COINSURANCE AGREEMENT
EFFECTIVE FEBRUARY 1, 1996
BETWEEN
DELTA LIFE AND ANNUITY COMPANY
OF
MEMPHIS, TENNESSEE,
HEREINAFTER REFERRED TO AS THE "REINSURED", AND
LONDON LIFE REINSURANCE COMPANY
OF
BLUE XXXX, PENNSYLVANIA,
HEREINAFTER REFERRED TO AS THE "REINSURER"
A. RECITALS
1. REINSURED desires to cede, and REINSURER desires to accept, reinsurance of
the certain deferred annuity policies as specified in this Agreement,
subject to the terms and conditions set forth herein.
2. To facilitate the profitable performance of the policies reinsured
hereunder for the mutual benefit of the REINSURED and the REINSURER, the
REINSURED and the REINSURER desire that the same investment manager manage
the investment and reinvestment of the assets underlying the reinsured
policies according to a common investment policy.
3. To facilitate the profitable performance of the policies reinsured
hereunder for the mutual benefit of the REINSURED and the REINSURER, the
REINSURED and the REINSURER desire that the companies establish a
management committee to oversee the investment policy for the assets
underlying the reinsured policies, to review investment performance and to
review other matters of mutual interest.
B. REINSURANCE COVERAGE
1. All of the deferred annuity policies (referred to herein as "the policies")
issued by the REINSURED during the term of this Agreement on the forms
listed in Schedule I shall be reinsured with the REINSURER automatically in
accordance with the REINSURED'S underwriting rules applicable to such
policies.
2. The reinsurance shall cover the quota share of the policies as specified in
Schedule II. All benefits provided by the policies shall be reinsured
hereunder in the portion specified in Schedule II.
3. The liability of the REINSURER shall begin simultaneously with that of the
REINSURED but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any policy shall not be in force and binding
unless the insurance issued directly by the REINSURED is in force and
unless the issuance and delivery of such insurance constituted the doing of
business in a state of the United States of America (including the District
of Columbia) in which the REINSURED was properly licensed.
4. Reinsurance under this Agreement shall be on the coinsurance plan and shall
follow the forms of the REINSURED.
5. The reinsurance under this Agreement with respect to any policy shall be
maintained in force without reduction so long as the liability of the
REINSURED under such policy reinsured hereunder remains in force without
reduction, unless reinsurance is terminated or reduced as provided herein.
2
6. Internal Replacements - Any internal program for the replacement of
reinsured contracts must be approved by the Management Committee.
Replacement business shall continue to be subject to this Coinsurance
Agreement unless the REINSURER decides not to reinsure the replaced
business.
C. PLACING REINSURANCE IN EFFECT
Reinsurance shall become effective simultaneously with the liability of the
REINSURED, provided however, that the REINSURED shall give notification of
such reinsurance to the REINSURER no later than the monthly report set out in
Schedule III.
D. PAYMENTS BY REINSURED
The REINSURED shall pay the REINSURER reinsurance premiums equal to the
REINSURER's quota share of the gross contributions or premiums the REINSURED
receives on the policies on and after the effective date of this Agreement.
E. PAYMENTS BY REINSURER
1. BENEFITS
The REINSURER shall pay the REINSURED the REINSURER's quota share of:
(a) the death benefits (including interest paid beyond the date of death)
paid by the REINSURED, without deduction for reserves (after taking
into account surrender charges, if any); and
(b) the net cash surrender values paid by the REINSURED;
3
(c) the net cash surrender calculated on anuitizing policies as if they
had been surrendered for cash;
(d) the return of premiums, net policy expense allowances, to the
policyholder of a canceled policy paid by the REINSURED.
2. POLICY EXPENSE ALLOWANCES
The REINSURER shall pay the REINSURED the allowances and expense
reimbursements as defined in Schedule VI on the REINSURER's quota share of
the policies. These allowances and expense reimbursements shall be netted
on at least a weekly basis from cash flow, if sufficient, before the
balance is transferred to the trust account. If insufficient, the
REINSURER shall be billed for the net amount due.
3. PROFIT SHARING
The REINSURER shall pay to REINSURED an experience refund at the end of
each seven year policy term if statutory profits earned during a given 7
year term, calculated assuming all in force policies surrender at the end
of the term, exceed 10% of the premium at the beginning of the term. Fifty
percent (50%) of any excess profit above 10% of premium on the REINSURER's
quota share of the business will be refunded to the REINSURED by the
REINSURER as an experience refund at the end of a given 7 year term. The
experience refund calculation will be done for all policies issued in a
given calendar year and paid within 30 days after the end of the year for
which it is being calculated.
F. TERMS OF REINSURANCE
1. AMOUNTS DUE REINSURED OR REINSURER
Except as otherwise specifically provided herein, all amounts due to be
paid to the REINSURER or the REINSURED shall be determined on a net basis
as of the issue day of every calendar week to which such amount is
attributable. The issue day for issues of
4
a given week will initially be the Thursday of the following week
subject to modifications by the REINSURED upon agreement by the
REINSURER. If the Thursday is a bank holiday or if the REINSURED feels
another day should be used, the REINSURED will notify the REINSURER and
they will mutually define another day of the week as the issue day. All
amounts shall be due and accrued as of such date. The payment of such
amounts shall be submitted in accordance with the provisions of Section
F, paragraph 2. All settlements of account between the REINSURER and
the REINSURED shall be made in cash or its equivalent. Book value and
statutory reserves shall be determined in accordance with the
REINSURED's standard practices.
2. PAYMENT DATES
(a) The REINSURED shall submit a Periodic Report substantially in accord
with the reports listed in Schedule III. Any amounts indicated in the
Periodic Report as due the REINSURER shall accompany such report.
(b) Not later than fifteen (15) days after the receipt of the Periodic
Report, any amounts indicated in the Periodic Report as due the
REINSURED shall be paid by the REINSURER.
(c) Not later than twenty (20) days after the end of each calendar
quarter, the REINSURED shall submit to the REINSURER a Quarterly
Report substantially in accord with Schedule IV.
