Document:

vapo-ex102_132.htm

 

Exhibit 10.2

 

AMENDMENT NO. 3 TO CREDIT AGREEMENT AND GUARANTY

 

This AMENDMENT NO. 3 TO CREDIT AGREEMENT AND GUARANTY, dated as of June 16, 2020 (this “Amendment”), is made by and among VAPOTHERM, INC., a Delaware corporation (the “Borrower”), certain Subsidiaries of the Borrower that are signatories hereto, the Lenders signatories hereto and PERCEPTIVE CREDIT HOLDINGS II, LP, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”). Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Credit Agreement (defined below).

 

W I T N E S S E T H:

 

WHEREAS, the Borrower, certain Subsidiary Guarantors, the Administrative Agent and the Lenders have entered into that certain Credit Agreement and Guaranty, dated as of April 6, 2018 (as amended or otherwise modified, the “Credit Agreement”);

 

WHEREAS, pursuant to Section 3.03 of the Credit Agreement, the Borrower is required to pay the Prepayment Premium upon the prepayment of all or any portion of the Loans;

 

WHEREAS, the parties to the Credit Agreement have agreed, among other things, to clarify the calculation of the Prepayment Premium and to amend the Credit Agreement accordingly;

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

ARTICLE I

AMENDMENTS TO CREDIT AGREEMENT

 

SECTION 1.1. Amendments to Section 1.01. Effective on the Third Amendment Effective Date (as defined below), Section 1.01 of the Credit Agreement is hereby amended as follows:

 

	
(a)
	
Each of the following definitions in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows:

 

“Prepayment Premium” means with respect to any prepayment of principal of the Loans referenced in clause (a) or (b) of Section 3.03 occurring (i) on or prior to the second anniversary of the Closing Date, an amount (not to be less than zero) such that the Return on the principal amount being prepaid pursuant to such prepayment is at least equal to a twenty percent (20%) Annualized Internal Rate of Return for the Lenders, (ii) at any time after the second anniversary of the Closing Date and on or prior to the fourth anniversary of the Closing Date, an amount (not to be less than zero) such that the Return on the principal amount being prepaid pursuant to such prepayment is at least equal to a seventeen percent (17%) Annualized Internal Rate of Return for the Lenders, and (iii) at any time after the fourth anniversary of the Closing Date and prior to the Maturity Date, an amount (not to be less than zero) such that the Return on the principal amount being prepaid pursuant to such prepayment is at least equal to a fifteen percent (15%) Annualized Internal Rate of Return for the Lenders.

ny-1936167

 

 

“Return” means, at the time of any prepayment of the type described in clause (a) or (b) of Section 3.03, an amount equal to the sum of (in each case without duplication) (i) all amounts that will be paid to the Lenders in cash at the time of such prepayment, including amounts required to be paid pursuant to Section 3.03 in respect of interest, fees and Prepayment Premiums as a result of such prepayment (but excluding any portion of such prepayment constituting principal or any portion of interest to the extent accrued at the Default Rate), plus, (ii) without duplication, (x) with respect to the portion of such prepayment constituting principal, all amounts paid in cash to the Lenders prior to the time of such prepayment, including in respect of interest, fees and Prepayment Premiums (but excluding any portion of interest to the extent accrued at the Default Rate), and (y) the aggregate Warrant Return received by the Lenders as of the time of such prepayment; provided that allocations of interest, fees, Prepayment Premiums or other applicable amounts will be pro-rated on the basis of the principal amount being prepaid relative to the aggregate original principal amount of Loans made hereunder as of the time of any applicable prepayment.

 

“Warrant Return” means $1,341,624.75.

 

	
(b)
	
The following definition is added to Section 1.01 of the Credit Agreement in appropriate alphabetical order:

 

“Annualized Internal Rate of Return” means an annual discount rate that results in a net present value equal to zero when such discount rate is applied to any Return, as calculated using the XIRR function in Microsoft Excel using a series of monthly cash flows and the corresponding dates associated with each cash flow; provided that the first value (representing the capital contribution (or equivalent) made by the Lenders) shall be a negative value.

 

ARTICLE II

CONDITIONS PRECEDENT

 

This Amendment shall become effective upon, and shall be subject to, the prior or simultaneous satisfaction of each of the following conditions in a manner reasonably satisfactory to the Lenders and the Administrative Agent (the date when all such conditions are so satisfied being the “Third Amendment Effective Date”):

 

SECTION 2.1. Counterparts. The Lenders and the Administrative Agent shall have received counterparts of this Amendment executed on behalf of the Borrower.

 

SECTION 2.2. Effective Date Certificate. The Lenders and the Administrative Agent shall have received a certificate, dated as of the date hereof and duly executed and delivered by a Responsible Officer of the Borrower certifying as to the matters set forth in Articles III and IV hereof, in form and substance reasonably satisfactory to the Administrative Agent.

 

SECTION 2.3. Costs and Expenses, etc. The Lenders and the Administrative Agent shall have received all fees, costs and expenses due and payable pursuant to Section 14.03 of the Credit Agreement (including without limitation the reasonable and documented fees and expenses of Morrison & Foerster LLP, counsel to the Lenders and the Administrative Agent), if then invoiced, together with any other fees separately agreed to by the Borrower and the Administrative Agent.

ny-1936167

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

To induce the Lenders and the Administrative Agent to enter into this Amendment, the Borrower represents and warrants to the Lenders and the Administrative Agent as set forth below.

 

SECTION 3.1. Representations and Warranties, etc. Immediately prior to, and immediately after giving effect to, this Amendment, the following statements shall be true and correct:

 

	
(a)
	
the representations and warranties set forth in each Loan Document (as defined in the Credit Agreement) shall, in each case, be true and correct in all material respects with the same effect as if then made (or in the case of any representation and warranty subject to a materiality qualifier, true and correct in all respects), unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date;

 

	
(b)
	
the Borrower has full power, authority and legal right to enter into this Amendment and perform its obligations under this Amendment and each Loan Document as amended hereby or thereby;

 

	
(c)
	
the transactions contemplated by this Amendment are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate and, if required, by all necessary shareholder action. This Amendment has been duly executed and delivered by the Borrower;

 

	
(d)
	
none of the transactions contemplated by this Amendment (i) requires any Governmental Approval of, registration or filing with, or any other action by, any Governmental Authority or any other Person, except for such as have been obtained or made and are in full force and effect, (ii) will violate (1) any applicable Law, the violation of which could reasonably be expected to result in a Material Adverse Effect, (2) any Organic Document of any Obligor or any of its Subsidiaries or (3) any order of any Governmental Authority the violation of which could reasonably be expected to result in a Material Adverse Effect, (iii) will violate or result in a default under any Contract binding upon any Obligor or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected (x) to result in a Material Adverse Effect or (y) solely in respect of any Material Agreement, to give rise to any rights thereunder to require any payments to be made by any such Person, any Obligor or any of their respective Subsidiaries and (iv) will result in the creation or imposition of any Lien (other than Permitted Liens) on any asset of any Obligor or any of its Subsidiaries; and

 

	
(e)
	
no Default or Event of Default shall have then occurred and be continuing.

 

ny-1936167

 

ARTICLE IV

CONFIRMATION

 

SECTION 4.1. Guarantees, Security Interest, Continued Effectiveness. The Borrower hereby consents to the modifications made to the Loan Documents pursuant to this Amendment and hereby agrees that, after giving effect to this Amendment, each Loan Document to which it is a party is and shall continue to be in full force and effect and the same are hereby ratified in all respects, except that upon the occurrence of the effectiveness of this Amendment, all references in such Loan Documents to the “Credit Agreement”, “Loan Documents”, “thereunder”, “thereof”, or words of similar import shall mean the Credit Agreement and the other Loan Documents, as amended or otherwise modified by this Amendment.

 

SECTION 4.2. Validity, etc. The Borrower hereby represents and warrants, as of the date hereof, that immediately after giving effect to this Amendment, each Loan Document, in each case as modified by this Amendment (where applicable and whether directly or indirectly), to which it is a party continues to be a legal, valid and binding obligation of such Obligor, enforceable against such Person in accordance with its terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law).

 

ARTICLE V

MISCELLANEOUS

 

SECTION 5.1. No Waiver. Except as expressly provided herein, (i) nothing contained herein shall be deemed to constitute a waiver of any other existing or future Default or Event of Default or compliance with any term or condition contained in the Credit Agreement or any of the other Loan Documents or constitute a course of conduct or dealing among the parties and (ii) the Lenders and the Administrative Agent reserve all rights, privileges and remedies under the Credit Agreement and the other Loan Documents.

 

SECTION 5.2. Cross-References. References in this Amendment to any Article or Section are, unless otherwise specified, to such Article or Section of this Amendment.

 

SECTION 5.3. Loan Document Pursuant to Credit Agreement. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with all of the terms and provisions of the Credit Agreement, as amended hereby.

 

SECTION 5.4. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

SECTION 5.5. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic transmission (in PDF format) shall be effective as delivery of a manually executed counterpart hereof.

 

ny-1936167

 

SECTION 5.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION; PROVIDED THAT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW SHALL APPLY.

 

SECTION 5.7. Full Force and Effect; Limited Amendment. Except as expressly  amended hereby, the Borrower agrees that all of the representations, warranties, terms, covenants, conditions and other provisions of the Credit Agreement and the other Loan Documents shall remain unchanged and shall continue to be, and shall remain, in full force and effect in accordance with their respective terms. The amendments and other waivers and modifications set forth in this Amendment shall be limited precisely as provided for herein to the provisions expressly amended herein or otherwise modified or waived hereby and shall not be deemed to be an amendment to, waiver of, consent to or modification of any other term or provision of the Credit Agreement or any other Loan Document or of any transaction or further or future action on the part of any Credit Party which would require the consent of the Lenders under the Credit Agreement or any of the Loan Documents.

 

[Signature pages to follow]

 

ny-1936167

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.

 

	
 
	
BORROWER:

	
 
	
 
	
 

	
 
	
VAPOTHERM, INC.

	
 
	
 
	
 

	
 
	
By:
	
/s/ John R. Landry

	
 
	
Title:
	
Vice President and Chief Financial Officer

 

 

ny-1936167

 

 

	
 
	
ADMINISTRATIVE AGENT:

	
 
	
 
	
 
	
 

	
 
	
PERCEPTIVE CREDIT HOLDINGS II, LP

	
 
	
 
	
 
	
 

	
 
	
By
	
Perceptive Credit Opportunities GP, LLC, its General Partner

	
 
	
 
	
 
	
 

	
 
	
By
	
/s/ Sandeep Dixit

	
 
	
 
	
Title:
	
Chief Credit Officer

	
 
	
 
	
 
	
 

	
 
	
By
	
/s/ Sam Chawla

	
 
	
 
	
Title:
	
Portfolio Manager

 

 

ny-1936167

 

 

	
 
	
LENDER:

	
 
	
 
	
 
	
 

	
 
	
PERCEPTIVE CREDIT HOLDINGS II, LP

	
 
	
 
	
 
	
 

	
 
	
By
	
Perceptive Credit Opportunities GP, LLC, its General Partner

	
 
	
 
	
 
	
 

	
 
	
By
	
/s/ Sandeep Dixit

	
 
	
 
	
Title:
	
Chief Credit Officer

	
 
	
 
	
 
	
 

	
 
	
By
	
/s/ Sam Chawla

	
 
	
 
	
Title:
	
Portfolio Manager

 

 

 

ny-1936167Exhibit 10.1

 

Certain portions of this exhibit
have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted
information is (i) not material and (ii) would likely cause competitive harm to
the Company if publicly disclosed. Information that has been omitted has been
noted in this document with a placeholder identified by the mark “[***]”.

 

CONFIDENTIAL                                                                                           EXECUTION VERSION 

 

 

 

 

 

AMENDED AND RESTATED

 

COMBINATION COINSURANCE AND MODIFIED
COINSURANCE AGREEMENT

 

by and between

 

AMERICAN GENERAL LIFE INSURANCE COMPANY

 

and

 

FORTITUDE REINSURANCE COMPANY, LTD.

 

Originally Effective January 1, 2017

 

 

 

 

 

TABLE OF
CONTENTS

 

Page

 

ARTICLE I

DEFINITIONS

	
  Section 1.1 

  	
  Definitions...............................................................................................................

  	
  1

  

ARTICLE II

BASIS OF REINSURANCE
AND BUSINESS REINSURED

	
  Section 2.1 

  	
  Reinsurance.............................................................................................................

  	
  13

  
	
  Section 2.2 

  	
  Existing Reinsurance.............................................................................................. 

  	
  15

  
	
  Section 2.3 

  	
  Insurance Contract  Changes................................................................................... 

  	
  16

  
	
  Section 2.4 

  	
  Follow the
  Fortunes; Follow the Settlements; Contested  Claims........................... 

  	
  17

  
	
  Section 2.5 

  	
  Non-Guaranteed Elements...................................................................................... 

  	
  20

  
	
  Section 2.6 

  	
  Misstatement
  of Age, Sex or Any Other Material
  Fact..........................................

  	
  21

  
	
  Section 2.7 

  	
  Programs
  of Internal  Replacement.......................................................................... 

  	
  22

  
	
  Section 2.8 

  	
  Actuarial
  Review....................................................................................................

  	
  22

  
	
  Section 2.9 

  	
  Other
  Restrictions...................................................................................................

  	
  23

  
	
  Section 2.10 

  	
  Reinsurer Net Retention..........................................................................................

  	
  23

  

ARTICLE III

INITIAL PAYMENTS;
SETTLEMENTS;

ADMINISTRATION;
REPORTING; BOOKS AND RECORDS 

	
  Section 3.1 

  	
  Initial Payments......................................................................................................

  	
  23

  
	
  Section 3.2 

  	
  Settlements..............................................................................................................

  	
  24

  
	
  Section 3.3 

  	
  Aggregate
  Expense Allowance, Investment Expenses and Surplus Participation Payments................................................................................................................. 

  	
  26

  
	
  Section 3.4 

  	
  Delayed Payments................................................................................................... 

  	
  26

  
	
  Section 3.5 

  	
  Offset.......................................................................................................................

  	
  27

  
	
  Section 3.6 

  	
  Administration........................................................................................................

  	
  27

  
	
  Section 3.7 

  	
  Certain Reports....................................................................................................... 

  	
  30

  
	
  Section 3.8 

  	
  Books and Records.................................................................................................

  	
  31

  

ARTICLE IV

MODCO ACCOUNT;
COLLATERAL TRUST

	
  Section 4.1 

  	
  ModCo Account; Investment  Guidelines................................................................ 

  	
  32

  
	
  Section 4.2 

  	
  Interest
  on Policy Loans.......................................................................................... 

  	
  39

  
	
  Section 4.3 

  	
  Credit for
  Reinsurance for Modified Coinsurance  Cession.................................... 

  	
  39

  
	
  Section 4.4 

  	
  Collateral Trust....................................................................................................... 

  	
  39

  

ARTICLE V

COINSURANCE CESSION

	
  Section 5.1 

  	
  Coinsurance Cessions  Generally............................................................................. 

  	
  40

  
	
  Section 5.2 

  	
  Security Required.................................................................................................... 

  	
  41

  
	
  Section 5.3 

  	
  Reinsurance Trust 
  Account..................................................................................... 

  	
  41

  

 

 

i

 

	
  Section 5.4 

  	
  Additional Withdrawals.......................................................................................... 

  	
  42

  
	
  Section 5.5 

  	
  General....................................................................................................................

  	
  42

  

ARTICLE VI

OVERSIGHTS; COOPERATION

	
  Section 6.1 

  	
  Oversights...............................................................................................................

  	
  43

  
	
  Section 6.2 

  	
  Cooperation.............................................................................................................

  	
  43

  

ARTICLE VII

TAX; GUARANTY FUND ASSESSMENTS

	
  Section 7.1 

  	
  DAC Tax
  Election...................................................................................................

  	
  43

  
	
  Section 7.2 

  	
  Federal Excise 
  Tax.................................................................................................. 

  	
  44

  
	
  Section 7.3 

  	
  FATCA...................................................................................................................

  	
  44

  
	
  Section 7.4 

  	
  Premium Tax........................................................................................................... 

  	
  44

  
	
  Section 7.5 

  	
  Guaranty Fund Assessments...................................................................................

  	
  44

  
	
  Section 7.6 

  	
  BEAT Tax............................................................................................................... 

  	
  45

  
	
  Section 7.7 

  	
  Indemnification.......................................................................................................

  	
  45

  
	
  Section 7.8 

  	
  Return of  Premium.................................................................................................. 

  	
  45

  

ARTICLE VIII

INSOLVENCY

	
  Section 8.1 

  	
  Insolvency of the Ceding  Company........................................................................ 

  	
  45

  

ARTICLE IX

DURATION; SURVIVAL;
RECAPTURE; TERMINAL SETTLEMENT

	
  Section 9.1 

  	
  Certain Definitions..................................................................................................

  	
  46

  
	
  Section 9.2 

  	
  Duration..................................................................................................................

  	
  48

  
	
  Section 9.3 

  	
  Survival...................................................................................................................

  	
  48

  
	
  Section 9.4 

  	
  Recapture................................................................................................................

  	
  48

  
	
  Section 9.5 

  	
  Terminal Settlement................................................................................................ 

  	
  49

  

ARTICLE X

MISCELLANEOUS

	
  Section 10.1 

  	
  Notices....................................................................................................................

  	
  51

  
	
  Section 10.2 

  	
  Entire
  Agreement, Interpretation............................................................................

  	
  52

  
	
  Section 10.3 

  	
  Arbitration...............................................................................................................

  	
  53

  
	
  Section 10.4 

  	
  Governing Law....................................................................................................... 

  	
  54

  
	
  Section 10.5 

  	
  No Third
  Party Beneficiaries.................................................................................. 

  	
  54

  
	
  Section 10.6 

  	
  Expenses.................................................................................................................

  	
  54

  
	
  Section 10.7 

  	
  Mode of Execution;  Counterparts........................................................................... 

  	
  54

  
	
  Section 10.8 

  	
  Severability.............................................................................................................

  	
  54

  
	
  Section 10.9 

  	
  Waiver of Jury 
  Trial................................................................................................ 

  	
  54

  
	
  Section 10.10 

  	
  Treatment
  of Confidential  Information................................................................... 

  	
  55

  
	
  Section 10.11 

  	
  Treatment
  of Personal  Information......................................................................... 

  	
  56

  
	
  Section 10.12 

  	
  Assignment.............................................................................................................

  	
  57

  
	
  Section 10.13 

  	
  Waivers
  and Amendments......................................................................................

  	
  57

  

 

 

ii

 

	
  Section 10.14 

  	
  Service of Suit......................................................................................................... 

  	
  57

  
	
  Section 10.15 

  	
  OFAC Compliance.................................................................................................. 

  	
  58

  
	
  Section 10.16 

  	
  Incontestability........................................................................................................

  	
  59

  

SCHEDULES

 

Schedule 1.1 – Expense Allowance

Schedule 1.2 – Reinsured Portfolios

Schedule 1.3 – Non-Transitioned TPAs

Schedule 2.2 – Rate Increase Disputes

Schedule 2.4 – Contests and Disputes

EXHIBITS

 

Exhibit A – Data and other Reporting Requirements

Exhibit A-1 – Reserve Calculation Dataset

Exhibit A-2 – Covered Insurance Policies Data

Exhibit A-3 – Cash Flow Testing Service Specifications

Exhibit A-4 – Loss Recognition Testing Service
Specifications

Exhibit B – Settlement Statement

Exhibit C – Investment Guidelines

Exhibit D – Form of Collateral Trust Agreement

Exhibit E – Valuation Methodology Memorandum

Exhibit F – Par Dividend Surplus Tally Spreadsheet
Memorandum

APPENDICES

Appendix A – Administrative Appendix

 

iii

 

AMENDED AND
RESTATED

 

COMBINATION COINSURANCE AND MODIFIED
COINSURANCE AGREEMENT

 

THIS AMENDED AND RESTATED
COMBINATION COINSURANCE AND MODIFIED COINSURANCE AGREEMENT (this “Agreement”)
is effective as of 12:00:01 a.m. Eastern Time on June 1, 2020 (the “Amendment
Date”) by and between AMERICAN GENERAL LIFE INSURANCE COMPANY, a
Texas-domiciled life insurance company (the “Ceding Company”), and
FORTITUDE REINSURANCE COMPANY, LTD., a Bermuda-domiciled reinsurance company
(the “Reinsurer”), which has been executed and delivered by the Parties
hereto on this 2nd day of June 2020. For purposes of this Agreement,
the Ceding Company and the Reinsurer shall each be deemed a “Party” and
together, the “Parties”. 

 

WHEREAS, on February 12, 2018 (the
“Closing Date”), the Parties entered into a COMBINATION COINSURANCE AND
MODIFIED COINSURANCE AGREEMENT, effective as of the Effective Time (as
hereinafter defined) (the “Original Coinsurance Agreement”), pursuant to
which the Ceding Company cedes to the Reinsurer, and the Reinsurer reinsures,
on a modified coinsurance basis, on the terms and conditions set forth therein,
certain risks arising in respect of the Covered Insurance Policies (as
hereinafter defined); 

 

WHEREAS, pursuant to this
Agreement, the Parties wish to amend and restate the Original Coinsurance
Agreement in its entirety; and 

 

WHEREAS, the Ceding Company and the
Reinsurer intend that the Ceding Company will continue to provide, or cause to
be provided, administrative services for the Covered Insurance Policies in
accordance with the terms of this Agreement.

 

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 Ceding Company and the Reinsurer agree as follows:

 

ARTICLE I

DEFINITIONS

 

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

 

“2019 Purchase Agreement”
means the Membership Interest Purchase Agreement, dated as of November 25,
2019, by and among American International Group, Inc., Fortitude Group
Holdings, LLC, Carlyle FRL, L.P., T&D United Capital Co., Ltd., The Carlyle
Group L.P., solely with respect to Sections 4.05, 5.20 and 7.02 and Article X
therein, and T&D Holdings, Inc., solely with respect to Article IX and
Article X therein.

 

“953(d) Election” means the
election made by the Reinsurer on or around July 15, 2019 with respect to its
taxable year beginning January 1, 2018 to be treated as a domestic corporation
pursuant to Section 953(d) of the Code.

 

“Acceptable Rating” has the meaning set forth in Section
2.9(a). 

 

“Accounting Period” means
each calendar quarter during the term of this Agreement or any fraction thereof
ending on the earlier of the Recapture Effective Date or the date this
Agreement is

 

 1 

 

otherwise terminated in
accordance with Section 9.2, as applicable. However, the initial
Accounting Period shall commence on the Effective Time and end on the last day
of the calendar quarter in which the Closing Date falls.

 

“Action” has the meaning set forth in Appendix A. 

 

“Administered Policies” has the meaning set forth in
the FLAS Administrative Services Agreement or any replacement thereof.

 

“Administrative Appendix” has the meaning set forth
in Section 3.6(c). 

 

“Administrative Services” has the meaning set forth
in Section 3.6(c). 

 

“Administrative Services Agreement” has the meaning
set forth in Section 3.6(e). 

 

“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; provided, however, for
purposes of this Agreement, “Affiliate” shall not include (i) the Ceding
Company or any of the Ceding Company’s Affiliates (excluding Fortitude Group
Holdings LLC or any of its direct or indirect Subsidiaries, including the
Reinsurer) when applied to the Reinsurer or Fortitude Group Holdings LLC or any
of its direct or indirect Subsidiaries or (ii) Fortitude Group Holdings LLC or
any of its direct or indirect Subsidiaries, including the Reinsurer, when
applied to the Ceding Company or any of the Ceding Company’s Affiliates.

 

“Aggregate Expense Allowance” has the meaning set
forth in Section 3.2(a)(v). 

 

“Agreement” has the meaning set forth in the
preamble.

 

“Alternative Rate” has the meaning set forth in Section
3.4. 

 

“Amendment Date” has the meaning set forth in the
preamble.

 

“Annual Cession Interest Rate”
means the annual yield rate, on the date of determination, of actively traded
U.S. Treasury securities having a remaining time to maturity of three (3)
months, as such rate is published under “Treasury Constant Maturities” in
Federal Reserve Statistical Release H.15(519).

 

“Applicable Law” means
any U.S. domestic or foreign, federal, provincial, state or local statute, law,
ordinance or code, or any written rules, regulations or administrative or
judicial interpretations or policies issued or imposed by any Governmental
Authority pursuant to any of the foregoing, any binding settlement with one or
more Governmental Authorities applicable to some or all of the Covered
Insurance Policies and any order, writ, injunction, directive, judgment or
decree of a court of competent jurisdiction, or arbitral award, in each case,
applicable to the Parties or the subject matter hereof.

 

“Applicable Insurance Regulations” has the meaning
set forth in the Investment Guidelines.

 

“Applicable Privacy and Security
Laws” means all Applicable Laws pertaining to the security,
confidentiality, protection or privacy of the Confidential Information
(including personal and health data) and Information Systems.

 

“ARIAS • U.S. Rules” has the meaning set forth in Section
10.3(a). 

 

“ARIAS • U.S. Streamlined Rules” has the meaning set
forth in Section 10.3(b). 

 

 2 

 

“Authorized Investments” has the meaning set forth
in Section 5.2(a). 

 

“Available Statutory Economic
Capital and Surplus” has the meaning ascribed thereto by or under the
Insurance Act. 

 

“Books and Records” means
originals or copies of all records and all other data and information, whether
created before or after the Effective Time, and in whatever form maintained, in
the possession or control of the Ceding Company or its Affiliates or
Subcontractors and relating to the Reinsured Liabilities,  including  (i)
administrative  records,  (ii) claim  records,  (iii) policy  files,  (iv)
sales records, (v) files  and  records  relating 
to  Applicable  Law,  (vi)  reinsurance  records,  (vii)  underwriting  records  and (viii)
accounting records, but excluding any (a) Tax Returns and Tax records and all
other data and information  with  respect  to  Tax,  (b) files,  records, 
data  and  information  with  respect  to employees,
records, data and information with respect to any employee benefit plan, (d)
any materials prepared for the boards of directors of the Ceding Company or any
of its Affiliates, (e) any materials (including, for the avoidance of doubt,
any records or data referred to in clauses (i) through (viii) of this
definition) that do not reasonably relate to the Reinsured Liabilities ceded
hereunder and/or the Ceding Company’s performance hereunder, and (f) any
materials that are privileged and/or confidential. 

 

“[***]” has the meaning set forth in Section  2.9(e)(i)b.. 

 

“[***]” has the meaning set forth in Section  2.9(e)(i)d.. 

 

“Business Day” shall mean
any day other than (a) a Saturday or Sunday, (b) a day on which banking
institutions in Bermuda or in Houston, Texas are permitted or obligated by
Applicable Law to be closed or (c) a day on which the New York Stock Exchange
or the U.S. government bond market is closed for trading. 

 

“Capital Markets Services
Agreement” means a services agreement between the Ceding Company and an
Affiliate of the Ceding Company pursuant to which such Affiliate provides
derivatives services or similar services, which may include, derivatives
execution services, short-term cash investment and reverse repurchase and
securities lending transaction services, repurchase transaction services,
borrowing services, collateral management services and operational support services. 

 

“Carlyle” has the meaning set forth in Section
9.1(d). 

 

“Ceding Company” has the meaning set forth in the
preamble.

 

“Ceding Company Extra-Contractual
Obligations” means (a) all Extra-Contractual Obligations to the extent
arising out of, resulting from or relating to any act, error or omission before
the Closing Date, whether or not intentional, negligent, in bad faith or
otherwise, by the Ceding Company, any of its Affiliates, any Subcontractors or
any other service provider engaged or compensated by the Ceding Company or any
of its Affiliates or otherwise; (b) all Extra-Contractual Obligations to the
extent arising out of the gross negligence or willful misconduct of the Ceding
Company, any of its Affiliates, any Subcontractor or any other service provider
engaged or compensated by the Ceding Company or any of its Affiliates or
otherwise (other than Reinsurer Appointed Administrators), on or after the
Closing Date but prior to the Amendment Date; (c) all Extra-Contractual
Obligations to the extent arising out of, resulting from or relating to any
act, error or omission on or after the Amendment Date, whether or not
intentional, negligent, in bad faith or otherwise, by the Ceding Company, any
of its Affiliates, any Subcontractor or any other service provider engaged or
compensated by the Ceding Company or any of its Affiliates or otherwise (other
than Reinsurer Appointed Administrators), other than any  liability arising
from any act, error or omission of the Ceding Company, any of its Affiliates,
any Subcontractor or 

 

 3 

 

such other service provider made
in the ordinary course of administering the Covered Insurance Policies; and (d)
on or after the Amendment Date, Extra-Contractual Obligations arising out of or
resulting from the Ceding Company’s Contest of a claim for benefits under a
Self-Administered Policy in the circumstances described in Section
2.4(c)(iii); provided, however, that any Extra-Contractual
Obligations arising out of, resulting from or relating to any act, error or
omission undertaken by, or at the request of, or with the prior written consent
or ratification of, the Reinsurer, any of its Affiliates or any Reinsurer
Appointed Administrator shall not constitute a “Ceding Company
Extra-Contractual Obligation” and shall be deemed a Reinsurer Extra-Contractual Obligation. 

 

“Change of Control” has the meaning set forth in Section
9.1(c). 

 

“Closing Date” has the meaning set forth in the recitals.

 

“Code” means the U.S. Internal Revenue Code of 1986,
as amended.

 

“Coinsured Liabilities”
means the Quota Share of Reinsured Liabilities and IMR to the extent ceded to
the Reinsurer hereunder on a coinsurance basis.

 

“Collateral Trust Account” has the meaning set forth
in Section 4.4(a). 

 

“Collateral Trust Agreement” has the meaning set
forth in Section 4.4(a). 

 

“Collateral Trust Authorized
Investments” means Authorized Investments that, other than in the case of
cash and certificates of deposit, are publicly traded securities and have an
NAIC SVO designation of 1 or 2.

 

“Collateral Trust Required
Balance” means 102% multiplied by the Risk Margin Amount as of the
end of the applicable Accounting Period. 

 

“Collateral Value” has the meaning set forth in Section
5.2(b). 

 

“Confidential Information” means:

 

(a) With respect to confidentiality obligations imposed on
the Reinsurer and its Affiliates and Representatives hereunder, all documents,
materials and information concerning the Ceding Company and any of its
Affiliates, including any derivative works thereof, as well as Personal
Information, that are furnished to the Reinsurer or its Affiliates or
Representatives by the Ceding Company or its Affiliates or Representatives in
connection with this Agreement or the transactions contemplated hereunder. 

 

(b) With respect to confidentiality obligations imposed on
the Ceding Company and its Affiliates and Representatives hereunder, all documents,
materials and information concerning the Reinsurer and any of its Affiliates,
including any derivative works thereof, that are furnished to the Ceding
Company or its Affiliates or Representatives by the Reinsurer in connection
with this Agreement or the transactions contemplated hereunder, but excluding
(i) any information furnished to the Reinsurer or its Affiliates or
Representatives by the Ceding Company or its Affiliates or Representatives as
described in clause (a) of this definition, including derivative works thereof,
(ii) any information furnished to the Ceding Company or its Affiliates or
Representatives under any Administrative Services Agreement to which it is
party, and (iii) any information furnished by the Reinsurer or its Affiliates
or Representatives to the Ceding Company or  its  Affiliates  or  Representatives  for  the  express 
purpose  of  the  Ceding  Company’s 

 

 4 

 

disclosure to a Governmental
Authority pursuant to a statutory or regulatory obligation or request,
including, by way of example, calculations provided for the Ceding Company’s
financial statement reporting; provided, that, in each case of clause
(iii), all derivative works, workpapers, memoranda and other documentation
developed therefrom or prepared in connection therewith by the Reinsurer or its
Affiliates or Representatives shall be protected as “Confidential Information”
of the Reinsurer and the Reinsurer shall assert its confidentiality interest to
prevent or oppose disclosures by the recipient Governmental Authority to the
public or other third parties (unless such disclosure is required by and made
consistent with Applicable Law).

 

However, Confidential Information does not include information
which: (x) at the time of disclosure or thereafter is ascertainable or
generally available to and known by the public other than by way of a
disclosure by the receiving Party or by any Representative or Affiliate of the
receiving Party in breach of this Agreement or any other obligation of
confidentiality attaching thereto; (y) was in the possession of,  or becomes
available to, the other Party or its Representatives or Affiliates on a
non-confidential basis, directly or indirectly, from a source other than the
disclosing Party to whom the Confidential Information pertained or its
Representatives or Affiliates in breach of this Agreement or any other
obligation of confidentiality attaching thereto; provided, that such
source is not, and was not, known to the receiving Party or its Representatives
or Affiliates after reasonable inquiry to be prohibited from transmitting the
information by a contractual, legal, fiduciary, or other obligation of
confidentiality by the party to whom the Confidential Information pertained; or
(z) was independently developed by the receiving Party or any of its
Representatives or Affiliates without violating any obligations under this
Agreement and without the use of, reference to, or reliance upon any other
Confidential Information or any derivative thereof. 

 

“Consultation Claims” has the meaning set forth in Section
2.4(b). 

 

“Contest” has the meaning set forth in Section
2.4(c). 

 

“Contested Claim” has the meaning set forth in Section
2.4(c). 

 

“Control” means the
possession, directly or indirectly, of the power to direct the management and
policies of a Person through the ownership of securities, by contract or
otherwise and the terms “Controlling” and “Controlled” have
meanings correlative to the foregoing.

 

“Covered Insurance Policies”
means, with respect to any Reinsured Portfolio, (a) the policies listed in the
electronic file specified in Schedule 1.2 with respect to such Reinsured
Portfolio, as such electronic file may be updated from time to time in
accordance with Schedule 1.2, (b) any such policy that is terminated and
then subsequently issued as a reinstatement of a Covered Insurance Policy in
accordance with Section 2.1(b), (c) any such policy that is issued as an
exchange, replacement or conversion of a Covered Insurance Policy in accordance
with Section 2.1(c), (d) any policy that is issued as a conversion of a
Covered Insurance Policy in accordance with Section 2.1(g), or (e) any
policy issued as a Supplemental Contract in accordance with Section 2.1(e)
or (f), in the case of each of (b) and (c), after the Effective Time and
in each case of (d) and (e), after the Amendment Date. 

 

“Deemed Paid” with respect
to an item at a given time, means that liability on the item has been
discharged as of such time, whether by payment, by offset, or otherwise. For
the avoidance of doubt, the amount of the liability that is Deemed Paid is
measured by the amount of the consideration given for discharging the
liability, not by the carrying value of the liability prior to discharge. 

 

“[***]” has the meaning set forth in Section
2.9(e)(i)a.. 

 

“Derivative Margin Amount” has the meaning set forth
in the Investment Guidelines.

 

 5 

 

“Derivative Margin Requirement” has the meaning set
forth in the Investment Guidelines.

 

“Determination Date” has the meaning set forth in Section
3.4. 

 

“Disputed Assets” has the meaning set forth in Section
4.1(f)(ii). 

 

“[***]” has the meaning set forth in Section
2.9(b). 

 

“Dollars” or “$” refers to United States
dollars.

 

“ECR Ratio” has the meaning set forth in Section
3.7(b). 

 

“ECR Reporting Deadline” has the meaning set forth
in Section 3.7(b). 

 

“Effective Time” means 12:01 a.m. Eastern Time on
January 1, 2017.

 

“Embedded Value Payment” has the meaning set forth
in Section 9.5(a). 

 

“Enhanced Capital Requirement” has the meaning set
forth in Section 9.1(b). 

 

“Ex Gratia Payments” means a
payment that is both (a) outside the terms and conditions of the applicable
Covered Insurance Policy and (b) made by or on behalf of the Ceding Company,
not as a good faith settlement, adjustment, or compromise of a dispute over
coverage or the amount of a claim or loss, but, rather, as a business
accommodation to the beneficiary.

 

“Exchange Program” has the meaning set forth in Section
2.7(a). 

 

“Excluded NGE Change” has the meaning set forth in Section
2.5(a). 

 

“Excluded Policy Changes” has the meaning set forth
in Section 2.3(a). 

 

“Exigent Circumstances” has the meaning set forth in
Section 2.3(a). 

 

“Existing Practice” has the meaning set forth in Section
3.6(a). 

 

“Existing Reinsurance Agreements”
means (a) all agreements, treaties, slips, binders, cover notes and other
similar arrangements under which the Ceding Company has ceded to reinsurers
(including those Affiliated with the Ceding Company as of the Closing Date)
risks arising in respect of the Covered Insurance Policies where such
agreements are (i) in-force or are treated as being in-force as of the Closing
Date, (ii) terminated but under which there remains any outstanding Liability,
whether known or unknown as of the Closing Date, from the reinsurer, or (iii)
entered into following the Closing Date with the consent of the Reinsurer, and
(b) any agreement, treaty, slip, binder, cover note or other similar arrangement
entered into by the Ceding Company to replace any of such arrangements
following any termination or recapture thereof, as all such arrangements may be
in-force from time to time and at any time.

 

“Extra-Contractual Obligations”
means all Liabilities not arising under the express terms and conditions of, or
in excess of the applicable policy limits of, the Covered Insurance Policies,
including Liabilities for fines, penalties, Taxes, fees, forfeitures,
compensatory, punitive, exemplary, special, treble, bad faith, tort or any
other form of extra-contractual damages, and legal fees and expenses relating
thereto, which Liabilities arise from any actual or alleged act, error or
omission in connection with (a) the form, sale,  marketing,  distribution,  underwriting,  production,  issuance,  cancellation  or  administration  of 

 

 6 

 

the Covered Insurance Policies,
(b) the investigation, defense, trial, settlement or handling of claims,
benefits, dividends or payments under the Covered Insurance Policies, (c) the
failure to pay or the delay  in payment or errors in calculating or
administering the payment of benefits, claims, dividends or any other amounts 
due  or  alleged  to  be  due  under  or  in  connection  with  the  Covered 
Insurance  Policies, escheat
or unclaimed property Liabilities arising under or relating to the Covered
Insurance Policies or the failure of
the Covered Insurance Policies to qualify for their intended Tax status.
Interest required under the terms of the applicable Covered Insurance Policy or
by Applicable Law (whether payable to a beneficiary or escheated) will
constitute Extra-Contractual Obligations only to the extent such interest is
incurred as a result of a failure of the Ceding Company, any Subcontractor or
Reinsurer Appointed Administrator to act in accordance with Applicable Law and
shall otherwise be deemed a Reinsured Liability pursuant to clause (x) or (y)
of the definition of “Reinsured Liability”. 

 

“Fair Market Value” means
the value at which the Ceding Company and the Reinsurer agree to transfer an
asset, reflecting the price at which a buyer and seller who are knowledgeable,
self-interested and not forced would transfer an asset at an arms-length basis.
For the avoidance of doubt, quoted market prices for publicly traded securities
are to be utilized where available. However, to the extent “Fair Market Value”
is being utilized in the context of valuing Reinsurance Trust Account
Authorized Investments or Collateral Trust Authorized Investments, “Fair Market
Value” shall be as defined in the applicable agreement(s) governing such
Reinsurance Trust Account(s) or Collateral Trust Account(s), as applicable.

 

“FATCA” has the meaning set forth in Section 7.3. 

 

“Federal Excise Tax” has the meaning set forth in Section
7.2. 

 

“FLAS” means Fortitude Life & Annuity Solutions,
Inc.

 

“FLAS Administrative Services
Agreement” means any Administrative Services Agreement between the Ceding
Company, the Reinsurer and FLAS, dated on or after the Amendment Date.

 

“GAAP Carrying Value” means,
with respect to any ModCo Asset, as of the relevant date of determination, the
value thereof on the US GAAP balance sheet of the Ceding Company determined in
accordance with US GAAP as of such date, including any investment income due
and accrued thereon.

 

“Governmental Authority”
means any court, administrative or regulatory agency or commission, or other
foreign, federal, provincial, state or local governmental or self-regulatory
authority, instrumentality or body having jurisdiction over any Party.

 

“Guaranty Fund Assessments” has the meaning set
forth in Section  7.5. 

 

“IMR” means the interest maintenance reserve
(whether positive or negative) determined in accordance with SAP attributable
from time to time to the Reinsured Liabilities. 

 

“Independent Actuary” has the meaning set forth in Section
9.5(d). 

 

“Independent Valuation Expert” has the meaning set
forth in Section 9.5(d). 

 

“Information Systems” means
any computer, computer network, computer application, imaging device, storage
device or media, mobile computing device, or any other information technology
that contains Confidential Information.

 

 7 

 

“Initial
Purchase Agreement” means the Membership Interest Purchase Agreement by and
among American International Group, Inc., Fortitude Group Holdings, LLC and TC
Group Cayman Investment Holdings, L.P, dated as of July 31, 2018 (as amended by
Amendment No. 1 to Membership Interest Purchase Agreement, dated as of November
13, 2018, and Amendment No. 2 to Membership Interest Purchase Agreement, dated
as of November 25, 2019).

 

“Initial ModCo Deposit” has the meaning set forth in
Section 3.1(a). 

 

“Insurance Act” has the meaning set forth in Section
9.1(b). 

 

“Interest Earned on Policy Loans” has the meaning
set forth in Section 3.2(a)(iii). 

 

“Interest Rate” has the meaning set forth in Section
3.4. 

 

“Interim Required Collateral Balance” has the
meaning set forth in Section 4.1(i). 

 

“Interim Return Collateral Balance” has the meaning
set forth in Section 4.1(i). 

 

“Internal Capital Model” has the meaning set forth
in Section 9.1(b). 

 

“Investment Expenses” has the meaning set forth in Section
3.2(a)(vi). 

 

“Investment Guidelines” has the meaning set forth in
Section 4.1(d). 

 

“Investment Manager” has the meaning set forth in Section
4.1(d). 

 

“Legally Required Ceding Company
Actions” means actions related to the Administered Policies, the
Administrative Services or the Retained Services that the Ceding Company is
required by Applicable Law or Governmental Authorities to take without any
administrator or a subcontractor acting on its behalf.

 

“Letter of Credit” has the meaning set forth in Section
5.2(a). 

 

“Liabilities” means any and
all debts, liabilities, commitments or obligations, whether direct or indirect,
accrued or fixed, known or unknown, absolute or contingent, matured or
unmatured or determined or determinable, whether arising in the past, present
or future.

 

“LIBOR” has the meaning set forth in Section 3.4. 

 

“Long-Term Business Account”
means the accounts of the Reinsurer in respect of insurance business that
constitutes “long-term business” within the meaning of the Insurance Act.

 

“Long-Term Business Account
Diversification Benefit” means, as of any date of determination, the amount
of the Overall Diversification Benefit calculated and allocated by the
Reinsurer to its Long- Term Business Account in a consistent manner in
accordance with the Reinsurer’s internal risk management policies and practices
and as reported to the Reinsurer’s Board of Directors and the Bermuda Monetary
Authority.

 

“[***]” has the meaning set forth in Section
2.9(e)(i). 

 

 8 

 

“Margin Collateral Value” means:

 

(a)  With respect to cash, the amount
thereof; and 

 

(b)  With respect to other ModCo Assets,
the sum of (i) either (x) the closing bid prices for the applicable ModCo Asset
quoted on the relevant date which appears on the display of Bloomberg Financial
Markets Commodities News (or its successor) published by Bloomberg L.P. or such
other financial information provider reasonably chosen by the Ceding Company;
or (y) if the value for the applicable ModCo Asset does not so appear, the arithmetic
mean of the closing bid prices quoted on the relevant date (or, if none are
available on that date, as of the next preceding date) of three recognized
principal market makers for such assets chosen by the Ceding Company; and (ii)
the accrued interest on such ModCo Assets if not reflected in such closing bid prices. 

 

“Material Ceding Company Administration Breach” has
the meaning set forth in Section 3.6(i). 

 

“ModCo Account” has the meaning set forth in Section
4.1(a). 

 

“ModCo Account Investment Income” has the meaning
set forth in Section 4.1(j). 

 

“ModCo Assets” means (a) the
cash and investment assets that are specifically and separately allocated to
the ModCo Account in respect of this Agreement, (b) Policy Loans under the
Covered Insurance Policies, and (c) without duplication, any receivables
related to cash or other investment assets posted under permitted derivatives
or Short Terms Borrowing Transactions in the ModCo Account where such cash or
other investment assets would otherwise no longer be recognized as a ModCo
Asset.

 

“ModCo Reinsurance Agreements”
means this Agreement, the USL Reinsurance Agreement and the VALIC Reinsurance
Agreement.

 

“ModCo Reserves” has the meaning set forth in Section
4.1(k). 

 

“NGE Change Notice” has the meaning set forth in Section
2.5(a). 

 

“NGE MAE” has the meaning set forth in Section
2.5(b). 

 

“Non-Guaranteed Element” has the meaning set forth
in Section 2.5(a). 

 

“Non-Transitioned TPAs”
means any third party administrator providing administrative services in
respect of the Covered Insurance Policies which Ceding Company and
Administrator have expressly agreed will continue to be overseen by Ceding
Company; the Non-Transitioned TPAs as of the Amendment Date are set forth on Schedule
1.3. 

 

“Objection Notice” has the meaning set forth in Section
4.1(f)(i). 

 

“Original Coinsurance Agreement” has the meaning set
forth in the recitals.

 

“Overall Diversification Benefit”
means as of any date of determination, the amount of the diversification benefit
calculated by the Reinsurer under the Bermuda Solvency Capital Requirement
(BSCR) rule, in aggregate, in a consistent manner in accordance with the
Reinsurer’s internal risk management policies and practices and as reported to
the Reinsurer’s Board of Directors and the Bermuda Monetary Authority.

 

“Parent” means American International Group, Inc., a
Delaware corporation.

 

 9 

 

“[***]” has the meaning set forth in Section
2.9(e)(i)c.. 

 

“Party” or “Parties” has the meaning set
forth in the preamble. 

 

“Permitted Assets” has the meaning set forth in Section  4.1(d). 

 

“Person” means any natural
person, 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.

 

“Personal Information” means
any financial or personal information provided by or on behalf of one Party to
the other Party in connection with the business reinsured hereunder that
identifies, relates to, describes, is capable of being associated with, or
could reasonably be linked to an individual, including name, street or mailing
address, electronic mail address, telephone or other contact information,
employer, social security or Tax identification number, date of birth, driver’s
license number, state identification card number, financial account, credit or
debit card number, health and medical information or photograph or
documentation of identity or residency (whether independently disclosed or
contained in any disclosed document), the fact that the individual has a
relationship with such Party or one or more of its Affiliates, and any other
information protected by any Applicable Privacy and Security Laws. 

 

“Policy Loans” means loans under the applicable
Covered Insurance Policies.

 

“Premium Tax” has the meaning set forth in Section
7.4. 

 

“Premiums” has the meaning set forth in Section
3.2(a)(ii). 

 

“Proposed Practice” has the meaning set forth in Section
3.6(a). 

 

“Quarterly Net Settlement Amount” has the meaning
set forth in Section 3.2(a). 

 

“Quota Share” means 100%.

 

“Recapture Effective Date” has the meaning set forth
in Section 9.4(a). 

 

“Recapture Penalty” has the meaning set forth in Section
9.5(a). 

 

“Recapture Triggering Event” has the meaning set
forth in Section 9.1(a). 

 

“Reinsurance Trust Account” has the meaning set
forth in Section 5.2(a). 

 

“Reinsurance Trust Account Required Balance” has the
meaning set forth in Section 5.3(a). 

 

“Reinsurance Trust Account Statement” has the
meaning set forth in Section 5.3(a). 

 

“Reinsured Liabilities” has the meaning set forth in
Section 3.2(a)(i). 

 

“Reinsured Portfolio” means each of the portfolios
listed on Schedule 1.2. 

 

“Reinsurer” has the meaning set forth in the
preamble.

 

“Reinsurer Appointed Administrator” has the meaning
set forth in Section 3.6(e). 

 

 10 

 

“Reinsurer Extra-Contractual
Obligations” means all Extra-Contractual Obligations other than any Ceding
Company Extra-Contractual Obligations. 

 

“Replacement Program” has the meaning set forth in Section
2.7(a). 

 

“Representative” means, with respect to any Person,
such Person’s consultants, attorneys, actuaries, auditors, reinsurers and
retrocessionaires.

 

“Required Balance” has the meaning set forth in Section
5.2(b). 

 

“[***]” has the meaning set forth in Section
2.9(c). 

 

“Restricted Purchaser” has the meaning set forth in Section
9.1(d). 

 

“Retained Services” has the meaning set forth in Section
3.6(b). 

 

“Risk Margin Amount” means
the aggregate of the Statutory Book Value of the Risk Assets (as defined in the
Investment Guidelines) and the Statutory Book Value of the Commercial Mortgage
Loans with a mortgage factor used for calculating the Ceding Company’s
risk-based capital requirement of CM3 or below, in each case, in the ModCo
Account multiplied by the Risk Margin Factor(s) applicable to such Risk
Assets.

 

“Risk Margin Factor” means
(i) for Below Investment Grade Obligations and Commercial Mortgage Loans with a
mortgage factor used for calculating the Ceding Company’s risk-based capital
requirement of CM3 or below, [***]%, and (ii) for Equity
Securities, Real Estate Equity or Other Investments (each as defined in the
Investment Guidelines), [***]%. 

 

“Sanctions Laws” has the meaning set forth in Section
10.15(a). 

 

“SAP” means, as to the
Ceding Company, the statutory accounting principles prescribed or permitted by
the Governmental Authority responsible for the regulation of insurance
companies in the jurisdiction in which the Ceding Company is domiciled (unless
otherwise specified).

 

“Self-Administered Policies”
means, (i) if the FLAS Administrative Services Agreement or any replacement
thereof is in effect, the meaning given to such term in such agreement and (ii)
if no Administrative Services Agreement is in effect, the Covered Insurance
Policies.

 

“Settlement Statement” has the meaning set forth in Section
3.2(a). 

 

“Short Term Borrowing Collateral Amount” has the
meaning set forth in the Investment Guidelines.

 

“Short Term Borrowing Collateral Requirement” has
the meaning set forth in the Investment Guidelines.

 

“Short Term Borrowing Transactions” has the meaning
set forth in the Investment Guidelines.

 

“[***]” has the meaning set forth in Section
2.9(e)(i)b.. 

 

“Significant Impairment” has the meaning set forth
in Section 4.1(f)(i). 

 

 11 

 

“Statutory
Book Value” means, with respect to any ModCo Asset, as of the relevant date
of determination, the carrying value thereof on the books of the Ceding Company
determined in accordance with SAP as of such date, including any investment
income due and accrued thereon, as such amount is adjusted in accordance with Section
4.1(f). 

 

“Statutory Financial Statements”
means, with respect to any Party, the annual and quarterly statutory financial
statements of such Party filed with the Governmental Authority charged with
supervision of insurance companies in the jurisdiction of domicile of such
Party to the extent such Party is required by Applicable Law to prepare and
file such financial statements.

 

“Statutory Reserves” means,
as of any date of determination, the statutory reserves required to be held by
the Ceding Company with respect to the Covered Insurance Policies, as reported
in Exhibits 5, 6 and 7 of its Statutory Financial Statements as of such date
determined (a) in accordance with the methodologies used by the Ceding Company
to calculate such amounts for purposes of its Statutory Financial Statements
prepared in accordance with SAP, and (b) after giving effect to the credit for
reinsurance taken by the Ceding Company in respect of the Covered Insurance
Policies for Existing Reinsurance Agreements as of such date of determination.

 

“Subcontractor” has the meaning set forth in Appendix
A. 

 

“Subsidiary” has the meaning set forth in Section
9.1(d). 

 

“Supplemental Contract” has the meaning set forth in
Section 2.1(e). 

 

“Surplus Participation Payments” has the meaning set
forth in Section 3.2(a)(viii). 

 

“Tax” (or “Taxes” as
the context may require) means any tax, however denominated, imposed by any
federal, state, local, municipal, territorial or provincial government or any
agency or political subdivision of any such government or agency charged with
the collection, assessment, determination or administration of such tax for
such government or subdivision (a “Taxing Authority”), including any net
income, alternative or add-on minimum tax, gross income, gross receipts,
Premium, sales, use, gains, goods and services, production, documentary,
recording, social security, unemployment, disability, workers’ compensation,
estimated, ad valorem, value added, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, capital stock,
occupation, personal or real property, environmental or windfall profit tax,
Premiums, custom, duty or other tax, governmental fee or other like assessment
or charge, together with any interest, penalty, addition to tax or additional
amount imposed by any Taxing Authority relating to the assessment or collection
thereof.

 

“Taxing Authority” has the meaning set forth in the
definition of “Tax”.

 

“Tax Return” means any
return, report, declaration, claim for refund, certificate, bill, or other
return or statement, including any schedule or attachment thereto, and any
amendment thereof, filed or required to be filed with any Taxing Authority in
connection with the determination, assessment or collection of any Tax. 

 

“Terminal Accounting Period”
means the Accounting Period during which the Recapture Effective Date occurs. 

 

“Terminal Settlement” has the meaning set forth in Section
9.5(a). 

 

“Terminal Settlement Statement” has the meaning set
forth in Section 9.5(a). 

 

 12 

 

“Treasury
Regulations” means the treasury regulations (including temporary and
proposed treasury regulations) promulgated by the United States Department of
Treasury with respect to the Code or other United States federal Tax statutes. 

 

“[***]” has the meaning set forth in Section
2.9(e)(i)d. 

 

“US GAAP” means accounting principles generally
accepted in the United States of America.

 

“USL” means The United
States Life Insurance Company in the City of New York, a New York life
insurance company.

 

“USL Reinsurance Agreement”
means the Amended and Restated Modified Coinsurance Agreement, by and between
USL and the Reinsurer, effective January 1, 2017 and dated as of the Amendment
Date.

 

“VALIC” means The Variable
Annuity Life Insurance Company, a Texas life insurance company.

 

“VALIC Reinsurance Agreement”
means the Amended and Restated Combination Coinsurance and Modified Coinsurance
Agreement, by and between VALIC and the Reinsurer, effective January 1, 2017
and dated as of the Amendment Date.

 

“Valuation Methodology” has the meaning set forth in
Section 4.1(c). 

 

ARTICLE II

BASIS OF REINSURANCE
AND BUSINESS REINSURED

 

Section 2.1       Reinsurance. 

 

(a)  Subject
to the terms and conditions of this Agreement, effective as of the Effective
Time, the Ceding Company hereby cedes to the Reinsurer, and the Reinsurer
hereby accepts and agrees to assume and indemnity reinsure, a Quota Share of
all Reinsured Liabilities and IMR on a modified coinsurance basis. Without
limiting the foregoing, on and after the Effective Time, the Reinsurer hereby
assumes and agrees to indemnify and hold the Ceding Company harmless from and
against all Reinsurer Extra-Contractual Obligations. This Agreement is solely
between the Ceding Company and the Reinsurer and, except as contemplated in Article
VIII, shall not create any legal relationship whatsoever between  the
Reinsurer and any Person other than the Ceding Company. The reinsurance
effected under this Agreement shall be maintained in-force, without reduction,
unless such reinsurance is recaptured, terminated or reduced as provided
herein. On and after the Effective Time, subject to the terms and conditions
herein, the Reinsurer shall be obligated to make payments to or on behalf of
the Ceding Company, as and when due, of all Reinsured Liabilities.
Notwithstanding anything to the contrary herein, the Reinsurer shall have no
liability for any (x) Ceding Company Extra-Contractual Obligations or (y) Ex
Gratia Payments absent the Reinsurer’s prior written consent; provided, however,
that any Ex Gratia Payments made or approved by any affiliated or unaffiliated
Reinsurer Appointed Administrator shall be deemed to be a payment consented to
in writing by the Reinsurer. 

 

(b)  Upon
reinstatement of any Covered Insurance Policy in accordance with its terms and
the Ceding Company’s reinstatement policies, the reinsurance hereunder will be
automatically reinstated with respect to such Covered Insurance Policy; provided,
that, to the extent that the reinstatement of such Covered Insurance Policy
requires payment of Premiums in arrears or reimbursement of claims paid,
following receipt  of  such  amounts, 
the  Ceding  Company 
shall  transfer  to  the  Reinsurer 
a  Quota  Share  of 

 

 13 

 

all Premiums in arrears and a
Quota Share of all reimbursements of claims paid on such Covered Insurance
Policy to the extent such claims had been reimbursed by the Reinsurer
hereunder.

 

(c)  Any
conversion, exchange or replacement policy or contract arising from the Covered
Insurance Policies that is converted, exchanged or replaced pursuant to and in
accordance with its policy terms shall be deemed to constitute a Covered
Insurance Policy for purposes of this Agreement only (i) if such converted,
exchanged or replaced policy carries the same policy number or a valid policy
number permutation resulting from a Family Thrift Plan election on the
Masterfile administration system (or similar) as the original Covered Insurance
Policy so converted, exchanged or replaced or (ii) pursuant to Section
2.1(g) and, in the event of such a conversion, exchange or replacement of
any Covered Insurance Policy, the Reinsurer shall reinsure the risk resulting
from such conversion on the basis set forth hereby with respect to the Covered
Insurance Policies. 

 

(d)  If,
in the normal course of administration (other than the issuance of Supplemental
Contracts, which are addressed in Section 2.1(f) below), the policy
number of a Covered Insurance Policy is changed, the policy shall continue to
constitute a Covered Insurance Policy for purposes of this Agreement.

 

(e)  For
so long as the Ceding Company retains administrative responsibilities for all
of the Covered Insurance Policies and until FLAS (or a replacement thereof) is
transferred to the Reinsurer or otherwise becomes an Affiliate of the Reinsurer
and assumes administration of Administered Policies, Supplemental Contracts
will not be Covered Insurance Policies whether or not such Supplemental
Contract was derived from a Covered Insurance Policy. “Supplemental Contract”
means a contract that is issued by Ceding Company to a policyholder or
beneficiary of a life insurance policy or an annuity contract issued by Ceding
Company pursuant to which Ceding Company retains proceeds of such life
insurance policy or annuity contract for payment in accordance with such contract. 

 

(f)  Should
FLAS (or a replacement thereof) be transferred to the Reinsurer or otherwise
become an Affiliate of the Reinsurer and assume administration of Administered
Policies, Supplemental Contracts will be reinsured as follows from and after
the commencement of such administration: 

 

(i)         A
Supplemental Contract issued by the Ceding Company and administered on a system
utilized by FLAS (or such replacement) to a policyholder or beneficiary of a
life insurance policy or annuity contract issued and administered on a system
utilized by FLAS, another Reinsurer Appointed Administrator or a Subcontractor
(whether or not such life insurance policy or annuity contract is a Covered
Insurance Policy), shall be a Covered Insurance Policy. 

 

(ii)        A
Supplemental Contract issued and administered on a system utilized by FLAS (or
such replacement) to a policyholder or beneficiary of a life insurance policy
or annuity contract issued and administered on a system utilized by the Ceding
Company but that is not a Covered Insurance Policy, shall be a Covered
Insurance Policy if (A) such Supplemental Contract is identified after the
calendar year end in which it was issued and (B) the Ceding Company and the
Reinsurer agree on mutually acceptable terms for such transfer and a
corresponding amendment to Schedule 1.2 to add such Supplemental
Contracts; provided, however, such Supplemental Contracts ceded
under this Section 2.1(f)(ii) will not be ceded hereunder until after
January 1 of the calendar year immediately following the calendar year in which
such Supplemental Contract is issued, provided  that once ceded
hereunder, such cession shall be effective as of the issue date of such
Supplemental Contract. For the avoidance of doubt, nothing in this Section
2.1(f)(ii) shall require either the Ceding Company to cede, or the
Reinsurer to reinsure, the Supplemental Contracts described in this Section
2.1(f)(ii) if, for any calendar year, the Parties do not mutually agree to
do so. 

 

 14 

 

(g)  A conversion policy issued after the Amendment Date
arising from a Covered Insurance Policy that does not carry the same policy
number or a valid policy number permutation resulting from a Family Thrift Plan
election on the Masterfile administration system (or similar) as the original
Covered Insurance Policy so converted shall also constitute a Covered Insurance
Policy for purposes of this Agreement; provided, however, that
the conversion policy will not be ceded hereunder until January 1 of the
calendar year immediately following the calendar year in which such conversion
policy is issued, provided that once ceded hereunder, such cession shall be
effective as of the issue date of such conversion policy.

 

(h)  To
the extent any policies are ceded to the Reinsurer as Covered Insurance
Policies pursuant to Sections 2.1(c), (f)  or (g)  following
the Amendment Date, the Ceding Company will incorporate the additional policy
numbers into the programs, processes or procedures that provide data from the
Ceding Company or a Subcontractor to the Reinsurer (including with respect to
the applicable requirements set forth in Exhibit A). The Ceding Company
will also provide the Reinsurer an annual list of policies added under these
sections. In connection with the entry into the FLAS Administrative Services
Agreement (or replacement thereof), the Parties agree to enter into an
amendment to Schedule 1.2 to add (i) a detailed description of the
additional Supplemental Contracts ceded to the Reinsurer pursuant to Section
2.1(f), with references to the systems on which such contracts are issued
and administered, and (ii) the conversion policies ceded to the Reinsurer
pursuant to Section  2.1(g) 

 

(i)   For
each Supplemental Contract ceded to the Reinsurer pursuant to Section
2.1(f)(ii) after the Amendment Date, the Ceding Company shall pay to the
Reinsurer, as consideration for the reinsurance hereunder, cash equal to (A)
the sum of all amounts received by the Ceding Company in respect of each
Supplemental Contract from the issuance date of such Supplemental Contract to
the date such Supplemental Contract is ceded to the Reinsurer hereunder,
including the amount of the initial deposit into the deposit accounts of the
Ceding Company upon the issuance of such Supplemental Contract, less (B) the
sum of all Reinsured Liabilities paid by the Ceding Company under such
Supplemental Contract prior to the date such Supplemental Contract is ceded to
the Reinsurer hereunder, including any distribution payments, plus (C) interest
thereon calculated at the Annual Cession Interest Rate in effect on the first
Business Day of the Accounting Period in which such Supplemental Contract was
issued from the 15th day of the second month of such Accounting
Period to December 31 of the year of such issuance. For each conversion policy
ceded to the Reinsurer pursuant to Section 2.1(g) after the Amendment
Date, the Ceding Company shall pay to the Reinsurer, as consideration for the
reinsurance hereunder, cash equal to (I) the sum of all amounts received by the
Ceding Company in respect of such conversion policy from the issuance date of
such conversion policy to the date such conversion policy is ceded to the
Reinsurer hereunder, including the sum of all premium payments received by the
Ceding Company in respect of such conversion policy (less any return premium
thereon), less (II) the sum of all Reinsured Liabilities paid by the Ceding
Company under such conversion policy prior to the date such conversion policy
is ceded to the Reinsurer hereunder, plus (III) interest thereon calculated at
the Annual Cession Interest Rate in effect on the first Business Day of the
Accounting Period in which such conversion policy was issued from 15th
day of the second month of such the Accounting Period to December 31 of the
year of such issuance. The payments required by this Section 2.1(i)
shall be made by the Ceding Company as soon as practicable after January 1 of
the calendar year immediately following the calendar year in which any such
contract or policy was issued and the Ceding Company has determined that such
contract or policy has become a Covered Insurance Policy hereunder. 

 

Section 2.2       Existing  Reinsurance. 

 

(a)  This
Agreement is written on a “net” basis such that (i) amounts payable to the
Reinsurer hereunder shall be adjusted to take into account amounts paid by the
Ceding Company under Existing Reinsurance Agreements and (ii) amounts due from
the Reinsurer hereunder shall be adjusted to take into 

 

 15 

 

account amounts recoverable by
the Ceding Company under the Existing Reinsurance Agreements, in the case of each
of (i) and (ii), in respect of the Covered Insurance Policies. All amounts
recoverable by the Ceding Company under the Existing Reinsurance Agreements for
periods (or portions of periods) prior to, on or after the Effective Time shall
inure to the benefit of the Reinsurer. The Ceding Company shall bear the risk
of non-collection of amounts due in respect of the Covered Insurance Policies
under the Existing Reinsurance Agreements.

 

(b)  The
Ceding Company shall be responsible for administration of the Existing
Reinsurance Agreements. However, the Ceding Company shall (i) except with
respect to changes resulting from the resolution of disputes contemplated in Section
2.2(d), consult with and obtain prior written consent of the Reinsurer,
which consent shall not be unreasonably withheld, conditioned or delayed with
respect to Existing Reinsurance Agreements that cover both Covered Insurance
Policies and other policies of the Ceding Company that are not reinsured
hereunder, (x) for any pricing rate changes or cost of insurance changes under
any such Existing Reinsurance Agreements initiated or agreed by Ceding Company
or (y) to terminate or replace any Existing Reinsurance Agreements, and (ii)
provide prior written notice to the Reinsurer of the initiation or resolution
of any disputes with reinsurers thereunder. 

 

(c)  To
the extent Existing Reinsurance covers only Covered Insurance Policies, the
Reinsurer may make recommendations consistent with the rights of the Ceding
Company under such agreements and the Ceding Company will use its reasonable
best efforts to effect such rights.

 

(d)  [***]. 

 

Section 2.3       Insurance Contract Changes. 

 

(a)  Except
as permitted in Section 2.3(b), the Ceding Company shall not voluntarily
make or agree to any change to the terms or conditions of, any Covered
Insurance Policy for any reason without the prior written consent of the
Reinsurer (other than (i) any Excluded NGE Change or any other change in
Non-Guaranteed Elements, which are subject to Section 2.5 and shall not
be governed by or subject to this Section 2.3, (ii) changes that are
initiated by policyowners under the terms of a Covered Insurance Policy, (iii)
changes required by Applicable Law, a Governmental Authority or any Existing
Reinsurance Agreement, and (iv) changes resulting from exigent circumstances
that require immediate action and affect the Covered Insurance Policies due to
situations including natural or manmade disaster, pandemic, governmental
actions or economic circumstances, which exigent circumstances may or may not
be dictated by Applicable Law; provided  that such changes are (x) made
to address the circumstances, (y) consistent with actions taken and changes
made by the Ceding Company or its Affiliates to similar policies issued by the
Ceding Company or such Affiliate that are not Covered Insurance Policies, if
any, in response to the relevant situation and (z) consistent with actions
taken and changes made by similarly situated insurers or financial institutions
not Affiliated with the Ceding Company to similar types of insurance policies
as the affected Covered Insurance Policies in response to the relevant
situation (“Exigent Circumstances”, and each of the items listed in
(ii), (iii) and (iv), are referred to herein as an “Excluded Policy Change”)). 

 

(b)  The
Reinsurer will provide written notification to the Ceding Company as to the
Reinsurer’s acceptance or rejection of any change requiring its consent within
fifteen (15) Business Days after receipt of notice of such change. If the
Reinsurer accepts such change, the Reinsurer will share in the Quota Share of
any increase or decrease in the liability of the Ceding Company on such Covered
Insurance Policy. If the Reinsurer rejects any such change and determines that
it would reasonably be expected to have a material adverse effect on the
Reinsurer’s liability under this Agreement (i) the Reinsurer shall notify the
Ceding Company of such determination and (ii) if the Ceding Company
nevertheless elects  to  make  such  change,  the  Ceding  Company  will  work  together  in  good  faith  with  the 

 

 16 

 

Reinsurer to put the Reinsurer
in substantially the same economic position as it would have been in if such
change had not occurred. In the event that the Parties, acting in good faith,
are unable to agree upon the
existence or amount of such material adverse effect or how to put the Reinsurer
in substantially the same economic position, such dispute shall be referred to
an Independent Actuary to determine whether such a material adverse effect has
occurred and, if so, an appropriate remedy. Both Parties will promptly supply
the Independent Actuary with the necessary data to perform its analysis,
subject to such actuary’s entry into a customary non-disclosure agreement. The
Independent Actuary’s written decision as to the existence of a material
adverse effect and the amount thereof and/or of how to put the Reinsurer in
substantially the same economic position will be binding on the Parties. The
fees and expenses of the Independent Actuary will be borne equally by the
Ceding Company and the Reinsurer; provided, that if the Independent
Actuary determines that there will not be a material adverse effect, the
Reinsurer will pay or promptly reimburse the Ceding Company for all fees and
expenses of the Independent Actuary. The Reinsurer shall be deemed to have
consented to such change if it fails to act in accordance with this Section
2.3(b) within fifteen (15) Business Days following receipt of written
notice of such change. 

 

(c)  Excluded
Policy Changes shall be automatically binding on the Reinsurer. Within a
reasonable period of time prior to effecting any Excluded Policy Change, the
Ceding Company shall provide reasonably detailed notice to the Reinsurer
describing the nature of such change and the reasons for making such change.
Within five (5) Business Days following the Reinsurer’s receipt of notice of any (i) change made due to Exigent
Circumstances, or (ii) change required by Applicable Law, a Governmental Authority
or any Existing Reinsurance Agreement pursuant to Section 2.3(a)(iii), the Reinsurer shall provide written notice
to the Ceding Company of any disagreement that such change was an Excluded Policy
Change. If the Reinsurer fails to provide such notice to the Ceding Company
within such time period, the Reinsurer shall be deemed to have accepted such
change. Should the Reinsurer provide timely notice of disagreement, during the
five (5) Business Days immediately following the delivery of such notice, the
Ceding Company and the Reinsurer will seek in good faith to resolve any
disputes as to the proposed change. In the event the Parties cannot resolve
such dispute within such period, either Party may elect to refer the dispute
for arbitration pursuant to Section 10.3(b). In the event of any such proceeding, the
arbitration panel shall only be authorized to determine whether the disputed
change is an Excluded Policy Change. If the resolution of the dispute results
in a determination that the change was not an Excluded Policy Change, the
Parties will use the mechanism set forth in Section 2.3(b) to value the
impact of the change. 

 

(d)  Except
as otherwise provided for in this Agreement, the Ceding Company shall not
voluntarily terminate, or waive any material provisions of, the Covered
Insurance Policies, except (i) in the ordinary course of business, (ii) as
required by Applicable Law or a Governmental Authority or (iii) with the
Reinsurer’s prior consent which consent shall not be unreasonably withheld,
conditioned or delayed.

 

Section 2.4       Follow the Fortunes; Follow
the Settlements; Contested Claims. 

 

(a)  The
Reinsurer’s liability under this Agreement shall attach simultaneously with
that of the Ceding Company under the Covered Insurance Policies and shall be
subject in all respects to the same risks, terms, rates, conditions,
interpretations, assessments, waivers, modifications, alterations,
cancellations and proportion of Premiums paid without any deductions as the
respective insurances (or reinsurances) of the Ceding Company, the true intent
of this Agreement being that the Reinsurer shall, subject to the terms,
conditions, and limits of this Agreement, follow the fortunes of the Ceding
Company under the Covered Insurance Policies and with respect to the Reinsured
Liabilities. Subject to the terms and conditions of this Agreement and any
Administrative Services Agreement, the Ceding Company alone and in its full
discretion, as applicable, shall adjust, settle or compromise all claims and losses
and shall commence, continue, defend, compromise, settle or withdraw from
actions, suits or proceedings, and 

 

 17 

 

generally do all such matters
and things relating to the validity and lapse or in-force status of any Covered
Insurance Policy, any claim or loss as in its judgment may be beneficial or
expedient. The Parties acknowledge and agree that the Ceding Company may
exercise such discretion itself or through any Subcontractor. All of the Ceding
Company’s liability as determined by a court or arbitration panel or arising
from a judgment, settlement, compromise or adjustment of claims or losses under
the Reinsured Liabilities, including payments involving coverage issues and/or
the resolution of whether such claim is required by law, regulation, or
regulatory authority to be covered (or not to be excluded), shall, subject to
the terms, conditions and limits of this Agreement, be binding on the Reinsurer
regardless of whether such court or arbitration determination, judgment,
settlement, compromise or adjustment is in respect of a liability recognized by
or contrary to the governing law of this Agreement. Such court or arbitration
determination, settlement, compromise or adjustment shall be considered a
satisfactory proof of loss. 

 

(b)  While
the Ceding Company retains ultimate decision-making authority for the handling
of all claims and losses and any disposition thereof in respect of the
Self-Administered Policies, from and after the Amendment Date, the Ceding
Company shall consult with the Reinsurer in good faith before (i) making a
single claims payment in respect of a Self-Administered Policy in excess of
$3.5 million; (ii) making a claims payment on a Self-Administered Policy that
is a life insurance policy during any applicable contestability period; (iii)
establishing a claims reserve with respect to a single Self- Administered
Policy in excess of $3.5 million; or (iv) denying a claim in respect of a
Self-Administered Policy in excess of $1 million (any claims listed in (i),
(ii), (iii) or (iv), a “Consultation Claim”); provided, 
however, that such consultation rights shall (x) not apply to
Self-Administered Policies that as of the Amendment Date are in pay-out status
and (y) be limited to the extent that any Non-Transitioned TPAs have authority
to take any of the foregoing actions on behalf of the Ceding Company without
prior notice to, or consultation with, the Ceding Company. The Reinsurer shall
honor the Ceding Company’s calculations of Reinsured Liabilities related to
such Consultation Claims and shall settle in the ordinary course the Reinsured
Liabilities as so calculated; provided, that notwithstanding anything to
the contrary in this Section 2.4, the Reinsurer shall then have the
right to notice a dispute subject to Section 10.3 hereof, to be resolved
in accordance with Section 10.3 and the following framework: 

 

(i)        The
Reinsurer shall bear the burden of proof to establish such settlement was not
reasonable. When determining the reasonableness of the Ceding Company’s
settlements in any such arbitration, the panel shall consider whether the
settlement would have been different had this Agreement not been entered into. 

 

(ii)       If
the panel determines the Ceding Company’s settlement would have been different
in the absence of this Agreement being in effect, the panel shall award the
Reinsurer all monetary damages, if any, to put the Reinsurer in substantially
the same position had the Ceding Company’s settlements been made without regard
to the existence of this Agreement. The panel shall determine the corresponding
adjustments to the calculation of Reinsured Liabilities in this regard.

 

(iii)       The
panel shall not award any damages, other than legal fees and costs, to
compensate the Reinsurer for the failure of the Ceding Company to act in good faith. 

 

(iv)       The
remedies set forth in this Section 2.4(b) are the Reinsurer’s exclusive
remedies in respect of Consultation Claims. 

 

(v)        If
any Party’s position in the arbitration is determined not to have been taken or
maintained in good faith and not consistent with the mutual intent of the
Parties as expressed in this Agreement, the panel shall have the power to award
attorneys’ fees and costs to the other Party, which shall be at the losing
Party’s own expense. 

 

 18 

 

For the
avoidance of  doubt,  except  as  specifically  set  forth  in  this 
Agreement, including this Section 2.4(b) in respect of Consultation
Claims, nothing herein shall deprive or otherwise limit the dispute rights of
the Reinsurer with respect to any other matter set forth herein. 

 

(c)  From
and after the Amendment Date, the Ceding Company will, as promptly as
practicable, notify the Reinsurer of the Ceding Company’s intention to contest,
arbitrate, dispute or litigate (any such action, a “Contest”) any claim
for benefits under a Self-Administered Policy (any such claim, a “Contested
Claim”), and, if requested by the Reinsurer, will promptly share
information pertaining thereto; provided, however, that claims
denials and administrative actions in the normal course of administration and
litigation initiated by a policyholder or beneficiary after such a denial or
action, shall not constitute “Contested Claims”. To the extent the Reinsurer
accepts participation (pursuant to the provisions below), the Ceding Company
will consult with the Reinsurer with respect of such Contest. Once notified, the
Reinsurer will promptly notify the Ceding Company in writing of its decision
concerning participation in the Contest; provided, that if the Reinsurer
has not responded in writing either way to the Ceding Company within ten (10)
Business Days following its receipt of such notice from the Ceding Company, the
Reinsurer shall be deemed to have accepted participation in such Contest. If
the Reinsurer provides written notice within ten (10) Business Days following
its receipt of such notice from the Ceding Company that it has elected not to
participate, the Reinsurer shall promptly pay the applicable amount in full as
contemplated in clause (c)(i) below. For the avoidance of doubt, the Reinsurer
shall be deemed to have accepted participation in any Contest in respect of an
Administered Policy. In addition, the Reinsurer shall be deemed to have
accepted participation in any Contest in respect of a Covered Insurance Policy
initiated by or on behalf of the Ceding Company prior to the Amendment Date,
and the Reinsurer hereby waives any requirement of the Ceding Company to
provide notice to, or consultation with, the Reinsurer with respect to any such
Contest prior to the Amendment Date, including all contests and disputes set
forth on Schedule 2.4. Whether the Reinsurer accepts participation in
any Contest or not, the Reinsurer will cooperate and will encourage any
Reinsurer Appointed Administrator to cooperate with the Ceding Company with
respect to the handling of such Contest, including, by way of example, making
individuals available as needed for depositions and providing information
necessary to appropriately manage any Contest. 

 

(i)         If
the Reinsurer does not accept participation, it will fulfil its obligation for
such Contested Claim by paying the Ceding Company its Quota Share of (A) all
amounts specified in clause (x) of the definition of “Reinsured Liabilities”
that are alleged to be due under the Self- Administered Policy in such
Contested Claim; (B) the costs and expenses specified in clause (y) of the
definition of “Reinsured Liabilities” relating to the Self-Administered Policy
that is the subject of such Contested Claim to the extent such costs and
expenses were incurred prior to the Ceding Company’s receipt of the Reinsurer’s
notice that it will not so participate; and (C) as specified in clause (z) of
the definition of “Reinsured Liabilities,” all Reinsurer Extra-Contractual
Obligations that relate to such Contested Claim but do not arise out of or
resulting from such Contest. Such payment will fully and completely satisfy all
of the Reinsurer’s obligations in regards to such Contested Claim, and the
Reinsurer shall not share in any reduction in the Reinsured Liabilities arising
from such Contest, nor in any costs or expenses awarded or  recouped by the
Ceding Company in connection with such Contest. For the avoidance of doubt, the
Reinsurer shall not be responsible for any Extra-Contractual Obligations
arising out of or resulting from any Contest that the Reinsurer does not accept
participation in (including deemed acceptance)
hereunder. 

 

(ii)        If
the Reinsurer accepts participation in the Contest (including deemed acceptance pursuant 
to  Section  2.4(c)),  the  Reinsurer  will  share,  in  proportion  to  its  Quota  Share:
(x) in any Extra-Contractual Obligations arising out of or resulting from the
Ceding Company’s Contest, including any compromise or settlement resulting from
such Contest; (y) all Reinsured

 

 19 

 

Liabilities and (z) all
additional costs and expenses specified in clause (y) of the definition of
“Reinsured Liabilities” that arise out of or result from such Contest.
Furthermore, if the Ceding Company’s Contest results in a reduction in the
Ceding Company’s contractual liability, the Reinsurer will share in any such
reduction in the Reinsured Liabilities in proportion to its Quota Share. To the
extent the Ceding Company is awarded or recoups its costs and expenses
resulting from such Contest, the Ceding Company will pay the Reinsurer the
Quota Share of the amount awarded or recouped (net of costs and expenses
incurred by the Ceding Company in obtaining such award or recoupment that are
not so awarded or recouped). The Ceding Company will promptly advise the
Reinsurer of all significant developments, including notice of legal
proceedings (including consumer complaints or actions by Governmental
Authorities) initiated in connection therewith.

 

(iii)
Any failure of the Ceding Company to timely notify the Reinsurer of the Ceding
Company’s intention to Contest a claim for benefits under a Self-Administered
Policy pursuant to Section 2.4(c) shall not limit the Reinsurer’s
obligations or liabilities under this Agreement for Extra-Contractual
Obligations; provided  that notice of such Contest is given to the
Reinsurer as soon as practicable after the Ceding Company discovers or is made
aware of such failure and provided further that the Reinsurer was not
materially prejudiced by such late notice. In the event that (A) the Reinsurer
was materially prejudiced by a late delivered notice under this clause (iii),
or (B) notice of such Contest was not given to the Reinsurer as soon as
practicable after the Ceding Company discovers or is made aware of such
failure, and following notice of such Contest, the Reinsurer timely elects not
to participate in such Contest, the Reinsurer shall not share in any
Extra-Contractual Obligations that arise out of or result from such Contest
and, with respect to the costs and expenses described in clause (y) of the
definition of “Reinsured Liabilities”, shall only share in fifty percent (50%)
of such costs and expenses relating to the Self- Administered Policy that is
the subject of such Contested Claim that were incurred prior to the Ceding
Company’s receipt of the Reinsurer’s notice that it will not so participate.

 

Section
2.5 Non-Guaranteed Elements. 

 

(a)  The
Reinsurer acknowledges that the Ceding Company shall have the ultimate
authority to establish  and  control  (i)  the  non-guaranteed  elements  of  the  Covered  Insurance 
Policies,  including (A) the initial and renewal crediting
rates, (B) Premiums following the expiration of the period during which Premium
amounts for the applicable Covered Insurance Policies are fixed and constant
(i.e., rate guarantee periods), (C) insurance charges, (D) loads and expense
charges, (E) mortality and expense charges,  (F) administrative  expense  risk 
charges,  (G) policyholder  dividends,  (H) Policy Loan rates, (I) index cap
and (J) participation rates and (ii) in respect of the Surplus Participation
Payments, (A) the average payout timing of such payments and (B) the surplus
tally calculation of such payments (each of such items, a “Non-Guaranteed
Element”); provided, however, that the Ceding Company shall
manage all Non-Guaranteed Elements in a manner consistent with the practices
and procedures applied by the Ceding Company for its similar businesses and in
accordance with Applicable Law. The Ceding Company agrees that, from and after
the Amendment Date, it shall take into account the recommendations of the
Reinsurer regarding the Non-Guaranteed Elements (whether in response to a
change proposed by the Ceding Company or at the initiative of the Reinsurer),
and, to the extent such recommendations comply with Applicable Law, the terms
of this Agreement, the applicable Covered Insurance Policies and generally
accepted actuarial standards of practice, the Ceding Company shall not
unreasonably reject such recommendations. Each time the Ceding Company elects
to change any Non-Guaranteed Elements, other than (1) any change in initial or
renewal crediting rates, Policy Loan rates, index cap or participation rates,
any other similar change or any change required by any Applicable Law or
Governmental Authority or (2) any change in term Premiums charged in respect of
term Covered Insurance Policies that have reached  the  end  of  the 
level-term period  (each  of  the  items  listed  (1) or  (2),  a  an  “Excluded  NGE 

 

 20 

 

Change”), the Ceding Company shall notify the Reinsurer in
writing of such change to any Non- Guaranteed Elements as soon as practicable
but in no case later than forty-five (45) calendar days after  the effective
date of such change; provided, however, that, in the case of any
such change to a Non- Guaranteed Element specified in clauses (i) or (ii)(A) of
the definition thereof that affects more than five percent (5%) of the Covered
Insurance Policies in any Reinsured Portfolio, the Ceding Company will use its
reasonable best efforts to notify the Reinsurer thirty (30) calendar days
before such change takes place (each form of notice described in this sentence,
an “NGE Change Notice”). 

 

(b)  If
the Reinsurer reasonably determines that any such change, or the unreasonable
rejection of any recommendations by the Reinsurer, to the Non-Guaranteed
Elements, other than Excluded NGE Changes, would reasonably be expected to have
a material adverse impact on the Reinsurer’s liability hereunder (an “NGE
MAE”), the Reinsurer may so notify the Ceding Company in writing of such
determination within twenty-five (25) calendar days following the Reinsurer’s
receipt of notice from the Ceding Company of the change, including an NGE
Change Notice. Within thirty (30) calendar days of receipt of such a notice
from the Reinsurer, the Ceding Company shall engage an Independent Actuary,
with the selection of the Independent Actuary subject to the Reinsurer’s prior
written consent, not to be unreasonably withheld, to (i) determine whether the
change to the Non- Guaranteed Elements will have an NGE MAE (if the existence
of an NGE MAE is disputed) and (ii) if so, estimate the present value of the
NGE MAE impact (if any). If the Independent Actuary determines that there will
be an NGE MAE, the Ceding Company will work together in good faith with the
Reinsurer to put the Reinsurer in substantially the same economic position as
it would have been in if such change had not occurred. Both Parties will
promptly supply the Independent Actuary with the necessary data to perform its
analysis, subject to such Independent Actuary’s entry into a customary non-disclosure
agreement.  The Independent Actuary’s written decision as to the existence and
amount of any NGE  MAE will be binding on the Parties. The fees and expenses of
the Independent Actuary will be borne equally by the Ceding Company and the
Reinsurer; provided, that if the Independent Actuary determines there
will not be any NGE MAE, the Reinsurer will pay or promptly reimburse the
Ceding Company for all fees and expenses of the Independent Actuary. The
Reinsurer hereby agrees that any change to a Non- Guaranteed Element that is
initiated, recommended, approved or ratified by the Reinsurer, any Affiliate of
the Reinsurer or a Reinsurer Appointed Administrator shall be deemed not to
have a material adverse effect on the Reinsurer’s liability hereunder. 

 

(c)  Within
a reasonable period of time prior to effecting any Excluded NGE Change required
by Applicable Law or a Governmental Authority, the Ceding Company shall provide
reasonably detailed notice to the Reinsurer describing the nature of such
change and the reasons for making such change. Within five (5) Business Days
following the Reinsurer’s receipt of notice of any such Excluded NGE Change,
the Reinsurer shall provide written notice to the Ceding Company of any
disagreement that such change is an Excluded NGE Change. If the Reinsurer fails
to provide such notice to the Ceding Company within such time period, the
Reinsurer shall be deemed to have accepted such change. Should the Reinsurer
provide timely notice of disagreement, during the five (5) Business Days
immediately following the delivery of such notice, the Ceding Company and the
Reinsurer will seek in good faith to resolve any disputes as to the change. In
the event the Parties cannot resolve such dispute within such period, either
Party may elect to refer the dispute for arbitration pursuant to Section
10.3(b). In the event of any such proceeding, the arbitration panel shall
only be authorized to determine whether the disputed change is an Excluded NGE
Change. If the resolution of the dispute results in a determination that the
change was not an Excluded NGE Change, the Parties will use the mechanism set
forth in Section 2.5(b) to value the impact of the change. 

 

Section 2.6 Misstatement of Age, Sex or Any Other
Material Fact. If the Ceding Company’s liability under any of the Covered
Insurance Policies is changed because of a misstatement of age, sex or any
other material fact, the Reinsurer shall: (a) assume a Quota Share of that
portion of any increase in the

 

 21 

 

Ceding Company’s liability
resulting from the change; and (b) receive credit for a Quota Share of that
portion of any decrease in the Ceding Company’s liability resulting from the
change. The reinsurance with the Reinsurer shall be restated and, as
applicable, adjusted between the Parties from commencement on the basis of the
adjusted amounts in the Covered Insurance Policy using Premiums and reserves at
the correct age and sex or other material fact. If the Ceding Company returns
Premium to the policyowner or beneficiary under a Covered Insurance Policy
based on contestable misrepresentation or suicide of the insured, the Reinsurer
will refund the net reinsurance Premiums received on that Covered Insurance
Policy to the Ceding Company as part of the Quarterly Net Settlement Amount
pursuant to Section  3.2. 

 

Section 2.7       Programs of Internal Replacement. 

 

(a)  Unless
otherwise agreed by the Parties, the Ceding Company will not, and will cause
its Affiliates not to, directly or indirectly, undertake, solicit, sponsor or
support any exchange program in respect of the Covered Insurance Policies (an “Exchange
Program”) or otherwise target in a directed, programmatic or systematic
manner, the Covered Insurance Policies for replacement (a “Replacement
Program”). 

 

(b) An
Exchange Program or Replacement Program shall be considered undertaken,
solicited, sponsored or supported by the Ceding Company or such Affiliates if
the program is initiated by the Ceding Company or any of such Affiliates and
the program offers financial incentives (e.g., bonuses or commissions) for
policyholders or sales representatives for the purpose of inducing the
replacement of the Covered Insurance Policies. A program designed to encourage
current policyholders to convert term life coverage shall not be considered to
be either an Exchange Program or Replacement Program so long as such program is
not specifically directed principally to policyowners of Covered Insurance Policies. 

 

(c)  The
offering by the Ceding Company or any of such Affiliates to new clients and to
policyholders of the Covered Insurance Policies of an insurance, annuity, or
investment product that offers then-market terms that are more favorable to the
policyholders of the Covered Insurance Policies in the normal course of the
Ceding Company’s or such Affiliate’s business and consistent with its past
practices shall not be considered to be an Exchange Program in violation of
this obligation; provided, that such product is not specifically
directed principally to policyowners of the Covered Insurance Policies and does
not otherwise constitute a Replacement Program. 

 

Section 2.8 Actuarial Review. The Reinsurer  shall 
engage  an  independent  third  party  actuarial firm to conduct a review (a)
no less than once every thirty-six (36) months covering the Long Term Care
business (as defined in Schedule 1.2 hereof) and (b) no less than every
sixty (60) months covering the First Generation Universal Life and SunAmerica
Life Reinsured Portfolios (each as defined in Schedule 1.2 hereof), in
each case ceded by the Ceding Company hereunder, and the Reinsurer shall either
pay directly, or, to the extent such review is required by a Governmental
Authority, reimburse the Ceding Company for, all fees, costs and expenses of
such firm. However, the Reinsurer shall obtain the prior written consent of the
Ceding Company as respects the choice of such actuarial firm, as well as the
lead actuarial partner working on such matter(s), prior to formalizing such
engagement, such consent not to be unreasonably withheld. Any changes to the
firm and/or lead actuarial partner shall also require the prior written consent
of the Ceding Company, such consent not to be unreasonably withheld. Prior to
the commencement of any such annual review, the Reinsurer and the Ceding
Company shall agree on the scope of work to be performed by such third party
actuarial firm; provided, that the scope of work to be performed by such
third party actuarial firm must include all work reasonably necessary to
satisfy the requirements of the review required pursuant to clauses (a) and (b)
of this Section 2.8 and all reporting requirements of the Reinsurer’s
domestic regulators with respect to reserves ceded from the Ceding Company to
the Reinsurer under this Agreement. Any additional work requested of such
actuarial firm  by the  Ceding  Company  shall  be  the  subject  of  a  separate 
scope  of  work  between  the  Ceding  Company 

 

 22 

 

and such firm, the costs of
which shall not be borne by the Reinsurer and shall be borne by the Ceding
Company at its own expense. In addition, nothing herein shall preclude the
Ceding Company from seeking from such third party actuarial firm a right to
consult with such firm from time to time in the course of such review and/or a
right to receive, concurrent with the Reinsurer’s receipt, copies of all draft
reports and material correspondence from such third party actuarial firm, and
the Reinsurer shall consent to such consultation or access requested by the
Ceding Company. The Reinsurer shall, and shall cause its Reinsurer Appointed
Administrator(s) to, fully cooperate with any third party actuarial firm
conducting any such reviews. 

 

Section 2.9       Other Restrictions and Other
Funding Obligations. 

 

(a)  From
and after the Amendment Date, the Reinsurer shall use its commercially reasonable efforts to obtain an
investment grade (financial strength / FSR) rating from at least one of the
following nationally recognized statistical rating organizations: Moody’s
Investors Service Inc., S&P Global Ratings or Fitch Ratings Inc. (an “Acceptable  Rating”). 

 

(b)  [***]. 

 

(c)  [***]. 

 

(d)  [***]. 

 

(e)  [***]: 

 

(i)         [***]: 

 

a.         [***]; 

 

b.         [***]; 

 

c.         [***];  and 

 

d.         [***]. 

 

(ii)        [***]. 

 

Section 2.10 Reinsurer Net Retention. At all times
during the term of this Agreement, the Reinsurer, together with one or more of
its Affiliates, shall retain net for its own account (and not reinsured or
retroceded) at least [***]% of the Statutory Reserves ceded to
the Reinsurer hereunder (as measured on the basis of SAP); provided,
that the foregoing restriction shall not take into account and shall not apply
to any retrocession or similar arrangement solely between the Reinsurer and any
of its Affiliates.

 

ARTICLE III

INITIAL PAYMENTS;
SETTLEMENTS;

ADMINISTRATION;
REPORTING; BOOKS AND RECORDS 

 

Section 3.1       Initial  Payments. 

 

(a)  Initial
ModCo Deposit. On the Closing Date, the Ceding Company shall deposit
Permitted Assets with a Statutory Book Value, as of the Closing Date, equal to
$25,331,667,332 into the ModCo Account (the “Initial ModCo Deposit”). 

 

 23 

 

(b)  Ceding   Commission. 
On the Closing Date, the Reinsurer shall pay to the Ceding Company a ceding
commission in an amount equal to $0. 

 

Section 3.2       Settlements. 

 

(a)  A
quarterly net settlement amount (the “Quarterly Net Settlement Amount”)
shall be payable under this
Agreement for each Accounting Period in accordance with a settlement statement
substantially in the form set forth on Exhibit B (the “Settlement
Statement”), which shall reflect the following settlement: 

 

(i)         a
Quota Share of all Reinsured Liabilities paid by the Ceding Company during such
Accounting Period; “Reinsured Liabilities” shall mean (x) all
liabilities and obligations (including death claims and other contractual
benefits, such as policyholder dividends, cash surrender and withdrawal
payments (net of surrender charges and fees), maturities, disability payments
and income payments, endowments and interest owed under Applicable Law or the
terms of the policy on policy claims) of the Ceding Company under the express
terms and conditions of the Covered Insurance Policies (whether paid to a beneficiary or escheated), plus (y) all
obligations of the Ceding Company for loss adjustment expenses in respect of
the Covered Insurance Policies, including legal fees, court costs, pre-and
post-judgment interest, and including costs and expense incurred in connection
with interpleader and declaratory judgment actions and responding to subpoenas,
as well as charges and expenses contractually incurred through the use of the
Ceding Company’s Affiliated claims services or technical services companies
providing such contest, compromise or litigation service on the Covered
Insurance Policies (but excluding any part of the general office expenses and
overhead of the Ceding Company), in each case, net of any such liabilities paid
by the Ceding Company that are recoverable by the Ceding Company under the
Existing Reinsurance Agreements, plus (z) all Reinsurer Extra-Contractual
Obligations, minus 

 

(ii)       a
Quota Share of “Premiums” for such Accounting Period, which shall equal (w) the gross premiums and other
amounts, payments, collections, considerations, recoveries, policy fees,
deposits and similar receipts received by or on behalf of the Ceding Company in
respect of the Covered Insurance Policies (other than Interest Earned on Policy
Loans addressed below), minus  (x) 100% of any premiums and other amounts
paid by the Ceding Company in respect of the Existing Reinsurance Agreements
for such Accounting Period, minus  (y) all refunds of unearned premiums
for such Accounting Period as a result of the termination of any Covered
Insurance Policies, whether due to lapse or death, or arising due to the
termination of this Agreement, minus  (z) any Federal Excise Tax payable
pursuant to Section 7.2,  minus 

 

(iii)       a
Quota Share of “Interest Earned on Policy Loans” for such Accounting
Period, which shall equal (x) the interest collected on Policy Loans, plus 
(y) the increase in accrued interest on Policy Loans, minus  (z) the
increase in unearned loan interest on Policy Loans during such Accounting
Period, or, in the alternative, any reasonable approximation method for accrued
and unearned interest as agreed to by the Parties, plus 

 

(iv)       a
Quota Share of Guaranty Fund Assessments for such Accounting Period paid
pursuant to Section 7.5,  plus 

 

(v)        the
“Aggregate Expense Allowance” for such Accounting Period, which shall
equal the sum of the Expense Allowances for each Reinsured Portfolio included
in the Covered Insurance Policies as calculated in accordance with Schedule
1.1,  plus 

 

 24 

 

(vi)      the “Investment Expenses” for such
Accounting Period, which means the sum
of (x) aggregate fees, expenses and other amounts and costs Deemed Paid by the
Ceding Company or any of its Affiliates or designees to any Investment Manager
or any other Person relating to investment advice, investment management,
hedging support, derivatives advisory services, tracking of derivatives
transactions, securities lending, repurchase, reverse repurchase and similar
transactions and trade processing, settlement, pricing, collateral and margin
management, and other related services for such transactions, in each case,
relating to the ModCo Assets or relating to the custody of any ModCo Assets, plus 
(y) an expense allowance for investment accounting services (including
maintenance of the Reinsurer accounting basis for the ModCo Assets) provided,
or caused to be provided, by the Ceding Company or its Affiliates equal to [***]
basis points times the GAAP Carrying Value of the ModCo Assets as of
the beginning of such Accounting Period, plus 

 

(vii)      the Quota Share
of the total balance of Policy Loans outstanding as of the end of the
Accounting Period minus the Quota Share of the total balance of Policy
Loans outstanding as of the end of the preceding Accounting Period, plus 

 

(viii)     a Quota Share
of “Surplus Participation Payments”, if any, made during such Accounting
Period, which shall equal all amounts paid to policyholders of certain Covered
Insurance Policies having a participating policyholder dividend feature that by
statute or historic course of practice provides for participation rights in a
separately tracked surplus tally calculation attributable to such block of
Covered Insurance Policies; Surplus Participation Payments will be made
consistent with the Ceding Company’s Description of Par Dividend Surplus
Tally Spreadsheet memorandum, dated October 12, 2017, in effect on the
Closing Date, attached as Exhibit F; provided, however,
the average payout timing of such Surplus Participation Payments may be changed
in accordance with Section  2.5). 

 

Following the Amendment Date,
the Parties shall use their reasonable best efforts to develop a mutually
agreeable mechanism for separately reporting to the Reinsurer all Reinsurer
Extra-Contractual Obligations and Ex Gratia Payments paid by the Ceding Company
during an Accounting Period.

 

The Ceding Company will provide a
Settlement Statement to the Reinsurer for each Accounting Period on the
fifteenth (15th) Business Day of the second calendar month following
each Accounting Period (other than a calendar year-end Accounting Period) and
on the first day of the third calendar month following each calendar year-end
Accounting Period. The Settlement Statement shall also include the Ceding
Company’s current list of Restricted Purchasers.

 

(b)  The
Quarterly Net Settlement Amount payable under this Agreement for each
Accounting Period and any Terminal Accounting Period (as set forth in the
Settlement Statement) shall be payable as follows: 

 

(i)         if
the Quarterly Net Settlement Amount is positive, the Reinsurer shall pay such
amount to the Ceding Company no later than the later of seven (7) Business Days
after the receipt by the Reinsurer of the Settlement Statement or seven (7)
Business Days after the due date for the Settlement Statement; and 

 

(ii)       if
the Quarterly Net Settlement Amount is negative, no later than seven (7) Business Days after the due
date for the Settlement Statement, the Ceding Company shall pay the absolute
value of such negative amount to the Reinsurer;

 

 25 

 

provided, that any amounts payable pursuant to Sections
3.2(b)(i) and (ii)  shall be adjusted (positive or negative) for any
amounts transferred to or paid by or on behalf of a Party during the period
between the end of the Accounting Period and the date any remittance is paid
hereunder.

 

In lieu of cash payments in respect of the Quarterly Net
Settlement Amount, the Parties may settle by means of an asset transfer. In
such event: (A) if an amount is due the Ceding Company, the Reinsurer shall
transfer Permitted Assets with a Fair Market Value equal to such amount and as
mutually agreed upon by the Parties; or (B) if an amount is due the Reinsurer,
the Ceding Company shall transfer assets with a Fair Market Value equal to such
amount that are mutually agreed upon by the
Parties. 

 

Section 3.3 Aggregate Expense Allowance, Investment
Expenses and Surplus Participation Payments. On a quarterly basis,
the Reinsurer shall pay to the Ceding Company, each as a component of the
Quarterly Net Settlement Amount, (a) the Aggregate Expense Allowance to cover
the cost of providing administrative and other services necessary or
appropriate in connection with the administration of the Covered Insurance
Policies and the Reinsured Liabilities in an aggregate amount calculated in
accordance with Schedule 1.1, (b) the Investment Expenses, and (c) a
Quota Share of any Surplus Participation Payments made during the Accounting
Period. Subject to the last sentence of this Section  3.3, the
Parties shall cooperate in good faith to mutually agree to (i) reasonable
adjustments to the Aggregate Expense Allowance or Investment Expenses for one
or more Reinsured Portfolios to reflect changes in the premium tax, commissions
and/or administration costs of such Reinsured Portfolios or investment expenses
in respect of the ModCo Assets and (ii) make a corresponding one-time payment
from one Party to the other, as applicable, in connection with any adjustment
made pursuant to (i), equal to the change in the fair value of the Reinsurer’s
liability for the applicable future Aggregate Expense Allowance payments or
Investment Expense payments, as applicable, following implementation of such
adjustment as determined in accordance with the Insurance Act, including the
Insurance (Prudential Standards) (Class C, Class D and Class E Solvency
Requirement) Rules 2011, utilizing a discount rate to be agreed between the
Parties at the time of such payment, taking account of any flooring of the
Ceding Commission at $0 as of the Effective Time (an increase in the fair value
of the Aggregate Expense Allowance payments or Investment Expenses payments
would result in a one-time payment to the Reinsurer, while a decrease in such
fair value payments would result in a one-time payment to the Ceding Company); provided,
however, that no adjustment shall be made to the Ceding Commission due
to any increase or decrease in (1) the Aggregate Expense Allowance that results
from any increase or decrease in fees or other amounts charged by any Reinsurer
Appointed Administrator or (2) the Investment Expenses that results from any
increase or decrease in fees or other amounts charged by any Investment Manager
that is not affiliated with the Ceding Company and is designated by the
Reinsurer pursuant to Section  4.1(d)(ii). Any such adjustments
shall be effected by an amendment to this Agreement in accordance  with Section
10.13 hereof. Notwithstanding the foregoing, solely with respect to the
adjustments made to the Aggregate Expense Allowance and Investment Expenses
that become effective as of the Amendment Date, the Parties shall use the
following methodology to determine the one-time payment required hereunder: the
one-time payment (calculated as of the Amendment Date) shall equal the midpoint
of (x) the amount of the one-time payment based on the original discount rate
used to determine the Ceding Commission as of the Closing Date and (y) the
amount of the one-time payment based on then-current (i.e., as of the
calculation date) technical provision discount rate applied to Reinsurer’s
Liabilities pursuant to the Insurance Act. 

 

Section 3.4 Delayed Payments. If there is a delayed 
settlement  of  any  Quarterly  Net  Settlement Amount due hereunder that is
actually reflected in the related Settlement Statement, interest will accrue on
such payment at a per annum rate equal to (a) the London interbank offered rate
for deposits in Dollars having a maturity of three (3) months (“LIBOR”)
as of the date that such payment was due (the “Determination Date”),
adjusted and compounded at each three (3)-month anniversary thereof, plus  (b)  1.25%  (the  “Interest  Rate”)  until  settlement  is  made,  unless 
the  Parties  mutually 
agree  that 

 

 26 

 

interest on such delayed
settlement payment shall be waived. If the Ceding Company determines in its
reasonable good faith judgment on the relevant Determination Date that the
LIBOR base rate has been permanently discontinued, then the Parties shall
mutually agree to use as a successor base rate the alternative reference rate
publicly-selected by the central bank, reserve bank, monetary authority or any
similar institution (including any committee or working group thereof) that is
consistent with accepted market practice on the Determination Date (the “Alternative
Rate”). If the Parties use the  Alternative Rate as the successor base rate
pursuant to the foregoing, the Parties shall work in good faith, to the extent
not provided by the terms thereof, to mutually agree upon and determine in
their commercially reasonable good faith judgment the interest rate
determination date and any other relevant methodology for calculating the
Alternative Rate, including any adjustment factor (including any necessary
spread adjustment) needed to make the Alternative Rate comparable to the LIBOR
base rate, in each case in a manner that is consistent with industry-accepted
practices for the Alternative Rate (including by reference to price quotations
listed on futures and derivatives exchanges). For purposes of this Section
3.4, a Quarterly Net Settlement Amount will be considered overdue, and such
interest will begin to accrue, on the first day immediately following the date
such payment is due. For greater clarity, (i) a Quarterly Net Settlement Amount
shall be deemed to be due hereunder on the last date on which such payment may
be timely made under the applicable provision and (ii) interest will not accrue
on any Quarterly Net Settlement Amount due the Reinsurer hereunder if the
delayed settlement was caused by the Reinsurer or any Reinsurer Appointed
Administrator, including delays caused by the inability to liquidate ModCo
Assets in a timely manner that were chosen for withdrawal by the Reinsurer to
fund amounts due to the Reinsurer hereunder. Further, no interest will accrue
on the initial Quarterly Net Settlement Amount hereunder.

 

Section 3.5       Offset. 

 

(a)  Each
Party shall have, and may exercise at any time and from time to time, the right
to offset any undisputed balance or balances, due from such Party to the other
Party under this Agreement, and may offset the same against any undisputed
balance or balances due to the former from the latter under this Agreement. In
the event of any insolvency, rehabilitation, conservatorship or comparable
proceeding by or against the Ceding Company or the Reinsurer, the rights of
offset and recoupment set forth in this Section 3.5 shall apply to the
fullest extent permitted by Applicable Law. Balances will be considered
“disputed” if one Party has contested the balance in writing to the other Party. 

 

(b)  This
right of offset will not be diminished by any insurance business transfer
pursuant to any Applicable Law similar in effect to Part VII of the Financial
Services and Markets Act 2000, a scheme of arrangement pursuant to 895-899 of
the Companies Act 2006, a company voluntary arrangement pursuant to Part I of
the Insolvency Act 1986, or any provision which replaces the foregoing, or has
the same effect as the foregoing in any jurisdiction, so that the Ceding
Company or the Reinsurer may continue to offset against any assignee or
statutory transferee amounts due under any prior or related agreement against
sums claimed under this Agreement, notwithstanding any assignment of this
Agreement, or any insurance business transfer including this Agreement, or any
such scheme of arrangement or company voluntary arrangement affecting
liabilities under it. 

 

Section 3.6       Administration. 

 

(a)  For
the period between the Closing Date and the Amendment Date, the Ceding Company
and its appointed administrators and other designees shall administer the
Covered Insurance Policies and perform all accounting therefor. During such
period, the Ceding Company shall be permitted to assign any of its
administrative functions, including claims administration, to any of its
Affiliates and/or third party administrators; provided, that the Ceding
Company shall remain ultimately responsible to the policyholders for such
administration. Such administration shall be conducted with no less skill, 

 

 27 

 

diligence and expertise as the
Ceding Company applies to servicing its other business and in material
conformance with the terms and conditions of the Covered Insurance Policies and
all Applicable Laws; provided, further, that the performance of
any material administrative services with regard to the Covered Insurance
Policies by any administrator that is not an Affiliate of the Ceding Company or
that is not acting as an administrator for such Covered Insurance Policy as of
the Effective Time shall be subject to the advance written approval of the
Reinsurer, such approval not to be unreasonably withheld, conditioned, delayed
or denied. Without limitation of the foregoing, in undertaking the direct and
reinsurance administration and claims practices relating to the Covered
Insurance Policies during such period, the Ceding Company and any administrator
or other designee appointed by the Ceding Company shall act in accordance and
consistent with the Ceding Company’s existing administrative and claims
practices in effect on the Effective Time (each, an “Existing Practice”);
provided, that, to the extent the Ceding Company or any administrator
proposes to modify materially an Existing Practice from time to time following
the Effective Time (an Existing Practice, as proposed to be modified from time
to time, a “Proposed Practice”), the Ceding Company shall (i) not,
without the prior written consent of the  Reinsurer (which shall not be
unreasonably withheld, conditioned, delayed or denied), implement or agree to
the implementation of the Proposed Practice and (ii) if the Reinsurer furnishes
such written consent, act in accordance and consistent with the Proposed
Practice. In the event that the Ceding Company or an administrator appointed by
the Ceding Company implements a Proposed Practice during such period without
obtaining the prior written consent of the Reinsurer and the Reinsurer
reasonably determines that it would reasonably be expected to have a material
adverse effect on the Reinsurer’s liability under this Agreement (x) the
Reinsurer shall notify the Ceding Company of such determination, and (y) the
Ceding Company will work together in good faith with the Reinsurer to put the
Reinsurer in substantially the same economic position as it would have been in
if the implementation of such Proposed Practice had not occurred. If the Ceding
Company outsources any material administrative services during such period, the
Ceding Company shall secure the Reinsurer’s right to audit and inspect the
party performing such outsourced services. Following the Amendment Date, this Section
3.6(a) shall cease to apply to the Ceding Company’s administration of the
Covered Insurance Policies. 

