Exhibit 10. (f)

 

 

EXECUTION COPY

 

 

 

MODIFIED COINSURANCE AGREEMENT

 

between the

 

AETNA LIFE INSURANCE AND ANNUITY COMPANY

 

(referred to as the Company)

 

and

 

LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK

 

(referred to as the Reinsurer)

 

 

Dated as of October 1, 1998

 

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INDEX OF SCHEDULES

 

 

Schedule 1.1 (A)

Policy Forms

Schedule 1.1 (B)

Separate Account Assets

Schedule 1.1 (C)

Separate Accounts

 

 

 

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TABLE OF CONTENTS

 

 

ARTICLE I

 

DEFINITIONS

2

 

ARTICLE II

 

BASIS OF MODIFIED COINSURANCE AND BUSINESS COINSURED

7

 

2.1.

Modified Coinsurance

7

 

2.2

Reinstatements, Conversions and Exchanges

7

 

2.3

Separate Accounts

8

 

2.4

Reserves

8

 

2.5

Policy Changes or Reductions

8

 

ARTICLE III

 

RESERVE ADJUSTMENTS; ACCOUNTING

8

 

3.1.

Ceding Commission

8

 

3.2

Monthly Reserve Adjustment

9

 

3.3

Interest on Accrued for Expense Allowance

9

 

3.4

Payments from Mutual Fund Organizations

9

 

3.5

Interim Monthly Accountings

9

 

3.6

Monthly Accountings

10

 

3.8

Delayed Payments

10

 

3.9

Offset Rights

11

 

3.10

Third-Party Reinsurance

11

 

ARTICLE IV

 

POLICY ADMINISTRATION

11

 

4.1

Interim Servicing

11

 

4.2

Transfer of Servicing Obligations

11

 

4.3

Regulatory Matters

11

 

4.4

Policy Changes

12

 

ARTICLE V

 

OVERSIGHTS

12

 

5.1.

Oversights

12

 

ARTICLE VI

 

CONDITIONS PRECEDENT

12

 

6.1

Conditions Precedent

12

 

 

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ARTICLE VII

 

DUTY OF COOPERATION

 13

 

7.1

Cooperation

13

 

ARTICLE VIII

 

DAC TAX

13

 

8.1

Election

13

 

ARTICLE IX

 

INDEMNIFICATION AND RECAPTURE

15

 

9.1

Reinsurer's Obligation to Indemnify

15

 

9.2

Company's Obligation to Indemnify

15

 

9.3

Certain Definitions and Procedures

15

 

9.4

Recapture Rights

16

 

ARTICLE X

 

DISPUTE RESOLUTION

19

 

10.1

Other Disputes over Calculations

19

 

ARTICLE XI

 

INSOLVENCY

20

 

11.1

Insolvency Clause

20

 

ARTICLE XII

 

DURATION

20

 

12.1

Duration

20

 

12.2

Reinsurer's Liability

20

 

12.3

Survival

21

 

ARTICLE XIII

 

MISCELLANEOUS

21

 

13.1

Notices

21

 

13.2

Confidentiality

22

 

13.3

Entire Agreement

22

 

13.4

Waivers and Amendments

22

 

13.5

No Third Party Beneficiaries

23

 

13.6

Assignments

23

 

13.7

Governing Law

23

 

13.8

Counterparts

23

 

13.9

Severability

23

 

13.10

Schedules Exhibits and Paragraph Headings

23

 

13.11

Expenses

24

 

13.12

No Prejudice

24

 

 

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MODIFIED COINSURANCE AGREEMENT

 

 

THIS MODIFIED COINSURANCE AGREEMENT (the "Agreement") made by and between Aetna
Life Insurance and Annuity Company, a Connecticut domiciled stock life insurance
company (the "Company") and Lincoln Life & Annuity Company of New York, a New
York domiciled stock life insurance company (the "Reinsurer").

