Exhibit 10. (c)

 

 

EXECUTION COPY

 

 

 

COINSURANCE AGREEMENT

 

between the

 

AETNA LIFE INSURANCE AND ANNUITY COMPANY

 

(referred to as the Company)

 

and

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

 

(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

 

 

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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

 

1.1

Definitions

1

 

ARTICLE II

 

BASIS OF COINSURANCE AND BUSINESS COINSURED

12

 

2.1.

Coinsurance

12

 

2.2

Reinsurer Extra Contractual Obligations

12

 

2.3

Reinstatements, Conversions and Exchanges

12

 

2.4

Certain Policy Elements

12

 

2.5

Reserves

13

 

2.6

Separate Accounts Reserves

13

 

2.7

Policy Changes or Reductions

14

 

ARTICLE III

 

 

ACCOUNTINGS AND TRANSFER OF ASSETS

14

 

3.1.

Ceding Commission

14

 

3.2

Transfer of Assets

14

 

3.3

Post-Closing Adjustments

15

 

3.4

Interim Monthly Accountings

15

 

3.5

Monthly Accountings

15

 

3.6

Monthly Payments

16

 

3.7

Delayed Payments

16

 

3.8

Offset Rights

16

 

3.9

Third-Party Reinsurance

16

 

3.10

Premium Taxes and Assessments

16

 

ARTICLE IV

 

POLICY ADMINISTRATION

17

 

4.1

Interim Servicing

17

 

4.2

Transfer of Servicing Obligations

17

 

4.3

Regulatory Matters

18

 

4.4

Policy Changes

18

 

ARTICLE V

 

OVERSIGHTS

18

 

5.1.

Oversights

18

 

ARTICLE VI

 

CONDITIONS PRECEDENT

18

 

6.1

Conditions Precedent

18

 

ARTICLE VII

 

DUTY OF COOPERATION

 18

 

7.1

Cooperation

18

 

 

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ARTICLE VIII

 

DAC TAX

18

 

8.1

Election

18

 

ARTICLE IX

 

INDEMNIFICATION AND RECAPTURE

20

 

9.1

Reinsurer's Obligation to Indemnify

20

 

9.2

Company's Obligation to Indemnify

21

 

9.3

Certain Definitions and Procedures

21

 

9.4

Security Trust Account and Recapture Rights

21

 

ARTICLE X

 

DISPUTE RESOLUTION

28

 

10.1

Other Disputes over Calculations

28

 

ARTICLE XI

 

INSOLVENCY

29

 

11.1

Insolvency Clause

29

 

ARTICLE XII

 

DURATION

29

 

12.1

Duration

29

 

12.2

Reinsurer's Liability

30

 

12.3

Survival

30

 

ARTICLE XIII

 

MISCELLANEOUS

31

 

13.1

Notices

31

 

13.2

Confidentiality

31

 

13.3

Entire Agreement

31

 

13.4

Waivers and Amendments

31

 

13.5

No Third Party Beneficiaries

32

 

13.6

Assignments

32

 

13.7

Governing Law

32

 

13.8

Counterparts

32

 

13.9

Severability

32

 

13.10

Schedules Exhibits and Paragraph Headings

32

 

13.11

Expenses

32

 

13.12

No Prejudice

32

 

 

 

 

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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 The Lincoln National Life Insurance Company, an
Indiana 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 Lincoln Life & Annuity Company of
New York, a stock life insurance company organized under the laws of the State
of New York ("LLANY"), 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 an Administrative Services
Agreement of even date herewith (the "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.

 

 

 

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"Administrative Services Agreement" means the Administrative Services Agreement
by and between the Company, ALIC and the Reinsurer of even date herewith.

 

"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.

 

"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.

 

"Assets Purchase Agreement" means the Second Amended and Restated Asset Purchase
Agreement by and among the Company, ALIC, the Reinsurer and LLANY, dated as of
May 21, 1998.

 

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"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 transactions 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

 

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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.

 

"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 the 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 of 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.

 

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"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); (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

- 5 -

 

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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.

 

"LLNY" means Lincoln Life & Annuity Company of New York, a stock life insurance
company organized under the laws of the State of New York.

 

"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.

