent shall
be affected by notice to the contrary.
12. Amendments and Waivers
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Notes under the
Indenture at any time by the Issuer with the consent of the Holders of Notes
representing a majority of the Outstanding Principal Amount of all Notes at the
time Outstanding. The Indenture also contains provisions permitting the Holders
of Notes representing specified percentages of the Outstanding Principal Amount
of the Notes, on behalf of the Holders of all the Notes, to waive compliance by
the Issuer with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Note (or any one or more Predecessor Notes) shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof whether or not notation of such consent or waiver is made upon this
Note. The Indenture also permits the Indenture Trustee to amend or waive certain
terms and conditions set forth in the Indenture without the consent of Holders
of the Notes issued thereunder.
13. Successor to Issuer; Mergers or Consolidations
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The term "Issuer", as used in this Note, includes any
successor to the Issuer under the Indenture.
The Issuer is permitted by the Indenture, under certain
circumstances, to merge or consolidate, subject to the rights of the Indenture
Trustee and the Holders of Notes under the Indenture.
14. Form of Notes
The Notes are issuable only in definitive, fully registered
form in denominations as provided in the Indenture, subject to certain
limitations therein set forth.
15. Governing Law
This Note and the Indenture shall be governed by, and
construed in accordance with the laws of the State of New York, and the
obligations, rights and remedies of the parties hereunder and thereunder shall
be determined in accordance with such laws.
16. Unconditional Rights
No reference herein to the Indenture, and no provision of this
Note or of the Indenture, shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the Principal Amount of and interest
on this Note at the times, place and rate, and in the coin or currency herein
prescribed.
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EXHIBIT B
[FORM OF CLASS B NOTE]
THIS NOTE MAY NOT BE ACQUIRED IN OR TRANSFERRED INTO, OR BE ACQUIRED BY OR
TRANSFERRED TO ANY PERSON RESIDENT IN, THE STATES OF [ ], [ ], [ ] AND [ ]. IN
CONNECTION WITH ANY TRANSFER OF THIS NOTE, THE HOLDER WILL BE REQUIRED TO
DELIVER TO THE INDENTURE TRUSTEE A CERTIFICATE IN THE FORM ATTACHED AS EXHIBIT C
TO THE INDENTURE TO THE EFFECT THAT THE PROPOSED TRANSFER IS NOT TO OCCUR IN OR
INTO ANY OF SUCH STATES AND THAT THE PROPOSED TRANSFEREE IS NOT A RESIDENT OF
ANY OF SUCH STATES.
THIS NOTE IS SUBORDINATED TO THE CLASS A FLOATING RATE NOTES UPON THE OCCURRENCE
OF A PRINCIPAL REDUCTION AS PROVIDED IN THE INDENTURE REFERRED TO HEREIN.
AS SET FORTH HEREIN, BOTH THE OUTSTANDING PRINCIPAL AMOUNT AND THE NOTIONAL
AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE
HEREOF.
REGISTERED $_____
No. CUSIP NO.__________
RESIDENTIAL REINSURANCE LIMITED
CLASS B FLOATING RATE NOTES
RESIDENTIAL REINSURANCE LIMITED, a company incorporated and
existing under the laws of the Cayman Islands (herein referred to as the
"Issuer"), for value received, hereby promises to pay to ___________, or
registered assigns, the principal sum of _____________________ DOLLARS, as such
amount may be reduced by any Principal Reduction, on January 2, 1998 together
with interest on each payment date at the per annum rate specified on the
reverse hereof on the Principal Amount of this Note outstanding on the previous
Payment Date after giving effect to any payments and/or Principal Reduction made
on such previous Payment Date (or on the Closing Date in the case of the first
Payment Date).
Payment Dates: The first day of each month, or if such day is
not a Business Day, the next succeeding
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Business Day, commencing on September 3, 1996 and ending on the earlier of the
date on which the Principal Amount of this Note is reduced to zero through a
Principal Reduction, the Maturity Date or the Redemption Date.
Record Dates: the fifteenth (15th) day preceding any Payment
Date.
Additional provisions of this Note are set forth on the other
side of this Note. Capitalized terms used and not otherwise defined herein are
defined in the Indenture, dated as of August __, 1996 (as amended, supplemented
or otherwise modified and in effect from time to time, the "Indenture") between
RESIDENTIAL REINSURANCE LIMITED and THE CHASE MANHATTAN BANK, a New York
corporation, as Indenture Trustee (in such capacity, the "Indenture Trustee").
Unless the certificate of authentication hereon has been
executed by the Indenture Trustee whose name appears below by manual signature,
this Note shall not be entitled to any benefit under the Indenture referred to
on the reverse hereof, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be signed, manually or in facsimile, by its Authorized Officer, as of the date
set forth below.
Date:
RESIDENTIAL REINSURANCE LIMITED
By:___________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes designated above and referred to in the
within-mentioned Indenture.
Date:
THE CHASE MANHATTAN BANK
not in its individual capacity
but solely as Indenture Trustee
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By: ___________________________
Authorized Officer
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[Form of Reverse Side of Note]
Class B Floating Rate Note due 1998
1. Interest
The Issuer shall pay interest on this Note on each Payment
Date at a per annum rate equal to the Applicable LIBOR Rate plus __%, on the
Principal Amount of this Note outstanding on the previous Payment Date after
giving effect to any payments and/or Principal Reduction made on such previous
Payment Date (or on the Closing Date in the case of the first Payment Date). The
Issuer shall pay interest on each Payment Date until the Principal Amount of
this Note is paid or made available for payment or reduced to zero on account of
payments and/or Principal Reductions, subject to certain limitations contained
in Section 3.1 of the Indenture. Interest on this Note will accrue for each
Payment Date from and including the previous Payment Date (or, in the case of
the initial Payment Date, from August __, 1996) to but excluding such Payment
Date (an "Interest Accrual Period"). Interest will be computed on the basis of
the actual number of days elapsed and a 360-day year. The Principal Amount of
and interest on this Note shall be paid in the manner specified below.
"Principal Amount" of any Note shall mean the original
principal amount of such Note reduced by the amount of any Principal Reduction
allocated to such Note.
"Principal Reduction" shall mean a reduction in the Issuer's
obligation to pay the principal of a Note pursuant to the Indenture as a result
of the payment by the Issuer to the Ceding Insurer under the Reinsurance
Agreement.
"LIBOR" for each Interest Accrual Period (the "Applicable
LIBOR Rate") will be determined by the Calculation Agent as follows: (i) On the
second London Banking Day prior to the Interest Reset Date for such Interest
Accrual Period (a "LIBOR Determination Date"), the Calculation Agent shall
determine the arithmetic mean of the offered rates for deposits in U.S. dollars
for the period of one month, commencing on such Interest Reset Date, which
appear on the Reuters Screen LIBOR Page at approximately 11:00 a.m., London time
on such LIBOR Determination Date. For purposes of calculating LIBOR, "London
Banking Day"
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means any Business Day on which dealings in deposits in United States dollars
are transacted in the London interbank market and "Reuters Screen LIBO Page"
means the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks). If at
least two such offered rates appear on the Reuters Screen LIBO Page, "LIBOR" for
such Interest Accrual Period will be the arithmetic mean of such offered rates
as determined by the Calculation Agent. (ii) If fewer than two offered rates
appear on the Reuters Screen LIBO Page on such LIBOR Determination Date, the
Calculation Agent will request the principal London offices of each of four
major banks in the London interbank market selected by such Calculation Agent to
provide such Calculation Agent with its offered quotations for deposits in U.S.
dollars for one month, commencing on such Interest Reset Date, to prime banks in
the London interbank market at approximately 11:00 a.m., London time, on such
LIBOR Determination Date and in a Principal Amount equal to an amount of not
less than $1,000,000 that is representative of a single transaction in such
market at such time. If at least two such quotations are provided, "LIBOR" for
such Interest Accrual Period will be the arithmetic mean of such quotations. If
fewer than two such quotations are provided, "LIBOR" for such Interest Accrual
Period will be the arithmetic means of rates quoted by three major banks in The
City of New York selected by the Calculation Agent at approximately 11:00 a.m.,
New York City time, on such LIBOR Determination Date for loans in U.S. dollars
to leading European banks, for one month, commencing on such Interest Reset
Date, and in a Principal Amount equal to an amount of not less than $1,000,000
that is representative of a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid by such Calculation
Agent are not quoting rates as mentioned in this sentence, "LIBOR" for such
Interest Accrual Period will be the same as LIBOR for the immediately preceding
Interest Accrual Period.
"Interest Reset Date" shall be the first day of each Interest
Accrual Period.
"Calculation Agent" shall mean The Chase Manhattan Bank.
2. Indenture
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This Note is one of a duly authorized issue of Notes of the
Issuer, designated as its Class B Floating Rate Notes (herein called the "Class
B Floating Rate Notes"), issued under the Indenture, to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights and obligations thereunder of the Issuer, the Indenture
Trustee and the Holders of such Notes. Also issued under the Indenture are the
Class A Floating Rate Notes (the "Class A Floating Rate Notes" and, together
with the Class B Floating Rate Notes, the "Notes"). The Notes are subject to all
terms of the Indenture.
3. Collateral
The Notes are and will be equally and ratably secured by the
Collateral pledged as security therefor as provided in the Indenture subject to
the prior security interest of the Ceding Insurer pursuant to the Indenture and
limitations on enforcement in Section 11.1 thereof.
4. Repayment of Principal
The entire unpaid Principal Amount of this Note shall be due
and payable on the Maturity Date. Notwithstanding the foregoing, the entire
unpaid Principal Amount of the Notes shall be due and payable on the date on
which an Event of Default shall have occurred and be continuing and the
Indenture Trustee or the Holders of the Notes representing not less than a
majority of the Principal Amount of the Outstanding Notes have declared the
Notes to be immediately due and payable in the manner provided in Section 5.2 of
the Indenture. All principal payments on the Notes shall be subject to the terms
of the Reinsurance Agreement and any resulting Principal Reduction of the
Principal Amount of the Notes in accordance with Section 2.8(d) of the
Indenture. All principal payments on the Notes shall be made pro rata to the
Noteholders entitled thereto; provided that the Principal Amount of the Class B
Floating Rate Notes shall be reduced on a pro rata basis to zero by means of
Principal Reductions before any Principal Reductions are made with respect to
any Class A Floating Rate Notes; and provided further that, following any
Contingent Principal Event and the establishment of any Loss Reserve Amount, the
Notional Amount of the Class B Floating Rate Notes shall be reduced on a pro
rata basis until all such Notes are wholly contingent before any
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reductions are made with respect to the Notional Amount of any Class A Floating
Rate Notes.
5. Method of Payment
Payments of interest on this Note due and payable on each
Payment Date, together with any repayment of the Principal Amount, to the extent
not in full payment of this Note, shall be made by check mailed to the Person
whose name appears as the Registered Holder of the Note (or one or more
Predecessor Notes) on the Note Register as of the close of business on each
Record Date. Such checks shall be mailed to the Person entitled thereto at the
address of such Person as it appears on the Note Register as of the applicable
Record Date without requiring that this Note be submitted for notation of
payment. All payments shall be made by the Paying Agent from a location outside
of the United States. Any reduction in the Principal Amount of this Note
effected by any Principal Reduction or by any payments made on any Payment Date
or any Redemption Date shall be binding upon all future Holders of this Note and
of any Note issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof, whether or not noted hereon. If funds are expected to
be available, as provided in the Indenture, for payment in full of the then
remaining unpaid Principal Amount of this Note on a Payment Date, then the
Indenture Trustee, in the name of and on behalf of the Issuer, will notify the
Person who was the Registered Holder hereof as of the Record Date preceding such
Payment Date by notice mailed or transmitted by facsimile prior to such Payment
Date, and the amount then due and payable shall be payable only upon
presentation and surrender of this Note at an office of the Indenture Trustee
located outside of the United States or the Indenture Trustee's agent appointed
for such purposes located outside of the United States.
[The Issuer shall pay interest on overdue installments of
interest at the Applicable LIBOR Rate for the Interest Accrual Period for which
the interest payment is overdue to the extent lawful.]
The Principal Amount of and interest on this Note are payable
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts. All payments
made by the Issuer with respect to this Note shall be applied first
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to interest due and payable on this Note as provided above and then to the
unpaid Principal Amount of this Note.
6. Redemption
As provided in the Indenture, the Notes shall be redeemed, in
whole, (a) on the Mandatory Redemption Date, if the Ceding Insurer does not
elect to extend the Claims Period for the Extended Claims Made Period under the
Reinsurance Agreement or (b) on the following Payment Date, if the Ceding
Insurer shall fail to pay any Premium when due under the Reinsurance Agreement.
7. Transfers
As provided in the Indenture, and subject to certain
limitations set forth therein, the transfer of this Note may be registered on
the Note Register upon surrender of this Note for registration of transfer,
together with a duly executed Transfer Certificate in the form attached as
Exhibit C to the Indenture, at the office or agency designated by the Issuer
pursuant to the Indenture, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Indenture Trustee duly
executed by, the Holder hereof or such Holder's attorney duly authorized in
writing, with such signature guaranteed by an "eligible guarantor institution"
meeting the requirements of the Note Registrar, and thereupon one or more new
Notes of authorized denominations and in the same aggregate Principal Amount
will be issued to the designated transferee or transferees. No service charge
will be charged for any registration of transfer or exchange of this Note, but
the transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any such registration
of transfer or exchange.
8. Corporate Obligation
Each Noteholder or Note Owner, by its acceptance of a Note or,
in the case of a Note Owner, a beneficial interest in a Note, covenants and
agrees that no recourse may be taken, directly or indirectly, with respect to
the obligations of the Issuer or the Indenture Trustee on the Notes or under the
Indenture or any certificate or other writing delivered in connection therewith,
against (i) the Indenture Trustee in its individual capacity, or (ii) any
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partner, owner, beneficiary, agent, officer, director or employee of the
Indenture Trustee, each in its individual capacity, any holder of equity in the
Issuer or the Indenture Trustee or in any successor or assign of the Indenture
Trustee, each in its individual capacity, except as any such Person may have
expressly agreed and except that any such partner, owner or equity holder shall
be fully liable, to the extent provided by applicable law, for any unpaid
consideration for stock, unpaid capital contribution for stock, unpaid capital
contribution or failure to pay any installment or call owing to such entity.
9. No Petition
Each Noteholder or Note Owner, by acceptance of a Note or, in
the case of a Note Owner, a beneficial interest in a Note, covenants and agrees
by accepting the benefits of the Indenture that such Noteholder or Note Owner
will not at any time institute against the Issuer, or join in any institution
against the Issuer of, any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings under any federal, state or foreign bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or the Basic Documents.
10. Tax Treatment
(a) The Issuer will treat the Class B Floating Rate Notes as
equity for United States federal income tax purposes, and by accepting a Class B
Floating Rate Note, Holders hereby acknowledge and agree to such treatment and
covenant to take no action inconsistent with such treatment.
(b) The Issuer will provide the "PFIC Annual Information
Statement" referred to in IRS Notice 88-125, or any such other or additional
information that the U.S. Internal Revenue Service shall require in connection
with being or becoming a shareholder of a "qualified electing fund" as defined
in Section 1295 of the Code (such Statement or other or additional information,
the "QEF Information") to any Holder that requests the QEF Information by
December 30 of any year in which the Notes are outstanding. The Issuer will use
reasonable efforts to provide the QEF Information to such a Holder by March 1 of
the immediately succeeding year; provided, however, that if the Issuer will
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not be able to provide such information by such March 1, the Issuer shall notify
the requesting Holder in writing, on or prior to that date, that the Issuer will
provide the QEF Information on or before a later specified date, which date will
be no later than August 15 of such year.
11. Persons Deemed Owner
Prior to the due presentment for registration of transfer of
this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the
Indenture Trustee may treat the Person in whose name this Note (as of the day of
determination or as of such other date as may be specified in the Indenture) is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and none of the Issuer, the Indenture Trustee or any such agent shall
be affected by notice to the contrary.
12. Amendments and Waivers
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Notes under the
Indenture at any time by the Issuer with the consent of the Holders of Notes
representing a majority of the Outstanding Principal Amount of all Notes at the
time Outstanding. The Indenture also contains provisions permitting the Holders
of Notes representing specified percentages of the Outstanding Principal Amount
of the Notes, on behalf of the Holders of all the Notes, to waive compliance by
the Issuer with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Note (or any one or more Predecessor Notes) shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof whether or not notation of such consent or waiver is made upon this
Note. The Indenture also permits the Indenture Trustee to amend or waive certain
terms and conditions set forth in the Indenture without the consent of Holders
of the Notes issued thereunder.
13. Successor to Issuer; Mergers or Consolidations
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The term "Issuer", as used in this Note, includes any
successor to the Issuer under the Indenture.
The Issuer is permitted by the Indenture, under certain
circumstances, to merge or consolidate, subject to the rights of the Indenture
Trustee and the Holders of Notes under the Indenture.
14. Form of Notes
The Notes are issuable only in definitive, fully registered
form in denominations as provided in the Indenture, subject to certain
limitations therein set forth.
15. Governing Law
This Note and the Indenture shall be governed by, and
construed in accordance with the laws of the State of New York, and the
obligations, rights and remedies of the parties hereunder and thereunder shall
be determined in accordance with such laws.
16. Unconditional Rights
No reference herein to the Indenture, and no provision of this
Note or of the Indenture, shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the Principal Amount of and interest
on this Note at the times, place and rate, and in the coin or currency herein
prescribed
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ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number of assignee:
_________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto:
________________________________________________________________________________
(name and address of assignee)
the within Note and all rights thereunder, and hereby irrevocably constitutes
and appoints _________________, attorney, to transfer said Note on the books
kept for registration thereof, with full power of substitution in the premises.
Dated: ____________________ __________________________ */
Signature Guaranteed
__________________________ */
________________________
*/ NOTICE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Note in
every particular, without alteration, enlargement or any change
whatever. Such signature must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar.
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EXHIBIT C
Form of Certificate to be delivered by transferees [to be discussed]
The Chase Manhattan Bank
[Address]
Attn: [ ]
Dear Sirs:
In connection with our proposed purchase of $[ ] Principal
Amount of the Floating Rate Notes of Residential Reinsurance Limited (the
"Notes"), the undersigned does
hereby certify that:
(a) the transaction in which the undersigned purchased the Notes did
not occur in any of the States of [ ], [ ], [ ] or [ ];
(b) the undersigned does not intend to transfer the Notes purchased by
the undersigned into any of the States of [ ], [ ], [ ] or [ ]; and
(c) the undersigned is not a resident of any of the States of [ ], [ ],
[ ] or [ ].
Very truly yours,
[PURCHASER]
By:_________________________
Name:
Title:
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EXHIBIT D
Principal Reduction Notice
[Letterhead of Administrator]
The Chase Manhattan Bank
[Address]
Pursuant to Section 2.8(d) of the Indenture between
Residential Reinsurance limited (the "Issuer") and you dated August __, 1996
(the "Indenture"), we hereby ad vise you, acting as the Administrator, of the
payment by or on behalf of the Issuer on [ ] under the Reinsurance Agreement of
a Reinsurance Amount in the amount of $ . All terms used herein shall have the
meaning specified in the Indenture.
[Administrator]
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SCHEDULE A
List of Permitted Investments
Account(s) Permitted Investments
Note Payment Account
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SCHEDULE B
The Allocated Expenses consist of payments of up to the following amounts to the
following Persons:
Indenture Trustee $
Paying Agent
Note Registrar
Administrator
Claims Reviewer
Loss Reserve Specialist
Issuer's Auditors
Issuer's Cayman Islands Counsel
Issuer's United States Counsel
Miscellaneous
SB-1
<PAGE> 1
Exhibit 4.3
CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
AGREEMENT OF REINSURANCE (the "Reinsurance Agreement) made by and between United
Services Automobile Association, a reciprocal interinsurance exchange domiciled
in the state of Texas, and USAA Casualty Insurance Company, a corporation
domiciled in the state of Florida
(hereinafter collectively, the "Reassured") and ______________; Cayman Islands
(hereinafter referred to as the "Reinsurer"). .
WITNESSETH:
The Reinsurer hereby reinsures the Reassured to the extent and on the terms and
conditions and subject to the exceptions, exclusions and limitations hereinafter
set forth in respect of the liability which may accrue to the Reassured under
any and all Policies issued by the Reassured, as the result of any single Loss
Occurrence as to which the Reassured in its discretion elects to make claims
hereunder, arising during the Loss Occurrence Period.
ARTICLE 1 - DEFINITIONS
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day on
which banking institutions or trust companies in the City of New York or Grand
Cayman, British West Indies are authorized or obligated by law, regulation or
executive order to remain closed.
"CLAIM DATE" shall mean, for any Proof of Loss Claim prior to the Final Proof of
Loss Claim, the 15th day of each month.
<PAGE> 2
"CLAIM REVIEWING AGENT" shall mean KPMG Peat Marwick or such other firm of
independent public accountants, which firm must be reasonably acceptable to the
Reassured, retained by the Reinsurer to perform a review of Paid Losses applying
agreed upon procedures as stated in Exhibit C attached hereto.
"CLAIMS REVIEW LETTER" shall mean the letter, substantially in the form of
Exhibit C hereto, to be delivered in respect of a Proof of Loss Claim pursuant
to Article 8 and/or 9.
