MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
From: Yuki Nakamura, Lead Associate, Calderwood & Harkness LLP
To: Angela Fontaine, Responsible Partner, Calderwood & Harkness LLP
Date: October 24, 2025
Re: Structuring and Regulatory Considerations — Catastrophe Excess-of-Loss Reinsurance Layer (Quorum Specialty Insurance Company)
Matter No.: 1025-00004
Client: Quorum Insurance Holdings Corp. (Nasdaq: QIHC)
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I. Executive Summary
The purpose of this memorandum is to analyze the structural, economic, and regulatory aspects of a new catastrophe excess-of-loss ("Cat XOL") reinsurance layer being placed for the benefit of Quorum Specialty Insurance Company ("Quorum Specialty" or "QSIC," NAIC No. 42917), the operating subsidiary of Quorum Insurance Holdings Corp. ("Quorum Holdings" or "QIHC"). This memorandum is prepared at your request in connection with our firm's engagement to advise Quorum Holdings and Quorum Specialty on the structuring, negotiation, documentation, and regulatory compliance aspects of the proposed Cat XOL placement.
The proposed Cat XOL layer provides a per-occurrence limit of $35,000,000 in excess of a $15,000,000 per-occurrence retention (calculated net of quota-share recoveries under Quorum Specialty's existing property quota-share treaty), resulting in an exhaustion point of $50,000,000 per occurrence. The treaty period runs from January 1, 2026 through December 31, 2026 (twelve months). The treaty affords one reinstatement at 100% additional premium, calculated pro rata as to time, yielding a maximum aggregate exposure across the panel of $70,000,000 for the treaty year.
The reinsurer panel consists of three participants, led by Pinnacle Re Ltd. at 50%, with Graystone Reinsurance AG at 30% and Tidewater Re S.A. at 20%. The total annual layer premium is $2,975,000, reflecting a rate-on-line of 8.50% as indicated by the broker's initial market submission.
The key regulatory framework governing this placement encompasses New York Insurance Law § 1308 and the regulations promulgated thereunder at 11 NYCRR 125, which govern reinsurance credit and collateral requirements for non-domestic reinsurers. Although Quorum Specialty is domiciled in Connecticut, Connecticut's credit-for-reinsurance standards have been substantially harmonized with the NAIC Credit for Reinsurance Model Law and Regulation, and Connecticut recognizes NYDFS certified reinsurer status and applies comparable collateral reduction frameworks.
The placement is being intermediated by Blackbridge Advisory Group LLC, with Owen F. Halstead, Managing Director (NY DFS License No. RI-00483), serving as the lead broker. Blackbridge circulated the initial market submission on October 17, 2025. The indicative pricing response deadline is November 15, 2025. The target signing date for the Cat XOL contract is December 1, 2025, and the target date for execution and funding of the trust agreements with respect to the non-certified reinsurers is December 15, 2025.
The Cat XOL contract will be governed by New York law. Disputes will be resolved through a three-arbitrator panel under the rules of ARIAS-U.S. (AIDA Reinsurance & Insurance Arbitration Society — U.S.), seated in New York, New York.
This memorandum addresses the following topics in detail: (A) layer structure and economics; (B) reinsurer panel composition and credit quality; (C) collateral and trust requirements under applicable law; (D) key contractual provisions of the Cat XOL treaty; (E) exclusion clauses; (F) regulatory considerations for reinsurance credit, including statutory reporting; and (G) recommended next steps and open issues for resolution. Each of these topics is discussed in turn below.
II. Background: Quorum's Reinsurance Program and Catastrophe Exposure
A. Quorum Specialty — Overview
Quorum Specialty Insurance Company is a Connecticut-domiciled admitted property and casualty insurer, assigned NAIC No. 42917. QSIC is a wholly owned operating subsidiary of Quorum Insurance Holdings Corp., a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol QIHC. Quorum Holdings maintains its principal offices at 400 Constitution Plaza, Suite 2200, Hartford, Connecticut 06103.
Quorum Specialty underwrites specialty property and casualty insurance, with a particular focus on fintech-enabled commercial lines. The company has developed a proprietary underwriting platform and has experienced significant premium growth in recent years, positioning itself as a mid-market specialty carrier with a well-defined catastrophe exposure footprint.
For the fiscal year ended December 31, 2024, Quorum Specialty reported the following key financial metrics on a statutory basis:
• 2024 Gross Written Premium (Property Book): $312,000,000
• Projected 2026 Gross Written Premium (Property Book): $338,000,000
• 2024 Net Combined Ratio: 94.7%
• 2024 Policyholder Surplus (Statutory Basis): $478,000,000
• A.M. Best Rating (per Brindoval Rating Services): A– (Excellent), Outlook Stable
The company's management team includes the following senior officers relevant to this engagement:
• Chief Executive Officer: Desmond R. Hargrove
• Chief Financial Officer: Priya Chandrasekaran
• General Counsel: Lionel T. Okafor
• Vice President, Reinsurance & Capital Management: Suzanne M. Driscoll
Suzanne Driscoll serves as our primary day-to-day contact at QSIC for all matters relating to the reinsurance program, and we have been working closely with her and with Lionel Okafor's in-house legal team in developing the terms of the proposed Cat XOL layer.
B. Existing Property Quota-Share Treaty
Quorum Specialty currently maintains a 40% property quota-share reinsurance treaty with Pinnacle Re Ltd. The quota-share treaty was originally incepted on January 1, 2022, and has been renewed annually since that date. The quota-share treaty is currently being renewed for the January 1, 2026 treaty year pursuant to a separate workstream within our engagement; accordingly, the detailed terms of the quota-share renewal are not addressed in this memorandum except insofar as they interact with the proposed Cat XOL layer.
