Exhibit 10.4

 

ASSURED GUARANTY LTD.
2004 LONG-TERM INCENTIVE PLAN

 

As Amended August 5, 2008

 

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ADOPTION OF ASSURED GUARANTY LTD.

2004 LONG-TERM INCENTIVE PLAN

 

WHEREAS, the Board of Directors of Assured Guaranty Ltd. (the “Company”), by
resolutions adopted on August 9, 2007, authorized the General Counsel of the
Company (and certain other officers of the Company) to adopt modifications of
the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the “Plan”) to conform
the Plan to the requirements of Section 409A of the US Internal Revenue Code
(“Section 409A”); and

 

WHEREAS, James M. Michener, the General Counsel of the Company, has submitted
the Plan to the chairman (the “Chairman”) of the Compensation Committee of the
Board of Directors with changes to conform the Plan to the requirements of
Section 409A, as attached hereto, and the Chairman has approved the changes;

 

NOW, THEREFORE, the undersigned, James M. Michener, hereby adopts the Plan in
the form attached hereto, to be effective with respect to all awards granted
thereunder.

 

 

 

 

James M. Michener

 

General Counsel

 

Assured Guaranty Ltd.

 

 

Date: August 5, 2008

 

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ASSURED GUARANTY LTD. 2004
LONG-TERM INCENTIVE PLAN

 

As Amended August 5, 2008

 

SECTION 1

GENERAL

 

1.1.  Purpose.  The Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the
“Plan”) has been established by Assured Guaranty Ltd. (the “Company”) to
(i) attract and retain persons eligible to participate in the Plan;
(ii) motivate Participants, by means of appropriate incentives, to achieve
long-range goals; (iii) provide incentive compensation opportunities that are
competitive with those of other similar companies; and (iv) further identify
Participants’ interests with those of the Company’s other shareholders through
compensation that is based on the Company’s common shares; and thereby promote
the long-term financial interest of the Company and the Subsidiaries, including
the growth in value of the Company’s equity and enhancement of long-term
shareholder return.

 

1.2.  Participation.  Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Individuals, those persons who will be granted one or more Awards under
the Plan, and thereby become “Participants” in the Plan.

 

1.3.  Operation, Administration, and Definitions.  The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 5 (relating to operation and
administration).  Capitalized terms in the Plan shall be defined as set forth in
the Plan (including the definition provisions of Section 9).

 

SECTION 2

OPTIONS AND SARS

 

2.1.  Definitions.

 

(a)           The grant of an “Option” entitles the Participant to purchase
Shares at an Exercise Price established by the Committee.  Any Option granted
under this Section 2 may be either an incentive stock option (an “ISO”) or a
non-qualified option (an “NQO”), as determined in the discretion of the
Committee.  An “ISO” is an Option that is intended to satisfy the requirements
applicable to an “incentive stock option” described in section 422(b) of the
Code.  An “NQO” is an Option that is not intended to be an “incentive stock
option” as that term is described in section 422(b) of the Code.

 

(b)           A stock appreciation right (an “SAR”) entitles the Participant to
receive, in cash or Shares (as determined in accordance with subsection 2.5),
value equal to (or otherwise based on) the excess of: (a) the Fair Market Value
of a specified number of Shares at the time of exercise; over (b) an Exercise
Price established by the Committee.

 

2.2.  Exercise Price.  The “Exercise Price” of each Option and SAR granted under
this Section 2 shall be established by the Committee or shall be determined by a
method established

 

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by the Committee at the time the Option or SAR is granted.  The Exercise Price
shall not be less than 100% of the Fair Market Value of a Share on the date of
grant (or, if greater, the par value, if any, of a Share).

 

2.3.  Exercise.  An Option and an SAR shall be exercisable in accordance with
such terms and conditions and during such periods as may be established by the
Committee.  In no event, however, shall an Option or SAR expire later than ten
years after the date of its grant.

 

2.4.  Payment of Option Exercise Price.  The payment of the Exercise Price of an
Option granted under this Section 2 shall be subject to the following:

 

(a)           Subject to the following provisions of this subsection 2.4, the
full Exercise Price for Shares purchased upon the exercise of any Option shall
be paid at the time of such exercise (except that, in the case of an exercise
arrangement approved by the Committee and described in paragraph 2.4(c), payment
may be made as soon as practicable after the exercise).

 

(b)           Subject to applicable law, the full Exercise Price shall be
payable in cash, by promissory note, or by tendering, by either actual delivery
of shares or by attestation, Shares acceptable to the Committee, and valued at
Fair Market Value as of the day of exercise, or in any combination thereof, as
determined by the Committee.

 

(c)           Subject to applicable law, the Committee may permit a Participant
to elect to pay the Exercise Price upon the exercise of an Option by irrevocably
authorizing a third party to sell Shares (or a sufficient portion of the Shares)
acquired upon exercise of the Option and remit to the Company a sufficient
portion of the sale proceeds to pay the entire Exercise Price and any tax
withholding resulting from such exercise.

