Exhibit
4.5


 


 


SUBSCRIPTION
AGREEMENT


 


BY AND BETWEEN


 


THE PURCHASERS SIGNATORY HERETO


 


AND


 


ARCH CAPITAL GROUP LTD.


 


 


DATED AS OF OCTOBER 24, 2001


 


CONFORMED TO REFLECT AMENDMENTS


DATED NOVEMBER 20, 2001, JANUARY 3, 2002, MARCH 15, 2002 AND
JANUARY 20, 2003


 

















 


TABLE OF CONTENTS


 


	
  A.

  	
  SUBSCRIPTION
  AND PURCHASE OF SECURITIES

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Agreement to Purchase

  
	
   

  	
  2.

  	
  Number of Securities
  Purchased

  
	
   

  	
  3.

  	
  Closing Date

  
	
   

  	
  4.

  	
  Deliveries

  
	
   

  	
   

  	
   

  
	
  B.

  	
  POST-CLOSING ADJUSTMENTS

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Audit Adjustment

  
	
   

  	
  2.

  	
  Adjustment for
  Triggering Event

  
	
   

  	
  3.

  	
  Final Adjustment

  
	
   

  	
   

  	
   

  
	
  C.

  	
  CONDITIONS
  PRECEDENT TO SALE OF SECURITIES ON THE CLOSING DATE

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Mutual Conditions

  
	
   

  	
  2.

  	
  Conditions of the Company

  
	
   

  	
  3.

  	
  Conditions of the
  Purchasers

  
	
   

  	
   

  	
   

  
	
  D.

  	
  REPRESENTATIONS,
  WARRANTIES AND AGREEMENTS

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Purchaser Acknowledgments

  
	
   

  	
  2.

  	
  Purchaser Representations

  
	
   

  	
  3.

  	
  Representations
  and Warranties of the Company

  
	
   

  	
   

  	
   

  
	
  E.

  	
  RIGHT TO EXCHANGE
  PREFERENCE SHARES

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Formation of Newco

  
	
   

  	
  2.

  	
  Capital Structure of Newco

  
	
   

  	
  3.

  	
  Exchange Right

  
	
   

  	
  4.

  	
  Maintenance of Newco

  
	
   

  	
  5.

  	
  Failure of Regulatory
  Approval

  
	
   

  	
  6.

  	
  Modification or Amendment

  
	
   

  	
   

  	
   

  
	
  F.

  	
  ADDITIONAL PROVISIONS

  
	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Modification

  
	
   

  	
  2.

  	
  Purchasers’ Costs and
  Expenses

  
	
   

  	
  3.

  	
  Notices

  



 


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  4.

  	
  Successors, Assigns

  
	
   

  	
  5.

  	
  Transaction Committee

  
	
   

  	
  6.

  	
  Governing Law

  
	
   

  	
  7.

  	
  Survival

  
	
   

  	
  8.

  	
  Entire Agreement

  
	
   

  	
  9.

  	
  Severability

  
	
   

  	
  10.

  	
  Counterparts

  
	
   

  	
   

  	
   

  
	
  SIGNATURES

  
	
   

  	
   

  	
   

  
	
  SCHEDULE
  A

  
	
   

  	
   

  	
   

  
	
  SCHEDULE
  B

  



 


ii

















 


SUBSCRIPTION AGREEMENT


 


This Agreement (this “Agreement”) is made as of
October 24, 2001 by and between Arch Capital Group Ltd., a company
organized under the laws of Bermuda (the “Company”), and each of the
Purchasers named below (each, a “Purchaser” and, collectively, the “Purchasers”),
in connection with the purchase by each Purchaser of the Securities (as defined
below).  Certain terms are defined in Schedule A
hereto.


 


WHEREAS, the Company has entered into employment
arrangements with Paul Ingrey, Dwight Evans and Marc Grandisson, true and
correct copies of which have been provided to the Purchasers.


 


For good and valid consideration, the receipt of which
is hereby acknowledged, the Company and each of the Purchasers agree as
follows:


 


A.            SUBSCRIPTION
AND PURCHASE OF SECURITIES


 


1.             Agreement to Purchase.  Subject to satisfaction of the conditions
set forth in Section C below, each Purchaser, severally and not jointly,
hereby irrevocably subscribes for and agrees to purchase, for the aggregate
purchase price set forth below the name of such Purchaser on the signature page
hereto (such Purchaser’s “Total Purchase Price”), series A convertible
preference shares (the “Preference Shares”) and class A warrants (such
warrants issued hereunder, the “Warrants,” and together with the
Preference Shares, the “Securities”) of the Company.  The Preference Shares will have the rights
and privileges set forth in the form of Certificate of Designations attached
hereto as Exhibit I (the “Certificate”).  The Preference Shares will be convertible,
on the terms and conditions set forth in the Certificate, into Common Shares
(such shares, the “Conversion Shares”) or, in the circumstance set forth
in Section E hereof, common shares of Newco. 
The form of the Warrants is attached hereto as Exhibit II.  The Warrants will be exercisable, on the
terms and conditions thereof, for Common Shares (such shares, the “Warrant
Shares”).


 


2.             Number of
Securities Purchased.  The
number of Preference Shares to be purchased by each Purchaser shall be equal to
such Purchaser’s Total Purchase Price divided by the Estimated Per Share
Price.  Such number is subject to
adjustment as provided in Section B hereof.


 


The number of Warrants to be purchased by each
Purchaser shall be equal to (a) the Adjusted Warrant Amount times (b) the
number of Common Shares issuable as of the date hereof upon exercise of all
class A warrants outstanding on the date hereof (which is 2,531,079) divided by
(c) the number of Common Shares outstanding as of June 30, 2001 (which is
12,863,079).  If the transactions
contemplated by this Agreement, or options granted to management concurrently
herewith, trigger an antidilution adjustment under existing class 


 

















 


A warrants, the number of Warrants purchased by each Purchaser
hereunder shall be adjusted upward to reflect the greater number of shares
issuable upon exercise of outstanding class A warrants as a result of such
antidilution adjustment.(1)


 


3.             Closing Date.  Subject to the terms and conditions hereof,
the purchase and sale of the Securities shall occur at 10:00 a.m. (Eastern
time) on the third business day after the date on which the condition set forth
in Section C.1(a) is satisfied (such date and time, the “Closing Date”).


 


4.             Deliveries.  As of the close of business on the business day
immediately preceding the Closing Date, the Company shall advise the Purchasers
of the Estimated Per Share Price.  On
the Closing Date, (a) each Purchaser shall pay its Total Purchase Price by wire
transfer of immediately available funds to the account of the Company
designated by the Company and (b) the Company shall deliver to such Purchaser
certificates for the Securities purchased by such Purchaser, registered in the
name of such Purchaser or its designee.


 


B.            POST-CLOSING ADJUSTMENTS


 


1.             Audit Adjustment.


 


(a)           As
soon as practicable after the Closing Date, the Company shall engage (i)
PricewaterhouseCoopers (the “Public Accountants”) to audit the Company’s
consolidated balance sheet as of June 30, 2001, (ii) an independent actuary
selected by the Transaction Committee and the Purchasers (the “Independent
Actuary”) to review the reserves for claims and claims expenses on such
balance sheet, and (iii) an independent pricing service selected by the
Transaction Committee and the Purchasers (the “Pricing Service”) to
determine the estimated fair value as of the Closing Date of the Company’s
investments in marketable securities included on such balance sheet.  The audit shall be performed on the same
basis


 












(1)           Amendment No. 1:  “The parties agree that (a) effective as of
the Closing, the only Class A Warrants outstanding will be held by The Trident
Partnership, L.P. and Taracay Investors and the only Class B Warrants
outstanding will be held by Robert Clements (or members of his family or trusts
established for his or his family’s benefit) and (b) there is no adjustment
under section 3.1 of the Class A Warrants of the Company or under section 4.1
of the Class B Warrants of the Company in connection with the grants set forth
on Schedule 5 to Amendment No.1, or the issuance of the Preference Shares, the
Warrants, or the Common Shares issuable upon conversion or exercise thereof,
under the Subscription Agreement or the Management Subscription Agreements.”


 


2

















 


as the preparation of the unaudited balance sheet and, in particular,
the $4.3 million liability associated with an anticipated but incomplete
reinsurance transaction shall either remain or be deemed to remain on the
audited balance sheet as a liability.  The Pricing Service, the Public Accountants and the Independent
Actuary are referred to as the “Independent Advisors.”


 


(b)           The
Company shall provide the Independent Advisors with full access to its books
and records for the purposes of such audit and reviews.  The Independent Advisors shall keep the
Transaction Committee and the Purchasers informed as to the progress of such
audit and reviews, and the Transaction Committee and the Purchasers shall have
the right to participate and comment upon such audit and reviews.  Any reviews pursuant to paragraph (d) below
shall also be subject to the provisions of this paragraph.


 


(c)           Within
60 days after the Closing Date (or as soon thereafter as practicable), the
Independent Advisors shall deliver the following to the Board of Directors and
the Purchasers (the “Initial Determinations”):


 


(i)            The Public Accountants shall deliver
the Company’s consolidated balance sheet as of June 30, 2001 and an unqualified
report thereto (the “Audited Balance Sheet”).


 


(ii)           The Independent Actuary shall deliver
a report on the reserves for claims and claims expenses on the Audited Balance
Sheet (the “Reserve Report”).


 


(iii)          The Pricing Service shall deliver a
report of its determinations of estimated fair value as of the business day
immediately preceding the Closing Date of the marketable securities in the
Company’s investment portfolio included in the Audited Balance Sheet (the “Portfolio
Review”).  In determining such
estimated fair value, the Pricing Service shall use the Mark to Market
Procedures.


 


(iv)          The Public Accountants shall calculate
the Per Share Price including, without limitation, the amount set forth in
clause (i)(A) of the definition of Per Share Price, and report the amounts
to the Board of Directors and the Purchasers (the “Per Share Calculation”).


 


(d)           After
receipt of the Initial Determinations, the Transaction Committee and the
Purchasers shall have the right to make a full review of the Initial
Determinations including, but not limited to, access by such professionals as
Purchasers may deem necessary, to all of the workpapers and reports prepared by
the Independent Advisors in connection with such Initial Determinations.  The Transaction Committee may object to the
Initial Determinations or one or more components thereof by giving written notice
to the Purchasers, and the Purchasers (acting collectively) may object to the
Initial Determinations or one or more components thereof by giving written
notice to the Transaction Committee, in each case, within 30 


 


3

















 


days of the date on which the Initial Determinations are
delivered.  Any such notice shall state
the basis of the objections in reasonable detail.  The Transaction Committee and the Purchasers shall then endeavor
in good faith to resolve the dispute as soon as possible.  If the dispute is not resolved within 10
days after receipt of the objection, within five days thereafter the
Transaction Committee and the Purchasers shall mutually agree on (i) a firm of
independent accountants to review the Audited Balance Sheet or the Per Share
Calculation, (ii) an independent actuary to review the Reserve Report and/or
(iii) an independent pricing service to review the Portfolio Review, who shall
complete such reviews within 30 days of appointment.  Based upon such independent reviews, the independent accountants
referred to in the preceding sentence shall select either the per share
calculation recommended by the Transaction Committee or that recommended by the
Purchasers, whichever is closer to the independent review, and the per share
calculation so selected shall be dispositive. 
If the Initial Determination (if not reviewed) or such review requires
an adjustment to the Audited Balance Sheet, the Audited Balance Sheet as so
adjusted shall be deemed to be the “Audited Balance Sheet” hereunder.


 


(e)           If
the Per Share Price is greater than the Estimated Per Share Price, within five
business days after the last date on which the Initial Determinations may be
objected to or after the date that all reviews following any such objection
have been completed (the “Applicable Date”), each Purchaser shall either
(i) pay to the Company an amount (the “Aggregate Amount”) in cash
equal to the difference between the Per Share Price and the Estimated Per Share
Price times the number of Preference Shares purchased by such Purchaser or (ii)
surrender to the Company a number of Preference Shares equal to the Aggregate
Amount divided by the greater of (A) the Per Share Price or (B) the Fair Market
Value of a Preference Share as of the Applicable Date.  The Purchasers shall make such payment by
wire transfer of immediately available funds to the account of the Company
designated by the Company.


 


(f)            If
the Estimated Per Share Price is greater than the Per Share Price, within five
business days after the Applicable Date, the Company shall issue and deliver to
each Purchaser one or more certificates registered in the name of such
Purchaser (or its designee) representing that number of Preference Shares equal
to (i) the difference between the Estimated Per Share Price and the Per Share
Price times (ii) the number of Preference Shares purchased by such Purchaser on
the Closing Date divided by (iii) the Per Share Price.


 


2.             Adjustment for
Triggering Event.  In the event
that a Triggering Event occurs, then, within five business days of the
occurrence of such Triggering Event or the Applicable Date (whichever is
later), the Company shall issue and deliver to each Purchaser one or more
certificates registered in the name of such Purchaser (or its designee)
representing that number of Preference Shares equal to the difference between
(i) such Purchaser’s Total 


 


4

















 


Purchase Price divided by an amount equal to the difference between the
Per Share Price and $1.50 and (ii) such Purchaser’s Total Purchase Price
divided by the Per Share Price.


 


3.             Final Adjustment.


 


(a)           The
Adjustment Basket, as defined on Schedule B, shall be determined as soon
as practicable after the second anniversary of the Closing Date or such earlier
date as the Purchasers request and the Transaction Committee agrees, which
agreement will not be unreasonably withheld (the “Test Date”).  The Company shall engage its independent
public accountants to prepare and deliver a report to the Transaction Committee
and the Purchasers setting forth in reasonable detail the calculation of the Adjustment
Basket (the “Adjustment Basket Report”).


 


(b)           The
Company shall provide such independent public accountants with full access to
its books and records for the purposes of preparing the Adjustment Basket
Report.  Such accountants shall keep the
Transaction Committee and the Purchasers informed as to the progress of the
Adjustment Basket Report, and the Transaction Committee and the Purchasers
shall have the right to participate and comment upon the Adjustment Basket
Report.  Any reviews pursuant to
paragraph (c) below shall also be subject to the provisions of this paragraph.