 

WHEREAS, the Company has issued certain Policies (as defined below);

 

WHEREAS, the Company, Aetna Life Insurance Company, a Connecticut domiciled
stock life insurance company ("ALIC"), the Reinsurer, and The Lincoln National
Life Insurance Company, a stock life insurance company organized under the laws
of the State of Indiana ("LNLIC"), 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 Reinsurer has agreed to reinsure on a 100%
basis all of the liabilities arising under the Policies and Post-Closing
Policies (as defined below);

 

WHEREAS, pursuant to the Asset Purchase Agreement, the Company and the Reinsurer
have entered into a certain Coinsurance Agreement of even date herewith (the
"Coinsurance Agreement") pursuant to which, the Company has ceded and the
Reinsurer has reinsured on a 100% coinsurance basis the general account
liabilities arising under the Policies and Post-Closing Policies;

 

WHEREAS, pursuant to the Asset Purchase Agreement, the Company and the Reinsurer
wish to supplement the Coinsurance Agreement by providing for the reinsurance by
the Reinsurer of the Separate Account Liabilities (as defined below) arising
under the Policies and Post-Closing Policies on a 100% modified coinsurance
basis in order to achieve 100% reinsurance of all the liabilities arising under
the Policies and Post-Closing Policies; and

 

WHEREAS, the Company desires that the Reinsurer perform certain administrative
functions on behalf of the Company with respect to the Policies and Post-Closing
Policies, and the Company, ALIC and Reinsurer have entered into a NY
Administrative Services Agreement of even date herewith (the "NY Administrative
Services Agreement") pursuant to which the Reinsurer shall provide such
administrative services.

 

 

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NOW, THEREFORE, in consideration of the mutual and several promises and
undertakings herein contained, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Company and the
Reinsurer agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1 Definitions. The following terms shall have the respective meanings set
forth below throughout this Agreement:

 

"Accounting" means an Interim Monthly Accounting or a Monthly Accounting, as
applicable.

 

"Affiliate" means, with respect to any Person, at the time in question, any
other Person Controlling, Controlled by or under common Control with such
Person. "Control" (including the terms "Controlling," "Controlled by" and "under
common Control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, the holding of
policyholders' proxies by contract other than a commercial contract for goods or
non-management services, or otherwise, unless the power is the result of an
official position with or corporate office held by the Person. Except as
provided otherwise in this Agreement, control is presumed to exist if any
Person, directly or indirectly, owns, controls, holds with the power to vote, or
holds shareholders' proxies representing 25% or more of the voting securities of
any other Person, or holds or controls sufficient policyholders' proxies, or is
entitled by contract or otherwise, to nominate, appoint or to elect the majority
of the board of directors or comparable governing body of any other Person.

 

"ALIAC" means Aetna Life Insurance and Annuity Company, a stock life insurance
company organized under the laws of the State of Connecticut.

 

"ALIC" means Aetna Life Insurance Company, a stock life insurance company
organized under the laws of the State of Connecticut.

 

"Ancillary Agreements" means the various agreements collectively defined as
"Ancillary Agreements" in the Asset Purchase Agreement.

 

 

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"Applicable Law" means any domestic or foreign federal, state or local statute,
law, ordinance or code, or any written rules, regulations or administrative
interpretations issued by any Governmental Authority pursuant to any of the
foregoing, and any order, writ, injunction, directive, judgment or decree of a
court of competent jurisdiction applicable to the parties hereto.

 

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

 

"Books and Records" means the originals or copies of all customer lists, policy
information, policy forms and rating plans, disclosure and other documents and
filings, including statutory filings, required under all Applicable Laws,
administrative records, reinsurance records, claim records, sales records,
underwriting records, financial records, Tax records and compliance records in
the possession or control of the Company and relating principally to the
operation of the Business including, without limitation, any database, magnetic
or optical media (to the extent not subject to licensing restrictions) and any
other form of recorded, computer generated or stored information or process, but
excluding: (a) the Company's original certificate of incorporation, bylaws,
corporate seal, licenses to do business, minute books and other corporate
records relating to corporate organization and capitalization; (b) original Tax
and corporate accounting records relating to the Business; and (c) any records
that are subject to attorney-client privilege.

