<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON January 29, 1997
REGISTRATION NO. 333-6011
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
------------------------
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT)
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<S> <C> <C>
DELAWARE 6312 22-2265014
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER NUMBER)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
116 HUNTINGTON AVENUE, BOSTON, MASSACHUSETTS 02116
(617) 266-6008
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
------------------------
Copies to:
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<S> <C>
JAMES D. GALLAGHER J. SUMNER JONES, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL JONES & BLOUCH L.L.P.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY 1025 THOMAS JEFFERSON STREET N.W.
73 TREMONT STREET WASHINGTON, DC 20007
BOSTON, MASSACHUSETTS 02108
(617) 266-6008
(NAME AND ADDRESS OF AGENT FOR SERVICE)
</TABLE>
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this registration statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
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Deferred Fixed Annuity
Contract Non-Participating... See Note (1) See Note (1) $200 million $60,606.06
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(1) The proposed aggregate offering price is estimated solely for determining
the registration fee. The amount to be registered and the proposed maximum
offering price per unit are not applicable since these securities are not
issued in predetermined amounts or units.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
CROSS REFERENCE TO ITEMS REQUIRED BY FORM S-1
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<CAPTION>
FORM S-1 ITEM NO. AND CAPTION PROSPECTUS HEADING
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1. Forepart of the Registration Statement and Cover Pages
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio Summary
of Earnings to Fixed Charges
4. Use of Proceeds North American Security Life Insurance
Company
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution North American Security Life Insurance
Company -- Distribution of the Contract
9. Description of Securities to be Registered Description of the Contract, Reinsurance
and Guarantees, North American Security
Life Insurance Company
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant North American Security Life Insurance
Company
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE> 3
PART 1
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 4
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Annuity Service Office Mailing Address
116 Huntington Avenue Post Office Box 9230
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6008 02205-9230
(800) 344-1029
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NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
DEFERRED FIXED ANNUITY
CONTRACT
NON-PARTICIPATING
This Prospectus describes Venture Market Value Adjusted Annuity ("Venture
MVA"), a single payment deferred fixed annuity contract, offered by North
American Security Life Insurance Company (the "Company"), a stock life insurance
company the ultimate parent of which is The Manufactuers Life Insurance Company
("Manulife").
The Prospectus describes both an individual deferred annuity contract and a
participating interest in a group deferred annuity contract. Both are designed
and offered to provide retirement programs for eligible individuals and
retirement plans. Participation in a group contract will be separately accounted
for by the issuance of a certificate evidencing the owner's interest under the
contract. Ownership of an individual contract is evidenced by the issuance of an
individual annuity contract. The certificate and individual annuity contract are
hereafter referred to as the "contract."
The purchase payment is paid to the Company at its Annuity Service Office.
The minimum purchase payment for a contract is $5,000. The maximum purchase
payment accepted without prior approval of the Company is $500,000. The purchase
payment is allocated to the guarantee period designated by the contract owner.
Additional purchase payments for a contract will not be accepted. Additional
contracts may, however, be purchased at the then prevailing rates and terms.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE FIXED ACCOUNT AND THE CONTRACT THAT A PROSPECTIVE
PURCHASER SHOULD KNOW BEFORE INVESTING.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE CONTRACT
OWNER BEARS THE INVESTMENT RISK THAT THE GUARANTEED INTEREST RATES OFFERED BY
THE COMPANY AT THE TIME OF WITHDRAWAL, TRANSFER OR THE START OF ANNUITY PAYMENTS
MAY BE HIGHER THAN THE GUARANTEED INTEREST RATE APPLIED TO THE CONTRACT WITH THE
RESULT THAT THE AMOUNT RECEIVED UPON WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY
BE REDUCED BY THE MARKET VALUE ADJUSTMENT AND MAY BE LESS THAT THE ORIGINAL
INVESTMENT IN THE CONTRACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY.
The date of the Prospectus is February 3, 1997
<PAGE> 5
AVAILABLE INFORMATION
Commencing with the offering of the securities described in this Prospectus,
North American Security Life Insurance Company will become subject to the
informational requirements of the Securities Exchange Act of 1934 (the "1934
Act"), as amended, and in accordance therewith will file reports and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at 75
Park Place, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission which is located at http://www.sec.gov.
A registration statement has been filed with the Commission under the Securities
Act of 1933, as amended, with respect to the contracts discussed in the
Prospectus. Not all the information set forth in the registration statement,
amendments and exhibits thereto has been included in this Prospectus. Statements
contained in this Prospectus concerning the content of the contracts and other
legal instruments are only summaries. For a complete statement of the terms of
these documents, reference should be made to the instruments filed with the
Commission. The Registration Statements and the exhibits thereto may be
inspected and copied, and copies can be obtained at the prescribed rates, in the
manner set forth in the preceding paragraph.
2
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TABLE OF CONTENTS
SPECIAL TERMS ............................................... 4
SUMMARY ..................................................... 6
DESCRIPTION OF THE CONTRACT ................................. 8
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT ............. 8
ACCUMULATION PROVISIONS ................................ 8
Purchase Payments ...................................... 8
GUARANTEE PERIODS ...................................... 8
Transfers Among Guarantee Periods ...................... 9
Telephone Transactions ................................. 9
Renewals ............................................... 9
Withdrawals ............................................ 9
Death Benefit Before Maturity Date ..................... 10
ANNUITY PROVISIONS ..................................... 11
General ................................................ 11
Annuity Options ........................................ 11
Death Benefit on or After Maturity Date ................ 12
OTHER CONTRACT PROVISIONS .............................. 12
Ten Day Right to Review ................................ 12
Ownership .............................................. 12
Beneficiary ............................................ 13
Annuitant .............................................. 13
Modification ........................................... 13
Company Approval ....................................... 13
Discontinuance of New Owners ........................... 13
MARKET VALUE ADJUSTMENT ................................ 13
CHARGES AND DEDUCTIONS ................................. 14
Withdrawal Charge ...................................... 14
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGE .......... 15
Taxes .................................................. 15
Administration Fee ..................................... 16
REINSURANCE ................................................. 16
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY .............. 16
Description of Business ................................ 16
Management Discussion & Analysis ....................... 17
Selected Financial Data ................................ 23
Officers and Directors of the Company .................. 24
Executive Compensation ................................. 25
NASL Fixed Account ..................................... 28
Distribution of the Contract ........................... 29
Legal Proceedings ...................................... 29
Legal Matters .......................................... 29
Independent Accountants ................................ 29
Notices and Reports to Contract Owners ................. 29
Contract Owner Inquiries ............................... 29
FEDERAL TAX MATTERS ......................................... 30
Introduction ........................................... 30
Taxation of Annuities in General ....................... 30
Qualified Retirement Plans ............................. 33
Federal Income Tax Withholding ......................... 34
GENERAL MATTERS ............................................. 34
Restrictions Under the Texas Optional Retirement Program 34
APPENDIX A - EXAMPLES OF CALCULATION OF WITHDRAWAL Charge ... 35
APPENDIX B - MARKET VALUE ADJUSTMENT EXAMPLES ............... 36
APPENDIX C - STATE PREMIUM TAXES ............................ 38
FINANCIAL STATEMENTS OF THE COMPANY ......................... 39
3
<PAGE> 7
SPECIAL TERMS
Annuitant Any individual person or persons whose life is used to
determine the duration of annuity payments involving life
contingencies. The Annuitant is as designated on the
contract or certificate specifications page or in the
application, unless changed.
Annuity Option One of several alternative methods by which payment
of the proceeds may be made.
Annuity Service The service office of the company is P.O. Box 9230, Boston
Office Massachusetts 02205-9230.
Beneficiary The person, persons, or entity to whom the death benefit
proceeds are payable following the death of the owner, or in
certain circumstances, an annuitant.
Certificate For a group contract, the documents issued to each owner
which summarizes the rights and benefits of the owner under
the contract.
Company North American Security Life Insurance Company.
Contingent The person, persons or entity who becomes the beneficiary if
Beneficiary the beneficiary is not alive.
Contract For an individual contract, the individual annuity contract.
For a group contract, the certificate evidencing a
participating interest in the group annuity contract. Any
reference in this prospectus to "contract" includes the
underlying group annuity contract.
Contract For an individual contract, the anniversary of the contract
Anniversary date. For a group contract, the anniversary of the date of
issue of a certificate under the contract.
Contract Date In the case of an individual annuity contract, the date of
issue of the contract as designated on the contract
specifications page. In the case of a group annuity
contract, the effective date of participation under the
group annuity contract as designated in the certificate
specifications page.
Contract Value The contract value is the sum of the net purchase payment
and accrued interest, less the sum of any withdrawals and
any administration fee, adjusted for any transfer market
value adjustment.
Contract Year The period of twelve consecutive months beginning on the
contract date, certificate date in the case of a group
contract, or any anniversary thereafter.
Code The Internal Revenue Code of 1986, as amended.
Due Proof of Death Due Proof of Death is required upon the death of the owner
or annuitant, as applicable. One of the following must be
received at the Annuity Service Office:
(a) A certified copy of a death certificate;
(b) A certified copy of a decree of a court of
competent jurisdiction as to the finding of
death; or
(c) Any other proof satisfactory to to the Company.
Death benefits will be paid within 7 days of receipt of due
proof of death and all required claim forms by the Company's
Annuity Service Office.
Fixed Account The NASL Fixed Account, which is a separate account of the
Company.
4
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Fixed Annuity An annuity option with payments which are predetermined and
guaranteed as to dollar amount.
General Account All of the assets of the Company other than assets in
separate accounts.
Group Holder In the case of a group annuity contract, the person, persons
or entity to whom the contract is issued.
Gross Withdrawal The portion of the contract value specified by the owner for
Value a full or partial withdrawal. Such amount is determined
prior to the application of any withdrawal charge, annual
administration fee and market value adjustment.
Initial Guarantee The period of time during which the initial guaranteed
Period interest rate is in effect.
Initial Guaranteed The compound annual rate used to determine the interest
Interest Rate earned on the net purchase payment during the initial
guarantee period.
Market Value An adjustment to amounts that are withdrawn or transferred
Adjustment prior to the end of the guarantee period. It may increase or
decrease the amount available for transfer or withdrawal.
Maturity Date The date on which annuity benefits commence. It is the date
specified on the contract specifications page, unless
changed.
Net Purchase The purchase payment less the amount of premium tax, if any,
Payment deducted from the payment.
Non-Qualified Certificates issued under non-qualified Contracts.
Certificates
Non-Qualified Contracts which are not issued under Qualified Plans.
Contracts
Owner or In the case of an individual contract, the person, persons
Contract Owner or entity entitled to the ownership rights under the
contract. In the case of a group annuity contract, the
person, persons or entity named in a certificate and
entitled to all of the ownership rights under the contract
not expressly reserved to the group holder. The owner is as
designated on the contract or certificate specifications
page or in the application, unless changed.
Payment or An amount paid by a contract owner to the Company as
Purchase Payment consideration for the benefits provided by the contract.
Qualified Certificates issued under qualified contracts.
Certificates
Qualified Contracts issued under Qualified Plans
Contracts
Qualified Plans Retirement plans which receive favorable tax treatment under
section 401, 403, 408 or 457 of the Code.
Renewal Amount The contract value at the end of the initial guarantee
period or at the end of a renewal guarantee period.
Renewal Guarantee The period of time during which a renewal guaranteed
Period interest rate is in effect.
Renewal Guaranteed The compound annual rate used to determine the interest
Interest Rate earned on a renewal amount during a renewal guarantee
period. In no event shall this rate be less than 3%.
Separate Account A segregated account of the Company that is not commingled
with the Company's general assets and obligations.
5
<PAGE> 9
SUMMARY
DESCRIPTION OF THE CONTRACT
The Contract. The contract offered by this Prospectus is a single purchase
payment deferred fixed annuity contract. The contract provides for the
accumulation of the contract value and the payment of annuity benefits on a
fixed basis. The Prospectus describes participating interests in both group
deferred annuity contracts and individual deferred annuity contracts. For
information on eligible groups for the group deferred annuity contracts see
"ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT."
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code, such as individual retirement
accounts and annuities, pension and profit-sharing plans for corporations and
sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), tax-sheltered
annuities, and state and local government deferred compensation plans. (See
"QUALIFIED RETIREMENT PLANS") Those who are considering purchase of a contract
for use in connection with a qualified retirement plan should consider, in
evaluating the suitability of the contract, that the contract allows only a
single premium purchase payment in an amount of at least $5,000.
Purchase Payments. Purchase payments are paid to the Company at its Annuity
Service Office. The minimum purchase payment for a contract is $5,000. The
maximum purchase payment accepted without prior approval of the Company is
$500,000. The purchase payment is allocated to the guarantee period designated
by the contract owner. Additional purchase payments for a contract will not be
accepted. Additional contracts may, however, be purchased at the then prevailing
rates and terms.
Prior to the maturity date, the Company may, at its option, cancel a
contract following the second contract anniversary if both (i) the total
purchase payment made, less any withdrawals, is less than $2,000; and (ii) the
higher of the contract value or the amount available upon total withdrawal is
less than $2,000. The cancellation of contract privileges may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states. (See "PURCHASE PAYMENTS")
Guarantee Periods. Currently, there are ten guarantee periods under the
contract: one year through ten years. The Company may offer additional guarantee
periods for any yearly period from one to twenty years. (See "INVESTMENT
OPTIONS")
Transfers Among Guarantee Periods. Before the maturity date, the contract
owner may transfer the entire contract value to a different guarantee period at
any time upon written notice to the Company or by telephone if the contract
owner authorizes the Company in writing to accept telephone transfer requests.
Amounts may only be transferred, however, once per contract year and the entire
amount of the account must be transferred. Amounts transferred will be subject
to a market value adjustment. (See "TRANSFERS AMONG INVESTMENT OPTIONS")
Telephone Transactions. Contract owners are permitted to request transfers
or withdrawals by telephone. (See "TELEPHONE TRANSACTIONS")
Renewals. At the end of a guarantee period, the contract owner may choose a
renewal guarantee period from any of the then existing guarantee period options,
at the then current interest rates. (See "RENEWALS")
Withdrawals. Prior to the earlier of the maturity date or the death of the
contract owner, the owner may withdraw all or a portion of the contract value.
The amount withdrawn must be at least $300 or, if less, the entire contract
value. If a partial withdrawal plus any applicable withdrawal charge, after
giving effect to any market value adjustment would reduce the contract value to
less than $300, the Company will treat the partial withdrawal as a total
withdrawal of the contract value. A withdrawal charge and market value
adjustment may be imposed. (See "WITHDRAWALS") A withdrawal may be subject to a
penalty tax. (See "FEDERAL TAX MATTERS")
Death Benefits. The Company will pay the death benefit to the beneficiary
if any contract owner dies before the maturity date. The death benefit is equal
to the contract value. If there is a surviving contract owner, that contract
owner will be deemed to be the beneficiary. No death benefit is payable on the
death of any annuitant, except that if any contract owner is not a natural
person, the death of any annuitant will be treated as the death of an owner. The
death benefit will be determined as of the date on which written notice and
proof of death and all required claim forms are received at the Company's
Annuity Service Office.
6
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Annuity Payments. The Company offers a variety of fixed annuity options.
Periodic annuity payments will begin on the maturity date. The contract owner
may select the maturity date, frequency of payment and annuity option. (See
"ANNUITY PROVISIONS")
Ten Day Review. Within 10 days of receipt of a contract, the contract owner
may cancel the contract by returning it to the Company or its agent. (See "TEN
DAY RIGHT TO REVIEW")
Market Value Adjustment. Any amount withdrawn, transferred or annuitized
prior to the end of either the initial guarantee period or a renewal guarantee
period will be adjusted by the market value adjustment factor described under
"MARKET VALUE ADJUSTMENT."
Withdrawal Charge. If a withdrawal is made from the contract before the
maturity date, a withdrawal charge (contingent deferred sales charge) may be
assessed against amounts withdrawn during the first seven contract years. There
is never a withdrawal charge with respect to certain free withdrawal amounts
described below or after seven complete contract years. The amount of the
withdrawal charge and when it is assessed is discussed under "CHARGES AND
DEDUCTIONS - WITHDRAWAL CHARGE."
Tax Deferral. The status of the contract as an annuity generally allows all
earnings on the underlying investments to be tax-deferred until withdrawn or
until annuity payments begin. (See "FEDERAL TAX MATTERS"). This tax deferred
treatment may be beneficial to contract owners in building assets in a long-term
investment program.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
North American Security Life Insurance Company ("the Company") is a stock
life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and
Manulife, the Company experienced a corporate restructuring which resulted in
the formation of a newly organized holding corporation, NAWL Holding Company,
Inc. ("NAWL"). NAWL holds all of the outstanding shares of the Company and Wood
Logan Associates, Inc. ("WLA"). Manulife owns all class A shares of NAWL,
representing 85% of the voting shares of NAWL. Certain employees of WLA own all
class B shares, which represent the remaining 15% voting interest in NAWL.
The Company issues fixed and variable annuity and variable life contracts.
Amounts invested in the fixed portion of the contracts are allocated either to
the general account of the Company or in the case of the contract described in
this Prospectus, to a separate account of the Company. Amounts invested in the
variable portion of the contracts are allocated to the separate accounts of the
Company (excluding the Fixed Account). These separate account assets are
invested in shares of NASL Series Trust, a no-load, open end management
investment company organized as a Massachusetts business trust.
An indemnity coinsurance agreement was entered into between the Company and
Peoples Security Life Insurance Company ("Peoples"), a subsidiary of the
Providian Corporation, to reinsure fixed annuity business written by the Company
for the product described in this prospectus. The indemnity aspects of the
agreement provide that the Company remains liable for the contractual
obligations whereas Peoples agrees to indemnify the Company for any contractual
claims incurred. The coinsurance aspects of the agreement require the Company to
transfer to Peoples an agreed upon percentage (currently, 100%) of all fixed
premiums received by the Company for fixed annuity contracts written for the
product described in this prospectus. Peoples reimburses the Company for the
same agreed upon percentage of claims and provides expense allowances to cover
commission and other costs associated with this fixed annuity business. Peoples
contractual liability runs solely to the Company, and no contract owner shall
have any right of action against Peoples. Peoples is responsible for investing
the assets and is at risk for any potential investment gains and losses. There
is no recourse back to the Company if investment losses are incurred.
The above summary is qualified in its entirety by the detailed information
appearing elsewhere in this Prospectus .
7
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DESCRIPTION OF CONTRACT
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT
The group deferred annuity contract may be issued to fund plans qualifying
for special income tax treatment under the Internal Revenue Code, such as
individual retirement accounts and annuities, pension and profit-sharing plans
for corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh"
plans), tax-sheltered annuities, and state and local government deferred
compensation plans. Those who are considering purchase of a contract for use in
connection with a qualified retirement plan should consider, in evaluating the
suitability of the contract, that the contract allows only a single premium
purchase payment in an amount of at least $5,000. (See "QUALIFIED RETIREMENT
PLANS") The group deferred annuity contract is also designed so that it may be
used with non-qualified retirement plans, such as deferred compensation and
payroll savings plans and such other groups (trusteed or non-trusteed) as may be
eligible under applicable law. Group deferred annuity contracts have been issued
to the Security Life Trust, a trust established with United Missouri Bank, N.A.,
Kansas City, Missouri, as group holder for groups comprised of persons who have
brokerage accounts with brokers having selling agreements with NASL Financial
Services, Inc., the principal underwriter of the contracts.
