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EXHIBIT 10.8
QUOTA SHARE REINSURANCE TREATY
(hereafter the "Agreement")
BETWEEN
ACA FINANCIAL GUARANTY CORPORATION
(hereinafter called the "Reinsured")
and
GLOBAL MARKETS GUARANTY LTD.
(hereinafter called the "Reinsurer")
PREAMBLE
In consideration of the mutual terms, covenants, and conditions
hereinafter set forth, the Reinsurer does hereby reinsure the Reinsured as set
forth herein.
ARTICLE I
REINSURING CLAUSE
Section 1. Quota Share Reinsurance.
The Reinsured shall, subject to the terms, conditions and exclusions
of this Agreement, cede, and the Reinsurer hereby agrees to accept as
reinsurance, a pro rata share in the percentage set forth on Exhibit A hereto
(the "Quota Share Percentage") of the Reinsured's Policies (defined below) that
incept and/or are renewed during the Term hereof and which fall within the
definition of Business Reinsured.
Section 2. Definition of Business Reinsured.
Except as otherwise set forth on Exhibit A hereto, the Business
Reinsured consists of all surety bonds, insurance contracts and policies,
indemnity contracts, financial guaranty policies, binders, endorsements and
other evidences of insurance actually written or assumed by the Reinsured, that
incept or renew during the Term of this Agreement, and with respect to which the
Reinsurer has received premium due in accordance with the terms of such contract
and policies (all such bonds, contracts, policies and other such coverages that
comprise the Business Reinsured are collectively referred to herein as the
"Policies" and individually as a "Policy").
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Section 3. Original Conditions; Scope of Reinsurer's Obligation to Follow
Reinsured's Underwriting Fortunes; Rights and Settlements.
(a) The liability of the Reinsurer shall attach simultaneously with
that of the Reinsured and shall be subject in all respects, except as set forth
herein, to the same risks, terms, conditions, interpretations, waivers, and to
the same modifications, alterations, and cancellations as are contained in the
respective Policies of the Reinsured, and the Reinsurer shall, in all respects,
follow the underwriting fortunes of the Reinsured with respect to the Business
Reinsured. Any increase in limits of liability made in such original Policy or
Policies are automatically binding upon the Reinsurer from the date such
increase is effective, subject to the limits of this Agreement. During the term
hereof, the Reinsured shall provide Notice to the Reinsurer, in the event of any
increase in limits of liability under a Policy or Policies of the Reinsured and
pay to Reinsurer the Quota Share Percentage of the additional premium with
respect to such increase pursuant to the terms hereof.
(b) The liability of the Reinsurer hereunder shall include a
proportionate share of any Allocated Loss Adjustment Expenses, which term shall
mean, except as otherwise set forth herein, for purposes of this Agreement,
those expenses relating to the mitigation and adjustment of losses sustained and
actually paid by the Reinsured under the Business Reinsured, including court
costs, interest upon judgments as it accrues, and allocated investigation,
adjustment and legal expenses chargeable to the investigation, negotiation,
settlement or defense of a claim or loss or the protection and perfection of any
subrogation or salvage rights under the Business Reinsured.
(c) The Reinsured shall, in its reasonable discretion, determine what
constitutes a single risk, Policy, claim, loss, or the subject of insurance
within the Business Reinsured in accordance with applicable law. The Reinsurer
agrees to abide by the loss settlements of the Reinsured pursuant to a Policy.
ARTICLE II
COVER
Subject to Article I, the Reinsured will cede, and the Reinsurer
will accept as reinsurance, a pro rata share of each Policy written by the
Reinsured for which the total premium on a single risk, whether received by the
Reinsured in a single
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payment or in a series of payments, is estimated to equal at least $100,000
during the calendar year in which the Policy or Policies covering such risk are
issued. Notwithstanding the foregoing, the Reinsurer will have no obligation
under this Article to accept any share of a Policy or increase in the limits of
liability thereunder to the extent such acceptance would cause it to exceed any
applicable single-risk or aggregate risk limit established by law or by a
nationally recognized rating organization. In the event that the Reinsurer's
share of a Policy or increase hereunder would cause it to exceed any applicable
risk limit as set forth in the preceding sentence, the Reinsurer will provide
Notice to the Reinsured within 24 hours of its discovery of such condition. The
Reinsured shall retain net and unreinsured at least 50% of each single risk
ceded hereunder or such other percentage as the parties mutually agree.
ARTICLE III
NOTICE OF CLAIMS
The Reinsured agrees to provide Notice as defined under Article XXI
herein of all claims under any Policy in the Business Reinsured within two (2)
business days following the Reinsured's receipt of notice of a claim or claims.
Failure to provide such Notice shall not relieve the Reinsurer of its
obligations hereunder for any losses resulting from such claim unless the
Reinsurer has suffered material prejudice thereby. Any such failure to provide
Notice of a claim or claims to the Reinsurer shall be immediately corrected,
upon discovery thereof by the Reinsured, although such correction shall not be
deemed to limit or waive any right or remedy Reinsurer may have hereunder.
ARTICLE IV
TERM
Section 1. Term.