"COVERED STATES" SHALL MEAN Alabama, Connecticut, Delaware, District of
Columbia, Florida, Georgia, Louisiana, Maine, Massachusetts, Maryland,
Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, South Carolina, Texas, Vermont and Virginia.
"EXISTING POLICIES" shall mean policies of insurance covering property within
the Covered States as Dwelling, Homeowners, Condominium Owners, Renters,
Pleasure Boat and Inland Marine Floater business, in force as of March 31, 1996,
and excluding all Dwelling and Homeowners policies with a mobile home
construction code. A listing of Existing Policies is attached hereto as Exhibit
A.
"EXTENDED CLAIMS MADE PERIOD" shall be the period beginning at 11:59 p.m. June
30, 1997 and ending at 11:59 p.m., December 31, 1997.
"FINAL PROOF OF LOSS CLAIM" shall mean the Proof of Loss Claim submitted by the
Reassured to Reinsurer in accordance with Articles 8 and 9 hereof.
"HURRICANE" shall mean a storm or storm system that has been declared by the
National Hurricane Center of the National Weather Service to be a category 3, 4
or 5 hurricane at any
2
<PAGE> 3
time during its existence. The duration of the hurricane includes the time
period beginning at the time a hurricane "watch" or "warning" (whether or not
the hurricane is then a category 3, 4, or 5 hurricane) is issued by the National
Hurricane Center of the National Weather Service for any part of any one or more
Covered States, and;
a. Continuing for the time period thereafter during which hurricane
conditions exist, regardless of the category rating; or
b. Continuing for 72 hours following the cancellation of the last
"watch" or "warning" condition issued by the National Hurricane
Center of the National Weather Service for any part of any one or
more Covered States, whichever is later.
"INCURRED BUT NOT REPORTED LOSSES" shall mean Losses that have been incurred but
have not yet been reported to the Reassured.
"INDEPENDENT LOSS RESERVE SPECIALIST" shall mean or such other
successor person or entity, which other person or entity must be reasonably
acceptable to the Reassured, as shall be acting as the Independent Loss
Reserve Specialist on behalf of the Reinsurer for the purpose of providing a
Loss Reserve Certificate.
"LOSS/ES" shall mean the sum of (i) claims paid by Reassured under Policies
resulting from a Loss Occurrence (exclusive of claims under Pleasure Boat and
Inland Marine Floater business) and (ii) any Loss Reserve. Loss/es does not
include claims under personal liability coverages or medical payments to others
coverages.
"LOSS OCCURRENCE" shall mean a Hurricane commencing during the Loss Occurrence
Period causing Losses under one or more Policies in one or more Covered States
by the peril of Windstorm during such Hurricane, including ensuing damage to the
interior of a building, or to property inside a building, caused by rain, snow,
sleet, hail, sand or dust if the direct force of the Windstorm first damages the
building, causing an opening through which rain, snow, sleet, hail, sand or dust
enters and causes damage.
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"LOSS OCCURRENCE PERIOD" shall mean the period commencing at 12:01 a.m., August
15, 1996 and ending at 11:59 p.m., June 30, 1997.
"LOSS RESERVE" shall mean the liability established by the Reassured to reflect
the estimated unpaid Losses (including Incurred but Not Reported Losses and
excluding claims under Pleasure Boat and Inland Marine Floater business) that
the Reassured will ultimately be required to pay under the Policies and shall
not include loss adjustment expenses.
"LOSS RESERVE CERTIFICATE" shall mean the Loss Reserve Certificate described in
Article 9.
"MAXIMUM RECOVERY" shall mean $475,000,000.
"NEW POLICIES" shall mean policies of insurance under a policy number which was
not in force on March 31, 1996 covering property within the Covered States as
Dwelling, Homeowners, Condominium Owners, Renters, Pleasure Boat and Inland
Marine Floater business.
"PAID LOSS/ES" shall mean Loss/es actually paid by the Reassured.
"POLICIES" shall mean all policies of insurance under Existing Policies,
Renewals, and New Policies.
"PROOF OF LOSS CLAIM" shall mean a written letter from the Reassured to the
Reinsurer and the Claims Reviewing Agent in the form of Exhibit B attached to
this Reinsurance Agreement.
"RENEWALS" shall mean the continuation of an Existing Policy under the same
policy number between 12:01 a.m., April 1, 1996 and 11:59 p.m., June 30, 1997
and shall include any and all modifications of such Existing Policies made by
the Reassured during the term of such Existing Policies at the request of the
policyholder and any and all modifications made at the time of renewal by
Reassured pursuant to Existing Policy endorsements and Policy program
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changes.
"TRIGGER AMOUNT" shall mean the first $1,000,000,000 of Ultimate Net Loss.
"TRUST AGREEMENT" shall mean the Trust Agreement dated , among the
Reassured as the beneficiary, the Reinsurer as the grantor, and
as the Trustee.
"TRUST ACCOUNT" shall mean the trust account established pursuant to the terms
of the Trust Agreement.
"TRUSTEE" shall mean the Trustee of the Trust Agreement.
"ULTIMATE NET LOSS" shall have the meaning set forth in Article 6.
"WINDSTORM" shall mean wind, wind gusts, hail, rain, tornadoes or cyclones
caused by, resulting from or occurring during a Hurricane which results in
direct physical loss or damage to property.
ARTICLE 2 - TERM
This Reinsurance Agreement is effective during the Loss Occurrence Period,
subject to Articles 5 and 12. This Reinsurance Agreement is non-cancelable and
non-terminable during the Loss Occurrence Period.
If the Loss Occurrence Period shall expire while a Loss Occurrence covered
hereby is in progress, it is agreed that, subject to the other conditions
hereof, the Reinsurer shall be liable for its proportion of the entire Ultimate
Net Loss caused by such Loss Occurrence.
ARTICLE 3 - TERRITORIAL LIMITS
The territorial limits of this Reinsurance Agreement are the Covered States as
defined in this
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Agreement
ARTICLE 4 - RETENTION AND LIMIT
The Reassured cedes and the Reinsurer accepts, proportionally, 95% of the
Ultimate Net Loss in excess of the Trigger Amount sustained by Reassured in
respect of a single Loss Occurrence.
This is a claims made agreement for a single Loss Occurrence to the extent of
the Ultimate Net Loss in excess of the Trigger Amount. If there is more than one
Loss Occurrence as to which a claim may be made hereunder, the Reassured shall,
in its sole discretion, select the Loss Occurrence as to which it will make
claims hereunder. No claim shall be made upon the Reinsurer, and the Reinsurer
has no liability for Losses hereunder, unless and until the Reassured has
provided the Reinsurer with a Proof of Loss Claim notifying the Reinsurer of the
Reassured's claim, under this Reinsurance Agreement. Any Proof of Loss Claim
shall be submitted to the Reinsurer and the Claims Reviewing Agent not later
than the Claim Date.
It is further understood and agreed that the total amount recoverable from the
Reinsurer under this Reinsurance Agreement shall not exceed the Maximum
Recovery.
The Reassured may carry reinsurance in addition to the reinsurance provided by
this Reinsurance Agreement. Any recoveries under such additional reinsurance
shall be disregarded for the purposes of this Reinsurance Agreement and inure to
the sole benefit of the Reassured. In addition, any recoveries by the Reassured
from the Florida Hurricane Catastrophe Fund or any similar fund or source shall
be disregarded for purposes of this Reinsurance Agreement and inure to the sole
benefit of the Reassured.
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ARTICLE 5 - EXTENDED CLAIMS MADE PERIOD
The Reassured may extend the time for presentation of Proof of Loss Claims for
the Extended Claims Made Period, at the Reassured's option, by the payment of
additional premium to the Reinsurer as required by Article 12. However, the Loss
Occurrence must still occur or commence prior to 11:59 p.m., June 30, 1997.
ARTICLE 6 - ULTIMATE NET LOSS CALCULATION
The Ultimate Net Loss for a Loss Occurrence shall be determined by:
Step 1 - Calculating all Losses under Existing Policies and Renewals;
and
Step 2 - Calculating all Losses under New Policies; and
Step 3 - Calculating 9% of the amount determined in Step 1; and
Step 4 - Adding the amount determined in Step 1 and the lesser of the
amounts determined in Step 2 or Step 3.
Step 5 - Multiplying the amount determined in Step 4 above by 102%, as
a factor for Pleasure Boat and Inland Marine Floater policies;
and
Step 6 - Multiplying the total amount determined in Step 5 above by
102%, as a factor for all loss adjustment expenses in respect
of such Loss Occurrence.
Nothing in this Article, however, shall be construed as meaning that Paid Losses
in excess of the Trigger Amount are not recoverable hereunder until the final
Ultimate Net Loss to the Reassured has been ascertained.
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ARTICLE 7 - EXCESS OF LOSS REINSURANCE
This Reinsurance Agreement shall not protect any liability of the Reassured
other than in respect of its direct underwriting. It is further understood and
agreed that all other liability of the Reassured is excluded from the protection
of this Reinsurance Agreement and cannot be taken into account in determining
the Ultimate Net Loss.
ARTICLE 8- LOSSES
All loss settlements paid by the Reassured, provided they are within the
conditions of the Policies and within the terms of this Reinsurance Agreement,
shall be unconditionally binding upon the Reinsurer. A Proof of Loss Claim shall
be furnished by the Reassured to the Reinsurer and the Claims Reviewing Agent as
a notice to the Reinsurer that a claim is being made, in respect of a Loss
Occurrence, in an amount equal to the Paid Losses calculated and determined by
the Reassured, subject to Reassured's right to file additional Proof of Loss
Claims in accordance with Article 5 and 9.
Reinsurer shall cause the Claims Reviewing Agent to provide a Claims Review
Letter in respect of a Proof of Loss Claim specifying Paid Losses, to Reassured
by the last Business Day of the month after the applicable Claim Date in such
month. The Reassured shall submit to the Trustee for payment a Proof of Loss
Claim reflecting the results of the Claims Review Letter. Unless otherwise
permitted or required the Trustee shall pay Reassured such amount on the 1st
Business Day of the succeeding month.
If Reinsurer or the Claims Reviewing Agent shall fail to provide the Reassured
with the Claims Review Letter on or before the last Business Day of the month
following the applicable Claim Date, the Reassured shall submit to the Trustee
and the Trustee shall pay Reassured the entire amount of the Proof of Loss
Claim, and any adjustment due to a subsequently provided Claims Review Letter
shall be reflected in a succeeding Proof of Loss Claim or the Final Proof of
Loss Claim. Any overpayment to the Reassured due to a failure
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to provide the Claims Review Letter by the last Business Day of the month
following the Claim Date in such month shall not be subject to any interest,
penalty or other obligation contemplated in Articles 10, 11, 15 or 22.
ARTICLE 9 - COMMUTATION
The Reassured shall be entitled to deliver to the Reinsurer, Claims Reviewing
Agent and Loss Reserve Specialist a Final Proof of Loss Claim not later than
November 30, 1997. If the time for presentation of Proof of Loss Claims has been
extended and the Reassured has not presented a Final Proof of Loss Claim which
did not contain Loss Reserves on or before October 31,1997 and expects to
present a Final Proof of Loss Claim specifying Loss Reserves, then from and
after November [15], 1997 the Reassured shall, upon reasonable notice, make its
appropriate representatives available to meet with representatives of the
Independent Loss Reserve Specialist during the Reassured's normal business hours
to review and discuss the Reassured's method of calculating Loss Reserves,
including without limitation the actuarial assumptions and any other reserving
techniques, for the purpose of rendering the Loss Reserve Certificate required
by this Article. The Reinsurer shall cause representatives of the Independent
Loss Reserve Specialist to meet with representatives of the Reassured for such
purpose sufficiently in advance of November 30, 1997 so that by November 30,
1997 the representatives of the Independent Loss Reserve Specialist will be
familiar with the Reassured's method of calculating Loss Reserves by such date.
The Reinsurer shall cause the Independent Loss Reserve Specialist to prepare a
Loss Reserve Certificate, which shall either (i) state that the Loss Reserve
specified by the Reassured in the Final Proof of Loss Claim is reasonable or
(ii) specify a Loss Reserve that the Independent Loss Reserve Specialist
believes, in its professional judgment, is reasonable for use in the Final Proof
of Loss Claim and, in either case, contain a reasonably detailed calculation of
such Loss Reserve. The Reinsurer shall cause the Independent Loss Reserve
Specialist to deliver a preliminary Loss Reserve Certificate to the Reassured on
or before December [20], 1997 and, if the Reassured requests, to meet with
representatives of the Reassured at its
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offices in San Antonio, Texas to discuss any questions of the Reassured in
respect of such preliminary Loss Reserve Certificate. The Reassured shall, and
the Reinsurer shall cause the Independent Loss Reserve Specialist to, discuss
such questions in good faith with the goal of resolving any disagreements in
good faith prior to December [30], 1997.
Any Loss Reserve Certificate that specifies a Loss Reserve calculated by the
Independent Loss Reserve Specialist (the "Specialist's Loss Reserve") that is
lower than the Loss Reserve calculated by the Reassured shall also certify that
the Specialist's Loss Reserve (i) is computed and fairly stated in accordance
with U.S. generally accepted loss reserving standards and principles, (ii) is
based upon actuarial assumptions that are relevant to the provisions of the
Policies, (iii) is established using reserving techniques applied on a
consistent basis throughout the periods covered except as otherwise stated
therein or as required by the rules and regulations of the relevant insurance
regulatory bodies and (iv) is in compliance with the requirements of the
insurance laws, rules and regulations of the relevant insurance regulatory
bodies.
The Reinsurer shall cause the Independent Loss Reserve Specialist to deliver a
final Loss Reserve Certificate to the Reassured on or before December 31, 1997.
If the Independent Loss Reserve Specialist delivers the preliminary Loss Reserve
Certificate to the Reassured on or before December [20], 1997 and the final Loss
Reserve Certificate to the Reassured on or before December [31], 1997 and if
such final Loss Reserve Certificate specifies, pursuant to clause (ii) of the
second paragraph of this Article a Loss Reserve that is lower than the Loss
Reserve specified in the Final Proof of Loss Claim delivered by the Reassured,
then the amount set forth as the Loss Reserve in the Final Loss Reserve
Certificate shall be the Loss Reserve used by the Reinsurer and the Reassured in
the Final Proof of Loss Claim and shall be used by the Reassured in submitting
its claim to the Trustee to pay to the Reassured the amount required in the
Final Proof of Loss Claim on the first Business Day after December 31, 1997. If
there is a failure to deliver either the preliminary or final Loss Reserve
Certificate as required herein, then the Loss Reserve specified by the Reassured
in its Final Proof of Loss Claim shall be binding on Reinsurer and Reassured and
shall be payable by the
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Trustee on the first Business Day after December 31, 1997.
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ARTICLE 10 - TRUST ACCOUNT
The Reinsurer hereby agrees to establish and maintain a Trust Account.
The amount the Reinsurer shall deposit into the Trust Account shall equal the
Maximum Recovery which shall be deposited with the Trustee under the Trust
Agreement concurrently with the execution of this Agreement.
The Reinsurer shall, prior to depositing assets with the Trustee, execute
assignments, endorsements in blank, or transfer legal title to the Trustee of
all, obligations or any other assets requiring assignments, in order that the
Reassured, or the Trustee upon the direction of the Reassured, may, whenever
necessary, transfer, assign, or negotiate any such assets without consent or
signature from the Reinsurer or any other entity. Assets shall consist solely of
commercial paper having at the time of investment or contractual commitment to
invest therein, a rating from Standard & Poors Rating Services of at least A-1
and a rating from Moody's Investors Service, Inc. of P-1.
The Reinsurer shall have the right at anytime to seek approval from the
Reassured to withdraw from the Trust Account all or any part of the assets
contained therein and transfer such assets to the Reinsurer, provided:
(i) the Reinsurer shall, at the time of such withdrawal, replace the
withdrawn assets with other qualified assets having a market value equal to the
market value of the assets withdrawn so as to maintain at all times the deposit
in the required amount; or
(ii) after such withdrawals and transfer, the market value of the Trust
Account is no less than 102 percent of the required amount.
The Reassured shall be the sole judge as to the application of this provision,
but shall not unreasonably or arbitrarily withhold its approval.
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The Reinsurer and the Reassured agree that the assets in the Trust Account,
established pursuant to the provisions of this Reinsurance Agreement, may be
withdrawn by the Reassured at any time, after a Loss Occurrence, notwithstanding
any other provisions in this Reinsurance Agreement, and shall be utilized and
applied by the Reassured or any successor by operation of law of the Reassured,
including, without limitation, any liquidator, rehabilitator, receiver or
conservator of such company, without diminution because of insolvency on the
part of the Reassured or the Reinsurer, only for the following purposes:
(i) to reimburse the Reassured for the Reinsurer's share of premiums
returned to the owners of policies reinsured under the reinsurance agreement on
account of cancellations of such policies;
(ii) to reimburse Reassured for the Reinsurer's share of surrenders
and benefits or Losses paid by Reassured pursuant to the provisions of the
Policies reinsured under the Reinsurance Agreement;
(iii) to fund an account with Reassured in an amount at least equal to
the deduction, for reinsurance ceded, from Reassured's liabilities for Policies
ceded under this Reinsurance Agreement. Such account shall include, but not be
limited to, amounts for Loss Reserves (including Incurred But Not Reported
Losses), loss adjustment expenses contributing to Ultimate Net Loss, and
unearned premiums; and
(iv) to pay to the Reassured any claims due under the Reinsurance
Agreement.
In the event any amount is withdrawn from the Trust Account by the Reassured,
other than pursuant to Articles 8, 9, 10 or 15, the Reassured shall pay to the
Trustee on the last Business Day of each month interest on such amount, from the
date any such amount is withdrawn at a per annum rate equal to the Published
Citibank 30-Day Commercial Paper Rate plus 2 percent, calculated on the basis of
the actual number of days elapsed and a 360 day year.
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ARTICLE 11 - INTEREST
The interest amounts provided for in this Article will apply to the Reinsurer or
to the Reassured in the following circumstances:
1. If a loss payment owed by the Reinsurer to the Reassured is not
received within 30 calendar days following the date on which payment is
due, and/or
2. If any premium payment owed by the Reassured to the Reinsurer is not
received on the date on which payment is due, and/or
Failure by the Reinsurer or Reassured to comply with their respective payment
obligations within the time periods as herein provided will result in compound
interest payable at a rate equal to the 90 day Treasury Bill rate as published
in the Money Rates Section or any successor section of the Wall Street Journal
on the first business day following the date a remittance becomes due, plus
____% per annum, to be compounded and adjusted quarterly, subject to any
applicable usury laws. Any interest that becomes payable pursuant to this
Article shall be calculated by the party to which it is owed. The accumulation
of the interest will cease on the date that the payment is received.
If the validity of any claim or payment is contested under the provisions of
this Reinsurance Agreement and the debtor party prevails in an arbitration or
any other proceeding, there shall be no interest due as outlined above. If the
creditor party prevails in an arbitration or other proceeding, interest shall be
calculated and payable as of the date of resolution of the arbitration or
proceeding as outlined above.
If the Reinsurer, prior to commutation, contests the payment of any claim, and
prevails in the contest, the Reassured shall return such payment plus pay
interest on same, calculated as per the provisions of this Article.
Any interest that becomes payable pursuant to this Article may be waived by the
party to
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which it is owed. Further, any interest which is calculated pursuant to this
Article that is $100 or less shall be waived. Waiver of such interest, however,
shall not affect the waiving party's right to similar interest for any other
failure by the other party to make payment when due under this Article.
Nothing in this Article shall diminish any legal remedies which either party may
have against the other.
ARTICLE 12 - PREMIUM
A. The premium to the Reinsurer for the term of this Reinsurance Agreement
shall equal _____% of the Maximum Recovery from Reinsurer, payable in
12 equal monthly installments, due on or before the last Business Day
of each month, beginning in August of 1996, plus the sum of $
payable within days of the execution of this Reinsurance Agreement.
A. Reassured may extend the time for presentation and approval of a Proof
of Loss Claim for a Loss Occurrence in accordance with Article 5 by
paying an additional premium equal to ____% of the Maximum Recovery
reduced by any payments previously made hereunder by the Reinsurer that
constitute part of the Ultimate Net Loss in excess of the Trigger
amount, on or before 11:59 p.m., June 30, 1997.
ARTICLE 13 - INSOLVENCY
In the event of insolvency and the appointment of a conservator, liquidator or
statutory successor of Reassured, all amounts payable hereunder shall be payable
to such conservator, liquidator or statutory successor at the times and in the
amounts such amounts would otherwise have been payable to the Reassured, without
diminution because of such insolvency or because such conservator, liquidator or
statutory successor has failed to pay all or a portion of any claims.
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In the event of the insolvency of the Reassured, the conservator, liquidator or
statutory successor shall give the Reinsurer written notice of the pendency of
any claim that might become a Loss covered by this Reinsurance Agreement within
a reasonable time after such claim is filed in the insolvency proceeding. During
the pendency of any such claim, the Reinsurer may investigate such claim and
interpose at its own expense in the name of the Reassured or its conservator,
liquidator or statutory successor in the proceeding where such claim is to be
adjudicated any defense or defenses which the Reinsurer may deem available to
the Reassured or its conservator, liquidator or statutory successor. The
expenses thus incurred by the Reinsurer shall be chargeable against the
Reassured as part of the expense of liquidation to the extent of a proportional
share of the benefit which may accrue to the Reassured solely as a result of the
defense undertaken by the Reinsurer.
