Exhibit 10.3
 
 
 
TRUST AGREEMENT
 
among
 
THE ASSET SWAP COUNTERPARTY,
 
THE CEDING INSURERS
 
and
 
XL CAPITAL LTD
 
as Beneficiaries
 
and
 
STONEHEATH RE,
 
as Grantor and Beneficiary
 
and
 
THE BANK OF NEW YORK,
as Trustee

December 12, 2006

 

 
 

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PREAMBLE
 
This trust agreement (the “Trust Agreement”), dated as of December 12, 2006, is
made and entered into by and among the ASSET SWAP COUNTERPARTY, the CEDING
INSURERS and XL CAPITAL LTD, a Cayman Islands exempted company, as
Beneficiaries, STONEHEATH RE, a Cayman Islands exempted company, as Grantor and
Beneficiary, and THE BANK OF NEW YORK, a New York banking corporation, not in
its individual capacity but solely as Trustee.
 
ARTICLE I

 
DEFINITIONS
 
“Account” has the meaning ascribed to such term in Section 3.1 hereof.
 
“Actual RO Coupon Payments” means the “Actual RO Coupon Payments” as such term
is defined in, and determined in accordance with the provisions of, the Asset
Swap Agreement.
 
“Actual RO Principal Repayments” means the “Actual RO Principal Repayments” as
such term is defined in, and determined in accordance with the provisions of,
the Asset Swap Agreement.
 
“Asset” means an asset in the Trust Account, including cash.
 
“Asset Swap Agreement” means that certain 1992 ISDA Master Agreement
(Multicurrency-Cross Border), as supplemented by a schedule and confirmation
thereto, dated as of the date hereof, between the Grantor and the Asset Swap
Counterparty, and as further amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof and the terms of the
Securities Issuance Agreement.
 
“Asset Swap Counterparty” means Goldman Sachs International as the initial Asset
Swap Counterparty under the Asset Swap Agreement and any permitted successor,
assign or replacement counterparty which assumes the obligations of the initial
counterparty in accordance with the terms thereof and the terms of the
Securities Issuance Agreement.
 
“Authorized Representative” has the meaning ascribed to such term in Section
3.16 hereof.
 
“Beneficiaries” means the Grantor and the Other Beneficiaries, for whose benefit
the Trust hereunder has been established. As used herein, the term
“Beneficiaries” shall include any respective permitted successor, assign or, in
the case of the Asset Swap Agreement and the Interest Rate Swap Agreement,
replacement swap counterparty of the Asset Swap Counterparty, the Interest Rate
Swap Counterparty, a Ceding Insurer or XL Capital, including any liquidator,
rehabilitator, receiver, conservator or court-appointed successor-in-interest.
 

 
 

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“Business Day” means a day on which commercial banks and foreign exchange
markets settle payments and are open for general business (including dealings in
foreign exchange and foreign currency deposits) in Bermuda, the Cayman Islands,
New York City and London.
 
“Ceding Insurers” means XLIB and any other insurance or reinsurance subsidiaries
of XL Capital that are party to the Reinsurance Agreement from time to time.
 
“Confirmation” means the “Confirmation” as such term is defined in the Asset
Swap Agreement.
 
“Designated Dealer” means, at any time, a dealer in securities of the type which
constitute the Portfolio, which shall be a third party designated by the Asset
Swap Counterparty.
 
“Eligible Assets” means (i) debt securities with a term not to exceed forty
years from the date of investment or contractual commitment to invest therein
issued or fully guaranteed or insured by the United States government or any
agency thereof; (ii) commercial paper payable 183 days or less from the date of
original issuance and with a rating from Moody’s of “P-1” and from S&P of at
least “A-1” at the time of investment or contractual commitment to invest
therein, and not placed on watchlist for a possible downgrade by either Moody’s
or S&P; (iii) other debt securities with a final maturity not to exceed forty
years and an average life not to exceed fifteen years from the date of
investment or contractual commitment to invest therein and with a rating from
Moody’s of at least “Aaa” and from S&P of at least “AAA” at the time of
investment or contractual commitment to invest therein; and (iv) money market
funds rated in the highest investment category by Moody’s and S&P and whose
distributions to, or for the benefit of, the Grantor would not be subject to tax
by any jurisdiction; provided, that (a) such Eligible Assets shall be
denominated in U.S. dollars and (b) any Eligible Asset whose maturity exceeds
six months shall bear interest at a rate that is determined from time to time by
reference to a specified benchmark or index.
 
“Exercise Notice” has the meaning ascribed to such term in Section 6.1 hereof.
 
“Extraordinary Expenses” has the meaning ascribed to such term in the Securities
Issuance Agreement.
 
“Final Redemption Date” means the date specified in the notice of redemption by
the Grantor to the holders of record of the outstanding Issuer Preferred
Securities following (i) the termination of the Reinsurance Agreement (whether
upon its expiry or as a result of the occurrence of an early termination of the
Securities Issuance Agreement) and (ii) if required by the terms of the
Reinsurance Agreement, the commutation of the rights and obligations of the
Grantor and the Ceding Insurers under the Reinsurance Agreement.
 
“Grantor” means Stoneheath Re, a Cayman Islands exempted company, which has
established the Trust hereunder for the sole benefit of itself and the Other
Beneficiaries as set forth more fully herein.
 

 
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“Initial Permitted Investments” has the meaning ascribed to such term in the
Investment Guidelines.
 
“Interest Rate Swap Agreement” means that certain long form transaction
confirmation incorporating by reference the 1992 ISDA Master Agreement
(Multicurrency-Cross Border), dated as of the date hereof, between the Grantor
and the Interest Rate Swap Counterparty, as amended, supplemented or otherwise
modified from time to time in accordance with the terms thereof and the terms of
the Securities Issuance Agreement.
 
“Interest Rate Swap Counterparty” means IXIS Financial Products Inc., as the
initial counterparty under the Interest Rate Swap Agreement, and any permitted
successor, assign or replacement counterparty which assumes the obligations of
the initial counterparty in accordance with the terms thereof and the terms of
the Securities Issuance Agreement.
 
“Investment Account” means the account, number 348226, established for the
benefit of the Beneficiaries and maintained in the name “The Bank of New York
f/b/o Beneficiaries,” consisting of the Investment Account Assets.
 
“Investment Account Assets” has the meaning ascribed to such term in Section 3.2
hereof.
 
“Investment Guidelines” means the Investment Guidelines attached hereto as
Exhibit A and made part of this Trust Agreement.
 
“Investment Notice” means a written notice, substantially in the form attached
hereto as Exhibit B, received by the Trustee from the Asset Swap Counterparty or
its Authorized Representative in respect of an Asset.
 
“Issuer Preferred Securities” means the non-cumulative perpetual preferred
shares, liquidation preference U.S. $1,000 per share, of the Grantor.
 
“Loss Verification Agent” means the “Loss Verification Agent” under the
Reinsurance Agreement.
 
“Moody’s” means Moody’s Investors Service, Inc. or any successor thereto.
 
“Other Beneficiaries” means the Asset Swap Counterparty, the Interest Rate Swap
Counterparty, the Ceding Insurers and XL Capital, for whose benefit the Trust
hereunder has been established as set forth more fully herein.
 
“Payment Account” means the account, number 348227, established for the benefit
of the Beneficiaries and maintained with the Trustee in the name “The Bank of
New York f/b/o Beneficiaries,” consisting of the Payment Account Assets.
 
“Payment Account Assets” has the meaning ascribed to such term in Section 3.3
hereof.
 

 
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“Payment Account Net Earnings” has the meaning ascribed to such term in Section
3.3 hereof.
 
“Policy Aggregate Limit” means the “Policy Aggregate Limit” as such term is
defined in, and determined in accordance with the provisions of, the Reinsurance
Agreement.
 
“Policy Repayments” means all amounts payable by the Ceding Insurers to the
Grantor pursuant to the Article entitled “Commutation and Quantum Dispute
Resolution” of the Reinsurance Agreement.
 
“Portfolio” means the “Portfolio” as such term is defined in, and determined in
accordance with the provisions of, the Asset Swap Agreement.
 
“Reference Obligation” means each “Reference Obligation” as such term is defined
in, and determined in accordance with the provisions of, the Asset Swap
Agreement.
 
“Reinsurance Agreement” means that certain Excess of Loss Reinsurance Agreement,
dated as of the date hereof, between the Grantor and the Ceding Insurers, as
amended, supplemented or otherwise modified from time to time in accordance with
the terms thereof.
 
