Exhibit 10.68
COINSURANCE AGREEMENT
between the
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(referred to as the Company)
and
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
(referred to as the Reinsurer)
Dated as of October 1, 1998

 

 

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INDEX OF SCHEDULES
Schedule 1.1(A)     Policy Forms
Schedule 1.1(B)     Separate Account Assets
Schedule 1.1(C)     Separate Accounts
Schedule 1.1(D)     Third-Party Reinsurance
INDEX OF EXHIBITS
Exhibit A     Recapture Fee Formula
Exhibit B     Form of Security Trust Agreement
Exhibit C     Closing Date Liabilities Methodology
Exhibit D     Calculation of Reinsurance Trust Required Balance

 

 

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TABLE OF CONTENTS

         
ARTICLE I
       
DEFINITIONS
       
1.1 Definitions
       
 
       
ARTICLE II
       
BASIS OF COINSURANCE AND BUSINESS COINSURED
       
2.1 Coinsurance
       
2.2 Reinsurer Extra Contractual Obligations
       
2.3 Reinstatements, Conversions and Exchanges
       
2.4 Certain Policy Elements
       
2.5 Reserves
       
2.6 Separate Account Reserves
       
2.7 Policy Changes or Reductions
       
 
       
ARTICLE III
       
ACCOUNTINGS AND TRANSFER OF ASSETS
       
3.1 Ceding Commission
       
3.2 Transfer of Assets
       
3.3 Post-Closing Adjustments
       
3.4 Interim Monthly Accountings
       
3.5 Monthly Accountings
       
3.6 Monthly Payments
       
3.7 Delayed Payments
       
3.8 Offset Rights
       
3.9 Third-Party Reinsurance
       
3.10 Premium Taxes and Assessments
       
 
       
ARTICLE IV
       
POLICY ADMINISTRATION
       
4.1 Interim Servicing
       
4.2 Transfer of Servicing Obligations
       
4.3 Regulatory Matters
       
4.4 Policy Changes
       
 
       
ARTICLE V
       
OVERSIGHTS
       
5.1 Oversights
       
 
       
ARTICLE VI
       
CONDITIONS PRECEDENT
       
6.1 Conditions Precedent
       
 
       
ARTICLE VII
       
DUTY OF COOPERATION
       
7.1 Cooperation
       
 
       
ARTICLE VIII
       
DAC TAX
       
8.1 Election
       

 

 

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ARTICLE IX
       
INDEMNIFICATION AND RECAPTURE
       
9.1 Reinsurer’s Obligation to Indemnify
       
9.2 Company’s Obligation to Indemnify
       
9.3 Certain Definitions and Procedures
       
9.4 Security Trust Account and Recapture Rights
       
 
       
ARTICLE X
       
DISPUTE RESOLUTION
       
10.1 Other Disputes over Calculations
       
 
       
ARTICLE XI
       
INSOLVENCY
       
11.1 Insolvency Clause
       
 
       
ARTICLE XII
       
DURATION
       
12.1 Duration
       
12.2 Reinsurer’s Liability
       
12.3 Survival
       
 
       
ARTICLE XIII
       
MISCELLANEOUS
       
13.1 Notices
       
13.2 Confidentiality
       
13.3 Entire Agreement
       
13.4 Waivers and Amendments
       
13.5 No Third Party Beneficiaries
       
13.6 Assignment
       
13.7 Governing Law
       
13.8 Counterparts
       
13.9 Severability
       
13.10 Schedules, Exhibits and Paragraph Headings
       
13.11 Expenses
       
13.12 No Prejudice
       

 

 

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COINSURANCE AGREEMENT
THIS COINSURANCE AGREEMENT (the “Agreement”) made by and between Aetna Life
Insurance and Annuity Company, a Connecticut domiciled stock life insurance
company (the “Company”) and Lincoln Life & Annuity Company of New York, a New
York domiciled stock life insurance company (the “Reinsurer”).
WHEREAS, the Company has issued or reinsured from other insurance companies,
including Aetna Life Insurance Company, a Connecticut domiciled stock life
insurance company (“ALIC”), certain Policies (as defined below);
WHEREAS, the Company, ALIC, the Reinsurer, and The Lincoln National Life
Insurance Company, a stock life insurance company organized under the laws of
the State of Indiana, have entered into a Second Amended and Restated Asset
Purchase Agreement, dated as of May 21, 1998 (the “Asset Purchase Agreement”),
pursuant to which the Company has agreed to cede and transfer to the Reinsurer
certain liabilities arising under the Policies (as defined below) and the
Post-Closing Policies (as defined below) for the consideration specified herein
and the Reinsurer has agreed to reinsure such liabilities on the terms and
conditions set forth herein; and
WHEREAS, the Company desires that the Reinsurer perform certain administrative
functions on behalf of the Company with respect to the Policies, and the
Company, ALIC and Reinsurer have entered into the NY Administrative Services
Agreement of even date herewith (the “NY Administrative Services Agreement”)
pursuant to which the Reinsurer shall provide such administrative services.
NOW, THEREFORE, in consideration of the mutual and several promises and
undertakings herein contained, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Company and the
Reinsurer agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms shall have the respective meanings set
forth below throughout this Agreement:
“Accounting” means an Interim Monthly Accounting or a Monthly Accounting, as
applicable.
“Affiliate” means, with respect to any Person, at the time in question, any
other Person Controlling, Controlled by or under common Control with such
Person. “Control” (including the terms “Controlling,” “Controlled by” and “under
common Control with”) means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, the holding of
policyholders’ proxies by contract other than a commercial contract for goods or
non-management services, or otherwise, unless the power is the result of an
official position with or corporate office held by the Person. Except as
provided otherwise in this Agreement, control is presumed to exist if any
Person, directly or indirectly, owns, controls, holds with the power to vote, or
holds shareholders’ proxies representing 25% or more of the voting securities of
any other Person, or holds or controls sufficient policyholders’ proxies, or is
entitled by contract or otherwise, to nominate, appoint or to elect the majority
of the board of directors or comparable governing body of any other Person.
“ALIAC” means Aetna Life Insurance and Annuity Company, a stock life insurance
company organized under the laws of the State of Connecticut.
“ALIC” means Aetna Life Insurance Company, a stock life insurance company
organized under the laws of the State of Connecticut.
“Ancillary Agreements” means the various agreements collectively defined as
“Ancillary Agreements” in the Asset Purchase Agreement.

 

 

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“Annual Statement” means the Company’s convention form statutory annual
statement, together with all required schedules and supplements thereto, as
filed with the Insurance Department of the State of Connecticut.
“Applicable Law” means any domestic or foreign federal, state or local statute,
law, ordinance or code, or any written rules, regulations or administrative
interpretations issued by any Governmental Authority pursuant to
any of the foregoing, and any order, writ, injunction, directive, judgment or
decree of a court of competent jurisdiction applicable to the parties hereto.
“Asset Purchase Agreement” means the Second Amended and Restated Asset Purchase
Agreement by and among the Company, ALIC, the Reinsurer and The Lincoln National
Life Insurance Company, dated as of May 21, 1998.
“Books and Records” means the originals or copies of all customer lists, policy
information, policy forms and rating plans, disclosure and other documents and
filings, including statutory filings, required under all
Applicable Laws, administrative records, reinsurance records, claim records,
sales records, underwriting records, financial records, Tax records and
compliance records in the possession or control of the Company and relating
principally to the operation of the Business including, without limitation, any
database, magnetic or optical media (to the extent not subject to licensing
restrictions) and any other form of recorded, computer generated or stored
information or process, but excluding: (a) the Company’s original certificate of
incorporation, bylaws, corporate seal, licenses to do business, minute books and
other corporate records relating to corporate organization and capitalization;
(b) original Tax and corporate accounting records relating to the Business;
(c) any original books and records relating to the Retained Liabilities; (d) any
records that are subject to attorney-client privilege; and (e) the Retained
Contracts and any records relating thereto.
“Business” means marketing, issuing and administering the Policies in the United
States and the other business activities reasonably related thereto, in each
case as currently conducted by the Company or, where so specified herein, as to
be conducted by the Reinsurer following the Closing Date.
“Business Day” means any day other than a Saturday, Sunday, a day on which
banking institutions in the State of Connecticut are permitted or obligated by
Applicable Law to be closed or a day on which the New York Stock Exchange is
closed for trading.
“Ceding Commission” means the aggregate ceding allowance payable by the
Reinsurer to the Company in connection with the reinsurance of the Policies
hereunder.
“Closing” means the closing of the transact ions contemplated by this Agreement.
“Closing Balance Sheet” means the pro forma balance sheet of the Business as of
the last day of the second month preceding the month in which the Closing shall
occur, which shall be prepared and delivered by the Company to the Reinsurer not
later than the fifth day prior to the Closing Date in accordance with Article II
of the Asset Purchase Agreement.
“Closing Date” means the date on which the Closing occurs.
“Closing Date Liabilities” means, as of any date, the General Account Reserves
and other statutory liabilities relating to the Business, which shall be
(a) estimated and reflected in the Closing Balance Sheet as of the last day
of the second month preceding the month in which the Closing shall occur; and
(b) subsequently adjusted and reflected in the Revised Closing Balance Sheet and
Final Closing Balance Sheet as of 11:59 p.m. Eastern Time on the last day of the
month immediately preceding the month in which the Closing Date falls. The
Closing Date Liabilities shall be determined and reported in accordance with the
methodology set forth on Exhibit C.
“Code” means the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
“Commissions” mean all commissions, expense allowances, benefit credits and
other fees and compensation payable to Producers.