The interaction between the quota-share and the Cat XOL is critical: the Cat XOL layer's $15,000,000 per-occurrence retention is calculated net of quota-share recoveries. In other words, the attachment point of the Cat XOL reflects Quorum Specialty's 60% retained share of each occurrence loss after the 40% cession to Pinnacle Re under the quota-share treaty. This netting mechanism is discussed in further detail in Section VIII below.
C. Catastrophe Exposure Profile
Quorum Specialty's catastrophe exposure has been modeled by Meridian Actuarial Partners LLC, an independent actuarial consulting firm retained by Quorum Specialty for catastrophe risk analysis and loss modeling purposes. The lead actuary on the engagement is Dr. Anita K. Rourke, FCAS, whose office is located at 1 Ashbury Asset Advisors, Suite 800, Hartford, Connecticut 06103.
Based on Meridian Actuarial Partners' analysis using the Tempest Analytics CatView version 11.2 catastrophe model, Quorum Specialty's 250-year modeled Probable Maximum Loss ("PML"), calculated net of quota-share recoveries, is approximately $52,000,000. This represents the loss amount that, based on the model, has a 0.4% probability of being equaled or exceeded in any given year.
The proposed Cat XOL layer, with its $35,000,000 limit and $15,000,000 attachment point, covers Quorum Specialty's catastrophe exposure through approximately the 1-in-50-year return period. The layer thus provides meaningful protection for the core of the loss distribution while preserving some risk retention at the tail. As a measure of materiality, the Cat XOL layer's $35,000,000 limit represents approximately 7.3% of Quorum Specialty's 2024 policyholder surplus of $478,000,000 ($35,000,000 ÷ $478,000,000 ≈ 7.3%).
It is important to note that the 250-year PML of $52,000,000 exceeds the Cat XOL exhaustion point of $50,000,000 by $2,000,000. This means that in a tail-risk scenario at or near the 250-year return period, Quorum Specialty would retain approximately $2,000,000 of loss above the exhaustion point, in addition to its $15,000,000 retention below the attachment point. We recommend discussing with Suzanne Driscoll and Dr. Rourke whether additional excess layers or a higher exhaustion point should be considered for the 2026 treaty year or, alternatively, for future treaty years beginning January 1, 2027. The cost-benefit analysis of extending the exhaustion point should take into account both the incremental premium and the marginal reduction in balance-sheet volatility at the tail.
III. Layer Structure and Economics
A. Coverage Parameters
The proposed Cat XOL layer is structured as follows:
• Per-Occurrence Limit: $35,000,000
• Attachment Point (Per Occurrence): $15,000,000, net of quota-share recoveries under the existing 40% property quota-share treaty with Pinnacle Re Ltd.
• Exhaustion Point (Per Occurrence): $15,000,000 + $35,000,000 = $50,000,000
• Reinstatements: One (1) reinstatement at 100% additional premium, calculated pro rata as to time remaining in the treaty period from the date of the loss event giving rise to the reinstatement
• Maximum Aggregate Exposure: $35,000,000 × 2 = $70,000,000 (i.e., the original per-occurrence limit plus one full reinstatement of the per-occurrence limit)
• Hours Clause: 168 consecutive hours
The hours clause defines the temporal window within which individual losses arising from a single catastrophe event may be aggregated into a single "occurrence" for purposes of attachment, limit, and exhaustion calculations. A 168-hour (seven-day) window is the market standard for property catastrophe treaties covering named storm and hurricane perils. However, we note that for earthquake perils, market practice often extends the aggregation period to between 168 and 504 hours in order to capture aftershock sequences that may occur over a more extended period following the initial seismic event. We recommend discussing with Quorum whether any peril-specific modification to the hours clause is warranted, taking into account Quorum's geographic exposure footprint and the actuarial analysis performed by Dr. Rourke's team at Meridian Actuarial Partners. This issue is flagged as an open item in Section XI below.
B. Territory
The Cat XOL layer covers catastrophe losses arising from risks located within the continental United States, Alaska, Hawaii, the Commonwealth of Puerto Rico, and the United States Virgin Islands. This territorial scope matches the licensed territory for Quorum Specialty's property book and is consistent with the territory definition in the existing quota-share treaty. No extra-territorial coverage has been requested or proposed.
C. Perils Covered
The Cat XOL layer covers all natural perils, including but not limited to:
• Named storm / hurricane (including tropical storm, typhoon, and associated storm surge)
• Earthquake (including tsunami)
• Flood (including riverine and flash flooding)
• Wildfire
• Severe convective storm (including tornado, hail, straight-line winds, and associated perils)
• Winter storm, ice storm, and freeze events
• Volcanic eruption
The treaty does not distinguish between perils for purposes of the coverage trigger; any occurrence arising from a covered natural peril that results in net losses to Quorum Specialty in excess of the $15,000,000 attachment point (net of quota-share) will activate the Cat XOL layer. Exclusions from coverage are analyzed separately in Section VI of this memorandum.
D. Premium Structure
The premium structure for the Cat XOL layer is summarized in the following table:
Several aspects of the premium structure merit further discussion:
Minimum Premium. The minimum premium provision ensures that Quorum Specialty bears a floor cost of $2,380,000 for the Cat XOL layer regardless of actual loss experience during the treaty period. The 80% minimum is within the range of market norms for catastrophe excess-of-loss treaties, which typically range from 75% to 100% of the annual layer premium. The minimum premium is payable in full even if the treaty is commuted or cancelled prior to expiration, subject to the specific terms of any cancellation or commutation provisions in the final contract.
