Exhibit 10.38


 


QUOTA SHARE RETROCESSION
AGREEMENT


 


This Quota Share
Retrocession Agreement (“Agreement”), effective as of January 1, 2002, is made
and entered into by and between ACE CAPITAL RE OVERSEAS LTD. (the
“Retrocedent”), an insurance company registered and licensed under the laws of
the Islands of Bermuda, and ACE AMERICAN INSURANCE COMPANY (the
“Retrocessionaire”), a Pennsylvania insurance company.


 


In consideration of the
mutual covenants herein contained and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the Retrocedent and the
Retrocessionaire agree as follows:


 


ARTICLE 1


 


DEFINITIONS


 


Section
1.1. Definitions. For all purposes with regard to this
Agreement, (i) unless otherwise defined in this Agreement, capitalized terms
shall have the meanings assigned to them in the Individual Disability Income
Stop Loss Reinsurance Treaty dated as of January 1, 1999 by and between
Guardian Life Insurance Company of America (the “Original Reinsured”) and the
Retrocedent, as the same may be amended, modified or supplemented from time to
time in accordance with the terms thereof (the “Underlying Treaty”, a copy of
which is attached hereto as Exhibit I), and (ii) all accounting terms shall
have the meanings assigned to them under generally accepted accounting
principles (“GAAP”).


 


Section
1.2. Headings. All captions, headings or titles preceding
any Section or Article in this Agreement are solely for convenience of
reference and are not part of this Agreement and shall not affect its meaning,
construction or effect.


 


ARTICLE 2 


 


TERM


 


Section
2.1. Term. The term of this Agreement (the
“Retrocession Term”) shall commence at 12:01 a.m., eastern standard time, on
January 1, 2002 (the “Effective Date”) and shall remain in force until all of
the Retrocedent’s obligations under the Underlying Treaty have been discharged.


 


ARTICLE 3


 


TYPE


 


Quota share retrocession.


 

















 


ARTICLE
4


 


COVERAGE;
REIMBURSEMENT OF EXPENSES


 


The Retrocedent hereby cedes
to the Retrocessionaire, and the Retrocessionaire hereby assumes as reinsurance
from the Retrocedent and agrees to pay Retrocedent, (i) 100% of Reinsurance
Amounts paid by the Retrocedent under the Underlying Treaty in respect of
Retroceded Claim Inception Years, net of reinsurance paid by the Excess
Retrocessionaires under the Excess Agreements to the extent such reinsurance is
attributable to Retroceded Claim Inception Years, (ii) 100% of Return Premiums
paid by the Retrocedent under the Underlying Treaty in respect of Retroceded
Claim Inception Years, (iii) the portion of any Downgrade Amount paid by the
Retrocedent under the Underlying Treaty that is attributable to Retroceded
Claim Inception Years and (iv) the portion of any Experience Refund paid by the
Retrocedent under the Underlying Treaty that is attributable to Retroceded
Claim Inception Years.


 


The Retrocessionaire shall
reimburse the Retrocedent for 100% of allocated loss adjustment expenses,
expenses paid with respect to the Premium Trust Account and expenses paid with
respect to trust accounts established or letters of credit delivered in
accordance with Article 10 of the Underlying Treaty, in each case, to the
extent such expenses are incurred on or after the Effective Date.


 


The Retrocessionaire shall
also reimburse the Retrocedent for 100% of the retrocession premium paid to the
Excess Retrocessionaires in respect of the Retroceded Claim Inception Years
under the Excess Agreements.


 


“Retroceded Claim Inception
Years” means the 2002 Claim Inception Year and each subsequent Claim Inception
Year during the Term of the Underlying Treaty.


 


“Excess Retrocessionaires”
means ACE Bermuda Insurance Ltd. and London Life & Casualty Reinsurance
Corporation.


 


“Excess Agreements” means (i) the Excess of Loss
Reinsurance Agreement dated as of January 1, 1999 between the Retrocedent and
ACE Bermuda Insurance Limited and (ii) the Excess of Loss Reinsurance Agreement
dated as of January 1, 1999 between the Retrocedent and London Life & Casualty Reinsurance Corporation,
copies of which have been delivered to the Retrocessionaire.


 


2

















 


ARTICLE 5


 


RETROCESSION PREMIUM; FUNDS WITHHELD ACCOUNT; EXCESS AMOUNT


 


Section
5.1. Retrocession
Premium. The Retrocedent
shall pay to the Retrocessionaire for each Retroceded Claim Inception Year
during the Retrocession Term a retrocession premium (the “Retrocession
Premium”) equal to the Reinsurance Premium paid to the Retrocedent under the
Underlying Treaty in respect of each such Retroceded Claim Inception Year. The Retrocession
Premium shall be payable on the date that the Retrocedent receives the
Reinsurance Premium from the Original Reinsured, but shall be paid on a funds
withheld basis.


 


Section
5.2. Funds
Withheld Account. The
Retrocedent shall calculate a notional account (the “Funds Withheld Account”)
and shall (A) credit thereto (i) the Retrocession Premiums and (ii) interest at
the Earned Rate on the average daily balance of the Funds Withheld Account
during each calendar quarter and (B) debit therefrom the Permitted Debits (as
defined below). For purposes of calculating such interest, interest shall be
credited to the Funds Withheld Account on the last day of each calendar
quarter, Retrocession Premiums shall be credited to the Funds Withheld Account
on the dates payable, and Permitted Debits shall be debited on the dates the
corresponding amounts owed by the Retrocedent to the Original Reinsured are
withdrawn from the Premium Trust Account. The balance of the Funds Withheld
Account shall be payable to the Retrocessionaire within five (5) business days
of the date on which the Retrocedent has no further liability under the
Underlying Treaty.


 


“Earned Rate” means, with
respect to a quarter, the book yield plus realized gains and losses for such
quarter on the portfolio of assets held in the Premium Trust Account.


 


Section
5.3. Excess Amount. In the event the Original Reinsured pays
any Excess Amount to the Retrocedent, the Retrocedent shall promptly pay to the
Retrocessionaire the portion of the Excess Amount that is attributable to
Retroceded Claim Inception Years.


 


ARTICLE
6


 


RIGHTS AND SETTLEMENTS


 


The Retrocessionaire agrees
to abide by the claim settlements of the Retrocedent. The Retrocedent shall be
the sole judge of:


 


A.                                  The interpretation of the Underlying Treaty;


 


B.                                    What shall constitute a claim under the
Underlying Treaty; and


 


C.                                     The Retrocedent’s liability under the
Underlying Treaty and the proper amounts for the Retrocedent to pay thereunder.


 


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ARTICLE 7


 


REPORTS
AND REMITTANCES


 


Section
7.1. Reports
Received from Original Reinsured. Within five (5) business days of receipt by the Retrocedent, the
Retrocedent shall deliver to the Retrocessionaire copies of the reports
required under Article 9 of the Underlying Treaty.


 


Section
7.2. Quarterly
Report. Within 30 days
following the end of each calendar quarter during the Retrocession Term, the
Retrocedent will prepare and deliver to the Retrocessionaire a report (the
“Quarterly Report”) containing information relevant to the calculation of the
amount owed by or to the Retrocessionaire hereunder in respect of such calendar
quarter as well as a statement of the Earned Rate in respect of such calendar
quarter and the balance of the Funds Withheld Account as at the end of such
calendar quarter (which report shall be in such form as the Retrocedent and the
Retrocessionaire shall reasonably agree).