 


(c)           After receipt of the Adjustment Basket
Report, the Transaction Committee and the Purchasers shall have the right to
make a full review of the Adjustment Basket Report including, but not limited
to, access by such professionals as Purchasers may deem necessary to all of the
workpapers and reports prepared by the independent public accountants in
connection with such Adjustment Basket Report. 
The Transaction Committee may object to the Adjustment Basket Report by
giving written notice to the Purchasers, and the Purchasers (acting collectively)
may object to the Adjustment Basket Report by giving written notice to the
Transaction Committee, in each case, within 30 days of the date on which the
Adjustment Basket Report is delivered. 
Any such notice shall state the basis of the objections in reasonable
detail.  The Transaction Committee and
the Purchasers shall then endeavor in good faith to resolve the dispute as soon
as possible.  If the dispute is not
resolved within 10 days after receipt of the objection, within five days
thereafter, the Transaction Committee and the Purchasers shall mutually agree
on a firm of independent accountants, an independent actuary and/or an
independent pricing service to review the Adjustment Basket Report or one or
more components thereof, who shall complete such reviews within 30 days of
appointment.  Based upon such
independent reviews, the independent accountants referred to in the preceding
sentence shall select either the adjusted basket report recommended by the
Transaction Committee or that recommended by the Purchasers, whichever is
closer to the independent review, and the adjusted basket report so selected
shall be dispositive.


 


5

















 


(d)           If the Adjustment Basket is less than
zero, within five business days after the last date on which the Adjustment
Basket Report may be objected to or the date on which all reviews following any
such objection have been completed (the “Second Applicable Date”), the
Company shall issue and deliver to each Purchaser one or more certificates
registered in the name of such Purchaser (or its designee) representing that
number of Preference Shares equal to the difference between NF — N,


 


where:

N = number of Preference Shares purchased by such Purchaser (after giving
effect to any adjustment pursuant to Section B.1);

P = Per Share Price;

B = absolute value of the Adjustment Basket; and

NF = such Purchaser’s Total Purchase Price divided by [P – B/12.86 million].


 


(e)           If the Adjustment Basket is greater
than zero, the Company at the direction of the Transaction Committee may use
cash in an amount equal to B to repurchase Common Shares (other than any
Conversion Shares or Warrant Shares) without regard to the restriction on
repurchases set forth in Article VI of the Shareholders Agreement.


 


(f)            In addition to paragraph (e), if the
Adjustment Basket is less than zero and in the event that a Triggering Event
occurs, then, on the Second Applicable Date, the Company shall also issue and
deliver to each Purchaser a number of Preference Shares equal to the difference
between (A) such Purchaser’s Total Purchase Price divided by an amount equal to
[P — $1.50 — B/12.86 million] and (B) the Purchaser’s Total Purchase Price
divided by an amount equal to (P — $1.50).


 


(g)           On the fourth anniversary of the
Closing Date, there shall be a calculation of a further Adjustment Basket,
taking into account ONLY the following: 
(i) the matters listed in clause (iii) of the definition of Non-Core
Assets, to the extent not previously included in the first Adjustment Basket
and (ii) any actual losses arising out of any breach of the representations set
forth in Section D.3.h or D.3.k discovered after the second anniversary of the
Closing.


 


C.            CONDITIONS PRECEDENT TO SALE OF
SECURITIES ON THE CLOSING DATE


 


1.             Mutual Conditions.  The obligation of the Company to sell, and of each Purchaser to
buy, the Securities on the Closing Date, is subject to the satisfaction, or
waiver by the parties hereto, of the following conditions:


 


6

















 


(a)           If required, the waiting period under
the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
“HSR Act”), shall have expired or been terminated early.


 


(b)           There shall not be in effect an order
or injunction of a court of competent jurisdiction prohibiting the consummation
of the sale and purchase of the Securities hereunder that are to be purchased
on the Closing Date.


 


2.             Conditions of the Company.  The obligation of the Company to sell the
Securities on the Closing Date is subject to the satisfaction, or waiver by the
Company, of the following conditions:


 


(a)           The representations and warranties
made by each Purchaser in this Agreement shall be true and accurate in all
material respects as of the Closing Date.


 


(b)           Each Purchaser shall have complied
with and performed all agreements and covenants to be complied with or
performed by it in all material respects at or prior to the Closing Date.


 


3.             Conditions of the Purchasers.  The obligation of each Purchaser to buy on
the Closing Date the Securities set forth below the name of such Purchaser on
the signature page hereof is subject to the satisfaction, or waiver by such
Purchaser, of the following conditions:


 


(a)           The representations and warranties
made by the Company in this Agreement shall be true and accurate as of the
Closing Date (except that representations and warranties made as of another
date shall be true and accurate as of such other date), except in each case as
would not have a Material Adverse Effect.


 


(b)           The Company shall have complied with
and performed all of its agreements and covenants to be complied with or
performed in all material respects at or prior to the Closing Date.


 


(c)           Such Purchaser shall have received
(i) a legal opinion of Conyers Dill & Pearman, Bermuda counsel to the
Company, covering such matters under Bermuda law as are customary for
transactions of this type and (ii) a legal opinion of Cahill Gordon &
Reindel, United States counsel to the Company, regarding enforceability of this
Agreement and the validity of the private placement exemption with respect to
the sale and purchase of the Securities hereunder.  Such opinions may be subject to such limitations and
qualifications as are customary for legal opinions in transactions of this
type.


 


7

















 


(d)           Such Purchaser shall have received
copies of such letters of resignation from the Board of Directors and certified
resolutions of the Board of Directors electing such directors to fill the
resulting vacancies in accordance with the Company’s Bye-laws, all effective
with the consummation of the purchase and sale of Securities hereunder so that
the members of the Board of Directors immediately following the Closing Date
shall be as contemplated by Section 3.1(b) of the Shareholders Agreement.


 


(e)           The Company shall have executed and
delivered a shareholders agreement substantially in the form attached as Exhibit
IV hereto (the “Shareholders Agreement”).


 


(f)            The Company’s Board shall have taken
all such action as is necessary to exempt Purchasers from paragraphs 78 and
79(3) of the Company’s Bye-laws.


 


D.            REPRESENTATIONS, WARRANTIES AND
AGREEMENTS


 


1.             Purchaser Acknowledgments.  Each Purchaser, severally and not jointly,
understands, acknowledges and hereby covenants and agrees with the Company as
follows:


 


(a)           Subject to the terms and conditions
of this Agreement, such Purchaser’s agreement to purchase Securities hereunder
is and shall be irrevocable.


 


(b)           The offering and sale of the
Securities is intended to be exempt from registration under the United States
Securities Act of 1933, as amended (the “Act”), by virtue of Section
4(2) of the Act.  The Securities, the
Conversion Shares and the Warrant Shares have not been registered under the
Act.  Except to the extent set forth in
the Shareholders Agreement, the Company is under no obligation to register the
Securities, the Conversion Shares or the Warrant Shares or to assist such
Purchaser in complying with any exemption from registration.


 


(c)           There is no existing public or other
market for the Securities, and it is not expected that any such market will
develop.  There can be no assurance that
such Purchaser will be able to sell or dispose of its Securities.  Without limiting the generality of the
foregoing, in order not to jeopardize the offering’s exempt status under the
Act, a transferee of such Securities may, among other things, be required to
fulfill the investor suitability requirements thereunder.


 


(d)           All certificates issued for the
Securities, the Conversion Shares and the Warrant Shares will bear the following
legend:


 


8

















 


“THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE TRANSFERRED, OFFERED OR SOLD EXCEPT (A) IN COMPLIANCE WITH THE PROVISIONS
OF A CERTAIN SUBSCRIPTION AGREEMENT AND A CERTAIN SHAREHOLDERS AGREEMENT AND
(B) PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, OR (2) AN APPLICABLE EXEMPTION FROM
REGISTRATION THEREUNDER.  ANY SALE
PURSUANT TO CLAUSE (B)(2) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN
OPINION OF WACHTELL, LIPTON, ROSEN & KATZ, OR SUCH OTHER COUNSEL AS IS
REASONABLY SATISFACTORY TO ARCH CAPITAL GROUP LTD., TO THE EFFECT THAT SUCH
EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE.”


 


(e)           Prior
to the earlier of the Shareholders Meeting (as defined below) and the four
month anniversary of the Closing Date, the Securities, Conversion Shares and
the Warrant Shares may not be sold, transferred or otherwise disposed of,
directly or indirectly, without approval of the Transaction Committee.


 


(f)            The
Purchasers shall not transfer, in one transaction, or a series of related
transactions, to a single Person or group, Common Shares, and/or securities
convertible into Common Shares, representing in excess of either 51% of the
votes then entitled to be cast in the election of directors, or 51% of the then
outstanding Common Shares (taking into account Common Shares issuable upon
conversion of the Preference Shares) without making available to all holders of
Common Shares the right to participate in such transaction on the same or
substantially the same terms as the Purchasers (giving effect to the securities
being transferred).


 


2.             Purchaser Representations.  Each Purchaser, severally and not jointly,
hereby represents and warrants and covenants to the Company as follows:


 


(a)           The Securities to be purchased by
such Purchaser are being purchased for such Purchaser’s own account, and not
with a view to distribution, assignment or resale to others or to
fractionalization in whole or in part. 
No other person has or will have a direct or indirect beneficial
interest in such Securities or any component thereof.


 


(b)           The financial situation of such
Purchaser is such that it can afford to bear the economic risk of holding the
Securities for an indefinite period, and such Purchaser can afford to suffer
the complete loss of its investment in the Securities.  Such 


 


9

















 


Purchaser has (i) knowledge and experience in
financial and business matters such that it is capable of evaluating the risks
of the investment in the Securities and (ii) carefully reviewed the terms and
provisions of this Agreement and has evaluated the restrictions and obligations
contained herein.


 


(c)           This Agreement has been duly
authorized, executed and delivered by such Purchaser and, assuming due
execution and delivery by each other party hereto, constitutes a valid and
binding obligation of such Purchaser enforceable in accordance with its terms.


 


(d)           Such Purchaser shall hold the
Securities subject to, and shall have voting rights with respect thereto as
specified in, the Company’s Bye-laws and the Certificate in effect from time to
time and shall not assign, sell, hypothecate or otherwise transfer the
Securities, the Conversion Shares or the Warrant Shares other than in
accordance with applicable law and the provisions with respect thereto in such
documents.


 


(e)           Such Purchaser covenants and agrees
to make available to the Company and the appropriate insurance regulatory
governmental authorities all information concerning such Purchaser required to
be furnished to such governmental authorities in connection with obtaining
requisite approvals, and further covenants and agrees to make all filings, and
seek to acquire all consents, required by such governmental authorities.


 


(f)            The execution, delivery and
performance by such Purchaser of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (i) violate any provision
of the organizational documents of such Purchaser, (ii) assuming compliance
with the matters referred to in Section C.1.a, violate any provision of any
applicable law, statute, ordinance, rule, regulation, judgment, injunction,
order or decree or (iii) violate or result in a default under any agreement or
other instrument binding upon such Purchaser or any of its Subsidiaries, except
in each case as would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect (as defined below) on such Purchaser.


 


(g)           Such Purchaser has, or will have
prior to the Closing Date, sufficient cash or other sources of immediately
available funds to enable it to make payment of the purchase price for the
Securities as required hereunder and all related fees and expenses.


 


10

















 


3.             Representations and Warranties of
the Company.(2)  Except as set
forth in the disclosure letter delivered to the Purchasers by the Company dated
as of the date hereof (the “Company Disclosure Letter”), or in the
Company Reports filed since December 31, 2000 but prior to the date hereof, the
Company hereby represents and warrants to each of the Purchasers that:


 


(a)           Organization, Good Standing and
Qualification.  (i)  Each
of the Company and its Subsidiaries is a corporation or other entity duly
organized, validly existing and, if applicable, in good standing under the laws
of its respective jurisdiction of organization and has all requisite corporate
or similar power and authority to own, operate and lease its properties and
assets and to carry on its business as presently conducted and is duly
qualified to do business and is in good standing as a foreign corporation or
other entity in each jurisdiction where the ownership, operation or leasing of
its assets or properties or conduct of its business requires such qualification
except for failures to be so qualified, or to be so in good standing, which
would not have a Material Adverse Effect. 
The Company has made available to Parent a complete and correct copy of
the Company’s certificate of incorporation, memorandum of association and
Bye-laws, each as amended to date, which are in full force and effect.


 


(ii)           The Company does not have any
Subsidiaries which (A) individually constitute or, if aggregated and treated as
one Subsidiary, would constitute a “Significant Subsidiary” within the
meaning of Rule 1-02(w) of Regulation S-X under the Exchange Act, (B)
have unlimited liability share capital or other equity or similar interests of
unlimited liability, or (C) conduct material insurance, fund management,
broker-dealer, banking or consumer finance operations.  Section 3.2(a)(ii) of the Company Disclosure
Letter (X) lists the jurisdiction of organization of each of the Company’s
Subsidiaries, (Y) in the case of the Company’s Subsidiaries that conduct
insurance operations (collectively, the “Company Insurance Companies”),
lists, as of  June 30, 2001, the U.S.
jurisdictions where the Company Insurance Companies are domiciled or
“commercially domiciled” and licensed to do an insurance business for insurance
regulatory purposes, and (Z) indicates which Subsidiaries in which the
Company’s interest therein includes unlimited share capital or other equity or
similar interests of unlimited liability. 
Each of the Company and each of its Subsidiaries holds all material 


 












(2)           Amendment No. 1:  “The representations and warranties made by
the Company herein shall be deemed made also as of the Closing Date (except
that representations and warranties made as of another date shall be true and
accurate as of such other date).”


 


11

















 


licenses or authorizations required or necessary to
conduct its business as currently conducted.


 


(iii)          As of the date hereof, the Company
does not own (other than (A) in a bona  fide fiduciary capacity or
in satisfaction of a debt previously contracted, (B) in the ordinary course of
its insurance, annuity or asset management business, (C) in customer accounts
held or maintained in the ordinary course, or (D) in any general account or
otherwise in the ordinary course to offset insurance liabilities) beneficially,
directly or indirectly, (X) any material equity securities or similar material
interests of any Person other than its Subsidiaries, or (Y) any interest in any
general partnership, unlimited company or other Person with share capital or
other equity or similar interests of unlimited liability, or any general
partnership interest in a limited partnership.


 


(b)           Capital Structure.  (i)  The authorized stock of the
Company consists of 200,000,000 Common Shares, of which 12,868,158 Common
Shares (including shares of restricted stock issued pursuant to Company Stock
Plans) were issued and outstanding as of the close of business on September 30,
2001, and 50,000,000 preference shares, par value $0.01 per share, of which no
shares are issued or outstanding as of the date hereof.  All of the issued and outstanding Common
Shares have been duly authorized and are validly issued, fully paid and
nonassessable.  Since September 30,
2001, the Company has issued no Common Shares, or securities convertible or
exchangeable into Common Shares.  As of
the date hereof, the Company has no commitments (including contingent or
conditional commitments) to issue or deliver Common Shares or preference
shares.


