Document:

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                                                                    EXHIBIT 10.9
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                               TERM LOAN AGREEMENT

                                      among

                       ENDURANCE SPECIALTY HOLDINGS LTD.,

                          VARIOUS LENDING INSTITUTIONS,

                                       and

                              JPMORGAN CHASE BANK,
                             as ADMINISTRATIVE AGENT

                           Dated as of August 13, 2002

                                  $192,000,000

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                          J.P. MORGAN SECURITIES INC.,
           as SOLE ADVISOR, SOLE LEAD ARRANGER AND SOLE BOOK MANAGER,

                              THE BANK OF NEW YORK,
                      as CO-ARRANGER AND SYNDICATION AGENT,

                                       and

                               BARCLAYS BANK PLC,
                             as DOCUMENTATION AGENT

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                  TERM LOAN AGREEMENT, dated as of August 13, 2002, among
ENDURANCE SPECIALTY HOLDINGS LTD., a company organized under the laws of Bermuda
(the "Parent Borrower"), the lending institutions listed from time to time on
Annex I hereto (each a "Lender" and, collectively, the "Lenders"), and JPMORGAN
CHASE BANK, as Administrative Agent (the "Administrative Agent"). Unless
otherwise defined herein, all capitalized terms used herein and defined in
Section 9 are used herein as so defined.

                              W I T N E S S E T H :

                  WHEREAS, subject to and upon the terms and conditions set
forth herein, the Lenders are willing to make available to the Parent Borrower
the term loans provided for herein.

                  NOW, THEREFORE, IT IS AGREED:

                  SECTION 1. Amount and Terms of Credit.

                  1.01 Commitments. (a) Subject to and upon the terms and
conditions set forth herein, each Lender with an Initial Term Loan Commitment
severally agrees, at any time and from time to time after the Effective Date and
prior to the Term Loan Commitment Expiration Date, to make a term loan or term
loans (each, an "Initial Term Loan" and, collectively, the "Initial Term Loans")
to the Parent Borrower, which Initial Term Loans (i) shall only be incurred on
each Initial Term Loan Borrowing Date, (ii) shall be denominated in Dollars,
(iii) shall, at the option of the Parent Borrower, be incurred and maintained as
and/or converted into Base Rate Loans or Eurodollar Loans, provided that, except
as otherwise specifically provided in Section 1.10(b), all Initial Term Loans
comprising the same Borrowing shall at all times be of the same Type and, (iv)
shall not exceed for any Lender, in initial aggregate principal amount, that
amount which equals the Initial Term Loan Commitment of such Lender at the time
of incurrence thereof (before giving effect to any reductions thereto on such
date pursuant to Section 2.03(b)), and (v) shall not exceed, in initial
aggregate principal amount, that amount which equals the Total Initial Term Loan
Commitment at the time of incurrence thereof (before giving effect to any
reductions thereto on such date pursuant to Section 2.03(b)). Once repaid,
Initial Term Loans incurred hereunder may not be reborrowed.

                  (b) Subject to Section 1.14 and the other terms and conditions
set forth herein, each Lender with an Incremental Term Loan Commitment severally
agrees to make a term loan or term loans (each, an "Incremental Term Loan" and,
collectively, the "Incremental Term Loans") to the Parent Borrower, which
Incremental Term Loans (i) shall only be incurred on each Incremental Term Loan
Borrowing Date, (ii) shall be denominated in Dollars, (iii) shall, at the option
of the Parent Borrower, be incurred and maintained as and/or converted into Base
Rate Loans or Eurodollar Loans, provided that, except as otherwise specifically
provided in Section 1.10(b), all Incremental Term Loans comprising the same
Borrowing shall at all times be of the same Type and (iv) shall not exceed for
any Lender, in initial aggregate principal amount, that amount which equals the
Incremental Term Loan Commitment of such Lender at the time of incurrence
thereof (before giving effect to any reductions thereto on such date pursuant to
Section 2.03(b)). Once repaid, Incremental Term Loans incurred hereunder may not
be reborrowed. Each initial Borrowing of Incremental Term Loans shall be
maintained as a single Borrowing, provided that each such initial Borrowing of
Incremental Term Loans shall be
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incorporated into the existing Borrowings of Term Loans as promptly as
practicable in a manner to be determined by the Administrative Agent in its sole
discretion.

                  1.02 Minimum Amount of Each Borrowing; Maximum Number of
Borrowings. The aggregate principal amount of each Borrowing hereunder shall not
be less than $5,000,000, provided that Borrowings of Incremental Term Loans
referred to in Section 1.01(b) above may be less than $5,000,000. More than one
Borrowing may be incurred on any day; provided that at no time shall there be
outstanding more than ten Borrowings of Eurodollar Loans.

                  1.03 Notice of Borrowing. (a) Whenever the Parent Borrower
desires to incur Term Loans, it shall give the Administrative Agent at its
Notice Office, (x) prior to 11:00 A.M. (New York time), at least three Business
Days' prior written notice (or telephonic notice promptly confirmed in writing)
of each Borrowing of Eurodollar Loans or (y) prior to 10:00 A.M. (New York time)
on the day of each Borrowing of Base Rate Loans, prior written notice (or
telephonic notice promptly confirmed in writing). Each such notice (a "Notice of
Borrowing"), except as otherwise expressly provided in Section 1.10, shall be
irrevocable, and, in the case of a written notice and a confirmation of
telephonic notice, shall be in the form of Exhibit A hereto, appropriately
completed to specify (i) the aggregate principal amount of the Term Loans to be
made pursuant to such Borrowing, (ii) the date of such Borrowing (which shall be
a Business Day) and (iii) whether the respective Borrowings shall consist of
Base Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest
Period to be initially applicable thereto. The Administrative Agent shall
promptly give each Lender written notice (or telephonic notice promptly
confirmed in writing) of each proposed Borrowing, of such Lender's proportionate
share thereof and of the other matters covered by the Notice of Borrowing.

                  (b) Without in any way limiting the obligation of the Parent
Borrower to confirm in writing any notice it may give hereunder by telephone,
the Administrative Agent may act prior to receipt of written confirmation
without liability upon the basis of such telephonic notice, believed by the
Administrative Agent in good faith to be from an Authorized Officer of the
Parent Borrower. In each such case the Administrative Agent's record of the
terms of any such telephonic notice shall be conclusive absent manifest error.

                  1.04 Disbursement of Funds. (a) Subject to the terms and
conditions herein set forth, no later than 11:00 A.M. (New York time) on the
date of each incurrence of Term Loans, each Lender will make available to the
Administrative Agent its pro rata share of each Borrowing requested to be made
on such date in the manner provided below.

                  (b) Each Lender shall make available all amounts it is to fund
under any Borrowing in Dollars and immediately available funds to the
Administrative Agent at the Payment Office and the Administrative Agent will
make available to the Parent Borrower as promptly as practicable by depositing
to its account at the Payment Office the aggregate of the amounts so made
available in the type of funds received. Unless the Administrative Agent shall
have been notified by any Lender prior to the date of any such Borrowing that
such Lender does not intend to make available to the Administrative Agent its
portion of the Borrowing or Borrowings to be made on such date, the
Administrative Agent may assume that such Lender has made such amount available
to the Administrative Agent on the date of such Borrowing, and the
Administrative Agent, in reliance upon such assumption, may (in its sole
discretion and without

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any obligation to do so) make available to the Parent Borrower a corresponding
amount. If such corresponding amount is not in fact made available to the
Administrative Agent by such Lender and the Administrative Agent has made
available same to the Parent Borrower, the Administrative Agent shall be
entitled to recover such corresponding amount from such Lender. If such Lender
does not pay such corresponding amount forthwith upon the Administrative Agent's
demand therefor, the Administrative Agent shall promptly notify the Parent
Borrower, and the Parent Borrower shall pay such corresponding amount to the
Administrative Agent within two Business Days. The Administrative Agent shall
also be entitled to recover from the Lender or the Parent Borrower, as the case
may be, interest on such corresponding amount in respect of each day from the
date such corresponding amount was made available by the Administrative Agent to
the Parent Borrower to the date such corresponding amount is recovered by the
Administrative Agent, at a rate per annum equal to (x) if paid by such Lender,
the overnight Federal Funds Effective Rate or (y) if paid by the Parent
Borrower, the then applicable rate of interest, calculated in accordance with
Section 1.08(a) or (b), as the case may be, for the respective Term Loans.

                  (c) Nothing in this Section 1.04 shall be deemed to relieve
any Lender from its obligation to fulfill its commitments hereunder or to
prejudice any rights which the Parent Borrower may have against any Lender as a
result of any default by such Lender hereunder.

                  1.05 Term Notes. (a) The Parent Borrower's obligation to pay
the principal of, and interest on, all of the Term Loans made to it by each
Lender shall be evidenced in the Register maintained by the Administrative Agent
pursuant to Section 11.16 and shall, if requested by such Lender, also be
evidenced by a promissory note substantially in the form of Exhibit B hereto
with blanks appropriately completed in conformity herewith (each a "Term Note"
and collectively, the "Term Notes").

                  (b) The Term Note issued to each Lender shall (i) be executed
by the Parent Borrower, (ii) be payable to the order of such Lender and be dated
the Effective Date (or if issued after the Effective Date, be dated the date of
the issuance thereof), (iii) be in a stated principal amount equal to the
Initial Term Loan Commitment or Incremental Term Loan Commitment, as the case
may be, of such Lender and be payable in a principal amount equal to the amount
of the Initial Term Loans or Incremental Term Loans, as the case may be, made by
such Lender, (iv) mature on the Maturity Date, (v) bear interest as provided in
the appropriate clause of Section 1.08 in respect of the Base Rate Loans and
Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to
voluntary prepayment as provided in Section 3.01 and mandatory repayment as
provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement
and the other Credit Documents. Upon receipt of an affidavit of an officer of
the Lender (together with a customary indemnity from such Lender in form and
substance satisfactory to the Parent Borrower) that a Term Note has been lost,
stolen, destroyed or mutilated, the Parent Borrower will issue a replacement
Term Note in the same principal amount thereof and otherwise of like tender.

                  (c) Each Lender will record on its internal records the amount
of each Term Loan made by it and each payment in respect thereof and will prior
to any transfer of its Term Note endorse on the reverse side thereof the
outstanding principal amount of Term Loans

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evidenced thereby. Failure to make any such notation or any error in any such
notation shall not affect the Parent Borrower's obligations in respect of such
Term Loans.

                  (d) Notwithstanding anything to the contrary contained above
in this Section 1.05 or elsewhere in this Agreement, Term Notes shall only be
delivered to Lenders which at any time specifically request the delivery of such
Term Notes. No failure of any Lender to request or obtain a Term Note evidencing
its Term Loans to the Parent Borrower shall affect or in any manner impair the
obligations of the Parent Borrower to pay the Term Loans (and all related
Obligations) incurred by the Parent Borrower which would otherwise be evidenced
thereby in accordance with the requirements of this Agreement. Any Lender which
does not have a Term Note evidencing its outstanding Term Loans shall in no
event be required to make the notations otherwise described in preceding clause
(c). At any time when any Lender requests the delivery of a Term Note to
evidence any of its Term Loans, the Parent Borrower shall promptly execute and
deliver to the respective Lender the requested Term Note in the appropriate
amount or amounts to evidence such Term Loans.

                  1.06 Conversions. The Parent Borrower shall have the option to
convert on any Business Day all or a portion at least equal to $1,000,000 of the
outstanding principal amount of its Term Loans of one Type, into a Borrowing or
Borrowings of the other Type of Term Loans; provided that (i) no partial
conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding
principal amount of the Eurodollar Loans pursuant to such Borrowing to less than
$1,000,000, (ii) Base Rate Loans may not be converted into Eurodollar Loans if
any Default or Event of Default is in existence on the date of the conversion if
the Administrative Agent or the Required Lenders have previously advised the
Parent Borrower that conversions will not be permitted while such Default or
Event of Default, as the case may be, remains in existence, (iii) Borrowings of
Eurodollar Loans resulting from this Section 1.06 shall be limited in number as
provided in Section 1.02, (iv) Eurodollar Loans may only be converted into Base
Rate Loans on the last day of the Interest Period applicable thereto, and (v)
each such conversion shall be made pro rata among the Term Loans of each Lender
of the Type being converted. Each such conversion shall be effected by the
Parent Borrower by giving the Administrative Agent at its Notice Office, prior
to 11:00 A.M. (New York time), at least three Business Days' (or one Business
Day's in the case of a conversion into Base Rate Loans) prior written notice (or
telephonic notice promptly confirmed in writing) (each a "Notice of Conversion")
specifying the Term Loans to be so converted, the Type of Term Loans to be
converted into and, if to be converted into a Borrowing of Eurodollar Loans, the
Interest Period to be initially applicable thereto. The Administrative Agent
shall give each Lender prompt notice of any such proposed conversion affecting
any of its Term Loans.

                  1.07 Pro Rata Borrowings. All Borrowings of Term Loans under
this Agreement shall be incurred by the Parent Borrower from the Lenders pro
rata on the basis of such Lenders' Term Loan Commitments (subject to the last
sentence of Section 1.01(b)). It is understood that no Lender shall be
responsible for any default by any other Lender in its obligation to make Term
Loans hereunder and that each Lender shall be obligated to make the Term Loans
provided to be made by it hereunder, regardless of the failure of any other
Lender to fulfill its commitments hereunder.

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                  1.08 Interest. (a) The unpaid principal amount of each Base
Rate Loan shall bear interest from the date of the Borrowing thereof until the
earlier of (i) the maturity (whether by acceleration or otherwise) of such Base
Rate Loan and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan
pursuant to Section 1.06, at a rate per annum which shall at all times be the
Applicable Margin then in effect for Base Rate Loans plus the Base Rate in
effect from time to time.

                  (b) The unpaid principal amount of each Eurodollar Loan shall
bear interest from the date of the Borrowing thereof until the earlier of (i)
the maturity (whether by acceleration or otherwise) of such Eurodollar Loan or
(ii) the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to
Sections 1.06, 1.09 or 1.10(b), as applicable, at a rate per annum which shall
at all times be the Applicable Margin then in effect for Eurodollar Loans plus
the relevant Eurodollar Rate for the Interest Period applicable to such
Eurodollar Loan.

                  (c) Overdue principal and, to the extent permitted by law,
overdue interest in respect of each Term Loan and any other overdue amount
payable hereunder shall be payable on demand and shall bear interest at a rate
per annum equal to the Applicable Margin then in effect for Base Rate Loans plus
the Base Rate in effect from time to time plus 2%, provided that overdue
principal in respect of Eurodollar Loans shall bear interest until the end of
the Interest Period applicable to such Eurodollar Loans at a rate per annum
equal to 2% in excess of the rate otherwise applicable to such Eurodollar Loans.

                  (d) Interest shall accrue from and including the date of any
Borrowing to but excluding the date of any repayment thereof and shall be
payable (i) in respect of each Base Rate Loan, quarterly in arrears on the last
Business Day of each calendar quarter, (ii) in respect of each Eurodollar Loan,
on the last day of each Interest Period applicable thereto and, in the case of
an Interest Period of six months, on the date occurring three months after the
first day of such Interest Period and (iii) in respect of each Term Loan, on any
conversion or prepayment (on the amount so converted or prepaid), at maturity
(whether by acceleration or otherwise) and, after such maturity, on demand.

                  (e) All computations of interest hereunder shall be made in
accordance with Section 11.07(b).

                  (f) The Administrative Agent, upon determining the interest
rate for any Borrowing of Eurodollar Loans for any Interest Period, shall
promptly notify the Parent Borrower and the Lenders thereof.

                  1.09 Interest Periods. At the time the Parent Borrower gives a
Notice of Borrowing or Notice of Conversion in respect of the making of, or
conversion into, a Borrowing of Eurodollar Loans (in the case of the initial
Interest Period applicable thereto) or prior to 11:00 A.M. (New York time) on
the third Business Day prior to the expiration of an Interest Period applicable
to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving
the Administrative Agent written notice (or telephonic notice promptly confirmed
in writing) of the Interest Period to be applicable to such Borrowing, which
Interest Period shall, at the option of the Parent Borrower, be a one, two,
three or six month period. Notwithstanding anything to the contrary contained
above:

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                  (i) the initial Interest Period for any Borrowing of
         Eurodollar Loans shall commence on the date of such Borrowing
         (including the date of any conversion from a Borrowing of Base Rate
         Loans) and each Interest Period occurring thereafter in respect of such
         Borrowing shall commence on the day on which the next preceding
         Interest Period expires;

                  (ii) if any Interest Period begins on a day for which there is
         no numerically corresponding day in the calendar month at the end of
         such Interest Period, such Interest Period shall end on the last
         Business Day of such calendar month;

                  (iii) if any Interest Period would otherwise expire on a day
         which is not a Business Day, such Interest Period shall expire on the
         next succeeding Business Day, provided that if any Interest Period
         would otherwise expire on a day which is not a Business Day but is a
         day of the month after which no further Business Day occurs in such
         month, such Interest Period shall expire on the next preceding Business
         Day;

                  (iv) no Interest Period may be elected if it would extend
         beyond the Maturity Date; and

                  (v) no Interest Period may be selected at any time when a
         Default or Event of Default is then in existence if the Administrative
         Agent or the Required Banks have previously advised the Parent Borrower
         that the selection of Interest Periods will not be permitted while such
         Default or Event of Default, as the case may be, remains in existence.

If upon the expiration of any Interest Period, the Parent Borrower has failed,
or is not permitted, to elect a new Interest Period to be applicable to the
respective Borrowing of Eurodollar Loans as provided above, the Parent Borrower
shall be deemed to have elected to convert such Borrowing into a Borrowing of
Base Rate Loans effective as of the expiration date of such current Interest
Period.

                  1.10 Increased Costs, Illegality, etc. (a) In the event that
(x) in the case of clause (i) below, the Administrative Agent, or (y) in the
case of clauses (ii) and (iii) below, any Lender, shall have determined in good
faith (which determination shall, absent manifest error, be final and conclusive
and binding upon all parties hereto):

                  (i) on any date for determining the Eurodollar Rate for any
         Interest Period, that, by reason of any changes arising after the
         Effective Date affecting the interbank Eurodollar market, adequate and
         fair means do not exist for ascertaining the applicable interest rate
         on the basis provided for in the definition of Eurodollar Rate; or

                  (ii) at any time, that such Lender shall incur increased costs
         or reductions in the amounts received or receivable hereunder with
         respect to any Eurodollar Loans (other than any increased cost or
         reduction in the amount received or receivable resulting from a change
         in the rate of taxes or similar charges) because of (x) any change
         since the Effective Date in any applicable law, governmental rule,
         regulation, guideline, order or request (whether or not having the
         force of law), or in the interpretation or administration thereof and
         including the introduction of any new law or governmental rule,
         regulation,

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         guideline, order or request (such as, for example, but not limited to,
         (A) a change in the basis of taxation of payment to any Lender of the
         principal of, or interest on, the Term Loans or any other amounts
         payable hereunder (except for changes in the rate of tax on, or
         determined by reference to, the net income or net profits of such
         Lender pursuant to the laws of the jurisdiction in which it is
         organized or in which its principal office or applicable lending office
         is located or any subdivision thereof or therein), but without
         duplication of any amounts owed to such Lender under Section 3.04(a),
         or (B) a change in official reserve requirements, but, in all events,
         excluding reserves required under Regulation D to the extent included
         in the computation of the Eurodollar Rate) and/or (y) other
         circumstances affecting the interbank Eurodollar market or the position
         of such Lender in such market; or

                  (iii) at any time, that the making or continuance of any
         Eurodollar Loan has become unlawful by compliance by such Lender in
         good faith with any change since the Effective Date in any law,
         governmental rule, regulation, guideline or order, or the
         interpretation or application thereof, or would conflict with any
         thereof not having the force of law but with which such Lender
         customarily complies, or has become impracticable as a result of a
         contingency occurring after the Effective Date which materially
         adversely affects the interbank Eurodollar market;

then, and in any such event, such Lender (or the Administrative Agent in the
case of clause (i) above) shall (x) on such date and (y) within 10 Business Days
of the date on which such event no longer exists give notice (by telephone
confirmed in writing) to the Parent Borrower and to the Administrative Agent of
such determination and the reason therefor (which notice the Administrative
Agent shall promptly transmit to each of the other Lenders). Thereafter (x) in
the case of clause (i) above, Eurodollar Loans shall no longer be available
until such time as the Administrative Agent notifies the Parent Borrower and the
Lenders that the circumstances giving rise to such notice by the Administrative
Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given
by the Parent Borrower with respect to Eurodollar Loans which have not yet been
incurred shall be deemed rescinded by the Parent Borrower or, in the case of a
Notice of Borrowing, shall, at the option of the Parent Borrower, be deemed
converted into a Notice of Borrowing for Base Rate Loans to be made on the date
of Borrowing contained in such Notice of Borrowing, (y) in the case of clause
(ii) above, the Parent Borrower shall pay to such Lender, within 10 Business
Days following receipt of written demand therefor, such additional amounts (in
the form of an increased rate of, or a different method of calculating, interest
or otherwise as such Lender shall determine in good faith) as shall be required
to compensate such Lender for such increased costs or reductions in amounts
receivable hereunder (a written notice as to the additional amounts owed to such
Lender, showing the basis for the calculation thereof, which basis shall be
reasonable and consistently applied, submitted to the Parent Borrower by such
Lender shall, absent manifest error, be final and conclusive and binding upon
all parties hereto) and (z) in the case of clause (iii) above, the Parent
Borrower shall take one of the actions specified in Section 1.10(b) as promptly
as possible and, in any event, within the time period required by law.

                  (b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.10(a)(ii) or (iii), the Parent Borrower may
(and, in the case of a Eurodollar Loan affected pursuant to Section
1.10(a)(iii), the Parent Borrower shall) either (i) if the affected

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Eurodollar Loan is then being made pursuant to a Borrowing, by giving the
Administrative Agent telephonic notice (confirmed promptly in writing) thereof
on the same date that the Parent Borrower was notified by a Lender (or on the
next Business Day if the Parent Borrower received such notice after 3:00 p.m.
(New York time)) pursuant to Section 1.10(a)(ii) or (iii), cancel said
Borrowing, convert the related Notice of Borrowing into one requesting a
Borrowing of Base Rate Loans or require the affected Lender to make its
requested Term Loan as a Base Rate Loan, or (ii) if the affected Eurodollar Loan
is then outstanding, upon at least one Business Day's notice to the
Administrative Agent, require the affected Lender to convert each such affected
Eurodollar Loan into a Base Rate Loan, provided that if more than one Lender is
affected at any time, then all affected Lenders must be treated the same
pursuant to this Section 1.10(b).

                  (c) If any Lender shall have determined in good faith that
after the Effective Date the adoption or effectiveness of any applicable law,
rule or regulation regarding capital adequacy, or any change therein, or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged by law with the
interpretation or administration thereof, or compliance by such Lender or its
parent corporation with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, in each case made subsequent to the Effective Date, has or
would have the effect of reducing the rate of return on such Lender's or its
parent corporation's capital or assets as a consequence of such Lender's
commitments or obligations hereunder to a level below that which such Lender or
its parent corporation could have achieved but for such adoption, effectiveness,
change or compliance (taking into consideration such Lender's or its parent
corporation's policies with respect to capital adequacy), then from time to
time, upon demand by such Lender (with a copy to the Administrative Agent), the
Parent Borrower agrees to pay such Lender such additional amount or amounts as
will compensate such Lender or its parent corporation for such reduction. Each
Lender, upon determining in good faith that any additional amounts will be
payable pursuant to this Section 1.10(c), will give prompt written notice
thereof to the Parent Borrower, which notice shall set forth the basis of the
calculation of such additional amounts, which basis must be reasonable and
consistently applied, although the failure to give any such notice shall not
release or diminish the Parent Borrower's obligations to pay additional amounts
pursuant to this Section 1.10(c) upon the subsequent receipt of such notice.

                  1.11 Compensation. The Parent Borrower agrees to compensate
each Lender, upon its written request (which request shall set forth the basis
for requesting such compensation), for all reasonable losses, expenses and
liabilities (including, without limitation, any loss, expense or liability
incurred by reason of the liquidation or reemployment of deposits or other funds
required by such Lender to fund its Eurodollar Loans but excluding any loss of
anticipated profit with respect to such Term Loans) which such Lender may
sustain: (i) if for any reason (other than a default by such Lender or the
Administrative Agent) a Borrowing of Eurodollar Loans does not occur on a date
specified therefor in a Notice of Borrowing or Notice of Conversion (whether or
not withdrawn by the Parent Borrower or deemed withdrawn pursuant to Section
1.10(a)); (ii) if any repayment, prepayment, assignment or conversion of any of
its Eurodollar Loans occurs on a date which is not the last day of an Interest
Period applicable thereto; (iii) if any prepayment of any of its Eurodollar
Loans is not made on any date specified in a notice of prepayment given by the
Parent Borrower; or (iv) as a consequence of (x) any other

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failure by the Parent Borrower to repay its Term Loans when required by the
terms of this Agreement or (y) an election made pursuant to Section 1.10(b).

                  1.12 Change of Lending Office. Each Lender agrees that, upon
the occurrence of any event giving rise to the operation of Section 1.10(a)(ii)
or (iii) or Section 3.04 with respect to such Lender, it will, if requested by
the Parent Borrower, use reasonable efforts (subject to overall policy
considerations of such Lender) to designate another lending office for any Term
Loans affected by such event; provided that such designation is made on such
terms that, in the opinion of such Lender, such Lender and its lending office
suffer no economic, legal or regulatory disadvantage, with the object of
avoiding the consequence of the event giving rise to the operation of any such
Section. Nothing in this Section 1.12 shall affect or postpone any of the
obligations of the Parent Borrower or the right of any Lender provided in
Section 1.10 or Section 3.04.

                  1.13 Replacement of Lenders. (a) Upon the occurrence of any
event giving rise to the operation of Section 1.10(a)(ii) or (iii) or Section
4.04 with respect to any Lender which results in such Lender charging to the
Parent Borrower increased costs in excess of those being generally charged by
the other Lenders, (b) if a Lender becomes a Defaulting Lender and/or (c) in the
case of a refusal by a Lender to consent to a proposed change, waiver, discharge
or termination with respect to this Agreement which has been approved by the
Required Lenders, the Parent Borrower shall have the right, if no Default or
Event of Default then exists, to replace such Lender (the "Replaced Lender"),
upon prior written notice to the Administrative Agent and such Replaced Lender,
with one or more banks or other financial institutions (none of whom shall
constitute a Defaulting Lender at the time of such replacement) reasonably
acceptable to the Administrative Agent (collectively, the "Replacement Lender"),
provided that (i) at the time of any replacement pursuant to this Section 1.13,
the Replacement Lender and the Replaced Lender shall enter into one or more
Assignment Agreements pursuant to Section 11.04(b) (and with all fees payable
pursuant to said Section 11.04(b) to be paid by the Replacement Lender) pursuant
to which the Replacement Lender shall acquire all of the Term Loan Commitments
and outstanding Term Loans of the Replaced Lender and, in connection therewith,
shall pay to the Replaced Lender in respect thereof an amount equal to the sum
of (A) an amount equal to the principal amount of, and all accrued but unpaid
interest on, all outstanding Term Loans of the Replaced Lender and (B) an amount
equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Lender
pursuant to Section 2.01 and (ii) all obligations of the Parent Borrower under
the Credit Documents owing to the Replaced Lender (other than those specifically
described in clause (i) above in respect of which the assignment purchase price
has been, or is concurrently being, paid), including, without limitation, all
amounts owing to the Replaced Lender under Section 1.11 as a result of the
assignment of its Term Loans under clause (i) above, shall be paid in full to
such Replaced Lender concurrently with such replacement. Upon the execution of
the respective Assignment Agreements, the payment of amounts referred to in
clauses (i) and (ii) above, if so requested by the Replacement Lender, delivery
to the Replacement Lender of the appropriate Term Note or Term Notes executed by
the Parent Borrower, the Replacement Lender shall become a Lender hereunder and
the Replaced Lender shall cease to constitute a Lender hereunder, except with
respect to indemnification provisions applicable to the Replaced Lender under
this Agreement, which shall survive as to such Replaced Lender.

                                      -9-
<PAGE>

                  1.14 Incremental Term Loan Commitments. (a) The Parent
Borrower shall have the right at any time and from time to time after the
Effective Date and prior to the Incremental Term Loan Termination Date to
request (so long as no Default of Event of Default is then in existence or would
result therefrom) on one or more occasions that one or more Lenders (and/or one
or more other Persons which will become Lenders as provided pursuant to clause
(vi) below) provide Incremental Term Loan Commitments and, subject to the
applicable terms and conditions contained in this Agreement and the relevant
Incremental Term Loan Commitment Agreement, make Incremental Term Loans pursuant
to Section 1.01(b); it being understood and agreed, however, that (i) no Lender
shall be obligated to provide an Incremental Term Loan Commitment as a result of
any request by the Parent Borrower, (ii) until such time, if any, as (x) such
Lender has agreed in its sole discretion to provide an Incremental Term Loan
Commitment and executed and delivered to the Administrative Agent an Incremental
Term Loan Commitment Agreement in respect thereof as provided in Section 1.14(b)
and (y) such other conditions set forth in Section 1.14(b) shall have been
satisfied, such Lender shall not be obligated to fund any Term Loans in excess
of the amounts provided for in Section 1.01(a) before giving effect to such
Incremental Term Loan Commitments provided pursuant to this Section 1.14, (iii)
any Lender (and/or one or more other Persons which will become Lenders as
provided pursuant to clause (vi) below) may so provide an Incremental Term Loan
Commitment without the consent of any other Lender (it being understood and
agreed that the consent of the Administrative Agent (such consent not to be
unreasonably withheld or delayed) shall be required if any such Incremental Term
Loan Commitments are to be provided by a Person which is not already a Lender),
(iv) (x) each provision of Incremental Term Loan Commitments on a given date
pursuant to this Section 1.14 shall be in a minimum aggregate amount (for all
Lenders (including, in the circumstances contemplated by clause (vi) below,
banks or other financial institutions who will become Lenders)) of at least
$1,000,000 and (y) the aggregate amount of Incremental Term Loan Commitments
provided pursuant to this Section 1.14 shall not exceed $7,857,143.86, (v) the
up-front fees payable to any Lender providing an Incremental Term Loan
Commitment shall be as set forth in the relevant Incremental Term Loan
Commitment Agreement, (vi) if, on or after the tenth Business Day following the
request by the Parent Borrower of the then existing Lenders (other than
Defaulting Lenders) to provide Incremental Term Loan Commitments pursuant to
this Section 1.14 on the terms to be applicable thereto, the Parent Borrower has
not received Incremental Term Loan Commitments in an aggregate amount equal to
that amount of the Incremental Term Loan Commitments which the Parent Borrower
desires to obtain pursuant to such request (as set forth in the notice provided
by the Borrower to the Administrative Agent as provided above), then the Parent
Borrower may request Incremental Term Loan Commitments from other banks or
financial institutions in aggregate amount equal to such deficiency on terms
which are no more favorable to such other bank or financial institution in any
respect than the terms offered to the Lenders, and (vii) all actions taken by
the Parent Borrower pursuant to this Section 1.14 shall be done in coordination
with the Administrative Agent.

                  (b) At the time of any provision of Incremental Term Loan
Commitments pursuant to this Section 1.14, (i) the Parent Borrower, the
Administrative Agent and each such Lender or other bank or financial institution
which agrees to provide an Incremental Term Loan Commitment (each, an
"Incremental Term Loan Lender") shall execute and deliver to the Administrative
Agent an Incremental Term Loan Commitment Agreement substantially in the form of
Exhibit F hereto, subject to such modifications in form and substance reasonably
satisfactory to the Administrative Agent as may be necessary or appropriate
(with the effectiveness of

                                      -10-
<PAGE>

such Incremental Term Loan Lender's Incremental Term Loan Commitment to occur
upon delivery of such Incremental Term Loan Commitment Agreement to the
Administrative Agent, the payment of any fees required in connection therewith
and the satisfaction of the other conditions in this Section 1.14 to the
reasonable satisfaction of the Administrative Agent), (ii) the Parent Borrower
shall deliver to the Administrative Agent resolutions authorizing the incurrence
of Incremental Term Loans to be incurred pursuant to each Incremental Term Loan
Agreement, together with evidence of good standing of the Parent Borrower (if
requested) and (iii) the Parent Borrower shall deliver to the Administrative
Agent an opinion, in form and substance reasonably satisfactory to the
Administrative Agent, from counsel to the Parent Borrower reasonably
satisfactory to the Administrative Agent and dated such date, covering such
matters similar to those set forth in the opinion of counsel delivered to the
Lenders on the Effective Date pursuant to Section 4.01(b) and such other matters
as the Administrative Agent may reasonably request. The Administrative Agent
shall promptly notify each Lender as to the occurrence of each Incremental Term
Loan Commitment Date, and (x) on each such date Annex I shall be deemed modified
to reflect the revised Term Loan Commitments of the affected Lenders and (y)
upon surrender of any old Term Notes by the respective Incremental Term Loan
Lender (or, if lost, a standard lost note indemnity in form and substance
reasonably satisfactory to the Parent Borrower), to the extent requested by any
Incremental Term Loan Lenders, a new Term Note will be issued, at the Parent
Borrower's expense, to such Incremental Term Loan Lender, to be in conformity
with the requirements of Section 1.05 (with appropriate modifications) to the
extent needed to reflect the new revised Term Loan Commitments and/or Term Loans
made by such Incremental Term Loan Lenders.

