AUTOMATIC INDEMNITY REINSURANCE AGREEMENT AMENDED AND RESTATED AS
OF OCTOBER 1, 2009*
CEDING COMPANY: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(hereinafter referred to as the "Ceding Company")
REINSURER: LINCOLN NATIONAL REINSURANCE COMPANY (BARBADOS) LIMITED
(hereinafter referred to as the "Reinsurer")
EFFECTIVE DATE: July 1, 2003
AMENDMENT DATE: October 1, 2009*
Commencing on the Effective Date and any Amendment Date thereafter, the Ceding
Company will submit and the Reinsurer agrees to accept the Ceding Company's
Guaranteed Benefit (GB) risks as defined in Schedule A, associated with the
Contracts listed in Schedule B, subject to the provisions of this Agreement.
* This Amended and Restated Agreement effective October 1, 2009 shall
supersede and replace in its entirety the Amended and Restated Automatic
Indemnity Reinsurance Agreement Amended and Restated as of October 1, 2009
executed by the Ceding Company and the Reinsurer on October 12, 2009.
TABLE OF CONTENTS
ARTICLE I DEFINITIONS 1
ARTICLE II AUTOMATIC REINSURANCE 2
ARTICLE III PREMIUMS, PAYMENTS, EXPENSES AND REPORTING 3
ARTICLE IV FUNDS WITHHELD ACCOUNT 5
ARTICLE V ERRORS 6
ARTICLE VI FORMS 6
ARTICLE VII REPRESENTATIONS, WARRANTIES AND COVENANTS 6
ARTICLE VIII AUDIT AND INSPECTION 7
ARTICLE IX CONFIDENTIALITY 7
ARTICLE X INSOLVENCY 8
ARTICLE XI PARTIES TO THE AGREEMENT 9
ARTCILE XII DURATION AND TERMINATION OF AGREEMENT 9
ARTICLE XIII RESERVE CREDIT 9
ARTICLE XIV ARBITRATION 14
ARTICLE XV DEFERRED ACQUISITION COST TAX ELECTION 14
ARTICLE XVI ENTIRE AGREEMENT 15
ARTICLE XVII MISCELLANEOUS 15
SCHEDULE A GB REINSURANCE BENEFITS 19
SCHEDULE B CONTRACTS WITH ACCEPTED COVERAGES 20
SCHEDULE C PREMIUM RATE SCHEDULE 21
SCHEDULE D REPORTS 23
SCHEDULE E ARBITRATION 24
SCHEDULE F INVESTMENT GUIDELINES 26
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ARTICLE I
DEFINITIONS
AGREEMENT means this Automatic Indemnity Reinsurance Agreement.
AMENDMENT DATE is October 1, 2009.
BASE REINSURANCE PREMIUM(S) means the premium so designated and calculated as
described in Schedule C.
CEDING COMPANY means The Lincoln National Life Insurance Company.
CONFIDENTIAL INFORMATION means any and all information acquired by the Reinsurer
or the Ceding Company prior or subsequent to the execution of this Agreement
with the exception of either information readily available in the public domain
or information acquired from sources other than the other party.
CONTRACT(S) means those specific annuity contracts enumerated in Schedule B.
EFFECTIVE DATE is July 1, 2003.
EPRC means Reinsurer's expense, profit and risk charge, calculated as described
in Article III, Section 5.
GAAP RESERVE(S) means the Ceding Company's net reserves calculated using U.S.
Generally Accepted Accounting Principles ("GAAP") before reinsurance under this
Agreement, less the Ceding Company's net reserves for GAAP purposes after
reinsurance under this Agreement.
INDIVIDUAL POLICY means a Contract issued to a contract holder.
GB means Guaranteed Benefits and refers specifically to those guaranteed minimum
death benefits and guaranteed living benefits specified in Schedule A.
MATERIAL CHANGE means a modification to a practice, procedure or condition that
a prudent insurance executive would consider as likely to impact on experience
under this Agreement.
REINSURER is Lincoln National Reinsurance Company (Barbados) Limited.
STATUTORY RESERVE(S) means the Ceding Company's net reserves for Indiana
insurance regulatory purposes before reinsurance under this Agreement, less the
Ceding Company's net reserves for Indiana insurance regulatory purposes after
reinsurance under this Agreement. For purposes of this Agreement, Statutory
Reserves shall be computed on a basis consistent with the Ceding Company's
Indiana insurance regulatory reporting valuation practices that are current as
of that particular valuation date.
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TOTAL COLLATERAL means the fair market value of assets in the funds withheld
account plus the fair market value of the assets in any trust established
pursuant to Article XIII, Section 2 plus the face amount of any letter of credit
established pursuant to Article XIII, Section 3.
TREATY RESERVE(S) means the greater of the GAAP Reserve(s), and the Statutory
Reserve(s).
ARTICLE II
AUTOMATIC REINSURANCE
1. CESSION
Beginning with the Amendment Date of this Agreement, the Ceding Company
will cede and the Reinsurer will accept, subject to the limits and
conditions set forth in this Agreement and the attached Schedules,
reinsurance on a coinsurance funds withheld basis, of a quota share equal
to 100% of the GB risks attached to the Contracts as specified in Schedule
B, except for Contracts with the LINCOLN SMARTSECURITY(R) Advantage- With
One Year Automatic Reset, Single and Joint Life, with Lifetime Withdrawals
rider ("SSA-1 Lifetime Rider"). The Ceding Company entered into a
Reinsurance Agreement effective July 1, 2007 with Swiss Re Life & Health
America, Inc. ("SSA-1 Lifetime Agreement") that reinsured a portion of the
SSA-1 Lifetime Rider for a limited period of time. Reinsurer agrees to
accept reinsurance of a quota share equal to all of the GB risks associated
with the SSA-1 Lifetime Rider solely to the extent that such GB risks are
not otherwise reinsured pursuant to the SSA-1 Lifetime Agreement.
2. COVERAGE
This Agreement covers the Ceding Company's liability for all GB liabilities
issued by the Ceding Company or assumed by the Ceding Company from Lincoln
Life & Annuity Company of New York and contained in the Contracts
enumerated in Schedule B. It does not include any liability arising under
the Contracts other than those specifically attributable to GB claims.
3. NEW ANNUITY CONTRACTS OR REVISIONS
The Ceding Company may cede to the Reinsurer liability for GB claims with
respect to a new annuity contract, or a revised version of an annuity
contract where such revision affects the calculation of the GB risks,
simply by providing the Reinsurer with written notice of such intention
together with a copy of the proposed annuity contract, or revision, Unless
the Reinsurer rejects the changes in writing within thirty (30) days after
receipt of the additions and revisions, such additions and revisions shall
automatically be included in this Agreement. Schedules A and B shall be
updated as necessary to reflect the addition of Contracts and revisions to
Contracts covered under this Agreement. Notwithstanding the foregoing, the
Reinsurer retains the right to terminate this Agreement as to new business
according to the terms of Article XII, Section 2.