The initial term of this Agreement shall commence on the later of
January 1, 1999 at 12:00 a.m. Eastern Standard Time, or the date of closing of
that certain initial public offering of the common stock of the Reinsurer (the
"Effective Date") and terminate at 11:59 p.m. Eastern Standard Time on December
31, 1999; provided, however, that this Agreement shall not become effective if
the initial public offering does not close. This Agreement shall automatically
renew for a one-year period on 12:00 a.m. each January 1 commencing with January
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2000, unless the Reinsurer gives at least 90 days' written notice prior to
the end of the then current Term to the Reinsured of its intent not to renew
(the "Notice of Non-Renewal"). As used herein, "Term" means the period
commencing on the Effective Date and terminating on the earlier of the Run-Off
Date and the Cut-Off Date.
Section 2. Run-Off Termination.
(a) In the event the Reinsurer delivers a Notice of Non-Renewal with
respect to any December 31, the Business Reinsured shall become fixed, with no
new Policies added to the Business Reinsured (a "Non-Renewal Run-Off
Termination"), as of 11:59 p.m. Eastern Standard Time on such December 31 (the
"Non-Renewal Run-Off Date"). In the event of a Non-Renewal Run-Off Termination,
the Reinsurer shall continue to be liable for the reinsurance liabilities ceded
hereunder prior to the Non-Renewal Run-Off Date until the earlier of (i) the
date of settlement, natural expiration or cancellation of such liabilities and
(ii) the Cut-Off Date, if any (the period from and including the Non-Renewal
Run-Off Date to but excluding such date is referred to herein as the
"Non-Renewal Run-Off Period"). During the Non-Renewal Run-Off Period, all of the
terms and conditions of this Agreement shall remain in full force and effect
with respect to the reinsurance liabilities ceded hereunder prior to the
Non-Renewal Run-Off Date.
(b) In the event of the occurrence of any of the events listed in the
following clauses (i) through (vii) inclusive, the Business Reinsured shall
become fixed, with no new Policies added to the Business Reinsured (an "Event
Run-Off Termination"), as of 11:59 p.m. Eastern Standard Time on the day such
event occurs (the "Event Run-Off Date"): (i) either the Reinsured or the
Reinsurer ceases to have a financial strength rating or claims-paying ability
rating from any of Standard & Poor's Ratings Services ("S&P"), Fitch IBCA, Inc.
("Fitch IBCA") or Duff & ▇▇▇▇▇▇ Credit Rating Co.("DCR") of "A-" or higher and
such rating of "A-" or higher is not restored within ninety (90) days; (ii)
either the Reinsured or the Reinsurer becomes insolvent or has a final order of
liquidation, rehabilitation, conservatorship or receivership entered against it;
(iii) the Reinsurer, in its sole discretion, determines that the Reinsured has
materially violated the Underwriting Guidelines, as defined below, or has made
material changes to the Underwriting Guidelines without complying with Article
X, Section 2, and delivers a notice to such effect; (iv) except as otherwise
provided herein, either the Reinsured or the Reinsurer
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materially breaches any of the terms and conditions of this Agreement and such
breach is not remedied within 60 days of notice of such breach delivered to the
breaching party by the other party; (v) there is a Change in Control, as defined
below; (vi) the Reinsured fails to pay the Premium in accordance with Article
VII hereof if such failure is not cured within ten business (10) days of notice
to the Reinsured by the Reinsurer; or (vii) the Reinsured reinsures, sells,
assigns, transfers or conveys, directly or indirectly, some or all the Business
Reinsured to another person or entity. Notwithstanding the foregoing, the either
party's failure to cure a default or event arising under any of the foregoing
clauses (i) through (vii) shall not cause an Event Run-Off Termination if, in
the sole discretion of the non-breaching party, the non-breaching party elects
to maintain this Agreement in force and effect while pursuing other remedies.
Each party will provide prompt notice to the other party of the occurrence of
any of the events described in clauses (i) through (vii) above. Subject to
rights and remedies of Reinsurer hereunder, in the event of an Event Run-Off
Termination, the Reinsurer shall continue to be liable for the reinsurance
liabilities ceded hereunder prior to the Event Run-Off Date until the earlier of
(i) the date of settlement, natural expiration or cancellation of such
liabilities and (ii) the Cut-Off Date, if any (the period from and including the
Event Run-Off Date to but excluding such date is referred to herein as the
"Event Run-Off Period"). Subject to rights and remedies of Reinsurer hereunder,
during the Event Run-Off Period, all of the terms and conditions of this
Agreement shall remain in full force and effect with respect to the reinsurance
liabilities ceded hereunder prior to the Event Run-Off Date.
(c) The Reinsurer and the Reinsured shall each give notice to S&P,
Fitch IBCA and DCR of any Non-Renewal Run-Off Termination or Event Run-Off
Termination.
Section 3. Cut-Off Termination.
Provided a Non-Renewal Run-Off Termination or an Event Run-Off
Termination arising on account of Reinsurer's failure to comply with Section
2(b) of this Article IV has previously occurred, the Reinsured may, by giving at
least 90 days' prior written notice, terminate this Agreement on a cut-off basis
(a "Cut-Off Termination") effective as of 11:59 p.m. Eastern Standard Time on
December 31, 2000 or any December 31 occurring thereafter. In addition, the
Reinsured may, by giving at least 90 days' prior written notice, effect a
Cut-Off Termination
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effective as of 11:59 p.m. Eastern Standard Time on December 31, 2003 or any
December 31 occurring thereafter, whether or not a Non-Renewal Run-Off
Termination or an Event Run-Off Termination has previously occurred, if no net
incurred losses have been paid by the Reinsurer hereunder. In the event of a
Cut-Off Termination, the Reinsurer's liability under this Agreement shall
terminate immediately and the Reinsurer shall return all unearned Premium less
the Ceding Commission applicable thereto paid to or due Reinsured within 30
business days of the Cut-Off Date. As used herein, "Cut-Off Date" means the date
a Cut-Off Termination is effective in accordance with the terms of this section.
