SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission File Number 1-8538
WESTBRIDGE CAPITAL CORP.
(Exact name of Registrant as specified in its Charter)
DELAWARE 73-1165000
(State of Incorporation) (I.R.S. Employer Identification No.)
777 MAIN STREET, FORT WORTH, TEXAS 76102
(Address of Principal Executive Offices) (Zip Code)
817-878-3300
(Registrant's Telephone Number, including Area Code)
800-437-8690
(Registrant's Shareholder and Investor Relations Toll Free Telephone Number)
NOT APPLICABLE
(Former Name, Address and Former Fiscal Year, if changed since Last Report)
Indicate, by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO_____
Common Stock - Par Value $.10 6,044,994 Shares Outstanding
at November 13, 1996
1
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FORM 10-Q
Company or group of companies for which report is filed:
WESTBRIDGE CAPITAL CORP.
This quarterly report, filed pursuant to Rule 13a-13 and 15d-13 of the General
Rules and Regulations under the Securities Exchange Act of 1934, consists of the
following information as specified in Form 10-Q: <TABLE> <CAPTION>
PAGE(S)
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
1. Consolidated Balance Sheets at September 30, 1996, December 31,
1995 and September 30, 1995. 3-4
2. Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 1996 and 1995. 5
3. Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1996 and 1995. 6-7
4. Notes to Consolidated Financial Statements. 8-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10-16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
</TABLE>
<TABLE>
<CAPTION>
Sep 31 Dec 30, Sep 30,
1996 1995 1995
-------- -------- --------
(UNAUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Investments:
Fixed Maturities:
Available-for-sale, at market value
(amortized cost $90,541, $83,160
and $11,052) $ 91,022 $ 86,780 $ 11,571
Held-to-maturity, at amortized cost
(market value $0, $0, and $77,442) -- -- 76,026
Equity securities, at market 1,594 539 538
Investment in Freedom Holding Company,
on the equity basis -- 6,173 6,086
Mortgage loans on real estate 671 639 654
Investment real estate -- 141 141
Policy loans 271 285 282
Short-term investments 9,070 14,946 3,154
-------- -------- --------
Total Investments 102,628 109,503 98,452
Cash 7,499 2,013 105
Accrued investment income 1,589 1,711 1,546
Receivables from agents, net of allowance
for doubtful accounts 18,434 16,706 13,360
Deferred policy acquisition costs 78,701 56,977 52,435
Leasehold improvements and equipment, at
cost, net of accumulated depreciation and
amortization 1,403 1,590 1,583
Other assets 14,348 12,499 11,826
-------- -------- --------
Total Assets $224,602 $200,999 $179,307
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
(Unaudited) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future policy benefits $ 56,039 $ 46,620 $ 46,217
Claims 39,935 39,063 37,755
--------------- --------------- ---------------
95,974 85,683 83,972
Accumulated policyholders' funds 379 373 367
Other liabilities 19,841 11,226 13,619
Deferred income taxes 7,732 5,841 2,814
Notes payable 16,220 15,807 --
Senior subordinated notes, net of unamortized
discount, due 2002 19,328 19,264 19,244
--------------- --------------- ---------------
Total Liabilities 159,474 138,194 120,016
--------------- --------------- ---------------
Redeemable Preferred Stock 20,000 20,000 20,000
--------------- --------------- ---------------
Stockholders' Equity:
Common stock, ($.10 par value, 30,000,000
shares authorized; 6,020,729, 5,992,458
and 5,986,458 shares issued) 602 599 599
Capital in excess of par value 29,184 29,208 29,124
Unrealized appreciation of investments carried
at market value, net of tax 334 2,593 544
Retained earnings 15,178 10,575 9,194
--------------- --------------- ---------------
45,298 42,975 39,461
Less - Aggregate of shares held in treasury and investment by affiliate in
Westbridge Capital Corp. common stock (28,600 at September 30, 1996, December
31, 1995 and September 30, 1995),
at cost (170) (170) (170)
--------------- --------------- ---------------
Total Stockholders' Equity 45,128 42,805 39,291
--------------- --------------- ---------------
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $ 224,602 $ 200,999 $ 179,307
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------
1996 1995 1996 1995
------------------------ ---------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums:
First-year $16,059 $ 9,653 $ 46,939 $23,109
Renewal 24,629 20,901 68,199 64,255
------ ------ -------- ------
40,688 30,554 115,138 87,364
Net investment income 2,283 1,722 6,590 5,306
Fee and service income 2,451 666 6,240 1,556
Net realized gain (loss) on
investments (28) 37 173 (35)
Other income (11) (1) (6) 4
---------- ---------- ---------- ----------
45,383 32,978 128,135 94,195
------ ------- ------- ------
Benefits, claims and expenses:
Benefits and claims 24,244 17,128 68,790 50,637
Amortization of deferred policy
acquisition costs 6,221 2,789 16,576 8,737
Commissions 2,506 2,825 6,252 8,639
General and administrative expenses 6,235 6,085 19,934 15,696
Taxes, licenses and fees 1,431 991 4,495 3,057
Interest expense 1,253 568 3,217 1,858
------- -------- --------- -------
41,890 30,386 119,264 88,624
------ ------ ------- ------
Income before income taxes, equity
in earnings of Freedom Holding
Company and extraordinary item 3,493 2,592 8,871 5,571
Provision for income taxes 1,223 881 3,105 1,894
Equity in Freedom Holding Company - 85 74 261
-------- -------- -------- -------
Income before extraordinary item 2,270 1,796 5,840 3,938
Extraordinary loss from early
extinguishment of debt - - - 407
-------- -------- ---------- -------
Net income $ 2,270 $ 1,796 $ 5,840 $ 3,531
====== ====== ====== ======
Preferred stock dividends 412 413 1,237 1,238
------- ------- ------ ------
Income applicable to common stockholders $ 1,858 $ 1,383 $ 4,603 $ 2,293
====== ====== ====== ======
Earnings per common share:
Primary:
Income before extraordinary item $ .30 $ .23 $ .75 $ .47
Extraordinary item - - - (.07)
-------- -------- -------- -------
Net earnings $ .30 $ 23 $ .75 $ .40
====== ====== ====== =======
Fully diluted:
Income before extraordinary item $ .27 $ .21 $ .69 $ .49
Extraordinary item - - - (.05)
------- -------- -------- -------
Net earnings $ .27 $ .21 $ .69 $ .44
====== ====== ====== =======
Weighted average shares outstanding:
Primary 6,138 6,063 6,119 5,756
Fully diluted 8,535 8,441 8,517 8,114
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1996 1995 1996 1995
----------------------- ----------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Income applicable to common stockholders $ 1,858 $ 1,383 $ 4,603 $ 2,293
Adjustments to reconcile net income to cash
used for operating activities:
Increase (decrease) in policy liabilities and accruals 2,040 (688) 5,439 (2,308)
Amortization of deferred policy acquisition costs 6,221 2,789 16,576 8,737
Increase (decrease) in deferred income taxes 1,305 (512) 1,563 (417)
Additions to deferred policy acquisition costs (12,661) (9,010) (34,539) (20,518)
Depreciation expense 117 126 378 360
(Increase) decrease in receivables from agents 3,136 (2,210) (52) (6,007)
Increase in other assets 2,505 557 233 (2,229)
(Increase) decrease in other liabilities (3,352) 6,491 (2,197) 4,935
Other, net (831) 81 (155) 148
--------- --------- --------- ---------
Net Cash Provided By (Used For) Operating Activities 338 (993) (8,151) (15,006)
--------- --------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company -- -- (3,970) --
Proceeds From Investments Sold:
Fixed maturities, classified as held-to-maturity,
called or matured -- 873 -- 1,392
Fixed maturities, classified as available-for-sale,
called or matured 1,206 94 6,394 171
Fixed maturities, classified as available-for-sale, sold6,857 -- 37,320 3,939
Short-term investments, sold or matured 74,056 84 130,055 10,614
Other investments, sold or matured 299 86 554 124
Cost of investments acquired (84,847) -- (165,280) (7,424)
Additions to leasehold improvements and equipment,
net of retirements (17) (133) (191) (728)
--------- --------- --------- ---------
Net Cash Provided By (Used For) Investing Activities (2,446) 1,004 4,882 8,088
---------- --------- --------- ---------
Cash Flows From Financing Activities:
Retirement of senior subordinated debentures, at par -- -- -- (25,000)
Proceeds from reinsurance treaty 8,418 -- 8,418 --
Issuance of notes payable 1,625 -- 4,356 --
Repayment of notes payable (3,998) -- (3,998) --
Issuance of subordinated notes -- -- -- 19,200
Issuance of common stock 102 148 104 10,098
Purchase and cancellation of common stock (125) (146) (125) (146)
--------- --------- --------- ---------
Net Cash Provided By Financing Activities 6,022 2 8,755 4,152
--------- --------- --------- ---------
Increase (Decrease) In Cash During Period 3,914 13 5,486 (2,766)
Cash At Beginning Of Period 3,585 92 2,013 2,871
--------- --------- --------- ---------
Cash At End Of Period $ 7,499 $ 105 $ 7,499 $ 105
========= ========= ========= =========
Supplemental Disclosures Of Cash Flow Information:
Cash Paid During The Periods For:
Interest $ 1,019 $ 554 $ 2,636 $ 2,892
Income taxes $ -- $ 322$32 $ 650
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
The Company purchased the remaining outstanding capital stock of an insurance
holding company that it did not already own, in the second quarter of 1996 for a
cash purchase price of $6.3 million. This purchase resulted in the Company
receiving assets and assuming liabilities as follows:
Assets $13,542,000
Liabilities $ 5,780,000
Adjustments to reconcile net income to cash used for operating activities in the
Company's Consolidated Statements of Cash Flows exclude increases relating to
the acquired assets and liabilities of Freedom Holding Company. Accordingly,
these adjustments do not correspond to the changes in the related line items on
the Company's Consolidated Balance Sheets.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited Consolidated Financial Statements for Westbridge
Capital Corp. ("Westbridge" and, together with its consolidated subsidiaries,
the "Company") have been prepared in accordance with the instructions to Form
10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles ("GAAP") for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three- and nine-month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. The financial statements should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of their business operations, National Foundation Life
Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"),
American Insurance Company of Texas ("AICT"), and Freedom Life Insurance Company
of America ("FLICA"), Westbridge's primary insurance subsidiaries, are involved
in various claims and other business related disputes. In the opinion of
management, the disposition of these matters will not affect the Company's
consolidated financial position.
NOTE 3 - EARNINGS PER SHARE
PRIMARY INCOME BEFORE EXTRAORDINARY ITEM. Calculated by dividing income before
extraordinary item, less preferred stock dividends, by primary weighted average
shares outstanding. Primary weighted average shares outstanding do not assume
the conversion to Common Stock of the Series A Preferred Stock.
FULLY DILUTED INCOME BEFORE EXTRAORDINARY ITEM. Calculated by dividing income
before extraordinary item by fully diluted weighted average shares outstanding.
The preferred stock dividend is not deducted from income for the fully diluted
calculation, but the fully diluted average shares outstanding number is larger.
The fully diluted calculation assumes the conversion of the Series A Preferred
Stock to Common Stock at the beginning of the period. Were such a conversion to
occur, (a) preferred dividends would not be paid, and are therefore not deducted
from earnings for the calculation and, (b) there would be a greater number of
shares of Common Stock outstanding as a result of the conversion.
At September 30, 1996, the Series A Preferred Stock was convertible to Common
Stock at a conversion price of $8.41, which would result in 2,378,120 additional
shares of Common Stock upon conversion.
NOTE 4 - ACQUISITION OF FREEDOM HOLDING COMPANY
On May 31, 1996, the Company completed the acquisition of the 60% of Freedom
Holding Company ("FHC") it did not already own. FHC is a holding company which
owns 100% of FLICA, a Mississippi domiciled insurer licensed in 34 states. FLICA
is the primary asset of FHC. The purchase price was $6.3 million in cash, and
was accounted for under the purchase method. Prior to the acquisition, the
Company accounted for its 40% investment in FHC using the equity method.
Beginning June 1, 1996, the results of operations of FHC have been reflected in
the Company's Consolidated Statements of Income and Cash Flows. The present
value of future profits associated with the purchase are being amortized in
relation to premium revenues over the remaining life of the business. At the
time of the acquisition, the Company, through an insurance subsidiary, reinsured
the majority of business underwritten by FLICA. The acquisition did not have a
material pro-forma impact on operations.
8
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NOTE 5 - REINSURANCE AGREEMENT WITH REASSURANCE COMPANY OF HANNOVER
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Agreement") effective July 1, 1996 on the
inforce Cancer, Heart and Intensive Care business. The Agreement provided an
initial ceding commission of $10.5 million, of which $8.4 million was received
in cash during the quarter, which is repaid, inclusive of interest at 12.5%, as
statutory profits emerge from the reinsured block of business. For the three
month period ended September 30, 1996, the repayment due approximated $1.0
million. The ceding allowance payable at September 30, 1996, totaled $9.5
million. The Company must maintain in trust, investments with a fair market
value equal to 90% of the active life reserves on the reinsured business, which
at September 30, 1996, approximated $14.6 million. Upon repayment of the initial
ceding commission, profits on the block of business will be shared on a 50/50
quota share basis. The Agreement is subject to recapture at anytime at the
option of the Company.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW AND COMPARABILITY OF PERIODS
Westbridge, through its subsidiaries and affiliated companies, principally
underwrites and sells specialized health insurance products to supplement
medical expense coverage usually provided by employers and government programs.
The Company's insurance subsidiaries and affiliates include the following:
* National Foundation Life Insurance Company ("NFL") - A
wholly-owned subsidiary of the Company, which is engaged primarily
in the sale of accident and health insurance.
* National Financial Insurance Company ("NFIC") and its wholly-owned
subsidiary, American Insurance Company of Texas ("AICT") - These
companies were acquired by the Company in April 1994. NFIC and
AICT are engaged in the sale of new policies and the
administration of blocks of insurance business that are similar to
the business of NFL.
* Freedom Holding Company ("FHC") and its wholly-owned subsidiary,
Freedom Life Insurance Company of America ("FLICA") - The Company
held a 40% interest in FHC until May 1996, at which time the
Company acquired the remaining 60% of FHC. FLICA is engaged
primarily in the sale of Cancer and Specified Disease Products.
The Company's major product lines are Cancer and Specified Disease Products,
Medical Expense Products and Medicare Supplement Products. Cancer and Specified
Disease Products include policies designed to provide daily indemnity for
hospital confinement and convalescent care for treatment of specified diseases,
as well as "event specific" policies designed to provide daily indemnity for
confinement in an intensive care unit or to provide a fixed benefit in the case
of accidental death. Medical Expense Products include policies providing
reimbursement for various costs of medical and hospital care, catastrophic
nursing care and home health care. Medicare Supplement Products are designed to
reimburse for the expenses not covered by the Medicare program.
The Company also derives revenue through fee and service income from other
insurance related activities. The Company's primary marketing subsidiaries
include the following:
* LifeStyles Marketing Group, Inc. ("LMG") - LMG is an insurance
marketing joint venture, which derives fee income in the form of
commissions on sales of Medical Expense Products primarily for NFL but
also for non-affiliated insurance carriers. LMG is 51% owned by the
Company.
* Senior Benefits, LLC ("SBL") - SBL is an insurance marketing
subsidiary, which derives fee income in the form of commissions on
sales of Medicare Supplement Products for NFL. SBL was formed in
November, 1993. The Company held a 50% ownership interest in SBL until
June 1996, at which time the company exercised an option in the joint
venture agreement to acquire the remaining 50% of SBL.
* American Senior Security Plans, LLC ("ASSP") - ASSP is an insurance
marketing subsidiary, which derives fee income as commissions on sales
of Medicare Supplement Products for NFIC. ASSP was formed in November
1994. The Company held a 50% ownership interest in ASSP until April
1996, at which time the Company acquired the remaining 50% of ASSP.
* Health Care-One Insurance Agency, Inc. ("HCO") - HCO is an insurance
marketing joint venture, which derives fee income as commissions on
sales of HMO Products and PPO Products, for non- affiliated companies.
HCO was formed in September 1995. The Company holds a 50% ownership
interest in HCO.
10
<PAGE>
The Company has purchased several significant blocks of business over the past
four years. Generally, as a result of the acquisition of policies in force, and
the transfer of assets and liabilities relating thereto, the Company receives
higher revenues in the form of premiums and net investment income, and
experiences higher expenses in the form of benefits and claims, amortization of
deferred policy acquisition costs ("DPAC"), commissions and general and
administrative expenses. The Company expects that the levels of premiums, net
investment income, net realized gains on investments, benefits and claims,
amortization of DPAC, commissions and general and administrative expenses
attributable to these acquired policies will continue to decline over time as
the acquired businesses run off.
The following table shows the premiums received by the Company through internal
sales and through acquisitions during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1996 1995 1996 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Company-Issued Policies:
First-year premiums $16,050 $ 9,292 $ 46,883 $22,748
Renewal premiums 14,314 9,251 36,488 27,022
------ ------- ------- ------
Total Company-issued policies 30,364 18,543 83,371 49,770
------ ------ ------- ------
Acquired Policies:
American Integrity 2,029 2,351 6,369 7,631
Life and Health 446 506 1,388 1,627
Dixie National Life 730 822 2,256 2,635
FLICA 1,117 - 1,505 -
NFIC and AICT 6,002 8,332 20,249 25,701
------- ------- -------- ------
Total acquired policies 10,324 12,011 31,767 37,594
------ ------ -------- ------
Total Premiums $40,688 $30,554 $115,138 $87,364
====== ====== ======= ======
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
SAME PERIODS ENDED SEPTEMBER 30, 1995
PREMIUMS. Premiums increased from $30.6 million to $40.7 million for the third
quarter of 1996, an increase of $10.1 million or 33%. This increase was
attributable to first-year and renewal premiums on Company-issued policies
increasing $6.8 million and $5.0 million or 73% and 54%, respectively, offset by
decreases in premiums from acquired policies of $1.7 million or 14%.
Premiums increased $27.7 million or 32%, for the first nine months of 1996, from
$87.4 million to $115.1 million. This increase is attributable to first-year and
renewal premiums on Company-issued policies increasing $24.1 million and $9.5
million or 106% and 35%, respectively, offset by decreases in premiums from
acquired policies of $5.8 million or 15%.
The increase in first-year premiums for the third quarter of 1996 was primarily
due to premiums on Companyissued policies increasing $6.5 million or 143%, for
Medical Expense Products and $1.0 million or 32% for Medicare Supplement
Products. These increases were offset, in part, by a decrease in first-year
premium of $1.1 million from products underwritten by FLICA, and reinsured by
NFL, prior to the purchase of FLICA by the Company.
The increase in first-year premiums for the first nine months of 1996 when
compared to the same period in 1995, was principally due to increases from
Company-issued policies of $20.4 million or 210% from Medical Expense Products,
and $5.2 million or 59% from Medicare Supplement Products. These increases were
offset, in part, by a decrease in first-year premiums of $1.9 million or 56%
from Cancer and Specified Disease Products reinsured with FLICA prior to the
purchase of FLICA by the Company.
11
<PAGE>
Renewal premiums for the third quarter of 1996 increased primarily due to
Company-issued premiums increasing $1.7 million or 59% for Medical Expense
Products, $2.8 million or 184% for Medicare Supplement Products, and $0.6
million or 13% for Cancer and Specified Disease Products. These increases were
offset, in part, by a decrease in renewal premiums from acquired policies of
$1.3 million or 11%, comprised of a $1.1 million increase in premiums from
policies acquired in the recent purchase of FLICA, offset by a decrease in
premiums of $2.4 million from all other acquired blocks of business.
The increase in renewal premiums for the nine months ended September 30, 1996 is
primarily attributable to premiums on Company-issued policies increasing $2.3
million or 25% from Medical Expense Products, $5.6 million or 166% from Medicare
Supplement Products, and $1.5 million or 11% from Cancer and Specified Disease
Products. These increases were offset, in part, by decreased renewal premiums
from acquired policies of $5.5 million or 15%, comprised of a $1.4 million
increase in premiums from policies acquired in the recent purchase of FLICA,
offset by decreases in premiums of $6.9 million from all other acquired blocks
of business.
NET INVESTMENT INCOME. Net investment income increased $0.6 million or 35%, for
the third quarter of 1996 from $1.7 million to $2.3 million. The increase was
attributable to $0.3 million of interest charged on receivables from agents,
which was not present in the prior year period with the remaining increase due
to a combination of higher investment asset base and yield.
Net investment income increased $1.3 million or 25%, for the first nine months
of 1996 from $5.3 million to $6.6 million. The increase was attributable to $1.1
million of interest charged on receivables from agents, which was not present in
the prior year period.
FEE AND SERVICE INCOME. Fee and service income increased from $0.7 million to
$2.5 million in the third quarter of 1996, an increase of $1.8 million. The
increase is primarily due to $1.5 million of commission fees earned by HCO from
non-affiliated companies and an increase of $0.3 million in fees for
telemarketing services to non-affiliated companies. HCO began operations during
the fourth quarter of 1995. Sales of telemarketing services to non-affiliated
companies began during the third quarter of 1995.
Fee and service income increased $4.6 million for the first nine months of 1996
from $1.6 million to $6.2 million. The increase was primarily due to $3.5
million of commission fees from non-affiliated companies earned by HCO, which
began operations during the fourth quarter of 1995. Additionally, sales of
telemarketing services to non-affiliated companies, which began during the third
quarter of 1995, increased $1.0 million.
BENEFITS AND CLAIMS. Benefits and claims increased $7.1 million or 42%, from
$17.1 million to $24.2 million in the third quarter of 1996 when compared to the
third quarter of 1995. Reflective of the increase in premiums, benefits and
claims on Company-issued policies increased $4.0 million or 91%, for Medical
Expense Products, and $3.1 million or 76% for Medicare Supplement Products.
Additionally, benefits and claims from acquired policies of NFIC and AICT
increased $1.9 million this quarter due to a non-recurring decrease in claim
reserves of approximately $3.6 million during the third quarter of 1995. The
claim reserve decrease resulted from settlement administration to mitigate
benefits on Disability Income policies currently in benefit status. Excluding
the aforementioned claim reserve adjustment of 1995, benefits and claims expense
for the acquired NFIC and AICT products decreased $1.7 million in the third
quarter of 1996, compared to the comparable 1995 period. These increases were
offset, in part, by a decrease of $1.3 million related to products underwritten
by FLICA, principally Cancer and Specified Disease Products. The decrease is the
result of lower claim reserves due to favorable claim experience. Also, benefits
and claims decreased $0.4 million or 19%, on the block of business acquired from
American Integrity Insurance Company.
Benefits and claims increased from $50.6 million to $68.8 million in the first
nine months of 1996, an increase of $18.2 million or 36%. Consistent with the
increase in premiums, benefits and claims from Company-issued policies increased
$9.4 million or 100%, on Medical Expense Products, and $7.6 million or 76% on
Medicare Supplement Products. Increases from acquired business were $0.5 million
for the policies recently acquired through the FLICA purchase, and $2.0 million
for policies acquired in the NFIC and AICT acquisition. The increase in benefits
and claims from acquired policies of NFIC and AICT stems from a decrease of
approximately $3.6 million in claims reserves in the third quarter of 1995, due
to mitigation efforts on Disability Income Products
12
<PAGE>
currently in benefit status. Excluding the aforementioned claim reserve
adjustment of 1995, benefits and claims expense for the acquired NFIC and AICT
products decreased $1.6 million for the first nine months of 1996, in relation
to the comparable 1995 period. Offsetting these increases, in part, were
decreases of $0.4 million on Company-issued policies for Cancer and Specified
Disease Products, primarily due to lower claim reserves as a result of favorable
claim experience, and $1.5 million or 24%, from Medicare Supplement Products
acquired from American Integrity Insurance Company.
COMMISSIONS. Commissions decreased $0.3 million or 11%, in the third quarter of
1996 from $2.8 million to $2.5 million. Before elimination of inter-company
revenue and expense in consolidation, commissions decreased $0.7 million or 28%,
in NFL and $0.2 million or 24%, in NFIC and AICT. Offsetting these decreases
were increases in commissions of $0.7 million or 54%, in LMG and $1.1 million in
HCO, which began operations in the fourth quarter of 1995. An increase of $0.8
million in commissions paid to LMG from NFL was eliminated in consolidation
along with an increase of $0.4 million in commissions paid to SBL by NFL.
For the first nine months of 1996, commissions decreased $2.3 million or 27%.
Before elimination of inter-company revenue and expense in consolidation,
commissions decreased $1.7 million or 24%, in NFL and $0.8 million or 33%, in
NFIC and AICT. Offsetting these decreases were increases in commissions of $2.6
million or 79%, in LMG and $2.3 million in HCO, which began operations in the
fourth quarter of 1995. An increase of $3.5 million in commissions paid to LMG
from NFL and $1.6 million in commissions paid to SBL from NFL were eliminated in
consolidation.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ("DPAC"). Amortization of DPAC
increased from $2.8 million to $6.2 million in the third quarter of 1996, an
increase of $3.4 million or 121%. The increase is a reflection of the large
volume of new business sales over the last twelve months. Amortization related
to Company-issued NFL products, including products originally reinsured with
FLICA, increased $2.3 million or 124%. In addition, amortization related to
Company-issued NFIC and AICT products, increased $1.1 million and amortization
related to policies acquired in the recent purchase of FLICA, totaled $0.2
million.
Amortization of DPAC increased $7.9 million or 91%, from $8.7 million to $16.6
million for the first nine months of 1996. This increase is the result of the
increase in new business premiums during the last twelve months. Amortization of
DPAC from Company-issued products of NFL, including policies originally
reinsured with FLICA, increased $5.4 million or 96%, from $5.6 million to $11.0
million. Amortization of DPAC from Company-issued products of NFIC and AICT
increased $2.1 million, from $0.2 million to $2.3 million. Amortization of DPAC
on policies acquired from the recent acquisition of FLICA accounted for $0.3
million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.1 million or 2%, from $6.1 million to $6.2 million in the third
quarter of 1996.
General and administrative expenses increased in the first nine months of 1996
from $15.7 million to $19.9 million, an increase of $4.2 million or 27% due to
expansion of marketing operations and policyholder count. Included in general
and administrative expenses for the nine months ended September 30, 1996 is
approximately $0.6 million of expenses related to the acquisition of the
remaining interest in ASSP and SBL.
TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $0.4 million or
40%, from $1.0 million to $1.4 million in the third quarter of 1996. The
increase is primarily due to growth in premium revenues along with state levied
fees for examinations and guaranty fund assessments.
For the first nine months of 1996, taxes, licenses and fees increased $1.4
million or 45%, from $3.1 million to $4.5 million, again primarily as a result
of increases in premiums coupled with state levied fees for examinations and
guaranty fund assessments.
INTEREST EXPENSE. Interest expense increased in the third quarter of 1996 from
$0.6 million to $1.3 million, an increase of $0.7 million or 117%, due to
interest of $0.5 million associated with a revolving line of credit which was
not present in the comparable 1995 period, and $0.2 million of interest
associated with a reinsurance treaty that was effective July 1, 1996, see NOTE 5
to the Consolidated Financial Statements.
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<PAGE>
Interest expense increased during the first nine months of 1996 from $1.9
million to $3.2 million, an increase of $1.3 million or 68%. This increase is
primarily due to $1.1 million of interest associated with a revolving line of
credit which was not present in the comparable 1995 period, and $0.2 million of
interest associated with a reinsurance treaty which was also not present in the
comparable 1995 period, see NOTE 5 to the Consolidated Financial Statements.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $0.3
million or 33%, from $0.9 million to $1.2 million in the third quarter of 1996
as a result of pre-tax income increasing $0.8 million.
The provision for income taxes increased $1.2 million or 63%, from $1.9 million
to $3.1 million for the first nine months of 1996. This increase is primarily
due to pre-tax income increasing $3.1 million.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
WESTBRIDGE. Westbridge is a holding company which conducts its principal
operations through its insurance subsidiaries. Westbridge's primary assets
consist of the outstanding capital stock of NFL, NFIC, and FHC of which it is
the sole stockholder. AICT is a wholly-owned subsidiary of NFIC, and FHC owns
100% of FLICA. Westbridge's primary sources of funds are advances due and
dividends from marketing subsidiaries, principal and interest payments on a
surplus certificate issued by NFL to Westbridge, lease payments on fixed assets
and tax contributions under a tax sharing agreement between Westbridge and its
subsidiaries. Westbridge's obligations consist primarily of interest payments on
the Senior Subordinated Notes, dividends on the Series A Preferred Stock,
working capital requirements for its marketing subsidiaries, and taxes. The
Senior Subordinated Notes mature in March 2002 and the Series A Preferred Stock
is subject to mandatory redemption in April 2004.
Dividend payments from Westbridge's principal insurance subsidiaries, NFL, NFIC,
AICT and FLICA are regulated by the insurance laws of their domiciliary states.
NFL is domiciled in Delaware. Under the Delaware Insurance Code, an insurer
domiciled in Delaware may not declare or pay a dividend or other distribution
from any source other than "earned surplus" without the state insurance
commissioner's prior approval. NFIC and AICT are domiciled in Texas. An insurer
domiciled in Texas may pay dividends only out of "surplus profits arising from
its business." Moreover, insurers domiciled in either Delaware or Texas may not
pay "extraordinary dividends" without first providing the state insurance
commissioner with 30-days prior notice, during which time such commissioner may
disapprove the payment. FLICA is domiciled in Mississippi. Under Mississippi
Insurance Regulations, an insurer domiciled in Mississippi may pay dividends
limited to the lesser of 10% of statutory capital and surplus or 100% of
statutory net income for the preceding year, unless they obtain prior written
approval of the Commissioner.
As of December 31, 1995, NFL had negative earned surplus as a result of
historical losses. For the foreseeable future, NFL has agreed to seek the
approval of the Delaware Insurance Commissioner prior to making any dividend
payments. During 1996, AICT has the ability to pay to NFIC, without prior
regulatory approval, $835,000 in dividends, none of which has been paid. During
1996, NFIC has the ability to pay Westbridge, without prior regulatory approval,
$994,000 in dividends, none of which has been paid. FLICA is precluded from
making dividend payments in 1996 without prior approval from the Insurance
Commissioner due to net losses on a statutory basis in 1995.
Westbridge believes that its near-term cash requirements, including interest on
the Senior Subordinated Notes and dividend payments on the Series A Preferred
Stock will be met through operating cash flows, repayments of advances due,
dividends from marketing subsidiaries, and payments relating to the surplus
certificate.
INSURANCE SUBSIDIARIES. The primary sources of cash for the insurance
subsidiaries are premiums, income on investment assets and fee and service
income. Additional cash is periodically provided from the sale of short-term
investment assets and could, if necessary, be provided through the sale of
long-term investment assets. The insurance subsidiaries also receive cash from
the sale of agent receivables to Westbridge Funding Corporation ("WFC"), a
wholly-owned subsidiary of Westbridge, under a Receivables Purchase Agreement.
Discontinuance of such sales to WFC would result in reduced liquidity and
decreases in statutory capital and
14
<PAGE>
surplus of the insurance subsidiaries. The insurance subsidiaries' primary uses
for cash are benefits and claims, commissions, general and administrative
expenses and taxes.
The insurance subsidiaries and other subsidiaries of Westbridge advance a
percentage of first-year commissions payable to agents for policies sold by such
agents. In order to finance these advances, Westbridge's wholly-owned subsidiary
WFC entered into a Credit Agreement dated as of December 28, 1995, with Fleet
National Bank (the "Credit Agreement") which provides WFC with a two-year $20.0
million revolving loan facility, the proceeds of which are used by WFC to
purchase receivables evidencing agent advances. WFC's obligations under the
Credit Agreement are secured by liens upon substantially all of WFC's assets. In
addition, through an agreement with Fleet National Bank dated December 28, 1995,
Westbridge has guaranteed WFC's obligations under the Credit Agreement and has
pledged all of the issued and outstanding shares of the capital stock of NFL,
NFIC and WFC as collateral for its guaranty. As of September 30, 1996 $15.2
million was outstanding under the Credit Agreement. The termination date of the
current agent receivable financing program is December 28, 1997.
Effective July 1, 1996, NFL and FLICA entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement which provided $8.4 million in cash, from ceding
commissions, and increased statutory surplus levels for the respective
companies. NFL and FLICA are obligated to repay the ceding commission, along
with related interest, from statutory profits on the business reinsured.
CONSOLIDATED. A significant portion of the Company's premiums for the
nine-months ended September 30, 1996 related to policies obtained through closed
blocks of insurance business including the NFIC and AICT acquisition. Renewal
premiums from these closed blocks of business will decline over time due to
policy run-off resulting from lapses and cancellations. In order to offset such
run-off, the Company must issue new policies through its existing general agency
networks or through new agency networks, or acquire additional policies.
Net cash used for operations was $8.2 million in the first nine months of 1996
and $15 million for the comparable 1995 period. The decrease in the amount of
net cash used for operations is the result of larger increases to cash inflows,
principally from premiums, relative to the increases in cash outflows,
principally from deferred policy acquisition costs associated with higher levels
of new business production in 1996, when compared to 1995. Additionally, initial
sales began moderating in the second quarter of 1996 thus allowing earned
commission to materially exceed new advances to agents and thereby reducing what
had been a negative cash flow in 1995.
Net cash provided by investing activities for the nine months ended September
30, 1996, totaled $4.9 million, compared to net cash provided by investing
activities of $8.1 million in the comparable 1995 period. Proceeds from
investment activity for the first nine months of both 1996 and 1995 were
utilized to fund operating cash outflows.
Net cash provided by financing activities was $8.8 million for the nine months
ended September 30, 1996, compared to $4.2 million for the prior year period.
The Company, through WFC, made net draws, including repayments of previous
amounts borrowed, of $0.4 on a $20.0 million revolving loan facility during the
first nine months of 1996. The loan facility is secured by receivables from
insurance agents and the outstanding balance totaled $15.2 million at September
30, 1996. The Company and WFC are subject to certain provisions and covenants
under the loan facility, including obtaining bank approval prior to paying any
dividend from WFC to Westbridge. This loan facility was not available to the
Company at September 30, 1995. Additional financing has been provided, through
NFL and FLICA, by a 90% Coinsurance Funds Withheld Reinsurance Agreement,
effective July 1, 1996. The reinsurance agreement grants an initial ceding
commission of $10.5 million, of which $8.4 million was received September 30,
1996. Quarterly repayment of the ceding commission, which totaled approximately
$1.0 million in the third quarter, along with interest at 12.5% per annum, will
be made from 90% of the statutory profits on the business reinsured. The Company
has given no representations or warranties to the reinsurer concerning the
future performance of the business reinsured. Subsequent to the repayment of the
ceding commission, profits will be shared on a 50/50 quota share basis. The
Company must maintain a trust comprised of investment assets with a market value
equal to 90% of the active life reserves on the business reinsured, which
approximated $14.6 million at September 30, 1996. The adequacy of the amount of
assets in trust will be reviewed quarterly and adjusted as needed. The
reinsurance agreement is subject to recapture at
15
<PAGE>
any time at the option of the Company. For the comparable 1995 period, $29.1
million was provided by the issuance of 1,500,000 shares of Common Stock and
$20.0 million principal amount of Senior Subordinated Notes, due 2002. Also in
the first nine months of 1995, $25.0 million was disbursed to retire at par
value, prior to maturity, the 11.7% Senior Subordinated Debentures, due 1996.
The cash inflows from financing activities were utilized to fund operations for
the nine months ended September 30, 1996 and 1995.
The Company believes that its near-term cash requirements will be met through a
combination of operating, investing, and financing cash flows. The Company
anticipates that its longer-term cash requirements for the operation of the
business will also be met through a combination of operating, investing, and
financing cash flows. The Company has established an agent balance financing
facility which will be used to finance additional marketing growth, and has
consummated a reinsurance treaty that provides capital for operating needs along
with increased statutory surplus levels for NFL and FLICA. Additional capital
may be necessary to continue future growth. There can be no assurance that
opportunities for additional capital or for future growth will arise. In
addition, the ability of the Company to issue new policies will be limited by
risk based capital guidelines as enforced by various insurance regulators.
The Company had less than 3.2% of its fixed maturity investments held in
high-yield, unrated or less than investment grade corporate debt securities in
its investment portfolio as of September 30, 1996, and it is the Company's
policy not to invest more than 5% of its holdings in such assets. Changes in
interest rates may affect the market value of the Company's investment
portfolio.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
(See PART I - NOTE 2 to the Consolidated Financial Statements).
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.34-Reinsurance Agreement between National Foundation Life
Insurance Company & Freedom Life Insurance Company of
America and Reassurance Company of Hannover, effective
July 1, 1996.
10.35-Pledge Agreement dated as of July 25, 1996 between
Westbridge Capital Corp. and Fleet National Bank.
10.36-Pledge Agreement dated as of July 25, 1996 between
Westbridge Capital Corp. and Fleet National Bank.
(b) REPORTS ON FORM 8-K
No Form 8-K was required to be filed during the period.
17
<PAGE>
FORM 10-Q
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WESTBRIDGE CAPITAL CORP.
/S/ PATRICK J. MITCHELL
Patrick J. Mitchell
Executive Vice President, Chief Financial
Officer and Treasurer
(On Behalf of the Registrant as authorized
Principal Financial and Accounting Officer)
Dated at Fort Worth, Texas
November 14, 1996
18
<PAGE>
EXHIBIT 10.34
REINSURANCE AGREEMENT
BETWEEN
NATIONAL FOUNDATION LIFE INSURANCE COMPANY
&
FREEDOM LIFE INSURANCE COMPANY OF AMERICA
777 Main Street
FORT WORTH, TEXAS 76109
(Referred to collectively in this Agreement as the Company)
AND
REASSURANCE COMPANY OF HANNOVER
800 N. Magnolia Avenue, Suite 1000
ORLANDO, FLORIDA 32803
(Referred to in this Agreement as the Reinsurer)
COINSURANCE FUNDS WITHHELD
REVISED 10/14/96 FORMER REFERENCE NO: HA-9606-5M
NEW REFERENCE NO: HA-9650-1F
<PAGE>
TABLE OF CONTENTS
Coinsurance Funds Withheld
Article I Reinsurance Definition
Article II Liability
Article III Plan and Amount of Reinsurance
Article IV Accounting and Payments
Article V Claims
Article VI General Provisions
Article VII Recapture
Article VIII Arbitration
Article IX Reinsurer's Right of Notice of Unusual Practices
Article X Treasury Regulation Section 1.848-2(g)(8)
Joint Election
Article XI Duration of Agreement
Article XII Insolvency
Article XIII Representations and Warranties
Article XIV Letters of Credit
Article XV Execution
Schedule A Business Reinsured
Schedule B Reinsurance Forms
Schedule C Experience Refund Calculation
Schedule D Expense Allowances
(i)
<PAGE>
TABLE OF CONTENTS CONT'D
Exhibit I Security Agreement and Asset Trust Agreement
Exhibit II Investment Guidelines/Eligible Investments
Appendix I Projection Model
(ii)
<PAGE>
TREATY SYNOPSIS OF COINSURANCE FUNDS WITHHELD
REINSURANCE AGREEMENT
BETWEEN
NATIONAL FOUNDATION LIFE INSURANCE COMPANY
&
FREEDOM LIFE INSURANCE COMPANY OF AMERICA
AND
REASSURANCE COMPANY OF HANNOVER
The Treaty document which follows details a Coinsurance Funds Withheld
Reinsurance Agreement (the "Agreement") between National Foundation Life
Insurance Company (NFL) & Freedom Life Insurance Company of America (FLICA),
NFL's wholly owned subsidiary, and the Reassurance Company of Hannover (RCH) to
be effective July 1, 1996. The Treaty provides NFL with a $10.5 million Initial
Ceding Allowance on the Company's inforce Cancer, Intensive Care and Heart
business as of the Effective Date. The reinsurance is on a 90/10 quota-share
basis on the Company's retained business with RCH accepting all of the inherent
morbidity risks on its 90%. Provisions of the treaty are in conformity with the
Life and Health Reinsurance Agreement Model Regulation and provide for the
repayment of the Initial Ceding Allowance out of the statutory profits on the
Business Reinsured. Other important aspects of the Agreement are as follows:
* The form of the treaty is Quota Share Coinsurance Funds Withheld which
implies under this Agreement that the Reinsurer has assumed all of the
risks inherent on its proportionate share of the business to include (on
a contingent basis) the adequacy of the active life reserves which are
held in trust by the Company.
* Accumulated profits in excess of the Initial Ceding Allowance will be
shared on a 50/50 quota-share basis between the Companies and RCH once
the Initial Ceding Allowance is repaid plus interest at the rate of 12
1/2% per annum on the outstanding balance.
* The Agreement is drafted to conform to reserve credit regulations:
(a) The renewal Expense Allowances are adequate to cover the
Companies actual expenses, with respect to the Business
Reinsured,
(b) the Companies cannot be deprived of surplus or assets except as
contemplated in the regulations,
(c) there is no requirement for the Companies to reimburse RCH for
negative experience under the Agreement, unless they exercise
their right to recapture.
(iii)
<PAGE>
(d) there is no provision for recapture, other than as
specifically outlined in Article VII,
(e) all forms of risk related to the Business Reinsured are
permanently transferred subject to the recapture provisions of
Article VII,
(f) quarterly settlements are required, and ...
(g) there are no representations or warranties given concerning the
future performance of the Business Reinsured.
* RCH is an approved reinsurer in Delaware and Mississippi. However, a
Letter of Credit (LOC) in the amount deemed necessary by the parties to
this Agreement will be provided to allow the Company(ies) to take credit
for statutory reserves in states where RCH is neither licensed nor
approved.
(iv)
<PAGE>
COINSURANCE FUNDS WITHHELD AGREEMENT
This Coinsurance Funds Withheld Agreement (the "Agreement") is entered
into as of the date below written by and between the National Foundation Life
Insurance Company, a Delaware insurer, and Freedom Life Insurance Company of
America, a Mississippi insurer (collectively referred to herein as the
"Company"), and Reassurance Company of Hannover, a Florida reinsurer (the
"Reinsurer").
The Company and the Reinsurer mutually agree to reinsure in accordance
with the terms and conditions set forth hereinafter. This Agreement is solely
between the Company and the Reinsurer, and performance of the obligations of
each party under this Agreement shall be rendered solely to the other party. In
no instance shall anyone other than the Company, or the Reinsurer (and/or their
duly appointed and mutually recognized successors or assigns) have any rights
under this Agreement.
This Agreement with its attached Schedules and Exhibits shall constitute
the Entire Agreement between the parties with respect to the Business Reinsured
hereunder, and there are no understandings between the parties other than as
expressed in the Agreement. Any change or modification to the Agreement shall be
null and void unless made by an amendment which is signed by both parties.
Page 1
<PAGE>
ARTICLE I
REINSURANCE DEFINITION
1.1 BUSINESS REINSURED. The Company agrees to cede to the Reinsurer on a
quota-share basis, and the Reinsurer agrees to assume from the Company, on a
Coinsurance Funds Withheld basis, 90% of the retained obligations of the Company
as specified in Schedule A, except as provided for under Section 1.2 hereof.
Under all circumstances the Reinsurer's liability hereunder shall not include
any amounts awarded in judgement against the Company, or any other person, firm,
corporation or entity by a court of competent jurisdiction in excess of the
policy benefit losses, whether in the form of punitive damages, attorneys fees,
costs of litigation, or other extracontractual liabilities.
The Reinsurer's liability under this Agreement shall be limited to
indemnification of the Company.
1.2 OTHER REINSURANCE COVERAGE. If there is applicable reinsurance on an
excess or other basis coincident with the Business Reinsured under this
Agreement, the Reinsurer's liability for such amounts shall be reduced to the
extent of the other benefits provided under those agreements. Termination and/or
recapture of any treaty(ies) directly impacting this Agreement will be subject
to mutual agreement prior to termination and/or recapture of those treaty(ies).
Other reinsurance inforce not impacting this Agreement is specifically excluded
from consideration.
..END OF ARTICLE I
Page 2
<PAGE>
ARTICLE II
LIABILITY
The liability of the Reinsurer on any reinsurance under this Agreement
begins on July 1, 1996, the Effective Date. The liability of the Reinsurer will
continue in accordance with the terms and conditions of this Agreement, and will
end at the same time as that of the Company, or recapture, whichever is earlier.
...END OF ARTICLE II
Page 3
<PAGE>
ARTICLE III
PLAN AND AMOUNT OF REINSURANCE
3.1 The Health Business Reinsured hereunder and outlined in Schedule A
shall be on a Coinsurance Funds Withheld basis in a manner consistent with the
risks inherent in the policy forms ceded by the Company. Under the terms of the
Agreement the Reinsurer assumes all of the inherent risks of the Business
Reinsured. The assets backing the active life reserves are to be retained in
Trust by the Company, in accordance with the provisions of Exhibit I, subject to
the terms and conditions outlined in Article VI, paragraph 6.4, and the
provisions of Schedule C, as they impact the distribution of earnings thereon.
The Reinsurer's amount at risk shall be limited to the risks on those policies
retained by the Company as of the Effective Date and now ceded under this
Agreement.
