EXHIBIT NO. 10.3
ANNUITY RETROCESSION AGREEMENT
EFFECTIVE AS OF APRIL 1, 1998
BETWEEN
THE AMERICAN LIFE & ANNUITY COMPANY, INC.
(REFERRED TO HEREIN AS "AMERICAN")
AND
REASSURANCE COMPANY OF HANNOVER
(REFERRED TO HEREIN AS "RCH")
HA-ALAC-50
COINSURANCE FUNDS WITHHELD
TABLE OF CONTENTS
Reinsurance Coverage 3
Placing Reinsurance in Effect 3
Payments by RCH 3
Payments by American 4
Terms of Reinsurance 4
Unusual Expenses and Adjustments 5
Investment Policy 6
Errors 6
Reductions 6
Audit of Records and Procedures 6
Arbitration 6
Choice of Law and Forum 7
Insolvency 7
Offset 7
Reserve Credit Account 8
Parties to Agreement 8
Recapture 9
Effective Date 9
Duration of Agreement 9
Entire Agreement 9
Execution 10
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE 11
SCHEDULE II
AMOUNT OF REINSURANCE 12
SCHEDULE III
ANNUITY COINSURANCE FUNDS WITHHELD
MONTHLY REPORT 13
SCHEDULE IV
ANNUAL REPORT 15
SCHEDULE V
ALLOWANCES 16
SCHEDULE VI
INTEREST RATE 17
SCHEDULE VII
ARBITRATION SCHEDULE 18
SCHEDULE VIII
SECTION 1.848-2(g)(8) ELECTION 20
SCHEDULE IX
STATEMENT OF INVESTMENT POLICY 21
REINSURANCE COVERAGE
A. The annuity policies (referred to herein as "policies") issued by
Allianz Life Insurance Company of North America on the forms listed on
Schedule I are 100% coinsured by RCH and shall be retroceded on a 15%
quota share coinsurance funds withheld basis. by American
automatically. Coinsurance funds withheld basis means reinsurance on a
basis whereby RCH retrocedes to American 15% of reserves underlying the
policies and retains possession of assets, valued at book value, in
accordance with the statutory accounting practices and procedures
permitted or prescribed by the state of domicile of Allianz, which
assets (i) satisfy the reserve requirements necessary or required by
applicable law or regulation with respect to American's proportionate
share of liability hereunder, and (ii) are invested in accordance with
the investment guidelines of RCH.
B. The reinsurance liability of American with respect to the contractual
benefits provided by the policies shall be as specified in Schedule II.
C. The liability of American shall begin simultaneously with that of RCH,
but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any policy shall not be
effective and binding against American unless the insurance issued
directly by Allianz is in force and unless the issuance and delivery of
such insurance constituted the doing of business in a state of the
United States of Allianz, the District of Columbia, or a country in
which Allianz was legally and properly licensed.
D. The reinsurance under this Agreement with respect to any policy shall
be maintained in force without reduction so long as the liability under
such policy reinsured hereunder remains in force without reduction,
unless reinsurance is terminated or reduced as provided herein.
PLACING REINSURANCE IN EFFECT
Reinsurance with respect to policies issued after the effective date of
this Agreement shall become effective simultaneously with the liability of RCH,
provided however, that RCH shall give written notification of such reinsurance
to American simultaneously with the monthly reconciliation prescribed in
paragraph B of the "Terms of Reinsurance" article.
PAYMENTS BY RCH
RCH shall pay American as reinsurance premiums the gross contributions
or premiums RCH receives on and after the effective date of this Agreement with
respect to the portion of all policies reinsured hereunder.
1
PAYMENTS BY AMERICAN
A. Benefits and Expenses
---------------------
American shall pay RCH:
(1) the gross amount of all contractual benefits paid by
RCH (i.e., without deduction for reserves) with
respect to the portion of the policies reinsured
hereunder;
(2) the net cash surrender values paid by RCH with
respect to the portions of the policies reinsured
hereunder; and
(3) any premium taxes paid by RCH with respect to
premiums received by RCH and paid to American on the
portion of the policies reinsured hereunder,
provided:
(a) American shall not be obligated to
pay such premium taxes directly,
but shall only be obligated to
reimburse RCH for premium taxes
actually paid by RCH;
(b) RCH shall use its best efforts to
net its premium tax obligation
against payments to American; and
(c) American shall not be obligated to
pay premium taxes for premiums
repaid or refunded by Allianz to
the policyholder.
(4) assessments of the various state guaranty
associations paid by RCH with respect to portions of
the policies reinsured hereunder.
B. Policy Expense Allowances
-------------------------
Expense Allowances shall be paid in accordance with the terms and
provisions of Schedule V.