 

 

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“Connecticut SAP” means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Connecticut.
“Contract Date” means May 21, 1998.
“Distribution Agreements” mean th e agreements between the Company, on one hand,
and Producers, on the other, with respect to the Policies as of April 13, 1998.
“Effective Date” means 12:01 a.m. Eastern Time on October 1, 1998.
“Election Notice” means a notice given by the Company to the Reinsurer with
respect to the exercise of recapture or Security Trust remedies pursuant to
Section 9.4 hereof.
“Event of Default” means any event described in Section 9.4 hereof which gives
rise to Recapture Rights or other remedy.
“Extra Contractual Obligations” means all liabilities or obligations arising
under the Policies and Post-Closing Policies, exclusive of liabilities or
obligations arising under the express terms and conditions of the Policies and
Post-Closing Policies and the other Liabilities, but including, without
limitation, any liability for fines, penalties, forfeitures, punitive, special,
exemplary or other form of extra-contractual damages, which liabilities or
obligations arise from any act, error or omission, whether or not intentional,
negligent, in bad faith or otherwise relating to: (a) the marketing, sale,
underwriting, production, issuance, cancellation or administration of the
Policies or Post-Closing Policies; (b) the investigation, defense, trial,
settlement or handling of claims, benefits, or payments under the Policies or
Post-Closing Policies; or (c) the failure to pay, the delay in payment, or
errors in calculating or administering the payment of benefits, claims or any
other amounts due or alleged to be due under or in connection with the Policies
or Post-Closing Policies.
“Final Closing Balance Sheet” means the final pro forma balance sheet of the
Business as of the Closing Date prepared in accordance with Article II of the
Asset Purchase Agreement.
“GAAP” means United States generally accepted accounting principles as in effect
from time to time.
“General Account Reserves” means the general account statutory reserves of the
Company before reduction for accrued for expense allowances recognized in
Separate Account Reserves (without regard to the transactions contemplated by
this Agreement) with respect to the Policies or Post-Closing Policies, as
applicable, determined in accordance with Connecticut SAP.
“Governmental Authority” means any court, administrative or regulatory agency or
commission, or other federal, state or local governmental authority or
instrumentality or the National Association of Securities Dealers or national
securities exchanges having jurisdiction over any party hereto.
“Interim Monthly Accounting” shall mean a monthly accounting prepared in
accordance with Connecticut SAP and delivered by the Company to the Reinsurer in
accordance with the provisions of Section 3.4 hereof.
“Liabilities” means all gross liabilities and obligations arising out of or
relating to the Policies and Post-Closing Policies, other than the Retained
Liabilities and Extra Contractual Obligations. The Liabilities shall include,
without limitation: (a) the General Account Reserves; (b) all liabilities for
incurred but not reported claims, benefits, interest on death claims or other
payments arising under or relating to the Policies and Post-Closing Policies,
whether or not (i) included within the General Account Reserves, or
(ii) incurred before or after the Effective Date; (c) all liabilities arising
out of any changes to the terms and conditions of the Policies and Post-Closing
Policies mandated by Applicable Law whether or not incurred before or after the
Effective Date; (d) premium Taxes due in respect of Premiums paid on or after
the Effective Date (without giving effect to any credits due to the Company for
any guaranty fund assessments paid by the Company prior to Closing), and all
other Tax liabilities arising out of or relating to the Business or Post-Closing
Policies for periods commencing on or after the Effective Date (except for
income Taxes imposed on the Company under Subtitle A of the Code);

 

 

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(e) assessments and similar charges in connection with participation by the
Company or Reinsurer, whether voluntary or involuntary, in any guaranty
association established or governed by any state or other jurisdiction, arising
on account of direct Premiums paid on or after the Effective Date;
(f) Commissions payable with respect to the Policies and Post-Closing Policies
to or for the benefit of the Producers who marketed or produced the Policies, in
any case payable on or after the Effective Date; (g) any liability arising under
the Transferred Contracts; (h) premiums, payments, fees or other consideration
or amounts due on or after the Effective Date under any Third Party Reinsurance
Agreements which are included with the Transferred Contracts; (i) all
liabilities for amounts payable on or after the Effective Date for returns or
refunds of Premiums, (j) all liabilities which relate to (i) amounts transferred
from the Separate Accounts to the Company’s general accounts pending
distribution to owners of the Variable Policies; and (ii) amounts held in the
Company’s general account pending transfer to the Separate Accounts; (iii) any
insurance liabilities or obligations arising under the Variable Policies
(including any Variable Policies included within the Post-Closing Policies) that
are not payable out of the assets of the Company’s Separate Account; and (k) all
unclaimed property liabilities arising under or relating to the Policies and
Post-Closing Policies.
“LIBOR” means a rate per annum equal to the three month London Interbank Offered
Rate as published in The Wall Street Journal, Eastern Edition, in effect on the
Closing Date.
“Market Value” means the market value of the assets held in a Security Trust,
determined pursuant to Section 4.01 of the Security Trust Agreement.
“Monthly Accounting” shall mean a monthly accounting prepared in accordance with
Connecticut SAP and delivered by the Reinsurer to the Company in accordance with
the provisions of Section 3.5 hereof.
“NAIC” means the National Association of Insurance Commissioners.
“Non-Guaranteed Elements” mean cost of insurance charges, loads and expense
charges, credited interest rates, mortality and expense charges, administrative
expense risk charges, variable premium rates and variable paid-up amounts, as
applicable, under the Policies and Post-Closing Policies.
“NY Administrative Services Agreement” means the NY Administrative Services
Agreement by and between the Company, ALIC and the Reinsurer of even date
herewith.
“NY Modified Coinsurance Agreement” means the Modified Coinsurance Agreement
between the Company and the Reinsurer in the form of Exhibit Q to the Asset
Purchase Agreement.
“Other Assets” mean the specific assets of the Company listed in Schedule 1.1(A)
to the Asset Purchase Agreement and such other fixed assets as may be mutually
agreed among the parties.
“Person” means any individual, corporation, partnership, firm, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, governmental, judicial or regulatory body, business
unit, division or other entity.
“Policies” mean all of the Company’s individual universal life, individual
corporate owned life, individual traditional life, sponsored life and individual
participating life insurance policies and participating annuities, together with
all related binders, slips and certificates (including applications therefor and
all supplements, endorsements, riders and agreements in connection therewith)
that were delivered or issued for delivery to policyowners that were New York
residents, and which have been issued or reinsured by the Company in connection
with the Business (in accordance with, and as determined by reference to, the
Company’s historical practices), which policies shall include, but not be
limited to (a) all policies issued on the policy forms included in the list of
base codes set forth on Schedule 1.1(A) and which: (i) are effected, bound or
issued on or prior to the Effective Date; and (ii) are in force as of the
Effective Date; or (iii) are subject to being renewed or reinstated in
accordance with their terms on the Effective Date; and (b) all individual life
policies which are required to be issued by the Company prior to or after the
Effective Date following the exercise of conversion rights in accordance with
the terms of the individual life policies coinsured by the Reinsurer under this
Agreement.