 

2.5.  Settlement of Award.  Settlement of Options and SARs is subject to
subsection 5.7.

 

2.6.  No Repricing.  Except for either adjustments pursuant to paragraph
5.2(f) (relating to the adjustment of Shares), or reductions of the Exercise
Price approved by the Company’s shareholders, the Exercise Price for any
outstanding Option may not be decreased after the date of grant nor may an
outstanding Option granted under the Plan be surrendered to the Company as
consideration for the grant of a replacement Option with a lower Exercise Price.

 

2.7.  Grants of Options and SARs.  An Option may but need not be in tandem with
an SAR, and an SAR may but need not be in tandem with an Option.  If an Option
is in tandem with an SAR, the Exercise Price of both the Option and SAR shall be
the same, and the exercise of the Option or SAR with respect to a Share shall
cancel the corresponding tandem SAR or Option right with respect to such Share. 
If an SAR is in tandem with an Option but is granted after the grant of the
Option, or if an Option is in tandem with an SAR but is granted after the grant
of the SAR, the later granted tandem Award shall have the same Exercise Price as
the earlier granted Award, but the Exercise Price for the later granted Award
may be less than the Fair Market Value of the Share at the time of such grant.

 

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SECTION 3

FULL VALUE AWARDS

 

3.1.  Definition.  A “Full Value Award” is a grant of one or more Shares or a
right to receive one or more Shares in the future, with such grant subject to
one or more of the following, as determined by the Committee:

 

(a)           The grant shall be in consideration of a Participant’s previously
performed services, or surrender of other compensation that may be due.

 

(b)           The grant shall be contingent on the achievement of performance or
other objectives during a specified period.

 

(c)           The grant shall be subject to a risk of forfeiture or other
restrictions that will lapse upon the achievement of one or more goals relating
to completion of service by the Participant, or achievement of performance or
other objectives.

 

The grant of Full Value Awards may also be subject to such other conditions,
restrictions and contingencies, as determined by the Committee.

 

3.2.  Restrictions on Awards.

 

(a)           The Committee may designate a Full Value Award granted to any
Participant as “performance-based compensation” as that term is used in section
162(m) of the Code.  To the extent required by Code section 162(m), any Full
Value Award so designated shall be conditioned on the achievement of one or more
performance objectives.  The performance objectives shall be based on
Performance Measures selected by the Committee.  For Awards under this Section 3
intended to be “performance-based compensation,” the grant of the Awards and the
establishment of the performance objectives shall be made during the period
required under Code section 162(m).

 

(b)           If the right to become vested in a Full Value Award is conditioned
on the completion of a specified period of service with the Company or the
Subsidiaries, without achievement of Performance Measures or other performance
objectives (whether or not related to the Performance Measures) being required
as a condition of vesting, and without it being granted in lieu of other
compensation, then the required period of service for full vesting shall be not
less than three years (subject to acceleration of vesting, to the extent
permitted by the Committee, in the event of the Participant’s death, disability,
retirement, change in control or involuntary termination).

 

SECTION 4

CASH INCENTIVE AWARDS

 

A Cash Incentive Award is the grant of a right to receive a payment of cash (or
in the discretion of the Committee, Shares having value equivalent to the cash
otherwise payable) that is contingent on achievement of performance or other
objectives over a specified period established by the Committee.  The grant of
Cash Incentive Awards may also be subject to such other conditions, restrictions
and contingencies, as determined by the Committee.  The

 

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Committee may designate a Cash Incentive Award granted to any Participant as
“performance-based compensation” as that term is used in section 162(m) of the
Code.  To the extent required by Code section 162(m), any such Award so
designated shall be conditioned on the achievement of one or more performance
objectives.  The performance objectives shall be based on Performance Measures
as selected by the Committee.  For Awards under this Section 4 intended to be
“performance-based compensation,” the grant of the Awards and the establishment
of the performance objectives shall be made during the period required under
Code section 162(m).  Except as otherwise provided in the applicable plan or
arrangement, distribution of any bonus awards by the Company or its Subsidiaries
(whether granted this Plan or otherwise), for a performance period ending in a
calendar year, shall be made to the participant not later than March 15 of the
following calendar year; provided, however, that for purposes of determining
compliance with Code section 409A, a payment will be considered to satisfy the
requirement of this sentence if distribution is made no later than the end of
the calendar year following the end of the applicable performance period.

 

SECTION 5

OPERATION AND ADMINISTRATION

 

5.1.  Effective Date.  The Plan shall be effective on the date immediately prior
to the date of the initial public offering of the shares of the Company (the
“Effective Date”).  The Plan shall be unlimited in duration and, in the event of
Plan termination, shall remain in effect as long as any Awards under it are
outstanding; provided, however, that no Awards may be granted under the Plan
after the ten-year anniversary of the Effective Date.