“Reinsurance Premium” means the premium payable by the Ceding Insurers to the
Grantor pursuant to the Reinsurance Agreement.
 
“Reinvestment Proceeds” has the meaning ascribed to such term in the Investment
Guidelines.
 
“Remaining Aggregate Limit” means, on any date, an amount equal to the Policy
Aggregate Limit as reduced as of such date by any payments made by the Grantor
under the Reinsurance Agreement and any distributions from the Trust Account
made to the Grantor to permit it to pay Extraordinary Expenses.
 
“Repayment Account” has the meaning ascribed to such term in Section 3.1 hereof.
 
“Repayment Account Assets” means the Repayment Cash Account Assets and the
Returned Securities Account Assets.
 
“Repayment Cash Account” means the account, number 348228, established for the
benefit of the Grantor and XLIB, as Beneficiaries, and maintained in the name
“The Bank of New York f/b/o Stoneheath Re and XL Insurance (Bermuda) Ltd,”
consisting of the Repayment Cash Account Assets, if any.
 
“Repayment Cash Account Assets” has the meaning ascribed to such term in Section
3.4 hereof.
 

 
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“Repayment Cash Account Net Earnings” has the meaning ascribed to such term in
Section 3.4 hereof.
 
“Repayment Option” has the meaning ascribed to such term in Section 6.1 hereof.
 
“Repayment Option Period” has the meaning ascribed to such term in Section 6.1
hereof.
 
“Returned Securities Account” means the account, number 348229, established for
the benefit of the Grantor and XLIB, as Beneficiaries, and maintained with the
Trustee in the name “The Bank of New York f/b/o Stoneheath Re and XL Insurance
(Bermuda) Ltd,” consisting of the Returned Securities Account Assets, if any.
 
“Returned Securities Account Assets” has the meaning ascribed to such term in
Section 3.5 hereof.
 
“Returned XL Preferred Securities” has the meaning ascribed to such term in
Section 3.6 hereof.
 
“RO Termination Payments” means the “RO Termination Payments” as such term is
used in, and determined in accordance with the provisions of, the Asset Swap
Agreement.
 
“S&P” means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill
Companies, Inc., or any successor thereto.
 
“Securities Issuance Agreement” means that certain Securities Issuance
Agreement, dated as of the date hereof, among the Grantor and XL Capital, as
amended, supplemented or otherwise modified from time to time in accordance with
the terms thereof.
 
“Securities Return Period” has the meaning ascribed to such term in Section 3.6
hereof.
 
“Specified Distribution Date” means the date on which a distribution from the
Payment Account is to be made to a Beneficiary. The Specified Distribution Date
shall be set forth in the written certification delivered by or on behalf of
such Beneficiary pursuant to Section 5.3, 5.4, 5.5, 5.6, 5.7 or 5.8 hereof and
shall not be earlier than:
 
(i)
3 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to the Asset Swap Counterparty or
its designee pursuant to Section 5.3 hereof;

 
(ii)
3 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to the Interest Rate Swap
Counterparty or its designee pursuant to Section 5.4 hereof;

 

 
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(iii)
20 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to a Ceding Insurer or its designee
pursuant to Section 5.5 hereof;

 
(iv)
10 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to XLIB or its designee pursuant to
Section 5.6 hereof;

 
(v)
3 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to XL Capital or its designee
pursuant to Section 5.7 hereof; and

 
(vi)
10 Business Days from the date on which the written certification was delivered
to the Trustee in the case of a distribution to the Grantor or its designee
pursuant to Section 5.8 hereof.

 
In the case of a distribution of Payment Account Net Earnings to XL Capital or
its designee pursuant to Section 5.7 hereof, the Specified Distribution Date
shall also be a date on which the holders of outstanding Issuer Preferred
Securities are paid all accrued (but unpaid) dividends on the Issuer Preferred
Securities in respect of the period from and including the immediately preceding
dividend payment date (or the date of original issuance if there has not been a
dividend payment date) to but excluding such date.
 
“Temporary Repayment Cash Account Net Earnings” has the meaning ascribed to such
term in Section 6.2(b).
 
“Termination Date” has the meaning ascribed to such term in Section 8.1(a)
hereof.
 
“Trust” has the meaning ascribed to such term in Section 2.1 hereof.
 
“Trust Account” has the meaning ascribed to such term in Section 3.1 hereof.
 
“Trustee” means The Bank of New York, a New York banking corporation, as trustee
hereunder.
 
“XL Capital” means XL Capital Ltd, a Cayman Islands exempted company, and its
permitted successors and assigns.
 
“XLIB” means XL Insurance (Bermuda) Ltd, a Bermuda exempted limited liability
company, and its permitted successors and assigns.
 
“XL Preferred Securities” means Series D Preference Ordinary Shares, liquidation
preference U.S. $1,000 per share, of XL Capital which may be issued and
delivered to the Grantor from time to time under the Securities Issuance
Agreement.
 

 
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ARTICLE II

 
ESTABLISHMENT OF TRUST
 
Section 2.1.  Establishment of Trust. By execution of this Trust Agreement, the
Grantor hereby establishes a trust (the “Trust”) for the sole benefit of the
Beneficiaries as set forth more fully herein.
 
ARTICLE III

 
CREATION OF TRUST ACCOUNT AND DEPOSITS
 
Section 3.1.  Establishment of Accounts. The Grantor hereby agrees to establish
and maintain with the Trustee the Investment Account, the Payment Account, the
Repayment Cash Account and the Returned Securities Account. Each of the
Investment Account, the Payment Account, the Repayment Cash Account and the
Returned Securities Account shall be maintained separately from any other
Account maintained with the Trustee, and the Assets in each Account shall be
segregated from the Assets in any other Account. Each of the Investment Account,
the Payment Account, the Repayment Cash Account and the Returned Securities
Account, including any successor account or accounts thereto, is referred to
herein as an “Account” and the Accounts are collectively referred to herein as
the “Trust Account.” The Repayment Cash Account and the Returned Securities
Account, including any successor account or accounts thereto, are collectively
referred to herein as the “Repayment Account.” Each Account shall form part of
the Trust created hereunder.
 
Section 3.2.  Investment Account Assets. The Assets in the Investment Account
(the “Investment Account Assets”) shall consist of (i) cash deposited by the
Grantor pursuant to Section 3.6 hereof, (ii) Assets transferred from the Payment
Account to the Investment Account in accordance with Section 3.7 hereof, (iii)
Assets acquired in connection with the investment and reinvestment of Investment
Account Assets in accordance with Section 4.1 hereof and (iv) the net earnings,
if any, on the foregoing. The Trustee shall transfer Investment Account Assets
from the Investment Account to the Payment Account from time to time in
accordance with Section 5.1 whereupon such transferred Investment Account Assets
shall constitute Payment Account Assets. The Trustee shall not, under any
circumstance, transfer Investment Account Assets to the Repayment Account or
otherwise transfer Investment Account Assets to the Payment Account.
 
Section 3.3.  Payment Account Assets. The Assets in the Payment Account (the
“Payment Account Assets”) shall consist of (i) cash deposited by the Asset Swap
Counterparty pursuant to Section 3.7 hereof, (ii) cash deposited by the Interest
Rate Swap Counterparty pursuant to Section 3.8 hereof, (iii) cash deposited by
the Ceding Insurers pursuant to Section 3.9 hereof (other than Policy
Repayments), (iv) cash deposited by XL Capital pursuant to Section 3.10 hereof,
(v) Assets transferred from the Investment Account to the Payment Account in
accordance with Section 3.2 hereof, (vi) Assets acquired in connection with the
investment and reinvestment of Payment Account Assets in accordance with Section
4.2 hereof and (vii) the net
 

 
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earnings (the “Payment Account Net Earnings”), if any, on the foregoing. The
Trustee shall transfer Payment Account Assets from the Payment Account to the
Investment Account from time to time in accordance with Section 3.7 hereof
whereupon such Payment Account Assets shall constitute Investment Account
Assets. The Trustee shall not, under any circumstance, transfer Payment Account
Assets to the Repayment Account or otherwise transfer Payment Account Assets to
the Investment Account.
 
Section 3.4.  Repayment Cash Account Assets. The Assets in the Repayment Cash
Account (the “Repayment Cash Account Assets”), if any, shall consist of (i) the
Policy Repayments deposited by the Ceding Insurers pursuant to Section 3.9
hereof, (ii) Assets acquired in connection with the investment and reinvestment
of Repayment Cash Account Assets in accordance with Section 4.2 hereof and (iii)
the net earnings (the “Repayment Cash Account Net Earnings”), if any, on the
foregoing. The Trustee shall not, under any circumstance, transfer Repayment
Cash Account Assets to any other Account. Except for the Grantor and XLIB, none
of the Beneficiaries shall have any claim, interest or right hereunder or
otherwise in the Repayment Cash Account Assets.
 
