This prospectus supplement No. 4 supplements the prospectus dated August
6, 2007 relating to the sale of up to 26,646,589 of the common shares of
CastlePoint Holdings, Ltd. by the selling shareholders named in the prospectus,
as supplemented by supplement No. 1 dated August 14, 2007, supplement No. 2
dated October 1, 2007 and supplement No. 3 dated November 7, 2007 (as so
supplemented, the "prospectus"). The selling shareholders will receive all
proceeds from the sale of the common shares, and therefore we will not receive
any of the proceeds from their sale of our shares.
This prospectus supplement should be read in conjunction with the
prospectus, which is to be delivered with this prospectus supplement No. 4. This
prospectus supplement is not complete without, and may not be delivered or
utilized except in connection with, the prospectus with respect to the
securities described above. The information contained herein and attached hereto
supplements and supersedes, in part, the information contained in the
prospectus. This prospectus supplement is qualified by reference to the
prospectus except to the extent that the information in this prospectus
supplement supersedes the information contained in the prospectus.
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 18 OF THE PROSPECTUS TO READ ABOUT THE RISKS YOU SHOULD CONSIDER BEFORE
BUYING OUR SHARES.
This prospectus supplement is filed for the purpose of including the
information contained in our quarterly report on Form 10-Q for the quarter ended
September 30, 2007, which was filed with the Securities and Exchange Commission
on November 14, 2007.
NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE REGISTRAR OF COMPANIES IN BERMUDA OR THE BERMUDA MONETARY
AUTHORITY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus supplement No. 4 is November 14, 2007
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 38,289,430 common shares, par
value $0.01 per share, as of November 9, 2007.
Note on Forward-Looking Statements
Some of the statements in this quarterly report, including without
limitation, in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including those using words such
as "believes," "expects," "intends," "estimates," "projects," "predicts,"
"assumes," "anticipates," "plans" and "seeks," and comparable terms, are
forward-looking statements. Forward-looking statements are not statements of
historical fact and reflect our views and assumptions as of the date of this
quarterly report regarding future events and operating performance. Because we
have a very limited operating history, many statements relating to us and our
business, including statements relating to our competitive strengths and
business strategies, are forward-looking statements.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are important factors that could cause our
actual results to differ materially from those indicated in these statements. We
believe that these factors include, but are not limited to, the risk factors
identified in our Registration Statement on Form S-1 (File No. 333-139939)
relating to the initial public offering, initially filed with the SEC on January
11, 2007 (as amended, the "Registration Statement") and the following:
o our relatively short operating history and our delays in receiving
regulatory approval for some of the transactions described in this
quarterly report and/or in our other filings with the SEC;
o our heavy dependence on Tower for revenue in our initial years of
operation, and possibly beyond, and the continued growth of Tower's
business, including as a result of its acquisition of Preserver Group
Inc. in April 2007, in the future consistent with Tower's past growth;
o the risk that CastlePoint Bermuda Holdings or CastlePoint Holdings may
be deemed to be engaged in a U.S. trade or business, or CastlePoint Re
may be considered to be doing business through a permanent
establishment in the U.S., either of which would subject these
companies to U.S. taxation, which could have a material adverse effect
on our business, financial condition and results of operations;
o the terms of our arrangements with Tower may change as a result of the
regulatory review and approval process;
16
o our ability to write premiums with clients other than Tower;
o the possibility that we may need additional capital to further
capitalize CastlePoint Re and CastlePoint Insurance for our
reinsurance business and insurance business, respectively, as well as
at least one additional broadly licensed U.S. insurance company for
our insurance business, and to make strategic investments in some of
our clients, including Tower, and the risk that we may not be able to
obtain future financing on favorable terms or at all;
o our ability to hire, retain and integrate our management team and
other personnel;
o the risk that we may not be able to implement our business strategy;
o the ineffectiveness or obsolescence of our planned business strategy
due to changes in current or future market conditions;
o changes in regulation or tax laws applicable to us, our brokers or our
customers;
o changes in the availability, cost or quality of insurance business
that meets our reinsurance underwriting standards;
o actual results, changes in market conditions, the occurrence of
catastrophic losses and other factors outside our control that may
require us to alter our anticipated methods of conducting our
business, such as the nature, amount and types of risk we assume and
the terms and limits of the products we intend to write;
o inability of any additional U.S. licensed insurance companies that we
may acquire to obtain acceptable ratings from A.M. Best;
o possible future downgrade in the rating of CastlePoint Re, CastlePoint
Insurance or any additional U.S. licensed insurance companies we may
acquire. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Ratings";
o changes in rating agency policies or practices;
o changes in accounting policies or practices; and
o changes in general economic conditions, including inflation, foreign
currency exchange rates, interest rates and other factors.
This list of factors is not exhaustive and should be read with the other
cautionary statements that are included in this quarterly report.
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from our projections. Any forward-looking statements you read in this
quarterly report reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to,
among other things, our operations, results of operations, growth strategy and
liquidity. All subsequent written and oral forward-looking statements
attributable to us or individuals acting on our behalf are expressly qualified
in their entirety by this paragraph. All investors and potential investors in
our common shares should specifically consider the factors identified in this
quarterly report and the risk factors identified in our Registration Statement
filed with the SEC that could cause actual results to differ from those
discussed in the forward-looking statements before making an investment
decision. We undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future events
or otherwise.
17
Critical Accounting Estimates
The Company's consolidated financial statements and the related
disclosures included in this quarterly report have been prepared in accordance
with U.S. GAAP. The preparation of financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that affect reported
and disclosed amounts of assets and liabilities, as well as disclosure of
contingent assets and liabilities as at the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. We believe the
following accounting policies are critical to our operations, as their
application requires management to make the most significant judgments. We
believe the items that require the most subjective and complex estimates are:
o premiums;
o losses and loss adjustment expense reserves;
o deferred acquisition costs;
o investments;
o reinsurance accounting;
o deferred taxes; and
o U.S. taxation.
Of the items mentioned above, management believes that a discussion of
premiums, losses and loss adjustment expense reserves, deferred tax and U.S.
taxation is appropriate in this quarterly report due to the developments that
occurred during the third quarter of 2007. More information regarding our other
critical accounting estimates is included in the section entitled "Critical
Accounting Estimates" in the "Management Discussion and Analysis of Financial
Condition and Results of Operations" included in the Registration Statement.
Regarding premium estimates, while we attempt to obtain current assumed
premiums written statements from ceding companies, it is common that the most
recent month statements are not received from the ceding company until after the
period ending and, in some cases, the most recent quarter. Therefore, assumed
premiums written from these ceding companies are estimated for the most recent
month or, in some cases, for several months. With respect to CastlePoint Re's
three quota share reinsurance agreements with Tower's insurance companies, we
obtain current monthly statements and record assumed premiums written from Tower
on an actual, rather than estimated, basis. For ceding companies from which we
have not received current monthly statements and therefore must estimate the
most recent period's assumed premiums written, the difference between the
estimated assumed premiums written and actual assumed premiums written is
reflected in the subsequent accounting period or as soon as the actual assumed
premiums written are obtained. For our most recent quarter ended September 30,
2007, approximately 17% of the assumed written premiums and approximately 3% of
the corresponding assumed earned premiums are based upon premium estimates.
After provision for applicable loss and loss adjustment expenses and commission
and other acquisition expenses, the impact of these estimates would not have a
material effect on the Company's consolidated financial position or results of
operations.
Regarding loss and loss adjustment expense estimates, changes in loss
reserve estimates may result from (1) variability in the estimation process
itself, and (2) the fact that external factors may cause changes in the future
that are not reflected in historical patterns. With respect to the former source
of variability, i.e. estimation process variation, we attempt to reduce this
source of variation by evaluating the underlying data accuracy from our clients
and the impact of underwriting and pricing changes on expected loss ratios.
Using all of the information made available to us by our clients, we determine a
best estimate of the loss ratio for each client and each program or treaty. With
regard to the potential variability in loss reserve estimates due to the fact
that future patterns may differ from historical patterns, we measure actual
reported claim results by contract as compared to the expected claims results.
If reported claims results differ significantly from expected claim results,
then we revise our estimated reserves accordingly. Nevertheless, there can be no
assurances that our reserves will prove to be adequate, as there may still be
variability in the estimation process and future claims may vary significantly
from historical patterns.
18
The deferred tax asset at September 30, 2007 was $4.1 million, which was
comprised of the tax effects for cost of stock options, unrealized losses and
CastlePoint Management's net loss. In assessing the valuation of deferred tax
assets, we consider whether it is more likely than not that some portion or all
the deferred tax will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income to offset
previous operating losses or during periods in which temporary differences
become deductible. Our management currently believes that it is more likely than
not that we will recover all of the assets based primarily upon future
profitability of our U.S. operations.
Regarding U.S. taxation, if either CastlePoint Bermuda Holdings or
CastlePoint Holdings are deemed by the U.S. Internal Revenue Service to be
engaged in a U.S. trade or business, or if CastlePoint Re is considered to be
doing business through a permanent establishment in the U.S., then these
entities would be subject to U.S. taxation. FIN No. 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement for uncertain tax positions taken or expected to be taken in
income tax returns. The Company is to determine whether it is "more likely than
not" (i.e., greater than 50% certain) that our position would be sustained upon
examination by tax authorities. Tax positions that meet the "more likely than
not" threshold are then measured using a probability weighted approach
recognizing the largest amount of tax benefit that has greater than a 50%
likelihood of being realized upon ultimate settlement. The adoption of FIN 48
has not had a material impact on the Company's consolidated financial position
or results of operations.
Consolidated Results of Operations
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
------------------- ----------------- ----------------- -----------------
($ in thousands)
Revenues
Net premiums earned $ 65,610 $ 27,003 $ 167,146 $ 47,390
Commission income 1,667 854 3,902 1,392
Net investment income 7,538 3,791 21,417 6,697
Net realized investment (losses)/gains (79) 7 (98) 10
------------------- ----------------- ----------------- -----------------
Total revenues 74,736 31,655 192,367 55,489
------------------- ----------------- ----------------- -----------------
Expenses
Net loss and loss adjustment expenses 34,482 13,919 87,790 25,297
Commission and other acquisition expenses 24,147 9,903 60,110 17,421
Other operating expenses 4,268 2,448 11,983 8,998
Interest expenses 2,254 -- 6,608 --
------------------- ----------------- ----------------- -----------------
Total expenses 65,151 26,270 166,491 51,716
------------------- ----------------- ----------------- -----------------
Income before taxes 9,585 5,385 25,876 3,773
Income tax benefit 956 -- 2,254 --
------------------- ----------------- ----------------- -----------------
Net Income $ 10,541 $ 5,385 $ 28,130 $ 3,773
=================== ================= ================= =================
Key Measures
Return on average equity 10.3% 8.0% 10.7% 2.8%
Consolidated combined ratio 93.3% 94.1% 93.3% 106.2%
|
We calculate our loss and expense ratios by segment. See "--Insurance
Segment Results of Operations," "--Reinsurance Segment Results of Operations"
and "--Insurance Services Segment Results of Operations" below.
Consolidated Results of Operations for the Three Months Ended September 30, 2007
and 2006
Summary. Despite softening market conditions reported by some companies in
the property and casualty industry, CastlePoint has not yet experienced
significant weakening in pricing or a softening in demand for its products.
Management believes that this is in large part due to CastlePoint's emphasis on
providing solutions to small insurance companies and program underwriting
agents, which results in the transfer by such companies and program underwriting
agents to CastlePoint of large blocks of business composed of small policies,
and a growing industry awareness of CastlePoint's capabilities to provide
primary insurance company capacity combined with reinsurance capacity and
customized insurance services.
19
Net income increased 96% to $10.5 million for the three months ended
September 30, 2007, compared to $5.4 million for the same period in 2006. Net
income excluding realized and unrealized gains (losses) increased 113.0% to
$11.5 million for the three months ended September 30, 2007, compared to $5.4
million for the same period in 2006. Net earned premiums increased 143.0% to
$65.6 million, based upon growth from Tower, CastlePoint's largest client, as
well as growth from other clients. CastlePoint Insurance implemented its
alternative insurance risk-sharing solutions with Tower during the third quarter
of 2007, and as a result, wrote $23.4 million in direct premiums from Tower.
Total revenues. Total revenues increased by 136.1% to $74.7million for the
three months ended September 30, 2007, compared to $31.7 million for the same
period in 2006. The increase is primarily due to the increase in net premiums
earned and net investment income. Revenues for the three months ended September
30, 2007 consisted of net premiums earned (87.8% of the total revenues),
commission income (2.2% of the total revenues) and net investment income and
realized losses (10.0% of the total revenues) compared to net premiums earned
(85.3% of the total revenues), commission income (2.7% of the total revenues)
and net investment income (12.0% of the total revenues) for the same period in
2006.
Premiums earned. Net premiums earned increased by 143.0% to $65.6 million
for the three months ended September 30, 2007 compared to $27.0 million for the
same period in 2006. The business assumed by CastlePoint Re and CastlePoint
Insurance under our reinsurance agreements with Tower's insurance companies and
the business written directly using CastlePoint Insurance's policies through
Tower Risk Management represented 80.2% of net premiums earned for the three
months ended September 30, 2007 compared to 96.7% of net premiums earned for the
same period in 2006.
Commission income. Commission income increased 95.2% to $1.7 million for
the three months ended September 30, 2007 compared to $0.9 million for the three
months ended September 30, 2006. We received this commission income as a result
of CastlePoint Management's management of the specialty and traditional
programs.
Net investment income and realized investment gains/(losses). Net
investment income increased by 98.8% to $7.5 million for the three months ended
September 30, 2007 compared to $3.8 million for the three months ended September
30, 2006. The growth resulted from an increase in cash and invested assets to
$675.4 million as of September 30, 2007 compared to $309.6 million as of
September 30, 2006. The increase in invested assets primarily resulted from the
proceeds of approximately $114 million after the deduction of underwriting
discounts and other estimated offering expenses from our IPO in March 2007 and
$100 million of cash received for the issuance of subordinated debentures in
connection with the trust preferred securities issued in December 2006. The
investment book yield on our invested assets was 4.7% for the three months ended
September 30, 2007 compared to 5.5% for the same period in 2006. The decrease in
yield is generally due to our investment in a limited partnership where we
booked an unrealized loss of $1.3 million offset by a realized gain of $0.4
million in net investment income partially mitigated by an extension in the
average duration of our fixed maturity portfolio from 2.27 years at September
2006 to 2.63 years at September 2007, to take advantage of a more normalized
yield curve compared with a relatively flat yield curve at September 2006. The
partnership invests in highly rated municipal bonds, which were negatively
impacted by the recent "flight to quality" and lack of liquidity. We believe
this impairment to be temporary.
Realized losses were $0.1 million for the nine months ended September 30,
2007, compared with virtually zero for the nine months ended September 30, 2006.
Loss and loss adjustment expenses. Loss and loss adjustment expenses
increased 147.7% to $34.5 million, which produced a 52.6% loss ratio for the
three months ended September 30, 2007 compared to $13.9 million which produced a
51.5% loss ratio for the same period in 2006. The calendar year loss ratio
includes an accident year loss ratio of 52% and reflects $0.4 million of revised
estimates in loss reserves from the prior year. The change in prior year loss
reserves resulted mainly from a reduction in the Tower brokerage quota share
reinsurance agreement and, to a lesser extent, a reduction in various excess of
loss reinsurance agreements assumed from Tower.
20
Operating expenses. Operating expenses increased 130.1% to $28.4 million
for the three months ended September 30, 2007, from $12.4 million for the same
period in 2006. Operating expenses are comprised of commission expense and other
operating expenses, including corporate expenses (primarily, salaries, audit,
legal services and insurance expenses). The increase was due primarily to the
increase in commission and other acquisition expenses resulting from the growth
in premiums earned and, to a lesser extent, an increase in payroll and payroll
related expenses due to increase in staffing.
Interest expense. Our interest expense was $2.3 million for the three
months ended September 30, 2007 compared to zero for the three months ended
September 30, 2006. Interest expense resulted primarily from the $103.1 million
of subordinated debentures issued by us in December 2006 at an average fixed
interest rate of 8.6%.
Income tax benefit. Our income tax benefit was $1.0 million for the three
months ended September 30, 2007 compared to zero for the three months ended 30,
2006. The effective income tax rate was negative 10.0% for the three months
ended September 30, 2007 due to losses generated in our U.S. operations.
Net income and return on average equity. Our net income was $10.5 million
for the three months ended September 30, 2007 compared to $5.4 million for the
same period in 2006. Our annualized return on average equity was 10.3% for the
three months ended September 30, 2007 compared 8.0% for the same period in 2006.
The annualized return for the three months ended September 30, 2007 was
calculated by dividing annualized net income of $42.2 million by weighted
average shareholders' equity of $409.0 million. The annualized return for the
three months ended September 30, 2006 was calculated by dividing annualized net
income of $21.5 million by weighted average shareholders' equity of $270.0
million. The increase in the average return on equity resulted from the
increased earned premiums due to an increased amount of business written in 2007
as well as higher earned premiums from business written in 2006. Also invested
assets as a percentage of equity increased, thereby increasing our net income
relative to equity.
Consolidated combined ratio. One of our key measures of profitability is
what we refer to as our consolidated combined ratio, which is calculated by (i)
dividing the total expenses (excluding interest expenses) minus commission
income by (ii) net premiums earned. Our consolidated combined ratio for the
three months ended September 30, 2007 was 93.3% compared to 94.1% for the same
period in 2006.
Consolidated Results of Operations for the Nine Months Ended September 30, 2007
and 2006
CastlePoint Re commenced writing business as of April 6, 2006. Therefore,
the nine months ended September 30, 2006 are comprised of operations for the
period April 6, 2006 through September 30, 2006. CastlePoint Insurance did not
conduct any business in 2006.
Total revenues. Total revenues increased by 246.7% to $192.4 million for
the nine months ended September 30, 2007, compared to $55.5 million for the same
period in 2006. The increase is primarily due to the increase in net premiums
earned and net investment income. Revenues for the nine months ended September
30, 2007 consisted of net premiums earned (86.9% of the total revenues),
commission income (2.0% of the total revenues) and net investment income and net
realized losses (11.0% of the total revenues) compared to net premiums earned
(85.4% of the total revenues), commission income (2.5% of the total revenues)
and net investment income (12.1% of the total revenues) for the same period in
2006.
Premiums earned. Net premiums earned increased by 252.7% to $167.1 million
for the nine months ended September 30, 2007 compared to $47.4 million for the
same period in 2006. The business assumed by CastlePoint Re and CastlePoint
Insurance under our reinsurance agreements with Tower's insurance companies and
the business written directly in CastlePoint Insurance through Tower represented
80.6% of net premiums earned for the nine months ended September 30, 2007
compared to 98% of net premiums earned for the same period in 2006.
Commission income. Commission income increased 180.2% to $3.9 million for
the nine months ended September 30, 2007 compared to $1.4 million for the nine
months ended September 30, 2006. We received this commission and fee income as a
result of CastlePoint Management's management of the specialty and traditional
programs. This increase reflects growth in existing programs as well as a full
nine months of operations for the current period.
21
Net investment income and realized investment gains/(losses). Net
investment income increased by 219.8% to $21.4 million for the nine months ended
September 30, 2007 compared to $6.7 million for the nine months ended September
30, 2006. The growth resulted from an increase in cash and invested assets to
$675.4 million as of September 30, 2007 compared to $309.6 million as of
September 30, 2006. The increase in invested assets resulted from cash flows
provided by operations of $95.8 million as a result of growth in premiums, the
proceeds of approximately $114 million after the deduction of underwriting
discounts and other estimated offering expenses from our IPO in March 2007 and
approximately $100 million of cash received for the issuance of subordinated
debentures in connection with the trust preferred securities issued in December
2006. The investment book yield on our invested assets was 5.2% for the nine
months ended September 30, 2007 compared to 5.5% for the same period in 2006.
The decrease in yield is generally due to our investment in a limited
partnership, with respect to which we booked an unrealized loss of $1.3 million
offset by a realized gain of $0.4 million in net investment income partially
mitigated by an extension in the average duration of our fixed maturity
portfolio from 2.27 years at September 2006 to 2.63 years at September 2007, to
take advantage of a more normalized yield curve compared with a relatively flat
yield curve at September 2006. The partnership invests in highly rated municipal
bonds, which were negatively impacted by the recent "flight to quality" and lack
of liquidity. We believe this impairment to be temporary.
Realized losses were $0.1 million for the nine months ended September 30,
2007 compared with virtually zero for the nine months ended September 30, 2006.