Reinstatement Premium. The reinstatement premium is calculated pro rata as to time (but not pro rata as to amount). By way of illustration, if a full limit loss occurs on July 1, 2026 (the midpoint of the treaty period), the reinstatement premium would be calculated as follows:
Reinstatement Premium = $2,975,000 × (184 days remaining / 365 days) ≈ $1,498,630
If a full limit loss occurs on November 1, 2026, the reinstatement premium would be substantially lower:
Reinstatement Premium = $2,975,000 × (61 days remaining / 365 days) ≈ $497,123
The "pro rata as to time" feature reduces the reinstatement premium cost for late-season events, which is economically favorable to Quorum Specialty but may present a modest credit risk from the reinsurers' perspective if a late-season event triggers both the original limit and the reinstatement in rapid succession.
Brokerage. Blackbridge Advisory Group LLC will receive a brokerage commission of 5% of the annual layer premium, calculated as follows:
Brokerage = 5% × $2,975,000 = $148,750
The brokerage is payable by the reinsurer panel (i.e., deducted from premium settlements) and does not represent an additional cost to Quorum Specialty. The brokerage rate is within normal market parameters for catastrophe excess-of-loss reinsurance placements.
Premium Payment Timing. The quarterly deposit premium structure contemplates four equal installments of $743,750 each, with the first deposit due on March 31, 2026. We note that the treaty incepts on January 1, 2026, and the first deposit is not due until approximately 90 days later. While this is consistent with the quarterly bordereau cycle for the existing quota-share treaty, it creates a period of approximately three months during which Quorum Specialty has the benefit of Cat XOL coverage without having remitted any premium to the panel. We should confirm with Owen Halstead at Blackbridge whether any of the reinsurers have expressed a preference for a deposit due on or before the inception date; this is flagged as an open negotiating point in Section XI below.
IV. Reinsurer Panel Composition and Credit Quality
A. Participation Table
The proposed Cat XOL layer will be placed across a panel of three reinsurers, with Pinnacle Re Ltd. serving as the lead reinsurer. The panel composition is as follows:
Each reinsurer's participation is several (not joint), meaning that each reinsurer is liable only for its proportionate share of each loss. No reinsurer is responsible for the default or insolvency of any other panel member. The several-liability structure is standard for property catastrophe excess-of-loss treaties and protects each reinsurer from cross-default risk within the panel.
B. Pinnacle Re Ltd. (Lead Reinsurer — 50%)
Pinnacle Re Ltd. is a Bermuda-domiciled Class 4 insurer, incorporated and regulated under the laws of Bermuda and supervised by the Bermuda Monetary Authority. Pinnacle Re's registered office is located at Cumberland House, 1 Victoria Street, Hamilton HM 11, Bermuda. The company is one of the larger independent property catastrophe reinsurers operating in the global market and maintains substantial underwriting capacity across natural catastrophe perils.
Key personnel relevant to this placement include:
• Chief Executive Officer: Sir Malcolm J. Broadhurst
• Chief Underwriting Officer: Elena Papadimitriou
• Head of Treaty, North America: Derek S. Kimball
Pinnacle Re holds an A.M. Best rating of A (Excellent) with a Stable outlook, as assessed by Brindoval Rating Services. This rating reflects Pinnacle Re's strong risk-adjusted capitalization, consistent underwriting performance, and well-diversified global reinsurance portfolio.
Pinnacle Re holds NYDFS Certified Reinsurer ID CR-2019-0217, which is of critical importance for Quorum Specialty's ability to take statutory credit for reinsurance ceded to Pinnacle Re without the requirement of collateral posting. The significance of this certification is discussed in detail in Section V below.
It is important to note that Pinnacle Re also serves as the sole reinsurer on Quorum Specialty's existing 40% property quota-share treaty. Pinnacle Re's dual participation in both the quota-share and the proposed Cat XOL raises several practical considerations: (i) coordination of claims handling and reporting across both treaties; (ii) potential conflicts of interest in loss adjustment, particularly in scenarios where the allocation of losses between the quota-share and the Cat XOL may affect Pinnacle Re's net exposure differently under each treaty; and (iii) the operation of any offset clause across both treaties. These issues should be addressed explicitly in the Cat XOL documentation and are discussed further in Sections VII.J and VIII below.
Pinnacle Re is represented in this transaction by the law firm of Harmon, Kessler & Fitch LLP, with Nathan R. Kessler, Partner, and Miriam Soto-Flores, Associate, serving as lead counsel. Their office is located at 780 Third Avenue, 30th Floor, New York, New York 10017. We have not yet received a draft contract from Harmon, Kessler & Fitch; our plan is to circulate the first draft from our side on or about November 1, 2025.
C. Graystone Reinsurance AG (Following Reinsurer — 30%)
Graystone Reinsurance AG is a Swiss corporation (Aktiengesellschaft) regulated by the Swiss Financial Market Supervisory Authority (FINMA). Graystone Re's registered office is located at Bahnhofstrasse 72, 8001 Zürich, Switzerland. The company is a well-established European reinsurer with a significant Americas treaty book, specializing in property catastrophe and specialty lines reinsurance.
The principal contact for this placement is Jan-Erik Lindgren, Head of Property Treaty, Americas.