2
TERMS OF REINSURANCE
A. Except as otherwise specifically provided herein, all amounts due to be
paid to either RCH or American shall be determined on a net basis as of
the last day of the calendar month to which such amount is
attributable. All amounts shall be due and accrued as of such date. The
payment of such amounts shall be submitted in accordance with the
provisions of paragraph B of this article.
B. RCH shall provide periodic reports to American as specified below:
(1) RCH shall submit monthly, not later than twenty (20)
days after the end of each calendar month, a monthly
report substantially in accord with Schedule III. Any
amounts indicated in the monthly report due and
payable to American shall accompany such report.
(2) Any amounts indicated in the monthly report due and
payable to RCH shall be paid by American within
twenty (20) days after the receipt of the monthly
report.
(3) Not later than twenty (20) days after the end of each
calendar year, RCH shall submit to American an annual
report substantially in accord with Schedule IV.
(4) Interest as specified in the Schedule VI shall be
paid on amounts not paid by either American or RCH
when due.
(5) If RCH ever becomes aware that its monthly reports as
required in this article did not accurately reflect
the actual experience of the policies during the
month, it shall promptly submit a revised summary to
American. Any amount shown by the revised summary as
owed by either American or RCH to the other shall be
paid promptly.
(6) RCH may unilaterally change Schedule III and Schedule
IV in order to obtain the data it reasonably needs to
administer properly this Agreement or to prepare its
financial statements.
C. The parties elect to have this Agreement treated in accordance with
Section 1.848-2(g)(8) of the Income Tax Regulations issued under
Section 848 of the Internal Revenue Code of 1986. Specific details of
this election are set forth in Schedule VIII.
3
UNUSUAL EXPENSES AND ADJUSTMENTS
A. Any unusual expenses incurred by RCH in defending or investigating a
claim for policy liability or rescinding a policy reinsured hereunder,
but net of unusual expenses receivable under other reinsurance
agreements with respect to the portion of the policies reinsured
hereunder, shall be participated in by American in the same proportion
as its reinsurance bears to the total insurance under such policy.
B. For purposes of this Agreement (but not as limitation on American's
liability under Paragraph A), it is agreed that penalties and interest
imposed automatically by statute against RCH or Allianz and arising
solely out of a judgment rendered against RCH or Allianz in a suit for
policy benefits reinsured hereunder shall be considered unusual
expenses.
C. In no event shall the following categories of expenses or liabilities
be considered for purposes of this Agreement as "unusual expenses":
(1) Routine investigative or administrative expenses;
(2) Expenses incurred in connection with a dispute or
contest arising out of conflicting claims of
entitlement to policy proceeds or benefits which RCH
admits are payable.
(3) Expenses, fees, settlements or judgments arising out
of or in connection with claims against RCH for
punitive or exemplary damages;
(4) Expenses, fees, settlements or judgments arising out
of or in connection with claims made against RCH or
Allianz and based on alleged or actual bad faith,
failure to exercise good faith or tortious conduct;
and
(5) Attorney's fees incurred by RCH or Allianz.
D. American agrees to indemnify RCH for American's equitable share of
those punitive and exemplary damages awarded against RCH if:
(1) American actively participated in the acts or
omissions, including the decision to deny a claim for
policy benefits; and
(2) Those acts or omissions serve as a material basis for
the award of punitive or exemplary damages.
American's equitable share shall be determined by an assessment of American's
participation in the particular case.
INVESTMENT POLICY
Unless otherwise agreed by RCH and American, the investments of the assets
underlying the reserves relating to the policies reinsured hereunder shall be
made in accordance with the Statement of Investment Policy in Schedule IX.
4
ERRORS
If either American or RCH shall fail to perform an obligation under this
Agreement and such failure shall be the result of an error on the part of
American or RCH, such error shall be corrected by restoring both American and
RCH to the positions they would have occupied had no such error occurred; an
"error" is a clerical mistake made inadvertently and excludes errors of judgment
and all other forms of error.
REDUCTIONS
If a portion of the insurance issued by Allianz on a policy reinsured hereunder
is reduced or terminated, reinsurance on that policy hereunder shall be reduced
or terminated correspondingly.
AUDIT OF RECORDS AND PROCEDURES
RCH and American each shall have the right to audit, at the office of the other,
all records and procedures relating to reinsurance under this Agreement. During
such audit, a party may suspend payment of any amount due, provided, however,
that the provisions of Schedule VI shall continue to apply.
ARBITRATION
A. It is the intention of American and RCH that the customs and practices
of the insurance and reinsurance industry shall be given full effect in
the operation and interpretation of this Agreement. The parties agree
to act in all things with the highest good faith. If American and RCH
cannot mutually resolve a dispute which arises out of or relates to
this Agreement, however, the dispute shall be decided through
arbitration as set forth in Schedule VII. 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.
