REINSURANCE AGREEMENT

Exhibit 10.2

REINSURANCE AGREEMENT

THIS REINSURANCE AGREEMENT (this “ Reinsurance Agreement ”), dated as of May 5, 2009, is made by and among American Security Insurance Company, a stock insurance company domiciled in the State of Delaware, American Bankers Insurance Company of Florida, a stock insurance company domiciled in the State of Florida, and Standard Guaranty Insurance Company, a stock insurance company domiciled in the State of Delaware (collectively, the “ Ceding Insurer ”) and Ibis Re Ltd., a Cayman Islands exempted company licensed as a Class B Insurer in the Cayman Islands (the “ Reinsurer ”) (each of the Reinsurer and the Ceding Insurer, a “ Party ” and collectively, the “ Parties ”). One or more New Parties (as defined herein) may be added to this Reinsurance Agreement as part of the Ceding Insurer in accordance with Article IX.

WITNESSETH:

The Ceding Insurer hereby cedes to the Reinsurer and the Reinsurer hereby reinsures the Ceding Insurer to the extent and on the terms and conditions and subject to the exceptions, exclusions and limitations hereinafter set forth in this Reinsurance Agreement.

ARTICLE I

DEFINITIONS

Unless defined herein, all capitalized terms in this Reinsurance Agreement shall have the meaning ascribed to them in (i) the Indenture attached hereto as Annex IV and (ii) the Series Supplement attached hereto as Annex V , both of which are incorporated herein.

“ Additional Premium ” shall have the meaning ascribed to it in Section 8.1(c)(ii) .

“ Business Day ” shall mean a day other than (i) a Saturday, (ii) a Sunday or (iii) a day on which banking institutions or trust companies in any of the Cayman Islands, the City of London, England or the City of New York, New York are authorized or required by applicable law, regulation or executive order to remain closed.

“ Calculation Agent Failure Event ” shall occur if the Calculation Agent fails to perform its duties and obligations under the Calculation Agent Agreement.

“ Calculation Agent Failure Notice ” shall have the meaning ascribed to it in Section 18.3(a) .

“ Ceding Insurer ” shall have the meaning ascribed to it in the preamble.

“ Ceding Insurer Default ” shall mean a failure on the part of the Ceding Insurer to pay, when due, any Premium or Ceding Insurer Payment.

“ Ceding Insurer Payment ” shall have the meaning ascribed to it in Section 6.3 .

“ Ceding Insurer Replacement Calculation Agent Notice ” shall have the meaning ascribed to it in Section 18.3(b) .

“ Coverage ” shall have the meaning ascribed to it in Section 3.1 .

“ Coverage Limit ” shall mean the Outstanding Principal Amount of the Notes in support of the Coverage provided under this Reinsurance Agreement.

“ Covered Area ” shall mean the District of Columbia and the following states: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Virginia and West Virginia.

“ Declaratory Judgment Expense ” or “ Declaratory Judgment Expenses ” shall include, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, the Ceding Insurer’s own costs and legal expenses incurred in direct connection with declaratory judgment actions brought to determine the Ceding Insurer’s defense and/or indemnification obligations between the Ceding Insurer and its insured(s) that are assignable to specific claims arising out of policies reinsured by this Reinsurance Agreement, regardless of whether the declaratory judgment action is successful or unsuccessful. Any Declaratory Judgment Expense shall be deemed to have been fully incurred by the Ceding Insurer on the same date as the original loss (if any) giving rise to the action.

“ Early Termination Date ” shall mean (i) with respect to an Early Termination Event I, II, III, IV and V, the first Payment Date that occurs at least thirty-five (35) calendar days after the date of such Early Termination Event, provided that , if such Early Termination Event occurs less than 35 calendar days prior to the Scheduled Termination Date or the relevant Extended Termination Date, then the Early Termination Date shall be the Scheduled Termination Date or the Extended Termination Date, as the case may be, or if such day is not a Business Day, on the next succeeding Business Day and (ii) with respect to an Early Termination Event VI, the next following June 15 Payment Date, provided that the Early Termination Event VI occurs on or prior to June 1 of that year or, if an Early Termination Event VI occurs on any date following June 1, 2011, the Scheduled Termination Date.

“ Early Termination Event ” shall mean an Early Termination Event I, an Early Termination Event II, an Early Termination Event III, an Early Termination Event IV, an Early Termination Event V or an Early Termination Event VI.

 

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“ Early Termination Event I ” shall have the meaning ascribed to it in Section 16.1(i) .

“ Early Termination Event II ” shall have the meaning ascribed to it in Section 16.1(ii) .

“ Early Termination Event III ” shall have the meaning ascribed to it in Section 16.1(iii) .

“ Early Termination Event IV ” shall have the meaning ascribed to it in Section 16.1(iv) .

“ Early Termination Event V ” shall have the meaning ascribed to it in Section 16.1(v) .

“ Early Termination Event VI ” shall have the meaning ascribed to it in Section 16.1(vi) .

