Subscription Agreement

EXHIBIT 10.3


CGA GROUP, LTD.


INVESTMENT UNITS


SUBSCRIPTION AGREEMENT


Dated as of June 4, 1997


TABLE OF CONTENTS


Page


ARTICLE I AUTHORIZATION; SUBSCRIPTION FOR UNITS.......................... 2


Section 1.1 The Investment Units............................. 2
Section 1.2 The Subscription for Investment Units............ 2
Section 1.3 Commitment....................................... 2


ARTICLE II CLOSING........................................................ 12


ARTICLE III CONDITIONS TO OBLIGATIONS OF THE INVESTORS..................... 13


Section 3.1 Accuracy of Representations and
Warranties..................................... 13
Section 3.2 Performance of Agreements; Regulatory
Approvals; Credit Rating......................... 13


Section 3.3 Compliance Certificate........................... 15
Section 3.4 Bye-laws......................................... 15
Section 3.5 Other Agreements................................. 15
Section 3.6 Opinion of Conyers Dill & Pearman................ 15
Section 3.7 Opinion of Dewey Ballantine...................... 15
Section 3.8 Aggregate Funding................................ 15
Section 3.9 St. George....................................... 16
Section 3.10 Avoidance of Conflicts........................... 16
Section 3.11 Appointment of Agent............................. 16
Section 3.12 List of Shareholders............................. 16


ARTICLE IV CONDITIONS TO THE COMPANY'S OBLIGATIONS........................ 17


Section 4.1 Accuracy of Representations and
Warranties..................................... 17
Section 4.2 Performance of Agreements........................ 17
Section 4.3 Bye-laws......................................... 17
Section 4.4 Other Agreements................................. 17
Section 4.5 Letters from Placement Agents.................... 17
Section 4.6 Payment for the Investment Units................. 17
Section 4.7 Aggregate Funding................................ 18


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ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
COMPANY...................................................... 18


Section 5.1 Due Organization, Valid Existence and
Authority of the Company and the
Company's Initial Subsidiaries................. 18
Section 5.2 Authorization and Validity of
Agreements..................................... 19
Section 5.3 Capitalization................................... 19
Section 5.4 Reserve of Shares Issued in Connection
with the Commitment............................ 20
Section 5.5 Shares Issued in Connection with the
Commitment..................................... 20
Section 5.6 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained....................................... 20
Section 5.7 Regulatory Filings; Compliance with Law.......... 21
Section 5.8 Stamp Duties or Taxes............................ 22
Section 5.9 Private Offering of the Shares................... 23
Section 5.10 The Private Placement Memorandum................. 23
Section 5.11 Not an "Investment Company"...................... 23
Section 5.12 Business Newly Formed............................ 23
Section 5.13 Operating Company................................ 24
Section 5.14 No U.S. Trade or Business and Not a
Controlled Foreign Corporation................. 24
Section 5.15 Related Person Insurance Income.................. 25
Section 5.16 Operating Guidelines............................. 25
Section 5.17 Passive Foreign Investment Company............... 26
Section 5.18 Use of Proceeds of the Offering.................. 26
Section 5.19 Shareholders..................................... 26
Section 5.20 St. George Representations....................... 26
Section 5.21 Bermuda Withholding Tax.......................... 27
Section 5.22 No Events of Non-Compliance...................... 27
Section 5.23 Registration Rights.............................. 27
Section 5.24 Letter Agreement with DCR........................ 27


ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE INVESTORS................ 27


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Section 6.1 Due Organization, Good Standing and
Authority of the Investor...................... 27
Section 6.2 Authorization and Validity of
Agreements..................................... 27
Section 6.3 Investment Intent................................ 28
Section 6.4 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained....................................... 28
Section 6.5 Investor Awareness and Suitability............... 29
Section 6.6 Accredited Investor Status....................... 32
Section 6.7 Receipt of Information, Access to
Information.................................... 33
Section 6.8 Investment Unit Ownership Limitations............ 34


ARTICLE VII RESTRICTIONS ON TRANSFER....................................... 34


Section 7.1 Restrictive Legends.............................. 35
Section 7.2 Notice of Proposed Transfers..................... 35