Graystone Re holds an A.M. Best rating of A (Excellent) with a Stable outlook from Brindoval Rating Services. The company maintains strong capitalization under both the Swiss Solvency Test (SST) framework and the Solvency II equivalence regime recognized by the European Insurance and Occupational Pensions Authority (EIOPA).
Graystone Re is not a NYDFS certified reinsurer. Accordingly, Quorum Specialty will require Graystone Re to fund a qualifying reinsurance trust to support statutory credit for reinsurance. The trust requirements applicable to Graystone Re are discussed in Section V.C below.
D. Tidewater Re S.A. (Following Reinsurer — 20%)
Tidewater Re S.A. is a Luxembourg-domiciled société anonyme, regulated by the Commissariat aux Assurances (Luxembourg). Tidewater Re's registered office is located at 14 Boulevard Royal, L-2449 Luxembourg. The company is a growing European reinsurer with a focus on property treaty and structured reinsurance solutions in the Americas and EMEA markets.
The principal contact for this placement is François-Xavier Delacroix, Chief Underwriting Officer.
Tidewater Re holds an A.M. Best rating of A– (Excellent) with a Positive outlook from Brindoval Rating Services. While this rating is within the investment-grade range and satisfies Quorum Specialty's internal counterparty credit standards, it is the lowest-rated participant on the proposed panel. The Positive outlook suggests that Brindoval Rating Services may upgrade Tidewater Re's rating in the near term, but no assurance can be given as to the timing or certainty of any such upgrade.
Tidewater Re is not a NYDFS certified reinsurer. Accordingly, Quorum Specialty will require Tidewater Re to fund a qualifying reinsurance trust, the terms of which are discussed in Section V.D below.
Given Tidewater Re's position as the lowest-rated panel member, we recommend including a ratings downgrade trigger provision in the Cat XOL contract. Specifically, we recommend that the contract require Tidewater Re (and, for that matter, each panel reinsurer) to post additional collateral or, at Quorum Specialty's election, submit to commutation of the ceded obligations, in the event that the reinsurer is downgraded below A– (Excellent) by Brindoval Rating Services or loses its financial strength rating entirely. This provision should be carefully drafted to apply on a several basis to each reinsurer individually, so that a downgrade of one panel member does not affect the obligations or rights of the remaining reinsurers. The downgrade trigger is discussed further in Section XI as an open issue.
E. Lead vs. Following Reinsurer Provisions
The Cat XOL contract should include standard provisions governing the relationship between the lead reinsurer (Pinnacle Re) and the following reinsurers (Graystone Re and Tidewater Re).
Pinnacle Re, as lead reinsurer, will have claims cooperation rights with Quorum Specialty. Under a claims cooperation clause, Pinnacle Re will have the right to be notified of and to participate in the evaluation and adjustment of catastrophe losses that may give rise to claims under the Cat XOL, including the right to consult with Quorum Specialty on loss reserve setting and the timing and amount of claim payments. Importantly, claims cooperation is distinct from claims control: Quorum Specialty will retain full authority over the settlement and payment of claims to its policyholders. Pinnacle Re's cooperation right does not extend to a veto over claim payments.
The following reinsurers (Graystone Re and Tidewater Re) will be bound by the lead reinsurer's claims decisions and recommendations, subject to standard "follow the lead" provisions. Under a follow-the-lead clause, the following reinsurers agree to accept, for purposes of their own obligations under the Cat XOL, the claims determinations and loss settlements agreed between Quorum Specialty and Pinnacle Re, provided that such settlements are made in good faith and in accordance with the terms of the underlying policies.
We note the potential complexity arising from Pinnacle Re's dual role as lead reinsurer on the Cat XOL and sole reinsurer on the quota-share treaty. In a catastrophe loss scenario, Pinnacle Re's economic interests under the two treaties may not be perfectly aligned. For example, the allocation of losses between the quota-share and the Cat XOL directly affects the amount recovered by Quorum Specialty under each treaty and the amount payable by Pinnacle Re under each treaty. If the quota-share per-occurrence cap is triggered (discussed in Section VIII below), the allocation becomes particularly sensitive. We recommend addressing this potential conflict explicitly in the Cat XOL documentation, potentially through a provision requiring that loss allocations between the two treaties be determined by Quorum Specialty in accordance with actuarially sound principles and in consultation with its independent actuaries, subject to the lead reinsurer's cooperation rights but not its approval.
V. Collateral and Trust Requirements
A. Regulatory Framework
The ability of a ceding insurer to take credit for reinsurance ceded on its statutory financial statements is governed by a comprehensive regulatory framework designed to ensure that reinsurance recoverables are backed by adequate security. The principal sources of law applicable to this placement are:
• New York Insurance Law § 1308: Establishes the conditions under which a ceding insurer domiciled or admitted in New York may take credit for reinsurance ceded to non-domestic reinsurers, including requirements for reinsurer licensing, accreditation, certification, or the posting of collateral through qualifying trust arrangements.
• 11 NYCRR 125 (Regulation 20): Implements the credit-for-reinsurance provisions of the New York Insurance Law and sets forth detailed requirements regarding collateral, trust structures, permissible investments, and certified reinsurer designations.
• Connecticut Credit-for-Reinsurance Regulations: Quorum Specialty, as a Connecticut-domiciled admitted insurer, must comply with Connecticut's credit-for-reinsurance standards in the first instance. Connecticut has substantially harmonized its credit-for-reinsurance framework with the NAIC Credit for Reinsurance Model Law and Regulation (as amended in 2019 to implement the U.S.-EU and U.S.-UK Covered Agreements on Insurance and Reinsurance). Connecticut recognizes NYDFS certified reinsurer status and applies comparable collateral reduction frameworks, such that the analysis in this memorandum under New York law is substantially applicable to Quorum Specialty's Connecticut regulatory obligations as well.