Section 4. Definitions.
As used in this Article, the following terms shall have the meanings
assigned to them below:
(a) "Run-Off Date" means the earlier to occur of the Non Renewal
Run-Off Date and the Event Run-Off Date.
(b) "Run-Off Period" means the Non-Renewal Run-Off Period or the Event
Run-Off Period, as applicable.
(c) "Underwriting Guidelines" means the underwriting policies and
procedures of the Reinsured, as authorized by the Reinsured's Board of Directors
and Underwriting Committee and approved by the Reinsurer, a true and complete
copy of which is on file with the Reinsured.
(d) "Change in Control" means the acquisition of beneficial ownership
of 30% or more of the issued and outstanding voting securities (including,
without limitation, securities convertible into voting securities) of the
Reinsured or of American Capital Access Holdings, Inc., its parent ("Holdings"),
by one or more purchasers acting in concert in a single transaction or in a
series of related transactions; provided, however, that "Change of Control"
shall not include an initial public offering of the capital stock of the
Reinsured or of Holdings.
ARTICLE V
EXCLUSIONS
This Agreement only provides reinsurance for claims for contractual
benefits arising under the Policies, and excludes all other claims of any kind
or character, including,
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without limitation: (i) bad faith damages, punitive damages or other
extracontractual liability asserted against the Reinsured, its officers,
directors, employees or agents, (ii) office expenses of the Reinsured and
salaries of officials and employees of the Reinsured, (iii) any payment by the
Reinsured in excess of its express contractual obligations under a Policy (iv)
all liability of the Reinsured arising by contract, operation of law, or
otherwise from its participation or membership, whether voluntary or
involuntary, in any Insolvency Fund; (v) commissions and related costs of
writing the Business Reinsured (excluding the ceding commission described under
Article VII hereof); (vi) taxes of any kind, including, without limitation,
premium taxes (excluding any excise tax the Reinsured may be obligated to pay,
provided that the Reinsured (a) provide notice to the Reinsurer immediately upon
the Reinsured's receipt of notice of any excise tax, and (b) permit Reinsurer,
in the name of the Reinsured or otherwise, to contest such tax); (vii)
administrative expenses of the Reinsured; and (viii) any other charges, costs or
expenses of any kind or character. "Insolvency Fund" includes any guaranty fund,
insolvency fund, plan, pool, association, fund or other arrangement, howsoever
denominated, established or governed, which provides for any assessment of or
payment or assumption by the Reinsured 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 the 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.
ARTICLE VI
TERRITORY
This Agreement will cover wherever the Reinsured's Policies cover.
ARTICLE VII
PREMIUM, CEDING COMMISSION, ACCOUNTS AND REMITTANCES
(a) The Reinsured will pay the Reinsurer an amount (the "Ceded
Premium") equal to the product of (1) the amount actually received by the
Reinsured of the Gross Net Written Premium Income, as defined herein, and (2)
the Quota Share Percentage (expressed as a decimal), less an amount (the "Ceding
Commission") equal to the product of (1) the Ceded Premium and (2) the Ceding
Commission Rate (expressed as a decimal) as set forth in Exhibit A hereto.
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(b) Within fifteen (15) days following the end of each month, the
Reinsured shall provide to the Reinsurer the following:
(1) An account current setting forth in the aggregate for the
month:
(i) Gross Net Written Premium Income;
(ii) Subject Gross Net Written Premium Income (defined
below);
(iii) Ceded Premium;
(iv) The Reinsurer's share of Recoveries (defined under
Article X);
(v) Ceding Commission;
(vi) Any excise tax due by Reinsurer pursuant to Article
V;
(vii) Net amount due Reinsurer(the sum of (iii) and (iv),
less (v) and (vi));
(viii) Reinsurer's share of subject deferred premium revenue
as of the end of the month;
(ix) Reinsurer's share of subject case basis reserves
established by the Reinsured as of the end of the
month; and
(x) Reinsurer's share of subject contingency reserves
established by the Reinsured as of the end of the
month.
(2) A premium bordereau report setting forth for each
Policy the name and location of each issuer, a
description of the issue insured including par amount
insured, maturity dates, underlying rating (if
available), the effective date of coverage, sector,
total premium, premium rate, premium and par amounts
subject to this Agreement and such other information
as the Reinsurer and Reinsured may agree with respect
to the bordereau report;
(3) A Recoveries bordereau setting forth for each Policy
paid claims, amount of
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Recoveries, and such other information as Reinsurer
may reasonably require;
(4) Payment of the net amount due the Reinsurer as set
forth in (b)(1)(vii) above. In the event that a net
balance is due the Reinsured by the Reinsurer, such
amount will be paid by the Reinsurer within fifteen
(15)days after the reports are furnished to the
Reinsurer; provided, however, that if the Reinsurer
objects to all or any portion of the amount due by
the Reinsurer based on its good faith belief that
such amount is incorrect, then the Reinsurer shall
not be obligated to pay the disputed amount until the
parties have resolved the dispute to their mutual
satisfaction.