“ Effective Date ” shall mean May 5, 2009.

“ Event Notice Request ” shall have the meaning ascribed to it in Section 18.2 .

“ Extended Termination Date ” shall mean the date to which the maturity of the Notes may be extended following one or more Extension Events (or if such day is not a Business Day, the next succeeding Business Day), but in no event will such date be later than the Final Extended Termination Date.

“ Extension Determination Date ” shall mean the date which is no later than three Business Days prior to the Scheduled Termination Date or any applicable Extended Termination Date, as the case may be.

“ Extension Event ” shall mean an Extension Event I, an Extension Event II, or an Extension Event III.

“ Extension Event I ” shall have the meaning ascribed to it in Section  17.1 .

“ Extension Event II ” shall have the meaning ascribed to it in Section  17.2 .

“ Extension Event III ” shall have the meaning ascribed to it in Section  17.3 .

“ Extension Notice ” shall have the meaning ascribed to it in Section 17.4 .

“ Extra Contractual Obligation ” or “ Extra Contractual Obligations ” shall mean, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, 100% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Ceding Insurer, not covered by any other provision of this Reinsurance Agreement and which arise from the handling of any claim on business subject to this

 

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Reinsurance Agreement, such liabilities arising because of, but not limited to, failure by the Ceding Insurer to settle within the policy limits or by reason of the Ceding Insurer’s alleged or actual negligence, fraud (except by an officer or director of the Ceding Insurer as hereinafter provided) or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An Extra Contractual Obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy. Extra Contractual Obligation shall not include Extra Contractual Obligations incurred due to the fraud or criminal act of a member of the board of directors, an officer, an agent or an employee of the Ceding Insurer, or any other person or organization involved in the presentation, defense or settlement of any claim covered hereunder, whether acting individually or collectively or in collusion with any person or organization.

“ Final Extended Termination Date ” shall mean, following an Extension Event, the earlier of the Payment Date immediately succeeding (i) 18 months from the Date of Loss of the most recent Loss Event with respect to the Notes, and (ii) the Event Reporting Date when PCS has released all Catastrophe Bulletins with final resurvey estimates for all Loss Events associated with the Notes.

“ Final Settlement ” shall have the meaning ascribed to it in Section 15.1 .

“ Final Settlement Date ” shall mean, with respect to each Loss Event, the date that occurs 18 months from the Payment Date when the last of the final Reinsurer Payment or final Ceding Insurer Payment was made with respect to such Loss Event.

“ Florida Inuring Coverage Update Notice ” shall have the meaning ascribed to it in Section 13.4 .

“ Hurricane ” shall mean any event that is assigned a number by PCS as a “catastrophe,” where the perils identified by PCS with respect to such catastrophe include the peril of Hurricane.

“ Incurred But Not Reported Losses ” shall mean, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, liabilities for future payments on losses from a Loss Event that have already occurred but have not yet been reported to the Ceding Insurer and the expected future development on claims already reported to the Ceding Insurer from a Loss Event.

“ Incurred Losses ” shall mean, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, losses that have been reported and either paid or reserved for future payment by the Ceding Insurer from a Loss Event.

“ Indenture ” shall mean the indenture dated as of May 5, 2009 by and among the Reinsurer, Deutsche Bank Trust Company Americas, as Indenture Trustee, and Deutsche Bank AG, London Branch, as Paying Agent.

 

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“ Initial Modeled Attachment Probability ” shall mean 3.14%.

“ Initial Modeled Expected Loss ” shall mean 2.28%.

“ Initial Premium ” shall have the meaning ascribed to it in Section 8.1(c)(i) .

“ Loss Adjustment Expense ” shall mean, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense, or appeal of claims, regardless of how such expenses are classified for statutory reporting purposes. Loss Adjustment Expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, expenses and a pro rata share of salaries of the Ceding Insurer’s field employees and expenses of other employees of the Ceding Insurer who have been temporarily diverted from their normal and customary duties and assigned to the adjustment of losses covered by this Reinsurance Agreement, expenses of the Ceding Insurer’s officials incurred in connection with coverage questions and legal actions connected thereto, advertising or other extraordinary communication expense as a result of a Loss Event, costs of supersedeas and appeal bonds and monitoring counsel expenses. Loss Adjustment Expense shall not include normal office expenses or salaries of the Ceding Insurer’s officials.

“ Loss Event ” shall mean any Hurricane with a Date of Loss within the Risk Period and identified by PCS as having caused insured industry personal property losses in the Covered Area.

“ Loss Event Net Payment ” shall have the meaning ascribed to it in Section 6.1 .

“ Loss in Excess of Policy Limits ” or “ Losses in Excess of Policy Limits ” shall mean, solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, 100% of any amount paid or payable by the Ceding Insurer in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Ceding Insurer’s policy limits having been incurred because of, but not limited to, failure by the Ceding Insurer to settle within the policy limits or by reason of the Ceding Insurer’s alleged or actual negligence, fraud (except by an officer or director of the Ceding Insurer as herein after provided) or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. A Loss in Excess of Policy Limits shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, Loss in Excess of Policy Limits shall not include Loss in Excess of Policy Limits incurred by the Ceding Insurer as a result of any fraudulent and/or criminal act by any officer or director of the Ceding Insurer acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

 

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“ Loss Payment ” shall mean a Loss Payment, as defined in the Series Supplement, with respect to the Notes.