 

 

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“Policyholders” means policyholders, insureds and assignees under the Policies
and Post-Closing Policies.
“Post-Closing Policies” means the policies issued by ALIAC after the Effective
Date pursuant to Article V of the Asset Purchase Agreement.
“Premiums” means premiums, considerations, deposits and similar receipts with
respect to the Policies or Post-Closing Policies.
“Producers” mean all LBMs, MGAs, brokers, agents, general agents, COLI specialty
brokers, re-enrollers under the Company’s sponsored life products,
broker-dealers, producers or other Persons who market or produce the Policies
and who (a) have been appointed by the Company, and (b) are entitled to receive
Commissions from the Company.
“Recapture Fee” means the amount determined in accordance with the formula set
forth on Exhibit A hereto, which is payable by the Reinsurer to the Company in
connection with recapture of the Policies and Post-Closing Policies by the
Company pursuant to Section 9.4 hereof.
“Recapture Rights” mean the right of the Company to recapture the Policies and
Post Closing Policies pursuant to Section 9.4 hereof.
“Reinsured Liabilities” means the Liabilities reinsured pursuant to this
Agreement.
“Reinsurer Extra Contractual Obligations” means: (a) all Extra Contractual
Obligations to the extent such obligations arise out of acts, errors or
omissions occurring (or, in the case of omissions, failing to occur) at any time
on or after the Effective Date by any of the Reinsurer or its directors,
officers, employees, Affiliates, agents, representatives, successors and
assigns; (b) all of the Sellers’ Extra Contractual Obligations except to the
extent otherwise provided in Articles VIII and IX of the Asset Purchase
Agreement; and (c) all liabilities and obligations (exclusive of obligations
rising under the express terms and conditions of the Policies and Post-Closing
Policies and the other Liabilities) to the extent such obligations arise out of
or relate to the Company’s administration of claims, Non-Guaranteed Elements,
and other aspects of or relating to the Policies or the Post-Closing Policies on
and after the Effective Date pursuant to the recommendations from the Reinsurer
pursuant to this Agreement, the NY Administrative Services Agreement or the
Transition Services Agreement.
“Required Balance” means one hundred percent (100%) of the amount equal to
(a) the Reserves on the Policies and Post-Closing Policies, plus (b) other
liabilities relating to the Policies and Post-Closing Policies, which shall be
calculated in accordance with the methodology set forth on Exhibit D hereto,
minus (c) the amount of outstanding loans under the Policies and Post-Closing
Policies (to the extent such loans constitute admitted assets under Connecticut
SAP).
“Reserves” means the sum of all reserves and liabilities required to be
maintained by the Company for the Policies and Post-Closing Policies issued or
reinsured by it, calculated consistent with (a) the reserve requirements,
statutory accounting rules and actuarial principles applicable to the Company
under the law of each state in which the Policies and Post-Closing Policies were
issued or delivered, and (b) otherwise in accordance with the methodologies used
by the Company to calculate the reserves and liabilities for the Policies and
Post-Closing Policies in accordance with Connecticut SAP and sound actuarial
principles and any valuation bases and methods of determining reserves as
provided in the forms of Policies and Post-Closing Policies, as applicable;
provided, however, the term “Reserves” shall not include the Separate Account
Reserves.
“Retained Contracts” means all contracts, agreements, leases, software licenses,
rights, obligations or other commitments of the Company that (a) arise out of or
are related exclusively to any business or operation of the Company other than
the Business, or (b) arise out of or are related in any way to the Business and
which, in the case of both clauses (a) and (b) herein, are not Transferred
Contracts.

 

 

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“Retained Liabilities” means the liabilities of the Company arising solely from
any of the following: (a) premium taxes due in respect of Premiums paid prior to
the Effective Date; (b) amounts payable prior to the Effective Date for returns
or refunds of Premiums; (c) Commissions payable with respect to the Policies to
or for the benefit of Producers, in any case payable prior to the Effective
Date; (d) assessments and similar charges in connection with participation by
the Company, whether voluntary or involuntary, in any guaranty association
established or governed by any state or other jurisdiction, arising on account
of direct Premiums paid prior to the Effective Date; (e) the Retained Contracts;
(f) premiums, payments, fees or other consideration or amounts due prior to the
Effective Date under the Third-Party Reinsurance Agreements; (g) death claims
under the Policies which are reported prior to the Closing Date; (h) the pending
litigation described on Schedule 3.03 to the Asset Purchase Agreement;
(i) interest stabilization reserve relating to the Policies; (j) liabilities or
obligations relating to the Business to the extent such liabilities or
obligations have been accrued for on Company’s books and records as of
11:59 p.m. Eastern Time on the day immediately preceding the Effective Date in
accordance with Connecticut SAP but are not reflected on the Final Closing
Balance Sheet; and (k) all other liabilities, obligations or indemnities
expressly assumed by the Company under the terms of the Asset Purchase
Agreement, this Agreement or any Ancillary Agreement.
“Revised Closing Balance Sheet” means the pro forma balance sheet of the
Business as of the Closing Date prepared and delivered by the Company to the
Reinsurer in accordance with Article II of the Asset Purchase Agreement.
“Secured Policies” means the Policies and Post-Closing Policies secured by the
Security Trust established under Section 9.4 hereof.
“Security Trust” means a trust account established with a Trustee for the
purpose of securing the Reinsurer’s obligations to the Company in accordance
with Article IX hereof.
“Security Trust Agreement” means the trust agreement governing the Security
Trust, which shall be substantially in the form of Exhibit B hereto.
“Sellers’ Extra Contractual Obligations” means all Extra Contractual Obligations
to the extent such obligations arise out of acts, errors or omissions occurring
(or, in the case of omissions, failing to occur) at any time prior to the
Effective Date by the Company or its directors, officers, employees, Affiliates,
agents or representatives.
“Separate Account Assets” means the assets described on Schedule 1.1(B) hereto
which constitute the Separate Accounts.
“Separate Account Reserves” means the reserves associated with the Variable
Policies which are held in the Company’s Separate Accounts, determined in
accordance with Connecticut SAP.
“Separate Accounts” means the specific separate accounts of the Company
identified in Schedule 1.1(C) hereto.
“Taxes” (or “Tax” as the context may require) means any tax, however
denominated, imposed by any federal, state, local, municipal, territorial,
provincial or foreign government or any agency or political subdivision of any
such government (a “Taxing Authority”), including, without limitation, any tax
imposed under Subtitle A of the Code and any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, gains, goods and
services, production, documentary, recording, social security, unemployment,
disability, workers’ compensation, estimated, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, capital stock, occupation, personal or real property,
environmental or windfall profit tax, premiums, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty, addition to tax or additional amount
imposed by any Taxing Authority relating thereto.
“Termination Date” shall mean the date on which this Agreement is terminated in
accordance with the terms and conditions of Article XII hereof.
“Third-Party Reinsurance Agreements” means the reinsurance agreements identified
on Schedule 1.1(D) hereto under which the Company has ceded liabilities to
non-Affiliated reinsurers with respect to the Policies.

 

 

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“Transferred Assets” means: (a) cash or cash equivalents equal to the amount as
of the Closing Date of (A) the Closing Date Liabilities, minus (B) the amount of
outstanding loans under the Policies (to the extent such loans constitute
admitted assets under Connecticut SAP), minus (C) the aggregate amounts ascribed
to the Other Assets in the Closing Balance Sheet, Revised Closing Balance Sheet
or Final Closing Balance Sheet, as applicable, and minus (D) the Ceding
Commission; (b) as between the parties hereto, all of the Company’s rights and
interests under the Policies to receive principal and interest paid on policy
loans on or after the Effective Date; and (c) as between the parties hereto, all
of the Company’s rights and interests to premiums due or to become due, premiums
deferred and uncollected, premium adjustments and any and all amounts, payments
or consideration which are or were held, received or collected by the Company on
or after the Effective Date, or which are now due or will become due from any
source under or in connection with the Policies except, however, to the extent
that any such premiums, adjustments, amounts, payments or consideration are
included within clause (a) herein.
“Transferred Contracts” means: (a) the contracts, agreements, leases, software
licenses, rights, obligations or other commitments of the Company (to the extent
freely assignable) used exclusively by the Company in the Business (but
excluding the Policies and the Distribution Agreements); and (b) contracts,
agreements, leases, software licenses, rights, obligations, and other
commitments relating to the Business (but excluding the Policies and the
Distribution Agreements) identified on Schedule 3.17 to the Asset Purchase
Agreement or listed on the supplement to such Schedule 3.17 contemplated by the
Asset Purchase Agreement.
“Transition Services Agreement” means the Transition Services Agreement among
the Company, ALIC, The Lincoln National Life Insurance Company and the
Reinsurer.
“Trustee” means a bank or trust company reasonably acceptable to the parties to
this Agreement, which acts as trustee of a Security Trust pursuant to the terms
and conditions of a Security Trust Agreement; provided, however, that such bank
or trust company shall (a) possess assets of at least $10 billion; and (b) be
rated at least A1 by each of Moody’s Investors Services, Inc. and A+ by Standard
& Poor’s Corporation.
“Variable Policies” means the individual variable life insurance policies issued
by the Company, which are funded, in whole or in part, by the Separate Accounts.
ARTICLE II
BASIS OF COINSURANCE AND BUSINESS COINSURED
2.1 Coinsurance. Subject to the terms and conditions of this Agreement, the
Company hereby cedes or retrocedes, as the case may be, on a coinsurance basis
to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and
agrees to indemnity reinsure on a coinsurance basis as of the Effective Date,
one hundred percent (100%) of all Liabilities arising under or relating to the
Policies and the Post-Closing Policies. This Agreement shall not continue or
create any legal relationship whatsoever between the Reinsurer and Persons who
own or are insured under the Policies and the Post-Closing Policies. Except as
expressly provided herein, this Agreement does not reinsure any policy written
by the Company or the Reinsurer after the Effective Date. The reinsurance
effected under this Agreement shall be maintained in force, without reduction,
unless such reinsurance is terminated, reduced or recaptured as provided herein.
2.2 Reinsurer Extra Contractual Obligations. In addition to the Reinsurer’s
coinsurance of Liabilities, the Reinsurer hereby accepts and agrees to assume
and discharge one hundred percent (100%) of all Reinsurer Extra Contractual
Obligations.
2.3 Reinstatements, Conversions and Exchanges. In no event shall the coinsurance
provided hereunder with respect to a particular Policy be in force and binding
unless such Policy is in force and binding as of the Effective Date; provided,
however that the Policies and Post-Closing Policies reinsured shall include
(a) all Post-Closing Policies; (b) all lapsed or surrendered Policies or
Post-Closing Policies reinstated in accordance with their terms on and after the
Effective Date; and (c) all Policies or Post-Closing Policies issued on and
after the Effective Date pursuant to (i) any option provided under the terms of
any Variable Policy issued at any time by the Company for the exchange of such
contract for a non-variable life insurance contract; or (ii) any option provided
under the terms of any of the Policies or Post-Closing Policies for the
conversion of such Policies or Post-Closing Policies to an individual life
insurance policy. Upon the reinstatement of any lapsed or surrendered Policy or
Post-Closing Policy, or the issuance of any exchange or converted life insurance
Policy or Post-Closing Policy, such Policy or Post-Closing Policy shall be
automatically reinsured hereunder. If the Company collects Premiums in arrears
from a Policyholder or ceding company of a reinstated Policy or Post-Closing
Policy, the Company shall pay to the Reinsurer all Premiums so collected.