(c) Within thirty (30) days after the end of each calendar quarter, the
Reinsured will provide to the Reinsurer any other information regarding the
Policies that the Reinsurer may require that is reasonably available to the
Reinsured.
(d) As used herein, the term "Gross Net Written Premium Income" shall
mean all premium actually received or due in respect of Policies (whether direct
or assumed) written during the Term. The term "Subject Gross Net Written Premium
Income" shall mean the portion of the Gross Net Written Premium Income of each
policy that is subject to this Agreement.
(e) At the option and upon the demand of the Reinsured, the Reinsured
shall be paid by special remittance within three (3) business days upon receipt
of a special account, which shall be prepared by the Reinsured and shall contain
all relevant details in connection with the Loss or Loss Expense. When the
Reinsured has determined with a reasonable degree of certainty that a payment
under a Policy will occur, the Reinsured, at its option, may present such
special account to the Reinsurer prior to the date of such payment by the
Reinsured. Provided that the Reinsurer receives such special account at least
three Business Days prior to the date of such policy payment by the Reinsured,
the Reinsurer shall make payment to the Reinsured by 12:00 p.m., Eastern
Standard time, on the business day prior to such scheduled date of such policy
payment by wire transfer in immediately available funds. If for any reason the
Reinsured shall not make such policy payment on the scheduled date and no such
policy payment is anticipated
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within two (2) business days, or if such policy payment was anticipated but two
(2) business days have expired without making such policy payment, the Reinsured
shall return to the Reinsurer within two (2) business days the amount paid to
the Reinsured by the Reinsurer for such policy payment to the extent not used
therefor, plus interest payable at the same rate as the first six-month U.S.
Treasury ▇▇▇▇ issued during that quarter.
ARTICLE VIII
RESERVES
The Reinsurer shall maintain reserves with respect to its
proportionate share of outstanding and incurred but not reported loss, unearned
premium and contingency reserves, as appropriate and required based on statutory
accounting and actuarial principles consistently applied.
ARTICLE IX
STATUTORY FINANCIAL CREDIT
The Reinsurer shall take all steps necessary to enable the Reinsured
to obtain full credit for the reinsurance provided by this Agreement in all
applicable jurisdictions, including compliance with the Insurance ▇▇▇ ▇▇▇▇ of
Bermuda and regulations promulgated thereunder; provided, however, that the
Reinsurer shall not be required to engage in any activity that would require the
Reinsurer to operate a trade or business or obtain any license or certification
within the United States. The obligations of the Reinsurer under this Article IX
shall include providing security or entering into appropriate security devices
in the amount required by law (collectively, the "Security") to permit the
Reinsured to obtain full reinsurance credit. When two or more types of Security
are permitted under applicable law, the Reinsurer may, in its sole discretion,
select the Security it will establish or provide and substitute other Security
after initial Security has been established or provided. The Reinsured and
Reinsurer agree that, if possible, any Security provided to Reinsured will be
held in a manner so as to allow the Reinsured to take financial credit for the
reinsurance provided by this Agreement and also allow, if possible, the
Reinsurer to treat such Security as an admitted asset in accordance with
applicable law.
When required by applicable law in order for the Reinsured to take
financial credit for the reinsurance provided by this Agreement, the Reinsured
shall be entitled to withhold from the Reinsurer as security for the payment of
the latter's
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obligations, an amount herein called the "Deposit." The Deposit shall equal the
Reinsurer's share of Allocated Loss Adjustment Expenses (as defined in Article
I) paid by the Reinsured but not recovered from the Reinsurer and outstanding,
and incurred but not reported loss, unearned premium and contingency reserves.
The Reinsured shall hold the deposit in a segregated account for the sole and
exclusive benefit of Reinsurer and only use such funds as provided hereunder. In
the event the Reinsured becomes insolvent, any assets of the Reinsurer held by
the Reinsured, including but not limited to the deposit, shall be deemed to be
held in trust for the sole and exclusive benefit of the Reinsurer.
The Deposit shall be adjusted quarterly to equal losses and
Allocated Loss Adjustment Expenses (as defined in Article I) paid by the
Reinsured but not recovered from the Reinsurer and the unearned premium,
contingency and outstanding and incurred but not reported loss reserves,
calculated on the basis of the requirements of applicable law, corresponding to
the Reinsurer's proportionate share of risks reinsured hereunder.
At any time after default by the Reinsurer of payments owing to the
Reinsured under this Agreement, the Reinsured may use so much of the Deposit as
may be required to eliminate the default. Until the Deposit has been utilized in
such manner, interest thereon shall be credited to the Reinsurer quarterly at
the lesser of the prime rate or the same interest rate payable on the first
six-month U.S. Treasury ▇▇▇▇ issued during each quarter.
Upon termination of this Agreement, if the Reinsured and the
Reinsurer agree that the Reinsured will withdraw the Business Reinsured from the
Reinsurer, the Reinsured shall credit and pay to the Reinsurer the balance of
any funds of the Reinsurer in the possession of the Reinsured, including,
without limitation, any funds withheld by the Reinsured as Security, and return
any Security in the possession of the Reinsured. If the cessions in force are
allowed to run to their normal expiry, then any funds withheld by or other
Security in the possession of the Reinsured shall be adjusted quarterly.