 

"Modified Coinsurance Agreement" means the Modified Coinsurance Agreement
between the Company and Reinsurer in the form of Exhibit P to the Asset Purchase
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.

 

"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.

 

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"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)
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; provided,
however, that Policies shall not include any policies that are coinsured or
administered by LLANY pursuant to the applicable Ancillary Agreements.

 

"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
speciality 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.

 

- 7 -

 

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"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
arising 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 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.

 

"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;

 

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(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; G) 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.

 

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"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.

 

"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

 

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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, LLANY 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 Al 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

 

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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.

 

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 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,

 

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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 arid the Reinsurer shall reinsure
the Separate Account Reserves on a modified coinsurance basis, subject to the
execution and delivery of the 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 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.

 

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 $662,004,000. 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

 

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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 under the Transition Services
Agreement and the Reinsurer shall deliver the final Monthly Accounting no later
than fifteen (15) Business Days after the Termination

 

 

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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.

 

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 (LIB OR) 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

 

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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 within five (5) Business Days of receiving the
accounting. The Company shall payor 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 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
Administrative Services Agreement. Reinsurer's compensation for all services
provided to 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.

 

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 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.

 

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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.

 

(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

 

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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
I.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

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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.

 

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

 

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defined in the Risk-Based Capital (REC) 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)

this Agreement is terminated in accordance with its terms; or 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 Bal; 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 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(t) 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 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

 

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administrative services to be provided pursuant to the terminated 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;

 

 

(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.

 

(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 on December 31, 1997)

 

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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

 

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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.

 

(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 A( 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

 

- 25 -

 

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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 of the Secured Policies; or

 

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(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.

 

(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

 

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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.

 

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

 

 

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--------------------------------------------------------------------------------

 

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

 

 

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If to the Reinsurer, to:

 

The Lincoln National Life Insurance Company

1300 South Clinton

P.O. Box 1110

Fort Wayne, Indiana 46801

Attention: Carl Baker

 

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.

 

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

 

 

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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.

 

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.

 

 

- 31 -

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
effective this ____ day of _______, 1998.

 

 

AETNA LIFE INSURANCE AND ANNUITY COMPANY

 

 

 

By:

/s/    Catherine H. Smith

Name:

Catherine H. Smith

Title:

Chief Financial Officer

 

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

 

 

 

By:

 

Name:

 

Title:

 

 

--------------------------------------------------------------------------------

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

 

 

 

By:

 

Name:

 

Title:

 

 

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

 

 

 

By:

/s/    Keith J. Ryan

Name:

Keith J. Ryan

Title:

Senior Vice President and Chief

Financial Officer

--------------------------------------------------------------------------------

 

EXHIBIT A

 

Recapture Fee

 

 

The amount of the Recapture Fee shall be determined in accordance with the
formula set forth below by Tillinghast-Towers Perrin ("Tillinghast"), or such
other nationally recognized actuarial consulting firm as may be agreed by the
Reinsurer and the Company and which shall not be affiliated with either the
Reinsurer or the Company. Tillinghast shall determine the amount of the
Recapture Fee, unless the Reinsurer and the Company reach an agreement in
writing on the use of another actuarial firm within 30 Business Days of the
delivery of an Election Notice electing recapture. The actuarial firm selected
to calculate the amount of the Recapture Fee is referred to hereinafter as the
"Actuary."

 

The Recapture Fee shall be equal to (a) + (b) - (c), where (a) is the Required
Balance (as defined in the Asset Purchase Agreement and the Coinsurance
Agreement to which this Exhibit is attached) as of the date on which the
recapture is consummated (the "Recapture Date"), (b) is the amount of the
Penalty Fee as determined below and (c) is the amount of the Ceding Commission
as determined below.

 

Penalty Fee. The Penalty Fee shall consist of 105 percent of (a) the
incremental, onetime fee (estimated by the Actuary if necessary) of a
third-party administrator (to be selected by the Company in its sole discretion)
charged by such administrator in connection with assuming responsibility for all
the administrative services to be provided under the Administrative Services
Agreement for the Policies, Post-Closing Policies and Separate Accounts subject
to recapture (the "Recaptured Business"), plus (b) the fees and costs (estimated
by the Actuary if necessary) of the Actuary for its work in calculating the
Recapture Fee and of any attorneys or other outside consultants advising the
Company in connection with the recapture.