 

5.2.  Shares and Other Amounts Subject to Plan.  The Shares for which Awards may
be granted under the Plan shall be subject to the following:

 

(a)           The Shares with respect to which Awards may be made under the Plan
shall be: (i) shares currently authorized but unissued; (ii) to the extent
permitted by applicable law, currently held or acquired by the Company as
treasury shares, including shares purchased in the open market or in private
transactions (it being recognized that at the time of adoption of the Plan the
Company is not permitted to have treasury shares); or (iii) shares purchased in
the open market by a direct or indirect wholly-owned subsidiary of the Company
(as determined by the Chief Executive Officer or the Chief Financial Officer of
the Company).  The Company may contribute to the subsidiary or trust an amount
sufficient to accomplish the purchase in the open market of the Shares to be so
acquired (as determined by the Chief Executive Officer or the Chief Financial
Officer of the Company).

 

(b)           Subject to the following provisions of this subsection 5.2, the
maximum number of Shares that may be delivered to Participants and their
beneficiaries under the Plan shall be 7,500,000 Shares.

 

(c)           To the extent provided by the Committee, any Award may be settled
in cash rather than Shares.

 

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(d)           Only Shares, if any, actually delivered to the Participant or
beneficiary on an unrestricted basis with respect to an Award shall be treated
as delivered for purposes of the determination under paragraph (b) above,
regardless of whether the Award is denominated in Shares or cash.  Consistent
with the foregoing:

 

(i)            To the extent any Shares covered by an Award are not delivered to
a Participant or beneficiary because the Award is forfeited or canceled, or the
Shares are not delivered on an unrestricted basis (including, without
limitation, by reason of the Award being settled in cash or used to satisfy the
applicable tax withholding obligation), such Shares shall not be deemed to have
been delivered for purposes of the determination under paragraph (b) above.

 

(ii)           If the exercise price of any Option granted under the Plan or the
tax withholding obligation with respect to any Award granted under the Plan is
satisfied by tendering Shares to the Company (by either actual delivery or by
attestation), only the number of Shares issued net of the Shares tendered shall
be deemed delivered for purposes of determining the number of Shares available
for delivery under the Plan.

 

(e)           Subject to paragraph 5.2(f), the following additional maximums are
imposed under the Plan:

 

(i)            The maximum number of Shares that may be delivered to
Participants and their beneficiaries with respect to ISOs granted under the Plan
shall be 7,500,000 Shares; provided, however, that to the extent that Shares not
delivered must be counted against this limit as a condition of satisfying the
rules applicable to ISOs, such rules shall apply to the limit on ISOs granted
under the Plan.

 

(ii)           The maximum number of Shares that may be covered by Awards
granted to any one Participant during any one-calendar-year period pursuant to
Section 2 (relating to Options and SARs) shall be 2,500,000 Shares.  For
purposes of this paragraph (ii), if an Option is in tandem with an SAR, such
that the exercise of the Option or SAR with respect to a Share cancels the
tandem SAR or Option right, respectively, with respect to such Share, the tandem
Option and SAR rights with respect to each Share shall be counted as covering
but one Share for purposes of applying the limitations of this paragraph (ii).

 

(iii)          The maximum number of Shares that may be issued in conjunction
with Awards granted pursuant to Section 3 (relating to Full Value Awards) shall
be 2,500,000 Shares.

 

(iv)          For Full Value Awards that are intended to be “performance-based
compensation” (as that term is used for purposes of Code section 162(m)), no
more than 1,250,000 Shares may be delivered pursuant to such Awards granted to
any one Participant during any one-calendar-year period; provided that Awards
described in this paragraph (iv) that are intended to be performance-based
compensation shall be subject to the following:

 

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(A)          If the Awards are denominated in Shares but an equivalent amount of
cash is delivered in lieu of delivery of Shares, the foregoing limit shall be
applied based on the methodology used by the Committee to convert the number of
Shares into cash.

 

(B)           If delivery of Shares or cash is deferred until after Shares have
been earned, any adjustment in the amount delivered to reflect actual or deemed
investment experience after the date the Shares are earned shall be disregarded.

 

(v)           For Cash Incentive Value Awards that are intended to be
“performance-based compensation” (as that term is used for purposes of Code
section 162(m)), the maximum amount payable to any Participant with respect to
any performance period shall equal $500,000 multiplied by the number of calendar
months included in that performance period; provided that Awards described in
this paragraph (v), that are intended to be performance-based compensation,
shall be subject to the following:

 

(A)          If the Awards are denominated in cash but an equivalent amount of
Shares is delivered in lieu of delivery of cash, the foregoing limit shall be
applied to the cash based on the methodology used by the Committee to convert
the cash into Shares.

 

(B)           If delivery of Shares or cash is deferred until after cash has
been earned, any adjustment in the amount delivered to reflect actual or deemed
investment experience after the date the cash is earned shall be disregarded.