Loss and loss adjustment expenses. Loss and loss adjustment expenses
increased 247.0% to $87.8 million, which produced a 52.5% loss ratio for the
nine months ended September 30, 2007 compared to $25.3 million which produced a
53.4% loss ratio for the same period in 2006. The reduction in the loss ratio is
primarily due to favorable experience to date on our brokerage business quota
share reinsurance agreement with Tower.
Operating expenses. Operating expenses increased 172.9% to $72.1 million
for the nine months ended September 30, 2007, from $26.4 million for the same
period in 2006. Operating expenses are comprised of commission expense and other
operating expenses, including corporate expenses (primarily, salaries, audit,
legal services and insurance expenses). The increase was due primarily to the
increase in commission and other acquisition expenses resulting from the growth
in premiums earned and, to a lesser extent, an increase in payroll and payroll
related expenses due to increase in staffing.
Interest expense. Interest expense was $6.6 million for the nine months
ended September 30, 2007 compared to zero for the nine months ended September
30, 2006. Interest expense resulted primarily from the $103.1 million of
subordinated debentures issued in connection with trust preferred securities
issued by us in December 2006 at an average fixed interest rate of 8.6%.
Income tax benefit. Our income tax benefit was $2.3 million for the nine
months ended September 30, 2007 compared to zero for the nine months ended 30,
2006. The effective income tax rate was negative 8.7% for the nine months ending
September 30, 2007 due to losses generated in our U.S. operations.
Net income and return on average equity. Our net income was $28.1 million
for the nine months ended September 30, 2007 compared to $3.8 million for the
same period in 2006. Our annualized return on average equity was 10.7% for the
nine months ended September 30, 2007. The annualized return was calculated by
dividing annualized net income of $37.5 million by weighted average
shareholders' equity of $349.1 million.
Consolidated combined ratio. One of our key measures of profitability is
what we refer to as our consolidated combined ratio, which is calculated by (i)
dividing the total expenses (excluding interest expenses) minus commission
income by (ii) net premiums earned. Our consolidated combined ratio for the nine
months ended September 30, 2007 was 93.3% compared to 106.2% for the same period
in 2006. Included in the 2006 ratio was the cost of the warrants we issued to
Tower of $4.6 million.
22
Insurance Segment Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------------- -------------- ---------------- ---------------
($ in thousands)
Revenues
Premiums earned
Gross premiums earned $ 6,063 $ -- $ 7,394 $ --
Less: ceded premiums earned (1,419) -- (1,419) --
---------------- -------------- ---------------- ---------------
Net premiums earned 4,644 -- 5,975 --
---------------- -------------- ---------------- ---------------
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment
expenses 3,312 -- 4,030 --
Less: ceded loss and loss
adjustment expenses (315) -- (315) --
---------------- -------------- ---------------- ---------------
Net loss and loss adjustment
expenses 2,997 -- 3,715 --
---------------- -------------- ---------------- ---------------
Underwriting expenses
Commission expense 1,997 -- 2,546 --
Other underwriting expenses 130 -- 151 --
---------------- -------------- ---------------- ---------------
Total underwriting expenses 2,127 -- 2,697 --
---------------- -------------- ---------------- ---------------
Underwriting Loss $ (480) $ -- $ (437) $ --
================ ============== ================ ===============
Key Measures
Premiums written
Gross premiums written $ 28,696 $ -- $ 42,228 $ --
Less: ceded premiums written (7,096) -- (7,096) --
---------------- -------------- ---------------- ---------------
Net premiums written $ 21,600 $ -- $ 35,132 $ --
================ ============== ================ ===============
Loss Ratios
Gross 54.6% n/a 54.5% n/a
Net 64.5% n/a 62.2% n/a
Accident Year Loss Ratios
Gross 54.6% n/a 54.5% n/a
Net 64.5% n/a 62.2% n/a
Underwriting Expense Ratios
Gross 35.1% n/a 36.5% n/a
Net 45.8% n/a 45.1% n/a
Combined Ratios
Gross 89.7% n/a 91.0% n/a
Net 110.3% n/a 107.3% n/a
|
23
Insurance Segment Results of Operations for the Three Months Ended
September 30, 2007 and 2006
The insurance segment did not conduct any business and did not have any
premium income, obligations relating to insurance policies, employees and
operations for the three months ended September 30, 2006.
Summary. The Insurance segment had an underwriting loss for the three
months ended September 30, 2007 due to the cost of purchasing property
catastrophe reinsurance. However, on a gross of reinsurance basis, the combined
ratio was 89.7% which reflects solid underlying profitability, and when the
premiums earned increase relative to premiums written the net combined ratio is
expected to decrease and be closer to the gross combined ratio. Premiums written
in the three month period ended September 30, 2007 increased significantly based
upon implementation of the alternative insurance risk-sharing solutions with
Tower which generated $23.4 million in premiums written during the period, as
well as premiums written of $5.7 million on another risk sharing arrangement
with a client other than Tower.
Gross premiums and net premiums. Gross and net premiums written were $28.7
million and $21.6 million, respectively, for the three months ended September
30, 2007. Gross and net premium earned were $6.1 and $4.6 respectively, for the
three months ended September 30, 2007. CastlePoint Insurance assumed $5.7
million through a new program managed by CastlePoint Management and wrote
approximately $23.4 million of direct business that was produced by Tower Risk
Management Corp., a subsidiary of Tower. The ceded premium consisted of excess
of loss and catastrophe premium of which approximately 49% was ceded to third
party reinsurers and 51% to CastlePoint Re.
Gross and net loss and loss adjustment expenses and loss ratio. Gross loss
and loss adjustment expenses were $3.3 million, which produced a 54.6% gross
loss ratio for the three months ended September 30, 2007. Net loss and loss
adjustment expenses were $3.0 million, which produced a 64.5% net loss ratio for
the three months ended September 30, 2007. The net loss ratio was negatively
impacted by $0.9 million of ceded catastrophe premium written and earned with a
zero percent loss ratio.
Underwriting expenses and underwriting expense ratio. Underwriting
expenses for the insurance segment are comprised of commission and other
underwriting expenses. Commission expense was $2.0 million and other
underwriting expenses were minimal for the three months ended September 30,
2007. The gross underwriting expense ratio was 35.1% and the net underwriting
expense ratio was 45.8% for the three months ended September 30, 2007.
Underwriting loss and net combined ratio. The underwriting loss and net
combined ratio from the insurance segment was $480,000 and 110.3%, respectively,
for the three months ended September 30, 2007.
Insurance Segment Results of Operations for the Nine Months Ended September 30,
2007 and 2006
The insurance segment did not conduct any business and did not have any
premium income, obligations relating to insurance policies, employees and
operations for the nine months ended September 30, 2006.
Gross premiums and net premiums. Gross and net premiums written were $42.2
million and $35.1 million, respectively, for the nine months ended September 30,
2007. Gross and net premium earned were $7.4 and $6.0 respectively, for the nine
months ended September 30, 2007. CastlePoint Insurance assumed $5.7 million
through a new program managed by CastlePoint Management, and wrote approximately
$23.9 million of direct business that was produced by Tower Risk Management
Corp., a subsidiary of Tower, which incepted in the third quarter; CastlePoint
Insurance also assumed $12.6 million of Tower's brokerage business during the
second quarter. The ceded premium consisted of excess of loss and catastrophe
premium, of which approximately 49% was ceded to third party reinsurers and 51%
to CastlePoint Re.
Gross and net loss and loss adjustment expenses and loss ratio. Gross loss
and loss adjustment expenses were $4.0 million, which produced a 54.5% gross
loss ratio for the nine months ended September 30, 2007. Net loss and loss
adjustment expenses were $3.7 million, which produced a 62.2% net loss ratio for
the nine months ended September 30, 2007. The net loss ratio was negatively
impacted by $0.9 million of ceded catastrophe premium written and earned with a
zero percent loss ratio.
24
Underwriting expenses and underwriting expense ratio. Underwriting
expenses for the insurance segment are comprised of commission and other
underwriting expenses. Commission expense was $2.5 million and other
underwriting expenses were minimal for the nine months ended September 30, 2007.
The gross underwriting expense ratio was 36.5% and the net underwriting expense
ratio were 45.1% for the nine months ended September 30, 2007. The gross
commission rate paid on direct business that was produced by Tower Risk
Management Corp. and the business assumed from Tower's brokerage business was
36%, which includes a commission slide of 2% based upon profitable loss ratio
results.
Underwriting loss and net combined ratio. The underwriting loss and net
combined ratio from the insurance segment were $437,000 and 107.3%,
respectively, for the nine months ended September 30, 2007.
Reinsurance Segment Results of Operations
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
----------------- ----------------- ----------------- -----------------
($ in thousands)
Revenues
Premiums earned
Gross premiums earned $ 60,965 $ 27,003 $ 161,171 $ 47,390
Less: ceded premiums earned -- -- -- --
----------------- ----------------- ----------------- -----------------
Net premiums earned 60,965 27,003 161,171 47,390
----------------- ----------------- ----------------- -----------------
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 31,485 13,919 84,075 25,297
Less: ceded loss and loss adjustment expenses -- -- -- --
----------------- ----------------- ----------------- -----------------
Net loss and loss adjustment expenses 31,485 13,919 84,075 25,297
----------------- ----------------- ----------------- -----------------
Underwriting expenses
Ceding commission expense 20,929 9,286 54,634 16,405
Other underwriting expenses 1,125 331 2,614 535
----------------- ----------------- ----------------- -----------------
Total underwriting expenses 22,054 9,618 57,248 16,940
----------------- ----------------- ----------------- -----------------
Underwriting Profit $ 7,426 $ 3,465 $ 19,848 $ 5,153
================= ================= ================= =================
Key Measures
Premiums written
Gross premiums written $ 68,975 $ 43,664 $ 207,849 $ 116,406
Less: ceded premiums written -- -- -- --
----------------- ----------------- ----------------- -----------------
Net premiums written $ 68,975 $ 43,664 $ 207,849 $ 116,406
================= ================= ================= =================
Loss Ratios
Gross 51.6% 51.5% 52.2% 53.4%
Net 51.6% 51.5% 52.2% 53.4%
Accident Year Loss Ratios
Gross 52.3% 51.5% 52.5% 53.4%
Net 52.3% 51.5% 52.5% 53.4%
Underwriting Expense Ratios
Gross 36.2% 35.6% 35.5% 35.7%
Net 36.2% 35.6% 35.5% 35.7%
Combined Ratios
Gross 87.8% 87.1% 87.7% 89.1%
Net 87.8% 87.1% 87.7% 89.1%
|
25
Reinsurance Segment Results of Operations for the Three Months Ended
September 30, 2007 and 2006
Summary. The Reinsurance segment is predominantly quota share reinsurance.
The segment had excellent results driven by a significant increase in premiums
written and earned and a combined ratio of 87.8%. CastlePoint Re assumed 40% of
Tower's brokerage business during the period, and premiums from clients other
than Tower were 27% of total premiums written. The loss ratio of 51.6% benefited
by 0.7 points from favorable loss development on prior accident years. The
expense ratio of 36.2% reflects 36.0% ceding commissions to Tower, which
includes 2 points of profit sharing commission to Tower based upon its loss
ratios. Ceding commissions to clients other than Tower also included profit
sharing commissions.
Gross premiums and net premiums. Gross and net written premiums increased
58.0% to $69.0 million for the three months ended September 30, 2007 from $43.7
million for the three months ended September 30, 2006. Business not originated
from Tower and CastlePoint Insurance represents 26.6% or $18.3 million of the
total written premiums compared to 9.3% or $4.1 million during the same period
last year. The quota share reinsurance agreements originated from third-party
clients included a new non-standard automobile U.S. regional insurance company
and a U.S. regional insurance company specializing in small workers compensation
and commercial automobile. Gross and net premiums earned increased by 125.8% to
$61.0 million for the three months ended September 30, 2007 from $27.0 million
for the same period in 2006. The increase is attributable to the fact we have a
full year of written premium included in our earned premium for the three months
ended September 30, 2007 compared to only two quarters of written premium
included for the same period in 2006. Further, during the three months ended
September 30, 2007, CastlePoint Re added four new quota share reinsurance
agreements (resulting in earned premium of $0.7 million) and one new excess of
loss reinsurance agreement (resulting in earned premium of $0.2 million).
Loss and loss adjustment expenses and loss ratio. Loss and loss adjustment
expenses increased by 126.2% to $31.5 million, which produced a 51.6% loss ratio
for the three months ended September 30, 2007 compared to $13.9 million, which
produced a 51.5% loss ratio for the same period in 2006.
Underwriting expenses and underwriting expense ratio. Underwriting
expenses for the reinsurance segment are comprised of ceding commission paid to
insurance companies, which cede business to CastlePoint Re, and other
underwriting expenses. Ceding commission expense was $20.9 million and other
underwriting expenses were $1.1 million for the three months ended September 30,
2007 compared to $9.3 million and $0.3 million, respectively, for the same
period in 2006. Both the gross underwriting expense ratio and the net
underwriting expense ratio were 36.2% for the three months ended September 30,
2007 compared to 35.6% for the same period in 2006.
Underwriting profit and combined ratio. The underwriting profit and
combined ratio from the reinsurance segment was $7.4 million and 87.8%,
respectively, for the three months ended September 30, 2007 compared to $3.5
million and 87.1% for the same period in 2006. The combined ratio increased
slightly as a result of higher profit sharing commission due to favorable loss
ratios on several treaties.
Reinsurance Segment Results of Operations for the Nine Months Ended
September 30, 2007 and 2006
Gross premiums and net premiums. Gross and net written premiums increased
78.6% to $207.8 million for the nine months ended September 30, 2007 from $116.4
million for the nine months ended September 30, 2006. Included in the gross and
net premiums of $116.4 million in 2006 was a transfer of unearned written
premiums in the amount of $40.9 million. The total amount of net written
premiums originated by and assumed from Tower and CastlePoint Insurance by
CastlePoint Re for the nine months ended September 30, 2007 was $157.6 million
or 75.8% of total written premium compared to $111.1 million or 95% during the
same period last year. Gross and net premiums earned increased by 240.1% to
$161.2 million for the nine months ended September 30, 2007 from $47.4 million
for the same period in 2006. The increase is attributable to the fact we have a
full year of written premium included in our earned premium for the three months
ended September 30, 2007 compared to only two quarters of written premium
included for the same period in 2006. Further, during the third quarter 2007
CastlePoint Re entered into four new quota share reinsurance agreements
(resulting in earned premium of $0.7 million) and one new excess of loss
reinsurance agreement (resulting in earned premium of $0.2 million). Three
reinsurance agreements, out of the five new reinsurance agreements that
CastlePoint Re entered into during the third quarter 2007, represent business
from clients other than Tower and CastlePoint Insurance.
26
Loss and loss adjustment expenses and loss ratio. Loss and loss adjustment
expenses increased by 232.3% to $84.1 million, which produced a 52.2% loss ratio
for the nine months ended September 30, 2007 compared to $25.3 million, which
produced a 53.4% loss ratio for the same period in 2006, primarily reflecting
favorable development on our brokerage business quota share reinsurance
agreement with Tower.
Underwriting expenses and underwriting expense ratio. Underwriting
expenses for the reinsurance segment are comprised of ceding commission paid to
insurance companies, which cede business to CastlePoint Re, and other
underwriting expenses. Ceding commission expense was $54.6 million and other
underwriting expenses were $2.6 million for the nine months ended September 30,
2007 compared to $16.4 million and $0.5 million, respectively, for the same
period in 2006. Both the gross underwriting expense ratio and the net
underwriting expense ratio were 35.5% for the nine months ended September 30,
2007 compared to 35.7% for the nine months ended September 30, 2006.
Underwriting profit and combined ratio. The underwriting profit and
combined ratio from the reinsurance segment was $19.9 million and 87.7%,
respectively, for the nine months ended September 30, 2007 compared to $5.2
million and 89.1%, respectively, for the nine months ended September 30, 2006.
The principal factor that led to the improvement in the underwriting profit and
combined ratio for the reinsurance segment was a reduction in the loss ratio
attributable to the Tower brokerage quota business.
Insurance Services Segment Results of Operations
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
----------------- ----------------- ------------------ -----------------
($ in thousands)
Revenues
Direct commission revenue from programs $ 1,667 $ 854 $ 3,902 $ 1,392
----------------- ----------------- ------------------ -----------------
Total Revenues 1,667 854 3,902 1,392
----------------- ----------------- ------------------ -----------------
Expenses
Direct commissions expense for programs 1,222 617 2,930 1,016
Other insurance services expenses 1,435 1,032 4,567 1,757
----------------- ----------------- ------------------ -----------------
Total Expenses 2,657 1,649 7,496 2,773
----------------- ----------------- ------------------ -----------------
Insurance Services Loss $ (990) $ (795) $ (3,594) $ (1,381)
================= ================= ================== =================
|
Insurance Services Segment Results of Operations for the Three Months
Ended September 30, 2007 and 2006
Direct commission revenue from programs. Direct commission revenue is
dependent upon the premiums written during the year with respect to the program
business managed by CastlePoint Management. CastlePoint Management receives a
30% commission from CastlePoint Insurance and Tower's insurance companies for
program business placed by CastlePoint Management with these companies less
boards, bureaus and premium taxes (which we refer to as "BB&T") and less direct
commission expenses that are incurred by Tower and CastlePoint Insurance. Direct
commission revenue increased 95.2% to $1.7 million for the three months ended
September 30, 2007 compared to $0.9 million for the three months ended September
30, 2006. These commission revenues were received for the specialty programs and
traditional programs. We also bound two additional programs, which contributed
approximately $0.5 million to revenues in the third quarter of 2007.
Direct commission expense for programs. Direct commission expense
increased 98.1% to $1.2 million for the three months ended September 30, 2007
from $0.6 million for the three months ended September 30, 2006. Direct
commission expense consisted of the commission fees paid by us to producing
agents for the placement of program business.
27
Other insurance services expenses. Other insurance services expenses were
$1.4 million for the three months ended September 30, 2007 compared to $1.0
million for the same period in 2006. This amount includes $0.3 million for the
three months ended September 30, 2007 and $0.2 million for the three months
ended September 30, 2006 of costs incurred and charged by Tower's insurance
companies for services provided to us.
Insurance services loss. Insurance services loss was $1.0 million for the
three months ended September 30, 2007 compared to $0.8 million for the same
period in 2006 due to CastlePoint Management's current incurrence of costs to
produce programs that are expected to generate commission revenue in future
periods due in part to the lag time associated with launching new programs that
require rates and forms to be filed and approved, as well as systems to be
implemented.
Insurance Services Segment Results of Operations for the Nine Months
Ended September 30, 2007 and 2006
Direct commission revenue from programs. Direct commission revenue is
dependent upon the premiums written during the year with respect to the program
business managed by CastlePoint Management. CastlePoint Management receives a
30% commission from CastlePoint Insurance and Tower's insurance companies for
program business placed by CastlePoint Management with these companies less BB&T
and less direct commission expenses that are incurred by these companies.
Commission income increased 180.3% to $3.9 million for the nine months ended
September 30, 2007 compared to $1.4 million for the nine months ended September
30, 2006. These commission revenues were received for the specialty programs and
traditional programs. We also bound two additional programs that began producing
revenues in the third quarter of 2007.
Direct commission expense for programs. Direct commission expense
increased 188.4% to $2.9 million for the nine months ended September 30, 2007
from $1.0 million for the nine months ended September 30, 2006. Direct
commission expense consisted of the commission fees paid by us to producing
agents for placement of program business.
Other insurance services expenses. Other insurance services expenses were
$4.6 million for the nine months ended September 30, 2007 compared to $1.8
million for the same period in 2006. This amount includes $0.8 million for the
nine months ended September 30, 2007 and $0.5 million for the nine months ended
September 30, 2006 of costs incurred and charged by Tower's insurance companies
for services provided to us. The increase in expenses over the two periods was
due in part to the fact we did not start our operations until April of 2006. In
addition, the increase in staffing increased the salary and salary related items
by approximately $1.9 million.
Insurance services loss. Insurance services loss was $3.6 million for the
nine months ended September 30, 2007 compared to $1.4 million for the same
period in 2006 primarily due to CastlePoint Management's current incurrence of
costs to produce programs that are expected to generate commission revenue in
future periods due in part to the lag time associated with launching new
programs that require rates and forms to be filed and approved, as well as
systems to be implemented.
Liquidity and Capital Resources
CastlePoint Holdings is organized as a Bermuda holding company, and as
such, has no direct operations of its own. We expect substantially all of our
operations to be conducted by our insurance, reinsurance, and management company
subsidiaries. Accordingly, we expect to have continuing cash needs for
administrative expenses and the payment of principal and interest on existing
and any future borrowings, taxes and dividends. Funds to meet these obligations
will come primarily from dividend payments from our operating subsidiaries.