ARTICLE 14 - OFFSET
Each party hereto shall have the right to offset any balance or balances,
whether on account of premiums or on account of Losses, due from one party to
any other party under this Reinsurance Agreement, against any balance or
balances due and payable to the one party from the other party under this
Reinsurance Agreement. However, in the event of the insolvency of any party
hereto, offset shall only be allowed in accordance with the applicable law of
the state having jurisdiction over the insolvency.
ARTICLE 15 - ADVANCES
If the Reinsurer is unauthorized in any State of the United States of America or
the District of Columbia where authorization is required by insurance regulatory
authorities, the Reassured may withdraw from the Trust Account such amounts as
are necessary to obtain reinsurance credit or avoid any other financial penalty,
if a financial penalty would accrue to the Reassured on its annual statement or
the Reassured could be denied reinsurance credit for annual statement purposes,
without such funding. If the Reassured withdraws funds from the Trust Account to
obtain the funding required pursuant to this Article, such funds shall be held
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in escrow until needed to pay claims and any interest or other earnings on such
funds shall be remitted to the Reinsurer and treated as realized income of the
Trust Account for purposes of Article 10 of this Reinsurance Agreement. If the
Reassured is required to withdraw funds pursuant to this Article, Reassured
shall invest and reinvest such funds and pay amounts pursuant to the terms and
conditions of the Trust Agreement and pursuant to Article 10 of this Reinsurance
Agreement.
Notwithstanding the preceding paragraph, the Reassured shall first attempt to
change the situs of the Trust Account to a jurisdiction that is acceptable to
each relevant regulator and permits the Reassured to retain the related
reinsurance credit for annual statement purposes. If the Reassured believes in
its reasonable judgment that such a change in situs is not reasonably possible,
it shall make the withdrawal permitted by the preceding paragraph.
ARTICLE 16 - CURRENCY
All amounts due to either party hereunder shall be payable in United States
currency.
ARTICLE 17 - FEDERAL EXCISE TAX
The Reassured has agreed to pay the Federal Excise Tax on the premium payable
hereunder to the extent such premium is subject to Federal Excise Tax, including
any additional Federal Excise Tax with respect to such payments.
ARTICLE 18 - ACCESS TO REASSURED'S RECORDS
The Reinsurer, the Claims Reviewing Agent, the Independent Loss Reserve
Specialist or their designated representatives shall have free access at any
reasonable time to all records of the
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Reassured which pertain in any way to this Reinsurance Agreement. The Reinsurer
agrees, on behalf of itself and any representatives, agents, employees, or
independent contractors that any information and records of the Reassured which
they access pursuant to this Article shall remain the sole and exclusive
property of the Reassured, shall be treated as confidential and shall not be
used or further disclosed for any purpose other than as necessary for the
administration or enforcement of this Reinsurance Agreement.
The Reinsurer shall require the Claims Reviewing Agent, the Independent Loss
Reserve Specialist and any other independent contractors of the Reinsurer, that
have access to such information and records, to maintain the confidentiality of
such information and records and shall make the Reassured a third party
beneficiary of such obligation to maintain confidentiality, subject to
exceptions thereto substantially the same as the exceptions thereto in the
Claims Administration Agreement and the Loss Reserve Specialist Agreement in the
form executed on the date hereof.
The Reinsurer shall not authorize any such person or entity to disclose any such
information or records and shall enforce its respective confidentiality
agreements with those persons or entities.
ARTICLE 19 - FORCE MAJEURE
Subject to the fact that this Reinsurance Agreement provides reinsurance to
Reassured resulting from the peril of Windstorm during a Hurricane, neither
party shall be deemed to be in default of any provision of this Reinsurance
Agreement due to events beyond its control. Such events include, but are not
limited to, Acts of God, civil or military authority, civil disturbance, war,
strikes, fire and other catastrophe.
ARTICLE 20 - SERVICE OF SUIT
Subject to Article 21, in the event of the failure of the Reinsurer to pay any
amount claimed
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to be due hereunder, the Reinsurer agrees that, it will submit to the
jurisdiction of any court of competent jurisdiction in any state in the United
States, will comply with all requirements necessary to give such court
jurisdiction, and will abide by the final decision of such court, or of any
Appellate court in the event of an appeal, with all relevant matters to be
determined in accordance with the law and practice of such court. Subject to
Article 21, nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's right to commence an action in any court
of competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another court as
permitted by the laws of the United States or of any state in the United States.
It is further agreed that pursuant to any state, territory or district of the
United States which makes provision therefore, the Reinsurer hereby designates
the superintendent, commissioner or director of insurance, or other officer
specified for that purpose in the statute, or his successor or successors in
office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding arising out of this Reinsurance
Agreement instituted by or on behalf of the Reassured or any beneficiary
hereunder.
ARTICLE 21 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of this Reinsurance Agreement shall be submitted to the decision of a board
of arbitration composed of two arbitrators and an umpire, meeting in New York,
New York unless otherwise agreed.
The members of the board of arbitration shall be active or retired disinterested
officials of insurance or reinsurance companies or Lloyds Underwriters. Each
party shall appoint its arbitrator and the two arbitrators shall choose an
umpire before instituting the hearing. In the event that either party should
fail to choose an arbitrator within thirty (30) days following a written request
by the other party to enter upon arbitration, the requesting party may choose
two arbitrators who shall in turn choose an umpire before entering upon
arbitration. In the event the two arbitrators fail to agree on an umpire, either
party, within thirty (30) days, shall have the right to submit the matter to the
American Arbitration Association in effect at that
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time.
Each party shall present its case to the arbitrators within sixty (60) days
following the date of their appointment. The board shall issue its decision in
writing based upon a hearing in which evidence may be introduced without
following strict rules of evidence but in which cross examination and rebuttal
shall be allowed. The board shall make its decision within (sixty) 60 days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding upon
all parties to the proceeding. Judgment may be entered upon the award of the
board in any court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the umpire. The remaining costs
of the arbitration proceedings shall be allocated by the board.
ARTICLE 22 - COVENANT OF REINSURER
The Reinsurer has entered into an Indenture dated as of September 1, 1996 (the
"Indenture") with _______________, as Indenture Trustee. The Reinsurer shall not
amend, supplement or modify Section 11.1 of the Indenture, any provision of the
Indenture that subjects a provision of the Indenture to Section 3.11 of the
Indenture, or any provision of the Indenture that requires the consent of the
Reassured, without the prior written consent of the Reassured.
The Reinsurer shall not engage in any business other than the business
contemplated by this Reinsurance Agreement and activities incidental thereto.
The Reinsurer shall not issue, incur, assume, guarantee or otherwise become
liable, directly or indirectly, for any indebtedness except for its liabilities
under this Reinsurance Agreement, the Notes (as defined in the Indenture as in
effect on the date hereof), the Interest Rate Swap (as defined in the Indenture
as in effect on the date hereof) and the other Basic Documents (as defined in
the Indenture as in effect on the date hereof). Except as contemplated by the
Indenture (as in effect on the date hereof) and the other Basic Documents, the
Reinsurer shall not make any loan or advance
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or credit to, or guarantee (directly or indirectly or by an instrument having
the effect of assuring another's payment or performance on any obligation or
capability of so doing or otherwise), endorse or otherwise become contingently
liable, directly or indirectly, in connection with the obligations, stocks or
dividends of, or own, purchase, repurchase or acquire (or agree contingently to
do so) any stock, obligations, assets or securities of, or any other interest
in, or make any capital contribution to, any other Person. The Reinsurer shall
not make any expenditure (by long-term or operating lease or otherwise) for
capital assets (either realty or personalty).
ARTICLE 23 - AGENT SUCCESSORS
The Claims Reviewing Agent or the Independent Loss Reserve Specialist identified
herein may resign or be removed by Reinsurer provided that no such resignation
or removal shall be effective until a successor Claims Reviewing Agent or
Independent Loss Reserve Specialist, as the case may be, has been appointed by
Reinsurer and approved by Reassured. Reassured agrees not to unreasonably
withhold approval.
ARTICLE 24 - MISCELLANEOUS
The provisions of and validity and construction of this Reinsurance Agreement
and any amendments hereto shall be governed by, and construed in accordance with
the laws of the State of New York, U.S..
Whenever in this Reinsurance Agreement there is a reference to time, the time
shall be according to the time in effect at the Grand Cayman, Cayman Islands.
No liability shall attain in favor of Reinsurer as against any officer,
director, member, agent or employee of USAA but Reinsurer will look solely to
the assets of USAA for satisfaction of this Reinsurance Agreement. Any written
notice required to be provided under this Reinsurance Agreement shall be
effective if provided by facsimile transmission or by physical delivery to:
21
<PAGE> 22
United Services Automobile Association
USAA Casualty Insurance Company
c/o Steven F. Goldberg
9800 Fredericksburg Rd. - B-01-E
San Antonio, TX. 78288
Facsimile (210) 498-
Residential Reinsurance Limited
c/o Tom Clark, Director
P.O. Box 309
Grand Cayman, Grand Cayman Islands
British West Indies
Facsimile - (809) 949-7634
KPMG
Tilinghast
22
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto, by their respective duly authorized
officers, have executed this Agreement as of the dates undermentioned.
In this day of 1996 for and on behalf
of:
By:__________________________________
Title:_______________________________
And in _________________, ___________ this day of 1996
or and on behalf of:
By:__________________________________
Title:_______________________________
23
<PAGE> 24
EXHIBIT B
PROOF OF LOSS CLAIMS
Residential Reinsurance Limited
P.O. Box 309
Ugland House
South Church Street
Grand Cayman, Cayman Islands, British West Indies
Re: Reinsurance Agreement dated _________________, 1996
Reference is made to the Reinsurance Agreement dated , 1996
(the "Reinsurance Agreement") between and (the "Reassured") and
Residential Reinsurance Limited (the "Reinsurer"). All capitalized terms used
herein have the meanings assigned to such terms in the Reinsurance Agreement.
The Reassured is submitting this Proof of Loss Claim in respect of its
Losses under Policies in respect of the Loss Occurrence resulting from Hurricane
[insert name of Hurricane].
The calculation of the Reassured's Paid Loss or Ultimate Net Loss with
respect to this Loss Occurrence is set forth on Schedule 1 hereto.
The Reassured certifies to the Reinsurer that the amount set forth in
Item J on Schedule 1 to this Proof of Loss Claim is payable to the Reassured in
accordance with the Reinsurance Agreement and that all calculations set forth on
Schedule 1 have been made in accordance with the requirements of the Reinsurance
Agreement.
[Name of Reassured]
By_________________________
(Title)
[Name of Reassured]
By_________________________
(Title)
24
<PAGE> 25
SCHEDULE 1
PROOF OF LOSS CLAIM SUBMITTED
ON ______________, 1996 ________
Loss Occurrence: [Name of Hurricane].
Paid Loss [or Ultimate Net Loss, if this is a Final Proof of Loss Claim]
Calculation as of , 199 ("Proof of Loss Date").
<TABLE>
<S> <C> <C>
(1): Total Paid Losses under Existing Policies and
under Renewal Policies as of Proof of Loss Date: $________
(2): Loss Reserves established under Existing Policies and under Renewal
Policies, if this is a Final Proof of Loss Claim and there are Loss
Reserves.
(N/A otherwise) $________
Add (1) and (2) (A) $________
(3): Total Paid Losses under New Policies
as of Proof of Loss Date: $________
(4): Loss Reserves established under New
Policies, if this is a Final Proof of Loss Claim.
(N/A otherwise) $________
Add (3) and (4) (B) $________
(5): Calculate 9% of (A): $________
(6): Select the lesser of (B) or (5): (C) $________
Add (A) and (C) (D) $________
Calculation of Pleasure Boat and
Inland Marine Floater Factor
(7): 1 .02 X (D) (E) $________
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
Calculation of loss adjustment expenses
(8): 1 .02 X (E): (F) ($)________
(9): Trigger Amount: $1,000,000,000
(10): (F) less (9) (G) $________
(11): .95 X (G) (H) $________
(12): Maximum Recovery $
(13): Lesser of (11) or (12) $
Proof of Loss Calculation
(14): Amount in (H) $________
(15): Amounts paid by Residential Reinsurance , Limited in respect
of previous Proof of Loss Claims $________
(16): (14) less (15) (I) $________
Proof of Loss Claim Amount = Amount in (I) (J) $________
</TABLE>
26
<PAGE> 27
EXHIBIT C
Date
Residential Reinsurance Limited
Re: Claims Review Agreed Upon Procedures
Dear Sir:
We have performed the agreed procedures enumerated below, solely to assist you
with respect to the accuracy of the amounts listed in Items 1 and 3 of Schedule
1 of the Proof of Loss Claim submitted pursuant to the Catastrophic Excess of
Loss Reinsurance Agreement (The "Reinsurance Agreement") between Residential
Reinsurance Limited, a Cayman Islands corporation, and USAA and USAA-CIC This
engagement to apply agreed-upon procedures was performed in accordance with
standards established by the American Institute of Certificate Public
Accountants. The sufficiency of the procedures is solely the responsibility of
the specified users of the report. Consequently, we make no representation
regarding the sufficiency of the procedures described below either for the
purpose for which this report has been requested or for any other purpose.
We have applied the following procedures to Items 1 and 3 of Schedule 1 of the
Proof of Loss Claim:
A. Recalculated the total of claims paid supporting each of the amounts
reflected in items 1 and 3.
B. Selected a statistically valid sample of the total claims included in
Items 1 and 3, using a confidence level of 95% and a level of precision
of +/- 5%. We performed the following:
1) Verified the underlying policy was in force at time of loss
and is accurately classified between Items 1 and 3 on
Schedule 1.
a) Verified coverage type is included in the
Reinsurance Agreement;
b) Noted policy period includes the date of the Loss
Occurrence, as defined in the Reinsurance
Agreement;
c) Verified classification of claim in compliance
with the Reinsurance Agreement as either (a) an
Existing or Renewal Policy, or (b) a New
27
<PAGE> 28
Policy.
1) Compared claim amounts paid to supporting documentation
contained in the claim files.
a) Noted claim file contained proof that the loss resulted
from the Hurricane specified on the Proof of Loss
Claim;
b) Noted claim file contained proof that location of
insured property was a Covered State per the
Reinsurance Agreement;
c) Compared documentation in claim file to actual loss
payments to determine payments were made for perils
covered under the Reinsurance Agreement.
We were not engaged to, and did not, perform an audit, the objective of which
would be the expression of an opinion on Items 1 and 3 of Schedule 1 of the
Proof of Loss Claim. Accordingly, we do not express such an opinion. Had we
performed additional procedures, other matters might have come to our attention
that would have been reported to you.
The report is intended solely for the use of the Residential Reinsurance Limited
and should not be used by those who have not agreed to the procedures and taken
responsibility for the sufficiency of the procedures for their purposes.
We will include in the above report a description of any discrepancies noted
during the course of our procedures.
Very truly yours,
v3a
28
<PAGE> 1
Exhibit 4.4
ADMINISTRATIVE SERVICES AGREEMENT
<PAGE> 2
THIS AGREEMENT is made the day of August, 1996 (the "Agreement") .
BETWEEN: RESIDENTIAL REINSURANCE LIMITED
a company incorporated in the Cayman Islands of P.O. Box 309,
Grand Cayman, B.W.I. (hereinafter called "Insurance") of the one
part
AND:
MIDLAND BANK TRUST CORPORATION (CAYMAN) LIMITED a company
incorporated in the Cayman Islands and duly licensed to carry on
business as an Insurance Manager and a Bank and Trust Company
under the Laws of the said Cayman Islands of P.O. Box 1109, Grand
Cayman, B.W.I. (hereinafter called "Administrator") of the other
part
WHEREAS
1) Insurance is duly licensed to carry on business as an Insurance Company
under the laws of the Cayman Islands (hereinafter called the
"Business").
2) Insurance has requested the Administrator to provide in the Cayman
Islands certain administrative, accounting and investment services
which the Administrator has agreed to do subject to the terms and
conditions hereinafter appearing.
3) Insurance has entered into an Indenture, dated the date hereof, with
_________ as Indenture Trustee (the "Indenture") relating to the
issuance of $475,000,000 aggregate principal amount of floating rate
notes (the "Notes").
4) Insurance has entered into an Catastrophe Excess of Loss Reinsurance
Contract (the "Reinsurance Agreement"), as Reinsurer, dated the date
hereof, with United Services Automobile Association, a reciprocal
interinsurance exchange organized under the laws of Texas, and USAA
Casualty Insurance Company, a Florida corporation, as the Reassured
with respect to potential liability from a single hurricane under
policies written by the Reassured covering the Reinsurance Period, as
defined in Article 1 of the Reinsurance Agreement.
5) Insurance has entered into a Claims Review Agreement, dated the date
hereof, with KPMG Peat Marwick, Cayman Islands as Claims Reviewer in
order to review claims submitted to Insurance for payment in accordance
with the terms and conditions of the Reinsurance Agreement during the
Loss Occurrence Period and Extended Claims Made Period, as defined in
Article 1 of the Reinsurance Agreement.
6) Insurance has entered into a Loss Reserve Specialist Agreement, dated
the date hereof, with Tillinghast, a Towers Perrin Company as the Loss
Reserve Specialist in order to analyze the Loss Reserves submitted to
Insurance for payment in connection with any commutation of the
Reinsurance Agreement.
<PAGE> 3
7) Insurance has entered into a Regulation 114 Trust Agreement, dated the
date hereof, with _________ as the Trustee in order to create a trust
account to hold assets as security for the performance by Insurance of
its obligations under the Reinsurance Agreement.
8) Capitalized terms not otherwise defined herein have the respective
meanings assigned to such terms in the Reinsurance Agreement.
NOW IT IS HEREBY AGREED by Insurance and the Administrator (the "Parties") as
follows:
1. Insurance hereby retains the Administrator and the Administrator agrees
to provide such services as are, and subject to the terms and
conditions, hereinafter set forth.
2. The Administrator hereby agrees:
(a) To perform and provide the services (the "Services") necessary
and appropriate to the Business of Insurance in and from within
the Cayman Islands as follows:
(i) To provide general banking and investment services in such
a manner as may be agreed upon from time to time and in
particular but without prejudice to the generality of the
foregoing to administer the investment of Insurance's funds
in accordance with Insurance's investment policy as
notified to the Administrator from time to time and the
Administrator shall not be liable for any loss suffered by
Insurance as a result of the Administrator acting in
accordance with such policy.
(ii) Subject to clause 3 (b) hereof to maintain all reasonable
and necessary records and accounts, including, but not
limited to, claims files, as may be required in the normal
course of Insurance's business and in order to comply with
any laws or regulations of the Cayman Islands in such
manner as may be agreed upon from time to time and in
particular without prejudice to the generality of the
foregoing to maintain the minute book, statutory registers
and other corporate records of Insur- ance.
(iii) Subject to Clause 3 (b) hereof to prepare and submit
regular reports not less frequently than quarterly to
Insurance in respect of Insurance's business in such form
as may be agreed upon from time to time.
2
<PAGE> 4
(iv) To deal with correspondence relating to Insurance's
business, including, but not limited to, correspondence
relating to claims made by the Reassured under the
Reinsurance Agreement.
(v) To deliver to the Indenture Trustee a Principal Reduction
Notice which shall advise the Indenture Trustee of the
payment by the Issuer of a Reinsurance Amount (as defined
in the Indenture) under the Reinsur- ance Agreement and
shall specify the amount of such Reinsurance Amount.
(vi) To provide the services of Secretary and/or Assistant
Secretary to Insurance and also to make available such
members of its staff as may be necessary to carry out
efficiently its duties hereunder.
(vii) To consider any request of Insurance to provide services
of one or more Directors or other officers of Insurance
provided that the Administrator shall be under no
obligation to provide or to continue to provide such
services.
(viii) Prepare and submit all filings required by and handle all
correspondence with any regulatory authorities pertaining
to the Business.
(ix) To maintain the registered office of Insurance at its own
offices as set out above and to make available within its
premises such non-exclusive space as may be necessary to
carry out efficiently its duties hereunder.
(b) Not to cause Insurance to enter into any contracts of insurance
or reinsurance (other than the Reinsurance Agreement) or to enter
into any commitments, loans or obligations or any loss
adjustment, agency or management agreement whatsoever or settle
or agree to any claims, disputes, actions or proceedings or
charge, mortgage, pledge, encumber or otherwise restrict or
dispose of Insurance's property or assets or generally take any
action regarding the Business of Insurance without the prior
approval of Insurance and not to hold itself out as permitted to
do any of the aforesaid.
(c) To keep confidential all documents, materials and other
information relating to the Business of Insurance and not to
disclose any of the aforesaid without the prior consent of
Insurance, unless it shall in good faith determine that such
disclosure is necessary to protect the interests of the
Administrator or is required by any applicable law or regulation.
(d) To use its best efforts to keep Insurance informed of all matters
necessary to maintain Insurance in good standing under the laws
of the Cayman Islands and
3
<PAGE> 5
to keep Insurance informed of developments in the Cayman Islands
which may affect the Business of Insurance.