                  SECTION 2. Fees; Commitments.

                  2.01 Fees. (a) The Parent Borrower agrees to pay the
Administrative Agent a facility fee (the "Commitment Fee") for the account of
the Lenders pro rata on the basis of their respective Term Loan Commitments, for
the period from and including the Effective Date to but not including the Term
Loan Commitment Termination Date, computed at a per annum rate equal to 0.10% of
the Total Term Loan Commitment (as in effect from time to time). Accrued
Commitment Fees shall be due and payable on the Term Loan Commitment Termination
Date and, with respect to any Commitment Fee owing to any Lender who is replaced
pursuant to Section 1.13, on the date on which such Lender is replaced.

                  (b) The Parent Borrower agrees to pay to the Administrative
Agent, for the account of the Administrative Agent, when and as due, such fees
as have been, or are from time to time, separately agreed upon.

                  (c) All computations of Fees shall be made in accordance with
Section 11.07(b).

                  2.02 Voluntary Reduction of Commitments. Upon at least three
Business Days' prior written notice (or telephonic notice promptly confirmed in
writing) given by the Parent Borrower to the Administrative Agent at its Notice
Office (which notice shall be deemed to be given on a certain day only if given
before 11:00 A.M. (New York time) on such day and the Administrative Agent shall
promptly transmit such notice to each of the Lenders), the Parent Borrower shall
have the right, without premium or penalty, to terminate or partially reduce the

                                      -11-
<PAGE>

Total Term Loan Commitment, provided that (x) any such reduction shall apply to
permanently reduce the Total Term Loan Commitment and to proportionately reduce
the Term Loan Commitment of each Lender, and (y) any partial reduction pursuant
to this Section 2.02 shall be in integral multiples of at least $5,000,000.

                  2.03 Mandatory Reduction of Commitments. (a) The Total Initial
Term Loan Commitment (and the Initial Term Loan Commitment of each Lender) shall
be terminated at 5:00 p.m. (New York time) on the Expiration Date unless the
Effective Date has occurred on or before such date.

                  (b) In addition to any other mandatory commitment reductions
pursuant to this Section 2.03, the Total Initial Term Loan Commitment shall (i)
be reduced on each Initial Term Loan Borrowing Date in an amount equal to the
aggregate principal amount of Initial Term Loans incurred on each such date,
(ii) terminate in its entirety (to the extent not theretofore terminated) on the
Term Loan Commitment Termination Date (after giving effect to any Initial Term
Loans to be made on such date) and (iii) prior to the termination of the Total
Initial Term Loan Commitment, be permanently reduced from time to time to the
extent required by Section 3.02(d).

                  (c) In addition to any other mandatory commitment reductions
pursuant to this Section 2.03, the Incremental Term Loan Commitment of each
Lender provided pursuant to a particular Incremental Term Loan Commitment
Agreement shall (x) prior to the Term Loan Commitment Termination Date (i) be
reduced on each Incremental Term Loan Commitment Termination Date in an amount
equal to the aggregate principal amount of Incremental Term Loans incurred on
each such date, (ii) terminate in its entirety (to the extent not theretofore
terminated) on the Term Loan Commitment Termination Date (after giving effect to
any Incremental Term Loans to be made on such date) and (iii) be permanently
reduced from time to time to the extent required by Section 3.02(d) and (y) on
and after the Term Loan Commitment Termination Date, terminate in its entirety
on the respective Incremental Term Loan Borrowing Date for such Incremental Term
Loan Commitment Agreement (after giving effect to the incurrence of the
Incremental Term Loans on each such date).

                  (d) Unless previously terminated pursuant to Section 2.02 or
Section 2.03(a) above, the Total Initial Term Loan Commitment and the Total
Incremental Term Loan Commitment then in effect shall, in each case, terminate
at 5:00 P.M. on the Term Loan Commitment Termination Date.

                  (e) Each reduction and/or termination of the Total Initial
Term Loan Commitment and the Total Incremental Term Loan Commitment pursuant to
this Section 2.03 shall be applied to proportionately and permanently reduce
and/or terminate the Initial Term Loan Commitment and the Incremental A Term
Loan Commitment, as the case may be, of each Lender with such a commitment.

                  SECTION 3. Payments.

                  3.01 Voluntary Prepayments. The Parent Borrower shall have the
right to prepay Term Loans, without premium or penalty (except for amounts
payable to Section 1.11), in whole

                                      -12-
<PAGE>

or in part, from time to time on the following terms and conditions: (i) the
Parent Borrower shall give the Administrative Agent at the Payment Office
written notice (or telephonic notice promptly confirmed in writing) of its
intent to prepay the Term Loans, specifying the amount of such prepayment and
(in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which
such Term Loans were made, which notice shall be received by the Administrative
Agent (x) in the case of Base Rate Loans, no later than 11:00 A.M. (New York
time) one Business Day prior to the date of such prepayment, or (y) in the case
of Eurodollar Loans, at least three Business Days prior to the date of such
prepayment and which notice shall promptly be transmitted by the Administrative
Agent to each of the Lenders; (ii) each partial prepayment shall be in an
aggregate principal amount of at least $1,000,000, provided that no partial
prepayment of any Term Loans shall reduce the aggregate principal amount of the
Term Loans outstanding to an amount less than $1,000,000; (iii) each prepayment
in respect of any Term Loans made pursuant to a Borrowing shall be applied pro
rata among such Term Loans; (iv) prepayments of Eurodollar Loans made pursuant
to this Section 3.01 may only be made on the last day of an Interest Period
applicable thereto unless concurrently with such prepayment any payments
required to be made pursuant to Section 1.11 as a result of such prepayment are
made; and (v) each prepayment of principal of Term Loans pursuant to this
Section 3.01(a) shall be applied to reduce the then remaining Scheduled
Repayments of Term Loans in inverse order of maturity.

                  3.02 Mandatory Repayments. (a) On each date set forth below,
the Parent Borrower shall be required to repay that principal amount of Term
Loans, to the extent then outstanding, as is equal to the product of (I) the sum
of the initial principal amount of all Term Loans made hereunder (without giving
effect to any prepayments or repayments thereof) on or prior to the first
anniversary of the Initial Borrowing Date multiplied by (II) the respective
percentage set forth opposite each such date below (each such repayment, as the
same may be reduced as provided in Sections 3.01 and 3.02(d), a "Scheduled
Repayment"):

<TABLE>
<CAPTION>
                Scheduled Repayment Date                                            Percentage
                ------------------------                                            ----------
<S>                                                                                 <C>
 First Anniversary of the Initial Borrowing Date                                      20.0%
 Second Anniversary of the Initial Borrowing Date                                     40.0%
 Maturity Date                                                                        40.0%
</TABLE>

                  (b) In addition to any other mandatory repayments or
commitment reductions pursuant to this Section 3.02, by no later than the
Business Day immediately following each date after the Effective Date upon which
the Parent Borrower or any of its Subsidiaries receives any cash proceeds from
any issuance of public debt by the Parent Borrower or any of its Subsidiaries in
a capital markets transaction, an amount equal to 100% of the cash proceeds of
the respective issuance (net of all reasonable costs associated therewith,
including, without limitation, all underwriting or similar fees, discounts and
commissions, attorneys' fees and expenses paid for, or reimbursed by, the Parent
Borrower and/or any of its Subsidiaries and other costs associated therewith)
shall be applied as a mandatory repayment and/or commitment reduction in
accordance with the requirements of Sections 3.02(d) and (f).

                                      -13-
<PAGE>

                  (c) In addition to any other mandatory repayments or
commitment reductions pursuant to this Section 3.02, by no later than the
Business Day immediately following each date after the Effective Date upon which
the Parent Borrower or any of its Subsidiaries receives any cash proceeds from
any sale or issuance of its equity securities, an amount equal to 50% of the
cash proceeds of the respective sale or issuance (net of all reasonable costs
associated therewith, including, without limitation, all underwriting or similar
fees, discounts and commissions, attorneys' fees and expenses paid for, or
reimbursed by, the Parent Borrower and/or any of its Subsidiaries and other
costs associated therewith) shall be applied as a mandatory repayment and/or
commitment reduction in accordance with the requirements of Sections 3.02(d) and
(f).

                  (d) Each amount required to be applied pursuant to Sections
3.02(b) and (c) in accordance with the requirements of this Section 3.02(d),
shall be applied (i) first, as a mandatory repayment of outstanding Term Loans,
and (ii) second, to the extent in excess of the amounts required to be applied
pursuant to the preceding clause (i), to permanently reduce the Total Term Loan
Commitment (if any). The amount of each principal repayment of each outstanding
Term Loan made as required by this Section 3.02(d) shall be applied to reduce
the then remaining Scheduled Repayments of such Term Loans in inverse order of
maturity.

                  (e) Notwithstanding anything to the contrary contained
elsewhere in this Agreement, and all Term Loans shall be repaid in full on the
Maturity Date.

                  (f) With respect to each prepayment of Term Loans required by
this Section 3.02, the Parent Borrower may designate the Types of Term Loans
which are to be prepaid and the specific Borrowing or Borrowings pursuant to
which such Term Loans were made, provided that (i) if any prepayment of
Eurodollar Loans made pursuant to a single Borrowing shall reduce the
outstanding Eurodollar Loans made pursuant to such Borrowing to an amount less
than $1,000,000 for such Borrowing, then all Eurodollar Loans outstanding
pursuant to such Borrowing shall be immediately converted into a Borrowing of
Base Rate Loans and (ii) each prepayment of Term Loans made pursuant to the same
Borrowing shall be applied pro rata among the Lenders which made such Term
Loans. In the absence of a designation by the Parent Borrower as described in
the preceding sentence, the Administrative Agent shall, subject to the above,
make such designation in its sole discretion.

                  3.03 Method and Place of Payment. Except as otherwise
specifically provided herein, all payments under this Agreement and the Term
Notes shall be made to the Administrative Agent for the ratable account of the
Lenders entitled thereto, not later than 11:00 A.M. (New York time) on the date
when due and shall be made in immediately available funds and in lawful money of
the United States of America at the Payment Office, it being understood that
written, telex or facsimile notice by the Parent Borrower to the Administrative
Agent to make a payment from the funds in the Parent Borrower's account at the
Payment Office shall constitute the making of such payment to the extent of such
funds held in such account. Any payments under this Agreement which are made
later than 11:00 A.M. (New York time) shall be deemed to have been made on the
next succeeding Business Day. Whenever any payment to be made hereunder shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day and, with respect to
payments of principal, interest shall be payable during such extension at the
applicable rate in effect immediately prior to such extension.

                                      -14-
<PAGE>

                  3.04 Net Payments. (a) All payments made by the Parent
Borrower hereunder or under any Term Note will be made without setoff,
counterclaim or other defense. All such payments will be made free and clear of,
and without deduction or withholding for, any present or future taxes, levies,
imposts, duties, fees, assessments or other charges of whatever nature now or
hereafter imposed by any jurisdiction or by any political subdivision or taxing
authority thereof or therein with respect to such payments (but excluding,
except as provided in the second succeeding sentence, any tax imposed on or
measured by the net income or net profits of a Lender pursuant to the laws of
the jurisdiction in which it is organized or the jurisdiction in which the
principal office or applicable lending office of such Lender is located or any
subdivision thereof or therein) and all interest, penalties or similar
liabilities with respect to such non-excluded taxes, levies, imposts, duties,
fees, assessments or other charges (all such non-excluded taxes, levies,
imposts, duties, fees, assessments or other charges being referred to
collectively, as "Taxes"). If any Taxes are so levied or imposed, the Parent
Borrower agrees to pay the full amount of such Taxes, and such additional
amounts as may be necessary so that every payment of all amounts due under this
Agreement or under any Term Note, after withholding or deduction for or on
account of any Taxes, will not be less than the amount provided for herein or in
such Term Note. If any amounts are payable in respect of Taxes pursuant to the
preceding sentence, the Parent Borrower agrees to reimburse each Lender, upon
the written request of such Lender, for taxes imposed on or measured by the net
income or net profits of such Lender, and franchise taxes imposed in lieu of
taxes imposed on or measured by net income or net profits of a Lender, pursuant
to the laws of the jurisdiction in which such Lender is organized or in which
the principal office or applicable lending office of such Lender is located or
under the laws of any political subdivision or taxing authority of any such
jurisdiction in which such Lender is organized or in which the principal office
or applicable lending office of such Lender is located and for any withholding
of taxes as such Lender shall determine are payable by, or withheld from, such
Lender, in respect of such amounts so paid to or on behalf of such Lender
pursuant to the preceding sentence and in respect of any amounts paid to or on
behalf of such Lender pursuant to this sentence. The Parent Borrower will
furnish to the Administrative Agent within 45 days after the date the payment of
any Taxes is due pursuant to applicable law certified copies of tax receipts
evidencing such payment by the Parent Borrower. The Parent Borrower agrees to
indemnify and hold harmless each Lender, and reimburse such Lender upon its
written request, for the amount of any Taxes so levied or imposed and paid by
such Lender.

                  (b) Each Lender agrees to use reasonable efforts (consistent
with legal and regulatory restrictions and subject to overall policy
considerations of such Lender) to file any certificate or document or to furnish
to the Parent Borrower if it is not a U.S. Borrower any information as
reasonably requested by the Parent Borrower that may be necessary to establish
any available exemption from, or reduction in the amount of, any Taxes;
provided, however, that nothing in this Section 3.04(b) shall require a Lender
to disclose any confidential information (including, without limitation, its tax
returns or its Tax calculations).

                  SECTION 4. Conditions Precedent.

                  4.01 Conditions Precedent to the Effective Date. This
Agreement shall become effective on the date (the "Effective Date") on which
each of the following conditions shall have been satisfied, or waived by the
Required Lenders:

                                      -15-
<PAGE>

                  (a) Execution of Agreement; Term Notes. On the Effective Date,
(i) each of the Parent Borrower, the Administrative Agent and each of the
Lenders shall have signed a copy hereof (whether the same or different copies)
and shall have delivered the same to the Administrative Agent at its Notice
Office or, in the case of the Lenders, shall have given to the Administrative
Agent telephonic (confirmed in writing), written or facsimile transmission
notice (actually received) at the Notice Office that the same has been signed
and mailed to the Administrative Agent; and (ii) there shall have been delivered
to the Administrative Agent for the account of each Lender that has requested
the same the appropriate Term Note or Term Notes, executed by the Parent
Borrower, in each case, in the amount, maturity and as otherwise provided
herein.

                  (b) Opinion of Counsel. On the Effective Date, the
Administrative Agent shall have received (i) an opinion, in form and substance
reasonably satisfactory to the Administrative Agent, addressed to the
Administrative Agent and each of the Lenders and dated the Effective Date, from
Skadden, Arps, Slate, Meagher & Flom LLP, special United States counsel to the
Parent Borrower, which opinion shall cover the matters contained in Exhibit C-1
hereto and (ii) an opinion, in form and substance reasonably satisfactory to the
Administrative Agent, addressed to the Administrative Agent and each of the
Lenders and dated the Effective Date, from Appleby, Spurling & Kempe, special
Bermuda counsel to the Parent Borrower, which opinion shall cover the matters
covered in Exhibit C-2 hereto.

                  (c) Officer's Certificate; Corporate Proceedings. (i) On the
Effective Date, the Administrative Agent shall have received from the Parent
Borrower a certificate, dated the Effective Date, signed by the President or any
Vice President of the Parent Borrower, and attested to by the Secretary or any
Assistant Secretary of the Parent Borrower, in the form of Exhibit D hereto with
appropriate insertions and deletions, together with (x) copies of its
certificate of incorporation, by-laws or other organizational documents and (y)
the resolutions relating to the Credit Documents which shall be satisfactory to
the Administrative Agent.

                  (ii) On or prior to the Effective Date, all corporate and
legal proceedings and all instruments and agreements in connection with the
transactions contemplated by this Agreement and the other Documents shall be
reasonably satisfactory in form and substance to the Administrative Agent, and
the Administrative Agent shall have received all information and copies of all
certificates, documents and papers, including certificates of existence or good
standing certificates, as applicable, and any other records of corporate
proceedings and governmental approvals, if any, which the Administrative Agent
reasonably may have requested in connection therewith, such documents and papers
where appropriate to be certified by proper corporate or governmental
authorities.

                  (d) Adverse Change, etc. Since November 30, 2001, nothing
shall have occurred or become known to the Administrative Agent or the Required
Lenders which has had, or would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

                  (e) Litigation. On the Effective Date, no actions, suits or
proceedings by any entity (private or governmental) shall be pending against the
Parent Borrower or any of its Subsidiaries (i) with respect to this Agreement,
any other Document, the Transaction or any of

                                      -16-
<PAGE>

the transactions contemplated hereby or thereby or (ii) which has had, or would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect.

                  (f) Approvals, etc. On the Effective Date, all necessary
governmental and third party approvals, permits and licenses in connection with
the Transaction and the other transactions contemplated by the Documents and
otherwise referred to herein or therein, shall have been obtained and remain in
full force and effect.

                  (g) Indebtedness, etc. On the Effective Date, the Parent
Borrower and its Subsidiaries shall have no outstanding preferred stock or
Indebtedness except (w) the Obligations, (x) the obligations under the 364-Day
Credit Documents, (y) Indebtedness set forth on Annex V and (z) Indebtedness (on
an individual basis) which has an outstanding principal balance of less than
$1,000,000.

                  (h) No Default; Representations and Warranties. On the
Effective Date, there shall exist no Default or Event of Default, and all
representations and warranties made by the Parent Borrower contained herein or
in any other Credit Document shall be true and correct in all material respects
(it being understood and agreed that any representation or warranty which by its
terms is made as of a specified date shall be required to be true and correct in
all material respects only as of such specified date).

                  (i) A.M. Best Rating. On the Effective Date, each Regulated
Insurance Company shall have an A.M. Best financial strength rating of at least
"A-".

                  (j) Fees. On the Effective Date, the Parent Borrower shall
have paid the Administrative Agent and the Lenders all fees, expenses
(including, without limitation, legal fees and expenses) and other compensation
contemplated by this Agreement and the other Credit Documents, agreed upon by
such parties to be paid on or prior to the Effective Date.

                  4.02 Conditions Precedent to All Terms Loans. The obligation
of each Lender to make each Term Loan is subject, at the time of the making of
each such Term Loan, to the satisfaction of the following conditions:

                  (a) Effective Date. The Effective Date shall have occurred.

                  (b) No Default; Representations and Warranties. (i) There
shall exist no Default or Event of Default and (ii) all representations and
warranties contained herein or in the other Credit Documents shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on the date of the making of such
Term Loan or such issuance or amendment of a Letter of Credit, as the case may
be (it being understood and agreed that any representation or warranty which by
its terms is made as of a specified date shall be required to be true and
correct in all material respects only as of such specified date).

                  (c) Notice of Borrowing. The Administrative Agent shall have
received a Notice of Borrowing meeting the requirements of Section 1.03(a) with
respect to each incurrence of Term Loans.

                                      -17-
<PAGE>

                  (d) Minimum Consolidated Tangible Net Worth. Consolidated
Tangible Net Worth shall not be less than $900,000,000 after giving effect to
each incurrence of Term Loans under either Section 1.01(a) or Section 1.01(b).

                  The occurrence of the Effective Date shall constitute a
representation and warranty by the Parent Borrower to the Administrative Agent
and each of the Lenders that all the conditions specified in Section 4.01 exist
as of that time. Thereafter, the acceptance of the benefits of each Term Loan
shall constitute a representation and warranty by the Parent Borrower to the
Administrative Agent and each of the Lenders that the conditions specified in
Section 4.02 exist as of that time. All of the Term Notes, certificates, legal
opinion and other documents and papers referred to in this Section 4, unless
otherwise specified, shall be delivered to the Administrative Agent at its
Notice Office for the account of each of the Lenders and, except for the Term
Notes, in sufficient counterparts or copies for each of the Lenders and shall be
in form and substance reasonably satisfactory to the Administrative Agent. The
Administrative Agent shall give the Parent Borrower and each Lender written
notice that the Effective Date has occurred.

                  SECTION 5. Representations, Warranties and Agreements. In
order to induce the Lenders to enter into this Agreement and to make the Term
Loans provided for herein, the Parent Borrower hereby makes the following
representations and warranties to, and agreements with, the Lenders, all of
which shall survive the execution and delivery of this Agreement and the making
of the Term Loans (with the making of each Term Loan being deemed to constitute
a representation and warranty that the matters specified in this Section 5 are
true and correct in all material respects on and as of the date of the making of
such Term Loan unless such representation and warranty expressly indicates that
it is being made as of any specific date in which case such representation and
warranty shall be true and correct in all material respects only as of such
specified date):

                  5.01 Corporate Status. Each of the Parent Borrower and each of
its Subsidiaries (i) is a duly organized and validly existing corporation or
business trust or other entity in good standing under the laws of the
jurisdiction of its organization and has the corporate or other organizational
power and authority to own its property and assets and to transact the business
in which it is engaged and presently proposes to engage, and (ii) has been duly
qualified and is authorized to do business and is in good standing in all
jurisdictions where it is required to be so qualified, except, in the case of
this clause (ii), where the failure to be so qualified, authorized or in good
standing would not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect.

                  5.02 Corporate Power and Authority. The Parent Borrower has
the corporate power and authority to execute, deliver and carry out the terms
and provisions of the Credit Documents to which it is a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Credit Documents to which it is a party. The Parent Borrower has duly
executed and delivered each Credit Document to which it is a party and each such
Credit Document constitutes the legal, valid and binding obligation of the
Parent Borrower enforceable against the Parent Borrower in accordance with its
terms, except to the extent that enforceability thereof may be limited by
applicable bankruptcy, insolvency, moratorium or similar laws affecting
creditors' rights generally and general principles of equity regardless of
whether enforcement is sought in a proceeding in equity or at law.

                                      -18-
<PAGE>

                  5.03 No Contravention of Laws, Agreements or Organizational
Documents. Neither the execution, delivery and performance by the Parent
Borrower of this Agreement or the other Documents to which it is a party nor
compliance with the terms and provisions thereof, nor the consummation of the
transactions contemplated therein, (i) will contravene any applicable provision
of any law, statute, rule, regulation, order, writ, injunction or decree of any
court or governmental instrumentality, (ii) will conflict or be inconsistent
with or result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of the Parent Borrower or any of its Subsidiaries pursuant to
the terms of, any indenture, mortgage, deed of trust, loan agreement, credit
agreement or any other material instrument to which the Parent Borrower or any
of its Subsidiaries is a party or by which it or any of its property or assets
are bound or to which it may be subject or (iii) will violate any provision of
the certificate of incorporation, by-laws or other organizational documents of
the Parent Borrower or any of its Subsidiaries.

                  5.04 Litigation and Contingent Liabilities. There are no
actions, suits or proceedings pending or threatened in writing involving the
Parent Borrower or any of its Subsidiaries (including, without limitation, with
respect to this Agreement or any other Document) that have had, or would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect.

                  5.05 Use of Proceeds; Margin Regulations. (a) All proceeds of
the Term Loans shall be utilized for the general corporate and working capital
purposes of the Parent Borrower and its Subsidiaries (including, without
limitation, to finance or refinance the Capital Optimization).

                  (b) Neither the making of any Term Loan hereunder or other
Indebtedness or financing of the Parent Borrower, nor the use of the proceeds
thereof, will violate or be inconsistent with the provisions of Regulation T, U
or X of the Board of Governors of the Federal Reserve System and no part of the
proceeds of any Term Loan or other Indebtedness or financing of the Parent
Borrower will be used to purchase or carry any Margin Stock or to extend credit
for the purpose of purchasing or carrying any Margin Stock.

                  5.06 Approvals. Any order, consent, approval, license,
authorization, or validation of, or filing, recording or registration with, or
exemption by, any foreign or domestic governmental or public body or authority,
or any subdivision thereof, which is required to authorize or is required in
connection with (i) the execution, delivery and performance of any Document or
(ii) the legality, validity, binding effect or enforceability of any Document,
has been obtained.

                  5.07 Investment Company Act. Neither the Parent Borrower nor
any of its Subsidiaries is an "investment company" or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.

                  5.08 Public Utility Holding Company Act. Neither the Parent
Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary
company" of a "holding company,"

                                      -19-
<PAGE>

or an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.

                  5.09 True and Complete Disclosure; Projections and
Assumptions. All factual information (taken as a whole) heretofore or
contemporaneously furnished by the Parent Borrower or any of its Subsidiaries to
the Administrative Agent or any Lender in writing (including, without
limitation, all information contained in the Documents) for purposes of or in
connection with this Agreement or any transaction contemplated herein is, and
all other factual information (taken as a whole with all other such information
theretofore or contemporaneously furnished) hereafter furnished by any such
Persons in writing to the Administrative Agent will be, true and accurate in all
material respects on the date as of which such information is dated and not
incomplete by omitting to state any material fact necessary to make such
information (taken as a whole with all other such information theretofore or
contemporaneously furnished) not misleading at such time in light of the
circumstances under which such information was provided. The projections
contained in such materials are based on good faith estimates and assumptions
believed by the Parent Borrower to be reasonable and attainable at the time
made, it being recognized by the Lenders that such projections as to future
events are not to be viewed as facts and that actual results during the period
or periods covered by any such projections may differ from the projected
results.

                  5.10 Financial Condition; Financial Statements. (a) The
consolidated balance sheet of ESI for the fiscal year ended December 14, 2001
and the related consolidated statements of income, shareholders' equity and cash
flows, reported on by Ernst & Young LLP, copies of which have been delivered to
each of the Lenders, and the unaudited consolidated balance sheet of ESI for its
fiscal quarter ended March 31, 2002 and the related consolidated statements of
income, shareholders' equity and cash flows, copies of which have been delivered
to each of the Lenders, fairly present, in each case, in conformity with GAAP or
SAP, as applicable, consistently applied, the consolidated financial position
and results of operations and cash flows of ESI as of such dates and their
consolidated results of operations and cash flows for such periods stated.

                  (b) The pro forma consolidated balance sheet of the Parent
Borrower and its Subsidiaries for the fiscal quarter of the Parent Borrower
ended March 31, 2002, and the related pro forma consolidated statement of income
(in each case, after giving effect to the Transaction and any other significant
transactions in the case of said pro forma financial statements), copies of
which have been delivered to each of the Lenders, fairly present, in all
material respects, the pro forma consolidated financial position and results of
operations of the Parent Borrower and its Subsidiaries for the periods covered
thereby and have been prepared in accordance with Regulation S-X of the
Securities Act of 1933 (as amended).

                  (c) Since November 30, 2001, nothing has occurred which has
had, or would reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect.

                  5.11 Tax Returns and Payments. The Parent Borrower and its
Subsidiaries (i) have timely filed with the appropriate taxing authority (taking
into account any applicable extension within which to file) all material income
and other material tax returns, domestic and

                                      -20-
<PAGE>

foreign, required to be filed by the Parent Borrower and its Subsidiaries, and
(ii) have paid all material taxes payable by them which have become due and
assessments which have become due, except for those contested in good faith and
adequately disclosed and fully provided for on the financial statements of the
Parent Borrower and its Subsidiaries and for which adequate reserves have been
established in accordance with GAAP and there is no action, suit, proceeding,
investigation, audit or claim now pending or, to the best knowledge of the
Parent Borrower or any of its Subsidiaries, proposed or threatened by any
authority regarding taxes relating to the Parent Borrower or any of its
Subsidiaries. Neither the Parent Borrower nor any of its Subsidiaries has
entered into an agreement or waiver or been requested to enter into an agreement
or waiver extending any statute of limitations relating to the payment or
collection of taxes of the Parent Borrower or any of its Subsidiaries. No tax
Liens have been filed and no claims are pending or, to the best knowledge of the
Parent Borrower or any of its Subsidiaries, proposed or threatened with respect
to any taxes, fees or other charges for any taxable period.

                  5.12 Compliance with ERISA. (a) The Parent Borrower and its
Subsidiaries and ERISA Affiliates have fulfilled their respective obligations
under the minimum funding standards of ERISA and the Code with respect to each
Plan and are in compliance with the applicable provisions of ERISA and the Code,
and have not incurred any liability to the PBGC or any Plan or Multiemployer
Plan (other than to make contributions in the ordinary course of business).

                  (b) Each Foreign Pension Plan has been maintained in
substantial compliance with its terms and with the requirements of any and all
applicable laws, statutes, rules, regulations and orders and has been
maintained, where required, in good standing with applicable regulatory
authorities. All contributions required to be made with respect to a Foreign
Pension Plan have been timely made. Neither the Parent Borrower nor any of its
Subsidiaries has incurred any material obligation in connection with the
termination of, or withdrawal from, any Foreign Pension Plan. The present value
of the accrued benefit liabilities (whether or not vested) under each Foreign
Pension Plan, determined as of the end of the Parent Borrower's most recently
ended fiscal year on the basis of actuarial assumptions, each of which is
reasonable, did not exceed the current value of the assets of such Foreign
Pension Plan allocable to such benefit liabilities.

                  5.13 Subsidiaries. (a) Set forth in Annex III is a complete
and correct list of all of the Subsidiaries of the Parent Borrower as of the
Effective Date, together with, for each such Subsidiary, (i) the jurisdiction of
organization of such Subsidiary, (ii) each Person holding direct ownership
interests in such Subsidiary and (iii) the percentage of ownership of such
Subsidiary represented by such ownership interests. Except as disclosed in Annex
III, each of the Parent Borrower and its Subsidiaries owns, free and clear of
Liens, and has the unencumbered right to vote, all outstanding ownership
interests in each Person shown to be held by it in Annex III.

                  (b) There are no restrictions on the Parent Borrower or any of
its Subsidiaries which prohibit or otherwise restrict the transfer of cash or
other assets from any Subsidiary of the Parent Borrower to the Parent Borrower,
other than (i) prohibitions or restrictions existing under or by reason of this
Agreement, the other Credit Documents or the 364-Day Credit Documents, (ii)
prohibitions or restrictions existing under or by reason of Legal Requirements,
and (iii) other

                                      -21-
<PAGE>

prohibitions or restrictions which, either individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect.

                  5.14 Capitalization. As of the Effective Date, the authorized
capital stock of the Parent Borrower consists of (i) 120,000,000 shares, $1.00
par value per share, of which 11,540,737 Ordinary Shares and 187,763 Class A
Shares are issued and outstanding. As of the Effective Date, all such
outstanding shares of the Parent Borrower have been duly and validly issued and
are fully paid and nonassessable. As of the Effective Date, neither the Parent
Borrower nor any of its Subsidiaries has outstanding any securities convertible
into or exchangeable for its capital stock or outstanding any rights to
subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, its capital stock
except for options, warrants and grants outstanding in the aggregate amounts set
forth on Annex IV.

                  5.15 Indebtedness. The Parent Borrower and its Subsidiaries do
not have any Indebtedness on the Effective Date other than (i) the Obligations,
(ii) the obligations under the 364-Day Credit Documents, (iii) the Indebtedness
listed on Annex V and (iv) Indebtedness (on an individual basis) which has an
outstanding principal balance of less than $1,000,000.

                  5.16 Compliance with Statutes, etc. The Parent Borrower and
each of its Subsidiaries is in compliance with all applicable statutes,
regulations, rules and orders of, and all applicable restrictions imposed by,
and has filed or otherwise provided all material reports, data, registrations,
filings, applications and other information required to be filed with or
otherwise provided to, all governmental bodies, domestic or foreign, in respect
of the conduct of its business and the ownership of its property (including
compliance with all applicable environmental laws), except where the failure to
comply or file would not reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect. All required regulatory approvals
are in full force and effect on the date hereof, except where the failure of
such approvals to be in full force and effect would not reasonably be expected
to have, either individually or in the aggregate, a Material Adverse Effect.