Section 3.5.  Returned Securities Account Assets. The Assets in the Returned
Securities Account (the “Returned Securities Account Assets”), if any, shall
consist of (i) the Returned XL Preferred Securities deposited by the Grantor
pursuant to Section 3.6 and Section 6.1 hereof and (ii) dividends and other
payments, if any, paid on the Returned XL Preferred Securities (irrespective of
when declared) while such Returned XL Preferred Securities are in the Returned
Securities Account. The Trustee shall not, under any circumstance, transfer
Returned Securities Account Assets to any other Account. Except for the Grantor
and XLIB, none of the Beneficiaries shall have any claim, interest or right
hereunder or otherwise in the Returned Securities Account Assets.
 
Section 3.6.  Deposits by the Grantor. On the date hereof, the Grantor shall
deposit into the Investment Account an amount of cash that is equal to the gross
proceeds to the Grantor from the issuance of Issuer Preferred Securities on the
date hereof. In addition, upon receipt by the Grantor of a written notice that
the Ceding Insurers have deposited Policy Repayments into the Repayment Cash
Account pursuant to Section 3.9 hereof, the Grantor shall have the option,
exercisable during the period commencing on the date of receipt of such written
notice and ending at 5 p.m., New York time, on the tenth Business Day thereafter
(the “Securities Return Period”), to deposit into the Returned Securities
Account an amount of XL Preferred Securities having an aggregate liquidation
preference that, when added to the accrued and unpaid dividends on such XL
Preferred Securities for the then-current dividend period, is equal to the
aggregate amount of Policy Repayments deposited in the Repayment Cash Account by
the Ceding Insurers (the “Returned XL Preferred Securities”).
 
Section 3.7.  Deposits by the Asset Swap Counterparty. From time to time after
the date hereof, the Asset Swap Counterparty shall deposit into the Payment
Account, on behalf of the Grantor, any amounts that are paid by the Asset Swap
Counterparty to the Grantor under the Asset Swap Agreement. The Trustee shall
transfer from the Payment Account to the Investment Account any RO Termination
Payments that are deposited in the Payment Account
 

 
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pursuant to this Section 3.7 to the extent that such amounts are to be used by
the Trustee to acquire an Asset pursuant to the Investment Guidelines and any
Investment Notice received from the Asset Swap Counterparty.
 
Section 3.8.  Deposits by the Interest Rate Swap Counterparty. The Interest Rate
Swap Counterparty has been instructed by the Grantor to deposit, from time to
time after the date hereof, into the Payment Account any amounts that are paid
by the Interest Rate Swap Counterparty to the Grantor under the Interest Rate
Swap Agreement.
 
Section 3.9.  Deposits by the Ceding Insurers. From time to time after the date
hereof, the Ceding Insurers shall deposit into the Payment Account, on behalf of
the Grantor, any Reinsurance Premiums that are paid to the Grantor under the
Reinsurance Agreement. In addition, to the extent that any Policy Repayments are
paid to the Grantor under the Reinsurance Agreement, the Ceding Insurers shall
deposit such Policy Repayments, on behalf of the Grantor, into the Repayment
Cash Account.
 
Section 3.10.  Deposits by XL Capital. From time to time after the date hereof,
XL Capital shall deposit into the Payment Account, on behalf of the Grantor, any
amounts that are paid by XL Capital to the Grantor under the Securities Issuance
Agreement (other than amounts payable pursuant to Section 3.3 of the Securities
Issuance Agreement, which amounts shall not be deposited into the Trust
Account).
 
Section 3.11.  Requirements for Deposits. All deposits into the Trust Account
(other than Returned XL Preferred Securities, if any, deposited pursuant to
Sections 3.6 and Section 6.1 hereof) shall be in U.S. dollars and shall be made
by wire transfer of immediately available funds to such account as may be
specified by the Trustee in writing from time to time. Any deposit of Returned
XL Preferred Securities by the Grantor shall be made by delivering to the
Trustee certificates evidencing such Returned XL Preferred Securities in
negotiable and proper deliverable form or accompanied by a duly executed stock
power, in blank, bearing the signature of the transferor.
 
Section 3.12.  Access to Trust Account Information. The Beneficiaries will be
given real-time access to all information with respect to the Trust Account
through the Trustee’s electronic account system.
 
Section 3.13.  Payments by Guarantors. For the purposes of this Trust Agreement,
any reference to a payment that is made by a specified person shall include any
payment that is made by a guarantor of such specified person pursuant to a
guarantee or by any other person that makes a payment for or on behalf of such
specified person.
 
Section 3.14.  Grant of Trust Power. The Grantor hereby grants to the Trustee
all trust powers necessary and reasonable in the performance of its duties and
obligations hereunder.
 
Section 3.15.  Purpose of Trust. The Assets in the Trust Account shall be held
by the Trustee for the sole use and benefit of the Beneficiaries as provided for
herein.
 

 
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Section 3.16.  Designation of Agents. Except as otherwise expressly provided in
this Trust Agreement, any statement, certificate, notice, request, consent,
approval, or other instrument to be delivered or furnished by a Beneficiary, as
the case may be, shall be sufficiently executed if executed in the name of such
Beneficiary by such officer or officers of such Beneficiary, or by such other
agent or agents of such Beneficiary, as may be designated in a resolution or
letter of advice by such Beneficiary (each such person, an “Authorized
Representative”). Written notice of such designation by such Beneficiary shall
be filed with the Trustee. The Trustee shall be protected in acting upon any
written statement or other instrument made by such Authorized Representative of
such Beneficiary with respect to the authority conferred on such person;
provided, that each Beneficiary or its Authorized Representative may only
represent its own respective interest.
 
Section 3.17.  No Other Conditions or Qualifications. This Trust Agreement and
the enforceability hereof are not subject to any conditions or qualifications
not expressly included herein.
 
ARTICLE IV

 
MAINTENANCE OF THE TRUST ACCOUNT
 
Section 4.1.  Administration of Investment Account by the Trustee. The
Investment Account Assets shall be invested in accordance with the Investment
Guidelines and any Investment Notice received by the Trustee from the Asset Swap
Counterparty or its Authorized Representative, and the Trustee is hereby
authorized and instructed to act in accordance with such Investment Guidelines
and Investment Notice. Except as otherwise provided by this Trust Agreement,
including the Investment Guidelines, or by any Investment Notice received from
the Asset Swap Counterparty or its Authorized Representative, the Trustee shall
not be required or permitted to take any action with respect to the investment
or reinvestment of the Investment Account Assets. Subject to Section 7.4 hereof,
any loss on an investment made pursuant to this Section 4.1 shall be borne
exclusively by the Investment Account and the Trustee shall not be liable for
such loss.
 
Section 4.2.  Administration of the Payment Account and the Repayment Account by
the Trustee. The Payment Account Assets and, if applicable, the Repayment Cash
Account Assets shall be invested in accordance with any written notices received
by the Trustee from XL Capital or its Authorized Representative, and the Trustee
is hereby authorized and instructed to act in accordance with such written
notices. Any investment of Payment Account Assets or Repayment Cash Account
Assets shall be made in financial instruments selected from time to time by XL
Capital which (x) satisfy the criteria set forth in clauses (ii) and (iv) and
the proviso (a) of the definition of Eligible Assets and (y) are capable of
being liquidated within one Business Day of the receipt by the Trustee of a
written notice from XL Capital. Investments made pursuant to this Section 4.2
shall not be deemed Reference Obligations for the purpose of the Asset Swap
Agreement, and the Portfolio shall not be modified to reflect such investments.
Except as otherwise provided by this Trust Agreement or by any written notice
received by the Trustee from XL Capital, the Trustee shall not be required or
permitted to take any action with
 

 
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respect to the investment or reinvestment of the Payment Account Assets and, if
applicable, the Repayment Cash Account Assets. Subject to Section 7.4 hereof,
any loss on an investment made pursuant to this Section 4.2 shall be borne
exclusively by the Payment Account or the Repayment Cash Account, as applicable,
and the respective Beneficiaries thereof and the Trustee shall not be liable for
such loss.
 
Section 4.3.  Voting and Redemption of Securities. The Trustee shall exercise
the right to vote with respect to any Investment Account Assets solely as
directed by the Asset Swap Counterparty and, if the Trustee does not receive any
direction from the Asset Swap Counterparty with respect to any vote, abstain
from such vote. The Trustee shall exercise the right to vote with respect to any
Payment Account Assets and any Repayment Cash Account Assets solely as directed
by XL Capital and, if the Trustee does not receive any direction from XL Capital
with respect to any vote, abstain from such vote. The Trustee shall exercise the
right to vote with respect to the Returned XL Preferred Securities, if any, in
the Returned Securities Account solely as directed by the Grantor and, if the
Trustee does not receive any direction from the Grantor with respect to any
vote, abstain from such vote. The Trustee shall exercise any right to redeem
Returned XL Preferred Securities in the Returned Securities Account, if any,
solely as directed by the Grantor and if the Trustee does not receive any
direction from the Grantor with respect to any such redemption right, abstain
from exercising such redemption right.
 
Section 4.4.  Books and Records
 
. The Trustee shall keep full and complete records of the administration of the
Trust Account and each Account. Each of the Beneficiaries may, with reasonable
prior notice, examine such Trust Account and Account records during business
hours through any person or persons duly authorized in writing by such
Beneficiary.
 
Section 4.5.  Disclosure of Interests. Each Beneficiary hereby authorizes the
Trustee to disclose its respective name, address and interest in the Assets in
the Trust Account if and to the extent that such disclosure is required by law.
 
ARTICLE V

 
DISTRIBUTIONS FROM THE PAYMENT ACCOUNT
 
Section 5.1.  Distributions Generally. (a) Except as provided in Sections 5.2,
6.2 and 6.3 hereof, all distributions from the Trust Account shall be made from
the Payment Account and shall be subject to Section 5.9 hereof. If the Payment
Account does not have sufficient Assets to fund a distribution that is required
to be made pursuant to Section 5.2, 5.3, 5.4, 5.5, 5.6, 5.7 or 5.8 hereof, the
Trustee shall (i) transfer cash from the Investment Account to the Payment
Account or (ii) liquidate one or more Investment Account Assets in accordance
with Section 4.1 hereof (but only to the extent that such liquidation is
necessary to generate funds for any such distribution or distributions) and
transfer such liquidation proceeds to the Payment Account. In the case of a
distribution to be made to the Grantor pursuant to Section 5.8 hereof in order
to permit the Grantor to pay Extraordinary Expenses stated by the Grantor to be
due and payable, the Trustee shall (x) liquidate one or more Investment Account
Assets in accordance
 

 
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with Section 4.1 hereof (but only to the extent that such liquidation is
necessary to generate funds for such distribution), (y) transfer any proceeds
from such liquidation to the Payment Account and (z) make such distribution to
the Grantor solely from such liquidation proceeds.
 
Section 5.2.  Distributions to the Trustee. The Trustee may from time to time
make distributions from the Payment Account to itself in order to satisfy any
obligations that are then due and payable to it pursuant to Section 7.11 hereof;
provided, that the Trustee has previously sought but not obtained payment from
the Grantor and XL Capital and any grace periods for the payment of such
obligations have expired. If after all Assets have been distributed from the
Payment Account (after giving effect to a liquidation of Investment Account
Assets and the transfer of the proceeds from such liquidation to the Payment
Account pursuant to Section 5.1 hereof) any obligations that are then due and
payable to the Trustee pursuant to Section 7.11 hereof remain unsatisfied, the
Trustee may make such further distributions to itself from the Repayment Account
as are necessary to satisfy such remaining obligations; provided, that the
Trustee has previously sought but not obtained payment from the Grantor or XL
Capital and any grace periods for the payment of such obligations have expired.
The Trustee shall notify each of the Beneficiaries in writing at least five
Business Days prior to making a distribution pursuant to this Section 5.2.
 
Section 5.3.  Distributions from the Payment Account to the Asset Swap
Counterparty. The Asset Swap Counterparty may, by delivering via facsimile a
written certification substantially in the form attached hereto as Exhibit C to
the Trustee and a copy of such written certification to each other Beneficiary,
from time to time request a distribution from the Payment Account in order to
satisfy any obligations stated by the Asset Swap Counterparty to be due and
payable (irrespective of whether any grace periods applicable thereto have
expired) on the Specified Distribution Date by the Grantor to the Asset Swap
Counterparty under the Asset Swap Agreement. The Trustee shall, subject to
Section 5.9 hereof, distribute the requested amount to the Asset Swap
Counterparty or its designee on the Specified Distribution Date.
 
Section 5.4.  Distributions from the Payment Account to the Interest Rate Swap
Counterparty. The Interest Rate Swap Counterparty may, by delivering via
facsimile a written certification in the form customarily produced in accordance
with its internal procedures to the Trustee and a copy of such written
certification to each other Beneficiary, from time to time request a
distribution from the Payment Account in order to satisfy any obligations stated
by the Interest Rate Swap Counterparty to be due and payable (irrespective of
whether any grace periods applicable thereto have expired) on the Specified
Distribution Date by the Grantor to the Interest Rate Swap Counterparty under
the Interest Rate Swap Agreement. The Trustee shall, subject to Section 5.9
hereof, distribute the requested amount to the Interest Rate Swap Counterparty
or its designee on the Specified Distribution Date.
 
Section 5.5.  Distributions from the Payment Account to the Ceding Insurers. Any
Ceding Insurer may, by delivering via facsimile a written certification
substantially in the form attached hereto as Exhibit C to the Trustee and a copy
of such written certification to each other Beneficiary, from time to time
request a distribution from the Payment Account in order to satisfy any
obligations stated by the Ceding Insurer to be due and payable (irrespective of
 

 
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whether any grace periods applicable thereto have expired) on the Specified
Distribution Date by the Grantor to the Ceding Insurer under the Reinsurance
Agreement; provided, in each case, that (i) such written certification certifies
that (a) the distribution will not result in the total amount of funds
distributed from the Trust Account pursuant to this Section 5.5 and Section 5.6
hereof exceeding, in the aggregate, $350,000,000 as of the time of distribution
and (b) there has not been commenced any winding up, liquidation or
insolvency-related reorganization of XL Capital and (ii), if the distribution is
requested in respect of a claim under the Reinsurance Agreement, a copy of the
quarterly or interim report or the commutation report relating to such claim is
attached to the written certification. The Trustee shall, subject to Section 5.9
hereof, distribute the requested amount to the Ceding Insurer or its designee on
the Specified Distribution Date, but only against the concurrent issuance and
delivery to the Grantor by XL Capital of an amount of XL Preferred Securities
having an aggregate liquidation preference that is equal to the amount of funds
so distributed. Any written certification to be delivered by a Ceding Insurer
hereunder may be executed and delivered on its behalf by XLIB.
 
Section 5.6.  Distributions from the Payment Account to XLIB. XLIB may, by
delivering via facsimile a written certification substantially in the form
attached hereto as Exhibit C to the Trustee and a copy of such written
certification to each other Beneficiary, request a distribution from the Payment
Account to fund amounts stated to be due and payable (irrespective of whether
any grace periods applicable thereto have expired) to XLIB or its designee on
the Specified Distribution Date against the issuance and delivery of XL
Preferred Securities to the Grantor pursuant to Sections 2.2(a)(ii) and 2.3(a)
of the Securities Issuance Agreement; provided, in each case, that such written
certification certifies that (i) the distribution will not result in the total
amount of funds distributed from the Trust Account pursuant to Section 5.5
hereof and this Section 5.6 exceeding, in the aggregate, $350,000,000 as of the
time of distribution and (ii) there has not been commenced any winding up,
liquidation or insolvency-related reorganization of XL Capital. The Trustee
shall, subject to Section 5.9 hereof, distribute the requested amount to XLIB or
its designee on the Specified Distribution Date, but only against the concurrent
issuance and delivery to the Grantor by XL Capital of an amount of XL Preferred
Securities having an aggregate liquidation preference that is equal to the
amount of funds so distributed.
 
Section 5.7.  Distributions from the Payment Account to XL Capital. XL Capital
may, by delivering via facsimile a written certification substantially in the
form attached hereto as Exhibit C to the Trustee and a copy of such written
certification to each other Beneficiary, from time to time request a
distribution from the Payment Account (i) in order to satisfy any obligations
stated by XL Capital to be due and payable (irrespective of whether any grace
periods applicable thereto have expired) on the Specified Distribution Date by
the Grantor to XL Capital under Section 3.4 of the Securities Issuance Agreement
or (ii) of Payment Account Net Earnings. The Trustee shall, subject to Section
5.9 hereof and the limitation set forth in the immediately succeeding sentence,
distribute the requested amount to XL Capital or its designee on the Specified
Distribution Date. Any distribution of Payment Account Net Earnings to XL
Capital pursuant to this Section 5.7 shall be limited to the Payment Account Net
Earnings in the Payment Account on the Specified Distribution Date after any
distributions that are required to
 

 
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be made to the Trustee, the Asset Swap Counterparty, the Interest Rate Swap
Counterparty, the Ceding Insurers and XLIB, or any of them, on the Specified
Distribution Date have been made.
 
