EXHIBIT 10.4
[RCRe Letterhead]
May 5, 2000
Folksamerica Holding Company, Inc.
Folksamerica Reinsurance Company
Xxx Xxxxxxx Xxxxx, 00xx Xxxxx
Xxx Xxxx, XX 00000
Re: AVIATION RETRO PROGRAM
Gentlemen:
Reference is made to the Asset Purchase Agreement, dated as of January 10,
2000, by and among Risk Capital Holdings, Inc., Risk Capital Reinsurance
Company, Folksamerica Holding Company, Inc. and Folksamerica Reinsurance Company
(the "AGREEMENT"). Capitalized terms used without definition herein have the
meanings given to them in the Agreement.
1. NET FINANCIAL POSITION LOSS. The Company represents and warrants
that the reinsurance protecting the aviation business (the "AVIATION
BUSINESS") assumed by FRC pursuant to the Transfer and Assumption
Agreement (the "AVIATION RETRO PROGRAM") limits the Net Financial Position
Loss with respect to any occurrence within the Aviation Business after
Closing to no more than $5.4 million per occurrence (assuming that the
reinstatements provided for in the Aviation Retro Program have not been
exhausted). If any such Net Financial Position Loss with respect to any
occurrence does exceed $5.4 million (i) because the maximum Net Financial
Position Loss under the Aviation Retro Program is, in fact, greater than
$5.4 million per occurrence (other than as a result of the exhaustion of
the reinstatements provided for in the Aviation Retro Program) or (ii) as
a result of the expiration of the Aviation Retro Program after June 30,
2001 (such excess amount above $5.4 million being referred to as the
"EXCESS LOSS"), FRC shall give prompt notice thereof to the Company.
Within 30 days of the Company's receipt of notice from FRC that FRC has
paid the Excess Loss and subject to Section 4 below and Purchaser's
compliance with Section 5 below, the Company shall pay FRC an amount equal
to the Excess Loss. The aggregate amount of all such payments by the
Company (plus, for purposes of Section 3 hereof, the aggregate amount that
would be payable by the Company hereunder after FRC has paid all Excess
Losses), less the aggregate amount paid to the Company pursuant to Section
2 below, is referred to herein as the "EXCESS LOSS PAYMENT AMOUNT."
For the avoidance of doubt, the parties expressly agree that:
(a) the Company shall not be responsible for any Excess Loss
resulting from (i) the failure to collect amounts due from any
reinsurer (other than as a result of a final judicial determination
that the reinsurer is not required to pay any such amount because
the reinsurance provided was based on incorrect information supplied
to the reinsurer by the Company), (ii) any offset by any reinsurer
against amounts due to such reinsurer (other than offsets relating
to reinstatements due to such reinsurer that are reflected in the
applicable Net Financial Position Loss calculation), (iii) the
exhaustion of reinstatements provided for in the Aviation Retro
Program, or (iv) any other cause, except for the items set forth in
clauses (i) and (ii) of the second sentence of this Section 1; and
(b) the sole remedy for a breach of the representation and
warranty in this Section 1 shall be the indemnity provided in the
third sentence hereof.
"NET FINANCIAL POSITION LOSS" means, with respect to any occurrence,
(i) incurred losses paid by FRC plus case reserves as reported by
reinsureds less (ii) reinsurance recoverables paid or payable to FRC less
(iii) reinstatement premiums paid or payable to FRC plus (iv)
reinstatement premiums paid or payable by FRC plus (v) broker commissions
paid by FRC, if any, in each case, with respect to such occurrence.
Notwithstanding the foregoing, if there is an occurrence between the 30th
month after the Closing and the Settlement Date (defined below), for
purposes of calculating the Net Financial Position Loss for such
occurrence, the calculation of the losses under clause (i) above shall not
be based on the incurred losses paid by FRC and the case reserves reported
by the reinsureds, but rather on the industry loss established by the
Broker (defined below) and the net participations of such reinsureds in
the industry loss as reported to the Broker.
2. NET PROFIT. In the event that there is a Net Profit on any
occurrence within the Aviation Business, FRC shall pay to the Company,
within 30 days of such occurrence, an amount equal to the Company's PRO
RATA share, if any, of such Net Profit based upon the Excess Loss Payment
Amount over FRC's Aggregate Net Financial Position Loss (defined below)
immediately prior to such occurrence.
"NET PROFIT" means, with respect to any occurrence, the excess of
(x) reinstatement premium paid or payable to FRC less reinstatement
premium paid or payable by FRC (including any broker commissions paid by
FRC, if any) over (y) the gross indemnity paid or payable by FRC less
reinsurance recoverables paid or payable, in each case, with respect to
such occurrence.
3. SETTLEMENT. (a) Promptly following the third anniversary of the
Closing (the "SETTLEMENT DATE"), FRC shall redetermine the Net Financial
Position Loss/Net Profit with respect to each occurrence within the
Aviation Business as of the Settlement Date.