Three tiers of collateral requirements are relevant to the proposed Cat XOL panel:
(i) Certified Reinsurers (e.g., Pinnacle Re Ltd.): Under both New York and Connecticut law, a reinsurer that has been certified by the NYDFS (or an equivalent state authority) and that maintains a financial strength rating of A or above from a recognized rating organization may qualify for reduced or eliminated collateral posting requirements. For reinsurers rated A or above, the required collateral may be reduced to $0, meaning that the ceding insurer may take full statutory credit for reinsurance ceded to such reinsurers without any trust or letter of credit.
(ii) Non-Certified, Non-Domestic Reinsurers (e.g., Graystone Re, Tidewater Re): Reinsurers that are domiciled outside the United States and that have not obtained certified reinsurer status must fund 100% of their obligations through a qualifying reinsurance trust, plus any additional margin required by the applicable regulatory authority. Under current practice, a margin of 2% above the maximum aggregate exposure is typically required, resulting in a trust funding requirement of 102% of maximum aggregate exposure.
(iii) Licensed or Accredited Reinsurers: This tier is not applicable to any of the three panel reinsurers, as none of them are licensed or accredited in Connecticut or New York as direct reinsurers. This category is mentioned only for completeness.
B. Pinnacle Re — Certified Reinsurer Exemption
Pinnacle Re Ltd. holds NYDFS Certified Reinsurer ID CR-2019-0217, having been certified by the New York Department of Financial Services as a qualifying reinsurer under 11 NYCRR 125. Pinnacle Re's certification is based on its compliance with the eligibility criteria established by the NYDFS, including domiciliary regulatory oversight by the Bermuda Monetary Authority, maintenance of adequate capitalization and solvency, prompt claims payment history, and designation of a U.S. agent for service of process.
As a certified reinsurer with an A.M. Best rating of A (Excellent) from Brindoval Rating Services, Pinnacle Re qualifies for a $0 collateral posting requirement under the graduated collateral reduction schedule set forth in 11 NYCRR 125. Specifically, for certified reinsurers rated A or above, the required collateral is reduced from 100% to 0% of the reinsurer's outstanding obligations. This means that no reinsurance trust agreement is required for Pinnacle Re's 50% share of the Cat XOL layer.
Quorum Specialty can therefore take full statutory credit for Pinnacle Re's $17,500,000 per-occurrence participation, and up to $35,000,000 of maximum aggregate exposure (including the reinstatement), without any collateral, trust, or letter of credit. This is a significant benefit of Pinnacle Re's lead participation, as it substantially reduces the overall collateral burden on the Cat XOL panel.
Notwithstanding the foregoing, we recommend that the Cat XOL contract include the following protections with respect to Pinnacle Re's certified reinsurer status:
(a) A representation and warranty by Pinnacle Re that, as of the date of execution of the Cat XOL contract, it holds valid certified reinsurer status with the NYDFS and that such status has not been revoked, suspended, or made subject to any conditions or limitations;
(b) A covenant by Pinnacle Re to maintain its certified reinsurer status throughout the term of the Cat XOL treaty and to notify Quorum Specialty promptly (and in any event within five (5) business days) of any change in its certification status, any pending or threatened regulatory action affecting its certification, or any change in its A.M. Best rating from Brindoval Rating Services;
(c) A contractual trigger providing that, in the event Pinnacle Re loses its certified reinsurer status or is downgraded below the applicable threshold rating for $0 collateral (currently A from Brindoval Rating Services), Pinnacle Re shall, within thirty (30) days of such event, either (i) post collateral in the form of a qualifying trust or clean, irrevocable letter of credit in an amount equal to 102% of its outstanding obligations under the Cat XOL, or (ii) at Quorum Specialty's election, submit to a commutation of its ceded obligations on terms to be negotiated in good faith.
These provisions are designed to protect Quorum Specialty's statutory credit position in the event of an adverse change in Pinnacle Re's regulatory or financial standing.
C. Graystone Reinsurance AG — Trust Requirement
Graystone Reinsurance AG is not a NYDFS certified reinsurer. As a Swiss-domiciled reinsurer without certification or accreditation in the United States, Graystone Re must fund a qualifying multi-beneficiary reinsurance trust to support Quorum Specialty's ability to take credit for reinsurance on its statutory financial statements.
The trust funding requirement for Graystone Re is calculated as follows:
• Graystone Re's per-occurrence share of the Cat XOL limit: 30% × $35,000,000 = $10,500,000
• With one reinstatement at 100%: $10,500,000 × 2 = $21,000,000 maximum aggregate exposure
• Required trust funding at 102% of maximum aggregate exposure: $21,000,000 × 1.02 = $21,420,000
The trust will be established with Fidelitas Trust Company of New York, located at 60 Wall Street, 12th Floor, New York, New York 10005, serving as trustee. The trust will be structured as a multi-beneficiary reinsurance trust in accordance with the requirements of New York Insurance Law § 1308 and 11 NYCRR 125.
The trust agreement will be a three-party instrument among Graystone Reinsurance AG (as grantor), Quorum Specialty Insurance Company (as beneficiary), and Fidelitas Trust Company of New York (as trustee). The trust agreement must be executed by December 15, 2025, and the trust must be fully funded with qualifying assets prior to the January 1, 2026 inception date of the Cat XOL treaty.