B. 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 A, 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.
5
CHOICE OF LAW AND FORUM
Florida law shall govern the terms and conditions of the Agreement. In the case
of arbitration, the arbitration hearing shall take place in the city of the home
office of the responding party.
INSOLVENCY
A. In the event of the insolvency of RCH and the appointment of a
conservator, liquidator or statutory successor of RCH, reinsurance
shall be payable to such conservator, liquidator or statutory successor
on the basis of claims allowed against RCH by and court of competent
jurisdiction or by the conservator, liquidator or statutory successor
of RCH without diminution because of the insolvency of RCH.
B. In the event of the insolvency of RCH, the conservator, liquidator or
other statutory successor of RCH agrees to deliver to American written
notice of the pendency of a claim on a policy within a reasonable time
after such claim is filed in the insolvency proceeding. During the
pendency of any such claim, American may investigate such claim and
interpose in the proceeding where such claim is to be adjudicated in
the name of RCH (its conservator, liquidator or statutory successor),
but at its own expense, any defense or defenses which American may deem
available to RCH or its conservator, liquidator or statutory successor.
C. The expense thus incurred by American shall be chargeable, subject to
court approval, against RCH as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to
RCH solely as a result of the defense undertaken by American.
OFFSET
Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or were incurred, in favor of or against
either American or RCH with respect to this Agreement or with respect
to any other claim of one party against the other, arising from any
other agreement or act of the parties, are deemed mutual debts or
credits, as the case may be, and shall be set off, and only the balance
shall be allowed or paid.
RESERVE CREDIT ACCOUNT
A. RCH shall establish an account that complies with Florida requirements
relating to reinsurance credit. The account shall consist of assets
which constitute admitted assets under Florida law, and shall be
contributed to the account by RCH. The statutory book value of assets
held in the account shall at all times equal or exceed the statutory
reserves for the portion of the policies reinsured hereunder which
American would have established pursuant to the laws of its state of
domicile if it had retained the policies. Assets in the account will be
invested by RCH in accordance with the Schedule IX hereof and RCH
shall, in its discretion, set and maintain crediting rates for the
policies reinsured hereunder.
B. American, may draw upon such account any time for any one or more of
the following
6
purposes, with such amounts drawn to be applied without diminution
because of the insolvency of American or RCH;
(1) To reimburse American for RCH's quota share of
premiums returned to owners of policies due to
cancellations of policies;
(2) To reimburse American for RCH's quota share of
surrenders and benefits or losses paid by American
under the terms and provisions of policies; and
(3) To fund an account with American in an amount at
least equal to the deduction. for reinsurance ceded,
from American's liabilities for policies ceded under
this Agreement. Such amount shall include, but not be
limited to, amounts for policy reserves, reserves for
claims and losses incurred (including losses incurred
but not reported), and unearned premium reserves.
C. American agrees immediately to return to RCH any amounts drawn on such
account which are in excess of the actual amounts required for the
purposes of subparagraphs B(1), B(2) and B(3) above.
D. American agrees to pay RCH interest compounded monthly, at the prime
rate as of the end of such month, on the amounts held pursuant to
subparagraph B(3), above.
PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between American
and RCH. The acceptance of reinsurance hereunder shall not create any
right or legal relation whatsoever between RCH or American, on the one
hand, and the insured or the beneficiary under any policy reinsured
hereunder, on the other hand, and Allianz shall be and remain solely
directly liable to such insured or beneficiary under any such policy.
RECAPTURE
Within the first 36 months after the effective date of this Agreement
and upon 90 days prior written notice to RCH by American, American shall have
the right to cause RCH to recapture, on an "all or none" basis, policies that
have not yet attained the third anniversary of their issue date, and to
terminate the reinsurance hereunder with respect to such policies. For each
policy so recaptured and the reinsurance with respect thereto to terminated,
American shall pay to RCH, coincident with such recapture and termination, an
amount equal to 101% of the statutory reserves relating to each such policy.
EFFECTIVE DATE
The effective date of this Agreement is 12:01 a.m., April 1, 1998.
7
DURATION OF AGREEMENT
A. This Agreement may be terminated at any time by either RCH or American
upon thirty (30) days' prior written notice with respect to reinsurance
not yet placed in force. American shall continue to accept reinsurance
during the thirty (30) day notice period and shall remain liable on all
reinsurance placed in effect under the Agreement until the termination
or expiry of the insurance reinsured, unless the policies reinsured
hereunder are recaptured by RCH.
B. The termination of this Agreement or of the reinsurance in effect under
this Agreement shall not extend to or affect any of the rights or
obligations of American and RCH applicable to any period prior to the
effective date of such termination. In the event that, subsequent to
the termination of this Agreement, an adjustment is made necessary with
respect to any accounting, hereunder, a supplementary accounting shall
take place. Any amount owed to either party by reason of such
supplementary accounting shall be paid promptly upon the completion
thereof.