An eligible member of a group to which a contract has been issued may
become an owner under the contract by submitting a completed application, if
required by the Company, and a minimum purchase payment. A certificate
summarizing the rights and benefits of the owner under the contract will be
issued to an applicant acceptable to the Company. The Company reserves the right
to decline to issue a certificate to any person in its sole discretion. All
rights and privileges under the contract may be exercised by each owner as to
his or her interest unless expressly reserved to the group holder. However,
provisions of any plan in connection with which the contract was issued may
restrict an owner's ability to exercise such rights and privileges.
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service Office.
The minimum purchase payment for a contract is $5,000. The maximum purchase
payment accepted without prior approval of the Company is $500,000. The purchase
payment is allocated to the guarantee period selected by the contract owner.
Additional purchase payments for a contract will not be accepted. Additional
contracts may, however, be purchased at the then prevailing rates and terms.
Prior to the maturity date, the Company may, at its option, cancel a
contract following the second contract anniversary, if both (i) the total
purchase payment made, less any withdrawals, is less than $2,000; and (ii) the
higher of the contract value or the amount available upon total withdrawal is
less than $2,000. The cancellation of contract privileges may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such state. Upon cancellation the Company will pay the contract
owner the higher of the contract value and any annual administration fee or the
amount available upon total withdrawal. The amount paid will be treated as a
withdrawal for Federal tax purposes and thus may be subject to income tax and to
a 10% penalty tax. (See "FEDERAL TAX MATTERS")
GUARANTEE PERIODS
Currently, there are ten guarantee periods: one year through ten years. The
Company may offer additional guarantee periods for any yearly period from one to
twenty years. The contract provides for the accumulation of interest on the
purchase payment at guaranteed rates for the duration of the guarantee period.
From time to time, customers of certain broker-dealers may be offered special
initial guaranteed interest rates which are higher than the initial guaranteed
interest rate offered to the general public. In consideration of these higher
interest rates, commissions to these broker-dealers may be reduced. The renewal
guaranteed interest rate on a renewal amount allocated or transferred to a
renewal guarantee period is determined from time-to-time by the Company in
accordance with market conditions. Under certain circumstances, the Company may
offer a rate in excess of the renewal guaranteed rate for the first year only of
a renewal guarantee period. In no event will the renewal guaranteed interest
rate be less than 3%. The interest rate is guaranteed for the duration of the
guarantee period and may not be changed by the Company.
8
<PAGE> 12
For information on the reinsurance for the product described in this
prospectus see "REINSURANCE."
TRANSFERS AMONG GUARANTEE PERIODS
Before the maturity date the contract owner may transfer the entire
contract value to a different guarantee period at any time upon written notice
to the Company or by telephone if the contract owner authorizes the Company in
writing to accept telephone transfer requests. Amounts may only be transferred,
however, once per contract year and the entire contract value must be
transferred. Amounts transferred will be subject to a transfer market value
adjustment. The amount requested to be transferred will be multiplied by the
market value adjustment factor to determine the transferred amount. (See "MARKET
VALUE ADJUSTMENT"). The Company also reserves the right to modify or terminate
the transfer privilege at any time in accordance with applicable law.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers or withdrawals by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request transfers or withdrawals by telephone, a contract owner
must elect the option on an appropriate authorization form provided by the
Company. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following: Upon
telephoning a request, contract owners will be asked to provide certain
identifying information. For the contract owner's and Company's protection, all
conversations with contract owners will be tape recorded. All telephone
transactions will be followed by a confirmation statement of the transaction.
RENEWALS
At the end of a guarantee period, the contract owner may choose a renewal
guarantee period from any of the then existing guarantee periods at the then
current interest rate, all without the imposition of any charge. The contract
owner may not select a guarantee period that would extend beyond the maturity
date. In the case of renewals within one year of the maturity date, the only
option available is to have interest accrued up to the maturity date at the then
current interest rate for one year guarantee periods.
If the contract owner does not specify the renewal guarantee period
desired, the Company will select the same guarantee period as has just expired,
so long as such period does not extend beyond the maturity date. In the event a
renewal would extend beyond the maturity date, the Company will select the
longest period that will not extend beyond such date, except in the case of a
renewal within one year of the maturity date in which case the Company will
credit interest up to the maturity date at the then current interest rate for
one year guarantee periods.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the contract
owner, the owner may withdraw all or a portion of the contract value upon
written request, complete with all necessary information, to the Company's
Annuity Service Office. For certain qualified contracts, exercise of the
withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department.
In the case of a total withdrawal, as of the date of receipt of the request
at its Annuity Service Office, the Company will cancel the contract and pay the
following amount:
C + [ (A - B - C) x D], where:
A=the gross withdrawal value reduced by an applicable annual administration fee;
B=the withdrawal charge;
C=the free withdrawal amount;
D=the market value adjustment factor.
(See "CHARGES AND DEDUCTIONS and `MARKET VALUE ADJUSTMENT")
9
<PAGE> 13
Partial withdrawals will use the formula specified above and the gross
withdrawal value to determine the amount payable. Partial withdrawals will be
subject to market value adjustments and possible withdrawal charges. The Company
will deduct the gross withdrawal value from the contract value. The gross
withdrawal value may not exceed the contract value.
The Company may defer the payment of a full or partial withdrawal for not
more than six months (or the period permitted by applicable state law if
shorter) from the date the Company receives the withdrawal request and the
contract. If payments are deferred thirty days or more, the amount deferred will
earn interest at a rate not less than 3% per year or at a rate determined by
applicable state law. The Company will not, however, defer payment for more than
thirty days for any withdrawal effective at the end of any guarantee period.
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire contract value.
If a partial withdrawal plus any applicable withdrawal charge, after giving
effect to any market value adjustment would reduce the contract value to less
than $300, the Company will treat the partial withdrawal as a total withdrawal
of the contract value.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS")
TELEPHONE REDEMPTIONS. The contract owner may request the option to
withdraw a portion of the contract value by telephone by completing the
application described under "Telephone Transactions" above. The Company reserves
the right to impose maximum withdrawal amounts and procedural requirements
regarding this privilege. For additional information on Telephone Redemptions
see "Telephone Transactions" above.
DEATH BENEFIT BEFORE MATURITY DATE
In General. The following discussion applies principally to contracts that
are not issued in connection with qualified plans, i.e., a "non-qualified
contract." The requirements of the tax law applicable to qualified plans, and
the tax treatment of amounts held and distributed under such plans, are quite
complex. Accordingly, a prospective purchaser of the contract to be used in
connection with a qualified plan should seek competent legal and tax advice
regarding the suitability of the contract for the situation involved and the
requirements governing the distribution of benefits, including death benefits,
from a contract used in the plan.
Determination of Death Benefit. The determination of the death benefit will
be made on the date written notice and proof of death, as well as all required
claims forms, are received at the Company's Annuity Service Office. No person is
entitled to the death benefit until this time.
Amount and Payment of Death Benefit. The Company will pay a death benefit
equal to the contract value to the beneficiary if any contract owner dies before
the maturity date. If there is a surviving contract owner, that contract owner
will be deemed to be the beneficiary. No death benefit is payable on the death
of any annuitant, except that if any contract owner is not a natural person, the
death of any annuitant will be treated as the death of an owner. On the death of
the last surviving annuitant, the contract owner, if a natural person, will
become the annuitant unless the contract owner designates another person as the
annuitant.
The death benefit may be taken in the form of a lump sum immediately. If
not taken immediately, the contract will continue subject to the following: (1)
The beneficiary will become the contract owner. (2) No additional purchase
payments may be made. (3) If the beneficiary is not the deceased owner's spouse,
distribution of the contract owner's entire interest in the contract must be
made within five years of the owner's death, or alternatively, distribution may
be made as an annuity, under one of the annuity options described below, which
begins within one year of the owner's death and is payable over the life of the
beneficiary or over a period not extending beyond the life expectancy of the
beneficiary. If the beneficiary dies before distributions described in "(3)"
above are completed, the entire remaining contract value must be distributed in
a lump sum immediately. (4) If the owner's spouse is the beneficiary, the spouse
continues the contract as the new owner. In such a case, the distribution rules
described in "(3)" applicable when a contract owner dies will apply when the
spouse, as the owner, dies.
If any annuitant is changed and any contract owner is not a natural person,
the entire interest in the contract must be distributed to the contract owner
within five years.
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<PAGE> 14
Death benefits will be paid within seven days of the date the amount of the
death benefit is determined, as described above, subject to postponement under
the same circumstances that payment of withdrawals may be postponed. (See
"WITHDRAWALS")
ANNUITY PROVISIONS
GENERAL
The proceeds of the contract payable on death, withdrawal or the contract
maturity date may be applied to the annuity options described below, subject to
the distribution of death benefit provisions. See "DEATH BENEFIT BEFORE MATURITY
DATE")
Generally, annuity benefits under the contract will begin on the maturity
date. The maturity date is the date specified on the contract specifications
page, unless changed. If no date is specified, the maturity date is the maximum
maturity date described below. The maximum maturity date is the first day of the
month following the later of the 85th birthday of the annuitant or the tenth
contract anniversary. The contract owner may specify a different maturity date
at any time by written request at least one month before both the previously
specified and the new maturity date. The new maturity date may not be later than
the maximum maturity date unless the Company consents. Maturity dates which
occur at advanced ages, e.g., past age 85, may in some circumstances have
adverse income tax consequences. See "FEDERAL TAX MATTERS" Distributions from
qualified contracts may be required before the maturity date.
The contract owner may select the frequency of annuity payments. However,
if the contract value at the maturity date is such that a monthly payment would
be less than $20, the Company may pay the higher of contract value and any
annual administration fee or the amount available upon total withdrawal in one
lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed basis. Upon
purchase of the contract, and on or before the maturity date, the contract owner
may select one or more of the annuity options described below or choose an
alternate form of settlement acceptable to the Company. If an annuity option is
not selected, the Company will provide as a default option annuity payments to
be made for a period certain of 10 years and continuing thereafter during the
lifetime of the annuitant. Treasury Department regulations may preclude the
availability of certain annuity options in connection with certain qualified
contracts.
The following annuity options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments during the
lifetime of the annuitant. No payments are due after the death of the
annuitant. Since there is no guarantee that any minimum number of payments
will be made, an annuitant may receive only one payment if the annuitant
dies prior to the date the second payment is due.
Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An
annuity with payments guaranteed for 10 years and continuing thereafter
during the lifetime of the annuitant. Since payments are guaranteed for 10
years, annuity payments will be made to the end of such period if the
annuitant dies prior to the end of the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with
payments during the lifetimes of the annuitant and a designated
co-annuitant. No payments are due after the death of the last survivor of
the annuitant and co-annuitant. Since there is no guarantee that any
minimum number of payments will be made, an annuitant or co-annuitant may
receive only one payment if the annuitant and co-annuitant die prior to the
date the second payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for 10
Years - An annuity with payments guaranteed for 10 years and continuing
thereafter during the lifetimes of the annuitant and a designated
co-annuitant. Since payments are guaranteed for 10 years, annuity payments
will be made to the end of such period if both the annuitant and the
co-annuitant die prior to the end of the tenth year.
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<PAGE> 15
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years - An
Annuity with payments guaranteed for 5, 15 or 20 years and continuing
thereafter during the lifetime of the annuitant. Since payments are
guaranteed for the specific number of years, annuity payments will be made
to the end of the last year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An annuity
with full payments during the joint lifetime of the annuitant and a
designated co-annuitant and two-thirds payments during the lifetime of the
survivor. Since there is no guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only one payment if
the annuitant and co-annuitant die prior to the date the second payment is
due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An
annuity with payments for a 5, 10, 15 or 20 year period and no payments
thereafter.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an annuity option providing
for payments for a guaranteed period, and the annuitant dies on or after the
maturity date, the Company will make the remaining guaranteed payments to the
beneficiary. Any remaining payments will be made as rapidly as under the method
of distribution being used as of the date of the annuitant's death. If no
beneficiary is living, the Company will commute any unpaid guaranteed payments
to a single sum (on the basis of the interest rate used in determining the
payments) and pay that single sum to the estate of the last to die of the
annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the Service
Office or agent at any time within 10 days after receipt of the contract. Within
7 days of receipt of the contract by the Company, the Company will refund the
payment made for the contract.
No withdrawal charge is imposed upon return of the contract within the ten
day right to review period. The ten day right to review may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states. When the certificate is issued as an individual
retirement annuity under Internal Revenue Code section 408, during the first 7
days of the 10 day period, the Company will return the contract value if this is
greater than the amount otherwise payable.
OWNERSHIP
In the case of an individual annuity contract, the contract owner is the
person entitled to exercise all rights under the contract. In the case of a
group annuity contract, the contract is owned by the group holder; however, all
contract rights and privileges not expressly reserved to the group holder may be
exercised by each owner as to his or her interest as specified in his or her
certificate. Prior to the maturity date, the contract owner is the person
designated in the contract specifications page or as subsequently named. On and
after the maturity date, the annuitant is the contract owner. If amounts become
payable to any beneficiary under the contract, the beneficiary is the contract
owner.
In the case of non-qualified contracts, ownership of the contract may be
changed or the contract may be collaterally assigned at any time prior to the
maturity date, subject to the rights of any irrevocable beneficiary. Assigning a
contract, or changing the ownership of a contract, may be treated as a
distribution of the contract value for Federal tax purposes. (See "FEDERAL TAX
MATTERS")
Any change of ownership or assignment must be made in writing. Any change
must be approved by the Company. Any assignment and any change, if approved,
will be effective as of the date the Company receives the
12
<PAGE> 16
request at its Annuity Service Office. The Company assumes no liability for any
payments made or actions taken before a change is approved or an assignment is
accepted or responsibility for the validity or sufficiency of any assignment. An
absolute assignment will revoke the interest of any revocable beneficiary.
In the case of qualified contracts, ownership of the contract generally may
not be transferred except by the trustee of an exempt employees' trust which is
part of a retirement plan qualified under Section 401 of the Internal Revenue
Code or as otherwise permitted by applicable IRS regulations. Subject to the
foregoing, a qualified contract may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose to any person other than
the Company.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the contract
specifications page or as subsequently named. However, if there is a surviving
contract owner, that person will be treated as the beneficiary. The beneficiary
may be changed subject to the rights of any irrevocable beneficiary. Any change
must be made in writing, approved by the Company and if approved, will be
effective as of the date on which written. The Company assumes no liability for
any payments made or actions taken before the change is approved. If no
beneficiary is living, the contingent beneficiary will be the beneficiary. The
interest of any beneficiary is subject to that of any assignee. If no
beneficiary or contingent beneficiary is living, the beneficiary is the estate
of the deceased contract owner. In the case of certain qualified contracts,
regulations promulgated by the Treasury Department prescribe certain limitations
on the designation of a beneficiary.
ANNUITANT
The annuitant is any natural person or persons whose life is used to
determine the duration of annuity payments involving life contingencies. If the
contract owner names more than one person as an "annuitant," the second person
named shall be referred to as "co-annuitant." The annuitant is as designated on
the contract specifications page or in the application, unless changed.
On the death of the annuitant, the co-annuitant, if living, becomes the
annuitant. If there is no living co-annuitant, the owner becomes the annuitant.
In the case of certain qualified contracts, there are limitations on the ability
to designate and change the annuitant and the co-annuitant.
MODIFICATION
The Company will not change or modify the contract without the owner's or
group holder's consent, as applicable, except to the extent necessary to conform
to any applicable law or regulation or any ruling issued by a government agency.
However, on 60 days' notice to the group holder, the Company may change the
withdrawal charges, administration fees, free withdrawal percentage, annuity
purchase rate and the market value adjustment as to any certificates issued
after the effective date of the modification. The provisions of the contract
shall be interepreted so as to comply with the requirements of Section 72(s) of
the Code.
COMPANY APPROVAL
The Company reserves the right to accept or reject a contract application
at its sole discretion.
DISCONTINUANCE OF NEW OWNERS
In the case of a group annuity contract, on thirty days' notice to the
group holder, the company may limit or discontinue acceptance of new
applications and the issuance of new certificates under a contract.
MARKET VALUE ADJUSTMENT
Any amount withdrawn, transferred or annuitized prior to the end of either
the initial guarantee period or a renewal guarantee period will be adjusted by
the market value adjustment factor described below.
The market value adjustment factor is determined by the following formula:
((1+i)/(1+j))n/12 where:
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<PAGE> 17
i - The initial guaranteed interest rate or renewal guaranteed interest
rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the request is
processed by the Company, for a guarantee period with the same length as
the period remaining in the initial guarantee period or guarantee period.
If the guarantee period of this length is not available, the guarantee
period with the next highest duration which is maintained by the Company
will be chosen.
n - The number of complete months remaining to the end of the initial
guarantee period or renewal guarantee period.
There will be no market value adjustment in the following situations: (a)
death of the contract owner; (b) amounts withdrawn within one month prior to the
end of the guarantee period; and (c) amounts withdrawn in any contract year that
do not exceed (i) 10% of total purchase payments less (ii) any prior partial
withdrawals in that year.
The market value adjustment reflects the relationship between the initial
guaranteed interest rate or the renewal guaranteed interest rate applicable to
the contract and the then current available guaranteed interest rate. Generally,
if the initial guaranteed interest rate or the renewal guaranteed interest rate
is lower than the then current available guaranteed interest rate, then the
effect of the market value adjustment will be to reduce the amount withdrawn,
transferred or annuitized. Similarly, if the initial guaranteed interest rate or
the renewal guaranteed interest rate is higher than the then current available
guaranteed interest rate, then the effect of the market value adjustment will be
to increase the amount withdrawn, transferred or annuitized. The greater the
difference in these interest rates the greater the effect of the market value
adjustment.
The market value adjustment is also affected by the amount of time
remaining in the guarantee period. Generally, the longer the time remaining in
the guarantee period, the greater the effect of the market value adjustment on
the amount withdrawn, transferred or annuitized. This is because the longer the
time remaining in the guarantee period, the higher the compounding factor `n' in
the market value adjustment factor.
The cumulative effect of the market value adjustment and withdrawal charges
could result in a contract owner receiving total withdrawal proceeds of less
than the contract owner's investment in the contract.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE
CONTRACT OWNER BEARS THE INVESTMENT RISK THAT THE CURRENT AVAILABLE GUARANTEED
INTEREST RATE OFFERED BY THE COMPANY AT THE TIME OF WITHDRAWAL, TRANSFER OR
ANNUITIZATION MAY BE HIGHER THAN THE INITIAL OR RENEWAL GUARANTEE INTEREST RATE
APPLICABLE TO THE CONTRACT WITH THE RESULT THAT THE AMOUNT THE CONTRACT OWNER
RECEIVES UPON A WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY BE SUBSTANTIALLY
REDUCED.