“ New Party ” shall have the meaning ascribed to it in Article IX.

“ Notes ” shall mean the $75,000,000 Series 2009-1 Class B Variable Rate Notes due May 10, 2012.

“ Original Coverage Limit ” shall mean $75,000,000.

“ Party ” or “ Parties ” shall have the meaning ascribed to it in the preamble.

“ Payment Event of Default ” shall mean a failure by the Ceding Insurer to cure a Ceding Insurer Default within five (5) Business Days of receipt of notice, substantially in the form attached hereto as Exhibit A , from the Reinsurer of such Ceding Insurer Default.

“ Payout Factors Update Notice ” shall have the meaning ascribed to it in Section 13.3 .

“ Permitted Investments ” shall have the meaning ascribed to it in the Reinsurance Trust Agreement.

“ Premium Payment ” shall have the meaning ascribed to it in Section 8.1(a) .

“ Proof of Loss Claim ” shall have the meaning ascribed to it in Section 15.2 .

“ Reinsurance Agreement ” shall have the meaning ascribed to it in the preamble.

“ Reinsurance Trust Account ” shall have the meaning ascribed to it in Section 12.1 .

“ Reinsurance Trust Agreement ” shall have the meaning ascribed to it in Section 12.1 .

“ Reinsurance Trustee ” shall mean Deutsche Bank Trust Company Americas.

“ Reinsurer ” shall have the meaning ascribed to it in the preamble.

“ Reinsurer’s Agent ” shall have the meaning ascribed to it in Section 18.3 .

“ Reinsurer Payment ” shall have the meaning ascribed to it in Section 6.2 .

 

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“ Replacement Calculation Agent ” shall mean any entity acceptable to the Ceding Insurer which, in the event of a Calculation Agent Failure Event, shall be appointed as the Replacement Calculation Agent and which will be unaffiliated with the Ceding Insurer.

“ Risk Period ” shall mean, the period commencing at 12:00 a.m., New York time on the date immediately following the Effective Date to and including the earlier of (i) 11:59 p.m., New York time on May 5, 2012, or (ii) in the event of an Early Termination Event, 11:59 p.m. New York time on the date on which such Early Termination Event occurs.

“ Scheduled Termination Date ” shall mean May 10, 2012.

“ Series 2009-1 Notes ” shall mean the $75,000,000 Series 2009-1 Class A Variable Rate Notes due May 10, 2012 and the $75,000,000 Series 2009-1 Class B Variable Rate Notes due May 10, 2012.

“ Series Supplement ” shall mean the Series Supplement in respect of the Notes by and between the Reinsurer and Deutsche Bank Trust Company Americas, as Indenture Trustee and series agent.

“ Termination Date ” shall mean (i) the earlier to occur of the Early Termination Date or the Scheduled Termination Date, as applicable, or (ii) following an Extension Event, the relevant Extended Termination Date or the Early Termination Date, as the case may be.

“ Ultimate Net Loss ” shall have the meaning ascribed to it in Article XIV.

“ U.S. Treasury Money Market Fund ” shall have the meaning ascribed to it in the Reinsurance Trust Agreement.

ARTICLE II

TERM

2.1 Term . This Reinsurance Agreement shall become effective on the Effective Date and shall remain in force until the Termination Date, provided, however , that if a Loss Payment has been made to the Ceding Insurer prior to the Termination Date, this Reinsurance Agreement shall terminate on the Final Settlement Date for the Loss Event that provides the lattermost Final Settlement Date.

ARTICLE III

BUSINESS COVERED

3.1 Coverage . This Reinsurance Agreement covers insured or reinsured losses of the Ceding Insurer arising during the Risk Period from one or more Loss Events on a per occurrence basis to real property (including manufactured housing)

 

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and personal property under policies of insurance issued by the Ceding Insurer or assumed by the Ceding Insurer and not otherwise excluded under subparagraph 9 of Article X hereof (“ Coverage ”).

3.2 Extension Period . Notwithstanding any Extension Event, nor the Ceding Insurer’s election to extend the term of the Reinsurance Agreement, the Risk Period will not be extended and the Reinsurer will not be liable for any payments in relation to any Hurricane occurring during any Extension Period.

3.3 No Third Party Rights . Except as set forth in Article XX, nothing contained in this Reinsurance Agreement shall in any manner create any obligations of or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Reinsurance Agreement.

ARTICLE IV

TERRITORIAL LIMITS

The territorial limit of this Reinsurance Agreement is the Covered Area for each Loss Event.

ARTICLE V

AGGREGATE LIMIT

The total amount recoverable from the Reinsurer under this Reinsurance Agreement in the aggregate shall not exceed the Original Coverage Limit.