If the Reinsurer elects to use a Letter of Credit as Security, the
following provisions shall apply to the Reinsurer:
(a) The Reinsurer shall provide to the Reinsured a letter of credit in
form and amount required by applicable law.
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If the issuing or confirming bank shall cease to meet applicable legal
requirements during the term of the letter of credit, the Reinsurer shall
replace such letter of credit with a complying one upon the earlier of the
stated expiration, next extension or renewal date, or modification or amendment
of the letter of credit. Within thirty (30) day of the Reinsurer's receipt of
the quarterly reports required by Article VII of this Agreement:
(1) if the Reinsurer's share of the obligations under this Agreement
shall exceed the then existing balance of the letter of credit
made available, the Reinsurer shall, if required by applicable
law, secure delivery to the Reinsured of an amendment to the
letter of credit increasing the amount of the letter of credit
available by the amount required under applicable law; or
(2) if the Reinsurer's share of the obligations under this Agreement
shall be less than the balance of the letter of credit available
on the accounting date, the Reinsured shall release such excess
credit by agreeing to an amendment to the letter of credit
reducing the amount of the letter of credit available by the
amount of such excess credit.
(b) Except as may otherwise be required under applicable law, the
Reinsurer and the Reinsured agree that a letter of credit provided by the
Reinsurer pursuant to this Agreement may be drawn upon at any time by the
Reinsured or its successors in interest only for one or more of the following:
(1) to reimburse the Reinsured for the Reinsurer's share of premiums
(adjusted for return to the Reinsurer of the pro rata portion of
the Ceding Commission paid to the Reinsured) returned to the
owners of Policies reinsured under this Agreement on account of
cancellations of such Policies; and
(2) to reimburse the Reinsured for the Reinsurer's share of losses
under the Business Reinsured and Allocated Loss Adjustment
Expenses paid by the Reinsured
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pursuant to the provisions of the Policies reinsured by this
Agreement.
When the Reinsured has received notification of the non-renewal of
the letter of credit and when the Reinsurer's obligations under this Agreement
with respect to risks and obligations covered by letter of credit remain
unliquidated and undischarged ten (10) days prior to such expiration date, the
Reinsurer shall supply to the Reinsured substitute Security meeting the
requirements of this Article.
All of the foregoing shall be applicable without diminution because
of insolvency on the part of the Reinsured or the Reinsurer.
ARTICLE X
COVENANTS, REPRESENTATIONS AND WARRANTIES
Section 1. Dividends.
The Reinsured shall not, in any fiscal year, pay dividends on its
common shares in an aggregate amount greater than 50% of its net income after
deduction for contingency reserves, for such fiscal year. Net income and
contingency reserves shall be determined in accordance with statutory accounting
principles prescribed or permitted by the Commissioner of Insurance of the State
of Maryland ("SAP"). In addition, the Reinsured shall not pay any dividends at
any time unless its SAP unassigned funds as shown on line 26C, page 3 of the
Reinsured's statutory financial statement as filed with the Maryland Insurance
Department are positive at such time.
Section 2. Underwriting Guidelines.
The Reinsured shall not make any material changes to the
Underwriting Guidelines without (1) providing written notice to the Reinsurer at
least thirty (30) days (or such shorter period as Reinsurer may agree to in
writing) prior to making any such material change, and (2) obtaining the
Reinsurer's prior written consent.
Section 3. Recoveries.
Except as otherwise provided herein, the Reinsured shall not sell,
pledge, hypothecate, assign or otherwise dispose of any Recoveries. As used
herein, "Recoveries" shall mean
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salvage and subrogation to the extent realized into cash or the equivalent or
booked in accordance with SAP.
Section 4. Non-Competition.
The Reinsurer shall not write direct financial guaranty insurance
within the ▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, the District of Columbia, Puerto Rico, Guam and the
Virgin Islands for so long as this Agreement remains in effect.
Section 5. Reinsured's Representations and Warranties.
The Reinsured hereby represents and warrants: (i) that the Reinsured
is duly qualified and holds all licenses and permits necessary to conduct its
business in all jurisdictions where the Reinsured issues insurance policies or
otherwise engages in business; (ii) that the Reinsured is in good standing in
all such jurisdictions, (iii) that the Reinsured, when conducting its business
as presently conducted, falls within the exception to the definition of an
investment company under Section 3(c)(3) of the Investment Company Act of 1940
and attendant regulations (collectively, the "40 Act Exception"); (iv) that
each Policy that is part of the Business Reinsured falls within the definition
of an exempt security under Section 3(a)(8) of the Securities Act of 1933 and
attendant regulations (collectively, the "33 Act Exception"); and the Reinsured
does not directly or indirectly own (within the meaning of Section 958(a) of
the U.S. Internal Revenue Code (the "IRC")) any stock of the Reinsurer and is
not a related person (within the meaning of Section 953(c)(6) of the IRC) to
any person who so owns such stock.
Section 6. Securities Laws Covenants.
The Reinsured hereby agrees that at all times during the term hereof
and during any run-off period hereunder, that the Reinsured (i) shall not
reinsure hereunder any Policy that does not fall within the 33 Act Exception,
(ii) shall fall within the 40 Act Exception, and (iii) shall not directly or
indirectly own (within the meaning of Section 958(a) of the IRC) any stock of
the Reinsurer or be a related person (within the meaning of Section 953(c)(6)
of the IRC) to any person who so owns such stock.