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ARTICLE III
PREMIUMS, PAYMENTS, EXPENSES AND REPORTING
1. REINSURANCE PREMIUMS
Both the Initial Reinsurance Premium and the Base Reinsurance Premium shall
be determined in accordance with Schedule C. Reinsurance premiums shall be
paid monthly in arrears. The Base Reinsurance Premium, when added to the
EPRC, will at all times be equal to or less than the explicit charges
collected by the Ceding Company from the contract holder for each covered
GB risk listed in Schedule A of this Agreement. In the event no charges or
fees are collected from the contract holder, no reinsurance premiums shall
be paid.
In the event the Ceding Company increases its charges for the contract
holder or a contract benefit allows for a reset which results in a higher
fee for the contract holder, the Reinsurer may increase the reinsurance
premiums, but not exceed the limitation described in the foregoing
paragraph of this Article III, Section 1.
2. OFFSET
Any debts or credits, regardless of how, when or where they arose or were
incurred, in favor of or against either the Ceding Company or the Reinsurer
shall be offset and only the balance allowed or paid. If either the Ceding
Company or the Reinsurer is under formal delinquency proceedings, this
right of offset shall be subject to the laws of the state exercising
primary jurisdiction over such delinquency proceedings. The application of
this offset provision shall not be deemed to constitute diminution of
liability in the event of insolvency of either party.
3. REIMBURSEMENT OF LOSSES
A. All reinsurance claims settlements are subject to the terms and
conditions of the Individual Policy under which the Ceding Company is
liable. The Reinsurer shall accept the Ceding Company's good faith
settlement of all GB claims under the Contracts. When requested, the
Ceding Company shall provide the Reinsurer with copies of any
documentation within the Ceding Company's possession with respect to
specific GB claims under the Contracts or with respect to items used
to compute amounts contained in the accounting reports.
B. The Reinsurer shall pay losses as of the end of the month immediately
following the month when the losses are incurred.
4. REPORTS
The Ceding Company shall prepare periodic reports as described in Schedule
D and submit these to the Reinsurer within thirty (30) days of the end of
each month. Amounts due to or from the parties shall be netted and only net
amounts paid, subject to the terms and conditions set forth in section 8 of
this Article III. Amounts due the Reinsurer or the Ceding
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Company as determined by the Ceding Company shall be settled in the manner
as described in section 8 below. If, subsequent to the Amendment Date,
either party determines that it needs additional reports from the other
party, it shall provide a written request to the other party detailing its
business needs for the additional report. If the other party does not
object in writing within thirty (30) days of receiving such a request, then
Schedule D shall be updated to include such report in the list of those to
be provided on a regular basis. The Ceding Company will provide the
Reinsurer with information necessary to properly account for the business
reinsured, as specified in this Agreement.
5. EXPENSE, PROFIT AND RISK CHARGE
The Reinsurer will be entitled to a payment for EPRC as calculated pursuant
to the terms of Schedule C, payable monthly in arrears.
6. TERMINAL SETTLEMENTS
In the event this Agreement is terminated, an accounting and settlement as
to any balance due under this Agreement shall be undertaken by the parties.
The net payment to the Ceding Company shall be an amount of cash equal to
the Treaty Reserves less any applicable reinsurance premiums and EPRC due
and not paid plus any losses due and not paid.
7. CLAIMS, EXPENSES AND EXTRA-CONTRACTUAL DAMAGES
Expenses incurred by the Ceding Company in settling, defending or
investigating a claim for Individual Policy liability or in taking up or
rescinding an Individual Policy reinsured under this Agreement shall be
covered under this Agreement, but in no event shall the following
categories of expenses or liabilities be covered under this Agreement:
A. routine investigative or administrative expenses;
B. expenses incurred in connection with a dispute or contest arising out
of the conflicting claims of entitlement to Policy proceeds or
benefits which the Ceding Company admits are payable;
C. expenses, fees, settlements or judgments arising out of, related to or
in connection with claims against the Ceding Company for
consequential, compensatory, punitive or exemplary damages; and
D. expenses, fees, settlements or judgments arising out of, related to or
in connection with claims against the Ceding Company and based on
alleged or actual bad faith, failure to exercise good faith, or
tortious conduct.
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8. MONTHLY SETTLEMENTS
A. All monthly settlements associated with the payment of reinsurance
premiums, claims, adjustments for investment activity within the funds
withheld account, and realized income, gains, or losses shall be on a
net cash basis or cash equivalent. If an amount is due the Reinsurer,
it shall be paid by the due date of the report. If an amount is due
the Ceding Company, it shall be paid within sixty (60) days of receipt
of the report.
B. Unrealized gains and losses associated with the derivatives held in
the funds withheld account will result in an adjustment to the ending
funds withheld balance each month.
ARTICLE IV
FUNDS WITHHELD ACCOUNT
1. DURATION
The Ceding Company shall maintain a funds withheld account during the term
of this Agreement.
2. AMOUNTS OF FUNDS WITHHELD
No later than October 15, 2009, the Reinsurer shall transfer to the Ceding
Company derivative assets and/or fixed income securities with market values
greater than or equal to Statutory Reserves at that date. This amount, or
some subset thereof with a total market value at least equal to the
Statutory Reserves, shall be placed in the funds withheld account. The
total market value of the funds withheld, along with assets held in a trust
and/or letters of credit, shall at all times be greater than or equal to
the Statutory Reserves.
3. INVESTMENT INCOME
The Ceding Company shall credit to the Reinsurer the entire investment
results from the assets in the funds withheld account. This includes all
net investment income or expense, realized capital gains and losses from
all of the assets in the funds withheld account, and unrealized gains and
losses from the derivatives held in the funds withheld account.
4. INVESTMENT STRATEGY
The Ceding Company may use its discretion in managing the assets in the
funds withheld account provided it follows the investment guidelines as set
forth in Schedule F. The Reinsurer may only challenge the Ceding Company's
investment strategy and buy/sell decisions with respect to the assets in
the funds withheld account if the Ceding Company fails to maintain a
reasonable matching between assets and liabilities. Notwithstanding the
preceding, the Ceding Company shall take due consideration of
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any recommendations made by the Reinsurer regarding the Ceding Company's
investment strategy or its buy/sell decisions.
ARTICLE V
ERRORS
This Agreement will not be abrogated by the failure of either the Ceding Company
or the Reinsurer to comply with any of the terms of this Agreement if it is
shown that said failure was unintentional and the result of a misunderstanding,
oversight or clerical error on the part of either the Ceding Company or the
Reinsurer. Both parties will be returned to the position they would have
occupied had no such oversight, misunderstanding or clerical error occurred. No
interest shall be paid on errors.
ARTICLE VI
FORMS
Upon request, the Ceding Company will furnish the Reinsurer with any specimen
copies of its applications, forms, and any tables of rates and values which may
be required for the proper administration of the business reinsured under this
Agreement, and will keep the Reinsurer informed with proper documentation as to
any modifications or new forms which would be required for the proper
administration of reinsurance under this Agreement.