 

(b)  Following
the Amendment Date, subject to the receipt of all requisite regulatory
approvals, the Parties intend to enter into the FLAS Administrative Services
Agreement pursuant to which the Ceding Company would appoint FLAS to perform
certain administrative services with respect to the Administered Policies
described therein, other than certain administrative services that the Ceding
Company agrees to continue to perform in respect of such Administered Policies
(the “Retained Services”). Notwithstanding any appointment by the Ceding
Company of FLAS or any replacement third party administrator to perform
administrative services with respect to the Administered Policies, the Ceding
Company shall remain ultimately responsible to the policyholders for such administration. 

 

(c)  For
any period between the Amendment Date and the date the Parties enter into the
FLAS Administrative Services Agreement (or any replacement thereof), and for
any period thereafter that the FLAS Administrative Services Agreement (or any
replacement thereof) is not in effect, the Ceding Company shall provide all of
the administrative services in respect of the Covered Insurance Policies.   For
any period that the FLAS Administrative Services Agreement (or any replacement
thereof) is in effect, (i) pursuant to the terms of such administrative service
agreement, FLAS (or any other Reinsurer Appointed Administrator) shall perform
certain administrative services with respect to the Administered Policies
described therein, other than any Retained Services; and (ii) the Ceding
Company shall provide all of the administrative services in respect of the
Self-Administered Policies and perform the Retained Services. All services to
be performed by the Ceding Company hereunder at any point in time on or after
the Amendment Date (the “Administrative Services”) shall be performed in
accordance with the Appendix A hereto (the “Administrative  Appendix”). 

 

 28 

 

(d)  The Reinsurer shall be bound by all payments and
settlements entered into (i) by any Reinsurer Appointed Administrator and (ii)
by the Ceding Company in accordance with Section 2.4. For purposes of interpreting Sections
2.4 and 3.6, the Reinsurer shall be absolutely bound by any act or
failure to act by it or any Reinsurer Appointed Administrator providing all or
a portion of administrative services as respects the Covered Insurance Policies
reinsured hereunder. 

 

(e)  Following
the Amendment Date, in addition to entering into the FLAS Administrative
Services Agreement and transitioning the administration of the Administered
Policies to FLAS (which transition is governed by the terms of the Initial
Purchase Agreement and shall not be subject to the requirements of this Section
3.6(e)), the Reinsurer shall have the right to recommend to the Ceding
Company that the administration of all or a portion of the Administrative
Services remaining with the Ceding Company be transferred to FLAS or an alternative
administrator (each alternative administrator, FLAS and any replacement of any
of the foregoing, a “Reinsurer Appointed Administrator”), and the Ceding
Company shall not unreasonably withhold its consent as respects a transition to
any such Reinsurer Appointed Administrator; provided, that (i) except as
set forth below in Section 3.6(i), the Reinsurer shall bear all costs to
transition any Administrative Services to such Reinsurer Appointed
Administrator, as well as any damages or costs resulting from such transition,
including, without limitation, any early termination fees, any increases in
service fees on business remaining with the predecessor administrator to the
extent such increase in service fees results from such transition, and any
other costs and expenses resulting from the transition, (ii) all requisite
regulatory approvals shall have been received for such Reinsurer Appointed
Administrator to administer the applicable Administrative Services and (iii)
the Ceding Company reserves the right to perform due diligence on any proposed
Reinsurer Appointed Administrator prior to granting or withholding its consent
and the Reinsurer shall give due regard to the Ceding Company’s views regarding
the qualifications of any such Reinsurer Appointed Administrator; and provided,
further, that any recommendation to transition Administrative Services
that are being performed by any Non-Transitioned TPAs, shall be subject to the
terms, conditions and limitations contained in the applicable administrative
services agreements with such Non- Transitioned TPAs. Such transition may be
accomplished in stages on an administration function-by- administration
function basis as the Parties shall mutually agree, pursuant to a mutually
acceptable administrative services agreement (or an amendment to the FLAS
Administrative Services Agreement or any
replacement thereof) (each such agreement, the FLAS Administrative Services
Agreement and any replacement of any of the foregoing, an “Administrative
Services Agreement”) having terms and conditions reasonably acceptable to
the Ceding Company, which shall include the specific services required to be
performed, the accounting and reporting requirements, the service standards,
financial consideration, insurance requirements and the term and termination of
the arrangement. 

 

(f)  Notwithstanding
any provision of this Agreement to the contrary, no act or failure to act by
the Reinsurer or any Reinsurer Appointed Administrator shall be considered an
act or failure to act by the Ceding Company for any purpose of this Agreement
unless such act or failure to act is at the written direction or request of the
Ceding Company. Without limiting the foregoing, the Ceding Company shall not be
deemed to be in breach of this Agreement as a result of any failure to perform,
or inadequacy in the performance of, any obligation of the Ceding Company
hereunder to the extent such performance by the Ceding Company is reasonably
dependent on the performance by a Reinsurer Appointed Administrator of its
obligations under any Administrative Services Agreement that has not been
properly, timely and fully performed.

 

(g)  Reinsurer
shall be deemed to have knowledge of, approved, consented to, and/or ratified
any act or failure to act by any Reinsurer Appointed Administrator. Any fact,
circumstance or issue that  is known or should reasonably be known by any
Reinsurer Appointed Administrator shall be deemed known by the Reinsurer. 

 

 29 

 

(h)  Reinsurer shall, and shall cause any Reinsurer
Appointed Administrator, to provide all data and any reports reasonably
requested by Ceding Company in connection with the Administered Policies to
enable Ceding Company to comply with all applicable financial, regulatory, tax
and rating agency requirements, as well as all other filings required by
Applicable Law or in connection with Actions or Legally Required Ceding Company
Actions, subject to and in accordance with the terms of any applicable
Administrative Services Agreement. Reinsurer shall, and shall cause any
Reinsurer Appointed Administrator to, prepare and deliver any such data and
reports on a timely basis in order for Ceding Company to manage any Actions or
comply with any filing or other mandatory deadlines required by Applicable Law
or Ceding Company’s internal reporting requirements. 

 

(i)   In
the event that the administration of all or a portion of the Administrative
Services are transferred from the Ceding Company to FLAS or an alternative
administrator pursuant to Section 3.6(e) above due to a Material Ceding
Company Administration Breach, the Ceding Company shall bear all costs to
transition such Administrative Services to such Reinsurer Appointed
Administrator, as well as any damages or costs resulting from such transition,
including, without limitation, any early termination fees, any increases in
service fees on business remaining with the predecessor administrator to the
extent such increase in service fees results from such transition, and any
other costs and expenses resulting from the transition. A “Material Ceding
Company Administration Breach” shall have occurred (A) if there is any
material breach by the Ceding Company in the performance of the Administrative
Services in accordance with the terms of this Agreement that has had, or would
be reasonably expected to have, a material adverse effect on the business,
reputation, relations with regulators or financial condition of the Reinsurer
or its Affiliates and such breach is not cured within twenty (20) Business Days
following receipt by the Ceding Company of written notice of such breach from
the Reinsurer, or (B) if there is any pattern of breaches by the Ceding Company
in the performance of the Administrative Services in accordance with the terms
of this Agreement that have caused, or would be reasonably expected to cause,
material detriment to the Reinsurer, following thirty (30) Business Days
written notice thereof to the Ceding Company by the Reinsurer and a one-time
opportunity to cure, if such pattern of breaches is capable of being cured and
material detriment to Ceding Company has not occurred. For purposes hereof,
“material detriment to the Reinsurer” means (I) any remedy of specific
performance, injunction, consent order or other form of equitable relief
imposed on the Reinsurer that would be material to any line of business of the
Reinsurer, (II) any loss by the Reinsurer of any insurance license or
qualification, (III) the inability of the Reinsurer to satisfy material
regulatory requirements, (IV) a determination by an applicable regulator that
such activity constitutes an intentional and material violation of any
material  law, statute or regulation or any criminal act, or (V) any material
and adverse impact on the Reinsurer’s ability to conduct its business or its
relationships with regulators. 

 

Section 3.7       Certain Reports. 

 

(a)  The
Reinsurer shall provide written notice of the occurrence of any Recapture
Triggering Event within five (5) Business Days after its occurrence. In
addition, the Reinsurer will provide immediate written notice to the Ceding
Company in the event that (i) the Reinsurer’s ECR Ratio in respect of its
Long-Term Business Account, after taking account of the Long-Term Business
Account Diversification Benefit, falls below [***]% or (ii) to
the Reinsurer’s knowledge, the occurrence of a Recapture Triggering Event
pursuant to clause (ii) of the definition of such term is reasonably likely to
occur. The Reinsurer shall also cooperate fully with the Ceding Company and
promptly respond to the Ceding Company’s reasonable inquiries from time to time
concerning whether a Recapture Triggering Event has occurred. In addition to
the foregoing, the Reinsurer shall also provide written notice of any of the
following occurrences within five (5) Business Days of its occurrence: (i) a
direct or indirect Change of Control of the Reinsurer; (ii) the Reinsurer cedes
more than fifty percent (50%) of the Statutory Reserves ceded hereunder (as
measured on the basis of SAP) to a single “person” or “group” (within the
meaning of  Rule  13d-5  of  the  Securities 
Exchange  Act  of  1934  as  in  effect  on  the  Closing  Date)  or  (iii) the Reinsurer makes an application
for any insurance business transfer pursuant to Part VII of the

 30 

 

Financial Services and Markets
Act 2000 or a scheme of arrangement pursuant to 895-899 of the Companies Act
2006, or any provision that replaces the foregoing, or has a substantially
similar effect as the foregoing in any jurisdiction, in each case of (i), (ii)
and (iii), that does not constitute a Recapture Triggering Event.

 

(b)  The
Reinsurer shall provide the Ceding Company with copies of its annual and
quarterly Statutory Financial Statement (or equivalent thereof required by its
domiciliary jurisdiction) promptly following the filing thereof. Concurrently,
the Reinsurer shall provide the  Ceding Company with (i) in the case of its
annual Statutory Financial Statement, the Reinsurer’s Available Statutory
Economic Capital and Surplus as a percentage of its Enhanced Capital
Requirement (“ECR Ratio”) as of the applicable year end, (ii) in the
case of its quarterly Statutory Financial Statement, the Reinsurer’s best
estimate of its ECR Ratio as of the applicable quarter end (in each case, the “ECR
Reporting Deadline”) and (iii) loss recognition reports and cash flow
testing reports on the Covered Insurance Policies. Without limiting the
foregoing, upon the reasonable request of the Ceding Company, the Reinsurer
shall also provide the Ceding Company with a report setting forth the
Reinsurer’s estimate of its ECR Ratio as of any applicable month end. Each such
calculation shall include (A)(I) the Reinsurer’s ECR Ratio  in respect of its
Long-Term Business Account both before and after taking account of the Long-Term
Business Account Diversification Benefit and (II) the Reinsurer’s overall ECR
Ratio both before and after taking account of the Overall Diversification
Benefit; and (B) reasonable supporting detail with respect to such
calculations, including Reinsurer’s economic balance sheet and any filings with
the Bermuda Monetary Authority required in connection with the calculation of
the Reinsurer’s Bermuda Solvency Capital Requirements. The Ceding Company shall
maintain the confidentiality of each such statement or report, in each case to
the extent that such statement or report is not publicly available. 

 

(c)  Except
as otherwise specified in any Administrative Services Agreement, the Ceding
Company shall provide the Reinsurer with the reports and data specified in Exhibit
A at the times specified in Exhibit A. All reports provided by the
Ceding Company pursuant to Exhibit A shall be prepared consistent with
the Ceding Company’s books and records. 

 

(d)  Internal
Control Support.  [***] 

 

(i)         [***]. 

 

(ii)        [***]. 

 

(iii)       [***]. 

 

(iv)       [***]. 

 

(v)        [***]. 

 

Section 3.8       Books and Records. 

 

(a)  The
Ceding Company shall, and shall cause its Affiliates to, preserve until such
date as the obligations of the Ceding Company and the Reinsurer hereunder are
fully and finally satisfied and two (2) years
thereafter (or such other later date as may be required by Applicable Law), all
Books and Records related to this Agreement and the transactions contemplated
by this Agreement. During such period, upon any reasonable request from the
Reinsurer or its Representatives, the Ceding Company shall (i) provide to the Reinsurer and its Representatives
reasonable access to such Books and Records during normal business hours; provided,
that such access shall not unreasonably interfere with the conduct of the 

 

 31 

 

business of the Ceding Company,
and (ii) permit the Reinsurer and its Representatives to make copies of any
such Books and Records, in each case, at no cost to the Reinsurer or its
Representatives (other than reasonable out-of-pocket expenses). Such Books and
Records may be sought under this Section 3.8 by the Reinsurer for any
reasonable purpose, including to the extent reasonably required in connection
with accounting, litigation, securities law disclosure, external or internal
audits, or other similar purpose. 

 

(b)  Notwithstanding
anything to the contrary in Section 3.8(a), the Ceding Company reserves
the right to withhold any Books and Records from the Reinsurer that, in the
Ceding Company’s judgment, are protected from discovery by any applicable
privilege and/or immunity, including the attorney-client privilege and/or work
product doctrines, and will notify the Reinsurer in the event any such
documents are withheld. In the event that the Ceding Company withholds such
privileged materials, it shall take steps as reasonably necessary to attempt to
provide the Reinsurer with the information it requested without jeopardizing
the privileged nature of the material withheld. However, in no event shall the
Reinsurer have access to privileged materials relating to any dispute between
the Reinsurer and the Ceding Company. Further, should the Reinsurer request
access to materials protected by a confidentiality or protective order, the
Parties will use reasonable efforts to provide access in a manner that does not
violate such order. 

 

(c)  Promptly,
but no later than thirty (30) calendar days after completion of any inspection
conducted by the Reinsurer, the Reinsurer shall consult with the Ceding Company
with respect to any and all questions or issues raised by the inspection. If,
as a result of any inspection, the Reinsurer denies or disputes coverage for any claims, the Reinsurer shall, upon
the Ceding Company’s request, promptly provide the Ceding Company with a report
or analysis completed by the Reinsurer or its Representatives outlining the
findings of the inspection and identifying the reasons for denying or disputing
such claim. 

 

(d)  The
Reinsurer may request and the Ceding Company shall use commercially reasonable
efforts to give the Reinsurer reasonable access to any Subcontractor performing
administrative services in respect of the Long Term Care Reinsured Portfolio
for purposes of monitoring the performance of such Subcontractor’s
administration of the Long Term Care Reinsured Portfolio, as may be further
agreed by the Parties from time to time; provided, however, that
the Reinsurer shall reimburse the Ceding Company for any costs and expenses
billed to Ceding Company by such Subcontractor resulting from Reinsurer’s
request for information to any such Subcontractor or other exercise of access
as provided herein. The Reinsurer agrees and acknowledges that it has no right
to, and shall not, direct the activities of any such Subcontractor. The
Reinsurer shall keep the Ceding Company informed each time the Reinsurer seeks
access to any such Subcontractor. To the extent any such Subcontractor seeks
additional fees from the Ceding Company by virtue of the Reinsurer’s exercise
of such access, the Ceding Company shall notify the Reinsurer of such request
and the Parties will convene to determine how to respond to such request. 

 

ARTICLE IV

MODCO ACCOUNT;
COLLATERAL TRUST

 

Section 4.1       ModCo Account; Investment Guidelines. 

 

(a)  On
the Closing Date, the Ceding Company (i) established one or more custodial
accounts (the “ModCo Account”) and (ii) in accordance with Section 3.1(a),
made the Initial ModCo Deposit. The ModCo Account and the assets maintained
therein will (x) be retained, controlled, owned and maintained by the Ceding
Company, (y) be used exclusively for the purposes set forth in this Agreement
and (z) be maintained by the Ceding Company in one or more custodial accounts
segregated and distinct from the Ceding Company’s other general account assets.
Such assets shall be valued, for purposes of this Agreement, according to their
Statutory Book Value. In accordance with SAP, the Ceding Company 

 

 32 

 

elects to cede all realized
capital gains and losses in respect of the ModCo Assets to the Reinsurer on a
gross basis.

 

(b)  The
amount of the ModCo Reserves shall be determined for each Accounting Period by
the Ceding Company in accordance with SAP consistently applied as of the last
calendar day of such Accounting Period and shall be set forth in each
applicable Settlement Statement; provided, that the Ceding Company shall not
seek any permitted practices from a Governmental Authority that would have the
effect of increasing the amount of ModCo Reserves required in respect of the
liabilities ceded to the Reinsurer hereunder in accordance with SAP as
applicable to Ceding Company without first consulting in good faith with the
Reinsurer and considering any reasonable recommendations of the Reinsurer
before proceeding; provided, that if the Ceding Company obtains any such
permitted practice and does not accept the Reinsurer’s recommendations, and the
Reinsurer determines that such permitted practice (x) is commercially
unreasonable (viewed solely in the context of this Agreement and the other
ModCo Reinsurance Agreements, without reference to any other business
relationships the Ceding Company may have with any particular insured) and (y)
has had a material adverse effect on the Reinsurer’s liability and/or overall
economic position hereunder, then the Reinsurer must raise any such
determination promptly to the Ceding Company. If the Ceding Company agrees, the
Parties will cooperate to determine how to handle such situation in a mutually
agreeable manner. If the Parties cannot so agree, then the Reinsurer may bring
an arbitration proceeding pursuant to Section 10.3 hereof, with the
Reinsurer bearing the burden of proof that such permitted practice was commercially
unreasonable (viewed solely in the context of this Agreement and the other
Modco Reinsurance Agreements, without reference to any other business
relationships the Ceding Company may have with any particular insured), and
caused a material adverse effect on the Reinsurer’s liability and/or overall
economic position hereunder. The arbitration panel shall only be authorized to
adjust the calculation of the ModCo Reserves required to be held in the ModCo
Account as of any relevant date of determination to put the Reinsurer in
substantially the same economic position it would have been in had the Ceding
Company not obtained such permitted practice (with no other damages, including
any equitable awards, being permissible). 

 

(c)  For
purposes of calculating the ModCo Reserves pursuant to this Agreement, the
Ceding Company shall perform such calculations in a manner materially
consistent with the [***]  Valuation Methodology Memorandum, from [***]
to File (inclusive of the memoranda embedded therein), dated November
29, 2017, attached as Exhibit E, which sets forth the Ceding Company’s
valuation methodology and basis for valuation, including valuation interest
rates or assumptions, for the Covered Insurance Policies (the “Valuation
Methodology”) as of the Effective Time. The Ceding Company shall not modify
or change the Valuation Methodology on any of the Covered Insurance Policies
without the prior written consent of the Reinsurer, unless such modifications
or changes are required pursuant to SAP or otherwise under Applicable Law. In
the event that the Reinsurer does not provide its consent to a modification or
change requested by the Ceding Company (which change is not otherwise required
by SAP or under Applicable Law, it being understood that no Reinsurer consent
is required for modifications or changes required pursuant to SAP or otherwise
under Applicable Law) and the Parties are unable to resolve the dispute within
thirty (30) calendar days of the Ceding Company’s request for a change in the
Valuation Methodology, notwithstanding Section 10.3, the Ceding Company
shall engage an Independent Actuary, with the selection of the Independent
Actuary subject to the Reinsurer’s prior written consent, not to be
unreasonably withheld, and the Independent Actuary’s written determination as
to whether the Ceding Company’s proposed modification or change to the
Valuation Methodology is reasonable will be binding on the Parties. Both
Parties will promptly supply the Independent Actuary with the necessary data to
reach its determination, subject to such Independent Actuary’s entry into a
customary non-disclosure agreement. The fees and expenses of such Independent
Actuary will be borne equally by the Parties; provided, that if the
Independent Actuary determines that  the Valuation Methodology shall be modified
as proposed by the Ceding Company, the Reinsurer will pay or promptly reimburse
the Ceding Company for all fees and expenses of the Independent Actuary. 

 

 33 

 

(d)  The ModCo Assets (other than Policy Loans) (I) will be
managed and invested by the Ceding Company and/or AIG Asset Management (U.S.), LLC, as the investment manager
appointed by the Ceding Company hereunder, and/or such other investment manager
designated from time to time as provided below (each, an “Investment Manager”)
in a manner consistent with the investment guidelines attached hereto as Exhibit
C (the “Investment Guidelines”), and (II) shall consist only of
cash, any securities qualifying as admitted assets in the state of domicile of
the Ceding Company, and any other form of security acceptable to the primary
insurance regulatory authority in such state (“Permitted Assets”). Such
assets will be free and clear of claims, liens and encumbrances running to the
benefit of third parties other than those (x) arising in the ordinary course of
investment management with respect to admitted assets, or (y) permitted in the
Investment Guidelines; provided, that if a claim, lien or encumbrance
arises with respect to any such asset, except as permitted under clause (x) and
(y), the Ceding Company will use its commercially reasonable efforts to cure
such claim, lien or encumbrance as promptly as practicable following its
discovery thereof. 

 

(i)        The
Ceding Company shall not amend, modify or otherwise change the investment
guidelines pursuant to which any Investment Manager manages Permitted Assets,
or, prior to the third anniversary of the Amendment Date, the terms relating to
the fees and expense reimbursement payable to any such Investment Manager,
without the Reinsurer’s prior written consent thereto. In addition, not less
than ninety (90) calendar days prior to the effective date of any proposed
amendments to the fees payable to any Investment Manager following the third
anniversary of the Amendment Date, the Ceding Company shall give the Reinsurer
written notice of such proposal, and the Parties shall consult in good faith
with respect to such proposed amendments to such fees. If the Investment
Manager resigns or is removed, or, following the third anniversary of the
Amendment Date, the Reinsurer requests that the Investment Manager be replaced
in accordance with the requirements of this Section 4.1(d), the Ceding
Company shall appoint a replacement investment manager as directed by the
Reinsurer with respect to the Permitted Assets, if such replacement investment
manager is reasonably acceptable to the Ceding Company; provided, however,
that no replacement investment manager shall have authority to engage in any of
the following, for or in respect of, the Modco Assets: (A) derivatives, (B)
foreign currency transactions (for the avoidance of doubt, not including
foreign currency denominated securities), (C) Short Term Borrowing
Transactions, or (D) Short Term Investments comprising reverse repurchase
agreements, cash-out securities lending agreements or liquidity pools managed
by the Ceding Company or any of its Affiliates. 

 

(ii)       From
time to time following the third anniversary of the Amendment Date, if directed
to do so by the Reinsurer, the Ceding Company shall appoint one or more
additional Investment Managers reasonably acceptable to the Ceding Company with
respect to the Permitted Assets; provided, however, that no
additional investment manager shall have authority to engage in any of the
following, for or in respect of, the Modco Assets: (A) derivatives, (B) foreign
currency transactions (for the avoidance of doubt, not including foreign
currency denominated securities), (C) Short Term Borrowing Transactions, or (D)
Short Term Investments comprising reverse repurchase agreements, cash-out
securities lending agreements or liquidity pools managed by the Ceding Company
or any of its Affiliates. Not less than ninety (90) calendar days prior to the
effective date of any proposed replacement or appointment of additional
Investment Managers following the third anniversary of the Amendment Date, the
Reinsurer shall give the Ceding Company written notice of such proposal, and
the Parties shall consult in good faith with respect to such proposed
replacement or additional Investment Managers. Any replacement or additional
Investment Manager shall accept its appointment by entering into an investment
management agreement with respect to the Permitted Assets in a form, including
the terms and conditions, reasonably acceptable to the Ceding Company and the
Reinsurer. Notwithstanding anything in this Agreement  to  the  contrary, 
the  Ceding  Company  shall  not  be  responsible  for  any  breach  of 

 

 34 

 

the Investment Guidelines
caused by an act or omission by any Investment Manager appointed at the
direction of the Reinsurer; provided, that such breach was not caused by the
act, failure to act or direction of the Ceding Company. Additionally, the
Ceding Company agrees to consult with the Reinsurer, in advance, regarding any
proposals by its Investment Managers to appoint any subadvisers in respect of
ModCo Assets that are unaffiliated with the Investment Managers. 

 

(iii)      The
Ceding Company and the Reinsurer will cooperate reasonably to give effect to
(and the Ceding Company will instruct its applicable Investment Manager to give
effect to) any (x) proposal by
the Reinsurer to transfer for Fair Market Value one or more assets between an
account owned by the Reinsurer, on the one hand, and the ModCo Account, on the
other hand; provided, that the Ceding Company shall have no obligation
to take any action with respect to  any transfer that could, as reasonably
determined by the Ceding Company or its advisors, (i) cause any breach or
exception to any provision of this Agreement (including the Investment
Guidelines) or any Applicable Insurance Regulation, (ii) give rise to a
requirement to obtain any regulatory approval or non-disapproval; or (iii)
contravene any provision of Applicable Law, including the U.S. securities laws,
or any rule promulgated thereunder; or (y) other commercially reasonable
direction from the Reinsurer with respect to management of the ModCo Assets;
provided that such direction does not violate this Agreement (including the
Investment Guidelines), any Applicable Law or any law or regulation applicable
to such Investment Managers or insurance company investments; provided, further,
that, in the case of either of clause (x) or (y), any such direction from, or
proposal by, the Reinsurer shall be given in writing, including by email, by
its designated representative described below. The Reinsurer shall designate an
authorized individual to provide such direction or proposal, and the Ceding
Company shall designate an individual to receive any such direction or proposal
and deliver such direction or proposal to the applicable Investment Manager.
Notwithstanding the foregoing, the Parties acknowledge that the Reinsurer bears
the economic risk of the ModCo Assets as described in this Agreement, and agree
that, other than the obligation to (A) cooperate in giving effect to any
proposal in respect of a transfer and/or (B) deliver any direction to the
applicable Investment Manager as contemplated above, the Ceding Company shall
have no obligation, and shall incur no liability, with respect to such
direction or proposal, as applicable. 

 

(iv)       Furthermore,
each of the Ceding Company and the Reinsurer acknowledges and agrees that any
fees and expenses paid by the Ceding Company under any Capital Markets Services
Agreement in respect of ModCo Assets shall constitute Investment Expenses, and
that the Ceding Company shall not agree to amend any terms relating to fees and
expense reimbursements payable to any Person under such Capital Markets
Services Agreement in respect of ModCo Assets without the Reinsurer’s prior
written consent.