 

(f)            In the event of a corporate transaction involving the Company
(including, without limitation, any share dividend, share split, extraordinary
cash dividend, recapitalization, reorganization, merger, amalgamation,
consolidation, split-up, spin-off, sale of assets or subsidiaries, combination
or exchange of shares), the Committee may adjust Awards to preserve the benefits
or potential benefits of the Awards.  Action by the Committee may include:
(i) adjustment of the number and kind of shares which may be delivered under the
Plan; (ii) adjustment of the number and kind of shares subject to outstanding
Awards; (iii) adjustment of the Exercise Price of outstanding Options and SARs;
and (iv) any other adjustments that the Committee determines to be equitable
(which may include, without limitation, (A) replacement of Awards with other
Awards which the Committee determines have comparable value and which are based
on shares of a company resulting from the transaction, and (B) cancellation of
the Award in return for cash payment of the current value of the Award,
determined as though the Award is fully vested at the time of payment, provided
that in the case of an Option, the amount of such payment may be the excess of
value of the Shares subject to the Option at the time of the transaction over
the exercise price).  However, in no event shall this paragraph (f) be construed
to permit a modification (including a replacement) of an Option or SAR if such
modification either: (i) would result in accelerated recognition of income or
imposition of additional tax under Code section 409A; or (ii) would cause the
Option or SAR subject to the modification (or

 

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cause a replacement Option or SAR) to be subject to Code section 409A, provided
that the restriction of this clause (ii) shall not apply to any Option or SAR
that, at the time it is granted or otherwise, is designated as being deferred
compensation subject to Code section 409A.

 

5.3.  General Restrictions.  Delivery of Shares or other amounts under the Plan
shall be subject to the following:

 

(a)           Notwithstanding any other provision of the Plan, the Company shall
have no obligation to recognize an exercise of an Option or SAR or deliver any
Shares or make any other distribution of benefits under the Plan unless such
exercise, delivery or distribution complies with all applicable laws (including,
without limitation, the requirements of the United States Securities Act of
1933), and the applicable requirements of any securities exchange or similar
entity or other regulatory authority with respect to the issue of shares and
securities by the Company.

 

(b)           To the extent that the Plan provides for issuance of share
certificates to reflect the issuance of Shares, the issuance may be effected on
a non-certificated basis, to the extent not prohibited by or may be made in
compliance with applicable law, the Bye-laws of the Company, or the applicable
rules of any stock exchange.

 

5.4.  Tax Withholding.  All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any Shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations.  Except as otherwise provided by the
Committee and subject to applicable law, such withholding obligations may be
satisfied (i) through cash payment by the Participant; (ii) through the
surrender of Shares which the Participant already owns (provided, however, that
to the extent Shares described in this clause (ii) are used to satisfy more than
the minimum statutory withholding obligation, as described below, then, except
as otherwise provided by the Committee, payments made with Shares in accordance
with this clause (ii) shall be limited to Shares held by the Participant for not
less than six months prior to the payment date); or (iii) through the surrender
of Shares to which the Participant is otherwise entitled under the Plan;
provided, however, that such Shares under this clause (iii) may be used to
satisfy not more than the Company’s minimum statutory withholding obligation
(based on minimum statutory withholding rates for Federal and state tax
purposes, including payroll taxes, that are applicable to such supplemental
taxable income).

 

5.5.  Grant and Use of Awards.  In the discretion of the Committee, a
Participant may be granted any Award permitted under the provisions of the Plan,
and more than one Award may be granted to a Participant.  Awards may be granted
as alternatives to or replacement of awards granted or outstanding under the
Plan, or any other plan or arrangement of the Company or a Subsidiary (including
a plan or arrangement of a business or entity, all or a portion of which is
acquired by the Company or a Subsidiary).  Subject to the overall limitation on
the number of Shares that may be delivered under the Plan, the Committee may use
available Shares as the form of payment for compensation, grants or rights
earned or due under any other compensation plans or arrangements of the Company
or a Subsidiary, including the plans and arrangements of the Company or a
Subsidiary assumed in business combinations.  Notwithstanding the provisions of
subsection 2.2, Options and SARs granted under the Plan in replacement for
awards under

 

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plans and arrangements of the Company or a Subsidiary assumed in business
combinations may provide for Exercise Prices that are less than the Fair Market
Value of the Shares at the time of the replacement grants, if the Committee
determines that such Exercise Price is appropriate to preserve the economic
benefit of the award.  The provisions of this subsection shall be subject to the
provisions of subsection 5.15.

 

5.6.  Dividends and Dividend Equivalents.  An Award (including without
limitation an Option or SAR Award) may provide the Participant with the right to
receive dividend or dividend equivalent payments with respect to Shares subject
to the Award (both before and after the Shares subject to the Award is earned,
vested, or acquired), which payments may be either made currently or credited to
an account for the Participant, and may be settled in cash or Shares as
determined by the Committee.  Any such settlements, and any such crediting of
dividends or dividend equivalents or reinvestment in Shares, will be subject to
the Company’s Bye-laws as well as applicable law and further may be subject to
such conditions, restrictions and contingencies as the Committee shall
establish, including the reinvestment of such credited amounts in Share
equivalents.  The provisions of this subsection shall be subject to the
provisions of subsection 5.15.