 

"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.

 

 

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"Closing Date" means the date on which the Closing occurs.

 

"Code" means the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.

 

"Coinsurance Agreement" means the Coinsurance Agreement by and between the
Company and the Reinsurer of even date herewith and which is entered into in
conjunction with this Agreement in order to give full effect to the Asset
Purchase Agreement.

 

"Commissions" means 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.

 

"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 remedy pursuant to Section 9.4 hereof.

 

"GAAP" means United States generally accepted accounting principles as in effect
from time to time.

 

"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" means a monthly accounting prepared in accordance
with Connecticut SAP and delivered by the Company to the Reinsurer in accordance
with the provisions of Section 3.5 hereof.

 

"LIBOR" means a rate per annum equal to the three month London Interbank Offered
Rate as published in The Wall Street Journal, Eastern Edition.

 

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"LNLIC" means The Lincoln National Life Insurance Company, a stock life
insurance company organized under the laws of the State of Indiana.

 

"Monthly Accounting" means a monthly accounting prepared in accordance with
Connecticut SAP and delivered by the Reinsurer to the Company in accordance with
the provisions of Section 3.6 hereof.

 

"Monthly Reserve Adjustment" shall have the meaning set forth in Section 3.2
hereof.

 

"NAIC" means the National Association of Insurance Commissioners.

 

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

 

"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" means all of the Company's individual variable life insurance
policies, together with all related binders, slips and certificates (including
applications therefor and all supplements, endorsements, riders and agreements
in connection therewith) that were delivered or issued for delivery to
policyowners that were New York residents, and which have been issued 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 variable life insurance 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 the Coinsurance Agreement.

 

"Policyholders" means policyholders, insureds and assignees under the Policies
and Post-Closing Policies.

 

5

 

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"Post-Closing Policies" means the individual variable life insurance 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" means all LBMs, MGAs, brokers, agents, general agents, COLI
specialty brokers, 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 Rights" means the right of the Company to recapture the Policies and
Post-Closing Policies pursuant to Section 9.4 hereof.

 

"Separate Account Assets" means the assets described on Schedule I.I(B) hereto
which constitute the Separate Accounts.

 

"Separate Account Liabilities" means the liabilities or obligations arising
under the express terms and conditions of the Policies and Post-Closing
Policies, to the extent payable out of the Separate Accounts in accordance with
the terms of the Policies and the Post-Closing Policies.

 

"Separate Account Reserves" means the reserves associated with the Policies and
Post-Closing Policies which are held in the Company's Separate Accounts,
determined in accordance with Connecticut SAP.

 

"Separate Accounts" means the specific separate accounts of the Company
identified in Schedule 1.1 (C) hereto.

 

"Taxes" (or "Tax" as the context may require) means any tax, however
denominated, imposed by any federal, state, local, municipal, territorial,
provincial or foreign government or any agency or political subdivision of any
such government (a "Taxing Authority"), including, without limitation, any tax
imposed under Subtitle A of the Code and any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, gains, goods and
services, production, documentary, recording, social security, unemployment,
disability, workers' compensation, estimated, ad valorem, value added, transfer,
franchise, profits, license,

 

6

 

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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" means the date on which this Agreement is terminated in
accordance with the terms and conditions of Article XII hereof.

 

"Transition Services Agreement" means the Transition Services Agreement among
the Company, ALIC, LNLIC and the Reinsurer.