3.2 Reductions and terminations of the Company's policies, riders or
benefits shall reduce or terminate the amount reinsured under this Agreement in
a corresponding amount as of the same date, taking into account any changes in
Other Reinsurance Coverage as called for by pertinent treaty language.
3.3 Reinstatement by the Company under its regular rules of policies,
riders or benefits which were reduced, terminated or lapsed, shall automatically
reinstate the reinsurance thereon for the amount that would have been in force
if the insurance had not been so reduced, terminated or lapsed.
...END OF ARTICLE III
Page 4
<PAGE>
ARTICLE IV
ACCOUNTING AND PAYMENTS
4.1 INITIAL REINSURANCE TRANSACTION. As a condition precedent to the
Company's and the Reinsurer's liability hereunder, the Company shall on, or
shortly after the execution date, transfer to the Reinsurer a net amount of
assets equal to 90% of the statutory unearned premium reserves and the Reinsurer
shall pay the Company an amount equal to the Initial Ceding Allowance contained
in Schedule D and as adjusted under paragraph 4.7. Such amounts shall be
reflective of the Effective Date of July 1, 1996.
4.2 SUBSEQUENT REINSURANCE PREMIUMS. Amounts due subsequent to the
initial reinsurance transaction shall be paid to the Reinsurer when determined
in accordance with paragraph 4.3 below. If the amount of net reinsurance
premiums set forth on any statement is a negative amount, the Reinsurer shall
pay to the Company an amount equal to such negative amount within fifteen (15)
days after the Reinsurer's receipt from the Company of such a Statement.
4.3 PAYMENT OF REINSURANCE. The accounting shall be on a calendar
quarter basis for all items. The initial accounting period shall run from the
Effective Date to the end of the first quarter in which the Effective Date
falls. The final accounting period shall run from the end of the preceding
calendar quarter end until the termination of this Agreement. Accounting reports
shall be submitted to the Reinsurer by the Company not later than 30 days after
the end of each accounting period. Such reports shall include information on the
amount of reinsurance premiums, commissions, expenses, claims, and any other
items required for NAIC statutory accounting on the policies reinsured for the
preceding accounting period. The monthly "premium and loss" report shall reflect
all transactions for the accounting period as stated above with the exception of
statutory reserves which shall be reported on a quarterly basis. Annual
accounting reports necessary to the filing of the Reinsurer's Annual Statement
blank and its Federal Income Tax return shall be submitted to the Reinsurer by
the Company at the request of the Reinsurer within 30 days after the end of a
calendar year. In addition, the Company shall provide, on a timely basis, an
Actuarial Certification satisfactory to the Reinsurer of the liability included
herein. This information will be supplied coincident with the annual accounting
information. The Company will also support any cash flow testing and/or other
regulatory requirements inherent in the assumption of these liabilities by the
Reinsurer.
4.4 ASSOCIATED RIDERS. If any riders are reinsured under this Agreement,
premiums and their related commissions will be paid in accordance with the
Company's contractual obligations at the inception of this Agreement.
ARTICLE IV CONTINUES...
Page 5
<PAGE>
4.5 PAYMENTS. The payments due under this Agreement from the Company to
the Reinsurer, shall be a condition precedent to the liability of the Reinsurer.
The Reinsurer shall have the right to terminate the reinsurance on risks for
which payments are in default by giving ninety (90) days written notice of
termination to the Company. At the close of the last day of the ninety-day
notice period, all of the Reinsurer's liability for risks subject to the
termination notice, plus for the risk on which premiums went into default during
the ninety-day notice period, shall terminate and the Agreement shall be subject
to the terminal accounting provisions of Article VII.
Notwithstanding termination of reinsurance as provided for by this
provision, the Company shall continue to be liable to the Reinsurer for all
unpaid premiums earned by the Reinsurer under this Agreement (see Section 7.3).
The Company may reinstate such terminated reinsurance by paying in full,
prior to expiration of the ninety (90) day termination notice, all unpaid
premiums (with interest from the due date consistent with the provisions of
4.17) for the reinsurance which was in force prior to its termination. The
effective date of reinstatement shall be the day the Reinsurer receives all
required premiums. However, there shall be no reinstatement on any risk on which
the Company incurred a claim for insurance after the reinsurance terminated.
4.6 PROCEDURE FOR PAYMENT.
a) FIRST YEAR AND RENEWAL BUSINESS. On or before the thirtieth
(30th) day after -------------------------------- the close of
each quarter, the Company will submit to the Reinsurer a
statement of account, substantially in accordance with Schedule B
showing the premium(s) due on reinsurance effected in the
preceding month(s) and any other pertinent data mutually agreed
upon by the parties hereto. If a statement shows that a net
reinsurance balance is due the Reinsurer, the Company will
include with the statement a payment for the amount(s) due.
Likewise, should the statement show a net reinsurance balance due
the Company, the Reinsurer shall remit the amount due within
fifteen (15) days after receipt of the statement.
b) ADJUSTMENTS. If any change is made to the Company's policy and/or
rates that affects the reinsurance, the Company will provide
written notice, on a form mutually agreed upon, to the Reinsurer.
If an adjustment to the premium is to be made, and a refund is
due the Company, it will be included as an adjustment to the
regular quarterly statement prepared for the Reinsurer. Policy
fees, if any, are not pro-rated or refunded on termination.
ARTICLE IV CONTINUES...
Page 6
<PAGE>
4.7 Placing Reinsurance in Effect. To effect reinsurance with respect to
policies in force on the Effective Date of this Agreement, the Company shall
settle with the Reinsurer on the date of execution of this Agreement the initial
reinsurance premium described in Section 4.8 hereunder. In addition, the Company
shall place in trust assets whose market value equals the statutory active life
reserves as of June 30, 1996 (the "Funds Withheld") held by the Company as of
the settlement date. The Company agrees to maintain a Trust Account in an amount
at least equal to the Funds Withheld which will be "trued-up" on a quarterly
basis coincident with the quarterly reporting. The account shall be governed by
a Trust Account in a form, and with a financial institution, acceptable to the
Reinsurer, and the Company attests that such assets in the Trust Account shall
be free and clear of any liens, security interests or adverse claims prior to
their deposit to the Trust Account.
Such Trust Agreement shall be maintained and funded by the Company according to
its terms during the life of this Treaty. If this condition is not met by the
Company on the dates specified, this Agreement shall be void as of its Effective
Date.
The Company shall be in default of the Trust Agreement if:
(a) it fails to make any required deposit as required by the
Reinsurance Agreement or the Trust Agreement concerning the
Authorized Investments in the Trust Account, or the Company
unilaterally seeks to terminate the Trust Agreement without the
prior written consent of the Reinsurer;
(b) it fails to perform any of its financial obligations under the
Agreement, or to comply with the provisions of the Investment
Guidelines of the Reinsurance Agreement as contained in Exhibit
II, or...
(c) it fails to pay the Reinsurer any amount due and owing under the
Reinsurance Agreement.
The following remedies shall be available hereunder in the event that
the Reinsurer notifies the Trustee of the Trust Agreement and the Company in
writing that an event of default, as outlined above, has occurred and the
Company has not cured such default to the Reinsurer's satisfaction within twenty
(20) days of receiving notice of such default from the Reinsurer.
The remedies are as follows:
(a) The Reinsurer, at its sole discretion, may convert the form of
reinsurance from coinsurance funds withheld to 100% coinsurance.
If the Company fails to transfer assets with a market value equal
to the active life reserves to the Reinsurer on or before the
effective date of the conversion to coinsurance on the portion of
the policies reinsured under the Reinsurance Agreement, the
Reinsurer may require the
ARTICLE IV CONTINUES...
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Trustee to apply to the Fund towards the satisfaction of such
reserve obligation of the Company to the Reinsurer.
(b) The Reinsurer may in writing (i) require the Trustee to sell any
or all of the assets in the Fund and pay all proceeds of such a
sale to the Reinsurer, up to an amount having a market value
equal to the active life reserves as of the date of transfer or,
(ii) require the Trustee to transfer any or all of the assets in
the Fund to the Reinsurer up to an amount having a market value
equal to the active life reserves, or (iii) a combination of (i)
and (ii).
(c) The Reinsurer shall ensure that the Trustee will not sell more
assets in the fund than is necessary to pay the amount required
hereunder, plus any amount necessary to pay estimated costs,
charges, and fees of sale, or other similar amounts payable
hereunder.
(d) The Trustee shall be authorized in writing by the Reinsurer to
execute such documents and give such notices as may reasonably be
necessary to conduct the sale and/or transfer of any assets
necessary to comply with the Reinsurer's directions.
(e) Neither the Trustee nor the Company may bid, or become a
purchaser at any asset sale, without the Reinsurer's prior
approval.
(f) After deducting from the proceeds of the sale of assets the costs
and expenses incurred in the conduct thereof, including the fees
and charges of the Trustee and reasonable attorney's fees, the
Reinsurer shall ensure that the Trustee shall pay to the
Reinsurer, from the net sales proceeds, only amounts up to the
amount owed by the Company to the Reinsurer equal to the active
life reserves. The Reinsurer shall have the right to offset any
deficiency between the amount owed and the amount paid to it by
the Trustee against its obligations to the Company under this
Reinsurance Agreement, or pursue any other remedy necessary to
collect such deficiency.
(g) The Reinsurer shall ensure that the Trustee, under the
Reinsurer's direction, shall furnish the Company and the
Reinsurer with an accounting of the disposition of all proceeds
of asset sales, including the identity and amount of all expenses
and fees, the identity of each recipient of the sale proceeds and
the respective amounts paid; and the amount of proceeds payable
to the Reinsurer after deduction of allowable expenses.
Should the Company become subject to the terms of Article VI, paragraph
6.4, the nature of the Trust Agreement and the Experience Refund Calculation
contained in Schedule C will change
ARTICLE IV CONTINUES...
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as of that event as will amounts due as periodic settlement. This change in
Treaty form from Coinsurance Funds Withheld to Coinsurance will require an
amendment to the Treaty and the Trust Agreement to reflect the change in status
of the Asset Account and each party's obligations under the reconfigured
Agreement. The Reinsurer will thereafter credit interest earned on the trust
assets to the reinsurance accounting of the Agreement in an amount equal to the
actual net investment earnings on the assets in the Trust Account, including
capital gains and losses, adjusted for any changes in the Company's Interest
Maintenance Reserve (IMR). In addition, the change in the statutory active life
reserves will also be a part of the Experience Refund Calculation. Unless, and
until, the change in status occurs, the Company will retain the investment
earnings on the Funds Withheld Account and be responsible for the adequacy of
the active life reserves. Also, once the LCF as determined by Schedule C has
become zero, the interest on the assets and the change in reserves will revert
to the sole benefit of the Company and not be a part of the ongoing Experience
Refund accounting effective at the beginning of the quarter following the
reporting period in which the LCF becomes zero.
The Company shall not change the method or assumptions used to calculate
the statutory active life reserves without the written consent of the Reinsurer,
unless an increase to such reserves shall be required by law or regulation.
The initial premium described in Paragraph 4.8 below, shall be paid on a
net basis as an offset to the Initial Ceding Allowance granted in Schedule D.
The net settlement due as of the settlement date shall reflect interest accrued
from the Effective Date at a rate of 7% per annum. The amount due under this
Agreement from the Effective Date to the initial settlement date (if after the
Effective Date) shall include all amounts due under the accounting for Schedule
C, and shall be recognized by the Company as an amount owing under the
Agreement.
4.8 PAYMENTS BY THE COMPANY: The initial reinsurance premium payable
pursuant to Section 4.7 above (if payable on or before the Effective Date) shall
be an amount equal to the Statutory Unearned Premium Reserves as of the
Effective Date.
4.9 BENEFITS. The Reinsurer shall pay the Company its proportionate
share of the gross amounts of all benefits paid by the Company, but net of
benefits attributable to the portions of the policies reinsured hereunder which
are receivable under other reinsurance agreements with respect to the portions
of the policies reinsured hereunder.
4.10 POLICY EXPENSE AND COMMISSION ALLOWANCES. The Reinsurer shall pay
the Company the Initial Ceding Allowance as defined in Schedule D. The Reinsurer
shall also pay its share of the Overhead Expense Allowances, Premium Taxes,
Trust Expenses and Commission Allowances as defined in Schedule D.
ARTICLE IV CONTINUES...
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4.11 EXPERIENCE REFUND. The Reinsurer shall be obligated to the
Company under the experience refund formula as determined in accordance
with Schedule C.
4.12 EXPENSES. The Reinsurer shall bear no part of the expenses incurred
in connection with the policies reinsured hereunder, except as otherwise
provided in Paragraph 4.10.
4.13 ACCOUNTING FOR AMOUNTS DUE REINSURER OR COMPANY
1) Except as otherwise specifically provided herein, all
amounts due to be paid to either the Reinsurer or the
Company shall be determined on a net basis as of the last
day of each accounting period and shall be due and payable
as of such date. If such amounts cannot be determined as
of such date on an exact basis, such payments may be paid
on an estimated basis within thirty (30) days of the end
of the accounting period, if owed by the Company, and
within fifteen (15) days after receiving the accounting
reflecting the Negative Balance, if owed by the Reinsurer.
Any final adjustments are to be made within 3 months after
the end of such accounting period with provision for loss
of interest to the party affected.
2) Any payment which either the Company or the Reinsurer
shall be obligated to pay to the other may be paid net of
any amount which is then due and unpaid under this
Agreement. The Company and the Reinsurer shall each
reconcile the reinsurance transactions hereunder as
prescribed in Schedule B at the end of each calendar
quarter.
4.14 ELECTRONIC DATA TRANSMISSION. If the Company chooses to report its
reinsurance transactions via electronic media, the Company shall consult with
the Reinsurer to determine the appropriate reporting format. Should the Company
subsequently desire to make changes in the data format or the code structure,
the Company shall communicate such changes to the Reinsurer prior to the use of
such changes in reports to the Reinsurer.
4.15 OTHER ADJUSTMENTS. Other payment adjustments made in the normal
course of business will be shared between the Company and the Reinsurer in
proportion to the amount of liability of each at the time of issue. Exceptions
to normal operating procedures will be discussed with the Reinsurer prior to any
action being taken.
4.16 CURRENCY. The reinsurance premiums and the reinsurance benefits
under this Agreement shall be payable in the lawful money of the United States.
ARTICLE IV CONTINUES...
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4.17 INTEREST ON LATE PAYMENTS. Subject to the reporting requirements of this
Agreement, should any payment not be made within the specified period, the party
to whom the payment is owed can elect to charge interest on such payment at the
rate of .75% per month.
...END OF ARTICLE IV
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ARTICLE V
CLAIMS
SETTLEMENT OF CLAIMS
5.1 Except as otherwise specifically set forth herein, the Reinsurer's
liability to the Company for the reinsurance benefits shall follow the Company's
liability for such amounts of benefits under the terms of its policies. The
Reinsurer shall only be liable for claims incurred after the Effective Date. The
claims incurral date used in establishing claim reserve liabilities shall be
determined in a manner consistent with that used by the Company immediately
prior to the Effective Date. Any change in such methodology shall be subject to
mutual agreement.
5.2 The Company shall investigate and settle or defend all claims or
losses. If a contest or compromise results in a reduced claim settlement, then
the Company and the Reinsurer shall participate in proportion to their
respective net liabilities before the reduction.
The Reinsurer will accept the good faith decision of the Company in
settling the claim and shall pay the reinsurance benefit amounts in effect when
the company settles with the claimant, including a proportionate share of any
interest paid to the claimant subject only to the limitations set forth below.
If the Company, in good faith, pays benefits for alternative services or
goods in order to reduce long term claim exposure, then the Reinsurer will
participate proportionately in such benefits provided the Reinsurer has been
advised or consulted with in accordance with 5.3 and 5.4 below.
5.3 The Reinsurer will reimburse the Company for its proportionate share
of reasonable legal expenses incurred in the defense of a claim only if the
Reinsurer has been informed in writing in advance of the Company's intent to
incur such expenses and the Reinsurer has agreed in writing to participate in
such expenses. If the Company proposes to defend a claim with respect to which
the Reinsurer does not agree to participate in the defense the Reinsurer shall
pay its proportionate share of the loss and the loss adjustment expenses
incurred prior to the Reinsurer's decision not to so participate. Such amounts
paid to the Company shall fully discharge the Reinsurer's obligation hereunder
with respect to such claim.
CONTESTED CLAIMS
5.4 The Company will advise the Reinsurer in writing of any litigation
involving reinsurance under this Agreement, and may advise the Reinsurer of its
intention to deny a claim or associated claims, or contest policies reinsured
under this Agreement.
ARTICLE V CONTINUES...
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5.5 "Extra-Contractual Obligations" shall mean any award made by a court
of competent jurisdiction against the Company which is not within the coverage
granted by any insurance or reinsurance contract made between the parties in
dispute.
The Reinsurer shall have no liability with respect to Extra-Contractual
Obligations which shall include, but not be limited to, the following:
(a) any assumption of liability of the Company by way of
participation in any mutual scheme designed specifically to cover
Extra-Contractual Obligations; or
(b) the fraud of a director, officer, employee, or duly appointed
agent of the writing Company acting individually or collectively,
or in collusion with an individual or corporation, or with any
other organizations or party involved in the presentation,
defense or settlement of any claim.
..END OF ARTICLE V
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ARTICLE VI
GENERAL PROVISIONS
6.1 COMPANY FORMS AND RATES. The Company shall make available to the
Reinsurer on an as-needed basis, a copy of its applications, policy and rider
forms, premium and reserve tables (if any), and any and all other forms or
tables needed for proper handling of reinsurance under this Agreement. It will
advise the Reinsurer of any changes or new forms it may adopt.
6.2 ADMINISTRATION BY THE COMPANY OF THE BUSINESS REINSURED. In return
for the payment of the Overhead Expense Allowances as set forth in Schedule D,
the Company agrees to perform all usual and customary servicing functions to
include, but not limited to, the following:
1) All usual and customary policy related customer services for the
insureds, owners, beneficiaries, agents and/or other interested
persons; including but not limited to, address changes,
beneficiary changes, ownership changes, providing policy related
information, reinstatements and providing duplicate policies. All
such services provided shall meet or exceed standards of service
deemed usual and customary in the insurance industry.
2) File maintenance and administration, including systems
maintenance and administration.
3) Billing and collection of premiums. All premiums collected on
behalf of the Business Reinsured shall be held by the Company in
a fiduciary capacity.
4) Maintenance of the Business Reinsured's financial data in such
form, and communicated at such intervals to the Reinsurer, as
outlined above (see Article I), so as to allow the Reinsurer to
meet any and all reporting requirements it may have.
5) Payments of agents' commissions related to the Business
Reinsured. The Company shall be financially responsible for all
such commissions due on premiums collected after the Effective
Date.
6) The timely filing of rate increases to maintain the viability of
the Business Reinsured. Both the Company and the Reinsurer
mutually recognize that rate monitoring and filing for increases,
where needed, are essential to maintaining the profitability of
the Business Reinsured. The Company's customary practice has been
to monitor the need for rate increases on a monthly basis.
ARTICLE VI CONTINUES...
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The Reinsurer shall have the right to request that the Company
file for rate increases should loss ratios justify such action.
If the Company fails to file within 60 days of the Reinsurer's
request, or fails to diligently pursue the granting of such
increases with regulatory authorities, the Expense Allowances
provided for under Schedule D shall be reduced according to the
provisions of that treaty schedule. Such allowance reduction will
be effective the first calendar quarter after the later of (a)
the end of such 60 day period, or (b) 30 days after the Reinsurer
notifies the Company that, in its opinion, such increases are not
being diligently pursued. If the Company disagrees with the
Reinsurer, and the parties are unable to amicably resolve their
dispute on the handling of the actions to be taken, the Company
shall be entitled to arbitrate the disagreement under Article
VIII of the Treaty.
In the event the Reinsurer considers that the Company has failed to
perform the usual and customary service functions outlined above, or has become
financially impaired to the point that regulatory supervision is imminent
(subject to the provisions below), the Reinsurer may secure other facilities to
perform such functions.
The Reinsurer shall first provide the Company with written notice of its
intent to find an alternative service facility and its reasons for requesting
such a change. If the Company fails to remedy the situation within ninety (90)
days, then, and only then, shall the Reinsurer have the right to proceed with
the change to an alternate service facility.
Should such a transfer occur, the Company shall surrender the service
function to the new carrier, or servicing center, and in turn aid in the
effective and efficient conversion of the servicing function to the new
facility. Once effected, the Company shall forfeit all right to future
compensation for such functions.
6.3 REINSURANCE CONDITIONS. The reinsurance is subject to the same
limitations and conditions as the insurance under the policy or policies assumed
by the Company on which reinsurance is based.
6.4 FORM OF THE AGREEMENT. While this Agreement is in effect, the Companies
party to this Agreement (collectively referred to herein as the "Company") shall
maintain for annual regulatory reporting purposes a minimum of 100% of Company
Action Level (CAL) risk based capital (RBC). Should either Company's RBC fall
below this required level, the form of this Agreement will change to
coinsurance, and the assets in the Trust Account shall transfer to the books of
the Reinsurer. The Trust Account will be amended as of the Effective Date of
such change to reflect that the Reinsurer is now the Grantor of the Trust.
ARTICLE VI CONTINUES...
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The Company agrees to provide the Reinsurer with a quarterly calculation
of its RBC. Such quarterly analysis shall be subject to timely review and good
faith discussion by the Reinsurer and the Company so as to determine whether a
change in the form of the Reinsurance Agreement to a coinsurance basis is
warranted. If so, such change will become effective within 30 days of the
decision, and the Company will transfer to the account of the Reinsurer, assets,
and accrued interest thereon, at market value in an amount equal to the
statutory active life reserves held by the Company as of the date of transfer.
Coincident with this event, Schedule C of this Agreement will be amended to
incorporate the investment earnings and change in active life reserves into the
Experience Refund calculation. Likewise, the Trust Agreement will be amended to
reflect the revised disposition of the assets in the Trust Account.
6.5 ERRORS AND OMISSIONS. It is understood and agreed that if
non-payment of premiums, within the time specified, or failure to comply with
any terms of this contract is shown to be unintentional, and the result of
misunderstanding or oversight on the part of either the Company or the
Reinsurer, both the Company and the Reinsurer shall be restored to the positions
they would have occupied had no such error or oversight occurred upon payment of
the overlooked amount.
6.6 INSPECTION. The Reinsurer may inspect, at the Home Office of the
Company and at any reasonable time, the original papers and any other books or
documents relating to or affecting the reinsurance under the Reinsurance
Agreement.
6.7 OFFSET PROVISION. Any debts or credits liquidated or unliquidated,
in favor of, or against, either the Reinsurer or the Company, with respect to
this Agreement only, shall be set-off, and only the balance shall be allowed or
paid.