ARTICLE VII
REPRESENTATIONS, WARRANTIES AND COVENANTS
1. CHANGES TO CEDING COMPANY PROCEDURES
Except as set forth in Article VII, Section 2 below, during the term of
this Agreement the Ceding Company shall not permit a Material Change to the
Ceding Company's:
A. normal underwriting practices and procedures when issuing Contracts
with GB risks, particularly with regard to policy coverages and
benefits, classes of persons insured and requirements for medical
examinations and other underwriting information;
B. normal practices and procedures of investigating and administering
claims; and
C. method of determining any value used to compute net retained claims.
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2. CONSENT TO CHANGES IN CEDING COMPANY PROCEDURES
The Ceding Company shall promptly notify the Reinsurer in writing of its intent
to take any action which, if performed, would breach one or more of the
covenants contained in Article VII, Section 1. If the Reinsurer determines that
such action would not adversely affect its economic interests under this
Agreement, it shall consent in writing to the action by the Ceding Company.
ARTICLE VIII
AUDIT AND INSPECTION
1. The Reinsurer may audit, at any reasonable time and at its own expense, all
records and procedures relating to reinsurance under this Agreement. The
Ceding Company shall cooperate in the audit, including providing at the
office of the Reinsurer any information requested by the Reinsurer in
advance of the audit.
2. Each party, or its duly authorized representative, shall have access at any
reasonable time during regular business hours to the original and any
non-identical copies of all electronic and hard copy papers, books, records
and documents relating or referring to, connected with or affecting
reinsurance under this Agreement that are within the possession or control
of the other party.
ARTICLE IX
CONFIDENTIALITY
The Reinsurer and the Ceding Company may come into the possession or knowledge
of Confidential Information of either party in fulfilling their obligations
under this Agreement. The Reinsurer and the Ceding Company agree to hold such
information in confidence and to take all reasonable steps to ensure that such
Confidential Information is not disclosed in any form by any means by its
employees or third parties of any kind, except by advance written authorization
by an officer of the Reinsurer or the Ceding Company; provided however, that the
Reinsurer and the Ceding Company will be deemed to have satisfied their
obligations as to the Confidential Information by protecting its confidentiality
in the same manner that they would protect their own proprietary or confidential
information of like kind which will be at least a reasonable manner or, if it is
determined that such disclosure is necessary in order to avoid a violation or
potential violation of legal obligations in accordance with the following:
If the Reinsurer or the Ceding Company, their employees, directors or advisers
are requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process) to disclose Confidential Information, it will promptly notify the other
party in writing. The party notified will promptly determine whether to contest
such attempted discovery by legal means or to waive compliance by the notifying
party with the terms of this Agreement. If, in the opinion of its counsel, the
Reinsurer or the Ceding Company is subject to contempt, sanction or other
penalty for failure to disclose the requested Confidential Information, it may,
without violating the terms of this Agreement, disclose only
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that portion of the Confidential Information that counsel advises is legally
required to be disclosed, provided that it exercises all reasonable efforts to
preserve the confidentiality of such information, including, without limitation,
by cooperating with the Reinsurer or the Ceding Company in obtaining a
protective order or other reliable assurance that the Confidential Information
will be protected from further disclosure, provided, however, that all expenses
of such efforts (other than allocated costs of home office employees at such
location) shall be borne by the party whose confidential information is sought
to be disclosed.
Notwithstanding anything in this Article IX to the contrary, both the Ceding
Company and the Reinsurer (and each employee, representative, or other agent of
either of them) may disclose to any and all persons, without limitation of any
kind, the tax treatment and tax structure contemplated by this Agreement and all
materials of any kind (including opinions or other tax analyses) that are
provided to either the Ceding Company or the Reinsurer relating to such tax
treatment and tax structure.
ARTICLE X
INSOLVENCY
1. In the event of the insolvency of the Ceding Company, reinsurance shall be
payable on the basis of reported claims allowed in liquidation proceedings
against the Ceding Company, subject to the Reinsurer's right of offset
provided in Article III, Section 2, and subject to court approval, without
diminution because of the insolvency of the Ceding Company. Payments shall
be made directly to the Ceding Company or its domiciliary liquidator,
except as provided in I.C. 27-9-3-30.1 or any successor thereto.
2. In the event of the insolvency of the Ceding Company, the domiciliary
liquidator, receiver or statutory successor of the Ceding Company shall
give the Reinsurer written notice of the pendency of a claim on a Contract
made against the Reinsurer within a reasonable time after such claim is
filed in the liquidation proceeding. During the pendency of the claim, the
Reinsurer may investigate the claim and interpose in the proceeding where
such claim is to be adjudicated at its own expense, any defenses that the
Reinsurer considers available to the Ceding Company or its liquidator,
receiver or statutory successor.
3. A proportionate share of the expense thus incurred by the Reinsurer shall
be charged, subject to court approval, against the Ceding Company as part
of the expense of liquidation, commensurate with the benefit which may
accrue to the Ceding Company as a result of the defense undertaken by the
Reinsurer.
4. The Reinsurer's liability will not increase as a result of the insolvency
of the Ceding Company.
5. In the event of the insolvency of the Reinsurer, the liability of the
Reinsurer shall not terminate but shall continue with respect to the
reinsurance ceded to the Reinsurer by the Ceding Company prior to the date
of such insolvency, and the Ceding Company shall
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continue to have a security interest in any and all sums held by or under
deposit in the name of the Reinsurer.
ARTICLE XI
PARTIES TO THE AGREEMENT
This is an Agreement for indemnity reinsurance solely between the Ceding Company
and the Reinsurer. The acceptance of reinsurance hereunder will not create any
right or legal relation whatsoever between the Reinsurer and any annuitant,
contract owner, or beneficiary under any contracts of the Ceding Company which
may be reinsured hereunder. In no instance shall anyone other than the Ceding
Company or the Reinsurer have any rights under this Agreement.
ARTICLE XII
DURATION AND TERMINATION OF AGREEMENT
1. Except as otherwise provided, this Agreement is unlimited in duration.
2. This Agreement can be terminated for new business by either the Ceding
Company or the Reinsurer, subject to thirty (30) days advance written
notice.
3. The Reinsurer may terminate this Agreement if the Ceding Company breaches a
covenant contained in Article VII, Section 1, and the Reinsurer does not
otherwise consent as provided for in Article VII, Section 2.
4. The Ceding Company may terminate this Agreement if the Ceding Company is
unable to secure reserve credit as described in Article XIII, Section 1.
5. In the event that more than 50% of the stock of the Reinsurer is ever held
by an individual or entity who is not affiliated with the Ceding Company,
then the Ceding Company may terminate this Agreement on thirty (30) days
written notice to the Reinsurer. The Reinsurer is obligated to provide the
Ceding Company with written notice immediately upon the transfer of 50% or
more of its stock to an individual or entity who is not affiliated with the
Ceding Company.
6. The Ceding Company shall have the right at its sole discretion to terminate
this Agreement on December 31, 2019.
7. This Agreement is automatically terminated when all GB risks terminate.
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ARTICLE XIII
RESERVE CREDIT
1. RESERVE CREDIT GENERALLY
A. It is the intention of the Ceding Company and the Reinsurer that the
Ceding Company receive full statutory accounting credit for
reinsurance ceded to the Reinsurer pursuant to this Agreement in all
jurisdictions in which the Ceding Company is authorized to do business
or accredited as a reinsurer. In addition to the requirements of other
provisions of this Agreement, the Reinsurer agrees to take any other
steps necessary for the Ceding Company to receive such statutory
accounting treatment.