 

5.7.  Settlement of Awards.  The obligation to make payments and distributions
with respect to Awards may be satisfied through cash payments, the delivery of
Shares, the granting of replacement Awards, or combination thereof as the
Committee shall determine.  Satisfaction of any such obligations under an Award,
which is sometimes referred to as “settlement” of the Award, may be subject to
such conditions, restrictions and contingencies as the Committee shall
determine.  The Committee may permit or require the deferral of any Award
payment, subject to such rules and procedures as it may establish, which may
include provisions for the payment or crediting of interest or dividend
equivalents, and may include converting such credits into deferred Share
equivalents.  Except for Options and SARs designated at the time of grant or
otherwise as intended to be subject to Code section 409A, this subsection 5.7
shall not be construed to permit the deferred settlement of Options or SARs, if
such settlement would result in deferral of compensation under Treas. Reg.
§1.409A-1(b)(5)(i)(A)(3) (except as permitted in paragraphs (i) and (ii) of that
section).  Each Subsidiary shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the services rendered for that Subsidiary by the Participant. 
Any disputes relating to liability of a Subsidiary for cash payments shall be
resolved by the Committee.  The provisions of this subsection shall be subject
to the provisions of subsection 5.15.

 

5.8.  Transferability.  Except as otherwise provided by the Committee, Awards
under the Plan are not transferable except as designated by the Participant by
will or by the laws of descent and distribution.

 

5.9.  Form and Time of Elections.  Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.

 

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5.10.  Agreement With Company.  An Award under the Plan shall be subject to such
terms and conditions, not inconsistent with the Plan, as the Committee shall, in
its sole discretion, prescribe.  The terms and conditions of any Award to any
Participant shall be reflected in such form of written (including electronic)
document as is determined by the Committee.  A copy of such document shall be
provided to the Participant, and the Committee may, but need not require that
the Participant sign a copy of such document.  Such document we refer to in the
Plan as an “Award Agreement” regardless of whether any Participant signature is
required.

 

5.11.  Action by Company or Subsidiary.  Any action required or permitted to be
taken by the Company or any Subsidiary shall be by resolution of its board of
directors, or by action of one or more members of the board (including a
committee of the board) who are duly authorized to act for the board, or (except
to the extent prohibited by applicable law or applicable rules of any stock
exchange) by a duly authorized officer of such company.

 

5.12.  Gender and Number.  Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and the
plural shall include the singular.

 

5.13.  Limitation of Implied Rights.

 

(a)           Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any assets, funds or
property of the Company or any Subsidiary whatsoever, including, without
limitation, any specific funds, assets, or other property which the Company or
any Subsidiary, in its sole discretion, may set aside in anticipation of a
liability under the Plan.  A Participant shall have only a contractual right to
the Shares or amounts, if any, payable under the Plan, unsecured by any assets
of the Company or any Subsidiary, and nothing contained in the Plan shall
constitute a guarantee that the assets of the Company or any Subsidiary shall be
sufficient to pay any benefits to any person.

 

(b)           The Plan does not constitute a contract of employment, and
selection as a Participant will not give any participating employee or other
individual the right to be retained in the employ of the Company or any
Subsidiary or the right to continue to provide services to the Company or any
Subsidiary, nor any right or claim to any benefit under the Plan, unless such
right or claim has specifically accrued under the terms of the Plan.  Except as
otherwise provided in the Plan, no Award under the Plan shall confer upon the
holder thereof any rights as a shareholder of the Company prior to the date on
which the individual fulfills all conditions for receipt of such rights and is
registered in the Company’s Register of Shareholders.

 

(c)           All Stock and shares issued under any Award or otherwise are to be
held subject to the provisions of the Company’s Bye-laws and each Participant is
deemed to agree to be bound by the terms of the Company’s Bye-laws as they stand
at the time of issue of any Shares under the Plan.

 

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5.14.  Evidence.  Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.

 

5.15.  Limitations under Section 409A.  The provisions of the Plan shall be
subject to the following:

 

(a)           Neither subsection 5.5 nor any other provision of the Plan shall
be construed to permit the grant of an Option or SAR if such action would cause
the Option or SAR being granted or the option or stock appreciation right being
replaced to be subject to Code section 409A, provided that this paragraph
(a) shall not apply to any Option or SAR (or option or stock appreciation right
granted under another plan) being replaced that, at the time it is granted or
otherwise, is designated as being deferred compensation subject to Code section
409A.

 

(b)           Except with respect to an Option or SAR that, at the time it is
granted or otherwise, is designated as being deferred compensation subject to
Code section 409A, no Option or SAR shall condition the receipt of dividends
with respect to an Option or SAR on the exercise of such Award, or otherwise
provide for payment of such dividends in a manner that would cause the payment
to be treated as an offset to or reduction of the exercise price of the Option
or SAR pursuant Treas. Reg. §1.409A-1(b)(5)(i)(E).

 

(c)           The Plan shall not be construed to permit a modification of an
Award, or to permit the payment of a dividend or dividend equivalent, if such
actions would result in accelerated recognition of taxable income or imposition
of additional tax under Code section 409A.

