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AUTOMATIC COINSURANCE
REINSURANCE AGREEMENT
INVESTORS GUARANTY LIFE INSURANCE COMPANY
A California corporation with executive offices in
Columbus, Ohio
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AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Schedule
1. Reinsured: Investors Guaranty Life Insurance Company
2. Address: A California corporation with executive offices in
Columbus, Ohio
3. Effective date: The date the stock of the Reinsured is purchased by the
Retrocessionaire.
4. Policies:
(a) All individual insurance policies written by the Reinsured.
(b) All group insurance policies written by the Reinsured.
(c) All annuity plans (whether group or individual) written by the
Reinsured.
(d) All riders issued with or added later to the above described
contracts.
5. Reinsurance: 100%
6. Initial consideration (all values as of effective date of this agreement)
computed as follows:
(a) The Reinsured's policy reserves from Annual Statement Exhibits
8, 9, and 10; plus
(b) the claim liabilities pertaining to the policies; plus
(c) the advance premiums applicable to the policies; minus
(d) the net due and deferred premiums applicable to the policies;
plus
(e) the miscellaneous reserves and liabilities applicable to the
policies; and less
(f) the policy loans; and less
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(g) the miscellaneous assets applicable to the policies.
7. Ceding commission: $133,000,000, minus the ceding commission pertaining
to the Ohio State Treaty.
8. Expense commission: The amount indicated by Exhibit A, attached to and
made a part of this agreement.
The agreement of which this Schedule is a part is hereby executed in duplicate
by the parties hereto.
INVESTORS GUARANTY LIFE EMPLOYERS REASSURANCE
INSURANCE COMPANY CORPORATION
By: By: /s/ Xxxxx X. Xxxxxx
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Title: Title: /s/ Ex. Vice Pres. and Actuary
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Date: Date: /s/ January 21, 1997
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By: By: /s/ Xxxxxx X. Xxxxxxx
-------------------------------- ------------------------------------
Title: Title: /s/ Ass't Gen Counsel
----------------------------- ---------------------------------
Date: Date: /s/ January 21, 1997
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AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Employers Reassurance Corporation
of
Overland Park, Kansas
(hereinafter called the Corporation)
agrees with the Reinsured named in the Schedule made a part hereof, in
consideration of the mutual covenants hereinafter contained, as follows:
ARTICLE I
APPLICATION OF AGREEMENT. This agreement applies to loss which is retained by
the Reinsured pertaining to the insurance policies and riders described in Item
4 of the Schedule becoming effective before, on and after the effective date of
this agreement (hereinafter called policies or policy) and which is paid by the
Reinsured on or after the effective date of this agreement.
ARTICLE II
ENTIRE AGREEMENT. This agreement shall constitute the entire agreement between
the parties with respect to the business being reinsured hereunder. There are no
other understandings between the parties other than as expressed in this
agreement. Any change or modification to this agreement shall be null and void
unless made by amendment to this agreement and signed by both parties.
ARTICLE III
REINSURANCE. The Corporation will indemnify the Reinsured against the
percentage specified in Schedule Item 5 of loss to which this agreement applies.
ARTICLE IV
RECAPTURE. The Reinsured does not have any rights to recapture the policies.
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ARTICLE V
PRODUCER COMMISSION. The Corporation is obligated to the Reinsured for the
commissions paid by the Reinsured to its producers of the policies.
ARTICLE VI
DEFINITIONS. The word "policies" means the insurance forms described in the
Schedule and includes conditional receipts pertaining thereto and conversions,
reinstatements and exchanges thereof.
The word "loss" shall mean only such amounts as are actually paid by the
Reinsured for benefits afforded under the policies, in settlement of claims for
benefits under the policies, or in satisfaction of judgments for benefits under
the policies; provided that, in the event of the insolvency of the Reinsured,
"loss" shall mean the amount of policy benefits which the Reinsured has incurred
or is liable for, and payment by the Corporation shall be made to the
liquidator, receiver or other statutory successor of the Reinsured in accordance
with the provisions of the Insolvency Clause attached to and made a part of this
agreement. The word "loss" shall include life insurance proceeds payable by
reason of death which remain unpaid because of the nature of the settlement
option selected. The word "loss" includes cash values paid by the Reinsured
because of policy surrenders. The word "loss" shall not include:
(1) claim expenses;
(2) salaries paid to employees of the Reinsured;
(3) any amount paid by the Reinsured for punitive, exemplary or compensatory
damages arising out of the conduct of the Reinsured in the investigation,
trial or settlement of any claim or failure to pay or delay in payment of
any benefits under any policy; provided that, this subparagraph (3) shall
not apply if the Corporation has, in advance of any such conduct by the
Reinsured, counseled with the Reinsured and concurred in the Reinsured's
course of conduct;
(4) any statutory penalty imposed upon the Reinsured on account of any unfair
trade practice or any unfair claim practice;
(5) amounts collected under other reinsurance.
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The term "claim expenses" shall mean statutory interest payable on insurance
proceeds, court costs, interest upon judgments, and allocated investigation,
adjustment and legal expenses, but the term "claim expenses" shall not include
salaries paid to employees of the Reinsured.
Claims shall be deemed to be "incurred" on the date when:
(a) the death occurs as respects life coverage;
(b) the disability commences, as respects waiver of premium coverage;
(c) the accident takes place, as respects accidental death coverage.
The word "exchange" means that an insurance contract reinsured hereunder is
traded for another plan of equal or smaller face amount, without requirement for
full evidence of insurability.
The term "other reinsurance" means those contracts entered into by the Reinsured
with insurance or reinsurance companies other than the Corporation which
reinsure the policies.
"Miscellaneous reserves and liabilities" means the sum of the following:
(a) due or accrued agent commissions;
(b) premiums due or accrued on other reinsurance;
(d) premium suspense.
"Miscellaneous assets" means the amounts recoverable under other reinsurance.
The term "Ohio State Treaty" means the Automatic Coinsurance Reinsurance
Agreement, which has the same effective date as this agreement, between the
Corporation and The Ohio State Life Insurance Company.
The term "Escrow Account" means the funds pertaining to this agreement and the
Ohio State Treaty received and held by COMMERCE BANK, N.A. of Kansas City,
Missouri ("Commerce Bank") pursuant to its Escrow Agreement (Ohio
State/Investors Guaranty Business) with the Corporation and the
Retrocessionaire).
The word "Retrocessionaire" means Great Southern Life Insurance Company, which
is the Corporation's reinsurer for the policies.
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ARTICLE VII
INITIAL CONSIDERATION. On the effective date of this agreement, the Reinsured
shall deposit to Commerce Bank assets equal to the Reinsured's estimate of the
initial consideration indicated in Item 6 of the Schedule, minus the ceding
commission indicated in Item 7 of the Schedule. Thirty days after the effective
date of this agreement, the Reinsured shall pay to the Corporation the amount by
which the estimate is less than actual, with interest thereon, or the
Corporation shall pay to the Reinsured the amount by which the estimate is more
than actual, with interest thereon.
ARTICLE VIII
REINSURANCE PREMIUM. The Reinsured shall pay to the Corporation a reinsurance
premium equal to the insurance premium collected by the Reinsured on and after
the effective date of this agreement pertaining to the policies, minus the
reinsurance premium paid to other carriers, and minus the expense commission
indicated in Item 8 of the Schedule.
ARTICLE IX
POLICY LOANS. The Corporation shall be obligated to the Reinsured for the policy
loan increases, minus the amount of uncapitalized policy loan interest (the net
result of which is hereinafter referred to as policy loan increase). The
Reinsured shall be obligated to the Corporation for the policy loan decreases,
plus the amount of uncapitalized policy loan interest (the net result of which
is hereinafter referred to as policy loan decrease).
ARTICLE X
INVESTMENTS. The Escrow Account assets shall be invested in accordance with the
investment guidelines contained in Exhibit B, attached to and made a part of
this agreement.
ARTICLE XI
INTEREST. Interest rates credited by the Reinsured on the policies shall be
determined in accordance with the procedures contained in Exhibit C, attached to
and made a part of this agreement.
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ARTICLE XII
REPORTING, ACCOUNTING AND SETTLEMENTS. Within 25 days after the end of each
calendar quarter, the Reinsured or its administrator shall furnish to the
Corporation a report (in a form satisfactory to the Corporation) showing the
following information:
(a) Amounts owed Corporation:
(1) Reinsurance premium applicable to insurance premium collected
during quarter;
(2) Policy loan decrease during quarter;
(3) Increase during quarter in miscellaneous reserves and
liabilities;
(4) Decrease during quarter in miscellaneous assets;
(b) Amounts owed Reinsured:
(1) loss paid under the policies during the quarter;
(2) expense commission;
(3) policy loan increase during quarter;
(4) producer commission for the quarter;
(5) Decrease during quarter in miscellaneous reserves and
liabilities;
(6) Increase during quarter in miscellaneous assets;
(c) Balance due Corporation or Reinsured.
Any balance due the Corporation shall be deposited to the Escrow Account within
30 days after the end of the calendar quarter involved. Any balance due the
Reinsured shall be paid by the Corporation to an account designated by the
Reinsured within 30 days after the end of the calendar quarter involved.
The Reinsured and the Corporation each agree to pay interest to the other on
amounts not paid within the time periods required within this article,
calculated using the one month LIBOR rate.
The Reinsured's report for the third calendar quarter of each calendar year
shall include:
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(1) a summary listing showing all policies in force;
(2) the detailed information required with respect to the policies
by the Exhibit of Life Insurance in the Corporation's Annual Statement;
(3) the aggregate reserve information required with respect to the
policies by the Corporation's actuarial opinion and by the other exhibits
of the Corporation's Annual Statement.
ARTICLE XIII
CLAIMS. The Reinsured agrees that it will cause to be investigated and paid,
settled or defended all claims arising under the policies. Except as respects
damages to which this agreement may apply by virtue of subparagraph (3) of the
definition of loss, the claim decisions of the Reinsured (or of its
administrator) shall be binding upon the Corporation.
The Corporation shall have the right, at its own expense, to participate jointly
with the Reinsured (or its administrator)in the investigation, adjustment or
defense of any claim.
The Corporation has no obligation to indemnify the Reinsured for any claim
expenses paid by the Reinsured with respect to the policies.
ARTICLE XIV
ADMINISTRATION OF INSURANCE. The Corporation shall have no authority or
responsibility to administer the insurance provided by the policies.
ARTICLE XV
INSPECTION OF RECORDS. The Corporation may inspect the records of the Reinsured
pertaining to the policies at any time during the normal business hours of the
Reinsured.
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ARTICLE XVI
OFFSET. The Reinsured or the Corporation may offset any balance due from one
party to the other under this agreement.
ARTICLE XVII
INSOLVENCY CLAUSE. The attached Insolvency Clause is hereby made a part of this
agreement.
ARTICLE XVIII
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the Reinsured's
interest hereunder, whether voluntary or involuntary and whether by merger or
reinsurance of its entire business with another company or otherwise, shall be
binding upon the Corporation, provided that, this article does not apply to:
(a) The Corporation's assignment of its interests and liabilities
as the reinsurer to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is not named as the direct insurer;
(b) The Reinsured's assignment of its rights and duties as the
ceding company to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is named as the direct insurer.
ARTICLE XIX
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
ARTICLE XX
TERMINATION. This agreement shall remain in force until terminated by mutual
consent or by either party giving to the other party not less than 90 days
advance notice, by registered mail or express delivery service, stating the
termination date.
This agreement does not apply with respect to policies issued by the Reinsured
to become effective on or after the termination date of this agreement.
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The reinsurance afforded by this agreement applicable to each policy issued by
the Reinsured to become effective prior to or during the term of this agreement
shall continue to apply thereto until the policy naturally expires.
IN WITNESS WHEREOF, the parties hereto have signed this agreement on the
Schedule Page.
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INSOLVENCY CLAUSE
The portion of any risk or obligation assumed by the reinsurer, when
such portion is ascertained, shall be payable on demand of the ceding insurer at
the same time an the ceding insurer shall pay its not 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 ceding insurer under the contract or contracts reinsured
without diminution because of the insolvency of the ceding insurer. In the event
of insolvency and the appointment of a conservator, liquidator or statutory
successor of the ceding company, 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 insolvent company by any court of competent jurisdiction or by any
conservator, liquidator, or statutory successor of the company 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. Payments by the reinsurer as above set forth shall be
made directly to the ceding insurer or to its conservator, liquidator or
statutory successor, except where the contract of insurance or reinsurance
specifically provides another payee of such reinsurance in the event of the
insolvency of the coding insurer.
The conservator, liquidator or statutory successor of a ceding insurer
shall give written notice of the pendency of a claim against the ceding insurer
indicating the policy or bond reinsured, within a reasonable time after such
claim is filed and the reinsurer may interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or defenses which
it may deem available to the coding company or its conservator, liquidator or
statutory successor. The expense thus incurred by the reinsurer shall be payable
subject to court approval out of the estate of the insolvent ceding insurer as
part of the expense of conservation or liquidation to the extent of a
proportionate share of the benefit which may accrue to the ceding insurer in
conservation or liquidation, solely as a result of the defense undertaken by the
reinsurer.
The original insured or policyholder shall not have any rights against
the reinsurer which are not specifically set forth in the contract of
reinsurance, or in a specific agreement between the reinsurer and the original
insured or policyholder.
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EXHIBIT A
Expense Commission
INVESTORS GUARANTY LIFE
Expense Commission:
Percent of
Per Policy Premium
Deferred Annuities $8.75 per quarter --
Life Insurance $8.75 per quarter 2.5%
Deposit Funds -- --
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EXHIBIT B
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2) Focus an well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on
anticipated interest rate and/or spread changes. Any restructuring of
the portfolio will be performed in conjunction with the overall
asset/liability management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities
purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
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INVESTMENT GUIDELINES AND LIMITATIONS
The following guidelines will be utilized in developing and managing the
portfolio:
1) Maturity Structure:
The targeted average life for the The maturity distribution of the
portfolio is a range of 6-13 years. portfolio will be a function of
expected liability cash flows, and
the term structure of interest
rates.
2) Sector Allocation: Target
Expected Percentage
Sector Range Allocation
U.S. Governments 0-25% - %
Corporate Bonds 45-85 55
Asset-Backed Securities (ABS): 5-20 20
Mortgage-Backed Securities (MBS): 15-45 25
--
Total MBS 100%
===
3) Ratings Guidelines:
a) Corporate Bonds:
Expected
Expected Percentage
Rating Category Range of Corporates
AAA & AA 5-15% 10%
A 40-75 65
BBB 15-25 25
--
100 %
For any corporate bonds rated both Baa-3/BBB by Moody's and Standard & Poor's
respectively, Employer's Re will be notified prior to their purchase. Subsequent
to the transaction, written approval will be obtained from Employer's Re for all
Baa-3/BBB- bonds acquired.
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b) Mortgage-Backed Securities:
MBS holdings will generally involve government agency, government
sponsored agency (FNMA and FHLMC), or AAA rated collateral. No
more than 20% of the total portfolio will be backed by non-agency
collateral.
c) Below Investment Grade Securities (BIG):
BIG bonds are not considered part of the overall investment
strategy. However, any bond purchased as an investment grade
security which is subsequently downgraded to a BIG rating will be
reevaluated at that time. If the risk of default is considered
low, the bond may be retained. Any BIG bonds retained will be
regularly monitored and reevaluated. The total amount of BIG bonds
to be retained cannot exceed 5% of total investments.
d) Asset-Backed Securities:
ABS investments should generally be rated AA or AAA by one of the
major rating agencies. No more than 20% of ABS holdings can be
rated below AA.
Expected Target
Range Allocation
AAA 80-100% 100%
AA 0-20 __
4) Holding limitations:
a) Industry Concentration:
Corporate bond holdings are limited to no more than 20% in any one
industry.
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b) Company Concentration:
The maximum amount to be invested in any one company or
organization is as follows:
Maximum Amount
Invested
Rating Category (In Million)
AAA $15
AA 15
A 12
BBB 8
c) Individual MBS concentration:
The maximum amount to be invested in any one agency collateral
security is $25 million. For a non-agency collateral security,
the maximum amount is $10 million (rated AAA).
d) Individual ABS Concentration:
The maximum amount to be invested in any one ABS security is
as follows:
Maximum Amount
Invested
Rating Category (In Million)
AAA $10
AA 5
5) Any security which is outside the scope of these guidelines can be
invested in, if mutually agreed upon by both organizations.
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EXHIBIT C
Interest Rate Crediting Process
1. Objective. The objective of this process is to assure that credited
rates are established so as to meet required spread targets.
2. Expected Gross Interest Rate. The expected gross interest rate for a
block of business is determined by blending current yields on the
investment portfolio of assets underlying the block of business
together with expected new money for minimal new and reinvestment cash
flow. The blending will be based on cash flow for the period under
review and will take into consideration funds due for reinvestment and
interest income.
Current yields should include the effect of realized statutory capital
gains and losses. New money assumptions shall consider these investment
guidelines in respect of quality, duration and type of assets.
An example is shown in the following Table 1:
Table 1
Expected Gross Interest Rate
Volume Rate
Investment Portfolio 800 8.5%
Reinvestment Portfolio 100 8.0%
New Money 100 8.0%
Average 1,000 8.4%
3. Expected Net Interest Rate. The expected net interest rate for a block
of business is determined by subtracting from the gross rate charges
for investment expenses and risks.
Charges for investment expenses cover the cost of investment expenses
(including transaction costs) per the Services Agreement described in
Numbered Paragraph 3 of this agreement.
Charges for risk should take into consideration the default and option
risks (as agreed upon) relating to the portfolio assets underlying the
block of business.
An example is shown in the following Table 2:
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Table 2
Expected Net Interest Rate
Expected Gross Rate 8.4%
Less: Investment Expenses 0.25%
And less: Investment Risks 0.2%
Expected Net Rate 7.95%
4. Target Credited Rate. To determine the target credited rate, the
required spread must be subtracted from the expected net investment
rate. The required spread varies by plan and by duration within plan.
The target credited rate may be modified for marketing reasons provided
that adjustments are offsetting in the aggregate. Antiselection in
favor of artificially high rates will be considered in this process.
An example is shown in the following Table 3:
Table 3
Target Credited Rate
Life Annuity
Expected Net Rate 7.95% 7.95%
Less: Required Spread 1.5% 1.75%
Calculated Credited Rate 6.45% 6.20%
Marketing Adjustments 0.4% -0.10%
(Assuming 80% annuities)
Target Credited Rate 6.85% 6.10%
5. Working Range. If currently credited interest rates are outside of the
defined working range of plus or minus 25 basis points of target rates, then
no action is required (but action may be taken) until the cumulative
shortfall exceeds $750,000.
6. Actions. If currently credited interest rates are outside the defined
working range of target rates, then action is required. Three courses of
action are possible:
a. Adjust credited rates;
b. Adjust reinsurance and retrocession allowances;
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c. Do nothing, which is not acceptable after cumulative shortfall exceeds
$750,000.
Considerations in this decision are:
1. The objective stated above;
2. Competition and marketing issues;
3. Previous deficiencies and sufficiencies in credited rates (relative to
target rates);
4. Expected trends in future credited rates;
5. The magnitude of the contemplated adjustments.
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