6.8 SEVERABILITY. In the event that any of the provisions herein
contained shall be declared or adjudicated invalid or unenforceable, such
declaration or adjudication shall in no manner affect or impair the validity or
the enforceability of the other and remaining provisions which shall remain in
full force and effect as though such invalid or unenforceable provisions or
clauses had not been herein included or made a part of this Agreement. The
Company and the Reinsurer agree to resolve the invalid or unenforceable
provision within 30 days after such declaration.
...END OF ARTICLE VI
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ARTICLE VII
RECAPTURE AND/OR TERMINATION
7.1 RECAPTURE. Business Reinsured under this Agreement is eligible for
recapture. If the Company elects to exercise its recapture option, such
recapture is subject to the terms and conditions as outlined in the Experience
Refund provisions of Schedule C.
7.2 OTHER RECAPTURE FOR FAILURE TO MAKE PAYMENT. Upon the failure by the
Reinsurer to pay the Company any Negative Amounts due the Company pursuant to
Section 4.2 hereof, the Company may, at its option and in its sole discretion
recapture the particular Reinsured Policies for which the Reinsurer has failed
to pay such Negative Amounts; provided, however, that the Company's option may
only be exercised by the Company by delivering to the Reinsurer thirty (30) days
prior written notice of the Company's intent to exercise the Company's option
and the Reinsurer shall be entitled to cure such nonpayment of any Negative
Amounts. Regardless of the Company's exercise of the Company's option, the
Reinsurer shall remain liable to the Company for all unpaid Negative Amounts due
to the Company hereunder.
7.3 PAYMENTS UPON TERMINATION OF REINSURANCE FOR NONPAYMENT.
1) In the event that this Agreement or any portion of the
policies reinsured hereunder is terminated for nonpayment
by either party to this Agreement, pursuant to any
provision hereof, a terminal accounting and settlement
shall take place with respect to such terminated
reinsurance.
2) The terminal accounting date for any such termination
shall be the effective date of a notice of termination
given under this Agreement or such other date as shall be
mutually agreed to in writing.
3) The terminal accounting period shall be the period
commencing on the first day of the calendar quarter in
which any termination is effective and ending on the
terminal accounting date for such termination.
4) The terminal accounting and settlement shall involve a
calculation of the terminal unearned premium reserve
liability then held by the Reinsurer for the portion of
the policies reinsured hereunder, and a calculation of a
terminal experience refund, as described in paragraph 7
below. Each of these items shall be computed only with
respect to the portion of the policies reinsured hereunder
then being terminated.
ARTICLE VII CONTINUES...
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5) The Reinsurer shall pay as an amount allowed on surrender
to the Company an amount equal to the Reinsurer's share of
the appropriate reserves outstanding. Unearned Premium
Reserves will be determined on a statutory basis, whereas
active life and claim reserves will be determined on a
basis consistent with historical practices used by the
Company (see Article VI regarding change in Form of the
Agreement) on the day immediately prior to the terminal
accounting date with respect to the portion of the
reinsurance hereunder then being terminated.
6) The Reinsurer's liability for reserves on the reinsurance
being terminated hereunder, shall terminate on the
terminal accounting date, and the Reinsurer shall be
obligated to pay such amount to the Company net of the
amounts due the Reinsurer from the experience account.
7) A terminal experience refund shall be computed for the
terminal accounting period on the portion of the
reinsurance hereunder then being terminated. Such terminal
experience refund shall be computed in a manner consistent
with Schedule C. If the terminal experience refund is
positive, such positive amount shall be paid by the
Reinsurer to the Company. If the terminal experience is
negative, the absolute value of such negative amount shall
be paid by the Company to the Reinsurer. The Reinsurer may
offset any amount due it under this provision against the
reserve transfer required under 5)
above.
8) In the event that subsequent to the terminal accounting
and settlement as above provided, an adjustment is made
with respect to any amount taken into account pursuant to
Schedule C, a supplementary accounting shall take place
pursuant to Paragraph 4 of this section. Any amount owed
to the Reinsurer or the Company by reason of such
supplementary accounting shall be paid promptly upon the
completion thereof.
...END OF ARTICLE VII
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ARTICLE VIII
ARBITRATION
8.1 AGREEMENT. All differences between the Company and the Reinsurer on
which an agreement cannot be reached, will be decided by arbitration. The
arbitrators will determine the interpretation of the Agreement in accordance
with usual business and reinsurance practices, rather than by strict
technicalities.
8.2 METHOD. Three arbitrators will decide any differences. They must be
active or retired officers of life insurance companies, or reinsurance
companies, employed by other than the two parties to the Agreement, or have been
previously so employed in such a capacity in an insurance or reinsurance
company. In no event may an employee - past or present - of either party or its
affiliates serve as an arbitrator.
Each party will choose one member of the arbitration panel and, once
selected, these two members will choose the third member. If the two arbitration
panel members chosen fail to agree on the selection of the third member of the
panel, the choice will be left to the American Arbitration Association.
Each Company will submit its case in writing to the arbitration panel
within one month of the date the panel is finally established, and the parties
to the Agreement are required to make their arbitrator nominee known to the
other party within 30 days of the announced dispute.
It shall be the function of the arbitration panel to determine
settlement of the differences between the parties based on the evidence
presented, their experience and knowledge of the subject matter, and on the
basis of usual and customary practice rather than to act solely on the basis of
evidence as would be admissible in a court of law. The majority decision of the
panel will be deemed to be the decision of the panel. The Reinsurer and the
Company agree to accept the interpretation of the panel as binding upon both
parties to the Agreement.
The costs of arbitration will be shared equally by the parties to the
Agreement, unless the arbitrators decide otherwise.
The arbitration will be held at the times and places agreed upon by the
arbitrators and their decision shall be rendered within 45 days after they are
impanelled.
... END OF ARTICLE VIII
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ARTICLE IX
REINSURER'S RIGHT OF NOTICE OF UNUSUAL PRACTICES
9.1 In providing reinsurance facilities to the Company under this
Agreement, the Reinsurer has granted the Company considerable authority with
respect to binding power, reinstatements, claim settlements, and the general
administration of the reinsurance account. To facilitate transactions, the
Reinsurer has required the minimum amount of information and documentation
possible, reflecting its utmost faith and confidence in the Company. Where the
Company does engage in exceptional or uncustomary practices for the Company, the
Company agrees to advise the Reinsurer in writing, and receive a written
acceptance of, said practices from the Reinsurer before assigning any liability
to the Reinsurer with respect to any Business Reinsured affected by such
practices.
...END OF ARTICLE IX
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ARTICLE X
TREASURY REGULATION SECTION 1.848-2(G)(8) JOINT ELECTION
The Company and the Reinsurer hereby agree to the following pursuant to
Section 1.848- 2(g)(8) of the Income Tax Regulations issued December 1992, under
Section 848 of the Internal Revenue Code of 1986, as amended. This election
shall be effective for the taxable year ended December 31, 1996 and for all
subsequent taxable years for which this Agreement remains in effect unless such
election is terminated by mutual written agreement of the parties hereto with
the consent, if required, of the Commissioner of the Internal Revenue Service.
10.1. The term "party" will refer to either the Company or the
Reinsurer as appropriate.
10.2. The terms used in this Article are defined by reference to
Treasury Regulation Section 1.848-2 in effect as of December 29, 1992. The term
"net consideration: will refer to either net consideration as defined in
Treasury Regulation Section 1.848-2(f).
10.3. Both parties agree to identify this Agreement as one for which the
joint election under Treasury Regulation Section 1.848-2(g)(8) has been made in
a schedule attached to their respective federal income tax returns for the
taxable period ended December 31, 1996.
10.4. The party with the positive net consideration for this Agreement
for each taxable year will capitalize specified policy acquisition expenses with
respect to this Agreement without regard to the general deductions limitation of
Section 848(c)(1).
10.5. Both parties agree to exchange information pertaining to the
amount of net consideration under this Agreement each year to ensure consistency
or as otherwise required by the Internal Revenue Service.
10.6. The Company will submit a schedule to the Reinsurer by July 1st of
each year of its calculation of the net consideration for the preceding calendar
year. This schedule of calculations will be accompanied by a statement signed by
an officer of the Company stating that the Company will report such net
consideration in its tax return for the preceding calendar year.
10.7. The Reinsurer may contest such calculation by providing an
alternative calculation to the Company in writing within 30 days of the
Reinsurer's receipt of the Company's calculation. If the Reinsurer does not so
notify the Company, the Reinsurer will report the net consideration as
determined by the Company in the Reinsurer's tax return for the previous year.
ARTICLE X CONTINUES...
10.8. If the Reinsurer contests the Company's calculation of the net
consideration, the parties will act in good faith to reach an agreement as to
the correct amount within thirty (30) days
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of the date the Reinsurer submits its alternative calculation. If the Company
and the Reinsurer reach agreement on an amount of net consideration, each party
shall report such amount in their respective tax returns for the previous
calendar year.
...END OF ARTICLE X
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ARTICLE XI
DURATION OF AGREEMENT
This Agreement is unlimited in duration, but may be amended in writing
by the mutual consent of the Company and the Reinsurer if signed by both
parties. Existing reinsurance will remain in force until termination of the
Company's policies on which the reinsurance is based, in accordance with the
terms of this Agreement.
At the end of any accounting period, this Agreement shall automatically
terminate if none of the policies hereunder are in force. At such termination, a
final experience refund calculation shall be made; if the result is greater than
zero, the Reinsurer shall pay such amount to the Company, and if the result is
less than zero, no payment shall be made to the Reinsurer.
The termination of the Agreement or of the reinsurance in effect under
this Agreement, pursuant to any provision hereof, shall not extend to, or affect
any of the rights or obligations of the Company and the Reinsurer applicable to
the period prior to the effective date of such termination. Such right or
obligation shall include, but not be limited to, the payment of any amount owed
by reason of supplementary accounting as set forth in Article VII, Paragraph 8.
... END OF ARTICLE XI
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ARTICLE XII
INSOLVENCY
12.1 INSOLVENCY OF THE COMPANY.
a) The portion of any risk or obligation assumed by the Reinsurer,
when such portion is ascertained, shall be payable on demand of
the Company, at the same time as the Company shall pay its net
retained portion of such risk or obligation, with reasonable
provision for verification before payment, and the reinsurance
shall be payable by the Reinsurer, on the basis of the liability
of the Company under the contract, or contracts, reinsured
without diminution because of the insolvency of the Company.
b) In the event of the insolvency and the appointment of a
conservator, liquidator or statutory successor for the Company,
such portion shall be payable to such conservator, liquidator, or
statutory successor, immediately upon demand, with reasonable
provision for verification, on the basis of claims allowed
against the insolvent company by any court of competent
jurisdiction, or by any conservator, liquidator, or statutory
successor of the Company, to allow such claims without diminution
because of such insolvency or because such conservator,
liquidator, or statutory successor has failed to pay all, or a
portion, of any claims.
c) All expenses incurred by the Reinsurer under Section 12.1(b)
hereof shall be borne and paid by the Company, subject to court
approval, as part of the expense of insolvency proceedings,
whether liquidation or rehabilitation. Any claim amounts which
are reduced as a result of the Reinsurer's action under Section
12.1(a) hereof shall be shared between the Reinsurer and the
Company pro-rata.
d) Upon the Company's Insolvency, the Reinsurer, with the consent of
the Receiver of the Company, may designate a company acceptable
to the Receiver to directly assume the reinsured policies and
acquire the Company's rights under this Agreement. The reserve
transfer to such company from the Company which is party to this
Agreement shall be reduced to reflect an Initial Ceding Allowance
on the Company's share determined in a manner consistent with the
Initial Ceding Allowance originally provided under this
Agreement.
ARTICLE XII CONTINUES...
Page 24
<PAGE>
The reserve transfer shall be calculated to include any
additional or claim reserves established by the Company on all
the reinsured policies, as well as the unearned premium reserve
on the Company's retained share of the reinsured policies. The
reserve transfer and the Allowance shall be subject to mutual
agreement by the Receiver and the Reinsurer.
12.2 INSOLVENCY OF REINSURER
a) If the Reinsurer shall, during the term of this Agreement,
be unable to pay its debts as they become due, or the amount
of its liabilities shall exceed the Value of its assets, or
the Reinsurer shall otherwise be deemed insolvent, and a
liquidator, rehabilitator, receiver or other statutory
successor be appointed to the Reinsurer, the Company may
draw on the Letter of Credit provided under Article XIV for
any amount due under this Agreement plus an amount equal to
the appropriate reserves (see Article VI) on the Business
Reinsured, less any outstanding LCF as determined under
Schedule D.
...END OF ARTICLE XII
Page 25
<PAGE>
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
THE COMPANY REPRESENTS AND WARRANTS TO THE REINSURER AS FOLLOWS:
13.1 THE MACKEEN REPORT: The Company provided to Mr. Duncan MacKeen,
Consulting Actuary and principal of MacKeen & Hull, Inc. all information
requested for the purpose of preparing the Actuarial Analysis of the Company
upon which the Reinsurer relied in evaluating the block of Business Reinsured.
Such historical information represented true and correct copies of, or excerpts
from, the Company's books and records.
Since such dates, there have been no material adverse changes to the
business, financial condition and/or other circumstances of, or involving the
business to be reinsured by the Company with the Reinsurer which would make such
provided information materially inaccurate. A complete and correct copy of the
MacKeen Report information has been provided to the Reinsurer.
13.2 STATUTORY RESERVES: The Statutory Unearned Premium Reserves on the
Business Reinsured were approximately $2.1 million as of June 30, 1996, and this
amount is not anticipated to materially change as of the Effective Date or the
initial settlement date, whichever is later.
13.3 PREMIUM INFORCE: The premium inforce on the Business Reinsured was
approximately $30.7 million as of June 30, 1996, and this amount is also not
anticipated to materially change as of the Effective Date, or the initial
settlement date, whichever is later.
...END OF ARTICLE XIII
Page 26
<PAGE>
ARTICLE XIV
LETTERS OF CREDIT
14.1 To the extent that the Reinsurer is not an admitted reinsurer, and in order
for the Company to be able to take credit for statutory reserves for the portion
of policies reinsured hereunder, the Reinsurer hereby agrees to apply for and
secure delivery to the Company a clean, irrevocable, and unconditional Letter of
Credit in an amount at least equal to the Reinsurer's liability under this
Agreement.
The Letter of Credit shall be in such a form as will comply with applicable
regulations such that the Company would be able to take credit on its financial
statement filed with the appropriate State Insurance Departments for the
Business Reinsured hereunder. The terms and conditions of the Letter of Credit
shall comply with all requirements of said authorities, including but not
limited to, the following:
The Letter of Credit shall be issued for an initial period of not less
than one year and shall automatically extend for an additional period of
at least one year at each and every expiry date, unless and until, the
Company has received at least 30 days prior notice from the issuing bank
(at least 60 days prior notice from a confirming bank) by certified
mail, registered mail, or receipted hand delivery of its intention not
to extend said Letter of Credit.
The Company and the Reinsurer agree that the Letters of Credit provided by the
Reinsurer pursuant to the provisions of this Agreement, may be drawn upon at any
time, notwithstanding any other provisions in this Agreement, and shall be
utilized by the Company, or its successors, in interest only for one or more of
the following:
(i) to reimburse the Company for the Reinsurer's share of
premiums returned to the owners of policies reinsured
under this Agreement on account of cancellations of such
policies.
(ii) to reimburse the Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Company
under the terms and provisions of the policies reinsured
under this Agreement only if they have not already been
paid by the Reinsurer.
(iii) to fund an account with the Company in an amount at least
equal to the deduction, for reinsurance ceded, from the
Company's liabilities for policies ceded under this
Agreement. Such amount shall include, but not be limited
to reserves for claims and losses incurred, and unearned
premium reserves, and
ARTICLE XIV CONTINUES...
Page 27
<PAGE>
(iv) to pay any other amounts the Company claims are due under
this Agreement.
The Company agrees to return to the Reinsurer any amounts withdrawn from such
Letters of Credit which are in excess of the actual amounts required for (i),
(ii) and (iii), or in the case of (iv), above, any amounts that are subsequently
determined not to be due.
All of the foregoing shall be applied without diminution because of insolvency
on the part of the Company or the Reinsurer.
...END OF ARTICLE XIV
Page 28
<PAGE>
ARTICLE XV
EXECUTION
In witness of the above, this Agreement is signed in duplicate at the dates and
places indicated, with an effective date of JULY 1, 1996.
NATIONAL FOUNDATION LIFE INSURANCE COMPANY
FORT WORTH, TEXAS
Date:
By: /S/ PATRICK J. MITCHELL
Title: S.V.P. & TREASURER
Witness: /S/ DEBRA G. SHADE
FREEDOM LIFE INSURANCE COMPANY OF AMERICA
FORTH WORTH, TEXAS
Date:
By: /S/ PATRICK J. MITCHELL
Title: S.V.P. & TREASURER
Witness: /S/ DEBRA G. SHADE
REASSURANCE COMPANY OF HANNOVER
ORLANDO, FLORIDA
Date: SEPTEMBER 30, 1996
By: /S/ CRAIG M. BALDWIN
Title: V.P. & ACTUARY
Witness: /S/ JEAN M. FAY
.. END OF ARTICLE XV
Page 29
<PAGE>
SCHEDULE A
BUSINESS REINSURED
The Business Reinsured under this Agreement shall be 90% (the Reinsurer's Share)
of the retained portion of the benefits payable on all policies, certificates,
riders and/or supplemental benefits and inforce as of the Effective Date, and as
outlined below.
<TABLE>
<CAPTION>
COMPANY POLICY FORM TYPE DESCRIPTION
<S> <C> <C> <C>
NFL 1904 CANCER Cancer Scheduled
NFL 1910 CANCER Cancer Scheduled (Ark)
NFL 1911 CANCER Cancer Indemnity
NFL 1916 CANCER Cancer Schedule - Under Age 65 (Arkansas)
NFL 2000 CABH CANCER Beverly Hills Cancer and Other Dread Disease
NFL CASH CANCER Cancer, Accident, Stroke and Heart Attack
NFL CC-90 CANCER Cancer, Acc., Stroke and Heart Attack -Elkins
NFL CC-90CV CANCER Cancer, Accident, Stroke and Heart Attack
NFL CSD-89 CANCER Cancer & Specified Disease Policy
NFL CSD-92 CANCER Cancer & Specified Disease Policy
NFL ED3000 CANCER Elkins Delux Cancer
NFL ED4000-588 CANCER Cancer & Specified Disease Policy
NFL FDD-687 CANCER Cancer & Specified Disease Policy
NFL LSMCS-93 CANCER Cancer & Specified Disease Policy
NFL 1902 CANCER Cancer Scheduled
NFL 1914-65 CANCER Cancer Scheduled 65 and Older
NFL EHI-88 CANCER $100 Per Day Hospital Indemnity
NFL EHIR-88 CANCER $100 Per Day Hospital Indemnity
NFL FHCB-87 CANCER Hospital Confinement Rider
NFL L-SAR 1/87 CANCER Stroke/Accident Rider; $100 Per Day
NFL PE CAN END CANCER Cancer Scheduled Endorsement
NFL RFICU-87 CANCER ICU Rider
NFL RFLT-87 CANCER First Occurrence Rider
NFL RFO-89 CANCER First Occurrence Rider
NFL RFO-92 CANCER First Occurrence Rider
NFL RFRP-87 CANCER Return Of Premium Rider
NFL RFRP-89 CANCER Return Of Premium Rider
NFL RHCB-89 CANCER Hospital Confinement Rider
NFL RHS-93 CANCER Heart Attack And Stroke Rider
NFL RICU-89 CANCER ICU Rider
NFL RICU-92 CANCER ICU Rider
NFL RSA-88 CANCER Heart Attack and Stroke Rider
NFL RSHA-88 CANCER Heart Attack and Stroke Rider
NFL RSHA-92 CANCER Heart Attack and Stroke Rider
</TABLE>
SCHEDULE A CONTINUES...
Page 30
<PAGE>
<TABLE>
<CAPTION>
COMPANY POLICY FORM TYPE DESCRIPTION
<S> <C> <C> <C>
NFL SHA-87 CA CANCER Heart Attack and Stroke Policy/Rider
NFL SHA-89 CANCER Heart Attack and Stroke Policy/Rider
NFL ROPCAN CANCER Return Of Premium Rider For Cash Policy
NFL NFL-1002-SC CANCER Hospital Intensive Care
NFL NFL-1003-SC CANCER Cancer & Specified Disease Policy
NFL NFL-1004-SC CANCER Cancer Treatment Policy
NFL NFL-DDCR-4 CANCER Dread Disease Benefit Rider
NFL NFL-FOR-1 CANCER First Occurrence Of Cancer Rider
NFL NFL-RP-1 CANCER Return Of Premium Rider
NFL 1909 HEART Heart Attack Indemnity
NFL 1913 HEART Heart Attack Scheduled
NFL 1915 HEART Heart Attack Scheduled
NFL PE HA END HEART Heart Attack Indemnity Johnny Bench
NFL HA 1917 HEART Heart Attack Scheduled Endorsement
NFL 1912 ICU ICU Indemnity
NFL 1918 ARK ICU Arkansas Only ICU Policy
NFL 1918 11/85 ICU ICU Policy - Other States Than Arkansas
DIXIE CP-1-DDCR-4 CANCER Dread Disease Benefit Rider
DIXIE CP-1FOR-1 CANCER First Occurrence Of Cancer Rider
DIXIE CP-1001-SC CANCER Cancer Treatment Policy
DIXIE CP-1001A-SC CANCER Cancer Treatment Policy
DIXIE CP-1003-SC CANCER Cancer & Specified Disease Policy
DIXIE CP-1004-SC CANCER Cancer Treatment Policy
DIXIE CP-1005-SC CANCER Cancer Benefit Policy
DIXIE IC-1001-SC ICU Hospital Intensive Care Unit
DIXIE IC-1002-SC ICU Hospital Intensive Care Unit
DIXIE ABP500-SC CANCER Accidental Death Benefit
DIXIE RP-AH-1 CANCER Return Of Premium Rider
PARAMONT CC-90ACQ CANCER Cancer, Accident, Stroke and Heart Attack
FLIC ADB FLIC 50% Accidental Death Benefit
FLIC CASH FLIC 50% Cancer, Acc., Stroke and Heart Attack
FLIC CASH 86 FLIC Cancer, Acc., Stroke and Heart Attack Non-Reins.