(e) To provide such services as may be necessary to permit Insurance
to perform all affirmative acts required to be performed by
Insurance under the Indenture, including but not limited to
[specify sections in Indenture requiring acts by the issuer] of
the Indenture, and to perform any other acts reasonably necessary
or otherwise required in the performance of the obligations of
Insurance under the Indenture.
(f) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations under the Interest Rate Swap
Agreement and any other acts reasonably necessary or otherwise
required in the administration of the Interest Rate Swap
Agreement.
(g) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations under the Claims Review
Agreement, and any other acts reasonably necessary or otherwise
required in the administration of the Claims Review Agreement.
(h) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations under the Loss Reserve
Specialist Agreement, and any other acts reasonably necessary or
otherwise required in the administration of the Loss Reserve
Specialist Agreement.
(i) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations under the Reinsurance
Agreement, and any other acts reasonably necessary or otherwise
required in the administration of the Reinsurance Agreement.
(j) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations under the Regulation 114 Trust
Agreement, and any other acts reasonably necessary or otherwise
required in the administration of the Regulation 114 Trust
Agreement.
(k) To provide such services as may be necessary to permit Insurance
to fulfill Insurance's obligations as issuer of the Notes under
applicable United States or Cayman Islands law, including but not
limited to the United States Securities Act of 1933, Trust
Indenture Act of 1939 and Securities Exchange Act of 1934, as
instructed by Insurance or by counsel to Insurance.
(l) To provide to the Company to the extent required by law, reports
on taxable benefits, and the amounts, if any, withheld pursuant
to applicable income tax
4
<PAGE> 6
laws, both as payments of Claims are made and as of the end of
each calendar or fiscal year of the Ceding Insurer.
(m) To comply with claims file maintenance, record retention and
reconciliation requirements in conformity with the standards of
performance set forth in the Claims Review Agreement or as
otherwise agreed by the Parties or required by applicable law.
(n) To engage and direct, as necessary, attorneys, consultants or
other professionals in connection with the processing, defense
and handling of any Claims.
3. (a) Until and unless otherwise amended by valid resolution of the Board
of Directors of Insurance (a certificated copy of which shall be
delivered to the Administrator) the Administrator shall be entitled to
assume that the approval and authorization of Insurance of any act,
deed, document, matter or thing has been given if it shall have been
notified whether in writing, verbally, by telephone, telecopier, telex
or cable by any one of the following:
[ TO COME ]
and it shall not be obliged to make further enquiry thereafter of
Insurance and shall be under no liability or obligation whatsoever to
Insurance for so assuming and relying whether or not such approval or
authorization has been actually given.
(b) Insurance shall promptly supply to the Administrator all such
information, documents and instructions as are required by the
Administrator to fulfil its obligations hereunder.
(c) The Administrator shall not be liable as a result of any failure
on Insurance's part promptly to give proper authorizations,
instructions, approvals, information and documents as may be
necessary to enable the Administrator to carry out its
obligations hereunder.
4. (a) In consideration for the provision of services hereunder, the
Administrator shall be entitled to a fee of $_____, payable [on
the effective date hereof].
(b) In addition to the fees specified in paragraph (a) of this
Clause, the Administrator shall be entitled to be reimbursed for
all governmental or similar fees, charges, taxes, duties and
imposts whatsoever levied on or in respect of Insurance or its
Business as may be properly incurred, as well as all reasonable
out of pocket expenses (including, but not limited to, telex,
telephone, postage and stationery) as the Administrator may incur
in the execution of its duties hereunder, provided, however, that
such fees, charges, taxes, duties and
5
<PAGE> 7
imposts shall not exceed $____ per month, or an aggregate amount
of $_____. The Administrator may debit the same to Insurance's
account with the Administrator at the time they are incurred
PROVIDED ALWAYS THAT the Administrator shall not be obliged to
incur any disbursement on Insurance's behalf unless in its sole
determination there are sufficient funds standing to the credit
of Insurance's account with the Administrator to cover the full
amount of all outstanding and anticipated fees and disbursements
for Insurance.
5. (a) The Administrator shall not be liable for any damage, loss, costs
or expenses whatsoever to or of Insurance at any time from any
cause whatsoever unless caused by the Administrator's own
negligence, actual fraud or wilful or wanton misconduct or that
of any of its directors, officers or employees.
(b) Insurance agrees to indemnify and hold harmless the
Administrator, its direc- tors, officers and employees and each
of them against any liability, actions, proceedings, claims,
demands, costs or expenses whatsoever which they or any of them
may incur or be subject to in consequence of this Agreement or as
a result of the performance of the functions and services
provided for hereunder except as a result of the negligence,
actual fraud or wilful or wanton miscon- duct of the
Administrator or any of its directors, officers, employees or
Agents as the case may be and this indemnity shall expressly
inure to the benefit of any director, officer or employee
existing or future and to the benefit of any successor of the
Administrator hereunder.
(c) Administrator agrees to indemnify and hold harmless Insurance,
its directors, officers and employees and each of them against
any liability, actions, pro- ceedings, claims, demands, costs or
expenses whatsoever which they or any of them may incur or be
subject to in consequence of this Agreement as a result of the
negligence, actual fraud or wilful or wanton misconduct of the
Admin- istrator or any of its directors, officers, employees or
Agents as the case may be and this indemnity shall expressly
inure to the benefit of any director, officer or employee
existing or future and to the benefit of any successor of
Insurance hereunder.
6. (a) The parties hereto agree that they will both use their best
endeavors to ensure that no breach of any laws or regulations of
the Cayman Islands occurs in connection with the operation of
Insurance's Business in and from within the Cayman Islands.
(b) Insurance acknowledges the obligation of the Administrator under
Section 8(5) of the Insurance Law, 1979, as amended, to notify
the Governor of the Cayman Islands if the Administrator feels
cause for concern regarding the probity or soundness of an
insurer or reinsurer for or with whom the Administrator carries
on business.
6
<PAGE> 8
7. (a) As used in this Section 7, the term "Confidential Information"
shall mean any information derived in connection with the
provision of Services by the Administrator, except such
information which was previously known by the Administrator and
not considered confidential and/or is or becomes generally
available to the public other than as a result of disclosure by
the Administrator or its directors, officers, employees, agents
or representatives, and/or is or becomes available to the
Administrator on a non-confidential basis from a source other
than Insurance.
(b) The Administrator will hold all Confidential Information
confidential and will not disclose such Confidential Information
to any person except as may be re- quired to perform the
Services, as authorized in advance by Insurance in writing or
otherwise, or as may be required by law, in which case the Admin-
istrator shall promptly provide notice to Insurance that such
Confidential Information has been subpoenaed or otherwise
demanded, so that Insurance may seek a protective order or other
appropriate remedy. The Administrator will use its reasonable
best effort to obtain or assist Insurance in obtaining such
protective order or other remedy.
8. (a) This Administrative Services Agreement may be terminated by the
Administrator:
(i) upon 45 days' written notice by the Administrator to
Insurance if Insurance fails to perform or observe in any
material respect, or commits a material breach of, any
material provision of this Administrative Services Agreement
and such failure or breach has not been cured to the
reasonable satisfaction of the Administrator within 30 days
after notice thereof; or
(ii) upon written notice by the Administrator to Insurance if
Insurance fails to make payment of any fees or expenses in
accordance with Section 4 and such failure has not been
cured within ten days after the date such payment was due.
(b) This Administrative Services Agreement may be terminated by
Insurance:
(i) upon written notice by Insurance to the Administrator (such
notice to specify the date of termination, which may not be
later than six months following such notice) if the
Administrator fails to perform or to observe in any material
respect, or commits a material breach of, any material
provision of this Administrative Services Agreement relating
to Insurance and such failure or breach has not been cured
to the reasonable satisfaction of Insurance within 30 days
after notice thereof; or
7
<PAGE> 9
(ii) upon 30 days notice for any reason.
(c) In the event of termination of this Administrative Services
Agreement:
(i) Insurance shall immediately arrange, at Insurance's sole
cost, for the return or transfer to a succeeding
Administrator, if any, of all Books and Records of Insurance
provided to the Administrator; and
(ii) the Administrator will cooperate fully with Insurance in
such return or transfer.
(d) The termination of this Administration Services Agreement as to
any Party shall be without prejudice to any rights or liabilities
of any Party hereunder which shall have accrued prior to such
termination and shall not affect any provisions of this
Administration Services Agreement that are expressly or by
necessary implication intended to survive such termination.
(e) No termination of this Administrative Services Agreement, or
other resignation or removal of the Administrator, and no
appointment of a successor Adminis- trator, shall become
effective until the acceptance of appointment by the successor
Administrator in accordance with this Section 8(e). Any successor
Administrator shall deliver a written acceptance of its
appointment to the retir- ing Administrator and to Insurance.
Thereupon, the resignation or removal of the retiring
Administrator shall become effective, and the successor Adminis-
trator shall have all the rights, powers and duties of the
Administrator under this Administrative Services Agreement.
9. Each of the Parties hereto acknowledges and agrees that the
Administrator is acting solely as an agent of Insurance in rendering
the Services hereunder and nothing herein contained, express or
implied, is intended to create any other relationship, whether as
principal or otherwise.
10. Except for the assignment by Insurance to the Indenture Trustee (as
defined in the Indenture), in accordance with the terms of the
Indenture, none of the parties thereto shall assign or transfer or
permit the assignment or transfer of this Administrative Services
Agreement without the prior written consent of the other, which consent
shall not be unreasonably withheld. All such assignments shall be
subject to all necessary regulatory approvals.
11. All written notices required under this Administrative Services
Agreement shall be given in writing and shall be deemed to have been
given upon (i) transmitter's confirmation of a receipt of a facsimile
transmission, (ii) confirmed delivery by a standard overnight carrier
or when delivered by hand or (iii) the expiration of five business days
after the day when mailed by certified or registered mail, postage
8
<PAGE> 10
prepaid, addressed at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Insurance, to:
RESIDENTIAL REINSURANCE LIMITED
c/o Midland Bank Trust Corporation
(Cayman) Limited
P.O. Box 309
Grand Cayman, Cayman Islands
British West Indies
Telephone No.: (809) 949-7755
Telecopy No.: (809) 949-7634
Attention: President
(b) if to the Administrator, to:
[ ]
12. This Administrative Services Agreement shall be governed by and
construed in accordance with the laws of the Cayman Islands (regardless
of the laws that might otherwise govern under applicable principles of
conflicts law) as to all matters, including, without limitation,
matters of validity, construction, effect, performance and remedies.
13. The effective date of this Agreement shall be the day of August,
1996 .
9
<PAGE> 11
IN WITNESS WHEREOF the parties have cause to be affixed their Common Seals the
day and year first before written.
The Common Seal of RESIDENTIAL REINSURANCE LIMITED
was hereunder affixed and acknowledged by
and
in the presence of:
The Common Seal of MIDLAND BANK
TRUST CORPORATION (CAYMAN) LIMITED
was hereto affixed and acknowledged by
and
in the presence of:
10
<PAGE> 1
Exhibit 4.5
CLAIMS REVIEW AGREEMENT
This CLAIMS REVIEW AGREEMENT, dated as of August , 1996
(this "Claims Review Agreement"), between RESIDENTIAL REINSURANCE LIMITED, a
company incorporated under the laws of the Cayman Islands (the "Company"), and
KPMG Peat Marwick, Cayman Islands ("KPMG Cayman Islands"), a partnership
organized under the laws of the Cayman Islands (in its capacity as Claims
Reviewer hereunder, the "Claims Reviewer").
W I T N E S S E T H
WHEREAS, the Company has entered into a Catastrophe Excess of
Loss Reinsurance Agreement, dated the date hereof (the "Reinsurance Agreement"),
with United Services Automobile Association, a reciprocal interinsurance
exchange organized under the laws of Texas and USAA Casualty Insurance Company
(collectively, the "Ceding Insurer") pursuant to which the Ceding Insurer has
ceded to the Company, and the Company has accepted, liability for Ultimate Net
Losses (capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Reinsurance Agreement) in excess of the
Trigger Amount which may accrue to the Ceding Insurer under any and all Policies
issued by the Ceding Insurer, as the result of any Loss Occurrence during the
Loss Occurrence Period;
WHEREAS, the Reinsurance Agreement provides, among other
things, that any Proof of Loss Claim submitted by the Ceding Insurer to the
Company shall be verified by an independent claims review agent appointed by the
Company; and
WHEREAS, the Company desires to appoint KPMG Cayman Islands to
serve as the Claims Reviewer under the Reinsurance Agreement during the term
thereof, and KPMG Cayman Islands desires to accept such appointment;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained,the parties to this Claims Review Agreement
(the "Parties") hereby agree as follows:
<PAGE> 2
Section 1. Appointment. The Company hereby appoints the Claims
Reviewer as its exclusive agent to provide the Services (as defined in Section
2, below), on the terms and subject to the conditions set forth herein. The
Claims Reviewer hereby accepts such appointment, on such terms and subject to
such conditions.
Section 2. Services. (a) The Claims Reviewer shall provide
to the Company all services necessary as Claims Reviewer under the Reinsurance
Agreement (the "Services"), including, but not limited to:
(i) receipt and review of Proof of Loss Claims received
from the Ceding Insurer under the Reinsurance
Agreement in accordance with the agreed-upon
procedures set forth in Annex A to this Claims Review
Agreement (the "Procedures");
(ii) issuing to the Company a report (the
"Claims Report") with respect to each
Proof of Loss Claim that is submitted by
the Ceding Insurer under the Reinsurance
Agreement, which Claims Report will be
substantially in the form of Annex A to
this Claims Review Agreement;
(iii) include in the Claims Report a statement
of any discrepancies noted during the
course of its application of the Proce-
dures; and
(iv) generally, all such other things reasonably necessary
or otherwise required, in accordance with the terms
of the Reinsurance Agreement, relating to the
review of claims made thereunder.
(b) In performing its duties under this Claims Review
Agreement, the Claims Reviewer shall provide all the Services from an office or
location outside of the United States; provided, however, that the Services
described in paragraph B.2. of Annex A attached hereto may be performed by
United States-based personnel of affiliates of the Claims Reviewer to the extent
necessary in order to implement the provisions of this Agreement.
(c) [In addition to the foregoing, the Services shall
include the application of the Procedures set forth in paragraph B of the Claims
Report to a sample of
2
<PAGE> 3
the total claims ("Trigger Amount Claims") paid by the Ceding Insurer that are
included in the determination of whether or not the Trigger Amount of claims has
been paid-out. The review of Trigger Amount Claims shall commence only after the
Claims Reviewer has received the first Proof of Loss Claim under the Reinsurance
Agreement.] [To be discussed]
Section 3. Books and Records; Access and Ownership. The Claims
Reviewer shall maintain at its principal administrative offices in [Grand
Cayman, B.W.I.] and retain for applicable periods, as agreed by the Claims
Reviewer and the Company or required by law, books and records relating to the
Services provided hereunder (the "Books and Records"). The Company, insurance
regulatory authorities and their respective designated representatives shall
have the right to inspect the Books and Records upon reasonable notice during
the Claims Reviewer's normal business hours.
The Claims Reviewer acknowledges and agrees that the Books and
Records are and shall remain the property of the Company. The Claims Reviewer
shall return the Books and Records to the Company upon the termination of this
Claims Review Agreement in accordance with Section 9; provided, however, in the
event that a dispute arises between the Company and the Claims Reviewer, the
Claims Reviewer shall have the right at any time after the termination of this
Claims Review Agreement to inspect the Books and Records returned to the Company
in so far as such Books and Records relate to the dispute, and to make copies
thereof or extracts therefrom; and provided, further, that nothing in this
Section 3 shall supersede, preclude or otherwise limit any discovery rights
otherwise available to the Claims Reviewer or the Company.
Section 4. General Provisions. The Company
and the Claims Reviewer agree that:
(a) During the term of this Claims Review
Agreement, the Claims Reviewer and its affiliates shall not be prohibited or
otherwise limited from engaging in any aspect of the insurance or reinsurance
business, or any activity that deals with such business, on behalf of or with
respect to persons other than the Company; provided, that neither the Claims
Reviewer nor any of its
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<PAGE> 4
affiliates retained to provide Services hereunder shall, during the term of this
Claims Review Agreement, engage in any aspect of the insurance or reinsurance
business with such persons if the terms of such engagement would, in the good
faith judgment of the Claims Reviewer, materially adversely affect the Claims
Reviewer's provision of Services hereunder in accordance with the terms hereof.
(b) The Company and the Claims Reviewer are not
partners or joint venturers with each other, and nothing herein shall be
construed as to make them such partners or joint venturers, or impose any
liability as such on either of them. The Claims Reviewer shall perform its
duties hereunder as an independent contractor.
(c) The Company shall not require the Claims
Reviewer to provide, and the Claims Reviewer shall not provide, Services in the
event that the provision of such Services, to the knowledge of the Claims
Reviewer or the Company, as the case may be, would violate, conflict with or
result in the breach of any (i) charter document of the Company, (ii) statute,
law, rule, regulation, judgment, decree, order or permit of any governmental
authority or (iii) any material agreement to which the Company is a party or by
which it is bound. The Company covenants and agrees that it shall not adopt or
amend any charter document or enter into or become bound by any agreement that
would be violated, conflicted with or breached by the provision of services by
the Claims Reviewer as contemplated by this Claims Review Agreement.
(d) Subject to the next sentence of this
Section 4(d), the Claims Reviewer may retain legal, financial, actuarial and
other advisors and service providers, including affiliates of the Claims
Reviewer, in connection with the provision of Services hereunder; provided,
however, that the Claims Reviewer shall not be relieved of its obligation to
provide Services satisfying the standards set forth in this Claims Review
Agreement by the retention of any such persons; and, provided, further, that the
charges or fees of any such persons for such Services shall be paid by the
Claims Reviewer from the amount set forth in Section 5. The Claims Reviewer
shall promptly notify the Company of its retention of any affiliate for purposes
of providing any Services hereunder and shall not retain any affiliate for
purposes of
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<PAGE> 5
providing such Services without the prior approval of the Board of Directors of
the Company.
Section 5. Fee. In consideration of the Services provided
to the Company hereunder, the Company shall pay the Claims Reviewer $_____,
payable upon delivery of each Claims Report, up to an aggregate sum not to
exceed $_______.
Section 6. Indemnification by the Company. (a)
Notwithstanding anything to the contrary in this Claims Review Agreement,
neither the Claims Reviewer, nor any affiliate of the Claims Reviewer, nor any
person who is or was a director, officer, employee or agent of the Claims
Reviewer or any such affiliate nor any person who is or was serving at the
request of the Claims Reviewer or any such affiliate as a director, officer,
partner, trustee, employee or agent of another person (collective- ly, the
"Claims Reviewer Indemnitees") shall be liable to the Company for any action or
inaction taken or omitted to be taken by such Claims Reviewer Indemnitee;
provided, -------- however, that such Claims Reviewer Indemnitee acted (or
- ------- failed to act) in good faith and such action or inaction does not
constitute actual fraud, negligence or wilful or wanton misconduct.
(b) The Company shall, to the fullest extent not
prohibited by law, indemnify each Claims Reviewer Indemnitee against all
liabilities and reasonable costs and expenses (including reasonable legal fees
and expenses) incurred by such Claims Reviewer Indemnitee in connection with any
threatened, pending or completed claim, demand, action, suit or proceeding to
which such Claims Reviewer Indemnitee was or is a party or is threatened to be
made a party by reason of the Services provided to the Company hereunder by the
Claims Reviewer or such Claims Reviewer Indemnitee's status as an affiliate of
the Claims Reviewer, a director, officer, employee or agent of the Claims
Reviewer or any such affiliate or a person serving at the request of the Claims
Reviewer or any such affiliate as a director, officer, partner, trustee,
employee or agent of another person and that relates to this Claims Review
Agreement, the management and operation of the Company or the business and
affairs of the Company; provided, however, that such Claims Reviewer Indemnitee
acted (or failed to act) in good
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<PAGE> 6
faith and such action or inaction does not constitute actual fraud, negligence
or wilful or wanton misconduct.
(c) Liabilities and reasonable costs and expenses
(including reasonable legal fees and expenses) incurred in investigating or
defending any claim, demand, action, suit or proceeding subject to Section 6(b)
shall be paid by the Company as and when incurred upon receipt of an undertaking
(which need not be secured) by or on behalf of the Claims Reviewer Indemnitee to
repay such amount if it shall ultimately be determined, by a court of competent
jurisdiction, that such indemnification is prohibited by law or not within the
scope of Section 6(b).
(d) The indemnification provided by this Section 6
shall be in addition to any other rights to which the Claims Reviewer
Indemnitees may be entitled under any agreement or undertaking of the Company or
as a matter of law or otherwise, and shall continue as to a Claims Reviewer
Indemnitee who has ceased to serve in a capacity for which the Claims Reviewer
Indemnitee is entitled to indemnification and shall inure to the benefit of the
heirs, successors, assigns, administrators and personal representatives of the
Claims Reviewer Indemni- tee.
(e) The provisions of this Section 6 are for the
benefit of the Claims Reviewer Indemnitees and the heirs, successors, assigns,
administrators and personal representatives of the Claims Reviewer Indemnitees
and shall not be deemed to create any rights for the benefit of any other
persons.