(d) Not later than twenty (20) days after the end of each calendar year,
the REINSURED shall submit to the REINSURER an Annual Report
substantially in accord with Schedule V.
In the event that actual numbers are not available, reasonable estimates will
be used and appropriate adjustments will be made within 30 days or on the
next report whichever is sooner.
In addition the REINSURED agrees to work with the REINSURER and the REINSURER
agrees to work with the REINSURED to perform cash flow analysis as required.
This would
5
include providing copies of any work (e.g. New York Regulation 126 actuarial
opinion) performed by the REINSURED and the REINSURER to analyze reserve
adequacy as this work is being developed.
3. SECTION 1.848-2(g)(8) ELECTION
If the Business reinsured hereunder includes for U.S. Federal income tax
purposes Specified Insurance Contracts pursuant to Section 848 of the
Internal Revenue Code or the Final Income Tax Regulations thereunder, the
REINSURED and the REINSURER, with respect to this Agreement, agree to make
the election provided in Section 1.848-2(g)(8) of the Final Income Tax
Regulations issued December 28, 1992 under Section 848 of the Internal
Revenue Code of 1986. The specifics on this election are set forth in
Schedule IX.
4. OFFSET
Any debits or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or were incurred, in favour of or against
either the REINSURED or the REINSURER with respect to this Agreement are
deemed mutual debits or credits, as the case may be, and shall be set off,
and only the balance shall be allowed or paid.
G. TRUST AGREEMENT AND ASSET MANAGEMENT
1. The REINSURER shall enter into a trust agreement with the REINSURED and
State Street Bank and Trust Company, as trustee for establishment of a
trust.
2. The REINSURED shall deposit premium payments as described in Section D,
less Payments by REINSURER as described in Section E, directly into the
trust account. Deposit by the REINSURED of amounts calculated pursuant to
this Agreement directly into the trust shall constitute payment by the
REINSURED of each premium to the REINSURER and shall satisfy the
REINSURED's obligation hereunder to pay such premium to the REINSURER.
6
3. The assets in the trust account shall be invested and reinvested pursuant
to the investment policy ("Investment Policy") set forth in Addendum I as
such policy may be modified from time to time by the Management Committee
as provided in Section J.
4. If this Agreement is terminated with respect to new policies pursuant to
Section W, and all reinsured policies have passed their second anniversary,
the trust account shall be managed to maintain the aggregate book value of
assets in the trust account at a level at least equal to the statutory
reserve of the policies supported by the assets in the account.
5. The REINSURED and the REINSURER shall share all trustee/custodial fees and
expenses paid for the trust account.
6. The REINSURED and REINSURER agree that the assets in the trust account,
notwithstanding any other provisions in this Agreement, shall be utilized
and applied by the REINSURED or any successor by operation of law of the
REINSURED, including, without limitation, any liquidator, rehabilitator,
receiver or conservator of the REINSURED, without diminution because of
insolvency on the part of the REINSURED or the REINSURER to satisfy the
obligations of the REINSURED, including expenses, with respect to the
policies reinsured under this Agreement.
7. At anytime when the book value of assets in the trust exceed the statutory
reserve required for the policies supported by the assets in the account,
the REINSURED and the REINSURER, upon mutual agreement, can withdraw their
respective quota share of assets exceeding the statutory reserves from such
account.
If, at the end of any calendar quarter, the statutory reserve required for
the policies supported by the assets in the trust account exceeds the book
value of assets in that account by an amount equal to or greater than
one-quarter of one percent (.25%) of the required reserve amount, the
REINSURER and the REINSURED shall immediately deposit cash in an amount
equal to their respective quota share of the shortfall into that account.
7
For purposes of this section, book value and statutory reserves shall be
determined in accordance with the REINSURED's standard practice, unless the
parties agree otherwise in writing.
8. In the event that any amount is withdrawn from the trust account pursuant
to Paragraph 6 of this Section, the REINSURED shall promptly return to the
trust account any amounts that are subsequently determined not to be
withdrawn in compliance with the provisions of this Agreement.
9. Transfer to the REINSURED by the trustee of the assets withdrawn from the
trust account pursuant to Paragraph 6 above, shall constitute payment by
the REINSURER pursuant to this Agreement and shall discharge the REINSURER
of the obligation which gave rise to the withdrawal to the extent of the
amount withdrawn, provided however, the REINSURER may later contest whether
it had failed to reimburse or pay the REINSURED as required by this
Agreement.
10. The REINSURER shall not retrocede any portion of its quota share of the
policies in a manner which would require the transfer of assets from the
trust to the retrocessionaire.
H. PORTFOLIO MANAGEMENT AGREEMENT
1. The REINSURER shall enter into an Portfolio Management Agreement with Delta
Life and Annuity Company ("DLAC") pursuant to which DLAC shall manage the
investment and reinvestment of the assets in the trust account. DLAC shall
invest the assets pursuant to the terms of the Investment Policy (Addendum
I) as such policy may be modified from times to times by the Management
Committee as provided in Section J hereof and the terms and conditions of
the Portfolio Management Agreement.
2. The REINSURER shall be responsible for paying DLAC a monthly fee as
specified in the Portfolio Management Agreement.
8
3. If reinsurance pursuant to this Agreement terminates and there is no
reinsurance in force between the REINSURED and the REINSURER hereunder,
DLAC (or any successor Portfolio Manager) and the REINSURER each shall have
the right to terminate the Portfolio Management Agreement immediately. The
Portfolio Management Agreement shall contain such additional termination
provisions as the REINSURER and DLAC may agree.
4. If the Management Committee determines that the performance of the
Portfolio Manager is not satisfactory to support the business reinsured
hereunder, the REINSURER shall have the right to terminate the Portfolio
Management Agreement upon 30 days prior written notice to the Portfolio
Manager.
5. In the event the Portfolio Management Agreement terminates while
reinsurance remains in force hereunder, a successor Portfolio Manager shall
be proposed by the REINSURED subject to approval by the REINSURER.
I. SPREADS DEDUCTED FROM THE INDEX OR INDICES ON THE POLICIES
First year and renewal spreads on the policies shall be set in accordance with
the provisions of Schedule VII.