 


(ii)           All of the outstanding capital stock
of, or other voting securities or ownership interests in, each Subsidiary, to
the extent owned by the Company, is owned by the Company, directly or
indirectly, free and clear of any mortgage, lien, pledge, charge, security
interest or encumbrance in respect of such property or asset and free of any
other limitation or restriction (including any restriction on the right to
vote, sell or otherwise dispose of such capital stock or other voting
securities or ownership interests, except as set forth in the Company’s
Bye-laws).  Except as contemplated by this
Agreement, there are no outstanding (A) securities of the Company or any of its
Subsidiaries convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary or (B) options
or other rights to acquire from the Company or any of its Subsidiaries, or
other obligation of the Company or any of its Subsidiaries to issue, any
capital stock or other voting securities or ownership interests in, or any
securities convertible into or exchangeable for any capital stock or other
voting securities of or ownership interests in, any Subsidiary (the items in
clauses (A) and (B) being referred to collectively with the capital stock of
the subsidiaries as the “Subsidiary Securities”).  There are no outstanding obligations 


 


12

















 


of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any of the Subsidiary Securities.


 


(iii)          Except as set forth above (A) there is
no share capital or other voting securities of the Company authorized,
reserved, issued or outstanding, (B) neither the Company nor any of its
Subsidiaries is party to any agreement creating preemptive or other outstanding
rights, subscriptions, options, warrants, stock appreciation rights, redemption
rights, repurchase rights, convertible securities or other agreements,
arrangements or commitments of any character relating to, or the value of which
is determined by reference to, the issued or unissued share capital or other
ownership interest of the Company or any of its Subsidiaries, and (C) neither
the Company nor any of its Subsidiaries is party to any agreement creating any
other securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities
of the Company or its Subsidiaries, and no securities or obligations evidencing
such rights are authorized, issued or outstanding.  Neither the Company nor any of its Subsidiaries has outstanding
any bonds, debentures, notes or other similar obligations.


 


(iv)          The Preference Shares have been duly
authorized and reserved for issuance, and, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and
non-assessable.  The Conversion Shares
have been duly authorized and reserved for issuance, and when issued in
exchange for the Preference Shares in accordance with the terms of the
certificate, will be validly issued, fully paid and non-assessable.


 


(v)           The Warrants have been duly
authorized, and, when executed and delivered in accordance with the terms of
this Agreement, will constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms.  The Warrant Shares have been duly authorized
and reserved for issuance, and, when issued upon exercise of the Warrants in
accordance with the terms thereof, will be validly issued, fully paid and
non-assessable.


 


(c)           Corporate Authority; Approval.  The Company has all necessary corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated
hereby.  The execution and delivery of
this Agreement by the Company, and the consummation by the Company of the
transactions contemplated hereby, have been duly and validly authorized by all
necessary corporate action, and no other corporate proceedings (other than
Requisite Shareholder Approval following the issuance of the Securities) on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions so contemplated.  The
Board of Directors has unanimously determined, as 


 


13

















 


of the date of this Agreement, that it is advisable
and in the best interest of the Company’s shareholders for the Company to enter
into this Agreement and to consummate the transactions contemplated hereby upon
the terms and subject to the conditions of this Agreement and, as of the date
of this Agreement, has recommended that the Bye-Law Amendment and the issuance
of the Conversion Shares and Warrant Shares to the Purchasers in accordance
with the terms hereof be approved by the shareholders of the Company.  This Agreement has been duly and validly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery by each other party hereto, constitutes a legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms.  The Company
has received the opinion of its financial advisor, Credit Suisse First Boston
Corporation (“CSFB”), to the effect that, as of the date hereof, the
consideration to be received by the Company for the issuance and sale of the
Securities is fair, from a financial point of view, to the Company, a true and
correct copy of which will be furnished to Parent.


 


(d)           Governmental Filings; No
Violations.  (i)  Other
than the reports, filings, registrations, consents, approvals, permits,
authorizations, applications, expiry of waiting periods and/or notices under
the HSR Act, no notices, reports or other filings are required to be made by
the Company or any of its Subsidiaries with, nor are any material consents,
registrations, approvals, permits applications, expiry of waiting periods or authorizations
required to be obtained by the Company or any of its Subsidiaries from, any
U.S. or non-U.S. governmental or regulatory authority, agency, commission,
tribunal, body or other governmental, quasi-governmental, regulatory or
self-regulatory entity, including, without limitation, any state insurance department
or insurance or consumer finance regulatory agency, in each case, of competent
jurisdiction (each a “Governmental Entity”), in connection with the
execution and delivery of this Agreement by the Company and the issuance of the
Preference Shares and Warrants contemplated hereby.


 


(ii)           The execution, delivery and
performance of this Agreement by the Company do not, and the consummation by
the Company of transactions contemplated hereby will not, constitute or result
in (A) a breach or violation of, or a default under, the certificate of
incorporation, memorandum of association or Bye-laws of the Company or the
comparable governing instruments of any of its Subsidiaries, (B) a breach
or violation of, or a default under, or the creation or acceleration of any
obligations or the creation of a material lien, pledge, security interest or
other encumbrance on the assets of the Company or any of its Subsidiaries (with
or without notice, lapse of time or both) pursuant to, or the creation or
acceleration of any right of termination under, any material agreement, lease,
contract, license, note, mortgage, indenture, arrangement or other obligation,
whether written or oral (“Contracts” and individually, a “Contract”),
binding upon the Company or any of its Subsidiaries or any of their respective 


 


14

















 


assets, or (C) any material and adverse change in the
rights or obligations of the Company or any of its Subsidiaries under any
material Contract.


 


(e)           Company Reports; Financial
Statements; Undisclosed Liabilities; Statutory Statements.  (i)  Each registration statement,
report, proxy statement or information statement prepared by the Company or its
Subsidiaries since December 31, 1999, including the Company’s Annual Report on
Form 10-K for the year ended December 31, 2000 (the “Company Form 10-K”),
each in the form (including exhibits, annexes and any amendments thereto) filed
with the SEC (collectively, including any such reports filed with the SEC
subsequent to the date hereof, the “Company Reports”), as of their
respective dates, as amended prior to the date hereof or as supplemented by
Company Reports filed prior to the date hereof, did not, and any Company Reports
filed with the SEC subsequent to the date hereof will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading.  Each of the consolidated balance sheets
included in or incorporated by reference into the Company Reports (including
the related notes and schedules) fairly presents, or will fairly present, in
all material respects the consolidated financial position of the Company and
its Subsidiaries as of its date, and each of the consolidated statements of
income and of changes in shareholders’ equity and cash flows included in or
incorporated by reference into the Company Reports (including any related notes
and schedules) fairly presents, or will fairly present, in all material
respects the results of operations, retained earnings and changes in financial
position, as the case may be, of the Company and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to notes and
normal year-end audit adjustments that were not, or are not reasonably expected
to be, material in amount or effect), in each case in accordance with U.S.
generally accepted accounting principles (“GAAP”) (except in the case of
unaudited statements, as permitted by Form 10-Q) consistently applied during
the periods involved, except as may be noted therein or in the notes thereto.


 


(ii)           Except for those liabilities that are
fully reflected or reserved against on the consolidated balance sheet of the
Company included in the Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2001 or liabilities described in the notes thereto (or
liabilities for which neither accrual nor footnote disclosure is required
pursuant to GAAP), neither the Company nor any of its Subsidiaries has incurred
any material liability of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due), other than
liabilities incurred in connection with the negotiation, execution, delivery
and performance of this Agreement and the transactions contemplated hereby.


 


15

















 


(iii)          Since December 31, 1999, the Company
and each of its Subsidiaries has timely filed all material periodic statements,
together with all exhibits, interrogatories, notes, schedules and any actuarial
opinions, affirmations or certifications or other supporting documents in
connection therewith, required to be filed with or submitted to any
Governmental Entity on forms prescribed or permitted thereby (collectively, the
“Company Regulatory Reports”). 
The financial statements included in the Company Regulatory Reports,
including the notes thereto, were prepared in conformity in all material
respects with applicable statutory accounting practices prescribed or permitted
by the applicable Governmental Entity consistently applied for the periods
covered thereby and present fairly, in all material respects, the statutory
financial position of the Company or such Subsidiary as at the respective dates
thereof and the results of operations thereof for the respective periods then
ended.  The Company Regulatory Reports
complied in all material respects with all applicable Laws when filed, and no
material deficiency has been asserted with respect to any Company Regulatory
Report by any Governmental Entity.


 


(iv)          Except as set forth in the Company’s
proxy statement with respect to the annual meeting of Company shareholders in
2001, neither the Company nor any of its Subsidiaries is a party to any
Contract with any officer or director of the Company or any Person in which any
such officer or director holds 5% or more of equity interests which would be
required to be disclosed under Item 404 of Regulation S-K promulgated by the
SEC.


 


(f)            Absence of Certain Changes.  Since December 31, 2000 (A) the Company
and its Subsidiaries have conducted their respective businesses only in the
ordinary course, consistent with past practice, and (B) there has not been (1)
any Material Adverse Effect with respect to the Company or any development or
combination of developments, that, individually or in the aggregate, has had or
is reasonably likely to have a Material Adverse Effect with respect to the
Company; (2) any material change by the Company in accounting principles,
practices or methods other than as required by GAAP or applicable Law; (3) any
declaration, setting aside or payment of any dividend or other distribution in
respect of the share capital of the Company; (4) any split in share capital,
combination, recapitalization, redenomination of share capital or other similar
transaction or issuance or authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for share capital of
the Company; (5) any material addition, or any development involving a
prospective material addition, to the Company’s consolidated reserves for
future policy benefits or other policy claims and benefits; or (6) any material
change in the accounting, actuarial, investment, reserving, underwriting or
claims administration policies, practices, procedures, methods, assumptions or
principles of the Company or any Subsidiary of the Company except as required by
GAAP or applicable Law.


 


16

















 


(i)            The Company has no Knowledge that
any material rating presently held by the Company or any of its Subsidiaries is
likely to modified, qualified, lowered or placed under surveillance for a
possible downgrade for any reason.


 


(g)           Litigation.  Except to the extent provided as of December
31, 2000 in appropriately identified reserves, there are no material civil,
criminal or administrative actions, suits, claims, hearings, investigations,
inquiries, arbitrations, mediations or proceedings (“Actions”) pending
or, to the Knowledge of the Company, threatened in writing against the Company
or any of its Subsidiaries.


 


(h)           Employee Benefits; Labor.  (i)  For purposes of this
Agreement, the term (A) “Plan” shall mean any “employee benefit plan,”
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended (“ERISA”), whether or not subject to ERISA, and
any employment, consulting, termination, severance, retention,
change-in-control, deferred or incentive compensation, commission, stock option
or other equity-based, vacation or other fringe-benefit plan, program, policy,
arrangement, agreement or commitment, and (B) “Company Plan” shall mean
each material Plan which is sponsored or contributed to by the Company or any
of its Subsidiaries, to which the Company or any such Subsidiary has any
obligation to contribute, or with respect to which the Company or any such
Subsidiary is a party or otherwise has any material liability.


 


(ii)           With respect to each Company Plan
listed on the Company Disclosure Letter, the Company will deliver or make
available to the Purchasers, no later than seven days after the date
hereof,  a true, correct and complete copy
of:  (A) each Company Plan, trust
agreement, and insurance contract and other funding vehicle related thereto;
(B) the most recent Annual Report (Form 5500 Series) and accompanying schedule,
if any; (C) the current summary plan description and any material modifications
thereto, if any (in each case, whether or not required to be furnished under
ERISA); (D) the most recent annual financial report, if any; (E) the most
recent actuarial report, if any; and (F) the most recent determination letter
from the U.S. Internal Revenue Service (the “IRS”) if any.  Since June 30, 2001, there have been no
amendments to any Company Plan adopted or approved, nor has the Company or any
of its Subsidiaries undertaken to make any such amendments or to adopt or
approve any new Company Plan that is not reflected in the Company Plan
document.


 


(iii)          Each Company Plan has been operated
and administered and is in compliance with its terms and all applicable Laws in
all material respects, and there are no actions, suits, claims or governmental
audits (other than routine claims for benefits in the ordinary course) pending
or, to the Knowledge of the Company, threatened with respect to any Company
Plan or the assets thereof that, if adversely determined, would, 


 


17

















 


individually or in the aggregate, result in any
material liability or obligation of the Company or any of its Subsidiaries.


 


(iv)          No Company Plan is (A) a multiemployer
plan within the meaning of Section 4001(a)(3) of ERISA, or (B) a multiple
employer plan within the meaning of Section 4063 or 4064 of ERISA.  No Company Plan has an “accumulated funding
deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the
Code), whether or not waived.


 


(v)           Each Company Plan that is intended to
qualify under Section 401(a) and/or 401(k) of the Code has received a favorable
determination letter from the IRS that it is so qualified and, to the Knowledge
of the Company, nothing has occurred or been done or omitted to be done since
the date of such letter that has adversely affected or will adversely affect
such qualified status.  The Company and
its Subsidiaries have timely paid all contributions, premiums and expenses
payable to or in respect of each Company Plan under the terms thereof and in
accordance with all applicable Laws, except where any failure to pay such
amounts has not and will not, individually or in the aggregate, resulted or
result in any material liability or obligation of the Company or its
Subsidiaries.


 


(vi)          Neither the Company nor any of its
Subsidiaries has incurred or will incur, either directly or indirectly (including
as a result of an indemnification obligation), any material liability under or
pursuant to any provision of Title I or IV of ERISA or the penalty, excise tax
or joint and several liability provisions of the Code relating to Plans, and,
to the Knowledge of the Company, no event, transaction or condition has
occurred, exists or is expected to occur that would reasonably be expected to
result in any such material liability to the Company or any of its Subsidiaries
or, after the Effective Time, to the Purchasers.


 


(vii)         Neither
the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, either alone or in combination with any other
event (whether contingent or otherwise) will (A) entitle any current or former
employee, consultant or director of the Company or any of its Subsidiaries to
any increased or modified benefit or payment; (B) increase the amount of
compensation or benefits due to any such employee, consultant or director;
(C) accelerate the vesting, payment or funding of any compensation,
stock-based, incentive or other benefit; (D) result in any “parachute payment”
under Section 280G of the Code (whether or not such payment is considered to be
reasonable compensation for services rendered); (E) cause any compensation to
fail to be deductible under Section 162(m) or any other provision of the Code
or any similar Law; (F) otherwise result in any payment in the nature of
severance or termination pay; or (G) limit or prohibit (except to the extent 


 


18

















 


required by applicable Law) the ability to amend,
merge, terminate or receive a reversion of assets from any Company Plan or
related trust.