B. In the event that the assets held in the funds withheld account are
less than the Statutory Reserves at the time of any quarterly
settlement, a trust account may be established and/or a letter of
credit may be provided by the Reinsurer to allow the Ceding Company to
take the appropriate level of reserve credit. The Total Collateral as
of the end of each calendar quarter shall equal the Statutory Reserves
for that quarter. The Ceding Company shall withhold an amount equal to
the increase in the Statutory Reserves from the Reinsurer as part of
the settlement described in Schedule D and place such amount in the
funds withheld account. If the Ceding Company is unable to withhold a
sufficient amount to cover the entire increase in the Statutory
Reserves, then the Reinsurer may either provide additional assets to
the Ceding Company to be placed in either the funds withheld account
or the trust account established pursuant to Article XIII, Section 2,
or establish or increase the amount of a letter of credit meeting the
requirements of Article XIII, Section 3.
C. If this Agreement is terminated for any reason, the Ceding Company may
withdraw all or a portion of the assets in the funds withheld account
and/or the trust account and draw down any letter of credit to satisfy
the terminal settlement amount.
2. TRUST
In order for the Ceding Company to take full reinsurance credit in any and
all jurisdictions where the Ceding Company conducts business or is
accredited as a reinsurer, the Reinsurer may provide, at its sole expense,
one or more trust accounts for the sole use, benefit and security of the
Ceding Company. The Reinsurer and any such trust account(s) shall comply
with all applicable Indiana laws, including Indiana Code Section 27-6-10-14
and Ind. Admin. Code tit. 760, Section 1-56-10 as well as the relevant
provisions of other states' laws. To the extent that the Reinsurer opts to
use one or more trust accounts to meet its obligations to provide reserve
credit, the following paragraphs shall apply to such trust(s):
A. Prior to depositing assets with the trustee, the Reinsurer shall
execute assignments, endorsements in blank, or transfer legal title to
the trustee of all shares, obligations or any other assets requiring
assignments, and take any other steps required in order that the
Ceding Company, or the trustee upon the direction of the Ceding
Company, may
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whenever necessary, negotiate any such assets without consent or
signature from the Reinsurer or any other person or entity.
B. The assets deposited into the trust(s) shall be valued according to
their current fair market value and shall be invested and reinvested
by the Reinsurer so as to satisfy its obligation to ensure that the
Ceding Company receives full statutory accounting credit for
reinsurance ceded to the Reinsurer in all jurisdictions in which the
Ceding Company is authorized to do business or accredited as a
reinsurer. All investments shall be limited to those permitted by
Indiana Code Section 27-6-10-14(c), Ind, Admin. Code tit.760, Section
l-56-10(d), other applicable statutes and regulations, and any
successors thereto.
C. If, at the end of any calendar quarter, the total amount of reserve
credit that the Reinsurer is obligated to provide exceeds the Total
Collateral, the Reinsurer shall eliminate the shortfall by depositing
cash or securities into the trust(s), and/or by furnishing or
increasing one or more letters of credit, consistent with the terms of
Article XIII, Section 3, and/or by providing cash or securities to the
Ceding Company for inclusion in the funds withheld account. However,
if at the end of any calendar quarter the fair market value of the
Total Collateral exceeds 102% of the total amount of reserve credit
that the Reinsurer is obligated to provide, the Reinsurer may request
that the Ceding Company withdraw from the trust(s) an amount not
greater than such excess amount and deliver that amount to the
Reinsurer, consistent with applicable legal requirements. In addition,
the Reinsurer shall have the discretion to add additional amounts to
the trust(s) or to refrain from requesting a withdrawal of excess
funds from the trust(s). All withdrawals of assets from the trust(s)
shall be made by the Ceding Company.
D. The Reinsurer shall pay all trustee and custodial fees for the
trust(s). Assets in the trust(s) shall not be used to pay any such
fees.
E. The Ceding Company or its successors in interest may draw against the
assets in said trust account(s) at any time, notwithstanding any other
provision in this Agreement, and shall utilize the amount drawn for
one or more of the following reasons only:
i. To reimburse the Ceding Company for the Reinsurer's share of
premiums returned to the owners of the Contracts because of
cancellation of GB benefits.
ii. To reimburse the Ceding Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Ceding Company
under the terms and conditions of the Contracts reinsured under
this Agreement.
iii. To fund an account with the Ceding Company in an amount at least
equal to the deduction for reinsurance ceded from the Ceding
Company's liabilities for Contracts ceded pursuant to this
Agreement. The account shall include but not be limited to
amounts for policy reserves, claims, and losses incurred,
(including losses incurred but not reported), loss
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adjustment expenses, and unearned premium reserves attributable
to the reinsured GB benefits.
iv. To pay any other amounts the Ceding Company claims are due under
this Agreement.
In the event that the Ceding Company withdraws assets in the Trust
Account for the purposes set forth in Article XIII, Section 2(E)(i),
(ii), or (iii), but the total amount withdrawn exceeds the amount
actually needed for such purposes, or, in the case of Article XIII,
Section 2(E)(iv), all or a portion of the amount withdrawn is
subsequently determined not to be due, the Ceding Company shall return
to the Trust Account such excess plus interest at the average prime
rate of interest applicable to the period during which such amounts
are so held.
The foregoing limitations on the use of withdrawn funds shall apply to
the Ceding Company or any successor, including, without limitation,
any liquidator, rehabilitator, receiver or conservator of the Ceding
Company, and shall apply without diminution because of insolvency on
the part of the Ceding Company or the Reinsurer.
F. The Reinsurer may substitute assets in the Trust Account provided it:
(i) seeks prior approval of the Ceding Company for the substitution;
and (ii) at the time of withdrawal assets with a fair market value
equal to those withdrawn and also meeting the requirements of Indiana
law to be eligible securities are placed in the Trust Account. The
Ceding Company shall not unreasonably or arbitrarily withhold its
approval.
G. Settlement of account between the Ceding Company and the Reinsurer
shall be made in cash or its equivalent.
H. The rights and liabilities of the Ceding Company and the Reinsurer, as
set forth in this Agreement shall not be diminished in any manner by
the insolvency of the other party.
3. LETTERS OF CREDIT
A. In lieu of replenishing the funds withheld account or adding assets to
the trust account, the Reinsurer may be the applicant for, and provide
the Ceding Company with, letters of credit made payable to the Ceding
Company. Any letters of credit entered into pursuant to this
subsection shall comply with all applicable laws, including but not
limited to the insurance laws of the State of Indiana.
B. The Reinsurer and the Ceding Company agree that any letters of credit
provided by the Reinsurer may be drawn upon by the Ceding Company at
any time, notwithstanding any other provisions in this Agreement, and
be utilized and applied by the Ceding Company or any successor by
operation of law of the
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Ceding Company, including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Ceding Company, without
diminution because of insolvency on the part of the Ceding Company or
the Reinsurer, only for the following purposes:
i. to reimburse the Ceding Company for the Reinsurer's share of
premiums returned to owners of Contracts reinsured under this
Agreement on account of cancellations of GB benefits;
ii. to reimburse the Ceding Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Ceding Company
under the terms and provisions of the Contracts reinsured under
this Agreement;
iii. to fund an account with the Ceding Company in an amount at least
equal to the deduction, for reinsurance ceded, from the Ceding
Company's liabilities for Contracts ceded under this Agreement;
and
iv. to pay any other amounts the Ceding Company claims are due under
this Agreement.