Section 7. Indemnification by the Claims Reviewer. (a) The
Claims Reviewer shall indemnify the Company, any affiliate of the Company, any
person who is or was a director, officer, employee or agent of the Company or
any such affiliate and any person who is or was serving at the request of the
Company or any such affiliate as a director, officer, partner, trustee, employee
or agent of another person (collectively, the "Company Indemnitees") against all
liabilities and reasonable costs and expenses (including reasonable legal fees
and expenses) incurred by the Company Indemnitee in connection with any claim,
demand, action, suit or proceeding to which such Company Indemnitee was a party,
but
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<PAGE> 7
only insofar as the same have been determined by a final, non-appealable order
of a court of competent jurisdiction to have arisen as a proximate result of the
actual fraud, negligence or wilful or wanton misconduct of the Claims Reviewer
in the provision of Services under this Claims Review Agreement.
(b) The indemnification provided by this Section 7
shall be in addition to any other rights to which the Company Indemnitees may be
entitled under any agreement or undertaking of the Claims Reviewer or as a
matter of law or otherwise, and shall continue as to a Company Indemnitee who
has ceased to serve in a capacity for which the Company Indemnitee is entitled
to indemnification and shall inure to the benefit of the heirs, successors,
assigns, administrators and personal representatives of the Company Indemnitee.
(c) The provisions of this Section 7 are for the
benefit of the Company Indemnitees and the heirs, successors, assigns,
administrators and personal representatives of the Company Indemnitees and shall
not be deemed to create any rights for the benefit of any other persons.
Section 8. Procedure for Indemnification. (a) If the Company
or Claims Reviewer (for the purposes of this Section 8, the "Indemnifying
Party") has become obligated to indemnify pursuant to Section 6 or 7, as the
case may be, or if any suit, action, investigation, claim or proceeding is
begun, made or instituted as a result of which the Indemnifying Party may become
obligated to a Company Indemnitee or a Claims Reviewer Indemnitee, as the case
may be (for the purposes of this Section 8, the "Indemnified Party"), hereunder,
the Indemnified Party shall give written notice to the Indemnifying Party within
a sufficiently prompt time to avoid prejudice to the Indemnifying Party,
specifying in reasonable detail the facts upon which the claimed right to
indemnification is or may be based; provided, however, that the failure of the
Indemnified Party to give notice as provided in this Section 8 shall not relieve
the Indemnifying Party of its obligations hereunder, except to the extent that
such Indemnifying Party is actually prejudiced by such failure to give notice.
7
<PAGE> 8
(b) An Indemnifying Party may elect to defend,
compromise and settle, at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel reasonably satisfactory to the Indemnified
Party, any third party claim. If an Indemnifying Party elects to defend a third
party claim, it shall, within 30 days of its receipt of notice of such third
party claim (or sooner, if the nature of such third party claim so requires),
notify the Indemnified Party of its intent to do so and such Indemnified Party
shall cooperate in the defense of such third party claim to the extent
reasonably requested in writing by the Indemnifying Party. After notice from an
Indemnifying Party of its election to assume the defense of a third party claim,
such Indemnifying Party shall not be liable to such Indemnified Party under this
Section 8 for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof. If an Indemnifying
Party elects not to defend against a third party claim, or fails to notify an
Indemnified Party of its election as provided in this Section 8, such
Indemnified Party may defend, compromise and settle such third party claim
subject to the conditions set forth below. Notwithstanding the foregoing, (i)
neither an Indemnifying Party nor an Indemnified Party, as the party controlling
the defense of a third party claim, may compromise or settle any claim or
consent to the entry of any judgment for other than monetary damages without the
prior written consent of any other Indemnifying Party or Indemnified Party;
provided, that (upon reasonable notice thereof) consent to compromise or
settlement or the entry of a judgment shall not be unreasonably withheld or
delayed, (ii) no Indemnifying Party shall consent to the entry of any judgment
or enter into any compromise or settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party and all other Indemnified Parties, subject to such third party
claim, of a full and final release from all liability in respect to such claim
or litigation and (iii) no Indemnified Party may compromise or settle any claim
or consent to the entry of any judgment for money damages without the prior
written consent of the Indemnifying Party, provided, that (upon reasonable
notice thereof) consent to compromise or settlement or the entry of a judgment
shall not be unreasonably withheld or delayed.
8
<PAGE> 9
(c) Any claim on account of an indemnifiable loss
hereunder which does not result from a third party claim shall be asserted by
written notice given by the Indemnified Party to the Indemnifying Party. The
Indemnifying Party shall have a period of 30 days from the date of its receipt
of such notice to respond thereto. If the Indemnifying Party does not respond
within such 30 day period, the Indemnifying Party shall be deemed to have
accepted responsibility to make payment, subject of the provisions of this
Section 8(c), and shall have no further right to contest the validity of such
claim. If the Indemnifying Party does respond within such 30 day period and
rejects such claim in whole or in part, such Indemnified Party shall be free to
pursue such remedies as may be available to such party under applicable law.
Section 9. Termination. (a) This Claims Review Agreement
may be terminated by the Claims Reviewer upon 45 days' written notice by the
Claims Reviewer to the Company if the Company fails to perform or observe in any
material respect, or commits a material breach of, any material provision of
this Claims Review Agreement and such failure or breach has not been cured to
the reasonable satisfaction of the Claims Reviewer within 30 days after notice
thereof.
(b) This Claims Review Agreement may be terminated
by the Company:
(i) upon written notice by the Company to the Claims Reviewer
(such notice to specify the date of termination, which may not be later than six
months following such notice) if the Claims Reviewer fails to perform or to
observe in any material respect, or commits a material breach of, any material
provision of this Claims Review Agreement relating to the Company and such
failure or breach has not been cured to the reasonable satisfaction of the
Company within 30 days after notice thereof; or
(ii) upon 30 days notice for any reason.
(c) In the event of termination of this Claims
Review Agreement:
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<PAGE> 10
(i) the Company shall immediately arrange, at the
Company's sole cost, for the return or transfer to a succeeding Claims Reviewer,
if any, of all Books and Records of the Company provided to the Claims Reviewer;
and
(ii) the Claims Reviewer will cooperate fully with the
Company in such return or transfer.
(d) The termination of this Claims Review
Agreement as to any Party shall be without prejudice to any rights or
liabilities of any Party hereunder which shall have accrued prior to such
termination and shall not affect any provisions of this Claims Review Agreement
that are expressly or by necessary implication intended to survive such
termination.
(e) No termination of this Claims Review
Agreement, or other resignation or removal of the Claims Reviewer, and no
appointment of a successor Claims Reviewer, shall become effective until the
acceptance of appointment by the successor Claims Reviewer in accordance with
this Section 9(e). Any successor Claims Reviewer shall deliver a written
acceptance of its appointment to the retiring Claims Reviewer and to the
Company. Thereupon, the resignation or removal of the retiring Claims Reviewer
shall become effective, and the successor Claims Reviewer shall have all the
rights, powers and duties of the Claims Reviewer under this Claims Review
Agreement.
Section 10. Personnel, Facilities, Resources and Authority
of the Claims Reviewer. The Claims Reviewer represents and warrants to the
Company that, as of the date of this Claims Review Agreement, the Claims
Reviewer has (i) sufficient personnel, facilities and resources adequately to
provide the Services as contemplated by this Claims Review Agreement and (ii)
all permits, certificates, licenses, approvals, registrations or authorizations
of any regulatory or governmental authority ("Permits") required in connection
with the provision of Services under this Claims Review Agreement, except for
such Permits the absence of which would not have a material adverse effect on
the ability of the Claims Reviewer to provide such Services. The Claims Reviewer
covenants and agrees with the Company that, for the term of this Claims Review
Agreement, it shall maintain (i) sufficient personnel, facilities and resources
in its Cayman Islands
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<PAGE> 11
(or other non-U.S) office adequately to provide the Services as contemplated by
this Claims Review Agreement and (ii) all Permits required in connection with
the provision of Services under this Claims Review Agreement, except for such
Permits the absence of which would not have a material adverse effect on the
ability of the Claims Reviewer to provide such Services.
Section 11. Assignment. Except for the assignment by the
Company to the Indenture Trustee (as defined in that certain Indenture, dated as
of August __, 1996, between Residential Reinsurance Limited and [ ], as
Indenture Trustee (the "Indenture")) in accordance with the terms of the
Indenture, none of the parties hereto shall assign or transfer or permit the
assignment or transfer of this Claims Review Agreement without the prior written
consent of the other, which consent shall not be unreasonably withheld. All such
assignments shall be subject to all necessary regulatory approvals.
Section 12. Amendments and Waivers. This Claims Review
Agreement may not be amended, and none of its provisions may be modified, except
expressly by an instrument signed by the Parties hereto and, solely in the case
of amendments or modifications of Section 13 that materially and adversely
affect the Ceding Insurer, the Ceding Insurer. No failure or delay of a Party in
exercising any power or right 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. No waiver by a Party of any provision of this Claims Review
Agreement or consent to any departure therefrom shall in any event be effective
unless the same shall be in writing and signed by such Party, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given.
Section 13. Confidentiality. (a) As used in this Section 13,
the term "Confidential Information" shall mean any information derived in
connection with the provision of Services by the Claims Reviewer, except such
information which was previously known by the Claims Reviewer and not considered
confidential and/or is or becomes generally available to the public other than
as a
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<PAGE> 12
result of disclosure by the Claims Reviewer or its directors, officers,
employees, agents or representatives, and/or is or becomes available to the
Claims Reviewer on a non-confidential basis from a source other than the
Company.
(b) The Claims Reviewer will hold all Confidential
Information confidential and will not disclose any such Confidential Information
to any person except as may be required to perform the Services or to effect the
assignment of this Claims Review Agreement by the Company to the Indenture
Trustee for the benefit of the Noteholders, as authorized in advance by the
Company in writing or otherwise, or as may be required by law, in which case the
Claims Reviewer shall promptly provide notice to the Company and the Ceding
Insurer that such Confidential Information has been subpoenaed or otherwise
demanded, so that the Company and the Ceding Insurer may seek a protective order
or other appropriate remedy. The Claims Reviewer will use its reasonable best
efforts to obtain or assist the Company and the Ceding Insurer in obtaining such
protective order or other remedy. The Ceding Insurer shall be a third party
beneficiary of the obligations of the Claims Reviewer in this Section 13(b) and
may enforce such obligations directly.
Section 14. Entire Agreement. Except for the terms of the
Reinsurance Agreement, this Claims Review Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior negotiations, commitments, agreements and
understandings, both written and oral, between the parties or any of them with
respect to the subject matter hereof.
Section 15. Governing Law. This Claims Review Agreement shall
be governed by and construed in accordance with the laws of the State of New
York (regardless of the laws that might otherwise govern under applicable
principles of conflicts law) as to all matters, including, without limitation,
matters of validity, construction, effect, performance and remedies.
Section 16. Notices. All written notices required under this
Claims Review Agreement shall be given in writing and shall be deemed to have
been given upon (i) transmitter's confirmation of a receipt of a
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<PAGE> 13
facsimile transmission, (ii) confirmed delivery by a standard overnight carrier
or when delivered by hand or (iii) the expiration of five business days after
the day when mailed by certified or registered mail, postage prepaid, addressed
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to the Company, to:
c/o Midland Bank Trust Corporation
(Cayman) Limited
P.O. Box 309
Grand Cayman, Cayman Islands
British West Indies
Telephone: (809) 949-7755
Telecopy No.: (809) 949-7634
Attention: President
(b) if to the Claims Reviewer, to:
(c) if to the Ceding Insurer, to:
Section 17. No Third Party Beneficiaries. Except as provided
in the first sentence of Section 12 and Section 13(b), nothing in this Claims
Review Agreement is intended to confer any rights or remedies under or by reason
of this Claims Review Agreement on any persons other than the Parties and their
respective successors and assignees. Except as provided in the first sentence of
Section 12 and Section 13(b), nothing in this Claims Review Agreement is
intended to relieve or discharge the obligations or liability of any third
persons to any of the Parties. No provision of this Claims Review Agreement
shall give any third persons any right of subrogation or action over or against
any of the Parties.
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<PAGE> 14
Section 18. Definitions. Capitalized terms used and not
defined herein shall have the respective meanings set forth in the Reinsurance
Agreement.
Section 19. Counterparts. This Claims Review Agreement may
be executed in two or more counterparts, each of which shall be deemed to be an
original, but all of which shall constitute one and the same instrument.
Section 20. Interpretation. The descriptive headings herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Claims Review Agreement.
Section 21. Legal Enforceability. Any provision of this
Claims Review Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without affecting the validity or enforceability of the
remaining provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. If any provision of this Claims Review Agreement is so broad
as to be unen- forceable, the provision shall be interpreted to be only so broad
as is enforceable.
Section 22. Specific Performance. Each of the Parties hereto
acknowledges and agrees that in the event of a breach of this Claims Review
Agreement, each non-breaching Party would be irreparably and immediately harmed
and could not be made whole by monetary damages. It is accordingly agreed that
the Parties hereto (i) will waive, in any action for specific performance, the
defense of adequacy of a remedy at law and (ii) shall be entitled, in addition
to any other remedy to which it may be entitled at law or in equity, to compel
specific performance of this Claims Review Agreement in any action instituted in
any state or federal court sitting in New York, New York.
Section 23. Capacity. Each of the Parties hereto
acknowledges and agrees that the Claims Reviewer is acting solely as an
independent contractor in render- ing the Services hereunder and nothing herein
contained,
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<PAGE> 15
express or implied, is intended to create any other relationship, whether as
principal or otherwise.
Section 24. No Petition. The Claims Reviewer hereby covenants
and agrees that it will not at any time institute against the Company, or join
in the institution against the Company of, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceedings under
any federal, state or foreign bankruptcy or similar law in connection with any
obligations relating to this Claims Review Agreement.
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<PAGE> 16
IN WITNESS WHEREOF, each of the Parties has caused this Claims
Review Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
HPR LIMITED
By
-----------------------------
Name:
Title:
KPMG PEAT MARWICK,
CAYMAN ISLANDS
By
-----------------------------
Name:
Title:
16
<PAGE> 17
Annex A
Independent Accountant's Report
on Applying Agreed-Upon Procedures
We have performed the procedures enumerated below, which were agreed to by
Residential Reinsurance Limited (the "Company") with respect to the accuracy of
the amounts listed in Items 1 and 3 of Schedule 1 of the Proof of Loss Claim
submitted pursuant to the Catastrophic Excess Quota Share Reinsurance Agreement
(the "Reinsurance Agreement") between the Company and United Services Automobile
Association, a reciprocal interinsurance exchange. This engagement to apply
agreed-upon procedures was performed in accordance with standards established by
the American Institute of Certified Public Accountants. The sufficiency of the
procedures is solely the responsibility of the specified users of the report.
Consequently, we make no representation regarding the sufficiency of the
procedures described below either for the purpose for which this report has been
requested or for any other purpose.
We have applied the following procedures to Items 1 and 3 of Schedule 1 of the
Proof of Loss Claim:
A. Recalculated the total of claims paid supporting
each of the amounts reflected in Items 1 and 3.
B. Selected a statistically valid sample of the total
claims included in Items 1 and 3, using a confidence
level of 95% and a level of precision of +/-5%. We
performed the following:
1. Verified that the underlying policy was in
force at time of loss and is accurately classi-
fied between Items 1 and 3 on Schedule 1;
a. Verified that the coverage type is includ-
ed in the Reinsurance Agreement;
b. Verified that the noted policy period in-
cludes the date of the Loss Occurrence, as
defined in the Reinsurance Agreement;
c. Verified that the classification of claim
is in compliance with the Reinsurance
A-1
<PAGE> 18
Agreement as either (a) an Existing or Renewal
Policy, or (b) a New Policy.
2. Compared claim amounts paid to supporting docu-
mentation contained in the claim files.
a. Noted claim file contained proof that the
loss resulted from the Hurricane specified
on the Proof of Loss Claims;
b. Noted claim file contained proof that
location of insured property was a Covered
State per the Reinsurance Agreement;
c. Compared documentation in claim file to
actual loss payments to determine payments
were made for perils covered under the
Reinsurance Agreement.
We were not engaged to, and did not, perform an audit, the objective of which
would be the expression of an opinion on Items 1 and 3 of Schedule 1 of the
Proof of Loss Claim. Accordingly, we do not express such an opinion. Had we
performed additional procedures, other matters might have come to our attention
that would have been reported to you.
This report is intended solely for the use of the Company and should not be used
by those who have not agreed to the procedures and taken responsibility for the
sufficiency of the procedures for their purposes.
Very truly yours,
KPMG Peat Marwick
A-2
<PAGE> 1
Exhibit 4.8
LOSS RESERVE SPECIALIST AGREEMENT
This LOSS RESERVE SPECIALIST AGREEMENT, dated as of August__,
1996 (this "Loss Reserve Specialist Agreement"), between RESIDENTIAL REINSURANCE
LIMITED, a company incorporated under the laws of the Cayman Islands (the
"Company"), and [_________________], a corporation organized under the laws of
[_____] (the "Loss Reserve Specialist").
W I T N E S S E T H
WHEREAS, the Company has entered into a Catastrophe Excess
Quota Share Reinsurance Agreement, dated the date hereof (the "Reinsurance
Agreement"), with United Services Automobile Association, a reciprocal
interinsurance exchange organized under the laws of Texas (the "Ceding Insurer")
pursuant to which the Ceding Insurer has ceded to the Company, and the Company
has accepted, liability for Ultimate Net Losses (capitalized terms used herein
and not otherwise defined shall have the meanings assigned to such terms in the
Reinsurance Agreement) in excess of the Trigger Amount which may accrue to the
Ceding Insurer under any and all Policies issued by the Ceding Insurer, as the
result of any Loss Occurrence during the Loss Occurrence Period.
WHEREAS, the Reinsurance Agreement provides, among other
things, that the Company shall have certain rights to analyze the Loss Reserves
established by the Ceding Insurer and submitted to the Company for payment in
connection with any commutation of the Reinsurance Agreement in accordance with
the terms and conditions of the Reinsurance Agreement (a "Commutation");
WHEREAS, the Reinsurance Agreement provides for an independent
Loss Reserve Specialist appointed by the Company to perform the review of Loss
Reserves described in the preceding Recital; and
WHEREAS, the Company desires to appoint [ ]
to serve as the independent Loss Reserve Specialist under the Reinsurance
Agreement during the term thereof, and Tillinghast, a Towers Perrin Corporation
desires to accept such appointment;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained,the parties to this Loss Reserve Specialist
Agreement (the "Parties") hereby agree as follows:
Section 1. Appointment. The Company hereby appoints the Loss
Reserve Specialist as its exclusive agent to provide the Services (as defined in
Section 2, below), on the terms and subject to the conditions set forth herein.
The Loss Reserve Specialist hereby accepts such appointment, on such terms and
subject to such conditions.
Section 2. Services. (a) The Loss Reserve Specialist shall
provide to the Company all services necessary as Loss Reserve Specialist under
the Reinsurance Agreement (the "Services"), including, but not limited to:
(i) undertaking a review of the reserving practices used
by the Ceding Insurer in the establishment of Loss
Reserves, if any, which review shall be commenced no
later than November 15, 1997 (subject to the Ceding
Insurer providing adequate access to the Loss Reserve
Specialist);
(ii) receipt and processing of any Final Proof of Loss
Claim provided to the Company and the Loss Reserve
Specialist by the Ceding Insurer pursuant to Article
9 of the Reinsurance Agreement;
(iii) acknowledgment of the receipt of any such Final Proof
of Loss Claim received from the Ceding Insurer in
connection with any Commutation;
(iv) analysis of the Loss Reserves set forth in any Final
Proof of Loss Claim, as necessary, to determine
their validity and compensability under the terms
of the Reinsurance Agreement, including
verification of the amount of any Loss Reserves and
the actuarial analysis underlying the establishment
thereof, verification of coverage for such Loss
Reserves under the terms of the Reinsurance
Agreement, and utilization of any relevant documents
and/or informa-
2
<PAGE> 3
tion made available to the Loss Reserve Specialist;
(v) delivery to the Ceding Insurer on or before
December 20, 1997, of a preliminary written
certificate (the "Preliminary Loss Reserve
Certificate") setting forth the preliminary results
of the analysis of Loss Reserves in reasonable detail
and including the basis for any conclusions set
forth in the Preliminary Loss Reserve Certificate;
(vi) response, after consultation with the Company, to any
inquiry, complaint or request received from the
Ceding Insurer, regarding any discrepancy between the
appropriate amount of Loss Reserves as set forth in
the Preliminary Report and the amount of Loss
Reserves set forth in the Final Proof of Loss Claim,
recordation of any such inquiry, complaint, or
request in logs to be maintained by the Company, and
attendance at meetings in San Antonio, Texas, with
representatives of the Ceding Insurer if so requested
by the Ceding Insurer;
(vii) delivery to the Ceding Insurer, not later than
December 31, 1997, of a detailed final certificate
(the "Final Loss Reserve Certificate") of the amount
of Loss Reserves believed by the Loss Reserve Spe-
cialist to be appropriate for coverage under the
Reinsurance Agreement, such Final Loss Reserve
Certificate to be in reasonable detail and to contain
the basis for any conclusions set forth therein; and
(viii) generally, all such other acts and things reasonably
necessary or otherwise required in connection with
the establishment of the amount of Loss Reserves to
be included in the calculation of Ultimate Net Losses
upon Commutation of the Reinsurance Agreement.