Section 7. Excessive Concentration.
In the event either party hereto receives notice from S&P, Fitch
IBCA or DCR providing that such party's financial strength rating or
claims-paying ability rating may be downgraded on account of excessive
concentration of reinsurance with the other party pursuant to this Agreement,
then the parties agree to negotiate in good faith to modify the Quota Share
Percentage or otherwise restructure reinsurance hereunder in order to permit the
party receiving notice to maintain its then current ratings without such
downgrade.
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ARTICLE XI
DUE DILIGENCE RESPONSIBILITIES OF THE REINSURED
In accordance with customary and reasonable practices within the
financial guaranty insurance industry, the Reinsured will be responsible for
performing due diligence with respect to all obligations to be ceded to and
reinsured by the Reinsurer pursuant to this Agreement, as may be necessary to
identify and evaluate the credit risks attendant thereto. Such evaluation and
analysis shall comport with the Underwriting Guidelines of the Reinsured, as
defined in Article IV. The Reinsured will provide copies of credit reports,
financial statements, environmental impact reports, market research and
feasibility studies, appraisals and other documentation obtained or generated by
the Reinsured with respect to the Business Reinsured, at the request of the
Reinsurer. In addition, the Reinsured will perform surveillance with respect to
the obligations reinsured hereunder, in order to avoid or mitigate claims
through early warning and remedial management. The surveillance function shall
include the responsibility: (i) to monitor compliance with covenants, changes in
the status, credit ratings or credit profile of reinsured obligations, (ii) to
maintain a watch list, (iii) where necessary, to engage in the re-structuring
and re-financing of troubled credits, and (iv) to provide monthly watch list
reports to the Reinsurer.
ARTICLE XII
ACCESS TO RECORDS
The Reinsurer or its authorized representative shall be permitted to
inspect and copy (at the Reinsurer's expense) the books and records of the
Reinsured at all reasonable times for the purpose of obtaining information
concerning this Agreement or its subject matter. This access shall include,
without limitation, all papers in possession of the Reinsured in connection with
claims, the adjustment of claims and underwriting determinations and practices.
The Reinsured or its authorized representatives shall be permitted to inspect
and copy (at the Reinsured's expense) the books and records of the Reinsurer
relating to this Agreement, where required by a governmental or regulatory
authority.
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ARTICLE XIII
SALVAGE AND SUBROGATION
Section 1. Credit for Recoveries.
To the extent of payments made under this Agreement, the Reinsurer
shall have the right to the product of (a) the Quota Share Percentage (expressed
as a decimal), and (b) the Recoveries with respect to the Business Reinsured,
subject to the rights of the Reinsured's other reinsurer(s), if any, providing
reinsurance.
Section 2. Expenses.
In the event there are any recoveries, salvages or reimbursements
recovered subsequent to settlement of a loss, it is agreed that, if the expenses
incurred in obtaining salvage or other recoveries are less than the amount
recovered, if any, such expenses shall be borne by each party in the proportion
that each party benefits from the recoveries or, otherwise, the amount recovered
shall first be applied to the reimbursement of the expense of recovery and then
in proportion to the liability of each party for the loss before such recovery
had been obtained. Expenses hereunder shall be limited to those directly related
to obtaining Recoveries, and shall exclude all other expenses, including,
without limitation, all office expenses and salaries of officials and employees
of the Reinsured.
Section 3. Control of Remedies.
The Reinsurer shall be bound by the reasonable judgment of the
Reinsured concerning the salvage and subrogation rights and remedies of the
Reinsured under any Policies.
ARTICLE XIV
SERVICE OF PROCESS, JURISDICTION AND VENUE
Subject to the parties hereto first complying with the provisions of
Article XVII hereof, the Reinsurer hereby irrevocably submits to the
non-exclusive jurisdiction of any Federal or New York State court sitting in New
York City over any suit, action or proceeding arising out of or relating to this
Agreement. The Reinsurer irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding brought in such court and any claim that
any such suit, action or proceeding brought in such a court was
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brought in an inconvenient forum. The Reinsurer agrees that a final judgment,
not subject to any further appeal, in any such suit, action or proceeding
brought in such a court shall be conclusive and binding upon it and will be
given effect in the country of domicile of the Reinsurer to the fullest extent
permitted by applicable law and may be enforced in any Federal or New York State
court sitting in New York City (or any other courts to the jurisdiction of which
the Reinsurer is or may be subject) by a suit upon such judgment, provided that
service of process is effected upon it as specified in this Article or as
otherwise permitted by law. Nothing herein shall be deemed to limit or waive the
Reinsurer's right to remove a suit, action or proceeding to a federal court of
the United States.
Pursuant to any statute of any state, territory or district of the
United States that makes provisions therefor, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for the purpose in the statute, or his successor or successors in
office, as its true and lawful attorney, upon whom may be served any lawful
process in any action, suit or proceeding arising hereunder that may be
instituted by or on behalf of the Reinsured or any beneficiary under this
Agreement, and hereby designates the person named in Article XXI hereof as the
person to whom such officer is authorized to mail such process or a true copy
thereof.