ARTICLE VI

LOSS PAYMENTS

6.1 Payment Limitations for Coverage . The Reinsurer’s obligations under this Reinsurance Agreement for each Loss Event are limited to the lesser of (i) the sum of the Reinsurer Payments due and payable for such Loss Event less the sum of the Ceding Insurer Payments receivable for such Loss Event, the difference being the “ Loss Event Net Payment ” for such Loss Event, and (ii) the Ultimate Net Loss of the Ceding Insurer for such Loss Event, subject to the terms and conditions set forth herein.

6.2 Reinsurer Payments . For each Loss Event, the Reinsurer agrees to pay to the Ceding Insurer on the first Payment Date after each related Event Reporting Date an amount equal to the Loss Payment if such amount is greater than zero (each, a “ Reinsurer Payment ”), if any, payable with respect to the Coverage in effect. Such payments shall be made by the Reinsurer on each Payment Date until the earlier of (i) the Payment Date which occurs 18 months from the first Payment Date following the first Event Reporting Date, (ii) the first Payment Date which occurs after the Event Reporting Date when PCS has released a Catastrophe Bulletin with its final resurvey estimate for

 

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such Loss Event, and (iii) the later of the Scheduled Termination Date and the Extended Termination Date, as the case may be, or, in the case of an Early Termination Event, the Early Termination Date.

6.3 Ceding Insurer Payments . For each Loss Event, the Ceding Insurer agrees to reimburse the Reinsurer on the first Payment Date after each related Event Reporting Date an amount equal to the absolute value of the Loss Payment if such amount is less than zero (each, a “ Ceding Insurer Payment ”), if any, payable with respect to the Coverage in effect. Such payments shall be made by the Ceding Insurer on each Payment Date until the earlier of (i) the Payment Date which occurs 18 months from the first Payment Date following the first Event Reporting Date, (ii) the first Payment Date which occurs after the Event Reporting Date when PCS has released a Catastrophe Bulletin with its final resurvey estimate for such Loss Event, and (iii) the later of the Scheduled Termination Date or the Extended Termination Date, as the case may be, or, in case of an Early Termination Event, the Early Termination Date.

6.4 Ultimate Net Loss Limitation . As stipulated in Section 6.1 , the Loss Event Net Payments payable by the Reinsurer for each Loss Event will be limited to the Ultimate Net Loss for such Loss Event as of the Final Settlement Date. If the Loss Event Net Payments paid by the Reinsurer with respect to a Loss Event in accordance with this Article VI exceed the Ultimate Net Loss for such Loss Event, the Ceding Insurer shall refund the excess to the Reinsurer, as stipulated in Article XV.

ARTICLE VII

EVENT REPORT

7.1 Delivery of Event Report . No claims shall be made upon the Reinsurer under any Coverage in effect, and the Reinsurer has no liability for any losses hereunder, unless and until the Reinsurer has received a report issued by the Calculation Agent to the Reinsurer, the Indenture Trustee and the Ceding Insurer pursuant to the Calculation Agent Agreement which reports the results of the procedures carried out by the Calculation Agent in accordance with the Calculation Agent Agreement stating, for each Loss Event, the PCS Loss Amount, the Class B Gross Event Index Value, the Class B Florida Inuring Coverage, the Class B Net Event Index Value, Index Loss Amount, Loss Payment, and stating for the Notes, the Net Loss Payment and the resulting Coverage Limit remaining as a consequence with respect to the Coverage, subject to the Original Coverage Limit.

 

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ARTICLE VIII

REINSURANCE PREMIUM

8.1 Premiums payable to the Reinsurer

(a) The Ceding Insurer shall pay the following reinsurance premiums (each, a “ Premium Payment ”) to the Reinsurer with respect to the Coverage Limit:

(i) Premium R Payments : on the Business Day immediately preceding each Payment Date up to and including the earlier of the Early Termination Date and the Scheduled Termination Date, an amount equal to 14.25% per annum calculated on the Coverage Limit determined as of the first day of the relevant Accrual Period, provided , however , that for all Accrual Period days from and including the Effective Date to but not including the first anniversary date of the Effective Date, even if such anniversary date is not a Payment Date, such premium will be calculated on the Original Coverage Limit, provided , further , that if such first anniversary date is not a Payment Date, for the remaining portion of the relevant Accrual Period days from and including such anniversary date to but not including the next Payment Date, such premium will accrue and be calculated on the Original Coverage Limit, provided further , that if a Premium F Payment becomes due and payable on any Payment Date prior to the end of the first anniversary date of the Effective Date, no Premium R Payment shall become due and payable following such Payment Date;

(ii) Premium S Payments : on the Business Day immediately preceding each Payment Date up to and including the Termination Date an amount equal to 0.70% per annum calculated on the Coverage Limit as of the first day of the relevant Accrual Period;