                  5.17 Insurance Licenses. Annex VI lists with respect to each
Regulated Insurance Company, as of the Effective Date, all of the jurisdictions
in which such Regulated Insurance Company holds licenses (including, without
limitation, licenses or certificates of authority from Applicable Insurance
Regulatory Authorities), permits or authorizations to transact insurance and
reinsurance business (collectively, the "Insurance Licenses"), and indicates the
type or types of insurance in which each such Regulated Insurance Company is
permitted to be engaged with respect to each Insurance License therein listed.
There is (i) no such Insurance License that is the subject of a proceeding for
suspension, revocation or limitation or any similar proceedings, (ii) no
sustainable basis for such a suspension, revocation or limitation, and (iii) no
such suspension, revocation or limitation threatened by any Applicable Insurance
Regulatory Authority, that, in each instance under (i), (ii) and (iii) above,
has had, or would reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. No Regulated Insurance Company transacts
any insurance business, directly or indirectly, in any jurisdiction other than
those listed on Annex VI, where such business requires any Insurance License of
an Applicable Insurance Regulatory Authority or such jurisdiction.

                                      -22-
<PAGE>

                  5.18 Insurance Business. All insurance policies issued by any
Regulated Insurance Company are, to the extent required under Applicable Law, on
forms approved by the insurance regulatory authorities of the jurisdiction where
issued or have been filed with and not objected to by such authorities within
the period provided for objection, except for those forms with respect to which
a failure to obtain such approval or make such a filing without it being
objected to, would not reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect.

                  5.19 Reinsurance Agreements. There are no material liabilities
outstanding as of the Effective Date under any Reinsurance Agreement to which a
Regulated Insurance Company is the ceding party. Each Reinsurance Agreement to
which a Regulated Insurance Company is the ceding party is in full force and
effect on the Effective Date.

                  5.20 The Transaction. At the time of consummation thereof, the
Transaction was (or will be) consummated in all material respects in accordance
with the terms of the relevant Documents therefor and all applicable laws. At
the time of consummation thereof, all material consents and approvals of, and
filings and registrations with, and all other actions in respect of, all
governmental agencies, authorities or instrumentalities required in order to
make or consummate the Transaction in accordance with the terms of the relevant
Documents therefor and all applicable laws have been (or will be) obtained,
given, filed or taken and are or will be in full force and effect (or effective
judicial relief with respect thereto has been obtained). All applicable waiting
periods with respect thereto have or, prior to the time when required, will
have, expired without, in all such cases, any action being taken by any
competent authority which restrains, prevents, or imposes material adverse
conditions upon the Transaction. Additionally, there does not exist any
judgment, order or injunction prohibiting or imposing material adverse
conditions upon any element of the Transaction or the performance by the Parent
Borrower and its Subsidiaries of their respective obligations under the
Documents and all applicable laws. All actions taken by the Parent Borrower and
its Subsidiaries pursuant to or in furtherance of the Transaction have been (and
will be) taken in all material respects in compliance with the respective
Documents and applicable laws.

                  SECTION 6. Affirmative Covenants. The Parent Borrower hereby
covenants and agrees that on and as of the Effective Date and thereafter, for so
long as this Agreement is in effect and until the Term Loan Commitments have
terminated, no Term Notes are outstanding and the Term Loans, together with
interest, Fees and all other Obligations (other than indemnities described in
Section 11.12 which are not then owing) incurred hereunder, are paid in full:

                  6.01 Information Covenants. The Parent Borrower will furnish
to each Lender:

                  (a) Annual Financial Statements. As soon as available and in
any event within 90 days after the close of each fiscal year of the Parent
Borrower, the consolidated balance sheet of the Parent Borrower and its
Subsidiaries as at the end of such fiscal year and the related consolidated
statements of income, operations, changes in stockholders' equity and cash flows
of the Parent Borrower and its Subsidiaries for such fiscal year, setting forth
in comparative form the consolidated figures for the previous fiscal year, all
in reasonable detail and accompanied by a report thereon of Ernst & Young LLP or
other independent public accountants of

                                      -23-
<PAGE>

recognized national standing selected by the Parent Borrower, which report shall
state that such consolidated financial statements present fairly the
consolidated financial position of each of the Parent Borrower and its
Subsidiaries as at the dates indicated and the consolidated results of its
operations and cash flows for the periods indicated in conformity with GAAP
applied on a basis consistent with prior years (except as otherwise specified in
such report; provided any exceptions or qualifications thereto must be
acceptable to the Required Lenders) and that the audit by such accountants in
connection with such consolidated financial statements has been made in
accordance with generally accepted auditing standards.

                  (b) Quarterly Financial Statements. As soon as available and
in any event within 60 days after the close of each of the first three quarterly
accounting periods in each fiscal year of the Parent Borrower, consolidated
balance sheets of each of the Parent Borrower and its Subsidiaries as at the end
of such period and the related consolidated statements of income, changes in
stockholders' equity and cash flows of the Parent Borrower and its Subsidiaries
for such period and (in the case of the second and third quarterly periods) for
the period from the beginning of the current fiscal year to the end of such
quarterly period, setting forth in each case in comparative form the
consolidated figures for the corresponding periods of the previous fiscal year,
all in reasonable detail and certified by the Chief Financial Officer of the
Parent Borrower as presenting fairly, in accordance with GAAP (except as
specifically set forth therein; provided any exceptions or qualifications
thereto must be acceptable to the Required Lenders) on a basis consistent with
such prior fiscal periods, the information contained therein, subject to changes
resulting from normal year-end audit adjustments;

                  (c) Officer's Certificates. At the time of the delivery of the
financial statements provided for in Sections 6.01(a) and 6.01(b), a certificate
of the Chief Financial Officer of the Parent Borrower to the effect that no
Default or Event of Default exists or, if any Default or Event of Default does
exist, specifying the nature and extent thereof, which certificate shall set
forth (i) the calculations required to establish whether the Parent Borrower and
its Subsidiaries were in compliance with the provisions of Sections 7.09, 7.10
and 7.11, inclusive, as at the end of such fiscal year or quarter, as the case
may be, and (ii) if delivered with the financial statements required by Section
6.01(a), the Consolidated Tangible Net Worth on such Financial Statement
Delivery Date.

                  (d) Notice of Default or Litigation. (x) Within five Business
Days after the Parent Borrower becomes aware of the occurrence of any Default
and/or any event or condition constituting, or which would reasonably be
expected to have a Material Adverse Effect, a certificate of an Authorized
Officer of the Parent Borrower setting forth the details thereof and the actions
which the Parent Borrower is taking or proposes to take with respect thereto and
(y) promptly after the Parent Borrower knows of the commencement thereof,
notice, of any litigation, dispute or proceeding involving a claim against the
Parent Borrower and/or any Subsidiary which claim would reasonably be expected
to have a Material Adverse Effect.

                  (e) Other Statements and Reports. Promptly upon the mailing
thereof to the security holders of the Parent Borrower generally, copies of all
financial statements, reports and proxy statements so mailed.

                                      -24-
<PAGE>

                  (f) SEC Filings. Promptly upon the filing thereof, copies of
all registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and annual, quarterly or
monthly reports which the Parent Borrower shall have filed with the SEC or any
national securities exchange.

                  (g) Insurance Reports and Filings. (i) Promptly after the
filing thereof, a copy of each Statutory Statement filed by each Regulated
Insurance Company.

                  (ii) Promptly following the delivery or receipt, as the case
may be, by any Regulated Insurance Company or any of their respective
Subsidiaries, copies of (a) each material registration, filing or submission
made by or on behalf of any Regulated Insurance Company with any Applicable
Insurance Regulatory Authority, except for policy form filings, (b) each
material examination and/or audit report or other submitted to any Regulated
Insurance Company by any Applicable Insurance Regulatory Authority, (c) all
material information which the Lenders may from time to time request with
respect to the nature or status of any material deficiencies or violations
reflected in any examination report or other similar report, and (d) each
material report, order, direction, instruction, approval, authorization, license
or other notice which any Borrower or any Regulated Insurance Company may at any
time receive from any Applicable Insurance Regulatory Authority.

                  (iii) As soon as available and in any event within 120 days
after the end of each fiscal year of the Parent Borrower, a report by an
independent actuarial consulting firm of recognized national standing reviewing
the adequacy of loss and loss adjustment expense reserves as at the end of the
last fiscal year of each Regulated Insurance Company, determined in accordance
with SAP, and stating an estimated amount of minimum reserves, it being agreed
that in each case such independent firm will be provided access to or copies of
all relevant valuations relating to the insurance business of each such
Regulated Insurance Company in the possession of or available to the Parent
Borrower or its Subsidiaries.

                  (iv) Promptly following notification thereof from a
Governmental Authority, notification of the suspension, limitation, termination
or non-renewal of, or the taking of any other action in respect of, any
Insurance License.

                  (h) Other Information. With reasonable promptness, such other
information or existing documents (financial or otherwise) as the Administrative
Agent or any Lender may reasonably request from time to time.

                  6.02 Books, Records and Inspections. The Parent Borrower will
(i) keep, and will cause each of its Subsidiaries to keep, proper books of
record and account in which full, true and correct entries in conformity with
GAAP or SAP, as applicable, shall be made of all dealings and transactions in
relation to its business and activities; and (ii) subject to Section 11.14,
permit, and will cause each of its Subsidiaries to permit, representatives of
any Lender at such Lender's expense prior to the occurrence and during the
continuance of an Event of Default and at the Borrowers' expense after the
occurrence of an Event of Default to visit and inspect any of their respective
properties, to examine their respective books and records and to discuss their
respective affairs, finances and accounts with their respective officers,
employees and independent public accountants. The Parent Borrower agrees to
cooperate and assist in such

                                      -25-
<PAGE>

visits and inspections, in each case at such reasonable times and as often as
may reasonably be desired.

                  6.03 Insurance. The Parent Borrower will maintain, and will
cause each of its Subsidiaries to maintain (either in the name of the Parent
Borrower or in such Subsidiary's own name) with financially sound and reputable
insurance companies, insurance on all their property in at least such amounts
and against at least such risks as are usually insured against in the same
general area by companies of established repute engaged in the same or similar
businesses.

                  6.04 Payment of Taxes. The Parent Borrower will pay and
discharge, and will cause each of its Subsidiaries to pay and discharge, all
taxes, assessments and governmental charges or levies imposed upon it or upon
its income or profits, or upon any properties belonging to it, in each case, on
a timely basis prior to the date on which penalties attach thereto, and all
lawful claims which, if unpaid, might become a Lien or charge upon any
properties of the Parent Borrower or any of its Subsidiaries; provided that,
neither the Parent Borrower nor any Subsidiary of the Parent Borrower shall be
required to pay any such tax, assessment, charge, levy or claim which is being
contested in good faith and by proper proceedings if it has maintained adequate
reserves with respect thereto in accordance with GAAP.

                  6.05 Maintenance of Existence. The Parent Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, its existence
and carry on its business in substantially the same manner and in substantially
the same fields as such business is now carried on and maintained. The Parent
Borrower will qualify and remain qualified, and cause each of its Subsidiaries
to qualify and remain qualified, as a foreign corporation in each jurisdiction,
except these jurisdictions in which the failure to receive or retain such
qualifications would reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect.

                  6.06 Compliance with Statutes, etc. The Parent Borrower will,
and will cause each Subsidiary to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls) other than those the non-compliance with which would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.

                  6.07 ERISA. As soon as possible and, in any event, within (10)
days after the Parent Borrower, any of its Subsidiaries or any of its ERISA
Affiliates knows or has reason to know that any of the events or conditions
specified below with respect to any Plan or Multiemployer Plan or Foreign
Pension Plan have occurred or exist, a certificate of the Chief Financial
Officer of the Parent Borrower setting forth details respecting such event or
condition and the action if any, that the Parent Borrower, such Subsidiary or
such ERISA Affiliate proposes to take with respect thereto (and a copy of any
report or notice required to be filed with or given to PBGC or an applicable
foreign governmental agency by the Parent Borrower, such Subsidiary or such
ERISA Affiliate with respect to such event or condition):

                                      -26-
<PAGE>

                  (i) any reportable event, as defined in subsections (c)(1),
         (2), (5) and (6), and subsection (d)(2) of Section 4043 of ERISA and
         the regulations issued thereunder, with respect to a Plan;

                  (ii) the filing under Section 4041(c) of ERISA of a notice of
         intent to terminate any Plan under a distress termination or the
         distress termination of any Plan;

                  (iii) the institution by PBGC of proceedings under Section
         4042 of ERISA for the termination of, or the appointment of a trustee
         to administer, any Plan, or the receipt by the Parent Borrower, any of
         its Subsidiaries or any of its ERISA Affiliates of a notice from a
         Multiemployer Plan that such action has been taken by PBGC with respect
         to such Multiemployer Plan;

                  (iv) the receipt by the Parent Borrower, any of its
         Subsidiaries or any of its ERISA Affiliates of notice from a
         Multiemployer Plan that the Parent Borrower, any of its Subsidiaries or
         any of its ERISA Affiliates has incurred withdrawal liability under
         Section 4201 of ERISA in excess of $5,000,000 or that such
         Multiemployer Plan is in reorganization or insolvency pursuant to
         Section 4241 or 4245 of ERISA or that it intends to terminate or has
         terminated under Section 4041A of ERISA whereby a deficiency or
         additional assessment is levied or threatened to be levied against a
         Borrower, any of its Subsidiaries or any of its ERISA Affiliates;

                  (v) the institution of a proceeding by a fiduciary of any Plan
         or Multiemployer Plan against the Parent Borrower, any of its
         Subsidiaries or any of its ERISA Affiliates to enforce Section 515 or
         4219(c)(5) of ERISA, which proceeding is not dismissed within 30 days;
         and

                  (vi) that any material contribution required to be made with
         respect to a Foreign Pension Plan has not been timely made, or that the
         Parent Borrower or any Subsidiary of the Parent Borrower may incur any
         material liability pursuant to any Foreign Pension Plan.

                  6.08 Maintenance of Property. The Parent Borrower shall, and
will cause each of its Subsidiaries to, maintain all of their properties and
assets in good condition, repair and working order, ordinary wear and tear
excepted, except where failure to maintain the same would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.

                  6.09 Maintenance of Licenses and Permits. The Parent Borrower
will, and will cause each of its Subsidiaries to, maintain all permits, licenses
and consents as may be required for the conduct of its business by any state,
federal or local government agency or instrumentality, except where failure to
maintain the same would not reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect.

                  6.10 Claims Paying Ratings. The Parent Borrower shall cause
each Regulated Insurance Company which has a claims paying rating from A.M. Best
Co. (or its successor) to maintain at all times a claims-paying rating of at
least "B++" from A.M. Best & Co. (or its successor).

                                      -27-
<PAGE>

                  6.11 End of Fiscal Years; Fiscal Quarters. The Parent Borrower
will cause (i) each of its, and each of its Subsidiaries', fiscal years to end
on December 31 of each year and (ii) each of its, and each of its Subsidiaries',
fiscal quarters to end on dates which are consistent with a fiscal year end as
described above.

                  SECTION 7. Negative Covenants. The Parent Borrower hereby
covenants and agrees that on and as of the Effective Date and thereafter, for so
long as this Agreement is in effect and until the Term Loan Commitments have
terminated, no Term Notes are outstanding and the Term Loans, together with
interest, Fees and all other Obligations (other than indemnities described in
Section 11.12 which are not then owing), incurred hereunder, are paid in full:

                  7.01 Changes in Business. The Parent Borrower will not, and
will not permit any of its Subsidiaries to, engage (directly or indirectly) in
any business other than substantially the same lines of business in which they
are engaged on the Effective Date and reasonable extensions thereof and other
businesses that are complimentary or reasonably related thereto.

                  7.02 Consolidations, Mergers, Sales of Assets and
Acquisitions. (a) The Parent Borrower will not, and will not permit any of its
Subsidiaries to, consolidate or merge with or into any other Person, provided
that (i) the Parent Borrower may merge with another Person if (x) the Parent
Borrower is the corporation surviving such merger and (y) immediately after
giving effect to such merger, no Default or Event of Default shall have occurred
and be continuing, and (ii) Subsidiaries of the Parent Borrower may merge with
one another.

                  (b) The Parent Borrower will not, nor will it permit any of
its Subsidiaries to, sell, convey, assign, lease, abandon or otherwise transfer
or dispose of, voluntarily or involuntarily (any of the foregoing being referred
to in this Section 7.02(b) as a "Disposition" and any series of related
Dispositions constituting but a single Disposition), any of its properties or
assets, tangible or intangible (including but not limited to sale, assignment,
discount or other disposition of accounts, contract rights, chattel paper or
general intangibles with or without recourse), except (i) to the extent that the
fair market value of the assets affected by any Disposition or Dispositions (as
determined in good faith by the Board of Directors of the Parent Borrower), when
added to the fair market value of the assets affected by any such other
Disposition or Dispositions previously consummated during the same fiscal year
of the Parent Borrower (as determined in good faith by the Board of Directors of
the Parent Borrower), does not constitute more than 10% of the consolidated
assets of the Parent Borrower and its Subsidiaries as of the last day of the
most recently ended fiscal year of the Parent Borrower and (ii) any Subsidiary
of the Parent Borrower may make a Disposition of any of its properties or assets
to the Parent Borrower, ESI or any Wholly-Owned Subsidiary of the Parent
Borrower.

                  (c) The Parent Borrower will not, nor will it permit any of
its Subsidiaries to, acquire all or substantially all of the capital stock or
assets of another Person unless at such time and immediately after giving effect
thereto no Default or Event of Default exists or would result therefrom.

                                      -28-
<PAGE>

                  7.03 Liens. Neither the Parent Borrower nor any of its
Subsidiaries will permit, create, assume, incur or suffer to exist any Lien on
any asset tangible or intangible now owned or hereafter acquired by it, except:

                  (a) Liens existing on the date hereof and listed on Annex VII
         hereto;

                  (b) Liens not securing Indebtedness which are incurred in the
         ordinary course of business;

                  (c) Liens securing repurchase agreements constituting a
         borrowing of funds by the Parent Borrower or any Subsidiary of the
         Parent Borrower in the ordinary course of business for liquidity
         purposes and in no event for a period exceeding 90 days in each case;

                  (d) Liens arising pursuant to purchase money mortgages,
         capital leases or security interests securing Indebtedness representing
         the purchase price (or financing of the purchase price within 90 days
         after the respective purchase) of assets acquired after the Effective
         Date;

                  (e) Liens on any asset of any Person existing at the time such
         Person is merged or consolidated with or into the Parent Borrower or
         any of its Subsidiaries and not created in contemplation of such event;

                  (f) Liens arising out of the refinancing, extension, renewal
         or refunding of any Indebtedness secured by any Lien permitted by any
         of the clauses of this Section 7.03, provided that such Indebtedness is
         not increased and is not secured by any additional assets;

                  (g) Liens securing obligations owed by the Parent Borrower to
         any of its Subsidiaries or owed by any Subsidiary of the Parent
         Borrower to the Parent Borrower or any Subsidiary of the Parent
         Borrower, in each case solely to the extent that such Liens are
         required by an Applicable Insurance Regulatory Authority for such
         Person to maintain such obligations;

                  (h) Liens on investments and cash balances of any Regulated
         Insurance Company securing obligations of such Regulated Insurance
         Company in respect of trust arrangements formed in the ordinary course
         of business for the benefit of cedents to secure reinsurance
         recoverables owed to them by such Regulated Insurance Company; and

                  (i) Liens not otherwise permitted by the foregoing clauses of
         this Section 7.03 securing Indebtedness in an aggregate principal
         amount not at any time exceeding 10% of Consolidated Tangible Net
         Worth.

                  7.04 Indebtedness. (a) The Parent Borrower will not, create,
incur, assume or permit to exist any Indebtedness, or agree, become or remain
liable (contingent or otherwise) to do any of the foregoing, except for the
Obligations, the obligations under the 364-Day Credit

                                      -29-
<PAGE>

Documents and other Indebtedness which is either pari passu with, or
subordinated in right of payment to, the Obligations.

                  (b) The Parent Borrower will not permit any of its
Subsidiaries to create, incur, assume or permit to exist any Indebtedness, or
agree, become or remain liable (contingent or otherwise) to do any of the
foregoing, except for the Obligations and the obligations under the 364-Day
Credit Documents.

                  7.05 Issuance of Stock. The Parent Borrower will not, and will
not permit any of its Subsidiaries to, directly or indirectly issue, sell,
assign, pledge, or otherwise encumber or dispose of any shares of its preferred
or preference equity securities or options to acquire preferred or preference
equity securities, except the issuance of preferred or preference equity
securities, so long as (x) no part of such preferred or preference equity
securities is mandatorily redeemable (whether on a scheduled basis or as a
result of the occurrence of any event or circumstance) prior to the first
anniversary of the Maturity Date and (y) such preferred or preference equity
securities do not contain any financial performance related covenants or
incurrence covenants which restrict the operations of the issuer thereof.

                  7.06 Dissolution. The Parent Borrower shall not suffer or
permit dissolution or liquidation either in whole or in part, except through
corporate reorganization to the extent permitted by Section 7.02.

                  7.07 Restricted Payments. The Parent Borrower will not declare
or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for
value any of its Equity Interests now or hereafter outstanding, return any
capital to its stockholders, partners or members (or the equivalent Persons
thereof) as such, make any distribution of assets, Equity Interests, obligations
or securities to its stockholders, partners or members (or the equivalent
Persons thereof) as such, or permit any of its Subsidiaries to purchase, redeem,
retire, defease or otherwise acquire for value any Equity Interests in the
Parent Borrower or to issue or sell any Equity Interests therein, if, in any
case referred to above, a Default or Event of Default shall have occurred and be
continuing at the time of such action or would result therefrom.

                  7.08 Transactions with Affiliates. Neither the Parent Borrower
nor any of its Subsidiaries shall enter into or be a party to, a transaction
with any Affiliate of the Parent Borrower or such Subsidiary (which Affiliate is
not the Parent Borrower or a Subsidiary), except transactions with Affiliates in
good faith in the ordinary course of business consistent with past practice and
on terms no less favorable to the Parent Borrower or such Subsidiary than those
that could have been obtained in a comparable transaction on an arm's length
basis from an unrelated Person.

                  7.09 Maximum Leverage Ratio. The Parent Borrower will not
permit the Leverage Ratio at any time to be greater than 0.35:1.00.

                  7.10 Minimum Consolidated Tangible Net Worth. The Parent
Borrower will not permit Consolidated Tangible Net Worth to be less than
$750,000,000 at any time.

                                      -30-
<PAGE>

                  7.11 Minimum Consolidated Fixed Charge Coverage Ratio. The
Parent Borrower will not permit the Consolidated Fixed Charge Coverage Ratio for
any Test Period ending on the last day of any fiscal quarter of the Parent
Borrower to be less than 2:00.1:00.

                  7.12 Private Act. The Parent Borrower will not become subject
to a Private Act.

                  SECTION 8. Events of Default. Upon the occurrence of any of
the following specified events (each an "Event of Default"):

                  8.01 Payments. The Parent Borrower shall (i) default in the
payment when due of any principal of any Term Loan or any Term Note, (ii)
default, and such default shall continue for three or more Business Days, in the
payment when due of any interest on any Term Loan or any Term Note or any Fees
or (iii) default in the prompt payment following notice or demand in respect of
any other amounts owing hereunder or under any other Credit Document; or

                  8.02 Representations, etc. Any representation, warranty or
material statement made or deemed made by the Parent Borrower herein or in any
other Credit Document or in any certificate or material statement delivered or
required to be delivered pursuant hereto or thereto shall prove to be untrue in
any material respect on the date as of which made or deemed made; or

                  8.03 Covenants. The Parent Borrower shall (a) default in the
due performance or observance by it of any term, covenant or agreement contained
in Section 6.01(d), 6.02(ii), 6.05, 6.08, 6.10 or Section 7, or (b) default in
the due performance or observance by it of any term, covenant or agreement
(other than those referred to in Section 8.01 or clause (a) of this Section
8.03) contained in this Agreement and such default shall continue unremedied for
a period of at least 45 days; or

                  8.04 Default Under Other Agreements. (a) The Parent Borrower
or any of its Subsidiaries shall (i) default in any payment with respect to
Indebtedness (other than the Obligations) in excess of $10,000,000 individually
or in the aggregate, for the Parent Borrower and its Subsidiaries, beyond the
period of grace, if any, provided in the instrument or agreement under which
such Indebtedness was created or (ii) default in the observance or performance
of any agreement or condition relating to any such Indebtedness or contained in
any instrument or agreement evidencing, securing or relating thereto, or any
other event shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders of such
Indebtedness (or a trustee or agent on behalf of such holder or holders) to
cause (determined without regard to whether any notice of acceleration, or any
lapse of time prior to the effectiveness of any notice of acceleration, is
required), any such Indebtedness to become due prior to its stated maturity; or
(b) Indebtedness of the Parent Borrower or its Subsidiaries in excess of
$10,000,000 shall be declared to be due and payable other than in accordance
with the terms of such Indebtedness or required to be prepaid, other than by a
regularly scheduled required prepayment or as a mandatory prepayment (unless
such required prepayment or mandatory prepayment results from a default
thereunder or an event of the type that constitutes an Event of Default), prior
to the stated maturity thereof; or

                  8.05 Bankruptcy, etc. The Parent Borrower or any of its
Subsidiaries shall commence a voluntary case concerning itself under Title 11 of
the United States Code entitled

                                      -31-
<PAGE>

"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the Parent
Borrower or any of its Subsidiaries and the petition is not controverted within
10 days, or is not dismissed within 60 days, after commencement of the case; or
a custodian (as defined in the Bankruptcy Code) is appointed for, or takes
charge of, all or substantially all of the property of the Parent Borrower or
any of its Subsidiaries; or the Parent Borrower or any of its Subsidiaries
commences (including by way of applying for or consenting to the appointment of,
or the taking of possession by, a rehabilitator, receiver, custodian, trustee,
conservator or liquidator (collectively, a "conservator") of itself or all or
any substantial portion of its property) any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency, liquidation, rehabilitation, supervision, conservatorship or similar
law of any jurisdiction or the Bermuda Companies Law whether now or hereafter in
effect relating to the Parent Borrower or any of its Subsidiaries; or any such
proceeding is commenced against (a) any Regulated Insurance Company which is
engaged in the business of underwriting insurance and/or reinsurance in the
United States, or (b) the Parent Borrower or any of its Subsidiaries (other than
(x) any Regulated Insurance Company described in the immediately preceding
clause (a)) to the extent such proceeding is consented to by such Person, and in
the case of either clause (a) or (b) remains undismissed for a period of 60
days; or the Parent Borrower or any of its Subsidiaries is adjudicated insolvent
or bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or (a) any Regulated Insurance Company which is engaged
in the business of underwriting insurance and/or reinsurance in the United
States suffers any appointment of any conservator or the like for it or any
substantial part of its property, or (b) the Parent Borrower or any of its
Subsidiaries (other than any Regulated Insurance Company described in the
immediately preceding clause (a)) suffers any appointment of any conservator or
the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Parent Borrower or any
of its Subsidiaries makes a general assignment for the benefit of creditors; or
any corporate action is taken by the Parent Borrower or any of its Subsidiaries
for the purpose of effecting any of the foregoing; or

                  8.06 ERISA. An event or condition specified in Section 6.07
shall occur or exist with respect to any Plan or Multiemployer Plan or Foreign
Pension Plan, a Borrower, any of its Subsidiaries or any of its ERISA Affiliates
shall fail to pay when due any material amount which they shall have become
liable to pay to the PBGC or to a Plan or a Multiemployer Plan under Title IV of
ERISA, or a condition shall exist by reason of which the PBGC would be entitled
to obtain a decree adjudicating that any Plan must be terminated, and as a
result of such event or condition, together with all such other events or
conditions, the Parent Borrower, any of its Subsidiaries or any of its ERISA
Affiliates shall be reasonably likely in the opinion of the general counsel of
such Borrower to incur a liability to a Plan, a Multiemployer Plan, a Foreign
Pension Plan or PBGC (or any combination of the foregoing); or

                  8.07 Judgments. One or more judgments or decrees shall be
entered against the Parent Borrower or any of its Subsidiaries involving a
liability, net of undisputed reinsurance, of $10,000,000 or more in the case of
any one such judgment or decree or in the aggregate for all such judgments and
decrees for the Parent Borrower and its Subsidiaries and any such judgments or
decrees shall not have been vacated, discharged, satisfied, stayed or bonded
pending appeal within 60 days from the entry thereof; or

                                      -32-
<PAGE>

                  8.08 Insurance License. Any one or more Insurance Licenses of
the Parent Borrower or any of its Subsidiaries shall be suspended, limited or
terminated or shall not be renewed, or any other action shall be taken by any
Governmental Authority, and such action would reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect; or

                  8.09 Ownership. A Change of Control shall occur;

then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Administrative Agent shall, upon the written
request of the Required Lenders, by written notice to the Parent Borrower, take
any or all of the following actions, without prejudice to the rights of the
Administrative Agent or any Lender to enforce its claims against any Borrower,
except as otherwise specifically provided for in this Agreement (provided that
if an Event of Default specified in Section 8.05 shall occur with respect to the
Parent Borrower, the result which would occur upon the giving of written notice
by the Administrative Agent as specified in clauses (i) and (ii) below shall
occur automatically without the giving of any such notice): (i) declare the
Total Term Loan Commitment terminated, whereupon the Initial Term Loan
Commitment and/or the Incremental Term Loan Commitment, as the case may be, of
each Lender shall forthwith terminate immediately and any Commitment Fees shall
forthwith become due and payable without any other notice of any kind and (ii)
declare the principal of, and any accrued interest in respect of, all Term Loans
and all Obligations owing hereunder and under the other Credit Documents to be,
whereupon the same shall become, forthwith due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Parent Borrower. Notwithstanding the foregoing, the Administrative Agent
shall have available to it all other remedies at law or equity, and shall
exercise any one or all of them at the request of the Required Lenders.

                  SECTION 9. Definitions. As used herein, the following terms
shall have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular number the plural
and in the plural the singular:

                  "Administrative Agent" shall have the meaning provided in the
first paragraph of this Agreement and shall include any successor to the
Administrative Agent appointed pursuant to Section 10.09.

                  "Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person, provided, that a Person shall not be
deemed to be an Affiliate solely as a result of a title or position held by such
Person. A Person shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power (i) to vote 10% or more of the
securities having ordinary voting power for the election of directors of such
corporation or (ii) to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.

                  "Agreement" shall mean this Term Loan Agreement, as the same
may be from time to time modified, amended and/or supplemented.

                                      -33-
<PAGE>

                  "Aon" shall mean, collectively, Combined Specialty
Corporation, Combined Insurance Company of America, Virginia Surety Company,
Inc., Resource Life Insurance Company, London General Insurance Company Limited,
Sterling Life Insurance Company and Combined Life Assurance Company of Europe
Limited.

                  "Applicable Insurance Regulatory Authority" shall mean, when
used with respect to any Regulated Insurance Company, the insurance department
or similar administrative authority or agency located in (x) each state in which
such Regulated Insurance Company is domiciled or (y) to the extent asserting
regulatory jurisdiction over such Regulated Insurance Company, the insurance
department, authority or agency in each state in which such Regulated Insurance
Company is licensed, and shall include any Federal insurance regulatory
department, authority or agency that may be created and that asserts regulatory
jurisdiction over such Regulated Insurance Company.