There are restrictions on the payment of dividends by our insurance
subsidiaries. These restrictions, as well as our liquidity, principal capital
requirements and related matters are described in more detail in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our Registration Statement filed with the
SEC.
28
Our ongoing principal cash requirements for the Company and its wholly
owned subsidiaries are expected to be the capitalization of our existing
operating subsidiaries, operating expenses, our acquisition of at least one
additional U.S. licensed insurance company in connection with our insurance
risk-sharing and program business within the next nine months, subject to
receipt of regulatory approvals, net cash settlements under the reinsurance
agreements, payment of losses and loss adjustment expenses, commissions paid to
program underwriting agents, ceding commissions to insurance companies including
Tower, excise taxes, operating expenses, purchases of marketable securities and
payments under our service and expense sharing agreements with Tower and certain
of its subsidiaries. In addition, we will need cash to enable us to make
strategic investments in some of our clients and potential clients, including
Tower, as well as to pay dividends to our shareholders and to service the debt
on the subordinated debentures of $103.1 million issued by CastlePoint
Management in December 2006 and an additional $30.9 million issued by
CastlePoint Bermuda Holdings in September 2007. Further, while insurance
regulations differ by location, insurers and reinsurers are generally required
to maintain certain minimum levels of capital and/or risk-based capital, the
calculation of which typically includes numerous factors specified by the
respective insurance regulatory authorities and the related insurance
regulations. In order to maintain these capital requirements our insurance
subsidiaries may need additional capital. In addition, we maintain levels of
capital commensurate with standards expected by rating agencies.
On March 28, 2007, we completed the sale of 8,697,148 common shares at
$14.50 per share in an initial public offering. In addition, 119,500 shares were
sold in that offering by selling shareholders who previously purchased such
shares in the private offering of our common shares we completed in April 2006.
Included in the 8,697,148 shares sold by us were 1,134,410 shares purchased by
the underwriters to cover over-allotments. The net proceeds to the Company of
the initial public offering were approximately $114 million after the deduction
of underwriting discounts and other offering expenses. We have used
approximately $70.0 million of these net proceeds to further capitalize
CastlePoint Re, and we intend to use the remaining proceeds of the initial
public offering to either further capitalize CastlePoint Re or capitalize any
U.S. licensed insurance companies we may acquire in the future, and for general
corporate purposes.
As previously reported in the Company's current report on Form 8-K filed
with the SEC on October 1, 2007, which is incorporated herein by reference (the
"October 2007 Current Report"), in September 2007, our subsidiary CastlePoint
Bermuda Holdings borrowed $30.9 million in a trust preferred securities
transaction, the proceeds of which are intended to be used for general corporate
purposes, including acquisitions. In connection with this transaction,
CastlePoint Bermuda Holdings formed a Delaware statutory trust in September
2007.
Sources of Cash
We expect to receive cash from direct and assumed premiums collected, net
cash settlements under our reinsurance agreements, fee income for services
provided, investment income and proceeds from sales and redemptions of
investments. We also expect that we may raise additional funds in the future
through additional equity and/or additional debt financings. However there are
no assurances that such equity/debt financing will be available on terms
acceptable to us or at all.
We, or one or more of our subsidiaries, may also enter into one or more
unsecured revolving credit facilities and/or term loan facilities with one or
more syndicates of lenders, and we may use any such facilities for strategic
acquisitions, general corporate purposes and working capital requirements. We
believe that any debt financing or credit facility will require compliance with
financial covenants, such as a leverage ratio, a consolidated tangible net worth
ratio and maintenance of ratings. Any debt financing or credit facility will
likely contain additional covenants that restrict the activities of our
operating subsidiaries, such as the incurrence of additional indebtedness and
liens and the payment of dividends and other payments. In addition, the terms of
any debt financings may require guarantees by CastlePoint Holdings or any of our
subsidiaries. We are currently in discussions with a major lender with respect
to a credit facility. We cannot assure you that we will be able to obtain a
credit facility on terms acceptable to us.
Cash Flows
For the nine months ended September 30, 2007, net cash provided by
operating activities was approximately $95.8 million compared to $45.0 million
for the nine months ended September 30, 2006. The increase in net cash provided
by operations resulted primarily from the increase in collected premiums as a
result of the growth in premiums written.
29
For the nine months ended September 30, 2007 net cash flows used in
investing activities was approximately $144.0 million compared to $285.8 million
for the same period in 2006, which consisted of purchases and sales of
investments.
The net cash flows provided by financing activities for the nine months
ended September 30, 2007 were approximately $141.2 million, which primarily
consisted of approximately $114.5 million in net proceeds from the IPO after all
offering expenses and net proceeds from the issuance of subordinated debentures
of approximately $30 million by CastlePoint Bermuda Holdings, less dividends
paid to shareholders of $2.7 million, as compared to $262.4 for the same period
in 2006, which primarily consisted of approximately $248.9 million in net
proceeds from the private offering and $15 million in net proceeds from Tower
Group's initial investment in the Company in early 2006, less dividends paid to
shareholders of $1.5 million.
The primary sources of cash of our operating subsidiaries are net premiums
received, commission income and investment income. Cash is used by our operating
subsidiaries to pay dividends to their parent, commissions, claims and operating
expenses, as well as to purchase investments and fixed assets, subject to
regulatory, contractual, rating agencies and other constraints applicable to us.
Security Requirements
Under the terms of the quota share reinsurance agreements between
CastlePoint Re and Tower's insurance companies, CastlePoint Re is required to
provide security to Tower's insurance companies to support reinsurance
recoverables owed to these reinsureds in a form acceptable to the insurance
commissioners of the State of New York and Commonwealth of Massachusetts, the
domiciliary states of Tower's insurance companies. The security is provided in
the form of trust accounts. These trust arrangements permit Tower's insurance
companies to take credit on their statutory financial statements for the
reinsurance ceded to CastlePoint Re, either as an additional asset or as a
reduction in liability. CastlePoint Re is also required by its reinsurance
agreements with its other cedents to collateralize amounts through a letter of
credit, cash advance, funds held or a trust account meeting the requirements of
the applicable state insurance regulations.
As of September 30, 2007, CastlePoint Re had trust accounts for the
benefit of its reinsureds totaling approximately $181.9 million, an increase of
approximately $84.1 million since December 31, 2006. The increase is due to
larger assumed loss reserves and unearned premium reserves due to the growth in
written and earned premiums. CastlePoint Re earns and collects the interest on
the trust funds. CastlePoint Insurance had no trust accounts for the benefit of
its clients as of September 30, 2007.
Investments
The Company has developed specific investment objectives and guidelines
for the management of its investment portfolio. These investment guidelines
stress capital preservation and maximization of after tax investment income
through the maintenance of liquidity, risk diversification and credit quality.
Generally, we invest our assets in relatively liquid, high-grade fixed maturity
securities of relatively short duration. We seek to manage our credit risk
through issuer and industry diversification and interest rate risk by monitoring
the duration and structure of the portfolio. Despite the prudent focus of these
objectives and guidelines, the Company's investments are subject to general
market risk, as well as to risks inherent to particular securities.
The aggregate fair market value of our available-for-sale investments as
of September 30, 2007 was $534.4 million, which excludes our investment in
common trust securities of the three statutory business trusts described under
"--Off-Balance Sheet Transactions" below and under Note 1
"Investments--Investments in partnerships and other funds" above. Our fixed
maturity securities as of this date had a fair market value of $494.3 million
and an amortized cost of $494.8 million. Short term investments were carried at
fair value of $0 as of September 30, 2007 compared to $51.6 million as of
December 31, 2006.
The portfolio duration of the fixed maturity securities at September 30,
2007 was approximately 2.63 years (2.0 years at December 31, 2006) and the
average credit rating was AA+ (AA+ at December 31, 2006).
30
Included in the "Fixed maturity securities" on the balance sheet at
September 30, 2007, the Company held $337.6 million ($187.7 million at December
31, 2006), at fair value in mortgage-backed, commercial mortgage-backed and
asset backed securities (reflecting primarily assets backed by automobile loans
and credit card receivables, with approximately $3.0 million of the asset backed
securities being backed by home equity loans at September 30, 2007). Our total
exposure to mortgage and asset backed securities at September 30, 2007
represented 50.0% (44.2% at December 31, 2006) of cash and invested assets. Of
the total $337.6 million exposure to mortgage and asset backed securities,
$159.3 million (47%) was rated Agency and $169.7 million (50%) was rated AAA.
The remaining 3% was rated above investment grade. The $3.0 million of assets
backed by home equity loans represents subprime exposure and is rated AAA. The
remaining asset class at September 30, 2007 and December 31, 2006 consisted
primarily of highly rated corporate securities.
Included in "Equity securities" on the balance sheet at September 30,
2007, the Company held an investment in a fund that has subprime mortgage
exposure. Our proportional share of the total exposure to subprime mortgages in
this fund is approximately $8.0 million. Of this amount, approximately $4.0
million is from mortgages originating in years 2006 and 2007 and all the
exposure from mortgages issued in these years is rated investment grade. Of the
$4.0 million originating in years 2005 and prior, only $126,000 is rated below
investment grade. Of our total exposure of $8.0 million, $6.0 million is rated A
or better. We do not believe these securities have suffered significant credit
impairment and we believe the lower market prices at September 30, 2007 for
these securities are based primarily on the lack of liquidity in this sector of
the mortgage backed securities market. Additionally, we have no Alternative A
(defined as risks falling between prime and subprime) mortgage exposure in our
portfolio or in any of the funds in which we have invested.
At September 30, 2007, we had gross unrealized gains of $2.5 million and
gross unrealized losses of $9.1 million. Of the $9.1 million of gross unrealized
losses, the majority is attributable to the liquidity problems affecting
mortgage and mortgage related securities. The gross unrealized losses are
generally attributed to the funds in which we have invested ($3.6 million
relates to our investment in a fund consisting of primarily floating rate asset
backed securities and mortgage backed securities and $1.4 million relates to
publicly traded mortgage real estate investment trusts).
At September 30, 2007, we held $127.6 million of cash and cash
equivalents, which include all securities that, at their purchase date, have a
maturity of less than 90 days, of which $30 million was uninvested cash
resulting from the proceeds from the offering by CastlePoint Bermuda Holdings of
trust preferred securities, which we received at the end of September 2007. Of
the remaining cash and cash equivalents, the majority is invested in 90 day
commercial paper. The average yield on commercial paper purchased during the
third quarter was approximately 5.5%. During the third quarter of 2007, our
investment manager recommended overweight positions in mortgages, favoring
pass-through instruments and high quality collateralized mortgage obligations
and commercial mortgage backed securities. Our investment manager recommended
underweight positions in virtually all other sectors. However, since we did not
wish to increase our exposure to mortgages at this time, we decided to maintain
a relatively high amount of cash and cash equivalent balances without
sacrificing yield.
The fair value pricing of our fixed maturity securities at September 30,
2007 is generally based on current marks provided by indices and reputable
pricing services and, to a lesser extent, established broker-dealers who
routinely make a market in the securities being priced. Approximately 77% of the
portfolio is priced by indices or pricing services and 23% is priced by broker
dealers. To the best of our management's knowledge, substantially all of the
prices represent identical or similar securities priced in actively traded
markets. No securities have been priced utilizing inputs from unobservable
inputs. Our investment in equity securities primarily represents funds in which
we have invested and substantially all of the pricing also comes from pricing
services and broker-dealers.
Contractual Obligations
There have been no material changes during the period covered by this
quarterly report on Form 10-Q, outside of our ordinary course of business, to
the contractual obligations specified in the table of contractual obligations in
the section "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in the Registration Statement, except as
described below.
31
As reported in more detail in the October 2007 Current Report, in
September 2007, CastlePoint Bermuda Holdings issued $30.9 million in
subordinated debentures, which mature on December 15, 2037 and represent payment
obligations due more than five years after the end of the period covered by this
quarterly report.
Off-Balance Sheet Transactions
We formed two Delaware statutory business trusts of which CastlePoint
Management owns all of the common trust securities, in connection with the trust
preferred financing completed in December 2006. We also formed another Delaware
statutory business trust of which CastlePoint Bermuda Holdings owns all of the
common trust securities, in connection with the trust preferred financing
completed in September 2007.
Ratings
During the first quarter of 2007, CastlePoint Insurance received a
Financial Strength rating of "A-" (Excellent) from A.M. Best Company, Inc., an
insurance rating agency, which is the fourth highest of fifteen rating levels
and indicates A.M. Best's opinion of our financial strength and ability to meet
ongoing obligations to our policyholders. A.M. Best also confirmed the "A-"
(Excellent) rating it previously assigned to CastlePoint Re. In June 2007,
following the Company's press release announcing a risk sharing arrangement with
AequiCap Program Administrators and certain of its subsidiaries, A.M. Best
placed the ratings of CastlePoint Re and CastlePoint Insurance, and the issuer
credit rating of "bbb-" of CastlePoint Holdings, under review with negative
implications. However, the ratings of CastlePoint Re and CastlePoint Insurance
were affirmed by A.M. Best in July 2007. The maintenance of the assigned ratings
depends, in part, upon CastlePoint Re and CastlePoint Insurance operating in a
manner consistent with the business plan presented to A.M. Best. A.M. Best
formally evaluates its Financial Strength ratings of insurance companies at
least once every twelve months and monitors the performance of rated companies
throughout the year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk relates to changes in the value of financial instruments that
arise from adverse movements in factors such as interest rates and equity
prices. We are exposed mainly to changes in interest rates that affect the yield
on and fair value of our investments in securities.
Sensitivity Analysis
Sensitivity analysis is a measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In our sensitivity analysis model,
we select a hypothetical change in interest rates that reflects what we believe
are reasonably possible near-term changes in those rates. The term "near-term"
means a period of time going forward up to one year from the date of the
consolidated financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this disclosure, especially since
this sensitivity analysis does not reflect the results of any action that we may
take to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, we use fair values to measure our
potential loss. The sensitivity analysis model includes fixed maturities
securities and short-term investments.
For fixed maturities securities, we use modified duration modeling to
calculate the impact of potential changes in interest rates on fair values.
Durations on invested assets are adjusted for any call, put and interest rate
reset features. Durations on tax-exempt securities are adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of September 30, 2007.
32
The following table summarizes the estimated change in fair value on our
fixed maturity portfolio based on specific changes in interest rates as of
September 30, 2007:
Estimated Increase Estimated Percentage
(Decrease) in Fair Value Increase (Decrease)
Change in Interest Rate ($ in thousands) in Fair Value
--------------------------- -------------------------- ------------------------
300 basis point rise (48,809) (9.8)%
200 basis point rise (32,407) (6.5)%
100 basis point rise (15,740) (3.2)%
100 basis point decline 13,800 2.8%
200 basis point decline 24,787 5.0%
300 basis point decline 34,887 7.0%
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The sensitivity analysis model used by us produces a predicted pre-tax
loss in fair value of interest-sensitive instruments of $15.7 million or 3.2%
based on a 100 basis point increase in interest rates as of September 30, 2007.
This loss amount only reflects the impact of an interest rate increase on the
fair value of our fixed maturities, which constituted approximately 90.2% of our
total investments as of September 30, 2007.
As of September 30, 2007, we had a total of $134.0 million of outstanding
debt, all of which are outstanding junior subordinated debentures underlying
trust securities issued by our wholly owned statutory business trusts carrying a
fixed interest rate during the first five years, after which the interest rate
will become floating and equal to the three month LIBOR rate plus 3.5% per annum
(calculated quarterly). If LIBOR rates increase, the amount of interest payable
by us would also increase.
Item 4T. Controls and Procedures
Our management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to provide reasonable assurance that
material information relating to us and our consolidated subsidiaries required
to be disclosed in our reports filed with or submitted to the SEC under the
Securities Exchange Act of 1934, as amended, is made known to such officers by
others within these entities, particularly during the period this quarterly
report was prepared, in order to allow timely decisions regarding required
disclosure.
In connection with the evaluation described above, we have not identified
any change in our internal control over financial reporting that occurred during
the three months ended September 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
EXHIBIT INDEX
3.2 Amended and Restated Bye-Laws of CastlePoint Holdings, Ltd.
10.1 Management Agreement, dated as of July 1, 2007, by and between
CastlePoint Insurance Company and Tower Risk Management Corp.
10.2 Amendment No. 2 to Amended and Restated Brokerage Business Quota Share
Reinsurance Agreement, between Tower Insurance Company of New York and
CastlePoint Reinsurance Company, Ltd.
10.3 Amendment No. 3 to Amended and Restated Brokerage Business Quota Share
Reinsurance Agreement, among Tower Insurance Company of New York, Tower
National Insurance Company and CastlePoint Reinsurance Company, Ltd.
31.1 Chief Executive Officer - Certification pursuant to Sarbanes-Oxley Act
of 2002 Section 302
31.2 Chief Financial Officer - Certification pursuant to Sarbanes-Oxley Act
of 2002 Section 302
32 Chief Executive Officer and Chief Financial Officer - Certification
pursuant to Sarbanes-Oxley Act of 2002 Section 906
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36
EXHIBIT 3.2
AMENDED AND RESTATED BYE-LAWS
OF
CASTLEPOINT HOLDINGS, LTD.
Amended and Restated on April 1, 2006
Amended July 31, 2007
TABLE OF CONTENTS
Bye-Law Page
1. Interpretation.........................................................1
2. Board of Directors.....................................................5
3. Management of the Company..............................................5
4. Power to appoint chief executive officer...............................6
5. Power to appoint manager...............................................6
6. Power to authorise specific actions....................................6
7. Power to appoint attorney..............................................6
8. Power to appoint and dismiss employees.................................6
9. Power to borrow and charge property....................................7
10. Power to purchase shares of the Company................................7
11. Election of Directors..................................................8
12. Defects in appointment of Directors....................................9
13. Removal of Directors..................................................10
14. Vacancies on the Board................................................10
15. Notice of meetings of the Board.......................................11
16. Quorum at meetings of the Board.......................................11
17. Meetings of the Board.................................................12
18. Unanimous written resolutions.........................................12
19. Contracts and disclosure of Directors' interests......................12
20. Remuneration of Directors.............................................12
21. Power to delegate to a committee......................................13
22. Officers of the Company...............................................13
23. Appointment of Officers...............................................14
24. Remuneration of Officers..............................................14
i
25. Duties of Officers....................................................14
26. Chairman of meetings..................................................14
27. Register of Directors and Officers....................................14
28. Obligations of Board to keep minutes..................................14
29. Indemnification of Directors and Officers of the Company..............15
30. Waiver of claim by Member.............................................15
31. Notice of annual general meeting......................................16
32. Notice of special general meeting.....................................16
33. Accidental omission of notice of general meeting......................16
34. Meeting called on requisition of Members..............................16
35. Short notice..........................................................16
36. Postponement of Meetings..............................................16
37. Quorum For General Meeting............................................17
38. Adjournment of meetings...............................................17
39. Attendance at meetings................................................17
40. Written resolutions...................................................17
41. Attendance of Directors...............................................18
42. Voting at meetings....................................................18
43. Voting on show of hands...............................................18
44. Decision of chairman..................................................19
45. Demand for a poll.....................................................19
46. Seniority of joint holders voting.....................................20
47. Instrument of proxy...................................................20
48. Representation of corporations at meetings............................20
49. Rights of shares......................................................20
50. Limitation on voting rights of Controlled Shares......................21
51. Power to issue shares.................................................23
52. Variation of rights and alteration of share capital...................24
53. Registered holder of shares...........................................25
ii
54. Death of a joint holder...............................................25
55. Share certificates....................................................25
56. Calls on shares.......................................................26
57. Forfeiture of Shares..................................................26
58. Contents of Register of Members.......................................26
59. Inspection of Register of Members.....................................26
60. Determination of record dates.........................................27
61. Instrument of transfer................................................27
62. Restrictions on transfer..............................................28
63. Transfers by joint holders............................................29
64. Lien on Shares........................................................29
65. Registration on death or bankruptcy...................................30
66. Representative of deceased Member.....................................30
67. Declaration of dividends by the Board.................................31
68. Other distributions...................................................31
69. Reserve fund..........................................................31
70. Deduction of amounts due to the Company...............................31
71. Unclaimed dividends...................................................31
72. Interest on dividend..................................................31
73. Issue of bonus shares.................................................31
74. Records of account....................................................32
75. Financial year end....................................................32
76. Financial statements..................................................32
77. Appointment of Auditor................................................32
78. Remuneration of Auditor...............................................33
79. Vacation of office of Auditor.........................................33
80. Access to books of the Company........................................33
81. Report of the Auditor.................................................33
82. Notices to Members of the Company.....................................33
iii
83. Notices to joint Members..............................................34
84. Service and delivery of notice........................................34
85. The Seal..............................................................34
86. Manner in which seal is to be affixed.................................34
87. Winding-up/distribution by liquidator.................................34
88. Alteration of Bye-laws................................................35
89. Voting of Subsidiary Shares...........................................35
90. Bye-Laws or Articles of Association of Certain Subsidiaries...........35
iv
B Y E - L A W S
of
CASTLEPOINT HOLDINGS, LTD.
INTERPRETATION
1. Interpretation
(1) In these Bye-laws the following words and expressions shall, where not
inconsistent with the context, have the following meanings respectively:
(a) "Act" means the Companies Act 1981 as amended from time to time;
(b) "Affiliate" has the meaning ascribed thereto in Rule 144
promulgated under the Securities Act;
(c) "Auditor" includes any individual or partnership;
(d) "Board" means the Board of Directors appointed or elected
pursuant to these Bye-laws and acting by resolution in accordance
with the Act and these Bye-laws or the Directors present at a
meeting of Directors at which there is a quorum;
(e) "Business Day" means any day, other than a Saturday, a Sunday or
any day on which banks in Hamilton, Bermuda or The City of New
York, United States are authorized or obligated by law or
executive order to close;
(f) "Cause" means wilful misconduct, fraud, gross negligence,
embezzlement or any other criminal conduct or any physical or
mental disability that would substantially impair the ability of
a Director to function in that capacity;
(g) "Code" means the United States Internal Revenue Code of 1986, as
amended from time to time, or any federal statute from time to
time in effect that has replaced such statute, and any reference
in these Bye-laws to a provision of the Code or a rule or
regulation promulgated thereunder means such provision, rule or
regulation as amended from time to time or any provision of a
federal law, or any federal rule or regulation, from time to time
in effect that has replaced such provision, rule or regulation;
(h) "Common Shares" means the common shares, par value U.S.$ 0.01 per
share, of the Company and includes a fraction of a Common Share;
(i) "Company" means the company for which these Bye-laws are approved
and confirmed;
(j) "Controlled Shares" of any Person means all Common Shares and
shares of any other class or classes of shares of the Company
conferring voting rights owned by such Person, whether:
(i) directly;
(ii) with respect to Persons who are U.S. Persons, by application
of the attribution and constructive ownership rules of
Sections 958(a) and 958(b) of the Code; or,
(iii) beneficially owned directly or indirectly within the
meaning of Section 13(d)(3) of the Exchange Act, as amended,
and the rules and regulations thereunder;
(k) "Director" means a director of the Company;
(l) "Dividend" includes a bonus or capitalization issue of shares;
(m) "Exchange Act" means the United States Securities Exchange Act of
1934 as amended from time to time or any federal statute from
time to time in effect that has replaced such statute, and any
reference in these Bye-laws to a provision of the Exchange Act or
a rule or regulation promulgated thereunder means such provision,
rule or regulation as amended from time to time or any provision
of a federal law, or any federal rule or regulation, from time to
time in effect that has replaced such provision, rule or
regulation;
(n) "Fair Market Value" means, with respect to a repurchase of any
shares of the Company in accordance with these Bye-laws, (i) if
such shares are listed on a securities exchange (or quoted in a
securities quotation system), the average closing sale price of
such shares on such exchange (or in such quotation system), or,
if such shares are listed on (or quoted in) more than one
exchange (or quotation system), the average closing sale price of
the shares on the principal securities exchange (or quotation
system) on which such shares are then traded, or, if such shares
are not then listed on a securities exchange (or quotation
system) but are traded in the over-the-counter market, the
average of the latest bid and asked quotations for such shares in
such market, in each case for the last five trading days
immediately preceding the day on which notice of the repurchase
of such shares is sent pursuant to these Bye-laws or (ii) if no
such closing sales prices or quotations are available because
such shares are not publicly traded or otherwise, the fair value
of such shares as determined by one independent nationally
recognized investment banking firm chosen by the Company and
reasonably satisfactory to the Member whose shares are to be so
repurchased by the Company, provided that the -------- ----
calculation of the Fair Market Value of the shares made by such
appointed investment banking firm (i) shall not include any
|
discount relating to the absence of a public trading market for,
or any transfer restrictions on, such shares, and (ii) shall be
final and the fees and expenses stemming from such calculation
shall be borne by the Company or its assignee, as the case may
be;
-2-
(o) "Formula" has the meaning ascribed thereto in Bye-law 50;
(p) "Member" means the person registered in the Register of Members
as the holder of shares in the Company and, when two or more
persons are so registered as joint holders of shares, means the
person whose name stands first in the Register of Members as one
of such joint holders or all of such persons as the context so
requires;
(q) "9.5% Shareholder" means a Person who owns, in the aggregate, (i)
directly, (ii) with respect to Persons who are U.S. Persons, by
application of the attribution and constructive ownership rules
of Sections 958(a) and 958(b) of the Code or (iii) beneficially,
directly or indirectly within the meaning of Section 13(d)(3) of
the Exchange Act, shares of the Company representing more than
nine and one half percent (9.5%) of the total combined voting
rights attaching to the issued Common Shares and the issued
shares of any other class or classes of shares of the Company;
(r) "Notice" means written notice as further defined in these
Bye-laws unless otherwise specifically stated;
(s) "Officer" means any person appointed by the Board to hold an
office in the Company;
(t) "Person" means any individual, company, corporation, firm,
partnership, trust or any other business, entity or person,
whether or not recognized as constituting a separate legal
entity;
(u) "Register of Directors and Officers" means the Register of
Directors and Officers referred to in Bye-law 27;
(v) "Register of Members" means the Register of Members referred to
in Bye-law 58;
(w) "Related Group" means a group of shareholders or members of the
Company that are investment vehicles and are under common control
or management;
-3-
(x) "Secretary" means the person appointed to perform any or all the
duties of secretary of the Company and includes any deputy or
assistant secretary;
(y) "Securities Act" means the United States Securities Act of 1933
as amended from time to time or any federal statute from time to
time in effect which has replaced such statute, and any reference
in these Bye-laws to a provision of the Securities Act or a rule
or regulation promulgated thereunder means such provision, rule
or regulation as amended from time to time or any provision of a
federal law, or any federal rule or regulation, from time to time
in effect that has replaced such provision, rule or regulation;
(z) "share" means a share of any class of shares in the capital of
the Company (including, where the context so admits, Common
Shares) and includes a fraction of a share;
(aa) "subsidiary", with respect to any Person, means a company more
than fifty percent (50%) (or, in the case of a wholly owned
subsidiary, one hundred percent (100%)) of the outstanding Voting
Shares of which is owned, directly or indirectly, by such Person
or by one or more other subsidiaries, or any such Person and one
or more other subsidiaries;
(bb) "Unadjusted Basis", when used with respect to the aggregate
voting rights held by any Member, refers to the determination of
such rights without reference to the provisions relating to the
adjustment of voting rights contained in Bye-law 50;
(cc) "United States" means the United States of America and dependent
territories or any part thereof;
(dd) "United States 25% Shareholder" means a U.S. Person who owns,
directly or by application of the attribution and constructive
ownership rules of Sections 958(a) and 958(b) of the Code,
twenty-five percent (25%) or more of either (i) the total
combined voting rights attaching to the issued Common Shares and
the issued shares of any other class or classes of shares of the
Company or (ii) the total combined value of the issued Common
Shares and any other issued shares of the Company, in each case
determined pursuant to Section 957 of the Code;
-4-
(ee) "U.S. Person" means (i) a citizen or resident of the United
States for U.S. tax purposes, (ii) a corporation, partnership or
other entity taxable as a corporation or partnership created or
organized in the United States or under the laws of the United
States or of any of its political subdivisions, (iii) an estate
the income of which is subject to United States federal income
tax without regard to its source, (iv) a trust if a court within
the United States is able to exercise primary supervision over
the trust's administration and one or more U.S. persons have the
authority to control all substantial decisions of the trust and
(v) certain electing corporations and trusts; and
(ff) "Voting Share" of any Person means any share in such Person
conferring voting rights on the holder thereof (other than such
voting rights as would exist solely in relation to a proposal to
alter or vary the rights attaching to such shares solely upon the
future occurrence of a contingency or voting rights attaching
solely by virtue of the provisions of the Act).
(2) In these Bye-laws, where not inconsistent with the context:
(a) words denoting the plural number include the singular number and
vice versa;
(b) words denoting the masculine gender include the feminine gender;
(c) words importing persons include companies, associations or bodies
of persons whether corporate or not;
(d) the word:
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
(e) unless otherwise provided herein words or expressions defined in
the Act shall bear the same meaning in these Bye-laws.
(3) Expressions referring to writing or written shall, unless the contrary
intention appears, include facsimile, electronic mail, printing, lithography,
photography and other modes of representing words in a visible form.
(4) Headings used in these Bye-laws are for convenience only and are not to
be used or relied upon in the construction hereof.
BOARD OF DIRECTORS
2. Board of Directors
The business of the Company shall be managed and conducted by the Board.
-5-
3. Management of the Company
(1) In managing the business of the Company, the Board may exercise all
such powers of the Company as are not, by statute or by these Bye-laws, required
to be exercised by the Company in general meeting subject, nevertheless, to
these Bye-laws, the provisions of any statute, and to such regulations as may be
prescribed by the Company in general meeting.
(2) No regulation or alteration to these Bye-laws made by the Company in
general meeting shall invalidate any prior act of the Board which would have
been valid if that regulation or alteration had not been made.
(3) The Board may procure that the Company pays to Members or third parties
all expenses incurred in promoting and incorporating the Company.
4. Power to appoint chief executive officer
The Board may from time to time appoint one or more Persons to the office
of chief executive officer of the Company who shall, subject to the control of
the Board, supervise and administer all of the general business and affairs of
the Company.
5. Power to appoint manager
The Board may appoint a Person to act as manager of the Company's day to
day business and may entrust to and confer upon such manager such powers and
duties as it deems appropriate for the transaction or conduct of such business.
6. Power to authorise specific actions
The Board may from time to time and at any time authorise any Director,
Officer or other Person or body of Persons to act on behalf of the Company for
any specific purpose and in connection therewith to execute any agreement,
document or instrument on behalf of the Company.
7. Power to appoint attorney
The Board may from time to time and at any time by power of attorney
appoint any company, firm, Person or body of Persons, whether nominated directly
or indirectly by the Board, to be an attorney of the Company for such purposes
and with such powers, authorities and discretions (not exceeding those vested in
or exercisable by the Board) and for such period and subject to such conditions
as they may think fit and any such power of attorney may contain such provisions
for the protection and convenience of persons dealing with any such attorney as
the Board may think fit and may also authorise any such attorney to sub-delegate
all or any of the powers, authorities and discretions so vested in the attorney.
Such attorney may, if so authorised under the seal of the Company, execute any
deed or instrument under their personal seal with the same effect as the
affixation of the seal of the Company.
-6-
8. Power to appoint and dismiss employees
The Board may appoint, suspend or remove any manager, secretary, clerk,
agent or employee of the Company and may fix their remuneration and determine
their duties.
9. Power to borrow and charge property
The Board may exercise all the powers of the Company to borrow money and to
mortgage or charge its undertaking, property and uncalled capital, or any part
thereof, and may issue debentures, debenture stock and other securities whether
outright or as security for any debt, liability or obligation of the Company or
any third party.
10. Power to purchase shares of the Company
(1) Exercise of power to repurchase shares of the Company or to
discontinue the Company
The Board may exercise all the powers of the Company to purchase all or any
part of its own shares pursuant to Sections 42 and 42A of the Act or to
discontinue the Company to a named country or jurisdiction outside Bermuda
pursuant to Section 132G of the Act or any successor to such provisions.
(2) Unilateral repurchase right
Subject to Section 42A of the Act, if the Board in its absolute and
unfettered discretion, on behalf of the Company, determines that share ownership
by any Member may result in adverse tax, regulatory or legal consequences to the
Company, any of its subsidiaries or any of the Members, the Company will have
the option, but not the obligation, to repurchase all or part of the shares held
by such Member (to the extent the Board, in the reasonable exercise of its
discretion, determines it is necessary to avoid or cure such adverse
consequences) for immediately available funds in an amount equal to the Fair
Market Value of such shares on the date the Company sends the Repurchase Notice
referred to below (the "Repurchase Price"); provided, that the Board will use
its best efforts to exercise this option equally among similarly situated
Members (to the extent possible under the circumstances). In that event, the
Company will also be entitled to assign its repurchase right to a third party or
parties including the other Members, with the consent of such assignee. Each
Member shall be bound by the determination by the Company to repurchase or
assign its right to repurchase such Member's shares and, if so required by the
Company, shall sell the number of shares that the Company requires it to sell.
In the event that the Company or its assignee(s) determines to repurchase
any such shares, the Company shall provide each Member concerned with written
notice of such determination (a "Repurchase Notice") at least seven (7) calendar
days prior to such repurchase or such shorter period as each such Member may
authorize, specifying the date on which any such shares are to be repurchased
and the Repurchase Price. The Company may revoke the Repurchase Notice at any
time before it (or its assignee(s)) pays for the shares. Neither the Company nor
its assignee(s) shall be obliged to give general notice to the Members of any
intention to purchase or the conclusion of any purchase of shares. Payment of
the Repurchase Price by the Company or its assignee(s) shall be by wire transfer
and made at a closing to be held no less than seven (7) calendar days after
receipt of the Repurchase Notice by the Member.
-7-
(3) Restrictions on repurchases
If the Company redeems or purchases shares pursuant to this Bye-law 10, it
shall do so only in a manner it believes would not result, upon consummation of
such redemption or purchase, in (i) any Person becoming or continuing to be a
9.5% Shareholder, other than Tower Group, Inc. or any of its Affiliates; or (ii)
any Person becoming or continuing to be a United States 25% Shareholder.
11. Election of Directors
(1) Unless otherwise provided by statute, regulation, stock exchange or
self-regulatory organisation rule, the election and removal of Directors shall
be governed by the following provisions.
(2) The Board of Directors shall consist of such number of directors as the
directors shall determine from time-to-time, or such number in excess thereof as
the Members may from time to time determine that shall be elected or appointed
in the first place at the statutory meeting of the Company and thereafter,
except in the case of a casual vacancy, at the annual general meeting or at any
special general meeting called for that purpose in accordance with these
Bye-laws. The Directors shall be divided into three (3) classes as nearly equal
as possible (Class A, Class B and Class C). The initial Class A Directors shall
serve for a term expiring at the annual general meeting of Members to be held in
2007; the initial Class B Directors shall serve for a term expiring at the
annual general meeting of Members to be held in 2008; and the initial Class C
Directors shall serve for a term expiring at the annual general meeting of
Members to be held in 2009. At each annual general meeting of Members, the
successor or successors of the class of Directors shall hold office for a term
expiring at the annual general meeting of Members held in the third year
following the year of their election. The Directors elected to each class shall
hold office until their successors are duly elected and qualified or until their
earlier death, disqualification, resignation, or removal.
(3) Only Persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nominations of Persons
for election to the Board of the Company may be made at a meeting of Members
called for the election of directors, or at the discretion of the Board, by any
nominating committee or Person appointed by the Board, or by any Member of the
Company entitled to vote for the election of Director at the meeting who
complies with the Notice procedures set forth in this Bye-Law. Such nominations,
other than those made by or at the direction of the Board, shall be made
pursuant to timely Notice to the Secretary of the Company. To be timely, a
Member's Notice shall be delivered to or mailed and received at the Office of
the Company not less than sixty (60) days prior to such meeting. Such Member's
Notice to the Secretary shall set forth (a) as to each Person whom the Member
proposes to nominate for election or re-election as a Director, (i) the name,
age, business address and residence address of the Person, (ii) the principal
occupation or employment of the Person, (iii) the class and number of shares of
Common Shares of the Company which are beneficially owned by the Person, (iv)
any other information relating to the Person that is required to be disclosed in
solicitations for proxies for election of Directors pursuant to Schedule 14A of
the Exchange Act, and (v) the consent of each nominee to serve as a Director, if
so elected; and (b) as to the Member giving the Notice (i) the name and record
address of the Member and (ii) the class and number of shares of capital stock
of the Company which are beneficially owned by the Member. The Company may
require any proposed nominee to furnish such other information as may reasonably
be required by the Company to determine the eligibility of such proposed nominee
to serve as a Director of the Company. No Persons shall be eligible for election
as a Director of the Company unless nominated in accordance with the procedures
set forth herein.
-8-
(4) The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
(5) The Directors shall (subject to any resolution of the Members to the
contrary) have the power from time to time and at any time to appoint any Person
as a Director to fill a casual vacancy on the Board, provided, however, that the
number of Directors so appointed shall not exceed any maximum number determined
from time to time by the Members in a General Meeting. Any Director so appointed
by the Board shall hold office until the next election of the class for which
such director shall have been chosen and shall then be eligible for re-election
at that meeting.
(6) A Director shall not be required to hold any shares of the Company by
way of qualification and a Director (as the case may be) who is not a Member
shall be entitled to receive Notice of and to attend and speak at any General
Meeting of the Company and of all classes of shares of the Company.
(7) A retiring Director shall be eligible for re-election.
12. Defects in appointment of Directors
All acts done bona fide by any meeting of the Board or by a committee of
the Board or by any person acting as a Director shall, notwithstanding that it
be afterwards discovered that there was some defect in the appointment of any
Director or person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every person had been duly appointed and was
qualified to be a Director.
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13. Removal of Directors
(1) Subject to any provision to the contrary in these Bye-laws, the Members
may, at any annual general meeting or any special general meeting convened and
held in accordance with these Bye-laws, remove any Director, only for Cause,
provided that the notice of any such meeting convened for the purpose of
removing a Director shall contain a statement of the intention so to do and be
served on such Director not less than 14 days before the meeting and at such
meeting such Director shall be entitled to be heard on the motion for such
Director's removal.
(2) A vacancy on the Board created by the removal of a Director under the
provisions of subparagraph (1) of this Bye-law may be filled by the Members at
the meeting at which such Director is removed. A Director so appointed shall
hold office in the same class of Directors as the removed Director held until
the next annual general meeting or until such Director's office is otherwise
vacated and, in the absence of such election or appointment, the Board may fill
any such vacancy in accordance with Bye-law 14.
(3) Subject to any provision to the contrary in these Bye-laws, a Director
may be removed for any reason prior to the expiration of such Director's period
of office or in any agreement between the Company and such Director by the
unanimous vote of the Directors other than the Director in question at a board
meeting duly convened and held in accordance with these Bye-laws.
(4) A vacancy on the Board created by the removal of a Director under
paragraph (3) of this Bye-law may be filled by the Board in accordance with
Bye-law 14. A Director so appointed shall hold office until the next annual
general meeting or until such Director's successor is elected or appointed or
such Director's office is otherwise vacated.
14. Vacancies on the Board
(1) The Board shall have the power from time to time and at any time to
appoint any person as a Director to fill a vacancy on the Board occurring as the
result of the death, disability, disqualification or resignation of any Director
or if such Director's office is otherwise vacated. A Director so appointed by
the Board shall hold office in the same class of Directors as the Director whose
vacant position he is filling until the next annual general meeting or until
such Director's office is otherwise vacated.
(2) The Board may act notwithstanding any vacancy in its number but, if and
so long as its number is reduced below the number fixed by these Bye-laws, or
such greater number as may have been determined by the Members, as the quorum
necessary for the transaction of business at meetings of the Board, the
continuing Directors or Director may act only for the purpose of (i) summoning a
general meeting of the Company or (ii) preserving the assets of the Company.
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(3) The office of Director shall be vacated if the Director:
(a) is removed from office pursuant to these Bye-laws or is
prohibited from being a Director by law;
(b) is or becomes bankrupt or makes any arrangement or composition
with his creditors generally;
(c) is or becomes of unsound mind or dies; or
(d) resigns his or her office by notice in writing to the Company.
15. Notice of meetings of the Board
(1) The Chairman or Deputy Chairman, or any two (2) Directors may, and the
Secretary on the requisition of the Chairman or Deputy Chairman, or any two (2)
Directors shall, at any time summon a meeting of the Board by at least three (3)
Business Days' notice to each Director, unless such Director consents to shorter
notice orally or in writing before the commencement of the meeting.
(2) Notice of a meeting of the Board shall specify the general nature of
the business to be considered at such meeting and shall be deemed to be duly
given to a Director if it is given to such Director verbally in person or by
telephone or otherwise communicated or sent to such Director by post, courier
service, cable, telex, telecopier, facsimile, electronic mail or other mode of
representing words in a legible and non-transitory form at such Director's last
known address or any other address given by such Director to the Company for
this purpose. If such notice is sent by next-day courier, cable, telex,
telecopier, facsimile or electronic mail, it shall be deemed to have been given
the Business Day following the sending thereof and, if by post, five (5)
Business Days following the sending thereof.