(b) In performing its duties under this Loss Reserve
Specialist Agreement, the Loss Reserve Specialist shall provide all Services
from an office or location outside of the United States; provided, however, that
the
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<PAGE> 4
Services described in clauses (i) and (vii) of Section 2(a) may be performed by
United States-based personnel of affiliates of the Loss Reserve Specialist to
the extent necessary in order to implement the provisions of this Agreement.
(c) Any Preliminary Loss Reserve Certificate or Final Loss
Reserve Certificate that specifies a Loss Reserve calculated by the Loss Reserve
Specialist that is lower than the Loss Reserve calculated by the Ceding Insurer
shall also specify that the Loss Reserve Specialist's Loss Reserve (i) is
computed and fairly stated in accordance with United States generally accepted
loss reserving standards and principles, (ii) is based upon actuarial
assumptions that are relevant to Policy provisions, (iii) is established using
reserving techniques applied on a consistent basis throughout the periods
covered except as otherwise stated therein or as required by the rules and
regulations of the relevant insurance regulatory bodies, and (iv) is in
compliance with the requirements of the insurance laws, rules and regulations of
the relevant insurance regulatory bodies.
Section 3. Books and Records; Access and Ownership. The Loss
Reserve Specialist shall maintain at its principal administrative offices in
[Bermuda] and retain for applicable periods, as agreed by the Loss Reserve
Specialist and the Company or required by law, books and records relating to the
Services provided hereunder (the "Books and Records"). The Company, insurance
regulatory authorities and their respective designated representatives shall
have the right to inspect the Books and Records upon reasonable notice during
the Loss Reserve Specialists' normal business hours.
The Loss Reserve Specialist acknowledges and agrees that the
Books and Records are and shall remain the property of the Company. The Loss
Reserve Specialist shall return the Books and Records to the Company upon the
termination of this Loss Reserve Specialist Agreement in accordance with Section
9 provided, however, in the event that a dispute arises between the Company and
the Loss Reserve Specialist, the Loss Reserve Specialist shall have the right at
any time after the termination of this Loss Reserve Specialist Agreement to
inspect the Books and Records returned to the Company in so far as such Books
and Records relate to the dispute, and to make
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<PAGE> 5
copies thereof or extracts therefrom; and provided, further, that nothing in
this Section 3 shall supersede, preclude or otherwise limit any discovery rights
otherwise available to the Loss Reserve Specialist or the Company.
Section 4. General Provisions. The Company and the Loss
Reserve Specialist agree that:
(a) During the term of this Loss Reserve Specialist
Agreement, the Loss Reserve Specialist and its affiliates shall not be
prohibited or otherwise limited from engaging in any aspect of the insurance or
reinsurance business, or any activity that deals with such business, on behalf
of or with respect to persons other than the Company; provided, that neither the
Loss Reserve Specialist nor any of its affiliates retained to provide Services
hereunder shall, during the term of this Loss Reserve Specialist Agreement,
engage in any aspect of the insurance or reinsurance business with such persons
if the terms of such engagement would, in the good faith judgment of the Loss
Reserve Specialist, materially adversely affect the Loss Reserve Specialist's
provision of Services hereunder in accordance with the terms hereof.
(b) The Company and the Loss Reserve Specialist are
not partners or joint venturers with each other, and nothing herein shall be
construed as to make them such partners or joint venturers, or impose any
liability as such on either of them. The Loss Reserve Specialist shall perform
its duties hereunder as an independent contractor.
(c) The Company shall not require the Loss Reserve
Specialist to provide, and the Loss Reserve Specialist shall not provide,
Services in the event that the provision of such Services, to the knowledge of
the Loss Reserve Specialist or the Company, as the case may be, would violate,
conflict with or result in the breach of any (i) charter document of the
Company, (ii) statute, law, rule, regulation, judgment, decree, order or permit
of any governmental authority or (iii) any material agreement to which the
Company is a party or by which it is bound. The Company covenants and agrees
that it shall not adopt or amend any charter document or enter into or become
bound by any agreement that would be violated,
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<PAGE> 6
conflicted with or breached by the provision of services by the Loss Reserve
Specialist as contemplated by this Loss Reserve Specialist Agreement.
(d) Subject to the next sentence of this Section
4(d), the Loss Reserve Specialist may retain legal, financial, actuarial and
other advisors and service providers, including affiliates of the Loss Reserve
Specialist, in connection with the provision of Services hereunder; provided,
however, that the Loss Reserve Specialist shall not be relieved of its
obligation to provide Services satisfying the standards set forth in this Loss
Reserve Specialist Agreement by the retention of any such persons; and,
provided, further, that the charges or fees of any such persons for such
Services shall be paid by the Loss Reserve Specialist from the amount set forth
in Section 5. The Loss Reserve Specialist shall promptly notify the Company of
its retention of any affiliate for purposes of providing any Services hereunder
and shall not retain any affiliate for purposes of providing such Services
without the prior approval of the Board of Directors of the Company.
Section 5. Fee. In consideration of the Services provided to
the Company hereunder, the Company shall pay the Loss Reserve Specialist a fee
of $______, payable upon its execution and delivery hereof.
Section 6. Indemnification by the Company. (a) Notwithstanding
anything to the contrary in this Loss Reserve Specialist Agreement, neither the
Loss Reserve Specialist, nor any affiliate of the Loss Reserve Specialist, nor
any person who is or was a director, offi- cer, employee or agent of the Loss
Reserve Specialist or any such affiliate nor any person who is or was serving at
the request of the Loss Reserve Specialist or any such affiliate as a director,
officer, partner, trustee, employee or agent of another person (collectively,
the "Loss Reserve Specialist Indemnitees") shall be liable to the Company for
any action or inaction taken or omitted to be taken by such Loss Reserve
Specialist Indemnitee; provided, however, that such Loss Reserve Specialist
Indemnitee acted (or failed to act) in good faith and such action or inaction
does not constitute actual fraud, negligence or wilful or wanton misconduct.
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<PAGE> 7
(b) The Company shall, to the fullest extent not
prohibited by law, indemnify each Loss Reserve Specialist Indemnitee against all
liabilities and reasonable costs and expenses (including reasonable legal fees
and expenses) incurred by such Loss Reserve Specialist Indemnitee in connection
with any threatened, pending or completed claim, demand, action, suit or
proceeding to which such Loss Reserve Specialist Indemnitee was or is a party or
is threatened to be made a party by reason of the Services provided to the
Company hereunder by the Loss Reserve Specialist or such Loss Reserve Specialist
Indemnitee's status as an affiliate of the Loss Reserve Specialist, a director,
officer, employee or agent of the Loss Reserve Specialist or any such affiliate
or a person serving at the request of the Loss Reserve Specialist or any such
affiliate as a director, officer, partner, trustee, employee or agent of another
person and that relates to this Loss Reserve Specialist Agreement, the
management and operation of the Company or the business and affairs of the
Company; provided, however, that such Loss Reserve Specialist Indemnitee acted
(or failed to act) in good faith and such action or inaction does not constitute
actual fraud, negligence or wilful or wanton misconduct.
(c) Liabilities and reasonable costs and expenses
(including reasonable legal fees and expenses) incurred in investigating or
defending any claim, demand, action, suit or proceeding subject to Section 6(b)
shall be paid by the Company as and when incurred upon receipt of an undertaking
(which need not be secured) by or on behalf of the Loss Reserve Specialist
Indemnitee to repay such amount if it shall ultimately be determined, by a court
of competent jurisdiction, that such indemnification is prohibited by law or not
within the scope of Section 6(b).
(d) The indemnification provided by this Section 6
shall be in addition to any other rights to which the Loss Reserve Specialist
Indemnitees may be entitled under any agreement or undertaking of the Company or
as a matter of law or otherwise, and shall continue as to a Loss Reserve
Specialist Indemnitee who has ceased to serve in a capacity for which the Loss
Reserve Specialist Indemnitee is entitled to indemnification and shall inure to
the benefit of the heirs, successors,
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<PAGE> 8
assigns, administrators and personal representatives of the Loss Reserve
Specialist Indemnitee.
(e) The provisions of this Section 6 are for the
benefit of the Loss Reserve Specialist Indemnitees and the heirs, successors,
assigns, administrators and personal representatives of the Loss Reserve
Specialist Indemnitees and shall not be deemed to create any rights for the
benefit of any other persons.
Section 7. Indemnification by the Loss Reserve Specialist. (a)
The Loss Reserve Specialist shall indemnify the Company, any affiliate of the
Company, any person who is or was a director, officer, employee or agent of the
Company or any such affiliate and any person who is or was serving at the
request of the Company or any such affiliate as a director, officer, partner,
trustee, employee or agent of another person (collectively, the "Company
Indemnitees") against all liabilities and reasonable costs and expenses
(including reasonable legal fees and expenses) incurred by the Company
Indemnitee in connection with any claim, demand, action, suit or proceeding to
which the Company Indemnitee was a party, but only insofar as the same have been
determined by a final, non-appealable order of a court of competent jurisdiction
to have arisen as a proximate result of the actual fraud, negligence or wilful
or wanton misconduct of the Loss Reserve Specialist or any of the directors,
officers, employees or agents of the Loss Reserve Specialist in the provision of
Services under this Loss Reserve Specialist Agreement.
(b) The indemnification provided by this Section 7 shall be in
addition to any other rights to which the Company Indemnitees may be entitled
under any agreement or undertaking of the Loss Reserve Specialist or as a matter
of law or otherwise, and shall continue as to a Company Indemnitee who has
ceased to serve in a capacity for which the Company Indemnitee is entitled to
indemnification and shall inure to the benefit of the heirs, successors,
assigns, administrators and personal representatives of the Company Indemnitee.
(c) The provisions of this Section 7 are for the benefit of
the Company Indemnitees and the heirs, successors, assigns, administrators and
personal representatives of the Company Indemnitees and shall not be
8
<PAGE> 9
deemed to create any rights for the benefit of any other persons.
Section 8. Procedure for Indemnification. (a) If the Company
or Loss Reserve Specialist (for the purposes of this Section 8, the
"Indemnifying Party") has become obligated to indemnify pursuant to Section 6 or
7, as the case may be, or if any suit, action, investigation, claim or
proceeding is begun, made or instituted as a result of which the Indemnifying
Party may become obligated to a Company Indemnitee or a Loss Reserve Specialist
Indemnitee, as the case may be (for the purposes of this Section 8, the
"Indemnified Party"), hereunder, the Indemnified Party shall give written notice
to the Indemnifying Party within a sufficiently prompt time to avoid prejudice
to the Indemnifying Party, specifying in reasonable detail the facts upon which
the claimed right to indemnification is or may be based; provided, however, that
the failure of the Indemnified Party to give notice as provided in this Section
8 shall not relieve the Indemnifying Party of its obligations hereunder, except
to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.
(b) An Indemnifying Party may elect to defend,
compromise and settle, at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel reasonably satisfactory to the Indemnified
Party, any third party claim. If an Indemnifying Party elects to defend a third
party claim, it shall, within 30 days of its receipt of notice of such third
party claim (or sooner, if the nature of such third party claim so requires),
notify the Indemnified Party of its intent to do so and such Indemnified Party
shall cooperate in the defense of such third party claim to the extent
reasonably requested in writing by the Indemnifying Party. After notice from an
Indemnifying Party of its election to assume the defense of a third party claim,
such Indemnifying Party shall not be liable to such Indemnified Party under this
Section 8 for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof. If an Indemnifying
Party elects not to defend against a third party claim, or fails to notify an
Indemnified Party of its election as provided in this Section 8, such
Indemnified Party may defend, compromise and settle such third party claim
subject to the conditions set forth below. Notwithstand-
9
<PAGE> 10
ing the foregoing, (i) neither an Indemnifying Party nor an Indemnified Party,
as the party controlling the defense of a third party claim, may compromise or
settle any claim or consent to the entry of any judgment for other than monetary
damages without the prior written consent of any other Indemnifying Party or
Indemnified Party; provided, that (upon reasonable notice thereof) consent to
compromise or settle or the entry of a judgment shall not be unreasonably
withheld or delayed, (ii) no Indemnifying Party shall consent to the entry of
any judgment or enter into any compromise or settlement which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party and all other Indemnified Parties, subject to such third party
claim, of a full and final release from all liability in respect to such claim
or litigation and (iii) no Indemnified Party may compromise or settle any claim
or consent to the entry of any judgment for money damages without the prior
written consent of the Indemnifying Party, provided, that (upon reasonable
notice thereof) consent to compromise or settlement or the entry of a judgment
shall not be unreasonably withheld or delayed.
(c) Any claim on account of an indemnifiable loss
hereunder which does not result from a third party claim shall be asserted by
written notice given by the Indemnified Party to the Indemnifying Party. The
Indemnifying Party shall have a period of 30 days from the date of its receipt
of such notice to respond thereto. If the Indemnifying Party does not respond
within such 30 day period, the Indemnifying Party shall be deemed to have
accepted responsibility to make payment, subject of the provisions of this
Section 8(c), and shall have no further right to contest the validity of such
claim. If the Indemnifying Party does respond within such 30 day period and
rejects such claim in whole or in part, such Indemnified Party shall be free to
pursue such remedies as may be available to such party under applicable law.
Section 9. Termination. (a) This Loss Reserve Specialist
Agreement may be terminated by the Loss Reserve Specialist upon 45 days' written
notice by the Loss Reserve Specialist to the Company if the Company fails to
perform or observe in any material respect, or commits a material breach of, any
material provision of
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<PAGE> 11
this Loss Reserve Specialist Agreement and such failure or breach has not been
cured to the reasonable satisfaction of the Loss Reserve Specialist within 30
days after notice thereof.
(b) This Loss Reserve Specialist Agreement may be
terminated by the Company:
(i) upon written notice by the Company to the Loss Reserve
Specialist (such notice to specify the date of termination, which may not be
later than six months following such notice) if the Loss Reserve Specialist
fails to perform or to observe in any material respect, or commits a material
breach of, any material provision of this Loss Reserve Specialist Agreement
relating to the Company and such failure or breach has not been cured to the
reasonable satisfaction of the Company within 30 days after notice thereof; or
(ii) upon 30 days notice for any reason.
(c) In the event of termination of this
Loss Reserve Specialist Agreement:
(i) the Company shall immediately arrange, at the Company's
sole cost, for the return or transfer to a succeeding Loss Reserve Specialist,
if any, of all Books and Records of the Company provided to the Loss Reserve
Specialist; and
(ii) the Loss Reserve Specialist will cooperate fully with the
Company in such return or transfer.
(d) The termination of this Loss Reserve Specialist
Agreement as to any Party shall be without prejudice to any rights or
liabilities of any Party hereunder which shall have accrued prior to such
termination and shall not affect any provisions of this Loss Reserve Specialist
Agreement that are expressly or by necessary implication intended to survive
such termination.
(e) No termination of this Loss Reserve Specialist
Agreement, or other resignation or removal of the Loss Reserve Specialist, and
no appointment of a successor Loss Reserve Specialist, shall become effective
until the acceptance of appointment by the successor Loss
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<PAGE> 12
Reserve Specialist in accordance with this Section 9(e). Any successor Loss
Reserve Specialist shall deliver a written acceptance of its appointment to the
retiring Loss Reserve Specialist and to the Company. Thereupon, the resignation
or removal of the retiring Loss Reserve Specialist shall become effective, and
the successor Loss Reserve Specialist shall have all the rights, powers and
duties of the Loss Reserve Specialist under this Loss Reserve Specialist
Agreement.
Section 10. Personnel, Facilities, Resources and Authority of
the Loss Reserve Specialist. The Loss Reserve Specialist represents and warrants
to the Company that, as of the date of this Loss Reserve Specialist Agreement,
the Loss Reserve Specialist has (i) sufficient personnel, facilities and
resources adequately to provide the Services as contemplated by this Loss
Reserve Specialist Agreement and (ii) all permits, certificates, licenses,
approvals, registrations or authorizations of any regulatory or governmental
authority ("Permits") required in connection with the provision of Services
under this Loss Reserve Specialist Agreement, except for such Permits the
absence of which would not have a material adverse effect on the ability of the
Loss Reserve Specialist to provide such Services. The Loss Reserve Specialist
covenants and agrees with the Company that, for the term of this Loss Reserve
Specialist Agreement, it shall maintain (i) sufficient personnel, facilities and
resources in its[Bermuda](or other non-U.S) office adequately to provide the
Services as contemplated by this Loss Reserve Specialist Agreement and (ii) all
Permits required in connection with the provision of Services under this Loss
Reserve Specialist Agreement, except for such Permits the absence of which would
not have a material adverse effect on the ability to the Loss Reserve Specialist
to provide such Services.
Section 11. Assignment. Except for the assignment by the
Company to the Indenture Trustee (as defined in that certain Indenture, dated as
of August ___, 1996, between Residential Reinsurance Limited and [_______], as
Indenture Trustee (the "Indenture")) in accordance with the terms of the
Indenture, none of the parties thereto shall assign or transfer or permit the
assignment or transfer of this Loss Reserve Specialist Agreement without the
prior written consent of the other, which consent shall not be unreasonably
withheld. All
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<PAGE> 13
such assignments shall be subject to all necessary regulatory approvals.
Section 12. Amendments and Waivers. This Loss Reserve
Specialist Agreement may not be amended, and none of its provisions may be
modified, except expressly by an instrument signed by the Parties hereto and,
solely in the case of amendments or modifications of Section 13 that materially
and adversely affect the Ceding Insurer, the Ceding Insurer. No failure or delay
of a party in exercising any power or right 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. No waiver by a Party or any provision of this Loss Reserve
Specialist Agreement or consent to any departure therefrom shall in any event be
effective unless the same shall be in writing and signed by such Party, and then
such waiver or consent shall be effective only in the specific instance and for
the purpose for which given.
Section 13. Confidentiality. (a) As used in this Section 13,
the term "Confidential Information" shall mean any information derived in
connection with the provision of Services by the Loss Reserve Specialist, except
such information which was previously known by the Loss Reserve Specialist and
not considered confidential and/or is or becomes generally available to the
public other than as a result of disclosure by the Loss Reserve Specialist or
its directors, officers, employees, agents or representatives, and/or is or
becomes available to the Loss Reserve Specialist on a non-confidential basis
from a source other than the Company.
(b) The Loss Reserve Specialist will hold all
Confidential Information confidential and will not disclose such Confidential
Information to any person except as may be required to perform the Services or
to effect the assignment of this Claims Administration Agreement by the Company
to the Indenture Trustee for the benefit of the Noteholders, as authorized in
advance by the Company in writing or otherwise, or as may be required by law, in
which case the Loss Reserve Specialist shall promptly provide notice to the
Company and the Ceding Insurer that such Confidential Information has
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<PAGE> 14
been subpoenaed or otherwise demanded, so that the Company and the Ceding
Insurer may seek a protective order or other appropriate remedy. The Loss
Reserve Specialist will use its reasonable best efforts to obtain or assist the
Company and the Ceding Insurer in obtaining such protective order or other
remedy. The Ceding Insurer shall be a third party beneficiary of the obligations
of the Loss Reserve Specialist in this Section 13(b) and may enforce such
obligations directly.
Section 14. Entire Agreement. Except for the terms of the
Reinsurance Agreement, this Loss Reserve Specialist Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all other prior negotiations, commitments, agreements and
understandings, both written and oral, between the parties or any of them with
respect to the subject matter hereof.
Section 15. Governing Law. This Loss Reserve Specialist
Agreement shall be governed by and construed in accordance with the laws of the
State of New York (regardless of the laws that might otherwise govern under
applicable principles of conflicts law) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
Section 16. Notices. All written notices required under this
Loss Reserve Specialist Agreement shall be given in writing and shall be deemed
to have been given upon (i) transmitter's confirmation of a receipt of a
facsimile transmission, (ii) confirmed delivery by a standard overnight carrier
or when delivered by hand or (iii) the expiration of five business days after
the day when mailed by certified or registered mail, postage prepaid, addressed
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to the Company, to:
c/o Midland Bank Trust Corporation
(Cayman) Limited
P.O. Box 309
Grand Cayman, Cayman Islands
British West Indies
Telephone No.: (809) 949-7755
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<PAGE> 15
Telecopy No.: (809) 949-7634
Attention: President
(b) if to the Loss Reserve Specialist, to:
[ ]
(c) if to the Ceding Insurer, to:
[ ].
Section 17. No Third Party Beneficiaries. Except as provided
in the first sentence of Section 12 and Section 13(b), nothing in this Loss
Reserve Specialist Agreement is intended to confer any rights or remedies under
or by reason of this Loss Reserve Specialist Agreement on any persons other than
the Parties and their respective successors and assigns. Nothing in this Loss
Reserve Specialist Agreement is intended to relieve or discharge the obligations
or liability of any third persons to any of the Parties. Except as provided in
the first sentence of Section 12 and Section 13(b), no provision of this Loss
Reserve Specialist Agreement shall give any third persons any right of
subrogation or action over or against any of the Parties.
