Document:

Exhibit 10.48

 

COMMUTATION AND SETTLEMENT AGREEMENT

(hereinafter referred to as this “Agreement”)

 

This Agreement is entered into by and between ACE Capital Re International, Ltd.
(hereinafter referred to as the “Company”)
and ACE Bermuda Insurance Ltd. (hereinafter
referred to as the “Reinsurer”)
and made effective 11:59:59 p.m. Local Standard Time, December 31, 2003 (the “Commutation Date”).

 

WHEREAS, the Company and Reinsurer are parties to the Per Contract
Excess of Loss Reinsurance Agreement for the term incepting December 31, 2001
and originally terminating December 31, 2026 (hereinafter referred to as the “Contract”), which is attached hereto and
made part of this Agreement; and

 

WHEREAS, the Company and Reinsurer desire to fully and finally settle
and commute all obligations and liabilities, known and unknown, of the Company
and the Reinsurer under the Contract.

 

NOW, THEREFORE, for good and valuable consideration the receipt of
which is hereby acknowledged, IT IS AGREED BY AND BETWEEN THE REINSURER AND THE
COMPANY THAT:

 

1.                                       As consideration
for the following release, the Reinsurer shall pay the Company the Commutation
Amount no later than January 31, 2004, subject to the Reinsurer’s receipt of an
original copy of this Agreement, having been fully executed by the parties
hereto.

 

The “Commutation Amount” shall equal the sum of the Principal and
Return, as defined below:

 

“Principal” shall equal One hundred thirty one million, nine hundred
thirty seven thousand, two hundred eighty five United States dollars
($131,937,285);

 

“Return” shall equal: [Principal] x [Lehman Intermediate Rate]; and

 

“Lehman Intermediate Rate” shall mean the year-to-date total return of
the Lehman Brothers U.S. Intermediate Aggregate Bond Index, determined for the
period January 1, 2004 through the date of transfer by the Reinsurer of the
payment of the Commutation Amount.

 

2.                                       Subject to the
execution of this Agreement by the parties hereto and payment by the Reinsurer
of the Commutation amount as required pursuant to paragraph 1 above, as of the
Commutation Date, the Company releases and discharges the Reinsurer and its
predecessors, successors, parent, subsidiaries, affiliates, assigns, agents,
employees, officers, directors and shareholders (collectively, the “Reinsurer’s
Related Parties”) from any and all present and future obligations, claims,
demands, liabilities and/or losses whatsoever, all whether known or unknown,
reported or unreported, and whether currently existing or arising in the
future, including, but not limited to, all claims (including but not limited to
those claims for which notices have been submitted to the Reinsurer),
obligations, offsets, debts, demands, actions, causes of action, suits, duties,
sums of money, covenants, contracts, controversies, agreements, reckonings,
bonds, bills, promises, doings, omissions, damages, liability for payment of
interest, judgments, costs,

 

1

 

Agreement may not be modified or amended, or any of its provisions
waived, except by an instrument in writing, signed by the parties hereunder.

 

7.                                       Any dispute,
controversy or claim arising out of or relating to this Agreement shall be
subject to arbitration in accordance with the provisions of section 13, Arbitration,
of the General Conditions of the Contract.

 

8.                                       This Agreement
shall be governed and construed in accordance with the laws of Bermuda,
notwithstanding the venue of any arbitration proceeding.

 

9.                                       This Agreement
is solely between the Company and the Reinsurer, and nothing herein shall in
any manner create any obligations or establish any rights against the Reinsurer
in favor of any third parties or any persons not parties to this Agreement.

 

10.                                 This Agreement may be
executed and delivered in counterparts, each of which, when so executed and
delivered shall constitute an original and all of such counterparts shall
together constitute one and the same instrument.

 

 

IN WITNESS WHEREOF, this
Agreement has been executed by the following individuals authorized to act on
behalf of the parties:

 

 

	
  For and on Behalf of:

  	
   

  	
  For and on Behalf of:

  
	
   

  	
   

  	
   

  
	
  ACE BERMUDA INSURANCE LTD.

  	
   

  	
  ACE CAPITAL RE INTERNATIONAL,

  LTD.

  
	
  in Hamilton, Bermuda

  	
   

  	
  in Hamilton, Bermuda

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Dienne Samson

  	
   

  	
   

  	
  /s/ Carla Ranum

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:  Dienne Samson

  	
   

  	
  Name:  Carla Ranum

  
	
  Title: 
  President Ace Financial Solutions International

  	
   

  	
  Title:  Vice President

  
	
  Date:  1/7/04

  	
   

  	
  Date: January 6, 2004

  
					

 

2Exhibit 10.49

 

 

AGGREGATE LOSS PORTFOLIO REINSURANCE
AGREEMENT

 

between

 

COMMERCIAL GUARANTY ASSURANCE, LTD.

 

Hamilton, Bermuda

 

and

 

ACE CAPITAL RE OVERSEAS LTD.

 

Hamilton, Bermuda

 

 

TABLE OF CONTENTS

 

 

	
  Article I DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  Article II COVERAGE

  	
   

  
	
   

  	
   

  
	
  Article
  III GENERAL PROVISIONS

  	
   

  
	
   

  	
   

  
	
  Article IV REINSURANCE PREMIUM

  	
   

  
	
   

  	
   

  
	
  Article V ACCOUNTING AND SETTLEMENT

  	
   

  
	
   

  	
   

  
	
  Article VI RESERVES

  	
   

  
	
   

  	
   

  
	
  Article
  VII DURATION AND TERMINATION

  	
   

  
	
   

  	
   

  
	
  Article
  VIII C PROFIT SHARE

  	
   

  
	
   

  	
   

  
	
  Article IX INSOLVENCY

  	
   

  
	
   

  	
   

  
	
  Article X ARBITRATION

  	
   

  
	
   

  	
   

  
	
  Article XI EXCLUSIONS

  	
   

  
	
   

  	
   

  
	
  Article
  XII MISCELLANEOUS PROVISIONS

  	
   

  

 

 

SCHEDULES

 

 

	
  SCHEDULE 1

  	
  -

  	
  CEDED REINSURANCE AGREEMENTS

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 2

  	
  -

  	
  FINANCING VEHICLES

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 3

  	
  -

  	
  RESERVES

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 4

  	
  -

  	
  REPACK FINANCING VEHICLES

  

 

 

EXHIBITS

 

 

	
  EXHIBIT A

  	
  -

  	
  Administrative Services Agreement

  

 

i

 

AGGREGATE LOSS PORTFOLIO REINSURANCE
AGREEMENT

 

This
Agreement, dated this 18th day of July, 2001 (this “Agreement”) is made and
entered into by and between Commercial Guaranty Assurance, Ltd., a company with
limited liability organized under the laws of Bermuda (the “Company”), and ACE
Capital Re Overseas Ltd., a company with limited liability organized under the
laws of Bermuda (the “Reinsurer”).

 

The Company
and the Reinsurer mutually agree to reinsure under the terms and conditions
stated herein.  This Agreement is an
indemnity reinsurance agreement solely between the Company and the Reinsurer,
and the performance of the obligations of each party under this Agreement shall
be rendered solely to the other party. 
In no instance, except as set forth in Article IX of this Agreement,
shall anyone other than the Company or the Reinsurer have any rights under this
Agreement.

 

ARTICLE
I

 

DEFINITIONS

 

1.1.                            Definitions.   As
used in this Agreement, the following terms shall have the following meanings
(definitions are applicable to both the singular and the plural forms of each
term defined in this Article):

 

“ACE
Limited” shall have the meaning set forth in Section 8.2.

 

1

 

“Administrative
Services Agreement” means the Administrative Services Agreement by and
between the Company and the Reinsurer, dated as of the date hereof, in the form
attached hereto as Exhibit A.

 

“Affiliate”
means, with respect to any Person, at the time in question, any other Person
controlling, controlled by or under common control with such Person.  For purposes of the foregoing, “control”,
including the terms “controlling”, “controlled by” and “under common control
with”, means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of an institution, whether
through the ownership of voting securities, by contract or otherwise.

 

“Affiliate
Reinsurance Agreement” means the Aggregate Excess of Loss Reinsurance
Agreement entered into between the Company and ACE Bermuda Insurance Ltd., a
company with limited liability organized under the laws of Bermuda, dated as of
the date hereof.

 

“Aggregate
Limit” shall have the meaning specified in Section 2.1.

 

“Agreement”
shall have the meaning specified in the introductory paragraph hereof.

 

“Allocated
Loss Adjustment Expenses” shall mean all expenses incurred by the Company
in connection with the investigation, settlement, defense or mitigation of any
claim or loss under the Reinsured Contracts, but shall exclude the salaries of
the Company’s employees, office expenses and any other overhead expenses.