(iii) Premium E1 Payments : if an Extension Event I occurs, on the Business Day immediately preceding each Payment Date at the end of each three-month period following the Scheduled Termination Date or any Extended Termination Date, as applicable, an amount equal to 4.00% per annum calculated on the Coverage Limit as of the first day of the related Accrual Period;

(iv) Premium E2 Payments : if an Extension Event II occurs, on the Business Day immediately preceding the Payment Date at the end of each three-month period following the Scheduled Termination Date or any Extended Termination Date, as applicable, an amount equal to 0.50% per annum calculated on the Coverage Limit as of the first day of the related Accrual Period;

(v) Premium E3 Payments : if an Extension Event III occurs, on the Business Day immediately preceding the Payment Date at the end of each three-month period following the Scheduled Termination Date or any Extended Termination Date, as applicable, an amount equal to 0.10% per annum calculated on the Coverage Limit as of the first day of the related Accrual Period.

(vi) Premium F Payments : if the Original Coverage Limit has been exhausted prior to the first anniversary of the Effective Date, an amount equal to the sum of the present value, discounted at LIBOR (determined for the Accrual Period in which the Coverage Limit was reduced to zero), of each of the

 

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scheduled payments of Interest Spread (calculated on the Original Coverage Limit) that would have been payable for the remaining days of the relevant Accrual Periods following the Payment Date that the Coverage Limit is reduced to zero through and including the first anniversary of the Effective Date; and

(vii) Premium G Payments : if an Early Termination Event IV has occurred, an amount equal to the sum of the present value, discounted at three-month LIBOR (determined for the Accrual Period for which such Early Termination Event IV occurred), of each of the scheduled Premium R Payments calculated on the Coverage Limit determined as of the Early Termination Date for each Accrual Period from the Early Termination Date to the Scheduled Termination Date.

(viii) Early Redemption Event IV Termination Payment Premium : Following receipt of notice from the Reinsurer in the form substantially as attached hereto as Exhibit K an amount equal to the Early Redemption Event IV Termination Payment (as specified in such exhibit). Any Early Redemption Event IV Termination Payment premium is to be paid into the Series 2009-1 Class B Swap Termination Account.

(b) Premium Payments shall be computed on the basis of the actual number of days elapsed and a 360-day year.

(c) The Ceding Insurer shall make the following additional premium payments to the Reinsurer under this Reinsurance Agreement:

(i) Initial Premium : On the Effective Date, in an amount equal to the sum of (x) expenses incurred by the Reinsurer in connection with the issuance of the Notes on such Effective Date, and (y) certain anticipated operating expenses, each such expense as set forth on Schedule A hereto, and certified by the Reinsurer in the form attached hereto as Exhibit B (the “ Initial Premium ”); and

(ii) Additional Premium : On each anniversary of the Effective Date, and from time to time, in an amount for certain operating expenses as set forth on Schedule B hereto, and certified by the Reinsurer substantially in the form attached hereto as Exhibit B (the “ Additional Premium ”); provided that the Additional Premium payable under all Reinsurance Agreements entered into in connection with the Program shall be subject to an annual maximum of $400,000 for the Program and an additional $50,000 for each outstanding Series of Notes issued.

8.2 Taxes . The Ceding Insurer shall pay any United States federal excise tax on any premium payable hereunder.

 

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ARTICLE IX

NEW PARTIES

Should the Ceding Insurer elect to utilize one or more additional subsidiaries or affiliated insurers for their risk covered hereunder, each such subsidiary or affiliate insurer shall become a New Party and a part of the Ceding Insurer under this Reinsurance Agreement, and shall have all the rights of and be subject to the obligations of the Ceding Insurer hereunder.

ARTICLE X

EXCLUSIONS

Solely for the purposes of calculating the Ceding Insurer’s Ultimate Net Loss, this Reinsurance Agreement shall not apply to and specifically excludes:

 

1.

All railroad business.

 

2.

All insurances on growing or standing crops.

 

3.

Flood when written as such, except for flood insurance written in conjunction with the Ceding Insurer’s Mortgage Service Program or its Mobile Homeowners business.

 

4.

All Ocean Marine business.

 

5.

All aviation, aerospace and satellite business.

 

6.

Financial guarantee and insolvency business.

 

7.

Difference in conditions insurances and similar kinds of insurances, however styled, insofar as they may provide coverage for losses from the following causes:

 

a.

Flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of the foregoing, all whether wind-driven or not, except when covering property in transit; or

 

b.

Earthquake, landslide, subsidence or other earth movement or volcanic eruption, except when covering property in transit;

but such exclusion shall not apply to flood and/or earthquake and/or volcanic eruption insurance written in conjunction with the Ceding Insurer’s Mortgage Service Program, Mobile Homeowners business or Voluntary “Choice” and “First Select” Products.

 

8.

Third party liability and medical payments business.

 

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9.

Reinsurance assumed from other companies, except the following shall not be excluded hereunder:

 

a.