C. The Ceding Company agrees to return promptly to the Reinsurer any
amounts drawn on such letters of credit in excess of the actual
amounts required for Subparagraphs B(i), B(ii), and B(iii) of this
Article XIII, Section 3, or in the case of Subparagraph B(iv) of
Article XIII, Section 3, any amounts that are subsequently determined
to be in excess of the amounts due.
D. Payment to the Ceding Company by the issuing banks of amounts drawn on
the letters of credit pursuant to Subparagraphs B(i), B(ii) and B(iv),
above, shall constitute payment by the Reinsurer pursuant to this
Agreement and shall discharge the Reinsurer of the obligation which
gave rise to the draw, provided however the Reinsurer may later
contest whether it had failed to reimburse or pay the Ceding Company
as required by this Agreement.
4. JURISDICTION ISSUES
To the extent necessary to comply with Indiana Code section 27-6-10-12 or any
successor thereto or otherwise meet its obligations pursuant to Article XIII,
Section 1, the Reinsurer hereby agrees to the following:
A. In the event that the Reinsurer fails to perform its obligations under
the terms of this Agreement, the Reinsurer, at the request of the
Ceding Company shall:
(i) submit to the jurisdiction of any court with jurisdiction in
any state of the United States;
(ii) comply with all requirements necessary to give the court
described in clause (i) above jurisdiction;
13
(iii) abide by the final decision of the court or of any appellate
court in the event of an appeal; and
(iv) designate the commissioner or an attorney licensed in, and
having offices in, Indiana 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.
B. This Article XIII, Section 4 is not intended to conflict with or
override the obligation of the parties to arbitrate their disputes
pursuant to Article XIV.
ARTICLE XIV
ARBITRATION
1. ARBITRATION
If the Ceding Company and the Reinsurer cannot mutually resolve a dispute
regarding the interpretation or operation of this Agreement, the dispute
shall be decided through arbitration as set forth in Schedule E. The
arbitrators shall base their decision on the terms and conditions of this
Agreement, plus, as necessary, on the customs and practices of the
insurance and reinsurance industry rather than solely on a strict
interpretation of the applicable law. There shall be no appeal from their
decision, except that either party may petition a court having jurisdiction
over the parties and the subject matter to reduce the arbitrator's decision
to judgment.
2. FEDERAL ARBITRATION ACT
The parties intend this article to be enforceable in accordance with the
Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to
that Act which are subsequently adopted. In the event that either party
refuses to submit to arbitration as required by paragraph 1, the other
party may request a United States Federal District Court to compel
arbitration in accordance with the Federal Arbitration Act. Both parties
consent to the jurisdiction of such court to enforce this article and to
confirm and enforce the performance of any award of the arbitrators.
ARTICLE XV
DEFERRED ACQUISITION COST TAX ELECTION
1. The Reinsurer and the Ceding Company each acknowledge that it is subject to
taxation under Subchapter "L" of the Internal Revenue Code of 1986 as
amended (the "Code").
2. With respect to this Agreement, the Reinsurer and the Ceding Company agree
to the following pursuant to Section 1.848-2(g)(8) of the Income Tax
Regulations, whereby:
14
A. Each party shall attach a schedule to its federal income tax return
which identifies this Agreement for which the joint election under the
Regulation has been made;
B. The party with net positive consideration, as defined in the
Regulation promulgated under Code Section 848, 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)(l);
C. Each party agrees to exchange information pertaining to the amount of
net consideration under this Agreement each year to ensure
consistency; and
D. This election shall be effective for the year that this Agreement was
entered into and for all subsequent years that this Agreement remains
in effect.
ARTICLE XVI
ENTIRE AGREEMENT
1. This Agreement represents the entire agreement between the parties with
respect to the business being reinsured hereunder and supersedes any prior
oral or written agreement between the parties regarding its subject matter.
2. Any changes or modifications to the Agreement will be null and void unless
made by amendment to the Agreement and signed by both parties.
3. A waiver of a right created by this Agreement shall constitute a waiver
only with respect to the particular circumstance for which it is given and
not a waiver of any future circumstance.
ARTICLE XVII
MISCELLANEOUS
1. CURRENCY
All currency will be payable in United States dollars.
2. HEADINGS AND SCHEDULES
Headings are not a part of this Agreement and shall not affect its terms.
The attached Schedules are a part of this Agreement.
15
3. NOTICES
All notices and communications hereunder shall be in writing and, except in
those instances when actual notice is required, shall be deemed given:
(a)(i) when delivered personally, (ii) when made or given via facsimile
transmission or electronic media, or (iii) when mailed by certified mail or
registered mail (return receipt requested); and (b) when addressed as
provided below.
All notices or communications to the Reinsurer under this Agreement shall
be addressed as follows:
Xx. Xxxxx X. Xxxx
Chief Financial Officer
Lincoln National Reinsurance Company (Barbados) Limited
0000 X. Xxxxxxx Xxxxxx
Xxxx Xxxxx, XX 00000-0000
All notices and communications to the Ceding Company under this Agreement
shall be directed to:
Xx. Xxxxx X. Xxxxxxx
Assistant Vice President
The Lincoln National Life Insurance Company
0000 X. Xxxxxxx Xxxxxx
Xxxx Xxxxx, XX 00000-0000
4. SEVERABILITY
If any term or provision of this Agreement shall be held void, illegal, or
unenforceable, the validity of the remaining portions or provisions shall
not be affected thereby.
5. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Indiana.
6. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the parties hereto and their
respective successors and assigns, including any rehabilitator,
conservator, liquidator, or statutory successor of either party.
7. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same instrument.
16
8. AMENDMENT OR WAIVER
No amendment or waiver of any provision of this Agreement shall be
effective unless set forth in writing, signed by duly authorized officers
of the parties. A waiver shall constitute a waiver only with respect to the
particular circumstance for which it is given and not a waiver of any
future circumstance.
9. INTERPRETATION
For purposes of this Agreement, the words "hereof," "herein," "hereby," and
other words of similar import refer to this Agreement as a whole unless
otherwise indicated. Whenever the words "include," "includes," or
"including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation." Whenever the singular is used herein,
the same shall include the plural, and whenever the plural is used herein,
the same shall include the singular, where appropriate.
10. INVESTIGATIONS
The Ceding Company will notify the Reinsurer immediately, in writing, of
any and all investigations of the Ceding Company or its directors,
principal officers or shareholders conducted by any federal, state or local
governmental or regulatory agency other than routine state or federal
examinations. Likewise, the Reinsurer will notify the Ceding Company
immediately, in writing, of any and all investigations of the Reinsurer or
its directors, principal officers or shareholders conducted by any federal,
state or local governmental or regulatory agency other than routine state
or federal examinations.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate on the dates shown below.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: /s/ Xxxxxx X. Xxxxxxxx Date: 12/22/09
-------------------------------------------
Xxxxxx X. Xxxxxxxx
Assistant Vice President
LINCOLN NATIONAL REINSURANCE COMPANY (BARBADOS) LIMITED
By: /s/ Xxxxx X. Xxxx Date: Dec 22, 2009
-------------------------------------------
Xxxxx X. Xxxx
Chief Financial Officer
17
SCHEDULES
SCHEDULE A GB REINSURANCE BENEFITS
SCHEDULE B CONTRACTS WITH ACCEPTED COVERAGES
SCHEDULE C PREMIUM RATES
SCHEDULE D REPORTS
SCHEDULE E ARBITRATION
SCHEDULE F INVESTMENT GUIDELINES
18
SCHEDULE A
GB REINSURANCE BENEFITS
Each contract listed in Schedule B contains one or more GB. GBs which are
covered by this Agreement include the following:
MARKETING NAME OF BENEFIT POLICY FORM NOS.
------------------------------------------------------------- ----------------
DEATH BENEFIT RIDERS
Guarantee of Principal Death Benefit Rider* 32148
Enhanced Guaranteed Minimum Death Benefit Rider* 32149
5% Step-Up Death Benefit Rider* 32150
7 Year Ratchet Death Benefit on American Legacy I & II* --
Estate Enhancement Death Benefit Rider* 32151
LINCOLN SMARTSECURITY(R) ADVANTAGE
Variable Annuity Rider 32793
i4LIFE(R) ADVANTAGE WITH GUARANTEED INCOME BENEFIT
Variable Annuity Income Rider I4LA
Guaranteed Income Benefit GIB
Increasing GIB IGIB
Annual XXX XXXX
4LATER(R) ADVANTAGE
Guaranteed Income Later Rider 4Later
LINCOLN LIFETIME INCOME(SM) ADVANTAGE
Variable Annuity Living Benefits Rider AR-512
Variable Annuity Living Benefits Rider (LINC Plus) AR-512P
* issued by Ceding Company only
19
SCHEDULE B
CONTRACTS WITH ACCEPTED
COVERAGES
Contracts covered by this Agreement include all Contracts either issued by the
Ceding Company directly or issued by Lincoln Life & Annuity Company of New York
and reinsured with the Ceding Company and included in the following list:
ChoicePlus Variable Annuity
ChoicePlus Access Variable Annuity
ChoicePlus Bonus Variable Annuity (issued by the Ceding Company only)
ChoicePlus II Variable Annuity
ChoicePlus II Access Variable Annuity
ChoicePlus II Bonus Variable Annuity
ChoicePlus II Advance Variable Annuity
ChoicePlus Assurance (A Share) (includes wrap fee version)
ChoicePlus Assurance (B Share)
ChoicePlus Assurance (C Share)
ChoicePlus Assurance (Bonus)
ChoicePlus Assurance (L Share)
ChoicePlus Momentum Income Option
ChoicePlus Design (includes all share classes)
American Legacy I (issued by the Ceding Company only)
American Legacy II (issued by the Ceding Company only)
American Legacy III
American Legacy III Plus
American Legacy III View
American Legacy III C-Share
Shareholders Advantage (includes wrap fee version)
American Legacy Design (includes all share classes)
Multi-Fund 1 (issued by the Ceding Company only)
Multi-Fund 2 (issued by the Ceding Company only)
Multi-Fund 3 (issued by the Ceding Company only)
Multi-Fund 4 (issued by the Ceding Company only)
Multi-Fund 5 (issued by the Ceding Company only)
Multi-Fund Select (issued by the Ceding Company only)
Accru Variable Annuity (issued by the Ceding Company only)
Accru ChoicePlus (issued by the Ceding Company only)
20
SCHEDULE C
PREMIUM RATE SCHEDULE
INITIAL REINSURANCE PREMIUM;
The Initial Reinsurance Premium shall equal the Treaty Reserve applicable to
each Individual Policy on the date it is first covered by this Agreement. For
all business issued by the Ceding Company after the Effective Date, the Initial
Premium shall be zero.
BASE REINSURANCE PREMIUM RATES:
Effective from Treaty Effective Date and the corresponding effective date of any
amendment, as appropriate:
CONTRACTS
CONTRACTS ISSUED CONTRACTS
ISSUED PRIOR PRIOR TO ISSUED
TYPE OF BENEFIT TO 7/01/03 7/01/03 AFTER 6/30/03 ALL CONTRACTS
---------------------------------------------------------------------------------------------
EFFECTIVE DATE OF COVERAGE 7/1/2003 7/26/2004 7/1/2003
--------------------------------------------------------------------------------------------------------
BASE BASE BASE EXPENSE,
REINSURANCE REINSURANCE REINSURANCE PROFIT, AND
PREMIUM PREMIUM PREMIUM RISK CHARGE APPLIED
GMDB TYPE ANNUAL RATE ANNUAL RATE ANNUAL RATE ANNUAL RATE TO
--------------------------------------------------------------------------------------------------------
Guarantee of Principal 0.015% 0.015% 0.020% 0.050% Account
Death Benefit - Employer VA Value
--------------------------------------------------------------------------------------------------------
Guarantee of Principal 0.050% 0.110% 0.100% 0.050% Account
Death Benefit - Individual Value
VA
--------------------------------------------------------------------------------------------------------
Enhanced Guaranteed Minimum 0.320% 0.280% 0.200% 0.050% Account
Death Benefit Value
--------------------------------------------------------------------------------------------------------
Enhanced Guaranteed Minimum 0.590% 0.210% 0.260% 0.050% Account
Death Benefit with 5% Rollup Value
--------------------------------------------------------------------------------------------------------
5% Step-Up Death Benefit 0.620% 0.290% 0.460% 0.050% Account
Value
--------------------------------------------------------------------------------------------------------
Legacy I and II with 7 Yr 0.110% 0.070% 0.100% 0.050% Account
Ratchet Benefit Value
--------------------------------------------------------------------------------------------------------
Estate Enhancement Benefit 0.500% 0.380% 0.500% 0.050% Account
Value
--------------------------------------------------------------------------------------------------------
Estate Enhancement Benefit with 0.620% 0.620% 0.620% 0.050% Account
5% Rollup Value
--------------------------------------------------------------------------------------------------------
21
ALL
TYPE OF BENEFIT CONTRACTS
-------------------------------------------------------------------------------------------------
BASE EXPENSE,
EFFECTIVE DATE RATES APPLIED REINSURANCE PROFIT,
OF RATE TO RIDERS PREMIUM AND RISK
GLB TYPE APPLICATION EFFECTIVE ANNUAL RATE CHARGE APPLIED TO
----------------------------------------------------------------------------------------------------------------
Lincoln SmartSecurity Advantage 7/1/2003 All In Force 0.350% 0.050%
- 5 Yr Optional Reset Riders
effective prior
to 5/15/2004
5/15/2004 All In Force 0.400% 0.050% Guaranteed
Riders effective Benefit (#)
5/15/2004 thru
1/19/2009
1/20/2009 Riders 0.600% 0.050%
effective or
reset on or
after 1/20/2009
----------------------------------------------------------------------------------------------------------------
Lincoln SmartSecurity Advantage Riders 0.550% 0.050%
- 1 Yr Automatic Reset effective
before 1/20/09
Guaranteed
1/20/2009 Riders 0.600% 0.050% Benefit (#)
effective or
reset on or
after 1/20/09
----------------------------------------------------------------------------------------------------------------
Lincoln SmartSecurity Advantage Riders 0.550% 0.050%
- 1 Yr Automatic Reset - Single effective
Life Option with Lifetime before 1/20/09
Withdrawals Guaranteed
Benefit (#)
1/20/2009 Riders 0.600% 0.050%
effective or
reset on or
after 1/20/09
----------------------------------------------------------------------------------------------------------------
Lincoln SmartSecurity Advantage Riders 0.700% 0.050%
- 1 Yr Automatic Reset - Joint effective
Life Option with Lifetime before
Withdrawals 1/20/09 Guaranteed
Benefit (#)
1/20/2009 Riders 0.750% 0.050%
effective or
reset on or
after 1/20/09
----------------------------------------------------------------------------------------------------------------
4LATER Advantage 7/1/2003 All In Force 0.450% 0.050%
Riders effective
prior to
1/20/2009 Current
Income Base
1/20/2009 Riders effective 0.600% 0.050% (#)
or reset on or
after 1/20/09
----------------------------------------------------------------------------------------------------------------
Guaranteed Income Benefit on Riders 0.400% 0.050%
i4Life effective
before
10/1/2009 Variable
Account
10/1/2009 Riders 0.850% 0.050% Value
effective or
reset on or
after 10/1/2009
----------------------------------------------------------------------------------------------------------------
Increasing Guaranteed Income Riders 0.400% 0.050%
Benefit effective
before Variable
10/1/2009 Account
Value
10/1/2009 Riders 0.850% 0.050%
effective or
reset on or
after 10/1/2009
----------------------------------------------------------------------------------------------------------------
Annual Step-Up Guaranteed Riders 0.400% 0.050%
Income Benefit effective
before
10/1/2009 Variable
Account
10/1/2009 Riders 0.850% 0.050% Value
effective or
reset on or
after 10/1/2009
----------------------------------------------------------------------------------------------------------------
Lincoln Lifetime Income Advantage All In Force 0.700% 0.050%
Riders
effective prior
to 1/20/2009 Guaranteed
Benefit (#)
1/20/2009 Riders 0.850% 0.050%
effective or
reset after
1/20/2009
----------------------------------------------------------------------------------------------------------------
22
ALL
TYPE OF BENEFIT CONTRACTS
-------------------------------------------------------------------------------------------------
BASE EXPENSE,
EFFECTIVE DATE RATES APPLIED REINSURANCE PROFIT,
OF RATE TO RIDERS PREMIUM AND RISK
GLB TYPE APPLICATION EFFECTIVE ANNUAL RATE CHARGE APPLIED TO
----------------------------------------------------------------------------------------------------------------
Lincoln Lifetime Income Advantage Riders 0.400% 0.050%
(transitioning to i4LIFE GIB) effective
before 10/1/2009 Variable
Account
10/1/2009 Riders effective 0.850% 0.050% Value
or reset on or
after 10/1/2009
----------------------------------------------------------------------------------------------------------------
Lincoln Lifetime Income Riders 0.800% 0.050%
Advantage Plus effective
before 1/20/2009 Guaranteed
Benefit
1/20/2009 Riders effective 1.000% 0.050% (#)
or reset after
1/20/2009
----------------------------------------------------------------------------------------------------------------
Lincoln Lifetime Income Advantage Riders 0.400% 0.050%
Plus (transitioning to i4LIFE GIB) effective
before 10/1/2009 Variable
Account
10/1/2009 Riders effective 0.850% 0.050% Value
or reset on or
after 10/1/2009
----------------------------------------------------------------------------------------------------------------
(#) Guaranteed Benefit amount and Current Income Base amount are as calculated
by the terms of the applicable riders.
Reinsurance premium shall step up to the current charge for any Policy that
resets,
REINSURER'S EXPENSE, PROFIT, AND RISK CHARGE (EPRC)
EPRC shall equal the annual rates shown above, payable monthly in arrears
computed in the manner as more fully described below.
MONTHLY PAYMENT OF REINSURANCE PREMIUM:
Both the Base Reinsurance Premium and the EPRC are payable in arrears after the
end of each calendar month. The monthly payment for all benefit types shall be
computed by adding the appropriate Base Reinsurance Premium annual rate to the
EPRC annual rate, then dividing the total by twelve and multiplying the result
times the end of the month Guaranteed Benefit Amount, the Current Income Base or
the Variable Account Value, as applicable.
23
SCHEDULE D
REPORTS
Within thirty (30) days after the end of each calendar month, the Ceding Company
will furnish the Reinsurer with a summary report that includes calculated
reinsurance premiums, claims, net investment income on the funds withheld
account, and Statutory Reserves, for the business covered by this Agreement
substantially similar to the following:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY MONTHLY REINSURANCE SETTLEMENT
REPORT FOR LINCOLN NATIONAL REINSURANCE BARBADOS, LTD. MM//YYYY
MONTHLY PREMIUMS CEDED:
1. GMDB
2. GMWB
3. GMIB
(1) TOTAL CEDED PREMIUMS $X
MONTHLY BENEFITS CEDED:
1. GMDB Claims Ceded
2. GMWB Claims Ceded
3. GMIB Claims Ceded
(2) TOTAL BENEFITS CEDED ($X)
MONTHLY FUNDS WITHHELD ASSETS-COST:
1. Ending Derivative Cost
2. Ending Deposit With Brokers
3. Ending Fixed Maturity Securities- Book Value
4. (Beginning Derivative Cost)
5. (Beginning Deposit With Brokers)
6. (Beginning Fixed Maturity Securities- Book Value)
(3) INCREASE (DECREASE) IN FUNDS
WITHHELD ASSETS- COST ($X)
MONTHLY INVESTMENT INCOME ON FUNDS WITHHELD ACCOUNT:
1. Derivatives Realized Gain/(Loss)
2. Fixed Income Assets Net Investment Income/(Loss)
3. Fixed Income Assets Realized Gain/(Loss)
(4) TOTAL CEDED NET INVESTMENT
INCOME $X
DUE TO (FROM) LNR BARBADOS FOR CURRENT REPORTING PERIOD
ACTIVITY = 1-2-3+4
MONTHLY FUNDS WITHHELD ACCOUNT ADJUSTMENT
1. Beginning Funds Withheld Account
2. Increase (Decrease) in Cost of Assets in Funds Withheld Account
3. Derivatives Unrealized Gain/(Loss)
4. End of Period Statutory Reserves
INCREASE (DECREASE) IN FUNDS
WITHHELD ACCOUNT $X
24
SCHEDULE E
ARBITRATION
To initiate arbitration, either the Ceding Company or the Reinsurer shall notify
the other party in writing of its desire to arbitrate, stating the nature of its
dispute and the remedy sought. The party to which the notice is sent shall
respond to the notification in writing within ten (10) days of its receipt.
The arbitration hearing shall be before a single arbitrator. In order to be
eligible to serve as an arbitrator, an individual must not be a present or
former officer, attorney or consultant of the Ceding Company or the Reinsurer or
of either of their affiliates. The arbitrator must be neutral, impartial, and
disinterested.
