AMENDMENT
TO THE
REINSURANCE AGREEMENT
AMONG
Capitol Specialty Insurance Corporation (hereinafter referred to as the "Ceding
Company") and Darwin National Assurance Company (hereinafter referred to as
"Reinsurer").
WHEREAS, the parties desire to modify certain terms and conditions of the
Reinsurance Agreement between the parties dated July 1, 2005, as amended;
NOW, THEREFORE, for the consideration mentioned and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties do agree as follows:
1. Article 7(A) is hereby amended in its entirety as follows:
On a monthly basis , during the term of this Reinsurance Agreement,
there shall be transmitted by the Reinsurer to the Ceding Company,
in form and substance mutually agreed upon by the parties, a
"summary report" for the period reported on, of all activity
relating to the Policy Liabilities. The report shall include, but
not be limited to, the amount of gross premiums, commissions,
related expenses, reserves and paid losses, as applicable. The
report shall also reconcile any amounts due the Ceding Company and
Reinsurer under this Reinsurance Agreement which shall include, but
not be limited to, payment by Reinsurer to Ceding Company of any
amounts related to any increase in total reserves (both case and
incurred but not reported and notwithstanding the fact that Ceding
Company may not yet have paid the associated claims) attributable to
the Policies, and such amounts, including amounts related to any
increase in reserves (both case and incurred but not reported and
notwithstanding the fact that Ceding Company may not yet have paid
the associated claims) shall be paid in accordance with Article 7(B)
below.
2. Article 18 is hereby added in its entirety as follows:
Article 18
Collateralization
A. It is agreed that when the Ceding Company files with an insurance
department or establishes reserves for claims covered and unearned
premium and commissions related to Policies reinsured hereunder, as
required by law, the Ceding Company shall forward to the Reinsurer a
statement showing the proportion of such loss, Allocated Loss
Adjustment
Expenses and unearned premium reserves which is applicable to the
Reinsurer. In the event that the Ceding Company is not permitted by
any insurance regulator to take full and complete credit on its
financial statements for this reinsurance, and that the collateral
provided by the reinsurer outlined in Article 18(B), below, shall
not be satisfactory to an insurance regulator to take full and
complete credit on its financial statements, then, the Reinsurer
hereby agrees to apply for and secure delivery to the Ceding Company
of a clean, irrevocable and unconditional Letter of Credit, that is
issued, and presentable and payable in the United States by a bank
or trust company that is a member of the Federal Reserve System, and
is in a format acceptable to the governmental authority having
jurisdiction over the Ceding Company's reserves, in an amount equal
to the Reinsurer's proportion of such loss (including case and
incurred but not reported), Allocated Loss Adjustment Expenses
(including case and incurred but not reported), unearned premium and
commission reserves. The Letter of Credit will be issued for a
period of not less than one year, and will be automatically extended
for one year from its date of expiration or any future expiration
date unless 60 days prior to any expiration date the issuing bank
notifies the Ceding Company by registered mail that the issuing bank
elects not to consider the Letter of Credit extended for any
additional period, in which case the Reinsurer shall deliver to the
Ceding Company a replacement Letter of Credit on or prior to such
expiration date. In lieu of the Letter of Credit described above,
the Reinsurer may provide to the Ceding Company other collateral
(such as cash advances, trust agreements, escrow accounts, or a
combination of the foregoing) acceptable to the Ceding Company and
to the governmental authority having jurisdiction over the Ceding
Company's reserves.
The Ceding Company and the Reinsurer agree that the Letter of Credit
or other collateral provided by the Reinsurer under this provision
may be drawn upon at any time, notwithstanding any other provisions
in this Agreement by Ceding Company, including without limitation by
any liquidator, rehabilitator, receiver or conservator of the Ceding
Company for the following purposes:
1) to reimburse the Ceding Company for the Reinsurer's share of
the Policy Liabilities paid by the Ceding Company and which
has not otherwise been paid by the Reinsurer;
2) to reimburse the Ceding Company for the Reinsurer's share of
premium and commission returned under Policies reinsured under
this Agreement on account of cancellation of such Policies and
which has not otherwise been paid by the Reinsurer;
3) to fund an account with the Ceding Company in an amount at
least equal to the deduction, for reinsurance ceded, from the
Ceding Company's liabilities for amounts ceded under this
Agreement. Such cash deposits shall be held in an interest
bearing account separate from
the Ceding Company's other assets, and interest thereon shall
accrue to the benefit of the Reinsurer. Such amount shall
include, but not be limited to, amounts for reserves for
claims and losses incurred, including losses incurred but not
reported, loss adjustment expenses, and unearned premiums;
4) to reimburse the Ceding Company insurer for the assuming
Reinsurer's share of surrenders and benefits or losses paid by
the Ceding Company under the terms and provisions of the
Policies reinsured under this Agreement; and
5) to pay any other amounts the Ceding Company claims are due
under this Agreement.