The Reinsurer hereby consents to process being served in any suit,
action or proceeding of the nature referred to above in any Federal or New York
State court sitting in New York City by service of process as set forth above,
provided that, to the extent lawful and possible, written notice of said service
upon such agent shall be mailed by registered or certified air mail, postage
prepaid, return receipt requested, to the Reinsurer at its address specified
Article XXI hereof or to any other address which the Reinsurer shall have
designated in accordance with Article XXI. The Reinsurer irrevocably waives, to
the fullest extent permitted by law, all claim of error by reason of any such
service (although the Reinsurer does not waives claims that service of process
was not actually received by the Reinsurer) and agrees that such service shall
be deemed to be effective service of process upon the Reinsurer in any such
suit, action or proceeding and shall, to the fullest extent permitted by law, be
held to be valid and personal service upon the Reinsurer, unless the service of
process was not actually received by the Reinsurer.
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Nothing in this Article shall affect the right of the Reinsurer to
receive service of process in any other manner permitted by law or limit the
right of the Reinsurer to bring proceedings against the Reinsured in any court
having jurisdiction over the Reinsured and such proceedings. Nothing in this
Article shall limit the provisions of Article XVI of this Agreement.
ARTICLE XV
CURRENCY
All premium and losses arising with respect to the Business
Reinsured, accounts, reports, deposits, arbitration awards and/or court
judgments arising out of this Agreement shall be in United States currency.
Premiums paid to the Reinsured for Policies covered by this
Agreement in other than United States currency shall be paid by the Reinsured to
the Reinsurer in United States currency at the rate of exchange on which the
original accounts were settled or, if not converted at such time, at the rate of
exchange used by the Reinsured in its own books of account at the time of the
settlement or in accordance with any subsequent adjustment to such account.
The amounts recoverable by the Reinsured from the Reinsurer for its
proportional share of losses under the Business Reinsured in other than United
States currency shall be converted into United States currency at the same rate
of exchange as were applied in the settlement of the original losses or, if not
converted at such time, at the rate of exchange used by the Reinsured in its own
books of account at the time of the settlement or in accordance with any
subsequent adjustment to such account.
The Reinsurer shall bear the currency risk for its proportionate
share in the event that (i) an insured obligation is denominated in a foreign
currency, (ii) the Reinsurer's limit of liability is denominated in United
States currency and (iii) the amount insured is such that the Reinsurer's
applicable limit of liability for the cession is applicable using the currency
exchange rate in effect on the Policy effective date. The Reinsurer's percentage
participation shall be calculated by converting the Reinsurer's limit of
liability using the currency exchange rate in effect on the Policy effective
date, and the Reinsurer shall be entitled to its proportionate share of premiums
and liable for its proportionate share of Policy
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Payments based on such percentage, notwithstanding any later change in currency
exchange rates which result in the Reinsurer's limit of liability being
exceeded.
ARTICLE XVI
INSOLVENCY
In the event of the insolvency of the Reinsured, the amounts owing
by the Reinsurer under this Agreement shall be immediately payable directly to
the Reinsured, or to its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Reinsured without diminution
because of the insolvency of the Reinsured or because the liquidator, receiver,
conservator or statutory successor of the Reinsured has failed to pay all or a
portion of any claim. It is agreed, however, that the liquidator, receiver,
conservator or statutory successor of the Reinsured shall give written notice to
the Reinsurer of the pendency of a claim against the Reinsured indicating the
policy or bond reinsured which claim would involve a possible liability on the
part of the Reinsurer, within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership and that, during
the pendency of such claim, the Reinsurer may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the Reinsured
or its liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable, subject to the approval of
the court, against the Reinsured as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may accrue to
the Reinsured solely as a result of the defense undertaken by the Reinsurer.
The reinsurance shall be payable by the Reinsurer to the Reinsured
or to its liquidator, receiver, conservator or statutory successor, except (a)
where the Agreement specifically provides another payee of such reinsurance in
the event of insolvency of the Reinsured and (b) where the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Reinsured as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Reinsured to such
payees, provided that any such assumption shall be subject to the approval of
the Maryland Insurance Commissioner.
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ARTICLE XVII
ARBITRATION
All disputes arising from this Agreement shall first be adjudicated
by a Board of Arbitration (the "Board") consisting of three arbitrators, all of
whom shall be active or retired executive officers of insurance or reinsurance
companies having no direct or indirect financial interest in either party or its
affiliates. Each of the parties hereto shall select one arbitrator. A third
arbitrator will be chosen by the two arbitrators selected by the parties. A
party shall initiate arbitration ("Petitioner") by providing the other party
with Notice, demanding arbitration and identifying its selected arbitrator. The
other party ("Respondent") will have thirty (30) days from its receipt of a
demand for arbitration within which to identify an arbitrator. In the event that
Respondent fails to identify an arbitrator within such thirty (30) day period,
Petitioner shall have the right to identify a second arbitrator, and Respondent
will not be deemed aggrieved thereby. The arbitrators will jointly select a
third arbitrator within thirty (30) days after both arbitrators have been
selected. If the two arbitrators do not agree on the selection of a third
arbitrator within such thirty (30) day period, the third arbitrator shall be
designated by the American Arbitration Association.
The Board shall interpret this Agreement as an honorable engagement
and will make its award with a view to effecting the purpose and intent of this
Agreement in a reasonable manner, rather than in accordance with the technical
interpretation of this Agreement. The Board will be relieved from judicial
formalities. The decision of a majority of the Board will be final and binding
upon the parties.