Section 18. Definitions. Capitalized terms used and not
defined herein shall have the respective meanings set forth in the Reinsurance
Agreement.
Section 19. Counterparts. This Loss Reserve Specialist
Agreement may be executed in two or more counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one and the same
instrument.
Section 20. Interpretation. The descriptive headings herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Loss Reserve Specialist
Agreement.
Section 21. Legal Enforceability. Any provi- sion of this Loss
Reserve Specialist Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibitation or unenforceability without affecting
15
<PAGE> 16
the validity or enforceability of the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. If any provision
of this Loss Reserve Specialist Agreement is so broad as to be unenforceable,
the provision shall be interpreted to be only so broad as is enforceable.
Section 22. Specific Performance. Each of the Parties hereto
acknowledges and agrees that in the event of a breach of this Loss Reserve
Specialist Agreement, each non-breaching Party would be irreparably and
immediately harmed and could not be made whole by monetary damages. It is
accordingly agreed that the Parties hereto (i) will waive, in any action for
specific performance, the defense of adequacy of a remedy at law and (ii) shall
be entitled, in addition to any other remedy to which they may be entitled at
law or in equity, to compel specific performance of this Loss Reserve Specialist
Agreement in any action instituted in any state or federal court sitting in New
York, New York.
Section 23. Capacity. Each of the Parties hereto acknowledges
and agrees that the Loss Reserve Specialist is acting solely as an independent
contractor in rendering the Services hereunder and nothing herein contained,
express or implied, is intended to create any other relationship, whether as
principal or otherwise.
Section 24. No Petition. The Loss Reserve Specialist hereby
covenants and agrees that it will not at any time institute against the Company,
or join in any institution against the Company of, any bankruptcy,
reorganization, arrangement, insolvency, or liquidation proceedings, or other
proceedings under any federal, state or foreign bankruptcy or similar law in
connection with any obligations relating to this Loss Reserve Specialist
Agreement.
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<PAGE> 17
IN WITNESS WHEREOF, each of the Parties has caused this Loss
Reserve Specialist Agreement to be executed on its behalf by its officers
hereunto duly authorized, all as of the day and year first above written.
RESIDENTIAL REINSURANCE LIMITED
By _________________________
Name:
Title:
By _________________________
Name:
Title:
[________________________]
By _________________________
Name:
Title:
By _________________________
Name:
Title:
17
<PAGE> 1
Exhibit 5.1
July 30, 1996
Residential Reinsurance Limited
P.O. Box 1109
Midland Bank Trust Building
Mary Street, Grand Cayman
Cayman Islands, B.W.I.
Ladies and Gentlemen:
At your request, we have examined the Registration Statement
on Form S-1, as prepared for filing by Residential Reinsurance Limited, a
company organized under the laws of the Cayman Islands (the "Registrant"), with
the Securities and Exchange Commission on July 30, 1996 (the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of Class A Floating Rate Notes due 1998 and Class
B Floating Rate Notes due 1998 (collectively, the "Notes"). The Notes will be
issued pursuant to an Indenture (the "Indenture") to be entered into between the
Registrant and the trustee named therein (the "Trustee"). The Notes are to be
sold as set forth in the Registration Statement, any amendment thereto and the
prospectus contained therein (the "Prospectus").
We have examined such instruments, documents and records as we
deemed relevant and necessary as a basis of our opinion hereinafter expressed.
In such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed; and (d) that the Indenture will be a legal, valid and binding
obligation of the Trustee enforceable in accordance with its terms.
<PAGE> 2
Residential Reinsurance Limited
July 30, 1996
Page 2
Based on such examination, we are of the opinion that when the
issuance of the Notes has been duly authorized by appropriate corporate action
and the Notes have been duly executed, authenticated and delivered in accordance
with the Indenture, and sold in the manner described in the Registration
Statement, any amendment thereto and the Prospectus, the Notes will be legally
issued, fully paid, non-assessable and binding obligations of the Company, and
the holders of the Notes will be entitled to the benefits of the Indenture,
except as enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, fraudulent conveyance, moratorium, or
other laws relating to or affecting the rights of creditors generally and
general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance or injunctive relief, regardless of
whether such enforceability is considered in a proceeding in equity or at law.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name wherever appearing in
the Registration Statement and the Prospectus. In giving such consent, we do not
consider that we are "experts," within the meaning of the term as used in the
Act or the rules and regulations of the Securities and Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe
ORRICK, HERRINGTON & SUTCLIFFE
<PAGE> 1
Exhibit 25
-------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
----------------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
---------------------------------------------
RESIDENTIAL REINSURANCE LIMITED
(Exact name of obligor as specified in its charter)
CAYMAN ISLANDS N/A
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
P.O. BOX 1109
MIDLAND BANK TRUST BUILDING
MARY STREET
GRAND CAYMAN, CAYMAN ISLANDS, BRITISH WEST INDIES N/A
(Address of principal executive offices) (Zip Code)
-------------------------
CLASS A FLOATING RATE NOTES
CLASS B FLOATING RATE NOTES
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany,
New York 12110.
Board of Governors of the Federal Reserve System,
Washington, D.C., 20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty
Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C.,
20429.
(b) Whether it is authorized to exercise corporate trust powers.
<PAGE> 3
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
- 2 -
<PAGE> 4
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996.
2. A copy of the Certificate of Authority of the Trustee to
Commence Business (see Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 33-50010, which is incorporated by reference).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee.
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the
Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement
No. 33-50010, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, Chemical Bank, a corporation organized and existing under the laws of
the State of New York, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
City of New York and State of New York, on the 29th day of July, 1996.
THE CHASE MANHATTAN BANK
By /s/
-------------------------------
Vice President
<PAGE> 5
[CHASE LOGO] THE CHASE MANHATTAN BANK
270 Park Avenue
New York, NY 10017-2070
CERTIFICATE
I, Jean E. Rugani, an Assistant Corporate Secretary of The Chase
Manhattan Bank (formerly known as Chemical Bank), a banking organization
organized under the laws of the State of New York, do hereby certify that
attached are true and correct copies of -
(a) the Organization Certificate of Chemical Bank, as approved and
filed in the office of the Superintendent of Banks of the
State of New York on November 26, 1968,
(b) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on February
17, 1969,
(c) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on September
8, 1977,
(d) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on January
29, 1981,
(e) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on September
14, 1982,
(f) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on March 13,
1985;
(g) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York on June 4,
1992; and
(h) a Certificate of Amendment of the Organization Certificate of
Chemical Bank as approved and filed in the office of the
Superintendent of Banks of the State of New York effective as
of July 13, 1996.
I further certify that said Organization Certificate, as amended by
said Certificates of Amendment, is in full force and effect on the date hereof.
IN WITNESS WHEREOF I have hereunto set my hand and affixed the seal of
The Chase Manhattan Bank as of this 18th day of July 1996.
/s/ Jean E. Rugani
- --------------------
Jean E. Rugani
<PAGE> 6
I, Bernard Gassman , Deputy Superintendent of Banks of the State of New York, do
hereby certify that I have caused the annexed Copy of the Organization
Certificate of Chemical Bank dated November 26, 1968, and filed in the office of
the Superintendent of Banks on November 26, 1968 to be compared by a competent
clerk with the original on file in the Banking Deparment, and the same is a
correct copy of said Organization Certificate end of the whole thereof.
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of New York, N.Y., this
17th day of February 1968
/s/Bernard Gassman
- ----------------------------------------
DEPUTY SUPERINTENDENT
<PAGE> 7
ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Received this 25th day of
November 1968
- --------------------------------------------------------------------------------
Superintendent of Banks
Filed for examination this 25th day of
November 1968
- --------------------------------------------------------------------------------
Superintendent of Banks
Approved by the Banking Board by unanimous
instrument in writing on the 26th day of
November 1968
/s/
-------------------------------
Secretary of the Banking Board
Approved this 26th day of November 1968
----------------------
<PAGE> 8
Superintendent of Banks
Filed in the office of
Superintendent of Banks
- --------------------------------------------------------------------------------
this 26th day of November 1968
- --------------------------------------------------------------------------------
Recorded in the office of
- --------------------------------------------------------------------------------
this day of 19
<PAGE> 9
ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
We, the undersigned all being of full age and citizens of the United
States, two of us being residents of the State of New York and three of us being
residents of states contiguous to the State of New York, for the purpose of
incorporating and organizing a trust company under the banking laws of the State
of New York do hereby certify as follows:
FIRST: The name by which the Corporation is to be known is CHEMICAL
BANK.
SECOND: The place where its office is to be located is 20 Pine Street,
Borough of Manhattan, City, County and State of New York.
THIRD: The amount of authorized capital stock which the Corporation
is hereafter to have is $510,000, and the number of shares into which such
capital stock is to be divided is 42,500 shares, each of the same class and of
the par value of $12 per share.
FOURTH: The names, places of residence and citizenship of the
incorporators and the number of shares of capital stock of the Corporation
subscribed for by each are as follows:
<PAGE> 10
<TABLE>
<CAPTION>
Number of
Place of Shares
Name Residence Citizenship Subscribed
---- --------- ----------- ----------
<S> <C> <C> <C>
William S. Renchard 200 E. 66th Street U.S. 84
New York, N.Y. 10021
Hulbert S. Aldrich 1088 Park Avenue U.S. 84
New York, N.Y. 10028
Howard W. McCall, Jr. 68 Dorchester Road U.S. 84
Darien, Conn. 06820
Walter M. Ross 442 North Street U.S. 84
Greenwich, Conn. 06830
Arthur P. Ringler 27 Londonberry Way U.S. 84
Summit, New Jersey 07901
</TABLE>
FIFTH: The number of directors of the Corporation shall be not less
than five nor more than fifteen; provided, however, that upon effectiveness of
the merger of Chemical Bank New York Trust Company into the Corporation the
number of directors of the Corporation shall be not less than seven nor more
than twenty-five.
SIXTH: The names of the incorporators who are to serve as directors
of the Corporation until the first annual meeting of stockholders of the
Corporation are:
William S. Renchard
Hulbert S. Aldrich
Howard W. McCall, Jr.
Walter M. Ross
Arthur P. Ringler
SEVENTH: The Corporation is to exercise the powers conferred by Section
100
<PAGE> 11
of the banking laws of the State of New York.
<PAGE> 12
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
day of 1968
-------------------
/s/William S. Renchard
- ---------------------------------
William S. Renchard, Incorporator
/s/Hulbert S. Aldrich
-----------------------------------------
Hulbert S. Aldrich, Incorporator
/s/Howard W. McCall, Jr.
- ---------------------------------
Howard W. McCall, Jr., Incorporator
Walter M. Ross, Incorporator
/s/Arthur P. Ringler
- ---------------------------------
Arthur P. Ringler, Incorporator
<PAGE> 13
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
On this________________day of__________1968 personally appeared before
me William S. Renchard, Hulbert S. Aldrich, Howard W. McCall, Jr., Walter M.
Ross and Arthur P. Ringler, to me known to be the persons described in and who
executed the foregoing certificate, and severally acknowledged that they
executed the same.
Notary Public
[Notarial Seal]
<PAGE> 14
Filed in the Office of the Superintendent
of Banks, State of New York, this
20 day of 19
- --------- ---------- --
ADMINISTRATIVE OFFICER
<PAGE> 15
I, FRANK WILLE, Superintendent of Banks of the State of New York, DO
HEREBY APPROVE, the annexed certificate entitled "Certificate of Amendment of
the Organization Certificate of CHEMICAL BANK under Section 8005 of the Banking
Law" dated 1969, providing for increase of capital stock from
$____ to $____
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of Albany, this 17th day
of February 1969
Superintendent of Banks
<PAGE> 16
I, Bernard Gassman Deputy Superintendent of Banks of the State of New York, do
hereby certify that I have caused the annexed Copy of Certificate of Amendment
of the Organization Certificate of Chemical Bank dated February 10, 1969, and
filed in the office of the Superintendent of Banks on February 17, 1969 to be
compared by a competent clerk with the original on file in the Banking
Department, and the same is a correct copy of said Certificate of Amendment of
Organization Certificate and of the whole thereof.
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of New York, N.Y., this
17th day of February 1969
/s/ Bernard Gassman
- --------------------------------
Deputy Superintendent
<PAGE> 17
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WILLIAM S. RENCHARD and RAYMOND F. ADAMS, being, respectively, the
President and the Secretary of CHEMICAL BANK, a New York banking organization,
do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. Paragraph THIRD of the Organization Certificate of the
Corporation, stating that the amount of the its authorized capital stock is
$510,000 and the number of shares into which such capital stock is to be divided
is 42,500 shares, each of the same class and of the par value of $12 per share,
is hereby amended to read as follows:
"THIRD: The amount of authorized capital stock which the Corporation
is hereafter to have is $160,731,564 and the number of shares into which such
capital stock is to be divided is 13,394,297 shares, each of the same class and
of the par value of $12 per share."
4. This amendment to the Organization Certificate was approved by
the votes, cast in person or by proxy at a special stockholders' meeting of the
Corporation duly held upon notice on December 30, 1968, by the holders of record
of all the outstanding shares of the capital stock of the Corporation.
<PAGE> 18
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
day of February 1969.
William S. Renchard
President
Raymond F. Adams
Secretary
[Corporate Seal]
<PAGE> 19
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
I, RAYMOND F. ADAMS, being duly sworn, depose and say that I, the said
Raymond F. Adams, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and known the contents thereof and the
statements therein contained are true.
Raymond F. Adams
Secretary
Subscribed and sworn to before me
this day of February 1969.
/s/
- ----------------------------------
Notary Public
<PAGE> 20
I, William J. Heaney, Deputy Superintendent of Banks of the State of
New York DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of under Section 8005
of the Banking Law" dated 19 providing for increase of
capital stock from $______ to $________
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of New York, N.Y., this
8th day of September 1977
Deputy /s/ William J. Heaney
--------------------------------------
Superintnedent of Banks
<PAGE> 21
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $160,731,564 and the number of shares into which such capital stock is to be
divided is 13,394,297 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
<PAGE> 22
"THIRD: The amount of authorized capital stock which the Corporation
is hereafter to have is $187,200,000 and the number of shares into which such
capital stock is to be divided is 15,600,000 shares, each of the same class and
of the par value of $12 per share."
5. This amendment to the Organization Certificate was approved by
the votes cast in person or by proxy at a special stockholders' meeting, duly
held on August 31, 1977, by the holders of record of all the outstanding shares
of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
31st day of August 1977.
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
- --------------------------------------- [Corporate Seal]
JOHN B. WYNNE
SECRETARY
<PAGE> 23
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the said
JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne Subscribed and sworn to before me this
- ------------------------ day of 1977.
JOHN B. WYNNE
SECRETARY
Notary Public
<PAGE> 24
I, DONALD J. KAVANAGH Deputy Superintendent of Banks of the State of New York,
DO HEREBY APPROVE the annexed certificate entitled "Certificate of Amendment of
the Organization Certificate of under Section 8005 of
the Banking Law" dated as of 19 , providing for increase of
capital stock from $ to
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of New York, N.Y., this
29th day of January 1981
/s/ Donald J. Kavanaugh
- ---------------------------------------------
DEPUTY SUPERINTENDENT OF BANKS
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $187,200,000 and the number of shares into which such capital stock is to be
divided is 15,600,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
<PAGE> 26
"THIRD: The amount of authorized capital
stock which the Corporation is hereafter to have is
$203,580,000 and the number of shares into which such capital
stock is to be divided is 16,965,000 shares, each of the same
class and of the par value of $12 per share."
6. This amendment to the Organization Certificate was approved by
the votes cast in person or by proxy at a special stockholders' meeting, duly
held as of December 31, 1980, by the holders of record of all the outstanding
shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this Certificate as
of December 31, 1980.
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
- --------------------------------- [Corporate Seal]
JOHN B. WYNNE
Secretary
<PAGE> 27
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the said
JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne Subscribed and sworn to before
- --------------------------------- me this day of 1977.
JOHN B. WYNNE
Secretary
Notary Public
<PAGE> 28
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of under
Section 8005 of the Banking Law" dated as of 19 , providing
for increase of capital stock from $ to
In Witness Whereof, I have hereunto set my
hand and affixed the official seal of the
Banking Department of New York, N.Y., this
14th day of September 1982
Deputy Superintendent of Banks
<PAGE> 29
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, DONALD C. PLATTEN and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the
Corporation was filed by the Superintendent of Banks of the State of New York is
November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on January 29, 1981.
<PAGE> 30
6. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $203,580,000 and the number of shares into which such capital stock is to be
divided is 16,965,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
"THIRD: The amount of authorized capital stock which
the Corporation is hereafter to have is $287,580,000 and the
number of shares into which such capital stock is to be
divided is 23,965,000 shares, each of the same class and of
the par value of $12 per share."
7. This amendment to the Organization Certificate was approved by
the votes cast in person or by proxy at a special stockholders' meeting, duly
held as of September 8, 1982, by the holders of record of all the outstanding
shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
9th day of September 1982.
DONALD C. PLATTEN,
Chairman of the Board
/s/ John B. Wynne
- ------------------------------- [Corporate Seal]
JOHN B. WYNNE
SECRETARY
<PAGE> 31
STATE OF NEW YORK, )
) ss. :
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the said
JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B. Wynne Subscribed and sworn to before me
- --------------------------------- this 9th day of September 1982.
JOHN B. WYNNE
SECRETARY
Notary Public
<PAGE> 32
STATE OF NEW YORK,
BANKING DEPARTMENT
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "Certificate of
Amendment of the Organization Certificate of Chemical Bank under Section 8005 of
the Banking Law" dated February 28, 1985 providing for increase of capital stock
from $287,580,000, consisting of 23,965,000 shares of the par value of $12 per
share, to $315,000,000, consisting of 25,000,000 shares of the same par value
and 15,000,000 shares of preferred stock, par value of $1 per share, with such
terms as may be approved by the Board at the time of issuance of any class or
series of such preferred stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York, this 13th day of March in the Year of our Lord one thousand nine hundred
and eighty-five.
<PAGE> 33
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2 The date on which the Organization Certificate of the Corporation
was filed by the Superintendent of Banks of the State of New York is November
26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1982.
<PAGE> 34
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The date on which the Organization Certificate of the Corporation
was filed by the Superintendent of Banks of the State of New York is November
26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1982.
<PAGE> 35
7. Paragraph THIRD of the Organization Certificate of the
Corporation, as amended, stating that the amount of its authorized capital stock
is $287,580,000 and the number of shares into which such capital stock is to be
divided is 23,965,000 shares, each of the same class and of the par value of $12
per share, is hereby amended to read as follows:
"THIRD: The amount of authorized capital stock which the
Corporation hereafter is to have is $315,000,000 and the number of
shares into which such capital stock is to be divided is 40,000,000
shares consisting of 25,000,000 shares of Common Stock, par value $12
per share, and 15,000,000 shares of Preferred Stock, par value $1 per
share, which shall be issued in one or more classes or series having
such designations, relative rights, preferences or limitations as fixed
by the Board of Directors of the Corporation at the time of issuance of
any such Preferred Stock."
8. This amendment to the Organization Certificate was approved by a
resolution adopted by the written consent of Chemical New York Corporation, the
sole stockholder of the Corporation, on February 28, 1985.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
28th day of February 1985.
/s/ Walter V. Shipley [Corporate Seal]
- --------------------------
Walter V. Shipley
Chairmain of the Board
/s/ John B. Wynne
- --------------------------
John B. Wynne
Secretary
<PAGE> 36
STATE OF NEW YORK
Banking Department
I, CARMINE M. TENGA, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "Certificate of
Amendment of the Organization Certificate of CHEMICAL BANK under Section 8005 of
the New York Banking Law," dated December 2, 1991, providing for the following:
1) An increase in capital stock from $315,000,000, consisting of
25,000,000 shares of Common Stock, par value $12 per share, and
15,000,000 shares of Preferred Stock, par value $1 per share, to
$699,000,000, consisting of 57,000,000 shares of Common Stock, par
value $12 per share, and 15,000,000 shares of Preferred Stock, par
value $1 per share; and
2) The location of the Principal office as New York, New York.
Witness, my hand and official seal of the Banking Department of the City of New
York, this 4th day of June in the Year of our Lord one thousand nine hundred
and ninety-two
/s/ Carmine M. Tenga Deputy Superintendent of Banks
- ------------------------
<PAGE> 37
STATE OF NEW YORK, )
)
COUNTY OF NEW YORK, )
I, JOHN B. WYNNE, being duly sworn, depose and say that I, the said
JOHN B. WYNNE, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ John B Wynne Subscribed and sworn to before
- ------------------------- me this 3rd day of
JOHN B WYNNE December 1977.
Secretary
Notary Public
<PAGE> 38
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the Banking Law
We, WALTER V. SHIPLEY and JOHN B. WYNNE, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The Organization Certificate of Chemical Bank was filed by the
Superintendent of Banks of the State of New York on November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1982.
7. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on March 13, 1985.
<PAGE> 39
8. Article SECOND of the Organization Certificate, stating that the
place where the Corporation's office is to be located is 20 Pine Street, New
York, New York, is hereby amended and restated to read in its entirety as
follows:
"SECOND: The principal office of the Corporation is to be located in
New York, New York."