J. MANAGEMENT COMMITTEE
1. A Management Committee consisting of four representatives from the
REINSURED and the REINSURER shall be established. Two representatives from
each company shall be elected by the Presidents of the respective companies
for one year terms. The Management Committee shall function as a general
communication vehicle and decision maker as set out below.
2. The Management Committee shall meet no less frequently than annually. Any
member of the Management
9
Committee may call a meeting upon ten (10) days prior written notice unless
waived in writing.
3. In addition to functioning as a general communication vehicle, the role of
the Management Committee is to deal with issues that arise in connection
with the following items:
1. To determine any adjustments to be made to the option price formula.
2. To decide upon modification of the Investment Policy as referred to in
Section H.
3. To approve any material changes in products, product pricing, or
market approach.
4. To periodically establish portfolio management guidelines with respect
to the realization of net capital gains and losses during defined
periods.
5. To establish a change in strategy and guidelines with respect to the
use of options, futures, caps and other derivative investment products
including inclusion or exclusion of counterparties for the call
options.
Decisions of the Management Committee shall require the unanimous agreement
of all members of the committee.
4. In the event the Management Committee fails to reach unanimous agreement on
items, there shall be no change in those items or the treatment under the
terms of this Agreement of the issues and matters which are subject of
those items.
K. CLAIMS, LITIGATION, UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any Unusual Expenses incurred by the REINSURED in defending or
investigating a claim for policy liability or rescinding a policy reinsured
hereunder shall be participated in by the REINSURER in the
10
same proportion as its reinsurance bears to the total insurance under
such policy.
2. For purposes of this Agreement, it is agreed that expenses, attorney's
fees, and interest imposed against the REINSURED and arising solely out of
a settlement or a judgement rendered against the REINSURED in a suit for
policy benefits reinsured hereunder shall be considered Unusual Expenses.
3. In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as "Unusual
Expenses":
(a) routine investigative or administrative expenses; and
(b) expenses, fees, settlements, or judgments arising out of or in
connection with claims against the REINSURED for punitive or exemplary
damages; and
(c) expenses, fees, settlements, or judgments arising out of or in
connection with claims made against the REINSURED and based on alleged
or actual bad faith, or willful misconduct;
and the REINSURER shall have no liability under this Agreement for expenses
or liabilities described in the above subparagraphs 3(a), (b) and (c).
4. Litigation. If the REINSURED contests a claim which results in actual or
threatened litigation, the REINSURED shall notify the REINSURER. The
REINSURER may elect not to participate in the contest and pay its quota
share of the liabilities on the policy being contested within 20 days of
such notice. In such event, the REINSURED shall be solely responsible for
the conduct of the litigation and for all expenses and liabilities incurred
in connection with such claim and the REINSURER shall have no further
liability or responsibility to pay or share in such expenses or
liabilities.
In all cases, the REINSURED shall be solely responsible for the management
of each and every claim or litigation arising out of or in connection with
the
11
policies reinsured hereunder, and shall have all power and authority to
settle or dispute any claim and to direct the course of any such
litigation. Consistent with the terms of this paragraph K, REINSURER shall
be bound by the terms of any such settlement or the outcome of any such
litigation.
In the event REINSURED shall become aware of any actual or threatened
litigation in which the claimant or adverse party is asserting direct
liability of the REINSURER with respect to a policy reinsured hereunder,
the REINSURED shall promptly notify REINSURER. The expenses incurred by
the REINSURER with respect to such litigation shall be shared by the
REINSURED in the same proportion as its quota share of the insurance
liability under such policy.
L. ANNUITIZATION
The REINSURED shall recapture reinsurance with respect to all reinsured
policies upon their annuitization. The REINSURER shall pay the REINSURED the
cash surrender value less any surrender charges according to the terms of the
respective policy being recaptured by the REINSURED upon annuitization
pursuant to this Section. Such payment shall reflect the entire
consideration to be paid in regard to such recapture.
M. ERRORS
If either the REINSURED or the REINSURER shall fail to perform an obligation
under this Agreement and such failure shall be the result of an error on the
part of the REINSURED or the REINSURER, such error shall be corrected by
restoring both the REINSURED and the REINSURER to the positions they would
have occupied had no such error occurred; an "error" is a clerical mistake
made inadvertently and excludes errors of judgment and all other forms of
error.
N. AUDIT OF RECORDS AND PROCEDURES
12
The REINSURER and the REINSURED each shall have the right to audit, at the
office of the other, all records and procedures relating to reinsurance under
this Agreement. The expenses of any such audit shall be born by the party
initiating the audit.
O. CONFIDENTIALITY
The REINSURED and REINSURER each agree that all information, including but
not limited to customer information, is proprietary in nature. Such
information shall be received by the REINSURER in strict confidence, shall be
used for the purpose of this Agreement only and no such information shall be
disclosed to a third party by the recipient party, its agents, or employees
without the prior written consent of the REINSURED. Except as may be
necessary by reason of legal or regulatory requirements, each party hereto
agrees to take all reasonable precautions to prevent the disclosure to
outside parties of such information.
P. ARBITRATION
1. If the REINSURED and the REINSURER cannot mutually resolve a dispute which
arises out of or relates to this Agreement, the dispute shall be decided
through arbitration as set forth in Schedule VIII. The arbitrators shall
be impartial and shall base their decision on the terms and conditions of
this Agreement. In the event that an interpretation of the terms and
conditions of this Agreement does not explicitly dispose of an issue in
dispute between the parties, then the arbitrators may base their decision
on the customs and practices of the insurance and reinsurance industry
rather than solely on a strict interpretation of applicable law. There
shall be no appeal from the arbitrators' decision. Any court having
jurisdiction over the subject matter and the parties may reduce the
arbitrators' decision to judgment.
2. The parties intend this Section to be enforceable in accordance with the
Federal Arbitration Act (9
13
U.S.C. Section 1 et seq.), including any amendments to that Act which are
subsequently adopted. The parties further intend that the issue of
arbitrability of any dispute hereunder shall be resolved pursuant to the
Federal Arbitration Act and federal court decisions construing the Federal
Arbitration Act, and not pursuant to the law of any state. In the event
that either party refuses to submit to arbitration as required by
Paragraph 1, the other party may request a United States Federal District
Court to compel arbitration in accordance with the Federal Arbitration Act.
Both parties consent to the jurisdiction of such court to enforce this
Section and to confirm and enforce the performance of any award of the
arbitrators.
3. The obligations of the parties to arbitrate disputes hereunder pursuant to
this Section shall survive the termination of this Agreement.
Q. INSOLVENCY
1. The portion of any risk or obligation assumed by the REINSURER, when such
portion is ascertained, shall be payable on demand of the REINSURED at the
same time as the REINSURED shall pay its net retained portion of such risk
or obligation, with reasonable provision for verification before payment,
and the reinsurance shall be payable by the REINSURER, on the basis of the
liability of the REINSURED under the policies reinsured hereunder without
diminution because of the insolvency of the REINSURED. In the event of
insolvency and the appointment of a conservator, liquidator or statutory
successor of the REINSURED, such portion shall be payable to such
conservator, liquidator or statutory successor immediately upon demand,
with reasonable provision for verification, on the basis of claims allowed
against the REINSURED by any court of competent jurisdiction or by any
conservator, liquidator or statutory successor of the REINSURED having
authority to allow such claims, without diminution because of such
insolvency or because such conservator, liquidator or statutory successor
has failed to pay all or a portion of any claims.
14
2. The REINSURED's conservator, liquidator, or statutory successor shall give
the REINSURER written notice of the pendency of a claim against the
REINSURED indicating the policy reinsured, within a reasonable time after
such claim is filed. The REINSURER may interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or
defenses which the REINSURER may deem available to the REINSURED, or its
conservator, liquidator or statutory successor.
3. Any expense incurred by the REINSURER pursuant to paragraph 2, above, shall
be payable subject to court approval out of the estate of the REINSURED as
part of the expense of conservation or liquidation to the extent of the
REINSURER's quota share of the benefit which may accrue to the REINSURED in
conservation or liquidation, solely as a result of the defense undertaken
by the REINSURER. Where two or more reinsurers are participating in the
same claim and a majority in interest elect to interpose defense to such
claim, the expense shall be apportioned in accordance with the terms of
this Agreement as though such expense had been incurred by the REINSURED.
R. PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between the REINSURED and
the REINSURER. The acceptance of reinsurance hereunder shall not create any
right or legal relation whatever between the REINSURER and the insured or the
beneficiary under any policy reinsured hereunder, and the REINSURED shall be and
remain solely liable to such insured or beneficiary under any such policy.
S. ASSIGNMENT
None of the rights and obligations under this Agreement may be assigned by
either the REINSURED or the REINSURER, without the prior written consent of the
other party.
15
T. EFFECTIVE DATE
The effective date of this Agreement is 12:01 a.m., February 1, 1996.
U. DURATION OF AGREEMENT
1. Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2. Except in the case mentioned in Schedule VII, this Agreement may be
terminated with respect to new policies by either the REINSURER or the
REINSURED any time after the earlier of (a) or (b), where (a) is February
1, 1999, and (b) is when the amount of the gross contributions and premiums
received by the REINSURER pursuant to the policies exceeds $300 million.
Such termination shall be effective immediately upon receipt of written
notice of termination by one party from the other party.
3. The REINSURED shall have the right to terminate this Agreement and
recapture the reinsured business as to any policy reinsured hereunder at
any time after such reinsured policy has been in force for a period of
fourteen (14) years. Recapture shall be based upon terms to be negotiated
at the time of termination. Several general principles shall be followed
at any recapture negotiation.
(a) Recapture must be elected with respect to all policies issued from a
same calendar year then in force which are reinsured under this
Agreement.
(b) The consideration to be paid shall reflect the present value of
profits on the Recaptured Business.
(c) The profit projection shall reflect the cost of all significant risks.
These risks are primarily risks associated with defaults, interest
rate movements, and the index movements.
4. The REINSURED shall have the right to terminate this Agreement and
recapture all reinsurance hereunder in
16
the event the REINSURER becomes subject to any insolvency or similar
proceeding. In the event the REINSURED exercises this right to
terminate and recapture reinsurance, the REINSURED shall reimburse the
REINSURER for any unamortized excess first-year expense allowances, and
the REINSURER shall transfer the assets in the trust to the REINSURED,
after first having deposited or withdrawn (with the REINSURED's consent)
sufficient assets to or from the trust such that the statutory book
value of assets in the trust is equal to the statutory liability
(statutory reserve plus interest maintenance reserve) recaptured.
5. The termination of this Agreement or of the reinsurance in effect under
this Agreement shall not extend to or affect any of the rights or
obligations of the REINSURED and the REINSURER applicable to any period
prior to the effective date of such termination. In the event that,
subsequent to the termination of this Agreement, an adjustment is made
necessary with respect to any accounting hereunder, a supplementary
accounting shall take place. Any amount owed to either party by reason of
such supplementary accounting shall be paid promptly upon the completion
thereof.
6. After the effective date of any recapture, the REINSURER shall no longer
share in the experience on the block, including profits and/or losses.
V. REGULATORY COMPLIANCE
If the overall structure or a particular clause of this Agreement causes a
regulatory issue with any of the states in which the REINSURED or the REINSURER
are licensed, both parties agree to make their best effort to resolve the
situation.
W. AGREEMENT
This Agreement, together with the trust agreement established pursuant to
Section G and the Portfolio Management
17
Agreement established pursuant to Section H constitutes the entire agreement
between the REINSURED and the REINSURER with respect to the business being
reinsured hereunder; they supersede any prior oral or written agreements with
respect to the business being reinsured hereunder other than as expressed in
this Agreement, together with the trust agreement pursuant to Section G and
the Portfolio Management Agreement established pursuant to Section H. Any
change or modification to this Agreement shall be null and void unless made
by amendment to the Agreement signed by both the REINSURED and the REINSURER.