 

 

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2.4 Certain Policy Elements. From and after the Effective Date, the Reinsurer
may make recommendations to the Company with respect to (a) the Non-Guaranteed
Elements of the Policies and the Post-Closing Policies; and (b) the reserving
methodology related to the Policies and the Post-Closing Policies (including
changes required by Applicable Law, GAAP or Connecticut SAP). The Company shall
set all Non-Guaranteed Elements of the Policies and the Post-Closing Policies,
taking into account the recommendations of the Reinsurer with respect thereto.
Notwithstanding the foregoing, however, the Reinsurer hereby acknowledges and
agrees that any claim, liability or obligation, to the extent such claim,
liability or obligation arises out of or relates to the Company’s establishment
of Non-Guaranteed Elements pursuant to the Reinsurer’s recommendations with
respect thereto, is included within the Reinsurer Extra Contractual Obligations
that the Reinsurer has expressly assumed pursuant to the Asset Purchase
Agreement, this Agreement and the other Ancillary Agreements and for which the
Reinsurer has agreed to indemnify the Company pursuant to Article IX of the
Asset Purchase Agreement and Article IX of this Agreement.
2.5 Reserves. On and after the Closing Date, the Reinsurer shall establish and
maintain as a liability on its statutory financial statements Reserves for the
Policies and the Post-Closing Policies ceded hereunder, calculated consistent
with (a) the reserve requirements, statutory accounting rules and actuarial
principles applicable to the Company under the law of the State of New York and
each state in which the Policies and the Post-Closing Policies were issued or
delivered; and (b) otherwise in accordance with the methodologies used by the
Company to calculate the reserves and liabilities for the Policies and the
Post-Closing Policies in accordance with Connecticut SAP and sound actuarial
principles and any valuation bases and methods of determining reserves as
provided in the forms of Policies and Post-Closing Policies. The Reinsurer shall
provide the Company, not less than annually, with copies of all actuarial
opinions and actuarial memoranda and all reserve evaluations pertaining to the
Reserves, including, without limitation, any actuarial opinions and reserve
evaluations performed by independent actuaries, auditors or other outside
consultants. At the option of the Company, the Company may, at its own cost at
any time following the Closing, examine the Books and Records maintained by the
Reinsurer and review its reserve procedures. If the results of such examination
are not reasonably satisfactory to the Company, the Reinsurer shall, at the
Company’s request and expense, obtain and deliver to the Company an actuarial
opinion as to the adequacy of the Reserves, produced by an independent actuary
acceptable to the Company. The Reinsurer shall promptly adjust the amount of the
Reserves and implement appropriate changes to its reserve procedures if an
actuarial opinion, reserve evaluation or review, including, without limitation,
any evaluation or review made by the Company, reasonably indicates an inadequacy
in the Reserves or in the Reinsurer’s reserve procedures.
2.6 Separate Account Reserves. Notwithstanding anything to the contrary herein,
effective as of the Effective Date the Company and the Reinsurer shall reinsure
the Separate Account Reserves on a modified coinsurance basis, subject to the
execution and delivery of the NY Modified Coinsurance Agreement; provided,
however, that the Company shall retain, control and own all Separate Account
Assets and Separate Account Reserves whether or not the NY Modified Coinsurance
Agreement is executed and delivered.
2.7 Policy Changes or Reductions. In the event of a material change in the
provisions and conditions of a Policy or a Post-Closing Policy (provided that
such change is not in violation of Section 4.4 hereof), a corresponding change
in the related coinsurance and appropriate cash adjustments shall be made
consistent with the policy change rules of the Company. If the face amount of a
Policy or a Post-Closing Policy is reduced or increased, the amount coinsured by
the Reinsurer shall be reduced or increased accordingly.

 

 

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ARTICLE III
ACCOUNTINGS AND TRANSFER OF ASSETS
3.1 Ceding Commission. The Reinsurer shall pay to the Company on the Closing
Date a Ceding Commission in the amount of $116,487,000. The Ceding Commission
shall be credited to the Company as a reduction in the amount of cash or cash
equivalents included within the Transferred Assets to be transferred by the
Company to the Reinsurer at Closing in accordance with the provisions of
Sections 3.2 hereof.
3.2 Transfer of Assets. On the Closing Date, the Company shall sell, assign and
transfer to the Reinsurer as reinsurance premium all of the Company’s right,
title and interest in the Transferred Assets, including, without limitation,
cash or cash equivalents in an aggregate amount (subject to adjustment pursuant
to Section 3.3 hereof) equal to the amount as of the Closing Date of:
(A) Closing Date Liabilities, minus (B) the amount of outstanding loans under
the Policies (to the extent such loans constitute admitted assets under
Connecticut SAP), minus (C) the aggregate amounts ascribed to the Other Assets,
and minus (D) the Ceding Commission, all as reflected on that part of the
Closing Balance Sheet relating to the Policies reinsured hereunder.
3.3 Post-Closing Adjustments. (a) In the event that the aggregate amount of cash
or cash equivalents transferred by the Company to the Reinsurer on the Closing
Date is less than the amount of (A) Closing Date Liabilities, minus (B) the
amount of outstanding loans under the Policies (to the extent that such loans
constitute admitted assets under Connecticut SAP), minus (C) the aggregate
amounts ascribed to the Other Assets, and minus (D) the Ceding Commission, all
as reflected on that part of the Final Closing Balance Sheet relating to the
Policies reinsured hereunder, the Company shall transfer to the Reinsurer
additional cash or cash equivalents equal to the amount of such difference,
together with interest thereon from and including the Closing Date to, but not
including the date of, such transfer computed at LIBOR.
(b) In the event that the aggregate amount of cash or cash equivalents
transferred to the Reinsurer on the Closing Date is greater than the amount of
(A) Closing Date Liabilities, minus (B) the amount of outstanding loans under
the Policies (to the extent that such loans constitute admitted assets under
Connecticut SAP), minus (C) the aggregate amounts ascribed to the Other Assets,
and minus (D) the Ceding Commission, all as reflected on the portion of the
Final Closing Balance Sheet relating to the Policies reinsured hereunder, the
Reinsurer shall transfer to the Company cash or cash equivalents equal to the
amount of such difference, together with interest thereon from and including the
Closing Date to, but not including the date of, such transfer computed at LIBOR.
3.4 Interim Monthly Accountings. The Company shall provide the Reinsurer with an
Interim Monthly Accounting as of the end of each calendar month, no later than
fifteen (15) Business Days after the end of such month; provided, however, that
the first Interim Monthly Accounting shall be provided to the Reinsurer no later
than fifteen (15) Business Days after the end of the month in which the Closing
Date fell and the final Interim Monthly Accounting shall be delivered no later
than fifteen (15) Business Days after the date on which the Company is no longer
providing accounting services under the Transition Services Agreement. The
Company shall provide such Accounting in a format that is mutually acceptable to
the Company and the Reinsurer.
3.5 Monthly Accountings. Beginning with and after the first calendar month
during which the Company is no longer providing accounting services under the
Transition Services Agreement, the Reinsurer shall provide the Company with a
Monthly Accounting as of the end of each calendar month, no later than fifteen
(15) Business Days after the end of such month; provided, however, that the
first Monthly Accounting shall be provided to the Company no later than fifteen
(15) Business Days after the end of the first calendar month during which the
Company is no longer providing accounting services pursuant to the Transition
Services Agreement and the Reinsurer shall deliver the final Monthly Accounting
no later than fifteen (15) Business Days after the Termination Date; provided,
further, that in the event that subsequent data or calculations require revision
of the final Monthly Accounting, the required revision and any appropriate
payments shall be made in cash by the parties five (5) Business Days after they
mutually agree as to the appropriate revision. The Reinsurer shall provide such
Accounting in a format that is mutually acceptable to the Company and the
Reinsurer.
3.6 Monthly Payments. If an Accounting reflects a balance due to the party to
which the Accounting is delivered and/or the Security Trust, the amount(s) shown
as due shall be paid within five (5) Business Days of the delivery of the
Accounting. If (a) an Accounting reflects a balance due the party that prepared
the Accounting or the Security Trust and (b) the party receiving the Accounting
does not object to the Accounting within five (5) Business Days of its delivery,
the amount(s) shown as due shall be paid within seven (7) Business Days after
the date on which the Accounting was delivered. Any dispute over any amount
shown on an Accounting that cannot be amicably resolved by the parties shall be
resolved pursuant to the procedures set forth in Article X. If the Security
Trust is established while the Company is collecting funds pursuant to the
Transition Services Agreement, the Company may remit directly to the Trustee on
behalf of the Reinsurer that portion of any amount due the Reinsurer needed to
fully fund the Security Trust and the balance only of any amount due the
Reinsurer shall be remitted to the Reinsurer.