For more information on the market value adjustment, including examples of
its calculation, see Appendix B.
CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn during the first seven contract years. There is never a
withdrawal charge with respect to certain free withdrawal amounts described
below or after seven complete contract years. The amount of the withdrawal
charge and when it is assessed is discussed below:
1. In any contract year, the free withdrawal amount for that year is the
excess of (i) over (ii), where (i) is 10% of the purchase payment and (ii) is
all prior partial withdrawals in that contract year. Withdrawals allocated to
the free withdrawal amount may be withdrawn without the imposition of a
withdrawal charge.
2. If a withdrawal is made at the end of the initial guarantee period, no
withdrawal charge will be applied provided such withdrawal occurs on or after
the end of the third contract year. If a withdrawal is made at the end of
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<PAGE> 18
any other guarantee period, no withdrawal charge will be applied provided such
withdrawal occurs on or after the end of the fifth contract year. A request for
withdrawal at the end of a guarantee period must be received in writing during
the 30 days period preceding the end of that guarantee period.
<TABLE>
3. The amount of the withdrawal charge is calculated by multiplying the
gross withdrawal value, less any administration fee and free withdrawal amount
by the applicable withdrawal charge percentage obtained from the table below.
<CAPTION>
NUMBER OF COMPLETED WITHDRAWAL CHARGE
CONTRACT YEARS PERCENTAGE
-----------------------------------------------------
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
</TABLE>
4. There is generally no withdrawal charge on distributions made as a
result of the death of the contract owner or, if applicable, the annuitant, (see
"Death Benefit Before Maturity Date - Amount of Death Benefit).
The amount collected from the withdrawal charge will be used to reimburse
the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
Withdrawals may be subject to a market value adjustment in addition to the
withdrawal charge described above. (See "MARKET VALUE ADJUSTMENT.")
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract or the period to which it
applies may from time to time be reduced or eliminated for sales of the
contracts to certain individuals or groups of individuals in such a manner that
results in savings of sales expenses. The Company will consider such factors as
(i) the size and type of group, (ii) the amount of the single premium and/or
(iii) other transactions where sales expenses are reduced, when considering
whether to reduce or eliminate the sales charge or the period to which it
applies.
TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values, death benefits or annuity payments.
Such taxes may include premium taxes or other taxes levied by any government
entity which the Company determines to have resulted from the (i) establishment
or maintenance of the Fixed Account, (ii) receipt by the Company of purchase
payments, (iii) issuance of the contracts, (iv) commencement or continuance of
annuity payments under the contracts or (v) death of the owner or annuitant. In
addition, the Company will withhold taxes to the extent required by applicable
law.
Except for residents in South Dakota, premium taxes will be deducted from
the contract value used to provide for annuity payments unless required
otherwise by applicable law. The amount deducted will depend on the premium tax
assessed in the applicable state. State premium taxes currently range from 0% to
3.5% depending on the jurisdiction and the tax status of the contract and are
subject to change by the legislature or other authority. (See "APPENDIX B: STATE
PREMIUM TAXES") FOR RESIDENTS OF SOUTH DAKOTA, THE FOLLOWING PREMIUM TAX
ASSESSMENT WILL APPLY: A premium tax will be assessed against all non-qualified
purchase payments received from contract owners who are residents of South
Dakota. The rate of tax is 1.25%. The state premium tax will be collected upon
payment of any withdrawal benefits, upon any annuitization or payment of death
benefits. In the state of South Dakota, purchase payments received in connection
with the funding of a qualified plan are exempt from state premium tax.
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<PAGE> 19
ADMINISTRATION FEE
To compensate the Company for assuming certain administrative expenses, the
Company reserves the right to charge an annual administration fee. Prior to the
maturity date, the administration fee is deducted on the last day of each
contract year. If the contract is surrendered for its contract value on any date
other than the last day of any contract year, the Company will deduct the full
amount of the administration fee from the amount paid. Currently, no fee is
being assessed.
REINSURANCE
An indemnity coinsurance agreement was entered into between the Company and
Peoples Security Life Insurance Company ("Peoples"), a subsidiary of the
Providian Corporation, to reinsure fixed annuity business written by the Company
for the product described in this prospectus.
The indemnity aspects of the agreement provide that the Company remains
liable for the contractual obligations whereas Peoples agrees to indemnify the
Company for any contractual claims incurred. The coinsurance aspects of the
agreement require the Company to transfer to Peoples an agreed upon percentage
(currently, 100%) of assets backing the fixed annuity premiums received by the
Company for fixed annuity contracts. Peoples reimburses the Company for a
percentage of claims and provides expense allowances to cover commission and
other costs associated with this fixed annuity business. Peoples contractual
liability runs solely to the Company, and no contract owner shall have any right
of action against Peoples.
Peoples is responsible for investing the fixed annuity premiums received
and is at risk for any potential investment gains and losses. Under this
agreement, the Company will continue to administer the fixed annuity business
for which it will earn an expense allowance. The Company has set up a reserve to
recognize that expense allowances received from Providian under this indemnity
coinsurance agreement do not fully reimburse the Company for overhead expenses
allocated to this fixed annuity line of business (See Note F to the Company's
financial statements).
Peoples is a wholly-owned subsidiary of Louisville, Kentucky based Providian
Corporation, a diversified financial services corporation.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
DESCRIPTION OF BUSINESS
Organization and History
------------------------
North American Security Life Insurance Company (the "Company") is a stock
life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and
Manulife, the Company experienced a corporate restructuring which resulted in
the formation of a newly organized holding corporation, NAWL Holding Company,
Inc. ("NAWL"). NAWL holds all of the outstanding shares of the Company and Wood
Logan Associates, Inc. ("WLA"). Manulife owns all class A shares of NAWL,
representing 85% of the voting shares of NAWL. Certain employees of WLA own all
class B shares, which represent the remaining 15% voting interest in NAWL.
On June 19, 1992, the Company formed First North American Life Assurance
Company ("FNAL"). Subsequently, on July 22, 1992, FNA was granted a license by
the New York State Insurance Department. FNAL issues fixed and variable annuity
contracts in the State of New York.
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<PAGE> 20
NASL Financial Services, Inc. ("NASL Financial"), a wholly-owned subsidiary
of the Company, acts as principal underwriter to the contracts issued by the
Company and FNAL. NASL Financial has entered into a promotional agent agreement
with WLA to act as the non-exclusive agent for the promotion of the Company's
insurance contract sales. (See "Distributor" below).
Product Lines
-------------
The Company issues fixed and variable annuities and variable life
contracts. Premiums received during 1995 totaled $1,090.0 million, gross of
reinsurance of $98.4 million, and included $1.8 million from individual fixed
annuity contracts, $11.1 million from variable annuity contracts, $1,076.9
million from combination fixed and variable annuity contracts and $0.2 million
from variable life contracts. Amounts invested in the fixed portion of the
Company's insurance contracts are allocated to the general account of the
Company or in the case of the contract described in this prospectus, to a
non-unitized separate account of the Company. Amounts invested in the variable
portion of the contracts are allocated to separate accounts of the Company. The
separate account assets (other than the separate account described in this
prospectus) are invested in shares of NASL Series Trust, a no-load, open end
management investment company organized as a Massachusetts business trust.
The Company also sponsors a family of mutual funds, the North American
Funds, which is advised by NASL Financial Services, Inc. Currently, the North
American Funds is comprised of thirteen portfolios. Assets under management as
of December 31, 1995 were approximately $734.3 million.
As of December 31, 1996, the Company was licensed to sell fixed and
variable annuities insurance in all states except New Hampshire, New York, Rhode
Island and Vermont and was licensed to sell variable life insurance in all
states except New Hampshire, New York, North Carolina and Vermont.
Property and Office Location
----------------------------
The Company's offices are located at 116 Huntington Avenue, Boston,
Massachusetts where the Company leases office space. The Company owns no real
property which is used for business purposes.
MANAGEMENT DISCUSSION & ANALYSIS
Overview
--------
The Company issues fixed and variable annuity contracts and variable life
insurance. Amounts invested in variable contracts are allocated to separate
accounts of the Company. The assets of the separate accounts are invested in
shares of the NASL Series Trust, a no-load, open-end management investment
company organized as a Massachusetts business trust. Amounts invested in the
fixed portion of the contracts are subject to an indemnity coinsurance agreement
entered into between the Company and Peoples Security Life Insurance Company
("Peoples") effective June 30, 1995. All sales and marketing support for the
annuity and life business is provided by Wood Logan Associates, Inc. Annuity
and variable life products are primarily sold through major wirehouses,
regional broker dealers, financial planners and banks.
The Company's primary sources of earnings are separate account fees earned on
variable contractholders' account balances and advisory fees earned on separate
account assets. Hence, a key factor in the Company's profitability is sustained
growth in the underlying assets through market performance coupled with the
ability to acquire and retain annuity and variable life deposits. Yet, although
strong sales position the Company for future growth in surplus, initially under
statutory accounting there is a loss from operations due to the expensing of
acquisition costs (principally commission costs) in excess of the expense
allowances provided in the reserve basis. Whenever a company experiences rapid
growth relative to the total business in force, as the Company did from 1992
through September 30, 1996, the first year losses on new business will
generally exceed the profits generated on the in force business. This result is
due to the conservative nature of statutory accounting. Eventually, as the
profits on the in force block of business become greater than the cost of
writing new business, profits will emerge.
Basis of Presentation
17
<PAGE> 21
Financial results have been prepared on the basis of statutory accounting
practices which until December 31, 1995, were considered by the insurance
industry to be in accordance with generally accepted accounting principles
(GAAP) for mutual life insurance companies and their wholly-owned subsidiaries.
Commencing January 1, 1996, financial statements prepared on the basis of
statutory accounting practices will no longer be considered in accordance with
GAAP. A description of the accounting policies can be found in Note B to the
December 31, 1995 audited financial statements.
Results of Operations
---------------------
September 30, 1996 Compared to September 30, 1995
For the nine months ended September 30, 1996, the Company incurred a net loss of
$.9 million versus a net gain of $15.1 million for the nine months ended
September 30, 1995.
Annuity deposits increased from $714.7 million to $790.3 million for the nine
months ended September 30, 1995 and 1996, respectively. The increase in deposits
was due to favorable investment performance and attractiveness of specific
competitive features of the Company's annuity product, such as the enhanced
minimum death benefit guarantee. Additionally, fixed annuity premiums were
ceded for the whole nine months in 1996 versus only three months for the
comparable period in 1995. Had there been no cession of premuim, the growth
would have been even greater. Annuity benefits increased from $205.8 million to
$269.3 million for the same time period which was expected given the higher and
more mature inforce business. Both the growth in annuity deposits and benefits
are offset by the change in separate account liabilities. With the growth in
separate account assets, due to net deposits and investment performance the
Company recognized an increase in mortality and expense fees of approximately
$16.1 million in 1996 versus 1995.
On June 30, 1995, the Company entered into an indemnity coinsurance agreement
with Peoples for all existing and future fixed annuity business. Under this
agreement, the Company transferred all assets backing its fixed annuity
obligations to Peoples. The financial affect of this agreement resulted in a
positive impact on surplus of approximately $10.0 million, of which $7.5 million
had a positive effect on income in 1995. Through the nine months ended September
30, 1996 the Company had net transfers from the reinsured fixed account to the
separate account of $161.5 million, incurring a recapture fee of $9.8 million.
These transfers are similar to new business in that the recapture fee
(acquisition cost) results in a loss to the extent that they exceed the expense
allowances in the reserve basis.
Other expenses, including general expenses, commissions and interest expense
were $90.4 million versus $77.8 million at September 30, 1996 and 1995,
respectively. These expenses increased primarily due to the increase in annuity
deposits and higher personnel and technology costs.
1995 Compared to 1994
The Company incurred a net loss form operations of $7.3 million versus a loss of
$30.4 million in 1994. Although there was a significant improvement relative to
1994 results, specific events occurred in 1995 that resulted in the net loss
recorded.
Annuity deposits decreased from $1,140.0 million to $991.6 million in 1994 and
1995, respectively. The reduction in annuity deposits was primarily the result
of below market investment results within the NASL Series Trust, the underlying
mutual fund for the annuity product, and investor concern over the downgrade
18
<PAGE> 22
in the rating received from A. M. Best of our previous parent company and the
cession of fixed annuity deposits for the second half of 1995. Annuity benefits
increased from $206.7 million to $269.7 million in 1994 and 1995, respectively
which was expected given the higher and more mature business in force. Both the
growth in annuity deposits and benefits are offset by the change in separate
account liabilities of $415.6 million in 1995 and 732.8 million in 1994. With
the growth in separate account assets, due to net deposits and investment
performance the Company recognized an increase in mortality and expense fees of
approximately $10.9 million in 1995 versus 1994. Investment performance within
the NASL Series Trust improved significantly in 1995 versus 1994. This resulted
in an increase in potential surrender charges available therefore reducing
statutory reserves under the Commissioner Annuity Reserve Valuation Method.
This reserve reduction which improved statutory earnings for 1995.
The loss of $7.3 million recognized in 1995 did reflect the establishment of
additional reserves of $19 million required by the NAIC under Guideline GGG.
This regulation clarified how the Commissioner's Annuity Reserve Valuation
Method ("CARVM") is to be applied with the result that reserves must be
sufficient to protect the Company against the worst possible combination of
events as part of its reserve adequacy testing.
Under the coinsurance agreement with Peoples, the Company expensed an initial
consideration of $727.5 million which resulted in a net decrease in reserves
expense of $621.5 million and an increase in surplus of approximately $10.0
million, of which $7.5 million had a positive effect on income in 1995.
Effective December 31, 1994 the Company recaptured its reinsurance with its
parent, North American Life Assurance Company, by paying a recapture fee which
resulted in a negative effect on income of $6.5 million.
Commission costs decreased from $82.0 million to $73.6 million in 1994 and 1995,
respectively directly due to the decrease in annuity deposits. Other expenses,
including general expenses and interest increased from $23.9 million to $31.9
million in 1994 and 1995, respectively as a result of incurring additional debt
to finance acquisition costs and added personnel and technology related costs to
support the larger inforce block of annuity business.
Additionally, an increase in net investment income earned on general account
assets and a decrease in realized capital losses had a $9.8 million positive
impact on earnings in 1995.
1994 Compared to 1993
The Company incurred a net loss from operations of $30.4 million in 1994 versus
a net loss of $10.7 million in 1993.
Annuity deposits decreased from $1,255.2 million to $1,140.0 million in 1993 and
1994, respectively. The reduction in annuity deposits was primarily the result
of below market investment results within the NASL Series Trust and investor
concern over the downgrade in the A.M. Best rating of our previous parent
company. Annuity benefits increased from $195.1 million to $206.7 million in
1993 and 1994, respectively which was expected given the higher and more mature
business in force. The change in both annuity deposits and benefits is offset by
the change in separate account liabilities of $732.8 million and $971.9 million
in 1994 and 1993, respectively. With the growth in separate account assets, due
to net deposits and investment performance, the Company recognized an increase
in mortality and expense fees of approximately $17.4 million in 1994 versus
1993. Investment performance within the NASL Series Trust declined significantly
in 1994 versus 1993. This resulted in a decrease in potential surrender charges
available therefore increasing statutory reserves under the Commissioner
Annuity Reserve Valuation Method. This reserve increase negatively affected
earnings in 1994.
Effective December 31, 1994 the Company recaptured its reinsurance with its
parent, North American Life Assurance Company, by paying a recapture fee which
resulted in a negative effect on income of $6.5 million.
Other expenses, including general expenses and interest increased from $13.9
million to $23.9 million in 1993 and 1994, respectively as a result of the
Company incurring additional debt to finance acquisition costs and added
personnel and technology related costs to support the larger inforce block of
annuity business.
Financial Position
Assets and Liabilities
September 30, 1996 Compared to December 31, 1995
At September 30, 1996 total assets were $6,078.6 million, an increase of
$1,116.1 million or 22.5% from December 31, 1995. The majority of this growth
was the increase in separate account assets of $1,094.7
19
<PAGE> 23
million which was attributable to sales, strong market performance and favorable
persistency. Total liabilities were $6,016.2 million , an increase of $1,103.9
million from December 31, 1995, again primarily the result of the corresponding
increase in separate account liabilities.
December 31, 1995 Compared to December 31, 1994
At December 31, 1995 total assets were $4,962.5 million, an increase of $722.3
million or 17.0% from 1994. Total liabilities at December 31, 1995 were $4,912.3
million an increase of $731.5 million over 1994. Separate account assets and
liabilities increased by $1,253.5 million from 1994 directly due to the increase
in sales and positive investment performance. In 1995, the Company entered into
a indemnity coinsurance agreement with Peoples which transferred all assets
backing its fixed annuity obligations to the reinsurer. As a result of this
agreement, general account assets declined from $578.9 million at December 31,
1994 to $47.8 million at December 31, 1995.
Capital and Surplus
September 30, 1996 Compared to December 31, 1995
Total capital and surplus at September 30, 1996 was $62.4 million, an increase
of $12.2 million from December 31, 1995. The Company received $15.0 million of
additional paid in capital from Manulife which offset the $2.8 million
increase in the unassigned deficit primarily attributable to a $2.5 million
initial commission on reinsurance ceded.
December 31, 1995 Compared to December 31, 1994
Total capital and surplus at December 31, 1995 was $50.2 million, a decrease of
$9.3 million from December 31, 1994. The primary reason for the change in
surplus was due to the loss from operations of $7.3 million. Other surplus
adjustments which netted to a negative surplus affect of $2.0 million included;
allowance for reinsurance ceded of $3.0 million offset by a combined net
change in non-admitted assets and valuation reserve of $1.0 million.
Liquidity and Capital Resources
The growth of the variable annuity market, particularly the substantial increase
in the Company's sales since 1993, has resulted in the Company needing to obtain
cash financing to support this growth. This is driven by the fact that the
Company must invest 100% of the variable option premiums in the separate
accounts while paying commissions on that block of business. Prior to 1995, the
Company used capital and general account assets to fund commissions. However
since 1995, under the Peoples fixed account reinsurance agreement, the Company
settles all general account obligations on a timely basis with Peoples.
Therefore, substantially all commission costs are financed through borrowing and
internally generated cash flows.
Since the commissions paid on separate account business exceed the separate
account surplus, the Company obtained external financing in 1994 by entering
into a $150 million revolving credit and term loan agreement (the "Loan") with
the Canadian Imperial Bank of Commerce and Deutsche Bank AG ("CIBC"). The Loan
was collateralized by the mortality and expense risk charges and surrender
charges due from a separate account (that is distinct from the separate account
for the product described in this Prospectus) excluding any portion thereof
subject to existing reinsurance agreements. The Loan is subordinated in every
respect to the claims of the Company's contractholders. The Company was subject
to various affirmative and negative covenants under this Loan, whereby breach of
these covenants could have caused an event of default. Such covenants required
the Company to meet certain financial ratios and placed restrictions on
incurring additional debt, reinsurance and capital changes.