Section 5.8.  Distributions from the Payment Account to the Grantor. The Grantor
may, by delivering via facsimile a written certification substantially in the
form attached hereto as Exhibit C to the Trustee and a copy of such written
certification to each other Beneficiary, from time to time request a
distribution from the Payment Account in order to (i) pay any Extraordinary
Expenses stated by the Grantor to be due and payable (irrespective of whether
any grace periods applicable thereto have expired) on the Specified Distribution
Date or (ii) make payments on the Issuer Preferred Securities on the Specified
Distribution Date in accordance with their terms, as in effect on the date
hereof. The Trustee shall, subject to Section 5.9 hereof, distribute the
requested amount to the Grantor or its designee on the Specified Distribution
Date.
 
Section 5.9.  Priority of Distributions from the Payment Account. If two or more
distributions from the Payment Account are to be made on the same date, the
Trustee shall make such distributions in the following order of priority: first,
to the Trustee pursuant to Section 5.2 hereof; second, to the Asset Swap
Counterparty or its designee pursuant to Section 5.3 hereof; third, to the
Interest Rate Swap Counterparty or its designee pursuant to Section 5.4 hereof;
fourth, to the Ceding Insurers or their respective designees pursuant to Section
5.5 hereof; fifth, to XLIB or its designee pursuant to Section 5.6 hereof;
sixth, to XL Capital or its designee pursuant to Section 5.7 hereof; and,
seventh, to the Grantor or its designee pursuant to Section 5.8 or 8.1(b)
hereof.
 
ARTICLE VI

 
DISTRIBUTIONS FROM THE REPAYMENT ACCOUNT
 
Section 6.1.  Repayment Option. The Grantor shall have the option to deposit the
full amount of Returned XL Preferred Securities into the Returned Securities
Account at any time during the Securities Return Period. If at the time of
expiration of the Securities Return Period the Grantor has not deposited the
full amount of Returned XL Preferred Securities into the Returned Securities
Account, the Trustee shall distribute all Repayment Cash Account Assets to XLIB
or its designee on the first Business Day following the expiration of the
Securities Return Period. If the Grantor deposits the full amount of Returned XL
Preferred Securities into the Returned Securities Account at any time during the
Securities Return Period, the Grantor shall have the option (the “Repayment
Option”), exercisable during the period commencing on the first date on which
the Ceding Insurers deposited the full amount of the Policy Repayments into the
Repayment Cash Account and ending at 5 p.m., New York time, on the tenth
Business Day thereafter (the “Repayment Option Period”), to receive a
distribution of either (i) all the Returned Securities Account Assets in the
Returned Securities Account at the time of the distribution or (ii) all
Repayment Cash Account Assets in the Repayment Cash Account at the time of the
distribution. The Grantor may exercise the Repayment Option at any time during
the Repayment Option Period by delivering a written notice (an “Exercise
Notice”) to the Trustee
 

 
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(with a copy to XLIB) stating that the Grantor has exercised the Repayment
Option and the type of distribution that the Grantor has elected to receive.
 
Section 6.2.  Distributions Prior to the Exercise of the Repayment Option.
 
(a)  The Trustee shall, subject to Section 6.4 hereof, promptly following the
receipt thereof distribute to the Grantor all dividends, if any, paid on the
Returned XL Preferred Securities (irrespective of when declared) while such
Returned XL Preferred Securities are in the Returned Securities Account. Upon
making any distribution to the Grantor pursuant to this Section 6.2(a), the
Trustee shall, subject to Section 6.4 hereof, contemporaneously distribute to
XLIB or its designee all Repayment Cash Account Net Earnings, if any, in the
Repayment Cash Account at the time of the distribution.
 
(b)  If during the Repayment Option Period all or a portion of the Returned XL
Preferred Securities in the Returned Securities Account are redeemed in
accordance with their terms, the Trustee shall, subject to Section 6.4 hereof,
promptly following the receipt thereof distribute to the Grantor the full
redemption price (including any accrued dividends) paid on the Returned XL
Preferred Securities so redeemed. Upon making any distribution to the Grantor
pursuant to this Section 6.2(b), the Trustee shall, subject to Section 6.4
hereof, contemporaneously distribute to XLIB or its designee an amount of
Repayment Cash Account Assets that is equal to the sum of (i) the aggregate
liquidation preference of the Returned XL Preferred Securities redeemed in
connection with the distribution to the Grantor and (ii) the Temporary Repayment
Cash Account Net Earnings as determined and notified to the Trustee by XLIB. For
purposes of this Trust Agreement, “Temporary Repayment Cash Account Net
Earnings” means an amount of Repayment Cash Account Net Earnings that is equal
to the product of (a) the Repayment Cash Account Net Earnings in the Repayment
Cash Account at the time of the distribution to XLIB or its designee multiplied
by (b) a fraction, the numerator of which is the aggregate liquidation
preference of the Returned XL Preferred Securities redeemed in connection with
the distribution to the Grantor and the denominator of which is the aggregate
liquidation preference of all of the Returned XL Preferred Securities in the
Returned Securities Account immediately prior to such redemption.
 
(c)  Subject to Section 6.4 hereof, any distribution pursuant to this Section
6.2 to the Grantor or its designee or to XLIB or its designee shall be made free
and clear of any claim by any other person.
 
Section 6.3.  Distributions following the Exercise of the Repayment Option.
Within one Business Day of receiving a completed Exercise Notice from the
Grantor, the Trustee shall, subject to Section 6.4 hereof, make a distribution
from the Repayment Account to the Grantor or its designee in accordance with the
election made by the Grantor in the Exercise Notice. If by the expiration of the
Repayment Option Period the Trustee shall not have received a properly completed
Exercise Notice from the Grantor, (i) the Grantor shall be deemed to have
elected to receive a distribution from the Returned Securities Account
consisting of all Returned Securities Account Assets at the time of the
distribution and (ii) the Trustee shall, subject to Section 6.4 hereof, make a
distribution on the first Business Day following the expiration of the
 

 
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Repayment Option Period to the Grantor or its designee in accordance with such
deemed election. Upon making any distribution to the Grantor pursuant to this
Section 6.3, the Trustee shall, subject to Section 6.4 hereof, contemporaneously
distribute all other Repayment Account Assets in the Repayment Account at the
time of the distribution to XLIB or its designee. Subject to Section 6.4 hereof,
any distribution pursuant to this Section 6.3 to the Grantor or its designee or
to XLIB or its designee shall be made free and clear of any claim by any other
person.
 
Section 6.4.  Priority of Distributions from the Repayment Account. If the
Trustee is to make a distribution from the Repayment Account to itself pursuant
to Section 5.2 hereof on any date on which a distribution from the Repayment
Account is also to be made to the Grantor or its designee or XLIB or its
designee pursuant to Section 6.2 or Section 6.3 hereof, the Trustee shall make
such distributions, first, to the Trustee and, second, to XLIB or its designee
and, if applicable, to the Grantor or its designee. Any distribution from the
Repayment Account to the Trustee pursuant to this Section 6.4 shall be made
equally out of the Repayment Cash Account Assets and the Returned Securities
Account Assets.
 
ARTICLE VII

 
RIGHTS AND DUTIES OF THE TRUSTEE
 
Section 7.1.  Acceptance of Assets by the Trustee. The Trustee shall not accept
any Assets for deposit into the Trust Account (other than cash) unless such
Assets are issued or registered in such form that they are readily negotiable to
the Trustee. For the purposes of the preceding sentence, Assets that are either
issued in “bearer” form or issued or registered in the name of the Trustee or
its nominee shall be deemed to be in such negotiable form or specifically
endorsed by the Grantor to the Trustee in blank. Any Assets received by the
Trustee that are not in such proper negotiable form shall not be accepted by the
Trustee and shall be returned to the appropriate person as unacceptable. In no
case shall any Asset to be credited to the Trust Account be registered in the
name of the Grantor, payable to the order of the Grantor or specially endorsed
to the Grantor except to the extent the foregoing have been specially endorsed
by the Grantor to the Trustee or in blank.
 