 

 

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3.7 Delayed Payments. If there is a delayed settlement of any payment due
hereunder, interest will accrue on such payment at the three month London
Interbank Offering Rate (LIBOR) as published in The Wall Street Journal, Eastern
Edition, in effect on the day such payment is due. For purposes of this
Section 3.7, a payment will be considered overdue, and such interest will begin
to accrue, on the date which is five (5) Business Days after the date such
payment is due.
3.8 Offset Rights. Any debts or credits incurred on and after the Effective Date
in favor of or against either the Company or Reinsurer with respect to this
Agreement are deemed mutual debts or credits, as the case may be, and shall be
set off, and only the balance shall be allowed or paid.
3.9 Third-Party Reinsurance. In the event the Reinsurer desires to retrocede to
any third-party reinsurer (whether or not Affiliated with the Reinsurer) any
portion of the Liabilities reinsured by it under this Agreement, the Reinsurer
shall be responsible for obtaining such retrocessional coverage at its sole
expense.
3.10 Premium Taxes and Assessments. The Reinsurer shall pay the Company on a
monthly basis an amount equal to two percent (2%) of the gross Premiums on the
Policies and the Post-Closing Policies collected by the Reinsurer, as an advance
against the Reinsurer’s liabilities for premium Taxes payable by the Company and
assessments to the Company by state guaranty or insolvency or similar
associations or funds, to the extent that such Taxes and assessments are
allocable to Premiums paid on or after the Effective Date. Amounts payable
pursuant to this Section 3.10 shall be reflected on the Accountings delivered
hereunder and shall be paid pursuant to the provisions of Section 3.6. Not later
than June 30 after each calendar year falling within the term of this Agreement,
the Company shall provide the Reinsurer with an accounting of its actual premium
Tax and guaranty fund assessment liability with respect to the Policies and the
Post-Closing Policies for such calendar year (without giving effect to any
credits due to the Company for any guaranty fund assessments paid by the Company
prior to Closing). If such accounting reflects amounts owed to the Reinsurer,
the Company shall pay such amounts in cash to the Reinsurer with the accounting.
If it reflects amounts owed to the Company (including any interest or penalties
relating to underpayment of estimated Taxes based on information provided by the
Reinsurer), the Reinsurer shall pay such amounts in cash to the Company
withinfive (5) Business Days of receiving the accounting. The Company shall pay
or provide the Reinsurer with the benefit of guaranty fund assessments
previously reimbursed by the Reinsurer to the extent such payments were actually
utilized to reduce the Company’s tax liabilities. The utilization of any
outstanding assessments by the Company shall be determined on a FIFO basis
(those assessments made in earlier years shall be considered used first).
ARTICLE IV
POLICY ADMINISTRATION
4.1 Interim Servicing. During the period from the Effective Date through the
termination of the Transition Services Agreement with respect to each service
provided by the Company thereunder, the Company has agreed to continue to
provide certain Policyholder services for the Policies and the Post-Closing
Policies.
4.2 Transfer of Servicing Obligations. On and after the date on which a service
is no longer being provided pursuant to the Transition Services Agreement, and
pursuant to the NY Administrative Services Agreement, the Reinsurer has agreed
to provide Policyholder service for the Policies and the Post-Closing Policies
and to supply to the Company on a timely basis copies of accounting and other
records pertaining to such service. The parties hereby agree that the Policies
and the Post-Closing Policies shall be administrated pursuant to the NY
Administrative Services Agreement. Reinsurer’s compensation for all services
provided to the Company pursuant to the NY Administrative Services Agreement
shall be included in the reinsurance premium paid by the Company to Reinsurer
pursuant to Section 3.2 above and the Company shall not be obligated to pay any
additional monies to Reinsurer for such administrative services.

 

 

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4.3 Regulatory Matters. If the Company or the Reinsurer receives notice of, or
otherwise becomes aware of any regulatory inquiry, investigation or proceeding
relating to the Policies or the Post-Closing Policies, the Company or the
Reinsurer, as applicable, shall promptly notify the other party thereof,
whereupon the parties shall cooperate in good faith and use their respective
commercially reasonable efforts to resolve such matter in a mutually
satisfactory manner, in light of all the relevant business, regulatory and legal
facts and circumstances. The parties recognize that, as the issuing company, the
Company retains ultimate responsibility for resolution of the matters described
in this section.
4.4 Policy Changes. Neither the Company nor the Reinsurer shall make any changes
to the Company’s policy forms except with the express written consent of the
other party (which consent shall not be unreasonably withheld) or if (a) the
changes are required by Applicable Law and (b) the Reinsurer gives the Company
prior notice in writing of the nature of such required changes in the manner
provided by the NY Administrative Services Agreement.
ARTICLE V
OVERSIGHTS
5.1 Oversights. Inadvertent delays, errors or omissions made in connection with
this Agreement or any transaction hereunder shall not relieve either party from
any liability which would have attached had such delay, error or omission not
occurred, provided always that such error or omission is rectified as soon as
possible after discovery, and provided that the party making such error or
omission or responsible for such delay shall be responsible for any additional
liability which attaches as a result.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent. This Agreement shall not become effective unless and
until (a) all state insurance regulatory authorities whose approval is required
shall have approved this Agreement in writing, and (b) all applicable waiting
periods under any federal or state statute or regulation shall have expired or
been terminated.
ARTICLE VII
DUTY OF COOPERATION
7.1 Cooperation. Each party hereto shall cooperate fully with the other in all
reasonable respects in order to accomplish the objectives of this Agreement.
ARTICLE VIII
DAC TAX
8.1 Election. In accordance with Treasury Regulations Section 1.848-2(g)(8), the
Company and Reinsurer hereby elect to determine specified policy acquisition
expenses with respect to this Agreement without regard to the general deductions
limitation of Section 848(c)(1) of the Code.
(a) All uncapitalized terms used herein shall have the meanings set forth in the
regulations under Section 848 of the Code.
(b) The party with net positive consideration under this Agreement for each
taxable year shall capitalize specified policy acquisition expenses with respect
to this Agreement without regard to the general deductions limitation of
Section 848(c)(1) of the Code.
(c) Both parties agree to exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency.

 

 