ARTICLE VIII MISCELLANEOUS.................................................. 37


Section 8.1 Survival of Representations, Warranties
and Covenants.................................. 37
Section 8.2 Entire Agreement................................. 37
Section 8.3 Severability..................................... 37
Section 8.4 Binding Effect; Benefit.......................... 37
Section 8.5 Assignability.................................... 38
Section 8.6 Amendment; Waiver................................ 38
Section 8.7 Headings......................................... 38
Section 8.8 Counterparts..................................... 38
Section 8.9 Applicable Law................................... 38
Section 8.10 Notices and Payment.............................. 38
Section 8.11 Full Payment..................................... 39
Section 8.12 Indemnification.................................. 40
Section 8.13 Submission to Jurisdiction....................... 41
Section 8.14 Expenses......................................... 42


Schedules:


Schedule 1 - List of Investors Schedule 2 - List of Shareholders of the Company and Their
Respective Shareholdings Schedule 3 - List of ss.6.3(b) Excepted Investors


Exhibits:


Exhibit A-1 - Form of Acknowledgment Concerning Commitment


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Exhibit A-2 - Form of Commitment of the Company Exhibit B - Forms of Letter of Credit Exhibit C - Form of Trust Agreement


Annexes:


Annex I - Form of Memorandum of Association Annex II - Form of Bye-Laws


Annex III - Forms of Series A Preferred Stock Subscription Agreement,
Founders' Common Stock Subscription Agreement and
Shareholders Agreement Annex IV - Opinion of Conyers Dill & Pearman Annex V - Opinion of Dewey Ballantine Annex VI - List of Other Closing Documents Annex VII - Operating Guidelines Annex VIII - Letter Agreement with DCR Annex IX - Sponsoring Investors and Founders Stock Warrant Plan and
Employees Stock Warrant Plan


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CGA GROUP, LTD.
INVESTMENT UNITS
SUBSCRIPTION AGREEMENT


EACH INVESTMENT UNIT CONSISTING OF
1 SHARE OF SERIES B PREFERRED STOCK
4.8925 SHARES OF COMMON STOCK AND
A COMMITMENT TO PURCHASE
1.5 ADDITIONAL SHARES OF SERIES B PREFERRED STOCK


SUBSCRIPTION AGREEMENT, dated as of June 4, 1997 (this "Agreement"), among CGA Group, Ltd., a company with limited liability organized under the laws of Bermuda (together with its successors and permitted assigns, the "Company"), and each of the Investors identified in Schedule 1 hereto (collectively, together with their successors and permitted assigns, the "Investors").


WHEREAS, the Company has offered (the "Offering") the opportunity to purchase Investment Units (as defined below) to the Investors pursuant to an Amended and Restated Confidential Private Placement Memorandum, dated April 9, 1997 (together with any amendments, modifications or supplements thereto as may be made from time to time on or prior to the Closing Date (as defined below), the "Private Placement Memorandum");


WHEREAS, each of the Investors wishes to subscribe for and purchase, severally and not jointly, and the Company wishes to issue and allot the number of Investment Units (the "Investment Units," and, if the context so requires, such term may include all or some of the underlying shares of the Company's capital) set forth opposite such Investor's name on Schedule I hereto, on the terms set forth herein;


WHEREAS, each Investment Unit consists of one share of Series B Cumulative Voting Preference Shares of the Company ("Series B Preferred Stock"), 4.8925 shares of Common Shares of the Company ("Common Stock") and a commitment, pursuant to Section 1.3 hereof, to purchase 1.5 additional shares of Series B Preferred Stock ("Commitment") (the Series B Preferred Stock and the Common Stock issued or to be issued in connection with the sale of the Investment Units, including pursuant to the Commitments, are herein referred to as the "Shares");


WHEREAS, the Company will use a substantial portion of the proceeds of the Investors' subscriptions to capitalize the Company's subsidiaries, Commercial Guaranty Assurance, Ltd. (together with its successors, "CGA") and CGA Investment Management, Ltd. (together with its successors, "CGAIM" and together with CGA, the "Initial


Subsidiaries"), as described in the Private Placement Memorandum;


In consideration of the premises and mutual agreements herein contained, the parties hereto hereby agree as follows:


ARTICLE I


AUTHORIZATION; SUBSCRIPTION FOR UNITS; COMMITMENTS


Section 1.1 The Investment Units. The Company has authorized the issuance and sale pursuant to this Agreement of 1,600,000 Investment Units (which consists of an aggregate of 1,600,000 shares of Series B Preferred Stock, 7,828,000 shares of Common Stock and commitments to purchase 2,400,000 shares of Series B Preferred Stock, all of which securities have been authorized for issuance and sale as a part of the units), each having such rights, restrictions and privileges as are contained in or accorded by (i) the Memorandum of Association of the Company in the form attached hereto as Annex I (the "Memorandum of Association"), (ii) the Bye-laws of the Company, in the form attached hereto as Annex II and all appendices and exhibits thereto (the "Bye-Laws"), (iii) the Shareholders Agreement, to be dated as of the Closing Date, among the Company, the Investors and the other parties named therein, in the form attached hereto as Annex III (as such agreement may be amended, supplemented, restated or otherwise modified from time to time in accordance with its terms, the "Shareholders Agreement"), and (iv) this Agreement. Subject to the terms and conditions hereof, the Investment Units will be issued on the Closing Date.


Section 1.2 The Subscription for Investment Units. Subject to the terms and conditions of this Agreement, each of the Investors hereby irrevocably subscribes for and agrees to purchase, severally and not jointly, the number of Investment Units set forth opposite such Investor's name on Schedule 1 hereto for the purchase price specified in Article II hereof. No Investor shall be obligated to purchase any of the Investment Units unless the conditions set forth in Article III hereof shall have been satisfied or waived by such Investor on or prior to the Closing Date. The Company shall not be obligated to sell any of the Investment Units unless the conditions set forth in Article IV hereof shall have been satisfied or waived by the Company on or prior to the Closing Date.


Section 1.3 Commitment. (a) For purposes of this Section 1.3 and other provisions of this Agreement, the following terms shall have the meanings set forth below:


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"Business Day" shall mean any day except a Saturday, Sunday or other day on which commercial banks in The City of New York or Bermuda are authorized by law or executive order to close.


"Commitment Termination Event" shall mean the earliest of (v) the latest of (1) the fifth anniversary of the Closing Date, (2) immediately after the final Funding Event occurring after the fifth anniversary of the Closing Date with respect to a Downgrade Notice delivered prior to the fifth anniversary of the Closing Date, or (3) the date of withdrawal of the final Downgrade Notice which was delivered prior to the fifth anniversary of the Closing Date, (w) the closing of a Qualified Public Offering, (x) the closing of an acquisition of a majority of the issued and outstanding shares of the Common Stock at the time of such acquisition by one or more purchasers acting in concert in a single transaction or in a series of related transactions (including, without limitation, acquisitions pursuant to an amalgamation, exchange offer, business combination, consolidation or corporate reorganization) resulting in the ultimate beneficial ownership of such acquired Common Stock being different than before such acquisition, (y) the sale of all or substantially all of the assets of the Company unless the ultimate beneficial owners of a majority of the ownership interests in the acquiror of such assets were the ultimate beneficial owners of a majority of the issued and outstanding shares of Common Stock at the time immediately before such sale, and (z) the establishment of either a bank stand-by credit facility or an excess of loss reinsurance treaty for the benefit of the Company or its Restricted Subsidiaries, upon terms acceptable to the Company in its sole discretion, for an aggregate principal amount, in the case of a bank stand-by credit facility, or which provides limits of liability, in the case of an excess of loss reinsurance treaty, equal to or greater than the sum of each Investors' Maximum Section 1.3 Obligation; provided, however, that, solely with respect to the foregoing clauses (w), (x), (y) and (z), such closing or establishment shall constitute a Commitment Termination Event only if (i) at such time (A) the sum of retained earnings, determined in accordance with GAAP, of CGA, plus the amount of equity capital (in excess of the amount of equity capital contributed on or prior to the Closing Date) contributed to CGA is equal to or greater than $60,000,000 (provided, that, CGA shall be a Restricted Subsidiary for this clause (A) to be satisfied) or (B) the Series A Preferred Stock (as defined below) is rated investment grade (i.e., a rating of BBB- or higher from DCR (as defined below) or the then-equivalent rating if DCR changes its rating designations after the date hereof) and (ii) (A) the Company receives a Ratings Confirmation with respect to such closing or establishment and the termination of the


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Commitments as a result thereof and (B) a Downgrade Notice is not in effect at the time of such closing or establishment.