 


(viii)        The Company and its Subsidiaries have no
liability for life, health, medical or other welfare benefits to former
employees or beneficiaries or dependents thereof, except for health
continuation coverage as required by Section 4980B of the Code or Part 6 of
Title I of ERISA and at no expense to the Company and its Subsidiaries.


 


(ix)           No labor organization or group of
employees of the Company or any of its Subsidiaries has made a pending demand
for recognition or certification, and there are no representation or
certification proceedings, or petitions seeking a representation proceeding,
presently pending, or threatened to be brought or filed, with the National
Labor Relations Board or any other labor relations tribunal or authority.  There are no organizing activities, strikes,
work stoppages, slowdowns, lockouts, material arbitrations or material
grievances, or other material labor disputes pending or threatened against or
involving the Company or any of its Subsidiaries.  Each of the Company and its Subsidiaries is in compliance with
all applicable laws in all material respects and collective bargaining
agreements respecting employment and employment practices, terms and conditions
of employment, wages and hours and occupational safety and health.


 


(i)            Compliance with Laws; Permits.  (i)  The businesses of the Company
and each of its Subsidiaries have been (since December 31, 1999), and are
being, conducted in compliance in all material respects with all applicable
federal, state, local or non-U.S. laws, statutes, ordinances, rules,
regulations (including, without limitation, the rules of any applicable
self-regulatory organization recognized by the SEC), rulings, written
interpretations, judgments, orders, injunctions, decrees, arbitration awards,
agency requirements, licenses or permits of any Governmental Entity of
competent jurisdiction, including all regulations regulating the business and
products of insurance and all applicable orders and directives of insurance
regulatory authorities (including federal authorities with respect to variable
insurance and annuity products) and orders resulting from market conduct
examinations of insurance regulatory authorities (including federal authorities
with respect to variable insurance and annuity products) (collectively, “Laws”).  Except as set forth in the Company Reports
filed prior to the date hereof and for regulatory examinations or reviews
conducted in the ordinary course, no material investigation or review by any Governmental
Entity with respect to the Company or any of its Subsidiaries is as of the date
hereof pending or, to the Knowledge of the Company, threatened.


 


19

















 


(ii)           No material change is required in the
Company’s or any of its Subsidiaries’ processes, properties, practices or
procedures in connection with any such Laws, and the Company has not received
any written notice or communication of any material noncompliance with any such
Laws that has not been cured as of the date hereof.  Notwithstanding the generality of the foregoing, the Company and
each of its Subsidiaries have in place policies and procedures with respect to
themselves and their insurance agents, third-party administrators, brokers,
broker/dealers, distributors and agents intended to assure that their sales
processes and practices are consistent in all material respects with applicable
Law governing such practices and processes, and, where there has been any
material deviation therefrom, such deviation has been cured, resolved or
settled through agreements with applicable Governmental Entities or are barred
by all applicable statutes of limitations or other equitable principles. To the
Knowledge of the Company, all employees of the Company and its Subsidiaries
with management responsibility with respect to any business line, and all
officers and directors thereof required to be registered with or licensed under
applicable Laws, are so licensed and in good standing with the applicable
Governmental Entity.


 


(j)            Takeover Statutes.  There are applicable to the transactions
contemplated by this Agreement no restrictive provision of any other applicable
“fair price,” “moratorium,” “control share acquisition,” “interested
shareholder” or other similar anti-takeover statute or regulation (each a “Takeover
Statute”).


 


(k)           Taxes.  (i)  All material Tax Returns
required to be filed by, or with respect to, the Company or any Subsidiary have
been timely filed (taking into account extensions) and are correct and complete
in all material respects.


 


(ii)           The Company and each of its
Subsidiaries has timely paid all Taxes due and payable by it or for which it
may be liable (other than Taxes that are being contested in good faith and for
which adequate reserves are reflected in accordance with GAAP on the Company’s
consolidated balance sheet filed with the Company Form 10-K).


 


(iii)          The Company and each Subsidiary have
made adequate provision in accordance with GAAP on the Company’s consolidated
balance sheet filed with the most recent Company Reports for all Taxes payable
for which no Tax Return has yet been filed.


 


(iv)          Neither the Company nor any Subsidiary
is doing business or maintains a taxable presence in a jurisdiction (a “Non-resident
Jurisdiction”) in which it does not file income Tax Returns (or does file
Tax Returns in the manner contemplated by Treasury Regulation
§1.882-4(a)(3)(iv) or any comparable provision of applicable law), and no claim
has been made in writing by any taxing authority in a Non-resident 


 


20

















 


Jurisdiction that the Company or any of its
Subsidiaries are or may be subject to taxation by that jurisdiction.


 


(v)           No material deficiencies for any
Taxes have been proposed, asserted or assessed, in each case in writing, by any
taxing authority against the Company or any of its Subsidiaries that are not
adequately reserved for in accordance with GAAP on the Company’s consolidated
balance sheet filed with the Company Form 10-K.


 


(vi)          Within the past three years neither
the Company nor any of its Subsidiaries have been a “distributing corporation”
or a “controlled corporation” in a distribution intended to qualify under
Section 355(a) of the Internal Revenue Code of 1986, as amended (the “Code”).


 


(vii)         No material amounts of Tax could
reasonably be expected to be imposed on the Company or any Subsidiary as a
result of the reorganization contemplated by the September 26, 2000 proxy
statement/prospectus of Arch Capital Group Ltd. or any related internal
restructuring.


 


(viii)        No agreements relating to the allocation
or sharing of Taxes exist between the Company and/or any of its Subsidiaries,
on the one hand, and a third party, on the other hand.


 


(ix)           All material Taxes required to be
withheld from any compensation, dividend or other payment by or on behalf of
the Company or any Subsidiary have been withheld, and such withheld Taxes have
been duly and timely paid to the proper taxing authorities.


 


(x)            Based on the advice of its tax
advisors, the Company does not believe that the Company or any of its Subsidiaries
presently is a “personal holding company” within the meaning of Section 542(a)
of the Code, a “foreign personal holding company” within the meaning of Section
552(a) of the Code, a “controlled foreign corporation” within the meaning of
Section 957 of the Code or a “foreign investment company” within the meaning of
Section 1246 of the Code.  Based on the
advice of its tax advisors, the Company does not believe that the Company
presently is, or, at the end of the taxable year that includes the Closing
Date, will be, a “passive foreign investment company” within the meaning of
Section 1297 of the Code.


 


(xi)           The Company has not had and does not
expect to have a disallowance of any deductions under Section 162(m) of the
Code for employee remuneration of any amount paid or payable by the Company or
any Subsidiary.  “Taxes,” with
respect to any person means, (A) any and all taxes, charges, fees, levies or
other assessments, including all net income, gross income, gross receipts,
excise, stamp, real or personal 


 


21

















 


property, ad valorem, withholding, social security,
unemployment, use, license, net worth, payroll, franchise, severance, transfer,
recording, employment, premium, windfall profits, environmental, customs
duties, capital stock, profits, sales, registration, value added, alternative
or add-on minimum, estimated or other taxes, assessments or charges imposed by
any taxing authority and any interest, penalties, or additions to tax
attributable thereto; (B) any joint or several liability of such person with
any other person for the payment of any amounts of the type described in clause
(A) of this definition, and (C) any liability of such person for the payment of
any amounts of the type described in clause (A) as a result of any express or
implied obligation to indemnify any other person.  “Tax Returns” means any return, report, form or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including any information return, claim for refund, amended return
or declaration of estimated Tax.


 


(l)            Intellectual Property.  Each of the Company and its Subsidiaries
owns, or is licensed or otherwise possesses legally enforceable rights to use,
all patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, technology, know-how, computer software programs or
applications, and tangible or intangible proprietary information or materials, including
trade secrets (collectively, “Intellectual Property”) that are used in,
and material to, the business of the Company and its Subsidiaries as currently
conducted, and any such patents, trademarks, trade names, service marks and copyrights
held by the Company and/or its Subsidiaries are valid and subsisting except, in
any such case, as would not have a Material Adverse Effect.


 


(m)          Brokers and Finders.  Neither the Company nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders’ fees in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company or any of its Subsidiaries, except that the
Company has employed CSFB as its financial advisor pursuant to a written
agreement, a true and accurate copy of which has previously been provided to
the Purchasers.


 


(n)           Insurance Business.  (i)  All actuarial reports with
respect to the Company or any Company Insurance Company relied upon by the
Company or any Company Insurance Company or Governmental Entity since December
31, 1999, and all attachments, addenda, supplements and modifications thereto
(the “Company Actuarial Analyses”), were prepared using appropriate
modeling and other procedures accurately applied, if relevant, and in
conformity with generally accepted actuarial standards consistently applied,
and the projections contained therein were properly prepared in accordance with
the assumptions stated therein.  The
information and data furnished by


 


22

















 


the Company or any Company Insurance Company to its independent
actuaries in connection with the preparation of the Company Actuarial Analyses
were accurate in all material respects.


 


(ii)           The Company Insurance Companies are
in compliance in all material respects with the underwriting guidelines
applicable thereto.


 


(iii)          Except as would not, individually or
in the aggregate, be reasonably likely to result in a material liability to the
Company, (A) each separate account maintained by a Company Insurance Company (a
“Separate Account”) is duly and validly established and maintained under
the laws of its state of formation and is either exempt from registration under
the 1940 Act or is duly registered as an investment company under the 1940 Act,
and (B) each such Separate Account is operated and all of its operations
conducted, and each contract issued by a Company Insurance Company under which
Separate Account assets are held has been duly and validly issued, offered and
sold, in compliance with all applicable Laws.


 


(o)           Material Contracts.  (i)  Other than contracts or
amendments thereto that have been disclosed in or have been filed as an Exhibit
to a Company Report filed prior to the date hereof, neither the Company nor any
of its Subsidiaries is a party to or otherwise bound by any Material
Contract.  “Material Contract”
means, with respect to any Person, any Contract that is material to the
business, financial position or results of operations of such Person and its
Subsidiaries, taken as a whole, including (A) any employment, severance,
termination, consulting or retirement contract with an officer or member of
senior management, and (B) any material Contract relating to the borrowing of
money or the guarantee of any such obligation.


 


(ii)           All of the Company’s Material
Contracts are in full force and effect. 
True and complete copies of all such Material Contracts not filed as
exhibits to the Company Reports prior to the date hereof have been delivered or
made available by the Company to Purchasers. 
Neither the Company nor any of its Subsidiaries nor, to the Knowledge of
the Company, any other party is in breach of or in default under any such
Material Contract.  Neither the Company
nor any of its Subsidiaries is party to any (A) Contract containing any
provision or covenant limiting in any material respect the ability of the Company
or any of its Subsidiaries to (1) sell any products or services to any other
Person, (2) engage in any line of business, or (3) compete with any Person, or
(B) except for employment agreements disclosed pursuant to another Section of
this Agreement or as provided in the certificate of incorporation, memorandum
of association, Bye-laws or other constituent documents of the Company or any
of its Subsidiaries, any Contract providing for indemnification of directors or
executive officers 


 


23

















 


of the Company in their capacity as such except as
would not have a Material Adverse Effect.


 


(p)           Risk Management; Derivatives.  (i)  The Company and its
Subsidiaries have in place risk management policies and procedures sufficient
in scope and operation to protect against risks of the type and in amounts
reasonably expected to be incurred by Persons of similar size and in similar
lines of business as the Company and its Subsidiaries.


 


(ii)           The adoption of Statement of
Financial Accounting Standards No. 133 will not have a material and adverse impact
on the Company’s consolidated results of operations or financial position.


 


(iii)          All material derivative instruments,
including, without limitation, swaps, caps, floors and option agreements,
whether entered into for the Company’s own account, or for the account of one
or more of its Subsidiaries or their customers, were entered into (A) only
for purposes of mitigating identified risk or as a means of managing the
Company’s long-term debt objectives, (B) in accordance with prudent practices
and in all material respects with all applicable laws, rules, regulations and
regulatory policies, and (C) with counterparties believed by the Company to be
financially responsible at the time; and each of them constitutes the valid and
legally binding obligation of the Company or one of its Subsidiaries, enforceable
in accordance with its terms, and are in full force and effect.  Neither the Company nor its Subsidiaries,
nor to the Company’s Knowledge any other party thereto, is in breach of any of
its material obligations under any such agreement or arrangement.


 


(q)           Aviation Treaties.  The Company Disclosure Letter sets forth a
list of all reinsurance treaties relating to aviation insurance written by the
Company or its Subsidiaries with respect to which the Company or any Subsidiary
of the Company may be claimed against, together with a description of the
material terms of such treaties (the “Aviation Treaties”).  The information set forth in such schedule,
as of the date hereof, fairly and accurately describes the Aviation Treaties
and reasonably estimates, as of the date hereof, any liabilities that the
Company or any of its Subsidiaries could reasonably be expected to incur in
connection therewith.