If the Excess Loss with respect to any occurrence is greater than
the amount paid by the Company pursuant to Section 1 above with respect to
such occurrence, the amount of such excess shall be payable by the Company
to FRC, and if the Excess Loss with
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respect to any occurrence is less than the amount paid by the Company
pursuant to Section 1 above with respect to such occurrence, the amount of
such deficiency shall be payable by FRC to the Company.
If the Net Profit with respect to any occurrence is greater than the
amount paid by FRC to the Company pursuant to Section 2 above with respect
to such occurrence, the amount of such excess shall be payable by FRC to
the Company to the extent that the Excess Loss Payment Amount has not been
reduced to zero, and if the Net Profit with respect to any occurrence is
less than the amount paid by FRC to the Company pursuant to Section 2
above with respect to such occurrence, the amount of such deficiency shall
be payable by the Company to FRC.
(b) Promptly following the Settlement Date, FRC shall determine the
Aggregate Net Financial Position Loss/Aggregate Net Profit with respect to
all occurrences in the aggregate within the Aviation Business as of the
Settlement Date. "AGGREGATE NET FINANCIAL POSITION LOSS" means the sum of
all Net Financial Position Losses with respect to each occurrence less the
Excess Loss Payment Amount. If the Aggregate Net Financial Position Loss
is less than zero (the absolute value of such amount being referred to as
the "AGGREGATE NET PROFIT"), then the Aggregate Net Profit shall be
payable by FRC to the Company.
(c) The settlement of the payments pursuant to this Section 3, which
shall be on a net basis, shall occur on the 15th day (or if such day is
not a business day, on the immediately succeeding business day) following
the Settlement Date, subject to Section 4 below.
(d) All obligations and liabilities of each of the parties under
this side letter shall terminate on the Settlement Date, except for the
settlement payments in accordance with this Section 3.
4. DISPUTES. In the event of a dispute regarding the calculation of
either Net Financial Position Loss or Net Profit or Aggregate Net
Financial Position Loss or Aggregate Net Profit, such dispute shall be
resolved in accordance with the procedures set forth in Section 5 of the
Escrow Agreement, which shall apply herein mutatis mutandis.
5. RECORDS AND INFORMATION. At least twice per year and after each
occurrence within the Aviation Business, representatives of the Company
shall be entitled, upon reasonable notice during normal business hours, to
inspect Purchaser's books and records involving the Aviation Business,
including those relating to settlement and payment of claims and work
papers of Purchaser's independent public accountants and actuaries and, at
the Company's expense, to make copies of them, and to discuss them with
Purchaser's representatives (including its independent accountants and
actuaries).
6. PURCHASE OF ADDITIONAL REINSURANCE. FRC shall purchase such
additional reinsurance protections in respect of the Aviation Business as
the Company shall request. Any such additional reinsurance protections
shall be at the Company's expense, and any
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amounts payable to FRC under such additional reinsurance protections shall
be taken into account in determining the amount of Net Financial Position
Loss and Net Profit. Any additional reinsurance protections purchased
pursuant to this Section 6 shall be included in, and deemed to be part of,
the Aviation Retro Program for all purposes hereof.
7. NO MODIFICATIONS. FRC shall not amend, modify or renew any
Aviation Business or any of the Aviation Retro Program in any manner, or
otherwise take any action relating to aviation business, that has a
detrimental effect on the Company.
8. E&O CLAIMS. In the event that the Company desires to pursue any
"errors and omissions" claims against a broker involved in the Aviation
Business, including Xxxxxx Re, Inc. (together with its affiliates, the
"BROKER"), FRC shall assign such claims to the Company if it is permitted
by law to do so (or the proceeds thereof if the assignment of the claim is
not permitted by law), and cooperate with the Company, and provide such
assistance as the Company reasonably requests, in the pursuit of such
claims.
9. MISCELLANEOUS. This side letter shall constitute a supplement to
the Agreement within the meaning of Section 11.08 thereof. This side
letter shall be governed by, and construed in accordance with, the laws of
the State of New York, other than any conflict of law rules which might
result in the application of the laws of any other jurisdiction. This side
letter may be executed in one or more counterparts.
Please acknowledge your agreement with the foregoing by signing in
the space indicated below.
RISK CAPITAL HOLDINGS, INC.
RISK CAPITAL REINSURANCE COMPANY
By: /s/ Xxxxx X. Xxxxx
---------------------------------
Name: Xxxxx X. Xxxxx
Title: Executive Vice President & Chief
Operating Officer
Xxxxxx and acknowledged as
of the date first written above:
FOLKSAMERICA HOLDING COMPANY, INC.
FOLKSAMERICA REINSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxxx, Xx.
-------------------------------
Name: Xxxxxx X. Xxxxxx, Xx.
Title: Sr. Vice President, General Counsel
& Secretary
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