 


Section
7.3. Permitted
Debits. Amounts payable by
the Retrocessionaire hereunder in respect of Return Premiums, Downgrade Amount
and/or Experience Refund shall be debited from the Funds Withheld Account to
the extent the Retrocedent is permitted to use funds in the Premium Trust
Account to pay amounts owed by the Retrocedent to the Original Reinsured in
respect of such Return Premiums, Downgrade Amount and/or Experience Refund
(such amounts, the “Permitted Debits”).


 


Section
7.4. Remittances. Net payments owed to the Retrocessionaire
shall accompany the Quarterly Report. Net payments owed to the Retrocedent
shall be made within five (5) business days of delivery of the Quarterly
Report; provided, however, at the option and upon the demand of the
Retrocedent, when the amount due from the Retrocedent exceeds $100,000, the
Retrocedent shall be paid by wire transfer of same day federal funds within two
business days following the date of receipt by the Retrocessionaire of a
special loss accounting.


 


ARTICLES 8


 


GENERAL
CONDITIONS


 


Section
8.1. Follow the
Fortunes. This Agreement is
based on the original terms of the Underlying Treaty so that the
Retrocessionaire’s rights and obligations vis-à-vis the Retrocedent with
respect to the reinsurance provided under this Agreement shall, subject to the
terms of this Agreement, follow the fortunes of the Retrocedent in all respects
under the Underlying Treaty.


 


Section 8.2. No Third Party Rights. Nothing herein shall be construed to expand
the liability of the Retrocessionaire beyond what is specifically assumed under
this Agreement by creating in any third party any rights hereunder.


 


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Section
8.3.  Insolvency. In the event of the insolvency of the
Retrocedent, this reinsurance shall be payable directly to the Retrocedent, or
its liquidator, receiver, conservator or statutory successor immediately upon
demand on the basis of the liability of the Retrocedent without diminution
because of the insolvency of the Retrocedent or because the liquidator,
receiver, conservator or statutory successor of the Retrocedent has failed to
pay all or a portion of any claim. It is agreed, however, that within a
reasonable time the liquidator, receiver, conservator or statutory successor of
the Retrocedent shall give written notice to the Retrocessionaire of the
pendency of a claim against the Retrocedent under the Underlying Treaty. During
the pendency of such claim, the Retrocessionaire may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the
Retrocedent or its liquidator, receiver, conservator or statutory successor.
The expense thus incurred by the Retrocessionaire shall be chargeable, subject
to the approval of the court, against the Retrocedent as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Retrocedent solely as a result of the defense
undertaken by the Retrocessionaire.


 


Section
8.4. Access to
Records. The
Retrocessionaire or its duly authorized representative shall have access to and
the right to inspect the books and records of the Retrocedent at all reasonable
times for the purpose of obtaining information concerning this Agreement, the
Underlying Treaty or the subject matter hereof.


 


Section
8.5. Offset. The Retrocessionaire or the Retrocedent may
offset any balance(s) due from one party to the other under this Agreement or
any other agreement exclusively between the parties hereto. The party asserting
the right of offset may exercise such right at any time whether the balance(s)
due are on account of premiums or losses or otherwise. In the event of the
insolvency of a party hereto, offsets shall only be allowed in accordance with
applicable law.


 


Section
8.6. Errors and
Omissions. Any inadvertent
delay, omission or error shall not be held to relieve either party hereto from
any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified as
soon as possible after discovery.


 


Section
8.7. Governing Law. This Agreement shall be governed by and is
to be construed in accordance with the laws of the State of New York without
giving effect to choice of law provisions and rules thereof.


 


Section
8.8. Arbitration. Any dispute or other matter in question
relating to this Agreement that cannot be resolved by the Retrocedent and the
Retrocessionaire arising out of, or relating to, the formation, interpretation,
performance or breach of this Agreement, whether such dispute arises before or
after termination of this Agreement, will be subject to arbitration.
Arbitration will be initiated by the delivery of a written notice of demand for


 


5

















 


arbitration by one party to
the other within a reasonable time after the dispute has arisen and cannot be
otherwise settled by the parties.


 


Within thirty (30) days of
receipt of notice of arbitration, each party will appoint a disinterested
individual as arbitrator and the two so appointed will then appoint a third
arbitrator who will serve as the umpire. If either party fails to appoint an
arbitrator within thirty (30) days, the other party may appoint the second
arbitrator. If the two arbitrators do not agree on a third arbitrator within
fifteen (15) days of the date on which the second arbitrator was appointed, the
parties shall employ the ARIAS-U.S. Umpire Appointment Procedures to appoint
the third arbitrator. If the ARIAS-U.S. Umpire Appointment Procedures have been
terminated, the parties shall jointly petition the American Arbitration
Association to appoint the third arbitrator. The arbitrators will be active or
retired officers of insurance or reinsurance companies who do not have a
personal or financial interest in the result of the arbitration and who are not
past or current officers, employees or directors of the Retrocedent, the
Retrocessionaire or their respective affiliates.


 


The arbitration hearings
will be held in New York, New York, or such other place as the parties may
mutually agree. Within thirty (30) days after appointment of the third
arbitrator, the panel shall meet and determine timely periods for briefs,
discovery procedures and schedules for hearings. The decision of the panel
shall be rendered within forty-five (45) days following the termination of the
hearings.


 


In making its decision, the
panel shall consider the customs and practices of the reinsurance industry. The
arbitrators will not be obliged to follow judicial formalities or the rules of
evidence except to the extent required by the laws of the State of New York.
Insofar as the arbitration panel looks to substantive law, it shall consider
the laws of the State of New York. The decision of any two arbitrators when
rendered in writing shall be final and binding. The panel is empowered to grant
interim relief as it may deem appropriate. Judgment upon the award may be
entered in any court having jurisdiction thereof. The substantive laws of the
State of New York, without regard to its conflict of laws rules, will govern
any action or suit brought to compel any such arbitration or to enforce any
award rendered pursuant to such arbitration.


 


Each party shall bear the
expense of its own arbitrator and shall jointly and equally bear with the other
party the cost of the third arbitrator. The remaining costs of the arbitration
shall be allocated by the panel. The panel may, at its discretion, award such
further costs and expenses as it considers appropriate, including but not
limited to attorneys’ fees, to the extent permitted by law.


 


Except as provided above,
arbitration will be based, to the extent applicable, upon ARIAS-U.S.
procedures.


 


The procedures specified in
this Section will be the sole and exclusive procedures for the resolution of
irreconcilable disputes between the parties arising out of or relating to this
Agreement.


 


6

















 


This Section shall survive the termination of this
Agreement.


 


Section 8.9. Service of Suit. Each party hereby irrevocably submits to
the nonexclusive jurisdiction of any Federal or State of New York court sitting
in the State of New York over any suit, action or proceeding relating to the
enforcement of the parties’ agreement to arbitrate or the enforcement of an
arbitral award. Each party irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of the
venue of any such suit, action or proceeding brought in such court and any
claim that any suit, action or proceeding brought in such court has been
brought in an inconvenient forum. Each party agrees that a final judgment, not
subject to any further appeal, in any such suit, action or proceeding brought
in such a court shall be conclusive and binding upon it and will be given
effect in its state or country of domicile, as applicable, to the fullest
extent permitted by applicable law and may be enforced in any Federal or State
of New York court sitting in the State of New York, by a suit upon such
judgment, provided that service of process is effected upon it as specified in
this Section or as otherwise permitted by law. Nothing herein shall be deemed
to limit or waive a party’s right to remove a suit, action or proceeding to
Federal court.