Section 7.2.  Collection of Interest, Dividends and Other Investment Income. The
Trustee is hereby authorized, without prior direction from, or notice to, any of
the Beneficiaries to demand payment of and collect all interest payments and
other investment income on the Assets comprising the Trust Account, if any. The
Trustee shall initially (i) deposit all interest payments and other investment
income on Investment Account Assets into the Investment Account, (ii) all
interest payments and other investment income on Payment Account Assets into the
Payment Account, (iii) all interest payments and other investment income on
Repayment Cash Account Assets into the Repayment Cash Account and (iv) all
dividend payments and other investment income on Returned Securities Account
Assets into the Returned Securities Account.
 
Section 7.3.  Obligations of the Trustee. The Trustee agrees to hold, transfer
and distribute Assets in the Trust Account in accordance with the provisions
expressed herein.
 

 
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Section 7.4.  Responsibilities of Trustee. The Trustee, in the administration of
this Trust Account, shall be bound solely by the express provisions herein, the
written notices and certifications contemplated hereby and such further
directions as the appropriate party or parties may, under the conditions herein
provided, deliver to the Trustee. The Trustee shall be under no obligation to
enforce the Grantor’s obligations under this Trust Agreement, except as
otherwise expressly provided or directed pursuant hereto. The Trustee’s
responsibilities shall be limited to the safe holding of the Assets comprising
the Trust Account, and the Trustee shall be liable only for its own negligence,
willful misconduct, lack of good faith or breaches of fiduciary duties or
express obligations under this Trust Agreement. The Trustee undertakes to
perform such duties and only such duties as are specifically set forth in this
Trust Agreement, and no implied covenants or obligations shall be read into this
Trust Agreement against the Trustee.
 
Section 7.5.  Consultation with Counsel. The Trustee may consult with counsel
selected by it, who may be counsel for a Beneficiary. If such counsel is not an
employee of the Trustee, the Grantor or any of the Other Beneficiaries, the
reasonable fees and expenses of such counsel shall be jointly and severally
borne by the Grantor and XL Capital. The opinion of said counsel shall be full
and complete authority and protection for the Trustee with respect to any action
taken, suffered or omitted by it in good faith and in accordance with the
opinion of said counsel.
 
Section 7.6.  Monthly Report, Etc. (a)The Trustee shall provide an activity
report to the Beneficiaries upon inception of the Trust Account and within five
Business Days following the end of each month, which report shall, in reasonable
detail, show with respect to each of the Investment Account, the Payment Account
and the Repayment Account (i) all deposits, distributions, transfers and
substitutions during such month; (ii) a listing of securities held and cash and
cash equivalent balances as of the day of such report; (iii) the fair market
value of each Asset held in such Account (other than cash held in U.S. dollars)
and the amount of cash held in U.S. dollars as of the day of such report; and
(iv) the cost basis of each Asset held in such Account (other than cash held in
U.S. dollars). The Trustee further agrees to forward upon request to the
Beneficiaries a certified list and valuation of all Assets held under this Trust
Agreement.
 
(b)  The Trustee shall utilize the services of a nationally recognized reporting
service in order to determine the fair market value of any Assets in the Trust
Account (other than cash held in United States dollars) on a monthly basis, and
the Beneficiaries shall accept and agree to such values absent manifest error;
provided, that such values are to be stated in United States dollars. The
Trustee shall notify the Beneficiaries of the identity of the reporting service
utilized by the Trustee for such purpose.
 
(c)  The Trustee shall, promptly following receipt by the Trustee, send to the
Asset Swap Counterparty and XL Capital copies of any notices, reports or
information that the Trustee receives concerning any security then being held as
part of the Portfolio, including, information concerning any unscheduled payment
the Trustee receives in respect of any such security.
 

 
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(d)  The Trustee shall, if requested by the Asset Swap Counterparty, request
copies of any notices, reports or information with respect to any security then
being held as part of the Portfolio which the Asset Swap Counterparty would be
entitled to receive if such security were held by the Asset Swap Counterparty.
 
Section 7.7.  Resignation or Removal of the Trustee. (a)Subject to clause (b)
below, the Trustee may, at any time, resign from, and terminate its capacity
hereunder by providing at least ninety days’ prior written notice to the
Beneficiaries. The Grantor may remove the Trustee by providing at least ninety
days’ prior written notice of such removal to the Trustee, provided that such
removal is consented to in writing by each of the Other Beneficiaries (who may
not unreasonably withhold or delay their consent). A resignation or removal of
the Trustee shall not become effective until a successor to the Trustee shall
have been duly appointed and approved by the Beneficiaries or by a court
pursuant to Section 7.7(b) hereof and all Assets held within the Trust Account
have been duly transferred to such successor.
 
(b)  The Grantor, upon receiving a notice of resignation from the Trustee or
delivering a notice of removal to the Trustee, shall promptly appoint a
successor trustee acceptable to the Other Beneficiaries, by written instrument,
copies of which instrument shall be delivered to the retiring Trustee, the Other
Beneficiaries and the successor trustee. If no successor trustee shall have been
appointed and accepted appointment as provided in this Section 7.7 within ninety
days following the written notice of resignation or removal, as the case may be,
the retiring Trustee may petition, at the expense of the Grantor, any court of
competent jurisdiction for appointment of a successor trustee. Such court may
thereupon, after prescribing such notice, if any, as it may deem proper, appoint
a successor trustee. Upon the Trustee’s delivery of the Assets in the Trust
Account to the successor trustee along with a closing statement showing all
activities from the last month report, the Trustee shall be discharged of
further responsibilities hereunder.
 
Section 7.8.  Successor Trustee. Any successor trustee appointed as provided in
Section 7.7 hereof, shall execute, acknowledge and deliver to the Beneficiaries
and to its predecessor Trustee an instrument accepting such appointment
hereunder and agreeing to be bound by the terms and conditions hereof. Upon the
Trustee’s delivery of the Assets held in the Trust Account to the successor
trustee along with a closing statement showing all activities from the last
month report, the successor trustee, without any further act, deed or
conveyance, shall become fully vested with all rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Trustee herein. The predecessor Trustee shall deliver to the successor
trustee all documents relating to the Assets held within the Trust Account
delivered to it, together with any Assets remaining in the Trust Account. In
addition, the predecessor Trustee and, upon request of the successor trustee,
the Grantor shall execute and deliver such instruments and do such other things
as may reasonably be required for more fully and certainly vesting and
confirming in the successor trustee all such rights, powers, duties and
obligations.
 
Section 7.9.  Merger, Conversion, Consolidation or Succession to Business. Any
corporation or national association into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation or national
association resulting from any
 

 
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merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation or national association succeeding to all or substantially all
of the corporate trust business of the Trustee shall be the successor of the
Trustee hereunder.
 
Section 7.10.  Release of Information. The Trustee shall respond to any and all
reasonable requests for information concerning the Trust Account or the Assets
held therein by any of the parties to this Trust Agreement.
 
Section 7.11.  Indemnification and Charges of the Trustee. (a)The Grantor and XL
Capital hereby jointly and severally agree to indemnify the Trustee and its
directors, officers, employees and agents for, and hold the Trustee and its
directors, officers, employees and agents harmless against, any loss, liability,
costs or expenses (including reasonable attorneys’ fees and expenses and the
costs and expenses of defending the Trustee or its directors, officers,
employees or agents against any claim) incurred or made without negligence,
willful misconduct, lack of good faith or breach of the Trustee’s fiduciary
duties or express obligations under this Trust Agreement, arising out of or in
connection with the performance of the Trustee’s obligations in accordance with
the provisions of this Trust Agreement. The Grantor and XL Capital hereby
acknowledge that the foregoing indemnities shall survive the resignation or
removal of the Trustee.
 
(b)  The Grantor and XL Capital hereby jointly and severally agree to pay all
costs, fees or expenses charged by the Trustee (including reasonable fees and
expenses of counsel as provided for in Section 7.5 hereof) for acting as the
Trustee pursuant to this Trust Agreement as set forth in the fee letter between
the Grantor and the Trustee.
 
(c)  The provisions of this Section 7.11 shall survive the termination of this
Trust Agreement.
 
Section 7.12.  Limitations of Responsibilities of Trustee. (a)The Trustee shall
not be responsible for determining the amount of Assets required to be deposited
into any Account.
 