 

ARTICLE II

BASIS OF MODIFIED COINSURANCE AND BUSINESS

COINSURED

 

2.1 Modified Coinsurance. Subject to the terms and conditions of this Agreement,
the Company hereby cedes or retrocedes, as the case may be, on a modified
coinsurance basis to the Reinsurer as of the Effective Date, and the Reinsurer
hereby accepts and agrees to indemnity reinsure on a modified coinsurance basis
as of the Effective Date, one hundred percent (100%) of the Separate Account
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 Reinstatements Conversions and Exchanges. In no event shall the modified
coinsurance provided hereunder with respect to a particular Policy be in force
and binding unless such Policy is in force and binding as of the Effective Date;
provided, however, that the Policies and Post-Closing Policies reinsured shall
include (a) all Post-Closing Policies; (b) all lapsed or surrendered Policies or
Post-Closing Policies reinstated in accordance with their terms on and after the
Effective Date; and (c) all Policies or Post-Closing Policies issued on or after
the Effective Date pursuant to any option provided under the term of any
policies coinsured by the Reinsurer pursuant to any Ancillary Agreement for the
conversion of such policies to a variable

 

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individual life insurance policy. Upon the reinstatement of any lapsed or
surrendered Policy or Post-Closing Policy, such Policy or Post-Closing Policy
shall be automatically reinsured hereunder.

 

2.3 Separate Accounts. (a) For each of the Policies and Post-Closing Policies,
the amount to be invested on a variable basis in accordance with the terms of
such Policies and Post-Closing Policies shall be held by the Company in the
Separate Accounts, and all Premiums or other deposits with respect to such
Policies and Post-Closing Policies shall be deposited in the Separate Accounts
to the extent required by such Policies and Post-Closing Policies.

 

(b) For each of the Policies and Post-Closing Policies, the amount to be paid
with respect to surrenders, loans, death benefits or any other amounts to be
paid out of the assets of the Separate Accounts in accordance with the terms of
such Policies and Post-Closing Policies shall be paid out of such assets.

 

2.4 Reserves. The Company shall retain, control and own the Separate Account
Reserves and all Separate Account Assets.

 

2.5 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 modified coinsurance and any 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

RESERVE ADJUSTMENTS: ACCOUNTINGS

 

3.1 Ceding Commission. The Reinsurer shall pay to the Company on the Closing
Date a Ceding Commission in the amount of $6,047,000. 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 (as defined in the
Coinsurance Agreement) to be transferred by the Company to the Reinsurer
pursuant to the Coinsurance Agreement. In accordance with Section 2.4 of this
Agreement, there shall be no transfer of Separate Account Reserves or Separate
Account Assets at the Closing.

 

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3.2 Monthly Reserve Adjustment. The "Monthly Reserve Adjustment" for any month
shall be an amount equal to the Separate Account Reserves at the end of such
month, minus (i) the amount transferred from the Company's general account to
the Separate Accounts for the Policies and Post-Closing Policies during such
month; (ii) the amount transferred from the Separate Accounts to the general
account for the Policies and Post-Closing Policies during such month, excluding
policy charges and fees deducted from the Separate Accounts for the Policies and
Post-Closing Policies; minus (iii) the amount equal to the Separate Account
Reserves at the end of the month preceding such calendar month; (iv) the amount
equal to the sum of all earned investment income and capital gains and losses,
realized and unrealized, with respect to the Policies and Post-Closing Policies
in the Separate Accounts during such calendar month. On a monthly basis,
commencing with the month in which the Closing occurs, an amount equal to the
Monthly Reserve Adjustment will be shown as a credit to the Reinsurer on the
Accountings required by Sections 3.5 and 3.6 below, if the foregoing formula
yields a negative amount, or as a credit to the Company on such Accountings, if
the foregoing formula yields a positive amount. The Monthly Reserve Adjustment
shall be calculated on a pre-tax basis.

 

3.3 Interest on Accrued for Expense Allowance. On a monthly basis, commencing
with the month in which the Closing occurs, an amount equal to the pre-tax
interest on the preceding month" Accrued for Expense Allowance Recognized in
Reserves" (as shown on page 3, line 13A of the NAIC Annual Statement Blank Form
for 1997) where the interest rate equals 1/12 x [month end l0-year Treasure rate
+ 75 basis points] will be shown as a credit to the Company on the Accountings.