ENTIRE AGREEMENT
A. This Agreement represents the entire agreement between American and RCH
and supersedes any prior oral or written agreements between the parties
regarding its subject matter.
B. No modification of this Agreement shall be effective unless set forth
in a written amendment executed by both parties.
C. A waiver of a right created by this Agreement shall constitute a waiver
only with respect to the particular circumstances for which it is given
and not a waiver in any future circumstance.
EXECUTION
American and RCH, by their respective officers, executed this Agreement
in duplicate on the dates shown below. As of the Effective Date, this
Agreement consists of
o This Annuity Retrocession Agreement;
o Schedule I, Policies Subject to Reinsurance;
o Schedule II, Amount of Reinsurance;
o Schedule III, Annuity Coninsurance Funds Withheld
Monthly Report;
o Schedule IV, Annual Report;
o Schedule V, Allowances;
o Schedule VI, Interest Rate;
o Schedule VII, Arbitration Schedule;
o Schedule VIII, Section 1.848-2(g)(8) Election; and
o Schedule IX, Statement of Investment Policy
8
THE AMERICAN LIFE & ANNUITY COMPANY, INC.
Taxpayer I.D. # 00-0000000
By:
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Title:
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Date:
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REASSURANCE COMPANY OF HANNOVER
Taxpayer I.D. # 00-0000000
By:
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Title:
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Date:
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9
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE
-------------------------------
Ultima Flex-Premium Deferred Annuity policies and contracts issued by
Allianz and sold to customers of First Banks, Inc. with the assistance
of First Institutional Marketing, Inc., which policies and contracts
are effective as of April 1, 1998.
10
SCHEDULE II
AMOUNT OF REINSURANCE
---------------------
The amount of reinsurance under this Agreement shall be fifteen (15%)
of the contractual liability of RCH on all policies listed in Schedule
I.
11
SCHEDULE III
ANNUITY COINSURANCE FUNDS WITHHELD MONTHLY REPORT
-------------------------------------------------
to
The American Life & Annuity Company, Inc.
from
Reassurance Company of Hannover
AMOUNTS DUE THE AMERICAN LIFE & ANNUITY COMPANY, INC.
Ultima Annuity Premiums (gross premium received during $
the month multiplied by the quota share percentage) --------------------------------
Premium Tax Reimbursements $
--------------------------------
Commission charge-backs $
--------------------------------
Sum of amounts due to The American Life & Annuity $
Company, Inc. --------------------------------
12
AMOUNTS DUE REASSURANCE COMPANY OF HANNOVER
Commission allowance (as defined in Schedule V) multiplied $
by (i) gross premium received during the month and (ii) the --------------------------------
quota share percentage.
Acquisition allowance (as defined in Schedule V) multiplied $
by (i) the premium collected and (ii) the quota share percentage. --------------------------------
Override allowance (as defined in Schedule V) multiplied $
--------------------------------
by (i) the account value at the end of the month and (ii)
the quota share percentage.
Maintenance allowance (as defined in Schedule V) multiplied $
by (i) the account value at the end of the month on all policies --------------------------------
in force at least one year and (ii) the quota share percentage.
Surrender values paid during the month, multiplied by the $
quota share. --------------------------------
Annuity payments made during the month, multiplied by $
the quota share percentage. --------------------------------
Death benefits paid during the month, multiplied by the $
quota share percentage. --------------------------------
Premium taxes paid during the month, multiplied by the $
quota share percentage. --------------------------------
Guaranty fund assessments paid during the month, multiplied $
by the quota share percentage. --------------------------------
Sum of amounts due to Reassurance Company of Hannover. $
--------------------------------
Net amount due (sum of amounts due Reassurance Company $
of Hannover minus sum of amounts due to The American Life --------------------------------
and Annuity Company, Inc.
13
ADDITIONAL ITEMS NEEDED BY THE AMERICAN LIFE & ANNUITY
------------------------------------------------------
COMPANY, INC. FOR FINANCIAL REPORTING
-------------------------------------
Surrender charges realized during the month, multiplied by $
the quota share. ------------------------------
Surrender charges waived on death during the month, multiplied $
by the quota share percentage. ------------------------------
A monthly listing of reserves, account values and interest credited.
Other information reasonably requested by American from RCH, if available to RCH
and in its possession.
Note: (1) If the net amount due is negative, then that amount is due
from Reassurance Company of Hannover to The American Life &
Annuity Company, Inc.
(2) If the net amount due is positive, then that amount is due
from The American Life & Annuity Company, Inc. to Reassurance
Company of Hannover.