As a result of the merger with Manulife, the Company became party to a
restructured lending facility that will provide sufficient cash flow needs at
more favorable interest rate margins. Consequently, in April 1996, the Company
extinguished its debt with CIBC through a restructured financing arrangement
directly with Manulife.
20
<PAGE> 24
Aside from the financing needs for funding acquisition costs, the Company's cash
flows are adequate to meet the general obligations on all annuity contracts.
Reinsurance
-----------
Peoples Security Life Insurance Company. See "REINSURANCE" for a
description of the reinsurance agreement with Peoples Security Life Insurance
Company.
Connecticut General Life Insurance Company and Swiss Re Life Company
America. The Company entered into treaties with Connecticut General Life
Insurance Company ("CIGNA") and Swiss Re Life Company America ("Swiss"),
effective July 1, 1995 and August 1, 1995, respectively, to reinsure its minimum
death benefit guarantee risks, with each company assuming 50% of the risk. In
addition, the Company reinsured with CIGNA 50% of its risk related to the
waiving of surrender charges at death. The Company is paying CIGNA and Swiss
under these reinsurance agreements an asset based premium, the level of which
varies with both the amount of exposure to this risk and the realized
experience.
Transamerica. Effective November 1, 1995, the Company entered into two
reinsurance agreements with Transamerica Occidental Life Insurance Company
("Transamerica") for variable life insurance contracts. The first reinsurance
agreement provides quota-share modified-coinsurance for contract obligations
attributable to the variable account investment options. The second reinsurance
agreement provides yearly renewable term coverage for insurance amounts in
excess of the Company's retention limits.
ITT Lyndon Life. On December 31, 1993, the Company entered into a modified
coinsurance agreement with ITT Lyndon Life, to cede one of the Company's
variable annuity contract forms. As of December 31, 1995, 95% of these
contracts were ceded.
Paine Webber Life. Effective December 31, 1994, the Company entered into an
indemnity reinsurance agreement with Paine Webber Life to reinsure a portion of
its policy forms. The quota share percentage varies between 15% and 35%
depending on the policy form. The form of reinsurance is modified coinsurance
and only covers the variable portion of contract written by Paine Webber
brokers. All elements of risk (including mortality, persistency and investment
performance) have been transferred with the exception of the minimum death
benefit guarantee. The Company receives an allowance to cover the expected cost
of the minimum death benefit guarantee.
Under each of the reinsurance agreements, the Company remains primarily
liable for the payment of benefits to all policyholders. In the event of a
reinsurer becoming insolvent, the Company remains liable for policyholder
benefits. For further information on the Company's reinsurance, see note F to
the Company's financial statements in this Prospectus.
Reserves
--------
In accordance with insurance laws and regulations under which the Company
operates and statutory accounting principles, the Company is obligated
to carry on its books, as liabilities, actuarially determined reserves to meet
its obligations on its outstanding contracts. Reserves are based on mortality
tables in general use in the United States and are computed to equal amounts
that, with additions from premiums to be received and with interest on such
reserves computed annually at certain assumed rates, will be sufficient to
meet the Company's contract obligations at their maturities or in the event of
the insured's death. In the financial statements included in this Prospectus,
these reserves are determined in accordance with statutory accounting
principles.
For further information on the Company's reserves, see note E to the
Company's financial statements in this Prospectus.
Investments
-----------
As noted above under "Reinsurance," all assets backing the fixed annuity
obligations of the Company were transferred to Peoples. The Company's assets
must be invested in accordance with requirements of applicable state laws and
regulations regarding the nature and quality of investments that may be made by
insurance companies and the percentage of its assets that may be held in certain
types of investments. In general, these laws permit investments, within
specified limits and subject to certain qualifications, in federal, state, and
municipal
21
<PAGE> 25
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
Competition
-----------
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing annuity products. There are approximately 2,100 stock, mutual and
other types of insurers in the life insurance business in the United States, a
significant number of which are substantially larger than the Company. As of
December 31, 1996, the Company had 194 employees.
Government Regulation
---------------------
The Company is subject to the laws of the state of Delaware governing
insurance companies and to the regulation of the Delaware Insurance Department
(FNAL is subject to the laws and regulation of the State of New York). In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which the Company operates. Regulation by each insurance
department includes periodic examination to determine the Company's contract
liabilities and reserves so that each insurance department may verify that these
items are correct. Regulation by supervisory agencies includes licensing to
transact business, overseeing trade practices, licensing agents, approving
policy forms, establishing reserve requiremements, fixing maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values, prescribing the form and content of required financial statements and
regulation of the type and amounts of investments permitted. The Company's books
and accounts are subject to review by each insurance department and other
supervisory agencies at all times, and the Company files annual statements with
these agencies. A full examination of the Company's operations is conducted
periodically by the Delaware insurance department.
In addition, several states, including Delaware and Michigan, regulate
affiliated groups of insurers, such as the Company, under insurance holding
company legislation. Manulife's state of entry for insurance regulatory purposes
is Michigan. In addition, several of its insurance subsidiaries are domiciled
there. Consequently, Michigan's Insurance Bureau has jurisdiction in applying
such legislation to transactions between Manulife and its U.S. insurance company
affiliates. Under such laws, intercompany transactions, transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies. Transactions between NASL and Wood
Logan are primarily regulated by Delaware, but may also be regulated by Michigan
if the transaction involves Manulife or any of its insurance subsidiaries
domiciled in Michigan.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments on the
Company under these laws cannot be reasonably estimated. Most of these laws do
provide, however, that an assesment may be excused or deferred if it would
threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal legislation that removed barriers preventing banks
from engaging in the insurance business or that changed the Federal income tax
treatment of insurance companies, insurance company products, or employee
benefit plans could significantly affect the insurance business.
22
<PAGE> 26
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums, Annuity Deposits and Other
Revenue............................ $ 991,552 $1,139,953 $1,255,219 $ 471,449 $ 281,570
Investment Income, Net of Investment
Expenses........................... 35,910 30,560 27,851 30,307 29,112
Commissions and Expense Allowances on
Reinsurance Ceded.................. 14,677 7,019 587 9,378 2,648
Reserve Adjustment on Reinsurance
Ceded.............................. (48,223) (6,024) (23,682) 114,567 (9,654)
Other Revenue........................ 3,901 4,968
---------- ---------- ---------- ---------- ----------
997,817 1,176,476 1,259,975 625,701 303,676
---------- ---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Policyholder Benefits................ 269,689 206,711 195,065 115,655 49,061
Commissions on Premiums and Annuity
Considerations..................... 73,594 81,981 82,137 43,291 20,640
Reserves............................. (517,161) 146,552 5,338 20,902 61,915
Net Transfers to Separate Accounts... 415,529 732,768 971,871 428,857 163,397
Reinsurance Costs.................... 727,523
Other Expenses....................... 33,298 31,883 13,945 37,078 10,711
---------- ---------- ---------- ---------- ----------
1,002,472 1,199,895 1,268,356 645,783 305,724
---------- ---------- ---------- ---------- ----------
Loss Before Federal Income Tax
Provision.......................... (4,655) (23,419) (8,381) (20,082) (2,048)
Federal Income Tax Provision......... 6 193
---------- ---------- ---------- ---------- ----------
Loss from Operations After Federal
Income Tax Provision............... (4,655) (23,425) (8,574) (20,082) (2,048)
Net Realized Capital Gains
(Losses)........................... (2,633) (7,029) (2,104) (229) 1,765
---------- ---------- ---------- ---------- ----------
Net Loss from Operations............. ($ 7,288) ($ 30,454) ($ 10,678) ($ 20,311) ($ 283)
========== ========== ========== ========== ==========
Total Assets......................... $4,962,504 $4,240,248 $3,415,584 $2,024,019 $1,521,429
========== ========== ========== ========== ==========
</TABLE>
23
<PAGE> 27
<TABLE>
OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company, together with their
principal occupations during the past five years, are as follows:
<CAPTION>
NAME POSITION WITH THE PRINCIPAL OCCUPATION
COMPANY
<S> <C> <C>
John D. DesPrez III Director* and President Vice President, U.S. Annuities, of Manulife, September 1996
Age: 40 to present; Director and President of the Company, September
1996 to present; Vice President, Mutual Funds, of Manulife,
January, 1995 to September 1996, President and Chief
Executive Officer of the North American Funds, March 1993 to
September 1996; Vice President and General Counsel of the
Company, January 1991 to June 1994.
Peter S. Hutchison Director* Senior Vice President, Corporate Taxation of Manulife, January 1996
Age: 47 to present; Executive Vice President and Chief Financial
Officer of North American Life, September 1994 to December
31, 1995; Senior Vice President and Chief Actuary, North
American Life, April 1992 to August 1994; Vice President and
Chief Actuary, North American Life, September 1990 to March
1992.
Brian L. Moore Director* and Chairman of the Executive Vice President, Canadian Insurance Operations, of
Age: 52 Board of Directors Manulife, January 1996 to present; Chief Executive Officer
and President, The North American Group Inc., and Chief
Executive Officer, North American Life, January 1996 to
December, 1995; President, The North American Group Inc. and
Vice-Chairman and Director, North American Life, October
1993 to December 1994; President, North American Life
Financial Services Inc., July 1992 to October 1993;
Executive Vice President and C.F.O., North American Life,
September 1988 to October 1993.
James D. Gallagher Vice President, Secretary and Vice President, Legal Services U.S. Operations, of Manulife,
Age: 42 General Counsel January 1996 to present; Vice President, Secretary and
General Counsel of the Company, June 1994 to present; Vice
President and Associate General Counsel, The Prudential
Insurance Company of America, 1990-1994.
Richard C. Hirtle Vice President, Treasurer, Chief Vice President, Chief Financial Officer, Annuities, of
Age: 41 Financial Officer Manulife, January 1996 to present; Vice President,
Treasurer, Chief Financial Officer and of the Company,
November 1988 to January 1996.
Hugh C. McHaffie Vice President, Product Management Vice President, Annuities and Product Development,
Age: 38 of Manulife, January 1996 to
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
NAME POSITION WITH THE PRINCIPAL OCCUPATION
COMPANY
<S> <C> <C>
present; Vice President and Product Actuary of the Company,
August 1994 to present; Product Development Executive of the
Company, August 1990 to August 1994.
Iain W. Scott Vice President, Life Vice President, Single Premium Variable Life, of Manulife,
Age: 45 Products January 1996 to present; Vice President, Life Products of
the Company, 1994 to present; Vice President of U.S.
Distribution, North American Life, 1992 to 1994; Vice
President, Marketing, M Financial Group of Portland, Oregon,
1990 to 1992.
Janet Sweeney Vice President, Human Resources Vice President, Human Resources, U.S. Operations, of
Manulife, January 1996 to present; Vice President, Corporate
Services of the Company, January 1995 to January 1996;
Executive, Corporate Services of the Company, July 1989 to
December 1994.
John G. Vrysen Vice President and Chief Actuary Vice President and Chief Financial Officer, U.S. Operations,
Age: 41 of Manulife, January 1996 to present; Vice President and
Chief Actuary of the Company, January 1986 to present.
James R. Boyle Vice President and Chief Vice President, Administration Accumulation Products, of
Age: 37 Administrative Officer Manulife, Vice President and Chief Administrative Officer of
the Company, September 1996 to present; Vice President,
Treasurer and Chief Administrative Officer, June 1994 to
September 1996, the North American Funds; Corporate
Controller of the Company, July 1993 to June 1994; Mutual
Fund Accounting Executive of the Company, June 1992 to July
1993; Audit Manager, 1990 to June 1992, Coopers & Lybrand
L.L.P.
</TABLE>
*Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and qualified.
EXECUTIVE COMPENSATION
The Company's executive officers may also serve as officers of one or more
of the Company's affiliates including FNAL and Manulife and its affiliates.
Allocations have been made as to such officers' time devoted to duties as
executive officers of the Company. The following table shows the allocated
compensation paid or awarded to or earned by the Company's Chief Executive
Officer for services provided to the Company. No other executive officer had
allocated cash compensation in excess of $100,000.
25
<PAGE> 29
<TABLE>
Summary Compensation Table
--------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
Name and Year Salary Bonus Other Annual All Other
Principal Position Compensation (1) Compensation (2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William J. 1996 $101,250 $3,790 $4,531 $4,521
Atherton,
President*
John D DesPrez, 1996 $107,004 $10,673 $969 $5,108
President**
<FN>
* President prior to September 1996.
** President since September 1996.
</TABLE>
(1) Other Annual Compensation includes car allowance, car expense reimbursement
and group term life insurance premiums.
(2) Other Compensation includes Company paid 401(k) plan and pension
contributions.
No executive officer participates in the formulation of his or her
compensation. The compensation of executive officers is determined by the
individual to whom the officer reports and is approved by Manulife.
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, dental, pension, basic and dependent life
insurance, defined contribution plan and long and short -term disability
coverage. There are no other benefit packages which currently enhance overall
compensation by more than 10%.
Executive officers participate in certain plans sponsored by the Company. A
short-term incentive plan is in place for all employees of the Company at the
executive level and above. Pay-outs under the short-term incentive plan are
based on a percentage of salary and the employee's level in the organization.
All employees at the Assistant Vice President level or above are eligible
for the Manulife Annual Incentive Plan. Under this plan, a reward target is
established for each organizational level of Manulife, expressed as a percentage
of the employee's base salary as of December 31st of the plan year. Incentive
payments are based on Manulife earnings and organizational level objectives as
well as individual achievement.
All employees at the Vice President level and above are eligible to
participate in the Manulife Long Term Incentive Plan. The Manulife Long Term
Incentive Plan is an appreciation rights plan. Participation in this plan is
generally granted to officers of Manulife who are recommended for participation
in the plan by the Chief Executive Officer of Manulife and the Management
Resource Compensation Committee of Manulife. Grants under the plan are
calculated based on the officer's position at Manulife as well as certain other
factors and are split evenly into two categories, cash appreciation rights and
retirement appreciation rights. Grants appreciate proportionally to the
statutory surplus of Manulife. Cash appreciation rights may be exercised on or
after the fourth anniversary of the grant whereas retirement appreciation
rights may only be exercised upon retirement.
Prior to December 31, 1995, NAL maintained a defined benefit pension plan
for all U.S. employees which vests at five years of service. This plan has been
continued by Manulife. Benefit pay-out is a function of years of service and
average earnings during the employee's last five years of service. Under the
Internal Revenue Code of 1986, as amended (the "Code"), the annual Pension
Credit is currently earned at a maximum salary of $150,000. Normal retirement
age is 65. Pay-out is an annuity based with either a single life with a 10 year
guarantee or joint life and 50% survivor. The normal retirement benefit is a
monthly pension benefit in an
26
<PAGE> 30
amount equal to the Employer Pension Credit plus the Participant Pension Credit
(The plan has been non-contributory since January 1, 1990). The Employer Pension
Credit is determined as follows:
The Employer Pension Credit is generally equal to the average of the
pension Units A during the employee's last five years of employment, multiplied
by the years of benefit service earned after December 31, 1966 (not to exceed 35
years). For each year in the average period, the Pension Units A is equal to
1.1% of compensation plus 0.4% of compensation in excess of the Social Security
Taxable Wage Base. Pension Units A prior to January 1, 1981 are calculated using
only compensation less than or equal to $75,000.
<TABLE>
Combined pension benefits at age 65 under these arrangements are as
follows:
<CAPTION>
Years of Service
- --------------------------------------------------------------------------------
Remuneration* 15 20 25 30 35
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $21,881 $29,175 $36,468 $43,762 $51,056
150,000 26,995 35,994 44,992 53,990 62,989
175,000 30,239 40,318 50,398 60,478 70,557
200,000 30,510 40,680 50,850 61,020 71,190
225,000 30,510 40,680 50,850 61,020 71,190
250,000 30,510 40,680 50,850 61,020 70,190
300,000 30,510 40,680 50,850 61,020 71,190
400,000 30,510 40,680 50,850 61,020 71,190
<FN>
* Remuneration table is based on a 100% time allocation to the Company.
</TABLE>
William J. Atherton and John D. DesPrez have 32 years and 6 years of vested
service, respectively.
Effective January 1, 1996, employees of the Company with earnings exceeding
federally mandated limits and eligible for the Manulife or NAL U.S. defined
benefit pension plan, became eligible for Manulife's Supplemental Executive
Retirement Plan. This is a noncontributory, non-qualified plan intended to
provide additional pension income consistent with the executive's pre-retirement
income. The pension earned under the Supplemental Executive Retirement Plan is
60% of the average of the highest 5 years of earnings up to $200,000 plus 30% of
the average of the highest 5 years of earnings between $200,000 and $500,000
plus 10% of the average of the highest 5 years of earnings in exess of $500,000,
less 15.75% of the average of the 3 years earnings up to the Social Security
Covered Compensation, multiplied by the credited years of service (up to a
maximum of 35 years), divided by 35, less the pension earned under the Manulife
or NAL U.S. defined benefit pension plan.
<TABLE>
Combined pension benefits at age 65 under these arrangements are as
follows:
<CAPTION>
Years of Service
- --------------------------------------------------------------------------------
Remuneration* 15 20 25 30 35
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$150,000 $ 0 $ 0 $ 0 $ 0 $ 0
175,000 2,138 2,850 3,563 4,275 4,988
200,000 7,673 10,230 12,788 15,345 17,903
225,000 12,930 17,240 21,550 25,860 30,170
250,000 15,853 21,137 26,421 31,705 36,989
300,000 21,697 28,930 36,162 43,395 50,627
400,000 33,387 44,516 55,645 66,774 77,903
500,000 45,077 60,102 75,128 90,153 105,179
</TABLE>
27
<PAGE> 31
<TABLE>
The Company offers a defined contribution plan pursuant to 401(k) of the
Code which allows employees to contribute up to 6% of their base annual salary.
The Company matches 50% of the employee contributions as well as contributes a
floor amount of 2% of base pay for each pay period. The maximum total
contribution (including employer contributions), based on the maximum taxable
wage as set forth in the Code is $16,500. Company employees are 100% vested in
the Company floor contributions and personal contributions to the plan.
Employees become 100% vested in the employer matching contributions if he or she
retires on or after age 65, becomes disabled or dies. Otherwise, employees earn
a right to employer contributions through the following vesting schedule:
<CAPTION>
Years of Service Vested Portion of Company Contribution
- --------------------------------------------------------------------------------
<S> <C>
Less than 3 None
At least 3 33 1/3%
At least 4 66 2/3%
5 or more 100%
</TABLE>
Directors of the Company, all of whom are also officers or employees of the
Company or its affiliates, receive no compensation in addition to their
compensation as officers or employees of the Company or its affiliates. No
shares of the Company or any of its affiliates are owned by any executive
officer or Director of the Company.
NASL FIXED ACCOUNT
NASL established the Fixed Account in 1996 as a separate account under
Delaware law. It is not a registered investment company. The Fixed Account holds
assets that are segregated from all of NASL's other assets. The Fixed Account is
currently used only to support the obligations under the contracts offered by
this prospectus. These obligations are based on interest rates credited to the
contracts and do not depend on the investment performance of the Fixed Account.
Any gain or loss in the Fixed Account accrues solely to NASL and NASL assumes
any risk associated with the possibility that the value of the assets in the
Fixed Account might fall below the reserves and other liabilities that must be
maintained. Should the value of the assets in the Fixed Account fall below
reserve and other liabilities, NASL will transfer assets from its General
Account to the Fixed Account to make up the shortfall. NASL reserves the right
to transfer to its General Account any assets of the Fixed Account in excess of
such reserves and other liabilities and to maintain assets in the Fixed Account
which support any number of annuities which NASL offers or may offer. The assets
of the Fixed Account are not insulated from the claims of NASL's creditors and
may be charged with liabilities which arise from other business conducted by
NASL. Thus NASL may, at its discretion if permitted by applicable state law,
transfer existing Fixed Account assets to, or place future Fixed Account
allocations in, it General Account for purposes of administration.
The assets of the Fixed Account will be invested in those assets chosen by
NASL and permitted by applicable state laws for separate account investment. As
noted above under `REINSURANCE," Peoples is responsible for investing an agreed
upon percentage (currently, 100%) of the assets in the Fixed Account.
28
<PAGE> 32
DISTRIBUTION OF THE CONTRACT
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington Avenue,
Boston, Massachusetts, 02116, a wholly-owned subsidiary of the Company, is the
principal underwriter of the contract. NASL Financial is a broker-dealer
registered under the Securities Exchange Act of 1934 ("1934 Act") and a member
of the National Association of Securities Dealers, Inc. (the "NASD"). NASL
Financial has entered into an non-exclusive promotional agent agreement with
Wood Logan Associates, Inc. ("Wood Logan"). Wood Logan is a broker-dealer
registered under the 1934 Act and a member of the NASD. Wood Logan is a wholly
owned subsidiary of a holding company that is 85% owned by Manulife and
approximately 15% owned by the principals of Wood Logan. Sales of the contract
will be made by registered representatives of broker-dealers authorized by NASL
Financial to sell the contracts. Such registered representatives will also be
licensed insurance agents of the Company. Under the promotional agent agreement,
Wood Logan will recruit and provide sales training and licensing assistance to
such registered representatives. In addition, Wood Logan will prepare sales and
promotional materials for the Company's approval. NASL Financial will pay
distribution compensation to selling brokers in varying amounts which under
normal circumstances are not expected to exceed 5% of purchase payments. NASL
Financial may from time to time pay additional compensation pursuant to
promotional contests. Additionally, in some circumstances, NASL Financial will
provide reimbursement of certain sales and marketing expenses. NASL Financial
will pay Wood Logan for providing marketing support for the distribution of the
contract.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation, to which either the Company or any of its subsidiaries is a
party or to which any of their property is subject and, to the best knowledge of
the Company, no such proceedings are contemplated by any governmental authority.
LEGAL MATTERS
All matters of applicable state law pertaining to the contract, including
the Company's right to issue the contract thereunder, have been passed upon by
James D. Gallagher, Esq., Vice President, Secretary and General Counsel of the
Company.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1995 included in
this Prospectus have been examined by Coopers & Lybrand, L.L.P., ("Coopers")
certified public accountants, as indicated in their report in this Prospectus,
and are included herein in reliance upon that report and upon the authority of
those accountants as experts in accounting and auditing. For the fiscal year
ended December 31, 1996, the Company has engaged Ernst & Young LLP, who are
also the independent accountants of Manulife, as the Company's independent
accountants.
In connection with the audits of NASL's financial statements for the two
fiscal years ended December 31, 1995, there were no disagreements between the
Company and Coopers on any matter of accounting principles or practices,
financial statements disclosure, or auditing scope or procedures, which
disagreements if not resolved to Cooper's satisfaction would have caused Coopers
to make reference to the subject matter of the disagreement in connection with
Cooper's audit reports on the financial statements of the Company. In addition,
the audit reports of Coopers on the financial statements of the Company as of
and for the two fiscal years ended December 31, 1995 did not contain any adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope, or accounting principles.
NOTICES AND REPORTS TO CONTRACT OWNERS
At least once each contract year, the Company will send to contract owners
a statement showing the contract value of the contract as of the date of the
statement. The statement will also show premium payments and any other
information required by any applicable law or regulation.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's Annuity Service
Office at P.O. Box 9230, Boston, Massachusetts 02205-9230.
29
<PAGE> 33
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this Prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contracts. In addition, THE COMPANY MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL --OF ANY CONTRACT OR OF
ANY TRANSACTION INVOLVING A CONTRACT.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral During Accumulation Period
- ---------------------------------------
Under existing provisions of the Code, except as described below, any
increase in an owner's contract value is generally not taxable to the owner or
annuitant until received, either in the form of annuity payments as contemplated
by the Contracts, or in some other form of distribution. However, this rule
applies only if the owner is an individual.
As a general rule, deferred annuity contracts held by "non-natural
persons," such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal tax purposes.
The income on such contracts (as defined in the tax law) is taxed as ordinary
income that is received or accrued by the owner during the taxable year. There
are several exceptions to this general rule for non-natural contract owners.
First, annuity contracts will generally be treated as held by a natural person
if the nominal owner is a trust or other entity which holds the contract as an
agent for a natural person. Thus, if a group annuity contract is held by a trust
or other entity as an agent for contract owners who are individuals, those
individuals should be treated as owning an annuity contract for federal income
tax purposes. However, this exception will not apply in the case of any employer
which is the nominal owner of an annuity contract under a non-qualified deferred
compensation arrangement for its employees.
Other exceptions to the general rule for non-natural contract owners will
apply with respect to (1) annuity contracts acquired by an estate of a decedent
by reason of the death of the decedent, (2) certain annuity contracts issued in
connection with various qualified retirement plans, (3) annuity contracts
purchased by employers upon the termination of certain qualified retirement
plans, (4) certain annuity contracts used in connection with structured
settlement agreements, and (5) annuity contracts purchased with a single premium
when the annuity starting date is no later than a year from purchase of the
annuity and substantially equal periodic payments are made, not less frequently
than annually, during the annuity period.
In addition to the foregoing, if the Contract's maturity date is scheduled
to occur at a time when the annuitant is at an advanced age, such as over age
85, it is possible that the owner will be taxable currently on the annual
increase in the contract value.
The remainder of this discussion assumes that the contract will constitute
an annuity for federal tax purposes.
Taxation of Partial and Total Withdrawals
- -----------------------------------------
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the owner's contract value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
total withdrawal, amounts received are includible in income to the extent they
exceed the "investment in the contract." For these purposes the investment in
the contract at any time equals the total of the purchase payments made under
the Contract to that time (to the extent such payments were neither deductible
when made nor excludable from
30
<PAGE> 34
income as, for example, in the case of certain employer contributions to
Qualified Plans) less any amounts previously received from the Contract which
were not included in income.
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the contract value
is treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount includible in income with respect to such
assignment or pledge, though it is not affected by any other aspect of the
assignment or pledge (including its release). If an owner transfers a Contract
without adequate consideration to a person other than the owner's spouse (or to
a former spouse incident to divorce), the owner will be taxed on the difference
between his or her contract value and the investment in the contract at the time
of transfer. In such case, the transferee's investment in the contract will be
increased to reflect the increase in the transferor's income.
There is some uncertainty regarding the treatment of the market value
adjustment for purposes of determining the amount includible in income as a
result of any partial withdrawal or transfer without adequate consideration.
There is legislation currently pending in Congress which would grant regulatory
authority to the Internal Revenue Service (the "IRS") to address this
uncertainty.
Taxation of Annuity Payments
- ----------------------------
Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, annuity payments will be fully taxable. If annuity payments cease
because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his last taxable year.
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person or are not married. For example,
where the owner and the annuitant are not the same person and are not married,
the owner may be taxed on the maturity date on the difference between the
contract value and the investment in the contract.
Taxation of Death Benefit Proceeds
- ----------------------------------
Amounts may be distributed from a Contract because of the death of an owner
or the annuitant. Such death benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a total withdrawal, as described above, or (2) if distributed under an annuity
option, they are taxed in the same manner as annuity payments, as described
above.
Penalty Tax on Premature Distributions
- --------------------------------------
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the owner reaches
age 59 1/2; (b) attributable to the owner's becoming disabled (as defined in the
tax law); (c) made on or after the death of the owner or, if the owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or the joint lives (or joint life expectancies) of the annuitant and a
"designated beneficiary" (as defined in the tax law), or (e) made under a
Contract purchased with a single premium when the maturity date is no later than
a year from purchase of the Contract and substantially equal periodic payments
are made, not less frequently than annually, during the annuity period.
There is also a 10% penalty tax on the taxable amount of any payment from
certain qualified contracts (but not section 457 plans). There are exceptions to
this penalty tax which vary depending on the type of Qualified Plan. In the case
of an "Individual Retirement Annuity" ("IRA"), exceptions provide that the
penalty tax does not apply to a payment: (a) received on or after the contract
owner reaches age 59 1/2; (b) received on or after the owner's death or
31
<PAGE> 35
because of the owner's disability (as defined in the tax law); or (c) made as a
series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the owner or the joint lives (or
joint life expectancies) of the owner and "designated beneficiary" (as defined
in the tax law). These exceptions, as well as certain others not described
herein, generally apply to taxable distributions from other Qualified Plans
(although, in the case of plans qualified under sections 401 and 403, exception
"c" above for substantially equal periodic payments applies only if the owner
has separated from service).
Aggregation of Contracts
- ------------------------
In certain circumstances, the IRS may determine the amount of an annuity
payment or a withdrawal from a Contract that is includible in income by
combining some or all of the annuity contracts owned by an individual which are
not issued in connection with a Qualified Plan. For example, if a person
purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the Service may treat the two
contracts as one contract.
In addition, if a person purchases two or more deferred annuity contracts
from the same insurance company (or its affiliates) during any calendar year,
all such contracts will be treated as one contract for purposes of determining
whether any payment not received as an annuity (including withdrawals prior to
the maturity date) is includible in income. Thus, if during a calendar year a
person buys two or more of the Contracts offered by this Prospectus (which might
be done, for example, in order to invest amounts in different guarantee
periods), all of such Contracts would be treated as one Contract in determining
whether withdrawals from any of such Contracts are includible in income.
The effects of such aggregation are not clear and depend on the
circumstances. However, aggregation could affect the amount of a withdrawal that
is taxable and the amount that might be subject to the 10% penalty tax described
above.
32
<PAGE> 36
QUALIFIED RETIREMENT PLANS
In General
The Contracts are also designed for use in connection with certain types of
qualified retirement plans which receive favorable treatment under the Code.
Those who are considering purchase of a contract for use in connection with a
qualified retirement plan should consider, in evaluating the suitability of the
contract, that the contract allows only a single premium purchase payment in an
amount of at least $5,000.
Numerous special tax rules apply to participants in Qualified Plans and to
the Contracts used in connection with Qualified Plans. These tax rules vary
according to the type of plan and the terms and conditions of the plan itself.
For example, for both withdrawals and annuity payments under certain Contracts
issued in connection with Qualified Plans, there may be no "investment in the
contract" and the total amount received may be taxable. Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. For example, failure to comply with minimum
distribution requirements applicable to Qualified Plans will result in the
imposition of an excise tax. This excise tax generally equals 50% of the amount
by which a minimum required distribution exceeds the actual distribution from
the Qualified Plan. In the case of IRAs and certain other Qualified Plans,
distributions of minimum amounts (as specified in the tax law) must generally
commence by April 1 of the calendar year following the calendar year in which
the owner attains age 70 1/2. For these reasons, no attempt is made to provide
more than general information about the use of Contracts with the various types
of Qualified Plans.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
owners, annuitants, and beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
Qualified Plan Types
- --------------------
Following are brief descriptions of various types of Qualified Plans in
connection with which the Company may issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain Qualified
Plans may be "rolled over" on a tax-deferred basis into an IRA.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAs). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. Employers intending to use the
Contract in connection with such plans should seek competent advice.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the Contracts for such purposes should seek competent
advice as to
33
<PAGE> 37
eligibility, limitations on permissible amounts of purchase payments and other
tax consequences associated with the Contracts.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings in such years on amounts held as of the last year beginning before
January 1, 1989. These amounts can be paid only if the employee has reached age
59 1/2, separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship are
limited to actual contributions; earnings thereon cannot be distributed on
account of hardship. (These limitations on withdrawals do not apply to the
extent the Company is directed to transfer some or all of the contract value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. To the extent the Contract is used in
connection with an eligible plan, employees are considered general creditors of
the employer and the employer as owner of the Contract has the sole right to the
proceeds of the Contract. Generally, a contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
Direct Rollover Rules
- ---------------------
In the case of Contracts used in connection with a pension, profit-sharing,
or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the
case of a Section 403(b) tax sheltered annuity, any "eligible rollover
distribution" from the Contract will be subject to direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under Section 401(a) of the
Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b)
tax sheltered annuity or custodial account, excluding certain amounts (such as
minimum distributions required under Section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, withholding at a rate of 20% will be imposed on
any eligible rollover distribution. In addition, the participant in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the participant elects
to have amounts directly transferred to certain qualified retirement plans (such
as to an Individual Retirement Annuity).
FEDERAL INCOME TAX WITHHOLDING
- ------------------------------
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances, the
Company may be required to withhold tax. The withholding rates applicable to the
taxable portion of periodic annuity payments are the same as the withholding
rates generally applicable to payments of wages. The withholding rate applicable
to the taxable portion of non-periodic payments (including withdrawals prior to
the maturity date) is 10%. As described above, the withholding rate applicable
to eligible rollover distributions is 20%.
GENERAL MATTERS
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in the
Texas Optional Retirement Program ("ORP") to withdraw their interest in a
deferred annuity contract issued under the ORP only upon (1) termination of
employment in the Texas public institutions of higher education, (2) retirement,
(3) death, or (4) the participant's attainment of age 70 1/2. Accordingly,
before any amounts may be distributed from the contract, proof must be furnished
to the Company that one of the four events has occurred. The foregoing
restrictions on withdrawal do not apply in the event a participant in the ORP
transfers his or her contract value to another contract or another qualified
custodian during the period of participation in the ORP.
34
<PAGE> 38
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, there
are no transfers or partial withdrawals and the withdrawal is not made at the
end of a guarantee period. The table below illustrates three examples of the
withdrawal charges that would be imposed if the contract is completely withdrawn
during the contract year shown, based on hypothetical contract values and
assuming no market value adjustment.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL FREE AMOUNT SUBJECT TO CHARGE
CONTRACT CONTRACT WITHDRAWAL WITHDRAWAL --------------------------
YEAR VALUE AMOUNT CHARGE PERCENT AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 55,000 5,000(a) 50,000 6% 3,000
6 60,000 5,000(b) 55,000 2% 1,100
8 70,000 5,000 0(c) 0% 0
<FN>
(a) During any contract year the free withdrawal amount is 10% of the
single payment made under the contract less any prior partial
withdrawals in that contract year. Ten percent of payments less prior
withdrawals equals $5,000 ($5,000-0). Consequently, on total withdrawal
$5,000 is withdrawn free of the withdrawal charge and the withdrawal
charge is assessed against the remaining balance of $50,000 (contract
value less free withdrawal amount).
(b) The free withdrawal amount is again equal to $5,000 and the withdrawal
charge is applied to the remaining balance of $55,000 (contract value
less free withdrawal amount).
(c) There is no withdrawal charge after 7 contract years.
</TABLE>
<TABLE>
EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract and
that no transfers are made. The table below illustrates two partial withdrawals
made during the third contract year of $2,000 and $7,000 and assumes no market
value adjustment applies.
<CAPTION>
WITHDRAWAL
HYPOTHETICAL PARTIAL FREE AMOUNT SUBJECT TO CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL WITHDRAWAL ---------------------------
VALUE REQUESTED AMOUNT CHARGE PERCENTAGE AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
65,000 2,000 2,000(a) 0 5% 0
63,000 7,000 3,000(b) 4,000 5% 200
<FN>
(a) The free withdrawal amount during any contract year is 10% of the
single payment made under the contract less any prior withdrawals in
that contract year. Ten percent of the payment less prior withdrawals
equals $5,000 ($5,000-0). The amount requested ($2,000) is less than
the free withdrawal amount; therefore, no withdrawal charge applies.
(b) Since $2,000 has already been withdrawn in the current contract year,
the remaining free withdrawal amount during the third contract year is
$3,000. The $7,000 partial withdrawal will consist of $3,000 free of
withdrawal charge, and the remaining $4,000 will be subject to a
withdrawal charge.
</TABLE>
Withdrawals may be subject to a market value adjustment in addition to the
withdrawal charge described above (see "MARKET VALUE ADJUSTMENT."
35
<PAGE> 39
APPENDIX B
MARKET VALUE ADJUSTMENT EXAMPLES
The market value adjustment factor is determined by the following formula:
((1+i)/(1+j)) n/12 where:
i - The initial guaranteed interest rate or renewal guaranteed interest
rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the request is
processed by the Company, for a guarantee period with the same length
as the period remaining in the initial guarantee period or guarantee
period. If the guarantee period of this length is not available, the
guarantee period with the next highest duration which is maintained by
the Company will be chosen.
n - The number of complete months remaining to the end of the initial
guarantee period or renewal guarantee period.
Example 1
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest
rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 6.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of
contract year 3 =$100,000 x 1.05(2.5)=$112,972.63
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment =((1+i)/(1+j))n/12
factor i = .05
j = .06
n = 30
=(1.05/1.06)(30/12)
=0.9765817
Amount transferred to a
different guarantee period =$112,972.63 x 0.9765817
=$110,327.00
36
<PAGE> 40
Example 2
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest 5.00% per annum
rate
Guaranteed interest rate for
three year guarantee period 4.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of =$100,000 x 1.05(2.5)=$112,972.63
contract year 3
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment
factor =((1+i)/(1+j))n/12
i = .05
j = .04
n = 30
=(1.05/1.04)30/12
=1.0242121
Amount transferred to a
different guarantee period =$112,972.63 x 1.0242121
=$115,707.93
37
<PAGE> 41
APPENDIX C
<TABLE>
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- --------------------------------------------------------------------------------
<S> <C> <C>
CALIFORNIA .......................... .50% 2.35%
DISTRICT OF COLUMBIA ................ 2.25% 2.25%
KANSAS .............................. .00 2.00%
KENTUCKY ............................ 2.00% 2.00%
MAINE ............................... .00 2.00%
MICHIGAN ............................ .00075% .00075%
NEVADA .............................. .00 3.50%
PUERTO RICO ......................... 1.00% 1.00%
SOUTH DAKOTA ........................ .00 1.25%
TEXAS ............................... .04% .04%
WEST VIRGINIA ....................... 1.00% 1.00%
WYOMING ............................. .00 1.00%
</TABLE>
38
<PAGE> 42
FINANCIAL STATEMENTS OF THE COMPANY
39
<PAGE> 43
FINANCIAL STATEMENTS
The accompanying unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that the Company's management
considers necessary for a fair presentation of the Company's financial position
and results of operations as of and for the interim periods presented. The
Company believes the disclosures in these financials are adequate to present
fairly the information contained herein. The results of operations for the nine
months ended September 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
There were no material changes or significant events affecting the financial
statements as of, and for the three and nine month periods ended September 30,
1996. For the nine months ended September 30, 1996, the Company incurred a net
loss of $.9 million versus a net gain of $15.1 million for the same period in
1995. The positive results through September 30, 1995 were the result of
reinsuring all existing fixed annuity business while 1996 results were
negatively impacted by additional reserves required by the NAIC under Guideline
GGG, which were not recorded until the fourth quarter of 1995.