 


4.             Covenants.  The Company and the Purchasers (severally
and not jointly) hereby covenant and agree as follows:


 


(a)           Conduct of the Company.  The Company agrees that from the date hereof
until the Closing Date, (i) except as set forth in the Disclosure Letter or as
otherwise expressly permitted or required by Sections D.4.b, D.4.e, D.4.h or
Section E of this Agreement, or (ii) except with the prior written consent of
the Purchasers (which 


 


24

















 


consent shall not be unreasonably withheld or
delayed), the Company and its Subsidiaries may conduct insurance and reinsurance
businesses and operations and, in the ordinary course consistent with past
practice, its other businesses and operations, and shall use their reasonable
efforts to preserve intact their business organizations and material
relationships with third parties and to keep available the services of their
present officers and employees.  Without
limiting the generality of the foregoing, from the date hereof until the
Closing Date, except as set forth in the Disclosure Letter or as expressly
permitted or required by Sections D.4.b, D.4.e, D.4.h or Section E of this
Agreement, without the prior written consent of the Purchasers:


 


(A)          the Company will not amend, or propose
to amend, its Certificate of Incorporation, memorandum of association, bye-laws
or other organizational documents;


 


(B)           the Company will not, and will not
permit any of its Subsidiaries to, merge or consolidate with any other person;


 


(C)           the Company will not split, combine,
subdivide, redeem or reclassify its shares or declare, set aside, make, or pay
any dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its share capital and other equity
interests;


 


(D)          the Company will not, directly or
indirectly, redeem, repurchase or otherwise acquire or offer to redeem,
repurchase, or otherwise acquire, any of its securities;


 


(E)           the Company will not (i) issue,
deliver or sell, or authorize the issuance, delivery or sale of, any of its
shares, or any securities convertible into or exercisable for, or any rights,
warrants or options to acquire, any of its shares, grant any additional options
to purchase Common Shares, or grant to any person any right to acquire any
shares of the Company or any right, the value of which is based on the value of
Common Shares, other than the issuance of Common Shares upon the exercise of
share options outstanding on the date hereof in accordance with their present
terms, (ii) enter into any agreement restricting the transfer of, or affecting
the rights of holders of, the Company’s securities, (iii) grant any
preemptive or antidilutive rights with respect to any of the Company’s
securities, (iv) grant any registration rights with respect to the
Company’s securities, or (v) amend in any term of any outstanding securities of
the Company or any of its Subsidiaries;


 


(F)           the Company will not acquire any
assets or properties for cash or otherwise for an amount in excess of $500,000,
in the aggregate;


 


25

















 


(G)           the Company will not, and will not
permit any of its Subsidiaries to, acquire (whether pursuant to merger, stock
or asset purchase, joint venture or otherwise) in one transaction or series of
related transactions any equity interest in, or all or substantially all of the
assets of, any person or any business or division of any person;


 


(H)          the Company will not, and will not
permit any of its Subsidiaries to, incur indebtedness for borrowed money,
guarantee any indebtedness, issue or sell any debt securities or warrants or
rights to acquire any debt securities of the Company or any of its Subsidiaries
or guarantee any debt securities of others (collectively “Debt”) in
excess of $500,000, or prepay or refinance any indebtedness for Borrower’s
money;


 


(I)            the Company will not, and will not
permit any of its Subsidiaries to, sell, lease, license or otherwise dispose
of, any material amount of assets, securities or property, except pursuant to
existing contracts or commitments;


 


(J)            the Company will not (i) change
its tax or financial accounting policies, practices or methods except as
required by accounting principles generally accepted in the U.S., or by the
rules and regulations of the SEC or (ii) make any tax election, file any tax
return or settle any tax contest or other matter, in each case, other than in a
manner consistent with past practice;


 


(K)          the First American portion of the Core
Insurance Operations shall not bind any gross or net insurance risk without the
approval of Messrs. Ingrey, Evans or Grandisson;


 


(L)           the Company will not replace the
independent auditors of the Company;


 


(M)         the Company will not increase by 5% or
more the annual base compensation of any officer or key employee of the
Company, or enter into or make any material change in any severance contract or
arrangement with any such officer or key employee;


 


(N)          the Company will not consummate a
complete liquidation or dissolution of the Company, a merger or consolidation
(i) in which the Company or any Subsidiary is a constituent corporation, or
(ii) with respect to which the Common Shares would have the right to vote under
applicable law, a sale of all or substantially all of the Company’s assets, or
any similar business combination;


 


26

















 


(O)          the Company will not approve the
annual plan, annual capital expenditure budget or the five-year plan of the
Company and its Subsidiaries, taken as a whole;


 


(P)           the Company will not remove the Chief
Executive Officer or Chairman of the Company, or appoint a new Chief Executive
Officer or Chairman of the Company;


 


(Q)          the Company will not, and shall cause
its Subsidiaries to not, engage in any transaction with any officer, director,
or affiliate of any officer or director, of the Company;


 


(R)           the Company will not (i) establish,
enter into or amend any collective bargaining agreement, Plan or Company Plan,
including, without limitation, any severance plan, agreement or arrangement,
(ii) increase the compensation payable or to become payable or the benefits
provided to its current or former directors, officers, employees, consultants
or service providers or (iii) accelerate the vesting or payment of the
compensation payable or the benefits provided to any current or former
director, officer, employee, consultant or service provider, in each case other
than as required by applicable Law or any existing Company Plan; or


 


(S)           the Company will not, and will not
permit any of its Subsidiaries to, agree or commit to do any of the foregoing.


 


Nothing in this Section
D.4 shall grant to any Purchaser any right of consent (to the extent that such
right would result in such Purchaser being deemed to “control” an insurance
subsidiary of the Company that is domiciled in the United States where the exercise
of such control would otherwise require the prior approval of such state).


 


(b)           Shareholders Meeting.  The Company will cause a meeting of its
shareholders (the “Shareholders Meeting”) to be duly called and held as
soon as reasonably practicable after the Closing Date for the purpose of voting
on (i) the adoption of an amendment (the “Bye-Law Amendment”) of the
Company’s bye-law 45 and 75 in the form of Exhibit III hereto, and
(ii) the proposal to obtain the Requisite Nasdaq Approval.  The parties agree and acknowledge that
Robert Clements will serve as Chairman of the Board of Directors so long as he
is a director and is willing to serve in such capacity.


 


(c)           Proxy Statement.  (i)  Promptly after the Closing
Date, the Company shall prepare and file with the SEC the proxy statement (the
“Proxy Statement”) relating to the Shareholders Meeting.  The Company shall mail the Proxy Statement
to its


 


27

















 


shareholders as promptly as practicable after the Closing
Date and, if necessary, after the Proxy Statement shall have been so mailed,
promptly circulate amended, supplemental or supplemented proxy material, and,
if required in connection therewith, resolicit proxies.  The parties acknowledge and agree that no
shareholder approval is required prior to the Closing Date in connection with
the sale and purchase of the Securities and the consummation of the
transactions contemplated hereby.


 


(ii)           The Company will advise the
Purchasers and the Transaction Committee, promptly after it receives notice
thereof, of the time when any supplement or amendment has been filed or any
request by the SEC for amendment of the Proxy Statement or comments thereon and
responses thereto or requests by the SEC for additional information.  If at any time the Company or the
Purchasers, respectively, discover any information relating to the Company or
the Purchasers, or any of their respective affiliates, officers or directors,
that should be set forth in an amendment or supplement to the Proxy Statement
so that the document will not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, then
the party that discovers any misleading information shall promptly notify the
other parties hereto and an appropriate amendment or supplement describing the
information shall be promptly filed with the SEC and, to the extent required by
law or regulation, disseminated to the Company’s shareholders.


 


(d)           Government Filings.  The Company and the Purchasers shall
cooperate with one another in (i) determining whether any other action by or in
respect of, or filing with, any federal, state or local court, administrative
or regulatory agency or commission or other governmental authority or agency,
domestic or foreign (each, a “Governmental Entity”) is required in
connection with the consummation of the transactions contemplated hereby or the
effectiveness of the Bye-Law Amendment and (ii) seeking any consents, approvals
or waivers, taking any actions, or making any filings, furnishing information
required in connection therewith and seeking promptly to obtain any consents,
approvals or waivers.  The Company and
the Purchasers agree, if required, to make an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the
transactions contemplated hereby as promptly as practicable and to supply as
promptly as practicable any additional information and documentary material
that may be requested pursuant to the HSR Act and to take all other actions
necessary to cause the expiration or termination of the applicable waiting
period under the HSR Act as soon as practicable.


 


(e)           Dispositions; Pending Acquisitions.  Prior to the Closing, the Company shall
endeavor in good faith, subject to prevailing market conditions, to (i) sell,
and cause its Subsidiaries to sell, all marketable securities, publicly traded
equity securities, 


 


28

















 


non-investment grade debt securities and illiquid
securities owned by it (other than shares of any Subsidiary) and (ii) invest
the proceeds from such sales prior to Closing Date in short-term, liquid,
investment grade debt securities, and after the Closing Date, as determined by
Board of Directors.(3)  The Company
shall also use its commercially reasonable efforts to consummate the
acquisition of Rock River.


 


(f)            Public Announcements.  Upon the execution of this Agreement, the
Company and the Purchasers will consult with each other with respect to the
issuance of a press release to be released by the Company with respect to this
Agreement and the transactions contemplated hereby, which release shall require
the prior approval of the Purchasers. 
Prior to the Closing Date, except as otherwise agreed to by the parties,
the parties shall not issue any report, statement or press release or otherwise
make any public statements with respect to this Agreement, except as in the
reasonable judgment of the party may be required by law, any national stock
exchange or the Nasdaq Stock Market or in connection with the obligations of a
publicly-held company.  The Company and
the Purchasers will consult with each other with respect to the issuance of a
press release on or after the Closing Date with respect to the consummation of
the transactions contemplated by this Agreement, which release shall require
the prior approval of the Purchasers.


 


(g)           Access; Information.  From the date hereof until the Closing Date
and subject to applicable law, the Company shall (i) give to each
Purchaser, its counsel, financial advisors, auditors and other authorized
representatives reasonable access to the offices, properties, books and records
of such party, (ii) provide access to each Purchaser, its counsel,
financial advisors, auditors and other authorized representatives to such
financial and operating data and other information as such persons may
reasonably request and (iii) instruct its employees, counsel, financial
advisors, auditors and 


 












(3)           Amendment No. 1:  “The parties hereto acknowledge and agree
that the Company has not liquidated its investment portfolio prior to Closing
in accordance with the first sentence of Section D.4(e).  From and after Closing, and prior to the
time of the audit adjustment contemplated by Section B.1 (the “Audit
Adjustment”), the Company will sell the portion of its investment portfolio
not theretofore sold which is listed in Schedule 3 to Amendment No. 1.  With respect to such sales from and after
Closing and prior to the audit adjustment, in calculating the Per Share Price,
the actual prices realized upon the sale of such securities shall be used in
the Mark to Market Procedures, in lieu of the estimated fair value of such
securities as of the close of business on the third business day immediately
preceding the Closing Date.”


 


29

















 


other authorized representatives to cooperate with the
Purchasers in its investigation.  Any investigation
pursuant to this Section shall be conducted in such manner as not to interfere
unreasonably with the conduct of the business of the Company.  Unless otherwise required by law, each
Purchaser will hold, and will cause its respective officers, employees,
counsel, financial advisors, auditors and other authorized representatives to
hold, any nonpublic information obtained in any such investigation or
otherwise, when conducted before or after the date hereof, in confidence and
shall not use for its own benefit in a manner adverse to the Company, and shall
take reasonable steps to prevent disclosure of, any confidential information
that it receives, and shall use at least the same degree of care to avoid
disclosure of such information as it uses with respect to its own confidential
information; provided, however, that no Purchaser shall have any
obligations hereunder with respect to information which (A) is known by such
Purchaser on a non-confidential basis at the time of disclosure by the Company,
(B) is at the time of disclosure, or becomes thereafter, publicly available
other than pursuant to a breach of this subsection by such Purchaser,
(C) is received from a third party without restriction on further
disclosure, (D) is independently developed by such Purchaser, or
(E) is requested or required to be disclosed by self-regulatory
organizations or by applicable law on request of any Governmental Entity.  In the event of clause (E), such Purchaser
will give prior notice to the Company of such disclosure in order to enable the
Company to seek a protective order or other remedy or to waive compliance with
this subsection.


 


Each Purchaser shall give
to the Company and its counsel such information regarding ownership of the
Company, ownership of such Purchaser and related areas as they reasonably
request in connection with preparing disclosure in filings under the Act or the
Exchange Act on issues arising under the Internal Revenue Code of 1986, as
amended, including the rules applicable to “controlled foreign corporations”
thereunder.


 


The Company shall, to the
extent practicable, cause its Subsidiaries to maintain under separate ledgers
the components necessary to calculate the Adjustment Basket.


 


30

















 


(h)           Indemnification; Insurance.  (i) 
To the fullest extent permitted by law, from and after the Closing Date,
all rights to indemnification as of the date hereof in favor of the directors,
officers, employees and agents of the Company or any of its Subsidiaries with
respect to their activities as such prior to the Closing Date and, with respect
to the Transaction Committee also, after the Closing Date, as provided in the
bye-laws or other organizational documents of the Company and its Subsidiaries
in effect on the date hereof, or otherwise in effect on the date hereof, shall
continue in full force and effect for a period of not less than six years from
the Closing Date.  The Purchasers shall
not cause the Company to take any action inconsistent with this Section D.4.h.


 


(ii)           To the extent, if any, not provided
by an existing right of indemnification or other agreement or policy, after the
Closing Date, the Company shall, to the fullest extent permitted by applicable
law, indemnify and hold harmless, each present and former director or officer
of the Company or any of its Subsidiaries (collectively, the “Indemnified
Parties”) against all costs and expenses (including reasonable attorneys’
fees), judgments, fines, losses, claims, damages, liabilities and settlement
amounts paid in connection with any claim, action, suit, proceeding or
investigation (whether arising before or after the Closing Date), whether
civil, administrative or investigative, arising out of or pertaining to any
action or omission in their capacity as a director, officer, employee or agent
of the Company or any of its Subsidiaries, in each case before the Closing Date
(including the transactions contemplated by this Agreement) and, with respect
to the Transaction Committee, also after the Closing Date.  In the event of any such costs, expenses,
judgments, fines, losses, claims, damages, liabilities or settlement amounts
(whether or not arising before the Closing Date), (A) the Company shall pay the
reasonable fees and expenses of counsel selected by the Indemnified Parties,
which counsel shall be reasonably satisfactory to the Company, promptly after
statements therefor are received, and otherwise advance to the Indemnified
Parties upon request reimbursement of documented expenses reasonably incurred,
in either case, to the extent not prohibited by the applicable law and (B) the
Company shall cooperate in the defense of any such matter.  In the event any Indemnified Party is
required to bring any action to enforce rights or to collect moneys due under
this Agreement and is successful in such action, the Company shall reimburse
such Indemnified Party for all of its expenses in bringing and pursuing such
action.


 


(iii)          For a period of at least six (6) years
after the Closing Date, the Company shall cause to be maintained in effect the
directors’ and officers’ liability insurance policies maintained by the Company
and its Subsidiaries or substitute policies with at least the same coverage
containing terms and conditions which are substantially equivalent with respect
to matters occurring prior to the Closing Date, but the 


 


31

















 


Company shall not, in any event, be required to pay
more than 200% of the current cost of such coverage.


 


(iv)          In the event the Company or any of its
successors or assigns (A) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (B) transfers all or substantially all of its
properties and assets to any person, then, and in either such case, proper
provision shall be made so that the successors and assigns of the Company,
shall assume the obligations set forth in this Section D.4.h.  This Section D.4.i is intended to benefit
(and shall be enforceable by) the Indemnified Parties and their respective
heirs, executors and personal representatives.


 


(i)            Further Assurances.  Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary or desirable under applicable legal requirements, to
consummate and make effective the transactions contemplated by this
Agreement.  If at any time after the Closing
Date, any further action is necessary or desirable to carry out the purposes of
this Agreement, the parties hereto shall use their reasonable best efforts to
take or cause to be taken all such necessary or desirable action and execute,
and deliver and file, or cause to be executed, delivered and filed, all
necessary or desirable documentation.


 


(j)            Certain Tax Matters.  (i)  With respect to each taxable
year during which any Purchaser owns shares of the Company, the Company shall
use its reasonable best efforts to cause the Company and each of its
Subsidiaries (A) not to constitute a “passive foreign investment company”
within the meaning of Section 1297 of the Code, (B) not to satisfy the gross
income requirement set forth in Section 542(a) of the Code, (C) not to satisfy
the gross income requirement set forth in Section 552(a) of the Code, and (D)
not to have any related person insurance income within the meaning of Section
953(c)(2) of the Code.