14
SCHEDULE IV
ANNUAL REPORT
-------------
The annual report provided by the administrator shall provide the
following information:
A. Exhibit 8 from the NAIC-prescribed annual statement;
B. A breakdown of the reserves by withdrawal
characteristics of the annuity contract;
C. "Analysis of Increase in Reserves" from the
NAIC-prescribed annual statement;
D. "Exhibit of Annuities" from the NAIC-prescribed
annual statement;
E. An actuarial certification for verification of ceded
statutory reserves;
F. Tax reserves and required interest;
G. Other information reasonably requested
15
SCHEDULE V
ALLOWANCES
----------
I. Commission Allowance
5 and 7 Year Surrender Charge
Policy Year Allowance
----------- ---------
1+ 6.25%
II. Administration Allowance
A. Acquisition Allowance:
.55% for the first $20,000,000 of premium collected;
.45% for the next $20,000,000 of premium collected;
.35% for the next $60,000,000 of premium collected;
.30% for the next $100,000,000 of premium collected; and
.35% for all premium collected in excess of $200,000,000.
B. Maintenance Allowance:
Policy Year Allowance
----------- ---------
1 0.0000%
2+ 0.0075%
C. Override Allowance
Policy Year Allowance
----------- ---------
1+ 0.0125%
16
SCHEDULE VI
INTEREST RATE
-------------
Interest on amounts overdue shall be at the prime rate from The Wall
Street Journal on the last business day of the month for which amounts
are due.
17
SCHEDULE VII
ARBITRATION SCHEDULE
--------------------
To initiate arbitration, either American or RCH shall notify the other party in
writing of its desire to arbitrate, stating that 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 panel of three (3) arbitrators, each
of whom must be a present or former officer of a life insurance company. An
arbitrator may not be a present or former officer, attorney, or consultant of
American or RCH or either's affiliates.
American and RCH shall each name five (5) candidates to serve as an arbitrator.
American and RCH shall each choose one (1) candidate from the other's party list
and these two (2) candidates shall serve as the first two (2) arbitrators. If
one (1) or more candidates so chosen shall decline to serve as an arbitrator,
the party which name such candidate shall add an additional candidate to its
list and the other party shall again choose one (1) candidate from the list.
This process shall continue until two (2) arbitrators have been chosen and have
accepted. American and RCH shall each present their initial list of five (5)
candidates by written notification to the other party within twenty-five (25)
days of the date of the mailing of the notification initiating the arbitration.
Any subsequent additions to the list which are required shall be presented
within ten (10) days of the date the naming party receives notice that a
candidate that has been chosen declines to serve.
The two (2) arbitrators shall then select the third arbitrator from the eight
(8) candidates remaining on the lists of American and RCH within fourteen (14)
days of the acceptance of their positions as arbitrators. If the two (2)
arbitrators cannot agree on the choice of a third, then this choice shall be
referred back to American and RCH. American and RCH shall take turns striking
the name of one (1) of the remaining candidates from the initial eight (8)
candidates until only one (1) candidate remains. If the candidate so chosen
shall decline to serve as the third arbitrator, the candidate whose name was
stricken last shall be nominated as the third arbitrator. The process shall
continue until a candidate has been chosen and accepted. This candidate shall
serve as the third arbitrator. 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 arbitrators are empowered to
decide all substantive and procedural issues by a majority of votes.
It is agreed that each of the three (3) arbitrators shall be impartial regarding
the dispute on the basis described in the "Arbitration article". Therefore, at
no time will either American or RCH 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 American and RCH to inform those candidates
actually chosen as arbitrators of the nature and facts of the dispute. Likewise,
any written or oral arguments provided to the arbitrators 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 (1) party or the other.
18
The arbitration hearing shall be held on the date fixed by the arbitrators and
shall take place in the city of the Home Office of the responding party. In no
event shall this date be later than six (6) months after the appointment of the
third arbitrator. As soon as possible, the arbitrators shall establish
pre-arbitration 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 arbitrators with a detailed
statement of the facts and arguments it will present at the arbitration hearing.
The arbitrators may consider any relevant evidence; they shall give the evidence
such weight as they deem 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 arbitrators shall issue a written
decision that sets forth their findings and any award to be paid as a result of
the arbitration, except that the arbitrators may not award punitive or exemplary
damages. In their decision, the arbitrators shall also apportion the costs of
arbitration, which shall include, but not be limited to, their own fees and
expenses.
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SCHEDULE VIII
SECTION 1.848-2(g)(8) ELECTION
------------------------------
American and RCH agree to the following pursuant to Section 1.848-2(g)(8) of the
Income Tax Regulations issued under Section 848 of the Internal Revenue Code of
1986 (hereinafter "Section 1.848-2(g)(8).")