 

3.4 Payments from Mutual Fund Organizations. On a monthly basis, commencing with
the month in which the Closing occurs, an amount equal to the pre-tax amount of
any expense reimbursement (other than "soft dollars"), indemnification or
revenue-sharing payments made to the Company by any mutual fund organization
attributable to the use of such organization's mutual funds as funding vehicles
for the Policies or the Post-Closing Policies will be shown as a credit to the
Reinsurer on the Accountings.

 

3.5 Interim Monthly Accountings. The Company shall provide the Reinsurer with an
Interim Monthly Accounting of the Monthly Reserve Adjustment and the amounts
contemplated by Section 3.3 and 3.4 of this Agreement 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 Month Accounting shall be
provided to the Reinsurer no later than fifteen (15) Business Days

 

9

 

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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.

 

3.6 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 of the Monthly Reserve Adjustment and the amounts
contemplated by Sections 3.3 and 3.4 of this Agreement 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 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.

 

3.7 Monthly -Payments. If an Accounting reflects a balance due to the party to
which the Accounting is delivered, 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 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.

 

3.8 Delayed Payments. If there is a delayed settlement of any payment due
hereunder, interest will accrue on such payment at the three month London
Interbank Offering Rate (LIBOR) as published in The Wall Street Journal, Eastern
Edition, in effect on the day such payment is due. For purposes of this Section
3.8, 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.

 

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3.9 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.

 

3.10 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 Separate Account Liabilities reinsured by it under this
Agreement, the Reinsurer shall be responsible for obtaining such retrocessional
coverage at its sole expense.

 

3.11 Premium Taxes and Assessments. In connection with the Policies and
Post-Closing Policies, and except for the DAC tax issues specifically addressed
by Article VIII of this Agreement, all matters regarding Taxes or assessments by
state guaranty or insolvency or similar associations or funds shall be governed
by the Coinsurance Agreement.

 

ARTICLE IV

POLICY ADMINISTRATION

 

4.1 Interim Servicing. During the period from the Effective Date through the
termination of the Transition Services Agreement with respect to each service
provided by the Company thereunder, the Company has agreed to continue to
provide certain Policyholder services for the Policies and the Post-Closing
Policies.

 

4.2 Transfer of Servicing Obligations. On and after the date on which a service
is no longer being provided pursuant to the Transition Services Agreement, and
pursuant to the NY Administrative Services Agreement, the Reinsurer has agreed
to provide Policyholder service for the Policies, the Post-Closing Policies and
the Separate Accounts 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, the Post-Closing Policies and the Separate Accounts
shall be administrated pursuant to the NY Administrative Services Agreement. The
Company shall not be obligated to pay any additional monies to Reinsurer for
such administrative services.

 

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, the Post-Closing Policies or the Separate Accounts,
the Company or the Reinsurer, as applicable, shall promptly notify the other
party thereof, whereupon the parties shall cooperate in

 

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good faith and use their respective commercially reasonable efforts to resolve
such matter in a mutually satisfactory manner, in light of all the relevant
business, regulatory and legal facts and circumstances. The parties recognize
that, as the issuing company, the Company retains ultimate responsibility for
resolution of the matters described in this Section.

 

4.4 Policy Changes. Neither the Company nor the Reinsurer shall make any changes
to the Company's policy forms except with the express written consent of the
other party (which consent shall not be unreasonably withheld) or if (a) the
changes are required by Applicable Law and (b) the Reinsurer gives the Company
prior notice in writing of the nature of such required changes in the manner
provided by the NY Administrative Services Agreement.