Inter-company reinsurance between any of the companies that are part of the Ceding Insurer under this Reinsurance Agreement or any insurer affiliated with any such company (so long as the company that is part of the Ceding Insurer is the assuming company) including, but not limited to, business or risks assumed from American Reliable Insurance Company, Reliable Lloyds Insurance Company and Voyager Indemnity Insurance Company;

 

b.

Agency reinsurance accepted in the normal course of business from agents of the Ceding Insurer;

 

c.

Reinsurance of policies which are intended to be reunderwritten in accordance with the standards of the Ceding Insurer and rewritten as Ceding Insurer policies at the next anniversary or expiration date; and

 

d.

Reinsurance assumed from another insurer on policies underwritten by and issued at the request of the Ceding Insurer.

 

10.

Nuclear risks as defined in the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)” attached hereto as Annex I and forming part of this Reinsurance Agreement.

 

11.

Risks excluded under the provisions of the “Total Insured Value Exclusion Clause (BRMA 53B)” attached hereto as Annex II and forming part of this Reinsurance Agreement.

 

12.

Loss or damage caused by or resulting from war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority, but this exclusion shall not apply to loss or damage covered under a standard Policy with a standard War Exclusion Clause. Nevertheless, this exclusion shall not apply to loss or damages arising out of or caused by an act of terrorism as defined in subparagraph 17 of this Article X.

 

13.

Business assumed from any pools, syndicates and/or associations per the “Pools, Associations & Syndicates Exclusion Clause” attached hereto as Annex III and forming part of this Reinsurance Agreement.

 

14.

All liability of the Ceding Insurer arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, by a governmental agency or a subdivision thereof which provides for any assessment of or payment or

 

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assumption by the Ceding Insurer of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

 

15.

Loss and/or damage and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25.0% of the Ceding Insurer’s property loss under the applicable original policy.

 

16.

Losses in respect of overhead transmission and distribution lines and their supporting structures, other than those on or within 500 feet of the insured premises.

It is understood and agreed that the public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitters’ or distributors’ policy.

 

17.

Loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

An act of terrorism shall include any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto , and which:

 

a.

Involves violence against one or more persons; or

 

b.

Involves damage to property; or

 

c.

Endangers life other than that of the person committing the action; or

 

d.

Creates a risk to health or safety of the public or a section of the public; or

 

e.

Is designed to interfere with or to disrupt an electronic system.

This Reinsurance Agreement also excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any act of terrorism.

 

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Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this Reinsurance Agreement, in respect only of personal lines, this Reinsurance Agreement will pay actual loss or damage (but not related cost or expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with biological, chemical or nuclear pollution, or contamination.

 

18.

All Workers’ Compensation business.

ARTICLE XI

OFFSET

Neither the Ceding Insurer nor the Reinsurer shall have the right to offset any balance or balances, on account of premiums or on account of Loss Payments, due from one Party to the other Party under this Reinsurance Agreement, against any balance or balances due and payable to the one Party from the other Party under this Reinsurance Agreement.

ARTICLE XII

REINSURANCE TRUST ACCOUNT

12.1 On or before the Effective Date, the Reinsurer, as grantor, shall enter into a trust agreement (“ Reinsurance Trust Agreement ”) and establish and maintain a separate trust account (“ Reinsurance Trust Account ”) with the Reinsurance Trustee, as trustee for the benefit of the Ceding Insurer, as beneficiary.

12.2 The Reinsurer shall deposit into the Reinsurance Trust Account on the Effective Date an amount that is equal to the Original Coverage Limit.

12.3 The Reinsurer shall, prior to depositing assets with the Reinsurance Trustee, execute assignments, endorsements in blank, or transfer legal title to the Reinsurance Trustee of all shares, obligations or any other assets requiring assignments, in order that the Ceding Insurer, or the Reinsurance Trustee upon the direction of the Ceding Insurer, may, whenever necessary, transfer, assign, or negotiate any such assets without consent or signature from the Reinsurer or any other entity. Assets held in the Reinsurance Trust Account shall be valued at their current market value and shall consist solely of Permitted Investments or, if applicable, U.S. Treasury Money Market Funds. The principal portion of such Permitted Investments or, if applicable, U.S. Treasury Money Market Funds, held in the Reinsurance Trust Account will be available solely to satisfy any obligations of the Reinsurer to the Ceding Insurer under this Reinsurance Agreement and, only after fulfillment of such obligations, to make payments under the Indenture in respect of the Outstanding Principal Amount. All settlements of account between the Ceding Insurer and the Reinsurer shall be made in cash or its equivalent.

 

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12.4 The Reinsurer shall be entitled to all dividends, interest, earnings, earned discount and other income resulting from the investment of the assets in the Reinsurance Trust Account.

12.5 The assets held in the Reinsurance Trust Account will be available to satisfy any obligations of the Reinsurer to the Ceding Insurer under this Reinsurance Agreement, without diminution because of the insolvency of the Ceding Insurer or the Reinsurer.