The parties shall equally bear the fees and costs of the Board of
Arbitrators. The remaining costs of the arbitration shall be paid as the Board
shall direct.
The arbitration shall take place in the City and State of New York,
unless the Board designates another location with the mutual consent of the
parties. The rules and procedures for pre-hearing investigations shall be
established by the Board and the investigation shall be completed within ninety
(90) days of the appointment of the third arbitrator. Petitioner shall deliver a
written arbitration brief to the Board and to the Respondent within thirty (30)
days of completion of the pre-hearing investigations. Respondent shall deliver a
written response to the Board and the Petitioner within thirty (30) days
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of its receipt of Petitioner's brief. A hearing shall be held within thirty (30)
days of submission of Respondent's response. The Board shall render its decision
within sixty (60) days after completion of the hearing unless the Board requests
and the parties consent to an extension of time.
The Board may alter the time periods set forth in this Article for
good cause shown.
This Article shall survive the termination of this Agreement.
ARTICLE XVIII
APPLICABLE LAW
This Agreement shall be interpreted in accordance with the laws of
the State of New York, without giving effect to the conflict of law rules
thereof.
ARTICLE XIX
SET-OFF
The Reinsured and the Reinsurer have the right to set-off amounts
due from one to the other. The party asserting the right of set-off may exercise
such right at any time whether the amount(s) due constitute payment of premiums,
losses or otherwise. In the event of the insolvency of a party hereto, setoff
shall only be allowed in accordance with applicable law.
ARTICLE XX
CONFIDENTIALITY
The Reinsurer agrees to maintain the confidentiality of the
Policies, the reinsurance of the Policies and the underlying transactions and
documents (the "Information"), except:
(a) to employees, officers, directors and legal counsel with a need to
know the Information,
(b) to reinsurers, bankers, governmental agencies that regulate the
Reinsurer and the rating agencies that rate the Reinsurer with a need to know
the Information,
(c) in response to a subpoena or other legal process calling for
production of the Information, or
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(d) to any other person as to whom the Reinsured has given its prior
written consent to each such disclosure, which consent shall not be unreasonably
withheld or delayed.
In the case of subparagraphs (a) and (b) above, no disclosure of the
Information shall be permitted if any such entity or individual is affiliated
with a financial guaranty insurer in competition with the Reinsured unless the
Reinsured consents to the disclosure in writing. In the case of subparagraph (c)
above, the Reinsurer shall promptly notify the Reinsured of such subpoena and
shall at the Reinsured's direction and expense contest production of the
Information thereunder.
The foregoing requirements of confidentiality shall not apply to
those portions of the Information that (a) are generally available to the public
other than as a result of a disclosure by the Reinsurer or its representatives
or (b) become available to the Reinsurer from a source that is not bound by an
obligation of confidentiality to the Reinsured. If required by a participant in
a transaction insured or to be insured by a Policy, the Reinsurer shall execute
a separate confidentiality agreement containing the foregoing obligations of
confidentiality with respect to such transaction. Nothing contained in this
Article XX shall expand or limit the non-compete obligation contained under
Section 4, Article X hereof.
ARTICLE XXI
ADDRESSES FOR NOTICES
All notices and other communications required by this Agreement
(each a "Notice") shall be sent to the parties at the following addresses,
respectively, unless a party designates another address in writing:
Global Markets Guaranty Ltd. ACA Financial Guaranty Corporation
▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇ St. ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇
▇.▇. ▇▇▇ ▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇, New York 10006 U.S.A.
▇▇▇▇▇▇▇▇, ▇▇ FX Bermuda
Fax No.: 441- Fax No.: ▇▇▇-▇▇▇-▇▇▇▇
Attn: Chief Executive Officer Attn: Reinsurance Officer
ARTICLE XXII
SEVERABILITY
Any provision of this Agreement that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperable,
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unenforceable, void or invalid without affecting the remaining provisions in
that jurisdiction or the operation, enforceability, or validity of that
provision in any other jurisdiction, and to this end, the provisions of this
Agreement are declared to be severable. Should any part or provision of this
Agreement be held inoperative, unenforceable, voidable or invalid in any
jurisdiction, such part or provision shall, as to that jurisdiction, be replaced
with a provision that accomplishes, to the extent possible and lawful, the
original business purpose and economic intent of such part or provision in a
valid and enforceable manner, and the remainder of this Agreement shall remain
effective and binding upon the parties hereto.
IN WITNESS WHEREOF, the parties, by their duly authorized representatives,
have executed this Agreement as of the 25th day of November, 1998.
REINSURER: REINSURED:
GLOBAL MARKETS GUARANTY LTD. ACA FINANCIAL GUARANTY CORPORATION
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ H. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
_________________________ __________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ H. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
President and C.E.O. Chairman and C.E.O.
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EXHIBIT A
QUOTA SHARE PERCENTAGE
CEDING COMMISSION RATE
BUSINESS REINSURED
1. The Quota Share Percentage reinsured by Reinsurer under the Agreement shall
equal:
22.5%
2. The Ceding Commission Rate payable by the Reinsurer shall equal:
35%
3. The Business Reinsured shall be limited to Policies covering new issues with
a rating of "BB" or better.
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