Permissible trust assets must comply with the investment standards set forth in 11 NYCRR 125, which generally limit trust investments to:
• Cash and cash equivalents (including demand deposits and money market instruments)
• United States government obligations (including Treasury bills, notes, and bonds)
• Obligations of U.S. government agencies and government-sponsored enterprises
• Investment-grade corporate debt securities meeting specified quality and diversification requirements
• Other high-quality fixed income securities as permitted by the applicable regulations
The trust agreement will include withdrawal provisions entitling Quorum Specialty, as beneficiary, to withdraw funds from the trust upon the occurrence of specified events, including (i) a default by Graystone Re under the Cat XOL contract, (ii) the presentation of a valid claim for reinsurance recovery, or (iii) the insolvency, receivership, or liquidation of Graystone Re. The withdrawal mechanics must comply with the regulatory requirement that the beneficiary have the right to draw on the trust without the consent of the grantor.
Fidelitas Trust will be required to provide quarterly trust asset statements to Quorum Specialty, detailing the composition, market value, and compliance of trust assets. Trustee fees will be borne by Graystone Re as grantor and will not be deducted from trust assets.
D. Tidewater Re S.A. — Trust Requirement
Tidewater Re S.A. is not a NYDFS certified reinsurer. As a Luxembourg-domiciled reinsurer without certification or accreditation in the United States, the same collateral framework applicable to Graystone Re applies to Tidewater Re.
The trust funding requirement for Tidewater Re is calculated as follows:
• Tidewater Re's per-occurrence share of the Cat XOL limit: 20% × $35,000,000 = $7,000,000
• With one reinstatement at 100%: $7,000,000 × 2 = $14,000,000 maximum aggregate exposure
• Required trust funding at 102% of maximum aggregate exposure: $14,000,000 × 1.02 = $14,280,000
The trust will also be established with Fidelitas Trust Company of New York as trustee, under a separate multi-beneficiary reinsurance trust agreement among Tidewater Re S.A. (as grantor), Quorum Specialty Insurance Company (as beneficiary), and Fidelitas Trust Company of New York (as trustee). The same execution timeline (December 15, 2025) and funding deadline (prior to January 1, 2026) apply.
The investment standards, withdrawal provisions, reporting requirements, and trustee fee arrangements will be substantially identical to those applicable to the Graystone Re trust agreement.
Given Tidewater Re's lower financial strength rating of A– (Excellent) — the minimum acceptable rating under Quorum Specialty's internal counterparty credit standards — we recommend that the Tidewater Re trust agreement include the following additional protective provisions:
(a) Top-Up Requirement on Rating Downgrade: If Tidewater Re is downgraded below A– (Excellent) by Brindoval Rating Services, Tidewater Re shall be required to increase trust funding by an additional margin (e.g., from 102% to 110% of maximum aggregate exposure) within thirty (30) days of such downgrade, or, at Quorum Specialty's election, Quorum Specialty may commute Tidewater Re's share of the ceded obligations;
(b) Replenishment Obligation on Trust Erosion: If trust assets are drawn down by Quorum Specialty to satisfy valid claims, or if trust assets decline in value due to investment losses below the minimum required funding level, Tidewater Re shall replenish the trust to the minimum required level within fifteen (15) business days of written notice from the trustee or Quorum Specialty;
(c) Enhanced Reporting: In addition to quarterly trust asset statements, Tidewater Re shall provide Quorum Specialty with copies of any communications from Brindoval Rating Services regarding its financial strength rating, including any notice of review, outlook change, or potential downgrade, promptly upon receipt.
E. Summary of Collateral Requirements
The following table summarizes the collateral requirements across the Cat XOL panel:
The total trust funding requirement across both non-certified reinsurers is $35,700,000, representing the aggregate collateral needed to support Quorum Specialty's full statutory credit for reinsurance on the Cat XOL layer (exclusive of Pinnacle Re's certified reinsurer share, which requires no collateral).
F. Trust Documentation Workstream
Separate draft trust agreements are being prepared for each of Graystone Re and Tidewater Re. Each agreement is a three-party instrument among the respective reinsurer (as grantor), Quorum Specialty (as beneficiary), and Fidelitas Trust Company of New York (as trustee).
Key provisions to be included in each trust agreement are as follows:
(a) Definition of Trust Assets: Clear identification of the assets comprising the trust corpus, including initial funding, subsequent contributions, and investment returns;
(b) Minimum Funding Requirements: Specification of the minimum trust balance (102% of maximum aggregate exposure, or such higher amount as may be required in the case of Tidewater Re upon a rating downgrade);
(c) Permitted Investments: Limitation of trust investments to those asset classes permitted under 11 NYCRR 125;
(d) Valuation Methodology: Mark-to-market valuation of trust assets on at least a quarterly basis, with specified treatment of accrued interest and unrealized gains/losses;
(e) Withdrawal and Drawdown Mechanics: Right of Quorum Specialty as beneficiary to withdraw funds upon default, claim presentation, or insolvency of the grantor, without the consent of the grantor;
(f) Reporting and Notification Obligations: Quarterly trust asset statements from the trustee; prompt notification of any material change in trust asset composition or value;
(g) Grantor's Duty to Replenish: Obligation of the grantor to restore the trust balance to the minimum required level upon any drawdown or investment loss that causes the trust to fall below such level;
(h) Termination Provisions: The trust must survive until all obligations of the reinsurer under the Cat XOL contract have been fully discharged, commuted, or otherwise extinguished. The trust may not be terminated unilaterally by the grantor while any ceded obligations remain outstanding;
(i) Governing Law: New York law.