 

2

 

“Business
Day” means any day other than a Saturday, Sunday, a day on which banking
institutions in Bermuda or the State of New York are permitted or obligated by
law to be closed or a day on which the New York Stock Exchange is closed for
trading.

 

“C Profit
Share” shall have the meaning set forth in Section 8.1.

 

“C Profit
Share Losses” shall have the meaning set forth in Section 8.3.

 

“Ceded
Reinsurance Agreements” means those agreements of reinsurance ceded by the
Company and described on Schedule 1 hereto.

 

“CFS”
shall have the meaning set forth in Section 8.3.

 

“CGA”
means CGA Group, Ltd., a company with limited liability organized under the
laws of Bermuda.

 

“CGAIM”
means CGA Investment Management, Inc., a Delaware corporation.

 

“Controlled
Person” shall have the meaning set forth in Section 12.10.

 

“Derivative
Contracts” means credit default swaps.

 

“GAAP”
means United States generally accepted accounting principles, consistently
applied.

 

“Egler
Litigation” means the pending lawsuit captioned Egler v. CGA Investment
Management, Inc., filed in the Supreme Court of the State of New York,
County of New York.

 

3

 

“Financing
Vehicles” means the financing vehicles set forth on Schedule 2 hereto and
any additional financing vehicles created pursuant to the authority of the
manager under the Management Agreement dated as of the date hereof by and
between INAC Corp., a corporation organized under the Laws of Delaware, and
CGAIM.

 

“Inception
Date” shall have the meaning specified in Section 2.1.

 

“Insolvency
Fund” shall have the meaning specified in Section 11.2.

 

“Litigation
Defense Expenses” means all costs and expenses incurred by the Company, CGA
or CGAIM (or by a manager affiliated with the Reinsurer on behalf of the
Company, CGA or CGAIM, as applicable) (including attorneys fees and expenses)
not previously paid or reserved (such reserves set forth on Schedule 3) of
defending, negotiating, settling, or avoiding any lawsuit, action or regulatory
proceeding against CGA, CGAIM or the Company, other than any such lawsuit,
action or proceeding relating to any claim or loss under a Reinsured Contract,
in excess of the amount covered by applicable insurance.

 

“Litigation
Losses” means any monetary settlement or final, non-appealable monetary
judgment rendered against CGA, CGAIM or the Company as the result of any
lawsuit, action or proceeding other than a lawsuit, action or proceeding
relating to any claim or loss under a Reinsured Contract in excess of the
amount covered by applicable insurance and, in the case of the Egler
Litigation, in excess of an

 

4

 

amount equal to (i) the reserve
amount set forth on Schedule 3 hereto less (ii) Litigation Defense Expenses
applicable to the Egler Litigation.

 

“Net
Premiums from Operations” means (a) premiums and all other amounts received
by the Company with respect to the Reinsured Contracts, other than with respect
to Derivative Contracts and Reinsured Contracts issued to or for the benefit of
the Financing Vehicles plus (b) all income received by the Company from
Derivative Contracts plus (c) premiums and all other amounts due to the Company
from the Financing Vehicles, whether with respect to Reinsured Contracts issued
to or for the benefit of the Financing Vehicles or otherwise.

 

“Noncontractual
Damages” shall have the meaning specified in Section 11.1.

 

“Person”
means any individual, corporation, partnership, firm, joint venture,
association, limited liability company, limited liability partnership,
joint-stock company, trust, unincorporated organization, governmental, judicial
or regulatory body, business unit, division or other entity.

 

“Reinsurance
Premium” shall have the meaning specified in Section 4.1.

 

“Reinsured
Contracts” means all contracts, binders, polices or other agreements of
insurance and assumed reinsurance and all Derivative Contracts (whether or not
accounted for as contracts of

 

5

 

insurance) issued by the
Company prior to the Inception Date or issued on behalf of the Company on or
after the Inception Date pursuant to the authority of the administrator under
the Administrative Services Agreement.

 

“Repack
Financing Vehicles” shall have the meaning specified in Section 8.3.

 

“Required
Rating” means a rating of A– or higher by Standard & Poor’s or a rating
of A3 or higher by Moody’s Investors Service.

 

“Reserve
Transfer Amount” means the amount set forth in Section 4.1, which is an
amount equal to the unearned premium reserves and the loss reserves of the
Company as of the Inception Date (including general reserves, case basis
reserves and reserves for Allocated Loss Adjustment Expenses), determined in all
instances in accordance with GAAP.

 

“Series C
Preference Stock” means the Series C Convertible Cumulative Voting
Preference Shares, par value U.S.$.01 per share, of CGA.

 

“Third
Party Accountants” shall have the meaning specified in Section 8.3.

 

“Ultimate
Net Loss” shall have the meaning specified in Section 2.3.

 

6

 

ARTICLE
II

 

COVERAGE

 

2.1.                            Coverage.   Effective
as of 12:01 a.m., Eastern Daylight Time, on July 1, 2001 (the “Inception
Date”), the Company reinsures with the Reinsurer, and the Reinsurer indemnifies
the Company for, all Ultimate Net Loss of the Company paid after the Inception
Date.  The Reinsurer’s limit of
liability under or related to this Agreement with respect to Ultimate Net Loss
(the “Aggregate Limit”) shall, notwithstanding any other provisions of this
Agreement to the contrary, be one hundred ten million dollars ($110,000,000) in
the aggregate.  The Reinsurer also
agrees to indemnify the Company for such Litigation Losses as the Reinsurer, in
its sole discretion, elects to fund.

 

2.2.                            Conditions.   No
changes made on or after the Inception Date in the terms and conditions of the
Reinsured Contracts which affect the Reinsurer’s liability shall be covered
hereunder without the prior approval of such changes by the Reinsurer, or
unless such changes were made by the administrator pursuant to the
Administrative Services Agreement.  In
the event any such changes are made in any Reinsured Contract in violation of
the previous sentence, this Agreement will cover Ultimate Net Loss arising from
such Reinsured Contract as if the non-approved changes had not been made.  No Reinsured Contract that is an agreement
of assumed reinsurance shall be commuted without the prior approval of the
Reinsurer, which shall not be unreasonably withheld or delayed.

 

7

 

2.3.                            Ultimate Net Loss.  (a)   “Ultimate
Net Loss” shall mean (i) the actual amount paid by the Company on its net
retained liability under the Reinsured Contracts (including, with respect to
Reinsured Contracts that are contracts of assumed reinsurance, all amounts paid
by the Company to cedents with respect to losses or loss adjustment expenses
and including with respect to Reinsured Contracts that are Derivative
Contracts, net amounts due to counterparties from the Company under the terms
of such contracts), after making deductions for all recoveries, subrogations
and inuring reinsurance actually collected (other than such amounts collected
under this Agreement and other than such amounts which constitute premiums
under Section 4.3(ii)), plus  (ii)
Allocated Loss Adjustment Expenses paid by the Company, plus (iii) an amount
equal to any additional premium due under the Ceded Reinsurance Agreements; provided
that Ultimate Net Loss shall not include any amounts excluded under Article XI.

 

(b)                                 All
recoveries or payments received by the Company subsequent to a loss settlement
under this Agreement shall be applied as if recovered or received prior to the
aforesaid settlement and all necessary adjustments shall be made by the parties
hereto, provided, that nothing in this Section 2.3(b) shall be
construed to mean that the Reinsurer’s obligation to pay losses under this
Agreement do not arise until the Company’s Ultimate Net Loss has been
ascertained, and the Reinsurer agrees that it shall be obligated to pay
directly or to the Company amounts equal to the Company’s gross liability with
respect to

 

8

 

losses and Allocated Loss
Adjustment Expenses, subject to the limits and exclusions set forth herein on
the liability of the Reinsurer and subject to the Reinsurer’s right to receive
such recoveries or payments subsequent to any such loss settlements.

 

2.4.                            Territory.   The
territorial limits of this Agreement shall be identical with those of the
Reinsured Contracts.

 

ARTICLE
III

 

GENERAL PROVISIONS

 

3.1.                            Contract Administration.   Pursuant
to the Administrative Services Agreement, the Company has appointed the Reinsurer
(or its permitted assignee) to perform administrative services with respect to
the Reinsured Contracts and the Reinsurer has agreed to perform such services
on behalf of the Company.

 

3.2.                            Inspection.   The
Reinsurer or its designated representative may inspect, at the offices of the
Company or elsewhere where such records are located, the papers and any and all
other books or documents of the Company reasonably relating to the Reinsured
Contracts and the Ceded Reinsurance Agreements, during normal business hours
for such period as this Agreement is in effect or for as long thereafter as the
Company seeks performance by the Reinsurer pursuant to the terms of this
Agreement.