Governing Law. This agreement shall be governed by and construed in accordance
with the laws of the State of Tennessee without regard to principles of
conflicts of law contained therein.
18
X. EXECUTION
IN WITNESS WHEREOF the said
DELTA LIFE AND ANNUITY COMPANY
of
Memphis, Tennessee,
and the said
LONDON LIFE REINSURANCE COMPANY
of
Blue Xxxx, Pennsylvania
have by their respective officers executed this Agreement in duplicate on the
dates shown below to be effective as of February 1, 1996.
DELTA LIFE AND ANNUITY COMPANY
By: Witness:
------------------------------ ------------------------------
Senior Vice President and Senior Vice President, Secretary
Title: Chief Actuary Title: and General Counsel
--------------------------- ------------------------------
Date: June 26, 1996 Date: June 26, 1996
--------------------------- ------------------------------
LONDON LIFE REINSURANCE COMPANY
By: Witness:
------------------------------ ------------------------------
Title: President Title: Vice President
--------------------------- ------------------------------
Date: June 24, 1996 Date: June 24, 1996
--------------------------- ------------------------------
19
ADDENDUM I
INVESTMENT POLICY - INDEX PRODUCTS
PORTFOLIO OBJECTIVES
The indexed deferred annuity account is managed to provide a guaranteed
minimum return with additional interest rate guarantees liked to the
performance of the index or indices as defined by the respective policy forms
reinsured under this Agreement. The product is designed with significant
surrender charges and a fixed maturity (rollover) period. The goal will be a
fixed income portfolio that closely matches projected guaranteed minimum
liability cash flows. The index linked additional interest rate guarantees
will be hedged using a combination of custom index call and put options.
PERMITTED INVESTMENTS
(1) Debentures issued, secured or guaranteed by the U.S. Government,
government agencies or instrumentalities (including original issue zero
coupon and stripped principal or interest payments from original coupon
bearing debentures).
(2) Public corporate and taxable municipal securities rated A3/A- or higher.
(3) Custom options (calls and puts) with approved counterparties designed to
hedge index linked additional interest liability under the annuity contracts.
MATURITY, LIQUIDITY & DURATION GUIDELINES
(1) A target fixed income portfolio modified duration will be established by
the Management Committee using periodic cash flow testing and assuming all
policies are redeemed at the end of each 7 year term. The fixed income
portfolio's actual duration will not vary from the target by more than one
half year.
20
(2) Notwithstanding the fixed income portfolio duration constraint described
in (1) above, no fixed income investments will be made which have a final
maturity date exceeding the next renewal date of the underlying liabilities
by more than one year.
(3) The Management Committee will direct periodic cash flow testing of the
block of business with projections utilizing various interest rate and
indices scenarios.
(4) Liquidity requirements will be defined by the Management Committee from
time to time. It is understood that DLAC will make every effort to be fully
invested at all times. To facilitate trades, there will be times where DLAC
will have to use additional cash or will not make full use of all of the
available cash to purchase bulk amounts of bonds in a given week. The
REINSURER will pay an overnight rate to the REINSURED on cash borrowed to
complete a trade. The net amount will be computed and settled quarterly.
DLAC may, subject to approval from the Management Committee, establish
collateral (REPO) credit lines to provide temporary liquidity in lieu of the
disposition of assets.
ADDITIONAL INVESTMENT CONSTRAINTS
- Overall credit quality of the fixed income portfolio to be "AA3/AA-" or
better.
- All fixed income investments to be U.S. dollar denominated.
- Minimum liquidity provisions to be maintained as defined by the Management
Committee.
- From time to time, DLAC may present revised guidelines to the Management
Committee for consideration.
- Asset Class Weightings (based on market value):
U.S. Government and Agency bonds 20 - 100%
Public taxable municipal bonds 0 - 15%
Public corporate bonds 0 - 80%
21
- Corporate Sector Weightings (based on market value):
Industrials maximum of 40%
Finance maximum of 30%
Utilities maximum of 30%
Yankees maximum of 10%
Foreign Governments maximum of 10%
- Issuer Limitations (other than U.S. Government and Agencies):
Rating minimum rating of A3/A-
Issuer Concentration (based on market value)
Aaa/AAA 3.00%
Aa3/AA- and above 2.00%
A3/A- and above 1.25%
For the first 3 months of the Agreement, the reinsured share of the
portfolio will have an assumed growth level of $100 million. This means
that on the REINSURER's share of the assets, the maximum amount to be
invested in a A3 bond from the same issuer is $1.25 million. This $100
million assumed growth level will be estimated again by the REINSURER and
the REINSURED at the end of the first 3 months based on the business volume
issued at that time.
- Taxable municipal bonds must be general obligations or essential service
revenue bonds. If insured, the underlying rating must be investment grade,
the insurer must be rated Aa3/AA- or higher, and all other issuer
limitations apply.
- All hedging activity will be conducted with counterparties (or guarantors)
with a minimum rating of A3 from Xxxxx'x or A- from S&P and approved by the
Management Committee. All hedging activity will be governed by the
policies and procedures outlined in Exhibit I of this Agreement.
- It is understood that, as this is a new and growing portfolio, compliance
with all the guidelines outlined above will not be possible immediately
from inception. While best efforts will be made to
22
achieve and maintain compliance as soon as possible, with respect to issuer
concentration, asset class weightings, and corporate sector weightings,
compliance requirements will be waived for a period not exceeding one year
from inception.
- The assets held in the fixed income portfolio shall be classified as
"Available for Sale" as defined under FASB 115 for GAAP accounting
purposes.
23
SCHEDULE I
BUSINESS REINSURED
The business to be reinsured is all of the indexed annuity contracts written by
the REINSURED during the term of the Agreement.
Only annuity contracts issued on or after February 1, 1996 shall be reinsured.
The following product codes identify the policies to be reinsured:
PRODUCE CODE: INA
24
SCHEDULE II
AMOUNT OF REINSURANCE
The amount of reinsurance under this Agreement shall be the REINSURER'S quota
share percentage shown below of the liability of the REINSURED on all
policies in the forms listed in Schedule I. All benefits provided by such
policies shall be reinsured.