9. Article THIRD of the Organization Certificate, as amended, stating
that the amount of its authorized capital stock is $315,000,000 and the number
of shares into which such capital stock is to be divided is 40,000,000 shares
consisting of 25,000,000 shares of Common Stock, par value $12 per share, and
15,000,000 shares of Preferred Stock, par value $1 per share, is hereby amended
and restated to read in its entirety as follows:
"THIRD: The amount of authorized capital stock which the Corporation is
hereafter to have is $699,000,000 and the number of shares into which
such capital stock is to be divided is 72,000,000 shares consisting of
57,000,000 shares of Common Stock, par value $12 per share, and
15,000,000 shares of Preferred Stock, par value $1 per share, which
shall be issued in one or more classes or series having such
designations, relative rights, preferences or limitations as fixed by
the Board of Directors of the Corporation at the time of issuance of
any such Preferred Stock."
10. These amendments to the Organization Certificate were approved by
a resolution adopted by the written consent of Chemical Banking Corporation, the
sole stockholder of the Corporation, on December 2, 1991.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
2nd day of December 1991.
/s/ Walter V. Shipley
- -----------------------------
Walter V. Shipley
Chairman of the Board
/s/ John B. Wynne
- -----------------------------
John B. Wynne
Secretary
<PAGE> 40
State of New York
BANKING DEPARTMENT
I, PETER M. PHILBIN, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF CHEMICAL BANK UNDER SECTION 8005 OF
THE BANKING LAW" dated July 10, 1996 providing for a change in name from
CHEMICAL BANK to THE CHASE MANHATTAN BANK and an increase in authorized capital
stock from $699,000,000, consisting of 15,000,000 shares with a par value of $1
each designated as Preferred Stock and 57,000,000 shares with a par value of $12
each designated as Common Stock to $1,335,000,000 consisting of 15,000,000
shares with a par value of $1 each designated as Preferred Stock and 110,000,000
shares with a par value of $12 each designated as Common Stock. Such name change
and increase in capital stock is to be effective July 13, 1996
Witness, my hand and official seal of the Banking Department at the City of New
York, this 11TH day of JULY in the Year of our Lord one
thousand nine hundred and NINETY-SIX
------------------------------------
Deputy Superintendent of Banks
<PAGE> 41
CERTIFICATE OF AMENDMENT
OF
THE ORGANIZATION CERTIFICATE
OF
CHEMICAL BANK
Under Section 8005 of the New York Banking Law
We, WALTER V. SHIPLEY and ANTHONY J. HORAN, being, respectively, the
Chairman of the Board and the Secretary of CHEMICAL BANK, a New York banking
organization, do hereby certify as follows:
1. The name of the Corporation is Chemical Bank.
2. The Organization Certificate of Chemical Bank was filed by the
Superintendent of Banks of the State of New York on November 26, 1968.
3. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on February 17, 1969.
4. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1977.
5. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on January 29, 1981.
6. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on September 8, 1982.
7. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on March 13, 1985.
<PAGE> 42
8. A Certificate of Amendment of the Organization Certificate of
Chemical Bank was filed by the Superintendent of Banks of the State of New York
on June 4, 1992.
9. Article FIRST of the Organization Certificate, stating that the
name by which the Corporation is to be known is CHEMICAL BANK, is hereby amended
and restated to read in its entirety as follows:
"FIRST: The name by which the Corporation is to be known is THE CHASE
MANHATTAN BANK."
10. Article THIRD of the Organization Certificate, as amended,
stating that the amount of its authorized stock which the Corporation is
hereafter to have is $699,000,000 and the number of shares into which such
capital stock is to be divided is 72,000,000 shares consisting of 57,000,000
shares of Common Stock, par value $12 per share, and 15,000,000 shares of
Preferred Stock, par value $1 per share, which shall be issued in one of more
classes or series having such designations, relative rights, preferences or
limitations as fixed by the Board of Directors of the Corporation at the time of
issuance of any such Preferred Stock, is hereby amended and restated to read in
its entirety as follows:
"THIRD: The amount of authorized capital stock which the Corporation is
hereafter to have is $1,335,000,000 and the number of shares into which such
capital stock is to be divided is 125,000,000 shares consisting of 110,000,000
shares of Common Stock, par value $12 per share, and 15,000,000 shares of
Preferred Stock, par value $1 per share, which shall be issued in one or more
classes or series having such designations, relative rights, preferences or
limitations as fixed by the Board of Directors of the Corporation at the time of
issuance of any such Preferred Stock."
11. These amendments to the Organization Certificate were approved by
a resolution adopted by the written consent of The Chase Manhattan Corporation,
the sole stockholder of the Corporation, on July 3, 1996.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
10th day of July, 1996. [GRAPHIC OMITTED]
/s/ Walter V. Shipley
- ------------------------------
Walter V. Shipley
Chairman of the Board
/s/ Anthony J. Horan
- ------------------------------
Anthony J. Horan
Secretary
<PAGE> 43
I, ANTHONY J. HORAN, being duly sworn, depose and say that I, the said
ANTHONY J. HORAN, am the Secretary of CHEMICAL BANK, and that I have read and
signed the foregoing Certificate and know the contents thereof and the
statements therein contained are true.
/s/ Anthony J. Horan Subscribed and sworn to before me
- ----------------------------- this 10th day of July 1996.
Anthony J. Horan
Secretary /s/
----------------------------------
Notary Public
<PAGE> 44
BY-LAWS
THE CHASE MANHATTAN BANK
(FORMERLY KNOWN AS CHEMICAL BANK)
AS AMENDED THROUGH
JULY 16, 1996
<PAGE> 45
SUBJECT
ARTICLE
I MEETINGS OF STOCKHOLDERS
SECTION ANNUAL MEETING
1.01
SECTION SPECIAL MEETINGS
1.02
SECTION QUORUM
1.03
II BOARD OF DIRECTORS
SECTION NUMBER
2.01
SECTION VACANCIES
2.02
SECTION ANNUAL MEETING
2.03
SECTION REGULAR MEETINGS
2.04
SECTION SPECIAL MEETINGS
2.05
SECTION QUORUM
2.06
SECTION RULES AND REGULATIONS
2.07
SECTION COMPENSATION
2.08
III COMMITTEES
SECTION EXECUTIVE COMMITTEE
3.01
SECTION EXAMINING COMMITTEE
3.02
SECTION OTHER COMMITTEES
3.03
<PAGE> 46
IV OFFICERS AND AGENTS
SECTION OFFICERS
4.01
SECTION CLERKS AND AGENTS
4.02
SECTION TERM OF OFFICE
4.03
SECTION CHAIRMAN OF THE BOARD
4.04
SECTION PRESIDENT
4.05
SECTION VICE CHAIRMAN OF THE BOARD
4.06
SECTION CHIEF FINANCIAL OFFICER
4.07
SECTION CONTROLLER
4.08
SECTION SECRETARY
4.09
SECTION GENERAL AUDITOR
4.10
SECTION POWERS AND DUTIES OF
4.10 OTHER OFFICERS
SECTION FIDELITY BONDS
4.12
V CORPORATE SEAL
VI FISCAL YEAR
VII INDEMNIFICATION
SECTION RIGHT OF INDEMNIFICATION
7.01
SECTION CONTRACTS AND FUNDING
7.02
SECTION EMPLOYEE BENEFIT PLANS
7.03
<PAGE> 47
SECTION INDEMNIFICATION NOT
7.04 EXCLUSIVE RIGHT
SECTION ADVANCEMENT OF EXPENSES;
7.05 PROCEDURES
VII BY-LAWS
SECTION INSPECTION
8.01
SECTION AMENDMENTS
8.02
SECTION CONSTRUCTION
8.03
<PAGE> 48
BY-LAWS
OF
THE CHASE MANHATTAN BANK
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1.01. Annual meeting. The annual meeting of
stockholders of the chase manhattan bank (herein called the bank), shall be held
in the borough of manhattan, city of new york, state of new york, within the
first four months of each calendar year, on such date and at such time and place
as the board of directors (herein called the board), may determine, for the
election of directors and the transaction of such other business as may properly
come before the meeting. Notice of such meeting, stating the purpose or purposes
thereof and the time when and the place where it is to be held and signed by the
chairman of the board (herein called the chairman), the president, a vice
chairman of the board or the secretary or an assistant corporate secretary of
the bank, shall be served by personal delivery upon each stockholder of record
entitled to vote at such meeting not less than 10 nor more than 50 days before
said meeting.
SECTION 1.02. Special meetings. A special meeting of the
stockholders may be called at any time by the board, the chairman, the
president, or a vice chairman of the board, or upon the request in writing of
the holders of record of not less than 40% of the outstanding capital stock.
Notice of any special meeting, stating the time, place and purpose or purposes
thereof, shall be given by personal delivery to the stockholders in the manner
provided in section 1.01 For the giving of notice of annual meetings of
stockholders. In the case of any meeting of stockholders, annual or special,
called for a purpose requiring other or further notice. Such notice shall be
give as required by law.
SECTION 1.03. Quorum. A majority of the outstanding common
stock, represented in person or by proxy, shall constitute a quorum at any
meeting of stockholders, unless otherwise provided by law; but less than a
quorum may adjourn any meeting, from time to time, and the meeting may be held
as adjourned, without further notice.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. Number. The business and affairs of the bank
shall be managed by or under the direction of a board of directors, of such
number as may be fixed from time to time by resolution adopted by the board, but
in no event less than 7 or more 25, selected, organized and continued in
accordance with the provisions of the new york banking law. Each director
hereafter elected shall hold office until the next annual meeting of the
stockholders and until his successor is elected and has qualified, or until his
death or until he shall resign or shall have been removed.
<PAGE> 49
SECTION 2.02. Vacancies. In case of any increase in the number
of directors, the additional director or directors, and in case of any vacancy
in the board due to death, resignation, removal, disqualification or any other
cause, the successors to fill the vacancies, not exceeding one-third of the
entire board, shall be elected by a majority of the directors then in office.
ARTICLE III
COMMITTEES
SECTION 3.01. Executive committee. The board, by resolution
adopted by a majority of the entire board, shall appoint an executive committee
which, when the board is not in session, shall have and may exercise all the
powers of the board that lawfully may be delegated including, without
limitation, the power and authority to declare dividends. The executive
committee shall consist of such number of directors as the board shall from time
to time determine, but not less than five and one of whom shall be designated by
the board as chairman thereof, as follows: (a) the chairman of the board, the
president, the vice chairmen of the boar, and (b) such other directors, none of
whom shall be an officer of the bank, as shall be appointed to serve at the
pleasure of the board. The board, by resolution adopted by a minority of the
entire board, may designate one or more directors as alternate members of the
executive committee and the manner and circumstances in which such alternate
members shall replace or act in the place of absent or disqualified members of
the executive committee. The attendance of one-third of the members of the
committee or their substitutes, or the next highest integer in the event of a
fraction, at any meeting shall constitute a quorum, and the act of a majority of
those present at a meeting thereof at which a quorum is present shall be the act
of the committee. All acts done and powers conferred by the committee from time
to time shall be deemed to be, and may be certified as being done or conferred
under authority of the board. The committee shall fix its own rules and
procedures, and the minutes of the meetings of the committee shall be submitted
at the next regular meeting of the board at which a quorum is present, or if
impracticable at the next such subsequent meeting. The committee shall hold
meetings "on call and such meetings may be called by the chairman of the
executive committee, the chairman of the board, the president, a vice chairman
of the board, or the secretary. Notice of each such meeting of the committee
shall be given by mail, telegraph, cable, wireless or other form of recorded
communication or be delivered personally or by telephone to each member of the
committee not later than the day before the day on which such meeting is to be
held. Notice of any such meeting need not be given to any member of the
committee who submits a signed waiver of notice whether before or after the
meeting, or if he shall be present at such meeting; and any meeting of the
committee shall be a legal meeting without any notice thereof having been given,
if all the members of the committee shall be present thereat. In the case of any
meeting, in the absence of the chairman of the executive committee, such members
as shall be designated by the chairman of the executive committee or the
executive committee shall act as chairman of the meeting.
SECTION 3.02. Examining committee. The board, by resolution
adopted by a majority of the entire board, shall appoint an examining committee
composed of not less than three of its members, none of whom shall be an officer
of the bank, to hold office at its pleasure and one of whom shall be designated
by the board as chairman thereof. The committee shall make such examination into
the affairs of the bank and its loans and discounts and make such reports in
writing thereof as may be directed by the board or required by the banking law.
The
<PAGE> 50
Attendance of one third of the members of the committee, or the next highest
integer in the event of a fraction, at any meeting shall constitute a quorum,
and the act of a majority of those present at a meeting thereof at which a
quorum is present shall be the act of the committee.
SECTION 3.03. Other committees. The board, by resolution
adopted by a majority of the entire board, may appoint, from time to time, such
other committees composed of not less than three of its members for such
purposes and with such duties and powers as the board may determine. The
attendance of one-third of the members of such other committees, or the next
highest integer in the event of a fraction, at any meeting shall constitute a
quorum, and the act of a majority of those present at a meeting thereof at which
a quorum is present shall be the act
SECTION 4.06. Vice chairman of the board. The vice chairman of
the board, or if there be more than one, then each of them, shall, subject to
the direction and control of the board and the chairman, participate in the
supervision of the policies and operations of the bank, and shall have other
duties as may be prescribed from time to time by the board or the chairman. In
the absence of the chairman and the president, a vice chairman, as designated by
the chairman or the board, shall preside at meetings of the stockholders and the
board. Each vice chairman have the same power to sign for the bank as is
prescribed in these by-laws for the chairman.
SECTION 4.07. Chief financial officer. The chief financial
officer shall have such powers and perform such duties as the board, the
chairman, the president, or a vice chairman of the board may from time to time
prescribe, which duties may include, without limitation, responsibility for
strategic planning, corporate finance, control, tax and auditing activities, and
shall perform such other duties as may be prescribed by these by-laws.
SECTION 4.08. Controller. The controller shall exercise
general supervision of the accounting departments of the bank. He shall be
responsible to the chief financial officer and shall render reports from time to
time relating to the general financial condition of the bank. He shall render
such other reports and perform such other duties as from time to time may be
prescribed by the chief financial officer, a vice chairman of the board, the
president or the chairman.
SECTION 4.09. Secretary. The secretary shall:
(a) record all the proceedings of the meetings of the
stockholders, the board and the executive committee in one or more books kept
for that purpose;
(b) see that all notices are duly given in accordance with the
provisions of these by-laws or as required by law;
(c) be custodian of the seal of the bank; and he may see that
such seal or a facsimile thereof is affixed to any documents the execution of
which on behalf of the bank is duly authorized and may attest such seal when so
affixed; and
(d) in general, perform all duties incident to the office of
secretary and such other duties as from time to time may be prescribed by the
board and the chairman.
<PAGE> 51
SECTION 4.10. General auditor. The general auditor shall
exercise general supervision of the auditing division. He shall audit the
affairs of the bank and its subsidiaries, including appraisal of the soundness
and adequacy of internal controls and operating procedures and shall ascertain
the extent of compliance with policies and procedures of the bank. He shall be
responsible to the board and shall make such audits and prepare such regular
reports as the board, its examining committee or the chairman may, from time to
time, require or as in his judgment are necessary in the performance of his
duties.
SECTION 4.11. Powers and duties of other officers. The powers
and duties of all other officers of the bank shall be those usually pertaining
to their respective officers, subject to the direction and control of the board
and as otherwise provided in these by-laws.
SECTION 4.12. Fidelity bonds. The board, in its discretion,
may require any or all officers, agents, clerks and employees of the bank to
give bonds covering the faithful performance of their duties or may obtain
insurance covering the same, in either case in form and amount approved by the
board, the premiums thereon to be paid by the bank.
<PAGE> 52
Of this article vii shall inure to the benefit of the heirs and legal
representatives of any person entitled to indemnity under this article vii and
shall be applicable to proceedings commenced or continuing after the adoption of
this article vii whether arising from acts or omissions occurring before or
after such adoption.
SECTION 7.05. Advancement of expenses: procedures. In
furtherance, but not limitation, of the foregoing provisions, the following
procedures and remedies shall apply with respect to advancement of expenses and
the right to indemnification under this article vii:
(a) Advancement of Expenses. All reasonable expenses incurred
by or on behalf of the indemnitee in connection with any proceeding shall be
advanced to the indemnitee by the bank within twenty (20) days after the receipt
by the bank of a statement or statements from the indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such proceeding. Such statement or statements shall reasonably
evidence the expense incurred by the indemnitee and, if required by the law at
the time of such advance, shall include or be accompanied by an undertaking by
or on behalf of the indemnitee to repay the amounts advanced if, and to the
extent, it should ultimately be determined that the indemnitee is not entitled
to be indemnified against such expenses.
(b) Written Request for Indemnification. To obtain
indemnification under this article vii, an indemnitee shall submit to the
secretary of the bank a written request, including such documentation and
information as is reasonably available to the indemnitee and reasonably
necessary to determine whether and to what extent the indemnitee is entitled to
indemnification (the "supporting documentation"). The determination of the
indemnitee's entitlement to indemnification shall be made within a reasonable
time after receipt by the bank of the written request for indemnification
together with the supporting documentation. The secretary of the bank shall,
promptly upon receipt of such a request for indemnification, advise the board in
writing that the indemnitee has requested indemnification.
(c) Procedure for Determination. The indemnitee's entitlement
to indemnification under this article vii shall be determined (i) by the board
by a majority vote of a quorum (as defined in article vii of these by-laws)
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) if such quorum is not obtainable, or, even if obtained, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders, but only if a majority of the
disinterested directors, if they constitute a quorum of the board, presents the
issue of entitlement to indemnification to the stockholders for their
determination.
ARTICLE VIII
BY-LAWS
SECTION 8.01. Inspection. A copy of the by-laws shall at all
times be kept in a convenient place at the principal office of the bank, and
shall be open for inspection by stockholders during banking hours.
<PAGE> 53
SECTION 8.02. Amendments. Except as otherwise specifically
provided by the statute, these by-laws may be added to, amended, altered or
repealed at any meeting of the board by vote of a majority of the entire board,
provided that written notice of any such proposed action shall be given to each
director prior to such meeting, or that notice of such addition, amendment,
alteration or repeal shall have been given at the preceding meeting of the
board.
SECTION 8.03. Construction. The masculine gender, where appearing in these
by-laws, shall be deemed to include the feminine gender.
<PAGE> 54
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a Member of the Federal Reserve System,
at the close of business March 31, 1996, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
Currency and coin ........................................................$ 3,391
Interest-bearing balances ................................................. 2,075
Securities:
Held to maturity securities .................................................... 3,607
Available for sale securities .................................................. 29,029
Federal Funds sold and securities purchased under
agreements to resell in domestic offices of the
bank and of its edge and agreement subsidiaries,
and in IBF'S:
Federal funds sold ........................................................ 1,264
Securities purchased under agreements to resell ........................... 354
Loans and lease financing receivables:
Loans and leases, net of unearned income .................................. $ 73,216
Less: Allowance for loan and lease losses ................................. 1,854
Less: Allocated transfer risk reserve ..................................... 104
--------
Loans and leases, net of unearned income,
allowance, and reserve .................................................... 71,258
Trading Assets ................................................................. 25,919
Premises and fixed assets (including capitalized
leases) ................................................................... 1,337
Other real estate owned ........................................................ 30
Investments in unconsolidated subsidiaries and
associated companies ...................................................... 187
Customer's liability to this bank on acceptances
outstanding ............................................................... 1,082
Intangible assets .............................................................. 419
Other assets ................................................................... 7,406
--------
TOTAL ASSETS ................................................................... $147,358
========
</TABLE>
- 4 -
<PAGE> 55
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits
In domestic offices .................................................... $ 45,786
Noninterest-bearing .................................................... $ 14,972
Interest-bearing ....................................................... 30,814
In foreign offices, Edge and Agreement subsidiaries,
and IBF'S .............................................................. 36,550
Noninterest-bearing ......................................................... $ 202
Interest-bearing ....................................................... 36,348
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and
of its Edge and Agreement subsidiaries, and in IBF'S
Federal funds purchased ................................................ 11,412
Securities sold under agreements to repurchase ......................... 2,444
Demand notes issued to the U.S. Treasury .................................... 699
Trading liabilities ......................................................... 19,998
Other borrowed money:
With a remaining maturity of one year or less .......................... 11,305
With a remaining maturity of more than one year ............................. 130
Mortgage indebtedness and obligations under capitalized
leases ................................................................. 13
Bank's liability on acceptances executed and outstanding .................... 1,089
Subordinated notes and debentures ........................................... 3,411
Other liabilities ........................................................... 6,778
TOTAL LIABILITIES ........................................................... 139,615
--------
</TABLE>
<TABLE>
<CAPTION>
EQUITY CAPITAL
<S> <C>
Common Stock ................................................................ 620
Surplus ..................................................................... 4,664
Undivided profits and capital reserves ...................................... 3,058
Net unrealized holding gains (Losses)
on available-for-sale securities ............................................ (607)
Cumulative foreign currency translation adjustments ......................... 8
TOTAL EQUITY CAPITAL ........................................................ 7,743
---------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED
STOCK AND EQUITY CAPITAL ............................................... $ 147,358
=========
</TABLE>
I, Joseph L. Sclafani, S.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
EDWARD D. MILLER )DIRECTORS
THOMAS G. LABRECQUE )
- 5 -