16. Quorum at meetings of the Board
The quorum necessary for the transaction of business at a meeting of the
Board shall be a majority of the Directors then in office, present in person or
represented or such greater number as the Members shall determine.
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17. Meetings of the Board
(1) The Board may meet for the transaction of business, adjourn and
otherwise regulate its meetings as it sees fit.
(2) Directors may participate in any meeting of the Board by means of such
telephone, electronic or other communication facilities as permit all persons
participating in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting.
(3) A resolution put to the vote at a duly constituted meeting of the Board
at which a quorum is present and acting throughout shall be carried by the
affirmative votes of a majority of the votes cast and in the case of an equality
of votes, the chairman shall have a second or casting vote.
18. Unanimous written resolutions
A resolution in writing signed by all the Directors which may be in
counterparts, shall be as valid as if it had been passed at a meeting of the
Board duly called and constituted, such resolution to be effective on the date
on which the last Director signs the resolution.
19. Contracts and disclosure of Directors' interests
(1) Any Director, or any Director's firm, partner or any company with whom
any Director is associated, may act in a professional capacity for the Company
and such Director or such Director's firm, partner or such company shall be
entitled to remuneration for professional services as if such Director were not
a Director, provided that nothing herein contained shall authorise a Director or
Director's firm, partner or such company to act as Auditor of the Company.
(2) A Director who is directly or indirectly interested in a contract or
proposed contract or arrangement with the Company shall declare the nature of
such interest as required by the Act.
(3) Following a declaration being made pursuant to this Bye-law, and unless
disqualified by the chairman of the relevant Board meeting, a Director may vote
in respect of any contract or proposed contract or arrangement in which such
Director is interested and may be counted in the quorum at such meeting.
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20. Remuneration of Directors
The remuneration, if any, of the Directors shall be determined by the
Board. In addition, each Director shall be paid his reasonable traveling, hotel
and incidental expenses in attending and returning from meetings of the Board or
committees appointed by the Board, or any Annual General Meeting or Special
General Meeting of the Members, and shall be paid all expenses properly and
reasonably incurred by him in the conduct of the Company's business or in the
discharge of his duties as a Director. Any question as to the reasonableness of
expenses as provided herein shall be a matter to be determined by the Board.
COMMITTEES
21. Power to delegate to a committee
--- --------------------------------
The Board may appoint one or more Board committees and may delegate any of
its powers to any such committee. Without limiting the generality of the
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foregoing, such committees may include:
(a) an Investment Committee, which shall advise the Board and Company
on the investment of the Company's assets;
(b) an Audit Committee, which shall, among other things, advise the
Board with respect to the Company's financial reporting
responsibilities and related matters;
(c) a Compensation Committee, which shall, among other things, advise
the Board with respect to compensation of Officers;
(d) a Nominating and Corporate Governance Committee which shall
advise the Board on all corporate governance matters; and
(e) an Executive Committee which shall have all of the powers of the
Board between meetings of the Board.
All Board committees shall conform to such directions as the Board shall
impose on them, provided that each member shall have one (1) vote, and each
committee shall have the right as it deems appropriate to retain outside
experts. Each committee may adopt rules for the conduct of its affairs,
including rules governing the adoption of resolutions by unanimous written
consent, and the place, time, and notice of meetings, as such committee shall
consider advisable and as shall not be inconsistent with these Bye-laws or with
any applicable resolution adopted by the Board. Each committee shall cause
minutes to be made of all meetings of such committee and of the attendance
thereat and shall cause such minutes and copies of resolutions adopted by
unanimous consent to be promptly inscribed or incorporated by the Secretary in
the Company's minute book.
OFFICERS
22. Officers of the Company
The Officers of the Company shall consist of a President and a Vice
President or a Chairman and a Deputy Chairman, a Secretary and such additional
Officers as the Board may from time to time determine all of whom shall be
deemed to be Officers for the purposes of these Bye-laws.
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23. Appointment of Officers
The Board shall, as soon as possible after the statutory meeting of Members
and after each annual general meeting, appoint a Chairman and a Deputy Chairman,
who shall be Directors, or a President and a Vice President, who shall be
Directors. The Secretary and any additional Officers shall be appointed by the
Board from time to time.
24. Remuneration of Officers
--- ------------------------
The Officers shall receive such remuneration as the Board may from time to
time determine.
25. Duties of Officers
--- ------------------
The Officers shall have such powers and perform such duties in the
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management, business and affairs of the Company as may be delegated to them by
the Board from time to time.
26. Chairman of meetings
Unless otherwise agreed by a majority of those attending and entitled to
attend and vote thereat, the Chairman, if there be one, and if not the
President, shall act as chairman at all meetings of the Members and of the Board
at which such person is present. In his or her absence the Deputy Chairman or
Vice President, if present, shall act as chairman and in the absence of all of
them a chairman shall be appointed or elected by those present at the meeting
and entitled to vote
27. Register of Directors and Officers
The Board shall cause to be kept in one or more books at the registered
office of the Company a Register of Directors and Officers and shall enter
therein the particulars required by the Act.
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MINUTES
28. Obligations of Board to keep minutes
(1) The Board shall cause minutes to be duly entered in books provided for
the purpose:
(a) of all elections and appointments of Officers;
(b) of the names of the Directors present at each meeting of the
Board and of any committee appointed by the Board; and
(c) of all resolutions and proceedings of general meetings of the
Members, meetings of the Board, meetings of managers and meetings
of committees appointed by the Board.
(2) Minutes prepared in accordance with the Act and these Bye-laws shall be
kept by the Secretary at the registered office of the Company.
INDEMNITY
29. Indemnification of Directors and Officers of the Company
(1) The Directors, Secretary and other Officers (such term to include, for
the purposes of this Bye-law and Bye-law 30, any person appointed to any
committee by the Board) for the time being acting in relation to any of the
affairs of the Company and the liquidator or trustees (if any) for the time
being acting in relation to any of the affairs of the Company and every one of
them, and their heirs, executors and administrators, shall be indemnified and
secured harmless out of the assets of the Company from and against all actions,
costs, charges, losses, damages and expenses which they or any of them, their
heirs, executors or administrators, shall or may incur or sustain by or by
reason of any act done, concurred in or omitted in or about the execution of
their duty, or supposed duty, or in their respective offices or trusts, and none
of them shall be answerable for the acts, receipts, neglects or defaults of the
others of them or for joining in any receipts for the sake of conformity, or for
any bankers or other persons with whom any moneys or effects belonging to the
Company shall or may be lodged or deposited for safe custody, or for
insufficiency or deficiency of any security upon which any moneys of or
belonging to the Company shall be placed out on loan or invested, or for any
other loss, misfortune or damage which may happen in the execution of their
respective offices or trusts, or in relation thereto, provided that this
indemnity shall not extend to any matter in respect of any fraud or dishonesty
which may attach to any of said persons. 30. Waiver of claim by Member
Each Member agrees to waive any claim or right of action such Member might
have, whether individually or by or in the right of the Company, against any
Director or Officer on account of any action taken by such Director or Officer,
or the failure of such Director or Officer to take any action in the performance
of his duties with or for the Company, provided that such waiver shall not
extend to any matter in respect of any fraud or dishonesty which may attach to
such Director or Officer.
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MEETINGS
31. Notice of annual general meeting
The annual general meeting of the Company shall be held in each year other
than the year of incorporation at such time and place as the President or the
Chairman or any two Directors or any Director and the Secretary or the Board
shall appoint. At least ten days' notice of such meeting shall be given to each
Member stating the date, place and time at which the meeting is to be held, that
the election of Directors will take place thereat, and as far as practicable,
the other business to be conducted at the meeting.
32. Notice of special general meeting
The President or the Chairman or any two Directors or any Director and the
Secretary or the Board may convene a special general meeting of the Company
whenever in their judgment such a meeting is necessary, upon not less than five
days' notice which shall state the time, place and the general nature of the
business to be considered at the meeting.
33. Accidental omission of notice of general meeting
The accidental omission to give notice of a general meeting to, or the
non-receipt of notice of a general meeting by, any person entitled to receive
notice shall not invalidate the proceedings at that meeting.
34. Meeting called on requisition of Members
Notwithstanding anything herein, the Board shall, on the requisition of
Members holding at the date of the deposit of the requisition not less than
one-tenth of such of the paid-up share capital of the Company as at the date of
the deposit carries the right to vote at general meetings of the Company,
forthwith proceed to convene a special general meeting of the Company and the
provisions of Section 74 of the Act shall apply.
35. Short notice
A general meeting of the Company shall, notwithstanding that it is called
by shorter notice than that specified in these Bye-laws, be deemed to have been
properly called if it is so agreed by (i) all the Members entitled to attend and
vote thereat in the case of an annual general meeting; and (ii) by a majority in
number of the Members having the right to attend and vote at the meeting, being
a majority together holding not less than 95% in nominal value of the shares
giving a right to attend and vote thereat in the case of a special general
meeting.
36. Postponement of Meetings
The Secretary may postpone any general meeting called in accordance with
the provisions of these Bye-laws (other than a meeting requisitioned under
Bye-law 35) provided that notice of postponement is given to each Member before
the time for such meeting. Fresh notice of the date, time and place for the
postponed meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
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37. Quorum For General Meeting
At any general meeting of the Company two or more persons present in person
and representing in person or by proxy in excess of 50% (on an Unadjusted Basis)
of the total issued and outstanding Common Shares throughout the meeting shall
form a quorum for the transaction of business; provided, that if the Company
shall at any time have only one Member, one Member present in person or by proxy
shall constitute a quorum. If within half an hour from the time appointed for
the meeting a quorum is not present, the meeting shall stand adjourned to the
same day one week later, at the same time and place or to such other day, time
or place as the Secretary may determine. Unless the meeting is adjourned to a
specific date and time, fresh notice of the date, time and place for the
adjourned meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
38. Adjournment of meetings
The chairman of a general meeting may, with the consent of the Members at
any general meeting at which a quorum is present (and shall if so directed),
adjourn the meeting. Unless the meeting is adjourned to a specific date and
time, fresh notice of the date, time and place for the resumption of the
adjourned meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
39. Attendance at meetings
Members may participate in any general meeting by means of such telephone,
electronic or other communication facilities as permit all persons participating
in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting.
40. Written resolutions
(1) Subject to subparagraph (6), anything which may be done by resolution
of the Company in general meeting or by resolution of a meeting of any class of
the Members of the Company, may, without a meeting and without any previous
notice being required, be done by resolution in writing signed by, or, in the
case of a Member that is a corporation whether or not a company within the
meaning of the Act, on behalf of, all the Members who at the date of the
resolution would be entitled to attend the meeting and vote on the resolution.
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(2) A resolution in writing may be signed by, or, in the case of a Member
that is a corporation whether or not a company within the meaning of the Act, on
behalf of, all the Members, or any class thereof, in as many counterparts as may
be necessary.
(3) For the purposes of this Bye-law, the date of the resolution is the
date when the resolution is signed by, or, in the case of a Member that is a
corporation whether or not a company within the meaning of the Act, on behalf
of, the last Member to sign and any reference in any Bye-law to the date of
passing of a resolution is, in relation to a resolution made in accordance with
this Bye-law, a reference to such date.
(4) A resolution in writing made in accordance with this Bye-law is as
valid as if it had been passed by the Company in general meeting or by a meeting
of the relevant class of Members, as the case may be, and any reference in any
Bye-law to a meeting at which a resolution is passed or to Members voting in
favour of a resolution shall be construed accordingly.
(5) A resolution in writing made in accordance with this Bye-law shall
constitute minutes for the purposes of Sections 81 and 82 of the Act.
(6) This Bye-law shall not apply to:
(a) a resolution passed pursuant to Section 89(5) of the Act; or
(b) a resolution passed for the purpose of removing a Director before
the expiration of his term of office under these Bye-laws.
41. Attendance of Directors
The Directors of the Company shall be entitled to receive notice of and to
attend and be heard at any general meeting.
42. Voting at meetings
(1) Subject to the provisions of the Act and these Bye-laws, any question
proposed for the consideration of the Members at any general meeting shall be
decided by the affirmative votes of a majority of the votes cast in accordance
with the provisions of these Bye-laws and in the case of an equality of votes
the resolution shall fail.
(2) No Member shall be entitled to vote at any general meeting unless such
Member has paid all the calls on all shares held by such Member.
43. Voting on show of hands
At any general meeting a resolution put to the vote of the meeting shall,
in the first instance, be voted upon by a show of hands and, subject to any
rights or restrictions for the time being lawfully attached to any class of
shares and subject to the provisions of these Bye-laws, every Member present in
person and every person holding a valid proxy at such meeting shall be entitled
to one vote and shall cast such vote by raising his or her hand.
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44. Decision of chairman
At any general meeting a declaration by the chairman of the meeting that a
question proposed for consideration has, on a show of hands, been carried, or
carried unanimously, or by a particular majority, or lost, and an entry to that
effect in a book containing the minutes of the proceedings of the Company shall,
subject to the provisions of these Bye-laws, be conclusive evidence of that
fact.
45. Demand for a poll
(1) Notwithstanding the provisions of the immediately preceding two
Bye-laws, at any general meeting of the Company, in respect of any question
proposed for the consideration of the Members (whether before or on the
declaration of the result of a show of hands as provided for in these Bye-laws),
a poll may be demanded by any of the following persons:
(a) the chairman of such meeting; or
(b) at least two Members present in person or represented by proxy;
or
(c) any Member or Members present in person or represented by proxy
and holding between them not less than one-tenth of the total
voting rights of all the Members having the right to vote at such
meeting; or
(d) any Member or Members present in person or represented by proxy
holding shares in the Company conferring the right to vote at
such meeting, being shares on which an aggregate sum has been
paid up equal to not less than one-tenth of the total sum paid up
on all such shares conferring such right.
(2) Where, in accordance with the provisions of paragraph (1) of this
Bye-law, a poll is demanded, subject to any rights or restrictions for the time
being lawfully attached to any class of shares, including any limitation on the
voting power of any Controlled Shares pursuant to Bye-law 50, every Person
present at such meeting shall have one vote for each share of which such Person
is the holder or for which such person holds a proxy and such vote shall be
counted in the manner set out in paragraph (4) of this Bye-law or in the case of
a general meeting at which one or more Members are present by telephone in such
manner as the chairman of the meeting may direct and the result of such poll
shall be deemed to be the resolution of the meeting at which the poll was
demanded and shall replace any previous resolution upon the same matter which
has been the subject of a show of hands.
(3) A poll demanded in accordance with the provisions of paragraph (1) of
this Bye-law, for the purpose of electing a chairman or on a question of
adjournment, shall be taken forthwith and a poll demanded on any other question
shall be taken in such manner and at such time and place as the chairman may
direct and any business other than that upon which a poll has been demanded may
be proceeded with pending the taking of the poll.
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(4) Where a vote is taken by poll each person present and entitled to vote
shall be furnished with a ballot paper on which such person shall record his or
her vote in such manner as shall be determined at the meeting having regard to
the nature of the question on which the vote is taken, and each ballot paper
shall be signed or initialled or otherwise marked so as to identify the voter
and the registered holder in the case of a proxy. At the conclusion of the poll
the ballot papers shall be examined and counted by a committee of not less than
two Members or proxy holders appointed by the chairman for the purpose and the
result of the poll shall be declared by the chairman.
46. Seniority of joint holders voting
In the case of joint holders the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the votes
of the other joint holders, and for this purpose seniority shall be determined
by the order in which the names stand in the Register of Members.
47. Instrument of proxy
The instrument appointing a proxy shall be in writing in the form, or as
near thereto as circumstances admit, of Form "A" in the Schedule hereto, under
the hand of the appointor or of his attorney duly authorised in writing, or if
the appointor is a corporation, either under its seal, or under the hand of a
duly authorised officer or attorney. The decision of the chairman of any general
meeting as to the validity of any instrument of proxy shall be final.
48. Representation of corporations at meetings
A corporation which is a Member may by written instrument authorise such
person as it thinks fit to act as its representative at any meeting of the
Members and the person so authorised shall be entitled to exercise the same
powers on behalf of the corporation which such person represents as that
corporation could exercise if it were an individual Member. Notwithstanding the
foregoing, the chairman of the meeting may accept such assurances as he or she
thinks fit as to the right of any person to attend and vote at general meetings
on behalf of a corporation which is a Member.
SHARE CAPITAL AND SHARES
49. Rights of shares
(1) Subject to any resolution of the Members to the contrary (and without
prejudice to any special rights conferred thereby on the holders of any other
shares or class of shares), the share capital of the Company shall be divided
into Common Shares, the holders of which shall, subject to the provisions of
these Bye-laws:
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(a) be entitled to one vote per Common Share or, in the case of
Controlled Shares, if applicable, a fraction of a vote per
Controlled Share as determined pursuant to Bye-law 50;
(b) be entitled to such dividends as the Board may from time to time
declare;
(c) in the event of a liquidation, winding-up or dissolution of the
Company, whether voluntary or involuntary or for the purpose of a
reorganisation or otherwise or upon any distribution of capital,
be entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all debts and
liabilities of the Company; and
(d) generally be entitled to enjoy all of the rights attaching to
shares.
50. Limitation on voting rights of Controlled Shares
(1) Subject to any rights or restrictions for the time being attached to
any class or classes of shares, on a poll at a general meeting every Member of
record present in person or by proxy shall have one vote for each Common Share
registered in his name in the register; provided, however, that, subject to the
following provisions of this Bye-law 50, if and for so long as the number of
issued Controlled Shares of any Person would constitute more than nine and one
half percent (9.5%) of the total combined voting rights attaching to the issued
Common Shares of the Company (calculated after giving effect to any prior
reduction in voting rights attaching to Common Shares of other Persons as
provided in this Bye-law 50), each such issued Controlled Share, regardless of
the identity of the registered holder thereof, shall confer only a fraction of a
vote as determined by the following formula (the "Formula"):
(T - C) / (9.525 x C)
Where: "T" is the aggregate number of votes conferred by all the
issued Common Shares immediately prior to that application
of the Formula with respect to such issued Controlled
Shares, adjusted to take into account each reduction in
such aggregate number of votes that results from a prior
reduction in the exercisable votes conferred by any issued
Controlled Shares pursuant to Bye-law 50(4) as at the same
date; and
"C" is the number of issued Controlled Shares attributable to
such Person.
(2) The Directors may, by notice in writing, require any Member to provide,
within not less than ten (10) Business Days, complete and accurate information
to the registered office or such other place as the Directors may designate in
respect of any or all of the following matters:
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(a) the number of Common Shares in which such Member is legally or
beneficially interested;
(b) the Persons who are beneficially interested in Common Shares in
respect of which such Member is the registered holder;
(c) the relationship, association or affiliation of such Member with any
other Member or Person whether by means of common control or ownership
or otherwise; or
(d) any other facts or matters which the Directors may consider relevant
to the determination of the number of Controlled Shares attributable
to any Person.
(3) If any Member does not respond to any notice given pursuant to Bye-law
50(2) above within the time specified therein or the Directors shall have reason
to believe that any information provided in relation thereto is incomplete or
inaccurate, the Directors may determine that the votes attaching to any Common
Shares registered in the name of such Member shall be disregarded for all
purposes until such time as a response (or additional response) to such notice
reasonably satisfactory to the Directors has been received as specified therein.
(4) The Formula shall be applied successively as many times as may be
necessary to ensure that no Person shall be a 9.5% Shareholder at any time. For
the purposes of determining the votes exercisable by Members as at any date, the
Formula shall be applied to the shares of each Member in declining order based
on the respective numbers of total Controlled Shares attributable to each
Member. Thus, the Formula will be applied first to the votes of shares held by
the Member to whom the largest number of total Controlled Shares is attributable
and thereafter sequentially with respect to the Member with the next largest
number of total Controlled Shares. In each case, calculations are made on the
basis of the aggregate number of votes conferred by the issued Common Shares as
of such date, as reduced by the application of the Formula to any issued Common
Shares of any Member with a larger number of total Controlled Shares as of such
date.
(5) If, after giving effect to the provisions of Bye-law 50(1), the votes
conferred by the Common Shares directly held by any Related Group would
otherwise represent more than 9.5% of the votes conferred by all of the issued
and outstanding Common Shares, the votes conferred by such Common Shares are
hereby reduced (and shall be automatically reduced in the future)
proportionately among all the Common Shares directly held by such Related Group
in accordance with the relative voting power of such Common Shares, by whatever
amount is necessary so that after any such reduction the votes conferred by the
Common Shares directly held by such Related Group shall not exceed 9.5% of the
votes conferred by all of the issued and outstanding Common Shares. The amount
of any reduction in votes pursuant to this Bye-law 50(5) shall then be allocated
and conferred proportionately among the Common Shares held directly by all
shareholders or members of the Company who are not in such Related Group in
accordance with the relative voting power of such Common Shares, provided,
however, that no Common Shares shall be conferred votes to the extent that so
doing shall cause any person to be treated as a 9.5% Shareholder.