Quota Share = 50%
25
SCHEDULE III
PERIODIC REPORTS
The REINSURED shall provide the REINSURER a variety of management reports. The
reports shall be faxed to:
Xxxx Xxxxxx, London Life Reinsurance Company
Fax: 000-000-0000
and Xxxxxxx Blue, London Life Insurance Company
Fax: 000-000-0000
1. Weekly reports
A liability report showing the number of new policies issued with premium
amounts and reserve for each week of issue during the year. This report
will also show surrendered policies along with the respective amounts
surrendered.
2. Monthly Reports
a. A reinsurance settlement report detailing premium, expense allowances,
benefits, reserve changes, etc. This report will show the net cash
transferred to the trust account. It will show the information for
each buy date and also inception to date numbers.
b. An inception to date report showing reserves, index values and cash
surrender values for all in force business split by buy date.
c. Assets and liabilities shown for each buy date.
In addition to the reports mentioned above, the REINSURED will submit the
investment information required by the REINSURER in the investment section of
the procedure manual attached as Exhibit I.
26
SCHEDULE IV
QUARTERLY PERIODIC REPORT
A report showing the DAC tax adjustment.
27
SCHEDULE V
ANNUAL REPORT
The annual report shall provide reserve and inforce detail as may be required
to complete the Pennsylvania prescribed life and health annual statement,
including, but not limited to:
(a) Exhibit 8, Part B
(b) withdrawal characteristic of the annuity contract and Life and Annuity
Reserve, Page 30.1, Footnotes 9 and 10
(c) Page 7, "Analysis of Increase in Reserves"
(d) Page 27, "Exhibit of Annuities"
(e) an actuarial opinion that the reported reserves equal or exceed those
required by the Commissioners Annuity Reserve Valuation Method
(f) United States federal income tax reserves and required interest
(g) GAAP Benefit reserves and DAC factors.
(h) Risk Based Capital - Interest Risk
28
SCHEDULE VI
ALLOWANCES AND EXPENSE REIMBURSEMENTS
The REINSURER shall pay to the REINSURED the following expense allowances:
1. Commission of 7% of premium on the initial policy term. This is
consistent with the pricing assumption of the REINSURED and what is actually
paid on new sales. These commissions are fully charged back on surrenders
occurring in the first year of issue and will be paid back to the REINSURER
on surrenders.
2. Agent Travel Commission of 0.35% of initial policy term premium.
If the REINSURED decides to change the commission rate or the bonus rate, the
Management Committee would have to review the expense allowances and the
spread management for this Agreement.
3. Commission of 3.5% of premium for a subsequent ("renewed") policy term in
the first renewal year and 0.6% of premium in the renewal years after the
first renewal year of each subsequent policy term.
4. Quota share of issue expense of $358 per policy.
5. Quota share of annual administrative expenses of $140.00 per policy in
force.
The initial policy term allowances shall be netted from cash flows, if
sufficient, before the balance is transferred to the trust account. If the
cash flows are insufficient, the REINSURER shall be billed for the net amount
due. The annual allowances are to be taken out of the trust account on a
monthly basis. Each renewal allowance is to be charged against all reinsured
policies issued on the same date.
29
SCHEDULE VII
Spread Management
Definition of Terms for Schedule VII:
Expense reimbursed is expressed as a percentage of premium and it
includes commission and other issue expenses. At inception of the
Agreement, it is equal to 8.245% of premium.
Yield is the effective annual yield that can be earned on a AA- rated
7 year bond purchased to comply with the Investment Policy. The yield
can be viewed as being the 7 year Treasury yield plus an average
spread earned on a 7 year "AA-" rated corporate bond.
A bucket is defined as all policies issued on the same date.
The Portfolio is defined as all policies issued since the inception of
this Agreement.
The Investment Policy is the investment policy set forth in Addendum I
hereto.
1. REINSURED POLICIES IN INITIAL POLICY TERM
a) Each Bucket
For each bucket, the REINSURED shall manage the spread deducted from
the effective yield calculated using the index defined in the
underlying policy such that the dollar amount remaining after paying
for the options and other issue expenses reimbursed under this
Agreement be invested in bonds with an effective yield large enough to
grow to 115.2% of the original premium at the end of a 7 year period.
In all instances, these bonds will be purchased in compliance with the
Investment Policy.
The formula for the maximum price to paid on the option is:
30
Option Price less than/or equal to 1- expense reiumbursed -
115.2%
-------------
((1+Yield)^7)
If the price of the option is greater than 20% of the premium, the
REINSURED will require prior approval from the REINSURER before
issuing more new business.
b) Entire Portfolio
Similarly for the entire portfolio, the REINSURED shall manage the
spread deducted from the effective yield calculated using the index
defined in the underlying policy such that the dollar amount remaining
after paying for the options and other issue expenses reimbursed under
this Agreement be invested in bonds with an average effective yield
large enough to grow to 116.25% of the original premiums at the end of
a 7 year period.
The formula for the average price to be paid on the option is:
Average Option Prices less than/or equal to 1- expense reiumbursed -
116.25%
----------------
((1+Avge Yld)^7)
where, the average option price is weighted by the premium volume and
the average yield is weighted by the initial book value of the bonds.
If the REINSURED does not comply to the above formula, the REINSURER
reserves the right to terminate this Agreement with respect to new
business with 10 days prior written notice.
2. REINSURED POLICIES IN SUBSEQUENT POLICY TERMS
The REINSURED shall set renewal spread under the same conditions as
the initial policy term spreads unless a different method is set by
the Management Committee.
31
SCHEDULE VIII
ARBITRATION SCHEDULE
To initiate arbitration, either the REINSURED or the REINSURER shall notify
the other party in writing of its desire to arbitrate, stating the nature of
its dispute and the remedy sought. The party to which the notice is sent
shall respond to the notification in writing within ten (10) days of its
receipt.
The arbitration hearing shall be before a panel of three arbitrators, each of
whom must be a present or former officer of an insurance or reinsurance
company. An arbitrator may not be a present or former officer, attorney, or
consultant of the REINSURED or the REINSURER or either's affiliates.