FLIC CSH 12P FLIC 50% Cancer, Stroke and Heart Attack - 12 Pay
FLIC CSH LIFE FLIC 50% Cancer, Stroke and Heart Attack
FLIC FDIA FLIC 50% First Diagnosis Benefit Rider
FLIC FDPL FLIC 50% First Diagnosis Policy
FLIC HIP FLIC 50% Hospital Indemnity Policy
FLIC HIP 12P APP1/93 FLIC 50% Hospital Indemnity Policy -12 Pay
FLIC FD ROP-95 FLIC 90% Return Of Premium Rider For FD-95
FLIC FD-95 FLIC 90% Cancer First Diagnosis Policy
FLIC GC1 FLIC 50% Cancer First Diagnosis Policy
FLIC PLAN #C100 FLIC 90% Cancer First Diagnosis Policy
</TABLE>
SCHEDULE A CONTINUES...
Page 31
<PAGE>
<TABLE>
<CAPTION>
COMPANY POLICY FORM TYPE DESCRIPTION
<S> <C> <C> <C>
FLIC PLAN #C200 FLIC 90% Cancer First Diagnosis Policy
FLIC PLAN #C500 FLIC 90% Cancer First Diagnosis Policy
FLIC RTC-95 FLIC 90% Radiation & Chemo Rider For FD-95 Policy
FLIC HRT-4/94 FLIC 50% First Diagnosis Heart
FLIC SRV-95 FLIC Cancer Survivor Policy
</TABLE>
...END OF SCHEDULE A
Page 32
<PAGE>
SCHEDULE B
REINSURANCE FORMS
SCHEDULE B/PART A
POLICY EXHIBIT
Reinsured under coinsurance with the Reinsurer
Number of
POLICIES
Beginning of Period
Less Lapses During the Period =
In Force at the End of Period
SCHEDULE B CONTINUES...
Page 33
<PAGE>
SCHEDULE B/PART B
SUMMARY OF MONETARY TRANSACTIONS
INITIAL ACCOUNTING PERIOD
1. DUE REINSURER
Unearned Premium Reserves
2. DUE THE COMPANY
Initial Ceding Allowance
Due REINSURER/COMPANY = 1 less 2
SUBSEQUENT ACCOUNTING PERIODS
3. DUE REINSURER
Premiums Incurred During The Period(= paid + chg in due & adv.)
Additional Consideration Equal To Increase In Active Life
Reserve Less Experience Refund
4. DUE REINSURED
Benefits Incurred During The Period (= paid + chg in accr.
claims)
Commission Allowances
Overhead Expense Allowances
Premium Taxes
Trust Maintenance Expenses
Funds Withheld Adjustment, defined as (i) - (ii), where:
(i) =Funds Withheld at the end of the period
(ii) =Funds Withheld at the beginning of the period
DUE REINSURER - total of 3. less total of 4.
...END OF SCHEDULE B
Page 34
<PAGE>
SCHEDULE C
EXPERIENCE REFUND CALCULATION
At the end of each quarter, an experience refund will be calculated on the
Business Reinsured. If positive, this experience refund will be payable to the
Company by the Reinsurer. Should the Company elect to exercise its recapture
option, the Company shall be liable for repayment of the then outstanding LBF as
defined below, in addition to an amount sufficient to assure the Reinsurer of a
15% return per annum on its investment from the Effective Date, with such
calculation to include $75,000 of acquisition expenses. The calculation will
also include a provision for target surplus in the amount of 200% of the
statutorily recognized Authorized Control Level RBC. The RBC shall be deemed to
be equal to 8% of the higher of a) the prior year's premium collected, or b) the
premium inforce at the end of the year, or the date of termination, whichever is
applicable.
Define the following for the Business Reinsured:
P = Premiums collected, plus the change in due and advance premiums,
during the quarter, and experience refunds under other reinsurance
treaties, net of any reinsurance premiums for the Reinsurer's Share of
the Business Reinsured
I = Net Investment income, to be based on the Reinsurer's quarterly net
portfolio rate, shall include any realized capital gains or losses,
increased or decreased by any decrease or increase to an allocated
share of the Interest Maintenance Reserve (IMR) arising from the
realized gains or losses reflected in the accounting for the rate
applied in this Agreement to the beginning unearned premium and claim
reserves held for the Business Reinsured.
R = Statutory Unearned Premium Reserve and Claim Reserve increases for
the quarter
B = Policyholder Benefits paid during the quarter, net of any
reinsurance benefits recovered under other reinsurance treaties for
the subject block of business
C = Commission allowances incurred during the quarter
A = Overhead Expense Allowances incurred during the quarter
T = Premium Taxes
M = Trust Maintenance Expenses
LBF = Loss Brought Forward from prior quarter end
(Note: The initial value for LBF will be the Initial Ceding Allowance as set
forth in Schedule D increased by $75,000.)
SCHEDULE C CONTINUES...
Page 35
<PAGE>
Then:
N = Net gain during the quarter = P + I - R - B - C - A - T - M
ER = Experience Refund for the quarter, defined as: = 50%[N - {1.125.25 x
LBF}] , but not less than zero, and...
LCF = Loss Carried Forward from current quarter end (= LBF for next
quarter), defined as: = {1.125.25 x LBF} - N, but not less than zero.
...END OF SCHEDULE C
Page 36
<PAGE>
SCHEDULE D
EXPENSE ALLOWANCES
THE INITIAL CEDING ALLOWANCE shall be $10,500,000.
THE COMMISSION ALLOWANCES shall be the contractual commissions actually
paid on the policies reinsured consistent with the commission scales described
for the business contained in the MacKeen Report.
THE EXPENSE ALLOWANCES: In conjunction with the quarterly accounting, a
proportionate share of the following allowances will be credited to the Company
at the start of each quarter in the premium/claim calculation based on the
number of policies and/or certificates inforce and/or applicable premium at the
start of the quarter.
Expense Allowances are as follows:
Overhead Expense Allowance Collected Premium 15%
Premium Taxes Collected Premium 3%
Trust Maintenance Expenses As Incurred
The Commission Allowances, Overhead Expense Allowances, Trust
Maintenance Expenses, and Premium Taxes shall be adjusted pro-rata to reflect
the Reinsurer's proportionate share of the Business Reinsured. In addition,
should the LBF as defined in Schedule C at the end of 30 treaty months be
greater than 110% of that projected (see attached Appendix I), or not be zero at
the end of 60 treaty months, the above Maintenance Expense percentage will be
reduced annually by 2% as of the next quarterly reporting period for each
calendar year following. Such reduction shall not reduce the Maintenance Expense
allowance below 8%.
When the LBF is equal to zero, the full Maintenance Expense allowance
will be payable, unless the Experience Refund calculation again results in an
LBF. Should such an event occur the Maintenance Expense allowance will revert to
the previously reduced amount level as of the next quarterly reporting period,
and remain so until the LBF is again equal to zero.
In the event that the reduction provisions of Paragraph 6.2, 6) become
effective, the Maintenance Expense allowance shall be cumulatively reduced 2%
per annum as of the next quarterly reporting period, but not below 8%, until the
requirements of paragraph 6.2, 6) are met, after which the full Maintenance
Expense allowance shall be restored, subject to the provisions of the above
paragraphs.
...END OF SCHEDULE D
Page 37
<PAGE>
EXHIBIT I
---------------------------------------
SECURITY AGREEMENT AND
ASSET TRUST AGREEMENT
--------------------------------------
BETWEEN
NATIONAL FOUNDATION LIFE INSURANCE COMPANY
&
FREEDOM LIFE INSURANCE COMPANY OF AMERICA
OF
FORT WORTH, TEXAS
AND
REASSURANCE COMPANY OF HANNOVER
OF
ORLANDO, FLORIDA
AND
FLEET NATIONAL BANK
AS TRUSTEE
Page 38
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
RECITALS 40
Section 1 Deposit of Assets to the Trust Account 41
Section 2 Withdrawal of Assets from the Trust Account 41
Section 3 Redemption, Investment and Substitution of Assets 42
Section 4 The Income Account 43
Section 5 Right to Vote Assets 44
Section 6 Additional Rights and Duties of the Trustees 44
Section 7 The Trustee's Compensation, Expenses and Indemnification 45
Section 8 Resignation of the Trustee 46
Section 9 Termination of the Trust Account 46
Section 10 Definitions 47
Section 11 Notices 47
Section 12 General Provisions 48
Section 13 Execution 50
EXHIBIT A Fee Schedule 51
EXHIBIT B NFL and FLICA Trust Account Assets 52
</TABLE>
Page 39
<PAGE>
SECURITY AGREEMENT AND
ASSET TRUST AGREEMENT
SECURITY AGREEMENT AND ASSET TRUST AGREEMENT, dated as of September 30,
1996 (the "Agreement"), among National Foundation Life Insurance Company, an
insurance company organized and existing under the laws of the state of
Delaware, and Freedom Life Insurance Company of America, an insurance company
organized and existing under the laws of the state of Mississippi, (collectively
referred to herein as the "Company"), and Reassurance Company of Hannover, an
insurance company organized and existing under the laws of Florida (the
"Reinsurer"), and Fleet National Bank, a banking corporation and a member of the
Federal Reserve System (the "Trustee"). (The Company, the Reinsurer and the
Trustee are hereinafter each sometimes referred to individually as a "Party" and
collectively as the "Parties").
WITNESSETH:
WHEREAS, the Company and the Reinsurer have entered into a reinsurance
agreement ("Reinsurance Agreement"), effective July 1, 1996, which requires the
establishment of a trust account; and
WHEREAS, the Trustee is a member of the Federal Reserve System which is
not the Parent, a Subsidiary or an Affiliate of the Company or the Reinsurer and
which has been granted authority to operate with fiduciary powers; and
WHEREAS, the Company desires to segregate certain of its assets in a
trust account by transferring to the Trustee for deposit to two separate trust
accounts (collectively referred to herein as the "Trust Accounts". One account
will contain the assets of National Foundation Life Insurance, the "NFL Trust
Accounts", the second being for the assets of Freedom Life Insurance Company of
America, the "FLICA Trust Account"), and
WHEREAS, the Trustee has agreed to act as Trustee hereunder, and to hold
such assets in trust in the Trust Account for the benefit of the Company as
owner of the reversionary interest in the Assets and to create and grant a
security interest in those Assets in favor of the Reinsurer in order to secure
the Company's obligations to the Reinsurer under the Reinsurance Agreement; and
WHEREAS, this Agreement is made for the purpose of setting forth the
duties and powers of the Trustee with respect to the Trust Account.
NOW, THEREFORE, for and in consideration of the premises and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the Parties hereby agree as follows:
Page 40
<PAGE>
SECTION 1: DEPOSIT OF ASSETS TO THE TRUST ACCOUNT
1.1 The Company shall establish a trust account designated as the NFL Trust
Account and a trust account designated as the FLICA Trust Account. The assets in
each of the NFL Trust Account and the FLICA Trust Account, and any investment
held as part of each Trust Account, shall be held and administered as a trust by
the Trustee solely for the benefit of the Company and as security for the
Reinsurer under the Reinsurance Agreement. The Trust Account shall be subject to
withdrawal solely as provided herein.
1.2 Within 30 days of the execution of this Agreement, the Company shall
transfer to the Trustee for deposit into each of the NFL Trust Account and the
FLICA Trust Account, the assets as required in the Reinsurance Agreement, and
may transfer to the Trustee, for deposit to the Trust Accounts, such other
assets as it may from time to time desire (each of such assets actually received
into each of the trust accounts is herein referred to individually as an "Asset"
and all of such Assets collectively are referred to as the "Assets"). The Assets
shall consist only of Eligible Investments as defined in Exhibit II of the
Reinsurance Agreement. The Trustee shall have no responsibility for determining
whether any Asset is an Eligible Investment. (Attached as Exhibit B is a list of
the assets to be transferred into the NFL and FLICA Trust Accounts.)
1.3 This Agreement is a security agreement under the Uniform Commercial Code
("UCC") as enacted and in effect in the State of Florida, and this Agreement
shall be governed by and construed in accordance with the laws of the State of
Florida to the extent it relates to the UCC. The Company hereby grants a
security interest in the Assets, and any proceeds thereof, to the Reinsurer, as
security for the Company's obligations under the Reinsurance Agreement. The
Assets in which the security interest in favor of the Reinsurer is granted shall
be held by the Trustee, as bailee and custodian for the Reinsurer, as secured
party, and for the benefit of the Company as owner of the Assets. UCC-1
financing statements shall be executed by the Company and any other necessary
party or parties and shall be filed by the Reinsurer in the manner specified by
law or as the Reinsurer may reasonably request. To the extent permitted by law,
the Company authorizes the Reinsurer to file one or more financing statements
with respect to the Assets signed only by the Reinsurer or the Trustee, as the
case may be, and to file a carbon, photograph or other reproduction of this
Agreement or of any financing statement. The Company and the Trustee shall
comply with directions from the Reinsurer which the Reinsurer certifies comply
with UCC requirements to create, preserve, perfect and validate the Reinsurer's
security interest hereunder and the first lien priority thereof and to enable
the Reinsurer to exercise and enforce its rights, remedies, privileges and
powers hereunder and under the UCC as enacted and in effect in the state of
Florida; and non-compliance with applicable UCC requirements shall not limit or
impair such rights, remedies, privileges and powers of the Reinsurer.
SECTION 2: WITHDRAWAL OF ASSETS FROM THE TRUST ACCOUNT
2.1 The Company shall have the right, at any time and from time to time, to
withdraw from the Trust Accounts, upon written notice to the Trustee, any Assets
in excess of the Assets required to be held in each of the NFL Trust Account and
the FLICA Trust Account by the Reinsurance Agreement. Such notice shall identify
the Assets to be delivered from each of the NFL Trust Account and the FLICA
Trust Account. The Company may receive the excess Assets itself, or may
designate a third party (the "Designee") to whom such excess Assets shall be
delivered. The
Page 41
<PAGE>
Company need present no statement or document in addition to a prior written
notice ordering a withdrawal of such excess Assets, which written notice shall
designate the specific Assets which are to be withdrawn and the Trustee is
entitled to treat any such designated Assets as excess Assets which may be
withdrawn; said right of withdrawal or any other provision of this Agreement is
not subject to any conditions or qualifications not contained in this Agreement.
Upon receipt of such notice the Trustee shall without further inquiry, and
pursuant to the written direction of the Company deliver physical custody of
such Assets as are designated in the notice to or for the account of the
Company, or such Designee as specified; provided, however, if the Reinsurer has
given written notice to the Trustee that the Company has not paid any amount due
and owing by the Company to the Reinsurer under the terms of the Reinsurance
Agreement, and such claim(s) remain(s) unresolved, the Trustee shall not deliver
assets except to the extent that the asset's value exceeds such claim.
2.2 If the Company has failed to pay any amount due and owing by the Company to
the Reinsurer under the terms of the Reinsurance Agreement, the Reinsurer will
present evidence of this to the Trustee in writing and either, (a) require the
Trustee to sell any or all of the Assets in either the NFL Trust Account or the
FLICA Trust Account, as so identified in the Reinsurer's notice, and pay all net
proceeds of such sale to the Reinsurer up to an amount ([the Amount Owed]),
designated by the Reinsurer to be equal to the amount owed by the Company; (b)
require the Trustee to transfer any or all of the Assets identified by the
Reinsurer to the Reinsurer (to be held by the Reinsurer subject to its security
interest granted hereunder) up to an amount such that the fair market value of
the transferred assets at the close of business on the second Business Day
preceding the transfer shall equal the Amount Owed, or; (c) require the Trustee
to perform a combination of the preceding. The Trustee need not require any
additional evidence of the Amount Owed and without making additional inquiry
shall comply with the requirements set forth in said notices whether or not a
default has actually occurred. The Trustee shall be held harmless in complying
with the directions of the Reinsurer under the order to pay the Reinsurer the
proceeds necessary to settle the Amount Owed, and is under no obligation to
determine the validity of the evidence provided. The Trustee shall furnish the
Company and the Reinsurer with an accounting of the disposition of all proceeds
of sale, including the identity and amount of all expenses and fees, the
identity of each recipient of sale proceeds and the respective amounts paid; and
the amount of proceeds payable to the Reinsurer after deduction of fees and
expenses. In addition to the rights and remedies specifically delineated in this
Section, the Reinsurer shall have all of the rights and remedies granted to a
secured party under the UCC as enacted and in effect in the State of Florida.
2.3 Other than as provided in Section 2 and Section 3 of this Agreement, the
Trustee shall allow no substitution or withdrawal of any Asset from either the
NFL Trust Account or the FLICA Trust Account. The fair market value of the
assets will be determined by Conseco Capital Management ("CCM").
SECTION 3: REDEMPTION, INVESTMENT AND
SUBSTITUTION OF ASSETS
3.1 The Trustee shall surrender for payment all maturing Assets and all Assets
called for redemption and deposit the proceeds of any such payment to the trust
account to which the Asset is credited.
Page 42
<PAGE>
3.2 From time to time, at the written order and direction of the Company, the
Trustee shall invest, purchase, sell or exchange Assets in the Trust Account in
Eligible Securities as directed in writing by the Company. If any funds are
uninvested and no instructions concerning their investment have been received,
the Trustee shall invest the same in an interest bearing money market account
with the Trustee's banking division. The Trustee shall be entitled to rely on
the written investment instructions from the Company and the Trustee shall have
no duty to monitor the Company's compliance with investment policy set forth in
Exhibit II attached hereto, including, but not limited to, determining whether
the investment is an Eligible Investment. Furthermore, the Trustee shall have no
responsibility for the Company's failure to comply with the attached Investment
Guidelines.
3.3 From time to time, at the written order of the Company, the Trustee may
accept substitutions of Eligible Investments (as defined in Exhibit II of the
Reinsurance Agreement) for other Eligible Investments held in the Trust
Accounts.
3.4 Any instruction or order concerning such investments or substitutions of
securities shall be referred to herein as an "Investment Order". The Trustee
shall execute Investment Orders and settle securities transactions by the agent
or broker designated by the Company.
3.5 The Trustee shall have no duty to make investment recommendations concerning
the Assets or to determine whether they are "Eligible Investments", and shall
have the absolute right to regard as "Eligible Investments" any Assets which are
designated in an Investment Order for purchase or receipt by the Trustee for so
long as the Trustee continues to hold the same hereunder, whether or not they
are in fact "Eligible Investments".
3.6 The Trustee shall have no duty to give notice or take other action if the
value of the Assets falls below the value required by the Reinsurance Agreement
or by any other agreement between the Company and the Reinsurer.
3.7 The Company and the Reinsurer acknowledge that the Trustee shall not be
responsible for any losses in value from investments made pursuant to the
written direction of the Company.
SECTION 4: THE INCOME ACCOUNT
4.1 All payments of interest and dividends actually received in respect of
Assets in the Trust Account shall be deposited by the Trustee in the separate
accounts established and maintained by the Company (the "Income Account"). The
timing and amounts of these deposits by the Trustee will be at the written
direction of the Company. The Company shall have the right to withdraw funds
from the Income Account at any time. Amounts withdrawn from the NFL Trust
Account will be deposited into the NFL Income Account. Amounts withdrawn from
the FLICA Trust Account will be deposited into the FLICA Income Account.
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SECTION 5: RIGHT TO VOTE ASSETS
5.1 The Trustee shall forward all annual and interim stockholder reports and all
proxies and proxy materials relating to the Assets in the Trust Account to the
Company. The Company shall have the full and unqualified right to vote any
Assets in the Trust Account.
SECTION 6: ADDITIONAL RIGHTS AND DUTIES OF THE TRUSTEE
6.1 The Trustee shall notify the Company and the Reinsurer in writing of each
deposit to, or withdrawal from, the Trust Account via monthly transaction
statements.
6.2 Before accepting any Asset for deposit to the Trust Account, the Trustee
shall determine that such Asset (i) has been transferred to the Trustee or its
designated custodian with any necessary endorsement in favor of the Trustee as
Trustee in the case of instruments and other physical certificates, or has been
issued or registered in the name of the Trustee or its designated custodian in
the case of any other type of Asset; (ii) such Asset has been identified on the
pertinent books and records of the Trustee as being held as bailee and custodian
for the Reinsurer as secured party, and as Trustee for the benefit of the
Company as the owner of the reversionary interest in the Assets; and (iii) such
Asset has been deposited with, transferred to, or issued or registered in the
name of the Trustee, or its designated custodian, recognizing the security
interest in favor of the Reinsurer hereunder and the interest of the Company as
the owner of the reversionary interest in the Assets in the event that this
Agreement is terminated pursuant to Section 9 hereof.
6.3 The Trustee shall receive all Assets and cause them to be held in a safe
place in the United States.
6.4 The Trustee shall accept, open and immediately forward to the Company all
mail directed to the Company in care of the Trustee.
6.5 The Trustee shall furnish to the Company and the Reinsurer a statement of
all Assets in the NFL Trust Account and the FLICA Trust Account upon the
inception of such trust accounts, and a monthly statement will provided
thereafter. The monthly statement shall include a transaction statement listing
each deposit to, or withdrawal from, either or both of the NFL Trust Account and
the FLICA Trust Account.
6.6 Upon the request of the Company or the Reinsurer, the Trustee shall promptly
permit the parties, their respective agents, employees, independent auditors and
insurance department examiners to examine, audit, excerpt, transcribe and copy,
during the Trustee's normal business hours, any books, documents, papers and
records relating to the NFL Trust Account and the FLICA Trust Account, or the
Assets.
6.7 The Trustee is authorized to follow and rely upon all instructions given by
officers named in incumbency certificates furnished to the Trustee from time to
time by the Company and the Reinsurer, and by attorneys-in-fact acting under
written authority furnished to the Trustee by the Company, including, without
limitation, instructions given by letter, facsimile transmission, telegram,
teletype, cablegram or electronic media, if the Trustee believes such
instructions, and any
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related incumbency certificate or written authorization to be genuine and to
have been signed, sent or presented by the proper party or parties. The Trustee
shall not incur any liability to anyone resulting from actions taken by the
Trustee in reliance in good faith on such instructions. The Trustee shall not
incur any liability in executing instructions (i) from an attorney-in-fact prior
to receipt by it of notice of the revocation of the written authority of the
attorney-in-fact or (ii) from any officer of the Company named in an incumbency
certificate delivered hereunder prior to receipt by it of a more current
certificate.
6.8 The duties and obligations of the Trustee shall only be such as are
specifically set forth in this Agreement, as it may from time to time be
amended, and no implied duties or obligations shall be read into this Agreement
against the Trustee. The Trustee shall only be liable for its own gross
negligence, willful misconduct or lack of good faith.
6.9 The Trustee is not a party to the Reinsurance Agreement or any other
agreement between the Company and the Reinsurer and shall not be deemed to be
responsible for the Company, the Reinsurer or the Trustee complying with any
provisions of any such Agreement, of any provisions of the Florida Insurance
Code, or of other provisions of Florida law pertaining to any such Agreements.