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(6) Notwithstanding the provisions of paragraphs (1) and (2) of this
Bye-law 50 above, having applied the provisions thereof as best as they consider
reasonably practicable, the Directors may make such final adjustments to the
aggregate number of votes attaching to the Common Shares of any Member that they
consider fair and reasonable in all the circumstances to ensure that no Person
shall be a 9.5% Shareholder at any time.
(7) This Bye-law 50 shall only be effective for and at such times when the
Company shall have eleven (11) or more Members holding Common Shares.
51. Power to issue shares
(1) Subject to the restrictions, if any that are provided for in these
Bye-laws from time to time and without prejudice to any special rights
previously conferred on the holders of any existing shares or class of shares,
the Board shall have power to issue any unissued shares of the Company on such
terms and conditions as it may determine and any shares or class of shares may
be issued with such preferred, deferred or other special rights or such
restrictions, whether in regard to dividend, voting, return of capital or
otherwise as the Board may determine. Further, the Board may create and issue
shares of a new class or of any existing class of shares and the Board may
generally exercise the powers of the Company set out in sections 45(1)(b), (c),
(d) and (e) of the Act, without the need of any approval of the Members as might
otherwise be required by such sections of the Act. The Board may also issue
options, warrants or other rights to purchase or acquire shares or, subject to
Section 43 of the Act, securities convertible into or exchangeable for shares
(including any employee benefit plan providing for the issue of shares or
options or rights in respect thereof), at such times, for such consideration and
on such terms and conditions as it may determine. The Board may create and issue
shares including, but not limited to, series of preferred shares (which may or
may not be separate classes of preferred shares), at such times, for such
consideration and on such terms and conditions, with similar or different rights
or restriction as any other series (or class) and to establish from time to time
the number of preferred shares to be included in each such series (or class),
and to fix the designation, powers, preferences, voting rights, dividend rights,
repurchase provisions, and other rights, qualifications, limitations or
restrictions thereof, as it may determine, provided that if any shares so
created by the Board confer any voting rights that entitle the holders thereof
to vote generally with the Common Shares, such new shares shall also be subject
to Bye-law 50 in the same manner as are the Common Shares and shall be included
with the Common Shares in determining the limitation on voting rights pursuant
to Bye-law 50.
(2) Notwithstanding the foregoing provisions of this Bye-law, the Company
shall not issue any shares in a manner that the Board believes would cause, by
reason of such issuance, any Person to become or continue to be a 9.5%
Shareholder, other than Tower Group, Inc. or any of its Affiliates.
Notwithstanding the foregoing provisions of this Bye-law, the restrictions of
this Bye-law 51(2) shall not apply to any issuance of shares to a person acting
as an underwriter in the ordinary course of its business, purchasing such shares
pursuant to a purchase agreement to which the Company is a party, for resale.
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(3) The Board shall, in connection with the issue of any share, have the
power to pay such commission and brokerage as may be permitted by law.
(4) The Company shall not give, whether directly or indirectly, whether by
means of loan, guarantee, provision of security or otherwise, any financial
|
assistance for the purpose of or in connection with a purchase or subscription
made or to be made by any person of or for any shares in the Company, but
nothing in this Bye-law shall prohibit transactions mentioned in Sections 39A,
39B, and 39C of the Act.
(5) The Company may (and the Board may exercise such power) from time to
time do any one or more of the following things:
(a) make arrangements on the issue of shares for a difference between
the Members in the amounts and times of payments of calls on
their shares;
(b) accept from any Member the whole or a part of the amount
remaining unpaid on any shares held by him, although no part of
that amount has been called up;
(c) pay dividends in proportion to the amount paid up on each share
where a larger amount is paid up on some shares than on others;
and
(d) issue its shares in fractional denominations and deal with such
fractions to the same extent as its whole shares and shares in
fractional denominations shall have in proportion to the
respective fractions represented thereby all of the rights of
whole shares including (but without limiting the generality of
the foregoing) the right to vote, to receive dividends and
distributions and to participate in a winding up.
52. Variation of rights and alteration of share capital
(1) If at any time the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issue of the shares of that class) may, whether or not the Company is being
wound-up, be varied with the consent in writing of the holders of three-fourths
of the issued shares of that class or with the sanction of a resolution passed
by a majority of the votes cast at a separate general meeting of the holders of
the shares of that class in accordance with Section 47(7) of the Act. The rights
conferred upon the holders of the shares of any class issued with preferred or
other rights shall not, unless otherwise expressly provided by the terms of
issue of the shares of that class, be deemed to be varied by the creation or
issue of further shares ranking pari passu therewith.
(2) The Company may from time to time by resolution of the Members change
the currency denomination of, increase, alter or reduce its share capital in
accordance with the provisions of Sections 45 and 46 of the Act. Where, on any
alteration of share capital, fractions of shares or some other difficulty would
arise, the Board may deal with or resolve the same in such manner as it thinks
fit including, without limiting the generality of the foregoing, the issue to
Members, as appropriate, of fractions of shares and/or arranging for the sale or
transfer of the fractions of shares of Members.
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(3) Subject to the restrictions, if any, that are provided for in these
Bye-laws from time to time, the Company may from time to time purchase its own
shares in accordance with the provisions of Section 42A of the Act.
53. Registered holder of shares
(1) The Company shall be entitled to treat the registered holder of any
share as the absolute owner thereof and accordingly shall not be bound to
recognise any equitable or other claim to, or interest in, such share on the
part of any other person.
(2) Any dividend, interest or other moneys payable in cash in respect of
shares may be paid by cheque or draft sent through the post directed to the
Member at such Member's address in the Register of Members or, in the case of
joint holders, to such address of the holder first named in the Register of
Members, or to such person and to such address as the holder or joint holders
may in writing direct. If two or more persons are registered as joint holders of
any shares any one can give an effectual receipt for any dividend paid in
respect of such shares.
54. Death of a joint holder
Where two or more persons are registered as joint holders of a share or
shares then in the event of the death of any joint holder or holders the
remaining joint holder or holders shall be absolutely entitled to the said share
or shares and the Company shall recognise no claim in respect of the estate of
any joint holder except in the case of the last survivor of such joint holders.
55. Share certificates
(1) Every Member shall be entitled to a certificate under the seal of the
Company (or a facsimile thereof) specifying the number and, where appropriate,
the class of shares held by such Member and whether the same are fully paid up
and, if not, how much has been paid thereon. The Board may by resolution
determine, either generally or in a particular case, that any or all signatures
on certificates may be printed thereon or affixed by mechanical means.
(2) The Company shall be under no obligation to complete and deliver a
share certificate unless specifically called upon to do so by the person to whom
such shares have been allotted.
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(3) If any such certificate shall be proved to the satisfaction of the
Board to have been worn out, lost, mislaid or destroyed the Board may cause a
new certificate to be issued and request an indemnity for the lost certificate
if they see fit.
56. Calls on shares
(1) The Board may from time to time make such calls as it thinks fit upon
the Members in respect of any monies unpaid on the shares allotted to or held by
such Members and, if a call is not paid on or before the day appointed for
payment thereof, the Member may at the discretion of the Board be liable to pay
the Company interest on the amount of such call at such rate as the Board may
determine, from the date when such call was payable up to the actual date of
payment. The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
(2) The Board may, on the issue of shares, differentiate between the
holders as to the amount of calls to be paid and the times of payment of such
calls.
57. Forfeiture of Shares
(1) If any Member fails to pay, on the day appointed for payment thereof,
any call in respect of any share allotted to or held by such Member, the Board
may, at any time thereafter during such time as the call remains unpaid direct
the Secretary to forward such Member a notice in writing in the form, or as near
thereto as circumstances admit, of Form "B" in the Schedule hereto.
(2) If the requirements of such notice are not complied with, any such
share may at any time thereafter before the payment of such call and the
interest due in respect thereof be forfeited by a resolution of the Board to
that effect, and such share shall thereupon become the property of the Company
and may be disposed of as the Board shall determine.
(3) A Member whose share or shares have been forfeited as aforesaid shall,
notwithstanding such forfeiture, be liable to pay to the Company all calls owing
on such share or shares at the time of the forfeiture and all interest due
thereon.
REGISTER OF MEMBERS
58. Contents of Register of Members
The Board shall cause to be kept in one or more books a Register of Members
and shall enter therein the particulars required by the Act.
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59. Inspection of Register of Members
The Register of Members shall be open to inspection at the registered
office of the Company on every Business Day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
business day be allowed for inspection. The Register of Members may, after
notice has been given by advertisement in an appointed newspaper to that effect,
be closed for any time or times not exceeding in the whole thirty days in each
year.
60. Determination of record dates
Notwithstanding any other provision of these Bye-laws, the Board may fix
any date as the record date for:
(a) determining the Members entitled to receive any dividend; and
(b) determining the Members entitled to receive notice of and to vote
at any general meeting of the Company.
TRANSFER OF SHARES
61. Instrument of transfer
(1) An instrument of transfer shall be in the form or as near thereto as
circumstances admit of Form "C" in the Schedule hereto or in such other common
form as the Board may accept. Such instrument of transfer shall be signed by or
on behalf of the transferor and transferee provided that, in the case of a fully
paid share, the Board may accept the instrument signed by or on behalf of the
transferor alone. The transferor shall be deemed to remain the holder of such
share until the same has been transferred to the transferee in the Register of
Members.
(2) The Board may refuse to recognise any instrument of transfer unless it
is accompanied by the certificate in respect of the shares to which it relates
and by such other evidence as the Board may reasonably require to show the right
of the transferor to make the transfer.
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62. Restrictions on transfer
(1) Subject to the Act, this Bye-law 62 and such other of the restrictions
contained in these Bye-laws and elsewhere as may be applicable, and except, in
the case of any shares other than the Common Shares, as may otherwise be
provided by the terms of issuance thereof, any Member may sell, assign, transfer
or otherwise dispose of shares of the Company at the time owned by it and, upon
receipt of a duly executed form of transfer in writing, the Directors shall
procure the timely registration of the same. If the Directors refuse to register
a transfer for any reason they shall notify the proposed transferor and
transferee within thirty days of such refusal.
(2) Except for shares held by Tower Group, Inc. or any of its Affiliates,
the Directors shall decline to register a transfer of shares if the Directors
have reason to believe that the effect of such transfer would be that any Person
would become or continue to be a 9.5% Shareholder or a United States 25%
Shareholder.
(3) The Directors may, in their absolute and unfettered discretion, decline
to register the transfer of any shares if the Directors have reason to believe
(i) that such transfer may expose the Company, any subsidiary thereof, any
Member or any Person ceding insurance to the Company or any such subsidiary to
adverse tax or regulatory treatment in any jurisdiction or (ii) that
registration of such transfer under the Securities Act or under any blue sky or
other U.S. state securities laws or under the laws of any other jurisdiction is
required and such registration has not been duly effected (provided, however,
that in this case (ii) the Directors shall be entitled to request and rely on an
opinion of counsel to the transferor or the transferee, in form and substance
satisfactory to the Directors, that no such approval or consent is required and
no such violation would occur, and the Directors shall not be obligated to
register any transfer absent the receipt of such an opinion).
(4) Without limiting the foregoing, the Board shall decline to approve or
register a transfer of shares unless all applicable consents, authorisations,
permissions or approvals of any governmental body or agency in Bermuda, the
United States or any other applicable jurisdiction required to be obtained prior
to such transfer shall have been obtained.
(5) The registration of transfers may be suspended at such time and for
such periods as the Directors may from time to time determine; provided that
such registration shall not be suspended for more than forty-five days in any
period of three hundred and sixty five (365) consecutive days.
(6) The Directors may require any Member, or any Person proposing to
acquire shares of the Company, to certify or otherwise provide information in
writing as to such matters as the Directors may request for the purpose of
giving effect to Bye-laws 10(2), 51(2), 62(2) and 62(3), including as to such
Person's status as a U.S. Person, its Controlled Shares and other matters of the
kind contemplated by Bye-law 50(2). Such request shall be made by written notice
and the certification or other information requested shall be provided to such
place and within such period (not less than ten (10) Business Days after such
notice is given unless the Directors and such Member or proposed acquiror
otherwise agree) as the Directors may designate in such request. If any Member
or proposed acquiror does not respond to any such request by the Directors as
requested, or if the Directors have reason to believe that any certification or
other information provided pursuant to any such request is inaccurate or
incomplete, the Directors may decline to register any transfer or to effect any
issuance or purchase of shares to which such request relates.
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(7) The restrictions on transfer authorized by this Bye-law 62 shall not be
imposed in any circumstance in a way that would interfere with the settlement of
trades or transactions in the Common Shares entered into through the facilities
of the PORTAL market; provided, however, that the Company may decline to
register transfers in accordance with these Bye-laws or resolutions of the Board
after a settlement has taken place.
63. Transfers by joint holders
The joint holders of any share or shares may transfer such share or shares
to one or more of such joint holders, and the surviving holder or holders of any
share or shares previously held by them jointly with a deceased Member may
transfer any such share or shares to the executors or administrators of such
deceased Member.
64. Lien on Shares
(1) The Company shall have a first and paramount lien and charge on all
shares (whether fully paid-up or not) registered in the name of a Member
(whether solely or jointly with others) for all debts, liabilities or
engagements to or with the Company (whether presently payable or not) by such
Member or his estate, either alone or jointly with any other Person, whether a
Member or not, but the Directors may at any time declare any share to be wholly
or in part exempt from the provisions of this Bye-law. The registration of a
transfer of any such share shall operate as a waiver of the Company's lien (if
any) thereon. The Company's lien (if any) on a share shall extend to all
dividends or other monies payable in respect thereof.
(2) The Company may sell, in such manner as the Directors think fit, any
shares on which the Company has a lien, but no sale shall be made unless a sum
in respect of which the lien exists is then presently payable, nor until the
expiration of fourteen days after a notice in writing stating and demanding
payment of such part of the amount in respect of which the lien exists as is
presently payable, has been given to the relevant Member, or the Person, of
which the Company has notice, entitled thereto by reason of such Member's death
or bankruptcy. Effective upon such sale, any certificate representing such
shares prior to such sale shall become null and void, whether or not it was
actually delivered to the Company.
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(3) To give effect to any such sale the Directors may authorise some Person
to transfer the shares sold to the purchaser thereof. The purchaser shall be
registered as the holder of the shares comprised in any such transfer, and he
shall not be bound to see to the application of the purchase money, nor shall
his title to the shares be affected by any irregularity or invalidity in the
proceedings in reference to the sale.
(4) The proceeds of such sale shall be received by the Company and applied
in payment of such part of the amount in respect of which the lien exists as is
presently payable and the residue, if any, shall (subject to a like lien for
sums not presently payable as existed upon the shares before the sale) be paid
to the Person entitled to the shares immediately prior to such sale.
TRANSMISSION OF SHARES
65. Registration on death or bankruptcy
Any Person becoming entitled to a share in consequence of the death or
bankruptcy of any Member may be registered as a Member upon such evidence as the
Board may deem sufficient or may elect to nominate some Person to be registered
as a transferee of such share, and in such case the Person becoming entitled
shall execute in favour of such nominee an instrument of transfer in the form,
or as near thereto as circumstances admit, of Form "D" in the Schedule hereto.
On the presentation thereof to the Board, accompanied by such evidence as the
Board may require to prove the title of the transferor, the transferee shall be
registered as a Member but the Board shall, in either case, have the same right
to decline or suspend registration as it would have had in the case of a
transfer of the share by that Member before such Member's death or bankruptcy.
66. Representative of deceased Member
In the case of the death of a Member, the survivor or survivors where the
deceased Member was a joint holder, and the legal personal representatives of
the deceased Member where the deceased Member was a sole holder, shall be the
only Persons recognised by the Company as having any title to the deceased
Member's interest in the shares. Nothing herein contained shall release the
estate of a deceased joint holder from any liability in respect of any share
which had been jointly held by such deceased Member with other Persons. Subject
to the provisions of Section 52 of the Act, for the purpose of this Bye-law,
legal personal representative means the executor or administrator of a deceased
Member or such other Person as the Board may in its absolute discretion decide
as being properly authorised to deal with the shares of a deceased Member.
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DIVIDENDS AND OTHER DISTRIBUTIONS
67. Declaration of dividends by the Board
Subject to any rights or restrictions at the time lawfully attached to any
class of shares and subject to these Bye-laws, the Board may, in accordance with
Section 54 of the Act, declare a dividend to be paid to the Members, in
proportion to the number of shares held by them, and such dividend may be paid
in cash or wholly or partly in specie in which case the Board may fix the value
for distribution in specie of any assets.
68. Other distributions
The Board may declare and make such other distributions (in cash or in
specie) to the Members as may be lawfully made out of the assets of the Company.
69. Reserve fund
--- ------------
The Board may from time to time before declaring a dividend set aside, out
of the surplus or profits of the Company, such sum as it thinks proper as a
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reserve fund to be used to meet contingencies or for equalising dividends or for
any other special purpose.
70. Deduction of amounts due to the Company
The Board may deduct from the dividends or distributions payable to any
Member all monies due from such Member to the Company on account of calls or
otherwise.
71. Unclaimed dividends
Any dividend unclaimed for a period of six (6) years from the date of
declaration of such dividend shall be forfeited and shall revert to the Company
and the payment by the Board of any unclaimed dividend, interest or other sum
payable on or in respect of the shares into a separate account shall not
constitute the Company a trustee in respect thereof.
72. Interest on dividend
No dividend or distribution shall bear interest against the Company.
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73. Issue of bonus shares
--- ---------------------
(1) Subject to Bye-law 51(2), the Board may resolve to capitalise any part
of the amount for the time being standing to the credit of any of the Company's
share premium or other reserve accounts or to the credit of the profit and loss
account or otherwise available for distribution by applying such sum in paying
up unissued shares to be allotted as fully paid bonus shares pro rata to the
Members.
(2) The Company may capitalise any sum standing to the credit of a reserve
account or sums otherwise available for dividend or distribution by applying
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such amounts in paying up in full partly paid shares of those Members who would
have been entitled to such sums if they were distributed by way of dividend or
distribution.
ACCOUNTS AND FINANCIAL STATEMENTS
74. Records of account
The Board shall cause to be kept proper records of account with respect to
all transactions of the Company and in particular with respect to:
(a) all sums of money received and expended by the Company and the
matters in respect of which the receipt and expenditure relate;
(b) all sales and purchases of goods by the Company; and
(c) the assets and liabilities of the Company.
Such records of account shall be kept at the registered office of the
Company or, subject to Section 83(2) of the Act, at such other place as the
Board thinks fit and shall be available for inspection by the Directors during
normal business hours.
75. Financial year end
The financial year end of the Company may be determined by resolution of
the Board and failing such resolution shall be December 31st in each year.
76. Financial statements
Subject to any rights to waive laying of accounts pursuant to Section 88 of
the Act, financial statements as required by the Act shall be laid before the
Members in general meeting.
AUDIT
77. Appointment of Auditor
Subject to Section 88 of the Act, at the annual general meeting or at a
subsequent special general meeting in each year, an independent representative
of the Members shall be appointed by them as Auditor of the accounts of the
Company. Such Auditor may be a Member but no Director, Officer or employee of
the Company shall, during his or her continuance in office, be eligible to act
as an Auditor of the Company.
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78. Remuneration of Auditor
The remuneration of the Auditor shall be fixed by the Company in general
meeting or in such manner as the Members may determine, or, by the Board as
permitted under the Act.
79. Vacation of office of Auditor
If the office of Auditor becomes vacant by the resignation or death of the
Auditor, or by the Auditor becoming incapable of acting by reason of illness or
other disability at a time when the Auditor's services are required, the Board
shall, as soon as practicable, convene a special general meeting to fill the
vacancy thereby created.
80. Access to books of the Company
The Auditor shall at all reasonable times have access to all books kept by
the Company and to all accounts and vouchers relating thereto, and the Auditor
may call on the Directors or Officers of the Company for any information in
their possession relating to the books or affairs of the Company.
81. Report of the Auditor
(1) Subject to any rights to waive laying of accounts or appointment of an
Auditor pursuant to Section 88 of the Act, the accounts of the Company shall be
audited at least once in every year.
(2) The financial statements provided for by these Bye-laws shall be
audited by the Auditor in accordance with generally accepted auditing standards.
The Auditor shall make a written report thereon in accordance with generally
accepted auditing standards and the report of the Auditor shall be submitted to
the Members in general meeting.
(3) The generally accepted auditing standards referred to in paragraph (2)
of this Bye-law shall be those of the United States of America and the financial
statements and the report of the Auditor shall disclose this fact.