12.6 The Reinsurer and the Ceding Insurer agree that the assets in the Reinsurance Trust Account, may be withdrawn by the Ceding Insurer at any time, notwithstanding any other provisions in this Reinsurance Agreement and shall be utilized and applied by the Ceding Insurer or any successor by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Ceding Insurer, without diminution because of insolvency on the part of the Ceding Insurer or the Reinsurer, only for the following purposes:

(i) to reimburse the Ceding Insurer for the Reinsurer’s share of premiums returned to the owners of policies reinsured under this Reinsurance Agreement on account of cancellations of such policies;

(ii) to reimburse the Ceding Insurer for the Reinsurer’s share of surrenders and benefits or losses paid by the Ceding Insurer pursuant to the provisions of the policies reinsured under this Reinsurance Agreement;

(iii) to fund an account with the Ceding Insurer in an amount at least equal to the deduction, for reinsurance ceded, from the Ceding Insurer’s liabilities for policies ceded under this Reinsurance Agreement. Such account shall include, but not be limited to, amounts for policy reserves, reserves for claims and Incurred Losses (including Losses Incurred But Not Reported), Loss Adjustment Expenses, and unearned premiums; and

(iv) to pay any Reinsurer Payments or any other amounts the Ceding Insurer claims are due under this Reinsurance Agreement.

12.7 In the event that the Ceding Insurer withdraws assets from the Reinsurance Trust Account for the purposes set forth in Section 12.06(i) to (iv) in excess of actual amounts required to meet the Reinsurer’s obligations to the Ceding Insurer, or in excess of amounts determined to be due under Section 12.06(iv), the Ceding Insurer shall return such excess to the Reinsurer. The Ceding Insurer will pay the Reinsurer, on the last Business Day of each month, interest on such excess amounts not yet returned at a per annum rate equal to LIBOR (as calculated under the Indenture for the corresponding Accrual Period) plus 2 percent, but not to exceed the prime rate, until such excess amounts are returned and any interests owed thereof are paid. The Ceding Insurer shall notify the Reinsurance Trustee on the date of any such payment that it has made such payment, stating the amount thereof.

 

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ARTICLE XIII

RESET

13.1 The Reinsurer shall enter into a Calculation Agent Agreement with the Calculation Agent pursuant to which the Calculation Agent will perform a Reset on each Reset Calculation Date, as more fully described in the Calculation Agent Agreement.

13.2 In performing each Reset, the Calculation Agent will use its most current commercially released update to the 2008 RMS Industry Exposure Database and will reflect all commercially released revisions to the 2008 RMS Industry Exposure Database by the Calculation Agent as of the applicable Reset Calculation Date, if any.

13.3 Prior to any Reset Calculation Date, the Ceding Insurer may, at its option, update the Payout Factors for each state in the Covered Area, provided , however , that no payout factor may change by more than 25% from its value at the Effective Date. If the Ceding Insurer elects to update the Payout Factors, the Ceding Insurer shall deliver a notice exercising such option to the Reinsurer and the Calculation Agent substantially in the form attached hereto as Exhibit C (“ Payout Factors Update Notice ”), together with the Updated Payout Factors. The notice must be delivered no later than 15 calendar days prior to the applicable Reset Calculation Date. The Updated Payout Factors will be applied during the Reset and will become effective as of the Reset Effective Date.

13.4 Prior to any Reset Calculation Date, the Ceding Insurer may, at its option, also update the Florida Inuring Coverage Attachment, the Florida Inuring Coverage Exhaustion and the Florida Inuring Coverage Percentage. If the Ceding Insurer elects such an update, it shall deliver a notice exercising such option and stating such Updated Florida Inuring Coverage Attachment, Updated Florida Inuring Coverage Exhaustion and Updated Florida Inuring Coverage Percentage to the Calculation Agent and the Reinsurer in substantially the form attached hereto as Exhibit D (“ Florida Inuring Coverage Update Notice ”). Such notice must be delivered no later than 15 calendar days prior to the applicable Reset Calculation Date. The Updated Florida Inuring Coverage Attachment, Updated Florida Inuring Coverage Exhaustion and the Updated Florida Inuring Coverage Percentage will become effective as of the Reset Effective Date.

13.5 Pursuant to the Calculation Agent Agreement, on each Reset Calculation Date, using the Updated Industry Exposure Data as of the applicable Reset Calculation Date, the Updated Payout Factors, if any, the Updated Florida Inuring Coverage Attachment, Updated Florida Inuring Coverage Exhaustion and Updated Florida Inuring Coverage Percentage, if any, and the Escrow Model, the Calculation Agent will reset effective as of the Reset Effective Date: (i) the Attachment Amount for the Notes to the nearest one million dollars such that the modeled annual attachment probability is the highest percentage equal to or less than the Initial Modeled Attachment Probability for the Notes, (ii) the Exhaustion Amount for the Notes to the nearest one

 

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million dollars such that the annual modeled expected loss is the highest percentage equal to or less than the Initial Modeled Expected Loss for the Notes, and (iii) the Insurance Percentage for the Coverage derived from dividing the Coverage Limit on the applicable Reset Calculation Date by the difference between the Updated Exhaustion Amount and the Updated Attachment Amount for the Notes, provided , however , that such percentage will not be greater than 100%.