(b)  Subject to Section 7.4 hereof, the Trustee shall not be liable with respect
to any action taken or omitted to be taken by it (i) in accordance with the
Investment Guidelines and Investment Notices received from the Asset Swap
Counterparty and (ii) the written notices from XL Capital pursuant to Section
4.2 hereof. In addition, subject to the immediately succeeding sentence the
Trustee shall not be liable with respect to any action taken or omitted to be
taken by it in accordance with any written directions received by the Trustee
from the Grantor or the Other Beneficiaries relating to the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this Trust
Agreement. If any such written direction conflicts on its face with another
direction signed by or on behalf of a Beneficiary or its Authorized
Representative and delivered to the Trustee, the Trustee shall, to the extent
any such direction pertains to a distribution to be made hereunder, make such
distribution as provided in Section 5.9 hereof and shall not be liable for doing
so. No provision of this Trust Agreement shall require the Trustee to
 

 
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expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers unless the Trustee shall have received reasonable assurance
that it will be reimbursed therefor.
 
(c)  The Trustee shall not be bound to make any investigation into the facts or
matters stated in any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document. The Trustee may execute any
of the trusts or powers hereunder or perform any duties hereunder either
directly or by or through agents, attorneys, custodians or nominees. The Trustee
makes no representations as to the validity or sufficiency of this Trust
Agreement.
 
(d)  Notwithstanding anything to the contrary in this Trust Agreement, in no
event shall the Trustee be liable under or in connection with this Trust
Agreement for indirect, special, incidental, punitive or consequential losses or
damages of any kind whatsoever, including but not limited to lost profits,
whether or not foreseeable, even if the Trustee, has been advised of the
possibility thereof and regardless of the form of action in which such damages
are sought.
 
(e)  Subject to Section 7.4 hereof, the Trustee shall be protected in acting
upon any statement, notice, resolution, request, consent, order certificate,
report, appraisal, opinion, telegram, cablegram, letter or other paper or
document believed by the Trustee to be genuine and to have been signed, sent or
presented by the proper party or parties or their Authorized Representatives.
 
Section 7.13.  Force Majeure. Notwithstanding anything contained in this Trust
Agreement to the contrary, the Trustee shall not be responsible or liable for
its failure to perform under this Trust Agreement or for any losses to the Trust
Account resulting from any event beyond the reasonable control of the Trustee,
its agents, or its subcustodians, including but not limited to nationalization,
strikes, expropriation, devaluation, seizure, or similar action by any
governmental authority, agency or body de facto or de jure; or enactment,
promulgation, imposition, or enforcement by any such governmental authority,
agency or body of currency restrictions, exchange controls, levies, or other
charges affecting the Assets; or the breakdown, failure, or malfunction of any
utilities or telecommunications systems; or any order or regulation of any
banking or securities industry regulatory body or organization including changes
in market rules and market conditions affecting the execution or settlement of
transactions; or acts of war, terrorism, insurrection, or revolution; or acts of
God; or any other similar event or the unavailability of the Federal Reserve
Bank wire or telex or other wire or communication facility maintained by a
clearing system or otherwise. This Section 7.13 shall survive the termination of
this Trust Agreement.
 
Section 7.14.  Deposit. The Trustee may deposit any Assets in the Trust Account
in a book-entry account maintained at the Federal Reserve Bank of New York or in
depositories such as the Depository Trust Company and the Participants Trust
Company. Assets may be held in the name of a nominee maintained by the Trustee
or by any such depository.
 

 
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Section 7.15.  Certificates of the Grantor and the Other Beneficiaries. Whenever
in the administration of the Trust Account created by this Trust Agreement, the
Trustee shall deem it necessary or desirable that a matter be proved or
established prior to taking, suffering or omitting any action thereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
statement or certificate signed by or on behalf of a Beneficiary or its
Authorized Representative and delivered to the Trustee and said certificate
shall, subject to the immediately succeeding sentence, be full warrant to the
Trustee for any action taken, suffered or omitted by it on the faith thereof;
provided, that the Trustee, at its sole discretion, may in lieu thereof accept
other evidence of the fact or matter or may require such other or additional
evidence as it may deem reasonable. If any such statement or certificate
conflicts on its face with another statement or certificate signed by or on
behalf of a Beneficiary or its Authorized Representative and delivered to the
Trustee, the Trustee shall, to the extent any such statement or certificate
pertains to a distribution to be made hereunder, make such distribution as
provided in Section 5.9 hereof and shall not be liable for doing so.
 
ARTICLE VIII

 
TERMINATION OF TRUST AGREEMENT
 
Section 8.1.  Termination. (a)This Trust Agreement will terminate on the Final
Redemption Date (the “Termination Date”). The Trust Agreement may be terminated
by the Grantor prior to the Termination Date with the written consent of each of
the Other Beneficiaries upon 60 days’ written notice to the Trustee; provided,
that such termination by the Grantor shall not be effective until such time as
the Grantor has provided the Other Beneficiaries with such alternative security
for the Grantor’s obligations under the Reinsurance Agreement, the Securities
Issuance Agreement, the Asset Swap Agreement and the Interest Rate Swap
Agreement, respectively, as the Other Beneficiaries may request in their sole
discretion.
 
(b)  Upon any such termination and subject to Sections 5.1 and 5.9 hereof, the
Trustee shall distribute any remaining Assets held in the Trust Account to or as
directed by the Grantor, and shall take any and all commercially practicable
steps necessary to absolutely and unequivocally transfer all right, title and
interest in such Assets and to deliver physical custody, if applicable, in such
Assets to the Grantor or as otherwise directed by the Grantor.
 
ARTICLE IX

 
GENERAL PROVISIONS
 
Section 9.1.  Failure to Act. The failure of any party hereto at any time to
exercise any of the rights or powers conferred upon it herein shall not
constitute a waiver of its right to exercise, or stop it from exercising, any
rights at any subsequent time, and such failure shall not reduce in any degree
any liability or obligation for which any other party is bound hereunder.
 

 
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Section 9.2.  Amendments. This Trust Agreement may be altered, amended or
terminated at any time only by written agreement executed by each party hereto;
provided that the consent of the Trustee shall not be required to the extent
that any such alteration, amendment or termination would not reasonably be
expected to have the effect of increasing or expanding the Trustee’s obligations
or duties under this Trust Agreement. A copy of any such written agreement not
executed by the Trustee shall be delivered to the Trustee by the Beneficiaries.
 
Section 9.3.  Additional Parties. Any Ceding Insurer who is no a party to this
Trust Agreement as of the date hereof shall become an additional party to this
Trust Agreement as a Beneficiary with all of the rights and obligations thereof
by executing a counterpart signature page and delivering such counterpart
signature page to the Trustee.
 
Section 9.4.  Assignment. This Trust Agreement may not be assigned without the
written consent of the parties hereto. Subject to the receipt of such written
consent, any such assignment shall be binding upon and inure to the benefit of
the parties hereto, their successor and assigns. Notwithstanding anything in
this Trust Agreement to the contrary, in no event shall any resignation or
removal of the Trustee be effective until a successor trustee has been duly
appointed and approved by the Beneficiaries or by a court and all Assets in the
Trust Account have been duly transferred to the new trustee, as provided in
Section 7.7 hereof.
 
Section 9.5.  Limited Recourse. All obligations of and any claims against the
Grantor under this Trust Agreement shall be with recourse solely to the
Grantor’s Assets (other than its ordinary share capital of U.S. $5,000, the
amount equal to U.S. $1,500 paid to the Grantor as a transaction fee, any
interest income earned on such excluded amounts and the Cayman Islands bank
account in which such amounts are held) for satisfaction of the Grantor’s
obligations hereunder.
 
All obligations of and any claims against the Grantor under this Trust Agreement
shall be extinguished and shall not thereafter revive in the event that, at any
time, the Grantor’s assets (other than the cash amounts representing its
ordinary share capital of U.S. $5,000, the amount equal to U.S. $1,500 paid to
the Grantor as a transaction fee, any interest income earned on such excluded
amounts and the Cayman bank account in which such amounts are held) are
exhausted. The Trustee and the Other Beneficiaries shall have no further claim
thereafter against the Grantor, its directors, officers or shareholders for any
shortfall.
 
The provisions of this Section 9.5 shall survive the termination of this Trust
Agreement.
 
Section 9.6.  Non-Petition. The Trustee and the Beneficiaries, by entering into
this Trust Agreement, hereby covenant and agree that they will not at any time
institute against each other, or join in any institution against each other of,
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under U.S. federal or state or any non-U.S.
bankruptcy or similar law in connection with any obligations hereunder until the
expiration of one year and one day (or if longer, the applicable preference
period then in
 

 
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effect (plus one day) under any applicable law) from the Termination Date. The
provisions of this Section 9.6 shall survive the termination of this Trust
Agreement.
 