 


(ii)           In the event that the Company or any
of its Subsidiaries constitutes a personal holding company, a foreign personal
holding company, a controlled foreign corporation, a foreign investment company
or a passive foreign investment company for U.S. federal income tax purposes
with respect to any taxable year, the Company shall provide, and shall cause
its Subsidiaries to provide, each Purchaser with such information as such
Purchaser may reasonably request to satisfy its legitimate tax, accounting or
other reporting requirements.


 


(k)           Listing.  The Company acknowledges that it will
arrange for the listing of the Common Shares issuable upon conversion or
exercise of the Preference Shares and Warrants on the Nasdaq Stock Market, to
the extent not so listed (it being understood


 


32

















 


that, prior to the Requisite Shareholder Approval, the
Company shall not be obligated to list more Common Shares than it is then
permitted to issue under applicable Nasdaq rules).(4)


 


(l)            FCPA.  The Company shall, as promptly as practicable,
adopt a policy and establish procedures designed to ensure that the Company and
its subsidiaries shall not act in violation of the Foreign Corrupt Practices
Act of 1977, as amended (15 U.S.C. Section 78dd-1, et  seq.), as
if it were applicable to the Company.(5)


 


E.             RIGHT TO EXCHANGE PREFERENCE SHARES


 


1.             Formation of Newco.  The Company shall use best efforts to (a) form a wholly owned
Subsidiary (“Newco”) to which the Company shall contribute 100% of its
equity interest in Arch Reinsurance Ltd., a Bermuda company (“ARL”) and
(b) contribute, or cause the appropriate Subsidiary to contribute, all Core
Insurance Operations other than Arch Reinsurance Company, a Nebraska
corporation (“ARC”), in each case, no later than 90 days after the
Closing Date (subject, in the case of direct or indirect contribution of U.S.
domiciled insurance companies, to any necessary regulatory approvals or
material third party approvals).  From
and after such formation and contribution, the Company shall not engage in the
insurance business other than through Newco, except for (i) its holding of ARC
and (ii) the operations of American Independent Insurance Holding Company, a
Pennsylvania corporation (“AIIH”) and Hales & Co., Inc., a Delaware
corporation (“Hale”), but only to the extent of the current nature and
scope of such operations of AIIH and Hale. 
The Company shall (1) use its best efforts to cause Newco to have the
benefit of, or obtain independently, the same insurance authorizations as
currently held by ARC, and (2) seek to accomplish the transactions contemplated
by this paragraph in as tax-efficient a manner as possible.


 


2.             Capital Structure of Newco.  Newco shall be a company organized under the
laws of Bermuda, with a number and kind of authorized and outstanding capital
shares (including shares and warrants identical to the Preference Shares and Warrants),
and a memorandum of association and bye-laws that replicate, as nearly as
possible, those of the Company.  All of
such outstanding shares shall, upon such formation and contribution, be held by
the Company.  Until the latest of (a)
the receipt of Requisite Shareholder Approval, (b) the receipt of Requisite
Regulatory Approval and (c) ninety days following the Fourth 


 












(4)           Added by Amendment
No. 1.


 


(5)           Added by Amendment
No. 1.


 


33

















 


Anniversary Adjustment Date, to the extent that the
number and kind of outstanding capital shares of the Company change from time
to time, a corresponding adjustment shall be made by the Company in the number
and kind of outstanding capital shares of Newco.


 


3.             Exchange Right.(6)  From and after the occurrence of an Exchange Trigger Event, the
Preference Shares and Warrants may be exchanged, in whole or in part (provided
that Preference Shares representing a minimum of $150 million in Liquidation
Preference shall be required for the initial such exchange), for preference
shares and warrants of Newco bearing identical rights and privileges, including
the right to convert into, or be exercised for, common shares of Newco.  Such right to exchange shall be exercisable
upon delivery to the Company and Newco of an exchange notice, which notice
shall specify the number of Preference Shares and Warrants surrendered for
exchange.  Once delivered, the exchange
notice shall be irrevocable, subject to the delivery of the required preference
shares and/or warrants of Newco by the Company to the surrendering holder.  Each exchange shall be deemed to have been
effected at the close of business on the date of receipt by the Company of the
exchange notice, and the person exercising such exchange right shall be deemed
to be the record holder of Newco preference shares and/or warrants as of the
close of business on such date.  From
and after the exercise of such exchange right, the Company shall replicate, as
nearly as possible, the rights and benefits, including governance rights and
registration rights, provided for the benefit of Purchasers under this
Agreement, the Certificate, the Shareholders Agreement and as otherwise
contemplated under this Agreement for the benefit of the holders of preference
shares and/or warrants of Newco.  An “Exchange
Trigger Event” shall mean any one or more of the following:  (a) failure to obtain the Requisite
Shareholder Approval (unless such failure was due to a breach by the Purchaser
of a covenant hereunder) within five months of the Closing Date, (b) failure to
obtain the Requisite Regulatory Approval (unless such failure was due to a
breach by the Purchaser of a covenant hereunder) within six months of the
Closing Date or (c) if the Adjustment Basket (as determined pursuant to
paragraphs (a) through (g) of Section B.3) is less than zero and its absolute
value at any time exceeds $250 million.


 












(6)           Amendment No. 1:  “The parties hereto acknowledge that in the
event that Section E.3 becomes applicable, and the Purchasers are entitled to
preference shares and warrants of Newco bearing “identical rights and
privileges”, such securities shall not include the voting limitations imposed
under Sections (f)(3)(B) or (C) of the Certificate for Preference Shares
pending Requisite Shareholder Approval or Requisite Regulatory Approval to the
extent such approvals are not required for the issuance or acquisition of Newco
securities.”


 


34

















 


4.             Maintenance of Newco.  Until the latest of (a) the receipt of
Requisite Shareholder Approval, (b) the receipt of Requisite Regulatory
Approval and (c) ninety days following the Fourth Anniversary Adjustment Date,
the Company shall maintain intact the business, customers and employees of
Newco and its operations as contemplated by Section E.1 and shall not (i) sell,
dispose, exchange or distribute by way of dividend or otherwise any of the
capital stock of Newco, (ii) sell, dispose, or exchange any assets of Newco,
except in the ordinary course of business and to the extent the proceeds are
retained in Newco, (iii) pay any dividend or distribution to the Company, or
(iv) permit Newco, or any of its Subsidiaries to engage in any merger, business
combination, consolidation or other similar transaction except for such
transactions between wholly owned Subsidiaries of Newco.


 


5.             Failure of Regulatory Approval.  To the extent approval of any governmental
authority is necessary either (a) for the Company to satisfy its obligations
under Section E.1, or (b) for a holder of Preference Shares or Warrants to
exercise its exchange right under clause (3) above, and such approval has not
occurred at the time a holder gives an exchange notice, the Company will hold
Newco, the assets and operations to be contributed in Newco, and ARC in trust
for the benefit of such exchanging holder, and shall use best efforts to
restructure such holdings, if necessary, to obtain such approval, or to provide
the same economic and governance benefit as intended to be provided by the
exchange right for preference shares and warrants of Newco.


 


6.             Modification or Amendment. The original
signatories to this Agreement shall be the sole parties required to agree with
the Company to any modification amendment or waiver of the provisions of this
Section E and no other holder of Preference Shares shall have such consent
rights.


 


F.             ADDITIONAL PROVISIONS


 


1.             Modification. 
This Agreement may not be modified, amended or supplemented except in
writing and signed by the party against whom any modification, amendment or
supplement is sought.  No term or
condition of this Agreement may be, or will be deemed to have been, waived
except in writing by the party charged with the waiver.  A waiver shall operate only as to the
specific term or condition waived and will not constitute a waiver for the
future or act on anything other than that which is specifically waived.  Any modification, amendment, supplement or
waiver to be executed by the Company must be approved by the Transaction
Committee.


 












(7)           The parties hereto acknowledge that
from and after the Closing the reference to “original signatories” in Section
E.6 shall mean Warburg and H&F as defined herein.


 


35

















 


2.             Purchasers’ Costs and Expenses.  The Company will reimburse the Purchasers
for their costs and expenses in connection with the transactions contemplated
by this Agreement, including, without limitation, (a) the fees and expenses of
the Purchaser’s accountants, attorneys and other advisors and (b) any and all
losses, liabilities, claims, damages and any out-of-pocket costs and expenses
incurred in connection with any claims, disputes, proceedings or litigation
arising directly or indirectly out of the transactions contemplated by this
Agreement, provided that any such reimbursed costs and expenses shall not be
reflected in any reduction of Book Value included under “C” in Schedule B.


 


3.             Notices.  Any
notice or other communications required or permitted to be given pursuant to
this Agreement shall be in writing and shall be sent by registered or certified
mail, return receipt requested, postage prepaid, by hand delivery (including
courier services), or by facsimile as follows:


 


if to the Company, to:


 


Arch Capital Group Ltd.


20 Horseneck Lane


Greenwich, CT 
06830


Attention: 
General Counsel


Facsimile: 
(203) 861-7240


 


with copies to:


 


Cahill Gordon & Reindel


80 Pine Street


New York, NY 
10005


Attention:  Immanuel
Kohn, Esq.


Facsimile: 
(212) 269-5420


 


and if to any Purchaser, at its address set forth on the signature
pages hereof or, with respect to the Company and the Purchasers, to such other
person or address as either party shall specify by like notice to the other
party.  Any notice or communication
shall be deemed given or made (a) when delivered by hand, (b) when
mailed, three business days after being deposited in the mail, postage prepaid,
sent by certified mail, return receipt requested, and (c) when sent by
facsimile, receipt acknowledged.


 


4.             Successors, Assigns.  This Agreement and all of the terms and
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns; provided that this
Agreement is not transferable or assignable by any Purchaser (other than to any
Affiliate of such Purchaser) without the Company’s consent.  Notwithstanding the foregoing, a Purchaser
shall be free to assign its rights and obligations 


 


36

















 


hereunder with respect to up to 30% of such
Purchaser’s Total Purchase Price to any Person previously discussed with the
Company, provided that such assignee becomes a party hereto, whereupon such
assignee shall have the rights of, and be subject to the obligations of, a
“Purchaser” hereunder.  Following any
assignment (including from a Purchaser to its Affiliates) the assignor shall
have no further obligations under, and shall have no rights or benefits of any
kind under, the Agreement with respect to the subscription so assigned.  Following the assignment by any of the
signatories on pages S-2 to S-5 ( “Warburg Purchaser”) to its Affiliate,
such Warburg Purchaser shall have no further obligations under, and shall have
no rights or benefits of any kind under, this Agreement.


 


5.             Transaction Committee.  During the period from the date of this
Agreement through the Fourth Anniversary Adjustment Date, in the event that the
Company’s Board of Directors is required to act with respect to (a) an
amendment, modification or waiver of rights under, this Agreement, the
Certificate, the Warrants or the Shareholders Agreement (the “Related
Agreements”), (b) the enforcement of obligations of the Purchasers under
the Related Agreements or (c) approval of actions relating to the disposition
of Non-Core Assets, such action shall be deemed approved by the Board if
approved by the Transaction Committee.


 


6.             Governing Law. 
The validity and effects of this Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York.


 


7.             Survival.  The
representations and warranties set forth in Section D.3 of this Agreement shall
survive the Closing Date, but the exclusive remedy shall be through the
Adjustment Basket(s) contemplated by Section B.3. of this Agreement.


 


8.             Entire Agreement.  This Agreement constitutes the entire agreement among the parties
hereto and supersedes all prior agreements, understandings and arrangements,
oral or written, among the parties hereto with respect to the subject matter
hereof.


 


9.             Severability. 
If any one or more of the provisions contained in this Agreement shall
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability will not affect any other provision hereof.


 


10.           Counterparts. 
This Agreement may be executed in any number of counterparts, each of
which shall be considered an original and all of which together shall be deemed
to be one and the same instrument.


 


11.           Currencies.  Unless otherwise specifically indicated, all
payments and currency amounts indicated herein refer to and shall be
denominated in United States Dollars. 
“Dollars” and “$” shall denote United States Dollars.


 


37

















 


[Signature pages follow]


 


38

















 


IN WITNESS WHEREOF, each Purchaser
has executed this Agreement as of the date first above-written.


 


	
   

  	
  WARBURG PINCUS
  NETHERLANDS INTERNATIONAL PARTNERS I, C.V.,

  
	
   

  	
   

  	
   

  
	
   

  	
  WARBURG PINCUS
  NETHERLANDS INTERNATIONAL PARTNERS II, C.V.,

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Warburg, Pincus & Co.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kewsong Lee

  
	
   

  	
   

  	
  Name:  Kewsong Lee

  
	
   

  	
   

  	
  Title:    Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  WARBURG PINCUS
  (BERMUDA) PRIVATE EQUITY VIII, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Warburg Pincus (Bermuda)

  
	
   

  	
   

  	
  Private Equity Ltd.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kewsong Lee

  
	
   

  	
   

  	
  Name:  Kewsong Lee

  
	
   

  	
   

  	
  Title:    Partner

  



 


S-1

















 


	
   

  	
  WARBURG PINCUS (BERMUDA)
  INTERNATIONAL PARTNERS, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Warburg Pincus (Bermuda)

  
	
   

  	
   

  	
  International Ltd.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kewsong Lee

  
	
   

  	
   

  	
  Name:  Kewsong Lee

  
	
   

  	
   

  	
  Title:    Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  HFCP IV (BERMUDA), L.P.,

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  H&F Investors IV (Bermuda), L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  H&F Corporate Investors IV 

  (Bermuda) Ltd.,

  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Name:  David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Title:    Authorized Signatory

  
	
   

  	
   

  
	
   

  	
  H&F
  INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  H&F
  Investors IV (Bermuda), L.P.,

  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  H&F Corporate Investors IV (Bermuda), Ltd., its
  General Partner,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Name:  David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Title:    Authorized Signatory

  
					



 


S-2

















 


	
   

  	
  H&F
  INTERNATIONAL PARTNERS

  IV-B (BERMUDA), L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  H&F Investors IV (Bermuda), L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  H&F Corporation Investors IV

  (Bermuda), Ltd.,

  its General Partner,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Name:  David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Title:    Authorized Signatory

  
	
   

  	
   

  	
   

  
	
   

  	
  H&F
  EXECUTIVE FUND IV

  (BERMUDA), L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  H&F Investors IV (Bermuda), L.P.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  H&F Corporate Investors IV (Bermuda), Ltd., its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Name:  David R. Tunnell

  
	
   

  	
   

  	
   

  	
  Title:    Authorized Signatory

  
						



 


S-3

















 


	
   

  	
  FARALLON CAPITAL PARTNERS, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Farallon Partners, L.L.C.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Monica R. Landry

  
	
   

  	
   

  	
  Name:  Monica R. Landry

  
	
   

  	
   

  	
  Title:    Managing Member

  
	
   

  	
   

  
	
   

  	
  Notice Information for Farallon Capital

  Partners, L.P.:

  
	
   

  	
   

  
	
   

  	
  c/o Farallon Capital Management, L.L.C.