1. As used below, the term "party" will refer to American or RCH
as appropriate.
2. As used below, the phrases "net positive consideration" ,
"capitalize specified policy acquisition expenses", "general
deductions limitation" and "net consideration" shall have the
meaning used in Section 1.848-2(g)(8).
3. The party with net positive consideration for this Agreement
for any taxable year beginning with the taxable year
prescribed in paragraph 5 below will capitalize specified
policy acquisition expenses with respect to this Agreement
without regard to the general deductions limitation.
4. The parties agree to exchange information pertaining to the
amount of net consideration under this Agreement to ensure
consistency. This will be accomplished as follows:
(a) American shall submit to RCH by the
fifteenth day of May in each year its
calculation of the net consideration for the
preceding calendar year. Such calculation
will be accompanied by a statement signed by
an officer of American stating that American
will report such net consideration in its
tax return for the preceding calendar year.
(b) RCH may contest such calculation by
providing an alternative calculation to
American in writing within thirty (30) days
of RCH's receipt of American's calculation.
If RCH does not so notify American, RCH will
report the net consideration as determined
by American in RCH's tax return for the
previous calendar year.
(c) If RCH contests American's calculation of
the net consideration, the parties will act
in good faith to reach an agreement as to
the current amount within thirty (30) days
of the date RCH submits its alternative
calculation. If American and RCH reach
agreement on an amount of net consideration,
each party shall report such amount in their
respective tax returns for the preceding
calendar year.
5. This election shall be effective for 1998 and all subsequent
taxable years for which the Reinsurance Agreement remains in
effect.
20
SCHEDULE IX
STATEMENT OF INVESTMENT POLICY
------------------------------
I. GENERAL
These investment guidelines are developed under the premise that RCH
will continue to depend upon a steady, secure and calculable income
generated by its invested assets to meet cash flow needs, thus
necessitating a well balanced, low risk portfolio. However, growth is
also important in order to guarantee maintenance of principal and to
increase the future value of the portfolio. The purpose of these
investment guidelines is to assure and secure a steady investment
income stream while allowing for growth within the portfolio.
RCH's management expects a controlled growth in RCH's underwriting
activities over the next several years producing a positive cash flow.
The funds to be invested will be generated by underwriting, as well as
investment activities.
The basic underlying strategy will, therefore, be a core portfolio of
buy and hold positions, as well as, a percentage of trading vehicles in
order to better take advantage of market cycles. Appreciation in the
core portfolio will be recognized from time to time if considered
advantageous by the Investment Committee.
II OBJECTIVES
The following objectives, ranked by priority, should be accomplished:
1. The investments should be secured. To provide safety
of principal and interest, investment instruments
have to be of high quality.
2. A high return on investment on an after tax basis.
3. The portfolio has to be well diversified by category
as well as by issuer.
II INVESTMENT RESTRICTIONS
1. All executed investment transactions have to comply
with the regulatory restrictions imposed by the
Florida Insurance Department and any other applicable
regulatory requirements. The attached exhibit of
eligible investments specified by Florida law form an
integral part of these guidelines.
2. All investment transactions must be reviewed,
approved and ratified quarterly By the Investment
Committee or the Board of Directors.
21
3. Investments in real estate, acquisition of stocks
representing an equity interest of five percent (5%)
or more, and capital contributions to subsidiaries
require the prior written approval of the Boards of
Directors.
4. Investments will be denominated in U.S.-$ only.
Investments in foreign currencies or in debt
instruments located outside of the United States
require the prior approval of the Board of Directors.
(Exception: See Convertible Bond Investment
Guidelines).
5. Investment must be listed with the SVO of the NAIC.
If a given security is not listed at the time of the
purchase, RCH is responsible for applying for listing
prior to the current quarter's end.
6. No MBS derivatives (defined as inverse-floaters,
interest only strips and/or residuals) will be
permitted in the portfolio.
IV PORTFOLIO GUIDELINES
A. DURATION
Portfolio duration must equal liability duration +_.5 years
(liability duration to be determined through a
duration/convexity study to be performed by the Company).
Current liability duration is assumed to be approximately five
(5) .
B. CONVEXITY
Portfolio convexity should be maximized to a level as close as
possible to that of the liabilities, not to fall below - 1.0.
C. CREDIT
Overall portfolio credit quality must be equal to or greater
than AA/AA. Individual securities must be rated at least
investment grade (Baa3/BBB) with no more than ten percent
(10%) overall permitted in the BBB (NAIC 2) category. At least
forty percent (40%) of the portfolio must be invested in U.S.
Government, U.S. Government guaranteed or U.S. Government
Agency issues with a least 20% invested in U.S. Treasury
securities.
An exception to this shall be the convertible securities which
shall have a minimum average quality of BBB- and shall not be
included in the ten percent (10%) overall limitation of BBBs
mentioned in the above paragraph.