Any references herein to any such Agreement(s) between the Company and the
Reinsurer, or to such law, shall not be deemed to impose any additional
responsibilities or obligations on the Trustee.
6.10 The Trustee may confer with counsel of its own choice in relation to
matters arising under this Agreement and shall have full and complete
authorization from the other Parties hereunder for any action taken or suffered
by it under this Agreement or under any transaction contemplated hereby in good
faith and in accordance with the opinion of such counsel, and the reasonable
fees of such counsel shall be an expense payable under Section 7.2 hereof.
SECTION 7: THE TRUSTEE'S COMPENSATION, EXPENSES
AND INDEMNIFICATION
7.1 The Company shall pay the Trustee, as compensation for its services under
this Agreement, a fee as set forth in Exhibit A and as such Exhibit may from
time to time be amended.
7.2 The Company shall pay or reimburse the Trustee for all of the Trustee's
expenses and disbursements in connection with its duties under this Agreement
(including reasonable attorney's fees and expenses), except any such expense or
disbursement as may arise from the Trustee's gross negligence, willful
misconduct or lack of good faith.
7.3 The Company also hereby indemnifies the Trustee for, and holds it harmless
against, any loss, liability, costs or expenses (including attorney's fees and
expenses) incurred or made without gross negligence, willful misconduct or lack
of good faith on the part of the Trustee, arising out of, or in connection with,
the performance of its obligations in accordance with the provisions of this
Agreement, including any loss, liability, costs or expenses arising out of, or
in connection with, the status of the Trustee and its nominee as the holder of
record of the Assets. The Company hereby acknowledges that the foregoing
indemnities shall survive the resignation of the Trustee or the termination of
this Agreement.
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7.4 The Company and the Reinsurer agree that the Trustee may charge the Assets
for any expenses not reimbursed promptly by the Company, or any indemnification
not paid, as provided in this Section 7, and the Trustee shall have a lien on
the Assets securing payment thereof.
SECTION 8: RESIGNATION OF THE TRUSTEE
8.1 The Trustee may resign at any time by giving not less than 90 days' prior
written notice thereof to the Company and the Reinsurer, such resignation to
become effective on the acceptance of appointment by a successor trustee and the
transfer to such successor trustee of all Assets in the Trust Account in
accordance with paragraph 8.2. If no successor Trustee shall have accepted such
appointment within 90 days from the time notice is given, the Trustee may at any
time thereafter either liquidate the Assets and pay the cash into court, paying
all expenses thereof from the Assets, or petition a court of competent
jurisdiction for the appointment of a successor trustee.
8.2 Upon receipt of the Trustee's notice of resignation, the Company shall
appoint a successor trustee. Any successor trustee shall be a bank that is a
member of the Federal Reserve System and shall not be a Parent, a Subsidiary or
an Affiliate of the Company or the Reinsurer. Upon the acceptance of the
appointment as trustee hereunder by a successor trustee and the transfer to such
successor trustee of all Assets in the Trust Account, the resignation of the
Trustee shall become effective. Thereupon, such successor trustee shall succeed
to and become vested with all the rights, powers, privileges and duties of the
previous Trustee, and the previous Trustee shall be discharged from any future
duties and obligations under this Agreement.
SECTION 9: TERMINATION OF THE TRUST ACCOUNT
9.1 The Trust Account and this Agreement may be terminated after (a) the Company
and the Reinsurer have given the Trustee written notice of their intention to
terminate the Trust Account (the "Notice of Intention"), and (b) the Trustee has
given the Company and the Reinsurer the written notice specified in paragraph
9.2. The Notice of Intention shall specify the date on which the notifying Party
intends the Trust Account to terminate (the "Proposed Date").
9.2 Within 10 Business Days following receipt by the Trustee of the Notice of
Intention, the Trustee shall give written notification (the "Termination
Notice") to the Company and the Reinsurer of the date (the "Termination Date")
on which the Trust Account shall terminate. The Termination Date shall be (a)
the Proposed Date (or if not a Business Day, the next Business Day thereafter),
if the Proposed Date is at least 30 days, but no more than 45 days, subsequent
to the date the Termination Notice is given: (b) 30 days subsequent to the date
the Termination Notice is given (or if not a Business Day, the next Business Day
thereafter), if the Proposed Date is fewer than 30 days subsequent to the date
the Termination Notice is given; or (c) 45 days subsequent to the date the
Termination Notice is given (or if not a Business Day, the next Business Day
thereafter), if the Proposed Date is more than 45 days subsequent to the date
the Termination Notice is given.
9.3 This Agreement automatically terminates upon the termination of the
Reinsurance Agreement.
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9.4 On the Termination Date, the Trustee shall transfer to the Company any
Assets remaining in the Trust Accounts, at which time all liability of the
Trustee with respect to such Assets shall cease.
SECTION 10: DEFINITIONS
Except as the context shall otherwise require, the following terms shall have
the following meanings for all purposes of this Agreement (the definitions to be
applicable to both the singular and the plural forms of each term defined if
both such forms of such terms are used in this Agreement):
10.1 The term "Affiliate" with respect to any corporation shall mean a
corporation which directly or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, such corporation.
The term "control" (including the related terms "controlled by" and "under
common control with") shall mean the ownership, directly or indirectly, of more
than fifty percent (50%) of the voting stock of a corporation.
10.2 The term "Business Day" shall mean any day on which the offices of the
Trustee are open for business.
10.3 The term "person" shall mean and include an individual, a corporation, a
partnership, an association, a trust, an unincorporated organization or a
government or political subdivision thereof.
10.4 The term "Parent" shall mean any institution that, directly or indirectly,
controls another institution.
10.5 The term "Subsidiary" shall mean an institution controlled, directly or
indirectly, by another institution.
SECTION 11: NOTICES
11.1 Unless otherwise provided in this Agreement, all notices, directions,
requests, demands, acknowledgments and other communications required or
permitted to be given or made under the terms hereof shall be in writing and
shall be deemed to have been duly given or made (a) (i) when delivered
personally, (ii) when made or given by prepaid telex, telegraph or telecopier,
or (iii) in the case of mail delivery, upon the expiration of three (3) days
after any such notice, direction, request, demand, acknowledgment or any other
communication shall have been deposited in the United States mail for
transmission by first class mail, postage prepaid, or upon receipt thereof,
whichever shall first occur, (provided, however, that no notice to the Trustee
shall be effective until it is actually received by the officer named below as
the person attending to its duties) and (b) when addressed as follows:
If to the Company:
Mr. Patrick Mitchell
National Foundation Life Insurance Company &
Freedom Life Insurance Company of America
777 Main Street
Fort Worth, Texas 76109
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If to the Reinsurer:
Mr. Dennis D. Braziel
Reassurance Company of Hannover
800 North Magnolia Avenue
Suite 1000
Orlando, FL 32803
If to the Trustee:
Fleet National Bank
Attn: Corporate Trust Department
One Federal Street
MAOF-3101
Boston, Massachusetts 02110-2010
Fax #: (617) 346-5501
Each Party may from time to time designate a different address for
notices, directions, requests, demands, acknowledgments and other communications
by giving written notice of such change to the other Parties. All notices,
directions, requests, demands, acknowledgments and other communications relating
to the termination of the Trust Account shall be in writing and may not be made
or given by prepaid telex, telegraph or telecopier.
SECTION 12: GENERAL PROVISIONS
12.1 Governing Law. Except as provided for in Section 1.3, this Agreement
shall be subject to and governed by the laws of the State of New York.
12.2 Successors and Assigns. No Party may assign this Agreement or any of its
rights or obligations hereunder, whether by merger, consolidation, sale of all
or substantially all of its assets, liquidation, dissolution or otherwise,
except as expressly permitted by Section 8 of this Agreement.
12.3 Severability. In the event that any provision of this Agreement shall be
declared invalid or unenforceable by any regulatory body or court having
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remaining portions of this Agreement.
12.4 Entire Agreement. This Agreement constitutes the entire Trust agreement
among the Parties, and there are no understandings or agreements, conditions or
qualifications relative to this Agreement which are not fully expressed in this
Agreement.
12.5 Amendments. This Agreement may be modified or otherwise amended, and the
observance of any term of this Agreement may be waived, if such modification,
amendment or waiver is in writing and signed by all of the Parties.
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12.6 Headings. The headings of the Sections and the Table of Contents have been
inserted for convenience of reference only, and shall not be deemed to
constitute a part of this Agreement.
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SECTION 13: EXECUTION
13.1 Counterparts. This Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall constitute an original, but
such counterparts together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
the date first above written.
NATIONAL FOUNDATION LIFE INSURANCE COMPANY
FEDERAL TAX ID #: 73-1187572
By: /S/ PATRICK J. MITCHELL
Name
S.V.P. & TREASURER
Title
FREEDOM LIFE INSURANCE COMPANY OF AMERICA
FEDERAL TAX ID #: 61-1080236
By: /S/ PATRICK J. MITCHELL
Name
S.V.P. & TREASURER
Title
REASSURANCE COMPANY OF HANNOVER
FEDERAL TAX ID #: 59-285-9797
By: /S/ DENNIS D. BRAZIEL
Name
SENIOR VICE PRESIDENT & TREASURER
Title
FLEET NATIONAL BANK
As Trustee
By: /S/ CHI MA
Name
ASSISTANT VICE PRESIDENT
Title
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EXHIBIT A
FEE SCHEDULE
Acceptance Fee: $2,500
Annual Administration Fee:
Freedom (FLICA Trust Account) $3,000
National (NFL Trust Account) $5,500
Investment Fees:
Sweep Fees 40 Basis Points
Direct Investments (Purchases/Sale) $25 per investment
Substitutions $25 per security
Wire Fees: $15 per wire
Distribution Fee: $50 per distribution
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EXHIBIT II
INVESTMENT POLICY
I. GENERAL
These investment guidelines are developed under the premise that the
Reinsurer and the Company 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.
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. The maturity of the investments should be matched with the
expected future liquidity needs in order to avoid realized
capital losses.
3. A high return on investment on an after tax basis.
4. The portfolio has to be well diversified by category as well as
by issuer.
III. INVESTMENT RESTRICTIONS
1. All executed investment transactions have to comply with the
regulatory restrictions imposed by the Florida Insurance Laws and
any other applicable regulatory requirements. The attached
exhibit of eligible investments specified by the Florida Statutes
form an integral part of these guidelines.
2. All investment transactions must be reviewed, approved and
ratified by the Company on a quarterly basis.
3. Investments in real estate, acquisition of stocks representing an
equity interest of 5% or more, and capital contributions to
subsidiaries require the prior approval of the Reinsurer.
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4. Investments will be denominated in US-$ only. Investments in
foreign currencies or in debt instruments located outside the
United States require the prior written approval of the
Reinsurer.
5. Investments must be listed with the SVO of the NAIC. If a given
security is not listed at the time of purchase, the Company 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.
7. It is recognized by the Company and the Reinsurer that the
Investment Guidelines pertain to a mix of assets characteristic
of the Reinsurer's aggregate portfolio and are intended as an
overall guide to investment. The Company and the Reinsurer agree
to consult on the mix of assets to assure that the portfolio
associated with this Treaty is in reasonable compliance with the
Reinsurer's aggregate portfolio guidelines.
IV. PORTFOLIO GUIDELINES
1. 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 5.
2. CONVEXITY
Portfolio convexity should be maximized to a level as close as
possible to that of the liabilities, not to fall below -1.0.
3. CREDIT
Overall portfolio credit quality must be equal to or greater than
Aa2/AA. Individual securities must be rated at least investment
grade (Baa3/BBB) with no more than 10% overall permitted in the
BBB (NAIC 2) category. At least 40% of the portfolio must be
invested in U.S. Government, U.S. Government guaranteed or U.S.
Government Agency issues with at 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 up to 25% of the
allocation may be rated BB or NAIC3.
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4. LIQUIDITY
At least 50% of the portfolio must be invested in highly liquid
securities defined as follows:
* U.S. Treasury Bonds
* U.S. Agency Debentures
* GNMA Pass-Through Pools
* FNMA, FHLMC Pass-Through Pools
V. DIVERSIFICATION
No more than 40% of the portfolio will be permitted in any one of
the following categories:
* U.S. Government Agency Debentures
* Mortgage Backed Securities (CMOs and pass-through pools
combined)
* Corporate Bonds
No more than 20% of the portfolio will be permitted in any of the
following categories:
* Municipal Bonds
* Private Placement Bonds
No more than 15% of the portfolio will be permitted in any of the
following categories:
* Preferred Stocks
* Asset Backed Securities
* Convertible Securities (both bond and preferred stocks),
with no more than 5% of convertible allocation permitted
in any one issue.
No more than 10% of the portfolio will be permitted in short term
securities with a minimum of 1% required as defined below. (No
one issuer should exceed $5,000,000.)
* Certificates of Deposit
* Money Market Funds
* Commercial Paper (A1/P1 rated)
* Repurchase Agreements
* Time Deposits
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VI. EXECUTION OF PORTFOLIO TRANSACTIONS
The management of the Company is hereby vested with the authority to
execute purchases and sales of investments within the objectives and
restrictions referenced herein. The management of the Company is
responsible for monitoring the existing security holdings, for
implementing proper internal control procedures and for accurate
recording of all investment transactions.
VII. PERFORMANCE MEASUREMENTS
The yield on the invested portfolio should be targeted to exceed a
minimum of 6%.
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EXHIBIT 10.35
PLEDGE AGREEMENT
This PLEDGE AGREEMENT dated as of July 25, 1996 (this "Pledge
Agreement") is between WESTBRIDGE CAPITAL CORP., a Delaware corporation
("Pledgor"), and FLEET NATIONAL BANK, a national banking association, formerly
known as Fleet National Bank of Connecticut ("Pledgee"). Except as otherwise
defined herein, all terms used herein and defined in the Credit Agreement dated
as of December 28, 1995 between Westbridge Funding Corporation ("WFC") and
Pledgee, as amended from time to time (as so amended, the "Credit Agreement"),
shall have the meaning assigned to them therein.
RECITALS:
1. Pledgor owns, on and as of the date on which this Pledge Agreement is
executed and delivered, 100% of the issued and outstanding shares of the capital
stock of WFC, a Delaware corporation, which shares (including any certificates
and/or other tangible evidences thereof) are more specifically described in
ATTACHMENT A hereto.
2. Pursuant to the Credit Agreement, the Pledgee has agreed, on certain
terms and conditions to make one or more revolving loans to WFC in an aggregate
principal amount not to exceed $20,000,000 (the "Revolving Loans"), which
Revolving Loans are evidenced by a single promissory note in favor of the
Pledgee in the principal amount of $20,000,000 (the "Revolving Note"), due and
payable in accordance with the terms of the Credit Agreement.
3. Pursuant to the Guaranty Agreement dated as of December 28, 1995 by
Pledgor in favor of the Pledgee (said Guaranty Agreement as currently in effect
and as from time to time amended, modified or supplemented being herein called
the "Financing Agreement"), Pledgor has (i) guaranteed the full and punctual
payment and performance by WFC of its obligations under the Credit Agreement and
the Revolving Note and (ii) agreed to execute and deliver this Pledge Agreement.
NOW, THEREFORE, in consideration of such financing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Pledgor and
Pledgee agree as follows:
1. PLEDGE AND DELIVERY. (a) To secure the prompt and complete payment
and performance when due of the Obligations (as defined in Section 1(b) hereof),
Pledgor hereby pledges, assigns and delivers to Pledgee, and grants Pledgee a
continuing security interest in, all of the following property and rights and
interests in property (all such property, rights and interests being hereinafter
collectively called the "Pledged Collateral"):
(i) all issued and outstanding shares of the capital stock of WFC
(the "Pledged Subsidiary") described in ATTACHMENT A hereto, and any additional
shares of the capital stock of any
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class or series of the Pledged Subsidiary which Pledgor may at any time and from
time to time hereafter purchase or otherwise acquire, together with the
certificates and/or other instruments or writings representing them (such
shares, certificates and other writings being hereinafter collectively called
the "Pledged Shares");
(ii) (A) all shares and other securities and all warrants, rights
and options (such shares, securities, warrants, rights and options together with
the certificates and/or other instruments or writings representing them being
hereinafter collectively called the "Additional Pledged Securities") and (B) all
money and other property, at any time and from time to time received or
receivable by or distributed or distributable to Pledgor from the issuer of any
or all of the Pledged Shares (whether in the ordinary course of such issuer's
business or representing or resulting from cash or stock dividends, stock splits
or reclassifications, the recapitalization, reorganization, merger,
consolidation, disposition of assets, liquidation or dissolution of such issuer,
the exercise by Pledgor of warrants, rights or options, or any other action or
cause) in exchange or substitution for or otherwise in respect of any or all of
the Pledged Shares or earlier-issued Additional Pledged Securities; and
(iii) all proceeds of any or all of the foregoing.
(b) As used herein, the term "Obligations" shall mean all indebtedness,
liabilities and obligations of any kind of Pledgor to Pledgee (whether directly
as principal or maker or indirectly as guarantor, surety, endorser or
otherwise), now or hereafter existing, due or to become due, howsoever incurred,
arising or evidenced, whether of principal or interest or payment or
performance, and all obligations of the Pledgee now or hereafter existing under
this Pledge Agreement.
(c) Prior to the execution and delivery hereof by Pledgee, Pledgor shall
have delivered to Pledgee, and Pledgee by such execution and delivery shall
acknowledge its prior receipt of, the certificate(s) and/or other instruments
and documents evidencing all of the Pledged Shares, Additional Pledged
Securities and all other items of the Pledged Collateral then owned by Pledgor.
Pledgor agrees that it shall immediately deliver to Pledgee any and all of the
Pledged Shares, Additional Pledged Securities and other Pledged Collateral
(including any and all certificates and/or other instruments or documents
representing each item thereof) which it acquires in any way at any time after
such execution and delivery. Upon delivery to Pledgee, each item of the Pledged
Collateral shall be accompanied by, as appropriate, (i) undated, duly executed
stock powers endorsed by Pledgor either in blank or to Pledgee in a manner which
Pledgee deems satisfactory, and/or (ii) such other instruments or documents as
Pledgee shall reasonably request.
2. PLEDGOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Pledgor
represents and warrants that: (i) Pledgor has the right, power and authority to
execute, deliver and perform this
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Pledge Agreement and to pledge, assign, deliver, transfer and grant a security
interest in the Pledged Collateral; (ii) this Pledge Agreement constitutes the
legal, valid and binding obligation of Pledgor, enforceable against Pledgor in
accordance with its terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally (regardless of whether such enforceability is
considered in a proceeding in equity or at law); (iii) Pledgor has good title to
all of the Pledged Shares and is the legal record and beneficial owner of each
of the Pledged Shares (and will have good title to and be the legal record and
beneficial owner of each other item of Pledged Collateral, including any
Additional Pledged Securities), free and clear of all encumbrances except
Pledgee's security interest hereunder; (iv) each of the Pledged Shares and
Additional Pledged Securities is, or will be when acquired by Pledgor and
pledged hereunder, duly and validly issued and fully paid and non-assessable,
and there are no restrictions on the transfer of any thereof other than such
restrictions as appear on the certificates or other instruments or writings
representing them, or as are referred to in clause (ii) above or otherwise may
be imposed under applicable law; (v) no action other than the delivery of each
item of the Pledged Collateral to, and its continued possession by, Pledgee or
any of its agents or nominees is necessary to maintain a perfected,
first-priority security interest in such item in favor of Pledgee; and (vi) no
authorizations, approvals or consents of, and no filings or registrations with,
any governmental or regulatory authority or agency are necessary for the
execution, delivery or performance by the Pledgor of this Pledge Agreement or
for the validity or enforceability hereof.
(b) Pledgor covenants and agrees that it will at its expense (i) defend
both its own rights and interests and Pledgee's rights and security interest in
and to the Pledged Collateral against the claims and demands of all other
persons and (ii) execute and deliver to Pledgee such further conveyances,
agreements, assignments, instruments and other writings, and take such further
action, as Pledgee may request in order to obtain the full benefit of this
Pledge Agreement, the Pledged Collateral, and the rights, powers and remedies
granted to Pledgee hereunder. Pledgor further covenants and agrees that until
all Obligations have been satisfied and this Pledge Agreement has been
terminated, Pledgor will not without Pledgee's prior written consent sell,
assign, transfer, exchange or otherwise temporarily or permanently dispose of
any item of the Pledged Collateral, or offer or contract to do so, and will not
without such consent create, incur, assume or permit to exist any security
interest, pledge, claim or other charge or encumbrance on or with respect to any
such item other than the security interest granted to Pledgee hereunder.
3. NAMES IN WHICH PLEDGED SHARES AND ADDITIONAL PLEDGED SECURITIES MAY
BE REGISTERED. Upon the occurrence of any Pledgor Default (as defined in Section
9 hereof), Pledgee shall be entitled to hold any or all of the Pledged Shares
and Additional Pledged Securities in its own name, the name(s) of one or more of
its nominees or the name of Pledgor endorsed or assigned in blank or in favor of
Pledgee. With respect to any of the Pledged Shares and/or Additional Pledged
Securities which Pledgee wishes to hold in its own name or the name of any
nominee in accordance with this Section 3, Pledgee (acting in its own name and
capacity or as Pledgor's attorney-in-fact
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pursuant to the power of attorney granted to Pledgee in Section 5 hereof) may
have such Pledged Shares and Additional Pledged Securities registered
accordingly on the books of the issuer(s) thereof, and Pledgor shall cooperate
fully with Pledgee in causing such issuer(s) to effect such transfer and
registration.
4. VOTING RIGHTS; DISTRIBUTIONS, ETC. (a) Subject to Section 4(c),
Pledgor shall be entitled to exercise any and all voting and/or consensual
rights and powers accruing to an owner of the Pledged Shares and Additional
Pledged Securities for any purpose not inconsistent with (A) the provisions of
this Pledge Agreement and the Financing Agreement and (B) the preservation of
the value of and Pledgee's security interest in the Pledged Collateral.
(b) Subject to Section 4(c), Pledgor shall be entitled to receive and
retain all cash dividends, interest and other cash distributions payable in
respect of the Pledged Collateral to the extent that such distributions are
permitted by law.
(c) Upon the occurrence and during the continuance of a Pledgor Default,
Pledgor may thereafter continue to exercise any and all voting and consensual
rights and powers until such time as Pledgee shall notify Pledgor in writing
that Pledgee intends to assume and, exercise the same, and all powers described
in Section 4(b) to receive the dividends, interest and other cash distributions
described in such Section shall cease, and all such rights shall thereupon
become vested in Pledgee.