  
	
   

  	
  One Maritime Plaza

  
	
   

  	
  Suite 1325

  
	
   

  	
  San Francisco, CA 
  94111

  
	
   

  	
  Attention: 
  Mark Wehrly and Sarah Aitcheson

  
	
   

  	
  Telephone: 
  (415) 421-2132

  
	
   

  	
  Facsimile: 
  (415) 421-2133

  



 


S-4

















 


	
   

  	
  FARALLON CAPITAL
  INSTITUTIONAL PARTNERS II, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Farallon Partners, L.L.C.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Monica R. Landry

  
	
   

  	
   

  	
  Name:  Monica R. Landry

  
	
   

  	
   

  	
  Title:    Managing Member

  
	
   

  	
   

  
	
   

  	
  Notice Information for Farallon Capital 

  Institutional Partners II, L.P.:

  
	
   

  	
   

  
	
   

  	
  c/o Farallon Capital Management, L.L.C.

  
	
   

  	
  One Maritime Plaza

  
	
   

  	
  Suite 1325

  
	
   

  	
  San Francisco, CA 
  94111

  
	
   

  	
  Attention: 
  Mark Wehrly and Sarah Aitcheson

  
	
   

  	
  Telephone: 
  (415) 421-2132

  
	
   

  	
  Facsimile: 
  (415) 421-2133

  



 


S-5

















 


	
   

  	
  FARALLON CAPITAL
  INSTITUTIONAL PARTNERS III, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Farallon Partners, L.L.C.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Monica R. Landry

  
	
   

  	
   

  	
  Name: Monica R. Landry

  
	
   

  	
   

  	
  Title:   Managing Member

  
	
   

  	
   

  
	
   

  	
  Notice Information for Farallon Capital 

  Institutional Partners III, L.P.:

  
	
   

  	
   

  
	
   

  	
  c/o Farallon Capital Management, L.L.C.

  
	
   

  	
  One Maritime Plaza

  
	
   

  	
  Suite 1325

  
	
   

  	
  San Francisco, CA 
  94111

  
	
   

  	
  Attention:  Mark
  Wehrly and Sarah Aitcheson

  
	
   

  	
  Telephone: 
  (415) 421-2132

  
	
   

  	
  Facsimile: 
  (415) 421-2133

  



 


S-6

















 


	
   

  	
  RR CAPITAL PARTNERS, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Farallon Partners, L.L.C.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Monica R. Landry

  
	
   

  	
   

  	
  Name: Monica R. Landry

  
	
   

  	
   

  	
  Title:   Managing Member

  
	
   

  	
   

  	
   

  
	
   

  	
  Notice Information for RR Capital

  Partners, L.P.:

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o Farallon Capital Management, L.L.C.

  
	
   

  	
  One Maritime Plaza

  
	
   

  	
  Suite 1325

  
	
   

  	
  San Francisco, CA 
  94111

  
	
   

  	
  Attention: 
  Mark Wehrly and Sarah Aitcheson

  
	
   

  	
  Telephone: 
  (415) 421-2132

  
	
   

  	
  Facsimile: 
  (415) 421-2133

  



 


S-7

















 


	
   

  	
  TRIDENT II, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  MMC Capital, Inc., 

  as Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David J. Wermuth

  
	
   

  	
   

  	
  Name: David J. Wermuth

  
	
   

  	
   

  	
  Title:   Principal

  
	
   

  	
   

  
	
   

  	
  Notice Information for Trident II, L.P.:

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o Maples and Calder Ugland House

  
	
   

  	
  South Church Street

  
	
   

  	
  George Town Grand Cayman

  
	
   

  	
  Cayman Islands, British West Indies

  
	
   

  	
  Attention: 
  Charles Jennings

  
	
   

  	
  Facsimile: 
  (345) 949-8080

  
	
   

  	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o MMC Capital, Inc.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  David Wermuth

  
	
   

  	
  Facsimile: 
  (203) 862-2925

  
				



 


S-8

















 


	
   

  	
  MARSH &
  MCLENNAN CAPITAL

  PROFESSIONALS FUND, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  MMC Capital, Inc.,

  
	
   

  	
   

  	
  as Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David J. Wermuth

  
	
   

  	
   

  	
  Name: David J. Wermuth

  
	
   

  	
   

  	
  Title:   Principal

  
	
   

  	
   

  	
   

  
	
   

  	
  Notice Information for Marsh & McLennan Capital
  Professionals Fund, L.P.:

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o Maples and Calder Ugland House

  
	
   

  	
  South Church Street

  
	
   

  	
  George Town Grand Cayman

  
	
   

  	
  Cayman Islands, British West Indies

  
	
   

  	
  Attention: 
  Charles Jennings

  
	
   

  	
  Facsimile: 
  (345) 949-8080

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  c/o MMC Capital, Inc.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  David Wermuth

  
	
   

  	
  Facsimile: 
  (203) 862-2925

  



 


S-9

















 


	
   

  	
  MARSH & MCLENNAN EMPLOYEES’

  
	
   

  	
  SECURITIES COMPANY, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  MMC Capital, Inc.,

  
	
   

  	
   

  	
  as Manager

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David J. Wermuth

  
	
   

  	
   

  	
  Name:  David
  J. Wermuth

  
	
   

  	
   

  	
  Title: 
  Principal

  
	
   

  	
   

  
	
   

  	
  Notice Information for Marsh & McLennan

  
	
   

  	
  Employees’ Securities Company, L.P.:

  
	
   

  	
   

  
	
   

  	
  c/o Maples and Calder Ugland House

  
	
   

  	
  South Church Street

  
	
   

  	
  George Town Grand Cayman

  
	
   

  	
  Cayman Islands, British West Indies

  
	
   

  	
  Attention: 
  Charles Jennings

  
	
   

  	
  Facsimile: 
  (345) 949-8080

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  c/o MMC Capital, Inc.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  David Wermuth

  
	
   

  	
  Facsimile: 
  (203) 862-2925

  



 


S-10

















 


	
   

  	
  INSURANCE PRIVATE EQUITY

  
	
   

  	
  INVESTORS,
  L.L.C.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  GE Asset Management Incorporated,

  
	
   

  	
   

  	
  its Manager

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Patrick McNeela

  
	
   

  	
   

  	
  Name:

  	
  Patrick McNeela

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
  Notice Information for Insurance Private

  
	
   

  	
  Equity Investors, L.L.C.:

  
	
   

  	
   

  
	
   

  	
  c/o GE Asset Management Incorporated

  
	
   

  	
  3003 Summer Street

  
	
   

  	
  Stamford, CT 
  06905

  
	
   

  	
  Attention: 
  Michael M. Pastore, Esq.

  
	
   

  	
   

  
	
   

  	
  ORBITAL HOLDINGS, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lorraine Hliboki

  
	
   

  	
   

  	
  Name:

  	
  Lorraine Hliboki

  
	
   

  	
   

  	
  Title:

  	
  Attorney-in-fact

  
	
   

  	
   

  
	
   

  	
  Notice Information for Orbital

  
	
   

  	
  Holdings, Ltd.:

  
	
   

  	
   

  
	
   

  	
  c/o GE Capital

  
	
   

  	
  120 Longridge Rd.

  
	
   

  	
  Stamford, CT 
  06927

  
						



 


S-11

















 


	
   

  	
  SOUND VIEW PARTNERS LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Robert Clements,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert Clements

  
	
   

  	
   

  	
  Name:

  	
  Robert Clements

  
	
   

  	
   

  	
  Title:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
  Notice Information for Sound View Partners LP:

  
	
   

  	
   

  
	
   

  	
  c/o Arch Capital Group Ltd.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  Robert Clements

  
	
   

  	
  Facsimile: 
  (203) 625-8366

  



 


S-12

















 


	
   

  	
  OTTER CAPITAL LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  John Pasquesi,

  
	
   

  	
   

  	
  its Managing Member

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Pasquesi

  
	
   

  	
   

  	
  Name:

  	
  John Pasquesi

  
	
   

  	
   

  	
  Title:

  	
  Managing Member

  
	
   

  	
   

  
	
   

  	
  Notice Information for Otter Capital LLC:

  
	
   

  	
   

  
	
   

  	
  One Maritime Plaza, 12th Floor

  
	
   

  	
  San Francisco, CA 
  94111

  
	
   

  	
  Attention: 
  John Pasquesi

  
	
   

  	
  Facsimile: 
  (415) 788-0176

  
					



 


S-13

















 


	
   

  	
  PETER A. APPEL

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Peter A. Appel

  
	
   

  	
   

  	
  Name:  Peter
  A. Appel

  
	
   

  	
   

  
	
   

  	
  Notice Information for Peter A. Appel:

  
	
   

  	
   

  
	
   

  	
  c/o Arch Capital Group Ltd.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  Peter A. Appel

  
	
   

  	
  Facsimile: 
  (203) 862-4460

  



 


S-14

















 


	
   

  	
  PAUL B. INGREY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Paul B. Ingrey

  
	
   

  	
   

  	
  Name: 
  Paul B. Ingrey

  
	
   

  	
   

  
	
   

  	
  Notice Information for Paul B. Ingrey:

  
	
   

  	
   

  
	
   

  	
  c/o Arch Reinsurance Ltd.

  
	
   

  	
  Wessex House

  
	
   

  	
  45 Reid Street

  
	
   

  	
  Hamilton HM 12

  
	
   

  	
  Bermuda

  
	
   

  	
  Attention: 
  Paul B. Ingrey

  
	
   

  	
  Facsimile: 
  (441) 296-8241

  



 


S-15

















 


	
   

  	
  DWIGHT R. EVANS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dwight R. Evans

  
	
   

  	
   

  	
  Name: 
  Dwight R. Evans

  
	
   

  	
   

  
	
   

  	
  Notice Information for Dwight R. Evans:

  
	
   

  	
   

  
	
   

  	
  8 Kent Place

  
	
   

  	
  Westfield, NJ 07090

  
	
   

  	
  Attention: 
  Dwight R. Evans

  



 


S-16

















 


	
   

  	
  MARC GRANDISSON

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Marc Grandisson

  
	
   

  	
   

  	
  Name:  Marc
  Grandisson

  
	
   

  	
   

  
	
   

  	
  Notice Information for Marc Grandisson:

  
	
   

  	
   

  
	
   

  	
  c/o Arch Reinsurance Ltd.

  
	
   

  	
  Wessex House

  
	
   

  	
  45 Reid Street

  
	
   

  	
  Hamilton HM 12

  
	
   

  	
  Bermuda

  
	
   

  	
  Attention: 
  Marc Grandisson

  
	
   

  	
  Facsimile: 
  (441) 296-8241

  



 


S-17

















 


	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
  TARACAY INVESTORS

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Robert Clements,

  
	
   

  	
   

  	
  Managing Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert Clements

  
	
   

  	
   

  	
  Name:

  	
  Robert Clements

  	 

	
   

  	
   

  
	
   

  	
  Notice Information for Taracay Investors:

  
	
   

  	
   

  
	
   

  	
  c/o Arch Capital Group Ltd.

  
	
   

  	
  20 Horseneck Lane

  
	
   

  	
  Greenwich, CT 
  06830

  
	
   

  	
  Attention: 
  Robert Clements

  
	
   

  	
  Facsimile: 
  (203) 625-8366

  
						



 


S-18

















 


	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
  THE TRIDENT PARTNERSHIP, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Trident Corp.,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Martine Purssell

  
	
   

  	
   

  	
  Name: 
  Martine Purssell

  
	
   

  	
   

  	
  Title: 
  Assistant Secretary

  
	
   

  	
   

  
	
   

  	
  Notice Information for The Trident Partnership,
  L.P.:

  
	
   

  	
   

  
	
   

  	
  c/o Trident
  Corp., General Partner of The Trident Partnership, L.P.

  
	
   

  	
  Victoria Hall, 5th Floor

  
	
   

  	
  11 Victoria Street

  
	
   

  	
  Hamilton 
  HM  11

  
	
   

  	
  Bermuda

  
	
   

  	
  Attention: 
  Martine Purssell

  
	
   

  	
  Facsimile: 
  (441) 292-3793

  



 


S-19

















 


	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
  MARILYN CLEMENTS

  
	
   

  	
   

  
	
   

  	
  /s/ Marilyn Clements

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  JEFFREY D. CLEMENTS

  
	
   

  	
   

  
	
   

  	
  /s/ Jeffrey D. Clements

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
  JOHN CLEMENTS

  
	
   

  	
   

  
	
   

  	
  /s/ John Clements

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  
	
   

  	
   

  
	
   

  	
  BEN T. CLEMENTS

  
	
   

  	
   

  
	
   

  	
  /s/ Ben T. Clements

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  



 


S-20

















 


	
   

  	
   

  
	
   

  	
  PAULA CLEMENTS SAGER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Paula Clements Sager

  



 


S-21

















 


	
   

  	
  For purposes of
  the footnote to Section A.2. only:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TRUST ESTABLISHED UNDER INDENTURE OF MARILYN
  CLEMENTS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert Clements

  	
  ,

  
	
   

  	
   

  	
  as trustee

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Notice Information for Marilyn Clements,

  	
   

  
	
   

  	
  Jeffrey D. Clements, John Clements, Ben T. Clements,
  Paula Clements Sager and Trust

  	
   

  
	
   

  	
  Established Under Indenture of Marilyn

  	
   

  
	
   

  	
  Clements:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  c/o Arch Capital Group Ltd.

  	
   

  
	
   

  	
  20 Horseneck Lane

  	
   

  
	
   

  	
  Greenwich, CT 
  06830

  	
   

  
	
   

  	
  Attention: 
  Robert Clements

  	
   

  
	
   

  	
  Facsimile: 
  (203) 625-8366

  	
   

  



 


S-22

















 


Schedule A


 


Certain Definitions


 


“Adjusted Warrant Amount” means, with respect
to each Purchaser, (a) the product of 0.5 times (b) an amount equal to (i) such
Purchaser’s Total Purchase Price divided by (ii) the Estimated Per Share Price
minus $1.50.


 


“Affiliate” shall have the same meaning as set
forth in the Shareholder Agreement.