B. In addition to any collateralization required as set forth in (A)
above, upon the earliest to occur of (i) an IPO, (ii) a Strategic
Sale or (iii) a Financial Sale (a "Collateralization Event"), all
obligations of the Reinsurer to the Ceding Company (gross of any
outside third party reinsurance which may be applicable), including
but not limited to obligations related to the Policy Liabilities,
loss reserves (case and incurred but not reported), unearned premium
reserves and allocated loss adjustment expense reserves related to
the Policies reinsured hereunder, must be fully collateralized
pursuant to arrangements reasonably satisfactory to the Ceding
Company. Such collateralization may, at Ceding Company's direction,
include the provision by Reinsurer to Ceding Company of a clean,
irrevocable and unconditional Letter of Credit having the same terms
and which may be drawn upon for the same reasons as previously set
forth above in this Article 18. The amount which must be fully
collateralized in the event of a Collateralization Event will be
recalculated every three (3) months following the occurrence of the
Collateralization Event. In the event that, following a
Collateralization Event, the actuaries for the Ceding Company and
the actuaries for the Reinsurer disagree as to the appropriate level
of reserves to be established in respect of such obligations of the
Reinsurer, then the obligations of the Reinsurer will be
collateralized at the level specified by the Ceding Company's
actuaries or in the event of disagreement between Reinsurer and
Ceding Company, the Reinsurer and the Ceding Company will mutually
agree upon a nationally recognized independent actuarial firm to
conduct an actuarial study of the obligations of the Reinsurer to
the Ceding Company, the fees and expenses of which will be paid by
the Reinsurer, and the obligations of the Reinsurer to the Ceding
Company will be collateralized at the level specified by such third
independent actuarial firm.
For purposes of this Article 18, an "IPO" means the initial public
offering of common stock of DPU or Reinsurer pursuant an effective
registration statement under the Securities Act of 1933, as amended,
in connection with which the common stock of DPU or Reinsurer
becomes listed on a U.S. national securities exchange or traded on
the Nasdaq National Market
System. For purposes of this Article 18, a "Strategic Sale" shall be
defined as the sale by Alleghany Insurance Holdings LLC (hereinafter
referred to as "AIHL") of securities representing a majority of the
voting power in DPU (determined on an as-converted basis) and/or
Reinsurer to an insurance company or an insurance holding company.
For purposes of this Article 18, "Financial Sale" shall be
determined as the sale by AIHL of securities to financial investors
(i.e., investors which are not insurance companies or insurance
holding companies) which would cause AIHL's voting interest in DPU
(determined on an as-converted basis) and/or Reinsurer to drop below
35%.
3. Article 19 is hereby added in its entirety as follows:
Article 19
Reimbursement of Expenses
Direct expenses incurred by the Ceding Company arising from the
issuance of policies of the Ceding Company in respect of business
produced by DPU will be reimbursed by Reinsurer to Ceding Company as
follows:
EXPENSE ALLOCATION OF METHODOLOGY
------------------------------ ----------------------------------------------
Taxes/Boards/ Reinsurer responsible for all taxes, boards
Bureaus and bureaus related to Policies.
Fines/Penalties Reinsurer responsible for all fines and
penalties arising out of acts, errors or
omissions of Reinsurer or its affiliates
and/or related to the Policies.
Assessments Reinsurer responsible for all assessments
(including, but not limited to, premium and
loss based) to the extent they arise from
or relate to Policies.
Market Conduct Exam Fees Reinsurer responsible for exam fees related
to regulatory review of DPU produced business
and/or the reinsurance/underwriting management
agreements implementing the Ceding
Company/DPU/Reinsurer relationship.
Corporate Outside Counsel Reinsurer responsible for all corporate
Fees Incurred by the Company outside counsel legal fees and expenses
(Company/DPU/ incurred by the Ceding Company in connection
Reinsurance Transactions) with regulatory matters related to Ceding
Company/DPU/ Reinsurer transactions. The Ceding
Company shall obtain Reinsurer's prior approval
before incurring such legal fees in excess
of $2,000 for any individual matter and
such approval shall not be unreasonably
withheld by Reinsurer.
4. This Amendment may be executed in counterparts of like form, each of
which, when executed, shall be deemed together an original and all
of which taken together shall constitute one and the same
instrument.
5. Except as hereby amended, the terms and provisions of the Agreement
shall remain in full force and effect.
6. The parties hereby agree that the effective date for this Amendment
shall be January 1, 2006.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
and delivered by their duly authorized representatives.
Darwin National Assurance Company Capitol Specialty Insurance Corporation
By: /s/ Xxxx X. Xxxxxxx, Xx. By: /s/ Xxxxx Xxxxx
--------------------------- ------------------------------------
Name: Xxxx X. Xxxxxxx, Xx. Name: Xxxxx Xxxxx
Title: CFO Title: CEO