The REINSURED and the REINSURER shall each name five (5) candidates to serve
as an arbitrator. The REINSURED and the REINSURER shall each choose one
candidate from the other party's list, and these two candidates shall serve
as the first two arbitrators. If one or more candidates so chosen shall
decline to serve as an arbitrator, the party which named such candidate shall
add an additional candidate to its list, and the other party shall again
choose one candidate from the list. This process shall continue until two
arbitrators have been chosen and have accepted. The REINSURED and the
REINSURER shall each present their initial lists of five (5) candidates by
written notification to the other party within twenty-five (25) days of the
date of the mailing of the notification initiating the arbitration. Any
subsequent additions to the list which are required shall be presented within
ten (10) days of the date the naming party receives notice that a candidate
that has been chosen declines to serve.
The two arbitrators shall then select the third arbitrator from the eight (8)
candidates remaining on the lists of the REINSURED and the REINSURER within
fourteen (14) days of the acceptance of their positions as arbitrators. If
the two arbitrators cannot agree on the choice of a third, then this choice
shall be referred back to the REINSURED and the REINSURER. The REINSURED and
the REINSURER shall take turns striking the name of one of the remaining
candidates from the initial eight (8)
32
candidates until only one candidate remains. If the candidate so chosen shall
decline to serve as the third arbitrator, the candidate whose name was
stricken last shall be nominated as the third arbitrator. This process shall
continue until a candidate has been chosen and has accepted. This candidate
shall serve as the third arbitrator. The first turn at striking the name of a
candidate shall belong to the party that is responding to the other party's
initiation of the arbitration. Once chosen, the arbitrators are empowered to
decide all substantive and procedural issues by a majority of votes.
It is agreed that each of the three arbitrators should be impartial regarding
the dispute and should resolve the dispute on the basis described in the
"ARBITRATION" section of this Agreement. Therefore, at no time will either the
REINSURED or the REINSURER contact or otherwise communicate with any person who
is to be or has been designated as a candidate to serve as an arbitrator
concerning the dispute, except upon the basis of jointly drafted communications
provided by both the REINSURED and the REINSURER to inform those candidates
actually chosen as arbitrators of the nature and facts of the dispute.
Likewise, any written or oral arguments provided to the arbitrators concerning
the dispute shall be coordinated with the other party and shall be provided
simultaneously to the other party or shall take place in the presence of the
other party. Further, at no time shall any arbitrator be informed that the
arbitrator has been named or chosen by one party or the other.
The arbitration shall be held on the date fixed by the arbitrators. In no
event shall this date be later than six (6) months after the appointment of
the third arbitrator. As soon as possible, the arbitrators shall establish
prearbitration procedures as warranted by the facts and issues of the
particular case. In establishing such procedures the arbitrators shall make
provision for reasonable pre-hearing examinations of officers, employees or
agents of the parties and for the production of relevant documentation. At
least ten (10) days prior to the arbitration hearing, each party shall
provide the other party and the arbitrators with a detailed statement of the
facts and arguments it will present at the arbitration hearing. The
arbitrators may consider any relevant evidence; they shall give the evidence
such weight as they deem it entitled to after consideration of any
33
objections raised concerning it. The party initiating the arbitration shall
have the burden of proving its case by a preponderance of the evidence. Each
party shall be entitled to call as witnesses any officers, employees or
agents of the other party and such other party shall do everything reasonable
to ensure the attendance and cooperation of any such witnesses. Each party
may examine any witnesses who testify at the arbitration hearing. Within
twenty (20) days after the end of the arbitration hearing, the arbitrators
shall issue a written decision that sets forth their findings and any award
to be paid as a result of the arbitration, except that the arbitrators may
not award punitive or exemplary damages. In their decision, the arbitrators
shall also apportion the costs of arbitration, which shall include, but not
be limited to, their own fees and expenses.
34
SCHEDULE IX
DAC TAX ARTICLE
The REINSURED and the REINSURER hereby agree to the following pursuant to
Section 1.848-2(g)(8) of the Income Tax Regulations issued December 1992,
under Section 848 of the Internal Revenue Code of 1986, as amended. This
election shall be effective for 1992 and for all subsequent taxable years for
which this Agreement remains in effect.
1. The term "party" will refer to either the REINSURED or the REINSURER as
appropriate.
2. The terms used in this Article are defined by reference to Regulation
Section 1.848-2 in effect December 1992.
3. The party with the net positive consideration for this Agreement for each
taxable year will capitalize specified policy acquisition expenses with
respect to this Agreement without regard to the general deductions
limitation of Section 848(c)(1).
4. Both parties agree to exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency or as
otherwise required by the Internal Revenue Service.
5. The REINSURED will submit a schedule to the REINSURER by May 1 of each year
of its calculation of the net consideration for the preceding calendar
year. This schedule of calculations will be accompanied by a statement
signed by an officer of the REINSURED stating that the REINSURED will
report such net consideration in its tax return for the preceding calendar
year.
6. The REINSURER may contest such calculation by providing an alternative
calculation to the REINSURED in writing within 30 days of the REINSURER's
receipt of the REINSURED's calculation. If the REINSURER does not so
notify the REINSURED, the REINSURER will report the net consideration as
determined by the
35
REINSURED in the REINSURER'S tax return for the previous calendar year.
7. If the REINSURER contests the REINSURED's calculation of the net
consideration, the parties will act in good faith to reach an agreement as
to the correct amount within thirty (30) days of the date the REINSURER
submits its alternative calculation. If the REINSURED and the REINSURER
reach agreement on an amount of net consideration, each party shall report
such amount in their respective tax returns for the previous calendar year.
36
SCHEDULE X
Counterparty Agreements
37
EXHIBIT I
Index Annuities
Procedures Manual
Investments Section
1. New Business will provide Investments with the dollar amount of verified
new business as of 9:00 a.m. (CST) each Thursday for premium received through
the previous Friday.
2. MIS will supply Investments with a report detailing the dollar amount of
verified new business as of 9:00 a.m. (CST) each Thursday.