(d) Upon the occurrence and during the continuance of a Pledgor Default,
Pledgee may, in its own name and capacity or as Pledgor's attorney-in-fact,
collect, receive, endorse and deposit all Additional Pledged Securities, money,
cash proceeds, instruments and any and all other property which is or may at any
time become payable in respect of any or all of the Pledged Collateral and which
Pledgee is or may become entitled to receive under subsection (a) or (b) of this
Section 4. All such property so received by Pledgee may be retained by Pledgee
as additional Pledged Collateral, and (i) all money and other cash proceeds so
received may be applied by Pledgee to payment of the Obligations in such order
as Pledgee may elect, whether or not a Pledgor Default shall then be continuing,
and (ii) during the continuance of a Pledgor Default, all other property so
received may be sold or otherwise disposed of by Pledgee as provided in Section
10 hereof and the proceeds thereof applied as also provided in such Section 10.
Any and all money and other property received by Pledgor contrary to the
provisions of this Section 4 shall be held by Pledgor in trust for Pledgee,
shall be segregated by Pledgor from Pledgor's other funds and property and shall
promptly be delivered to Pledgee in exactly the form received by Pledgor, except
for any necessary endorsements.
5. PLEDGEE APPOINTED AS PLEDGOR'S ATTORNEY-IN-FACT. Pledgor hereby appoints
Pledgee as Pledgor's attorney-in-fact with full power in Pledgor's place and
stead, in Pledgor's name or its own name and at Pledgor's expense, to execute,
endorse and deliver any and all agreements, assignments, pledges, instruments
and any other writings, and to take any and all other actions,
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which Pledgee may deem necessary or desirable to carry out the terms and effect
the purposes of this Pledge Agreement and to exercise fully its rights and
remedies hereunder. Pledgee may delegate any or all of such power to any of its
officers, directors, employees, agents, nominees, stockholders and other
representatives (hereinafter collectively called "Representatives") and to have
any such Representative(s) exercise any such delegated power as substitute(s)
for Pledgee. Pledgor hereby ratifies all that Pledgee and all such
Representatives shall lawfully and properly do or cause to be done under this
power of attorney, which power is coupled with an interest and shall be
irrevocable until all Obligations have been satisfied and this Pledge Agreement
has been terminated. So long as no Pledgor Default (as defined in Section 9
hereof) has occurred, Pledgee agrees to give Pledgor five (5) business days
prior notice of its intention to exercise the power of attorney granted hereby.
6. PLEDGEE'S RIGHTS TO PERFORM FOR PLEDGOR. If Pledgor shall at any time
fail to perform or comply with any of its covenants and agreements hereunder,
Pledgee may (but shall not be required or obligated to) take such action, in its
own name and capacity or as Pledgor's attorney-in-fact, as Pledgee shall deem
necessary or desirable to effect such performance or compliance.
7. REASONABLE CARE OF PLEDGED COLLATERAL. Pledgee shall be deemed to
have used reasonable care in the custody and preservation of the Pledged
Collateral in its possession to the extent it accords such Pledged Collateral
treatment which is substantially equal to that which Pledgee accords its own
property of like kind; PROVIDED, HOWEVER, that Pledgee shall have no obligation,
regardless of whether it takes any such action with respect to its own property,
(i) to ascertain or take action with respect to calls, tenders, conversions,
exchanges, maturities or other matters involving or affecting any item(s) of
such Pledged Collateral (whether or not Pledgee has actual or constructive
knowledge of any such matters), unless reasonably requested by Pledgor to do so,
or (ii) to take action to preserve rights against prior or other parties.
8. LIMITATION OF PLEDGEE'S LIABILITY; REIMBURSEMENT OF EXPENSES AND
INDEMNIFICATION. (a) Pledgor agrees that Pledgee shall have no obligation to
take, or refrain from taking, any action with respect to the Pledged Collateral
or Pledgor's rights and interests therein except for (i) the preservation and
return of the Pledged Collateral in its possession as and to the extent
provided, respectively, in Sections 7 and 14 hereof, (ii) the execution and
delivery to Pledgor of certain instruments and other writings imposed by law and
(iii) compliance with insurance regulatory requirements, if any. Pledgor further
agrees that neither Pledgee nor any of its Representatives shall have any
liability to Pledgor, or to any person claiming rights against Pledgee by,
through or under Pledgor, in any way arising out of or in connection with
Pledgee's or any such Representative's administration of this Pledge Agreement
or its exercise of any of its rights, power and remedies hereunder except for
(i) Pledgee's or any such Representative's failure to take as and when required
any of the actions referenced in the first sentence of this Section 8(a) or to
account to Pledgor for those amounts of money and other property -- and only for
those amounts -- which it actually
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receives in connection with such administration or exercise and which it is
required to pay over to Pledgor or apply to the Obligations under any other
provision hereof, (ii) its failure to exercise reasonable care as and to the
extent required in Section 7 hereof or (iii) its negligence or willful
misconduct.
(b) Pledgor shall pay or reimburse Pledgee on demand for all costs and
expenses (including without limitation reasonable attorneys' fees and legal
expenses) paid or incurred by Pledgee in connection with (i) any amendment of
this Pledge Agreement and (ii) the exercise and enforcement of any of Pledgee's
rights, powers and remedies hereunder, including without limitation its right to
perform Pledgor's covenants and agreements hereunder to the extent Pledgor fails
to do so. Pledgor further agrees to indemnify, defend and hold harmless Pledgee,
its Representatives, successors and assigns from and against any and all
liabilities, claims, actions, losses, damages, taxes, penalties, fines, costs
and expenses (including reasonable attorneys' fees and legal expenses) which in
any way arise out of or in connection with any of the actions or matters with
respect to which Pledgor has a payment or reimbursement obligation under this
Section 8; PROVIDED, HOWEVER, that Pledgor shall have no obligation to indemnify
Pledgee or any such Representative, successor or assign against any liabilities,
claims, etc., resulting from such party's negligence or willful misconduct or
its failure to exercise reasonable care as and to the extent required in Section
7 hereof. Until any reimbursement of costs or expenses or any indemnity payment
required under this Section 8 is received by Pledgee in cash or immediately
available funds, the amount thereof shall bear interest at the rate specified in
the Credit Agreement for delinquent payments, and such amount and such interest
shall constitute part of the Obligations secured by the Pledged Collateral.
9. PLEDGOR DEFAULTS. The following shall constitute a "Pledgor Default":
(i) Pledgor fails to perform or comply with any of its covenants or agreements
hereunder; or (ii) a default or event of default occurs under the Financing
Agreement.
10. REMEDIES. (a) If a Pledgor Default has occurred and is continuing,
Pledgee may at any time and from time to time exercise any and all rights and
remedies available to it (i) hereunder and under the Financing Agreement and any
other agreement or instrument then in effect between Pledgor and Pledgee and
relating to the Obligations, including without limitation those rights and
remedies set out in subsections (b) through (f) of this Section 10, and (ii) as
a secured party under the Uniform Commercial Code as then in effect in the State
of Connecticut (the "Code") and under any other applicable law or rule of law or
equity. Should Pledgee elect to proceed by action at law or in equity to
foreclose its security interest in and sell any or all of the Pledged
Collateral, Pledgor waives (to the extent permitted by law) any rights it may
then have in connection therewith to require Pledgee to post bonds, sureties or
collateral security or to demand possession of any such Pledged Collateral
pending judgment therein.
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(b) To the extent permitted by federal and state securities laws,
Pledgee may sell, assign, transfer, endorse and deliver all or, from time to
time any part, of the Pledged Collateral at public or private sale, over the
counter or at any broker's board or securities exchange, for cash, on credit or
in exchange for other property, for immediate or future delivery, without
advertisement or notice (except as provided in this subsection), and for such
price and on such terms as Pledgee deems appropriate, PROVIDED only that all
aspects of any such disposition are commercially reasonable within the
requirements of Section 42a-9-504 of the Code, as defined and supplemented by
the standards and agreements set forth herein. Pledgor agrees that to the extent
notice of the time and place of any such public sale, or of the time after which
Pledgee intends to make any such private sale or other disposition, is required
under the Code, such notice shall be deemed commercially reasonable if
transmitted by any of the means described in the Financing Agreement not less
than fifteen (15) days prior thereto. Pledgee shall not be obligated to effect
any sale of any or all of the Pledged Collateral, whether or not notice thereof
has been given, and may adjourn any public or private sale from time to time by
announcement at the time and place fixed for such sale, and such sale may be
held without further notice at the time and place to which it was so adjourned.
(c) At any such private or public sale, Pledgee shall be entitled to bid
for and/or purchase the Pledged Collateral then being sold and may pay the price
thereof by credit against the Obligations then outstanding. Any purchaser of any
item(s) of the Pledged Collateral (including Pledgee) shall take such item(s)
free from any right or claim of Pledgor, and Pledgor hereby waives, to the
extent permitted by the Code and other applicable law, all rights of redemption
and/or to any stay, exemption or appraisal which Pledgor now has or may
hereafter acquire.
(d) Pledgor agrees and acknowledges that requiring the issuer(s) of the
securities included in the Pledged Collateral to register such securities under
applicable provisions of federal and state securities laws would not be
practicable and therefore could not be deemed commercially reasonable. Pledgor
further agrees and acknowledges that in order to comply with applicable federal
and state securities laws without effecting such registration, Pledgee may be
required: (i) to sell or otherwise dispose of any or all of the Pledged
Collateral at one or more private rather than public sales and (ii) to limit the
prospective purchasers at such sale(s) to persons who will represent and agree
that they are purchasing the securities they intend to acquire for their own
account for investment and not with a view to the distribution or sale thereof,
and who will be compelled to accept stringent restrictions on their ability to
dispose of such securities. Accordingly, Pledgor agrees that: (i) Pledgee shall
not incur any liability to Pledgor by reason of the fact that the price obtained
for any or all the Pledged Collateral at such private sale(s) to investors
restricted as provided above may be less than the price which might be obtained
therefor at a public sale or unrestricted private sale and (iii) any and all
private sales shall be deemed commercially reasonable even if (A) the amount
received is less than the then-outstanding amount of the Obligations and/or (b)
even if Pledgee accepts the first offer received or does not offer all or any
part of the Pledged Collateral to more than one prospective
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purchaser, unless the sale in question is conducted in bad faith or in a manner
manifestly unreasonable for sales of that type.
(e) In case of any sale by the Pledgee of any item(s) of the Pledged
Collateral on credit or for future delivery, such item(s) may be retained by the
Pledgee until the selling price is paid by the purchaser(s) thereof, but the
Pledgee shall incur no liability in case of failure of the purchaser to take up
and pay for such item(s). In case of any such failure, such item(s) may be sold
again upon notice, to the extent required by law, as provided in subsection (b)
of this Section 10.
(f) The proceeds of the sale or other disposition of the Pledged
Collateral shall be applied first, to that part of the Obligations consisting of
Pledgee's expenses (including without limitation reasonable attorneys' fees and
legal expenses) in preparing for disposition and disposing of the Pledged
Collateral and, to the extent not previously reimbursed by Pledgor and
exercising and enforcing its rights, powers and remedies hereunder, and second,
to the satisfaction of the then outstanding amount of Pledgor's indebtedness
under the Financing Agreement and of all other Obligations then remaining
unpaid. Pledgee shall account to Pledgor for any surplus and Pledgor shall be
liable to Pledgee for any deficiency.
11. AMENDMENTS, ETC. No provision of this Pledge Agreement may be
amended, modified, supplemented or waived, and no consent to any departure
therefrom by Pledgor may be given, except by a writing duly executed and
delivered by the parties hereto, and any such amendment, modification,
supplement or waiver shall be effective only as and to the extent provided
therein.
12. CUMULATIVE REMEDIES; NO WAIVERS BY PLEDGEE. All rights, powers and
remedies of Pledgee (i) under this Pledge Agreement and the Financing Agreement
and under any other agreements, instruments and other writings now or hereafter
existing between Pledgor and Pledgee and relating to the Obligations, and (ii)
under the Code and other applicable law, are cumulative and except as otherwise
provided by law or in such agreements may be exercised concurrently or in any
order of succession. Pledgee's failure to exercise or delay in exercising any of
such rights, powers and remedies shall not constitute or imply a waiver thereof,
nor shall Pledgee's single or partial exercise of any such right, power or
remedy preclude its other or further exercise thereof, or the exercise of any
other right, power or remedy. Pledgee's cure of any Pledgor Default shall not
constitute a waiver thereof, and its waiver of one Pledgor Default shall not
constitute a waiver of any subsequent Pledgor Default.
13. PLEDGOR'S WAIVERS. Pledgor agrees that Pledgee's security interest in
the Pledged Collateral shall be absolute and unconditional regardless of the
existence or occurrence of, and expressly waives any defense or discharge which
might otherwise arise from, any of the following:
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(i) any lack of validity or enforceability of this Pledge
Agreement, the Financing Agreement, the Credit Agreement or any other agreement
or instrument relating hereto or thereto or otherwise relating to the
Obligations;
(ii) any change in the time, manner or place of payment of, or
in any other terms of, any or all of the Obligations, or any other amendment or
waiver of, or any consent to departure from, this Pledge Agreement or the
Financing Agreement, the Credit Agreement or any other agreement, instrument or
other writing now or hereafter existing between Pledgor and Pledgee and relating
to the Obligations;
(iii) any exchange, release or non-perfection of any other
collateral, or any release, amendment or waiver of, or consent to departure from
any guaranty, for any or all of the Obligations;
(iv) Pledgee's resort, during the continuation of a Pledgor
Default, to any or all of the Pledged Collateral for payment of all or part of
the Obligations prior to proceeding against any other collateral or any other
party primarily or secondarily liable for payment thereof; or
(v) to the extent permitted by law, any other circumstance which
might otherwise constitute a defense available to, or a discharge of, Pledgor in
respect of the Obligations or this Pledge Agreement.
14. TERMINATION; RELEASE OF PLEDGED COLLATERAL. This Pledge Agreement
and the security interest granted hereunder shall terminate on the date on which
all Obligations have been fully satisfied. Pledgee shall thereupon reassign and
redeliver (or cause to be reassigned and redelivered) to Pledgor or such
person(s) as Pledgor shall designate, against due execution and delivery by
Pledgor or such person(s) of a receipt therefor satisfactory to Pledgee in form
and substance, such items of the Pledged Collateral (if any) as are then held by
Pledgee or its Representatives, together with appropriate instruments of
reassignment and release. Any such reassignment shall be without recourse to or
warranty by Pledgee or any such Representative and at the expense of Pledgor.
15. NOTICES. All notices, requests, directions, consents, waivers and other
communications hereunder shall be in writing and shall be transmitted by the
means and to the addresses from time to time specified in the Financing
Agreement.
16. BINDING AGREEMENT; ASSIGNMENT. This Pledge Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that Pledgor shall not assign or
otherwise transfer any of its obligations, rights or interests hereunder without
the prior written consent of Pledgee.
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17. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of Connecticut. Wherever
possible each provision of this Pledge Agreement shall be construed in such
manner as to be valid and enforceable under applicable law, but if any provision
hereof shall be deemed invalid or unenforceable to any extent in any
jurisdiction, such provision shall be ineffective only to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remainder of such provision or any of the other provisions hereof, and any
such invalidity or unenforceability in one jurisdiction shall not render such
provision ineffective in any other jurisdiction.
18. JURISDICTION; IMMUNITIES. (a) The Pledgor hereby irrevocably submits
to the jurisdiction of any Connecticut State or United States Federal court
sitting in Connecticut over any action or proceeding arising out of or relating
to this Pledge Agreement, and the Pledgor hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such Connecticut State or Federal court. The Pledgor irrevocably consents to the
service of any and all process in any such action or proceeding by the mailing
of copies of such process to the Pledgor at its address specified in Section 7.4
of the Financing Agreement. The Pledgor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
The Pledgor further waives any objection to venue in such State and any
objection to an action or proceeding in such State on the basis of forum non
conveniens. The Pledgor further agrees that any action or proceeding brought
against the Pledgee shall be brought only in Connecticut State or United States
Federal courts sitting in Connecticut.
(b) Nothing in this Section 18 shall affect the right of the Pledgee to
serve legal process in any other manner permitted by law or affect the right of
the Pledgee to bring any action or proceeding against the Pledgor or its
Property in the courts of any other jurisdictions.
19. TITLES; COUNTERPARTS. Section titles are for convenience only and
shall not define, limit, amplify, supplement or otherwise modify or affect the
substance or intent of this Pledge Agreement or any provision hereof. This
Pledge Agreement may be executed in two(2) or more counterparts, each of which
shall when executed by both parties be deemed to be an original but all of which
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Pledge
Agreement to be duly executed by its respective authorized officer as of the
date first above written.
WESTBRIDGE CAPITAL CORP.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
FLEET NATIONAL BANK
By: /S/ ANSON HARRIS
Name: Anson Harris
Title: Assistant Vice President
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ATTACHMENT A
ISSUED AND OUTSTANDING SHARES
OF CAPITAL STOCK
NAME OF ISSUER NO. OF SHARES CERTIFICATE NO.(S)
Westbridge Funding 50 2
Corporation
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EXHIBIT 10.36
PLEDGE AGREEMENT
This PLEDGE AGREEMENT dated as of July 25, 1996 (this "Pledge
Agreement") is between WESTBRIDGE CAPITAL CORP., a Delaware corporation
("Pledgor"), and FLEET NATIONAL BANK, a national banking association, formerly
known as Fleet National Bank of Connecticut ("Pledgee"). Except as otherwise
defined herein, all terms used herein and defined in the Credit Agreement dated
as of December 28, 1995 between Westbridge Funding Corporation ("WFC") and
Pledgee, as amended from time to time (as so amended, the "Credit Agreement"),
shall have the meaning assigned to them therein.
RECITALS:
1. Pledgor owns, on and as of the date on which this Pledge Agreement is
executed and delivered, 100% of the issued and outstanding shares of the capital
stock of National Foundation Life Insurance Company, a Delaware corporation
("NFL"), which shares (including any certificates and/or other tangible
evidences thereof) are more specifically described in ATTACHMENT A hereto.
2. Pursuant to the Credit Agreement, the Pledgee has agreed, on certain
terms and conditions to make one or more revolving loans to WFC in an aggregate
principal amount not to exceed $20,000,000 (the "Revolving Loans"), which
Revolving Loans are evidenced by a single promissory note in favor of the
Pledgee in the principal amount of $20,000,000 (the "Revolving Note"), due and
payable in accordance with the terms of the Credit Agreement.
3. Pursuant to the Guaranty Agreement dated as of December 28, 1995 by
Pledgor in favor of the Pledgee (said Guaranty Agreement as currently in effect
and as from time to time amended, modified or supplemented being herein called
the "Financing Agreement"), Pledgor has (i) guaranteed the full and punctual
payment and performance by WFC of its obligations under the Credit Agreement and
the Revolving Note and (ii) agreed to execute and deliver this Pledge Agreement,
subject to receipt of all required regulatory approvals, which approvals now
have been received.
NOW, THEREFORE, in consideration of such financing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Pledgor and
Pledgee agree as follows:
1. PLEDGE AND DELIVERY. (a) To secure the prompt and complete payment
and performance when due of the Obligations (as defined in Section 1(b) hereof),
Pledgor hereby pledges, assigns and delivers to Pledgee, and grants Pledgee a
continuing security interest in, all of the following property and rights and
interests in property (all such property, rights and interests being hereinafter
collectively called the "Pledged Collateral"):
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(i) all issued and outstanding shares of the capital stock of NFL
(the "Pledged Subsidiary") described in ATTACHMENT A hereto, and any additional
shares of the capital stock of any class or series of the Pledged Subsidiary
which Pledgor may at any time and from time to time hereafter purchase or
otherwise acquire, together with the certificates and/or other instruments or
writings representing them (such shares, certificates and other writings being
hereinafter collectively called the "Pledged Shares");
(ii) (A) all shares and other securities and all warrants, rights
and options (such shares, securities, warrants, rights and options together with
the certificates and/or other instruments or writings representing them being
hereinafter collectively called the "Additional Pledged Securities") and (B) all
money and other property, at any time and from time to time received or
receivable by or distributed or distributable to Pledgor from the issuer of any
or all of the Pledged Shares (whether in the ordinary course of such issuer's
business or representing or resulting from cash or stock dividends, stock splits
or reclassifications, the recapitalization, reorganization, merger,
consolidation, disposition of assets, liquidation or dissolution of such issuer,
the exercise by Pledgor of warrants, rights or options, or any other action or
cause) in exchange or substitution for or otherwise in respect of any or all of
the Pledged Shares or earlier-issued Additional Pledged Securities; and
(iii) all proceeds of any or all of the foregoing.
(b) As used herein, the term "Obligations" shall mean all indebtedness,
liabilities and obligations of any kind of Pledgor to Pledgee (whether directly
as principal or maker or indirectly as guarantor, surety, endorser or
otherwise), now or hereafter existing, due or to become due, howsoever incurred,
arising or evidenced, whether of principal or interest or payment or
performance, and all obligations of the Pledgee now or hereafter existing under
this Pledge Agreement.
(c) Prior to the execution and delivery hereof by Pledgee, Pledgor shall
have delivered to Pledgee, and Pledgee by such execution and delivery shall
acknowledge its prior receipt of, the certificate(s) and/or other instruments
and documents evidencing all of the Pledged Shares, Additional Pledged
Securities and all other items of the Pledged Collateral then owned by Pledgor.
Pledgor agrees that it shall immediately deliver to Pledgee any and all of the
Pledged Shares, Additional Pledged Securities and other Pledged Collateral
(including any and all certificates and/or other instruments or documents
representing each item thereof) which it acquires in any way at any time after
such execution and delivery. Upon delivery to Pledgee, each item of the Pledged
Collateral shall be accompanied by, as appropriate, (i) undated, duly executed
stock powers endorsed by Pledgor either in blank or to Pledgee in a manner which
Pledgee deems satisfactory, and/or (ii) such other instruments or documents as
Pledgee shall reasonably request.
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2. PLEDGOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Pledgor
represents and warrants that: (i) Pledgor has the right, power and authority to
execute, deliver and perform this Pledge Agreement and to pledge, assign,
deliver, transfer and grant a security interest in the Pledged Collateral; (ii)
this Pledge Agreement constitutes the legal, valid and binding obligation of
Pledgor, enforceable against Pledgor in accordance with its terms except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights generally
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) and subject to any limitation that may restrict Pledgee from
selling, voting or exercising control over NFL without obtaining approval of the
Insurance Commissioner; (iii) Pledgor has good title to all of the Pledged
Shares and is the legal record and beneficial owner of each of the Pledged
Shares (and will have good title to and be the legal record and beneficial owner
of each other item of Pledged Collateral, including any Additional Pledged
Securities), free and clear of all encumbrances except Pledgee's security
interest hereunder; (iv) each of the Pledged Shares and Additional Pledged
Securities is, or will be when acquired by Pledgor and pledged hereunder, duly
and validly issued and fully paid and non-assessable, and there are no
restrictions on the transfer of any thereof other than such restrictions as
appear on the certificates or other instruments or writings representing them,
or as are referred to in clause (ii) above or otherwise may be imposed under
applicable law; (v) no action other than the delivery of each item of the
Pledged Collateral to, and its continued possession by, Pledgee or any of its
agents or nominees is necessary to maintain a perfected, first-priority security
interest in such item in favor of Pledgee; and (vi) no authorizations, approvals
or consents of, and no filings or registrations with, any governmental or
regulatory authority or agency are necessary for the execution, delivery or
performance by the Pledgor of this Pledge Agreement or for the validity or
enforceability hereof except those which have already been obtained and remain
in full force and effect.