                  "Applicable Margin" shall mean, for any Margin Adjustment
Period, from and after any Start Date to and including the corresponding End
Date, the respective percentage per annum set forth below opposite the
respective Level (i.e., Level 4, Level 3, Level 2 or Level 1, as the case may
be) indicated to have been achieved on the applicable Test Date for such Start
Date (as shown in the respective officer's certificate delivered pursuant to
Section 6.01(c) of the first proviso below):

<TABLE>
<CAPTION>
                                             Term Loans              Term Loans
                                             maintained as           maintained as Base
Level              Leverage Ratio            Eurodollar Loans        Rate Loans
---------------------------------------------------------------------------------------
<S>                <C>                       <C>                     <C>
4                  Greater than 0.30 to
                   1.00                      1.375%                  0.375%

3                  Greater than 0.20 to
                   1.00 but less than or
                   equal to 0.30 to 1.00     1.125%                  0.125%

2                  Greater than 0.10 to
                   1.00 but less than or
                   equal to 0.20 to 1.00     1.00%                   0%

1                  Less than or equal to
                   0.10 to 1.0               0.875%                  0%
</TABLE>

; provided, however, that if the Parent Borrower fails to deliver the financial
statements required to be delivered pursuant to Section 6.01(b) or (c)
(accompanied by the officer's certificate required to be delivered pursuant to
Section 6.01(c) showing the applicable Leverage Ratio on the relevant Test Date)
on or prior to the respective date required by such Sections, then Level 4
pricing shall apply until such time, if any, as the financial statements
required as set forth above and the accompanying officer's certificate have been
delivered showing the pricing for the respective Margin Adjustment Period is at
a Level below Level 4 (it being understood that, in the case of any late
delivery of the financial statements and officer's certificate as so required,
any reduction in the Applicable Margin shall apply only from and after the date
of the delivery of the complying financial statements and officer's
certificate); provided, further, that (i) Level 4

                                      -34-
<PAGE>

pricing shall apply at all times when any Default or Event of Default is in
existence and (ii) Level 2 pricing shall apply for the period from the Effective
Date to the date of the delivery of the Parent Borrower's consolidated financial
statements (and related officer's certificate) in respect of its fiscal quarter
ending September 30, 2002.

                  "Assignment Agreement" shall mean an Assignment Agreement in
the form of Exhibit E (appropriately completed).

                  "Authorized Officer" shall mean any senior officer of the
Parent Borrower designated as such in writing by the Parent Borrower to, and
found acceptable by, the Administrative Agent.

                  "Bankruptcy Code" shall have the meaning provided in Section
8.05.

                  "Base Rate" at any time shall mean the higher of (x) the rate
which is 1/2 of 1% in excess of the Federal Funds Effective Rate and (y) the
Prime Lending Rate as in effect from time to time.

                  "Base Rate Loans" shall mean each Term Loan bearing interest
at the rates provided in Section 1.08(a).

                  "Bermuda Companies Law" shall mean the Companies Act 1981 of
Bermuda and other relevant Bermuda law.

                  "Borrowing" shall mean the incurrence of one Type of Term Loan
hereunder by the Parent Borrower from all of the Lenders on a pro rata basis on
a given date (or resulting from a conversion or conversions on such date),
having in the case of Eurodollar Loans the same Interest Period, provided that
Base Rate Loans incurred pursuant to Section 1.10(b) shall be considered part of
any related Borrowing of Eurodollar Loans.

                  "Business Day" shall mean (i) for all purposes other than as
covered by clause (ii) below, any day, excluding Saturday, Sunday and any day
which shall be in the City of New York a legal holiday or a day on which banking
institutions are authorized by law or other governmental actions to close, and
(ii) with respect to all notices and determinations in connection with, and
payments of principal and interest on, Eurodollar Loans, any day which is a
Business Day described in clause (i) and which is also a day for trading by and
between banks in U.S. dollar deposits in the interbank Eurodollar market.

                  "Capital Optimization" shall mean the return of up to
$200,000,000 of capital to the shareholders of the Parent Borrower either
through (x) the declaration of a dividend or (y) the repurchase of certain of
its outstanding equity interests held by its existing shareholders.

                  "Capital Optimization Documents" shall mean all documents
executed and delivered with respect to the Capital Optimization, as in effect on
the Effective Date and as the same may be modified, supplemented, restated
and/or amended from time to time in accordance with the terms hereof and
thereof.

                                      -35-
<PAGE>

                  "Capital Z Partners" shall mean, collectively, Capital Z
Financial Services Fund II, L.P. and Capital Z Financial Services Private Fund
II, L.P.

                  "Change of Control" shall mean the occurrence of any of the
following events or conditions: (a) any Person or group of Persons (as used in
Sections 13 and 14 of the Securities Exchange Act of 1934, and the rules and
regulations thereunder), other than one or more Initial Lead Investors and their
respective affiliates, shall have become the beneficial owner (as defined in
rules promulgated by the SEC) of more than 35% of the voting securities of the
Parent Borrower; (b) a majority of the members of the Parent Borrower's board of
directors are persons who are then serving on the board of directors without
having been elected by the board of directors or having been nominated for
election by its shareholders; (c) the Initial Lead Investors (together with
their respective affiliates), on an aggregate basis, shall cease to own at least
a majority of the voting securities of the Parent Borrower owned by the Initial
Lead Investors (together with their respective affiliates), on an aggregate
basis, on the Effective Date; or (d) any three or more of the Initial Lead
Investors (together with their respective affiliates), on an individual basis,
shall cease to own at least a majority of the voting securities of the Parent
Borrower owned by such Initial Lead Investor (together with its affiliates), on
an individual basis, on the Effective Date.

                  "Claims" shall have the meaning provided in Section 11.01.

                  "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to the Code are to the Code, as in effect at the
date of this Agreement and any subsequent provisions of the Code, amendatory
thereof, supplemental thereto or substituted therefor.

                  "Commitment Fee" shall have the meaning provided in Section
2.01(a).

                  "Consolidated Fixed Charge Coverage Ratio" for any period
shall mean the ratio of (i) the remainder of (x) the aggregate amount of
dividends which the Regulated Insurance Companies are permitted to pay to the
Parent Borrower under Legal Requirements during such period (determined as if
such Regulated Insurance Companies had not paid any such dividends during such
period) minus (y) the aggregate amount of dividends paid by the Parent Borrower
to its shareholders during such period, to (ii) Consolidated Fixed Charges for
such period.

                  "Consolidated Fixed Charges" for any period shall mean, with
respect to the Parent Borrower and its Subsidiaries determined on a consolidated
basis, the sum, without duplication, of (i) the aggregate amount of cash
interest expense incurred by such Persons during such period and (ii) the
aggregate amount of all scheduled repayments of Indebtedness of such Persons
required to be made during such period.

                  "Consolidated Indebtedness" shall mean, as of any date of
determination, (i) all Indebtedness for borrowed money of the Parent Borrower
and its Subsidiaries at such time determined on a consolidated basis in
accordance with GAAP plus (ii) any Indebtedness for borrowed money of any other
Person as to which the Parent Borrower and/or any of its Subsidiaries has
created a guarantee or other Contingent Obligation (but only to the extent of
such guarantee or other Contingent Obligation). For the avoidance of doubt,
"Consolidated

                                      -36-
<PAGE>

Indebtedness" shall not include any contingent obligations of any Person under
or in connection with letters of credit or similar facilities so long as no
drawings or payments have been made in respect thereof.

                  "Consolidated Net Worth" shall mean, as of any date of
determination, the Net Worth of the Parent Borrower and its Subsidiaries
determined on a consolidated basis in accordance with GAAP after appropriate
deduction for any minority interests in Subsidiaries.

                  "Consolidated Tangible Net Worth" shall mean, as of the date
of any determination, Consolidated Net Worth of the Parent Borrower and its
Subsidiaries on such date less the amount of all intangible items included
therein, including, without limitation, goodwill, franchises, licenses, patents,
trademarks, trade names, copyrights, service marks, brand names and write-ups of
assets.

                  "Consolidated Total Capital" shall mean, as of any date of
determination, the sum of (i) Consolidated Indebtedness and (ii) Consolidated
Net Worth at such time.

                  "Contingent Obligations" shall mean, as to any Person, any
obligation of such Person guaranteeing or intended to guarantee any
Indebtedness, leases, dividends or other obligations ("primary obligations") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (d) otherwise to assure or hold
harmless the owner of such primary obligation against loss in respect thereof;
provided, however, that the term Contingent Obligation shall not include (x)
endorsements of instruments for deposit or collection in the ordinary course of
business or (y) obligations of any Regulated Insurance Company under Insurance
Contracts, Reinsurance Agreements or Retrocession Agreements. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.

                  "Credit Documents" shall mean this Agreement, the Term Notes,
each Assignment Agreement and all other documents, instruments and agreements
entered into in connection herewith or therewith.

                  "Default" shall mean any event, act or condition which, with
notice or lapse of time, or both, would constitute an Event of Default.

                  "Defaulting Lender" shall mean any Lender with respect to
which a Lender Default is in effect.

                  "Dispositions" shall have the meaning provided in Section
7.02(b).

                                      -37-
<PAGE>

                  "Documents" shall mean, collectively, (i) the Credit
Documents, (ii) the 364-Day Credit Documents and (iii) the Capital Optimization
Documents.

                  "Dollar" and the sign "$" shall each mean freely transferable
lawful money of the United States.

                  "Effective Date" shall have the meaning provided in Section
4.01.

                  "End Date" shall mean, with respect to any Margin Adjustment
Period, the last day of such Margin Adjustment Period.

                  "Equity Interests" shall mean, with respect to any Person,
shares of capital stock of (or other ownership or profit interests in) such
Person, warrants, options or other rights for the purchase or other acquisition
from such Person of shares of capital stock of (or other ownership or profit
interests in) such Person, securities convertible into or exchangeable for
shares of capital stock of (or other ownership or profit interests in) such
Person or warrants, rights or options for the purchase or other acquisition from
such Person of such shares (or such other interests), and other ownership or
profit interests in such Person (including, without limitation, partnership,
member or trust interests therein), whether voting or nonvoting, and whether or
not such shares, warrants, options, rights or other interests are authorized or
otherwise existing on any date of determination.

                  "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time and the regulations promulgated and
rulings issued thereunder. Section references to ERISA are to ERISA, as in
effect at the date of this Agreement and any subsequent provisions of ERISA,
amendatory thereof, supplemental thereto or substituted therefor.

                  "ERISA Affiliate" shall mean any corporation or trade or
business which is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as the Parent Borrower or any of its
Subsidiaries or is under common control (within the meaning of Section 414(c) of
the Code) with the Parent Borrower or any of its Subsidiaries.

                  "ESI" shall mean Endurance Specialty Insurance Ltd., a company
organized under the laws of Bermuda.

                  "Eurodollar Loans" shall mean each Term Loan bearing interest
at the rates provided in Section 1.08(b).

                  "Eurodollar Rate" shall mean, with respect to each Interest
Period for a Eurodollar Loan, (i) the rate per annum that appears on page 3750
of the Dow Jones Telerate Screen (or any successor page) for Dollar deposits
with maturities comparable to such Interest Period as of 11:00 A.M. (London
time) on the date which is two Business Days prior to the commencement of such
Interest Period or, if such a rate does not appear on page 3750 of the Dow Jones
Telerate Screen (or any successor page), the offered quotations to first-class
banks in the London interbank market by JPMorgan Chase Bank for Dollar deposits
of amounts in same day funds comparable to the outstanding principal amount of
such Dollar denominated Term Loan with maturities comparable to such Interest
Period determined as of 11:00 A.M. (London

                                      -38-
<PAGE>

time) on the date which is two Business Days prior to the commencement of such
Interest Period divided (and rounded upward to the next whole multiple of 1/16
of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of
all reserve requirements (including, without limitation, any marginal,
emergency, supplemental, special or other reserves) applicable to any member
bank of the Federal Reserve System in respect of Eurocurrency liabilities as
defined in Regulation D (or any successor category of liabilities under
Regulation D).

                  "Event of Default" shall have the meaning provided in Section
8.

                  "Expiration Date" shall mean August 23, 2002.

                  "Federal Funds Effective Rate" shall mean for any period, a
fluctuating interest rate equal for each day during such period to the weighted
average of the rates on overnight Federal Funds transactions with members of the
Federal Reserve System arranged by Federal Funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Administrative Agent from three Federal
Funds brokers of recognized standing selected in good faith by the
Administrative Agent.

                  "Fees" shall mean all amounts payable pursuant to, or referred
to in, Section 2.01.

                  "Financial Statement Delivery Date" shall mean each date upon
which the respective officer's certificate is delivered pursuant to Section
6.01(c) (together with the related financial statements pursuant to Section
6.01(a)).

                  "Foreign Pension Plan" shall mean any plan, fund (including,
without limitation, any superannuation fund) or other similar program
established or maintained outside the United States of America by the Parent
Borrower or any one or more of its Subsidiaries primarily for the benefit of
employees of the Parent Borrower or such Subsidiaries residing outside the
United States of America, which plan, fund or other similar program provides, or
results in, retirement income, a deferral of income in contemplation of
retirement or payments to be made upon termination of employment, and which plan
is not subject to ERISA or the Code.

                  "GAAP" shall mean generally accepted accounting principles in
the United States of America; it being understood and agreed that determinations
in accordance with GAAP for purposes of Section 7, including defined terms as
used therein, are subject (to the extent provided therein) to Section 11.07(a).

                  "Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, including any Applicable Insurance Regulatory
Authority.

                  "Guaranteed Creditors" shall mean and include each of the
Administrative Agent, and the Lenders.

                  "Incremental Term Loan" shall have the meaning provided in
Section 1.01(b).

                                      -39-
<PAGE>

                  "Incremental Term Loan Borrowing Date" shall mean (x) in the
case of Incremental Term Loan Commitments provided on or prior to the Term Loan
Commitment Termination Date, any Business Day on or prior to the Term Loan
Commitment Termination Date and (y) in the case of Incremental Term Loan
Commitments provided after the Term Loan Commitment Termination Date, the date
of the effectiveness of the respective Incremental Term Loan Commitment
Agreement pursuant to which such Incremental Term Loan Commitment is provided;
provided that no Incremental Term Loan Borrowing Date shall occur after the
Incremental Term Loan Termination Date.

                  "Incremental Term Loan Commitment" shall mean, for each
Incremental Term Loan Lender, the commitment of such Incremental Term Loan
Lender to make Incremental Term Loans pursuant to Section 1.01(b) on a given
Incremental Term Loan Borrowing Date, as such commitment (x) is set forth in the
respective Incremental Term Loan Commitment Agreement delivered pursuant to
Section 1.14(b), (y) may be reduced or terminated pursuant to Sections 2.02,
2.03 and/or 8 or (z) may be adjusted from time to time as a result of assignment
to or from such Incremental Term Loan Lender pursuant to Section 11.04(b).

                  "Incremental Term Loan Commitment Agreement" shall mean an
Incremental Term Loan Commitment Agreement substantially in the form of Exhibit
G (appropriately completed).

                  "Incremental Term Loan Commitment Date" shall mean each date
upon which an Incremental Term Loan Commitment under an Incremental Term Loan
Commitment Agreement becomes effective as provided in Section 1.14.

                  "Incremental Term Loan Lender" shall have the meaning provided
in Section 1.14(b).

                  "Incremental Term Loan Termination Date" shall mean (x) if the
Initial Borrowing Date has not occurred on or prior to the Term Loan Commitment
Termination Date, the Term Loan Commitment Termination Date or (y) if the
Initial Borrowing Date has occurred on or prior to the Term Loan Commitment
Termination Date, the date occurring 10 Business Days prior to the first
anniversary of the Initial Borrowing Date.

                  "Indebtedness" of any Person shall mean, without duplication,
(i) all indebtedness of such Person for borrowed money, (ii) the deferred
purchase price of assets or services which in accordance with GAAP would be
shown on the liability side of the balance sheet of such Person, (iii) the face
amount of all letters of credit issued for the account of such Person and,
without duplication, all drafts drawn thereunder, (iv) all Indebtedness of a
second Person secured by any Lien on any property owned by such first Person,
whether or not such Indebtedness has been assumed, (v) all capitalized lease
obligations of such Person, (vi) all obligations of such Person under Interest
Rate Protection Agreements and (vii) all Contingent Obligations of such Person
with respect to any of the foregoing; provided that, Indebtedness shall not
include (x) trade payables (including payables under insurance contracts and
reinsurance payables) and accrued expenses, in each case arising in the ordinary
course of business and (y) obligations with respect to Policies.

                                      -40-
<PAGE>

                  "Initial Borrowing Date" shall mean the date of the initial
Borrowing of Term Loans under this Agreement.

                  "Initial Lead Investors" shall mean, collectively, Aon,
Zurich, TPG, THLee, Capital Z Partners and Perry Capital.

                  "Initial Term Loan" shall have the meaning provided in Section
1.01(a).

                  "Initial Term Loan Borrowing Date" shall mean any Business Day
occurring on or after the Effective Date and on or prior to the Term Loan
Commitment Termination Date on which a Borrowing of Initial Term Loans occurs.

                  "Initial Term Loan Commitment" shall mean, with respect to
each Lender, the amount set forth opposite such Lender's name on Annex I hereto,
as the same may be (x) reduced or terminated pursuant to Sections 2.02, 2.03
and/or 8, or (y) adjusted from time to time as a result of assignment to or from
such Lender pursuant to Section 11.04(b).

                  "Insurance Business" shall mean one or more aspects of the
business of selling, issuing or underwriting insurance or reinsurance.

                  "Insurance Contract" shall mean any insurance contract or
policy issued by a Regulated Insurance Company but shall not include any
Reinsurance Agreement or Retrocession Agreement.

                  "Insurance Licenses" shall have the meaning provided in
Section 5.18.

                  "Interest Period" shall mean, with respect to any Eurodollar
Loan, the interest period applicable thereto, as determined pursuant to Section
1.09.

                  "Interest Rate Protection Agreement" shall mean any interest
rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedging agreement or other similar agreement or
arrangement.

                  "Legal Requirements" shall mean all applicable laws, rules and
regulations made by any governmental body or regulatory authority (including,
without limitation, any Applicable Insurance Regulatory Authority) having
jurisdiction over the Parent Borrower or a Subsidiary of the Parent Borrower.

                  "Lender" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Lender Default" shall mean (i) the refusal (which has not
been retracted) of a Lender to make available its portion of any Borrowing or
(ii) a Lender having notified the Administrative Agent and/or the Parent
Borrower that it does not intend to comply with its obligations under Section
1.01, in the case of either clause (i) or (ii) above as a result of the
appointment of a receiver or conservator with respect to such Lender at the
direction or request of any regulatory agency or authority.

                                      -41-
<PAGE>

                  "Leverage Ratio" shall mean the ratio of (i) Consolidated
Indebtedness to (ii) Consolidated Total Capital.

                  "Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement or any
lease in the nature thereof), or any understanding or agreement to repurchase
any property or assets sold by the Parent Borrower or any of its Subsidiaries
(including sales of accounts receivable or notes with recourse to the Parent
Borrower or any of its Subsidiaries), or the assignment of any right to receive
income, or the filing of any financing statement under the UCC or any other
similar notice under any similar recording or notice statute relating to any
property.

                  "Margin Adjustment Period" shall mean each period which shall
commence on the date upon which the respective officer's certificate is
delivered pursuant to Section 6.01(c) (together with the related financial
statements pursuant to Sections 6.01(a) or (b), as the case may be) and
which shall end on the date of actual delivery of the next officer's certificate
pursuant to Section 6.01(c) (and related financial statements) or the latest
date on which such next officer's certificate (and related financial statements)
is required to be so delivered; it being understood that the first Margin
Adjustment Period shall commence with the delivery of the Parent Borrower's
financial statements (and related officer's certificate) in respect of its
fiscal quarter ending September 30, 2002.

                  "Margin Stock" shall have the meaning provided in Regulation
U.

                  "Material Adverse Effect" shall mean, (i) a material adverse
effect on the business, operations, property or financial condition of the
Parent Borrower and its Subsidiaries taken as a whole or (ii) a material adverse
effect on (x) the rights and remedies of the Administrative Agent or the Lenders
under the Credit Documents, (y) the ability of the Parent Borrower to perform
its obligations under the Credit Documents to which it is a party or (z) the
legality, validity or enforceability of any Credit Document.

                  "Material Subsidiary" shall mean any Subsidiary of the Parent
Borrower whose total assets or total revenues exceed 10% of the total assets or
gross revenues, respectively, of the Parent Borrower and its Subsidiaries on a
consolidated basis as of the most recent fiscal quarter end and for the most
recent fiscal quarter period, respectively, determined in accordance with GAAP.

                  "Maturity Date" shall mean the date occurring three years
following the Initial Borrowing Date.

                  "Moody's" shall mean Moody's Investors Service, Inc. and its
successors.

                  "Multiemployer Plan" shall mean any multiemployer plan as
defined in Section 4001(a)(3) of ERISA, which is maintained or contributed to by
(or to which there is an obligation to contribute of) the Parent Borrower, any
of its Subsidiaries or any of its ERISA Affiliates, and each such plan for the
five year period immediately following the latest date on which the Parent
Borrower, such Subsidiary or such ERISA Affiliate maintained, contributed to or
had an obligation to contribute to such plan.

                                      -42-

<PAGE>

                  "Net Worth" shall mean, as to any Person, the sum of its
capital stock (including, without limitation, its preferred stock), capital in
excess of par or stated value of shares of its capital stock (including, without
limitation, its preferred stock), retained earnings and any other account which,
in accordance with GAAP, constitutes stockholders equity, but excluding (i) any
treasury stock and (ii) the effects of Financial Accounting Statement No. 115.

                  "Notice of Borrowing" shall have the meaning provided in
Section 1.03.

                  "Notice of Conversion" shall have the meaning provided in
Section 1.06.

                  "Notice Office" shall mean the office of the Administrative
Agent at One Chase Manhattan Plaza, New York, New York 10081, Attention: Lauren
Rebecca, Telephone: (212) 552-7253, Facsimile: (212) 552-7490, or such other
office as the Administrative Agent may designate to the Parent Borrower and the
Lenders from time to time.

                  "Obligations" shall mean all amounts, direct or indirect,
contingent or absolute, of every type or description, and at any time existing,
owing to the Administrative Agent or any Lender pursuant to the terms of this
Agreement or any other Credit Document.

                  "Parent Borrower" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Payment Office" shall mean the office of the Administrative
Agent at One Chase Manhattan Plaza, New York, New York 10081, Attention: Laura
Rebecca, Telephone: (212) 552-7253, Facsimile: (212) 552-7490, or such other
office as the Administrative Agent may designate to the Parent Borrower and the
Lenders from time to time.

                  "PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Section 4002 of ERISA, or any successor thereto.

                  "Perry Capital" shall mean, collectively, Perry European Fund,
L.P., Perry European Fund, Ltd., Perry Partners International, Inc. and Perry
Partners, L.P.

                  "Person" shall mean any individual, partnership, joint
venture, firm, corporation, association, trust or other enterprise or any
government or political subdivision or any agency, department or instrumentality
thereof.

                  "Plan" shall mean any pension plan as defined in Section 3(2)
of ERISA and subject to Title IV of ERISA, which is maintained or contributed to
by (or to which there is an obligation to contribute of) the Parent Borrower or
any of its Subsidiaries or any of its ERISA Affiliates, and each such plan for
the five year period immediately following the latest date on which the Parent
Borrower, any of its Subsidiaries or any of its ERISA Affiliates maintained,
contributed to or had an obligation to contribute to such plan.

                  "Policies" shall mean all insurance policies, annuity
contracts, guaranteed interest contracts and funding agreements (including
riders to any such policies or contracts, certificates issued with respect to
group life insurance or annuity contracts and any contracts issued in connection
with retirement plans or arrangements) and assumption certificates issued or to
be

                                      -43-
<PAGE>
issued (or filed pending current review by applicable Governmental Authorities)
by any Regulated Insurance Company and any coinsurance agreements entered into
or to be entered into by any Regulated Insurance Company.

                  "Prime Lending Rate" shall mean the rate which JPMorgan Chase
Bank announces from time to time as its prime commercial lending rate, the Prime
Lending Rate to change when and as such prime commercial lending rate changes.
The Prime Lending Rate is a reference rate and does not necessarily represent
the lowest or best rate actually charged to any customer. JPMorgan Chase Bank
may make commercial loans or other loans at rates of interest at, above or below
the Prime Lending Rate.

                  "Private Act" shall mean separate legislation enacted in
Bermuda with the intention that such legislation apply specifically to the
Parent Borrower, in whole or in part.

                  "Register" shall have the meaning provided in Section 11.16.

                  "Regulated Insurance Company" shall mean any Subsidiary of the
Parent Borrower, whether now owned or hereafter acquired, that is authorized or
admitted to carry on or transact Insurance Business in any jurisdiction and is
regulated by any Applicable Insurance Regulatory Authority.

                  "Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System as from time to time in effect and any
successor to all or a portion thereof establishing reserve requirements.

                  "Regulation U" shall mean Regulation U of the Board of
Governors of the Federal Reserve System as from time to time in effect and any
successor to all or a portion thereof establishing margin requirements.

                  "Reinsurance Agreement" shall mean any agreement, contract,
treaty, certificate or other arrangement whereby any Regulated Insurance Company
agrees to transfer, cede or retrocede to another insurer or reinsurer all or
part of the liability assumed or assets held by such Regulated Insurance Company
under a policy or policies of insurance issued by such Regulated Insurance
Company or under a reinsurance agreement assumed by such Regulated Insurance
Company.

                  "Replaced Lender" shall have the meaning provided in Section
1.13.

                  "Replacement Lender" shall have the meaning provided in
Section 1.13.

                  "Required Lenders" shall mean, at any time, at least four
Lenders whose (x) Term Loan Commitments (if any) plus (y) then outstanding Term
Loans (if any) represent an amount equal to or greater than 50% of the sum of
(i) the Total Term Loan Commitment (if any) plus (ii) the then total outstanding
Term Loans (if any).

                  "Retrocession Agreement" shall mean any agreement, contract,
treaty or other arrangement whereby one or more insurers or reinsurers, as
retrocessionaires, assume liabilities

                                      -44-
<PAGE>
of reinsurers under a Reinsurance Agreement or other retrocessionaires under
another Retrocession Agreement.

                  "S&P" shall mean Standard & Poor's Ratings Group and its
successors.

                  "SAP" shall mean, with respect to any Regulated Insurance
Company, the accounting procedures and practices prescribed or permitted by the
Applicable Insurance Regulatory Authority of the state in which such Regulated
Insurance Company is domiciled; it being understood and agreed that
determinations in accordance with SAP for purposes of Section 7, including
defined terms as used therein, are subject (to the extent provided therein) to
Section 11.07(a).

                  "SEC" shall mean the Securities and Exchange Commission or any
successor thereto.

                  "SEC Regulation D" shall mean Regulation D as promulgated
under the Securities Act of 1933, as amended, as the same may be in effect from
time to time.

                  "Scheduled Repayment" shall have the meaning provided in
Section 3.02(a).

                  "Scheduled Repayment Date" shall have the meaning provided in
Section 3.02(a).

                  "Start Date" shall mean, with respect to any Margin Adjustment
Period, the first day of such Margin Adjustment Period.

                  "Stated Amount" shall mean, at any time, the maximum amount
available to be drawn thereunder (regardless of whether any conditions for
drawing could be met).

                  "Statutory Statements" shall mean, with respect to any
Regulated Insurance Company for any fiscal year, the annual or quarterly
financial statements of such Regulated Insurance Company as required to be filed
with the Insurance Regulatory Authority of its jurisdiction of domicile and in
accordance with the laws of such jurisdiction, together with all exhibits,
schedules, certificates and actuarial opinions required to be filed or delivered
therewith.

                  "Subsidiary" of any Person shall mean and include (i) any
corporation more than 50% of whose stock of any class or classes having by the
terms thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person directly
or indirectly through Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person directly or indirectly through
Subsidiaries has more than a 50% voting interest at the time for the board of
directors or equivalent body. Unless otherwise expressly provided, all
references to "Subsidiary" shall mean a Subsidiary of the Parent Borrower.

                  "Taxes" shall have the meaning provided in Section 3.04(a).

                  "Term Loan Commitment" shall mean (x) the Initial Term Loan
Commitments of any Lender plus (y) the Incremental Term Loan Commitments of any
Lender.

                                      -45-
<PAGE>
                  "Term Loan Commitment Termination Date" shall mean the earlier
to occur of (x) September 30, 2002 or (y) the date on which the Term Loan
Commitments are terminated pursuant to Sections 2.02, 2.03 and/or 9.

                  "Term Loans" shall mean, collectively, each Initial Term Loan
and each Incremental Term Loan.

                  "Term Note" shall have the meaning provided in Section 1.05.

                  "Test Date" shall mean, with respect to any Start Date, the
last day of the most recent fiscal quarter of the Parent Borrower ended
immediately prior to such Start Date.

                  "Test Period" shall mean, at any time, each period of four
consecutive fiscal quarters of the Parent Borrower then last ended; provided
that at all times prior to the last day of the Parent Borrower's fiscal quarter
ending on June 30, 2003, "Test Period" shall mean the period from the first day
of the Parent Borrower's fiscal quarter ending on September 30, 2002 to and
including the last day of the Parent Borrower's fiscal quarter then last ended.

                  "THLee" shall mean, collectively, Thomas H. Lee (Alternative)
Fund V, L.P., Thomas H. Lee (Alternative) Parallel Fund V, L.P., Thomas H. Lee
(Alternative) Cayman Fund V, L.P., Thomas H Lee Investors Limited Partnership,
State Street Bank and Trust Company, not personally, but solely as Trustee under
the 1997 Thomas H. Lee Nominee Trust, Putnam Investments Holdings, LLC, Putnam
Investments Employees' Securities Company I LLC and Putnam Investments
Employees' Securities Company II LLC.

                  "364-Day Credit Agreement" shall mean the Credit Agreement,
dated as of the date hereof, among the Parent Borrower, the designated
subsidiary borrowers party thereto, the lenders party from time to time thereto
and JPMorgan Chase Bank, as administrative agent, providing up to a $150,000,000
commitment to provide revolving loans to the Parent Borrower and issue letters
of credit for the account of various designated subsidiary borrowers.

                  "364-Day Credit Documents" shall mean the 364-Day Credit
Agreement and all other documents, instruments and agreements entered into in
connection therewith.

                  "Total Incremental Term Loan Commitment" shall mean, at any
time, the sum of the Incremental Term Loan Commitments of each of the
Incremental Term Loan Lenders at such time.

                  "Total Initial Term Loan Commitment" shall mean, at any time,
the sum of the Initial Term Loan Commitments of each of the Lenders at such
time.

                  "Total Term Loan Commitment" shall mean the sum of the Term
Loan Commitments of each Lender.

                  "TPG" shall mean, collectively, TPG Endurance Partners
(Cayman), L.P., TPG Endurance Investments (Cayman), L.P. and TPG Dutch Parallel
III, C.V.

                                      -46-
<PAGE>
                  "Transaction" shall mean, collectively, (i) the entering into
of the Credit Documents, (ii) the entering into of the 364-Day Credit Documents,
(iii) the consummation of the Capital Optimization and (iv) the payment of all
fees and expenses in connection with the foregoing.

                  "Type" shall mean any type of Term Loan determined with
respect to the interest option applicable thereto, i.e., a Base Rate Loan or a
Eurodollar Loan.

                  "UCC" shall mean the Uniform Commercial Code.

                  "Wholly-Owned Subsidiary" of any Person shall mean any
Subsidiary of such Person to the extent all of the capital stock or other
ownership interests in such Subsidiary, other than directors' or nominees'
qualifying shares, is owned directly or indirectly by such Person.

                  "Written" or "in writing" shall mean any form of written
communication or a communication by means of telex, facsimile device, telegraph
or cable.

                  "Zurich" shall mean, collectively, BG Investments, Ltd.,
Farmers Group, Inc. and Centre Strategic Investments Holdings Limited.

                  SECTION 10. The Administrative Agent.

                  10.01 Appointment. Each Lender hereby irrevocably designates
and appoints JPMorgan Chase Bank as Administrative Agent to act as specified
herein and in the other Credit Documents, and each such Lender hereby
irrevocably authorizes JPMorgan Chase Bank as the Administrative Agent for such
Lender, to take such action on its behalf under the provisions of this Agreement
and the other Credit Documents and to exercise such powers and perform such
duties as are expressly delegated to the Administrative Agent by the terms of
this Agreement and the other Credit Documents, together with such other powers
as are reasonably incidental thereto. The Administrative Agent agrees to act as
such upon the express conditions contained in this Section 10. Notwithstanding
any provision to the contrary elsewhere in this Agreement, the Administrative
Agent shall not have any duties or responsibilities, except those expressly set
forth herein or in the other Credit Documents, nor any fiduciary relationship
with any Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or otherwise exist
against the Administrative Agent. The provisions of this Section 10 are solely
for the benefit of the Administrative Agent and the Lenders, and the Parent
Borrower shall not have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement,
the Administrative Agent shall act solely as agent of the Lenders and does not
assume and shall not be deemed to have assumed any obligation or relationship of
agency or trust with or for the Parent Borrower.

                  10.02 Delegation of Duties. The Administrative Agent may
execute any of its duties under this Agreement or any other Credit Document by
or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by it with reasonable care except to the extent
otherwise required by Section 10.03.

                                      -47-
<PAGE>
                  10.03 Exculpatory Provisions. Neither the Administrative Agent
nor any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement (except
for its or such Person's own gross negligence or willful misconduct (as
determined by a court of competent jurisdiction in a final and non-appealable
decision)) or (ii) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Parent Borrower
or any Subsidiary or any of their respective officers contained in this
Agreement, any other Credit Document or in any certificate, report, statement or
other document referred to or provided for in, or received by the Administrative
Agent under or in connection with, this Agreement or any other Credit Document
or for any failure of the Parent Borrower or any of its Subsidiaries or any of
their respective officers to perform its obligations hereunder or thereunder.
The Administrative Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement, or to inspect the
properties, books or records of the Parent Borrower or any of its Subsidiaries.
The Administrative Agent shall not be responsible to any Lender for the
effectiveness, genuineness, validity, enforceability, collectibility or
sufficiency of this Agreement or any Credit Document or for any representations,
warranties, recitals or statements made herein or therein or made in any written
or oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Administrative Agent to the Lenders or by or on behalf
of the Parent Borrower to the Administrative Agent or any Lender or be required
to ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Term Loans or of the existence or possible
existence of any Default or Event of Default.

                  10.04 Reliance by Administrative Agent. The Administrative
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, facsimile transmission, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrowers), independent accountants and other experts
selected by the Administrative Agent. The Administrative Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Credit Document unless it shall first receive such advice or concurrence
of the Required Lenders as it deems appropriate or it shall first be indemnified
to its satisfaction by the Lenders against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any such
action. The Administrative Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement and the other Credit
Documents in accordance with a request of the Required Lenders, and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all the Lenders.

                  10.05 Notice of Default. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless the Administrative Agent has received notice from a
Lender or the Parent Borrower referring to this Agreement, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that the Administrative Agent receives such a notice, the
Administrative

                                      -48-
<PAGE>
Agent shall give prompt notice thereof to the Lenders. The Administrative Agent
shall take such action with respect to such Default or Event of Default as shall
be reasonably directed by the Required Lenders, provided that unless and until
the Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Lenders.

                  10.06 Non-Reliance. Each Lender expressly acknowledges that
neither the Administrative Agent nor any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates have made any representations or
warranties to it and that no act by the Administrative Agent hereinafter taken,
including any review of the affairs of the Parent Borrower or any of its
Subsidiaries, shall be deemed to constitute any representation or warranty by
the Administrative Agent to any Lender. Each Lender represents to the
Administrative Agent that it has, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, assets, operations, property, financial and
other conditions, prospects and creditworthiness of the Parent Borrower and its
Subsidiaries and made its own decision to make its Term Loans hereunder and
enter into this Agreement. Each Lender also represents that it will,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit analysis, appraisals and decisions
in taking or not taking action under this Agreement, and to make such
investigation as it deems necessary to inform itself as to the business, assets,
operations, property, financial and other conditions, prospects and
creditworthiness of the Parent Borrower and its Subsidiaries. The Administrative
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, operations, assets,
property, financial and other conditions, prospects or creditworthiness of the
Parent Borrower or any Subsidiary which may come into the possession of the
Administrative Agent or any of its officers, directors, employees, agents,
attorneys-in-fact or affiliates.

                  10.07 Indemnification. Each Lender agrees to indemnify the
Administrative Agent in its capacity as such ratably according to their
respective "percentages" as used in determining the Required Lenders at such
time from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, reasonable expenses or
disbursements of any kind whatsoever which may at any time (including, without
limitation, at any time following the payment of the Obligations) be imposed on,
incurred by or asserted against the Administrative Agent in its capacity as such
in any way relating to or arising out of this Agreement or any other Credit
Document, or any documents contemplated by or referred to herein or the
transactions contemplated hereby or any action taken or omitted to be taken by
the Administrative Agent under or in connection with any of the foregoing, but
only to the extent that any of the foregoing is not paid by the Parent Borrower
or any of its Subsidiaries, provided that no Lender shall be liable to the
Administrative Agent for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting solely from the Administrative Agent's gross
negligence or willful misconduct (as determined by a court of competent
jurisdiction in a final and non-appealable decision). If any indemnity furnished
to the Administrative Agent for any purpose shall, in the opinion of the
Administrative Agent, be insufficient or become impaired, the Administrative

                                      -49-
<PAGE>
Agent may call for additional indemnity and cease, or not commence, to do the
acts indemnified against until such additional indemnity is furnished. The
agreements in this Section 10.07 shall survive the payment of all Obligations.

                  10.08 The Administrative Agent in its Individual Capacity. The
Administrative Agent and its affiliates may make loans to, accept deposits from
and generally engage in any kind of business with the Parent Borrower and its
Subsidiaries as though not acting as Administrative Agent hereunder. With
respect to the Term Loans made by it and all Obligations owing to it, the
Administrative Agent shall have the same rights and powers under this Agreement
as any Lender and may exercise the same as though it were not the Administrative
Agent, and the terms "Lender" and "Lenders" shall include the Administrative
Agent in its individual capacity.

                  10.09 Successor Administrative Agent. The Administrative Agent
may resign as the Administrative Agent upon 20 days' notice to the Lenders and
the Parent Borrower. Upon such resignation, the Required Lenders shall, with the
consent of the Parent Borrower (such consent not to be unreasonably withheld),
appoint from among the Lenders a successor Administrative Agent for the Lenders,
whereupon such successor agent shall succeed to the rights, powers and duties of
the Administrative Agent, and the term "Administrative Agent" shall include such
successor agent effective upon its appointment, and the resigning Administrative
Agent's rights, powers and duties as the Administrative Agent shall be
terminated, without any other or further act or deed on the part of such former
Administrative Agent or any of the parties to this Agreement. After the retiring
Administrative Agent's resignation hereunder as the Administrative Agent, the
provisions of this Section 10 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Administrative Agent under this
Agreement.

                  SECTION 11. Miscellaneous.

                  11.01 Payment of Expenses, etc. The Parent Borrower hereby
agrees to: (i) whether or not the transactions herein contemplated are
consummated, pay all reasonable out-of-pocket costs and expenses of the
Administrative Agent in connection with the negotiation, preparation,
syndication, execution, delivery and administration of the Credit Documents and
the documents and instruments referred to therein (including, without
limitation, the reasonable fees and disbursements of White & Case LLP and of
consultants and advisors to the Administrative Agent and its counsel); (ii)
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with any amendment, waiver or consent relating to this Agreement or
any other Credit Document; (iii) whether or not the transactions herein
contemplated are consummated, pay all reasonable out-of-pocket costs and
expenses of the Administrative Agent and each of the Lenders in connection with
the enforcement of the Credit Documents and the documents and instruments
referred to therein (including, without limitation, the reasonable fees and
disbursements of counsel and consultants for the Administrative Agent and for
each of the Lenders); (iv) pay and hold each of the Lenders harmless from and
against any and all present and future stamp and other similar taxes with
respect to the foregoing matters and save each of the Lenders harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission to pay such taxes; and (v) indemnify the Administrative Agent and each
Lender, and their respective officers, directors, employees, representatives and
agents (each, an

                                      -50-
<PAGE>
"indemnified person") from and hold each of them harmless against any and all
losses, liabilities, claims, damages or expenses (collectively, "Claims")
incurred by any of them as a result of, or arising out of, or in any way related
to, or by reason of, any investigation, litigation or other proceeding (whether
or not the Administrative Agent or any Lender is a party thereto) related to the
entering into and/or performance of any Credit Document or the use of the
proceeds of any Term Loans hereunder or the consummation of any other
transactions contemplated in any Credit Document, including, without limitation,
the reasonable fees and disbursements of counsel incurred in connection with any
such investigation, litigation or other proceeding (but excluding any such
losses, liabilities, claims, damages or expenses to the extent incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified (as determined by a court of competent jurisdiction in a final and
non-appealable decision)).

                  11.02 Right of Setoff. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and continuance of an Event
of Default, each Lender is hereby authorized at any time or from time to time,
without presentment, demand, protest or other notice of any kind to the Parent
Borrower or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and apply any and all deposits (general or
special) and any other Indebtedness at any time held or owing by such Lender
(including, without limitation, by branches and agencies of such Lender wherever
located) to or for the credit or the account of the Parent Borrower against and
on account of the Obligations and liabilities of the Parent Borrower to such
Lender or any other Lender under this Agreement or under any of the other Credit
Documents, including, without limitation, all interests in Obligations of the
Parent Borrower purchased by such Lender or any other Lender pursuant to Section
11.06(b), and all other claims of any nature or description arising out of or
connected with this Agreement or any other Credit Document, irrespective of
whether or not such Lender shall have made any demand hereunder and although
said Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured. Each Lender is hereby designated the agent of all other Lenders for
purposes of effecting set off pursuant to this Section 11.02 and the Parent
Borrower hereby grants to each Lender for such Lender's own benefit and as agent
for all other Lenders a continuing security interest in any and all deposits,
accounts or moneys of the Parent Borrower maintained from time to time with such
Lender.

                  11.03 Notices. Except as otherwise expressly provided herein,
all notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, facsimile or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered, if to the Parent
Borrower, at the address specified opposite its signature below; if to any
Lender, at its address specified for such Lender on Annex II hereto; or, at such
other address as shall be designated by any party in a written notice to the
other parties hereto. All such notices and communications shall be mailed,
telegraphed, telexed, telecopied, cabled or sent by overnight courier and shall
be effective when received.

                  11.04 Benefit of Agreement. (a) This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided, however, the Parent
Borrower may not assign or transfer any of its rights or obligations hereunder
without the prior written consent of the Lenders. Each Lender may at any time
grant participations in any of its rights hereunder or under any of its Term
Notes to any

                                      -51-
<PAGE>
bank or other financial institution; provided that in the case of any such
participation, the participant shall not have any rights under this Agreement or
any of the other Credit Documents, including rights of consent, approval or
waiver (the participant's rights against such Lender in respect of such
participation to be those set forth in the agreement executed by such Lender in
favor of the participant relating thereto) and all amounts payable by the Parent
Borrower hereunder shall be determined as if such Lender had not sold such
participation, except that the participant shall be entitled to receive the
additional amounts under Sections 1.10, 1.11 and 3.04 of this Agreement to, and
only to, the extent that such Lender would be entitled to such benefits if the
participation had not been entered into or sold; and provided further, that no
Lender shall transfer, grant or assign any participation under which the
participant shall have rights to approve any amendment to or waiver of this
Agreement or any other Credit Document except to the extent such amendment or
waiver would (i) extend the final scheduled maturity of any Term Loan or Term
Note in which such participant is participating or reduce the rate or extend the
time of payment of interest thereon or Fees, or reduce the principal amount
thereof, or increase such participant's participating interest in any Term Loan
Commitment or Term Loan over the amount thereof then in effect (it being
understood that a waiver of any Default or Event of Default or of a mandatory
reduction in the Total Term Loan Commitment shall not constitute a change in the
terms of any Term Loan Commitment and that an increase in any Term Loan
Commitment shall be permitted without the consent of any participant if such
participant's participation is not increased as a result thereof) or (ii)
consent to the assignment or transfer by the Parent Borrower of any of its
rights and obligations under this Agreement or any other Credit Document except
in accordance with the terms hereof and thereof.

                  (b) Notwithstanding the foregoing, any Lender may assign all
or a portion of its rights and obligations hereunder to a bank or other
financial institution with the prior written consent of the Administrative Agent
(such consent not to be unreasonably withheld or delayed). No assignment of less
than all of a Lender's rights and obligations hereunder pursuant to the
immediately preceding sentence shall, to the extent such transaction represents
an assignment to an institution other than one or more Lenders hereunder, be in
an aggregate amount less than the minimum of $5,000,000 unless otherwise agreed
to by the Administrative Agent and the Parent Borrower in writing. If any Lender
so sells or assigns all or a part of its rights hereunder or under the Term
Notes, any reference in this Agreement or the Term Notes to such assigning
Lender shall thereafter refer to such Lender and to the respective assignee to
the extent of their respective interests and the respective assignee shall have,
to the extent of such assignment (unless otherwise provided therein), the same
rights and benefits as it would if it were such assigning Lender. Each
assignment pursuant to this Section 11.04(b) shall be effected by the assigning
Lender and the assignee Lender executing an Assignment Agreement (appropriately
completed). At the time of any such assignment, (i) Annex I shall be deemed to
be amended to reflect the Term Loan Commitments, if any, and outstanding Term
Loans of the respective assignee (which shall result in a direct reduction to
the Term Loan Commitments, if any, and outstanding Term Loans of the assigning
Lender) and of the other Lenders, (ii) if any such assignment occurs after the
Effective Date, at the request of the assignor or the assignee, the Parent
Borrower will issue new Term Notes to the respective assignee and to the
assigning Lender in conformity with the requirements of Section 1.05 and (iii)
the Administrative Agent shall receive from the assigning Lender and/or the
assignee Lender or financial institution at the time of each assignment the
payment of a nonrefundable assignment fee of $3,500, provided that such transfer
or assignment will not be effective until recorded by the Administrative Agent
on

                                      -52-
<PAGE>
the Register pursuant to Section 11.16 hereof. Each Lender and the Parent
Borrower agrees to execute such documents (including, without limitation,
amendments to this Agreement and the other Credit Documents) as shall be
necessary to effect the foregoing. Promptly following any assignment pursuant to
this Section 11.04(b), the assigning Lender shall promptly notify the Parent
Borrower and the Administrative Agent thereof. Nothing in this Section 11.04
shall prevent or prohibit any Lender from pledging its Term Loans or Term Notes
hereunder to a Federal Reserve Bank in support of borrowings made by such Lender
from such Federal Reserve Bank.

                  (c) Notwithstanding any other provisions of this Section
11.04, no transfer or assignment of the interests or obligations of any Lender
hereunder or any grant of participations therein shall be permitted if such
transfer, assignment or grant would require the Parent Borrower to file a
registration statement with the SEC or to qualify the Term Loans under the "Blue
Sky" laws of any State of the United States.

                  (d) Each Lender initially party to this Agreement hereby
represents, and each Person that becomes a Lender pursuant to an assignment
permitted by clause (b) above will upon its becoming party to this Agreement
represent, that it is a commercial lender, other financial institution or other
"accredited investor" (as defined in SEC Regulation D) which makes loans in the
ordinary course of its business or is acquiring the Term Loans without a view to
distribution of the Term Loans within the meaning of the federal securities
laws, and that it will make or acquire Term Loans for its own account in the
ordinary course of such business, provided that, subject to the preceding
clauses (a) through (c), the disposition of any promissory notes or other
evidences of or interests in Indebtedness held by such Lender shall at all times
be within its exclusive control.

                  11.05 No Waiver; Remedies Cumulative. No failure or delay on
the part of the Administrative Agent or any Lender in exercising any right,
power or privilege hereunder or under any other Credit Document and no course of
dealing between the Parent Borrower and the Administrative Agent or any Lender
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder or under any other Credit Document
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder or thereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Administrative Agent or any Lender would otherwise have. No
notice to or demand on the Parent Borrower in any case shall entitle the Parent
Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Administrative Agent
or the Lenders to any other or further action in any circumstances without
notice or demand.

                  11.06 Payments Pro Rata. (a) The Administrative Agent agrees
that promptly after its receipt of each payment from or on behalf of the Parent
Borrower in respect of any Obligations of the Parent Borrower, it shall
distribute such payment to the Lenders (other than any Lender that has consented
in writing to waive its pro rata share of such payment) pro rata based upon
their respective shares, if any, of the Obligations with respect to which such
payment was received.

                  (b) Each of the Lenders agrees that, if it should receive any
amount hereunder (whether by voluntary payment, by realization upon security, by
the exercise of the right of

                                      -53-
<PAGE>
setoff or banker's lien, by counterclaim or cross action, by the enforcement of
any right under the Credit Documents, or otherwise) which is applicable to the
payment of the principal of, or interest on, the Term Loans or Fees, of a sum
which with respect to the related sum or sums received by other Lenders is in a
greater proportion than the total of such Obligation then owed and due to such
Lender bears to the total of such Obligation then owed and due to all of the
Lenders immediately prior to such receipt, then such Lender receiving such
excess payment shall purchase for cash without recourse or warranty from the
other Lenders an interest in the Obligations of the Parent Borrower to such
Lenders in such amount as shall result in a proportional participation by all of
the Lenders in such amount, provided that if all or any portion of such excess
amount is thereafter recovered from such Lender, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest.

                  11.07 Calculations; Computations. (a) The financial statements
to be furnished to the Lenders pursuant hereto shall be made and prepared in
accordance with GAAP or SAP, as the case may be, consistently applied throughout
the periods involved (except as set forth in the notes thereto or as otherwise
disclosed in writing by the Parent Borrower to the Lenders). In addition, except
as otherwise specifically provided herein, all computations determining
compliance with Section 7, including definitions used therein, shall utilize
accounting principles and policies in effect from time to time; provided that
(i) if any such accounting principle or policy (whether GAAP or SAP or both)
shall change after the Effective Date, the Parent Borrower shall give reasonable
notice thereof to the Administrative Agent and each of the Lenders and if within
30 days following such notice the Parent Borrower, the Administrative Agent or
the Required Lenders shall elect by giving written notice of such election to
the other parties hereto, such computations shall not give effect to such change
unless and until this Agreement shall be amended pursuant to Section 11.11 to
give effect to such change, and (ii) if at any time the computations determining
compliance with Section 7 utilize accounting principles different from those
utilized in the financial statements then being furnished to the Lenders
pursuant to Section 6.01, such financial statements shall be accompanied by
reconciliation work-sheets.

                  (b) All computations of interest on Term Loans and Fees
hereunder shall be made on the actual number of days elapsed over (i) a year of
365/366 days for interest on Term Loans maintained as Base Rate Loans when the
Base Rate is based on the Prime Lending Rate and (ii) a year of 360 days in all
cases other than that set forth in the preceding clause (i).

                  11.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE. (a)
THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
PARENT BORROWER AND EACH LENDER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. THE PARENT BORROWER AND EACH LENDER

                                      -54-
<PAGE>
HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK
JURISDICTION OVER THE PARENT BORROWER OR SUCH LENDER, AND AGREES NOT TO PLEAD OR
CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER CREDIT DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH
COURT LACKS JURISDICTION OVER THE PARENT BORROWER OR SUCH LENDER. THE PARENT
BORROWER AND EACH LENDER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
THE PARENT BORROWER OR SUCH LENDER, AS THE CASE MAY BE, AT ITS ADDRESS FOR
NOTICES PURSUANT TO SECTION 11.03, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS
AFTER SUCH MAILING. THE PARENT BORROWER AND EACH LENDER, AS THE CASE MAY BE,
HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER
IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING
HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY
WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE
ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE PARENT BORROWER IN ANY OTHER JURISDICTION.

                  (b) THE PARENT BORROWER AND EACH LENDER HEREBY IRREVOCABLY
WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE
OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED
TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO
PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

                  11.09 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the Parent
Borrower and the Administrative Agent.

                  11.10 Headings Descriptive. The headings of the several
sections and subsections of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement.

                  11.11 Amendment or Waiver. Neither this Agreement nor any
other Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Parent Borrower

                                      -55-
<PAGE>
and the Required Lenders, provided that no such change, waiver, discharge or
termination shall, without the consent of each Lender (other than a Defaulting
Lender) directly affected thereby, (i) extend the scheduled final maturity of
any Term Loan or Term Note or reduce the rate or extend the time of payment of
interest of any Term Loan or Term Note (except in connection with the waiver of
applicability of any post-default increase in interest rates), or reduce the
principal amount of any Term Loan or Term Note, or reduce the amount or extend
the time of payment of any Fee (it being understood that any amendment or
modification to the financial definitions in this Agreement or to Section
11.07(a) shall not constitute a reduction in the rate of interest or reduction
in the amount of Fees for purposes of this clause (i)), (ii) except as set forth
in Section 1.14, increase the Term Loan Commitment of any Lender over the amount
thereof then in effect (it being understood that a waiver of any Default or
Event of Default or of a mandatory reduction in the Total Term Loan Commitment
shall not constitute a change in the terms of any Term Loan Commitment of any
Lender), (iii) amend, modify or waive any provision of this Section 11.11
(except for technical amendments with respect to additional extensions of credit
pursuant to this Agreement which afford the protections to such additional
extensions of credit of the type provided to the Term Loans and the Term Loan
Commitments on the Effective Date), (iv) reduce any percentage specified in, or
otherwise modify, the definition of Required Lenders (it being understood that
(A) the Incremental Term Loans and the Incremental Term Loan Commitments and (B)
with the consent of the Required Lenders, other additional extensions of credit
pursuant to this Agreement, in each case, may be included in the determination
of the Required Lenders on substantially the same basis as the extensions of
Term Loans and Term Loan Commitments are included on the Effective Date) or (v)
consent to the assignment or transfer by the Parent Borrower of any of its
rights and obligations under this Agreement. No provision of Section 10 or any
other provision relating to the rights and/or obligations of the Administrative
Agent may be amended without the consent of the Administrative Agent.

                  11.12 Survival. All indemnities set forth herein including,
without limitation, in Section 1.10, 1.11, 3.04, 10.07 or 11.01 shall survive
the execution and delivery of this Agreement and the making of the Term Loans,
the repayment of the Obligations and the termination of the Total Term Loan
Commitment.

                  11.13 Domicile of Term Loans. Each Lender may transfer and
carry its Term Loans at, to or for the account of any branch, office, Subsidiary
or affiliate of such Lender. Notwithstanding anything to the contrary contained
herein, to the extent that a transfer of Term Loans pursuant to this Section
11.13 would, at the time of such transfer, result in increased costs under
Section 1.10, 1.11 or 3.04 from those being charged by the respective Lender
prior to such transfer, then the Parent Borrower shall not be obligated to pay
such increased costs (although the Parent Borrower shall be obligated to pay any
other increased costs of the type described above resulting from changes after
the date of the respective transfer).

                  11.14 Confidentiality. Each Lender shall (i) hold all
non-public information (including, without limitation, all financial projections
and analyses) furnished by the Parent Borrower in connection with such Lender's
evaluation of whether to become a Lender hereunder or obtained by such Lender
pursuant to the requirements of this Agreement ("Confidential Information")
confidential, (ii) use Confidential Information only for purposes related to
this Agreement and its position as a Lender hereunder and (iii) not disclose
such Confidential Information other than as provided herein; provided that any
Lender and/or its affiliates may

                                      -56-
<PAGE>
disclose any such Confidential Information (a) as has become generally available
to the public other than as a result of disclosure in violation of this Section
11.14, (b) as has become available to such Lender or any such affiliate on a
non-confidential basis from a source other than the Parent Borrower and its
respective affiliates, provided that the source is not known by such Lender to
be prohibited from transmitting such information to such Lender by a
contractual, legal or fiduciary obligation, (c) as may be required or
appropriate in any report, statement or testimony submitted to any municipal,
state or Federal regulatory body having or claiming to have jurisdiction over
such Lender and/or its affiliates, (d) as may be required or appropriate in
respect to any summons or subpoena or in connection with any litigation or other
judicial process (it being understood that, to the extent reasonably practicable
under the circumstances, the Parent Borrower shall be given prior notice and an
opportunity to contest any proposed disclosure pursuant to this clause (d)), (e)
in order to comply with any law, order, regulation or ruling applicable to such
Lender and/or its affiliates, and (f) to any permitted prospective or actual
syndicate member or participant in any Term Loans, provided that such
prospective or actual syndicate member or participant agrees with the respective
assigning Lender to be bound by the provisions of this Section 11.14. The
provisions of this Section 11.14 shall survive any termination of this
Agreement.

                  11.15 WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE
CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

                  11.16 Register. The Parent Borrower hereby designates the
Administrative Agent to serve as its agent, solely for purposes of this Section
11.16, to maintain a register (the "Register") on which it will record the Term
Loan Commitments from time to time of each of the Lenders, the Term Loans made
by each of the Lenders and each repayment in respect of the principal amount of
the Term Loans of each Lender. Failure to make any such recordation, or any
error in such recordation shall not affect the obligations of the Parent
Borrower in respect of such Term Loans. With respect to any Lender, the transfer
of the Term Loan Commitments of such Lender and the rights to the principal of,
and interest on, any Term Loan made pursuant to such Term Loan Commitments shall
not be effective until such transfer is recorded on the Register maintained by
the Administrative Agent with respect to ownership of such Term Loan Commitments
and Term Loans and prior to such recordation all amounts owing to the transferor
with respect to such Term Loan Commitments and Term Loans shall remain owing to
the transferor. The registration of assignment or transfer of all or part of any
Term Loan Commitments and any Term Loans shall be recorded by the Administrative
Agent on the Register only upon the acceptance by the Administrative Agent of a
properly executed and delivered Assignment Agreement pursuant to Section
11.04(b). Coincident with the delivery of such an Assignment Agreement to the
Administrative Agent for acceptance and registration of assignment or transfer
of all or part of a Term Loan, or as soon thereafter as practicable, the
assigning or transferor Lender shall surrender the Term Note evidencing such
Term Loan, and thereupon one or more new Term Notes in the same aggregate
principal amount shall be issued to the assigning or transferor Lender and/or
the new Lender. The Parent Borrower agrees to indemnify the Administrative Agent
from and against any and all losses, claims, damages and liabilities of
whatsoever nature which may be imposed on, asserted against or incurred by the

                                      -57-
<PAGE>
Administrative Agent in performing its duties under this Section 11.16 (but
excluding any such losses, liabilities, claims, damages or expenses to the
extent incurred by reason of the gross negligence or willful misconduct of the
Administrative Agent (as determined by a court of competent jurisdiction in a
final and non-appealable decision)).

                                      * * *

                                      -58-
<PAGE>
                  IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.

<TABLE>
<S>                                                     <C>
Address:
-------
Crown House, 4 Par-la-Ville Road                        ENDURANCE SPECIALTY HOLDINGS LTD.
Hamilton HM 08
Bermuda
                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
Attention:  James Kroner
Telephone:  (441) 278-0430
Facsimile:  (441) 278-0401
</TABLE>
<PAGE>
                                                        JPMORGAN CHASE BANK,
                                                        Individually and as
                                                        Administrative Agent

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        THE BANK OF NEW YORK

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        BARCLAYS BANK PLC

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        COMERICA BANK

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        CREDIT LYONNAIS
                                                        NEW YORK BRANCH

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        THE BANK OF BERMUDA
                                                        LIMITED

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                        THE BANK OF N.T.
                                                        BUTTERFIELD & SON
                                                        LIMITED

                                                        By:
                                                           ---------------------
                                                        Name:
                                                        Title:
<PAGE>
                                                                         ANNEX I

                    LIST OF LENDERS AND TERM LOAN COMMITMENTS

<TABLE>
<CAPTION>
Lender Name                                                          Initial Term Loan Commitments
-----------                                                          -----------------------------
<S>                                                                  <C>
JPMorgan Chase Bank                                                            $ 55,000,000.00

The Bank of New York                                                           $ 28,500,000.00

Barclays Bank Plc                                                              $ 28,500,000.00

Comerica Bank                                                                  $ 20,000,000.00

Credit Lyonnais New York Branch                                                $ 20,000,000.00

The Bank of Bermuda Limited                                                    $ 15,000,000.00

The Bank of N.T. Butterfield & Son Limited                                     $ 25,000,000.00
                                                                                --------------
Total                                                                          $192,000,000.00
                                                                                ==============
</TABLE>
<PAGE>
                                                                        ANNEX II

                                LENDER ADDRESSES

Lender Address

JPMorgan Chase Bank
270 Park Avenue
New York, NY  10017
Attention:  Helen Newcomb
Tel: (212) 270-6260
Fax: (212) 270-0670

The Bank of New York
One Wall Street
New York, NY  10286
Attention: David Trick
Tel: (212) 635-1064
Fax: (212) 809-9520

Barclays Bank Plc
54 Lombard Street
London EC3V 9EX
England
Attention: Chris Lee
Tel: (44) 207-699-3311
Fax: (44) 207-699-2407

Comerica Bank
One Detroit Center
500 Woodward Avenue MC 3331
Detroit, MI  48226
Attention: Martin Ellis
Tel: (313) 222-9443
Fax: (313) 222-5466

Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, NY  10019
Attention: Seth Ruffer
Tel: (212) 261-7410
Fax: (212) 261-3401
<PAGE>
                                                                        ANNEX II

The Bank of Bermuda Limited
6 Front Street
Hamilton, HM11
Bermuda
Attention:  Kerry Davison
Tel: (441) 299-6219
Fax.: (441) 299-6519

The Bank of N.T. Butterfield & Son Limited
65 Front Street
Hamilton, HMAX
Bermuda
Attention: Jonathan Raynor
Tel: (441) 298-4774
Fax: (441) 296-0380
<PAGE>
                                                                       ANNEX III

                                  SUBSIDIARIES

<TABLE>
<CAPTION>
     NAME                      OWNER                               PERCENTAGE
<S>                            <C>                                 <C>

</TABLE>
<PAGE>
                                                                        ANNEX IV

                                 CAPITALIZATION
<PAGE>
                                                                         ANNEX V

                                  INDEBTEDNESS

<TABLE>
<CAPTION>
DESCRIPTION AND LENDER            BORROWING ENTITY              PRINCIPAL AMOUNT
<S>                               <C>                           <C>

</TABLE>
<PAGE>
                                                                        ANNEX VI

                               INSURANCE LICENSES
<PAGE>
                                                                       ANNEX VII

                                      LIENS
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                  Page
<S>                                                                                               <C>
SECTION 1.     Amount and Terms of Credit..................................................        1
    1.01       Commitments.................................................................        1
    1.02       Minimum Amount of Each Borrowing; Maximum Number of Borrowings..............        2
    1.03       Notice of Borrowing.........................................................        2
    1.04       Disbursement of Funds.......................................................        2
    1.05       Term Notes..................................................................        3
    1.06       Conversions.................................................................        4
    1.07       Pro Rata Borrowings.........................................................        4
    1.08       Interest....................................................................        5
    1.09       Interest Periods............................................................        5
    1.10       Increased Costs, Illegality, etc............................................        6
    1.11       Compensation................................................................        8
    1.12       Change of Lending Office....................................................        9
    1.13       Replacement of Lenders......................................................        9
    1.14       Incremental Term Loan Commitments...........................................       10

SECTION 2.     Fees; Commitments...........................................................       11
    2.01       Fees........................................................................       11
    2.02       Voluntary Reduction of Commitments..........................................       11
    2.03       Mandatory Reduction of Commitments..........................................       12

SECTION 3.     Payments....................................................................       12
    3.01       Voluntary Prepayments.......................................................       12
    3.02       Mandatory Repayments........................................................       13
    3.03       Method and Place of Payment.................................................       14
    3.04       Net Payments................................................................       15

SECTION 4.     Conditions Precedent........................................................       15
    4.01       Conditions Precedent to the Effective Date..................................       15
    4.02       Conditions Precedent to All Terms Loans.....................................       17

SECTION 5.     Representations, Warranties and Agreements..................................       18
    5.01       Corporate Status............................................................       18
    5.02       Corporate Power and Authority...............................................       18
    5.03       No Contravention of Laws, Agreements or Organizational Documents............       19
    5.04       Litigation and Contingent Liabilities.......................................       19
    5.05       Use of Proceeds; Margin Regulations.........................................       19
    5.06       Approvals...................................................................       19
    5.07       Investment Company Act......................................................       19
    5.08       Public Utility Holding Company Act..........................................       19
    5.09       True and Complete Disclosure; Projections and Assumptions...................       20
    5.10       Financial Condition; Financial Statements...................................       20
    5.11       Tax Returns and Payments....................................................       20
    5.12       Compliance with ERISA.......................................................       21
    5.13       Subsidiaries................................................................       21
    5.14       Capitalization..............................................................       22
    5.15       Indebtedness................................................................       22
    5.16       Compliance with Statutes, etc...............................................       22
</TABLE>
                                        i
<PAGE>
                                TABLE OF CONTENTS
                                  (continued)
<TABLE>
<CAPTION>
                                                                                                  Page
<S>                                                                                               <C>
    5.17       Insurance Licenses..........................................................       22
    5.18       Insurance Business..........................................................       23
    5.19       Reinsurance Agreements......................................................       23
    5.20       The Transaction.............................................................       23

SECTION 6.     Affirmative Covenants.......................................................       23
    6.01       Information Covenants.......................................................       23
    6.02       Books, Records and Inspections..............................................       25
    6.03       Insurance...................................................................       26
    6.04       Payment of Taxes............................................................       26
    6.05       Maintenance of Existence....................................................       26
    6.06       Compliance with Statutes, etc...............................................       26
    6.07       ERISA.......................................................................       26
    6.08       Maintenance of Property.....................................................       27
    6.09       Maintenance of Licenses and Permits.........................................       27
    6.10       Claims Paying Ratings.......................................................       27
    6.11       End of Fiscal Years; Fiscal Quarters........................................       28

SECTION 7.     Negative Covenants..........................................................       28
    7.01       Changes in Business.........................................................       28
    7.02       Consolidations, Mergers, Sales of Assets and Acquisitions...................       28
    7.03       Liens.......................................................................       29
    7.04       Indebtedness................................................................       29
    7.05       Issuance of Stock...........................................................       30
    7.06       Dissolution.................................................................       30
    7.07       Restricted Payments.........................................................       30
    7.08       Transactions with Affiliates................................................       30
    7.09       Maximum Leverage Ratio......................................................       30
    7.10       Minimum Consolidated Tangible Net Worth.....................................       30
    7.11       Minimum Consolidated Fixed Charge Coverage Ratio............................       31
    7.12       Private Act.................................................................       31

SECTION 8.     Events of Default...........................................................       31
    8.01       Payments....................................................................       31
    8.02       Representations, etc........................................................       31
    8.03       Covenants...................................................................       31
    8.04       Default Under Other Agreements..............................................       31
    8.05       Bankruptcy, etc.............................................................       31
    8.06       ERISA.......................................................................       32
    8.07       Judgments...................................................................       32
    8.08       Insurance License...........................................................       33
    8.09       Ownership...................................................................       33

SECTION 9.     Definitions.................................................................       33

SECTION 10.    The Administrative Agent....................................................       47
    10.01      Appointment.................................................................       47
    10.02      Delegation of Duties........................................................       47
    10.03      Exculpatory Provisions......................................................       48
</TABLE>

                                      -ii-
<PAGE>
                                TABLE OF CONTENTS
                                  (continued)
<TABLE>
<CAPTION>
                                                                                                  Page
<S>                                                                                               <C>
    10.04      Reliance by Administrative Agent............................................       48
    10.05      Notice of Default...........................................................       48
    10.06      Non-Reliance................................................................       49
    10.07      Indemnification.............................................................       49
    10.08      The Administrative Agent in its Individual Capacity.........................       50
    10.09      Successor Administrative Agent..............................................       50

SECTION 11.    Miscellaneous...............................................................       50
    11.01      Payment of Expenses, etc....................................................       50
    11.02      Right of Setoff.............................................................       51
    11.03      Notices.....................................................................       51
    11.04      Benefit of Agreement........................................................       51
    11.05      No Waiver; Remedies Cumulative..............................................       53
    11.06      Payments Pro Rata...........................................................       53
    11.07      Calculations; Computations..................................................       54
    11.08      GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE............................       54
    11.09      Counterparts................................................................       55
    11.10      Headings Descriptive........................................................       55
    11.11      Amendment or Waiver.........................................................       55
    11.12      Survival....................................................................       56
    11.13      Domicile of Term Loans......................................................       56
    11.14      Confidentiality.............................................................       56
    11.15      WAIVER OF JURY TRIAL........................................................       57
    11.16      Register....................................................................       57
</TABLE>
                                     -iii-

<PAGE>
<TABLE>
<Caption>
                               TABLE OF CONTENTS
                                  (continued)                                       Page
<S>               <C>                                                               <C>
ANNEX I           List of Lenders and Commitments
ANNEX II          Lender Addresses
ANNEX III         Subsidiaries
ANNEX IV          Capitalization
ANNEX V           Indebtedness
ANNEX VI          Insurance Licenses
ANNEX VII         Liens

EXHIBIT A         Form of Notice of Borrowing
EXHIBIT B         Form of Term Note
EXHIBIT C-1       Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
EXHIBIT C-2       Form of Opinion of Appleby, Spurling & Kempe
EXHIBIT D         Form of Officers' Certificate
EXHIBIT E         Form of Assignment Agreement
EXHIBIT F         Form of Incremental Term Loan Agreement
</TABLE>

                                      -1-

<PAGE>

                                 FIRST AMENDMENT

      FIRST AMENDMENT (this "Amendment"), dated as of September 26, 2002, among
ENDURANCE SPECIALTY HOLDINGS LTD., a company organized under the laws of Bermuda
(the "Parent Borrower"), the lenders party to the Term Loan Agreement referred
to below (the "Lenders"), and JPMORGAN CHASE BANK, as Administrative Agent (in
such capacity, the "Administrative Agent"). All capitalized terms used herein
and not otherwise defined herein shall have the respective meanings provided
such terms in the Term Loan Agreement referred to below.

                              W I T N E S S E T H :

      WHEREAS, the Parent Borrower, the Lenders and the Administrative Agent are
parties to a Term Loan Agreement, dated as of August 13, 2002 (the "Term Loan
Agreement"); and

      WHEREAS, the Parent Borrower has requested, and the Lenders have agreed
to, the amendments and agreements provided herein on the terms and conditions
set forth herein;

      NOW, THEREFORE, it is agreed:

      1. Section 1.01(a) of the Term Loan Agreement is hereby amended by
deleting the term "Term Loan Commitment Expiration Date" appearing therein and
inserting the term `Term Loan Commitment Termination Date" in lieu thereof.

      2. Section 3.02(a) of the Term Loan Agreement is hereby amended by (i)
deleting the first appearance of the text "the first anniversary of the Initial
Borrowing Date" appearing therein and inserting the text "the earlier of (x) the
first anniversary of the Initial Borrowing Date and (y) September 30, 2003" in
lieu thereof and (ii) deleting the table set forth in such Section in its
entirety and inserting the following new table in lieu thereof:

<TABLE>
<CAPTION>
                "Scheduled Repayment Date                                           Percentage
                 ------------------------                                           ----------
<S>                                                                                 <C>
 The earlier of (x) the first anniversary of the                                      20.0%
 Initial Borrowing Date and (y) September 30, 2003

 The earlier of (x) the second anniversary of the                                     40.0%
 Initial Borrowing Date and (y) September 30, 2004

 Maturity Date                                                                        40.0%".
</TABLE>

      3. The definition of "Incremental Term Loan Commitment Termination Date"
appearing in Section 9 of the Term Loan Agreement is hereby amended by deleting
the text "the first anniversary of the Initial Borrowing Date" appearing therein
and inserting the text
<PAGE>
"the earlier of (x) the first anniversary of the Initial Borrowing Date and (y)
September 30, 2003" in lieu thereof.

      4. The definition of "Maturity Date" appearing in Section 9 of the Term
Loan Agreement is hereby amended by deleting said definition in its entirety and
inserting the following new definition in lieu thereof:

      "Maturity Date" shall mean the earlier of (x) the date occurring three
years following the Initial Borrowing Date and (y) September 30, 2005.

      5. The definition of "Term Loan Commitment Termination Date" appearing in
Section 9 of the Term Loan Agreement is hereby amended by deleting the date
"September 30, 2002" appearing therein and inserting the date "December 2, 2002"
in lieu thereof.

      6. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Term Loan
Agreement or any other Credit Document.

      7. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Parent Borrower and the Administrative Agent.

      8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.

      9. This Amendment shall become effective on the date (the "First Amendment
Effective Date") when the Parent Borrower and the Required Lenders shall have
signed a counterpart hereof (whether the same or different counterparts) and
shall have delivered (including by way of facsimile transmission) the same to
the Administrative Agent at the Notice Office. Furthermore, in order to induce
the Lenders to enter into this Amendment, the Parent Borrower agrees to pay to
each Lender which executes and delivers to the Administrative Agent a
counterpart of this Amendment on or prior to 12:00 p.m. (New York time) on
September 26, 2002, a fee equal to 0.05% of such Lender's Initial Term Loan
Commitment then in existence at 9:00 a.m. (New York time) on October 15, 2002,
with such fee to be earned at 9:00 a.m. (New York time) on October 15, 2002 and
payable on or prior to 5:00 p.m. (New York time) on October 15, 2002 (it being
understood and agreed that if such fee referred to in this sentence is not paid
by the Parent Borrower on or prior to 5:00 p.m. (New York time) on October 15,
2002, an immediate Event of Default under Section 8.01(iii) of the Term Loan
Agreement shall be deemed to have occurred at such time).

      10. In order to induce the Lenders to enter into this Amendment, the
Parent Borrower hereby represents and warrants that (i) no Default or Event of
Default exists as of the First Amendment Effective Date, both before and after
giving effect to this Amendment and (ii) on the First Amendment Effective Date,
both before and after giving effect to this Amendment, all representations and
warranties contained in the Term Loan Agreement and in the other Credit

                                      -2-
<PAGE>
Documents are true and correct in all material respects (it being understood and
agreed that any representation or warranty which by its terms is made as of a
specified date shall be true and correct in all material respects only as of
such specified date).

      11. From and after the First Amendment Effective Date, all references in
the Term Loan Agreement and each of the other Credit Documents to the Term Loan
Agreement shall be deemed to be references to the Term Loan Agreement as
modified hereby. This Amendment shall constitute a Credit Document for all
purposes under the Term Loan Agreement and the other Credit Documents.

                                      * * *

                                      -3-
<PAGE>
      IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.

                                     ENDURANCE SPECIALTY HOLDINGS LTD.

                                     By:
                                        ----------------------------------------
                                        Name:
                                        Title:
<PAGE>
                                     JPMORGAN CHASE BANK,
                                       Individually and as Administrative Agent

                                     By:
                                        ----------------------------------------
                                        Name:
                                        Title:
<PAGE>
                                     SIGNATURE PAGE TO THE FIRST AMENDMENT,
                                     DATED AS OF SEPTEMBER 26, 2002, TO THE
                                     CREDIT AGREEMENT, DATED AS OF AUGUST 13,
                                     2002, AMONG ENDURANCE SPECIALTY HOLDINGS
                                     LTD., A COMPANY ORGANIZED UNDER THE LAWS OF
                                     BERMUDA, THE VARIOUS LENDERS PARTY THERETO,
                                     AND JPMORGAN CHASE BANK, AS ADMINISTRATIVE
                                     AGENT

                                     NAME OF INSTITUTION:

                                     -------------------------------------------

                                     By:________________________________________
                                        Name:
                                        Title:<PAGE>
                                                                     EXHIBIT 4.1

                              INVESTMENT AGREEMENT

                                  By and Among

                               KMART CORPORATION,

                                on the one hand,

                                       and

                           THE INVESTORS NAMED HEREIN,

                                on the other hand

                          Dated as of January 24, 2003

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
<S>               <C>                                                                                           <C>
                                                             ARTICLE I

                                                            DEFINITIONS

Section 1.1.      Definitions.....................................................................................1
Section 1.2.      Other Definitions...............................................................................6

                                                            ARTICLE II

                                                    PURCHASE AND SALE OF SHARES

Section 2.1.      Issuance and Sale...............................................................................7
Section 2.2.      The Purchase Price..............................................................................8

                                                            ARTICLE III

                                                            THE CLOSING

Section 3.1.      The Closing.....................................................................................8
Section 3.2.      Deliveries......................................................................................8
Section 3.3.      Breaching Plan Investor.........................................................................9

                                                            ARTICLE IV

                                           REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Section 4.1.      Organization, Subsidiaries.....................................................................10
Section 4.2.      Due Authorization..............................................................................11
Section 4.3.      Capitalization.................................................................................11
Section 4.4.      Consents and Approvals.........................................................................12
Section 4.5.      No Violations..................................................................................12
Section 4.6.      Compliance with Laws...........................................................................13
Section 4.7.      Financial Advisory Fees........................................................................13
Section 4.8.      Allowed Claims.................................................................................13

                                                             ARTICLE V

                                        REPRESENTATIONS AND WARRANTIES OF THE PLAN INVESTORS

Section 5.1.      Organization...................................................................................13
Section 5.2.      Due Authorization..............................................................................14
Section 5.3.      Consents and Approvals.........................................................................14
Section 5.4.      No Violations..................................................................................14
Section 5.5.      Financial Advisory Fees........................................................................14
Section 5.6.      Financing......................................................................................15
Section 5.7.      Ownership of Shares and Prepetition Claims.....................................................15
Section 5.8.      Investment Representations.....................................................................15
</TABLE>

                                       -i-
<PAGE>

<TABLE>
<S>               <C>                                                                                           <C>
                                                            ARTICLE VI

                                                            COVENANTS

Section 6.1.      Conduct of Business Pending the Closing........................................................15
Section 6.2.      No Solicitation of Alternative Proposals.......................................................17
Section 6.3.      Cooperation; Access to Information.............................................................18
Section 6.4.      Further Actions; Reasonable Efforts............................................................20
Section 6.5.      Use of Proceeds................................................................................21
Section 6.6.      Restructuring..................................................................................21
Section 6.7.      Registration Rights Agreement..................................................................21
Section 6.8.      Corporate Governance...........................................................................21
Section 6.9.      Releases.......................................................................................21
Section 6.10.     Payment of Plan Investors' Expenses............................................................22
Section 6.11.     Notification of Certain Matters................................................................22
Section 6.12.     Information....................................................................................22
Section 6.13.     Transfer Restrictions..........................................................................23
Section 6.14.     ESL Option.....................................................................................23
Section 6.15.     Company Call...................................................................................23

                                                            ARTICLE VII

                                                            CONDITIONS

Section 7.1.      Conditions to the Plan Investors' Obligations..................................................24
Section 7.2.      Conditions to the Obligations of the Company...................................................25

                                                           ARTICLE VIII

                                                           TERMINATION

Section 8.1.      Termination....................................................................................26
Section 8.2.      Commitment Fee.................................................................................27

                                                            ARTICLE IX

                                                           MISCELLANEOUS

Section 9.1.      Governing Law..................................................................................28
Section 9.2.      Jurisdiction; Forum; Service of Process; Waiver of Jury Trial..................................28
Section 9.3.      Successors and Assigns.........................................................................28
Section 9.4.      Entire Agreement; Amendment....................................................................29
Section 9.5.      Notices........................................................................................29
Section 9.6.      Delays or Omissions............................................................................30
Section 9.7.      Consent........................................................................................31
Section 9.8.      Counterparts...................................................................................31
Section 9.9.      Severability...................................................................................31
</TABLE>

                                      -ii-
<PAGE>

<TABLE>
<S>               <C>                                                                                           <C>
Section 9.10.     Headings.......................................................................................31
Section 9.11.     No Public Announcement.........................................................................31
Section 9.12.     Interpretation.................................................................................31
</TABLE>

Exhibits.

Exhibit A -- Plan
Exhibit B -- Exit Financing Facility Commitment Letter
Exhibit C -- Term Sheet of Called Notes

Schedules.

Company Disclosure Schedule
Plan Investors' Disclosure Schedule
Store Closing Schedule

                                     -iii-

<PAGE>

                              INVESTMENT AGREEMENT

                  THIS INVESTMENT AGREEMENT (as it may be amended, restated,
supplemented or otherwise modified from time to time, this "Agreement") is made
as of January 24, 2003 by and among Kmart Corporation, a Michigan corporation,
in its capacity as debtor and debtor-in-possession (the "Company"), on the one
hand, and ESL Investments, Inc., a Delaware corporation ("ESL") and Third Avenue
Trust, a Delaware business trust, on behalf of certain of its investment series
("Third Avenue"), on the other hand. ESL and Third Avenue and each of their
permitted assignees are sometimes referred to herein individually as a "Plan
Investor" and collectively as the "Plan Investors."

                                    RECITALS

                  WHEREAS, on January 22, 2002 (the "Petition Date") the Company
and certain of its subsidiaries (collectively, the "Debtors") filed voluntary
petitions for reorganization relief (the "Bankruptcy Cases") under chapter 11 of
Title 11 of the United States Code, 11 U.S.C. ss.ss. 101 et seq., as amended
(the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern
District of Illinois (the "Bankruptcy Court");

                  WHEREAS, the Company desires to undertake the Restructuring
(as hereinafter defined);

                  WHEREAS, in connection with the Restructuring, the Plan
Investors desire to make a significant investment in the Reorganized Debtors (as
hereinafter defined);

                  WHEREAS, to implement such investment, the Plan Investors
desire to purchase from the Reorganized Debtor (as hereinafter defined), and the
Reorganized Debtor desires to issue and sell to the Plan Investors, upon the
terms and subject to the conditions set forth herein, the Plan Investors' Shares
(as hereinafter defined); and

                  WHEREAS, with respect to the sale and purchase of the Plan
Investors' Shares, the Plan Investors will have the benefit of the registration
rights provided for in a Registration Rights Agreement, in form and substance
reasonably mutually acceptable to the Company and the Plan Investors, to be
executed at the Closing of the transactions contemplated hereby (the
"Registration Rights Agreement").

                  NOW, THEREFORE, in consideration of the mutual covenants,
agreements, representations and warranties contained herein, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

                  Section 1.1. Definitions. For the purposes of this Agreement,
the following terms shall have the following meanings:

<PAGE>

                  "Adjusted Excess Availability" shall mean, as of any date, the
excess of (i) Liquidity over (ii) the aggregate amount of trade payables, other
accounts payable and accrued liabilities, as of such date.

                  "Affiliate" shall have the meaning ascribed thereto in Rule
12b-2 promulgated under the Exchange Act.

                  "Board of Directors" shall mean the Board of Directors of the
Company (or the Reorganized Debtor, as the case may be).

                  "Business Day" shall mean any day excluding Saturday, Sunday,
or any other day on which banking institutions located in Chicago, Illinois or
New York, New York are required or authorized to be closed.

                  "Business Plan" shall mean that five-year business plan of the
Company, as the same shall exist as of the date hereof, a copy of which has been
previously provided to ESL.

                  "Code" shall mean the Internal Revenue Code of 1986, as
amended.

                  "Commitment Fee" shall mean a payment in cash in an aggregate
amount equal to ten million dollars ($10,000,000), payable pursuant to Section
8.2(b), following entry of the Commitment Fee Order.

                  "Commitment Fee Order" shall mean an order of the Bankruptcy
Court approving, inter alia, (i) the Commitment Fee and (ii) the reimbursement
of the Expenses of the Plan Investors pursuant to Section 6.10 hereof, as
administrative expenses of the Debtors' Chapter 11 Estates.

                  "Commitment Letter" shall mean the commitment letter for the
Exit Financing Facility in the form attached hereto as Exhibit B, together with
the Side Letter, in each case without giving effect to any amendments or
supplements thereto.

                  "Company Debentures" shall mean the 12-1/2% Debentures due
2005, the 7-3/4% Debentures due 2012, the 8-3/4% Debentures due 2022 and the
7.95% Debentures due 2023 of the Company.

                  "Company Senior Notes" shall mean the 8-3/4% Notes due 2004,
the 8-1/8% Notes due 2006, the 8-1/4% Notes due 2022 and the Fixed-Rate Medium
Term Notes (Series A, B, C, D) of the Company.

                  "Confirmation Order" shall mean an order, which shall include
orders of the Bankruptcy Court that have the effect, except as contemplated by
the Plan, of vesting all licenses, permits, authorizations, registrations and
other governmental or regulatory requirements to conduct the business of the
Debtors in the Reorganized Debtors without any further action, filing, notice,
declaration or registration by them, and otherwise in form and substance
reasonably acceptable to the Plan Investors entered by the Bankruptcy Court in
the Bankruptcy Cases confirming the Plan pursuant to Section 1129 of the
Bankruptcy Code.

                                      -2-
<PAGE>

                  "Creditor Shares" shall mean the New Common Shares to be
issued to the creditors of the Debtors pursuant to the Plan.

                  "DIP Financing Facility" shall mean that certain Revolving
Credit and Guaranty Agreement, dated as of January 22, 2002, as amended to the
date hereof, among the Company and certain of its direct or indirect
subsidiaries signatory thereto, JPMorgan Chase Bank, a New York banking
corporation, certain other financial institutions from time to time party
thereto and JPMorgan Chase Bank, in its capacity as administrative agent.

                  "Disclosure Statement" shall mean the disclosure statement
filed in connection with the Plan in the Bankruptcy Cases.

                  "Domestic Subsidiary" shall mean any Subsidiary (as defined
below) that is created or organized in or under the law of the United States,
any State thereof or the District of Columbia.

                  "Encumbrance" shall mean, with respect to any Person, any
mortgage, lien, pledge, security interest or other encumbrance, or any interest
or title of any vendor, lessor, lender or other secured party to or of such
Person under any conditional sale or other title retention agreement or capital
lease, upon or with respect to any property or asset of such Person (including
in the case of stock, stockholder agreements, voting trust agreements, voting
rights agreements and all similar arrangements).

                  "ESL Existing Prepetition Credit Agreement Obligations" shall
mean the allowed amount of ESL's claims pursuant to the Prepetition Credit
Agreements in respect of such claims that ESL holds as of the date of this
Agreement.

                  "ESL Subsequent Prepetition Credit Agreement Obligations"
shall mean the allowed amount of ESL's claims pursuant to the Prepetition Credit
Agreements in respect of such claims that ESL acquires after the date of this
Agreement.

                  "Excess Availability" shall have the meaning ascribed thereto
in the Commitment Letter.

                  "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any successor federal statute, and the rules and regulations of
the SEC thereunder, all as the same shall be in effect at the time. Reference to
a particular section of the Exchange Act shall include reference to the
comparable section, if any, of such successor federal statute.

                  "Exit Financing Facility" shall mean the exit financing
facility obtained by the Reorganized Debtors having a committed amount of at
least two billion dollars ($2,000,000,000), which shall either be on terms and
conditions consistent in all material respects with those set forth on the
Commitment Letter, or to the extent inconsistent therewith, on terms and
conditions acceptable to the Plan Investors.

                  "FIC" shall mean the Financial Institutions Committee.

                                      -3-
<PAGE>

                  "Governmental Entity" shall mean any supranational, national,
foreign, federal, state or local judicial, legislative, executive,
administrative or regulatory body or authority.

                  "Knowledge" of a party hereto shall mean the actual knowledge
of any executive officer of such party after due inquiry.

                  "Law" shall mean any law, statute, ordinance, rule,
regulation, order, judgment, decree or body of law of any Governmental Entity.

                  "Material Adverse Effect" shall mean, when used in connection
with the Company or the Reorganized Debtor, any change, effect, event,
occurrence or development that is, or is reasonably likely to be, materially
adverse to the business, results of operations or financial condition of the
Company and its Subsidiaries, taken as a whole, other than any change, effect,
event or occurrence relating to or arising out of (i) the economy or securities
markets in general, (ii) this Agreement or the transactions contemplated hereby
or the announcement thereof or the announcement of the Store Closing Program,
(iii) the Company's financial condition as of the date of this Agreement, (iv)
the filing of the Plan or (v) the Company's industry generally.

                  "Non-Lender Unsecured Claims" shall have the meaning ascribed
thereto in the Plan attached hereto as Exhibit A.

                  "Ordinary Course of Business" shall mean the ordinary course
of business of the Debtors.

                  "Permitted Encumbrances" shall mean: any Encumbrance (i)
permitted under the DIP Financing Facility; (ii) approved by the Bankruptcy
Court, including, without limitation, liens granted pursuant to a cash
collateral and/or debtor-in-possession financing order and liens granted as
adequate protection; (iii) granted pursuant to any forbearance agreement, or
amendment thereto, entered into with respect to the DIP Financing Facility; (v)
mechanics', materialmen's, and similar liens; (vi) liens for taxes not yet due
and payable or for taxes that the taxpayer is contesting through appropriate
proceedings; (vii) purchase money liens and liens securing rental payments under
capital lease arrangements; and (viii) other liens or Encumbrances either (A)
arising in the Ordinary Course of Business that are not incurred in connection
with the borrowing of money or (B) that would not materially interfere with the
conduct of the business of the Company or any of its Subsidiaries that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X.

                  "Person" shall mean any individual, firm, corporation, limited
liability company, partnership, company, trust or other entity, and shall
include any successor (by merger or otherwise) of such entity.

                  "Plan" shall mean the plan of reorganization in a form
acceptable to the Debtors and the Plan Investors and embodying the terms set
forth in the Plan attached hereto as Exhibit A, with such changes as may be
reasonably acceptable to the Debtors and the Plan Investors hereafter, together
with all contracts, agreements, schedules, exhibits, certificates, orders and
other documents prepared in connection therewith, provided, however, that any
such change that adversely affects the Plan Investors or the distributions
required to be made to ESL or Third

                                      -4-
<PAGE>

Avenue pursuant to the Plan in respect of their prepetition claims against the
Company, shall require the prior written consent of the Plan Investors, in their
sole and absolute discretion.

                  "Preferred Obligations" shall mean the 7-3/4% Trust
Convertible Preferred Securities of Kmart Financing I, a Delaware Statutory
business trust and Debtor.

                  "Prepetition Credit Agreements" shall mean that certain
364-Day Credit Agreement, dated as of November 31, 2001 and that certain
Three-Year Credit Agreement, dated as of December 6, 1999 and each made by and
among Kmart, Chase Securities, Inc., as Lead Arranger and Book Manager, The
Chase Manhattan Bank, as Administrative Agent, Bank of America, National
Association, as Syndication Agent, BankBoston, N.A., as Co-Documentation Agent,
and Bank of New York, as Co-Documentation Agent, as amended, supplemented or
otherwise modified from time to time, and all documents executed in connection
therewith.

                  "Prepetition Credit Agreement Obligations" shall mean the
allowed amount of the Prepetition Lenders' claims pursuant to the Prepetition
Credit Agreements.

                  "Prepetition Lender" shall mean any creditor of the Debtors
holding claims pursuant to the Prepetition Credit Agreements.

                  "Prepetition Note Claims" shall have the meaning ascribed
thereto in the Plan.

                  "Reorganized Debtor" shall mean the Reorganized Debtor whose
shares of New Common Stock will be issued pursuant to the Plan.

                  "Reorganized Debtors" shall mean the entities, which may
include one or more new holding companies and operating companies to be formed
pursuant to the Plan, that will carry out the business of the Company and its
Subsidiaries upon emergence from bankruptcy under chapter 11 of the Bankruptcy
Code.

                  "SEC" shall mean the United States Securities and Exchange
Commission and any successor Governmental Entity.

                  "SEC Reports" shall mean any and all proxy statements, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other documents required to be filed by the Company under the Exchange
Act since January 27, 2000, as amended and/or restated.

                  "Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of the
SEC thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Act shall include reference to the
comparable section, if any, of such successor federal statute.

                  "Side Letter" shall mean the side letter to the Commitment
Letter, dated January 23, 2003, without giving effect to any amendments or
supplements thereto.

                  "Store Closing Program" shall mean the Company's program (i)
to close and conduct store closing sales of up to the 326 stores set forth on
the attached Store Closing

                                      -5-
<PAGE>

Schedule and (ii) in connection therewith, to (A) close one or more distribution
centers and (B) reduce personnel at the Company's headquarters and regional
offices, after the 2002 holiday selling season consistent with its long-term
business plan, together with any actions required or necessary therefor or
connected therewith, including but not limited to any reduction in force, sales
of assets and rejection of unexpired leases and executory contracts related
thereto.

                  "Transaction Documents" shall mean this Agreement, the
Registration Rights Agreement, and all other contracts, agreements, schedules,
certificates, orders and other documents being delivered pursuant to or in
connection with this Agreement.

                  "UCC" shall mean the Unsecured Creditors' Committee.

                  Section 1.2 Other Definitions. The following terms shall have
the meanings defined in the Section indicated:

<TABLE>
<S>                                                                                     <C>
         Agreement................................................................................Preamble
         Alternative Plan Investor.............................................................Section 3.3
         Alternative Proposal...............................................................Section 6.2(a)
         Balance Sheet Cash................................................................Section 6.15(a)
         Bankruptcy Cases.........................................................................Recitals
         Bankruptcy Code..........................................................................Recitals
         Bankruptcy Court.........................................................................Recitals
         Breaching Plan Investor...............................................................Section 3.3
         Called Notes......................................................................Section 6.15(a)
         Cash Balance......................................................................Section 6.15(a)
         Closing...............................................................................Section 3.1
         Closing Date..........................................................................Section 3.1
         Company..................................................................................Preamble
         Company Call......................................................................Section 6.15(a)
         Company Confidential Information...................................................Section 6.3(f)
         Company Disclosure Schedule............................................................Article IV
         Debtors..................................................................................Recitals
         Disclosure Statement Approval Order...................................................Section 6.6
         ESL......................................................................................Preamble
         ESL Option........................................................................Section 6.14(a)
         ESL Prepetition Obligation Shares..................................................Section 2.1(c)
         Excess Distributions..............................................................Section 6.15(a)
         Expenses.............................................................................Section 6.10
         Governmental Requirements.............................................................Section 4.4
         HSR Act...............................................................................Section 4.4
         Initial Called Note...............................................................Section 6.15(a)
         Initial Company Call..............................................................Section 6.15(a)
         Investment............................................................................Section 2.2
         Liquidity.........................................................................Section 6.15(a)
         Maximum Company Call Amount.......................................................Section 6.15(b)
         Maximum Optioned Shares...........................................................Section 6.14(b)
         New Common Shares..................................................................Section 4.3(b)
</TABLE>

                                      -6-
<PAGE>

<TABLE>
<S>                                                                                    <C>
         New ESL Shares........................................................................Section 2.1
         New Third Avenue Shares...............................................................Section 2.1
         Option Price......................................................................Section 6.14(a)
         Petition Date............................................................................Recitals
         Plan Investor............................................................................Preamble
         Plan Investors' Disclosure Schedule.....................................................Article V
         Plan Investors' Shares.............................................................Section 2.1(b)
         Proceeding............................................................................Section 9.2
         Purchase Price........................................................................Section 2.2
         Registration Rights Agreement............................................................Recitals
         Representatives.......................................................................Section 6.2
         Restraint..........................................................................Section 7.1(b)
         Restructuring.........................................................................Section 6.6
         Selected Courts....................................................................Section 9.2(a)
         Subsequent Called Note............................................................Section 6.15(a)
         Share Price........................................................................Section 2.2(b)
         Subsidiary.........................................................................Section 4.1(b)
         Third Avenue.............................................................................Preamble
</TABLE>

                                   ARTICLE II

                           PURCHASE AND SALE OF SHARES

                  Section 2.1. Issuance and Sale. (a) Upon the terms and subject
to the conditions set forth herein, at the Closing: (i) the Reorganized Debtor
shall issue and sell to ESL, and ESL shall purchase from the Reorganized Debtor
a number of New Common Shares (the "New ESL Shares") equal to the sum of (A)
78.21% of the Plan Investors' Shares and (B) the ESL Prepetition Obligation
Shares, (ii) the Reorganized Debtor shall issue and sell to Third Avenue, and
Third Avenue shall purchase from the Reorganized Debtor, 21.79% of the Plan
Investors' Shares (the "New Third Avenue Shares") and (iii) if requested by the
Reorganized Debtor under the circumstances provided for in, and in accordance
with, Section 6.15, the Reorganized Debtor shall issue and sell to ESL, and ESL
shall purchase from the Reorganized Debtor, the Initial Called Note (as defined
in Section 6.15(a)).

                  (b) The "Plan Investors' Shares" shall mean fourteen million
(14,000,000) New Common Shares.

                  (c) The "ESL Prepetition Obligation Shares" shall mean a
number of New Common Shares equal to the quotient obtained by dividing, (i) the
sum of (A) the aggregate amount of cash required to be paid by the Reorganized
Debtor to ESL pursuant to the Plan in settlement and compromise of the ESL
Existing Prepetition Credit Agreement Obligations and (B) such portion as ESL
may in its sole discretion designate of the aggregate amount of cash required to
be paid by the Reorganized Debtor to ESL pursuant to the Plan in settlement and
compromise of the ESL Subsequent Prepetition Credit Agreement Obligations by
(ii) the Share Price (as defined below).

                                      -7-
<PAGE>

                  Section 2.2. The Purchase Price. (a) At the Closing, (i) in
consideration of the issuance of the New ESL Shares to ESL, ESL shall pay to the
Reorganized Debtor an amount equal to the sum of (A) 78.21% of the Purchase
Price and (B) the product of (1) the Share Price and (2) the ESL Prepetition
Obligation Shares, (ii) in consideration of the issuance of the Third Avenue
Shares to Third Avenue, Third Avenue shall pay to the Reorganized Debtor an
amount equal to 21.79% of the Purchase Price, and (iii) in consideration of the
issuance of the Initial Called Note to ESL, if requested by the Reorganized
Debtor under the circumstances provided for in, and in accordance with, Section
6.15, ESL shall pay to the Reorganized Debtor an amount equal to the principal
amount of the Initial Called Note. The payment of the consideration set forth in
this Section, in whole or in part, shall sometimes be referred to herein as the
"Investment".

                  (a) The "Purchase Price" shall mean an amount in dollars equal
to one hundred forty million dollars ($140,000,000).

                  (b) The "Share Price" shall mean a price per share equal to
the quotient obtained by dividing, (x) the Purchase Price by (y) the Plan
Investors' Shares.

                                  ARTICLE III

                                  THE CLOSING

                  Section 3.1. The Closing. The closing of the purchase and sale
of the Plan Investors' Shares hereunder and the other transactions contemplated
hereby (the "Closing") shall take place at the offices of Skadden, Arps, Slate,
Meagher & Flom, 333 West Wacker Drive, Chicago, Illinois 60606-1285, at a date
(the "Closing Date") and time to be mutually agreed upon by the Company and ESL
on behalf of the Plan Investors, which shall be at least three (3) but no more
than ten (10) Business Days after the date following the satisfaction (or waiver
by ESL or the Company, as appropriate) of all of the conditions set forth in
Article VII (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of those
conditions); provided, however, that in the event the Company and ESL are not
able mutually to agree on a Closing Date in accordance with the immediately
preceding clause, the parties agree that the Closing Date shall be on the tenth
Business Day following the satisfaction or waiver of all the conditions set
forth in Article VII (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of those
conditions); and provided, further, that the Closing Date shall be the same date
as the Effective Date of the Plan.

                  Section 3.2. Deliveries. (a) At the Closing, the Reorganized
Debtor shall deliver certificates to (i) ESL, evidencing the aggregate number of
New ESL Shares being purchased by ESL and registered in the name of ESL or, to
the extent designated by ESL to the Reorganized Debtors at least three (3)
Business Days prior to the Closing Date, to an Affiliate thereof, as its nominee
or designee (with the individual certificates in such amounts as ESL shall
specify to the Reorganized Debtor at least three (3) Business Days prior to the
Closing Date) and (ii) Third Avenue, evidencing the aggregate number New Third
Avenue Shares being purchased by Third Avenue and registered in the name of
Third Avenue or, to the extent designated by Third Avenue to the Reorganized
Debtors at least three (3) Business Days prior to the Closing

                                      -8-
<PAGE>

Date, an Affiliate thereof, as its nominee or designee (with the individual
certificates in such amounts as Third Avenue shall specify to the Reorganized
Debtor at least three (3) Business Days prior to the Closing Date). At the
Closing, if the Reorganized Debtor requests that ESL purchase the Initial Called
Note under the circumstances provided for in, and in accordance with, Section
6.15, the Reorganized Debtor shall deliver a convertible note to ESL, in form
and substance consistent with the terms set forth on Exhibit C and otherwise
reasonably acceptable to ESL, evidencing the Initial Called Note being purchased
by ESL and registered in the name of ESL or, to the extent designated by ESL to
the Reorganized Debtors at least three (3) Business Days prior to the Closing
Date, to an Affiliate thereof, as its nominee or designee. Delivery of such
certificates to each Plan Investor shall be made against receipt by the
Reorganized Debtor of the portion of the Purchase Price payable by such Plan
Investor and any other portion of the Investment payable by ESL pursuant to
Section 2.2, which in each case shall be paid by wire transfer of immediately
available funds to an account designated at least three (3) Business Days prior
to the Closing Date by the Reorganized Debtor.

                  (b) At the Closing, the Company shall deliver to the Plan
Investors statements prepared in accordance with the Company's reasonable and
customary practices and procedures used in preparing financial statements and in
accordance with the terms of this Agreement (together with supporting detail
therefor in form and substance reasonably acceptable to the Plan Investors)
setting forth the calculation of the estimated amount of (i) the Excess
Availability and (ii) the Adjusted Excess Availability of the Company and its
Domestic Subsidiaries, in each case as of the Closing.

                  (c) At the Closing, the Company shall deliver to the Plan
Investors the Commitment Fee.

                  (d) At the Closing, the Company shall deliver to the Plan
Investors the officers' certificates required under Sections 7.1(c), 7.1(d) and
7.1(g).

                  (e) At the Closing, each Plan Investor shall deliver to the
Company the officers' certificates required under Sections 7.2(c) and 7.2(d).

                  Section 3.3. Breaching Plan Investor. Notwithstanding anything
contained in this Agreement to the contrary, if each of the conditions to each
party's obligations to this Agreement set forth in Article VII has otherwise
been satisfied or waived and if Third Avenue breaches its obligation to
consummate the transactions contemplated herein (the "Breaching Plan Investor"),
ESL shall, or shall cause one or more other Persons to, by the earlier of (x)
May 30, 2003 and (y) the date that is ten (10) Business Days from the date that,
but for the Breaching Plan Investor's failure to close, would have been the
Closing Date, assume and perform all the rights and obligations of the Breaching
Plan Investor (an "Alternative Plan Investor"); provided that any such
Alternative Plan Investor which is neither an Affiliate of, or an investor in
(including a limited partner thereof), a Plan Investor as of the date of this
Agreement shall be subject to the reasonable approval of the Company. If ESL
does not assume or cause an Alternative Plan Investor to assume and perform the
Breaching Plan Investor's rights and obligations under this Agreement, the
Company shall have the right to terminate this Agreement without any liability
to the Plan Investors (including, without limitation, liability for the
Commitment Fee or any Expenses, which if previously paid, shall be repaid to the
Company),

                                      -9-
<PAGE>

but without in any way (i) releasing the Breaching Plan Investor from any
liability to the Company for its breach or limiting the Company's rights with
respect to the Breaching Plan Investor, (ii) releasing ESL from any liability to
the Company for any breach of its obligations hereunder or limiting the
Company's rights with respect to ESL or (iii) releasing the Breaching Plan
Investor from any liability to ESL for the Breaching Plan Investor's breach or
limiting ESL's rights with respect to the Breaching Plan Investor.

                                   ARTICLE IV

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                  Except as specifically set forth in the disclosure schedule
prepared and signed by the Company (the "Company Disclosure Schedule") and
delivered to the Plan Investors simultaneously with the execution and delivery
hereof, the Company represents and warrants to each of the Plan Investors that
all of the statements contained in this Article IV are true and correct as of
the date of this Agreement (or, if made as of a specified date, as of such
date).

                  Section 4.1. Organization, Subsidiaries. (a) The Company and
each of its Subsidiaries is a corporation or other legal entity duly organized,
validly existing and (in the jurisdictions recognizing the concept) in good
standing under the laws of the jurisdiction in which it is organized and has the
requisite corporate or other power and authority to own, lease and operate its
properties and to conduct its business as it is now being conducted. To the
Knowledge of the Company, the Company and each of its subsidiaries is duly
qualified or licensed as a foreign entity to do business and (in the
jurisdictions recognizing the concept) is in good standing (and has paid all
relevant franchise or analogous taxes) in each jurisdiction in which the nature
of its business or the ownership, leasing or operation of its properties makes
such qualification or licensing necessary, except for failures to be so
qualified that, individually or in the aggregate, are not reasonably likely to
have a Material Adverse Effect.

                  (b) Except for Kmart Financing I, Section 4.1(b) of the
Company Disclosure Schedule sets forth, as of the date hereof, (i) each
corporation, limited liability company, partnership, business association or
other Person in which the Company owns any direct or indirect equity interest
(each a "Subsidiary," and collectively the "Subsidiaries"), (ii) the ownership
interest therein of the Company or such other Subsidiary, and (iii) if such
Subsidiary is not directly or indirectly wholly-owned by the Company, to the
extent of the Knowledge of the Company, the identity and ownership interest of
each of the other owners of such Subsidiary.

                  (c) Except as set forth on Section 4.1(c) of the Company
Disclosure Schedule or except as it relates to Kmart Financing I (i) the Company
owns, either directly or indirectly through one or more Subsidiaries, all of the
capital stock or other equity interests of the Subsidiaries free and clear of
all Encumbrances, other than Permitted Encumbrances, and (ii) there are no
outstanding subscription rights, options, warrants, convertible or exchangeable
securities or other rights of any character whatsoever relating to issued or
unissued capital stock or other equity interests of any Subsidiary, or any
commitments of any character whatsoever relating to issued or unissued capital
stock or other equity interests of any Subsidiary or pursuant to which any
Subsidiary is or may become bound to issue or grant additional shares of its
capital stock or other equity interests or related subscription rights, options,
warrants, convertible or

                                      -10-
<PAGE>

exchangeable securities or other rights, or to grant preemptive rights, which,
in each case, will be in effect immediately following the Closing.

                  Section 4.2. Due Authorization. Subject to the approval of the
Bankruptcy Court, the Company has all corporate right, power and authority to
enter into this Agreement and each of the other Transaction Documents to which
it is a party, to consummate the transactions contemplated hereby and thereby
and to comply with the terms, conditions and provisions hereof and thereof. The
execution and delivery by the Company of this Agreement and of each other
Transaction Document to which it is a party is, and the issuance, sale and
delivery of the New Common Shares by the Reorganized Debtor and the compliance
by the Company (or the Reorganized Debtors, as the case may be) with each of the
provisions of this Agreement and of each other Transaction Document to which it
(or the Reorganized Debtors, as the case may be) is a party will, upon the
approval of the Bankruptcy Court, be (i) within the corporate power and
authority of the Company (or the Reorganized Debtors, as the case may be) and
(ii) have been duly authorized by all requisite corporate action of the Company
(or the Reorganized Debtors, as the case may be). This Agreement has been, and
each of the other Transaction Documents to which the Company (or the Reorganized
Debtors, as the case may be) is a party when executed and delivered by the
Company (or the Reorganized Debtors, as the case may be) will be, duly and
validly executed and delivered by the Company (or the Reorganized Debtors, as
the case may be), and this Agreement constitutes, and each of such other
Transaction Documents when executed and delivered by the Company (or the
Reorganized Debtors, as the case may be) will constitute, upon approval of the
Bankruptcy Court, a valid and binding agreement of the Company (or the
Reorganized Debtors, as the case may be), enforceable against the Company (or
the Reorganized Debtors, as the case may be) in accordance with its terms,
except as such enforcement is limited by bankruptcy, reorganization, insolvency
and other similar laws affecting the enforcement of creditors' rights generally
and limitations imposed by general principles of equity.

                  Section 4.3. Capitalization. (a) Except as set forth in
Section 4.3 of the Company Disclosure Schedule and the Plan and except for the
transactions contemplated by this Agreement, the other Transaction Documents or
any benefit plans approved by the Plan Investors, there are no outstanding
subscription rights, options, warrants, convertible or exchangeable securities
or other rights of any character whatsoever to which the Company is a party
relating to issued or unissued capital stock of the Company, or any commitments
of any character whatsoever relating to issued or unissued capital stock of the
Company or pursuant to which the Company or any of the Subsidiaries are or may
become bound to issue or grant additional shares of their capital stock or
related subscription rights, options, warrants, convertible or exchangeable
securities or other rights, or to grant preemptive rights, which, in each
instance, will be in effect immediately following the Closing. Except as
contemplated by this Agreement, the Plan and the Registration Rights Agreement,
(i) the Company has not agreed to register any Creditor Shares under the
Securities Act or under any state securities law or granted registration rights
to any Person and (ii) there are no voting trusts, stockholders agreements,
proxies or other understandings in effect to which the Company is a party with
respect to the voting or transfer of any of the New Common Shares (as defined
below) that will be outstanding as of the Closing.

                                      -11-
<PAGE>

                  (b) As of the Closing, after giving effect to the Investment
and the Restructuring contemplated hereby, (i) the authorized capital stock of
the Reorganized Debtor shall be the number of shares of common stock provided in
the Plan, i.e., 100 million common shares ("New Common Shares") and 20 million
shares of preferred stock and (ii) the shares of capital stock of the
Reorganized Debtor (A) outstanding shall consist solely of (x) the New ESL
Shares, New Third Avenue Shares and the Creditor Shares and (y) New Common
Shares issued pursuant to executive compensation plans, if any, approved by the
Plan Investors and (B) subject to issuance pursuant to outstanding options shall
consist solely of the New Common Shares reserved for issuance pursuant to (x)
executive compensation plans, if any, approved by the Plan Investors and (y) the
ESL Option.

                  Section 4.4. Consents and Approvals. To the Knowledge of the
Company, no consent, approval, authorization of, declaration, filing, or
registration with, any Governmental Entity is required to be made or obtained by
either the Company or any of its Subsidiaries in connection with the execution,
delivery, and performance of this Agreement or any of the other Transaction
Documents contemplated hereby, except for (i) the filing of new Certificates of
Incorporation for one or more of the Reorganized Debtors with the Secretary of
State of such Reorganized Debtors' state of incorporation, (ii) any required
filings under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended (the "HSR Act"), the Exchange Act or the Securities Act, (iii) the
Confirmation Order, and (iv) the Commitment Fee Order. The items referred to in
clauses (i) through (iv) of this Section 4.4 are hereinafter referred to as the
"Governmental Requirements."

                  Section 4.5, No Violations. Except as set forth on Section 4.5
of the Company Disclosure Schedule, assuming that the Governmental Requirements
will be satisfied, made or obtained and will remain in full force and effect and
the conditions set forth in Article VII will be satisfied, except as
contemplated by the Plan and the reorganization of the Company and the other
Debtors under the Plan (including any consents required thereunder), neither the
execution, delivery or performance by the Company of this Agreement or any of
the other Transaction Documents to which the Company (or the Reorganized
Debtors, as the case may be) is a party nor the consummation of the transactions
contemplated hereby or thereby will: (i) conflict with, or result in a breach or
a violation of, any provision of the certificate of incorporation or bylaws or
other organizational documents of the Company or any of its Subsidiaries (or the
Reorganized Debtors, as the case may be) or (ii) as of the Closing, constitute,
with or without notice or the passage of time or both, a breach, violation or
default, create an Encumbrance (other than any Permitted Encumbrance) or give
rise to any right of termination, modification, cancellation, prepayment,
suspension, limitation, revocation or acceleration, under any Law or any
provision of any agreement or other instrument to which the Company or any of
its Subsidiaries is a party or pursuant to which the Company or any of its
Subsidiaries or any of their respective assets or properties is subject, except
for breaches, violations, defaults, Encumbrances (other than Permitted
Encumbrances), or rights of termination, modification, cancellation, prepayment,
suspension, limitation, revocation or acceleration which, individually or in the
aggregate, are not material and would not materially adversely affect the
ability of the Company (or the Reorganized Debtors, as the case may be) to
perform its obligations under this Agreement or any of the Transaction
Documents.

                                      -12-
<PAGE>

                  Section 4.6. Compliance with Laws. Except as disclosed in the
SEC Reports or in Section 4.6 of the Company Disclosure Schedule, to the
Knowledge of the Company, the Company and its Subsidiaries are in compliance
with all Laws, and neither the Company nor any of its Subsidiaries has received
any notice of any alleged violation of Law, except, in either instance, for
failures to comply or violations which, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect. To the Knowledge of the
Company, the Company and its Subsidiaries hold all other licenses, franchises,
permits, consents, registrations, certificates, and other governmental or
regulatory permits, authorizations or approvals required for the operation of
the business as presently conducted and for the ownership, lease or operation of
the assets of the Company and its Subsidiaries, except for failures to hold such
licenses or approvals that, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect.

                  Section 4.7. Financial Advisory Fees. No agent, broker,
investment bank or other financial advisor is or will be entitled to any fee,
commission, expense or other amount from the Company or any of its Subsidiaries
in connection with any of the transactions contemplated by this Agreement or the
other Transaction Documents except for (a) those fees, payments and agreements
to pay approved by the Bankruptcy Court and (b) other Persons (i) hired by the
Debtors after the date of this Agreement in connection with the Bankruptcy Cases
or (ii) required or authorized to be paid by the Debtors by the Bankruptcy Code
or by an order of the Bankruptcy Court.

                  Section 4.8. Allowed Claims. The sum of the aggregate amount
of allowed claims in the classes set forth in Section III.A.1 (Administrative
Claims) and Section III.A.2 (Other Priority Claims) of the Plan does not exceed
eight hundred million dollars ($800,000,000). The sum of the aggregate amount of
allowed claims in the class set forth in Section III.C (Secured Claims) of the
Plan does not exceed one hundred twenty-five million dollars ($125,000,000).

                                   ARTICLE V

              REPRESENTATIONS AND WARRANTIES OF THE PLAN INVESTORS

                  Except as specifically set forth in the disclosure schedule
prepared and signed by each of the Plan Investors (the "Plan Investors'
Disclosure Schedule") and delivered to the Company simultaneously with the
execution and delivery hereof, each Plan Investor hereby severally represents
and warrants solely as to itself to the Company that all of the statements
contained in this Article V are true and correct as of the date of this
Agreement (or, if made as of a specified date, as of such date).

                  Section 5.1. Organization. Such Plan Investor is a corporation
or other legal entity duly organized, validly existing and (in the jurisdictions
recognizing the concept) in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate or other power and
authority to own, lease and operate its properties and to conduct its business
as it is now being conducted.

                                      -13-

<PAGE>

                  Section 5.2. Due Authorization. (a) Such Plan Investor has all
right, power and authority to execute and deliver this Agreement and the other
Transaction Documents to which it is a party, to consummate the transactions
contemplated hereby and thereby and to comply with the terms, conditions and
provisions hereof applicable to such Plan Investor.

                  (b) The execution, delivery and performance by such Plan
Investor of this Agreement and each of the other Transaction Documents to which
it is a party, the compliance by such Plan Investor with each of the provisions
of this Agreement and each of the Transaction Documents and the consummation of
the transactions contemplated hereby and thereby, are within the power and
authority of such Plan Investor, have been duly authorized and approved by the
requisite actions of such Plan Investor and do not require any further
authorization or consent of such Plan Investor or its beneficial owners. This
Agreement is the legal, valid and binding agreement of such Plan Investor,
enforceable against such Plan Investor in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws from time to time affecting the
enforcement of creditors' rights generally.

                  Section 5.3. Consents and Approvals. To the Knowledge of such
Plan Investor, no consent, approval, authorization of, declaration, filing, or
registration with, any Governmental Entity is required to be made or obtained by
it in connection with the execution, delivery, and performance of this Agreement
or any of the other Transaction Documents contemplated hereby, except for the
Governmental Requirements.

                  Section 5.4. No Violations. Assuming that the Governmental
Requirements will be satisfied, made or obtained and will remain in full force
and effect and the conditions set forth in Article VII will be satisfied,
neither the execution, delivery or performance by such Plan Investor of this
Agreement or any of the other Transaction Documents to which it is a party and
the consummation of the transactions contemplated hereby and thereby, will: (i)
conflict with, or result in a breach or a violation of, any provision of the
certificate of incorporation or bylaws or other organizational documents of such
Plan Investor or (ii) constitute, with or without notice or the passage of time
or both, a breach, violation or default, create an Encumbrance (other than any
Permitted Encumbrance) or give rise to any right of termination, modification,
cancellation, prepayment, suspension, limitation, revocation or acceleration,
under any Law or any provision of any agreement or other instrument to which
such Plan Investor is a party or pursuant to which such Plan Investor or any of
its respective assets or properties is subject, except for breaches, violations,
defaults, Encumbrances (other than Permitted Encumbrances), or rights of
termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration which, individually or in the aggregate, are not
material and would not materially adversely affect the ability of such Plan
Investor to perform its obligations under this Agreement or any of the
Transaction Documents.

                  Section 5.5. Financial Advisory Fees. Except as provided in
Section 6.10, no agent, broker, investment bank or other financial advisor is or
will be entitled to any fee, commission, expense or other amount from such Plan
Investor in connection with any of the transactions contemplated by this
Agreement or the other Transaction Documents.

                                      -14-

<PAGE>

                  Section 5.6. Financing. Such Plan Investor has, and at the
Closing will have, available to it funds in amounts sufficient to pay its
portion of the Purchase Price and to effect the transactions contemplated
hereby.

                  Section 5.7. Ownership of Shares and Prepetition Claims.
Section 5.7 of the Plan Investors' Disclosure Schedule sets forth the number of
shares of common stock, the amount of Preferred Obligations and the prepetition
claims of the Company held by such Plan Investor.

                  Section 5.8. Investment Representations.

                  (a) Such Plan Investor understands that the Plan Investors'
Shares have not been registered under the Securities Act.

                  (b) Such Plan Investor has substantial experience in
evaluating and investing in private placement transactions of securities so that
it is capable of evaluating the merits and risks of its investment in the
Reorganized Debtor and has the capacity to protect its own interests.

                  (c) Such Plan Investor is acquiring its portion of the Plan
Investors' Shares for its own accounts for investment only, and not with a view
towards their distribution.

                  (d) Such Plan Investor represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.

                  (e) Such Plan Investor acknowledges and agrees that it shall
hold its portion of the Plan Investors' Shares indefinitely unless such Plan
Investors' Shares are subsequently registered under the Securities Act or an
exemption from such registration is available and such shares are sold or
otherwise transferred or otherwise disposed of in accordance therewith. Such
Plan Investor is aware of the provisions of Rule 144 promulgated under the
Securities Act as in effect from time to time.

                  (f) ESL is a Delaware corporation, whose office is located at
One Lafayette Place, Greenwich, CT 06830. Third Avenue is a Delaware business
trust, whose office is located at 767 Third Avenue, Fifth Floor, New York, NY
10017. After February 21, 2002, Third Avenue's office will be located at 622
Third Avenue, Thirty-Second Floor, New York, NY 10017.

                                  ARTICLE VI.

                                   COVENANTS

                  Section 6.1. Conduct of Business Pending the Closing. Except
as otherwise expressly contemplated by this Agreement and the Plan or any of the
other Transaction Documents or as consented to by the Plan Investors in writing
or as required by the Bankruptcy Code, during the period from the date of this
Agreement through and including the Closing Date, the Company shall, and shall
cause each of its Subsidiaries to, conduct its operations and business in the
Ordinary Course of Business, including, without limitation, paying its vendors,

                                      -15-

<PAGE>

trade creditors and other creditors in a manner consistent with the Business
Plan. Without limiting the generality of the foregoing, the Company shall not,
and shall not permit any of its Subsidiaries to:

                  (a) amend its charter, bylaws or other comparable
organizational documents other than in accordance with this Agreement or amend
or waive any provisions of the Transaction Documents;

                  (b) acquire any "business", as defined in Rule 3-05(a)(2) of
Regulation S-X (whether by merger, consolidation, purchase of assets or
otherwise) or acquire any, or increase any existing, equity interest in any
person not a Subsidiary (whether through a purchase of stock, establishment of a
joint venture or otherwise), except in connection with the disposition of any
item referenced in Section 6.1(d) of the Company Disclosure Schedule;

                  (c) assume or reject any material executory contract or
unexpired lease to which the Plan Investors have filed a written objection which
has not been withdrawn by the date of entry of the order authorizing the
assumption or rejection of such contract or lease;

                  (d) other than the items set forth in Section 6.1(d) of the
Company Disclosure Schedule and other than in connection with the Store Closing
Program, (i) sell, exchange, license or otherwise dispose of any of its real
properties or other material assets, except for sales of inventory in the
Ordinary Course of Business, (ii) enter into any new joint ventures or similar
projects, (iii) enter into any new real estate development projects, (iv) enter
into any new licenses, leases or other material agreements or understandings
other than in the Ordinary Course of Business or (v) mortgage any of its real
properties or other assets except for Permitted Encumbrances; provided that
nothing set forth in this Section 6.1(d) shall prevent the Company from (i)
entering into licenses, leases or subleases for which the Company is the
licensor, lessor or sublessor, respectively, or (ii) transferring real property
in connection with condemnation proceedings and easement agreements in the
Ordinary Course of Business.

                  (e) except as set forth in Section 6.1(e) of the Company
Disclosure Schedule, change its methods of accounting, except as required by
changes in GAAP; or change any of its methods of reporting income and deductions
for federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ended January 30, 2002, and
except for future amendments of those tax returns to correct immaterial mistakes
or as required by changes in law or regulation or as may be required in
connection with the Bankruptcy Cases;

                  (f) (i) incur any additional indebtedness, except as permitted
by the DIP Financing Facility, or (ii) make any loans, advances or capital
contributions to, or investments in, any Person (excluding any Subsidiary),
except as permitted by the DIP Financing Facility;

                  (g) except as set forth on Section 6.1(g) of the Company
Disclosure Schedule, (i) terminate the employment of any executive officer of
the Company other than for cause, or (ii) except pursuant to agreements in
effect on the date hereof (A) enter into any new employment agreement with any
existing director or executive officer without the consent of the Plan
Investors, which consent shall not be unreasonably withheld, (B) grant to any
current or

                                      -16-

<PAGE>

former director or executive officer of the Company or its Subsidiaries any
increase in compensation, bonus or other benefits (other than increases in base
salary in the Ordinary Course of Business or arising due to a promotion or other
change in status and consistent with generally applicable compensation
practices), (C) grant to any such current or former director, executive officer
or other employee any increase in severance or termination pay, except in
connection with the Store Closing Program, (D) amend, adopt or terminate any
employment, deferred compensation, severance, termination or indemnification
agreement with any such current or former director, executive officer or
employee, except in connection with the Store Closing Program, or (E) amend,
adopt or terminate any employee benefit plan, except as may be required to
retain qualification of any such plan under Section 401(a) of the Code and
except for the adoption of one or more severance plans in connection with the
Store Closing Program;

                  (h) enter into any new agreement or amend any existing
agreement containing a non-competition, geographical restriction or similar
covenant, in each case in a manner materially adverse to the Plan Investors or
the Reorganized Debtor; or

                  (i) agree to take any of the foregoing actions.

                  Section 6.2. No Solicitation of Alternative Proposals. (a)
Except as otherwise expressly provided by this Section 6.2 and except and only
to the extent that the Board of Directors determines in good faith that it is
necessary or desirable to authorize such actions in connection with the
administration of the Bankruptcy Cases or that it is required to authorize such
actions to comply with its fiduciary duties under any applicable Law, including
the Bankruptcy Code, from and after the date of this Agreement until the earlier
of (x) the Closing Date and (y) the termination of this Agreement in accordance
with section 8.1, the Company shall not authorize, and shall not permit any of
its Subsidiaries or any of the Company's or the Subsidiaries' directors,
officers, employees, representatives, agents and advisors (including any
investment banker, financial advisor, attorney, accountant or other
representative retained by any of them or acting on their behalf) (all such
Persons, "Representatives"), directly or indirectly, to (i) solicit, initiate,
or take any other action designed to solicit a proposal or offer for a
restructuring transaction or a plan of reorganization, merger, consolidation,
transfer or exchange of shares, issuance of equity securities (or securities
convertible into equity securities), debt refinancing, sale of a material
portion of the assets of the Debtors (except in connection with the Store
Closing Program and with respect to the items described in Section 6.1(d) of the
Company Disclosure Schedule) or similar transaction involving the Debtors
(collectively, an "Alternative Proposal"), (ii) participate in any discussions
or negotiations regarding any Alternative Proposal, (iii) enter into any letter
of intent, agreement in principle, acquisition agreement or other similar
agreement related to any Alternative Proposal or (iv) subject to the following
sentence, furnish any nonpublic information. Notwithstanding anything to the
contrary that may be set forth in the foregoing, none of the Company or any of
its Representatives will be precluded from providing information to, or
discussing and negotiating with, any Person that has after the date hereof
notified the Company in an unsolicited writing that it is considering making, or
has made in writing an unsolicited bona fide Alternative Proposal or has
notified the Company prior to the date hereof that it is considering making or
has made a bona fide Alternative Proposal so long as the Company and its
Representatives are not in violation of this Section 6.2. In addition, so long
as the Company and its Representatives are not in violation of this Section 6.2,
none of the Company or any of its Representatives will be precluded from
executing an agreement providing

                                      -17-

<PAGE>

for an Alternative Proposal or recommending any such Alternative Proposal to the
creditors of the Company, if in the good faith opinion of the Board of Directors
(in consultation with its financial advisors and outside legal counsel) such
Alternative Proposal provides a higher transaction value or is otherwise more
favorable to the Company than and its creditors the transactions contemplated by
this Agreement and that the Board of Directors reasonably believes in good faith
(after consultation with outside legal counsel) that the failure to authorize
such actions would be inconsistent with its fiduciary duties under any
applicable Law, including the Bankruptcy Code; provided that no such action
shall be authorized unless (i) the Company shall have delivered the notice with
respect to such Alternative Proposal to the Plan Investors pursuant to Section
6.2(b) and (ii) the Plan Investors do not, within five (5) Business Days of
receipt of such notice, make an offer to revise the transactions contemplated by
this Agreement that in the good faith opinion of the Board of Directors (in
consultation with its financial advisors and outside legal counsel) provides an
equal or higher transaction value or is otherwise more favorable to the Company
and its creditors than the Alternative Proposal. No Person considering making an
Alternative Proposal shall be provided non-public information by the Company
unless such Person has executed a customary confidentiality agreement; provided
that such confidentiality agreement shall not prohibit the Company from
delivering any notice required by Section 6.2(b).

                  (b) The Company shall notify the Plan Investors promptly (and
in no event later than seventy-two (72) hours) after (i) receipt by the Company
of (A) any written or oral indication from any Person that informs the Company
that such Person is considering making an Alternative Proposal or (B) any
Alternative Proposal or (ii) the delivery by the Company of any non-public
information in connection with an Alternative Proposal or the granting of access
by the Company to the properties, books or records of the Company to any Person
that informs the Company that it is considering making, or has made an
Alternative Proposal. Such notice shall be made in writing and shall indicate
the identity of the offeror and shall also indicate all the material terms and
conditions of such proposal, inquiry or contract.

                  (c) Notwithstanding any other provision of this Agreement, the
Company agrees that it will not (i) enter into any definitive agreement, letter
of intent or agreement in principle relating to an Alternative Proposal unless
such definitive agreement, letter of intent or agreement in principle shall
provide for an obligation by the Company to pay any portion of the Commitment
Fee, not theretofore paid to the Plan Investors pursuant to and in accordance
with Section 8.2 or (ii) consummate any Alternative Proposal unless there shall
be paid any portion of the Commitment Fee, not theretofore paid to the Plan
Investors, pursuant to and in accordance with Section 8.2.

                  Section 6.3. Cooperation; Access to Information. (a) From the
date hereof through the earlier of termination hereof and the Effective Date of
the Plan, the Company shall, and shall cause each of its Subsidiaries and, to
the extent any other Person is controlled directly or indirectly by the Company,
each such other Person to, give ESL and its agents, attorneys, accountants, and
representatives, reasonable, non-exclusive access, during normal business hours
upon reasonable notice, to the books, contracts, records and other documents,
and personnel of the Company, its Subsidiaries and such other Persons; provided,
however, that none of the foregoing shall unreasonably interfere with the
conduct of business of the Debtors, their Subsidiaries, or such other Persons;
provided, further, that, subject to Section 6.3(f) hereof, ESL

                                      -18-

<PAGE>

shall be required, if requested by Third Avenue, to disclose any information
furnished or obtained pursuant to this Section 6.3(a) to Third Avenue and its
agents, attorneys, accountants, and representatives, so long as they have a
confidentiality agreement containing terms and conditions substantially similar
to those set forth in Section 6.3(f) with respect to such information.

                  (b) From the date hereof through the earlier of termination
hereof and the Effective Date of the Plan, the Company shall use its reasonable
commercial efforts to cause its independent certified public accountants and the
independent certified public accountants of each of its Subsidiaries and, to the
extent any other Person is controlled directly or indirectly by the Company, of
each such other Person, to afford ESL and its agents, attorneys, accountants,
and representatives, reasonable access to the audit work papers and other
records of each such firm relating to the Company, its Subsidiaries and any of
such Persons, subject to ESL executing any agreement reasonably required by the
certified public accountants of the Company or its Subsidiaries.

                  (c) The Company and ESL agree to cooperate fully in
facilitating the access provided for under this Agreement in accordance with
mutually acceptable procedures, which procedures shall require, among other
things, that all requests for such access: (i) be made to the President and
Chief Executive Officer of the Company or such other person as the Company may
designate in writing to ESL, and (ii) specify the representatives of ESL to whom
such access is to be provided and the scope and nature of the access requested.
Further, the Company shall be permitted to have any of its representatives
present during any requested meetings or discussions.