NOTICES
82. Notices to Members of the Company
--- ---------------------------------
A notice may be given by the Company to any Member either by delivering it
to such Member in person or by sending it to such Member's address in the
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Register of Members or to such other address given in writing for the purpose.
For the purposes of this Bye-law, a notice may be sent by mail, courier service,
cable, telex, telecopier, facsimile or other mode of representing words in a
legible and non-transitory form.
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83. Notices to joint Members
Any notice required to be given to a Member shall, with respect to any
shares held jointly by two or more persons, be given to whichever of such
persons is named first in the Register of Members and notice so given shall be
sufficient notice to all the holders of such shares.
84. Service and delivery of notice
Any notice shall be deemed to have been served at the time when the same
would be delivered in the ordinary course of transmission and, in proving such
service, it shall be sufficient to prove that the notice was properly addressed
and prepaid, if posted, and the time when it was posted, delivered to the
courier or to the cable company or transmitted by telex, facsimile or other
method as the case may be.
SEAL OF THE COMPANY
85. The Seal
The seal of the Company shall be in such form as the Board may from time to
time determine. The Board may adopt one or more duplicate seals for use outside
Bermuda.
86. Manner in which seal is to be affixed
The seal of the Company shall not be affixed to any instrument except
attested by the signature of a Director and the Secretary or any two Directors,
or any person appointed by the Board for the purpose, provided that any
Director, or Officer, may affix the seal of the Company attested by such
Director or Officer's signature to any authenticated copies of these Bye-laws,
the incorporating documents of the Company, the minutes of any meetings or any
other documents required to be authenticated by such Director or Officer. Any
such signature may be printed or affixed by mechanical means on any share
certificate, debenture, share or other security certificate.
WINDING-UP
87. Winding-up/distribution by liquidator
--- -------------------------------------
Subject to the Act, the Company may be wound up voluntarily by resolution
of the Members. If the Company shall be wound up the liquidator may, with the
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sanction of a resolution of the Members, divide amongst the Members in specie or
in kind the whole or any part of the assets of the Company (whether they shall
consist of property of the same kind or not) and may, for such purpose, set such
value as he or she deems fair upon any property to be divided as aforesaid and
may determine how such division shall be carried out as between the Members or
different classes of Members. The liquidator may, with the like sanction, vest
the whole or any part of such assets in trustees upon such trusts for the
benefit of the Members as the liquidator shall think fit, but so that no Member
shall be compelled to accept any shares or other securities or assets whereon
there is any liability.
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ALTERATION OF BYE-LAWS
88. Alteration of Bye-laws
No Bye-law shall be rescinded, altered or amended and no new Bye-law shall
be made until the same has been approved by a resolution of the Board and by a
resolution of the Members, in accordance with Bye-law 42.
CERTAIN SUBSIDIARIES
89. Voting of Subsidiary Shares
Notwithstanding any other provision of these Bye-laws to the contrary, if
the Company is required or entitled to vote at a general meeting of any direct
or indirect non-U.S. subsidiary of the Company, the Directors shall refer the
subject matter of the vote to the Members of the Company on a poll (subject to
Bye-law 50) and seek authority from the Members for the Company's corporate
representative or proxy to vote in favor of the resolution proposed by the
subsidiary. The Directors shall cause the Company's corporate representative or
proxy to vote the Company's shares in the subsidiary pro rata to the votes
received at the general meeting of the Company, with votes for or against the
directing resolution being taken, respectively, as an instruction for the
Company's corporate representative or proxy to vote the appropriate proportion
of its shares for and the appropriate proportion of its shares against the
resolution proposed by the subsidiary.
90. Bye-Laws or Articles of Association of Certain Subsidiaries
The Board in its discretion shall require that the Bye-laws or Articles of
Association of each subsidiary of the Company, organized under the laws of a
jurisdiction outside the U.S., shall contain provisions substantially similar to
Bye-law 89 herein. The Company shall enter into agreements with each such
subsidiary, as reasonably necessary, to effectuate or implement this Bye-law.
*********
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SCHEDULE - FORM A (Bye-law 47)
..............................................
P R O X Y
I/We
of
the holder(s) of share(s) in the above-named company
hereby appoint .................................................... or
failing him/her ................................................. or failing
him/her ................................................. as my/our proxy to
vote on my/our behalf at the general meeting of the Company to be held on
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the day of , 20 , and at any adjournment thereof.
Dated this day of , 20
*GIVEN under the seal of the Company
*Signed by the above-named
.............................................................
.............................................................
Witness
*Delete as applicable.
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SCHEDULE - FORM B (Bye-law 57)
NOTICE OF LIABILITY TO FORFEITURE FOR NON-PAYMENT OF CALL
You have failed to pay the call of [amount of call] made on the ......
day of ........, 20.. last, in respect of the [number] share(s)
[numbers in figures] standing in your name in the Register of Members
of the Company, on the ...... day of ........., 20.. last, the day
appointed for payment of such call. You are hereby notified that
unless you pay such call together with interest thereon at the rate of
.......... per annum computed from the said ....... day of .........,
20... last, on or before the ....... day of ........., 20... next at
the place of business of the Company the share(s) will be liable to be
forfeited.
Dated this ....... day of .............., 20...
[Signature of Secretary]
By order of the Board
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SCHEDULE - FORM C (Bye-law 61)
------------------------------
TRANSFER OF A SHARE OR SHARES
-----------------------------
FOR VALUE RECEIVED......................................................[amount]
.................................................................. .[transferor]
hereby sell assign and transfer unto................................[transferee]
of.....................................................................[address]
..............................................................[number of shares]
shares of......................................................[name of Company]
Dated ................................................
......................................................
(Transferor)
In the presence of:
......................................................
(Witness)
......................................................
(Transferee)
In the presence of:
......................................................
(Witness)
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SCHEDULE - FORM D (Bye-law 65)
TRANSFER BY A PERSON BECOMING ENTITLED ON DEATH/BANKRUPTCY OF A MEMBER
I/We having become entitled in consequence of the [death/bankruptcy] of
[name of the deceased/bankrupt Member] to [number] share(s) standing in the
register of members of [Company] in the name of the said [name of
deceased/bankrupt Member] instead of being registered myself/ourselves elect to
have [name of transferee] (the "Transferee") registered as a transferee of such
share(s) and I/we do hereby accordingly transfer the said share(s) to the
Transferee to hold the same unto the Transferee his or her executors
administrators and assigns subject to the conditions on which the same were held
at the time of the execution thereof; and the Transferee does hereby agree to
take the said share(s) subject to the same conditions.
WITNESS our hands this ........ day of ..........., 20...
Signed by the above-named )
[person or persons entitled] )
in the presence of: )
Signed by the above-named )
[transferee] )
in the presence of: )
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EXHIBIT 10.1
MANAGEMENT AGREEMENT
between
CastlePoint Insurance Company
and
Tower Risk Management Corp.
This Agreement, entered into as of July 1, 2007 (the "Agreement") by
and between CASTLEPOINT INSURANCE COMPANY, a property and casualty insurance
company domiciled in New York (the "Company"), and TOWER RISK MANAGEMENT CORP.,
a New York corporation ("Manager"), each having offices located at 120 Broadway,
New York, N.Y. 10271.
PREAMBLE
WHEREAS, Company desires to appoint Manager as its manager for
performing underwriting and claims and other services with respect to certain
business, which includes but is not limited to Brokerage Business and business
that is not Specialty Program Business and Insurance Risk-Sharing Business or
Traditional Program Business, as set forth in this Agreement; and
WHEREAS, Manager desires to perform such responsibilities;
NOW, THEREFORE, Company and Manager, in consideration of the mutual
promises herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, agree as follows:
1. Appointment.
Company does hereby nominate, constitute, and appoint Manager as
non-exclusive manager for: (i) the soliciting, underwriting, quoting, binding,
issuing, and servicing of such of the Company's insurance policies as the
Company determines for time-to-time on Exhibit A (such insurance and any
policies, contracts, binders, endorsements, certificates, agreements, or
evidence of insurance, individually and collectively, will be referred to as
"Policy" or "Policies" hereunder), which business includes, but is not limited
to, Brokerage Business and business that is not Specialty Program Business and
Insurance Risk Sharing Business or Traditional Program Business.
2. Authority. Manager is authorized to:
2.1 Issue, or direct Company to issue, Policies subject to: (i) the
scope and limits granted in Exhibit A attached hereto; (ii) the terms and
conditions (including exclusions) of forms of Policies prescribed by Company;
(iii) applicable state insurance laws, rules, and regulations; (iv) the
underwriting guidelines approved by Company; (v) Company's ultimate right to
veto the solicitation, underwriting, quoting, binding, and issuing of any Policy
by Manager; (vi) Company's ultimate right to cancel any Policy subject to
applicable governmental regulatory requirements for cancellation and
non-renewal; (vii) Company's ultimate right to veto the appointment by Manager
of any agent, broker or producer, and the ultimate power of Company to cancel
any such agency pursuant to Section 2.4; (viii) Company's right to approve all
advertising with respect to the Policies in which Company's name is used.
Page 1 of 16
2.2 Collect, account, receipt for, and remit premiums on Policies that
Manager writes on behalf of Company in accordance with Section 2.1 and to retain
its provisional management fee and policy billing fees, if any, out of premiums
so collected. Manager agrees to pay all costs and expenses of collection from
insureds where premiums to be received by Manager pursuant to this Agreement are
not paid in full by the insured. Manager agrees that all premiums, including
return premiums received by Manager, are Company's property and will be paid
over to the Company.
2.3 Secure or obtain agents and producers to produce business. Company
appointments will follow upon Manager providing evidence that the agents and
producers are lawfully licensed to transact the type of insurance they are
expected to write, are not serving on Company's or Manager's board of directors
and complete Company's appointment process. The agents and producers must meet
the applicable compliance regulations for licensure.
2.4 Terminate agents and producers.
2.5 Investigate and settle claims as provided in Section 10 below
and establish reserves for such claims.
2.6 Purchase and maintain in effect treaty and facultative reinsurance
to limit Company's exposure on the Policies to the net amounts outlined in
Exhibit A. Company shall reimburse Manager for the Company's proportionate
share, but not greater than 15% of catastrophe reinsurance costs attributable to
the business written by it.
3. Performance.
3.1 Manager hereby accepts the foregoing appointment and agrees
faithfully to perform the duties thereof in a professional manner as an agent of
Company and to obey promptly such reasonable instructions as it may receive from
time to time from Company in accordance with this Agreement.
3.2 If Manager commits a material breach of this Agreement, Company
may, as one remedy but not as an exclusive remedy, require its own employees or
designated representatives to carry out Manager's duties hereunder. Manager
shall reimburse Company for Company's reasonable expenses, including salaries,
incurred for having Company's employees or representatives perform such duties
or, at Company's option, Manager shall pay such employees or representatives
directly. Such reimbursement or direct payments shall be made by Manager within
five (5) days after Manager's receipt of invoices of such expenses.
Page 2 of 16
4. Fees.
Manager shall receive a management fee quarterly for the foregoing
services ("Management Fees") during each calendar year of this agreement (or
part thereof) equal to (A) the management fee percentage for such year (as set
forth below) (the "Management Fee Percentage") times (B) the amount of Subject
Written Premium on Policies managed by Manager for Company, net of return
premiums. "Subject Written Premium" shall mean direct written premium net of
specific, aggregate and property catastrophe excess of loss reinsurance costs.
It is expressly agreed that the Management Fee Percentage payable to the manager
shall be reduced by any expenses attributable to boards, bureaus and taxes that
are required to be paid by Company. The provisional Management Fee Percentage
shall be 34%.
Such Management Fee Percentage shall be subject to adjustment until all
losses for a given year have been settled (or deemed settled as set forth
below). Within sixty (60) days following the end of each year, Company shall
calculate the Net Loss Ratio for each year that remains open and shall forward
copies of such calculations to Manager. The Management Fee Percentage shall be
increased nine-tenths of a percentage point for every percentage point by which
the Net Loss Ratio is below 61% up to a maximum Management Fee Percentage of
36%, and decreased nine-tenths of a percentage point for every percentage point
by which the Net Loss Ratio exceeds 61%, subject to a minimum Management Fee
Percentage of 31% as follows:
Net Loss Ratio Management Fee Percentage
-------------- -------------------------
64.33% or higher 31.0
64 31.3
63 32.2
62 33.1
61 34.0
60 34.9
59 35.8
58.78 or lower 36.0
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The parties will settle amounts due within ten (10) days thereafter. The Net
Loss Ratio for each year shall be deemed to be finalized six (6) years following
the close of such year or at any time before six (6) years by mutual agreement
of the parties.
For the purposes of this paragraph 4, "Net Loss Ratio" shall mean, for
any period of time, the ratio of Net Losses incurred during such period to Net
Premium Earned for such period, where "Net Losses" means, for any period of
time, any and all amounts that the Company is required to pay to or on behalf of
insureds for insurance claims made under its Policies including loss adjustment
expenses, after the application of any applicable reinsurance.
5. Territory.
Manager's authority to solicit, quote, underwrite, bind, issue, or
service Policies extends only to insureds or prospective insureds located in the
states specified in Exhibit A attached hereto, subject to: (i) the applicable
licensing authority of Company, (ii) Company having made and received approval
of all necessary regulatory filings and (iii) Manager obtaining licenses if
required for activities conducted by Manager pursuant to this Agreement.
Page 3 of 16
6. Representations and Warranties of Manager. On the effective date hereof,
during the term of this Agreement, and for any period described in Section 14.5,
Manager hereby represents and warrants to Company as follows:
6.1 Laws and Licenses. Manager has complied and will comply with all
applicable laws, rules, and regulations. Manager shall provide current copies of
Manager's licenses, which will be maintained in Company's records. Company will
appoint Manager in all applicable states. Manager will obtain and maintain at
its own expense all licenses required for it to perform this Agreement.
6.2 No Breach. This Agreement is a valid and binding obligation of
Manager. The execution and delivery of this Agreement and the consummation of
the transactions contemplated herein will not breach or conflict with Manager's
by-laws or certificate of incorporation, nor with any agreement, covenant, or
understanding (oral or written) to which Manager is bound, and will not
adversely affect the application for issuance or the validity of any license of
Manager.
6.3 Status. Manager is a duly organized and validly existing
corporation in the State of New York.
6.4 Authorization. The execution, delivery, and performance of this
Agreement by Manager have been duly and properly authorized by it.
7. Representations and Warranties of Company. On the effective date hereof,
during the term of this Agreement, and for any period described in Section 14.5,
each Company hereby represents and warrants to Manager as follows:
7.1 Laws and Licenses. Company has complied and will comply with all
applicable laws, rules and regulations and shall, whenever necessary, obtain and
maintain at its own expense all licenses required for it to perform this
Agreement.
7.2 No Breach. This Agreement is a valid and binding obligation of
Company. The execution and delivery of this Agreement and the consummation of
the transactions contemplated herein will not breach or conflict with Company's
by-laws or articles of incorporation, nor with any agreement, covenant, or
understanding (oral or written) to which Company is bound, and will not
adversely affect the application for issuance or the validity of any license of
Company.
7.3 Status. Company is a duly organized and validly existing
corporation in the State of New York.
7.4 Authorization. The execution, delivery, and performance of this
Agreement by Company have been duly and properly authorized by it.
Page 4 of 16
8. Duties and Responsibilities. Subject to Company's supervision and
instructions, Manager agrees to perform the following duties and services in
addition to those otherwise enumerated in this Agreement with regards to
Policies it manages hereunder:
8.1 Solicit, underwrite, quote, bind, issue, secure proper
countersignature when required by applicable laws, and service Policies on
behalf of Company.
8.2 Cancel Policies issued or underwritten by Manager in accordance
with the terms of the Policies and applicable state regulations.
8.3 Issue Policies only on forms approved by Company and filed with and
approved by regulatory authorities wherever such filing and approval is
required.
8.4 Underwrite and issue Policies in accordance with the premium rates
and underwriting criteria and guidelines as approved by Company.
8.5 Investigate and settle claims as provided in Section 10 below
and establish reserves for such claims.
8.6 Maintain at Manager's expense data processing systems and
equipment, an office or offices and a staff of employees sufficient in number
and qualifications to perform the duties set forth in this Agreement.
8.7 Pay to Company any fines imposed by regulatory authorities,
taxation authorities, and their agents for data collection and advisory
organizations, due to late filing or poor quality of data provided by Manager.
8.8 Pay to Company any fines imposed by regulatory authorities upon
Company due to the use of unapproved forms or rates by Manager or due to other
market conduct violations caused by Manager's willful misconduct.
8.9 Maintain separately for Company and each other insurer with which
Manager does business, complete and current records and accounts, including
underwriting files, which Manager shall retain in accordance with Section 12 and
any applicable laws.
8.10 Refund within sixty (60) days of the end of each calendar month,
return commissions on Policy cancellations or premium reduction, in each case at
the same rate at which such commissions were originally retained.
8.11 Collect, account and receipt for premiums on Policies that Manager
writes on behalf of Company in accordance with Section 2.1, and return premiums
to policyowners, as necessary. Manager shall promptly remit premiums collected
on Company's behalf, less return premium, reinsurance costs and Management Fees,
to Company.
8.12 Hold all monies, including premiums, return premiums, and monies
received by Manager, in a fiduciary capacity for Company. Except as otherwise
authorized by this Agreement, Manager shall maintain such monies in a separate
and segregated bank account in a bank that is a member of the Federal Reserve
System and is insured by the Federal Deposit Insurance Corporation. This account
shall not be used for any purpose other than payments to or on behalf of
Company. Any investment income produced from this bank account is the property
of Manager.
Page 5 of 16
8.13 Comply with all regulatory requirements including, but not
limited to, the cancellation, non-renewal, or conditional renewal of policies.
8.14 Return upon demand after termination of this Agreement, all unused
Policies, forms, and other property furnished to Manager by Company. Such items
remain the property of Company. Manager shall fully cooperate with and assist
Company in recovering such items from third parties, if any.
8.15 Exercise Manager's authority through authorized employees of
Manager or its affiliates.
8.16 Exercise exclusive and independent control of Manager's time
and conduct.
9. Limitations of Authority.
Notwithstanding the foregoing, all underwriting services provided to
Company by Manager shall be based upon the written criteria, standards and
guidelines of Company which shall retain the final authority over underwriting
decisions including, but not limited to, acceptance, rejection, cancellation and
termination of risks.
10. Claims.
10.1 Manager shall or shall arrange to investigate, negotiate, and
settle all Policy claims or losses on behalf of Company; however, Manager shall
obtain the prior approval of Company before handling and settling any Policy
claim or loss which is in excess of One Hundred Thousand Dollars ($100,000)
gross incurred loss. Manager shall determine coverage for claims; however,
Manager shall obtain the prior written approval of Company for the handling of
litigation in which the Company is named as a defendant or claims in which
Manager seeks declaratory relief on behalf of Company. All claims or losses
shall be reported in monthly statements pursuant to Section 11 below. In
addition, Manager shall immediately notify Company in writing of any claim or
loss as Company requests upon receiving notice or knowledge of: (i) any Policy
claim or loss in excess of Two Hundred Fifty Thousand Dollars ($250,000) gross
incurred loss; or (ii) any loss regardless of incurred dollar amount involving
the following: fatalities; brain stem/brain damage injuries; spinal cord
injuries; heart attacks; severe, non-accumulative hearing loss; severe,
non-accumulative vision loss; amputation of major body part; paraplegia;
quadriplegia; serious burns (i.e. second or third degree and/or burns over 50%
of the body); non-union, compound, comminuted, serious fractures; injury to the
spine or pervasive nerve damage; class action suits; allegations of criminal
conduct by an insured or allegations of criminal conduct by an insured or
allegations of criminal conduct on the insured's premises; bad faith claims or
suits; demands in excess of policy limits; actual or alleged violations of the
Deceptive Trade Practices Act; actual or alleged violations of the applicable
State Insurance Codes; actual or alleged violation of law by Manager; or
litigation naming Company as a defendant. In determining gross incurred loss,
Manager shall consider the facts and circumstance of the claim or loss,
Manager's analysis of the insured's liability for the claim or loss, Manager's
analysis of damages resulting from the claim or loss and Manager's analysis of
the applicability of coverage for the claim or loss. These individually reported
claims or losses should be updated semi-annually and more frequently upon the
occurrence of any material change in any claim or loss or any information
previously reported to Company. Company shall be immediately notified if Manager
is closing a file on a reported claim or loss and of the reason for this file
closure. Failure to promptly notify Company of claims under this Section 10.1
shall be considered a material breach of this Agreement and subject to all the
remedies provided herewith.