3. Investments will analyze the data from New Business and MIS to verify the
integrity of the final dollar amount (program notional).
4. Investments will verify with Actuary to confirm the final dollar amount
against Actuary's calculations.
5. Actuary will fax a copy of the Actuarial Summary report and the verified
program notional amount to the coinsurer by 12:00 p.m. (CST).
All faxes should be sent to the attention of Xxxx Xxxxxx, Vice President
(000) 000-0000.
6. On a weekly basis, Actuary will fax to the coinsurer summary liability
information on outstanding policies to date. Detailed information will be
supplied as requested by the coinsurer.
7. Investments will wire transfer premium received through the previous
Friday from the depository bank, Nations Bank, Nashville, account 1800688044,
to the segregated trust account at State Street Bank and Trust, Boston,
Massachusetts.
8. Investments will notify the approved dealer by 10:00 a.m. (CST) with an
estimate of the program notional amount of options to be purchased that
afternoon. Unless mutually agreed by the parties, if premium exceeds
38
$5,000,000 in a week, Investments will be purchasing European put options and
will require an additional price estimate. The structure of the put options
will be as follows:
Put 1 Original value of the call option - expires at the end of year 1
Put 2 6/7th of the original value of the call option - expires at the end
of year 2
Put 3 5/7th of the original value of the call option - expires at the end
of year 3
Put 4 4/7th of the original value of the call option - expires at the end
of year 4
Put 5 3/7th of the original value of the call option - expires at the end
of year 5
9. The approved dealer will supply Investments with a pricing estimate for
that day's option(s) purchase by 11:00 a.m. (CST).
10. Investments will review the current option(s) pricing estimate(s) with
Actuary.
11. An authorized trader will execute the option(s) trade with the approved
dealer for Thursday's index closing value by 12:00 p.m. (CST).
12. An authorized trader will execute fixed income securities trades as
determined by Investments (fixed income securities may be purchased
throughout the week as estimates of premium become available from New
Business).
13. The authorized trader will submit a pencil trade ticket for the option(s)
trade to the financial analyst in Investments and a detailed trade blotter
will be delivered to Accounting before 12:30 p.m. (CST).
14. The authorized trader will submit a pencil trade ticket on trade date for
fixed income securities to the financial analyst in Investments. The
financial analyst will provide a trade blotter detailing the trade
specifications to Accounting no later than 2:30 p.m. (CST) or as
39
soon as possible if trade execution is later than 2:30 p.m. (CST).
15. Accounting will verify the option(s) trade with approved dealer by 1:00
p.m. (CST). Accounting will report any discrepancies to Investments
immediately so that an authorized trader can contact the approved broker to
adjust the trade before the close of the Euro-dollar futures market at 1:45
p.m. (CST).
16. Accounting will verify any fixed income security trades with the approved
dealer. Any determined discrepancies will be reported to Investments. An
authorized trader will contact the approved dealer to correct any specific
information regarding the trade.
17. Investments will telephone Standard & Poor's 1-800 line to verify the
index closing value by 4:45 p.m. (CST) and enter this verified closing value
into the AS400 computer system.
18. The new option position will be entered into the Hedge Position Report
along with the previously outstanding option positions valuation levels
(provided on Fridays).
19. Investments will fax a copy of the option pencil trade ticket and a copy
of the trade blotter (detailing all trades from the previous Friday through
the current Thursday) to the coinsurer after the close of the index on
Thursday.
20. Investments will distribute the following reports to the President, Chief
Actuary, Chief Investment Officer, and coinsurer each Friday afternoon after
the option(s) valuation is received from the approved dealer:
Hedge Position Report
Counter Party Security Collateral Reporter
Counter Party Security Collateral List
These reports will also be made available at all meetings of the Delta Life
and Annuity Company Investment Committee.
40
21. On a monthly basis, Investments will distribute the following reports to
the President, Chief Actuary, Chief Investment Officer, and coinsurer within
25 days of month end:
Total Portfolio Holdings Report
Total Portfolio Holdings Report by Sector
Total Portfolio Holdings Report by Credit Rating
These reports will also be made available at all meetings of the Delta Life
and Annuity Company Investment Committee.
22. Each Friday, the approved dealer will fax to Investments and to the
coinsurer the bid side option valuation levels for all outstanding option
positions as of the previous day's closing index value (also on all quarter
end dates).
23. On Friday afternoon (t+1), Investments will reprice the current
collateral as of the previous day's close and will notify the approved dealer
of any collateral adjustments due as a result of the new option(s) position.
The approved dealer will have two business days to deliver in new approved
collateral securities. If collateral is to be returned to the approved
dealer, Investments will return these securities within two business days.
24. On Friday (t+1), the approved dealer will fax four copies of the
option(s) trade confirmation. One copy will be faxed to the trustee, State
Street Bank and Trust, the second to the attention of Investments, and the
third to the attention of Accounting, and the fourth to the coinsurer.
25. If no discrepancies are found on the faxed copy of the option(s) trade
confirmation, an approved officer will sign and fax back to the approved
dealer the copy of the option(s) trade confirmation.
26. The approved dealer will overnight mail two signed copies of the
option(s) trade confirmation to Delta Life and Annuity Company. Both copies
will be signed by an
41
approved officer. One copy will be returned to the approved broker and one
will be retained by the trustee.
27. The approved dealer will mail three copies of the fixed income securities
trades. The original will be sent to the trustee, State Street Bank and
Trust, with duplicate copies to the attention of Investments, to the
attention of Accounting.
28. As copies of mailed confirmations for fixed income securities trades are
received, Investments will review and contact the approved dealer if
corrections to the confirmation are warranted.
29. If no discrepancies are found on the faxed copy of the option trade
confirmation, Delta Life and Annuity Company will deliver each Tuesday (t+3)
the cash settlement by fed wire to the approved dealer's custodian bank.
30. On the specific settlement date, Delta Life and Annuity Company will
deliver cash settlement via fed wire versus book entry of the fixed income
securities purchased. These securities will be held by the trustee, State
Street Bank and Trust in Boston, Massachusetts.
42