 


Further, each party hereby
designates the Superintendent of Insurance of the State of New York, or his
successor or successors in office, as the true and lawful attorney upon whom
may be served any lawful process in any action, suit or proceeding instituted
by or on behalf of the other party under this Agreement and arising out of this
Agreement, and hereby designates the person named in the “Notice” provision of
this Agreement as the person to whom the Superintendent or such successor is
authorized to mail such process or a true copy thereof.


 


Each party hereby consents
to process being served in any suit, action or proceeding of the nature
referred to above in any Federal or State of New York court sitting in the
State of New York by service of process as set forth above; provided that, to
the extent lawful and possible, written notice of said service shall be mailed
by registered or certified air mail, postage prepaid, return receipt requested,
to the other party at its address specified herein or to any other address of
which such party shall have given notice. Each party irrevocably waives, to the
fullest extent permitted by law, all claim of error by reason of any such
service and agrees that such service shall be deemed in every respect effective
service of process upon such party in any such suit, action or proceeding and
shall, to the fullest extent permitted by law, be taken and held to be valid
and personal service upon and personal delivery to such party.


 


Service of process may be
affected in any other manner permitted by law. Nothing in this Section shall
limit the right of a party to bring proceedings against the other party in any
court having jurisdiction over such other party and such proceeding for the
purpose of enforcing the parlies’ agreement to arbitrate or to enforce an
arbitral award.


 


Section 8.10. Notice. As used in this Agreement, notice shall mean any and all notices,
requests, demands or other communications required or permitted to be given
hereunder.


 


7

















 


All notices
shall be in writing and shall be (i) delivered personally, (ii) sent by an
overnight delivery service, or (iii) sent by confirmed facsimile transmission,
addressed to the parties at the addresses set forth below. Any such notice
shall be deemed given (i) in the case of personal delivery, when so delivered
personally, (ii) if sent by overnight delivery service, one day after delivery
of such notice to such service, and (iii) if sent by confirmed facsimile
transmission, at the time of transmission.


 


If to the Retrocedent:


 


ACE Capital Re Overseas Ltd.


Victoria Hall


11 Victoria Street


PO Box HM 1826


Hamilton, Bermuda HM HX


Facsimile: 441-292-1563


Attention: Corporate
Secretary


 


with a copy to:


 


ACE Capital Re Inc.


1325 Avenue of the Americas


New York, New York 10019


Telephone: 212-974-0100


Facsimile:   212-581-3268


Attention: General Counsel


 


If to the Retrocessionaire:


 


ACE American Insurance
Company


c/o ACE Financial Solutions
Inc.


1133 Avenue of the Americas


New York, NY 10036


Telephone: 212-642-7800


Facsimile: 212-642-7801


Attention: President


 


The Retrocedent and the
Retrocessionaire shall provide each other with wiring instructions for monies
to be transferred under this Agreement promptly after execution of this
Agreement and at the time of any change in such instructions.


 


Section 8.11. Assignment. This Agreement may not be assigned by either party without the prior
written consent of the other party.


 


8

















 


Section 8. 12. Amendments. This  Agreement may not
be modified or amended except by mutual written consent of the parties.


 


Section 8.13. Changes to Underlying Treaty. The Retrocedent shall not amend, modify or
supplement the Underlying Treaty without the prior written consent of the
Retrocessionaire.


 


Section 8.14. Waivers. The terms of this Agreement may be waived only with the written
consent of the party waiving compliance. No failure or delay in exercising any
right, power or privilege hereunder will operate as a waiver thereof, nor will
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.


 


Section 8.15. Entire Agreement; Rights and Remedies. This Agreement constitutes the entire
agreement between the parties relating to the subject matter hereof and
supersedes all prior written and oral statements with respect hereto. The
rights and remedies provided herein are cumulative and are not exclusive or any
rights or remedies that any party may have at law or in equity.


 


Section 8.16. Counterparts. This Agreement may be executed in any
number or counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.


 


 


IN WITNESS WHEREOF, this Agreement has been signed
by a duly authorized officer of each of the parties on the respective dates set
forth below.


 


ACE CAPITAL RE OVERSEAS LTD.


 


 


	
  By:

  	
  /s/ Rebecca L. Carne

  	
   

  
	
   

  	
  Name:

  	
  Rebecca L.
  Carne

  	
   

  
	
   

  	
  Title:

  	
  Director

  	
   

  
	
   

  	
  Date:

  	
  4/2/02

  	
   

  



 


ACE
AMERICAN INSURANCE COMPANY


 


 


	
  By:

  	
  /s/ [ILLEGIBLE]

  	
   

  
	
   

  	
  Name:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
  Title:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
  Date:

  	
   

  	
   

  



 


9

















 


EXHIBIT
I


 


[Underlying
Treaty]


 


10

















 


Exhibit
I


 


INDIVIDUAL DISABILITY INCOME

STOP LOSS REINSURANCE TREATY


 


This Individual Disability Income Stop Loss
Reinsurance Treaty (this “Treaty”), dated as of January 1, 1999, is made and entered into by and
between The Guardian Life Insurance Company of America (the “Company”) and KRE
Reinsurance Ltd. (the “Reinsurer”).


 


In consideration of the mutual covenants hereinafter
contained and upon the terms and conditions hereinafter set forth, the
Reinsurer and the Company agree as follows:


 


ARTICLE 1

DEFINITIONS


 


For all purposes with regard to this Treaty, (i) the
following terms shall have the respective meanings assigned to them and shall
include the plural as well as the singular, (ii) all accounting terms,
including those involving premium and claim calculations, shall have the
meanings assigned to them under generally accepted accounting principles and
(iii) all premium and claim calculations shall be computed net of any
reinsurance covering the Covered Policies (other than the reinsurance provided
hereunder), whether or not recoverable:


 


A.           “Actual Claims Incurred” means, with respect to a Claim Inception Year,
the sum of (i) the present value of disability benefits (excluding premiums
waived on account of disability) paid by the Company in respect of Claims
Incepted in such Claim Inception Year during the period commencing on January 1
of such Claim Inception Year and ending five years following the December 31 of
such Claim Inception Year and (ii) the present value of the Claim Reserve
established by the Company as of the date five years following the December 31
of such Claim Inception Year with respect to Claims Incepted in such Claim
Inception Year, where all present values are computed as of January 1 of such
Claim Inception Year at a 6% annual effective rate of interest.


 


B.             “Attachment Point” means, with respect to a
Claim Inception Year, 150% of Planned Claims for such Claim Inception Year.


 


C.             “Automatic Termination Date” has the meaning
set forth in Article 4.


 


D.            “Claim Inception Year” means a calendar year
during the Term.


 


E.              “Claim Reserve” means, with respect to Claims
Incepted in a Claim Inception Year, the actuarial present value of future
benefit amounts due on claims, computed (i) at an effective annual rate of
interest of 6% and (ii) using 100% of the 1985 Commissioners’ Individual
Disability Income Table A for claim termination rates, as


 

















 


such actuarial
present value is reduced or increased in accordance with such adjustments as
are agreed in writing by the parties hereto from time to time.


 


F.              “Claims Incepted”
means, with respect to a Claim Inception Year, all claims under Covered
Policies for disabilities that occur in such Claim Inception Year with respect
to which the Company admits liability for payment, whether or not any payment
is made by the Company in such Claim Inception Year.