 

(e)  For
the avoidance of doubt, the Ceding Company and the Reinsurer agree that the IMR
is ceded to the Reinsurer. The IMR shall be calculated by the Ceding Company. 

 

(f)  Statutory  Impairments. 

 

(i)         Determinations
of statutory impairments of ModCo Assets which are made by the Ceding Company
shall be based upon the statutory rules and guidelines and the impairment
policy used by the Ceding Company for purposes of calculating statutory
impairments  reflected in the Ceding Company’s Statutory Financial Statements
and without regard to the existence of this Agreement. Notwithstanding Section
10.3, any disagreements with respect to determinations of statutory
impairments of ModCo Assets shall be subject to this Section 4.1(f). If
the Ceding Company determines that any ModCo Assets have become impaired for
purposes of determining Statutory Book Value and such impairments exceed
$10,000,000 in the aggregate as respects any 

 

 35 

 

Accounting Period (a “Significant
Impairment”), the Ceding Company shall notify the Reinsurer as promptly as
practicable after such determination and in no event later than ten (10)
Business Days following the last day of such Accounting Period. Any report
notifying the Reinsurer of a Significant Impairment shall provide the CUSIP,
ISIN or similar security identifier  (as applicable)  for the impaired ModCo
Assets and describe the reason for each such impairment  and the effect on
Statutory Book Value of the applicable ModCo Assets. In addition, any such
report shall state whether any impaired assets are held in other portfolios of
the Ceding Company or any of its Affiliates and, if so, shall confirm that the
Statutory Book Value treatment for each such asset is consistent across all
such portfolios. Within five (5) Business Days following the Reinsurer’s
receipt of written notification of a Significant Impairment, the Reinsurer
shall provide written notice to the Ceding Company of its objection (the “Objection
Notice”) to any such impairment determination. If the Reinsurer fails to
provide such Objection Notice to the Ceding Company within such time period,
the Reinsurer shall be deemed to have accepted such impairment determination.
During the five (5) Business Days immediately following the delivery of an
Objection Notice, the Ceding Company and the Reinsurer will seek in good faith
to resolve any disputes as to the determination or calculation of statutory
impairments of the applicable ModCo Assets. The Parties shall use reasonable
efforts and work together in good faith to  resolve any such dispute prior to
the date on which the Ceding Company is required to file the relevant Statutory
Financial Statement with the relevant insurance regulator. If the Parties are
unable to resolve any such dispute prior to the date on which the Ceding
Company is required to file a Statutory Financial Statement with an applicable
insurance regulator, the Ceding Company may use its own good faith calculation
of the statutory impairment for purposes of preparing its Statutory Financial
Statements. If the Parties are unable to resolve any such dispute prior to the
date on which a quarterly settlement is due hereunder, the Parties shall use
the Ceding Company’s good faith calculation of the statutory impairment for
purposes of effecting such required quarterly settlement. If thereafter the
dispute is ultimately decided in the Reinsurer’s favor pursuant to the arbitration
process set forth in Section 4.1(f)(ii), then the necessary adjustment
will be made between the Parties and reflected in the quarterly settlement for
the Accounting Period in which such dispute is ultimately resolved. 

 

(ii)        In
the event that the Parties cannot resolve a dispute regarding a Significant
Impairment with the five (5) Business Days immediately following the delivery
of an Objection Notice, at the Reinsurer’s option, the Parties may engage one
or more Independent Valuation Experts (depending on whether different asset
classes are implicated in the same Significant
Impairment, thereby entailing different experts for valuation purposes), with
the selection of such Independent Valuation Experts subject to the Reinsurer’s
prior written consent, not to be unreasonably withheld, to arbitrate the
dispute. If the Parties cannot agree on the choice of  expert, the process in Section
9.5(e) shall be followed for such selection. The Independent Valuation
Experts shall evaluate which of the Parties’ two (2) determinations with
respect to the Statutory Book Value of the relevant ModCo Assets (the “Disputed
Assets”) is more reasonable in light of the evidence provided by both
Parties in connection with their respective submissions to such Independent
Valuation Experts. The Independent Valuation Experts shall select one and only
one of the determinations submitted by the Parties. Both Parties will promptly
supply the Independent Valuation Experts with the necessary data to perform its
analysis, subject to each such expert’s entry into a customary non-disclosure
agreement. Each Independent Valuation Expert’s written decision as to the more
reasonable Statutory Book Value of the Disputed Assets under the circumstances
will be binding on the Parties. The fees and expenses of the applicable
Independent Valuation Expert will be borne by the Party that such expert
decides against in its determination of the more reasonable Statutory Book
Value of the Disputed Assets. 

 

 36 

 

(iii)      In addition to the  Reinsurer’s  right  to 
pursue  the  process  set  forth  in  Section 4.1(f)(ii), if a
Significant Impairment dispute cannot be resolved by the Parties within the
five (5)-Business Day period following the delivery of an Objection Notice, the
Reinsurer may elect to do either of the following: 

 

(x)        Instruct the Ceding Company
to continue to hold any Disputed Assets in the ModCo Account and not to sell,
or cause to be sold, any such Disputed Assets unless directed to do so by the
Reinsurer (or unless the sale or other transfer thereof is necessary to satisfy
a reinsured obligation in accordance with this Agreement or unless necessary to
remain in compliance with Applicable Law and/or the Investment Guidelines); or 

 

(y)        To the extent such Disputed
Assets are readily transferable, instruct the Ceding Company to transfer any
such Disputed Assets to the Reinsurer. 

 

(iv)       For
the sake of clarity, the risk of impairments is fully transferred to the
Reinsurer as noted by the reference to line 34 (Net realized capital gains and
losses) of the Summary of Operations of the Ceding Company’s Statutory
Financial Statements as contained in the definition of ModCo Account Investment Income. 

 

(g)  In
addition to the settlement of the Quarterly Net Settlement Amount for each 
Accounting Period, if the aggregate Statutory Book Value of the ModCo Assets as
of the end of such Accounting Period (first taking into account any transfer to
the Reinsurer of any Disputed Assets pursuant Section 4.1(f)(iii)(y)
above and excluding the Statutory Book Value, whether positive or negative, of
any derivatives held in the ModCo Account) exceeded the sum of (i) the ModCo
Reserves as of the end of such Accounting Period, plus (ii) the sum of (x) the
Derivative Margin Amount as of the end of such Accounting Period and (y) the
Short Term Borrowing Collateral Amount as of the end of such Accounting Period,
plus (iii) [***], the Ceding Company shall withdraw Permitted
Assets as directed by the Reinsurer having a Statutory Book Value as of the end
of such Accounting Period in an amount no greater than the lesser of (x) such
excess and (y) the aggregate Statutory Book Value of Permitted Assets and shall
transfer cash or other Permitted Assets to the Reinsurer equal to such
withdrawn amount; provided, that the Reinsurer shall direct the Ceding
Company as respects allocation between cash and Permitted Assets as well as the
choice of the Permitted Assets, if any, to so withdraw and transfer;
provided, further, that the aggregate Statutory Book Value of the
ModCo Assets following such withdrawal shall be no less than the sum of (i) the
ModCo Reserves as of the end of such Accounting Period, plus (ii) the sum of
(x) the Derivative Margin Amount as of the end of such Accounting Period and
(y) the Short Term Borrowing Collateral Amount as of the end of such Accounting
Period, plus (iii) [***]. For the sake of clarity, the aggregate
Statutory Book Value of the ModCo Assets as of the end of an Accounting Period
in Sections 4.1(g) and (h)  will be inclusive of any ModCo Assets
held therein in respect of any ModCo Account Investment Income for such
Accounting Period. 

 

(h)  In
addition to the settlement of the Quarterly Net Settlement Amount for each 
Accounting Period, if the aggregate Statutory Book Value of ModCo Assets as of
the end of such Accounting Period (first taking into account any transfer to
the Reinsurer of any Disputed Assets pursuant Section 4.1(f)(iii)(y)
above and excluding the Statutory Book Value, whether positive or negative, of
any derivatives held in the ModCo Account) was less than the sum of (i) the ModCo
Reserves as of the end of such Accounting Period, plus (ii) the sum of (x) the
Derivative Margin Amount as of the end of such Accounting Period and (y) the
Short Term Borrowing Collateral Amount as of the end of such Accounting Period,
plus (iii) [***], the Reinsurer shall transfer to the Ceding
Company for deposit into the ModCo Account cash or other Permitted Assets
having an aggregate Fair Market Value or Margin Collateral Value, as
applicable, as of the day of transfer sufficient to cure such shortfall. The
obligation to transfer amounts for deposit into the ModCo Account as described
herein shall in no manner be construed 

 

 37 

 

to obligate the Ceding Company
to top up the ModCo Account independently in any manner separate from amounts
so paid by the Reinsurer for such purpose.

 

(i)   In
addition to the requirements in Section 4.1(h), if on any Business Day,
the sum of (x) the portion of the aggregate Derivative Margin Requirement for
the ModCo Account that has not yet been funded through the deposit of assets to
the ModCo Account, plus (y) the portion of the aggregate Short Term Borrowing
Collateral Requirement for the ModCo Account that has not yet been funded
through the deposit of assets to the ModCo Account (such sum, the “Interim Required
Collateral Balance”)  exceeds $[***],
the Reinsurer shall deposit into the ModCo Account additional ModCo Assets
having an aggregate Margin Collateral Value (for the avoidance of doubt, such
amount inclusive of the $[***] threshold) as of the day of
transfer at least equal to such Interim Required Collateral Balance, which
amount shall be deposited into the ModCo Account no later than 5:00 p.m. on the
second Business Day after which written notice of such Interim Required
Collateral Balance is provided by the Ceding Company to the Reinsurer; provided,
however, that if such notice is received by the Reinsurer later than
11:00 a.m. on any Business Day, the Reinsurer shall have until 5:00 p.m. on the
third Business Day after which such notice is provided to make such deposit. In
addition to the requirements in Section 4.1(g), if on any Business Day,
the sum of (x) the portion of the aggregate Derivative Margin Amount for the
ModCo Account in excess of the Derivative Margin Requirement, and not
previously withdrawn by or transferred to Reinsurer and (y) the portion of the
aggregate Short Term Collateral Amount for the ModCo Account in excess of the
Short Term Borrowing Collateral Requirement and not previously withdrawn by  or  transferred  to  Reinsurer  (such  sum,  the  “Interim  Return 
Collateral  Balance”)  exceeds $[***], the Ceding
Company shall withdraw ModCo Assets as directed by the Reinsurer having an
aggregate Statutory Book Value as of the date of transfer equal to the Interim
Return Collateral Balance (for the avoidance of doubt, such amount inclusive of
the $[***] threshold), which amount shall be transferred to
Reinsurer no later than 5:00 p.m. on the second Business Day after written
notice of such Interim Return Collateral Balance is provided by the Ceding
Company to the Reinsurer via the daily report referenced below; provided,
however, that if such notice is received by the Reinsurer later than
11:00 a.m. on any Business Day, the Ceding Company shall have until 5:00 p.m.
on the third Business Day after which such notice is provided to complete such
transfer; provided, that the Reinsurer shall direct the Ceding Company
as respects such allocation between cash and other ModCo Assets as well as the
choice of the ModCo Assets, if any, to so withdraw and transfer; provided,
further, that the aggregate Statutory Book Value of ModCo Assets in the
ModCo Account following such withdrawal is no less than the sum  of  (i)  ModCo  Reserves 
as  of  the  last  day  of  the  previous  Accounting 
Period,  plus  (ii)  the  sum  of
(x) the Derivative Margin Amount for the ModCo Account and (y) the Short Term
Borrowing Collateral Amount for the ModCo Account, with each of (x) and (y)
measured as of the previous Business Day, plus
(iii) [***]. On each Business Day, the Ceding Company shall
provide a report to the Reinsurer stating the value of the Derivatives Margin
Amount and the  Short Term Borrowing Collateral Amount, each as of the previous
Business Day. The obligation to deposit such cash or other ModCo Assets into the
ModCo Account as described herein shall in no manner be construed to obligate
the Ceding Company to top up the ModCo Account independently in any manner
separate from amounts so paid by the Reinsurer for such purpose. Any amounts
paid by or transferred to a Party under this Section 4.1(i) during a
given Accounting Period shall be reflected in the report delivered by the
Ceding Company for such Accounting Period pursuant to Section 3.2 for
such Accounting Period and taken into account in determining the amounts due
under Sections 4.1(g) and (h), respectively, with respect to such
Accounting Period. 

 

(j)   “ModCo
Account Investment Income” for an Accounting Period shall equal the sum of
the net investment income calculated by the Ceding Company on the ModCo Assets
during such Accounting Period in accordance with line 3 (Net Investment Income)
(excluding the impact of any investment expenses, calculated in accordance with
line 11 on the Exhibit of Net Investment Income from its Statutory Financial
Statements), line 4 (Amortization of Interest Maintenance Reserve), line 34
(both column 1  and  inset  amount  #1  together) 
(Net  realized  capital  gains  (losses), 
prior  to  reduction  for  taxes) 

 

 38 

 

and line 38 (Change in net
unrealized capital gains (losses) prior to reduction for taxes) of the Summary
of Operations from its Statutory Financial Statement, earned and realized; provided,
however, the ModCo Account Investment Income shall not include any
Interest Earned on Policy Loans. The ModCo Account Investment Income
calculation will not be reduced for any investment expenses (as the Investment
Expenses are a separate allowance hereunder payable by the Reinsurer). For the
sake of clarity, the Reinsurer bears full investment risk of the ModCo Assets,
with no independent obligation of the Ceding Company to top up the ModCo Assets
due to impairments or otherwise, with all such risk being transferred and
effected in connection with the adjustments contemplated in Section 4.1(g)
and (h)  above. 

 

(k)  “ModCo
Reserves” means, for each Accounting Period, an amount equal to 100% of the
Quota Share of (a) the Statutory Reserves, plus  (b) the IMR, minus 
(c) the result of (i) uncollected premium, plus  (ii) deferred and
accrued premium, minus  (iii) advance premium (where (c) is calculated in
accordance with Exhibit 1 of the Statutory Financial Statements), plus 
(d) the result of (i) resisted claims, plus (ii) pending claims, plus 
(iii) incurred but not reported claims (where (d) is calculated in accordance
with Exhibit 8 of the Statutory Financial Statements), each as determined as of
the last calendar day of the current Accounting Period in accordance with the
methodologies used by the Ceding Company to calculate such amounts in
accordance with SAP, and after giving effect to the credit for reinsurance
taken by the Ceding Company in respect of the Covered Insurance Policies for
the Existing Reinsurance Agreements (for avoidance of doubt, all accruals net
of reinsurance ceded are included in these amounts, such as amounts recoverable
from reinsurers and other amounts receivable under Existing Reinsurance
Agreements).

 

(l)   All
deposits under Section 4.1(h) shall be made no later than ten (10)
Business Days after the receipt by the Reinsurer of the Settlement Statement.
Notwithstanding anything to the  contrary, where a deposit is made pursuant to Section
4.1(h) with respect to any year end settlement, the Ceding Company may
provide a projected calculation of ModCo Reserves for such year-end at any time
following December 1 prior to such year end, and the Reinsurer shall transfer
to the Ceding Company any collateral shortfalls reflected therein within the
later of (x) ten (10) Business Days after receipt of the aforementioned report
of projections and (y) the last Business Day of December of the year for which
the Ceding Company is filing its Statutory Financial Statement (assuming the
report on year-end collateral requirements has been reported to the Reinsurer
five (5) Business Days prior to such date). Any true-ups to such amounts shall
occur as part of the regular periodic settlement that follows the finalization
of the Ceding Company’s annual Statutory Financial Statements. 

 

Section 4.2    Interest on Policy Loans. Each
Accounting Period and pursuant to the Settlement Statement, the Reinsurer shall
participate in a Quota Share of Interest Earned on Policy Loans. Such payments
will be based on the best estimate of the Ceding Company.

 

Section 4.3    Credit  for  Reinsurance  for  Modified 
Coinsurance  Cession.  The  Ceding Company shall own the ModCo Account and
the assets maintained therein, and the Reinsurer will not be required to provide
reserve credit in respect of any Reinsured Liabilities ceded hereunder on a
modified coinsurance basis. 

 

Section 4.4    Collateral  Trust. 

 

(a)  Within
thirty (30) days following the Closing Date, the Reinsurer shall establish a
collateral trust account (the “Collateral Trust Account”) with a third
party trustee for the benefit of the Ceding Company pursuant to the terms of a
reinsurance trust agreement substantially in the form of Exhibit D (the
“Collateral Trust Agreement”), with such changes thereto as may be
mutually agreed by the Parties. The Reinsurer shall maintain the Collateral
Trust Account with Collateral Trust Authorized Investments having an aggregate
Fair Market Value no less than the Collateral Trust Required Balance. 

 

 39 

 

The Collateral Trust Required
Balance shall be adjusted as of the end of each Accounting Period. The
Collateral Trust Authorized Investments shall be valued according to their
current Fair Market Value.

 

(b)  Notwithstanding
any other provision of this Agreement, the Ceding Company or any successor by
operation of law, including any liquidator, rehabilitator, receiver or
conservator of the Ceding Company may draw upon the assets held in the
Collateral Trust Account at any time, without diminution because of the
insolvency of any Party only for the following purposes: (i) to reimburse the
Ceding Company for the Reinsurer’s share of premiums returned to the owners of
the Covered Insurance Policies on account of cancellation of such policies;
(ii) to reimburse the Ceding Company for the Reinsurer’s share of surrenders
and benefits or losses paid by the Ceding Company pursuant to the provisions of
the Covered Insurance Policies; (iii) to pay any other amount that the Ceding
Company claims is due under this Agreement; or (iv) in the event that the
Ceding Company receives notice of termination of the Collateral Trust Agreement,
to fund an account with the Ceding Company in an  amount at least equal to the
Collateral Trust Required Balance. In the event that any amount drawn by the
Ceding Company is subsequently determined not to be due, the Ceding Company
shall promptly return to the Reinsurer the excess amounts so drawn and, until
such excess amounts are returned to the Reinsurer, such amounts, together with
interest thereon accrued at the Interest Rate (or the Alternative Rate, if
applicable), shall be held by the Ceding Company in trust for the complete and
sole benefit of the Reinsurer and the Reinsurer shall be entitled to all
rights, title and interest in said amounts. 

 

(c)  If
as of the end of any Accounting Period the Fair Market Value of Collateral
Trust Authorized Investments is less than the Collateral Trust Required
Balance, the Reinsurer shall deposit Collateral Trust Authorized Investments
into the Collateral Trust Account having an aggregate Fair Market Value
sufficient to make up such difference. If as of the end of any Accounting
Period the Fair Market Value of Collateral Trust Authorized Investments exceeds
the Collateral Trust Required Balance, the Reinsurer may request the Ceding
Company to release an amount up to such excess. 

 

(d)  The
Reinsurer shall arrange for assets to be deposited into the Collateral Trust
Account. Prior to depositing any assets with the trustee of such Collateral
Trust Account, the Reinsurer shall execute assignments or endorsements in
blank, or transfer legal title of such assets to the trustee of all shares,
obligations or any other assets requiring assignment so that the Ceding
Company, or the trustee upon the Ceding Company’s direction, may, whenever
necessary, negotiate any such assets without the consent or signature of the
Reinsurer or any other entity. 

 

(e)  Upon
the Ceding Company’s approval, which shall not be unreasonably withheld,
conditioned or delayed, the Reinsurer may withdraw all or any of the assets
held in the Collateral Trust Account and replace the withdrawn assets with
other Collateral Trust Authorized Investments having a Fair Market Value at
least equal to the Fair Market Value of the assets so withdrawn so as to
maintain at all times on deposit Collateral Trust Authorized Investments in an
amount at least equal to the Collateral Trust Required Balance. 

 

(f)  Notwithstanding
any rule of any Applicable Law regarding the existence or non- existence of
irreparable injury, the provisions of this Section 4.4 are agreed to be
specifically enforceable including by motion for preliminary injunction or
other provisional remedies. 

 

ARTICLE
V

COINSURANCE CESSION

 

Section 5.1    Coinsurance Cessions Generally.   At
the Effective Time, no cession shall be made hereunder on a coinsurance basis. 

 

 40 

 

Section 5.2       Security  Required. 

 

(a)  To
the extent any cession is made hereunder on a coinsurance basis, the Reinsurer
shall secure its obligations with respect to the Coinsured Liabilities by, at
its option, either (i) posting a “clean”, irrevocable, unconditional and
evergreen letter of credit issued by a bank acceptable to the Ceding Company in
its sole discretion that meets the requirements of Applicable Law and would
permit the Ceding Company  full  credit  as  admitted  reinsurance  of  the  Coinsured 
Liabilities  (a  “Letter  of  Credit”), (ii)
establishing and funding a reinsurance trust account (the “Reinsurance Trust
Account”) for the benefit of the Ceding Company, which Reinsurance Trust
Account 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/or investments of the types permitted by Article 3.10, § (d), or
Article 5.75-1, § (d) of the Texas Insurance Code and permitted by investment
guidelines mutually agreed between the Ceding Company and the Reinsurer, provided,
that such investments are issued by an institution that is not the parent,
Subsidiary or other Affiliate of either the Ceding Company or the Reinsurer (“Authorized
Investments”), deposited pursuant to a trust agreement in form and
substance, and with a third party trustee, in each case satisfactory to the
Ceding Company in its sole discretion that, at all times, meets the
requirements of any Applicable Law, and that would permit the Ceding Company
full credit as admitted reinsurance of the Coinsured Liabilities, or (iii) a
combination of both a Letter of Credit and Reinsurance Trust Account. Assets
deposited into the Reinsurance Trust Account shall be valued according to their
current Fair Market Value. 

 

(b)  The
Reinsurer shall maintain the face amount of the Letter of Credit plus the Fair
Market Value of Reinsurance Trust Account Authorized Investments (“Collateral
Value”) at an amount no less than the then-applicable Required Balance. The
Required Balance shall be adjusted as of the end of each Accounting Period. “Required
Balance” means, with respect to any Accounting Period, an amount equal to
the Coinsured Liabilities as of the end of the most recent Accounting Period
plus, to the extent required, any additional amount necessary to provide the
Ceding Company full credit for reinsurance for the Coinsured Liabilities under
Applicable Law.

 

(c)  If
at any time the Collateral Value is less than the Required Balance, the
Reinsurer shall, at its option, either (i) deposit Authorized Investments into
the Reinsurance Trust Account having an aggregate Fair Market Value sufficient
to make up such difference, (ii) secure delivery to the Ceding Company of an
amendment to the existing Letter of Credit or a new Letter of Credit with a
face amount sufficient to make up such difference or (iii) a combination of (i)
and (ii). 

 

(d)  If,
following the date on which payment of the applicable Quarterly Net Settlement
Amount is paid, the Collateral Value exceeds the Required Balance as of the end
of the immediately prior Accounting Period, the Reinsurer may request, at its
option, the Ceding Company to release excess credit (whether in the form of a
downward adjustment in the Letter of Credit and/or a release of assets in the
Reinsurance Trust Account) in an amount no greater than the excess of the
Collateral Value over the Required Balance. The Ceding Company shall cooperate
in such regard; provided, that, following such reduction and/or
withdrawal, the Required Balance does not exceed the Collateral Value and the
Reinsurance Trust Account Authorized Investments is at least equal to 102% of
the Reinsurance Trust Account Required Balance. 

 

Section 5.3    Reinsurance Trust Account. 

 

(a)  For
so long as all or some portion of the reinsurance of the Coinsured Liabilities
is secured through the use of the Reinsurance Trust Account, the Reinsurer
shall maintain in such Reinsurance Trust Account Authorized Investments having,
with respect to any date of determination, a Fair Market  Value  equal  to  (i)  the  Required 
Balance  as  of  such  date  of  determination,  minus  (ii)  the  face 

 

 41 

 

amount of the Letter of Credit,
if any, as of such date of determination (the “Reinsurance Trust Account
Required Balance”). As promptly as practicable following the date on
which payment of the applicable Quarterly Net Settlement Amount is due, the
Reinsurer shall prepare and deliver to the Ceding Company a statement (the “Reinsurance
Trust Account Statement”) setting forth: (x) the Reinsurance Trust Account
Required Balance with respect to such Accounting Period and (y) the Fair Market
Value of the assets held in the Reinsurance Trust Account as of the end of such
Accounting Period. 

 

(b)  The
Reinsurer shall arrange for assets to be deposited into the Reinsurance Trust
Account. Prior to depositing any assets with the trustee of such Reinsurance
Trust Account, the Reinsurer shall execute assignments or endorsements in
blank, or transfer legal title to the trustee of all shares, obligations or any
other assets requiring assignment so that the Ceding Company, or the trustee
upon the Ceding Company’s direction, may, whenever necessary, negotiate any
such assets without the consent or signature of the Reinsurer or any other
entity. Notwithstanding the composition of assets in the Reinsurance Trust
Account, all settlements with respect to the Reinsurance Trust Account between
the Ceding Company and the Reinsurer shall be in cash or its equivalent. 

 

(c)  Upon
the Ceding Company’s approval, which shall not be unreasonably withheld,
conditioned or delayed, the Reinsurer may withdraw all or any of the assets
held in the Reinsurance Trust Account and replace the withdrawn assets with
other Authorized Investments having a Fair Market Value at least equal to the
Fair Market Value of the assets so withdrawn so as to maintain at all times on
deposit Authorized Investments in an amount at least equal to the Reinsurance
Trust Account Required Balance. 

 

Section 5.4    Additional  Withdrawals. 
Notwithstanding  any  other  provision  of  this Agreement, the Ceding Company
or any successor by operation of law, including any liquidator, rehabilitator,
receiver or conservator of the Ceding Company may draw upon the Letter of
Credit or the assets held in the Reinsurance Trust Account at any time, without
diminution because of the insolvency of any Party only for the following
purposes: (a) to reimburse the Ceding Company for the Reinsurer’s share of
premiums returned to the owners of the Covered Insurance Policies on account of
cancellation of such policies; (b) to reimburse the Ceding Company for the
Reinsurer’s share of surrenders and benefits or losses paid by the Ceding Company
pursuant to the provisions of the Covered Insurance Policies; (c) to pay any
other amount that the Ceding Company claims is due under this Agreement; or (d)
in the event that the Ceding Company receives notice of nonrenewal of any
Letter of Credit or termination of any trust agreement to fund an account with
the Ceding Company in an amount at least equal to the Required Balance. In the
event that any amount drawn by the Ceding Company is subsequently determined
not to be due, the Ceding Company shall promptly return to the Reinsurer the
excess amounts so drawn and, until such excess amounts are returned to the
Reinsurer, such amounts, together with interest thereon accrued at the Interest
Rate (or the Alternative Rate, if applicable), shall be held by the Ceding
Company in trust for the complete and sole benefit of the Reinsurer and the
Reinsurer shall be entitled to all rights, title and interest in said amounts. 

 

Section 5.5    General. 