 

SECTION 6

CHANGE IN CONTROL

 

Subject to the provisions of paragraph 5.2(f) (relating to the adjustment of
shares), the occurrence of a Change in Control shall have the effect, if any,
with respect to any Award as set forth in the Award Agreement or, to the extent
not prohibited by the Plan or the Award Agreement, as provided by the Committee.

 

SECTION 7

COMMITTEE

 

7.1.  Administration.  The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the “Committee”) in
accordance with this Section 7.  The Committee shall be selected by the Board,
and shall consist solely of two or more members of the Board.  As a committee of
the Board, the Committee is subject to the overview of the Board.  If the
Committee does not exist, or for any other reason determined by the Board, and
to the extent not prohibited by applicable law or the applicable rules of any
stock exchange, the Board may take any action under the Plan that would
otherwise be the responsibility of the Committee.

 

7.2.  Powers of Committee.  The Committee’s administration of the Plan shall be
subject to the following:

 

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(a)           Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Individuals those
persons who shall receive Awards, to determine the time or times of receipt, to
determine the types of Awards and the number of Shares covered by the Awards, to
establish the terms, conditions, performance criteria, restrictions, and other
provisions of such Awards, and (subject to the restrictions imposed by
Section 8) to cancel or suspend Awards.

 

(b)           To the extent that the Committee determines that the restrictions
imposed by the Plan preclude the achievement of the material purposes of the
Awards in jurisdictions outside the United States and Bermuda, the Committee
will have the authority and discretion to modify those restrictions as the
Committee determines to be necessary or appropriate to conform to applicable
requirements or practices of jurisdictions outside of the United States and
Bermuda.

 

(c)           The Committee will have the authority and discretion to interpret
the Plan, to establish, amend, and rescind any rules and regulations relating to
the Plan, to determine the terms and provisions of any Award Agreement made
pursuant to the Plan, and to make all other determinations that may be necessary
or advisable for the administration of the Plan.

 

(d)           Any interpretation of the Plan by the Committee and any decision
made by it under the Plan is final and binding on all persons.

 

(e)           In controlling and managing the operation and administration of
the Plan, the Committee shall take action in a manner that conforms to
applicable corporate law.

 

7.3.  Delegation by Committee.  Except to the extent prohibited by applicable
law or the applicable rules of a stock exchange, the Committee may allocate all
or any portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers to
any person or persons selected by it.  Any such allocation or delegation may be
revoked by the Committee at any time.

 

7.4.  Information to be Furnished to Committee.  The Company and Subsidiaries
shall furnish the Committee with such data and information as it determines may
be required for it to discharge its duties.  The records of the Company and
Subsidiaries as to an employee’s or Participant’s employment (or other provision
of services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect.  Participants and other
persons entitled to benefits under the Plan must furnish the Committee such
evidence, data or information as the Committee considers desirable to carry out
the terms of the Plan.

 

SECTION 8

AMENDMENT AND TERMINATION

 

The Board may, at any time, amend or terminate the Plan, and may amend any Award
Agreement, provided that no amendment or termination may, in the absence of
written consent to the change by the affected Participant (or, if the
Participant is not then living, the affected beneficiary), adversely affect the
rights of any Participant or beneficiary under any Award granted under the Plan
prior to the date such amendment is adopted by the Board; and further

 

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provided that adjustments pursuant to paragraph 5.2(f) shall not be subject to
the foregoing limitations of this Section 8; and further provided that the
provisions of subsection 2.6 (relating to Option repricing) cannot be amended
unless the amendment is approved by the Company’s shareholders.  No amendment or
termination shall be adopted or effective if it would result in accelerated
recognition of income or imposition of additional tax under Code section 409A
or, except as otherwise provided in the amendment, would cause amounts that were
not otherwise subject to Code section 409A to become subject to section 409A.

 

SECTION 9

DEFINED TERMS

 

In addition to the other definitions contained herein, the following definitions
shall apply:

 

(a)           Award.  The term “Award” means any award or benefit granted under
the Plan, including, without limitation, the grant of Options, SARs, and Full
Value Awards.

 

(b)           Board.  The term “Board” means the Board of Directors of the
Company.

 

(c)           Change in Control.  The term “Change in Control” means the
occurrence of the events described in any of paragraphs (i), (ii), (iii) or
(iv) below:

 

(i)            Acquisition of Securities.  The acquisition (disregarding any
Excluded Acquisitions) by any Person of ownership of any Voting Securities if,
immediately after such acquisition, such Person has ownership of more than
twenty-five percent (25%) of either the Outstanding Company Common Shares, or
the combined voting power of the Outstanding Company Voting Securities.  In no
event shall a Change in Control occur by reason of ownership of Shares, Voting
Securities, Outstanding Company Common Shares, or Outstanding Company Voting
Securities by ACE Limited and/or any successor or Affiliate of ACE Limited.

 

(ii)           Change in Board.  Individuals who constitute the Incumbent Board
cease for any reason to represent greater than 50% of the voting power of
members of the Board.