 


G.             “Company” has the
meaning set forth in the introductory paragraph.


 


H.            “Covered Policies” has
the meaning set forth in Article 2.


 


I,                 “Deposit Premium”
has the meaning set forth in Article 5.


 


J,                “Downgrade Amount”
has the meaning set forth in Article 4.


 


K.            “Downgrade Termination
Date” has the meaning set forth in Article 4.


 


L.              “Early Termination
Date” has the meaning set forth in Article 4.


 


M.         “Effective Date” means
12:01 a.m., eastern standard time, on January 1, 1999.


 


N.            “Excess Amount” has
the meaning set forth in Article 4.


 


O.            “Excluded Claim
Inception Year” has the meaning set forth in Article 5.


 


P.              “Final Amount” has
the meaning set forth in Article 4.


 


Q.            “Maximum Benefits”
means the maximum disability benefits under Covered Policies in force at the
Effective Date or issued during the Term (inclusive of any future increases in
benefits permitted under the terms of any Covered Policy), as set forth in
Appendix A hereto.


 


R.             “New Policy Exclusion
Right” has the meaning set forth in Article 2.


 


S.              “Non-Payment
Termination Date” has the meaning set forth in Article 4.


 


T.             “Planned Claims”
means, (i) with respect to the 1999 Claim Inception Year, 192% of the
arithmetic average of the amounts obtained by applying, in a manner consistent
with actuarial standards of practice, the 1985 Commissioners’ Individual
Disability Table A at 5.5% interest (computed from the beginning of calendar
year 1999) to the census of Covered Policies in force as of the end of calendar
year 1999 and to the census of Covered Policies in force as of the beginning of
calendar year 1999 and (ii) with respect to all subsequent Claim Inception
Years, the amount obtained pursuant to a method (x) developed by the Company
and communicated to the Reinsurer no later


 


2

















 


than June 30,
2000 (which method shall be consistent with actuarial standards of practice)
and (y) agreed to by the Reinsurer no later than July 31, 2000.


 


U.            “Premium Trust
Account” means the account established with the Trustee to hold all Reinsurance
Premiums payable under this Treaty.


 


V.             “Premium Trust
Agreement” means the agreement among the Company, the Reinsurer and the Trustee
concerning the Premium Trust Account, in substantially the form attached hereto
as Appendix B.


 


W.        “Reinsurance Amount” has
the meaning set forth in Article 3.


 


X.            “Reinsurance Premium”
has the meaning set forth in Article 5.


 


Y.             “Reinsurance Premium
Settlement Date” has the meaning set forth in Article 5.


 


Z.             “Reinsurer” has the
meaning set forth in the introductory paragraph.


 


AA.      “Reinsurer Downgrade” means
the Reinsurer’s financial strength rating by Standard & Poors Rating Group,
a division of McGraw Hill, Inc., is downgraded below “A-”.


 


BB. “Reserve Amount” has the meaning set
forth in Article 10.


 


CC. “Return Premium” has the meaning set
forth in Article 5.


 


DD. “Term” has the meaning set forth in
Article 4.


 


EE. “Treaty” has the meaning set forth in the
introductory paragraph.


 


FF. “Trustee” means The Chase Manhattan Bank.


 


ARTICLE 2

BUSINESS REINSURED


 


The business reinsured hereunder consists of
(i) all individual disability income insurance policies issued by the Company
and in force as of the Effective Date and (ii) all individual disability income
insurance policies issued by the Company during the Term, other than such
policies that are issued during a calendar year in which the Reinsurer
exercises its New Policy Exclusion Right or any calendar year thereafter (the
“Covered Policies”).


 


The Reinsurer shall have the right (the “New
Policy Exclusion Right”), exercisable upon written notice delivered to the
Company at least 90 days prior to the beginning of a calendar year, to exclude
from Covered Policies all individual disability income insurance


 


3

















 


policies issued by the Company during such
calendar year and during each subsequent calendar year of the Term.


 


ARTICLE 3


COVERAGE


 


A.           In the event Actual
Claims Incurred in any Claim Inception Year is in excess of the Attachment
Point for such Claim Inception Year, the Reinsurer shall pay to the Company the
amount of such excess, subject to (i) a limit of liability equal to 75% of
Planned Claims for such Claim Inception Year and (ii) a limit of liability
equal to $150 million for the Term; provided, however, that the Reinsurer shall
have no liability for Actual Claims Incurred in any Excluded Claim Inception
Year (such excess, subject to such limits, is referred to herein as the
“Reinsurance Amount”).  In no event
shall the Reinsurer be obligated to pay more than $150 million to the Company
under this Treaty.


 


B.             The Reinsurance
Amount in respect of each Claim Inception Year shall be payable by the
Reinsurer no later than 60 days following the December 31 which is five years
following the December 31 of such Claim Inception Year.


 


ARTICLE 4

TERM


 


A.           The term of this Treaty
(the “Term”) shall commence on the Effective Date and terminate on the earliest
to occur of (i) 11:59 p.m., eastern standard time, on December 31, 2008, (ii)
the Early Termination Date, (iii) the Non-Payment Termination Date, (iv) the
Automatic Termination Date and (v) the Downgrade Termination Date. The
provisions of this Treaty that provide for the performance of obligations at a
date subsequent to the end of the Term shall survive the termination of this
Treaty.


 


B.             The Reinsurer shall
have the right, exercisable as of any December 31 occurring on or after
December 31, 2001, to terminate coverage hereunder for all calendar years
commencing thereafter, by giving at least 180 days’ prior written notice to the
Company thereof (such December 31 is referred to herein as the “Early
Termination Date”). The exercise of such right shall not relieve the Reinsurer
of liability for the Reinsurance Amount in respect of Claim Inception Years
ended on or prior to the Early Termination Date.


 


C.             In the event the
Company fails to transfer the Reinsurance Premium to the Trustee for deposit in
the Premium Trust Account in accordance with Article 5 and such failure is not
remedied within 30 days of the date written notice of such failure is delivered
to the Company by the Reinsurer, the Reinsurer shall have the right (but not
the


 


4

















 


obligation) to terminate
coverage as of the December 31 immediately preceding the date of delivery of
such notice (such December 31 is referred to herein as the “Non-Payment
Termination Date”). The exercise of such right shall not relieve the Reinsurer
of liability for the Reinsurance Amount in respect of Claim Inception Years ended
on or prior to the Non-Payment Termination Date. In the event the Reinsurer
exercises such right, it shall direct the Trustee to return to the Company any
portion of Reinsurance Premium previously transferred by the Company to the
Trustee for deposit in the Premium Trust Account in respect of such Claim
Inception Year. The Company shall not be relieved of its obligation to pay the
Reinsurance Premium in accordance with Article 5 in the event the Reinsurer
does not exercise its right to terminate coverage as provided in this Section
C.


 


D.            In the event (i) the Company fails to develop
and communicate to the Reinsurer, on or before June 30, 2000, a methodology for
determining “Planned Claims” for all Claim Inception Years subsequent to the
1999 Claim Inception Year or (ii) the Company develops such a methodology but
the Reinsurer gives written notice to the Company that it does not agree with
such methodology (which notice shall be provided no later than July 31, 2000),
this Treaty shall automatically terminate with respect to all Claim Inception
Years subsequent to the 1999 Claim Inception Year (June 30, 2000, in the case
of clause (i), or the date of such written notice, in the case of clause (ii),
being referred to herein as the “Automatic Termination Date”).  Such termination shall not relieve the
Reinsurer of liability for the Reinsurance Amount in respect of the 1999 Claim
Inception Year.  In the event of such a
termination, the Reinsurer shall direct the Trustee to return to the Company
any Reinsurance Premium previously transferred by the Company to the Trustee
for deposit in the Premium Trust Account in respect of Claim Inception Years
subsequent to the 1999 Claim Inception Year.