We are awaiting Fidelitas Trust Company of New York's standard form multi-beneficiary trust agreement, which will serve as the initial drafting template. We anticipate that the standard form will need to be reviewed and negotiated to incorporate treaty-specific requirements, including the enhanced provisions recommended for the Tidewater Re trust. The trust documentation workstream is on the critical path for the December 15, 2025 target execution date, and we recommend engaging directly with Fidelitas Trust as soon as practicable to initiate this process.
VI. Key Exclusion Clauses
A detailed analysis of the exclusion clauses applicable to the Cat XOL layer is being prepared separately by Carlos Espinoza of our insurance regulatory practice group. That memorandum is expected to be circulated prior to the November 1, 2025 target date for distribution of the first draft Cat XOL contract. The following is a summary of the principal exclusion clauses that have been identified for inclusion in the Cat XOL treaty:
NMA 1975a — Nuclear Exclusion. This is the standard market nuclear exclusion clause, which excludes from coverage any loss or liability arising from nuclear reaction, nuclear radiation, or radioactive contamination, howsoever caused. The exclusion is broadly drafted and has been in use in the reinsurance market for decades. No modifications to the standard NMA 1975a wording are proposed, and we do not anticipate any significant negotiating issues with respect to this exclusion.
NMA 2962 — Communicable Disease Exclusion. This is the standard market communicable disease exclusion, which excludes from coverage any loss, damage, liability, cost, or expense arising from or related to any communicable disease, including but not limited to epidemic and pandemic events. This exclusion became a standard feature of property catastrophe reinsurance treaties following the COVID-19 pandemic. While the exclusion is expected to be included without modification, we need to confirm its scope in relation to potential pandemic-related business interruption claims within Quorum Specialty's property book. To the extent that any of Quorum Specialty's underlying policies provide or may be argued to provide business interruption coverage triggered by communicable disease events, the NMA 2962 exclusion in the Cat XOL would exclude such losses from reinsurance recovery. Carlos Espinoza's analysis will address this issue in greater detail.
LMA 3030 — Terrorism Exclusion (Modified). The terrorism exclusion is based on Lloyd's Market Association form LMA 3030, modified to exclude losses arising from acts of terrorism that are certified under the Terrorism Risk Insurance Act of 2002, as amended and reauthorized ("TRIA"). Under the modified exclusion, Quorum Specialty retains terrorism risk to the extent covered by TRIA, and the Cat XOL does not respond to TRIA-certified losses. This approach is consistent with the general market practice for U.S.-placed property catastrophe reinsurance, where terrorism is typically excluded from Cat XOL programs and addressed through separate coverage arrangements or through the federal TRIA backstop. It will be important to ensure that the modified LMA 3030 wording is properly aligned with Quorum Specialty's underlying policy terrorism exclusions, so that there are no coverage gaps or unintended mismatches between the inward and outward programs.
LMA 5400 — Cyber Exclusion (Modified per Quorum Manuscript). This is the most complex and potentially contentious exclusion clause in the placement. The base exclusion is derived from the Lloyd's Market Association cyber exclusion form LMA 5400, which broadly excludes losses arising from or attributable to any cyber act, cyber incident, or cyber operation. However, Quorum Specialty has proposed a manuscript modification to the standard LMA 5400 wording that would carve back coverage for physical damage caused by or resulting from cyber events — so-called "cyber-physical" losses. Under Quorum's proposed carve-back, the Cat XOL would respond to losses involving physical damage to tangible property (e.g., fire, explosion, structural collapse) even if the physical damage was caused by or resulted from a cyber attack or cyber incident, provided that certain conditions are met (e.g., the physical damage must be the proximate cause of the insured loss, and the loss must not arise from the failure of, or interruption to, digital infrastructure alone).
The cyber-physical carve-back is a key negotiating point. Based on our preliminary discussions with Blackbridge, we anticipate that Pinnacle Re (through its counsel at Harmon, Kessler & Fitch LLP) may resist the breadth of the proposed carve-back, particularly with respect to the scope of "physical damage" and the proximate cause requirement. The following reinsurers may also raise concerns, although they are likely to defer to the lead reinsurer's position on this issue. We recommend that Quorum Specialty develop a clearly articulated fallback position on the cyber exclusion in advance of formal contract negotiations. Carlos Espinoza's forthcoming memorandum will include a detailed analysis of the cyber exclusion and recommended negotiating positions.
VII. Key Contractual Provisions
A. Occurrence Definition and Hours Clause
As noted in Section III.A above, the Cat XOL contract will include a 168-consecutive-hour aggregation clause (the "hours clause") that defines the temporal window within which individual losses may be aggregated into a single occurrence for purposes of the attachment point, per-occurrence limit, and exhaustion point. The hours clause is fundamental to the operation of the Cat XOL, as catastrophe events — particularly named storms and hurricanes — may produce losses over a period of days, and the hours clause determines the extent to which those losses are treated as a single event for reinsurance purposes.
A 168-hour (seven-day) window is the standard market approach for named storm and hurricane perils in the property catastrophe reinsurance market. However, we note that for earthquake perils, market practice frequently employs a longer aggregation period — typically between 168 and 504 hours — to capture aftershock sequences that may extend over a period of weeks following the initial seismic event. Whether a peril-specific modification is warranted for the Quorum Cat XOL depends on the nature and geographic distribution of Quorum Specialty's earthquake exposure.