 

(a)  Notwithstanding
anything to the contrary herein, the Reinsurer agrees to take other
commercially reasonable actions that are necessary to allow the Ceding Company
to receive full credit as admitted reinsurance under any Applicable Law for the
reinsurance of the Coinsured Liabilities. In the event that the Reinsurer at
any time fails to meet its security obligations as set forth in this Article
V, the Ceding Company shall be entitled to hold back, as funds withheld,
any amounts otherwise due to the Reinsurer under this Agreement or any other
agreement between the Ceding Company and the
Reinsurer. 

 

 42 

 

(b)  The Ceding Company may, at its discretion, require
payment of any sum in default instead of resorting to any security held, and it
shall be no defense to any such claim that the Ceding Company might have had
recourse to any such security. 

 

(c)  Notwithstanding
any rule of any Applicable Law regarding the existence or  non-existence of
irreparable injury, the provisions of this Article V are agreed to be
specifically enforceable including by motion for preliminary injunction or
other provisional remedies. 

 

(d)  For
purposes of this Article V, “any Applicable Law” shall include but not
be limited to all laws and regulations affecting the ability of the Ceding
Company to take credit for reinsurance, including all such laws and regulations
applicable to foreign branches of the Ceding
Company. 

 

ARTICLE
VI

OVERSIGHTS; COOPERATION

 

Section 6.1    Oversights. Any unintentional or
inadvertent delay, omission or error made in connection with this Agreement or
any transaction hereunder shall not relieve either Party from any Liability
that would attach to it hereunder if such delay, omission or error had not been
made; provided, that such delay, omission or error is rectified upon
discovery. If (a) the failure of either Party to comply with any provision of
this Agreement is unintentional or the result of a misunderstanding or
oversight and

(b) such
failure to comply is promptly rectified, both Parties shall be restored as
closely as possible to the positions they would have occupied if no error or
oversight had occurred. 

 

Section 6.2    Cooperation. Each Party shall
cooperate fully with the other in all reasonable  respects in order to
accomplish the objectives of this Agreement. 

 

ARTICLE
VII

TAX; GUARANTY FUND ASSESSMENTS

 

Section 7.1    DAC  Tax  Election.   The   Parties  
shall   make   the   election   provided   in Section 1.848-2(g)(8) of the
Treasury Regulations under Section 848 of the Code. The specifics of this
election are as follows: 

 

(a)  The
Ceding Company and the Reinsurer shall make the following election pursuant to
Section 1.848-2(g)(8) of the Treasury Regulations under Section 848 of the
Code. This election shall be effective for the first year in which this
Agreement is effective and for all subsequent taxable years for which this
Agreement remains in effect. Each Party shall make the election by timely
attaching to its Tax Returns the schedule required by Section 1.848-2(g)(8)(ii)
of such Treasury Regulation identifying this Agreement as one for which such election
has been made. 

 

(b)  The
terms used in this Article VII, and not otherwise defined in this
Agreement, are defined by reference to Treasury Regulation Section 1.848-2 in
effect on the date this Agreement is executed.

 

(c)  The
Party with the net positive consideration for 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). 

 

(d)  Both
Parties shall exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency or as
otherwise required by the Internal Revenue Service.

 

 43 

 

(e)  The Ceding Company shall submit a schedule to the
Reinsurer by May 1 of each year of its calculation of the net consideration for
the preceding calendar year. This schedule of calculations shall be accompanied
by a statement signed by an officer of the Ceding Company stating that the
Ceding Company shall report such net consideration in its Tax Return for the
preceding calendar year. 

 

(f)  The
Reinsurer may contest such calculation by providing an alternative calculation
to the Ceding Company in writing within thirty (30) calendar days of
Reinsurer’s receipt of the Ceding Company’s calculation. If the Reinsurer does
not so notify the Ceding Company, the Reinsurer shall report the net
consideration as determined by the Ceding Company in the Reinsurer’s Tax Return
for the previous calendar year. 

 

(g)  If
the Reinsurer contests the Ceding Company’s calculation of the net
consideration, the Parties shall act in good faith to reach an agreement as to
the correct amount within thirty (30) calendar days of the date the Reinsurer
submits its alternative calculation. If the Ceding 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
Ceding Company and the Reinsurer do not reach agreement on the calculation of
net consideration with such thirty (30) calendar day period, then the net
consideration for the preceding calendar year shall be determined by an
independent accounting firm, selected by the Ceding Company and reasonably
acceptable to the Reinsurer, within twenty (20) calendar days after the
expiration of such thirty (30) calendar day period. All fees and expenses
relating to the work performed by the independent accounting firm shall be
shared equally between the Ceding Company and the Reinsurer. 

 

Section 7.2    Federal Excise Tax. The Reinsurer
will allow for the purpose of paying federal excise tax (“Federal Excise Tax”)
the applicable percentage of Premiums payable hereunder to the extent such
Premiums are subject to Federal Excise Tax and will, in all cases, indemnify
the Ceding Company for any Federal Excise Tax liability with respect to the
Premiums payable hereunder. 

 

Section 7.3    FATCA. The Reinsurer shall provide to
the Ceding Company, on or before the Closing Date, documentation on forms
approved by the United States Internal Revenue Service establishing an
exemption from withholding of Premium payable hereunder in accordance with the
Foreign Account Tax Compliance Act (“FATCA”), and the Reinsurer shall
provide or otherwise make available updated documentation upon the Ceding
Company’s request therefor. In the event that the Reinsurer fails to do so or
ceases to be exempt from withholding in accordance with FATCA, the Ceding
Company shall withhold the applicable percentage of Premium payable hereunder,
and the Reinsurer shall allow such withholding. Interest shall not be payable
on any amounts withheld in accordance with this paragraph, nor shall any such
amounts be subject to offset.

 

Section 7.4    Premium Tax.  The Parties agree that
the Ceding Company shall be compensated for a Quota Share of any Tax imposed on
Premiums (“Premium Tax”) through the Aggregate Expense Allowance
mechanism set forth in Schedule  1.1. 

 

Section 7.5    Guaranty Fund  Assessments.  The 
Reinsurer  shall  reimburse  the  Ceding Company for a Quota Share of any
guaranty fund assessments paid by the Ceding Company with respect to any
Covered Insurance Policy (the “Guaranty Fund Assessments”) in accordance
with  Section 3.2. Any Guaranty Fund Assessments paid by the Ceding
Company shall be reflected in the Settlement Statement for the applicable
Accounting Period. To the extent there is any recovery of Guaranty Fund
Assessments paid by the Reinsurer, the Ceding Company shall promptly pay the
Quota Share of such recovery to the Reinsurer. 

 

 

 44 

 

Section 7.6    BEAT  Tax. 

(a)  During
the term of this Agreement, the Reinsurer will not seek to withdraw its 953(d)
Election unless (i) the Reinsurer delivers to the Ceding Company a tax opinion
of nationally recognized tax counsel, which opinion is reasonably acceptable to
the Ceding Company, to the effect that either, (A) the Reinsurer should remain a U.S. Person within the meaning
of Section 7701(a)(30) of the Code following such withdrawal, or (B) assuming
the Reinsurer were no longer treated as a U.S. Person within the meaning of
Section 7701(a)(30) of the Code following such withdrawal, the Reinsurer should
not be treated as a “related person” within the meaning of Section 59A(g) of
the Code with respect to the Ceding Company or (ii) the Ceding Company consents
to such withdrawal, such consent not to be unreasonably withheld, conditioned,
or delayed. 

 

(b)  The
Ceding Company covenants and agrees to reasonably cooperate with the Reinsurer
in the preparation of a tax opinion described in clauses (i)(A) or (i)(B) of Section
7.6(a), including through providing a representation letter acceptable to
the Ceding Company and the Reinsurer upon which the Reinsurer and its counsel
can reasonably rely in the preparation of such tax opinion; provided, however,
that (i) any representations requested from the Ceding Company or any of its
Affiliates shall be purely factual in nature, and (ii) the Reinsurer shall bear
all costs and expenses associated with such tax opinion and shall indemnify the
Ceding Company for any such costs and expense incurred by the Ceding Company or
its Affiliates. 

 

Section 7.7    Indemnification.   The  Reinsurer 
agrees  to indemnify the  Ceding Company for any Tax Liability, or interest or
penalty related to such Tax Liability, that the Ceding Company may incur (a) pursuant to FATCA, (b) under
Section 4371 (or any amendments or supplements thereto) of the Code, or (c)
pursuant to any other withholding Tax requirement. 

 

Section 7.8    Return of Premium. In the event any
return of premium is due to the Ceding Company, the Reinsurer will return the
premium paid hereunder and the Ceding Company or its agent will recover Taxes
paid to the United States Government in accordance with this Article VII.
Notwithstanding the foregoing, in the event that the Ceding Company’s attempt
to recover such Taxes is denied, contested or disputed by the United States
Government, then the Reinsurer shall reimburse the Ceding Company for such
Taxes within thirty (30) days of receipt of written notice of such denial,
contest or dispute. 

 

ARTICLE VIII

INSOLVENCY

 

Section 8.1    Insolvency of the Ceding Company. 

 

(a)  In
the event the Ceding Company has entered into or has otherwise become subject
to an order of supervision, rehabilitation, liquidation or other proceeding
that is in substance the same type of proceeding as the aforementioned, but
conducted under a different name, whether involuntary or otherwise, this
reinsurance shall be payable directly to the Ceding Company or to its
liquidator, rehabilitator, receiver or statutory successor on the basis of
liability of the Ceding Company, without diminution by reason of the insolvency
of the Ceding Company or because the liquidator, rehabilitator, receiver or
statutory successor of the Ceding Company has failed to pay all or a portion of
any claim. It is agreed, however, that the liquidator, receiver or statutory
successor of the Ceding Company shall give written notice of the pendency of a
claim against the Ceding Company on the Covered Insurance Policy within a
reasonable time after such claim is filed in the insolvency proceeding. It is
further agreed 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 defenses which it deems available to
the Ceding Company, its liquidator, receiver or statutory successor. Such
expense shall be chargeable, 

 45 

 

subject to  court  approval, 
against  the  Ceding  Company  as  part  of  the  expense 
of  liquidation  to  the  extent of a proportionate share of the
benefit which may accrue to the Ceding Company solely as a result of the
defense undertaken by the Reinsurer.

 

(b)  Where
two (2) or more reinsurers are involved in the same claim and a majority in
interest elects to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Ceding Company. 

 

(c)  The
reinsurance provided hereunder shall be payable by the Reinsurer to the Ceding
Company or to its liquidator, receiver, conservator, or statutory successor,
except (i) where this Agreement specifically provides another payee of such
reinsurance in the event of the insolvency of the Ceding Company, (ii) where
the Reinsurer with the consent of the direct insured or insureds has
voluntarily assumed such Covered Insurance Policy obligations of the Ceding
Company as direct obligations of the Reinsurer to the payees under such Covered
Insurance Policies and in substitution for the obligations of the Ceding
Company to the payees or (iii) where provided otherwise under Applicable Law.

 

ARTICLE IX

DURATION; SURVIVAL; RECAPTURE; TERMINAL
SETTLEMENT

 

Section 9.1    Certain Definitions. 

 

(a)  “Recapture
Triggering Event” means any of the following occurrences: 

 

(i)         the
Reinsurer becomes (whether voluntary or involuntary) insolvent or has been
placed into liquidation, rehabilitation, conservation, supervision,
receivership, bankruptcy action or similar proceedings (whether judicial or
otherwise), or there has been instituted against it proceedings for the
appointment of a receiver, liquidator, rehabilitator, conservator, or trustee
in bankruptcy, or other agent known by whatever name, to take possession of its
assets or assume control of its operations; 

 

(ii)        the Reinsurer’s ECR Ratio in
respect of its Long-Term Business Account, after taking account of the
Long-Term Business Account Diversification Benefit, (A) falls below [***]%
and the Reinsurer has not cured such shortfall within one hundred twenty (120)
calendar days of becoming aware thereof; provided, however, such
one hundred twenty (120) day cure period shall be tolled for up to ninety (90)
calendar days if, prior to the end of such cure period, the Reinsurer has
entered into a binding transaction to cure such shortfall but the closing of
such transaction is subject to regulatory approval which the parties to such transaction
are using their reasonable best efforts to obtain; and provided, further,
that if such ECR Ratio is not cured in accordance with the timelines in this
clause (A) but is subsequently restored to at least [***]% and
continuously remains at or above [***]% for at least ninety (90)
calendar days, the Ceding Company shall no longer have a right to recapture
this Agreement as a result of such occurrence (unless and until such ECR Ratio
again falls below [***]%); or (B) falls below [***]%
and the Reinsurer has not increased such ECR Ratio to at least [***]%
within the shorter of any then remaining cure period set forth in clause (A)
above or forty-five (45) calendar days of
becoming aware thereof; 

 

(iii)       there
has been a failure by the Reinsurer to pay any amounts due hereunder in excess
of $[***] or to fund the ModCo Account in an amount in excess of
$[***], in each case for which the Ceding Company shall not have
received a certificate executed by the Chief Financial Officer  or  other 
senior  officer  of  the  Reinsurer  certifying  that  the  Reinsurer  disputes 

 

 46 

 

such
amounts in good faith and, in each case, such breach has not been cured within
forty-five (45) calendar days after notice from the Ceding Company of such
failure;

 

(iv)       without
the Ceding Company’s prior written consent, (a) the Reinsurer undergoes a
direct or indirect Change of Control to a Restricted Purchaser; or (b) the
Reinsurer cedes more than fifty percent (50%) of the Statutory Reserves ceded
hereunder (as measured on the basis of SAP) to a single “person” or “group”
(within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in
effect on the Closing Date) that (i) at any time during such cession does not
hold an investment grade (financial strength/FSR) rating from at least one of
the following nationally recognized statistical rating organizations: Moody’s
Investors Service Inc., S&P Global Ratings or Fitch Ratings Inc. or (ii) at
the time of such cession, was a Restricted Purchaser; provided, however,
that clause (a) and clause (b)(ii) of the Recapture Trigger Event set forth in
this Section 9.1(a)(iv) shall cease to apply in the event of a Change of
Control of the Ceding Company after the Amendment Date to any Person other than
Parent or one or more Affiliates of Parent, provided that a Change of Control
of Parent to any Person shall not constitute a Change of Control of the Ceding
Company; or 

 

(v)        without
the Ceding Company’s prior written consent, the Reinsurer makes an application
for any insurance business transfer pursuant to Part VII of the Financial
Services and Markets Act 2000 or a scheme of arrangement pursuant to 895-899 of
the Companies Act 2006, or any provision that replaces the foregoing, or has a
substantially similar effect as the foregoing in any jurisdiction, in each case
in respect of a transaction involving a Restricted Purchaser. 

 

(b)  “Enhanced
Capital Requirement” means, solely in respect of the Reinsurer for purposes
of this Agreement, a capital and surplus requirement imposed by or under the
Insurance Act 1978 and related regulations and in particular the provisions of
Bermuda Insurance (Prudential Standards) (Class 4 and Class 3B Solvency
Requirement) Rules 2008, as amended (“Insurance Act”), that is
calculated by reference to (i) the Bermuda Solvency Capital Requirement model
for the Reinsurer unless and until (ii) the Reinsurer is permitted to use a
Bermuda Monetary Authority-approved internal capital model (an “Internal
Capital Model”) and/or bespoke capital charges to calculate its capital and
surplus, in which case the Internal Capital Model and/or bespoke capital
charges, as applicable, shall be utilized for such calculation; provided,
that, to the extent there has been a material change in the factors or formulae
prescribed by the Bermuda Monetary Authority with respect to the components of
and methodologies contained in such calculations, or the Reinsurer
redomesticates to a jurisdiction outside Bermuda, the Parties shall amend this
Agreement to incorporate the equivalent ratio or requirement that represents
the supervisory minimum capital ratio applicable to the Reinsurer under the
Applicable Laws of Bermuda or the Reinsurer’s then current jurisdiction of
domicile; provided, that if (x) such supervisory minimum capital ratio
results in an amount of capital required to be held by the Reinsurer that the
Ceding Company reasonably determines is substantially dissimilar to the amount
of capital required to be held by the Reinsurer on the date immediately prior
to the effective date of such material change or redomestication and (y) the
Ceding Company objects to amending this Agreement to incorporate such
supervisory minimum capital ratio based on the dissimilarity cited in clause
(x), then the Parties shall work in good faith to amend this Agreement to
reflect an alternative calculation that is reasonably equivalent to the
components of and methodologies contained in the calculation of the Reinsurer’s
Enhanced Capital Requirement in effect as of the Amendment Date within thirty
(30) calendar days after implementation of such change and if the Parties
cannot agree on any such alternative, then the Reinsurer shall, for purposes of
this Agreement, continue to calculate its Enhanced Capital Requirement as if
such material change had not occurred or the Reinsurer had not redomesticated,
as applicable. 

 

(c)  “Change
of Control” of any Person shall be deemed to have occurred if, after the
Amendment Date, any “person” or “group” (within the meaning of Rule 13d-5 of
the Securities Exchange

 

 47 

 

Act of 1934 as in effect on the
Closing Date) shall acquire ownership, directly or indirectly, beneficially or
of record, of shares representing more than fifty percent (50%) of the
aggregate ordinary voting power represented by the issued and outstanding
capital stock of such Person, who does not own more than fifty percent (50%)
thereof as of the Amendment Date. Notwithstanding the foregoing, any  restructuring
which has as its purpose the insertion of a new direct or indirect holding
company parent in the chain of ownership of the Reinsurer, or the changing of
any such parent holding company from one form of organization to another, shall
not constitute a Change of Control of the Reinsurer if the same Persons who
directly or indirectly owned the Reinsurer immediately prior thereto directly
or indirectly own the Reinsurer in the same proportions as to voting and
economic rights as immediately prior to such restructuring. The Parties agree
that the “Acquisition” contemplated by the 2019 Purchase Agreement shall not
constitute a Change of Control for purposes of this Agreement. 

 

(d)  “Restricted
Purchaser” means: (A) any “person” or “group” (within the meaning of Rule
13d-5 of the Securities Exchange Act of 1934 as in effect on the Closing Date)
set forth on a list of no more than five persons or groups whom the Ceding
Company has determined would be unacceptable as a reinsurance counterparty or
the owner of a reinsurance counterparty, which list may be revised by the
Ceding Company no more frequently than twelve months after the previous
revision (or after the Amendment Date, in the case of the first such revision)
and provided to the Reinsurer in writing; and (B) any Person (x) newly formed
within the last twelve (12) months, formed for, or being used principally for,
the purpose of a transaction involving the Reinsurer or the business covered
hereunder, or (y) affiliated with a private equity fund, hedge fund or similar
investment group; provided, that the Ceding Company will not
unreasonably withhold its consent to a Change of Control involving a Restricted
Purchaser described in this clause (B); and provided, further,
that The Carlyle Group Inc. (as successor to The Carlyle Group, L.P.) (“Carlyle”)
and any of its Subsidiaries shall not be considered Restricted Purchasers, as
long as (i) no Person that is not a Subsidiary of Carlyle shall acquire
ownership, directly or indirectly, beneficially or of record, of shares or
other equity interests representing more than fifty percent (50%) of the aggregate ordinary voting power
represented by the issued and outstanding capital stock or other equity
interests of the Reinsurer (including through acquiring such an interest in
Carlyle) and (ii) the Reinsurer remains a Subsidiary of Carlyle continuously
following the Amendment Date. For purposes of
this Agreement, a Person shall be considered a “Subsidiary” of
another Person if such other Person beneficially
owns, directly or indirectly, shares or other equity interests representing
more than fifty percent (50%) of the aggregate ordinary voting power
represented by the issued and outstanding capital stock or other equity
interests of such first Person. 

 

Section 9.2    Duration.  This Agreement  shall 
continue in-force until  such time as (a)  the  Ceding Company’s liability
arising out of or related to all Covered Insurance Policies reinsured hereunder
is terminated in accordance with their respective terms, and the Reinsurer has
satisfied all of its obligations to the Ceding Company hereunder or (b) the
Ceding Company has elected to recapture the Covered Insurance Policies in full
following a  Recapture  Triggering  Event  in  accordance  with  Section
9.4(a), and the Ceding Company has received all applicable payments which
discharge such liability in full in accordance with Section  9.5. 

 

Section 9.3    Survival. All of the provisions of
this Agreement shall, to the extent necessary to carry out the purposes of this
Agreement or to ascertain and enforce the Parties’ rights hereunder, survive
its termination in full force and effect. 

 

Section 9.4    Recapture. 

 

(a)  At
any time following the occurrence of a Recapture Triggering Event (provided,
with respect to a Recapture Triggering Event under clause (ii) of the
definition of the term, that such Recapture Triggering Event has not been
cured), the Ceding Company shall have the right (but not the obligation) to 

 

 48 

 

recapture all, and not less
than all, of the reinsurance of the Covered Insurance Policies ceded under this
Agreement, by providing the Reinsurer with prior written notice of its intent
to effect such recapture specifying the date upon which such recapture will be
effective (the “Recapture Effective Date”), which Recapture Effective
Date must be the last calendar day of an Accounting Period. The Ceding Company
will also recapture all, and not less than all, of the reinsurance of the
Covered Insurance Policies ceded under this Agreement if termination of this
Agreement is awarded by an arbitration panel pursuant to Section 10.3(d);
provided  that the Recapture Effective Date for any such recapture shall
be determined by the arbitration panel unless otherwise agreed between the
Parties in writing.

 

(b)  Notwithstanding
anything in this Agreement to the contrary, upon any recapture by the Ceding
Company, the Ceding Company will only recapture liabilities arising under the
express terms of the Covered Insurance Policies and will not be liable for any
Extra-Contractual Obligations incurred before the Recapture Effective Date
other than Ceding Company Extra-Contractual
Obligations. 

 

(c)  Following
any recapture pursuant to this Section 9.4, subject to the payment
obligations described in Section 9.5, both the Ceding Company and the
Reinsurer will be fully and finally released from all rights and obligations
under this Agreement in respect of the applicable Covered Insurance Policies,
other than any payment obligations due hereunder as respects periods through
the Recapture Effective Date but still unpaid on such date, any
Extra-Contractual Obligations incurred before the Recapture Effective Date
other than Ceding Company Extra-Contractual Obligations, and any other
obligations of the Reinsurer with respect to the Reinsured Liabilities incurred
prior to the Recapture Effective Date. Following the consummation of the
recapture or termination, no additional Premiums or other amounts payable under
such Covered Insurance Policies shall be payable to the Reinsurer hereunder.

 

(d)  Notwithstanding
the remedies contemplated by this Article IX, the Ceding Company may, in
its sole discretion, require direct payment by the Reinsurer of any sum in
default under this Agreement in lieu of exercising the remedies in this Article
IX, and it shall be no defense to any such claim that the Ceding Company
might have had other recourse. 

 

Section 9.5    Terminal  Settlement. 

 

(a)  In
connection with a termination of this Agreement or recapture of the Covered
Insurance Policies pursuant to Section 9.4, a Terminal Settlement will
take place. In connection therewith, the Ceding Company shall deliver to the
Reinsurer, within forty-five (45) calendar days following the Recapture
Effective Date, a statement (the “Terminal Settlement Statement”)
setting forth the Ceding Company’s computation of the Terminal Settlement,
including a good faith calculation of the Embedded Value Payment. The “Terminal
Settlement” shall consist of (i) the Quarterly Net Settlement Amount for
the Terminal Accounting Period, and (ii) the Embedded Value Payment with
respect to the then in-force Covered Insurance Policies as of the Recapture
Effective Date. “Embedded Value Payment” means an amount equal to (x)(A)
the present value, based on the best estimate assumptions and market conditions
at the Recapture  Effective 
Date,  of  statutory  after-tax  future  profits  and  losses  from  this  Agreement,  minus  (B) the
present value of the cost of capital, based on the standalone target capital
for a capital ratio of [***]% of company action level risk-based
capital calculated under SAP where the cost of capital is the change in the
amount of target capital over the projected duration of the business reinsured
hereunder, net of after-tax investment income on the target capital, where (A)
– (B) is adjusted for taxes, including federal income tax and DAC tax impact
based on relevant tax rules applicable to the Ceding Company as of the
Recapture Effective Date, all discounted at [***]%, minus 
(y) the aggregate expense to the Ceding Company, not to exceed $[***],
associated with replacing the reinsurance provided hereunder or entering into a
reasonably equivalent alternative arrangement, minus  (z) the Recapture
Penalty. If the Embedded Value Payment  is  positive,  such  amount  will  be  paid  by  the  Ceding  Company  to  the  Reinsurer  as  part  of 

 

 49 

 

the Terminal Settlement. If the
Embedded Value Payment is negative, the absolute value of such negative amount
shall be paid by the Reinsurer to the Ceding Company as part of the Terminal
Settlement. “Recapture Penalty” means $[***]. 

 

(b)  The
Terminal Settlement shall be paid on a net basis by the Reinsurer or the Ceding
Company, as the case may be, within seven (7) Business Days following the
delivery by the Ceding Company to the Reinsurer of the Terminal Settlement
Statement. If, subsequent to the Terminal Settlement, a change is made with
respect to any amounts due solely as a result of a mathematical error in the
calculation of the Terminal Settlement, a supplementary accounting will take
place.  Any amount owed to the Ceding Company or to the Reinsurer by reason of
such supplementary accounting will be paid promptly upon the completion thereof. 

 

(c)  Following
the Terminal Settlement, any assets remaining in (i) the ModCo Account shall be
retained by the Ceding Company, and the ModCo Account shall be terminated and
(ii) the Collateral Trust Account shall be released to the Reinsurer, and the
Collateral Trust Account shall be terminated in accordance with its terms. 

 

(d)  Within
thirty (30) calendar days after its receipt of the Terminal Settlement
Statement, the Reinsurer shall notify the Ceding Company in writing if the
Reinsurer disagrees with the Ceding Company’s calculation of the Embedded Value
Payment. During the ten (10) Business Days immediately following the delivery
of such notice of disagreement, the Ceding Company and the Reinsurer will seek 
in good faith to resolve any disputes as to such calculation. Notwithstanding
anything to the contrary herein, any and all disputes as to the calculation of
the Embedded Value Payment that have not been resolved during such ten (10)
Business Day period shall be submitted to an independent and disinterested
actuarial firm (the “Independent Actuary”), as respects the ModCo
Reserves, or to one or more independent and disinterested asset valuation
experts, as respects the ModCo Assets (each, an “Independent Valuation
Expert”), reasonably agreed to by each of the Ceding Company and the
Reinsurer for review and determination. Should the Parties proceed with such an
evaluation by an Independent Actuary or the Independent Valuation Expert(s),
such evaluation shall assess which of the Parties’ two results is the more
reasonable calculation in light of the evidence provided by both Parties to
support their calculations. The Parties shall instruct the Independent Actuary
and Independent Valuation Expert(s) to render their decisions as to the more
reasonable calculation of the applicable component(s) of the Embedded Value
Payment within thirty (30) calendar days after the submission of the matter for
its review (or as soon thereafter as possible). The Independent Actuary’s or
the Independent Valuation Expert’s decision, as applicable, shall be final and
binding upon each of the Ceding Company and the Reinsurer. All fees and
expenses relating to the work performed by the Independent Actuary and the
Independent Valuation Expert shall be shared equally between the Ceding Company
and the  Reinsurer. In the event of any conflict between this Section 9.5(d)
and any other provision of this Agreement, the terms of this Section 9.5(d)
shall control. 