<PAGE> 44
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL Holding Company, Inc.)
<TABLE>
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Investments
Bonds $ 8,275,246 $ 16,281,452
Real estate 3,397,885 4,847,164
Common stock 34,887,683 20,097,789
Policy loans 158,926 -
Cash and short-term investments 14,136,515 1,797,230
-------------- --------------
Total investments 60,856,255 43,023,635
Accrued investment income 175,031 431,415
Other assets 8,134,832 4,320,909
Separate account assets 6,009,441,134 4,914,727,917
-------------- --------------
Total assets $6,078,607,252 $4,962,503,876
============== ==============
LIABILITIES
Aggregate reserves 3,239,899 1,931,894
Transfers from separate account, net (181,053,805) (156,458,903)
Borrowed money 143,491,352 107,865,148
Accrued interest on surplus note 1,191,233 3,248,219
Payable to Parent 2,580,792 3,033,665
Funds held account from reinsurers 9,000,000 9,000,000
Asset valuation reserve 3,365,078 2,895,914
Bank overdraft 8,350,247 8,606,730
Amounts payable on reinsurance ceded 4,508,058 7,256,229
Other liabilities 12,117,715 10,239,069
Separate account liabilities 6,009,441,134 4,914,727,917
-------------- --------------
Total liabilities 6,016,231,703 4,912,345,882
CAPITAL AND SURPLUS
Common stock (Shares authorized: 3,000;
issued and outstanding 2,600; par value $1,000) 2,600,000 2,600,000
Surplus note payable to Parent 20,000,000 20,000,000
Paid-in capital in excess of par value 125,633,000 110,633,000
Unassigned deficit (85,857,451) (83,075,006)
-------------- --------------
Total capital and surplus 62,375,549 50,157,994
-------------- --------------
Total liabilities, capital and surplus $6,078,607,252 $4,962,503,876
============== ==============
</TABLE>
<PAGE> 45
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL Holding Company, Inc.)
<TABLE>
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Annuity considerations and deposits $247,245,793 $227,468,290 $790,323,073 $ 714,742,980
Amortization of interest
maintenance reserve - - - 11,040,025
Net investment income 1,695,058 390,047 4,040,557 26,980,411
Commissions and expense
allowances on reinsurance ceded 7,382,520 6,576,178 19,404,716 10,851,628
Experience refund on reinsurance
ceded 2,086,386 2,182,500 4,090,435 3,495,078
Reserve adjustments on reinsurance 1,423,587 (23,814,559) (3,639,740) (50,325,014)
------------ ------------ ------------ -------------
259,833,344 212,802,456 814,219,041 716,785,108
------------ ------------ ------------ -------------
Expenses
Annuity benefits 90,280,221 63,611,010 269,335,442 205,814,305
Increase (decrease) in reserves 1,004,827 (4,806,728) 1,308,005 (518,956,950)
Increase in separate account 132,053,117 122,134,677 442,349,806 206,039,261
liability
Commissions 21,068,380 19,357,804 63,989,714 54,374,365
General expenses 6,654,184 5,334,679 19,019,116 16,736,490
Interest expense 2,713,931 2,450,337 7,375,652 6,667,040
Recapture fee on reinsurance ceded 1,292,659 0 9,837,022 1,445,889
Initial consideration on reinsurance
ceded - 1,163,931 - 726,756,060
Reinsurance premium 757,620 320,618 1,884,204 320,618
------------ ------------ ------------ -------------
255,824,939 209,566,328 815,098,961 699,197,078
------------ ------------ ------------ -------------
Gain (loss) before realized capital
gains (losses) 4,008,405 3,236,128 (879,920) 17,588,030
Realized capital losses (220,794) (124,061) (60,090) (2,457,797)
------------ ------------ ------------ -------------
Net gain (loss) $ 3,787,611 $ 3,112,067 $ (940,010) $ 15,130,233
============ ============ ============ =============
</TABLE>
<PAGE> 46
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL Holding Company, Inc.)
<TABLE>
STATEMENT OF CAPITAL AND SURPLUS
(Unaudited)
For the nine months ended September 30, 1996
<S> <C>
Capital and Surplus - January 1, 1996 $50,157,994
Net loss (940,010)
Change in net unrealized capital gains and losses 575,285
Change in asset valuation reserve (469,164)
Decrease in non-admitted assets 511,444
Paid in capital in excess of par 15,000,000
Initial commission allowance on reinsurance ceded (2,460,000)
-----------
Capital and Surplus - September 30, 1996 $62,375,549
===========
</TABLE>
<PAGE> 47
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY INC.)
<TABLE>
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended September 30,
1996 1995
---- ----
<S> <C> <C>
From operating activities:
Annuity considerations and deposits $ 790,323,073 $ 714,742,980
Allowances & reserve adjustments on reinsurance ceded 15,764,976 (39,473,386)
Net investment income 1,961,956 35,000,405
Experience refund on reinsurance ceded 165,619,400 3,495,078
Surrender benefits and other fund withdrawals paid (243,528,997) (166,968,764)
Other benefits paid to policyholders (25,224,816) (38,285,992)
Commissions, other expenses & taxes paid (81,605,337) (70,572,231)
Net transfers to separate account (628,473,673) (222,815,953)
Other operating expenses paid (19,255,804) (732,610,299)
------------- -------------
Net cash used by operating activities (24,419,222) (517,488,162)
------------- -------------
From investing activities:
Proceeds from investments sold, matured or repaid:
Bonds 9,472,186 761,541,164
Stocks 7,337,530 5,080,010
Mortgage loans - 111,813,926
Real estate 1,205,461 3,365,427
Cost of investments acquired:
Bonds (1,170,741) (434,909,576)
Stocks (19,328,665) (10,000,000)
Real Estate - (2,505,052)
------------- -------------
Net cash (used) provided by investing activities (2,484,229) 434,385,899
------------- -------------
Other cash provided:
Capital and surplus paid-in 15,000,000 -
Borrowed money 36,160,095 3,000,000
Other sources 1,506,237 3,671,565
Other applications (13,423,596) (22,764,834)
------------- -------------
Total other cash provided (used) 39,242,736 (16,093,269)
------------- -------------
Net change in cash and short-term investments 12,339,285 (99,195,532)
Cash and short-term investments, beginning of period 1,797,230 101,578,176
------------- -------------
Cash and short-term investments, end of period $ 14,136,515 $ 2,382,644
============= =============
</TABLE>
<PAGE> 48
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE
COMPANY OF NORTH YORK, CANADA)
---------------
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholder of North American Security
Life Insurance Company:
We have audited the accompanying statements of admitted assets,
liabilities, capital and surplus of North American Security Life Insurance
Company (a wholly-owned subsidiary of North American Life Assurance Company of
North York, Canada) as of December 31, 1995 and 1994, and the related statements
of operations, capital and surplus, and cash flows for the three years ended
December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities, capital and surplus
of North American Security Life Insurance Company as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware, which practices are considered to be generally accepted accounting
principles for wholly-owned stock life subsidiaries of mutual life insurance
companies.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule
1 -- Selected Financial Data, is presented to comply with the NAIC's Annual
Statement Instructions and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Boston, Massachusetts
February 23, 1996 Coopers & Lybrand L.L.P.
F-2
<PAGE> 50
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE
COMPANY OF NORTH YORK, CANADA)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Investments
Bonds..................................................... $ 16,281,452 $ 333,973,085
Mortgages................................................. -- 115,429,834
Real estate............................................... 4,847,164 4,745,559
Common stock.............................................. 20,097,789 11,039,222
Policy loans.............................................. -- 2,579,308
Cash and short-term investments........................... 1,797,230 101,578,176
-------------- --------------
Total investments................................. 43,023,635 569,345,184
Accrued investment income................................. 431,415 7,197,833
Other assets.............................................. 4,320,909 2,427,102
Separate account assets................................... 4,914,727,917 3,661,278,295
-------------- --------------
Total assets...................................... $4,962,503,876 $4,240,248,414
============== ==============
LIABILITIES
Aggregate reserves.......................................... 1,931,894 519,092,606
Transfers from separate account, net........................ (156,458,903) (148,035,998)
Borrowed money.............................................. 107,865,148 100,023,562
Accrued interest on surplus note............................ 3,248,219 1,648,219
Payable to Parent........................................... 3,033,665 --
Funds held account from reinsurers.......................... 9,000,000 12,000,000
Asset valuation reserve..................................... 2,895,914 5,536,860
Interest maintenance reserve................................ -- 2,494,101
Bank overdraft.............................................. 8,606,730 9,547,533
Amounts payable on reinsurance ceded........................ 7,256,229 --
Payable to Parent on reinsurance ceded...................... -- 8,577,268
Other liabilities........................................... 10,239,069 8,677,836
Separate account liabilities................................ 4,914,727,917 3,661,278,295
-------------- --------------
Total liabilities................................. 4,912,345,882 4,180,840,282
CAPITAL AND SURPLUS
Common stock (Shares authorized: 3,000; issued and
outstanding 2,600; par value $1,000)...................... 2,600,000 2,600,000
Surplus note payable to Parent.............................. 20,000,000 20,000,000
Paid-in capital in excess of par value...................... 110,633,000 110,633,000
Unassigned deficit.......................................... (83,075,006) (73,824,868)
-------------- --------------
Total capital and surplus......................... 50,157,994 59,408,132
-------------- --------------
Total liabilities, capital and surplus....... $4,962,503,876 $4,240,248,414
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE> 51
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE
COMPANY OF NORTH YORK, CANADA)
STATEMENTS OF OPERATIONS
DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Annuity considerations and deposits....... $ 991,551,945 $1,139,953,302 $1,255,219,443
Net investment income..................... 35,909,722 30,559,559 27,851,126
Commissions and expense allowances on
reinsurance ceded...................... 14,676,544 7,019,266 586,983
Experience refund on reinsurance ceded.... 3,901,633 4,967,753 --
Reserve adjustments on reinsurance........ (48,222,552) (6,023,746) (23,681,983)
-------------- -------------- --------------
997,817,292 1,176,476,134 1,259,975,569
-------------- -------------- --------------
Expenses
Annuity benefits.......................... 269,688,906 206,710,232 195,064,882
Increase (decrease) in reserves........... (517,160,712) 146,552,124 5,337,935
Increase in separate account liability.... 415,529,185 732,768,257 971,871,375
Commissions............................... 73,593,478 81,981,046 82,137,269
General expenses.......................... 22,872,812 19,253,764 13,475,040
Interest expense.......................... 8,980,132 4,599,441 456,196
Recapture fee on reinsurance ceded........ 1,445,889 8,029,909 13,300
Initial consideration on reinsurance
ceded.................................. 727,522,634 -- --
-------------- -------------- --------------
1,002,472,324 1,199,894,773 1,268,355,997
-------------- -------------- --------------
Loss before federal income tax provision and
realized capital losses................... (4,655,032) (23,418,639) (8,380,428)
Federal income tax provision................ -- 6,415 193,000
-------------- -------------- --------------
Loss after federal income tax provision..... (4,655,032) (23,425,054) (8,573,428)
Realized capital (losses)................... (2,632,953) (7,029,018) (2,104,462)
-------------- -------------- --------------
Net loss.................................... $ (7,287,985) $ (30,454,072) $ (10,677,890)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE> 52
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE
COMPANY OF NORTH YORK, CANADA)
STATEMENTS OF CAPITAL AND SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Capital and Surplus -- beginning of the year...... $59,408,132 $ 51,722,525 $ 35,773,897
Net loss.......................................... (7,287,985) (30,454,072) (10,677,890)
Change in net unrealized capital gains (losses)... (636,335) 3,514,108 (1,198,895)
Change in asset valuation reserve................. 2,640,946 1,976,033 (5,847,867)
Increase in non-admitted assets................... (958,941) (1,859,181) (1,326,720)
Issuance of common stock.......................... -- 600,000 458,000
Paid in capital in excess of par.................. -- 29,400,000 4,542,000
Initial commission allowance on reinsurance
ceded........................................... (3,007,823) 4,508,719 10,000,000
Surplus note from Parent.......................... -- -- 20,000,000
----------- ------------ ------------
Capital and Surplus -- end of the year............ $50,157,994 $ 59,408,132 $ 51,722,525
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE> 53
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE
COMPANY OF NORTH YORK, CANADA)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- ---------------
<S> <C> <C> <C>
FROM OPERATING ACTIVITIES:
Annuity considerations and deposits......... $ 991,551,945 $1,139,953,302 $ 1,255,219,443
Allowances & reserve adjustments on
reinsurance ceded......................... (33,546,008) 1,140,018 (20,898,549)
Net investment income....................... 32,128,833 28,230,341 27,231,438
Experience refund on reinsurance ceded...... 3,901,633 4,967,753 --
Surrender benefits and other fund
withdrawals paid.......................... (232,650,150) (175,523,156) (171,434,721)
Other benefits paid to policyholders........ (36,860,052) (30,555,923) (22,727,802)
Commissions, other expenses & taxes paid.... (97,024,418) (100,210,171) (93,392,207)
Net transfers to separate account........... (423,952,090) (768,208,239) (1,022,539,449)
Other operating expenses paid............... (735,369,347) (13,571,986) (1,546,814)
------------- -------------- --------------
Net cash provided (used) by operating
activities................................ (531,819,654) 86,221,939 (50,088,661)
------------- -------------- --------------
FROM INVESTING ACTIVITIES:
Proceeds from investments sold,
matured or repaid:
Bonds..................................... 763,005,273 112,385,919 75,750,376
Stocks.................................... 5,080,010 5,805,050 5,818,725
Mortgage loans............................ 110,791,047 14,076,659 6,294,101
Real estate............................... 860,375 5,950,412 5,528,761
Cost of investments acquired:
Bonds..................................... (441,405,890) (232,208,934) (42,169,482)
Stocks.................................... (10,137,862) (488,212) (11,144,711)
Mortgage loans............................ (136,101) (4,301,717) (3,890,750)
------------- -------------- --------------
Net cash provided (used) by investing
activities................................ 428,056,852 (98,780,823) 36,187,020
------------- -------------- --------------
Other cash provided (applied):
Capital and surplus paid-in............... -- 30,000,000 5,000,000
Borrowed money............................ 7,000,000 70,000,000 80,000,000
Reinsurance ceding commission and
expense allowance...................... -- -- 25,000,000
Other sources............................. 11,380,829 17,892,210 4,771,451
Other applications........................ (14,398,973) (103,250,950) (4,931,341)
------------- -------------- --------------
Total other cash provided
(used).......................... 3,981,856 14,641,260 109,840,110
------------- -------------- --------------
Net change in cash and short-term
investments............................... (99,780,946) 2,082,376 95,938,469
Cash and short-term investments,
beginning of year......................... 101,578,176 99,495,800 3,557,331
------------- -------------- --------------
Cash and short-term investments, end of
year...................................... $ 1,797,230 $ 101,578,176 $ 99,495,800
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE> 54
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NORTH AMERICAN LIFE ASSURANCE COMPANY
OF NORTH YORK, CANADA)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
A. ORGANIZATION
North American Security Life Insurance Company ("the Company") is a
wholly-owned subsidiary of North American Life Assurance Company of North York,
Canada ("NAL"). See Note O. For subsequent event describing merger with
Manufacturers Life Insurance Company.
The Company issues fixed and variable annuity and variable life contracts
(the "Contracts"). Amounts invested in the fixed portion of the Contracts are
allocated to the general account of the Company (see Note F on fixed annuity
reinsurance). Amounts invested in the variable portion of the Contracts are
allocated to the separate accounts of the Company. The separate account assets
are invested in shares of the NASL Series Trust, a no-load, open-end management
investment company organized as a Massachusetts business trust.
On June 19, 1992, the Company formed First North American Life Assurance
Company ("FNA"). Subsequently, on July 22, 1992, FNA was granted a license by
the New York State Insurance Department. FNA issues fixed and variable annuity
contracts in the State of New York.
NASL Financial Services Inc. ("NASL Financial"), a wholly-owned subsidiary
of the Company, acts as investment adviser to the NASL Series Trust and
principal underwriter of the Contracts issued by the Company and FNA. NASL
Financial has entered into a promotional agent agreement with Wood Logan
Associates, an affiliate of NAL, to act as the exclusive agent for promotion of
annuity and variable life contract sales.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING
The Company's financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Department of the
State of Delaware. These practices, in the case of a wholly-owned stock life
insurance subsidiary of a mutual life insurance company, are considered to be
generally accepted accounting principles (GAAP).
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting Standards
No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration participating Contracts. The
American Institute of Certified Public Accountants issued Statement of Position
95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises. Neither of these groups has a role in establishing regulatory
accounting practices.
These pronouncements will require mutual life insurance companies to modify
their financial statements in order for them to continue to be in accordance
with generally accepted accounting principles, effective for 1996 financial
statements. The manner in which policy reserves, new business acquisition costs,
asset valuations and related tax effects are recorded will change. Management
has not determined the impact of such changes on its financial statements.
Certain amounts in the 1994 and 1993 financial statements are presented
differently than in prior years to conform with 1995 presentation guidelines.
F-7
<PAGE> 55
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments reported on the balance sheet consist primarily of
investments in cash and short-term investments, marketable securities, and debt.
Fair value of financial instruments have been determined through information
obtained from market sources and management estimates. At December 31, 1995, the
fair value of cash and short-term investments and debt approximates the carrying
value due to the short maturity and variable interest rate arrangements,
respectively.
Credit risk associated with concentrations can arise when changes in
economic, industry, or geographical factors affect groups of counterparties with
similar characteristics causing aggregate credit exposure to be significant to
the Company. All of the Company's investments in mortgage loans are collaterized
by real estate which is geographically dispersed throughout the United States.
During 1994, the most significant concentrations existed in California (40%),
Georgia (14%) and Illinois (11%). The Company had no outstanding mortgages at
December 31, 1995 (see Note G). There are no other significant concentrations of
credit risk (See also Note C).
INVESTMENTS AND INVESTMENT INCOME
Investments are valued in accordance with rules promulgated by the National
Association of Insurance Commissioners ("NAIC"). Bonds and short-term
investments, where eligible under NAIC rules, are valued at amortized cost.
Investment income is recognized on the accrual basis. Unrealized gains or
losses on investments are recorded in unassigned surplus. Realized gains or
losses on investments sold are determined on the basis of the specific
identification method.
Common stocks are valued at market value except for investments in
affiliates which are carried on the equity basis; and real estate acquired in
satisfaction of debt which is stated at the lower of the appraised market value
or the outstanding principal loan balance plus accrued interest and foreclosure
costs.
There are no mortgage loans outstanding at December 31, 1995 (See Note G).