We recommend discussing this issue with Dr. Anita K. Rourke at Meridian Actuarial Partners to obtain actuarial guidance on historical earthquake aftershock durations relevant to Quorum Specialty's exposure footprint. If Quorum's property book has significant exposure in seismically active regions (e.g., California, the New Madrid Seismic Zone, the Pacific Northwest), a peril-specific extension of the hours clause for earthquake events may be advisable.
B. Reinstatement Provisions
The Cat XOL treaty provides for one (1) reinstatement of the per-occurrence limit at 100% additional premium, calculated pro rata as to time. The reinstatement is automatic upon exhaustion of the original limit — that is, the reinsurers do not have the discretion to decline the reinstatement, and the coverage is automatically reinstated upon payment of the additional premium.
The pro-rata-as-to-time calculation ensures that the reinstatement premium reflects the unexpired portion of the treaty period remaining from the date of the loss event. As illustrated in Section III.D above, a mid-year loss would generate a reinstatement premium of approximately half the annual premium, while a late-year loss would generate a proportionately smaller reinstatement premium.
The maximum aggregate exposure of the Cat XOL panel, including the reinstatement, is $35,000,000 × 2 = $70,000,000 for the treaty year. Following a full exhaustion of both the original limit and the reinstated limit, Quorum Specialty would have no further Cat XOL protection for the remainder of the treaty period.
This is a meaningful risk, particularly in an active hurricane season where multiple named storms could produce back-to-back catastrophe losses. We recommend that Quorum Specialty consider negotiating a second reinstatement, even at a higher premium multiple (e.g., 150% or 200% of the annual premium), to provide additional aggregate protection. A second reinstatement at 150% would increase the maximum aggregate exposure to $35,000,000 × 3 = $105,000,000, at a maximum additional cost of $2,975,000 × 1.50 = $4,462,500 for the second reinstatement premium. The cost-benefit analysis should be evaluated in the context of Quorum's catastrophe model output and risk tolerance. This issue is flagged as an open item in Section XI below.
C. Net Retained Lines Clause
The Cat XOL contract will include a net retained lines clause requiring Quorum Specialty to retain a net interest in every risk and every loss covered by the Cat XOL treaty. Quorum Specialty's net retention after the quota-share is 60% of gross, and the $15,000,000 attachment point of the Cat XOL represents Quorum Specialty's retained loss before the Cat XOL layer responds.
The net retained lines clause serves to ensure alignment of interests between the cedent and its reinsurers. By requiring Quorum Specialty to maintain a meaningful economic interest in the loss, the clause provides comfort to the reinsurer panel that Quorum Specialty has appropriate incentives to underwrite and manage its book of business prudently. This is a standard feature of catastrophe excess-of-loss treaties and is not expected to present any negotiating difficulty.
D. Loss Settlement and Claims Cooperation
Losses paid by Quorum Specialty under its underlying policies will be reported to the reinsurer panel and settled in accordance with the procedures specified in the Cat XOL contract. The key elements of the loss settlement and claims cooperation framework are as follows:
(a) Loss Notification: Quorum Specialty will provide prompt written notice to Pinnacle Re (as lead reinsurer) and to the following reinsurers of any catastrophe event that has resulted or is reasonably expected to result in losses exceeding a specified threshold. The notification threshold is discussed in Section VII.F below.
(b) Claims Cooperation: Pinnacle Re, as lead reinsurer, will have claims cooperation rights, entitling it to be consulted on the evaluation, adjustment, and settlement of catastrophe losses that may give rise to claims under the Cat XOL. Pinnacle Re's cooperation right does not extend to claims control — Quorum Specialty retains full authority over the settlement and payment of claims to its policyholders.
(c) Follow the Lead: The following reinsurers (Graystone Re and Tidewater Re) will be bound by the loss settlement decisions agreed between Quorum Specialty and Pinnacle Re, subject to standard follow-the-lead provisions.
(d) Payment Timing: Reinsurance recoveries will be settled and paid within thirty (30) days of presentation of a complete proof of loss by Quorum Specialty to the panel.
E. Premium Payment Mechanics
Premium payment under the Cat XOL treaty will be structured as follows:
Quorum Specialty will pay quarterly deposit premiums of $743,750 per quarter, payable in advance, with the first quarterly deposit due on March 31, 2026. Total annual premium for the treaty year is $2,975,000. Premium payments will be reconciled annually.
All premiums will be payable through Blackbridge Advisory Group LLC as the placement intermediary. The Cat XOL contract will include an intermediary clause specifying that payment of premium by Quorum Specialty to Blackbridge shall constitute payment to the reinsurer panel, and that failure by Blackbridge to remit premiums to the reinsurers shall not relieve the reinsurers of their obligations under the Cat XOL or entitle the reinsurers to assert any defense of non-payment against Quorum Specialty. Conversely, the intermediary clause should specify that payment by the reinsurers of claims to Blackbridge shall constitute payment to Quorum Specialty, and that failure by Blackbridge to remit claims payments to Quorum Specialty shall not relieve the reinsurers of their claims payment obligations. This reciprocal intermediary clause is the standard approach in broker-intermediated reinsurance placements and is critical to protecting both parties against intermediary credit risk.
The minimum premium provision ensures that in no event shall the total annual premium paid by Quorum Specialty be less than $2,380,000 (80% of the annual premium of $2,975,000). The minimum premium is not subject to adjustment based on loss experience, cancellation, or any other factor.