 

ARTICLE V

OVERSIGHTS

 

5.1 Oversights. Inadvertent delays, errors or omissions made in connection with
this Agreement or any transaction hereunder shall not relieve either party from
any liability which would have attached had such delay, error or omission not
occurred, provided always that such error or omission is rectified as soon as
possible after discovery, and provided that the party making such error or
omission or responsible for such delay shall be responsible for any additional
liability which attaches as a result.

 

ARTICLE VI

CONDITIONS PRECEDENT

 

6.1 Conditions Precedent. This Agreement shall not become effective unless and
until (a) all state insurance regulatory authorities whose approval is required
shall have approved this Agreement in writing, and (b) all applicable waiting
periods under any federal or state statute or regulation shall have expired or
been terminated.

 

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ARTICLE VII

DUTY OF COOPERATION

 

7.1 Cooperation. Each party hereto shall cooperate fully with the other in all
reasonable respects in order to accomplish the objectives of this Agreement.

 

ARTICLE VIII

DAC TAX

 

8.1 Election. In accordance with Treasury Regulations Section 1.848-2(g)(8), the
Company and Reinsurer hereby elect to determine specified policy acquisition
expenses with respect to this Agreement without regard to the general deductions
limitation of Section 848(c)(1) of the Code.

 

(a) All uncapitalized terms used herein shall have the meanings set forth in the
regulations under Section 848 of the Code.

 

(b) The party with net positive consideration under this Agreement for each
taxable year shall capitalize specified policy acquisition expenses with respect
to this Agreement without regard to the general deductions limitation of Section
848(c)(1) of the Code.

 

(c) Both parties agree to exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency.

 

(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.

 

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 (f) If Reinsurer contests the Company's calculation of the net consideration
under this Agreement, the parties shall act in good faith to reach an agreement
as to the correct amount of net consideration within thirty (30) days after the
date on which the Reinsurer submits its alternative calculation. If Reinsurer
and the Company reach agreement as to the amount of net consideration under this
Agreement, each party shall report such amount in its federal income tax return
for the preceding taxable year.

 

If, during such period, Reinsurer and the Company are unable to reach agreement,
they shall promptly thereafter cause independent accountants of nationally
recognized standing reasonably satisfactory to Reinsurer and the Company (who
shall not have any material relationship with Reinsurer or the Company),
promptly to review (which review shall commence no later than five (5) days
after the selection of such independent accountants), this Agreement and the
calculations of Reinsurer and the Company for the purpose of calculating the net
consideration under this Agreement. In making such calculation, such independent
accountants shall consider only those items or amounts in the Company's
calculation as to which the Reinsurer has disagreed.

 

Such independent accountants shall deliver to Reinsurer and the Company, as
promptly as practicable (but no later than sixty (60) days after the
commencement of their review), a report setting forth such calculation, which
calculation shall result in a net consideration between the amount thereof shown
in the Company's calculation delivered pursuant to Section 8.1 (d) and the
amount thereof shown in Reinsurer's calculation delivered pursuant to Section
8.1 (e). Such report shall be final and binding upon Reinsurer and the Company.
The fees, costs and expenses of such independent accountant shall be borne (i)
by the Company if the difference between the net consideration as calculated by
the independent accountants and the Company's calculation delivered pursuant to
Section 8.1(d) is greater than the difference between the net consideration as
calculated by the independent accountants and Reinsurer's calculation delivered
pursuant to Section 8 .1 (e), (ii) by the Reinsurer if the first such difference
is less than the second such difference, and (iii) otherwise equally by
Reinsurer and the Company.

 

(g) This election shall be effective for the 1998 taxable year and for all
subsequent taxable years for which this Agreement remains in effect.

 

(h) Both parties agree to attach a schedule to their respective federal income
tax returns for the first taxable year ending after the date on which this
election becomes effective which identifies this

 

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Agreement as a reinsurance agreement for which an election has been made under
Treasury Regulations Section 1.848-2(g)(8).