"DCR" means Duff & Phelps Credit Rating Company or any successor thereto.


"Downgrade Notice" shall mean written notice that CGA's claims paying ability rating will be reduced to a level below the Required Company Rating.


"Funding Event" shall mean the 45th consecutive day on which a Downgrade Notice has been in effect and not been withdrawn (or, if such 45th consecutive day is not a Business Day, the immediately preceding Business Day).


"GAAP" shall mean the generally accepted accounting principles (including the methods of application of such principles) so described and promulgated by the U.S. Financial Accounting Standards Board ("FASB") which are applicable as at the date on which any calculation or determination made hereunder is to be effective or as at the date of any financial statement referred to herein, as the case may be.


"Letter of Credit Provider" shall mean the person who is issuing the Required Letter of Credit.


"Maximum Section 1.3 Obligation" shall mean, with respect to each Investor, at any time, the remaining dollar amount of such Investor's obligation under Section 1.3 of this Agreement at such time.


"Minimum Rating" shall mean, as to any person, (1) at the time which any determination regarding such person is first made hereunder, a long-term unsecured senior debt rating of AA or higher by DCR (or the then-equivalent rating in the event DCR changes its rating designations after the date hereof); provided, however, if the long-term unsecured senior debt of such person is not rated by DCR, then an equivalent rating from at least one other nationally recognized rating agency, provided that no other nationally recognized rating agency has rated such person below the equivalent of a rating of AA- by DCR (or the then-equivalent rating in the event DCR changes its rating designations after the date hereof) and (2) thereafter, whenever any determination regarding such person is made from time to time hereunder, a long-term unsecured senior debt rating from all nationally recognized rating agencies rating such debt of such person of the equivalent of a rating of AA- or higher by DCR (or the then-equivalent rating in the event DCR changes its rating designations after the date hereof); provided, however, that should such person fail to maintain


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the Minimum Rating described in clause (2) of this definition, such person shall not again meet the Minimum Rating requirement until it first again meets the requirements of clause (1) of this definition.


"Permitted Investments" shall mean (i) U.S. Government Obligations (as defined below) or securities that would be U.S. Government Obligations if such securities were not callable or redeemable at the option of the issuer thereof; (ii) debt securities or debt instruments with a rating of AAA by DCR (or the then-equivalent rating in the event DCR changes its rating designations after the date hereof), or the equivalent of such a rating by Standard & Poor's Rating Service and its successors ("S&P"), Moody's Investors Service, Inc. and its successors ("Moody's") or any other nationally recognized securities rating agency; or (iii) debt securities or debt instruments with a rating of Class 1 or higher by the National Association of Insurance Commissioners ("NAIC") (or the then-equivalent rating in the event NAIC changes its rating designations after the date hereof) and issued or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Governmental National Mortgage Association, the Student Loan Marketing Association or the Federal Home Loan Bank.


"Qualified Public Offering" shall mean the completion of an underwritten public offering of Common Stock pursuant to a registration statement under the Securities Act (as defined below) resulting in net proceeds to the Company of at least $50,000,000.


"Ratings Confirmation" shall mean DCR's written confirmation that, after its review of the matter under review, DCR's rating of the claims paying ability of CGA will not be downgraded, terminated, withdrawn or suspended.


"Required Company Rating" shall mean a claims paying ability rating of AAA (or the then-equivalent rating in the event DCR changes its rating designations after the date hereof) issued by DCR.


"Required Letter of Credit" shall mean an irrevocable direct pay letter of credit for the benefit of the Special Account Trustee from a Letter of Credit Provider rated at least the Minimum Rating (a) in substantially the forms attached as Exhibit B hereto (appropriately completed), and (b) if obtained subsequent to the Closing Date pursuant to Sections 1.3(d)(i) or 1.3(d)(ii), in such forms and otherwise subject to a Ratings Confirmation by DCR; in the case of each of (a) and (b), with a stated amount not less than the applicable Maximum Section 1.3 Obligation.