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(d) The Company shall submit a schedule to the Reinsurer by May 1 of each year
of its calculation of the net consideration under this Agreement for the
preceding taxable year. This schedule of calculations shall be accompanied by a
statement signed by an authorized representative of the Company stating that the
Company shall report such net consideration in its federal income tax return for
the preceding taxable year.
(e) The Reinsurer may contest such calculation by providing an alternative
calculation to the Company in writing within thirty (30) days after the date on
which the Reinsurer receives the Company’s calculation. If the Reinsurer does
not so notify the Company, the Reinsurer shall report the net consideration
under this Agreement as determined by the Company in the Reinsurer’s federal
income tax return for the preceding taxable year.
(f) If Reinsurer contests the Company’s calculation of the net consideration
under this Agreement, the parties shall act in good faith to reach an agreement
as to the correct amount of net consideration within thirty (30) days after the
date on which the Reinsurer submits its alternative calculation. If Reinsurer
and the Company reach agreement as to the amount of net consideration under this
Agreement, each party shall report such amount in its federal income tax return
for the preceding taxable year.
If, during such period, Reinsurer and the Company are unable to reach agreement,
they shall promptly thereafter cause independent accountants of nationally
recognized standing reasonably satisfactory to Reinsurer and the Company (who
shall not have any material relationship with Reinsurer or the Company),
promptly to review (which review shall commence no later than five (5) days
after the selection of such independent accountants), this Agreement and the
calculations of Reinsurer and the Company for the purpose of calculating the net
consideration under this Agreement. In making such calculation, such independent
accountants shall consider only those items or amounts in the Company’s
calculation as to which the Reinsurer has disagreed.
Such independent accountants shall deliver to Reinsurer and the Company, as
promptly as practicable (but no later than sixty (60) days after the
commencement of their review), a report setting forth such calculation, which
calculation shall result in a net consideration between the amount thereof shown
in the Company’s calculation delivered pursuant to Section 8.1(d) and the amount
thereof shown in Reinsurer’s calculation delivered pursuant to Section 8.1(e).
Such report shall be final and binding upon Reinsurer and the Company. The fees,
costs and expenses of such independent accountant shall be borne (i) by the
Company if the difference between the net consideration as calculated by the
independent accountants and the Company’s calculation delivered pursuant to
Section 8.1(d) is greater than the difference between the net consideration as
calculated by the independent accountants and Reinsurer’s calculation delivered
pursuant to Section 8.1(e), (ii) by the Reinsurer if the first such difference
is less than the second such difference, and (iii) otherwise equally by
Reinsurer and the Company.
(g) This election shall be effective for the 1998 taxable year and for all
subsequent taxable years for which this Agreement remains in effect.
(h) Both parties agree to attach a schedule to their respective federal income
tax returns for the first taxable year ending after the date on which this
election becomes effective which identifies this Agreement as a reinsurance
agreement for which an election has been made under Treasury Regulations
Section 1.848-2(g)(8).
ARTICLE IX
INDEMNIFICATION AND RECAPTURE
9.1 Reinsurer’s Obligation to Indemnify. Subject to any limitation contained in
the Asset Purchase Agreement, Reinsurer hereby agrees to indemnify, defend and
hold harmless the Company and its directors, officers, employees,
representatives (excluding the Producers), Affiliates, successors and permitted
assigns (collectively, the “Company Indemnified Parties”) from and against all
Losses asserted against, imposed upon or incurred by any Company Indemnified
Party arising from: (i) the Liabilities; (ii) the Reinsurer Extra Contractual
Obligations (including, but not limited to, all claims that constitute Sellers’
Extra Contractual Obligations but for which the Company’s indemnification
obligation has expired pursuant to Section 8.01(c) of the Asset Purchase
Agreement); (iii) any breach or nonfulfillment by Reinsurer of, or any failure
by Reinsurer to perform, any of the covenants, terms or conditions of, or any
duties or obligations under, this Agreement; and (iv) any enforcement of this
indemnity.

 

 

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9.2 Company’s Obligation to Indemnify. Subject to any limitation contained in
the Asset Purchase Agreement, the Company hereby agrees to indemnify, defend and
hold harmless the Reinsurer and its directors, officers, employees,
representatives (excluding the Producers), Affiliates, successors and permitted
assigns (collectively, the “Reinsurer Indemnified Parties”) from and against all
Losses asserted against, imposed upon or incurred by any Reinsurer Indemnified
Party arising from: (i) the Retained Liabilities; (ii) Sellers’ Extra
Contractual Obligations (but only to the extent that the Company’s
indemnification obligation for Sellers’ Extra Contractual Obligations has not
expired pursuant to Section 8.01(c) of the Asset Purchase Agreement); (iii) any
breach or nonfulfillment by the Company of, or any failure by the Company to
perform, any of the covenants, terms or conditions of, or any duties or
obligations under, this Agreement; and (iv) any enforcement of this indemnity.
9.3 Certain Definitions and Procedures. For purposes of this Article IX, “Loss”
or “Losses” shall mean actions, claims, losses, liabilities, damages, costs,
expenses (including reasonable attorneys’ fees), interest and penalties. In the
event either Reinsurer or the Company shall have a claim for indemnity against
the other party under the terms of this Agreement, the parties shall follow the
procedures set forth in Sections 9.02, 9.03 and 9.04 of the Asset Purchase
Agreement.
9.4 Security Trust Account and Recapture Rights.
(a) Events of Default. From and after the Closing Date, any of the following
occurrences shall constitute an event that entitles the Company to require the
Reinsurer to deposit and maintain assets in a Security Trust in accordance with
the terms and conditions of this Section 9.4 (individually or collectively, as
the context indicates, an “Event of Default”):

  (i)   the Reinsurer ceases to maintain any of (A) an A.M.Best Company rating
of at least B++, (B) a Standard & Poor’s Corporation insurer financial strength
rating of at least BBB-, and (C) Moody’s Investors Services, Inc. claims-paying
ability rating of at least Baa3; or     (ii)   the Reinsurer fails to
(A) maintain a ratio of (i) Total Adjusted Capital (as defined in the Risk-Based
Capital (RBC) Model Act or in the rules and procedures prescribed by the NAIC
with respect thereto, in each case as in effect as of December 31, 1997) to
(ii) the Company Action Level RBC (as defined in the Risk-Based Capital
(RBC) Model Act or in the rules and procedures prescribed by the NAIC with
respect thereto, in each case as in effect as of December 31, 1997) of at least
185 percent, or (B) maintain a Standard & Poor’s Corporation’s capital adequacy
ratio (calculated in accordance with the rules and procedures in effect on the
Contract Date) of at least 115 percent; or     (iii)   (A) the Reinsurer ceases
to be licensed as a life insurer or ceases to qualify as an accredited reinsurer
in a particular jurisdiction under circumstances that would cause the Company to
be denied credit for reinsurance ceded hereunder on the financial statements
filed by the Company in said jurisdiction, or (B) the Company is denied credit
for reinsurance ceded hereunder on the financial statements filed by the Company
in any jurisdiction: or     (iv)   a petition for insolvency, rehabilitation,
conservation, supervision, liquidation or similar proceeding is filed by or
against the Reinsurer or its statutory representative in any jurisdiction; or  
  (v)   any Person other than one of the Affiliates of the Reinsurer in
existence on the Closing Date acquires or assumes (A) Control of the Reinsurer,
whether by merger, consolidation, stock acquisition, or otherwise (including,
without limitation, the acquisition or assumption of the power to direct the
Reinsurer’s management and policies by means of a management or services
agreement or other contractual arrangement) or (B) all or substantially all of
the assets or liabilities of the Reinsurer by reinsurance (whether indemnity or
assumption) or otherwise;     (vi)   this Agreement is terminated in accordance
with its terms; or     (vii)   an Event of Default occurs pursuant to
Section 9.07(a)(vii) of the Asset Purchase Agreement.

The occurrence of any Event of Default shall entitle the Company to elect to
require the Reinsurer to establish a Security Trust regardless of whether or not
such an occurrence constitutes a Recapture Event, provided, that the Company has
not delivered an Election Notice electing recapture.

 

 

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(b) Recapture Events. From and after the Closing Date, and whether or not an
Event of Default has occurred or Security Trust has been established pursuant to
Section 9.4(a) hereof, any of the following occurrences shall constitute an
event that entitles the Company to exercise the recapture remedy set forth in
this Section 9.4 (individually or collectively, as the context indicates, a
“Recapture Event”):

  (i)   Reinsurer ceases to maintain any of (A) an A.M. Best Company rating of
at least B+, (B) a Standard & Poor’s Corporation insurer financial strength
rating of at least BB+, and (C) a Moody’s Investors Services, Inc. claims-paying
ability rating of at least Ba1; or     (ii)   Reinsurer fails to (A) maintain a
ratio of (i) Total Adjusted Capital (as defined in the Risk-Based Capital
(RBC) Model Act or in the rules and procedures prescribed by the NAIC with
respect thereto, in each case as in effect as of December 31, 1997) to (ii) the
Company Action Level RBC (as defined in the Risk-Based Capital (RBC) Model Act
or in the rules and procedures prescribed by the NAIC with respect thereto, in
each case as in effect as of December 31, 1997) of at least 160 percent; or
(B) maintain a Standard & Poor’s Corporation’s capital adequacy ratio
(calculated in accordance with the rules and procedures in effect on the
Contract Date) of at least 100 percent; or     (iii)   a petition for
insolvency, rehabilitation, conservation, supervision, liquidation or similar
proceeding is filed by or against the Reinsurer or its statutory representative
in any jurisdiction; or     (iv)   within thirty (30) calendar days of its
receipt of a demand therefor delivered pursuant to Section 9.4(d), Reinsurer
fails to execute the Security Trust Agreement or deposit and maintain asset in
trust on the terms provided in Section 9.4(f) and in the Security Trust
Agreement, provided, however, that the Company executes such Security Trust
Agreement contemporaneously with the delivery of the demand; or     (v)   this
Agreement is terminated in accordance with its terms; or     (vi)   within
thirty (30) calendar days of the termination of the NY Administrative Services
Agreement in accordance with its terms, (A) Reinsurer does not take all steps
necessary to arrange for a third-party administrator acceptable to the Company
in its sole discretion, reasonably exercised, to provide all administrative
services to be provided pursuant to the terminated NY Administrative Services
Agreement at the cost of Reinsurer or (B) such third-party administrator fails
to enter into an administrative service agreement with the Company, satisfactory
in form and substance to the Company in its sole discretion, reasonably
exercised; or     (vii)   a judgment or order is entered by a court of competent
jurisdiction declaring the invalidity of the Security Trust or finding that the
assets held in a Security Trust are general assets of Reinsurer or otherwise do
not constitute a “secured claim” within the meaning of the laws of Reinsurer’s
domiciliary state; or     (viii)   a Security Trust is established for the
benefit of the Company pursuant to Section 9.4(a)(iii) and the Company is denied
credit on its financial statements filed in any jurisdiction with respect to the
reinsurance provided by the Reinsurer, and the Reinsurer does not take all steps
necessary to enable the Company to obtain credit on its financial statements
within thirty (30) calendar days of the Reinsurer’s receipt of written notice
from the Company as to the occurrence described herein; or     (ix)   a
Recapture Event occurs pursuant to Section 9.07(b)(ix) of the Asset Purchase
Agreement.