 


E.              In the event the Reinsurer fails to deliver,
in accordance with Section C of Article 8, a guarantee, evidence that a third
party reinsurer has agreed to assume or reinsure the obligations of the
Reinsurer hereunder on a stand-by basis, or a letter of credit securing the
obligations of the Reinsurer under this Treaty within 30 days of the date of a
Reinsurer Downgrade, the Company shall have the right (but not the obligation)
to terminate coverage as of such 30th day (such 30th day
is referred to herein as the “Downgrade Termination Date”).  In the event of such a termination, (x) the
Reinsurer shall direct the Trustee to make a payment to the Company in an
amount equal to (i) the Reinsurance Premiums previously transferred by the
Company to the Trustee for deposit in the Premium Trust Account in respect of
Claim Inception Years (other than Excluded Claim Inception Years) that have not
settled prior to the Downgrade Termination Date plus (ii) interest thereon at
the rate of 6% compounded annually from the date of deposit to the Downgrade
Termination Date and (y) the Company shall be entitled to draw on any letters
of credit established pursuant to Article 10B hereof, withdraw the assets from
any trust account established pursuant to Article 10B hereof and/or reduce to
zero any amount deposited by the Reinsurer with the Company pursuant to Article
10B hereof.  Upon receipt by the Company
of the amounts described in the preceding sentence, the Reinsurer shall be
released from all


 


5

















 


further liability hereunder,
other than the obligation of the Reinsurer to pay the Experience Refund to the
Company in accordance with Article 6 hereof. No later than 60 days following
December 31 of the fifth year following the last Claim Inception Year completed
prior to the Downgrade Termination Date, the Company shall calculate the Final
Amount. In the event the amount received by the Company pursuant to clauses (x)
and (y) of the second sentence of this Section (the “Downgrade Amount”) exceeds
the Final Amount, the Company shall pay such excess (the “Excess Amount”) to
the Reinsurer.  “Final Amount” means the
sum of the Reinsurance Amounts for Claim Inception Years (other than Excluded
Claim Inception Years) completed prior to the Downgrade Termination Date that
would have been payable after the Downgrade Termination Date but for the
termination pursuant to this Section.


 


ARTICLE 5

PREMIUM TRUST ACCOUNT; REINSURANCE PREMIUM


 


A.           The Reinsurer and the Company shall enter into the Premium Trust
Agreement contemporaneously with or promptly following the execution of this
Treaty.  All Reinsurance Premium shall
be transferred by the Company to the Trustee for deposit in the Premium Trust
Account. For the avoidance of doubt, no Reinsurance Premium shall be payable
directly to the Reinsurer.  All amounts
held in the Premium Trust Account shall be payable to the Company or the
Reinsurer in accordance with the terms hereof and of the Premium Trust
Agreement.  Withdrawals from, and
substitutions of assets held in, the Premium Trust Account shall be effected in
accordance with the procedures set forth in Section 2 of the Premium Trust
Agreement.  The Reinsurer shall be
entitled to direct the investment of the assets in the Premium Trust Account.
Upon satisfaction of the Reinsurer’s obligations hereunder, all amounts remaining
in the Premium Trust Account shall be payable to the Reinsurer, and the Company
shall direct the Trustee to promptly pay such amounts to the Reinsurer.


 


B.             The reinsurance premium payable with respect
to each Claim Inception Year (the “Reinsurance Premium”) shall be equal to the
greater of (i) $2.5 million and (ii) an amount equal to 2% of the premiums
earned by the Company during such Claim Inception Year with respect to Covered
Policies. The Reinsurance Premium shall be payable at the times and in the
manner described in Sections C and D of this Article 5.  Premiums shall be deemed to be earned by the
Company in accordance with generally accepted accounting principles.


 


C.             No later than 10 days following the date of
execution of the Premium Trust Agreement by both parties (with respect to the
1999 Claim Inception Year) and no later than 30 days after the commencement of
each Claim Inception Year (with respect to all other Claim Inception Years),
the Company shall transfer to the Trustee, for deposit in the Premium Trust
Account, a deposit premium (the “Deposit


 


6

















 


Premium”). The Deposit
Premium for any Claim Inception Year shall be equal to the greatest of (i) $2.5
million, (ii) an amount equal to 2% of the Company’s good faith estimate of the
premiums to be earned by it during such Claim Inception Year with respect to
Covered Policies and (iii) for all Claim Inception Years other than the 1999
Claim Inception Year, an amount equal to 2% of 90% of the premiums earned by
the Company during the immediately preceding Claim Inception Year with respect
to Covered Policies.


 


D.            No later than 60 days after the end of each
Claim Inception Year (the “Reinsurance Premium Settlement Date”), the Company
shall, if necessary, transfer funds to the Trustee for deposit in the Premium
Trust Account, or if necessary, the Reinsurer shall direct the Trustee to make
a payment to the Company from the Premium Trust Account so as to reconcile the
difference between the Deposit Premium paid with respect to such Claim
Inception Year and the Reinsurance Premium payable with respect to such Claim
Inception Year.


 


E.              The Company shall have the right, but not the
obligation, to release the Reinsurer from all liability to pay the Reinsurance
Amount with respect to any Claim Inception Year by delivering written notice
thereof to the Reinsurer no later than 60 days following the end of such Claim
Inception Year; provided, however, that the Company may exercise such right
with respect to the 1999 Claim Inception Year without condition but may
exercise such right with respect to any Claim Inception Year subsequent to the
1999 Claim Inception Year only if the Company has exercised such right with
respect to the immediately preceding Claim Inception Year (any Claim Inception
Year with respect to which the Company has exercised such right is referred to
herein as an “Excluded Claim Inception Year”). In the event the Company
exercises such right with respect to a Claim Inception Year, the Reinsurer
shall direct the Trustee to make a payment to the Company from the Premium
Trust Account, on or before the later to occur of (i) the Reinsurance Premium
Settlement Date with respect to such Claim Inception Year and (ii) that date
that is 30 days following the date of such notice, in an amount (the “Return
Premium”) equal to 25% of the Reinsurance Premium payable in respect of such
Claim Inception Year. The exercise by the Company of such right shall not
relieve either party of its obligation to comply with Section D of this
Article.


 


ARTICLE 6

EXPERIENCE REFUND


 


No later than 60 days following the December 31
which is five years following the last day of the Term (or, in the event the
Term terminates pursuant to Section E of Article 4, no later than 60 days
following December 31 of the fifth year following the last Claim Inception Year
completed prior to the Downgrade Termination Date), the Reinsurer shall pay to
the Company an Experience Refund, calculated as set forth below, plus interest
at the rate of 6% compounded annually from the last day of the Term to the date
of


 


7

















 


payment. To
the extent funds remain in the Premium Trust Account on the date the Experience
Refund is to be paid, the Reinsurer shall direct the Trustee to make a payment
to the Company from the Premium Trust Account in an amount equal to the
Experience Refund. To the extent the Experience Refund exceeds the funds
remaining in the Premium Trust Account, the Reinsurer shall make direct payment
to the Company of such excess. The Experience Refund is equal to:


 


1)              all Reinsurance
Premium payable by the Company under this Treaty, minus


 


2)              all Return Premiums
payable by the Reinsurer under this Treaty, minus


 


3)              all Reinsurance
Amounts payable by the Reinsurer under this Treaty, minus


 


4)              in the event the
Term terminates pursuant to Section E of Article 4, the Downgrade Amount, plus


 


5)              in the event the
Term terminates pursuant to Section E of Article 4, the Excess Amount, minus


 


6)              an amount equal to
1.6% of premiums earned by the Company with respect to the Covered Policies
during each Claim Inception Year that is not an Excluded Claim Inception Year
(or, in the event the Term terminates pursuant to Section E of Article 4, an
amount equal to 1.6% of premiums earned by the Company with respect to the
Covered Policies during each Claim Inception Year that has settled prior to the
Downgrade Termination Date).