 

(e)  If
the Ceding Company and the Reinsurer are unable to agree upon the identity of
the Independent Actuary or the Independent Valuation Expert within five (5)
Business Days of beginning such process,  then  each  Party  shall  submit,  within  seven  (7)  calendar 
days  thereafter,  the  names  of  three
(3) candidates to the other Party whom the submitting Party shall consider
to be independent and disinterested. Unless otherwise agreed by the Parties,
each candidate for Independent Actuary must be a current Fellow of the Society
of Actuaries in good standing and neither presently nor formerly retained by,
employed by, or Affiliated with either the Ceding Company or the Reinsurer or
any company Affiliated with either within the past twelve (12) months. Unless
otherwise agreed by the Parties, each candidate for Independent Valuation
Expert must be neither presently nor formerly employed by, or Affiliated with,
either the Ceding Company or the Reinsurer or any company Affiliated with
either within the past  twelve  (12)  months. 
In  contacting  possible 
candidates  to  serve  in  either  such  role,  neither  Party 

 

 50 

 

shall disclose the nature of
the dispute nor its own position to such candidates, but may only describe the
identities of the Ceding Company and the Reinsurer, the type of business
reinsured and/or assets in dispute and the fact that an issue exists hereunder
as to the embedded value of the business hereunder and/or the assets in
dispute. From the list of six (6) candidates thus produced, within five (5)
Business Days, each of the Ceding Company and the Reinsurer shall strike two
(2) names so that among the remaining names a disinterested actuary or
disinterested valuation expert shall be chosen by drawing lots. The candidate
selected from this method shall be the Independent Actuary or the Independent
Valuation Expert who shall resolve the difference as described above. These
same procedures shall be used as necessary for determining the Independent
Actuary and/or Independent Valuation Expert for the specified disputes
involving such experts as contemplated in Sections 2.3, 2.5  and 4.1(f),
as applicable. 

 

ARTICLE X

MISCELLANEOUS

 

Section 10.1 Notices. All notices, requests, demands
and other communications under this Agreement shall be in writing and shall be
deemed to have been duly given (a) on the date of service if served personally
on the Party to whom notice is to be given, (b) on the day of transmission if
sent via electronic mail to the email address given below, or (c) on the
Business Day after delivery to an overnight courier (such as Federal Express)
or an overnight mail service (such as the Express Mail service) maintained by
the United States Postal Service, to the applicable Party as follows:

 

To the Ceding Company:

 

American General Life Insurance Company 

2727A Allen Parkway

Life Building 4C-2 

Houston, TX 77019  

E-mail: [***] 

Attention: Head
of Life and Retirement Reinsurance Finance and Operations 

With concurrent copies (which will not constitute notice)
to:

American International Group, Inc. 

21650 Oxnard Street, Suite 750 

Woodland Hills, CA 91367

E-mail: [***] 

Attn: General
Counsel, Life & Retirement 

To the Reinsurer:

Fortitude Reinsurance Company, Ltd. 

Chesney House – 3rd Floor

96 Pitts Bay Road 

Pembroke HM 08, Bermuda
 

E-mail: [***] 

Attention: James
Bracken, Chief Executive Officer

With concurrent
copies (which will not constitute notice) to: 

 

 51 

 

Fortitude Reinsurance Company, Ltd.

Chesney House – 3rd Floor

96 Pitts Bay Road 

Pembroke HM 08, Bermuda
 

E-mail: [***] 

Attention: Jeffrey Burman, General Counsel

 

Either Party may change its notice information upon fifteen
(15) calendar days’ advance notice in writing to the other Party.

 

Section 10.2  Entire Agreement, Interpretation. 

 

(a)  With
respect to the subject matter hereof, (i) this Agreement, including any
Schedules, Exhibits, Appendices and documents expressly incorporated by
reference herein and the other documents delivered pursuant hereto and thereto
(including the Collateral Trust Agreement and the FLAS Administrative Services
Agreement), constitutes the entire agreement between the Parties with respect
to the subject matter hereof and (ii) supersedes all prior agreements,
understandings, representations and warranties, written or oral, with respect
thereto. Any change to or modification of this Agreement will be made by
written amendment to this Agreement, signed by the Parties. 

 

(b)  This
Agreement is between sophisticated parties, each of which has reviewed this
Agreement and is fully knowledgeable about its terms and conditions. The
Parties therefore agree that  this Agreement shall be construed without regard
to the authorship of the language and without any presumption or rule of
construction in favor of either of them. 

 

(c)  The
table of contents, articles, titles, captions and headings to Sections herein
are inserted for convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement. The
Schedules, Exhibits and Appendices referred to herein are to be construed with
and as an integral part of this Agreement to the same extent as if they were
set forth verbatim herein. All references herein to Articles, Sections,
Exhibits, Schedules and Appendices shall be construed to refer to Articles and
Sections of, and Exhibits, Schedules and Appendices to, this  Agreement.
Whenever the words “include”, “includes” or “including” are used in this
Agreement, they are deemed to be followed by the words “without limitation”.
Unless the context otherwise requires, the word “Agreement” means this
Agreement, together with all Exhibits, Schedules and Appendices attached hereto
or incorporated by reference, and the words “hereof”, “herein” and “hereunder”
and words of similar import when used in this Agreement refer to this Agreement
in its entirety and not to any particular Article, Section or provision of this
Agreement. All terms defined in this Agreement have the defined meanings when
used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein. The definitions in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine genders of such term. Any agreement or
instrument defined or referred to herein or any agreement or instrument that is
referred to herein means such agreement or instrument as from time to time
amended, modified or supplemented, including by waiver or consent and
references to all attachments thereto and instruments incorporated therein. Any
statute or regulation referred to herein means such statute or regulation as
amended, modified, supplemented or replaced from time to time (and, in the case
of statutes, includes any rules and regulations promulgated under the statute),
and references to any section of any statute or regulation include any
successor to such section. References to a Person are also to its successors
and permitted assigns. Any agreement referred to herein includes reference to
all Exhibits, Schedules and other documents or agreements attached thereto. 

 

 52 

 

Section 10.3  Arbitration. 

 

(a)  Any
and all disputes or differences arising out of or relating to this Agreement
for which a dispute resolution mechanism is not otherwise provided herein shall
be referred to arbitration, except that disputes or differences involving the
formation and/or validity of this Agreement may be submitted to the Supreme
Court of the state and county of New York or the United States District Court
for the Southern District of New York. Any arbitration shall be conducted in
accordance with the ARIAS •
U.S. Rules for the Resolution of U.S. Insurance and Reinsurance Disputes
(Arb Prov 2014) (the “ARIAS • U.S. Rules”). 

 

(b)  However,
if either Party demands arbitration of a dispute, such dispute does not relate
to the formation and/or validity of this Agreement, and the total amount in
dispute in such arbitration (i) is less than $1,000,000 (or, if the applicable
currency is other than Dollars, the equivalent amount based on the applicable
exchange rates used in the Ceding Company’s books at the date of the
arbitration demand), or (ii) pertains to the determination as to whether a
change by the Ceding Company of the terms or conditions of any Covered
Insurance Policy is an Excluded Policy Change or a change in a Non- Guaranteed
Element is an Excluded NGE Change, the dispute shall be resolved in accordance
with the ARIAS • U.S. Streamlined Rules for  Small  Claim  Disputes  (Streaml 
Prov  2014)  (the  “ARIAS  •   U.S. Streamlined Rules”). 

 

(c)  The
arbitration panel shall be appointed in accordance with the ARIAS • U.S. Rules
and ARIAS • U.S. Streamlined Rules, as applicable. The panel shall interpret
this Agreement as an honorable engagement, and shall not be obligated to follow
the strict rules of law or evidence. In making their decision, the panel shall
apply the custom and practice of the insurance and reinsurance industry, with a
view to effecting the general purpose of this Agreement. Each arbitrator
serving on the panel must be a life insurance or reinsurance industry
professional with no less than ten (10) years of experience in such industry.
Notwithstanding anything to the contrary in the ARIAS U.S. Rules or the ARIAS
U.S. Streamlined Rules, ARIAS certification shall not be required
in order to act as an arbitrator on the panel.

 

(d)  The
Ceding Company shall not be restricted from seeking, and the arbitration panel
shall not be restricted from awarding, termination as a remedy with respect to
any claim by the Ceding Company alleging material breach of this Agreement by
the Reinsurer that has not been cured within thirty (30) calendar days after
the Reinsurer’s receipt of notice thereof from the Ceding Company. To the
extent the arbitration panel determines that there has been such a material
breach and awards termination of this Agreement as a remedy, the Parties shall
effect a recapture of this Agreement in accordance with Article IX. For
the avoidance of doubt, nothing in this Section 10.3(d) shall require
the arbitration panel to award termination as a remedy for material breach or
to otherwise limit any other remedies that may be awarded by the panel in
respect thereof. The arbitration panel shall only be permitted to award
termination of this Agreement as a remedy if the Ceding Company so requests
termination as a remedy or potential remedy. If the arbitration panel awards
termination of this Agreement, the Parties shall request the arbitration panel
to set the Recapture Effective Date unless the Parties have otherwise agreed to
such date in writing. 

 

(e)  The
arbitration shall take place in New York, New
York. 

 

(f)  Unless
prohibited by Applicable Law, the Supreme Court of the state and county of New
York and the United States District Court for the Southern District of New York
shall have exclusive jurisdiction over any and all court proceedings that
either Party may initiate in the case of a dispute involving the formation or
validity of this Agreement or in connection with the arbitration, including
proceedings to compel, stay, or enjoin arbitration or to confirm, vacate,
modify, or correct an arbitration award. In addition, the Ceding Company and
the Reinsurer shall have the right to seek and obtain in such 

 

 53 

 

courts provisional relief prior
to the panel being fully formed pursuant to this Section 10.3,
including  prior to the commencement of the arbitration proceeding. 

 

(g)  In
the event of any conflict between this Section 10.3 and the ARIAS • U.S.
Rules or the ARIAS • U.S. Streamlined Rules, as applicable, this Section
10.3, and not the ARIAS • U.S. Rules or the ARIAS • U.S. Streamlined Rules,
as applicable, will control. 

 

Section 10.4  Governing Law. This Agreement shall be
governed by and  construed  in  accordance with the Applicable Laws of the
state of New York, without regard to its conflicts of law principles.

 

Section 10.5  No Third Party Beneficiaries. Nothing
in this Agreement is intended or shall be construed to give any party, other
than the Parties, their successors and permitted assigns, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision contained herein.

 

Section 10.6  Expenses. Except as otherwise provided
herein, the Parties shall each bear their respective expenses incurred in
connection with the negotiation, preparation, execution, and performance of
this Agreement and the transactions contemplated hereby, including all fees and
expenses of counsel, actuaries and other Representatives.

 

Section 10.7  Mode of Execution; Counterparts. 

 

(a)  Unless
otherwise required by Applicable Law, this Agreement may be executed by:     (i) an original written ink
signature; (ii) an exchange of facsimile copies showing the original signature;
or (iii) electronic signature technology employing computer software and a
digital signature or digitizer pen pad to capture an individual’s handwritten
signature in such a manner that the signature is unique to the individual
signing, under the sole control of the individual signing, capable of
verification to authenticate the signature, and linked to the document signed
in such a manner that if the data is changed, such signature is invalidated.

 

(b)  Unless
otherwise required by Applicable Law, the use of any one or combination of
these methods of execution shall constitute a legally binding and valid signing
of this Agreement. This Agreement may be executed in separate counterparts,
each of which when so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same instrument. Each
counterpart may consist of a number of copies hereof each signed by less than
all, but together signed by all, of the Parties. 

 

Section 10.8 Severability. Any term or provision of
this Agreement which is invalid or unenforceable in any jurisdiction shall, as
to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions  of this Agreement in any other jurisdiction, so
long as the economic or legal substance of the transactions contemplated hereby
is not affected in any manner materially adverse to any Party. If any provision
of this Agreement is so broad as to be unenforceable, that provision shall be
interpreted to be only so broad as is enforceable. In the event of such
invalidity or unenforceability of any term or provision of this Agreement, the
Parties shall use their commercially reasonable efforts to reform such terms or
provisions to carry out the commercial intent of the Parties as reflected
herein, while curing the circumstance giving rise to the invalidity or
unenforceability of such term or provision. 

 

Section 10.9 Waiver of Jury Trial. Each Party
irrevocably waives, to  the  fullest  extent  permitted by  Applicable  Law,  any  right  it  may  have  to  a  trial  by  jury  in  respect  of  any  action  arising  out 

 

 54 

 

of or relating to this
Agreement, and whether made by claim, counterclaim, third person claim or
otherwise. Each Party (a) certifies that no Representative or agent of the
other Party has represented, expressly or otherwise, that such other Party
would not, in the event of litigation, seek to enforce the foregoing waiver and
(b) acknowledges that it and the other Party have been induced to enter into
this Agreement by, among other things, the mutual waivers and certifications in
this Section 10.9. 

 

Section 10.10   Treatment of Confidential Information. 

 

(a)  Each
Party agrees that, other than as contemplated by this Agreement or any
Administrative Services Agreement, and to the extent permitted or required to
implement the transactions contemplated by this Agreement or thereby, it and
its Affiliates and Representatives will keep  confidential and will not use or
disclose the other Party’s Confidential Information or the terms and conditions
of this Agreement, including the Exhibits, Schedules and Appendices hereto. 

 

(b)  Each
Party shall be permitted to disclose this Agreement and any Confidential
Information of the other Party to such receiving Party’s Affiliates and its
Representatives that need to know such information for the purposes below; provided,
that the receiving Party advises such parties of the confidential nature of the
Confidential Information and their obligation to maintain its confidentiality
in accordance with the terms hereof. The receiving Party shall be responsible
for any breach of this provision by any of its Representatives or Affiliates. 

 

(c)  Confidential
Information provided by one Party to the other Party or such Party’s
Representatives or Affiliates and any reports derived therefrom may only be
used by the receiving Party and its Representatives and Affiliates only for
purposes relating to such receiving Party’s rights and obligations under this
Agreement or any Administrative Services Agreement to which it is a party, or
for the receiving Party’s own internal administration and risk management. The
receiving Party may use knowledge gleaned from the Confidential Information
provided to it by the disclosing Party in the conduct of the receiving Party’s
normal business, provided that no such material shall be used by the receiving
Party or its Representatives or Affiliates to compete with the disclosing Party
or any of the disclosing Party’s Affiliates. 

 

(d)  Nothing
herein shall prohibit the receiving Party from disclosing this Agreement and
any Confidential Information of the disclosing Party provided in connection
herewith (i) if legally compelled to do so or as required in connection with an
examination by an insurance regulatory authority or otherwise by Governmental Authorities
or Applicable Law; (ii) to the extent necessary for the performance of such
receiving Party’s obligations hereunder or under any Administrative Services
Agreement to which it is a party; (iii) to enforce the rights of the receiving
Party or its Affiliates under this Agreement or any Administrative Services
Agreement; (iv) as required by a Tax Authority to support a position taken on
any Tax Return; or (v) as required by the rules of any stock exchange on which
the stock of a receiving Party’s Affiliate is traded, as applicable. Upon any
such permissible disclosures, a receiving Party must also assert the
confidential nature of the Confidential Information to any third party
recipient and obtain appropriate assurance of continued confidential treatment
where practicable. If a receiving Party or any of its Affiliates, or any of
their respective Representatives, becomes legally compelled to disclose any
Confidential Information (other than as required in connection with any
insurance regulatory examination or as required to a Tax Authority to support a
position on any Tax Return), the receiving Party shall notify the disclosing
Party immediately and afford it an opportunity, to the full extent possible and
at the disclosing Party’s own expense, to make any objections or challenges to
the disclosure sought as the disclosing Party may deem appropriate. If the
disclosing Party objects to or challenges
disclosure, the receiving Party will take reasonable measures to cooperate with
the disclosing Party, at the disclosing Party’s own expense, in its efforts to
resist such disclosure. If no remedy is obtained or  the  disclosing  Party  otherwise  waives 
its  compliance  herewith, 
the  receiving  Party  or  its 

 

 55 

 

Affiliates, as applicable,
shall furnish only that portion of Confidential Information that it is legally
required to be provided and exercise its commercially reasonable efforts to
obtain assurances that appropriate confidential treatment will be accorded to
the Confidential Information.

 

Section 10.11  Treatment of Personal Information. 

 

(a)  The
Reinsurer shall comply with its obligations under Applicable Privacy and
Security Laws and shall cooperate with the Ceding Company’s efforts to comply
with such laws. The Ceding Company may perform, or have a third party perform,
reasonable security audits, investigations or assessments of the Reinsurer upon
reasonable notice, and the Reinsurer shall provide all reasonably requested
security reports, information and access. The Parties agree that, for the
purposes of Applicable Privacy and Security Laws, each Party (to the extent it
processes Personal Information pursuant to or in connection with this
Agreement) processes Personal Information as an independent data controller in
its own right. Nothing in this Agreement (or the arrangements contemplated by
it) is intended to construe either Party as the data processor of the other
Party or as joint data controllers with one another with respect to Personal Information. 

 

(b)  Each
Party agrees that, to the extent it discloses Personal Information to the other
Party, such disclosure shall be in accordance with Applicable Privacy and
Security Laws. Each Party also  agrees that no such Personal Information shall
be disclosed for monetary or other valuable
consideration. 

 

(c)  The
Reinsurer shall maintain a comprehensive information security program designed
to protect the confidentiality, integrity and availability of Information
Systems and to protect all Confidential Information from unauthorized use,
alteration, access, disclosure or loss. The information security program shall,
at a minimum, comply with the requirements of Applicable Privacy and Security
Laws and, in particular, shall include: (i) written policies and procedures,
which shall be periodically assessed and revised to address changes in risks
and the effectiveness of controls; and (ii) technical, administrative,
physical, organizational and operational controls that are appropriate to the
information security risk, including encryption of Personal Information at rest
and in transit where feasible and commensurate with the sensitivity of the
Personal Information, controls to limit unauthorized access to Information
Systems and Confidential Information, and the use of multi-factor
authentication when accessing any Information Systems of the Ceding Company or
its Affiliates from outside the Ceding Company’s or its Affiliates’ network. 

 

(d)  The
Reinsurer shall: (i) promptly (and without undue delay) notify the Ceding
Company in writing of any reasonably suspected unauthorized or unlawful use,
processing, alteration, access, disclosure, loss or unavailability of
Confidential Information or Information Systems (if reasonably likely to
provide unauthorized access to Confidential Information) and shall cooperate
with the Ceding Company to investigate and respond to such events; and (ii)
permit no third party to access or use the Confidential Information or any
Information Systems of the Ceding Company except as necessary for the purposes
of this Agreement or otherwise permitted hereby. 

 

(e)  The
Reinsurer shall (i) immediately notify the Ceding Company of any requests from
individuals regarding their Personal Information; and (ii) be responsible for
responding to any requests it receives from the Ceding Company or directly from
individuals regarding their Personal Information, inquiries or complaints
(including any request by a data subject to exercise their rights under
Applicable Privacy and Security Laws), unless otherwise agreed between the
Parties in writing. The Ceding Company shall also promptly forward to the
Reinsurer any data subject rights requests that require the Reinsurer to
facilitate either Party’s compliance with Applicable Law. 

 

 56 

 

(f)  If and where Personal Information is disclosed or
transferred internationally to the Reinsurer or its Representatives, the
Reinsurer shall, as reasonably requested by the Ceding Company, cooperate with
the Ceding Company in concluding the most appropriate contractual framework to
comply with Applicable Privacy and Security Laws, such as standard model
contract clauses approved by the European Commission (or such other transfer
mechanism approved by the European Commission) or AIG’s International Data
Processing and Transfer Agreement. 

 

(g)  Except
as otherwise specifically provided in this Agreement, nothing herein shall be
constructed as granting or conferring rights by license or otherwise in
Confidential Information disclosed to the receiving Party. Each Party shall
destroy the Confidential Information of the other Party when no longer needed
for the purposes described and permitted herein or to comply with Applicable
Law or such Party’s internal record retention
policies. 

 

(h)  The
Parties hereby acknowledge and agree that money damages may be both
incalculable and an insufficient remedy for any breach of this Article by the
breaching Party or its Representatives and that any such breach may cause the
other Party irreparable harm. Accordingly, each Party shall  be entitled to
seek equitable relief, including injunctive relief and specific performance, in
the event of any breach of the provisions of this Article by the other Party or
its Representatives, in addition to all other remedies available at law or in equity. 

 

Section 10.12 Assignment.  This  Agreement shall be
binding upon and inure to the benefit of  the Parties and their respective
successors and permitted assigns. Except as provided below in this  Section
10.12, neither Party may assign any of its rights, duties or obligations
hereunder without the prior written consent of the other Party and any
attempted assignment in violation of this Section 10.12 shall be invalid
ab initio; provided, however, that this Agreement shall
inure to the benefit and bind those who, by operation of law, become successors
to the Parties, including any receiver or any successor, merged or consolidated entity. 

 

Section 10.13  Waivers and Amendments. 

 

(a)  This
Agreement may be amended, superseded, canceled, renewed or extended, and the
terms hereof may be waived, only by an instrument in writing signed by the
Parties hereto, or, in the case of a waiver, by the Party waiving compliance.
Any amendment requiring the approval of any state insurance department under
Applicable Law shall not be effective until so
approved. 

 

(b)  No
delay on the part of any Party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any such right, power or privilege. No waiver of any breach of this
Agreement shall be held to constitute a waiver of any other or subsequent breach. 

 

Section 10.14  Service of Suit. 

 

(a)  At
the request of the Ceding Company, the Reinsurer hereby agrees to submit to the
jurisdiction of any court of competent jurisdiction within the United States
and agrees to comply with the requirements necessary to give the court
jurisdiction with respect to any and all court proceedings that the Ceding
Company may initiate in connection with an arbitration, including proceedings
to compel, stay or enjoin arbitration or to confirm, vacate, modify or correct
an arbitration award. The Reinsurer agrees to abide by the final decision of
that court or of an appellate court in the event of an appeal, and consents to
any effort to enforce the final decision of that court within its home
jurisdiction, including the granting of full faith and credit or comity in the
Reinsurer’s home jurisdiction or any
other jurisdiction where the Reinsurer is  subject 
to  jurisdiction.  Nothing 
in  this  Section 10.14 constitutes  or  should  be  understood  to 

 

 57 

 

constitute a waiver of the
rights of the Reinsurer to remove such an action to a United States District
Court, or to seek a transfer of such a case to another court as permitted by
the Applicable Laws of the United States or of any state in the United States,
or to commence an action in connection with the arbitration in any court of
competent jurisdiction in the United States. It is further agreed that service
of process on the Reinsurer in such suit may be made upon Corporation Service
Company, 1180 Avenue of the Americas, Suite 210, New York, NY 10036, or such
other entity at its New York address as is specifically designated in the
applicable signing page of this Agreement, and that, in any suit instituted
against the Reinsurer under this Agreement, the Reinsurer will abide by the
final decision of such court or of any Appellate Court in the event of an
appeal.

 

(b)  Corporation
Service Company, 1180 Avenue of the Americas, Suite 210, New York, NY 10036, or
such other designated entity, is authorized and directed to accept service of
process on behalf of the Reinsurer in any such suit and/or upon the request of
the Ceding Company to give a written undertaking to the Ceding Company that
they will enter a general appearance on the Reinsurer’s behalf in the event
such a suit shall be instituted. 

 

(c)  Further,
pursuant to any statute of any state, territory or district of the United
States which makes provision therefor, the Reinsurer also hereby designates the
Superintendent, Commissioner or Director of Insurance or other officer
specified for that purpose in the statute, or his or her successor or
successors in office, as its 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 Ceding Company or any beneficiary hereunder arising out of this
Agreement, and hereby designates Corporation Service Company, 1180 Avenue of
the Americas, Suite 210, New York, NY 10036, or such other entity as
designated, as the entity to whom the said officer is authorized to mail such
process or a true copy thereof. 

 

(d)  This
Section 10.14 shall not be read to conflict with or override any
obligation of the Parties hereunder to arbitrate a dispute or difference
arising out of this Agreement. 

 

Section 10.15  OFAC  Compliance. 

 

(a)  Each
of the Ceding Company and the Reinsurer represents, as to itself, that it is in
compliance in all material respects with all laws, regulations, judicial and
administrative orders applicable to the Covered Insurance Policies as they
pertain to applicable sanction laws and regulations, and specifically those
administered by the U.S. Treasury Department’s Office of Foreign Assets
Control, as such laws may be amended from time to time (collectively the “Sanctions
Laws”). Each of the Ceding Company and the Reinsurer agrees to comply in
all material respects with applicable Sanctions Laws throughout the term of
this Agreement as respects the subject matter hereof. Neither Party shall be
required to take any action under this Agreement that would violate said
Sanctions Laws as respects itself, its parent company or its ultimate
controlling entity, including making any payments in violation of the Sanctions Laws. 

 

(b)  Should
either Party discover or otherwise become aware that a transaction subject to
the reinsurance hereunder has been entered into or a payment has been made in
violation of applicable Sanction Laws, the Party that first becomes aware of
the actual or potential violation of applicable Sanctions Laws shall notify the
other Party, and the Parties shall cooperate in order to take all necessary
corrective actions. 

 

(c)  Where
coverage provided by this Agreement would be in violation of applicable
Sanctions Laws as respects either Party, its parent company or its ultimate
controlling entity, such coverage shall  be  null  and  void.  In  such  event,  each  Party  shall  be  restored  to  the  position 
it  would  have 

 

 58 

 

occupied under this Agreement
if the violation had not occurred, including the return of any payments
received, unless prohibited by Applicable Law.

 

Section
10.16 Incontestability. Each Party hereby acknowledges that this
Agreement, and each and every provision hereof, is and shall be enforceable
according to its terms. Each Party hereby irrevocably waives any right to
contest in any respect the validity or enforceability hereof. This Agreement
shall not be subject to rescission, or to an award of damages, restitution, or
reformation in lieu thereof, on any basis whatsoever, including intentional fraud. 

 

[The rest of this page
intentionally left blank.] 

 

 59 

 

IN WITNESS
WHEREOF, the Parties have caused this Agreement to be executed effective as of
the Amendment Date.

 

AMERICAN GENERAL LIFE INSURANCE COMPANY

 

 

By:   /s/ Michael P.  Harwood                                        

Name: Michael P. Harwood

Title: Senior Vice President, Chief Actuary and

Corporate Illustration Actuary

 

FORTITUDE REINSURANCE COMPANY, LTD.

 

 

By:   /s/ 
James  Bracken                                                

Name: James Bracken

Title: Chief Executive Officer

 

 

By:    /s/ Jeffrey S.  Burman                                         
 

Name: Jeffrey S. Burman

Title: SVP, General Counsel & Secretary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Signature Page to AGL ModCo Agreement]

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