 

ARTICLE IX

INDEMNIFICATION AND RECAPTURE

 

9.1 Reinsurer's Obligation to Indemnify. Subject to any limitation contained in
the Asset Purchase Agreement and without prejudice to any indemnity rights under
the Coinsurance 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) 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 (ii) any enforcement of this
indemnity.

 

9.2 Company's Obligation to Indemnify. Subject to any limitation contained in
the Asset Purchase Agreement and without prejudice to any indemnity rights under
the Coinsurance 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) 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 (ii) 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.

 

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9.4 Recapture Rights.

 

(a) Recapture Events. From and after the Closing Date, 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)

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)

this Agreement is terminated in accordance with its terms; or

 

(v)

within thirty (30) calendar days of the termination of the NY Administrative
Services Agreement in accordance with its terms, (A) Reinsurer does not take all
steps necessary to arrange for a third-party administrator acceptable to the
Company in its sole discretion, reasonably exercised. to provide all
administrative services to be provided pursuant to the terminated NY
Administrative Services Agreement at the cost of Reinsurer or (B) such
third-party administrator fails to enter into an

 

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administrative service agreement with the Company, satisfactory in form and
substance to the Company in its sole discretion, reasonably exercised; or

 

 

(vi)

a Recapture Event occurs pursuant to Section 9.07(b)(ix) of the Asset Purchase
Agreement or

 

(vii)

a Recapture Event occurs under the Coinsurance Agreement.

The occurrence of any Recapture Event shall entitle the Company to elect
recapture remedies hereunder.

 

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

 

 

(i)

written notice of any downgrade in the Reinsurer's A. M. Best Company rating or
its Standard & Poor's Corporation insurer financial strength rating or its
Moody's Investors Services, Inc. claims-paying ability rating within three (3)
Business Days after the Reinsurer's receipt of notice of such adjustment

 

 

(ii)

a written report of the calculation of the Reinsurer's Total Adjusted Capital
and Authorized Control Level RBC based on the Risk-Based Capital (RBC) Model Act
and/or the rules and procedures in effect as of December 31, 1997 and Standard &
Poor's Corporation's capital adequacy ratio (based on the rules and procedures
in effect on the Contract Date) as of the end of each calendar quarter within
fifteen (15) Business Days after the end of such quarter;

 

 

(iii)

written notice of the occurrence of any 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 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.

 

17

 

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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(b)(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.

 

(c) Recapture. 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 the grounds for the exercise of its remedies
pursuant to this Section 9.4, the fact of recapture, and the effective date of
recapture. Any recapture by the Company shall not be deemed to have been
consummated until (i) the Company has given the Reinsurer an Election Notice
pursuant to Section 9.4(c) and (ii) the Company has received payment of the
entire Recapture Fee as defined in the Coinsurance Agreement. The Reinsurer
shall promptly pay the Company the full amount of the Recapture Fee. Following
the consummation of the recapture of Policies and Post-Closing Policies pursuant
to this Section.9.4(c), no additional premiums, deposits or other amounts
payable under or in connection with such Policies and Post-Closing Policies,
including but not limited to all amounts payable to the Reinsurer according to
Article III of this Agreement shall be ceded to the Reinsurer hereunder.

 

(d) 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 recapture remedy.

 

(e) 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 along

 

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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 any remedy of the
Company including, without limitation, the Company's recapture remedy 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 calculations relating to DAC tax, which shall be
resolved in accordance with Article VIII hereof), which cannot be resolved by
the parties within sixty (60) calendar days, shall be referred to an independent
accounting firm of national recognized standing (which shall not have any
material relationship with the Reinsurer or the Company) mutually agreed to by
the parties; provided, however, that where the dispute involves an actuarial
issue, the dispute shall instead be referred to an independent actuarial firm of
national recognized standing (which shall not have any material relationship
with the Reinsurer or the Company) mutually agreed to by the parties. There
shall be no appeal from the decision made by such firm except that, pursuant to
Section 11.07 of the Asset Purchase Agreement, either party may petition a court
having jurisdiction over the parties and subject matter to reduce the
arbitrator's decision to judgment. The fees charged by the accounting firm or
actuarial firm, as applicable, to resolve the dispute shall be allocated between
the Company and the Reinsurer by such firm in accordance with its judgment as to
the relative merits of the parties' positions in respect of the dispute.