 

Ceding Commission. The Ceding Commission shall be equal to the Appraisal Value
of the Recaptured Business as of the Recapture Date, adjusted for Taxes as
provided below.

 

Appraisal Value. The Appraisal Value of the Recaptured Business shall be equal
to the present value (calculated at a 13.5 percent interest rate) as of the
Recapture Date of the following values for the Recaptured Business: (a) After
Tax Statutory Profits, plus (b) After Tax Interest on Required Surplus, minus or
plus (c) the Increase or Decrease in Required Surplus, minus (d) the Required
Surplus as of the Recapture Date.

 

For these purposes, Required Surplus shall be calculated on the assumption that
Total Adjusted Capital to Company Action Level RBC, in each case with respect to
the Recaptured Business, shall be 200 percent (Both Total Adjusted Capital and
Company Action Level RBC shall be determined as provided in the Risk-Based
Capital (RBC) Model Act or the NAIC's rules with respect thereto in effect as of
the Recapture Date). In fixing the other values required by the above formula,
the Actuary shall use its best estimates of future mortality, earned and
credited interest rates, lapses and surrenders, premium persistency, producer
compensation, other taxes, licenses and fees; provided, however, that the
Actuary shall assume that the unit cost of

 

 

 

 

--------------------------------------------------------------------------------

 

providing administrative services for the Recaptured Business shall increase by
three percent per year over the estimated cost of such services for the twelve
months immediately following the Recapture Date.

 

Tax Adjustments. The Ceding Commission shall be calculated net of any Federal or
state income Tax credits and charges incurred by the Company as a result of the
recapture of the Recaptured Business.

 

If the Tax adjustments contemplated by the preceding paragraph were made
pursuant to the Code provisions in effect as of the Closing, the Company would
realize a Tax credit for (a) the Ceding Commission adjusted for the difference
between statutory and Tax reserves and (b) the present value of the Tax charge
for the DAC Taxes (determined under Section 848 of the Code) generated by the
recapture. The present value of the DAC Tax charge shall be calculated at a 13.5
percent interest rate and shall take into account the amount and timing of
anticipated Tax deductions attributable to amortization of specified policy
acquisition costs pursuant to Section 848 of the Code. The Ceding Commission
would equal the Appraisal Value net of such credits and charges.

 

In the event that the Code is amended prior to a Recapture Date, the Actuary
shall make the appropriate adjustment (if any) to the calculations set forth in
the preceding paragraph in order to preserve the parties' intent that the Ceding
Commission be calculated net of any Federal or state income tax credits as a
result of the recapture.

 

 

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EXHIBIT C

 

Closing Date Liabilities

 

AETNA LIFE INSURANCE AND ANNUITY COMPANY

 

 

ALIAC's Closing Date Liabilities shall consist of all liabilities listed below
with re to the Policies issued by ALIAC, determined as of 11:59 p.m. Eastern
Time on the day immediately preceding the Effective Date in accordance with
Connecticut SAP.

 

Liabilities with Respect to Policies and Post-Closing Policies

 

Aggregate Reserves for Life Policies

Policy and Contract Claims

Premiums Received in Advance

Liability for Premium and Other Fund Deposits Cost of Collection

Separate Account Liabilities

 

 

 

 

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EXHIBIT D

 

Required Balance

 

AETNA LIFE INSURANCE AND ANNUITY COMPANY

 

 

The Required Balance with respect to the Policies and Post-Closing Policies
issued by ALIAC as of any date shall be computed as the excess of (a) all
liabilities listed below with respect to such Policies and Post-Closing
Policies, determined under Connecticut SAP as of such date, over (b) the
aggregate amount of the policy loans (including accrued interest thereon) under
such Policies and Post-Closing Policies, determined under Connecticut SAP as of
such date.

 

Liabilities with Respect to Policies and Post-Closing Policies

 

Aggregate Reserves for Life Policies

Policy and Contract Claims

Premiums Received in Advance

Liability for Premium and Other Fund Deposits Cost of Collection

Separate Account Liabilities