The occurrence of any Recapture Event shall entitle the Company to elect
recapture remedies hereunder regardless of whether (1) such an occurrence also
constitutes an Event of Default, (2) the Reinsurer has previously established a
Security Trust or (3) the Company has previously delivered an Election Notice
requiring Reinsurer to establish a Security Trust.

 

 

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(c) Notice to The Company. The Reinsurer shall provide the Company with:

  (i)   written notice of any downgrade in the Reinsurer’s A. M. Best Company
rating or its Standard & Poor’s Corporation insurer financial strength rating or
its Moody’s Investors Services, Inc. claims-paying ability rating within three
(3) Business Days after the Reinsurer’s receipt of notice of such adjustment;  
  (ii)   a written report of the calculation of the Reinsurer’s Total Adjusted
Capital and Authorized Control Level RBC (based on the Risk-Based Capital
(RBC) Model Act and/or the rules and procedures in effect as of December 31,
1997) and Standard & Poor’s Corporation’s capital adequacy ratio (based on the
rules and procedures in effect on the Contract Date) as of the end of each
calendar quarter within fifteen (15) Business Days after the end of such
quarter;     (iii)   written notice of the occurrence of any Event of Default or
Recapture Event within two (2) Business Days after its occurrence; and     (iv)
  not less than annually, a written report, in form reasonably satisfactory to
the Company, certifying that no Event of Default or Recapture Event has occurred
during the period covered by such report or is continuing as of the last day of
such period, together with the appropriate calculations and back up reasonably
necessary to substantiate the basis of the Reinsurer’s certification.

The Company may, at its own expense, review the Reinsurer’s books and records to
confirm the risk based capital calculations provided by the Reinsurer pursuant
to Section 9.4(c)(ii). In addition, Reinsurer shall (A) cooperate fully with the
Company and promptly respond to the Company’s inquiries from time to time
concerning the Reinsurer’s financial condition, operating results and any
events, occurrences or other matters which arise on and after the Effective Date
and which reasonably relate to the Business or Reinsurer’s ability to perform
and discharge its obligations under the Asset Purchase Agreement, this Agreement
or the Ancillary Agreements and (B) provide to the Company such financial
statements, reports, internal control letters and reports prepared by auditors
and other third parties, SAS-70 reports and other documents of the Reinsurer as
the Company may reasonably request from time to time.
(d) Election of Remedies. Upon the occurrence of any Event of Default, the
Company may elect to require the Reinsurer to maintain assets in a Security
Trust for the purpose of securing the Reinsured Liabilities under the Policies
and Post-Closing Policies ceded to it pursuant to this Agreement. Upon the
occurrence of any Recapture Event, the Company may elect to recapture, subject
to the terms and conditions set forth below all, but not less than all, of the
Policies and the Post-Closing Policies ceded hereunder. The Company shall give
the Reinsurer written notice of its election (the “Election Notice”) specifying
(x) the grounds for the exercise of its remedies pursuant to this Section 9.4
and either (y) if it elects to recapture the Policies and Post-Closing Policies,
the fact of recapture, and the effective date of recapture or (z) if it elects a
Security Trust, the fact that the Reinsurer is obligated to execute the Security
Trust Agreement and to deposit and maintain assets in the Security Trust for the
purpose of securing such Reinsured Liabilities (the “Secured Policies”). The
Reinsurer may unwind and terminate a Security Trust if, prior to the second
anniversary of the date on which the Event of Default which originally gave rise
to the establishment of such Security Trust occurred, both (A) the original
Event of Default has been cured or remediated, and (B) no new Event of Default
or Recapture Event has occurred; provided that (i) prior to such second
anniversary date, the Company has not properly provided an Election Notice to
recapture the Policies and Post-Closing Policies ceded by it; and (ii) the
termination of the Security Trust shall not prejudice or be deemed a waiver of
the Company’s right to demand the establishment of a new Security Trust or elect
recapture upon the occurrence of any other or new Event of Default or Recapture
Event.

 

 

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(e) Recapture. Any recapture by the Company shall not be deemed to have been
consummated until (i) the Company has given the Reinsurer an Election Notice
pursuant to Section 9.4(d); and (ii) the Company has received payment of the
entire Recapture Fee as determined in accordance with Exhibit A hereto. If the
Reinsured Liabilities under the Policies and Post-Closing Policies to be
recaptured are secured pursuant to a Security Trust established pursuant to
Section 9.4(f), the Company may, in its sole discretion, withdraw assets from
the Security Trust having an aggregate Market Value (determined pursuant to the
Security Trust Agreement governing such Security Trust) not to exceed the amount
of the Recapture Fee. The Reinsurer shall promptly pay the Company the full
amount of the Recapture Fee, reduced by the amount, if any, withdrawn from the
Security Trust. Following the consummation of the recapture of Policies and
Post-Closing Policies pursuant to this Section 9.4(e), no additional premiums,
deposits or other amounts payable under such Policies and Post-Closing Policies
shall be ceded to the Reinsurer hereunder.
(f) Security Trust. (i) Establishment of the Trust Account. Within thirty
(30) calendar days of the Company’s delivery to the Reinsurer of an Election
Notice requiring that the Reinsurer secure the Reinsured Liabilities ceded by
the Company with a Security Trust, the Reinsurer shall execute the Security
Trust Agreement and deposit into an account with the Trustee (the “Security
Trust”), naming the Company as the sole beneficiary thereof, assets having a
market value in an amount no less than the Required Balance, for the purpose of
securing the Reinsured Liabilities under Secured Policies. The Security Trust
Agreement shall be substantially in the form of Exhibit B hereto.
(ii) Trust Assets. At the direction of the Reinsurer, the assets held in the
Security Trust shall be held in the form of (A) cash and cash-equivalents,
(B) Certificates of deposit, (C) obligations of the United States Government or
its agencies, (D) investment grade bonds, (E) whole (not participations)
investment grade (as determined in accordance with the Reinsurer’s internal
rating systems) commercial mortgages; provided that the aggregate market value
of such commercial mortgages held in the Security Trust shall not exceed
15 percent of the aggregate market value of the assets held in the Security
Trust, and (F) straight Ginnie Mae, Freddie Mac and Fannie Mae 30-year
mortgage-backed securities rated AA+ and above; provided that the aggregate
market value of such mortgage-backed securities held in the Security Trust shall
not exceed 15 percent of the aggregate market value of the assets held in the
Security Trust; and provided, further, that in the event a Security Trust is
established pursuant to Section 9.4(a)(v), the assets held in the Security Trust
may be invested in accordance with the Reinsurer’s internal investment policies
for its individual life insurance business, a copy of which has been provided to
the Company. The aggregate Market Value of the assets held in the Security Trust
shall at all times be at least equal to the Required Balance. As long as the
Security Trust Agreement remains in force, the Reinsurer shall calculate the
Required Balance as of the last day of each calendar month and report the amount
of the Required Balance to the Company and the Trustee within ten (10) Business
Days after the end of such month. In connection with such calculation, the
Company shall direct the Trustee to make the payment to the Reinsurer of any
amounts in the Security Trust which exceed the Required Balance, and Reinsurer
shall promptly deposit such additional permitted assets as may be necessary to
increase the Market Value of the Security Trust assets to the Required Balance.
The form and duration of assets to be held in the Security Trust shall be
appropriate in light of the Reinsured Liabilities under the Secured Policies.
Prior to delivering any assets for deposit in the Security Trust, the Reinsurer
shall execute assignments or endorsements in blank of all of the Reinsurer’s
right, title and interest in such assets (according to procedures set forth in
the Security Trust Agreement), so that the Company, or the Trustee upon the
Company’s direction, may whenever necessary negotiate title to any such assets
without consent or signature from the Reinsurer or any other entity.
(iii) Permitted Withdrawals. The Company may withdraw assets from the Security
Trust at any time and from time to time, notwithstanding any other provisions of
the Asset Purchase Agreement, this Agreement or any other Ancillary Agreement,
and such assets may be utilized and applied by the Company, or any successor by
operation of law of the Company, including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Company, without diminution
because of insolvency on the part of the Company or Reinsurer; provided,
however, that the Company may only withdraw such assets for one or more of the
following purposes:

  (A)   to reimburse the Company for any Reinsured Liabilities under the Secured
Policies paid by the Company to the extent not paid by the Reinsurer when due;  
  (B)   to make payment to the Reinsurer of any amounts that exceed the Required
Balance;     (C)   to pay all or any portion of any Recapture Fee due in
connection with the recapture the Secured Policies; or     (D)   to pay any
other amounts that are due to the Company under this Agreement, the Asset
Purchase Agreement or any of the Ancillary Agreements to the extent not paid
directly to Company by Reinsurer when due.