 


ARTICLE 7

EXCLUSIONS


 


This Treaty does not
cover:


 


A.           individual disability
income policies purchased by the Company or assumed by the Company as
reinsurance, unless the Reinsurer gives its prior written consent to the
inclusion of such policies;


 


B.             policies issued by
the Company not included in Covered Policies;


 


C.             provisions contained
in Covered Policies (including in riders to Covered Policies) issued after the
Effective Date that provide coverage for risks other than disability risks, to
the extent that, in the Reinsurer’s reasonable opinion, coverage for such other
risks constitutes more than a de minimus portion
of the total coverage provided by such Covered Policies;


 


D.            disability benefits in
excess of the Maximum Benefits;


 


8

















 


E.              bad faith, punitive damages or any other
extra-contractual liability asserted against the Company, its officers,
directors, employees or agents;


 


F.              allocated or unallocated claim adjustment
expenses;


 


G.             any payment by the Company in excess of its
contractual obligations under the Covered Policies; and


 


H.            all liability of the Company arising by
contract, operation of law, or otherwise from its participation or membership,
whether voluntary or involuntary, in any Insolvency Fund. “Insolvency Fund”
includes any guaranty fund, insolvency fund, plan, pool, association, fund or
other arrangement, howsoever denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company of part
or all of any claim, debt, charge, fee or other obligation of any insurer, or
its successors or assigns, which has been declared by the competent authority
to be insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.


 


ARTICLE 8

REPRESENTATIONS, WARRANTIES AND COVENANTS


 


A.           Prior to the date which is five years following the end of the Term,
the Company shall not recapture, amend, modify or terminate any reinsurance
covering the Covered Policies without the prior written consent of the
Reinsurer.


 


B.             Prior to the date which is five years
following the end of the Term, the Company shall not purchase any reinsurance
covering the Covered Policies without the prior written consent of the
Reinsurer, other than reinsurance which covers (i) Claims Incepted in an
Excluded Claim Inception Year or (ii) Claims Incepted in a year occurring after
the end of the Term.


 


C.             In the event of a Reinsurer Downgrade, the
Reinsurer shall deliver to the Company (i) a guarantee from Capital Re
Corporation (or other entity satisfactory to the Company), in form and
substance satisfactory to the Company, guaranteeing the obligations of the
Reinsurer under this Treaty, (ii) evidence, in form and substance satisfactory
to the Company, that a third party reinsurer, acceptable to the Company, has
agreed to assume or reinsure on a stand-by basis the obligations of the
Reinsurer under this Treaty or (iii) a letter of credit, in form and substance
satisfactory to the Company, issued by a bank satisfactory to the Company,
securing the obligations of the Reinsurer under this Treaty.


 


9

















 


ARTICLE 9

REPORTS


 


Within 30 days following the end of each calendar
quarter during the Term and the five-year period following the end of the Term,
the Company shall render a bordereau to the Reinsurer showing for such calendar
quarter;


 


1)              premiums earned by the Company during such
calendar quarter with respect Covered Policies (provided that this information
need only be provided for calendar quarters during the Term);


 


2)              disability payments made by the Company
during such calendar quarter with respect to Covered Policies, segregated by
Claim Inception Year; and


 


3)              the Claim Reserve for each Claim Inception
Year as at the end of such calendar quarter.


 


ARTICLE 10

RESERVES, FINANCIAL STATEMENT CREDIT


 


A.           Reserves.  The Reinsurer shall maintain
reserves with respect to its liabilities hereunder as required by all laws and
regulations applicable to the Company. Notwithstanding anything herein to the
contrary, the Reinsurer shall have no obligation to post any reserve for
unearned premiums.  No later than 30
days following the end of each calendar quarter during the Term and the
five-year period following the end of the Term, the Company shall deliver to
the Reinsurer a report as to the amount of the reserve the Reinsurer is
required to establish with respect to this Treaty.  If the Reinsurer does not, within 10 calendar days of its receipt
of such report, provide written notice to the Company that it disputes such
amount, the Reinsurer shall be obligated to establish a reserve by the end of
the calendar quarter. If the Reinsurer provides written notice that it disputes
such amount within such 10 day period, the parties will work together in good
faith to agree upon an appropriate reserve amount; provided that if such
dispute is not resolved in 15 days it shall be submitted to arbitration. The
reserve established by the Reinsurer with respect to this Treaty is referred to
herein as the “Reserve Amount” for such year.


 


B.             Financial Statement Credit. To the extent necessary to provide
statutory financial statement credit to the Company, the Reinsurer agrees that,
no later than the end of each calendar quarter during the Term and the
five-year period following the end of the Term, the Reinsurer shall either:


 


1)              Deliver to the Company a clean, irrevocable,
unconditional and evergreen letter of credit, in form and substance
satisfactory to the Company (including a waiver by the issuing bank of its
right to delay payment under the letter of credit), in an


 


10

















 


amount equal to 102% of the
Reserve Amount (or if the Reinsurer has previously delivered such a letter of
credit to the Company, the Reinsurer shall deliver an amendment thereto that
increases the letter of credit to an amount equal to 102% of the Reserve Amount
most recently communicated by the Company). Such letter of credit shall be
drawn only on those financial institutions which are (a) approved by the
National Association of Insurance Commissioners as acceptable issuers of
letters of credit, and (b) acceptable to the Company. Should the letter of
credit be issued for less than the term of this Treaty, the Reinsurer shall
cause the issuer of the letter of credit to notify the Company, not less than
30 calendar days prior to the date of expiry, of its decision to renew or its
decision not to extend the letter of credit for an additional period, or


 


2)              establish a trust account at a bank,
acceptable to the Company, and on terms that are in complete conformance with
all applicable state law and with all additional requirements of governmental
authorities having jurisdiction over the Company’s reserves, in an amount equal
to 102% of the Reserve Amount (or, if the Reinsurer has previously established
such a trust account, the Reinsurer shall deposit additional assets in the
trust account so that the market value of the assets in the trust account is at
least equal to 102% of the Reserve Amount as most recently communicated by the
Company), or


 


3)              deposit with the Company an amount equal to
102% of the Reserve Amount (or, if the Reinsurer has previously deposited funds
with the Company, the Reinsurer shall deposit additional funds so that the
total funds deposited are at least equal to 102% of the Reserve Amount as most
recently communicated by the Company).