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D. LIQUIDITY
At least forty percent (40%) of the portfolio must be invested
in highly liquid securities defined as follows:
o U.S. Treasury Bonds
o U.S. Agency Debentures
o GNMA Pass-Through Pools
o FNMA, FHLMC Pass-Through Pools
V. DIVERSIFICATION
A. No more than forty percent (40%) of the portfolio
will be permitted in any one of the following
categories:
o U.S. Government Agency Debentures
o Mortgage Backed Securities (CMOs, CMBS, and
pass-through pools combined)
o Corporate Bonds
B. No more than twenty percent (20%) of the portfolio
will be permitted in any of the following categories:
o Municipal Bonds
o Private Placement Bonds
C. No more than fifteen percent (15%) of the portfolio
will be permitted in any of the following
catergories:
o Preferred Stocks
o Asset Backed Securities
o Convertible Securities (both bond and preferred
stocks), with no more than five percent (5%) of
convertible allocation permitted in any one issue.
D. No more than ten percent (10%) of the portfolio will
be permitted in short term securities with a minimum
of one percent (1%) required as defined below. (No
one issuer should exceed five million dollars
($5,000,000).
o Certificates of Deposit
o Money Market Funds
o Commercial Paper (A1/P1 rated)
o Repurchase Agreements
o Time Deposits
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VI. PRIVATE PLACEMENT UNDERWRITING GUIDELINES
A. All investments must be of investment grade quality - a
minimum rating of Baa3/BBB-NAIC 2 or its equivalent by a
nationally recognized rating agency, i.e., Standard & Poor;
Moody's: Xxxx & Xxxxxx; Fitch; Canadian Bond Rating Co.;
International Bond Rating Co., etc., or indirectly via a
shadow rating (i.e., other outstanding public public and/or
private debt that is structurally equivalent rated
Baa3/BBB-NAIC 2 or better).
B. Both affirmative and negative covenants shall be appropriate
for the type of company and transaction and protect the
noteholder against unwanted subordination and unreasonable
credit deterioration.
C. Private placements must include explicit language regarding
prepayment terms. Preferably non-call or callable with a make
whole provision.
D. The average quality of the Private placement portfolio shall
be no lower than A3/A-.
E. The private placement portfolio shall be well diversified
across industries, with no more than ten percent (10%) of
invested assets in any one industry and one and one- half
percent (1.5%) of invested assets in any one issuer.
F. The private placement portfolio shall make up no more than ten
percent (10%) of invested assets. All issue restrictions in
guidelines shall also apply to private placement issues.
VII. CONVERTIBLE BOND INVESTMENT GUIDELINES
G. All investments will be of investment grade quality at the
time of purchase. For this purpose, a security is investment
grade if (1) the issuer of the security has outstanding senior
indebtedness rated BBB- or better by Standard & Poors, Baa3 or
better by Xxxxx'x Investor Services or a comparable rating by
a reorganized rating agency (an "Investment Grade Rating"), or
(2) in the event that an issuer of the security has
outstanding senior indebtedness that is not rated by a
recognized rating agency, in good faith judgment of Advisor,
such indebtedness would, if rated, have an Investment Grade
Rating, or (3) if the issuer of the security does not have any
outstanding senior indebtedness, in the good faith judgment of
Advisor, if such indebtedness existed, it would have an
Investment Grade Rating. A convertible security generally
carries a rating that is lower than the credit rating of the
issuer's outstanding senior indebtedness. As a result, a
portion of the portfolio (up to 25%) may consist of securities
that carry a minimum credit of BB-/Ba3.
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H. All investments will be U.S.-$ denominated only. The
convertible portfolio may invest up to 50% of its assets in
U.S.-$ denominated obligations of non-U.S. entities.
I. The convertible portfolio may invest up to 30% of its assets
in convertible preferred stocks.
J. The convertible portfolio may invest in 144A placement
securities.
VIII. EXECUTION OF PORTFOLIO TRANSACTIONS
The management of RCH is hereby vested with the authority to execute
purchases and sales of investments within the objectives and
restrictions referenced herein.
Asset Allocation & Management Company, LLC (AAM) will recommend the
investments to be purchased and/or sold. The actual execution of
investment transactions will be performed by AAM or a responsible RCH
official appointed by the President, Treasurer, or by the Investment
Department of Hannover Ruckverischerungs-AG.
The management of RCH is responsible for monitoring the existing
security holdings, implementing proper internal control procedures,
accurate recording of all investment transactions, and for all overall
investment performance.
IX. PERFORMANCE Measuremen
The yield on the whole invested portfolio should exceed a minimum of
six percent (6%).