The Ceding Company and the Reinsurer shall each name three candidates to serve
as an arbitrator. The Ceding Company and the Reinsurer shall take turns striking
the name of one of the remaining candidates from the initial six candidates
until only one candidate remains, If the candidate so chosen shall decline to
serve as the arbitrator, the candidate whose name was stricken last shall be
nominated as the arbitrator. This process shall continue until a candidate has
been chosen and has accepted. The first turn at striking the name of a candidate
shall belong to the party that is responding to the other party's initiation of
the arbitration. Once chosen, the arbitrator is empowered to decide all
substantive and procedural issues.
It is agreed that the arbitrator shall be neutral, impartial, and disinterested
regarding the dispute on the basis described in the "Arbitration" article of the
Agreement, Therefore, at no time will either the Ceding Company or the Reinsurer
contact or otherwise communicate with any person who is to be or has been
designated as a candidate to serve as an arbitrator concerning the dispute,
except upon the basis of jointly drafted communications provided by both the
Ceding Company and the Reinsurer to inform the individual actually chosen as
arbitrator of the nature and facts of the dispute. Likewise, any written or oral
arguments provided to the arbitrator concerning the dispute shall be coordinated
with the other party and shall be provided simultaneously to the other party or
shall take place in the presence of the other party. Further, at no time shall
any arbitrator be informed that the arbitrator has been named or chosen by one
party or the other.
The arbitration hearing shall be held on the date fixed by the arbitrator, In no
event shall this date be later than six months after the appointment of the
arbitrator. The arbitration hearing shall be held in Fort Xxxxx, Indiana. As
soon as possible, the arbitrator shall establish prearbitration procedures as
warranted by the facts and issues of the particular case. At least ten (10) days
prior to the arbitration hearing, each party shall provide the other party and
the arbitrator with a detailed statement of the facts and arguments it will
present at the arbitration hearing. The arbitrator may consider any relevant
evidence; he or she shall give the evidence such weight as he or she deems it
entitled to after consideration of any objections raised concerning it. The
party initiating the arbitration shall have the burden of proving its case by a
preponderance of the evidence. Each party may examine any witnesses who testify
at the arbitration hearing. Within twenty (20) days after the end of the
arbitration hearing, the arbitrator shall issue a written decision that sets
forth his or her findings and any award to be paid as a result of the
arbitration,
25
except that the arbitrator may not award punitive or exemplary damages. In his
or her decision, the arbitrator shall also apportion the costs of arbitration,
which shall include, but not be limited to, his or her own fees and expenses.
26
SCHEDULE F
INVESTMENT GUIDELINES
Company: The Lincoln National Life Insurance Company (LNL)
Portfolio:
Regulation: Indiana Insurance Company Law and various State
Insurance Department and regulatory authorities.
This Statement of Investment Policy is subject to and
will comply with applicable laws and regulations.
Portfolio Manager: Delaware Investment Advisers
PRODUCT DESCRIPTION:
[Portfolio #] was created with the intent of housing assets and a dynamic hedge
program to support reinsurance of LNL's variable annuity riders with: Guarantee
of Principal Death Benefit, Enhanced Guaranteed Minimum Death Benefit, 5%
Step-Up Death Benefit, Estate Enhancement Benefit, Accumulated Benefit
Enhancement, Principal Security Benefit, and Guaranteed Income Benefit
("Guarantee Riders.") Liabilities associated with these Guarantee Riders have
been ceded to Lincoln Reinsurance Company (Barbados) Limited ("LNBAR") on a
coinsurance with funds withheld basis, so assets supporting the fair value
reserves are held by in [Portfolio #] for the benefit of LNBAR. The purpose of
the dynamic hedging program is to reduce earnings volatility created by the
aforementioned Guarantee Riders. Changes in the liabilities ceded to LNBAR will
be hedged using tailored futures positions based on recognized indices such as
the S&P 500, Xxxxxxx 2000, and NASDAQ. Market movements will be monitored
continuously with respect to a proprietary trading grid, triggering hedge
position true-ups if market movements exceed tolerance limits. In the absence of
market activity warranting daily true-ups, a weekly true-up will be performed.
INVESTMENT OBJECTIVE:
The primary objective is to greatly reduce or eliminate the GAAP income
volatility due to Guarantee Riders through a systematic hedging mechanism. The
secondary purpose is to greatly reduce or eliminate the non-diversifiable
economic risk associated with these guarantees. The ultimate goal of the
portfolio manager is the translation of volatile costs resulting from the
Guarantee Riders into predictable, fixed cost features. This portfolio will
require cash flow matching between liability claims and a highly liquid asset
structure to facilitate ongoing claims payment as well as unpredictable hedge
needs. Overall investment strategy will be executed within the context of
prudent asset/liability management and the constraints of applicable law and
regulation.
ASSET CATEGORIES:
The Portfolio Manager will have full discretion subject to compliance with all
applicable LNL policies, Risk Management Committee guidelines, and reinsurance
treaty limitations to invest and
27
reinvest the funds in assets in a manner necessary to achieve the investment
objective. Such assets may include, but are not limited to, cash and cash
equivalents; U.S. and foreign Government obligations; public, U.S. and foreign
corporate fixed income securities; private placements (including Rule 144A
securities); structured products (i.e., ABS, MBS, CMBS, etc.); mortgage loans;
and derivative instruments. All purchases are subject to the limitations imposed
in this investment policy.
Exposure limits are based on the market value of invested assets as of the most
recent statutory financial statement.
MAXIMUM % OF ASSETS
Cash and Cash Equivalents 100%
U.S. Treasury/Agency Securities 100%
Public Corporate Bonds (including 144 securities) 100%
Derivative Instruments 100%
LESS LIQUID INVESTMENTS
Traditional Private Placements 20%
Commercial Mortgage Loans 20%
Real Estate 0%
Total Less Liquid Investments 35%
ASSET BACKED SECURITIES
Agency Residential Mortgage Backed Securities 100%
Non-Agency Residential Mortgage Backed Securities 10%
Commercial Mortgage Backed Securities 10%
Total Asset Backed Securities 100%
FOREIGN INVESTMENTS
Investments in Developing Countries 5%
Total Foreign Investments* 25%*
* Excludes ownership of subsidiaries and securities issued or guaranteed by a
Canadian governmental unit or business entity
EQUITY RELATED SECURITIES:
Common stock 0%
Preferred stock 0%
Total Equity-Related Securities 0%
28
DERIVATIVE TRANSACTIONS POLICY: Derivatives products are permitted for the
prudent management of risk and return subject to THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY STATEMENT OF POLICY, GUIDELINES AND INTERNAL CONTROL
PROCEDURES FOR DERIVATIVES approved periodically by the LNL Board of Directors
and LNL Investment Committee.
DIVERSIFICATION:
Per industry 15%
Per Non-Government Issuer 2%
QUALITY RESTRICTIONS:
Maximum % of assets rated "Baa/BBB": 30%
Maximum % of assets rated below investment grade: 7%
Minimum average portfolio quality: A
MATURITY AND DURATION PROFILE:
The target duration and range will be communicated to Delaware on a periodic
basis; annually at a minimum, Price sensitivity of the aggregate derivatives
position will be set to offset the economic price sensitivity of the
liabilities.
APPROVING BODIES:
DATE APPROVED:
29