 


The Reinsurer shall have
complete discretion to chose which of the above-described forms of reinsurance
security it shall provide. Upon the request of the Reinsurer and subject to the
approval of the Company, the amounts on deposit in the Premium Trust Account
may be used to (i) collateralize such letters of credit or (ii) fund such trust
accounts or deposits. In the event the Reinsurer elects to deliver a letter of
credit pursuant to this Treaty, such letter of credit may be drawn upon at any
time, notwithstanding any other provisions in this Treaty, and shall be
utilized by the Company or any successor by operation of law of the Company
(including, without limitation, any liquidator, rehabilitator, receiver or
conservator or the Company) only for one or more of the following purposes;


 


1)              to reimburse the Company for the Reinsurer’s
share of disability benefits paid by the Company pursuant to the provisions of
the policies ceded under this Treaty;


 


2)              to fund an account with the Company in an
amount equal to the Reserve Amount; and


 


3)              to pay any other amounts the Company claims
are due under this Treaty.


 


11

















 


All of the foregoing shall
be applied without diminution because of insolvency on the part of the Company
or the Reinsurer. The Company shall credit to the Reinsurer quarterly interest
on the amounts drawn from the letter of credit and held pursuant to paragraph 2
above at the lesser of the rate earned by the Company on its general account
and the prime rate of interest as reported in the Federal Reserve Bulletin. The
Company shall return to the Reinsurer any amounts drawn on the letter of credit
in excess of the actual amounts required for paragraphs 1 and 2 above or, in
the case of paragraph 3 above, any amounts that are subsequently determined not
to be due.


 


In the event the Reinsurer
elects to establish a trust account pursuant to Section B of Article 10 of this
Treaty, the Reinsurer and the Company shall enter into a trust agreement which
establishes a trust account for the benefit of the Company. The trustee of the
trust account and the trust agreement shall comply with all applicable
requirements of regulatory authorities having jurisdiction over the Company.
The assets deposited in the trust account shall be valued according to their
current fair market value, and shall consist only of cash (United States legal
tender), certificates of deposit issued by a United States bank and payable in
United States legal tender, and investments of the types specified in
paragraphs (1) and (2) of subsection (a) of section 1404 of the New York
Insurance Law. Prior to depositing assets with the trustee, the Reinsurer shall
execute assignments, endorsements in blank, or transfer legal title to the
trustee of all assets requiring assignments, in order that the Company, or the
trustee upon the direction of the Company, may whenever necessary negotiate any
such assets without consent or signature from the Reinsurer or any other
entity. All settlements of account between the Company and the Reinsurer shall
be made in cash or its equivalent.


 


The Reinsurer and the
Company agree that the assets in the trust account established pursuant to this
provision of this Treaty may be withdrawn by the Company at any time,
notwithstanding any other provisions in this Treaty, and shall 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 the Reinsurer only for one or more of the following
purposes:


 


1)              to reimburse the Company for the Reinsurer’s
share of disability benefits paid by the Company pursuant to the provisions of
the policies ceded under this Treaty;


 


2)              to fund an account with the Company in an
amount equal to the Reserve Amount; and


 


3)              to pay any other amounts the Company claims
are due under this Treaty.


 


The Company shall return to
the trust account any amount withdrawn in excess of the actual amounts required
for in paragraphs 1 and 2 above, or in the case of paragraph 3, any amounts
that are subsequently determined not to be due. The Company shall


 


12

















 


credit quarterly to the
Reinsurer interest on the amounts drawn from the trust account and held
pursuant to paragraph 2 above at the lesser of the rate earned by the Company
on its general account and the prime rate of interest as reported in the
Federal Reserve Bulletin.


 


The Reinsurer has the right
to seek approval from the Company to withdraw from the aforementioned trust
account all or any part of the assets contained therein and transfer such
assets to the Reinsurer, provided that:


 


1)              the Reinsurer shall, at the time of such
withdrawal, replace the withdrawn assets with other qualified assets having a
market value at least equal to the market value of the assets withdrawn so as
to maintain at all times the deposit in the required amount; or


 


2)              after such withdrawal and transfer, the
market value of the trust account is not less than 102 percent of the Reserve
Amount.


 


The Company shall be the
sole judge as to the application of this provision, but shall not unreasonably
or arbitrarily withhold its approval.


 


In the event the Reinsurer
elects to deposit funds with the Company, the Company shall credit such funds
with interest at the rate earned by the Company on its general account and
shall pay such interest income to the Reinsurer upon request, but in no event
more frequently than once per calendar quarter. The Company and the Reinsurer
agree that the deposit will be in such form and held in such manner so as to
allow the Company to take financial statement credit for the reinsurance ceded
hereunder and also allow, if possible, the Reinsurer to treat the deposit as an
admitted asset in accordance with applicable law.


 


ARTICLE 11

DAC TAX


 


A.           Each of the Company and the Reinsurer agrees that, for each taxable
year during the Term and the five-year period immediately following the Term,
it will comply with the following provisions. As used below, the term “party”
refers to either the Company or the Reinsurer, as appropriate. The terms used
in this Article are defined by reference to Regulation Section ) 1.848-2 of the
Income Tax Regulations issued in December 1992 under Section 848 of the
Internal Revenue Code of 1986, as amended (the “Code”).


 


B.             The party with the net positive consideration
for this Treaty for each taxable year will capitalize specified policy
acquisition expenses with respect to this Treaty without regard to the general
deductions limitation of Section 848(c)(l) of the Code.


 


13

















 


C.             The parties shall exchange information
regarding the amount of net consideration paid under this Treaty in each year
to ensure consistency.  The parties also
agree to exchange information which may otherwise be required by the Internal
Revenue Service.


 


D.            The Company will submit a schedule to the
Reinsurer by June 1 of each year of its calculation of net consideration for
the preceding year. Such schedule will be accompanied by a statement signed by
an officer of the Company stating that the Company will report such net consideration
in its tax return for the preceding calendar year.  The Reinsurer may contest such calculation by providing an
alternative calculation to the Company in writing within 30 days of the
Reinsurer’s receipt of the Company’s calculation.  If the Reinsurer does not so notify the Company, the Reinsurer
will report the net consideration as determined by the Company in the
Reinsurer’s tax return for the previous calendar year. If the Reinsurer
contests the Company’s calculation of the net consideration, the parties will
act in good faith to reach an agreement as to the correct amount within 30 days
of the date the Reinsurer submits its alternative calculation.  If the Company and the Reinsurer reach
agreement on an amount of net consideration, each party shall report such
amount in their respective tax returns for the previous calendar year.  If the parties still fail to reach
agreement, the determination of net consideration shall be submitted to
arbitration.


 


ARTICLE 12

GENERAL CONDITIONS


 


A.           Follow the Fortunes. 
Except as otherwise provided herein, (i) this reinsurance is subject to
all of the terms, clauses and conditions of the Covered Policies and (ii) the
Reinsurer shall follow the fortunes of the Company in all respects under the
Covered Policies to the extent of the Reinsurer’s share hereunder.


 


B.             No Third Party Rights. 
Nothing herein shall be construed to expand the liability of the
Reinsurer beyond what is specifically assumed under this Treaty by creating in
any third party any rights hereunder.


 


C.             Insolvency. In the event of the insolvency of the Company, this reinsurance shall
be payable by the Reinsurer directly to the Company, or its liquidator,
receiver, conservator or statutory successor, on the basis of the liability of
the Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor of the
Company has failed to pay all or a portion of any claim. It is agreed, however,
that within a reasonable time the liquidator, receiver, conservator or
statutory successor of the Company shall give written notice to the Reinsurer
of the pendency of a claim against the Company. 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,


 


14

















 


any defense or defenses that
it may deem available to the Company or its liquidator, receiver, conservator
or statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the court, against the Company as part
of the expense of conservation or liquidation to the extent of a pro rata share
of the benefit which may accrue to the Company solely as a result of the
defense undertaken by the Reinsurer.