(b) Pledgor covenants and agrees that it will at its expense (i) defend
both its own rights and interests and Pledgee's rights and security interest in
and to the Pledged Collateral against the claims and demands of all other
persons and (ii) execute and deliver to Pledgee such further conveyances,
agreements, assignments, instruments and other writings, and take such further
action, as Pledgee may request in order to obtain the full benefit of this
Pledge Agreement, the Pledged Collateral, and the rights, powers and remedies
granted to Pledgee hereunder. Pledgor further covenants and agrees that until
all Obligations have been satisfied and this Pledge Agreement has been
terminated, Pledgor will not without Pledgee's prior written consent sell,
assign, transfer, exchange or otherwise temporarily or permanently dispose of
any item of the Pledged Collateral, or offer or contract to do so, and will not
without such consent create, incur, assume or permit to exist any security
interest, pledge, claim or other charge or encumbrance on or with respect to any
such item other than the security interest granted to Pledgee hereunder.
3. NAMES IN WHICH PLEDGED SHARES AND ADDITIONAL PLEDGED SECURITIES MAY BE
REGISTERED. Upon the occurrence of any Pledgor Default (as defined in Section 9
hereof), Pledgee
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4
shall be entitled to hold any or all of the Pledged Shares and Additional
Pledged Securities in its own name, the name(s) of one or more of its nominees
or the name of Pledgor endorsed or assigned in blank or in favor of Pledgee.
With respect to any of the Pledged Shares and/or Additional Pledged Securities
which Pledgee wishes to hold in its own name or the name of any nominee in
accordance with this Section 3, Pledgee (acting in its own name and capacity or
as Pledgor's attorney-in-fact pursuant to the power of attorney granted to
Pledgee in Section 5 hereof) may have such Pledged Shares and Additional Pledged
Securities registered accordingly on the books of the issuer(s) thereof, and
Pledgor shall cooperate fully with Pledgee in causing such issuer(s) to effect
such transfer and registration.
4. VOTING RIGHTS; DISTRIBUTIONS, ETC. (a) Subject to Section 4(c),
Pledgor shall be entitled to exercise any and all voting and/or consensual
rights and powers accruing to an owner of the Pledged Shares and Additional
Pledged Securities for any purpose not inconsistent with (A) the provisions of
this Pledge Agreement and the Financing Agreement and applicable insurance and
other law and (B) the preservation of the value of and Pledgee's security
interest in the Pledged Collateral.
(b) Subject to Section 4(c), Pledgor shall be entitled to receive and
retain all cash dividends, interest and other cash distributions payable in
respect of the Pledged Collateral to the extent that such distributions are
permitted by law.
(c) Upon the occurrence and during the continuance of a Pledgor Default,
Pledgor may thereafter continue to exercise any and all voting and consensual
rights and powers until such time as Pledgee shall notify Pledgor in writing
that Pledgee intends to assume and, subject to Section 15, exercise the same,
and all powers described in Section 4(b) to receive the dividends, interest and
other cash distributions described in such Section shall cease, and all such
rights shall thereupon become vested in Pledgee.
(d) Upon the occurrence and during the continuance of a Pledgor Default
and subject to Section 15, Pledgee may, in its own name and capacity or as
Pledgor's attorney-in-fact, collect, receive, endorse and deposit all Additional
Pledged Securities, money, cash proceeds, instruments and any and all other
property which is or may at any time become payable in respect of any or all of
the Pledged Collateral and which Pledgee is or may become entitled to receive
under subsection (a) or (b) of this Section 4. All such property so received by
Pledgee may be retained by Pledgee as additional Pledged Collateral, and (i) all
money and other cash proceeds so received may be applied by Pledgee to payment
of the Obligations in such order as Pledgee may elect, whether or not a Pledgor
Default shall then be continuing, and (ii) during the continuance of a Pledgor
Default, all other property so received may be sold or otherwise disposed of by
Pledgee as provided in Section 10 hereof and the proceeds thereof applied as
also provided in such Section 10. Any and all money and other property received
by Pledgor contrary to the provisions of this Section 4 shall be held by
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5
Pledgor in trust for Pledgee, shall be segregated by Pledgor from Pledgor's
other funds and property and shall promptly be delivered to Pledgee in exactly
the form received by Pledgor, except for any necessary endorsements.
5. PLEDGEE APPOINTED AS PLEDGOR'S ATTORNEY-IN-FACT. Subject to Section
15, Pledgor hereby appoints Pledgee as Pledgor's attorney-in-fact with full
power in Pledgor's place and stead, in Pledgor's name or its own name and at
Pledgor's expense, to execute, endorse and deliver any and all agreements,
assignments, pledges, instruments and any other writings, and to take any and
all other actions, which Pledgee may deem necessary or desirable to carry out
the terms and effect the purposes of this Pledge Agreement and to exercise fully
its rights and remedies hereunder. Pledgee may delegate any or all of such power
to any of its officers, directors, employees, agents, nominees, stockholders and
other representatives (hereinafter collectively called "Representatives") and to
have any such Representative(s) exercise any such delegated power as
substitute(s) for Pledgee. Pledgor hereby ratifies all that Pledgee and all such
Representatives shall lawfully and properly do or cause to be done under this
power of attorney, which power is coupled with an interest and shall be
irrevocable until all Obligations have been satisfied and this Pledge Agreement
has been terminated. So long as no Pledgor Default (as defined in Section 9
hereof) has occurred, Pledgee agrees to give Pledgor five (5) business days
prior notice of its intention to exercise the power of attorney granted hereby.
6. PLEDGEE'S RIGHTS TO PERFORM FOR PLEDGOR. If Pledgor shall at any time
fail to perform or comply with any of its covenants and agreements hereunder,
Pledgee may (but shall not be required or obligated to) take such action, in its
own name and capacity or as Pledgor's attorney-in-fact, as Pledgee shall deem
necessary or desirable to effect such performance or compliance.
7. REASONABLE CARE OF PLEDGED COLLATERAL. Pledgee shall be deemed to
have used reasonable care in the custody and preservation of the Pledged
Collateral in its possession to the extent it accords such Pledged Collateral
treatment which is substantially equal to that which Pledgee accords its own
property of like kind; PROVIDED, HOWEVER, that Pledgee shall have no obligation,
regardless of whether it takes any such action with respect to its own property,
(i) to ascertain or take action with respect to calls, tenders, conversions,
exchanges, maturities or other matters involving or affecting any item(s) of
such Pledged Collateral (whether or not Pledgee has actual or constructive
knowledge of any such matters), unless reasonably requested by Pledgor to do so,
or (ii) to take action to preserve rights against prior or other parties.
8. LIMITATION OF PLEDGEE'S LIABILITY; REIMBURSEMENT OF EXPENSES AND
INDEMNIFICATION. (a) Pledgor agrees that Pledgee shall have no obligation to
take, or refrain from taking, any action with respect to the Pledged Collateral
or Pledgor's rights and interests therein except for (i) the preservation and
return of the Pledged Collateral in its possession as and to the extent
provided, respectively, in Sections 7 and 14 hereof, (ii) the execution and
delivery to Pledgor of certain
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6
instruments and other writings imposed by law and (iii) compliance with
insurance regulatory requirements, if any, described in Section 15. Pledgor
further agrees that neither Pledgee nor any of its Representatives shall have
any liability to Pledgor, or to any person claiming rights against Pledgee by,
through or under Pledgor, in any way arising out of or in connection with
Pledgee's or any such Representative's administration of this Pledge Agreement
or its exercise of any of its rights, power and remedies hereunder except for
(i) Pledgee's or any such Representative's failure to take as and when required
any of the actions referenced in the first sentence of this Section 8(a) or to
account to Pledgor for those amounts of money and other property -- and only for
those amounts -which it actually receives in connection with such administration
or exercise and which it is required to pay over to Pledgor or apply to the
Obligations under any other provision hereof, (ii) its failure to exercise
reasonable care as and to the extent required in Section 7 hereof or (iii) its
negligence or willful misconduct.
(b) Pledgor shall pay or reimburse Pledgee on demand for all costs and
expenses (including without limitation reasonable attorneys' fees and legal
expenses) paid or incurred by Pledgee in connection with (i) any amendment of
this Pledge Agreement and (ii) the exercise and enforcement of any of Pledgee's
rights, powers and remedies hereunder, including without limitation its right to
perform Pledgor's covenants and agreements hereunder to the extent Pledgor fails
to do so. Pledgor further agrees to indemnify, defend and hold harmless Pledgee,
its Representatives, successors and assigns from and against any and all
liabilities, claims, actions, losses, damages, taxes, penalties, fines, costs
and expenses (including reasonable attorneys' fees and legal expenses) which in
any way arise out of or in connection with any of the actions or matters with
respect to which Pledgor has a payment or reimbursement obligation under this
Section 8; PROVIDED, HOWEVER, that Pledgor shall have no obligation to indemnify
Pledgee or any such Representative, successor or assign against any liabilities,
claims, etc., resulting from such party's negligence or willful misconduct or
its failure to exercise reasonable care as and to the extent required in Section
7 hereof. Until any reimbursement of costs or expenses or any indemnity payment
required under this Section 8 is received by Pledgee in cash or immediately
available funds, the amount thereof shall bear interest at the rate specified in
the Credit Agreement for delinquent payments, and such amount and such interest
shall constitute part of the Obligations secured by the Pledged Collateral.
9. PLEDGOR DEFAULTS. The following shall constitute a "Pledgor Default":
(i) Pledgor fails to perform or comply with any of its covenants or agreements
hereunder; or (ii) a default or event of default occurs under the Financing
Agreement.
10. REMEDIES. (a) If a Pledgor Default has occurred and is continuing,
Pledgee may at any time and from time to time exercise any and all rights and
remedies available to it (i) hereunder and under the Financing Agreement and any
other agreement or instrument then in effect between Pledgor and Pledgee and
relating to the Obligations, including without limitation those rights and
remedies set out in subsections (b) through (f) of this Section 10, and (ii) as
a secured party under
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7
the Uniform Commercial Code as then in effect in the State of Connecticut (the
"Code") and under any other applicable law or rule of law or equity. Should
Pledgee elect to proceed by action at law or in equity to foreclose its security
interest in and sell any or all of the Pledged Collateral, Pledgor waives (to
the extent permitted by law) any rights it may then have in connection therewith
to require Pledgee to post bonds, sureties or collateral security or to demand
possession of any such Pledged Collateral pending judgment therein.
(b) Subject to Section 15 and to the extent permitted by federal and
state securities laws, Pledgee may sell, assign, transfer, endorse and deliver
all or, from time to time any part, of the Pledged Collateral at public or
private sale, over the counter or at any broker's board or securities exchange,
for cash, on credit or in exchange for other property, for immediate or future
delivery, without advertisement or notice (except as provided in this
subsection), and for such price and on such terms as Pledgee deems appropriate,
PROVIDED only that all aspects of any such disposition are commercially
reasonable within the requirements of Section 42a-9-504 of the Code, as defined
and supplemented by the standards and agreements set forth herein. Pledgor
agrees that to the extent notice of the time and place of any such public sale,
or of the time after which Pledgee intends to make any such private sale or
other disposition, is required under the Code, such notice shall be deemed
commercially reasonable if transmitted by any of the means described in the
Financing Agreement not less than fifteen (15) days prior thereto. Pledgee shall
not be obligated to effect any sale of any or all of the Pledged Collateral,
whether or not notice thereof has been given, and may adjourn any public or
private sale from time to time by announcement at the time and place fixed for
such sale, and such sale may be held without further notice at the time and
place to which it was so adjourned.
(c) At any such private or public sale, subject to Section 15, Pledgee
shall be entitled to bid for and/or purchase the Pledged Collateral then being
sold and may pay the price thereof by credit against the Obligations then
outstanding. Any purchaser of any item(s) of the Pledged Collateral (including
Pledgee) shall take such item(s) free from any right or claim of Pledgor, and
Pledgor hereby waives, to the extent permitted by the Code and other applicable
law, all rights of redemption and/or to any stay, exemption or appraisal which
Pledgor now has or may hereafter acquire.
(d) Pledgor agrees and acknowledges that requiring the issuer(s) of the
securities included in the Pledged Collateral to register such securities under
applicable provisions of federal and state securities laws would not be
practicable and therefore could not be deemed commercially reasonable. Pledgor
further agrees and acknowledges that in order to comply with applicable federal
and state securities laws without effecting such registration, Pledgee may be
required: (i) to sell or otherwise dispose of any or all of the Pledged
Collateral at one or more private rather than public sales and (ii) to limit the
prospective purchasers at such sale(s) to persons who will represent and agree
that they are purchasing the securities they intend to acquire for their own
account for investment and not with
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8
a view to the distribution or sale thereof, and who will be compelled to accept
stringent restrictions on their ability to dispose of such securities.
Accordingly, Pledgor agrees that: (i) Pledgee shall not incur any liability to
Pledgor by reason of the fact that the price obtained for any or all the Pledged
Collateral at such private sale(s) to investors restricted as provided above may
be less than the price which might be obtained therefor at a public sale or
unrestricted private sale and (iii) any and all private sales shall be deemed
commercially reasonable even if (A) the amount received is less than the
then-outstanding amount of the Obligations and/or (b) even if Pledgee accepts
the first offer received or does not offer all or any part of the Pledged
Collateral to more than one prospective purchaser, unless the sale in question
is conducted in bad faith or in a manner manifestly unreasonable for sales of
that type.
(e) In case of any sale by the Pledgee of any item(s) of the Pledged
Collateral on credit or for future delivery, such item(s) may be retained by the
Pledgee until the selling price is paid by the purchaser(s) thereof, but the
Pledgee shall incur no liability in case of failure of the purchaser to take up
and pay for such item(s). In case of any such failure, such item(s) may be sold
again upon notice, to the extent required by law, as provided in subsection (b)
of this Section 10.
(f) The proceeds of the sale or other disposition of the Pledged
Collateral shall be applied first, to that part of the Obligations consisting of
Pledgee's expenses (including without limitation reasonable attorneys' fees and
legal expenses) in preparing for disposition and disposing of the Pledged
Collateral and, to the extent not previously reimbursed by Pledgor and
exercising and enforcing its rights, powers and remedies hereunder, and second,
to the satisfaction of the then outstanding amount of Pledgor's indebtedness
under the Financing Agreement and of all other Obligations then remaining
unpaid. Pledgee shall account to Pledgor for any surplus and Pledgor shall be
liable to Pledgee for any deficiency.
11. AMENDMENTS, ETC. No provision of this Pledge Agreement may be
amended, modified, supplemented or waived, and no consent to any departure
therefrom by Pledgor may be given, except by a writing duly executed and
delivered by the parties hereto, and any such amendment, modification,
supplement or waiver shall be effective only as and to the extent provided
therein.
12. CUMULATIVE REMEDIES; NO WAIVERS BY PLEDGEE. All rights, powers and
remedies of Pledgee (i) under this Pledge Agreement and the Financing Agreement
and under any other agreements, instruments and other writings now or hereafter
existing between Pledgor and Pledgee and relating to the Obligations, and (ii)
under the Code and other applicable law, are cumulative and except as otherwise
provided by law or in such agreements may be exercised concurrently or in any
order of succession. Pledgee's failure to exercise or delay in exercising any of
such rights, powers and remedies shall not constitute or imply a waiver thereof,
nor shall Pledgee's single or partial exercise of any such right, power or
remedy preclude its other or further exercise thereof, or the
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9
exercise of any other right, power or remedy. Pledgee's cure of any Pledgor
Default shall not constitute a waiver thereof, and its waiver of one Pledgor
Default shall not constitute a waiver of any subsequent Pledgor Default.
13. PLEDGOR'S WAIVERS. Pledgor agrees that Pledgee's security interest in
the Pledged Collateral shall be absolute and unconditional regardless of the
existence or occurrence of, and expressly waives any defense or discharge which
might otherwise arise from, any of the following:
(i) any lack of validity or enforceability of this Pledge
Agreement, the Financing Agreement, the Credit Agreement or any other agreement
or instrument relating hereto or thereto or otherwise relating to the
Obligations;
(ii) any change in the time, manner or place of payment of, or
in any other terms of, any or all of the Obligations, or any other amendment or
waiver of, or any consent to departure from, this Pledge Agreement or the
Financing Agreement, the Credit Agreement or any other agreement, instrument or
other writing now or hereafter existing between Pledgor and Pledgee and relating
to the Obligations;
(iii) any exchange, release or non-perfection of any other
collateral, or any release, amendment or waiver of, or consent to departure from
any guaranty, for any or all of the Obligations;
(iv) Pledgee's resort, during the continuation of a Pledgor
Default, to any or all of the Pledged Collateral for payment of all or part of
the Obligations prior to proceeding against any other collateral or any other
party primarily or secondarily liable for payment thereof; or
(v) to the extent permitted by law, any other circumstance which
might otherwise constitute a defense available to, or a discharge of, Pledgor in
respect of the Obligations or this Pledge Agreement.
14. TERMINATION; RELEASE OF PLEDGED COLLATERAL. This Pledge Agreement
and the security interest granted hereunder shall terminate on the date on which
all Obligations have been fully satisfied. Pledgee shall thereupon reassign and
redeliver (or cause to be reassigned and redelivered) to Pledgor or such
person(s) as Pledgor shall designate, against due execution and delivery by
Pledgor or such person(s) of a receipt therefor satisfactory to Pledgee in form
and substance, such items of the Pledged Collateral (if any) as are then held by
Pledgee or its Representatives, together with appropriate instruments of
reassignment and release. Any such reassignment shall be without recourse to or
warranty by Pledgee or any such Representative and at the expense of Pledgor.
15. INSURANCE REGULATORY REQUIREMENTS. Anything in this Pledge Agreement to
the contrary notwithstanding, Pledgee may not exercise any of the rights or
powers described in Sections
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10
4, 5 and 10 hereof or otherwise foreclose upon or sell the Pledged Shares or the
Additional Pledged Securities, unless and until the Pledgee (and, in the cases
of a sale of the Pledged Shares or the Additional Pledged Securities, the
purchaser thereof) has complied, to the extent legally required, with all filing
requirements of all applicable laws of Delaware regulating the acquisition of
voting securities or control of any insurance company, and the acquisition of
the Pledged Collateral and the Additional Pledged Securities and control of NFL
by the Pledgee hereunder (or by the purchaser in any such sale) has, to the
extent legally required, been duly approved in accordance with all applicable
Delaware statutory and regulatory requirements and any other applicable laws.
16. NOTICES. All notices, requests, directions, consents, waivers and other
communications hereunder shall be in writing and shall be transmitted by the
means and to the addresses from time to time specified in the Financing
Agreement.
17. BINDING AGREEMENT; ASSIGNMENT. This Pledge Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that Pledgor shall not assign or
otherwise transfer any of its obligations, rights or interests hereunder without
the prior written consent of Pledgee.
18. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of Connecticut. Wherever
possible each provision of this Pledge Agreement shall be construed in such
manner as to be valid and enforceable under applicable law, but if any provision
hereof shall be deemed invalid or unenforceable to any extent in any
jurisdiction, such provision shall be ineffective only to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remainder of such provision or any of the other provisions hereof, and any
such invalidity or unenforceability in one jurisdiction shall not render such
provision ineffective in any other jurisdiction.
19. JURISDICTION; IMMUNITIES. (a) The Pledgor hereby irrevocably submits
to the jurisdiction of any Connecticut State or United States Federal court
sitting in Connecticut over any action or proceeding arising out of or relating
to this Pledge Agreement, and the Pledgor hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such Connecticut State or Federal court. The Pledgor irrevocably consents to the
service of any and all process in any such action or proceeding by the mailing
of copies of such process to the Pledgor at its address specified in Section 7.4
of the Financing Agreement. The Pledgor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
The Pledgor further waives any objection to venue in such State and any
objection to an action or proceeding in such State on the basis of forum non
conveniens. The Pledgor further agrees that any action or proceeding brought
against the Pledgee shall be brought only in Connecticut State or United States
Federal courts sitting in Connecticut.
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11
(b) Nothing in this Section 19 shall affect the right of the Pledgee to
serve legal process in any other manner permitted by law or affect the right of
the Pledgee to bring any action or proceeding against the Pledgor or its
Property in the courts of any other jurisdictions.
20. TITLES; COUNTERPARTS. Section titles are for convenience only and
shall not define, limit, amplify, supplement or otherwise modify or affect the
substance or intent of this Pledge Agreement or any provision hereof. This
Pledge Agreement may be executed in two(2) or more counterparts, each of which
shall when executed by both parties be deemed to be an original but all of which
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Pledge
Agreement to be duly executed by its respective authorized officer as of the
date first above written.
WESTBRIDGE CAPITAL CORP.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
FLEET NATIONAL BANK
By: /S/ ANSON HARRIS
Name: Anson Harris
Title: Assistant Vice President
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<PAGE>
12
ATTACHMENT A
ISSUED AND OUTSTANDING SHARES
OF CAPITAL STOCK
NAME OF ISSUER NO. OF SHARES CERTIFICATE NO.(S)
National Foundation Life 2,000,000 1
Insurance Company
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<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 91,022
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,594
<MORTGAGE> 671
<REAL-ESTATE> 0
<TOTAL-INVEST> 102,628
<CASH> 7,499
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 78,701
<TOTAL-ASSETS> 224,602
<POLICY-LOSSES> 95,974
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 379
<NOTES-PAYABLE> 35,548
20,000
0
<COMMON> 602
<OTHER-SE> 44,526
<TOTAL-LIABILITY-AND-EQUITY> 224,602
115,138
<INVESTMENT-INCOME> 6,590
<INVESTMENT-GAINS> 173
<OTHER-INCOME> 6,234
<BENEFITS> 68,790
<UNDERWRITING-AMORTIZATION> 16,576
<UNDERWRITING-OTHER> 19,934
<INCOME-PRETAX> 8,871
<INCOME-TAX> 3,105
<INCOME-CONTINUING> 5,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,603
<EPS-PRIMARY> .75
<EPS-DILUTED> .69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