13.6 No Loss Payment will be made to the Ceding Insurer in respect of any Loss Event occurring after a Reset Effective Date unless the Calculation Agent has established and confirmed to the Reinsurer, the Updated Payout Factors, the Updated Attachment Amount, the Updated Exhaustion Amount, the Updated Insurance Percentages, the Updated Florida Inuring Coverage Attachment, the Updated Florida Inuring Coverage Exhaustion and the Updated Florida Inuring Coverage Percentage, if any, applicable on or after the corresponding Reset Effective Date but prior to and excluding the subsequent Reset Effective Date.

ARTICLE XIV

ULTIMATE NET LOSS

The term “ Ultimate Net Loss ” shall mean the sum or sums including Incurred Losses, Incurred But Not Reported Losses, Loss Adjustment Expenses, Losses in Excess of Policy Limits, Declaratory Judgment Expenses, and Extra Contractual Obligations paid or payable by the Ceding Insurer arising in connection with a Loss Event in settlement of claims or in satisfaction of judgments rendered on account of claims, after making deductions for all recoveries, all salvages and all claims upon other reinsurances inuring to the benefit of the Reinsurer under this Reinsurance Agreement, whether collectible or not.

Solely for the purposes of calculating the Ultimate Net Loss,

(a) All loss settlements made by the Ceding Insurer, provided they are within the terms of the original policies (or within the terms of Loss in Excess of Policy Limits, Extra Contractual Obligations, or declaratory judgment interpretation) and within the terms of this Reinsurance Agreement shall be binding,

(b) The Ceding Insurer shall be the sole judge of what is covered under the original policy.

(c) All expense incurred by the Ceding Insurer which are included as part of the policy limit under the Ceding Insurer’s original policies reinsured hereunder shall be included in “Ultimate Net Loss” as defined above.

The coverage provided under this Reinsurance Agreement shall not apply where the laws, regulations, or public policy of an applicable jurisdiction would prohibit such coverage.

 

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All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Reinsurance 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. Subject always to the provisions of Article VI hereof, nothing in this clause shall be construed to mean that losses under this Reinsurance Agreement are not recoverable until the Ceding Insurer’s Ultimate Net Loss has been ascertained.

In the event of an insolvency of the Ceding Insurer, payment by the Reinsurer shall be made in accordance with the provisions of Article XXI.

ARTICLE XV

FINAL SETTLEMENT

15.1 Final Settlement . With respect to each Loss Event for which a Loss Payment has been made to the Ceding Insurer, the Reinsurer and the Ceding Insurer agree to settle all claims and obligations with respect to that portion of the Coverage relating to such Loss Event, which settlement shall be based on the Ceding Insurer’s Ultimate Net Loss (“ Final Settlement ”). Such Final Settlement shall be effected as of the Final Settlement Date.

15.2 Proof of Loss . The Ceding Insurer shall submit to the Reinsurer a proof of loss claim (“ Proof of Loss Claim ”) substantially in the form of Exhibit E attached hereto, within 30 days from the Final Settlement Date. Such Proof of Loss Claim shall present the Ceding Insurer’s Ultimate Net Loss as defined in Article XIV.

15.3 Settlement . If the Loss Event Net Payment paid to the Ceding Insurer with respect to a Loss Event exceeds the Ultimate Net Loss, the Ceding Insurer shall refund the difference to the Reinsurer, with interest from the Final Settlement Date computed at LIBOR, within 60 days from the date of the Proof of Loss Claim. If the Loss Event Net Payment paid to the Ceding Insurer with respect to a Loss Event is less than the Ultimate Net Loss, the Reinsurer shall under no circumstances be obligated to make any further payments to the Ceding Insurer with respect to such Loss Event.

ARTICLE XVI

EARLY TERMINATION EVENTS

16.1 Early Termination Event . Each of the following is an “ Early Termination Event ” and will occur:

(i) on the date on which the Ceding Insurer gives written notice to the Reinsurer in substantially the form attached hereto as Exhibit F that the aggregate Outstanding Principal Amount of the Series 2009-1 Notes is equal to or less than $10,000,000, provided , that such notice may not be given during any of the Accrual Periods prior to the first anniversary date following the Effective Date (“ Early Termination Event I ”);

 

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(ii) on the date on which the Ceding Insurer gives written notice to the Reinsurer in substantially the form attached hereto as Exhibit F of its election to terminate the Reinsurance Agreement following the certification by the Calculation Agent in writing to the effect that PCS or its successor has ceased to provide Catastrophe Bulletins and that the applicable Calculation Agent was unable to find a replacement for PCS or its successor (“ Early Termination Event II ”);

(iii) if the Reinsurer after using its reasonable best efforts in cooperation with the Ceding Insurer, is unable to identify a Replacement Calculation Agent within forty-five (45) calendar days of a Calculation Agent Failure Event and