 


D.            Access to Records. Each party hereto may at any time during
normal office hours inspect and take copies of such of the other party’s
records and documents that relate to any matter arising under this Treaty. It
is agreed that each party’s right of inspection shall continue as long as
either party has a claim against the other arising out of this Treaty.


 


E.              Offset. The Reinsurer or the Company may offset any balance due from one
party to the other under this Treaty.


 


F.              Premium Taxes. The Company shall be liable for the payment
of all premium taxes on the Covered Policies.


 


G.             Errors and Omissions. Any inadvertent delay, omission or error
shall not be held to relieve any party hereto from any liability which would
attach to it hereunder if such delay, omission or error had not been made,
provided such delay, omission or error is rectified as soon as possible after
discovery.


 


H.            Governing Law. This Treaty is governed by and is to be
construed according to the laws of the State of New York, without giving effect
to choice of law provisions.


 


I.                 Arbitration. Any dispute, controversy or claim arising out of or relating to this
Treaty shall be submitted to arbitration to be conducted in New York City,
pursuant to the following procedures and the then-current Commercial Rules of
the American Arbitration Association (to the extent such rules are not
inconsistent with the following procedures). There must be three arbitrators
who will be active or retired disinterested officials of insurance or
reinsurance companies or persons with not less than ten years experience of
insurance or reinsurance as lawyers or professional advisors serving the
insurance or reinsurance industry; provided that no arbitrator may be a present
or former officer, director, employee, attorney or consultant of either party
or its affiliates. The Company and the Reinsurer will each appoint one of the
arbitrators and these two arbitrators will select the third. In the event that
either party is unable to chose an arbitrator within 30 days of the demand for
arbitration, the other party may choose two arbitrators who shall in turn
choose the third arbitrator before entering arbitration. If the two arbitrators
are unable to agree on the selection of a third arbitrator within 30 days
following their appointment, each arbitrator shall nominate three candidates
within 10 days thereafter, two of whom the other shall decline, and the
decision shall be made by drawing lots. Each of the parties shall bear the
expenses of its own arbitrator and shall jointly and equally bear, with the
other


 


15

















 


party, the expenses of the
third arbitrator. The remaining expenses of the arbitration, if any, shall be
allocated by the arbitrators. The award of the arbitrators will be final, and
judgment may be entered upon it in any court having jurisdiction.


 


J.                Additional Information. In the event that state law or regulation
relating to this Treaty shall require either party to obtain information in
writing from the other party in order to credit reserves or unallocated
liability for purposes of any quarterly or annual statement, the other shall
provide such information within 30 days of the end of the period for which that
information is required, or 30 days from the date of the request, whichever is
later.


 


K.            Penalty Interest. An amounts due hereunder and unpaid shall
bear interest from and including the date that is 30 days after the due date to
but excluding the date of payment at a monthly rate equal to 1.5%.


 


L.              Notice. As used in this Treaty, notice shall mean any and all notices,
requests, demands or other communications required or permitted to be given
hereunder. All notices shall be in writing and shall be (i) delivered
personally, (ii) sent by certified, registered or express mail, postage
prepaid, (iii) sent by an overnight delivery service, or (iv) sent by confirmed
facsimile transmission, addressed to the parties at the addresses set forth
below. Any such notice shall be deemed given (i) in the case of personal
delivery, when so delivered personally, (ii) in the case of certified,
registered or express mail, three days after the date of deposit in the United
States mail, (iii) if sent by overnight delivery service, one day after
delivery of such notice to such service, and (iv) if sent by confirmed
facsimile transmission, at the time of transmission.


 


KRE Reinsurance Ltd.

Victoria Hall

PO Box HM 1826

Hamilton, Bermuda HM HX

Facsimile:  441-292-1563

Attention: Corporate Secretary


 


with a copy to:


 


Capital Re Solutions
Incorporated

1325 Avenue of the Americas

New York, New York 10019

Telephone: 212-974-0100

Facsimile:  212-581-3268

Attention: Corporate Secretary


 


The Guardian Life Insurance
Company of America

7 Hanover Square


 


16

















 


New York, New York 10004

Telephone: 212-598-8386

Facsimile: 212-919-2944

Attention: Corporate Secretary


 


with a copy to:


 


The Guardian Life Insurance
Company of America

7 Hanover Square

New York, New York 10004

Telephone: 212-598-8295

Facsimile: 212-919-2816

Attention: Vice President, Disability


 


The Company and the
Reinsurer shall provide each other with wiring instructions for monies to be
transferred under this Treaty promptly after execution of this Treaty and at
the time of any change in such instructions.


 


M.         Assignment. This Treaty may not be assigned by either party without the prior
written consent of the other party.


 


N.            Amendments. This Treaty may not be modified or amended except by mutual written
consent of the parties.


 


O.            Waivers. The terms of this Treaty may be waived only with the written consent
of the party waiving compliance. No failure or delay in exercising any right,
power or privilege hereunder will operate as a waiver thereof, nor will any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.


 


P.              Entire Treaty; Rights and Remedies. This Treaty constitutes the entire
agreement between the parties relating to the subject matter hereof and
supersedes all prior written and oral statements with respect hereto. The
rights and remedies provided herein are cumulative and are not exclusive or any
rights or remedies that any party may have at law or in equity.


 


Q.            Headings. The headings used herein are intended solely for convenience of
reference and shall not effect the meaning, interpretation, construction or
effect of this Treaty.


 


R.             Counterparts. This Treaty may be executed in any number
or counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.


 


S.              Severability In the event that any of the provisions
contained herein shall be declared invalid or unenforceable, such declaration
or adjudication shall in no manner affect or


 


17

















 


impair the validity or
enforceability of the other and remaining provisions, which shall remain in
full force and effect as though the invalid or unenforceable provisions or
clauses had not been herein included or made apart of this Treaty.


 


IN WITNESS WHEREOF, this Treaty has been signed by a
duly authorized officer of each of the parties as of the date first above
written.


 


KRE REINSURANCE LTD.


 


	
  By:

  	
  /s/ Rebecca L. Carne

  	
   

  
	
   

  	
  Name:

  	
  REBECCA L. CARNE

  	
   

  
	
   

  	
  Title:

  	
  Asst. Sec.

  	
   

  
					



 


 


THE GUARDIAN LIFE INSURANCE COMPANY OF
AMERICA


 


	
  By:

  	
  /s/ John M. Sawyer

  	
   

  
	
   

  	
  Name:

  	
  John M. Sawyer

  	
   

  
	
   

  	
  Title:

  	
  Vice President

  	
   

  
	
   

  	
   

  	
  Individual Disability Insurance

  	
   

  
					



 


18

















 


Appendix A


 


Issue Limits for Covered
Policies


 


	
  Personal Disability Income Policies:

  	
   

  	
  $15,000/month

  
	
  Overhead Expense Disability Income Policies:

  	
   

  	
  $30,000/month

  
	
  Disability Buy-Out Policies:

  	
   

  	
  $66,667/month

  
	
  Disability Buy-Out Policies with Lump Sum Settlement:

  	
   

  	
  $625,000 aggregate

  
	
  Business Reducing Term Policies:

  	
   

  	
  $10,000/month

  



 


19

















 


Appendix B


 


[Form of Premium Trust
Agreement]


 


20