 

(iii)          Corporate Transaction.  Consummation of (A) a Corporate
Transaction or (B) the sale or other disposition of more than fifty percent
(50%) of the operating assets of the Company (determined on a consolidated
basis), but not including an Internal Reorganization.

 

(iv)          Liquidation.  Approval by the shareholders of the Company of a
plan of complete liquidation or dissolution of the Company.

 

(v)           Definitions.  The terms used in the definition of “Change in
Control” shall have the following meanings:

 

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(A)          An “Affiliate” of a person or other entity shall mean a person or
other entity that directly or indirectly controls, is controlled by, or is under
common control with the person or other entity specified.

 

(B)           The term “Company Plan” means an employee benefit plan (or related
trust) sponsored or maintained by the Company or any Affiliate of the Company.

 

(C)           The term “Corporate Transaction” means any reorganization, merger,
amalgamation, consolidation, or other business combination involving the
Company.

 

(D)          The following shall constitute “Excluded Acquisitions” of Shares or
Voting Securities (whichever is applicable):

 

(I)            Any acquisition of Shares or Voting Securities (whichever is
applicable) by a Company Plan.

 

(II)           Any acquisition of Shares or Voting Securities (whichever is
applicable) by an underwriter temporarily holding securities pursuant to an
offering of such securities.

 

(III)         Any acquisition of Shares or Voting Securities (whichever is
applicable) by any Person pursuant to an Internal Reorganization.

 

(IV)         Any acquisition of Shares or Voting Securities (whichever is
applicable) directly from the Company (excluding any acquisition resulting from
the exercise of an exercise, conversion or exchange privilege unless the
security being so exercised, converted or exchanged was acquired directly from
the Company).

 

(V)           Any acquisition of Shares or Voting Securities (whichever is
applicable) by the Company.

 

(VI)         Any acquisition of Shares or Voting Securities (whichever is
applicable) by ACE Limited and/or any successor or Affiliate of ACE Limited or
any employee benefit plan (or related trust) maintained by any such entity.

 

(E)           The members of the “Incumbent Board” shall mean the members of the
Board of Directors as of the Effective Date and shall also mean any individual
becoming a director after that date whose election, or nomination for election
by the Company shareholders, was approved by a vote of a least a majority of the
directors then comprising the Incumbent Board; provided, however, that there
shall be excluded for this purpose any such individual whose initial assumption
of office occurs as a result of an actual or publicly threatened election
contest (as such terms are used in Rule 14a-11 promulgated under the Securities
Exchange Act of 1934) or

 

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other actual or publicly threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board.

 

(F)           The term “Internal Reorganization” means a sale-leaseback or other
arrangement resulting in the continued utilization of the assets being sold or
otherwise transferred (or the operating products of such assets) by the
Company.  The term “Internal Reorganization” also means a Corporate Transaction
to which all of paragraphs (I), (II), and (III) below are applicable:

 

(I)            All or substantially all of the individuals and entities who have
ownership, respectively, of the Outstanding Company Common Shares and
Outstanding Company Voting Securities immediately prior to such Corporate
Transaction have ownership of more than fifty percent (50%) of, respectively,
the then outstanding shares of common equity securities and the combined voting
power of the then outstanding Voting Securities entitled to vote generally in
the election of directors, as the case may be, of the ultimate parent entity
resulting from such Corporate Transaction (including, without limitation, an
entity which, as a result of such transaction, has ownership of the Company or
all or substantially all of the assets of the Company either directly or through
one or more subsidiaries) in substantially the same relative proportions as
their ownership, immediately prior to such Corporate Transaction, of the
Outstanding Company Common Shares and Outstanding Company Voting Securities, as
the case may be.

 

(II)           No Person (other than the Company, any Company Plan or related
trust, the corporation resulting from such Corporate Transaction, and any Person
having ownership, immediately prior to such Corporate Transaction, directly or
indirectly, of more than twenty-five percent (25%) of the Outstanding Company
Common Shares or the Outstanding Company Voting Securities, as the case may be)
will have ownership of more than twenty-five percent (25%) of, respectively, the
then outstanding common shares of the ultimate parent entity resulting from such
Corporate Transaction or the combined voting power of the then outstanding
Voting Securities of such entity.

 

(III)         Individuals who were members of the Incumbent Board immediately
prior to the Corporate Transaction will constitute at least a majority of the
members of the board of directors of the ultimate parent entity resulting from
such Corporate Transaction.

 

(G)           The term “Outstanding Company Common Shares” as of any date means
the then outstanding common shares, of whatever subclass or series, of the
Company.

 

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(H)          The term “Outstanding Company Voting Securities” as of any date
means the then outstanding Voting Securities (which shall be counted based on
the number of votes that may be cast per share).

 

(I)            The term “ownership” means beneficial ownership within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934.

 

(J)            The term “Person” means an individual, entity or group as that
term is used in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934.