 


“Common Shares” means the common shares, par
value $0.01 per share, of the Company.


 


“Core Insurance Operations” shall mean the
following assets and capital:


 


(i)                   Arch Reinsurance Ltd., a
Bermuda company (“ARL”),


 


(ii)                  Arch Capital Group (U.S.)
Inc., a Delaware corporation (“ACG(US)”),


 


(iii)                 Arch Reinsurance Company, a
Nebraska corporation (“ARC”),


 


(iv)                Cross River Insurance Company, a
Nebraska corporation (including funding for Rock River Insurance Company, a
Wisconsin corporation (“Rock River”)),


 


(v)                 Arch Risk Transfer Services
Ltd., a Cayman Islands company (including First American Financial Corporation,
a Missouri corporation),


 


(vi)                capital held at the holding
company level, gross of capital to be invested in unfunded private equity
commitments which, when funded, shall be deemed to be Non-Core Assets, and


 


(vii)               $2.5 million in segregated assets
and liabilities in cell companies.


 


A-1

















 


“Estimated Per Share Price” (8) means (a) the
Company’s total shareholders’ equity as of June 30, 2001 as set forth on its
unaudited consolidated balance sheet as of such date (which is $271,652,000),
adjusted using the Mark to Market Procedures, so that marketable securities in
the Company’s investment portfolio are valued at their estimated fair value as
of the close of business on the third business day preceding the Closing Date
in accordance with GAAP, divided by (b) the total number of Common Shares outstanding
as of June 30, 2001 (which is 12,863,079).


 


“Exchange Act” means the United States
Securities Exchange Act of 1934, as amended.


 


“Fair Market Value” shall mean (a) with respect
to Common Shares, the average of the high and low daily sales price on the
Nasdaq of the Common Shares for the 20 trading days immediately preceding the
date of which Fair Market Value is to be calculated, and (b) with respect to a
security convertible into exchangeable for Common Shares, the product of (i)
the average of the high and low daily sales price on the Nasdaq of the Common
Shares for the 20 trading days immediately preceding the date of which Fair
Market Value is to be calculated, and (ii) the number of Common Shares into
which such security is then convertible or exchangeable.


 












(8)           Amendment No. 1:  “The parties hereto acknowledge that for
purposes of calculating the Estimated Per Share Price, the Mark to Market
Procedures were performed using closing sales prices instead of closing bid
prices and that to adjust for such variance a “Bid/Ask Spread Adjustment” was
included in the Mark to Market Procedures as set forth in Schedule 4(A) to
Amendment No. 1.  Such adjustment is
hereby deemed to modify the Mark to Market Procedures set forth in Schedule
A.  For purposes of the Audit
Adjustment, and subject to the footnote to clause (e) of Section D.4, the Mark
to Market Procedures shall also use closing sales prices (instead of closing
bid prices) and such “Bid/Ask Spread Adjustment” shall be applied, on the same
percentage basis, by the Pricing Service in performing the Audit Adjustment
under Section B.1(a), it being understood that the Purchasers have not accepted
the closing sales prices underlying in Schedule 4(A) as binding, and the
Pricing Service shall, among other things, verify such prices in the Audit
Adjustment.


 


The parties acknowledge that Schedule 4(B) to
Amendment No.1 sets forth the number of Preference Shares and Class A Warrants
to be issued to each Purchaser at Closing based on the Estimated Per Share
Purchase Price.”


 


A-2

















 


“Farallon” shall mean Farallon Capital
Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon
Capital Institutional Partners III, L.P., and RR Capital Partners, L.P.
collectively, with each individually being a “Farallon Purchaser.”


 


“Fourth Anniversary Adjustment Date” means (i)
the last date on which an adjustment could be required to be determined under
Section B.3.g. hereof or (ii) if such an adjustment is required to be
determined, the date of completion of such adjustment.


 


“GAAP” means accounting principles generally
accepted in the United States applied on a basis consistent with those used in
preparation of the Audited Balance Sheet.


 


“GE” shall mean Orbital Holdings, Ltd. and
Insurance Private Equity Investors, L.L.C., collectively, with each individually
being a “GE Purchaser.”


 


“Knowledge” refers to the actual knowledge of
an officer or the Chairman of the Company.


 


“Mark to Market Procedures” (9) means that the
Company will liquidate all non treasury securities prior to the Closing Date
and reinvest the proceeds in short term U.S. Treasury Securities.  All remaining securities held at the Closing
Date will be marked to market based on the closing bid price on the Closing
Date.  A purchase price adjustment
computed will be made as follows:


 


	
  Realized gains
  (losses) in the period from July 1, 2001 to day before the closing

  	
   

  	
  XXX

  
	
  Plus (minus) the
  change in unrealized gains in the period July 1, 2001 to the Closing Date

  As follows

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Unrealized gain (loss)
  at June 30

  	
  XXX

  	
   

  
	
  net of Unrealized gain
  (loss) at closing

  	
  XXX

  	
  +XXX (net unrealized)

  
	
   

  	
   

  	
   

  
	
  Market value change

  	
   

  	
  XXX

  



 












(9)           It is understood that for purposes of
the Mark to Market Procedures, and any adjustments based on those procedures,
the close of business on the third business day preceding the Closing Date
should be used (including, without limitation, for purposes of Section B.1(a)
and B.1(c)(iii) of this Agreement) rather than the day prior to the Closing
Date, or the Closing Date.


 


A-3

















 


	
  Less Tax effect at 18.5%

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Purchase price adjustment

  	
   

  	
  XXX

  



 


“Material Adverse Effect” on the Company means
a material adverse effect on the properties, assets, liabilities, condition
(financial or otherwise), business, operations or operating earnings of the
Company and its Subsidiaries, taken as a whole, or an effect which is
reasonably likely to prevent or materially delay or materially impair the
ability of the Company to consummate the transactions contemplated by this
Agreement, excluding any such effect resulting from changes in general economic
or industry conditions, announcement of the transaction contemplated hereby or
the performance by the Company of its obligations hereunder.


 


“Non-Core Assets” shall mean the following:


 


(a)           American
Independent Insurance Holding Company, a Pennsylvania corporation,


 


(b)           Hales & Co., Inc., a Delaware
corporation,


 


(c)           escrow assets under the Folksamerica
disposition agreement, net of the contingent reserve recorded as of
June 30, 2001, as adjusted for 18.5% tax benefits and minus all
liabilities, contingent or otherwise, not transferred to the purchaser under
such disposition agreement, including “Excluded Liabilities” under such
disposition agreement,


 


(d)           all non-public securities held by the
Company, ACG (US), and ARC,


 


(e)           all commitments to The Trident
Partnership, II and Distribution Partners, as and when funded,


 


(f)            all commitments to Innovative
Coverage Concepts LLC and


 


(g)           Personal Service Insurance Company
and its affiliate, Anson B. Smith & Co. (collectively, “PSIC”).


 


“Per Share Price” means (a) the Company’s total
shareholders’ equity as of June 30, 2001 as set forth on the Audited
Balance Sheet, adjusted (ii) so that marketable securities in the
Company’s investment portfolio are valued at their estimated fair value as of
the close of business on the third business day preceding the Closing Date,
using the Mark to Market Procedures, as set forth in the Portfolio Review and
(ii) to give effect to those expenses that are described in “C” on
Schedule B that are ascertainable prior to the calculation of the Per Share
Price (whether or not paid prior to Closing) and that would otherwise result in


 


A-4

















 


a decrease of total shareholders’ equity of the Company, divided by (b)
the total number of Common Shares outstanding as of June 30, 2001 (which is
12,863,079).


 


“Person” shall mean any individual,
corporation, partnership, trust, limited liability company, association or
other entity or organization, including a government or political subdivision
or an agency or instrumentality thereof.


 


“Requisite Nasdaq Approval” has the meaning
given to such term in the Certificate.


 


“Requisite Regulatory Approval” has the meaning
given to such term in the Certificate.


 


“Requisite Shareholder Approval” has the meaning
given to such term in the Certificate.


 


“Transaction Committee” means a committee of
the Board of Directors consisting of persons who either (a) were members of the
Board of Directors on the date prior to the date of this Agreement and/or (b)
were designated as members of the Transaction Committee by a person who was a
member of the Board of Directors on the date prior to the date of this
Agreement.


 


“Trident” shall mean Trident II, L.P., Marsh
& McLennan Capital Professionals Fund, L.P., and Marsh & McLennan
Employee’s Securities Company, L.P., collectively, with each individually a “Trident
Purchaser.”


 


“Triggering Event” means, at any time on or
prior to September 19, 2005, either:


 


(i)    the closing price of the Common Shares being
at or above $30 per share (as adjusted, for any event which would subject the
exercise price of the Warrants to an adjustment, by the same percentage as the
percentage adjustment of such exercise price) for 20 out of 30 consecutive
trading days at any time following the Closing Date; or


 


(ii)   the acquisition by any person, entity or
“group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 40% or more, in the aggregate, of either the voting
power of the then outstanding Common Shares or the combined voting power of the
Company’s then outstanding voting securities entitled to vote generally in
election of directors; provided, however, that if such acquisition
results in whole or in part from a transfer of any Common Shares or other
voting securities


 


A-5

















 


by Marsh & McLennan
Companies, Inc. or any of its subsidiaries (or by any parent of Marsh &
McLennan Companies, Inc. or any of its subsidiaries), such acquisition shall
not constitute a Triggering Event unless such transfer is effected pursuant to
an offer by such acquiror to purchase all of the Company’s outstanding Common
Shares.


 


A-6

















 


Schedule B


 


Adjustment Basket


 


The Adjustment Basket shall be equal to A + B - C, where:


 


A        =         sum of
(Realized Value - Adjusted Closing Book Value) of each Non-Core Asset.


 


“Realized Value”
means (a) with respect to any Non-Core Asset that is disposed of on or prior to
the Test Date:  (i) all cash proceeds
realized from the disposition of such asset from July 1, 2001 through the Test
Date (the “Realization Period”) to the extent such proceeds are received
by the Company, Newco or a subsidiary of Newco and would be distributable to
the Company, net of all taxes or withholding that would be payable if such
proceeds were so distributed, plus (ii) the after-tax amount of any dividends
or distributions made from such asset during the Realization Period (to the
extent received by the Company or Newco), minus (iii) taxes payable (plus
actual tax benefits) resulting from such disposition, minus (iv) earn-outs and
other incentive payments actually made, or committed to, in connection with such
disposition (with reasonable estimates with respect to commitments which are
outstanding as of the Test Date), minus (v) investment banking, brokerage,
legal and consulting fees and other costs actually incurred in connection with
such disposition, minus all contingent liabilities, guarantee and escrows
associated with such disposition; and (b) with respect to any Non-Core Asset
that is not disposed of on or prior to the Test Date:  the appraised value, as determined by a reputable appraisal firm
selected by the Purchasers and the Transaction Committee.  Such appraisal shall take into account,
among other things, without duplication, the illiquid nature of such assets,
the size of the business, the minority nature of the interest and an expected
future 20% cost of capital for such business.


 


“Adjusted Closing Book
Value” means, with respect to any Non-Core Asset that is or is not disposed
of on or prior to the Test Date, its book value, determined in accordance with
GAAP, as of June 30, 2001 as set forth in the Audited Balance Sheet, plus, in
the case of Non-Core Assets, a capital charge equal to 15% per annum,
compounded annually, computed from the Closing Date to the Test Date (or in the
case of Non-Core Assets disposed of, the disposition date).


 


B        =         Test Date
Balances - Closing Date Balances


 


“Test Date Balances”
means the sum of (a) the Insurance Balances at the Test Date, calculated on the
same basis as the Audited Balance Sheet, and (b) all related cash collections
(including, without limitation, premiums and reinsurance recoveries)


 


B-1

















 


and cash payments from June 30, 2001 to the Test
Date.  It is anticipated that cash flows
subject to these provisions will be maintained under separate general ledger
control.


 


“Closing Date Balances”
means the Insurance Balances at June 30, 2001 as set forth on the Audited
Balance Sheet, including, without limitation, the amount set forth in
clause (i)(x) of the definition of Per Share Price.


 


For the avoidance of doubt, A or B can be either a
positive or negative balance.


 


“Insurance Balances”
means premiums receivable, unpaid claims and claims expenses recoverable,
prepaid reinsurance premiums, reinsurance balances receivable, deferred policy
acquisition costs, claims and claims expenses, unearned premiums, reinsurance
balances payable, and any other insurance balance (e.g., assets held in
separate accounts, claims payable, aggregate deductible fund, payables to
Bermuda cell and commissions payable) of the Core Insurance Operations with
respect to any policy or contract written or having an effective date prior to
the Closing Date.  The Insurance
Balances as contemplated herein are intended to incorporate, among other
things, return and additional premiums, retrospectively rated contract
features, extra-contractual obligations, commissions, fees and guarantee funds
and residual market assessments and other cash flows associated with in force
business as of the Closing Date and all obligations arising from business that
expired prior to Closing.


 


C       =        Reductions
in Book Value arising from the following (and without duplication of any
expenses included in the calculation of Realized Value and without duplication
of any expenses otherwise reflected in the determination of the Per Share
Price), all costs and expenses relating to the purchase and sale of Securities
and the transactions provided for hereunder (including, without limitation, all
costs and expenses arising from performance by the Company of its obligations
hereunder, all costs associated with the purchase price adjustments, all costs
of any payments that become due to any third party as a result of the
transactions hereunder, and all costs relating to litigation concerning this
Agreement), actual losses arising out of breach of representations of the
Company hereunder, the rationalization of the Company’s operations and
elimination of overhead undertaken in connection with this transaction with the
approval of the Transaction Committee, the reduction in book value resulting
from any other expenses (including internal incentive arrangements), employee
separation agreements, fee payable by the Company to Credit Suisse First Boston
Corporation or any other investment banking firm or broker, legal fees payable
to counsel engaged by or on behalf of the Company, and other related breakage
costs, in each case in connection with the transactions hereby.  For


 


B-2

















 


the avoidance of doubt, the foregoing shall not
include, and in no event shall the Per Share Price be reduced by, any payments
made in exchange for cancellation of the Company’s class B warrants outstanding
on the date of this Agreement.


 


Notwithstanding anything herein to the contrary, with
respect to PSIC, “Adjusted Closing Book Value” means $3,655,000,
consisting of the (a) purchase price of $2,255,000 paid by the Company on
December 4, 2002 and (b) related capital contribution of $1,400,000 made to
PSIC by the Company on December 10, 2002 required in connection with the
Company’s acquisition of PSIC, plus, a capital charge equal to 15% per annum,
compounded annually, computed from the date each respective payment was made by
the Company to the Test Date (or in the case that PSIC is disposed of, the
disposition date).


 


B-3