RCH management will prepare for review by the Investment Committee
yearly comparisons with investment returns accomplished by other
comparable companies and/or appropriate published indexes shall be
conducted.
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AMENDMENT 1
TO THE ANNUITY RETROCESSION AGREEMENT
BETWEEN
THE AMERICAN LIFE & ANNUITY COMPANY, INC.
(Referred to in this Amendment 1 as "American")
AND
REASSURANCE COMPANY OF HANNOVER
(Referred to in this Amendment 1 as "RCH")
This Amendment I is to be attached to and made a part of the Annuity
Retrocession Agreement HA-ALAC-50 effective as of April 1, 1998 (the "Effective
Date") between American and RCH (the "Agreement"). Except as otherwise provided
herein, all terms and provisions of the Agreement shall continue unchanged in
full force and effect.
1 The section of the Agreement entitled "PAYMENTS BY AMERICAN" is amended
by adding the following:
I. Coinsurance Funds Withheld Reserves
American shall pay to RCH on a monthly basis an amount, if
negative, equal to the difference of (i) reserves with respect to the portion of
the policies reinsured hereunder for the prior month minus (ii) reserves with
respect to the portion of the policies reinsured hereunder for the month for
which such amount is being calculated.
2. Schedule III of the Agreement is deleted in its entirety and replaced
with Schedule III attached hereto and incorporated herein by reference.
In witness whereof, the parties have executed this Amendment I
effective as of the Effective Date.
THE AMERICAN LIFE & REASSURANCE COMPANY OF
ANNUITY COMPANY HANNOVER
Knoxville, Tennessee Orlando, Florida
By: By:
------------------------------------------------ ----------------------------------------------------
Title: Title:
Witness: Witness:
---------------------------------------------- ---------------------------------------------
Date: Date:
-------------------------------------------------- --------------------------------------------------
26
SCHEDULE III
ANNUITY COINSURANCE FUNDS WITHHELD MONTHLY REPORT
-------------------------------------------------
to
The American Life & Annuity Company, Inc.
from
Reassurance Company of Hanover
AMOUNTS DUE THE AMERICAN LIFE & ANNUITY COMPANY, INC.
-----------------------------------------------------
Ultima Annuity Premiums (gross premium received during
the month multiplied by the quota share percentage) $
---------------------------
Premium Tax Reimbursements $
---------------------------
Commission charge-backs $
---------------------------
Sum of amounts due to The American Life & Annuity $
Company, Inc. ---------------------------
AMOUNTS DUE REASSURANCE COMPANY OF HANNOVER
-------------------------------------------
Coinsurance funds withheld reserve amount, if negative, equal to (A) the
difference between (i) reserves underlying the policies for the prior month
minus (ii) reserves underlying the policies for this month, multiplied by (B)
the quota share percentage (then use the absolute value of such amount) $
---------------------------
Commission allowance (as defined in Schedule V) multiplied
by (i) the gross premium received during the month and
(ii) the quota share percentage. $
---------------------------
Acquisition allowance (as defined in Schedule V) multiplied
by (i) the premium collected and (ii) the quota share percentage. $
---------------------------
Override allowance (as defined in Schedule V) multiplied by
(i) the account value at the end of the month and (ii) the quota $
share percentage. ---------------------------
Maintenance allowance (as defined in Schedule V) multiplied by
(i) the account value at the end of the month on all policies in
force at least one year and (ii) the quota share percentage. $
--------------------------
Surrender values paid during the month, multiplied by the
quota share percentage. $
--------------------------
Annuity payments made during the month, multiplied by the
quota share percentage. $
--------------------------
Death benefits paid during the month, multiplied by the
quota share percentage. $
--------------------------
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Guaranty fund assessments paid during the month, multiplied
by the quota share percentage. $
--------------------------
Sum of amounts due to Reassurance Company of Hannover. $
--------------------------
Net amount due (sum of amounts due Reassurance Company
of Hannover minus sum of amounts due to the American Life
& Annuity Company, Inc. $
--------------------------
ADDITIONAL ITEMS NEEDED BY THE AMERICAN LIFE & ANNUITY
------------------------------------------------------
COMPANY, INC. FOR FINANCIAL REPORTING
-------------------------------------
Surrender charges realized during the month, multiplied by the
quota share percentage. $
---------------------------
Surrender charges waived on death during the month, multiplied
by the quota share percentage. $
--------------------------
A monthly listing of reserves, account values and interest $
credited. --------------------------
Other information reasonably requested by American from RCH, if available to RCH
and in its possession.
Note: (1) If the net amount due is negative, then the amount is due from
Reassurance Company of Hannover to The American Life &
Annuity Company, Inc.
2. If the net amount due is positive, then that amount is due
from The American Life & Annuity Company, Inc. to Reassurance
Company of Hannover.
28