 

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ARTICLE XI

INSOLVENCY

 

11.1 Insolvency Clause. In the event of the insolvency of the Company, all
modified 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 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

 

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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, VII, 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:

 

Lincoln Life & Annuity Company of New York

120 Madison Street, Suite 1700

Syracuse, NY 13202

Attention: Philip L. Holstein

 

With a copy (which shall not constitute notice) to:

 

Sutherland, Asbill & Brennan LLP

1275 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

Attention: David A. Massey

 

Either party may change the names or addresses where notice is to be given by
providing notice to the other party of such change in accordance with this
Section 13. 1.

 

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 Coinsurance 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. Except for those matters specifically addressed in Article III
of this Agreement, in the event that there is any conflict between the
provisions of this Agreement and those of the Coinsurance Agreement, the
language of the Coinsurance Agreement shall govern.

 

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

 

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writing and must be executed by an executive officer of such party. A waiver on
one occasion shall not be deemed to be a waiver of the same or any other term or
condition on a future occasion. This Agreement may be modified or amended only
by a writing duly executed by an executive officer of the Company and the
Reinsurer, respectively.

 

13.5 No Third Party Beneficiaries. This Agreement constitutes an indemnity
reinsurance agreement solely between the Company and the Reinsurer, and is
intended solely for the benefit of the parties hereto and their permitted
successors and assigns, and it is not the intention of the parties to confer any
rights as a third-party beneficiary to this Agreement upon any other Person as
to any other term, condition or provision of this Agreement.

 

13.6 Assignment. This Agreement shall not be assigned by either of the parties
hereto without the prior written approval of the other party.

 

13.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT, WITHOUT REGARD TO ITS
CONFLICTS OF LAW DOCTRINE. ALL ISSUES RELATING TO VENUE AND JURISDICTION SHALL
BE GOVERNED BY SECTION 11.07 OF THE ASSET PURCHASE AGREEMENT.

 

13.8 Counterparts. This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.

 

13.9 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any present or future law or if determined by a
court of competent jurisdiction to be unenforceable, and if the rights or
obligations of the Company or the Reinsurer under this Agreement will not be
materially and adversely affected thereby, such provision shall be fully
severable, and this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part of this Agreement,
and the remaining provisions of this Agreement shall remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom.

 

13.10 Schedules, Exhibits and Paragraph Headings. Schedules and Exhibits
attached hereto are made a part of this Agreement. Paragraph headings are
provided for reference purposes only and are not made a part of this Agreement.

 

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13.11 Expenses. Except as explicitly provided to the contrary herein or in the
Asset Purchase Agreement, each party shall be solely responsible for all
expenses it incurs in connection with this Agreement or in consummating the
transactions contemplated hereby or performing the obligations imposed hereby,
including, without limitation, the cost of its attorneys, accountants and other
professional advisors.

 

13.12 No Prejudice. The parties agree that this Agreement has been jointly
negotiated and drafted by the parties hereto and that the terms hereof shall not
be construed in favor of or against any party on account of its participation in
such negotiations and drafting.

 

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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

 

 

 

 

/s/    Catherine H. Smith

By:

Catherine H. Smith

Title:

Chief Financial Officer

 

 

LINCOLN LIFE & ANNUITY COMPANY OF

NEW YORK

 

 

 

By:

 

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

 

 

 

 

/s/    Catherine H. Smith

By:

Catherine H. Smith

Title:

Chief Financial Officer

 

 

LINCOLN LIFE & ANNUITY COMPANY

OF NEW YORK

 

 

 

 

/s/    Philip L. Holstein

By:

Philip L. Holstein

Title:

President