 

3.3.                            Misunderstandings and
Oversights.   If any delay, omission, error or failure to
pay amounts due or to perform any other

 

9

 

act required by this Agreement
is unintentional and caused by misunderstanding or oversight, the Company and
the Reinsurer will adjust the situation to what it would have been had the
misunderstanding or oversight not occurred. 
The party first discovering such misunderstanding or oversight, or an
act resulting from such misunderstanding or oversight, will notify the other
party in writing promptly upon discovery thereof, and the parties shall act to
correct such misunderstanding or oversight within twenty (20) Business Days of
such other party’s receipt of such notice. 
However, this Section shall not be construed as a waiver by either party
of its right to enforce strictly the terms of this Agreement.

 

3.4.                            Payments.   All
payments made pursuant to this Agreement shall be made by wire transfer of
immediately available non-reversible United States federal funds to such bank
account or accounts as designated by the recipient.

 

3.5.                            Setoff  (a)   Notwithstanding
anything in this Agreement to the contrary, in the event of insolvency of the
Company, payments of Ultimate Net Loss due the Company (or its liquidator,
receiver, conservator or statutory successor, as the case may be ) under this
Agreement and reinsurance premium and/or recovery amounts due the Reinsurer
under Sections 4.3 and 2.3(b), respectively, but not yet paid to the Reinsurer
(other than such failure to pay caused by the administrator under the Administrator
Services Agreement) are deemed

 

10

 

mutual debts or credits, as the
case may be, and shall be set off, and only the net balance shall be allowed or
paid.

 

(b)                                 The
C Profit Share when due under Article 8 and reinsurance premium and/or recovery
amounts due the Reinsurer under Sections 4.3 and 2.3(b), respectively, but not
yet paid to the Reinsurer (other than such failure to pay caused by the
administrator under the Administrative Services Agreement) are deemed mutual
debts or credits, as the case may be, and shall be set off, and only the net
balance shall be allowed or paid.

 

ARTICLE
IV

 

REINSURANCE PREMIUM

 

4.1.                            Reinsurance Premium.   On
or before the Inception Date, the Company shall pay to the Reinsurer the sum of
fifty-nine million, four hundred sixty-eight thousand, five hundred and
fifty-four dollars ($59,468,554.00) (the “Reinsurance Premium”) plus eight
million, thirty-one thousand, four hundred and forty-six dollars
($8,031,446.00) as the Reserve Transfer Amount.

 

4.2.                            Premium Earned.   The
Reinsurance Premium and the Reserve Transfer Amount shall be considered fully
earned when received by the Reinsurer and shall be non-refundable.

 

4.3.                            Additional Reinsurance
Premium.   In addition to the Reinsurance Premium and the
Reserve Transfer Amount, the Company shall pay to the Reinsurer (i) an amount
equal to the Net Premiums from

 

11

 

Operations collected during
each calendar quarter (or part thereof) that this Agreement is in effect, and
(ii) an amount equal to all salvage, subrogation and other recoveries collected
on or after the Inception Date related to claims paid prior to the Inception
Date.

 

ARTICLE
V

 

ACCOUNTING AND SETTLEMENT

 

5.1.                            Accounting Reports and Payments.   For so long as the
Reinsurer acts as administrator under the Administrative Services Agreement,
the Reinsurer shall provide accounting reports to the Company and pay claims
and other amounts reinsured hereunder with respect to Reinsured Contracts in
accordance with the terms of the Administrative Services Agreement.  In the event that the Reinsurer shall cease
to so act as administrator, the following provisions shall become applicable.

 

5.2.                            Amounts Due the Company.   All amounts due to be paid
to the Company under this Agreement shall be paid by the Reinsurer to the
Company or its administrator in accordance with Section 3.4 no later than three
(3) Business Days after receipt by the Reinsurer of notification by the Company
or its administrator of the amount due to be paid hereunder.

 

5.3.                            Quarterly Reports.   Within ten (10) days of
the end of each calendar quarter that this Agreement remains in effect, the
Company shall supply, directly or through its administrator, the

 

12

 

Reinsurer
with a report that shall provide financial and other data for such calendar
quarter in such form as agreed to by the parties.  The Company shall pay concurrent with the delivery of each such
report, directly or through its administrator, all recoveries or payments due
to the Reinsurer under Section 2.3(b) and not previously paid to the Reinsurer.

 

5.4.                            Best Efforts to Supply Actual Data.   In preparing all reports
required in this Agreement, the Company shall use, or cause its administrator
to use, its best efforts to supply the actual data.  If the actual data cannot be supplied with the appropriate
report, the Company shall produce, or cause its administrator to produce, best
estimates and shall provide amended reports based on actual data no more than
ten (10) Business Days after the actual data becomes available.

 

5.5.                            Additional Reports and Updates.   For so long as this
Agreement remains in effect, the Company shall periodically furnish, or cause
its administrator to furnish, to the Reinsurer such other reports and
information as may be reasonably required by the Reinsurer and reasonably
available to the Company.

 

ARTICLE
VI

 

RESERVES

 

6.1.                            Reserves and Reserve
Credits.   The Reinsurer shall establish and maintain
adequate reserves with respect to the Reinsured.

 

13

 

Contracts as are necessary to
enable the Company to take full credit for the reinsurance provided by this
Agreement on its statutory balance sheet filed with the insurance regulatory
authorities of Bermuda; provided that the Reinsurer shall in no event be
required to establish any contingency reserves.

 

ARTICLE
VII

 

DURATION AND TERMINATION

 

7.1.                            Duration.   Except
as otherwise provided herein, this Agreement shall be unlimited in duration.

 

7.2.                            Termination.   This
Agreement will terminate on the earlier of: (i) the date the Company’s
liability with respect to the Reinsured Contracts are terminated, or (ii) the
date on which the Reinsurer has paid to the Company and/or its administrator
Ultimate Net Loss that, in the aggregate, equals the Aggregate Limit; provided
however, that notwithstanding the foregoing, (x) the obligation of the Company
to pay additional premium pursuant to Section 4.3 shall continue until all
securities owned by the Financing Vehicles have matured or been liquidated
through sale or otherwise and all amounts due the Reinsurer under this
Agreement with respect to the Reinsured Contracts are paid and (y) the
obligation of the Reinsurer to calculate and pay, if any, the C Profit Share
pursuant to Article 8 shall continue.

 

14

 

ARTICLE
VIII

 

C PROFIT SHARE

 

8.1.                            Determination of Profit
Share   Within 30 days following the seventh anniversary of
the Inception Date (i.e., July 1, 2008), a profit commission (the “C Profit
Share”) shall be calculated by the Reinsurer and such amount, if any, shall be
payable to the Company.  The C Profit
Share shall be equal to the product of (a) forty-five million dollars
($45,000,000) minus the sum of (i) 100% of all Litigation Defense Expenses,
(ii) those Litigation Losses that the Reinsurer elects hereunder to fund, in
its sole discretion, and (iii) a portion of all C Profit Share Losses incurred
through the seventh anniversary of the Inception Date under this Agreement,
determined in accordance with the following schedule, times (b) a fraction the
denominator of which is the number of shares of Series C Preference Stock
outstanding on the day immediately prior to the date hereof and the numerator
of which is the number of shares of Series C Preference Stock outstanding on
the day of payment of the C Profit Share; provided, however, that the C Profit
Share shall in no event be less than zero.

 

Portion of C
Profit Share Losses subtracted from forty-five million dollars ($45,000,000) in
determining C Profit Share:

 

62.50% of all C Profit Share Losses up to forty million dollars
($40,000,000) in C Profit Share Losses,

16.67% of all C Profit Share Losses in excess of forty million dollars
($40,000,000) up to one hundred million dollars ($100,000,000) in C Profit
Share Losses, and

 

15

 

100.00% of all C Profit Share Losses in excess of one hundred million
dollars ($100,000,000) up to one hundred ten million dollars ($110,000,000) in
C Profit Share Losses.

 

8.2.                            Early Payment of C
Profit Share.   In the event that the Reinsurer should cease
to be a direct or indirect subsidiary of ACE Limited, a Cayman Islands corporation
(“ACE Limited”), and in the further event that the Reinsurer should fail to
assign this Agreement to any direct or indirect subsidiary of ACE Limited with
the Required Rating within 10 Business Days thereafter, the C Profit Share
shall be determined as of the last day of the month following the date that the
Reinsurer ceases to be a direct or indirect subsidiary of ACE Limited, and
shall be payable to the Company within 30 days following such date.

 

8.3.                            C Profit Share Losses.   (a)
In determining “C Profit Share Losses” hereunder, the amount of losses incurred
under Reinsured Contracts shall be determined as follows: (i) for direct
insurance or reinsurance written by the Company (other than Derivative
Contracts) covering payment obligations on securities not owned by or on behalf
of the Financing Vehicle(s), C Profit Share Losses (and case basis reserve
practice) will be determined in accordance with GAAP, (ii) for direct insurance
or reinsurance written by the Company (other than Derivative Contracts)
covering payment obligations on securities owned by or on behalf of the
Financing Vehicles including, without limitation, such securities being at one
time owned by or on behalf of a Financing Vehicle listed in Schedule 4 (a
“Repack Financing Vehicle”), C Profit Share Losses will be determined (a) upon
the sale or exchange of the

 

16

 

security from the Financing
Vehicle (other than a sale to another Financing Vehicle or to an Affiliate of
the Reinsurer), the amount of the C Profit Share Loss will be the difference
between the par amount of the security and the price received upon the sale or
exchange or (b) if there is no sale or exchange of the security or the security
has been sold to another Financing Vehicle or to an Affiliate of the Reinsurer,
upon a determination by the Reinsurer that the value of such security is
permanently impaired, the amount of the C Profit Share Loss will be the
difference between the par amount of the security and the determined value of
the security based on such permanent impairment (including the net present
value estimate of defaulted interest income), and (iii) for Derivative
Contracts entered into by the Company, C Profit Share Losses will be recognized
in accordance with GAAP (including market value losses of securities delivered
against payment in settlement of such Derivative Contracts, as and when
settled).  Allocated Loss Adjustment
Expenses for purposes of determining C Profit Share Losses shall consist of
actual expenses incurred and liabilities expected to be incurred either with
respect to Reinsurance Contracts or with respect to loss amounts determined
under clauses (i) through (iii) of this Section 8.3(a) in accordance with
GAAP.  For purposes of clause (ii)(a) of
this Section 8.3(a), the amount of any gains realized (i.e., the amount by
which proceeds exceed the par amount) on the sale or exchange of securities
shall be used to offset C Profit Share Losses, if any, to the extent of such
gains.  For

 

17

 

purposes of calculating C
Profit Share Losses, the amount of losses and Allocated Loss Adjustment
Expenses incurred under the Reinsured Contracts shall be reduced by (x) the
amount of any additional reinsurance premium received by the Reinsurer under
Section 4.3(ii) related to Commercial Financial Services, Inc. (“CFS”) and
securities serviced by CFS, and (y) the amount (if any and subject to a maximum
amount of one hundred thousand dollars ($100,000)) by which two hundred fifty
thousand dollars ($250,000) exceeds the aggregate amount of Litigation Defense
Expenses related to the Egler Litigation plus any monetary settlement(s) or
final, non-appealable monetary judgment(s) rendered against CGA, CGAIM or the
Company related to the Egler Litigation.]

 

(b)                                 The
Company and the Reinsurer agree that any dispute between the Company and the
Reinsurer arising out of the calculation by Reinsurer of the C Profit Share
Losses under clause (i) of Section 8.3(a), under clause (ii) (b) of Section 8.3
(a) or under clause (iii) of Section 8.3(a) to the extent derivative
transactions have not been settled, shall be submitted, through written
summaries prepared by the Company and Reinsurer to an independent accounting
firm of internationally recognized standing reasonably satisfactory to the
Company and the Reinsurer (the “Third party Accountants”).  The Third Party Accountants shall act as
experts and not as arbitrators to determine the resolution, based on GAAP, of
those issues (and only those issues) in dispute; provided, however,
that the dollar amount of

 

18

 

each item in dispute shall be
determined within the range of dollar amounts proposed by the Company, on the
one hand, and the Reinsurer, on the other hand.  The Third Party Accountants’ determination shall be made as
promptly as practicable after the submission of the dispute by the Company and
the Reinsurer, shall be set forth in a written statement delivered to the
Company and the Reinsurer and shall be final, binding and conclusive on the
parties.  Each party agrees to execute,
if requested by the Third Party Accountants, a reasonable engagement
letter.  All fees and expenses relating
to the work, if any, to be performed by the Third Party Accountants shall be
allocated to the Company and the Reinsurer as assessed by the Third Party
Accountants.  Notwithstanding anything
in this Agreement to the contrary, the Company and the Reinsurer agree that
calculation by the Reinsurer of C Profit Share Losses under clause (ii) (a) of
Section 8.3 (a), or under clause (iii) of Section 8.3(a) to the extent that
derivative transactions have been settled, shall be final and binding on the
Company and shall not be subject to the dispute resolution mechanism described
above in this Section 8.3(b) or arbitration under Article X hereof.

 

ARTICLE
IX

 

INSOLVENCY

 

9.1.                            Payments.   In
the event of the insolvency of the Company, all payments due the Company under
this Agreement shall be

 

19

 

payable by the Reinsurer
directly to the Company or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company under the
policy or policies reinsured, without diminution because of the insolvency of
the Company.  It is agreed and
understood, however, (i) that in the event of the insolvency of the Company the
Reinsurer shall be given written notice of the pendency of a claim against the
insolvent Company on a Reinsured Contract within a reasonable time after such
claim is filed in the insolvency proceeding and (ii) that during the pendency
of such claim the Reinsurer may, subject to the obligation of the Reinsurer to
make timely payments of amounts due the Company or its liquidator, receiver,
conservator or statutory successor under this Agreement, investigate such claim
and interpose, at its own expense, in the proceeding where such claim is to be
adjudicated any defenses which it may deem available to the Company or its
liquidator, receiver or statutory successor.

 

9.2.                            Expenses.   It
is further understood that any expense thus incurred by the Reinsurer shall be
chargeable, subject to court approval, against the insolvent Company as part of
the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer.  Where two
or more assuming reinsurers are involved in the same claim and a majority in
interest elect to interpose defenses to such claim, the expense shall be
apportioned in accordance

 

20

 

with the terms of this
Agreement as though such expense had been incurred by the Company.

 

ARTICLE
X

 

ARBITRATION

 

10.1.                     Resolution of Damages.   Any
dispute between the Company and the Reinsurer arising out of the provisions of
this Agreement or concerning its interpretation or validity (other than any
dispute arising out of the calculation by the Reinsurer of the C Profit Share
Losses), whether arising before or after termination of this Agreement, shall
be submitted to arbitration in the manner set forth in this Article X.  Either party may initiate arbitration of any
such dispute by giving written notice to the other party of its intention to
arbitrate and of its appointment of an arbitrator in accordance with Section
10.3.

 

10.2.                     Composition of Panel.   Unless
the parties agree upon a single arbitrator within fifteen (15) days after the
receipt of notice of intention to arbitrate, all disputes shall be submitted to
an arbitration panel composed of two arbitrators and an umpire, chosen in
accordance with Sections 10.3 and 10.4.

 

10.3.                     Appointment of Arbitrators.   The
party requesting arbitration (hereinafter referred to as the “claimant”) shall
appoint an arbitrator and give written notice thereof to the other party
(hereinafter referred to as the “respondent”) together with its notice

 

21

 

of intention to arbitrate.  Unless a single arbitrator is agreed upon
within fifteen (15) days after the receipt of the notice of intention to
arbitrate, the respondent shall, within thirty (30) days after receiving such
notice, also appoint an arbitrator and notify the claimant thereof.  Before instituting a hearing, the two
arbitrators so appointed shall choose an umpire.  If, within twenty (20) days after they are both appointed, the
arbitrators fail to agree upon the appointment of an umpire, the umpire shall
be appointed by the President of the American Arbitration Association.  All members of the arbitration panel shall
be active or former insurance or reinsurance executives having relevant
knowledge of the matters in dispute, and shall be impartial third parties
without past employment or directorial relations with the parties to the
arbitration and their parents and/or Affiliates.

 

10.4.                     Failure of a Party to Appoint
Arbitrator.   If the respondent fails to appoint an
arbitrator within thirty (30) days after receiving a notice of intention to
arbitrate, such arbitrator shall be appointed by the President of the American
Arbitration Association, and shall then, together with the arbitrator appointed
by the claimant, choose an umpire as provided in Section 10.3.

 

10.5.                     Involvement of Other Reinsurers.   If
the Company is involved in a dispute under the terms of this Agreement and in
one or more separate disputes with one or more other reinsurers in which common
questions of law or fact are in issue, the Company or the

 

22

 

Reinsurer, at their option, may
join with such other reinsurer in a common arbitration proceeding under the
terms of this Article X.  If the Company
and such other reinsurers have commenced arbitration, the Reinsurer may at its
option join such proceeding for the determination of the dispute between the
Company and the Reinsurer.

 

10.6.                     Choice of Forum.   Any
arbitration instituted pursuant to this Article X shall be held in New York,
New York.

 

10.7.                     Submission of Dispute to Panel.   Unless
otherwise extended by the arbitration panel, or agreed to by the parties, each
party shall submit its case to the panel within thirty (30) days after the
selection of an umpire.

 

10.8.                     Procedure Governing Arbitration.   All
proceedings before the panel shall be informal and the panel shall not be bound
by the formal rules of evidence.  The
panel shall have the power to fix all procedural rules relating to the
arbitration proceeding.  In reaching any
decision, the panel shall give due consideration to the custom and usage of the
insurance and reinsurance business.

 

10.9.                     Arbitration Award.   The
arbitration panel shall render its decision within sixty (60) days after
termination of the proceeding, which decision shall be in writing, stating the
reason therefor.  The decision of the
majority of the panel shall be final and binding on the parties to the
proceeding.

 

10.10.              Cost of Arbitration.   All
fees and expenses of the arbitration, including the fees and expenses of each
arbitrator and the

 

23

 

umpire, shall be allocated to
the Company and the Reinsurer as assessed by the panel.

 

10.11.              Limit of Jurisdiction.   The
arbitration panel does not have the jurisdiction to authorize any punitive
damage awards between the parties.

 

ARTICLE
XI

 

EXCLUSIONS

 

11.1.                     Noncontractual Damages.   This
Agreement does not cover Noncontractual Damages.  “Noncontractual Damages” as used herein shall mean those
liabilities arising from actual or alleged misconduct of the Company or of its
Affiliates, or their agents, brokers, or representatives (other than the
Reinsurer) in their handling of claims or losses, or in any of their dealings
with their insureds or any other person. 
Such liabilities shall include, but are not limited to, punitive,
exemplary, compensatory, and consequential damages.  Such misconduct shall include, but is not limited to, failure to
settle within the policy limit, negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action or in the preparation or prosecution of any appeal consequent upon any
action.  Notwithstanding the foregoing,
Noncontractual Damages shall not include, and this Agreement shall cover, any
and all amounts otherwise included in the definition of Ultimate Net Loss that
the Company actually pays or is obligated to pay

 

24

 

to ceding companies under
Reinsured Contracts that are agreements of assumed reinsurance, whether under
the terms of such Reinsured Contracts or as a result of agreements between the
Company and cedents as to the settlement of specific claims.

 

11.2.                     Insolvency Funds.   The
Reinsurer shall not be obligated to pay to the Company any share of any
liability of the Company arising, by contract, operation of law, or otherwise,
from participation or membership of the Company or any of its Affiliates,
whether voluntary or involuntary, in any Insolvency Fund or for reimbursement
of any Person for any such liability. 
“Insolvency Fund” includes any government mandated guaranty or
insolvency fund, plan, pool, association, or other arrangement howsoever
denominated, established or governed, which provides for any assessment of or
payment or assumption by any person of part or all of any claim, debt, charge,
fee, or other obligation of any insurer, or its successors or assigns which has
been declared to be insolvent, or which is otherwise deemed unable to meet any
claim, debt, charge, fee or other obligations in whole or in part.

 

ARTICLE
XII

 

MISCELLANEOUS
PROVISIONS

 

12.1.                     Headings and Schedules.   Headings
used herein are not a part of this Agreement and shall not affect the terms
hereof.  The attached Schedules and
Exhibit are a part of this Agreement.

 

25

 

12.2.                     Notices.   Any
notice required or permitted hereunder shall be in writing and shall be (i)
delivered personally (by courier or otherwise), (ii) sent by facsimile
transmission with confirmation of receipt and with subsequent personal delivery
or express delivery of the original notice, (iii) transmitted by electronic
mail with confirmation of receipt and with subsequent personal delivery or
express delivery of the original notice or (iv) sent by express delivery.  Any such notice shall be deemed given when
so delivered, sent or transmitted, as follows:

 

If to the
Company:

 

Commercial
Guaranty Assurance, Ltd.

Craig Appin
House

8 Wesley
Street

Hamilton HM 11

Bermuda

Attention:  President

Telephone
No.:  441-296-5144

Telecopier
No.:   441-296-5145

Email:    liz@cga.bm

 

If to the
Reinsurer:

 

ACE Capital Re
Overseas Ltd.

11 Victoria
Hall

Victoria
Street

P.O. Box 1826

Hamilton HM HX

Bermuda

Attention:  Corporate Secretary

Telephone
No.:  441-297-9730

Telecopier
No.:   441-297-9704

Email:    rebecca.carne@marshmc.com

 

26

 

With a copy
to:

 

ACE Capital Re Inc.

1325 Avenue of the Americas

New York, NY 10019

Attention:  General Counsel

Telephone No.:   212-974-0100

Telecopier No.:    212-581-3268

Email:    nbregman@acecapitalre.com

 

12.3.                     Successors and Assigns.   This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, permitted assigns and legal
representatives.  Neither this
Agreement, nor any right hereunder, may be assigned by either party without the
prior written consent of the other party hereto; provided that the Reinsurer
may assign this Agreement without the prior written consent of the Company (a)
if the Reinsurer ceases to be a subsidiary of ACE Limited, to any Person which
has the Required Rating, (b) if any of the Reinsurer’s ratings shall have been
downgraded one full rating category from its ratings as of the date of this
Agreement, to any Person which has the Required Rating or (c) to any Person
which has a rating of AA or higher from Standard & Poor’s (or an equivalent
rating from another nationally recognized rating agency).

 

12.4.                     Execution in Counterpart.   This
Agreement may be executed by the parties hereto in any number of counterparts,
and by each of the parties hereto in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an

 

27

 

original, but all such
counterparts shall together constitute but one and the same instrument.

 

12.5.                     Currency.   Whenever
the word “dollars” or the “$” sign appear in this Agreement, they shall be
construed to mean United States Dollars, and all transactions under this Agreement
shall be in United States Dollars.

 

12.6.                     Amendments.   This
Agreement may not be changed, altered or modified unless the same shall be in
writing executed by the Company and the Reinsurer.

 

12.7.                     Governing Law.   This
Agreement shall be interpreted and governed by the laws of Bermuda without
regard to its rules with respect to conflicts of law.

 

12.8.                     Integration.   This
Agreement and the Administrative Services Agreement constitute the entire
agreement between the parties hereto relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties and there
are no general or specific warranties, representations or other agreements by
or among the parties in connection with the entering into of this Agreement or
the subject matter hereof except as specifically set forth or contemplated
herein.

 

12.9.                     No Waiver.   No
consent or waiver, express or implied, by any party to or of any breach or default
by any other party in the performance by such other party of its obligations
hereunder shall be

 

28

 

deemed or construed to be a
consent or waiver to or of any other breach or default in the performance of
obligations hereunder by such other party hereunder.  Failure on the part of any party to complain of any act or
failure to act of any other party or to declare any other party in default,
irrespective of how long such failure continues, shall not constitute a waiver
by such first party of any of its rights hereunder.

 

12.10.              Related Person Insurance Income.   (a)
The Company represents that to the best of its knowledge:  (i)  it does not own, directly or indirectly, any
shares of ACE Limited, (ii) no Person that controls the Company through direct
or indirect ownership of fifty (50) percent or more (by vote or value) of the
capital stock of the Company owns any shares of ACE Limited, and (iii) no
Person that is controlled by the Company through direct or indirect ownership
of fifty (50) percent or more (by vote or value) of the capital stock of that
Person (“Controlled Person”) owns any shares of ACE Limited.  (b) 
The Company agrees that, during the term of this Agreement, it will not
knowingly purchase, and to the extent reasonably practicable, it will not
permit any Controlled Person to purchase any shares of ACE Limited.

 

29

 

IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be executed in Hamilton, Bermuda
by their duly authorized representatives.

 

 

	
   

  	
  COMMERCIAL GUARANTY ASSURANCE, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael Miran

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE CAPITAL RE OVERSEAS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rebecca L. Carne

  	
   

  
	
   

  	
  Title:

  	
  Director

  	
   

  
					

 

30

 

Schedule 1

 

Ceded Reinsurance Agreements

 

 

1.                                       Facultative
Reinsurance Agreement between Commercial Guaranty Assurance, Ltd. and ACE
Capital Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), effective as of
January 1, 1998.

 

2.                                       Quota
Share Reinsurance Agreement, dated as of October 28, 1998 between Commercial
Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly named KRE
Reinsurance Ltd.), with respect to Financial Guaranty Insurance Policy Number
981022A.

 

3.                                       Quota
Share Reinsurance Agreement, dated as of October 28, 1998 between Commercial
Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly named KRE
Reinsurance Ltd.), with respect to Financial Guaranty Insurance Policy Number
981022B.

 

4.                                       Quota
Share Reinsurance Agreement, dated as of October 28, 1998 between Commercial
Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly named KRE
Reinsurance Ltd.), with respect to Financial Guaranty Insurance Policy Number
981022C.

 

5.                                       Quota
Share Reinsurance Agreement, dated as of October 28, 1998 between Commercial
Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly named KRE
Reinsurance Ltd.), with respect to Financial Guaranty Insurance Policy Number
981022D.

 

6.                                       Quota
Share Reinsurance Agreement, dated as of October 28, 1998 between Commercial
Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly named KRE
Reinsurance Ltd.), with respect to Financial Guaranty Insurance Policy Number
981022E.

 

 

Schedule 2

 

Financing Vehicles

 

1.                                       Butler
Trust, a Delaware business trust.

 

2.                                       Cobalt
Capital, LLC, a Delaware limited liability company.

 

3.                                       Cobalt
Holdings, LLC, a Delaware limited liability company.

 

4.                                       GFC
Cobalt, LLC, a Delaware limited liability company.

 

5.                                       GFC
St. George, Ltd., an exempted Cayman Islands limited liability company.

 

6.                                       Guaranteed
Finance Company, Ltd., a Bermuda company.

 

7.                                       Guaranteed
Residential Securities Trust, Series 1998-1, a Delaware business trust.

 

8.                                       Guaranteed
Residential Securities Trust, Series 1999-A, a Delaware business trust.

 

9.                                       Newport
Trust, a Delaware business trust.

 

10.                                 NW
Funding, LLC, a Nevada limited liability company.

 

11.                                 St.
George CDO Funding I Ltd., an exempted Cayman Islands limited liability company.

 

12.                                 St.
George CDO Funding I (Delaware) Corp., a Delaware corporation.

 

13.                                 St.
George Funding 2000-1, Limited, an exempted Cayman Islands limited liability
company.

 

14.                                 St.
George Holdings, Ltd., an exempted Cayman Islands limited liability company.

 

15.                                 St.
George Investments I, Ltd., an exempted Cayman Islands limited liability
company.

 

16.                                 St.
George Investments II, Ltd., an exempted Cayman Islands limited liability
company.

 

17.                                 St.
George Investments III, Ltd., an exempted Cayman Islands limited liability
company.

 

 

18.                                 St.
George Residential Funding, Ltd., an exempted Cayman Islands limited liability
company.

 

 

Schedule 3

 

Reserves

 

 

$250,000 for Egler Litigation

 

 

Schedule 4

 

Repack Financing Vehicles

 

St. George CDO Funding 1 Ltd.

Guaranteed Residential
Securities Trust, Series 1998-1

Guaranteed Residential
Securities Trust, Series 1999-A

St. George Funding 2000-1,
Limited

Butler Trust

Newport Trust

 

 

Exhibit A

 

 

ADMINISTRATIVE SERVICES AGREEMENT

 

 

COMMERCIAL GUARANTY ASSURANCE, LTD.

 

and

 

ACE CAPITAL RE OVERSEAS LTD.

 

 

Dated as of July 18, 2001

 

 

ADMINISTRATIVE SERVICES AGREEMENT

 

This
ADMINISTRATIVE SERVICES AGREEMENT (this “Agreement”), dated as of July 18,
2001, is entered into by and between Commercial Guaranty Assurance, Ltd., a
company with limited liability organized under the laws of Bermuda (the
“Company”), and ACE Capital Re Overseas Ltd., a company with limited liability
organized under the laws of Bermuda (the “Administrator”).

 

RECITALS

 

WHEREAS, the
Company and the Administrator have entered into an Aggregate Loss Portfolio
Reinsurance Agreement dated as of the date hereof (the “Reinsurance Agreement”)
whereby the Company has agreed to cede and the Administrator has agreed to
reinsure, on an indemnity reinsurance basis, certain losses of the Company
under the Reinsured Contracts (capitalized terms used herein and not defined
herein, unless otherwise indicated, have the respective meanings assigned to
them in the Reinsurance Agreement); and

 

WHEREAS, the
Company desires that the Administrator perform certain administrative functions
on behalf of the Company from and after the date hereof (the “Inception Date”)
in connection with the Reinsurance Agreement and with respect to the Reinsured
Contracts, and the Administrator has agreed to provide such services;

 

NOW,
THEREFORE, in consideration of the foregoing premises, the mutual agreements
and covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Administrator hereby agree as follows:

 

ARTICLE I

 

AUTHORITY

 

The Company
hereby appoints the Administrator, and the Administrator hereby accepts
appointment, to provide as an independent contractor of the Company such
administrative and other services with respect to the Reinsurance Agreement and
the Reinsured Contracts as set forth in this Agreement (the “Administrative
Services”), all on the terms, and subject to the limitations and conditions, as
set forth in this Agreement.

 

ARTICLE II

 

STANDARD FOR SERVICES

 

All of the
Administrative Services described in this Agreement shall be performed by the
Administrator in accordance with (i) applicable law, (ii) the Reinsured
Contracts and (iii) the Administrator’s own standards in providing services
with respect to contracts issued by the Administrator in its own name that are
similar to the Reinsured Contracts.

 

 

ARTICLE III

 

NOTIFICATION TO CONTRACTHOLDERS

 

The
Administrator agrees to send to the holders of Reinsured Contracts (the “Contractholders”)
a written notice prepared by the Administrator and reasonably acceptable to the
Company to the effect that the Administrator has been appointed by the Company
to provide Administrative Services.  The
Administrator shall send such notice by mail at a time reasonably acceptable to
the Company and the Administrator.

 

ARTICLE IV

 

CLAIMS HANDLING

 

The
Administrative Services with respect to claims for loss payments shall include
the following:

 

4.1. Claim
Administration Services.   The Administrator shall
acknowledge, consider, review, investigate, deny, settle, pay or otherwise
dispose of each claim for losses reported under a Reinsured Contract (each a
“Claim” and collectively the “Claims”). 
The Administrator shall pay Claims and associated expenses under the
Reinsured Contracts to the extent that the Company provides it with funds
sufficient to make such payments or the Administrator collects, on behalf of
the Company, amounts due under the Ceded Reinsurance Agreements, the Affiliate
Reinsurance Agreement or the Reinsurance Agreement; provided that the
Administrator may, in its sole discretion, advance its own funds, such advances
to be reimbursed from the collection of amounts due the Company under the Ceded
Reinsurance Agreements, the Affiliate Reinsurance Agreement or the Reinsurance
Agreement.  In the event of the
insolvency of the Company, the Administrator shall continue to make timely
payments of Claims and associated expenses in accordance with the provisions
set forth above, except as otherwise required under applicable law in any
insolvency proceeding with respect to the Company.

 

4.2. Mitigation
of Loss.   The Administrator shall have full authority to
seek recoveries with respect to Claims and to participate on behalf of the
Company in any financial restructuring of transactions which resulted in
Claims, to the extent that it determines the losses could be minimized by doing
so.  In addition, the Administrator
shall have full authority to act on behalf of the Company in the exercise of the
rights and remedies of the Company under the Reinsured Contracts, including the
right to direct the sale of underlying securities.

 

4.3. Legal
Proceedings.   In the event that the Administrator receives
notice after the date hereof of any lawsuit, arbitration or other dispute
resolution proceedings related to Claims that involve any alleged liabilities
under a Reinsured Contract (a “Legal Proceeding”), the Administrator shall
deliver to the Company a written notice with respect thereto.  The Administrator shall monitor and control
all Legal Proceedings, including the defense, settlement or withdrawal of any
such Legal Proceedings in its absolute discretion, with its own counsel at its
own expense.

 

2

 

ARTICLE V

 

UNDERWRITING

 

Administrator
shall assume all responsibility for all underwriting necessary or appropriate
with respect to the issuance of new Reinsured Contracts necessary or desirable
to facilitate the run-off of the existing business of the Company, and for
processing of underwriting-related transactions including but not limited to
the processing of applications and the issuance of Reinsured Contracts.

 

ARTICLE VI

 

BILLINGS AND COLLECTIONS

 

On the
Inception Date, the Administrator shall assume all responsibility for billing
and collecting premiums and other amounts due under the Reinsured Contracts
payable on or after such date.  The risk
of loss, theft or destruction of premium with respect to the Reinsured
Contracts shall be borne solely by the Administrator.

 

ARTICLE VII

 

REGULATORY REPORTING

 

The
Administrator shall timely provide to the Company such informational reports
and summaries including statistical summaries regarding the services provided
by the Administrator hereunder as are necessary or useful to allow the Company
to satisfy any requirements (financial reporting or otherwise) (i) imposed by
any insurance regulatory authority upon the Company with respect to the
Reinsured Contracts, (ii) required under the Reinsurance Agreement or the
Affiliate Reinsurance Agreement, or (iii) required by applicable rating
agencies.  In addition, the
Administrator, upon the reasonable request of the Company, shall promptly
provide to the Company copies of all existing records maintained by the
Administrator relating to the Reinsured Contracts (including, with respect to
records maintained in machine readable form, hard copies) that are necessary to
satisfy such requirements.

 

ARTICLE VIII

 

MISCELLANEOUS ADMINISTRATIVE SERVICES

 

On the
Inception Date, the Administrator shall assume the obligations set forth below:

 

(i)                                     The
Administrator shall timely pay all reinsurance premiums due to reinsurers under
the Ceded Reinsurance Agreements with respect to the Reinsured Contracts.

 

(ii)                                  The
Administrator shall collect from reinsurers all reinsurance recoveries due
under the Ceded Reinsurance Agreements, the Affiliate Reinsurance Agreement and
the Reinsurance Agreement and shall collect all other recoveries and
subrogation amounts under the Reinsured Contracts.

 

3

 

(iii)                               From
and after the Inception Date, the Company does hereby by these presents appoint
and name the Administrator, acting through its duly appointed officers, the
Company’s lawful attorney-in-fact for it, and in its name, place and stead, to
act for the Company with respect to any and all letters of credit and trust
funds outstanding for the benefit of the Company pursuant to the Affiliate
Reinsurance Agreement or the terms of any of the Ceded Reinsurance Agreements.

 

(iv)                              The
Administrator shall timely pay to the reinsurers under the Affiliate
Reinsurance Agreement and the Reinsurance Agreement all premiums and recoveries
and subrogation amounts due to such reinsurers under the terms of such
Agreements.

 

ARTICLE IX

 

MAINTENANCE OF RECORDS

 

On or before
the Inception Date, the Company shall deliver to the Administrator copies of
all records required by the Administrator in order for the Administrator to
perform its obligations under this Agreement. 
On the Inception Date, the Administrator shall assume responsibility for
maintaining records under the Reinsured Contracts concerning underwriting,
billing and collection, accounting and reporting and any other category of
Administrative Services.

 

ARTICLE X

 

COOPERATION BY THE COMPANY

 

The Company
shall cooperate to the extent reasonably possible with the Administrator and
execute and provide such additional documentation as may become necessary or
appropriate to enable the Administrator to fully carry out its responsibilities
under this Agreement and to effectuate the intention of the parties under the
Reinsurance Agreement and this Agreement.

 

ARTICLE XI

 

ACCESS TO RECORDS

 

Upon advance
written notice, each party, by its duly appointed representatives, shall have
the right at any reasonable time, prior to or after the termination of this
Agreement, to audit, examine and copy all records in the possession of the
other party relating to the Reinsured Contracts.  Such audit and examination shall occur at the non-auditing
party’s place of business during normal business hours.

 

4

 

ARTICLE XII

 

CONSIDERATION FOR ADMINISTRATIVE SERVICES

 

Except as
otherwise provided in Article IV, apart from the performance by the Company of
its obligations under the Reinsurance Agreement, there shall be no fee or other
consideration due to the Administrator for performance of the Administrative
Services under this Agreement.

 

ARTICLE XIII

 

INDEMNIFICATION

 

13.1.                        Indemnification.  (a) 
Administrator agrees to indemnify and hold harmless the Company and any
of its shareholders, directors, officers, employees, agents or affiliates (and
the shareholders, directors, officers, employees and agents of such affiliates)
from any and all losses, liabilities, costs, claims, demands, compensatory,
extra contractual and/or punitive damages, fines, penalties and expenses
(including reasonable attorneys’ fees and expenses) (collectively, “Company
Losses”) arising out of or caused by any actual or alleged: (i) fraud, theft or
embezzlement by officers, employees or agents of Administrator during the term
of this Agreement; (ii) failure, either intentional or unintentional, of
Administrator to properly perform the services or take the actions required by
this Agreement, including, without limitation, the failure to properly process,
evaluate and pay Claims in accordance with the terms of this Agreement; (iii)
other act of gross negligence or willful misconduct committed by officers,
agents or employees of Administrator during the term of this Agreement; (iv)
action or inaction of Administrator when acting on behalf of the Company
hereunder which results in Noncontractual Damages (under the Reinsurance
Agreement or the Affiliate Reinsurance Agreement); or (v) failure of
Administrator to comply with applicable laws, rules and regulations during the
term of this Agreement.

 

(b)                                 The
Company agrees to indemnify and hold harmless Administrator and any of its
shareholders, directors, officers, employees, agents or affiliates (and the
shareholders, directors, officers, employees and agents of such affiliates)
from any and all losses, liabilities, costs, claims, demands, compensatory,
extra contractual and/or punitive damages, fines, penalties and expenses
(including reasonable attorneys’ fees and expenses) (collectively,
“Administrator Losses”) arising out of or caused by any actual or alleged: (i)
fraud, theft or embezzlement by officers, employees or agents (other than
Administrator, its affiliates or any of the officers, employees or agents of
the Administrator or its affiliates) of the Company during the term of this
Agreement; (ii) other act of gross negligence or willful misconduct committed
by officers, employees or agents (other than Administrator, its affiliates or
any of the officers, employees or agents of the Administrator or its
affiliates) of the Company during the term of this Agreement; or (iii) failure
of the Company to comply with applicable laws, rules and regulations during the
term of this Agreement other than any failure on the part of the Company or
Administrator caused by the action or inaction of Administrator, including when
acting in the name or on behalf of the Company, whether or not in compliance
with the terms of this Agreement.

 

5

 

13.2.                        Notice
of Asserted Liability.   In the event that either party
hereto asserts a claim for indemnification hereunder, such party seeking
indemnification (the “Indemnified Party”) shall give written notice to the other
party (the “Indemnifying Party”) specifying the facts constituting the basis
for, and the amount (if known) of, the claim asserted.

 

13.3.                        Right
to Contest Claims of Third Parties. 
(a) If an Indemnified Party asserts, or may in the future seek to assert,
a claim for indemnification hereunder because of a claim or demand made, or an
action, proceeding or investigation instituted, by any person not a party to
this Agreement (a “Third Party Claimant”) that may result in an Administrator
Loss with respect to which Administrator is entitled to indemnification
pursuant to Section 13.1(b) hereof or a Company Loss with respect to which the
Company is entitled to indemnification pursuant to Section 13.1(a) hereof (an
“Asserted Liability”), the Indemnified Party shall so notify the Indemnifying
Party as promptly as practicable, but in no event later than 10 Business Days
after such Asserted Liability is actually known to the Indemnified Party.  Failure to deliver notice with respect to an
Asserted Liability in a timely manner shall not be deemed a waiver of the
Indemnified Party’s right to indemnification for losses in connection with such
Asserted Liability but the amount of reimbursement to which the Indemnified
Party is entitled shall be reduced by the amount, if any, by which the
Indemnified Party’s losses would have been less had such notice been timely
delivered.

 

(b)                                 The
Indemnifying Party shall have the right, upon written notice to the Indemnified
Party, to investigate, contest, defend or settle the Asserted Liability; provided
that the Indemnified Party may, at its option and at its own expense,
participate in the investigation, contesting, defense or settlement of any such
Asserted Liability through representatives and counsel of its own choosing.  The failure of the Indemnifying Party to
respond in writing to proper notice of an Asserted Liability within 10 Business
Days after receipt thereof shall be deemed an election not to defend the
same.  Unless and until the Indemnifying
Party elects to defend the Asserted Liability, the Indemnified Party shall have
the right, at its option and at the Indemnifying Party’s expense, to do so in
such manner as it deems appropriate, including, but not limited to, settling
such Asserted Liability (after giving notice of the settlement to the
Indemnifying Party) on such terms as the Indemnified Party deems appropriate.

 

(c)                                  Except
as provided in the immediately preceding sentence, the Indemnified Party shall
not settle or compromise any Asserted Liability for which it seeks
indemnification hereunder without the prior written consent of the Indemnifying
Party (which shall not be unreasonably withheld) during the 10-day period
specified above.

 

(d)                                 The
Indemnifying Party shall be entitled to participate in (but not to control) the
defense of any Asserted Liability which it has elected, or is deemed to have
elected, not to defend, with its own counsel and at its own expense.

 

(e)                                  Except
as provided in the first sentence of paragraph (b) of this Section 13.3, the
Indemnifying Party shall bear all costs of defending any Asserted Liability and
shall indemnify and hold the Indemnified Party harmless against and from all
costs, fees and expenses incurred in connection with defending such Asserted
Liability.

 

6

 

(f)                                    Administrator
and the Company shall make mutually available to each other all relevant
information in their possession relating to any Asserted Liability (except to
the extent that such action would result in a loss of attorney-client
privilege) and shall cooperate with each other in the defense thereof.

 

13.4.                        Indemnification
Payments.   Any payment hereunder shall be made by wire
transfer of immediately available funds to such account or accounts as the
Indemnified Party shall designate to the Indemnifying Party in writing.

 

13.5.                        Survival.   The
provisions of this Article XIII shall survive the termination of this
Agreement.

 

ARTICLE XIV

 

ARBITRATION

 

14.1.                        Resolution
of Damages.   Any dispute between the Company and the Administrator
arising out of the provisions of this Agreement, or concerning its
interpretation or validity, whether arising before or after termination of this
Agreement, shall be submitted to arbitration in the manner set forth in this
Article XIV.  Either party may initiate
arbitration of any such dispute by giving written notice to the other party of
its intention to arbitrate and of its appointment of an arbitrator in
accordance with Section 14.3.

 

14.2.                        Composition
of Panel.   Unless the parties agree upon a single
arbitrator within fifteen (15) days after the receipt of notice of intention to
arbitrate, all disputes shall be submitted to an arbitration panel composed of
two arbitrators and an umpire, chosen in accordance with Sections 14.3 and
14.4.

 

14.3.                        Appointment
of Arbitrators.   The party requesting arbitration
(hereinafter referred to as the “claimant”) shall appoint an arbitrator and
give written notice thereof to the other party (hereinafter referred to as the
“respondent”) together with its notice of intention to arbitrate.  Unless a single arbitrator is agreed upon
within fifteen (15) days after the receipt of the notice of intention to
arbitrate, the respondent shall, within thirty (30) days after receiving such
notice, also appoint an arbitrator and notify the claimant thereof.  Before instituting a hearing, the two
arbitrators so appointed shall choose an umpire.  If, within twenty (20) days after they are both appointed, the
arbitrators fail to agree upon the appointment of an umpire, the umpire shall
be appointed by the President of the American Arbitration Association.  All members of the arbitration panel shall
be active or former insurance or reinsurance executives having relevant
knowledge of the matters in dispute, and shall be impartial third parties
without past employment or directorial relations with the parties to the
arbitration and their parents and/or Affiliates.

 

14.4.                        Failure
of a Party to Appoint Arbitrator.   If the respondent fails
to appoint an arbitrator within thirty (30) days after receiving a notice of
intention to arbitrate, such arbitrator shall be appointed by the President of
the American Arbitration Association, and shall then, together with the
arbitrator appointed by the claimant, choose an umpire as provided in Section
14.3.

 

7

 

14.5.                        Choice
of Forum.   Any arbitration instituted pursuant to this
Article XIV shall be held in New York, New York.

 

14.6.                        Submission
of Dispute to Panel.   Unless otherwise extended by the
arbitration panel, or agreed to by the parties, each party shall submit its
case to the panel within thirty (30) days after the selection of an umpire.

 

14.7.                        Procedure
Governing Arbitration.   All proceedings before the panel
shall be informal and the panel shall not be bound by the formal rules of
evidence.  The panel shall have the
power to fix all procedural rules relating to the arbitration proceeding.  In reaching any decision, the panel shall
give due consideration to the custom and usage of the insurance and reinsurance
business.

 

14.8.                        Arbitration
Award.   The arbitration panel shall render its decision
within sixty (60) days after termination of the proceeding, which decision
shall be in writing, stating the reason therefor.  The decision of the majority of the panel shall be final and
binding on the parties to the proceeding.

 

14.9.                        Cost of
Arbitration.   All fees and expenses of the arbitration,
including the fees and expenses of each arbitrator and the umpire, shall be
allocated to the Company and the Administrator as assessed by the panel.

 

14.10.                  Limit of
Jurisdiction.   The arbitration panel does not have the
jurisdiction to authorize any punitive damage awards between the parties.

 

ARTICLE XV

 

DURATION; TERMINATION

 

15.1.                        Duration.   This
Agreement shall commence on the date of its execution and continue with respect
to each Reinsured Contract until no further Administrative Services in respect
of such Reinsured Contract is required, unless it is earlier terminated under
Section 15.2.

 

15.2.                        Termination.  (a)  This
Agreement is subject to immediate termination at the option of the Company,
upon written notice to the Administrator, in the event that a voluntary or
involuntary proceeding is commenced in any state by or against the Administrator
for the purpose of conserving, rehabilitating or liquidating the Administrator,
or the Administrator shall lose its authority to perform services hereunder
and, in either event, this Agreement is not promptly assigned by the
Administrator to an affiliate of Administrator pursuant to Section 16.5.

 

(b)  This Agreement may be terminated at any time
upon the mutual written consent of the parties hereto, which writing shall
state the effective date of termination.

 

(c)  In the event that this Agreement is terminated
under any of the provisions of Section 15.2(a), the Administrator shall select
a third-party administrator to perform the services required by this
Agreement.  The Company shall have the
right to approve any such third-party administrator selected by the
Administrator, but such approval will not unreasonably be withheld.  If the Administrator fails to select a
third-party administrator pursuant to this Section 15.2(c),

 

8

 

the Company shall select such a
third-party administrator.  In either
case, the Administrator shall pay all fees and charges imposed by the selected
third-party administrator and the reasonable costs of the Company in the
transition of the performance of the services required under this Agreement to
such third-party administrator.

 

(d)  In the event that this Agreement is
terminated, the Administrator shall cooperate fully in the transfer of services
and the books and records maintained by the Administrator pursuant to this
Agreement (or, where appropriate, copies thereof) to the third-party
administrator selected pursuant to Section 15.2(c) (in the event that this
Agreement is terminated under Section 15.2(a)) or to the Company (in the event
that this Agreement is terminated pursuant to the provisions of Section
15.2(b)), so that such third-party administrator or the Company, as the case
may be, will be able to perform the services required under this Agreement
without interruption following termination of this Agreement.

 

ARTICLE XVI

 

MISCELLANEOUS PROVISIONS

 

16.1.                        Notices.   Any
notice required or permitted hereunder shall be in writing and shall be (i)
delivered personally (by courier or otherwise), (ii) sent by facsimile
transmission with confirmation of receipt and with subsequent personal delivery
or express delivery of the original notice, (iii) transmitted by electronic
mail with confirmation of receipt and with subsequent personal delivery or
express delivery of the original notice or (iv) sent by express delivery.  Any such notice shall be deemed given when
so delivered, sent or transmitted, as follows:

 

(1)                                  If
to the Company to:

 

Commercial
Guaranty Assurance, Ltd.

Craig Appin
House

8 Wesley
Street

Hamilton HM 11

Bermuda

Attention:   President

Telephone
No.:   441-296-5144

Telecopier
No.:   441-296-5145

Email:    liz@cga.bm

 

9

 

(2)                                  If
to the Administrator to:

 

ACE Capital Re Overseas Ltd.

11 Victoria Hall

Victoria Street

P.O. Box 1826

Hamilton HM HX

Bermuda

Attention:   Corporate Secretary

Telephone
No.:   441-297-9730

Telecopier No.:   441-297-9704

Email:    rebecca.carne@marshmc.com

 

With a copy
to:

 

ACE Capital Re
Inc.

1325 Avenue of
the Americas

New York,
NY   10019

Attention:  General Counsel

Telephone
No.:   212-974-0100

Telecopier
No.:   212-581-3268

Email:    nbregman@acecapitalre.com

 

Any party may,
by notice given in accordance with this Agreement to the other party, designate
another address or person for receipt of notices hereunder.

 

16.2.                        Amendment.   This
Agreement may not be modified, changed, discharged or terminated, except by an
instrument in writing signed by an authorized officer of each of the parties
hereto.

 

16.3.                        Counterparts.   This
Agreement may be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same instrument.  Each counterpart may consist of a number of
copies hereof each signed by less than all, but together signed by all, of the
parties hereto.

 

16.4.                        No
Third Party Beneficiaries.   Nothing in this Agreement is
intended or shall be construed to give any Person, other than the parties
hereto, their successors and permitted assigns, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision
contained herein.

 

16.5.                        Assignment;
Subcontracting.   This agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
permitted assigns and legal representatives. 
Except as provided by the last sentence of this Section 16.5, neither
party may assign any of its obligations under this Agreement without the prior
written approval of the other party, but Administrator may, subject to
applicable law, subcontract for the provision of any of its Administrative
Services without such approval.  In the
event of any such subcontracting,

 

10

 

Administrator shall continue to
be bound by all of its obligations under this Agreement and shall be solely
responsible for the performance and compensation of subcontractors.  Notwithstanding the foregoing, Administrator
may assign this Agreement to any affiliate of Administrator in Administrator’s
sole discretion.

 

16.6.                        Governing
Law.   THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF BERMUDA, WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.

 

16.7.                        Entire
Agreement.   This Agreement and the Reinsurance Agreement
constitute the entire agreement between the parties hereto relating to the
subject matter hereof and supersede all prior and contemporaneous agreements,
understandings, and discussion of the parties.

 

11

 

IN WITNESS
WHEREOF, the Company and the Administrator have executed this Administrative
Services Agreement in Hamilton, Bermuda as of the date first above written.

 

	
   

  	
  COMMERCIAL
  GUARANTY ASSURANCE, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael
  Miran

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Michael Miran

  
	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE CAPITAL
  RE OVERSEAS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rebecca
  L. Carne

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Rebecca L. Carne

  
	
   

  	
   

  	
  Title:

  	
  Director

  
						

 

12

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