 

 

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(g) Resort to Collateral. Notwithstanding the remedies contemplated by this
Section 9.4, the other Ancillary Agreements and the Asset Purchase Agreement,
the Company may, in its sole discretion, require direct payment by the Reinsurer
of any sum in default under the Asset Purchase Agreement, this Agreement or any
other Ancillary Agreement in lieu of exercising the remedies in this
Section 9.4, and it shall be no defense to any such claim that the Company might
have had recourse to the Security Trust or recapture remedy.
(h) Certain Remedies. The Company and Reinsurer acknowledge that any damage
caused to the Company by reason of the breach by the Reinsurer or any of its
successors in interest of this Section 9.4 could not be adequately compensated
for in monetary damages alone; therefore, each party agrees that, in addition to
any other remedies at law or otherwise, the Company shall be entitled to
specific performance of this Section 9.4 or an injunction to be issued by a
court of competent jurisdiction pursuant to Section 13.7 hereof restraining and
enjoining any violation of this Section 9.4, in addition to such other equitable
or legal remedies as such court may determine. The Company and Reinsurer hereby
release, waive and discharge any and all claims and causes of action asserting
in any way that: (a) any Security Trust is not valid, binding or enforceable;
and (b) any remedy of the Company including, without limitation, the Company’s
recapture and Security Trust remedies hereunder and under Article IX of the
Asset Purchase Agreement is not valid, binding or enforceable. The Company and
the Reinsurer are forever estopped and barred from making any such assertion in
any context or forum whatsoever.
ARTICLE X
DISPUTE RESOLUTION
10.1 Other Disputes over Calculations. After the Closing Date, any dispute
between the parties with respect to the calculation of amounts which are to be
calculated, reported, or which may be audited pursuant to this Agreement (other
than disputes relating to: (i) the Closing Balance Sheet, which shall be
resolved in accordance with the Asset Purchase Agreement; or (ii) calculations
relating to DAC tax, which shall be resolved in accordance with Article VIII
hereof), which cannot be resolved by the parties within sixty (60) calendar
days, shall be referred to an independent accounting firm of national recognized
standing (which shall not have any material relationship with the Reinsurer or
the Company) mutually agreed to by the parties; provided, however, that where
the dispute involves an actuarial issue, the dispute shall instead be referred
to an independent actuarial firm of national recognized standing (which shall
not have any material relationship with the Reinsurer or the Company) mutually
agreed to by the parties. There shall be no appeal from the decision made by
such firm except that, pursuant to Section 11.07 of the Asset Purchase
Agreement, either party may petition a court having jurisdiction over the
parties and subject matter to reduce the arbitrator’s decision to judgment. The
fees charged by the accounting firm or actuarial firm, as applicable, to resolve
the dispute shall be allocated between the Company and the Reinsurer by such
firm in accordance with its judgment as to the relative merits of the parties’
positions in respect of the dispute.
ARTICLE XI
INSOLVENCY
11.1 Insolvency Clause. In the event of the insolvency of the Company, all
coinsurance made, ceded, renewed or otherwise becoming effective under this
Agreement shall be payable by the Reinsurer directly to the Company or to its
liquidator, receiver or statutory successor on the basis of the liability of the
Company under the Policies and Post-Closing Policies without diminution because
of the insolvency of the Company. It is understood, however, that in the event
of the insolvency of the Company, the liquidator or receiver or statutory
successor of the Company shall give written notice of the pendency of a claim
against the Company on a Policy or Post-Closing Policy within a reasonable
period of time after such claim is filed in the insolvency proceedings and that
during the pendency of such claim the Reinsurer may investigate such claim and
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 Company
or its liquidator or receiver or statutory successor. It is further understood
that the expense thus incurred by the Reinsurer shall be chargeable, subject to
court approval, against the Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.

 

 

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ARTICLE XII
DURATION
12.1 Duration. This Agreement shall continue in force until such time that the
Reinsurer’s liability with respect to all Policies and Post-Closing Policies
reinsured hereunder is terminated pursuant to Section 12.2.
12.2 Reinsurer’s Liability. The liability of the Reinsurer under this Agreement
with respect to any Policy or Post-Closing Policy will begin simultaneously with
that of the Company, but not prior to the Effective Date. The Reinsurer’s
liability with respect to any Policy will terminate on the earliest of: (a) the
date such Policy or Post-Closing Policy is recaptured in accordance with
Section 9.4; or (b) the date the Company’s liability on such Policy or
Post-Closing Policy is terminated in accordance with its terms. Termination of
the Reinsurer’s liability under clauses (a) and (b) herein is subject to the
Company’s actual receipt of payments which discharge such liability in full in
accordance with the provisions of this Agreement. In no event shall the
interpretation of this Section 12.2 imply a unilateral right of the Reinsurer to
terminate this Agreement.
12.3 Survival. Notwithstanding the other provisions of this Article XII, the
terms and conditions of Article I, VIII, IX and X and Section 13.2 shall remain
in full force and effect after the Termination Date.
ARTICLE XIII
MISCELLANEOUS
13.1 Notices. Any notice or other communication required or permitted under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) mailed by United States registered or certified mail, return receipt
requested, (b) mailed by overnight express mail or other nationally recognized
overnight or same-day delivery service or (c) delivered in person to the parties
at the following addresses:
If to the Company, to:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Chief Financial Officer
With copies (which shall not constitute notice) to:
Aetna Retirement Services, Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: General Counsel
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
Attention: James R. Dwyer
If to the Reinsurer, to:
Lincoln Life & Annuity Company of New York
120 Madison Street, Suite 1700
Syracuse, NY 13202
Attention: Philip L. Holstein
With a copy (which shall not constitute notice) to:
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: David A. Massey
Either party may change the names or addresses where notice is to be given by
providing notice to the other party of such change in accordance with this
Section 13.1.

 

 

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13.2 Confidentiality. Each of the parties shall maintain the confidentiality of
all information related to the Policies and Post-Closing Policies and all other
information denominated as confidential by the other party provided to it in
connection with this Agreement, and shall not disclose such information to any
third parties without prior written consent of the other party, except as may be
permitted by Sections 5.18 and 11.02 of the Asset Purchase Agreement.
13.3 Entire Agreement. This Agreement, the other Ancillary Agreements, the Asset
Purchase Agreement, the other agreements contemplated hereby and thereby, and
the Exhibits and the Schedules hereto and thereto contain the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements, written or oral, with respect thereto.
13.4 Waivers and Amendments. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof. Such
waiver must be in writing and must be executed by an executive officer of such
party. A waiver on one occasion shall not be deemed to be a waiver of the same
or any other term or condition on a future occasion. This Agreement may be
modified or amended only by a writing duly executed by an executive officer of
the Company and the Reinsurer, respectively.
13.5 No Third Party Beneficiaries. This Agreement constitutes an indemnity
reinsurance agreement solely between the Company and the Reinsurer, and is
intended solely for the benefit of the parties hereto and their permitted
successors and assigns, and it is not the intention of the parties to confer any
rights as a third-party beneficiary to this Agreement upon any other Person as
to the Transferred Assets or any other term, condition or provision of this
Agreement.
13.6 Assignment. This Agreement shall not be assigned by either of the parties
hereto without the prior written approval of the other party.
13.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT, WITHOUT REGARD TO ITS
CONFLICTS OF LAW DOCTRINE. ALL ISSUES RELATING TO VENUE AND JURISDICTION SHALL
BE GOVERNED BY SECTION 11.07 OF THE ASSET PURCHASE AGREEMENT.
13.8 Counterparts. This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
13.9 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any present or future law or if determined by a
court of competent jurisdiction to be unenforceable, and if the rights or
obligations of the Company or the Reinsurer under this Agreement will not be
materially and adversely affected thereby, such provision shall be fully
severable, and this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part of this Agreement,
and the remaining provisions of this Agreement shall remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom.
13.10 Schedules, Exhibits and Paragraph Headings. Schedules and Exhibits
attached hereto are made a part of this Agreement. Paragraph headings are
provided for reference purposes only and are not made a part of this Agreement.

 

 

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13.11 Expenses. Except as explicitly provided to the contrary herein or in the
Asset Purchase Agreement, each party shall be solely responsible for all
expenses it incurs in connection with this Agreement or in consummating the
transactions contemplated hereby or performing the obligations imposed hereby,
including, without limitation, the cost of its attorneys, accountants and other
professional advisors.
13.12 No Prejudice. The parties agree that this Agreement has been jointly
negotiated and drafted by the parties hereto and that the terms hereof shall not
be construed in favor of or against any party on account of its participation in
such negotiations and drafting.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
effective this 1st day of October, 1998.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK