AMENDMENT
TO THE
REINSURANCE AGREEMENT
AMONG
Capitol Indemnity Corporation (hereinafter referred to as the "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, 2004;
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 VII is hereby amended in its entirety as follows:
A. The Company shall pay to the Reinsurer:
100% of the written premium charged and collected by the Company in
connection with the Policies referenced in Article I (A) (ii), net
of any other outside reinsurance purchased on this subject premium,
plus 100% of the unearned premium charged and collected by the
Company in connection with the Policies referenced in Article I (A)
(i), net of any other outside reinsurance purchased on this subject
premium.
The reinsurance premiums set forth above shall be subject to a commission
allowance payable to the Company in an amount equal to the compensation
paid by the Company to Darwin Professional Underwriters, Inc. in relation
to such business. The Reinsurer shall also compensate the Company as set
forth below:
1. Ceding Commission
The Company will be paid a ceding commission (as a
percentage of gross written premiums in respect of
business that is produced by Darwin Professional
Underwriters, Inc. (hereinafter referred to as "DPUI")
and for which Policies are issued by the Company)
according to the following schedule:
Policies' premium written on the books of the Company
in calendar year 2006 0.5%
Policies' premium written on the books of the Company
in calendar year 2007 1.0%
Policies' premium written on the books of the Company
in calendar year 2008 2.0%
Policies' premium written on the books of the Company
in calendar year 2009 and thereafter 3.0%;
provided, that in the event of an IPO, the ceding
commission will increase to 3.0% of the premium written
on the books of the Company effective as of January 1 of
the year following the year in which the IPO takes
place; provided, further, that in the event of a sale by
Alleghany Insurance Holdings, LLC (hereinafter referred
to as "AIHL") of securities representing a majority of
the voting power in DPUI (determined on an as-converted
basis) and/or Reinsurer to an insurance company or an
insurance holding company (a "Strategic Sale"), or in
the event of a 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 DPUI (determined on an
as-converted basis) and/or Reinsurer to drop below 35%
(a "Financial Sale"), the ceding commission will
increase to 3.0% upon the closing of such Strategic Sale
or Financial Sale. For the purposes of this Article VII,
an "IPO" means the initial public offering of common
stock of DPUI or Reinsurer pursuant an effective
registration statement under the Securities Act of 1933,
as amended, in connection with which the common stock of
DPUI or Reinsurer becomes listed on a U.S. national
securities exchange or traded on the Nasdaq National
Market System.
2. Reimbursement of Expenses
In addition to payment of the ceding commission provided
for above, direct expenses incurred by the Company
arising from the issuance of policies of the Company in
respect of business produced by DPUI will be reimbursed
by Reinsurer to Company as follows:
EXPENSE ALLOCATION OF METHODOLOGY
--------------------------------- -------------------------------------------
Taxes/Boards/ Reinsurer responsible for all taxes,
Bureaus boards 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 DPUI
produced business and/or the
reinsurance/underwriting management
agreements implementing the
Company/DPUI/Reinsurer relationship.
Corporate Outside Counsel Fees Reinsurer responsible for all
corporate Incurred by the Company outside counsel legal fees and expenses
(Company/DPUI/ incurred by the Company in connection
Reinsurance Transactions) with regulatory matters related to
Company/DPUI/Reinsurer transactions.
The 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.
2. Article VIII is hereby amended in its entirety as follows:
A. The Company shall furnish the Reinsurer with all necessary data
respecting losses for as long as one of the parties hereto has a
claim against the other arising from this Agreement.
B. Within 15 days of the end of any month the Reinsurer shall furnish
the Company with a report of reinsurance premium, commission
allowance and ceding commission due. Any balances shown to be due
will be remitted with said report.
C. Payment by the Reinsurer of its proportion of loss, Allocated Loss
Adjustment Expenses and reimbursable expenses paid by the Company
shall be made by the Reinsurer to the Company within 15 days after
proof of payment is received by the Reinsurer.
3. Article XV is hereby amended in its entirety as follows:
A. It is agreed that when the Company files with an insurance
department or establishes reserves for claims covered and unearned
premium hereunder, as required by law, the Company shall forward to
the Reinsurer a statement showing the proportion of such loss,
Allocated Loss Adjustment Expense and unearned premium reserves
which is applicable to the Reinsurer. In the event that the 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 in Article XV B. below
shall not be satisfactory with an insurance regulator to take full
and complete credit in its financial statements for this
reinsurance, then, the Reinsurer hereby agrees to apply for and
secure delivery to the 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 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
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 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 the
Company other collateral (such as cash advances, trust agreements,
escrow accounts, or a combination of the foregoing) acceptable to
the Company and to the governmental authority having jurisdiction
over the Company's reserves.
The 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 the Company, including any liquidator, rehabilitator,
receiver or conservator of the Company, for the following purposes:
1) to reimburse the Company for the Reinsurer's share of the
Ultimate Net Losses paid by the Company and which has not
otherwise been paid by the Reinsurer;
2) to reimburse the 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 Company in an amount at least
equal to the deduction, for reinsurance ceded, from the
Company's liabilities for amounts ceded under this Agreement.
Such cash deposits shall be held in an interest bearing
account separate from the 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 Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Company under
the terms and provisions of the Policies reinsured under this
Agreement; and
5) to pay any other amounts the 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 Company (gross of any outside third party reinsurance
which may be applicable), including but not limited to obligations related
to the Ultimate Net Loss, 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
Company. Such collateralization may, at Company's direction, include the
provision by Reinsurer to 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 XV. 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 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 Company's actuaries, or in the event of
disagreement between the
Reinsurer and the Company, the Reinsurer and the Company will mutually
agree upon a nationally recognized independent actuarial firm to conduct
an actuarial study of the obligations of the Reinsurer to the Company, the
fees and expenses of which will be paid by the Reinsurer, and the
obligations of the Reinsurer to the Company will be collateralized at the
level specified by such third independent actuarial firm.
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.
Darwin National Assurance Company Capitol Indemnity Corporation
By: /s/ Xxxx X. Xxxxxxx, Xx. By: /s/ Xxxxx Xxxxx
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Name: Xxxx X. Xxxxxxx, Xx. Name: Xxxxx Xxxxx
Title: CFO Title: CEO