For the year ended December 31, 1994 mortgage loans in good standing are stated
at the aggregate unpaid balance. Mortgage loans are considered to be in default
if interest and principal payments are delinquent for more than 90 days. The
Company writes-down mortgage loans in default to the lower of unpaid principal
or the value of the underlying property. The Company maintains asset valuation
reserves sufficiently in excess of minimum requirements which serve to cover the
excess of the loan balance over the underlying property values on restructured
loans.
The maximum percentage of any one loan to the value of the property at the
time of the original loan commitment, exclusive of purchase money mortgages, was
75%. Fire insurance is required on all properties covered by mortgage loans at
least equal to the excess of the loan over the maximum loan which would be
permitted by law on the land without the buildings. At December 31, 1995, 1994,
and 1993, the Company held $0, $414,974, and $5,682,476, respectively, of
mortgages in default at statement value. In 1995, 1994 and 1993, the Company
wrote-down $0, $1,745,682, and $1,915,623, respectively of mortgages held at
year end to reflect the carrying value at the lower of appraised value or
outstanding principal plus accrued interest and foreclosure costs.
F-8
<PAGE> 56
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In 1995, 1994 and 1993, the Company transferred, in satisfaction of debt,
mortgages with statement values of $2,405,052, $6,407,174 and $4,413,889,
respectively to foreclosed real estate. Subsequently, in 1995, 1994 and 1993,
the Company wrote-down $1,360,620, $0, and $1,016,484, respectively, on these
properties to reflect the carrying value at the lower of the current market
valuation or the value transferred at the time of foreclosure. At year end, the
Company held $4,847,164 of foreclosed real estate at adjusted book value which
approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments generally consist of U.S. Treasury bills, commercial
paper and money market instruments whose maturities at the time of acquisition
are one year or less. Short-term investments are valued at cost, which
approximates market value.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit related losses on all invested assets with risk of loss
including mortgages, real estate, fixed-income securities, and common stocks.
Changes in the AVR are accounted for as a direct increase or decrease in
unassigned surplus.
The Interest Maintenance Reserve (IMR) captures realized capital gains and
losses which result from changes in interest rates for all fixed income
securities and amortizes these capital gains and losses into investment income
over the original life of the investments sold. During 1995, $11,040,025 of
cumulative net gains were released from IMR in connection with a reinsurance
treaty whereby the Company reinsured all of its fixed annuity business (see Note
F). This accounting was approved by the State of Delaware Department of
Insurance as a permitted practice. Total net gains (losses) of $(59,933) and
$1,807,018 were realized of which $541,484 and $495,672 were amortized and
included in net investment income in 1994 and 1993, respectively.
AGGREGATE RESERVES
The reserves, developed using accepted actuarial methods, have been
established and maintained on the basis of published mortality tables and
prescribed interest rates per the National Association of Insurance
Commissioners' standard valuation law, as adopted by the State of Delaware. The
method used for the valuation of annuities is the Commissioner's Annuity Reserve
Valuation Method (CARVM). Under this method the reserve is the highest present
value of all future guaranteed cash surrender values. In addition, the Company
has established additional reserves during 1995 to cover the impact of guideline
GGG. The method used for the valuation of Variable Life Insurance ("VLI") is the
Commissioners Reserve Valuation Method (CRVM). Under this method, the VLI
reserves are equal to the present value of future death benefits, with a minimum
of the cash surrender value.
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
Premium revenues are recognized as received. Expenses, including
acquisition costs such as commissions and other costs in connection with
acquiring new business, are charged to operations as incurred.
SEPARATE ACCOUNT
Separate account assets represent mutual funds held for the exclusive
benefit of both variable annuity and variable life contractholders and are
reported at fair market value. Since the contractholders receive the full
benefit and bear the full risk of the separate account investments, the income,
realized and unrealized gains and losses from such investments, is offset by an
equivalent change in the liabilities related to the separate
F-9
<PAGE> 57
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounts. Transfers from separate account, net, primarily represents the
difference between the contract owner's account value and the CARVM reserve.
UNCONSOLIDATED SUBSIDIARIES
The Company records its equity in the earnings of unconsolidated
subsidiaries as net investment income. The Company owns 100% of the outstanding
common stock of First North American Life Assurance Company and NASL Financial
Services, Inc.
Summarized financial data for unconsolidated subsidiaries at December 31,
1995 and 1994 is shown below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total assets at year-end....................... $318,326 $194,177
Total liabilities at year-end.................. 304,409 183,777
Net income..................................... 1,220 894
</TABLE>
INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries, FNA and NASL Financial. The Company files separate state income
tax returns.
The method of allocation between the companies is subject to a tax sharing
agreement. Tax liability is allocated to each member on a pro rata basis based
on the relationship the member's tax liability (computed on a separate return
basis) bears to the tax liability of the consolidated group.
C. INVESTMENTS
Net investment income was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Bonds....................................... $18,046,504 $16,182,157 $14,861,152
Common stock................................ 137,862 498,222 125,986
Equity in undistributed income (loss) of
subsidiaries.............................. (482,580) 737,688 (747,294)
Short-term investments...................... 2,642,678 1,664,563 104,719
Mortgage loans.............................. 5,420,613 12,026,724 13,830,160
Real estate................................. 1,071,080 1,248,043 635,245
Policy loan interest........................ (32,300) 10,658 66,228
Amortization of IMR......................... 11,040,025 541,484 495,672
Investment expenses......................... (1,934,160) (2,349,980) (1,520,742)
----------- ----------- -----------
Net investment income....................... $35,909,722 $30,559,559 $27,851,126
=========== =========== ===========
</TABLE>
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments," requires disclosures,
if practical, of fair value information about financial instruments, whether or
not recognized in the balance sheet. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Presentation of the estimated fair value of assets without a corresponding
revaluation of liabilities associated with insurance contracts can be
misinterpreted.
F-10
<PAGE> 58
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies............ $ 8,998 $362 $3 $ 9,357
Corporate securities..................... 3,672 125 3 3,794
Mortgage-backed securities............... 3,611 195 0 3,806
--
------- ---- -------
Totals......................... $16,281 $682 $6 $16,957
======= ==== == =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies........... $ 8,673 $ 70 $ 402 $ 8,341
Corporate securities.................... 294,447 939 6,185 289,201
Mortgage-backed securities.............. 30,853 16 2,267 28,602
-------- ------ ------ --------
Totals........................ $ 333,973 $1,025 $8,854 $ 326,144
======== ====== ====== ========
</TABLE>
The fair value of debt securities were determined based on quoted market
prices or dealer quotes.
The amortized cost and estimated market value of debt securities at
December 31, 1995, by the contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers or lenders
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................. $ 2,162 $ 2,175
Due after one year through five years................... 5,336 5,553
Due after five years through ten years.................. 4,281 4,439
Due after ten years..................................... 892 984
------- -------
Sub-totals.................................... 12,671 13,151
Mortgage-backed securities.............................. 3,610 3,806
------- -------
Totals........................................ $16,281 $16,957
======= =======
</TABLE>
Gross gains of $10,452,916, $1,600,852 and $2,015,587 and gross losses of
$2,035,657, $1,660,785 and $208,569 were recognized on those sales for the years
ended December 31, 1995, 1994 and 1993, respectively. Net realized gains
(losses) of $8,417,259 (see Note A), $(59,933) and $1,797,140 for the years
ended December 31, 1995, 1994 and 1993, respectively, were transferred to IMR.
Policy loans are an integral component of insurance policies, therefore, it
is not practicable to value policy loans.
F-11
<PAGE> 59
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. FEDERAL INCOME TAXES
At December 31, 1995 and 1994 the Company had net operating loss
carryforwards of approximately $33,000,000 and $21,000,000, respectively, which
expire between the years 2007 and 2010.
E. LIFE AND ANNUITY ACTUARIAL RESERVES
The Company issues flexible premium deferred combination fixed and variable
annuity contracts and variable life insurance contracts. Reserves for these
contracts are established using the Commissioners Annuity Reserve Valuation
Method ("CARVM") and the Commissioner's Reserve Valuation Method ("CRVM") as
adopted by the State of Delaware Insurance Department. The reserves for the
fixed portion of the contracts are subject to an indemnity reinsurance agreement
and the reserves for the variable portion of the contracts are held in the
separate account. The Company has now reinsured its Minimum Guaranteed Death
Benefit risks, and accordingly, is holding no reserve for this risk, which
relates to the excess of Death Benefit over policyholder Account Value. The
Company does not offer surrender values in excess of the reserves.
Withdrawal characteristics of Annuity Actuarial Reserves and Deposit
Liabilities are as follows:
<TABLE>
<S> <C> <C>
Subject to discretionary withdrawal with market value
adjustment......................................... $ 467,775,126 8.53%
Subject to discretionary withdrawal at book value
less surrender charge.............................. 228,269,135 4.16
Subject to discretionary withdrawal at market
value.............................................. 4,760,670,029 86.79
Subject to discretionary withdrawal at book value.... 11,553,562 .21
-------------- -----
Subtotal................................... 5,468,267,852 99.69
Not subject to discretionary withdrawal provision.... 17,150,937 .31
-------------- -----
Total gross annuity actuarial reserves and deposit
fund liabilities................................... 5,485,418,789 100%
-------------- =====
Reinsurance ceded.................................... 729,344,503
--------------
Total net annuity actuarial reserves and deposit
funds liabilities.................................. $4,756,074,286
==============
</TABLE>
F. REINSURANCE
Effective June 30, 1995 an indemnity coinsurance agreement was entered into
between the Company and Peoples Security Life Insurance Company ("Peoples" or
"the Reinsurer"), a AAA rated subsidiary of the Providian Corporation, to
reinsure both in force and new fixed annuity business written by the Company.
The indemnity aspects of the agreement provide that the Company remains
liable for the contractual obligations whereas the Reinsurer agrees to indemnify
the Company for any contractual claims incurred. The coinsurance aspects of the
agreement required the Company to transfer all assets backing the fixed annuity
obligations to the Reinsurer together with all future fixed premiums received by
the Company for fixed annuity contracts. Once transferred, the assets belong to
the Reinsurer. In exchange, the Reinsurer reimburses the Company for all claims
and provides expense allowances to cover commissions and other costs associated
with the fixed annuity business.
The Reinsurer is responsible for investing the assets and is at risk for
any potential investment gains and losses. There is no recourse back to the
Company if investment losses are incurred. Under this agreement the Company will
continue to administer the fixed annuity business for which it will earn an
expense allowance. The Company has set up a reserve of $1,931,894 to recognize
that expense allowances received from Providian
F-12
<PAGE> 60
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
under this indemnity coinsurance agreement do not fully reimburse the Company
for overhead expenses allocated to the fixed annuity line of business.
The reinsurance agreement required the Company to transfer to the Reinsurer
a consideration of $726.7 million, in cash or securities, to cover all in force
business as of June 30, 1995.
The financial impact of the reinsurance agreement was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Net loss from operations:
Consideration paid to reinsurer........................ $(726.7)
Net reserves reinsured................................. 725.1
Expense gap reserve.................................... (1.9)
-------
(3.5)
Capital and Surplus adjustments:
Release of IMR......................................... 11.0
Market loss on sale of mortgages....................... (2.2)
Release of bond and mortgage asset valuation reserve... 4.7
-------
Net impact on surplus.................................. $ 10.0
=======
</TABLE>
Effective July 1, 1995 and August 1, 1995, respectively, the Company
entered into treaties with the Connecticut General Life Insurance Company
("CIGNA") and Swiss Re Life Company America companies to reinsure its Minimum
Death Benefit Guarantee risks. Each company has assumed 50% of the risk. In
addition, the Company reinsured 50% of its risk related to the waiving of
surrender charges at death with CIGNA. The Company is paying the reinsurers an
asset based premium, the level of which varies with both the amount of exposure
to this risk and the realized experience.
On December 7, 1995, the Company entered into a letter of intent with
Transamerica Occidental Life Insurance Company. Transamerica will reinsure a 50%
quota share of the variable portion of the Company's VLI contracts. In addition,
Transamerica will also reinsure 80% of this product's net amount at risk in
excess of the Company's retention limit of $100,000 on a YRT basis.
During 1984, the Company assumed from its parent, NAL, approximately 26% of
NAL's ordinary and group vested annuity contracts issued in the United States
prior to 1983. In 1984, the Company received consideration from NAL relating to
the agreement of $800,000. In December, 1989 the percentage assumed was
increased to 90% and the Company recognized consideration of $2,325,000. On
March 31, 1995, this agreement was 100% recaptured. To effect this recapture the
Company paid NAL $1,445,889. At December 31, 1994, the Company's liability for
future policy benefits was $1,635,097.
Effective October 1, 1988, the Company ceded 18% of its variable annuity
contracts (policy from 203-VA) to its parent NAL under a modified coinsurance
agreement. Under this agreement, NAL provides the Company with an expense
allowance on reinsured premiums which is repaid out of a portion of future
profits on the business reinsured. The agreement provides full risk transfer of
mortality, persistency and investment performance to the reinsurer with respect
to the portion reinsured. Effective July 1, 1992, the quota share percentage was
increased to 36%.
On December 31, 1993 the Company entered into a modified coinsurance
agreement with an ITT Lyndon Life, a non-related third party to cede the
remaining 64% of the Company's variable annuity contracts (policy form 203-VA)
and 95% of the Company's new variable annuity contract series issued in 1994
(policy form Ven 10). The Company received approximately $25 million in cash
representing withheld premiums of $15 million and $10 million ceding commission.
The amounts of withheld premiums will be repaid with
F-13
<PAGE> 61
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
interest over 5 years. The ceding commission is payable out of future profits
generated by the business reinsured.
Effective December 31, 1994, the Company recaptured its reinsurance with
NAL. Upon recapture, 1994 operating results were negatively impacted by a
one-time recapture fee of approximately $6.5 million. Concurrent with this
transaction, the Company ceded 31% of the recaptured contracts (policy form
203-VA) to ITT Lyndon Life bringing the portion of these contracts reinsured by
ITT Lyndon to 95%. In return, the Company received consideration of $5.2 million
which is reflected as a surplus adjustment and will be amortized into income in
future years.
Effective December 31, 1994, the Company entered into indemnity reinsurance
agreement with Paine Webber Life to reinsure a portion of its policy forms
207-VA, VFA, VENTURE.001, and VENTURE.003. The quota share percentage varies
between 15% and 35% depending on the policy form. The form of reinsurance is
modified coinsurance and only covers the variable portion of contracts written
by Paine Webber brokers. The Company received an allowance of $1,580,896 to
complete this transaction. All elements of risk (including mortality,
persistency, investment performance) have been transferred with the exception of
the minimum death benefit guarantee. The Company receives an allowance to cover
the expected cost of the minimum death benefit guarantee.
G. RELATED PARTY TRANSACTIONS
In connection with the fixed annuity indemnity coinsurance agreement (See
Note F), the Company pooled its mortgage portfolio (book value of approximately
$106 million) and transferred a senior participation interest to an affiliate of
the reinsurer. The senior interest was transferred for a purchase price of
approximately $72 million and entitles an affiliate of the reinsurer to 100% of
the cash flows produced by the portfolio until they recover in full the purchase
price with interest at a rate of 7.52%. The remaining residual interest was
transferred to First North American Realty, Inc., a wholly-owned subsidiary of
NAL for a purchase price of $33 million. As a result of the sale of the senior
and residual interests in the Company's mortgages, the Company has no further
economic interest in any mortgages and hence has reported zero for mortgage loan
assets on its balance sheet as of December 31, 1995.
The Company utilizes various services administered by NAL, such as payroll
and investment accounting. The charges for these services were approximately
$295,000, $234,000 and $232,000, in 1995, 1994 and 1993, respectively. At
December 31, 1995, the Company had a net liability to NAL for $5,928,889.
The Company provides various services and personnel to FNA for accounting,
actuarial, administration, and systems support. These services are allocated on
a pro rata basis and charged as incurred. The total costs allocated for these
services in 1995, 1994 and 1993 was approximately $456,000, $418,000 and
$310,000, respectively. At December 31, 1995, the Company had a net receivable
from FNA for $1,427,631.
The Company's annuity and insurance contracts are distributed through NASL
Financial pursuant to an underwriting agreement. At December 31, 1995, the
Company had a receivable from NASL Financial for $881,119.
The financial statements have been prepared from the records maintained by
the Company and may not necessarily be indicative of the financial condition or
results of operations that would have occurred if the Company had been operated
as an unaffiliated corporation.
H. INVESTMENTS ON DEPOSIT WITH REGULATORY AUTHORITIES
Bonds and United States Treasury Notes with a carrying value of $5,600,444
at December 31, 1995, and $6,620,154 at December 31, 1994, were on deposit with,
or in custody accounts on behalf of, certain state insurance departments.
F-14
<PAGE> 62
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. BORROWED MONEY
The Company has an unsecured line of credit with State Street Bank and
Trust, in the amount of $10 million, bearing interest at the bank's prime rate
(8.5% at December 31, 1995). There were no outstanding balances at December 31,
1995 and 1994. Interest expense was approximately $76,000, $81,600 and $236,000
in 1995, 1994 and 1993, respectively.
In December 1994, the Company entered into a $150 million revolving credit
and term loan agreement (the "Loan") with the Canadian Imperial Bank of Commerce
and Deutsche Bank AG ("CIBC"). The amount outstanding at December 31, 1995 was,
$107 million and is payable in quarterly installments through December 31, 1999.
Interest is due at the maturity of each LIBOR contract. The interest rate is
determined based on LIBOR plus an interest rate margin. Accrued interest at
December 31, 1995 is $865,148.
The Loan is collaterized by the mortality and expense risk charges and
surrender charges due from the separate account, excluding any portion thereof
subject to existing reinsurance agreements. The Loan is subordinated in every
respect to the claims of the Company's contractholders as directed by the
Insurance Commissioner of the State of Delaware. The Company is subject to
various affirmative and negative covenants under this Loan, whereby breach of
these covenants could cause an event of default. Such covenants require the
Company to meet certain financial ratios and places restrictions on the
incurrence of additional debt, reinsurance and capital changes.
J. SURPLUS NOTES
The Company received $20 million on December 20, 1994 pursuant to a surplus
note agreement with NAL bearing interest at 8%. The note and accrued interest
are subordinated to payments due to policyholders, and other claimants.
Principal and interest payments can be made only upon prior approval of the
Delaware Insurance Commissioner. Interest accrued at December 31, 1995 is
$3,248,219, and was paid on January 2, 1996.
K. DEFERRED COMPENSATION AND RETIREMENT PLANS
The parent, NAL, sponsors a defined benefit pension plan covering
substantially all of the Company's employees. The benefits are based on years of
service and the employee's compensation during the last five years of
employment. NAL's funding policy is to contribute annually the normal cost up to
the maximum amount that can be deducted for federal income tax purposes and to
charge each subsidiary for its allocable share of such contributions based on a
percentage of payroll. No pension cost was allocated to the Company in 1995,
1994, and 1993 as the plan was subject to the full funding limitation under the
Internal Revenue Code. The Company sponsors a defined contribution retirement
plan pursuant to regulation 401(k) of the Internal Revenue Code. All employees
on September 1, 1990 were eligible to participate. Employees hired after
September 1, 1990 will be eligible after one year of service and attaining age
21. The Company contributes two percent of base pay plus fifty percent of the
employee savings contribution. The employee savings contribution is limited to
six percent of base pay. The Company contributed $203,248, $167,148, and $89,218
in 1995, 1994 and 1993, respectively.