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"Restricted Subsidiaries" shall mean those subsidiaries designated or classified as Restricted Subsidiaries pursuant to Section 7.9 of the Series A Subscription Agreement (as defined below).


"Series A Preferred Stock" means the Series A Preferred Stock of the Company.


"Special Account" shall mean a segregated trust account designated pursuant to a trust agreement in the form of Exhibit C hereto (appropriately completed).


"Special Account Trustee" shall mean the person acting, on behalf of the Company and its assignee (as well as others), as trustee for the Special Account and the Special Transaction Subaccounts (as defined below). The Company shall cause the Special Account Trustee to comply with its obligation hereunder.


"Special Transaction Subaccount" shall mean, with respect to an Investor (if applicable to such Investor), the subaccount of the Special Account designated by the Company as such Investor's subaccount thereof.


"Supporting Obligation Provider" shall mean a Letter of Credit Provider or other person issuing a Supporting Obligation (as defined below).


"U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act (as defined below)), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt.


(b) (i) Subject to the occurrence of the Closing (as defined herein) and a Funding Event, each Investor hereby irrevocably agrees to purchase, severally and not


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jointly, on a pro rata basis with all other Investors determined in proportion to such Investor's Maximum Section 1.3 Obligation, as compared to the aggregate of all of the Investors' Maximum Section 1.3 Obligations, in accordance with the procedures set forth below in this Section 1.3(b) and for the purchase price of U.S. $25 per share, the number of shares of Series B Preferred Stock specified in one or more Drawdown Notices (as defined below) delivered by the Company or by an assignee on behalf of the Company to such Investor pursuant to the provisions of this Section 1.3; provided, however, that the aggregate number of shares of Series B Preferred Stock that such Investor shall be required to purchase pursuant to this Section 1.3 shall not exceed the aggregate number of additional shares of Series B Preferred Stock set forth opposite such Investor's name on Schedule 1 hereto; provided, further, that such Investor shall not be obligated to purchase any such shares in respect of any Drawdown Closing Date (as defined below) that is after the date of a Commitment Termination Event.


(ii) Unless the Commitment Termination Event has occurred, the Company or an assignee on behalf of the Company shall, no later than 10 days after receipt by the Company or CGA of a Downgrade Notice, send to each Investor a notice (a "Drawdown Notice") specifying (i) the aggregate number of shares of Series B Preferred Stock that such Investor is required to purchase pursuant to such Drawdown Notice and the aggregate purchase price therefor at U.S. $25 per share, provided that (x) the aggregate purchase price specified in the Drawdown Notice sent to each Investor shall not exceed the Maximum Section 1.3 Obligation of such Investor, (y) the aggregate number of shares of Series B Preferred Stock specified in the Drawdown Notice sent to each Investor shall be such Investor's pro rata share, determined in proportion to such Investor's Maximum Section 1.3 Obligation as compared to the aggregate of all of the Investors' Maximum Section 1.3 Obligations, of the aggregate number of shares of Series B Preferred Stock specified in all of the Drawdown Notices sent in connection with the Funding Event with respect to which such Drawdown Notices are being sent, and (z) the aggregate amount of such aggregate purchase prices for all Investors shall not exceed the smallest amount necessary to cause DCR to withdraw such Downgrade Notice by issuance of a Ratings Confirmation with respect to such amount following CGA's receipt of the proceeds thereof, and (ii) the date (the "Drawdown Closing Date") on which the Investor is required to purchase such Series B Preferred Stock, which date shall be no later than the 45th day after the date of receipt by the Company or CGA of the Downgrade Notice (provided that if such 45th day is not a Business Day, then the Drawdown Closing Date shall be the first Business Day prior to such day); provided, further, that such Investor shall not be obligated to


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purchase any such shares in respect of any Drawdown Closing Date that is after the date of a Commitment Termination Event. Each Investor which has either (a) not provided a Supporting Obligation (as defined below) or (b) provided a Supporting Obligation which is not capable of being drawn upon shall, on or prior to the Drawdown Closing Date, pay the aggregate purchase price specified in such ...