 

(K)          The term “Voting Securities” as of any date means any of the
outstanding securities of the Company entitled to vote generally in the election
of the Company’s Board of Directors.

 

(d)           Code.  The term “Code” means the United States Internal Revenue
Code of 1986, as amended.  A reference to any provision of the Code shall
include reference to any successor provision of the Code.

 

(e)           Dollars.  As used in the Plan, the term “dollars” or numbers
preceded by the symbol “$” means amounts in United States dollars.

 

(f)            Eligible Individual.  For purposes of the Plan, the term
“Eligible Individual” means any employee of the Company or a Subsidiary, and any
consultant, director, or other person providing services to the Company or a
Subsidiary; provided, however, that to the extent required by the Code, an ISO
may only be granted to an employee of the Company or a subsidiary corporation of
the Company (as that term is used in section 424(f) of the Code).  An Award may
be granted to an employee or other individual providing services, in connection
with hiring, retention or otherwise, prior to the date the employee or service
provider first performs services for the Company or the Subsidiaries, provided
that such Awards shall not become vested prior to the date the employee or
service provider first performs such services.

 

(g)           Fair Market Value.  Except as otherwise provided by the Committee,
the “Fair Market Value” of a Share as of any date shall be the closing market
composite price for such Share as reported for the New York Stock Exchange -
Composite Transactions on that date or, if the Shares are not traded on that
date, on the next preceding date on which the Shares were traded.

 

(h)           Performance Measures.  The “Performance Measures” shall be based
on any one or more of the following Company, Subsidiary, operating unit or
division performance measures: gross premiums written; net premiums written; net
premiums earned; net investment income; losses and loss expenses; underwriting
and administrative expenses; operating expenses; cash flow(s); operating income;
profits, earnings before interest and taxes; net income; stock price; dividends;
strategic business objectives, consisting of one or more objectives based on
meeting specified cost targets, business expansion goals, and goals relating to
acquisitions or divestitures; or any combination thereof.  Each goal may be
expressed on an absolute and/or relative basis, may be based on or otherwise
employ

 

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comparisons based on internal targets, the past performance of the Company
and/or the past or current performance of other companies, and in the case of
earnings-based measures, may use or employ comparisons relating to capital,
shareholders’ equity and/or shares outstanding, investments or to assets or net
assets.

 

(i)            Shares.  The term “Shares” means common shares of the Company.

 

(j)            Subsidiaries.  For purposes of the Plan, the term “Subsidiary”
means any corporation, partnership, joint venture or other entity during any
period in which at least a fifty percent voting or profits interest is owned,
directly or indirectly, by the Company (or by any entity that is a successor to
the Company), and any other business venture designated by the Committee in
which the Company (or any entity that is a successor to the Company) has a
significant interest, as determined in the discretion of the Committee.

 

(k)           Stock.  The term “Stock” is sometimes used to refer to common
shares of the Company.

 

(l)            Termination of Service.  With respect to Awards that constitute
Deferred Compensation, references to the Participant’s termination of employment
(including references to the Participant’s employment termination, and to the
Participant terminating employment, a Participant’s separation from service, and
other similar reference) and references to a Participant’s termination as a
director (including separation from service and other similar references) shall
mean, respectively, the Participant ceasing to be employed by, or ceasing to
perform director services for, the Company and the Affiliates, subject to the
following:

 

(i)            The employment relationship or director relationship will be
deemed to have ended at the time the Participant and the applicable company
reasonably anticipate that a level of bona fide services the Participant would
perform for the Company and the Affiliates after such date would permanently
decrease to no more than 20% of the average level of bona fide services
performed over the immediately preceding 36 month period (or the full period of
service to the Company and the Affiliates if the Participant has performed
services for the Company and the Affiliates for less than 36 months).  In the
absence of an expectation that the Participant will perform at the
above-described level, the date of termination of employment or termination as a
director will not be delayed solely by reason of the Participant continuing to
be on the Company’s and the Affiliates’ payroll after such date.

 

(ii)           The employment or director relationship will be treated as
continuing intact while the Participant is on a bona fide leave of absence
(determined in accordance with Treas. Reg. §409A-1(h)).

 

(iii)          The determination of a Participant’s termination of employment or
termination as a director by reason of a sale of assets, sale of stock,
spin-off, or other similar transaction of the Company or an Affiliate will be
made in accordance with Treas. Reg. §1.409A-1(h).

 

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(iv)          If a Participant performs services both as an employee of the
Company or an Affiliate, and a member of the board of directors of the Company
or an Affiliate, the determination of whether termination of employment or
termination of service as a director shall be made in accordance with Treas.
Reg. §1.409A-1(h)(5) (relating to dual status service providers).

 

(v)           The term “Affiliates” means all persons with whom the Company is
considered to be a single employer under section 414(b) of the Code and all
persons with whom the Company would be considered a single employer under
section 414(c) thereof.

 

(vi)          The term “Deferred Compensation” means payments or benefits that
would be considered to be provided under a nonqualified deferred compensation
plan as that term is defined in Treas. Reg. §1.409A-1.

 

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