                  (d) The preceding subsections of this Section 6.3 shall not
require the disclosure of any information if, in the Company's reasonable
determination (after consultation with counsel), such information is reasonably
believed to be (i) subject to an attorney-client or work product privileges and
disclosure would result in the loss of such privileges or (ii) subject to a
binding confidentiality agreement entered into as of the date hereof and
disclosure would cause a breach of such confidentiality agreement. The Company
will use its commercially reasonable efforts, including commercially reasonable
efforts to obtain appropriate consents or waivers under any confidentiality
agreement, to disclose all such information requested by ESL. In the case that
attorney-client or work product privileges apply, the parties shall use their
commercially reasonable efforts to make appropriate substitute disclosure
arrangements.

                  (e) Between the entry of the approval order and the earlier of
termination hereof and the Effective Date of the Plan:

                           (i)      The Company's senior management shall meet
                                    with ESL's representatives weekly (or as
                                    otherwise reasonably requested by ESL) to
                                    inform the Plan Investors of pending or
                                    proposed transactions (including claim
                                    resolutions) involving the Company, its
                                    Subsidiaries or any other Person controlled
                                    by the Debtor which could have a material
                                    effect on the assets or liabilities of the
                                    Company, any of its Subsidiaries or any such
                                    controlled Person.

                                      -19-

<PAGE>

                           (ii)     The Company shall serve copies of all
                                    pleadings it files in the Bankruptcy Cases
                                    upon ESL.

                  (f) Each Plan Investor shall, and shall cause each of its
agents, attorneys, accountants, and representatives to keep strictly
confidential all nonpublic, confidential and/or proprietary information
provided, or caused to be provided, by the Company pursuant to this Section 6.3
("Company Confidential Information"); provided, however, that no Plan Investor
shall be required to keep confidential any information that (i) (A) was
previously available to it on a non-confidential basis or by virtue of it being
a member of an official committee in the Bankruptcy Cases; provided, however,
that any information made available to a Plan Investor in its capacity as a
member of a statutory committee shall be kept confidential as may be required
pursuant to agreements between such statutory committees and the Company, (B)
was at the time of its disclosure, or thereafter became, generally available to
the public other than as a result of a disclosure by any Plan Investor or any of
its respective agents, attorneys, accountants, and representatives, (C) was
available to the Plan Investor on a non-confidential basis from a source other
than the Company or its Representatives, provided that such source was not in
breach of any obligation of confidentiality to the Company or (D) has been
independently acquired or developed by any Plan Investor without the use of, and
is not derived from, any Company Confidential Information or (ii) is required to
be disclosed pursuant to applicable Law. In the event that any Plan Investor or
any of its agents, attorneys, accountants, and representatives is requested
pursuant to, or required by, Law to disclose any such Company Confidential
Information, such Plan Investor will provide the Company with prompt prior
written notice of such request or requirement in order to enable the Company to
(x) seek an appropriate protective order or other appropriate remedy (and if the
Company seeks such order, such Plan Investor will provide, at the Company's sole
expense, such cooperation as the Company shall reasonably request) or (y) in its
sole discretion, waive compliance with the terms of this Section 6.3. In the
event that such protective order or other remedy is not obtained, or the Company
waives compliance with the terms of this Section 6.3, only that portion of such
Company Confidential Information may be disclosed as the Plan Investor is
advised by counsel is legally required to be disclosed and the Plan Investor
will use its commercially reasonable efforts to ensure that all such Company
Confidential Information so disclosed will be accorded confidential treatment.

                  Section 6.4 Further Actions; Reasonable Efforts. Without
waiving any right to terminate this Agreement under Section 8.1, upon the terms
and subject to the conditions hereof, each of the parties agrees to use its
commercially reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by the Transaction Documents, including without limitation (i) the
obtaining of all Governmental Requirements, (ii) the defending of any lawsuits
or other legal proceedings, whether judicial or administrative, challenging any
of the Transaction Documents or the consummation of the transactions
contemplated thereby, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity or any
restraint vacated or reversed, and (iii) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated by,
and to fully carry out the purposes of, the Transaction Documents.

                                      -20-

<PAGE>

                  Section 6.5. Use of Proceeds. The proceeds received by the
Reorganized Debtor in respect of the Investment shall be used by the Reorganized
Debtors in accordance with the Plan to fund the cash distribution to Prepetition
Lenders pursuant to the Plan.

                  Section 6.6. Restructuring. The Company shall, and shall cause
each of its Subsidiaries to, in coordination with the Plan Investors, use its
reasonable best efforts to restructure the capitalization of the Company and its
Subsidiaries pursuant to the Plan (the "Restructuring"). In furtherance of, and
without limiting the generality of the foregoing, the Company and its
Subsidiaries that are Debtors shall, as promptly as practicable, (i) file the
Plan and related Disclosure Statement, the material provisions of which
Disclosure Statement shall be in form and substance reasonably acceptable to the
Plan Investors, with the Bankruptcy Court, (ii) seek to obtain an order of the
Bankruptcy Court approving the Disclosure Statement (the "Disclosure Statement
Approval Order"), (iii) file a motion with the Bankruptcy Court seeking the
Commitment Fee Order and (iv) seek to obtain the Confirmation Order with respect
to the Plan which shall provide, among other things, (x) that the issue and sale
of the New Common Shares pursuant to this Agreement or to be otherwise
outstanding or subject to issuance upon completion of the Restructuring shall at
the time of their issuance be duly authorized and validly issued and
outstanding, fully paid and nonassessable, and free and clear of any
Encumbrances of any kind, (y) an express finding that each Plan Investor has
acted in good faith in connection with the Bankruptcy Cases, the Plan and the
Restructuring, and (z) that the issuance of the New Common Shares to creditors
as contemplated by the Plan is exempt from registration under the Securities
Act.

                  Section 6.7. Registration Rights Agreement. Effective as of
the Closing, the Reorganized Debtor shall enter into the Registration Rights
Agreement, in form and substance reasonably acceptable to the Plan Investors,
for the benefit of the Plan Investors.

                  Section 6.8. Corporate Governance. Pursuant to the Plan,
immediately prior to the Closing, the Company shall cause the resignation of
each member of the Board of Directors. The Board of Directors of the Reorganized
Debtor shall consist of nine members. One member of senior management of the
Reorganized Debtors will serve on the initial Board of Directors of the
Reorganized Debtor, as designated in the Plan. The other board members shall
consist of (i) four directors selected by the Plan Investors, at least one of
whom shall not be an officer or employee of any of the Plan Investors or a
family member of any of the foregoing, (ii) two directors selected by the FIC
neither of which shall be an officer or employee of ESL or a family member
thereof and (iii) two directors to be selected by the UCC; provided that the
Board of Directors, collectively, including any required committee thereof,
shall comply with any other qualification, experience and independence
requirements under applicable Law, including the Sarbanes-Oxley Act of 2002 and
the rules then in effect of the stock exchange or quotation system (including
the benefit of any transition periods available under applicable Law) on which
the New Common Shares are listed or are anticipated to be listed, when such
shares are listed following the Closing.

                  Section 6.9. Releases. The Company shall use its reasonable
best efforts to ensure that the Plan and Confirmation Order shall provide, among
other things, that the directors, officers, advisors, attorneys, investment
bankers and agents of each Plan Investor and each of their respective
Affiliates, members, managers, stockholders, partners, representatives,

                                      -21-

<PAGE>

employees, attorneys and agents are fully, completely and unconditionally
released from any and all claims related to the Company, its Subsidiaries and
Affiliates, its business, its governance, its securities disclosure practices,
the purchase or sale of any of the Company's equity or debt securities, or the
Restructuring.

                  Section 6.10. Payment of Plan Investors' Expenses. On the date
on which the Bankruptcy Court enters the Commitment Fee Order, the Company shall
reimburse ESL for all of the reasonable out-of-pocket costs and expenses of the
Plan Investors, including the fees and reasonable expenses of advisors,
accountants, attorneys, consultants and other parties that the Plan Investors
have engaged to assist them in connection with the Bankruptcy Cases, actually
incurred by the Plan Investors in connection with the evaluation, due diligence,
negotiation and consummation of the Plan, this Agreement, the Restructuring, the
other Transaction Documents and the transactions contemplated hereby and thereby
(collectively, "Expenses"); provided that in no event shall the amount that the
Company is obligated to pay ESL on the date of the entry of the Commitment Fee
Order exceed two million dollars ($2,000,000); and provided, further that any
such amount shall be repaid by ESL if this Agreement is terminated pursuant to
Sections 8.1(d)(ii) or 8.1(g). At or prior to the earlier of (x) the Closing and
(y) the date on which this Agreement is terminated pursuant to Article VIII
(other than pursuant to Sections 8.1(d)(ii) or 8.1(g)), the Company shall pay to
ESL an amount in dollars equal to the excess of (i) its Expenses over (ii) any
amount already paid to ESL on the date of the entry of the Commitment Fee Order
pursuant to the previous sentence; provided that in no event shall the aggregate
Expenses that the Company is obligated to pay under this Section exceed five
million dollars ($5,000,000). ESL hereby agrees to reimburse Third Avenue for up
to forty thousand dollars ($40,000) of its reasonable out-of-pocket costs and
expenses, including the fees and reasonable expenses of attorneys, actually
incurred by Third Avenue in connection with the evaluation and negotiation of
this Agreement, but only if and to the extent that the Company shall have paid
ESL the Expenses of the Plan Investors pursuant to this Section and ESL shall
not have been obligated to repay those Expenses to the Company under this
Section or any other section of this Agreement.

                  Section 6.11. Notification of Certain Matters. From the date
hereof through the Closing, each party hereto shall give prompt notice to the
other parties hereto of the occurrence, or failure to occur, of any event the
occurrence or failure of which shall have caused any of such party's
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect or of any condition not satisfied for
purposes of satisfying the conditions set forth in Section 7.1 hereof; provided,
however, that no such notification shall be deemed for any purpose under this
Agreement to permit such party to alter or amend such party's representations
and warranties contained herein.

                  Section 6.12. Information. (a) Between the date hereof and the
Closing Date, the Plan Investors shall notify the Company promptly after any
Plan Investor purchases, or enters into an agreement to purchase, additional
shares of common stock, Preferred Obligations or prepetition claims of the
Company.

                  (b) Between the date hereof and the Closing, the Plan
Investors shall comply with reasonable requests from the Company for information
concerning the Plan Investors related to preparation of the Plan or the
Disclosure Statement.

                                      -22-

<PAGE>

                  Section 6.13. Transfer Restrictions. ESL agrees that, from the
Closing Date until the earlier of (i) the first anniversary of the Closing Date
and (ii) the date on which all of the Non-Lender Unsecured Claims are
reconciled, it will not in any transaction or series of transactions sell,
transfer or otherwise dispose of (other than to any other Plan Investor or to
any Affiliate thereof, provided such Affiliate shall agree to be bound by the
terms of this Agreement) more than twenty percent (20%) in aggregate of the New
Common Shares issued to it pursuant to the terms and conditions of this
Investment Agreement, other than in connection with a sale of the Reorganized
Debtor in its entirety. The Plan Investors agree that, prior to the earlier of
the Closing Date and the date this Agreement is terminated, the Plan Investors
shall not transfer or sell (other than to any Plan Investor or any Affiliate
thereof, provided such Affiliate shall agree to be bound by the terms of this
Agreement) any Prepetition Credit Agreement Obligations or Prepetition Note
Claims held by such Plan Investor.

                  Section 6.14. ESL Option. (a) From and after the date hereof
until the second anniversary of the Closing, ESL shall have an unconditional and
irrevocable right (the "ESL Option"), exercisable, in its sole discretion, at
any time and in one or more tranches, prior to the second anniversary of the
Closing, to purchase from the Reorganized Debtor an aggregate number of New
Common Shares not to exceed the Maximum Optioned Shares at a price per share
equal to 130% of the Share Price (the "Option Price").

                  (b) The "Maximum Optioned Shares" shall mean the number of New
Common Shares (rounded up to the nearest whole number) equal to the quotient
obtained by dividing (x) eighty-six million dollars ($86,000,000) by (y) the
Option Price, adjusted by customary antidilution protections.

                  Section 6.15. Company Call. (a) At the Closing, the Company
shall have an unconditional and irrevocable right (the "Initial Company Call"),
exercisable in its sole discretion, to require ESL to purchase from the
Reorganized Debtor a note (the "Initial Called Note") in an aggregate principal
amount equal to the lesser of (i) sixty million dollars ($60,000,000) (the
"Maximum Company Call Amount"), and (ii) the excess, if any, of (A) one billion
five hundred forty five million dollars ($1,545,000,000) over (B) (i) the
Company's Liquidity (as hereinafter defined) at Closing, reduced by (ii) the
amount of all payments and distributions to be made on the Effective Date of the
Plan or required to be paid in respect of prepetition and/or priority claims
(other than priority claims in respect of postpetition trade payables) pursuant
to the Plan, at a purchase price equal to the principal amount of such note. For
purposes hereof, (i) "Liquidity" shall mean, at any time, Excess Availability at
such time plus the Cash Balance at such time and (ii) "Cash Balance" shall mean,
at any time, the aggregate amount of the Company's and its Subsidiaries
unrestricted cash, cash equivalents and short term investments at such time,
calculated in the manner consistent with the Business Plan (but exclusive of
cash necessary for store operations, which amount is agreed to be equal to three
hundred million dollars ($300,000,000)). The Initial Called Note and any
Subsequent Called Note (as hereinafter defined) shall have the terms set forth
in Exhibit C hereto.

                  (b) In the event that the Reorganized Debtors determine during
the 90 day period following the Closing that the aggregate amount of payments
required to be made pursuant to the Plan in respect of prepetition and/or
priority claims (other than priority claims in respect of postpetition trade
payables) are or will be in excess of those actually paid at the Closing (such

                                      -23-

<PAGE>

excess, the "Excess Distributions"), the Reorganized Debtor shall have an
unconditional and irrevocable right, in its sole discretion, to require ESL to
purchase from the Reorganized Debtor a note (the "Subsequent Called Note," and,
together with the Initial Called Note, the "Called Notes"), which Subsequent
Called Note shall be in an aggregate principal amount equal to the lesser of (1)
the excess, if any, of (A) one billion five hundred forty five million dollars
($1,545,000,000) over (B)(i) the Company's Liquidity at Closing (after giving
effect to all payments and borrowings made at Closing other than in respect of
postpetition trade payables), reduced by (ii) the amount of any Excess
Distributions, and (2) the excess, if any, of the Maximum Company Call Amount
over the principal amount of the Initial Called Note, at a purchase price equal
to the principal amount of such note, it being agreed that the aggregate of the
principal amounts of the Initial Called Note and the Subsequent Called Note, if
either or both shall be issued, shall not exceed the Maximum Company Call
Amount.

                                  ARTICLE VII

                                   CONDITIONS

                  Section 7.1. Conditions to the Plan Investors' Obligations.
The obligation of each of the Plan Investors to consummate the transactions
contemplated hereby with respect to the Investment shall be subject to the
satisfaction at or prior to the Closing of each of the following conditions;
provided, however, that ESL may, in its sole and absolute discretion, waive any
or all of the following conditions (other than (a), (b) and (i), and purchase
the New ESL Shares, in which event Third Avenue Funds shall be required to
purchase the New Third Avenue Shares.

                  (a) HSR Approval. The applicable waiting period (and any
extension thereof) under the HSR Act, relating to the transactions contemplated
by the Transaction Documents shall have been terminated or shall have expired.

                  (b) No Injunction. No temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction (each, a "Restraint") preventing consummation of any of the
transactions contemplated hereby shall be in effect.

                  (c) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
as of the Closing Date as though made on the Closing Date (or, if made as of a
specified date, as of such date), except to the extent that all such failures of
such representations and warranties to be true and correct taken together shall
not result or be reasonably expected to result in a Material Adverse Effect and
shall not prevent or materially impair the ability of the Company to consummate
the transactions contemplated hereby, except with respect to the representations
and warranties set forth in Section 4.8, which shall be true and complete in all
respects, and the Plan Investors shall have received a certificate to such
effect signed on the Closing Date on behalf of the Company by its respective
Chief Executive Officer and Chief Financial Officer in their corporate (not
personal) capacities as such, in form and substance reasonably satisfactory to
the Plan Investors, to the foregoing effect. Said representations and warranties
shall not survive the Closing and the signatories to any closing certificate
shall have no personal liability for any of the representations and warranties
or as a result of signing such certificate.

                  (d) Performance of Obligations. The Company shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing and the Company shall have
delivered to the Plan Investors at the Closing a certificate signed by its Chief
Executive Officer and Chief Financial Officer, dated the Closing Date, in form
and substance reasonably satisfactory to the Plan Investors, to the foregoing
effect and such signatories shall have no personal liability as a result of
signing such certificate.

                                      -24-

<PAGE>

                  (e) Transaction Documents. Each of the parties to the
Transaction Documents (other than the Plan Investors) shall have executed and
delivered to the Plan Investors, in form and substance reasonably acceptable to
the Plan Investors, the applicable Transaction Documents and such Transaction
Documents shall constitute the legal, valid and binding obligation of the
Reorganized Debtor (or other Reorganized Debtors, as the case may be).

                  (f) Financing. The Exit Financing Facility shall be in full
force and effect, there shall exist no material breach of or default under the
Exit Financing Facility, and any and all fees and expenses paid or payable to
any commercial bank or any other financial institution in connection with the
Exit Financing Facility shall be as provided in the Commitment Letter and
related side letters or for amounts otherwise reasonably acceptable to the Plan
Investors.

                  (g) Excess Liquidity. As of the Closing, after giving effect
to all payments and distributions to be made on the Effective Date of the Plan
or required to be paid in respect of administrative and priority claims pursuant
to the Plan, the Reorganized Debtors shall have Liquidity of at least one
billion, two hundred fifty million dollars ($1,250,000,000) and Adjusted Excess
Availability of at least five hundred eighty-nine million dollars ($589,000,000)
and the Company shall have delivered to the Plan Investors at the Closing a
certificate signed by its Chief Executive Officer and Chief Financial Officer,
dated the Closing Date, in form and substance reasonably satisfactory to the
Plan Investors, to the foregoing effect and such signatories shall have no
personal liability as a result of signing such certificate.

                  (h) Plan. All conditions precedent to the effectiveness of the
Plan (other than those relating to the Closing hereunder) shall have been
satisfied or waived.

                  (i) Bankruptcy Cases. The Plan, in form and substance
satisfactory to the Plan Investors, shall have been approved by the Bankruptcy
Court pursuant to the Confirmation Order and shall have an Effective Date no
later than May 30, 2003.

                  Section 7.2. Conditions to the Obligations of the Company. The
respective obligation of the Company to consummate the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Closing of each
of the following conditions:

                  (a) HSR Approval. The applicable waiting period (and any
extension thereof) under the HSR Act, relating to the transactions contemplated
by the Transaction Documents shall have been terminated or shall have expired.

                  (b) No Injunction. No Restraint preventing consummation of any
of the transactions contemplated hereby shall be in effect.

                                      -25-

<PAGE>

                  (c) Plan. All conditions precedent to the effectiveness of the
Plan (other than those relating the Closing hereunder) shall have been satisfied
or waived.

                  (d) Representations and Warranties. The representations and
warranties of each of the Plan Investors set forth in this Agreement shall be
true and correct as of the Closing Date as though made on the Closing Date (or,
if made as of a specified date, as of such date) except to the extent that all
such failures of such representations and warranties to be true and correct
shall not have a material adverse effect on the ability of the Plan Investors,
taken together, to consummate the transactions contemplated hereby, and the
Company shall have received certificates to such effect signed on the Closing
Date on behalf of each of the Plan Investors by their respective Chief Executive
Officers and Chief Financial Officers in their corporate (not personal)
capacities as such, in form and substance reasonably satisfactory to the
Company, to the foregoing effect. Said representations and warranties shall not
survive the Closing and the signatories to any closing certificate shall have no
personal liability for any of the representations and warranties or as a result
of signing such certificate.

                  (e) Performance of Obligations. Each of the Plan Investors
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing and each of
the Plan Investors shall have delivered to the Company at the Closing a
certificate signed by their respective Chief Executive Officer and Chief
Financial Officer, dated the Closing Date, in form and reasonably substance
satisfactory to the Company, to the foregoing effect. Such signatories having no
personal liability as a result of signing such certificate.

                                  ARTICLE VIII

                                   TERMINATION

                  Section 8.1. Termination. This Agreement may be terminated and
the transactions contemplated hereby may be abandoned at any time prior to the
Closing Date notwithstanding the fact that any requisite authorization and
approval of the transactions contemplated hereby shall have been received and no
party hereto shall have any liability to any other party hereto as a result of
its invoking its rights to terminate this Agreement pursuant to this Section
(provided that any such termination shall not relieve any party from liability
for a breach of any provision hereof prior to such termination nor shall it
terminate the Company's obligations under this Article VIII nor eliminate the
liability of any Breaching Plan Investor):

                  (a) by the mutual written consent of ESL and the Company;

                  (b) by ESL if: (i) the Closing has not occurred by May 30,
2003 or (ii) there shall be any Law that makes consummation of the purchase of
the New Common Shares hereunder illegal or otherwise prohibited or if any court
of competent jurisdiction or Governmental Entity shall have issued an order,
decree or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the purchase of the New Common Shares hereunder and such order,
decree, ruling or other action shall have become final and non-appealable;

                                      -26-

<PAGE>

                  (c) by ESL, (i) if the Board of Directors withdraws or changes
its recommendation of this Agreement in a manner materially adverse to the Plan
Investors, (ii) if the Board of Directors recommends an Alternative Proposal or
(iii) if the Company enters into a written agreement or letter of intent or
agreement in principle providing for any Alternative Proposal;

                  (d) (i) by ESL, if the Company shall be in breach of its
obligations hereunder such that the conditions to the obligations of the Plan
Investors set forth in Section 7.1 will not be satisfied at or prior to the
Closing, and such failure cannot be or has not been cured within twenty (20)
Business Days after the giving of written notice to the Company and the other
Plan Investors; and (ii) by the Company, if the Plan Investors shall be in
breach of their obligations hereunder such that the conditions to the
obligations of the Company set forth in Section 7.2 will not be satisfied at or
prior to the Closing, and such failure cannot be or has not been cured within
twenty (20) Business Days after the giving of written notice to the Plan
Investors;

                  (e) by ESL, if (i) the Disclosure Statement Approval Order has
not been entered on or prior to February 28, 2003, in form and substance
reasonably acceptable to the Plan Investors, (ii) the Commitment Fee Order has
not been entered on or prior to February 28, 2003, in form and substance
reasonably acceptable to the Plan Investors, or (iii) the Confirmation Order has
not been entered on or prior to May 16, 2003, in form and substance reasonably
acceptable to the Plan Investors; provided that in the case of (i) or (ii) ESL
shall be deemed to have waived such termination right if it does not exercise
such right within five (5) Business Days of the applicable date;

                  (f) by the Company, if (i) the Board of Directors determines
in good faith that termination of this Agreement is necessary in order for the
Company to accept any Alternative Proposal, or (ii) the Bankruptcy Court has
ordered the Company to terminate this Agreement in order to accept any
Alternative Proposal; provided that the Company shall have the right to
terminate this Agreement pursuant to clause (i) above only if it has complied in
all material respects with the provisions of Section 6.2(a), and shall
acknowledge its obligation to comply with the requirements of Section 8.2
relating to any required payment (including the timing of any payment) of the
Commitment Fee;

                  (g) by the Company pursuant to Section 3.3.

                  Section 8.2. Commitment Fee.

                  Commitment Fee. Unless (a) the Plan Investors are in material
breach of their obligations hereunder as determined in a final order by the
Bankruptcy Court or (b) this Agreement has previously been terminated in
accordance with its terms (except under clause (iii) below), ESL shall be
entitled to receive, and the Company shall pay to ESL for the benefit of the
Plan Investors, the Commitment Fee no later than the earlier to occur of (i) May
30, 2003, (ii) the Effective Date of the Plan, and (iii) the date of termination
of this Agreement by ESL under Section 8.1(c), or by the Company under Section
8.1(f).

                  (a) The Company acknowledges and agrees that (i) the payment
of the Commitment Fee is an integral part of the transaction contemplated by
this Agreement, (ii) in the

                                      -27-

<PAGE>

absence of the Company's obligation to pay the Commitment Fee, the Plan
Investors would not have entered into this Agreement and (iii) time is of the
essence with respect to the payment of the Commitment Fee.

                  (b) The Plan Investors acknowledge and agree that ESL shall be
entitled to receive 87.8% of the Commitment Fee and that Third Avenue shall be
entitled to receive 12.2% of the Commitment Fee.

                                   ARTICLE IX

                                  MISCELLANEOUS

                  Section 9.1. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the internal and substantive Laws of the
State of Delaware without giving effect to conflicts of law principles thereof.

                  Section 9.2. Jurisdiction; Forum; Service of Process; Waiver
of Jury Trial. With respect to any suit, action or proceeding ("Proceeding")
arising out of or relating to this Agreement each of the Company and the Plan
Investors hereby irrevocably:

                  (a) submits to the exclusive jurisdiction of the courts of the
State of Illinois and of the United States of America, in each case located in
Cook County (the "Selected Courts"), including the Bankruptcy Court, for any
Proceeding arising out of or relating to this Agreement or the other Transaction
Documents and the transactions contemplated hereby and thereby (and agrees not
to commence any Proceeding relating hereto or thereto except in such courts) and
waives any objection to venue being laid in the Selected Courts whether based on
the grounds of forum non conveniens or otherwise; provided that each of the
Company and the Plan Investors hereby irrevocably submits to the exclusive
jurisdiction of the Bankruptcy Court for so long as the Bankruptcy Cases are
pending;

                  (b) consents to service of process in any Proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, or
by recognized international express carrier or delivery service, to the Company
or the Plan Investors at their respective addresses referred to in Section 9.5
hereof; provided, however, that nothing herein shall affect the right of any
party hereto to serve process in any other manner permitted by law; and

                  (c) waives, to the fullest extent permitted by law, any right
it may have to a trial by jury in any Proceeding directly, or indirectly arising
out of, under or in connection with this Agreement or the other Transaction
Documents.

                  Section 9.3. Successors and Assigns. Except as otherwise
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors by operation of law and permitted assigns of the
parties hereto. No assignment of this Agreement may be made by any party at any
time, whether or not by operation of law, without the other parties' prior
written consent; provided, however, that, any (i) transfer of New Common Shares
permitted hereunder (other than transfers between and among the Plan Investors
or their respective Affiliates) shall not entitle the transferee to the rights
of the transferring Plan Investor under this Agreement and (ii) any Plan
Investor shall be permitted to assign it rights and obligations under

                                      -28-

<PAGE>

this Agreement to another Plan Investor or any of their respective Affiliates,
in each case without the consent of any other party hereto; provided that no
such assignment shall relieve the Plan Investor from its obligations under this
Agreement. Only the parties to this Agreement or their permitted assigns shall
have rights under this Agreement.

                  Section 9.4. Entire Agreement; Amendment. This Agreement
(including the Exhibits and Schedules attached hereto) and the other Transaction
Documents constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and supersedes all prior agreements
relating to the subject matter hereof. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and by the
Plan Investors. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof. The Company and the
Plan Investors acknowledge and agree that nothing herein shall prohibit the Plan
Investors from acquiring any further claims against the Debtors or any interest
in such claims. After the Effective Date, in the event that any terms of this
Agreement conflict with any terms of the Plan, the terms of the Plan shall
control.

                  Section 9.5. Notices. All notices, requests, consents and
other communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:

                           (i)      if to the Company or to any Subsidiary that
                                    is a Debtor:

                                    Kmart Corporation, et al.
                                    3100 West Big Beaver Road
                                    Troy, MI  48084
                                    Fax:   (248) 637-4858
                                    Attn:  General Counsel

                                    with a copy to:

                                    Skadden, Arps, Slate, Meagher & Flom
                                    (Illinois)
                                    333 West Wacker Drive
                                    Chicago, IL 60606-1285
                                    Fax:   (312) 407-8501
                                    Attn:  John Wm. Butler, Jr., Esq.

                                    and

                           (ii)     if to ESL, to:

                                    ESL Investments, Inc.
                                    One Lafayette Place
                                    Greenwich, CT 06830
                                    Fax:    (203) 861-0115
                                    Attn:  Edward S. Lampert

                                      -29-

<PAGE>

                                    with a copy to:

                                    Wachtell, Lipton, Rosen & Katz
                                    51 West 52nd Street
                                    New York, NY  10019
                                    Fax:   (212) 403-2000
                                    Attn:  Scott K. Charles, Esq.

                           (iii)    if to Third Avenue, on or before February
                                    21, 2003, to:

                                    Third Avenue Trust
                                    767 Third Avenue
                                    5th Floor
                                    New York, NY  10017
                                    Fax:   (212) 888-6704
                                    Attn:  Brandon Stranzl

                                    and after February 21, 2003, to:

                                    Third Avenue Trust
                                    622 Third Avenue
                                    32nd Floor
                                    New York, NY  10017
                                    Fax:    (212) 888-6704
                                    Attn:   Brandon Stranzl

All such notices, requests, consents and other communications shall be deemed to
have been given or made if and when delivered personally or by overnight courier
to the parties at the above addresses or sent by electronic transmission, with
confirmation received, to the telecopy numbers specified above (or at such other
address or telecopy number for a party as shall be specified by like notice).
Any notice delivered by any party hereto to any other party hereto shall also be
delivered to each other party hereto simultaneously with delivery to the first
party receiving such notice.

                  Section 9.6. Delays or Omissions. Except as expressly provided
herein, no delay or omission to exercise any right, power or remedy accruing to
the Company or the Plan Investors upon any breach or default of any party under
this Agreement, shall impair any such right, power or remedy of the Company or
the Plan Investors nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of the Company or the Plan Investors of any breach or
default under this Agreement, or any waiver on the part of any such party of any

                                      -30-

<PAGE>

provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to the
Company or the Plan Investors shall be cumulative and not alternative.

                  Section 9.7. Consent. Any consent or approval of the Plan
Investors under this Agreement shall be deemed to have been given by all of the
Plan Investors if such consent or approval has been given by ESL.

                  Section 9.8. Counterparts. This Agreement may be executed in
any number of counterparts, each of which may be executed by only one of the
parties hereto, each of which shall be enforceable against the party actually
executing such counterpart, and all of which together shall constitute one
instrument.

                  Section 9.9. Severability. In the event that any, provision of
this Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provisions; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.

                  Section 9.10. Headings. The table of contents and headings
used in this Agreement are used for convenience only, do not constitute a part
of this Agreement and are not to be considered in construing or interpreting
this Agreement.

                  Section 9.11. No Public Announcement. The parties agree that
the initial press release to be issued with respect to the transactions
contemplated by the Transaction Documents shall be in a form reasonably mutually
agreed to by the parties. Thereafter, the Company and the Plan Investors shall,
to the extent reasonably practicable, consult with the other regarding the
content of those press releases, public announcements or filings with
Governmental Entities concerning the transactions contemplated by the
Transaction Documents.

                  Section 9.12. Interpretation. The parties agree that to the
extent any provision of the Plan relating to the Plan Investors conflicts with
any provision of this Agreement, the provisions of this Agreement shall control.

                           [SIGNATURE PAGES TO FOLLOW]

                                      -31-

<PAGE>

                  IN WITNESS WHEREOF, each of the undersigned has caused the
foregoing Agreement to be executed as of the date first above written.

                           COMPANY:

                           KMART CORPORATION

                           By:
                                ------------------------------------------------
                                Name:
                                Title:

                           PLAN INVESTORS:

                           ESL INVESTMENTS, INC.

                           By:
                                ------------------------------------------------
                                Name:
                                Title:

                           THIRD AVENUE TRUST, on behalf of the Third Avenue
                                Value Fund Series

                           By:
                                ------------------------------------------------
                                Name:
                                Title:

                           THIRD AVENUE TRUST, on behalf of the Third Avenue
                           Small-Cap Value Fund Series

                           By:
                                ------------------------------------------------
                                Name:
                                Title:

                           THIRD AVENUE TRUST, on behalf of the Third Avenue
                           Real Estate Value Fund Series

                           By:
                                ------------------------------------------------
                                Name:
                                Title:

                                      -32-

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00046-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00046-of-00352.parquet"}]]