Section 9.7.  Paragraph Headings. The paragraph headings contained herein are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
 
Section 9.8.  Counterparts. This Trust Agreement may be executed in any number
of counterparts or by attached documents, all of which shall constitute one and
the same original.
 
Section 9.9.  Notices. (a)Except as otherwise provided herein, all notices,
requests, demands and other communications required or permitted to be given to
the Grantor, the Asset Swap Counterparty, Interest Rate Swap Counterparty, the
Ceding Insurers or XL Capital under this Trust Agreement shall be in writing and
shall be deemed to have been duly given, made and received when delivered
against receipt or upon actual receipt of (i) personal delivery, (ii) delivery
by reputable overnight courier, (iii) delivery by facsimile transmission with
telephonic confirmation or (iv) delivery by registered or certified mail,
postage prepaid, return receipt requested, addressed as set forth below:
 

Grantor:
 
Stoneheath Re
     
c/o HSBC Financial Services (Cayman)
     
Limited
     
Strathvale House
     
North Church Street
     
P.O. Box 1109
     
Georgetown
     
Grand Cayman, KY1-1102
     
Cayman Islands
     
Attention: The Directors
     
Telephone: (345)-949-7755
     
Facsimile: (345)-949-7634
         
Asset Swap Counterparty:
 
Goldman Sachs International
     
Goldman Sachs International
     
Peterborough Court
     
133 Fleet Street
     
London EC4A 2BB
     
England
     
Attention: IBD Legal
     
Telephone: 44-(20)-7774-0374
     
Facsimile: 44-(20)-7774-4123
         
Interest Rate Swap Counterparty:
 
IXIS Financial Products Inc.
     
9 West 57th Street, 35th Floor
     
New York, New York 10019
 

 
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United States of America
     
Attention: Swaps Administration
     
Telephone: (212)-891-6194
     
Facsimile: (212)-891-0660
         
Ceding Insurers:
 
XL Insurance (Bermuda) Ltd
     
XL House
     
One Bermudiana Road
     
Hamilton, HM 11 Bermuda
     
Attention: Chief Operating Officer and
     
Director of Global Programs
     
Telephone: (441)-294-7742
     
Facsimile: (441)-292-3919
         
Cc:
 
XL Insurance (Bermuda) Ltd
     
XL House
     
One Bermudiana Road
     
Hamilton HM 11 Bermuda
     
Attention: Chief Financial Officer
     
Telephone: (441)-294-7379
     
Facsimile: (441)-292-3919
         
XL Capital:
 
XL Capital Ltd
     
XL House
     
One Bermudiana Road
     
Hamilton, HM 11 Bermuda
     
Attention: Executive Vice President-
     
General Counsel-Corporate Affairs-
     
Secretary
     
Telephone: (441)-292-8515
     
Facsimile: (441)-295-2840
 

Each party hereto may alter the address to which notices, requests, demands and
other communications are to be sent to such party by giving notice of such
change of address in conformity with the provisions of this Section 9.9.
 
(b)  Unless otherwise specifically provided herein, every notice, direction,
request, demand, acknowledgment or other communication required or permitted to
be given to the Trustee under this Trust Agreement shall be given and made under
the terms hereof, shall be in writing and may be made or given by facsimile and
shall be deemed to have been duly given or made (i) when received by the Trustee
and (ii) when addressed as follows:
 
Trustee:
 
The Bank of New York
     
101 Barclay Street, 21st Floor
     
New York, New York 10286
 
 

 
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Attention: Global Structured Finance
   
Telephone: (212)-298-1550
   
Facsimile: (212)-815-5915
 

Section 9.10.  Severability. In the event any provision of this Trust Agreement
shall be held invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the remaining provisions of this Trust
Agreement.
 
Section 9.11.  Governing Law. Both this Trust Agreement and the Trust Account
shall be governed and construed by the laws of the State of New York.
 
Section 9.12.  Dispute Resolution. Notwithstanding any other provision contained
in this Trust Agreement, any controversy or claim arising out of or relating to
this Trust Agreement shall be resolved by binding arbitration administered by
the American Arbitration Association, pursuant to its Commercial Arbitration
Rules. This agreement to arbitrate shall be enforceable under the Federal
Arbitration Act, 9 U.S.C. §1 et seq. The arbitration shall be held in New York,
New York before three neutral arbitrators, none of which shall be
party-appointed and all of which shall be selected in accordance with Rule 11 of
the Commercial Arbitration Rules of the American Arbitration Association. The
arbitrators may hear and rule on dispositive motions as part of the arbitration
proceeding, including motions for judgment on the pleadings, summary judgment
and partial summary judgment. The arbitration award shall be in writing and
shall state the findings of fact and conclusions of law upon which it is based.
Judgment upon the award rendered by the arbitrators may be entered in any court
having competent jurisdiction. The parties covenant that they will participate
in the arbitration in good faith and that they will share equally its costs
(which, in the case of the Grantor, shall constitute Extraordinary Expenses).
The provisions of this Section 9.12 shall be enforceable in any court of
competent jurisdiction, and the parties hereto shall bear their own costs
(which, in the case of the Grantor, shall constitute Extraordinary Expenses) in
the event of any proceeding to enforce this Trust Agreement. The decision of the
arbitrators shall be final and conclusive and shall not be subject to appeal
absent manifest error. In no event shall the arbitrators award any party
punitive, special, consequential or exemplary damages. By agreeing to
arbitration, the parties hereto do not intend to deprive any court with
jurisdiction of its ability to issue a preliminary injunction, attachment or
other form of provisional remedy in aid of the arbitration and a request for
such provisional remedies by a party to a court shall not be deemed a waiver of
this agreement to arbitrate, and in addition to the authority conferred upon the
panel by the rules specified above, the panel shall also have the authority to
grant provisional remedies, including injunctive relief.
 
[Remainder of page intentionally left blank.]
 

 

 

 
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IN WITNESS OF THE ABOVE, this Trust Agreement is executed by the parties’ duly
authorized officers on the dates indicated below with an effective date of
December 12, 2006.
 
GOLDMAN SACHS INTERNATIONAL,
as Beneficiary
 
By /s/ Dan Parker        
Name: Dan Parker
Title: Authorised Signatory
Date: 12-December-2006
 
 
Attest: /s/ Sarah Taylor        
Name: Sarah Taylor
Title: Authorised Signatory
Date: 12-December-2006

 

 

 
[Signature Page (Trust Agreement)]

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XL INSURANCE (BERMUDA) LTD
on behalf of itself and the OTHER CEDING INSURERS,
as Beneficiaries
 
By /s/ C. Stanley Lee        
Name: C. Stanley Lee
Title: SVP, Chief Financial Officer
Date: December 12, 2006
 
 
Attest: /s/ Georgette Barit        
Name: Georgette Barit
Title: Asst. Secretary
Date: December 12, 2006

 

 

 

 

 
[Signature Page (Trust Agreement)]

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XL CAPITAL LTD,
as Beneficiary
 
By: /s/ Kirstin Romann Gould
Name: Kirstin Romann Gould
Title: Secretary
Date: December 12, 2006
 
 
Attest: /s/ Robert Kuzloski        
Name: Robert Kuzloski
Title: Vice President
Date: December 12, 2006

 

 

 

 

 
[Signature Page (Trust Agreement)]

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STONEHEATH RE,
as Grantor and Beneficiary
 
By /s/ Linda Haddleton    
Name: Linda Haddleton
Title: Director
Date: December 12, 2006
 
 
Attest: /s/ Liz Frederick        
Name: Liz Frederick
Title: Assistant Manager
Date: December 12, 2006

 
[Signature Page (Trust Agreement)]

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THE BANK OF NEW YORK
not in its individual capacity, but solely as the
Trustee
 
By /s/ Christopher Curti        
Name: Christopher Curti
Title: Assistant Vice President
Date: December 12, 2006
 
 
Attest: /s/ Joseph Constantino        
Name: Joseph Constantino
Title: Assistant Vice President
Date: December 12, 2006
 

 

 
[Signature Page (Trust Agreement)]

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EXHIBIT A
 
 
INVESTMENT GUIDELINES
 

 
 

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ANNEX A
 
LIST OF INITIAL PERMITTED INVESTMENTS
 

 
 

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ANNEX B
 
LIST OF ISSUERS OF ELIGIBLE ASSETS
 
 

 
 

 
 

 
 

 
 

 

 
 

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EXHIBIT B
 
 
NOTICE REGARDING ASSETS
 

 

 

 
 

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EXHIBIT C
 
 
Form of Request Notice
for Distributions from the Trust Account