Page 6 of 16
10.2 Whenever Manager shall deem it prudent to engage legal counsel or
loss adjusters to protect Company's interest regarding claims or losses, such
services shall be provided only by qualified attorneys-at-law and/or licensed
loss adjusters selected by Manager, who have substantial experience in the
handling of claims litigation of the type involved. Upon execution of this
Agreement, Manager shall submit to Company for approval a list of the attorneys
and loss adjusters it intends to use. Such list shall be considered approved
unless Company objects to any of such firms or individuals within fourteen (14)
days after receipt of such list. Any provision hereof to the contrary
notwithstanding, it is agreed that, with respect to any claim or loss of any
amount, Manager shall promptly furnish Company, or its designee, any additional
claim or loss information requested by Company with respect to a claim or loss
pertaining to any Policy covered by this Agreement, and it is further agreed
with respect to any claim or loss of any amount as follows:
a. Company may assign an attorney of its own choice to assume
the defense of any claim or loss reported to Company and, in the event
an attorney has already been employed by Manager, the service of such
attorney which has already been employed by Manager shall be terminated
by Manager forthwith and Manager shall waive any conflict of interest
that may have been created by such attorney's employment by Manager.
b. In the event that Company is named as a defendant in any
lawsuit, Manager shall, as soon as it has notice or knowledge of such
lawsuit, immediately give written notice thereof to Company accompanied
by a copy of the complaint and any court papers related to such
lawsuit.
10.3 All claims services provided to Company by Manager shall be based
upon the written criteria, standards and guidelines of Company which shall
retain the final authority over claims decisions including, but not limited to,
payment and non-payment of claims.
10.4 The Company will establish a bank account to fund claim payments
on its policies managed by Manager. Manager shall be made an authorized
signatory on, and shall pay claims out of such account. Manager shall not be
obligated to pay claims unless such account is sufficiently funded by the
Company.
11. Accounting and Reporting Procedures.
Manager shall:
Within thirty (30) days after the end of each month, remit to Company
all premiums collected on Policies issued under the terms of this Agreement,
less the provisional management fee due to Manager in accordance with Exhibit A
attached hereto. Manager may not offset balances due to Company hereunder
against balances due Manager under any other contract with Company;
Page 7 of 16
On behalf of Company supply accounting, underwriting, and
claim bordereaux with copies to Company, pursuant to these terms and conditions;
With regard to business placed by Manager with Company
hereunder, furnish to Company, in electronic format, within thirty (30) days
after the end of each quarter a report of written, earned, and unearned
premiums; losses and loss adjustment expenses paid and outstanding; loss and
loss adjustment expenses incurred; commissions earned by Manager;
Provide detail and summary reports, in an electronic or
printed medium, as are required to meet all reporting requirements of state
regulatory or taxation authorities, their managers for data collection, and
advisory organizations including but not limited to:
a. Within thirty (30) days of the close of the calendar
quarter: direct premiums (written and earned); in force premiums;
policy counts (written and in force); direct losses and loss adjustment
expenses including subrogation (paid and reserved); number of claims
open, closed with payment, and closed without payment; as prescribed by
state regulatory authorities.
b. Within thirty (30) days of the close of the calendar
quarter: direct written premium, losses, and loss adjustment expense
including subrogation (paid and reserved) transaction data as
prescribed by advisory organizations providing loss cost and policy
forms.
c. Thirty (30) days prior to the prescribed deadline: the
reports of direct premiums (written and earned), losses, and loss
adjustment expenses including salvage and subrogation (paid and
reserved) as required by state regulatory data collection agents,
including but not limited to financial calls, unit statistical data,
summary statistical data, and detailed claim information for National
Council on Compensation Insurance (NCCI), Insurance Services Office
(ISO), and National Association of Independent Insurers (NAII), and
various state-specific reporting requirements as necessary.
By the first business day of February of each year, Manager
shall provide Company with any information Company may require in order to
complete its statutory financial statements for the prior year. Company shall
notify Manager of the material information required by December 31 of the prior
year.
12. Books and Records.
Manager shall keep such books and records as may be (i) reasonably
requested by Company; or (ii) required by law, rulings, or orders of the
insurance departments of the states having jurisdiction over: (a) Manager or
Manager's business or (b) any Policies. Manager shall make such books and
records available for examination, audit, and copying by the insurance
departments of such states and by Company, or by their authorized
representatives. Company shall have the right to examine and review at any
reasonable time all books, records, files, and papers, including, but not by way
of limitation, claim files and underwriting files maintained and kept by Manager
which relate to this Agreement and the Policies. Manager shall institute and
maintain retention and disposal systems for claim files and underwriting files
in accordance with procedures and requirements as prescribed by law. All books
and records of Manager shall be maintained at the principal place of business of
Manager and shall be complete, accurate, and up-to-date, and shall reflect all
monies paid or received by Agent and all transactions of Manager pursuant to
this Agreement. Anything to the contrary notwithstanding, all of the books,
records, files, and papers maintained and kept by Manager relating to
underwriting and claims matters involving this Agreement or the Policies, shall
be and remain the sole and exclusive property of Company except that upon
termination of this Agreement, all right, title, and interest in and to all
Policy renewals or expirations and all records with respect to renewals and
expirations shall automatically and irrevocably transfer to and vest in Manager
provided Manager has accounted for and has made payments of all amounts due
Company and continues to do so.
Page 8 of 16
13. Indemnification.
13.1 Manager shall indemnify and hold harmless Company from and against
all losses, damages, costs, expenses, claims, fines, penalties, or liabilities
of any description suffered by Company with respect to Manager on any Policies
issued or underwritten by Manager, including, without limitation, any attorney's
fees, in connection with or arising out of: (i) any violations by Manager of
laws, rules, or regulations to which it is subject; (ii) any material breach of
any warranty or representation of Manager made in this Agreement or any other
material breach of this Agreement by Manager; or (iii) any willful misconduct,
gross negligence, or misrepresentation, of Manager or of it officers, directors,
employees, agents, sub-producers, or independent contractors.
13.2 Company shall indemnify and hold harmless Manager from and against
all losses, damages, costs, expenses, claims, fines, penalties, or liabilities
of any description suffered by Manager with respect to Company on any Policies
issued or underwritten by Company, including, without limitation, any attorney's
fees, in connection with or arising out of: (i) any violations by Company of
laws, rules, or regulations to which it is subject; (ii) any breach of any
warranty or representation of Company made in this Agreement or any other breach
of this Agreement by Company; or (iii) any alleged or actual misconduct,
negligence, misrepresentation, or other acts or failures to act of Company or of
it officers, directors, employees, agents, sub-producers, or independent
contractors.
14. Termination of Agreement.
14.1 This Agreement shall continue until terminated in accordance with
Sections 14.2 through 14.6 below.
14.2 This Agreement may be terminated immediately by either party upon
giving written notice to the other party via electronic, certified or registered
mail in the event of:
a. The misappropriation by either party of any funds or
property belonging to the other party;
b. The fraud, gross negligence, or willful misconduct of the
other party;
Page 9 of 16
c. The license or certificate of authority of the other party
in their state of domicile is canceled, non-renewed or suspended by any
public authority;
d. An assignment by the other party for the benefit of
creditors; the dissolution or liquidation of the other party; the
appointment of a conservator, receiver, or liquidator for a substantial
part of the other party's property; the institution of bankruptcy,
insolvency, or similar proceedings by or against the other party;
e. Material breach by the other party of any provision of this
Agreement;
f. If any law or regulation of the federal, state, or local
government of any jurisdiction in which the other party is doing
business shall render illegal or invalid any transaction contemplated
by this Agreement, or any term of this Agreement, this Agreement may be
terminated insofar as it applies to such jurisdiction by either party
giving notice to the other party to such effect or by either party
giving notice to the other party to such effect;
g. Change in ownership of ten percent (10%) or more of the
outstanding voting stock of the other party, sale or transfer of the
other party's assets, merger of the other party, or change or
resignation of any principal officer or director of the other party;
h. The licenses required of the other party for it to perform
under this Agreement expire, are terminated, or are not valid pursuant
to the law of the State in which the other party is transacting
business on behalf of either party.
14.3 This Agreement may be terminated at any time by the Company if the
Reinsurance covering the business under this agreement is cancelled, terminated
or expired.
14.4 This Agreement may be terminated at any time by mutual written
agreement, or upon sixty (60) days prior written notice by either Company or
Manager.
14.5 If at any time either party sends notice of termination to the
other party as provided in Section 14.2 above or the Agreement is otherwise
terminated as provided herein, the Manager shall not solicit, underwrite, quote,
bind, or issue any Policies or renew any existing Policies for which the
inception date or renewal date falls after the effective date of termination of
this Agreement, nor shall Manager cancel and rewrite any existing Policies.
14.6 Unless otherwise indicated by this Agreement or either party
otherwise notifies the other party in writing, Manager's duties and
responsibilities under this Agreement shall survive termination of this
Agreement until such time as all Policies issued, underwritten, or serviced by
Manager pursuant to this Agreement have expired and all known losses under such
Policies have been paid or settled, have run off or otherwise have been disposed
of in the judgment of Company, all incurred but not reported loss reserves have
been reduced to zero, and any amounts owed to Company by others has been paid.
The only compensation Manager shall receive for its performance of its duties
hereunder (both during and after the term of this Agreement) is set forth in
Section 4.
Page 10 of 16
14.7 Upon termination of the Agreement, Manager shall, unless notified
in writing to the contrary by Company:
a. Continue to represent Company for the purpose of servicing
Policies placed by Manager with Company which are in force on, or
renewed at Company's election, or as required by law, after the date of
termination of this Agreement, and Manager shall continue to receive
its normal compensation for such services.
b. Issue and countersign appropriate endorsements on Policies
in force, provided that without prior written approval of Company, such
endorsement shall not increase nor extend Company's liability nor
extend the term of any Policy.
c. Collect and receipt for premiums and retain commissions out
of premiums collected as full compensation.
14.8 Any notice issued pursuant to this Section shall be effective
on the day after it is received by Manager.
15. Suspension of Manager's Authority.
15.1 In lieu of terminating this Agreement, Company may give written
notice to Manager that Company is immediately suspending Manager's authority in
its entirety or in any particular state to bind new or renewal business, change
any existing Policy and/or settle any claim during the pendency of any of the
following events:
a. Manager is delinquent in payment of any monies due Company;
b. Any dispute exists between Manager and Company regarding
the existence of any of the events listed in Section 14.2;
15.2 Such suspension shall remain in effect until such delinquency is
cured or dispute is resolved and Manager receives written notification from
Company to that effect. If such delinquency is not cured within fifteen (15)
days from the date of receipt of written notification by Manager of such
delinquency, Company may exercise its right to terminate this Agreement under
Section 14.2.
15.3 Unless otherwise notified in writing to the contrary by Company,
Manager's obligation under this Agreement shall continue during the suspension
of Manager's authority under this Agreement.
15.4 Any notice of suspension issued pursuant to this Section shall be
effective immediately.
16. Ownership of Expirations.
The use and control of expirations of the Policies will remain the
property of Manager; and Company will not, without consent of Manager, (a) refer
or communicate to any other agent or broker, Company's records of insureds,
expiration dates and other material information relating to specific risks
except for loss or claims information specifically requested by the insured or
the insured's authorized representative nor (b) use such material information
relating to specific risks for purposes of solicitation.
Page 11 of 16
17. Mediation; Arbitration and Injunctive Relief.
17.1 If any dispute arises between Company and Manager with reference
to the interpretation, performance, or breach of this Agreement (whether the
dispute arises before or after termination of this Agreement) such dispute, if
not resolved by the parties, must be submitted to non-binding mediation. If such
dispute is not resolved by non-binding mediation within sixty (60) days it will
then be submitted for decision to a panel of three arbitrators. Notice
requesting arbitration will be in writing and sent certified or registered mail,
return receipt requested.
17.2 One arbitrator shall be chosen by each party and the two
arbitrators shall, before instituting the hearing, choose an impartial third
arbitrator who shall preside at the hearing. If either party fails for any
reason to appoint its arbitrator within thirty (30) days after being requested
to do so by the other party, the latter, after ten (10) days notice by certified
or registered mail of its intention to do so, may appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the third arbitrator shall be selected
from a list of six individuals (three named by each arbitrator) by a judge of
the United States District Court having jurisdiction over the geographical area
in which the arbitration is to take place, or if that court declines to act, the
state court having general jurisdiction in such area.
17.3 All arbitrators shall be active or retired disinterested officials
of insurance or reinsurance companies not under the control or management of
either party to this Agreement and will not have personal or financial interests
in the result of the arbitration.
17.4 Within thirty (30) days after notice of appointment of all
arbitrators, the panel shall meet and determine timely periods for briefs,
discovery procedures, and schedules for hearings.
17.5 The panel shall be relieved of all judicial formality and shall
not be bound by the strict rules of procedure and evidence. Arbitration shall
take place in New York, New York. Insofar as the arbitration panel looks to
substantive law, it shall consider the law of the State of New York. The
decision of any two arbitrators when rendered in writing shall be final and
binding. The panel is empowered to grant interim relief as it may deem
appropriate.
17.6 The panel shall interpret this Agreement as an honorable
engagement rather than merely a legal obligation and shall make its decision
considering the custom and practice of the applicable insurance and reinsurance
businesses within sixty (60) days following the termination of the hearing
unless the parties consent to an extension. Judgment upon the award may be
entered in any court having jurisdiction thereof.
17.7 Punitive damages will not be awarded. The arbitrators may,
however, at their discretion award such other costs and expenses as they deem
appropriate, including but not limited to attorneys' fees, the cost of
arbitration, and arbitrators' fees, to the extent permitted by law.
Page 12 of 16
17.8 It is understood and agreed that in the event of any breach or
threatened breach, Company may apply to a court of competent jurisdiction for,
and shall be entitled to, injunctive relief from such court, without the
requirement of posting a bond or proof of damages, designed to cure existing
breaches and to prevent a future occurrence or threatened future occurrence of
like breaches on the part of Manager. It is further understood and agreed that
the remedies and recourses herein provided shall be in addition to, and not in
lieu of, any other remedy or recourse which is available to Company either at
law or in equity in the absence of this paragraph including without limitation
the right to damages.
18. Miscellaneous.
18.1 This Agreement may be revised by mutual agreement of Manager and Company
and such revision shall be evidenced by a written agreement duly executed by
authorized representatives of Manager and Company, which specifies the effective
date thereof. Any amendment to which section 1505 of the New York Insurance Laws
is applicable shall be resubmitted to the Superintendent of Insurance in
accordance with the provisions of that section.
18.2 Manager shall not have authority to represent Company on any exclusive
basis with respect to any policy form, line, or class or subclass of business,
unless otherwise authorized in writing by Company.
18.3 Manager shall not commit Company to any expenses or obligations not
specifically provided for herein without the prior written permission of
Company. Company shall reimburse Manager for expenses and costs incurred by
Manager which are not in the ordinary course of business and which Company has
specifically approved.
18.4 Company shall have the right to oversee and supervise the operation of this
Agreement, including but not limited to the right at all reasonable times to
have access to and to copy at Company's expense Manager's books and records as
they relate to this Agreement, which rights shall survive the termination or
expiration of this Agreement. The director or commissioner of insurance of any
state where Manager issues Policies on behalf of Company shall have at all
reasonable times the right of access to all books, records, and bank account of
Manager in a form usable by such official.
18.5 During the term of this Agreement, Manager shall obtain and maintain in
full force and effect, at its expense, fidelity insurance with a minimum policy
limit of $1,000,000, errors and omissions insurance with a minimum policy limit
of $2,000,000, directors and officers insurance with a minimum policy limit of
$2,000,000, and general liability insurance with a minimum policy limit of
$1,000,000 and on such terms as are reasonably acceptable to Company. Manager
shall furnish Company with copies of the certificates of insurance for such
insurance, and shall not cancel or amend any such insurance without Company's
prior written consent.
18.6 Manager shall provide to Company, copies of its quarterly financial reports
and annual audited financial reports.
Page 13 of 16
18.7 If Manager fails in any respect to fulfill its duties and responsibilities
under this Agreement, then the expense incurred by Company in order to fulfill
Manager's duties and responsibilities under this Agreement will be fully
reimbursed by Manager.
18.8 This Agreement may not be directly or indirectly assigned by either party
in whole or in part, nor may Manager appoint a sub managing general Manager.
18.9 Any provision of this Agreement which conflicts with applicable law or
regulation will be amended to the minimum extent necessary to effectuate
compliance with such law or regulation.
18.10 Manager is an independent contractor, not an employee of Company, and
nothing in this Agreement shall be construed to create an employer/employee
relationship between Company and Manager.
18.11 This Agreement shall be construed in accordance with the laws of the
State of New York.
18.12 Neither Company nor Manager shall disclose material details of this
Agreement and the Policies without the prior consent of the other party.
However, this restriction will not apply to disclosures made by Company or
Manager to its agents, producers, shareholders, policyholders, auditors,
accountants, arbitrators, legal counsel, or other third parties as required in
the ordinary course of business, nor to disclosures required by arbitration
panels, governmental agencies, regulatory authorities, or courts of law.
18.13 Failure of either party to enforce compliance with any term or condition
of this Agreement shall not constitute a waiver of such term or condition. No
waiver of any breach or default hereunder shall be valid unless in writing and
signed by the party giving such waiver, and no such waiver shall be deemed a
waiver of any subsequent breach or default of the same or similar nature.
18.14 Manager acknowledges and agrees that it will benefit from this Agreement
and that a breach by it of the covenants contained herein would cause Company
irreparable damages that could not adequately be compensated for only by
monetary compensation. Manager shall notify Company in writing via electronic,
certified or registered mail, within five (5) days if there is a change in
ownership of ten percent (10%) or more of the outstanding voting stock of
Manager, sale or transfer of all Manager's assets, merger of Manager, or change
of any principal officer or director of Manager including, but not limited to,
resignation.
18.15 Any notice or other communications required or permitted hereunder shall
be sufficiently given if sent by electronic, certified or registered mail,
postage prepaid, if to Company, addressed to Tower Risk Management Corp., 120
Broadway, 31st Floor, New York, New York, 10271, Attention: Stephen Kibblehouse,
General Counsel, and if to Company addressed to CastlePoint Insurance Company.,
120 Broadway, 30th Floor, New York, NY 10271, Attention: General Counsel or such
other address as notified by either party to the other.
18.16 Notwithstanding any other provisions of this Agreement, the business and
affairs of Company shall be managed by its board of directors, and, to the
extent delegated by the board, by its appropriately authorized officers. The
board of directors and officers of Manager shall not have any management
prerogatives with respect to the business affairs and operations of the Company.
Page 14 of 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
TOWER RISK MANAGEMENT CORP.
By: /s/ Frank Colalucci
----------------------------
Title: Sr VP and CFO
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CASTLEPOINT INSURANCE COMPANY
By: /s/ Joel Weiner
----------------------------
Title: Sr VP and CFO
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Page 15 of 16
EXHIBIT A
SCHEDULE OF AUTHORITY
Manager is only authorized to accept or bind business, as defined in Section A
below, subject to the amounts and stipulations indicated below. Amounts in
excess of the authorized limits or classifications must be referred to Company
for review and approval prior to binding.
A. GROSS NET WRITTEN PREMIUM LIMIT. A maximum of $100,000,000 unless
Manager obtains the prior written consent of Company. Gross Net Written Premium
shall mean gross written premium of Company less returned premium for
cancellations and reductions.
B. POLICY LIMITS, COVERAGE CLASSIFICATIONS AND MAXIMUM NET LINES (after
treaty and facultative reinsurance).
--------------------------------------------- -------------------------------- -----------------------------
Coverage Limit Maximum Net Lines
--------------------------------------------- -------------------------------- -----------------------------
Property $50 Million or TBA $1 Million per risk/per
(including Equipment Breakdown) occurrence
--------------------------------------------- -------------------------------- -----------------------------
General Liability and Auto Liability $1 Million per Occurrence / $2 $1 Million per occurrence
Million Aggregate
--------------------------------------------- -------------------------------- -----------------------------
Workers' Compensation Statutory $1 Million per occurrence
Employer's Liability $1 Million
--------------------------------------------- -------------------------------- -----------------------------
Excess and Umbrella Liability $10 Million $250,000 per occurrence
--------------------------------------------- -------------------------------- -----------------------------
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The above coverages are provided on ISO forms and on certain independent
manuscript forms to be agreed.
Other classifications of insurance may be written on Company's insurance
policies subject to Company's prior approval.
C. TERRITORIAL LIMITATIONS. Manager shall not issue any policy in any
jurisdiction other than the authorized states defined as those states in which
Company is licensed and has filed and approved rates and policies. Company at
its own discretion may limit or revoke Manager's authority as regards any
particular state.
Page 16 of 16
EXHIBIT 10.2
Amendment No.2
To
Amended and Restated