L. LEASES
The Company leases its office space and various office equipment under
operating lease agreements. For the years ended December 31, 1995, 1994 and 1993
the Company incurred rent expense of $1,388,780 and $840,233, and $718,579,
respectively. The Company negotiated a ten year lease for new office space which
commenced in March 1992. In connection with the lease, the Company was required
to deposit $1,500,000 in an escrow account as security toward fulfilling the
future lease commitment. The balance of the escrow account at December 31, 1995
is $1,050,000.
F-15
<PAGE> 63
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The minimum lease payments associated with the office space and various
office equipment under operating lease agreements is as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR LEASE PAYMENTS
--------------------------------------------- --------------
<S> <C>
1996......................................... $1,017,006
1997......................................... 1,187,665
1998......................................... 1,203,878
1999......................................... 1,203,364
2000......................................... 1,194,527
Remaining years.............................. 1,384,493
----------
Total.............................. $7,190,933
==========
</TABLE>
The Company also guarantees FNA's office space lease which has an annual
cost to FNA of approximately $72,000.
M. INTEREST RATE SWAP CONTRACT
The Company entered into an interest rate swap with CIBC for the purpose of
minimizing exposure to fluctuations in interest rates on a portion of the
outstanding debt held by the Company. The notional amount of the matched swap
outstanding at December 31, 1995 was $97 million. The unexpired term at December
31, 1995 was 4 years. CIBC is a major international financial institution. The
agreement subjects the Company to financial risk that will vary during the life
of the agreement in relation to market interest rates. Gains or losses on the
swap will be recognized in investment income when due.
N. GUARANTEE AGREEMENT
A guarantee agreement continues in effect, whereby NAL has agreed to
unconditionally guarantee that it will, on demand, make funds available to the
Company for the timely payment of contractual claims made under fixed annuity
and variable life contracts issued by the Company. The guarantee covers all
outstanding fixed annuity contracts, including those issued prior to the date of
the guarantee agreement. Following the merger (see Note O), Manufacturers Life
Insurance Company has assumed all of NAL's obligations under the guarantee
agreement.
O. SUBSEQUENT EVENTS
MERGER
On January 1, 1995, NAL merged with the Manufacturers Life Insurance
Company ("MLI") of Canada. The surviving company will conduct business under the
name "Manufacturers Life Insurance Company".
CORPORATE RESTRUCTURING
Effective January 1, 1996, immediately following the merger, the Company
experienced a corporate restructuring which resulted in the formation of a newly
organized holding corporation, NAWL Holding Company, Inc. ("NAWL"). NAWL holds
all of the outstanding shares of the Parent and Wood Logan Associates, Inc.
("WLA").
MLI owns all class A shares of NAWL, representing 85% of the voting shares
of NAWL. Certain employees of WLA own all class B shares, which represent the
remaining 15% voting interest in NAWL.
F-16
<PAGE> 64
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN
LIFE ASSURANCE COMPANY)
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995
SCHEDULE 1 -- SELECTED FINANCIAL DATA
<TABLE>
<S> <C>
Investment Income Earned
Government bonds........................................................... $ 1,060,741
Other bonds (unaffiliated)................................................. 16,510,356
Common stocks of affiliates................................................ 1,287,731
Mortgages loans............................................................ 5,420,613
Real estate................................................................ 1,071,080
Premium notes, policy loans and liens...................................... (32,300)
Short-term investments..................................................... 2,642,678
Aggregate write-ins for investment income.................................. 475,407
--------------
Gross investment Income................................................. $ 28,436,306
==============
Real Estate Owned -- Book Value less Encumbrances............................ $ 4,847,164
==============
Bonds and Stocks of Parents, Subsidiaries and Affiliates -- Book Value
Common Stocks........................................................... $ 21,282,599
Bonds and Short-Term Investments by Class and Maturity:
Bonds by Maturity -- Statement Value
Due within one year........................................................ 3,957,418
Over 1 year through 5 years................................................ 5,477,162
Over 5 years through 10 years.............................................. 4,645,633
Over 10 years through 20 years............................................. 127,972
Over 20 years.............................................................. 3,868,984
--------------
Total by Maturity.......................................................... $ 18,077,169
==============
Bonds by Class -- Statement Value
Class 1.................................................................... $ 16,756,213
Class 2.................................................................... 1,010,956
Class 3.................................................................... 310,000
--------------
Total by Class.......................................................... $ 18,077,169
==============
Total Bonds Publicly Traded.................................................. $ 17,066,213
==============
Total Bonds Privately Traded................................................. $ 1,010,956
==============
Common Stocks -- Market Value................................................ $ 21,730,238
==============
Supplementary Contracts in Force
Ordinary -- Involving Life Contingencies
Income Payable............................................................. $ 24,442
==============
Ordinary -- Not Involving Life-Contingencies
Income Payable............................................................. $ 341,176
==============
Annuities:
Ordinary
Immediate -- Amount of Income Payable................................... $ 2,291,184
==============
Deferred -- Fully Paid Account Balance.................................. $5,267,516,243
==============
Group
Fully Paid Account Balance.............................................. $ 374,375,752
==============
</TABLE>
F-17
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $60,606.06
Printing......................................................... $12,000.00*
Edgarization Expenses............................................ $ 5,500.00*
Accounting fees and expenses..................................... $20,000.00*
Legal fees and expenses.......................................... $13,000.00*
</TABLE>
- ---------------
* Estimate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 9 of the Articles of Incorporation of the Company provides as
follows:
NINTH: A director of this corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any repeal or
modification of the foregoing sentence shall not adversely affect any right or
protection of a director of the corporation existing hereunder with respect to
any act or omission occurring prior to such repeal or modification.
Article XIV of the By-laws of the Company provides as follows:
Each Director or officer, whether or not then in office, shall be
indemnified by the Company against all costs and expenses reasonably incurred by
or imposed upon him or her, including legal fees, in connection with or
resulting from any claim, action, suit or proceeding, whether civil, criminal or
administrative, in which he or she may become involved as a party or otherwise,
by reason of his or her being or having been a Director or officer of the
Company.
(1) Indemnity will not be granted to any Director or officer with
respect to any claim, action, suit or proceeding which shall be brought
against such Director or officer by or in the right of the Company, and
(2) Indemnification for amounts paid and expenses incurred in settling
such action, claim, suit or proceeding, will not be granted, until it shall
be determined by a disinterested majority of the Board of Directors or by a
majority of any disinterested committee or group of persons to whom the
question may be referred by the Board, that said Director or officer did
indeed act in good faith and in a manner he or she reasonably believed to
be in, or not adverse, to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonably cause to
believe that his or her conduct was legal, and that the payment of such
costs, expenses, penalties or fines is in the interest of the Company, and
not contrary to public policy or other provisions of law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendre or its equivalent, shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in, or not adverse, to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Indemnification shall be made by the corporation upon determination by a
disinterested majority of the Board of Directors or of a majority of any
disinterested committee or group or persons to whom the question may be referred
to by said Board, that the person did indeed act in good faith and in a manner
he or she reasonably believed to be in, or not adverse, to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
reasonably cause to believe that his or her conduct was legal.
II-1
<PAGE> 66
The foregoing right to indemnity shall not be exclusive of any other rights
to which such Director or officer may be entitled as a matter of law.
The foregoing right to indemnity shall also extend to the estate of any
deceased Director or officer with respect to any such claim, action, suit or
proceeding in which such Director or officer or his or her estate may become
involved by reason of his or her having been a Director or officer of the
Company, and subject to the same conditions outlined above.
Section IX, paragraph D of the Promotional Agent Agreement among the
Company, NASL Financial Services, Inc. ("NASL Financial") and Wood Logan
Associates, Inc. (referred to therein as "Promotional Agent") provides as
follows:
a. NASL Financial and the Company agree to indemnify and hold harmless
Promotional Agent, its officers, directors and employees against any and
all losses, claims, damages or liabilities to which they may become subject
under the Securities Act of 1933 ("1933 Act"), the 1934 Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact or any omission or alleged
omission to state a material fact required to be stated or necessary to
make the statements made not misleading in any registration statement for
the Contracts filed pursuant to the 1933 Act or any prospectus included as
a part thereof, as from time to time amended and supplemented, or any
advertisement or sales literature approved in writing by NASL Financial or
Security Life pursuant to Section VI, paragraph B of this Agreement.
b. Promotional Agent agrees to indemnify and hold harmless NASL
Financial and the Company, their officers, directors and employees against
any and all losses, claims, damages or liabilities to which they may become
subject under the 1933 Act, the 1934 Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon: (i) any oral or written misrepresentation
by Promotional Agent or its officers, directors, employees or agents unless
such misrepresentation is contained in any registration statement for the
Contracts or Fund shares, any prospectus included as a part thereof, as
from time to time amended and supplemented, or any advertisement or sales
literature approved in writing by NASL Financial pursuant to Section VI,
paragraph B of this Agreement or, (ii) the failure of Promotional Agent or
its officers, directors, employees or agents to comply with any applicable
provisions of this Agreement.
Notwithstanding the foregoing, Registrant hereby makes the following
undertaking pursuant to Rule 484 under the Securities Act of 1933:
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company currently sells Venture Group Annuity, a flexible premium
payment deferred variable unallocated group annuity, to retirement plans that
qualify for special tax treatment under Section 401(a) of the Internal Revenue
Code. Sales of these securities are not required to be registered under the
Securities Act of 1933 (Section 3(a)(2) of this Act). NASL Financial Services,
Inc., a wholly owned subsidiary of the
II-2
<PAGE> 67
Company is the principal underwriter of the contracts and Wood Logan Associates,
Inc., an affiliate of the Company, is the promotional agent. There are no
maximum or minimum purchase payments required to establish a contract. The value
of a contract will vary according to the investment performance, charges and
expenses of the subaccounts in which the contract is invested. As of December
31, 1996, the total assets in the variable portion of the Venture Group
Annuity was $46,252,212.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
<S> <C>
1(a) Underwriting Agreement between North American Security Life Insurance Company
(the "Company") and NASL Financial Services, Inc. (Underwriter) (1)
1(b) Promotional Agent Agreement between NASL Financial Services, Inc.
(Underwriter), the Company and Wood Logan Associates, Inc. (Promotional Agent) (2)
2 Not Applicable
3(i) Article of Incorporation of the Company (3)
3(ii) By-Laws of the Company (4)
4(i) Form of Individual Single Payment Deferred Fixed Annuity Non-Participating
Contract -- (10)
4(ii) Form of Group Single Payment Deferred Fixed Annuity Non-Participating
Contract -- (10)
4(iii) Individual Retirement Annuity Endorsement -- (10)
4(iv) ERISA Tax-Sheltered Annuity Endorsement -- (10)
4(v) Tax-Sheltered Annuity Endorsement -- (10)
4(vi) Section 401 Plans Endorsement -- (10)
5 Opinion and Consent of James D. Gallagher, Esq. -- Filed herewith
6 Not Applicable
7 Not Applicable
8 Not Applicable
9 Not Applicable
10(i) -- Form of broker-dealer agreement between the Company, NASL Financial
Services, Inc. (underwriter), Wood Logan Associates, Inc.
(Promotional Agent) and broker-dealers (5)
10(ii) -- Reinsurance and Guaranteed Death Benefits Agreement between NASL and
Connecticut General Life Insurance Company (8)
10(iii) -- Reinsurance Agreement between NASL and PaineWebber Life Insurance Company (9)
10(iv) -- Coinsurance Agreement between NASL and Peoples Security Life Insurance
Company -- Filed Herewith
10(v) -- Reinsurance and Accounts Receivable Agreements between NASL and ITT Lyndon
Life -- Filed Herewith
10(vi) -- Automatic Modified -- Coinsurance Reinsurance Agreement between NASL and
Transamerica Occidental Life Insurance Company -- Filed Herewith
10(vii) -- Automatic Yearly Renewable Term Reinsurance Agreement between NASL and
Transamerica Occidental Life Insurance Company -- Filed Herewith
</TABLE>
II-3
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
<S> <C>
10(viii) -- Amendment No. 1 to the Variable Annuity Guaranteed Death Benefit
Reinsurance Agreement between NASL and Connecticut General Life Insurance
Company -- Filed Herewith
11 Not Applicable
12 Not Applicable
13 Not Applicable
14 Not Applicable
15 Not Applicable
16 Not Applicable
17 Not Applicable
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 The Company has the following wholly owned subsidiaries: NASL Financial
Services, Inc. and First North American Life Assurance Company
22 Not Applicable
23 Consent of Coopers & Lybrand L.L.P. -- Filed herewith
24(i) Power of Attorney (Principal Financial and Accounting Officer of the
Company)(6)
24(ii) Power of Attorney (Directors of the Company)(7)
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule -- Filed herewith
28 Not Applicable
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit (A)(3)(a) to Form S-6, file number
2-93435, filed September 24, 1984 on behalf of the NASL Variable Account of
the Company.
(2) Incorporated by reference to Exhibit 3(ii) to Form N-4, file number
33-28455, filed February 15, 1991 on behalf of the NASL Variable Account of
the Company.
(3) Incorporated by reference to Exhibit (A)(6) to Form S-6, file number
2-93435, filed September 24, 1984 on behalf of the NASL Variable Account of
the Company.
(4) Incorporated by reference to Exhibit (b)(6)(ii) to Form N-4, file number
33-9960, filed November 4, 1986 on behalf of the NASL Variable Account of
the Company.
(5) Incorporated by reference to Exhibit (b)(3)(iii) to pre-effective amendment
no. 1 to Form N-4, file number 33-9960, filed February 2, 1987 on behalf of
the NASL Variable Account of the Company.
(6) Incorporated by reference to Exhibit (b)(14)(b) to Registration Statement
on Form N-4, file number 33-28455, filed April 2, 1993 on behalf of the
NASL Variable Account of the Company.
(7) Incorporated by reference to Exhibit (7)(a) to Registration Statement on
Form S-6, file number 33-92466, filed May 18, 1995 on behalf of the NASL
Variable Life Account of the Company.
(8) Incorporated by reference to Exhibit (b)(7)(i) to Registration Statement on
Form N-4, file number 33-76162, filed March 1, 1996.
(9) Incorporated by reference to Exhibit (b)(7)(iii) to Registration Statement
on Form N-4, file number 33-76162, filed March 1, 1996.
(10) Incorporated by reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996.
II-4
<PAGE> 69
(B) FINANCIAL STATEMENT SCHEDULES
Schedule I -- Summary of Investments
Schedule II -- Supplementary Insurance Information
Schedule IV -- Reinsurance
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 70
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT
SHOWN
MARKET IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ---------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Fixed Maturites:
United States Government.......................... $10,274,836 $10,687,544 $ 10,335,549
Other bonds -- unaffiliated....................... 5,958,963 5,960,313 5,945,903
----------- ----------- -----------
Total fixed maturities.............................. 16,233,799 $16,647,857 16,281,452
===========
Common stock of affiliates.......................... 20,657,630 20,097,789
Real Estate......................................... 6,579,569 4,847,164
Short-term investments.............................. 1,797,230 1,797,230
----------- -----------
Total investments................................... $45,268,228 $ 43,023,635
=========== ===========
</TABLE>
II-6
<PAGE> 71
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
SCHEDULE II -- SUPPLEMENTARY INSURANCE INFORMATION
(000'S OMITTED)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
----------------------------------------------------- ---------------------------------------------------
FUTURE POLICY BENEFITS, AMORTIZATION
DEFERRED BENEFITS, OTHER POLICY CLAIMS OF DEFERRED
POLICY LOSSES, CLAIMS AND NET LOSSES AND POLICY
ACQUISITION CLAIMS AND UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COST LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS
- --------------- ----------- ------------- -------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Life
Insurance.... $ 0 $ 0 $0 $ 0 $ 75 $ 0 $ 0 $0
Annuity........ 0 1,932 0 2,143 991,477 35,910 269,689 0
-- -- --
-------- ------ ---------- ------- --------
Total...... $ 0 $ 1,932 $0 $2,143 $ 991,552 $ 35,910 $269,689 $0
== ======== == ====== ========== ======= ======== ==
1994:
Life
Insurance.... $ 0 $ 0 $0 $ 0 $ 0 $ 0 $ 0 $0
Annuity........ 0 519,093 0 1,964 1,139,953 30,560 206,711 0
-- -- --
-------- ------ ---------- ------- --------
Total...... $ 0 $ 519,093 $0 $1,964 $1,139,953 $ 30,560 $206,711 $0
== ======== == ====== ========== ======= ======== ==
1993:
Life
Insurance.... $ 0 $ 0 $0 $ 0 $ 0 $ 0 $ 0 $0
Annuity........ 0 372,540 0 1,028 1,255,219 27,395 195,066 0
-- -- --
-------- ------ ---------- ------- --------
Total...... $ 0 $ 372,540 $0 $1,028 $1,255,219 $ 27,395 $195,066 $0
== ======== == ====== ========== ======= ======== ==
<CAPTION>
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
- --------------- --------- ----------
<S> <C> <C>
1995:
Life
Insurance.... $ 115 $ 75
Annuity........ 22,758 991,477
------- ----------
Total...... $22,873 $ 991,552
======= ==========
1994:
Life
Insurance.... $ 0 $ 0
Annuity........ 19,254 1,139,953
------- ----------
Total...... $19,254 $1,139,953
======= ==========
1993:
Life
Insurance.... $ 0 $ 0
Annuity........ 13,475 1,255,219
------- ----------
Total...... $13,475 $1,255,219
======= ==========
</TABLE>
II-7
<PAGE> 72
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
<TABLE>
<CAPTION>
PERCENTAGE
GROSS CEDED TO ASSUMED FROM OF AMOUNT
AMOUNT OTHER COMPANIES OTHER COMPANIES NET AMOUNT ASSUMED TO NET
---------- --------------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1995:
Life insurance in force......... $ 245 123 0 122 0
========== ======= = ========= =
Premiums:
Life insurance................ 150 75 0 75 0
Annuity Considerations........ 1,421 741 0 680 0
Deposit-type funds............ 1,088,518 100,836 0 987,682 0
Supplementary contracts....... 3,115 0 0 3,115 0
---------- ------- - --------- -
Total................. $1,093,204 101,652 0 991,552 0
========== ======= = ========= =
1994:
Life insurance in force......... $ 0 0 0 0 0
========== ======= = ========= =
Premiums:
Life insurance................ 0 0 0 0 0
Annuity Considerations........ 887 0 0 887 0
Deposit-type funds............ 1,281,582 143,980 0 1,137,602 0
Supplementary contracts....... 1,464 0 0 1,464 0
---------- ------- - --------- -
Total................. $1,283,933 143,980 0 1,139,953 0
========== ======= = ========= =
1993:
Life insurance in force......... $ 0 0 0 0 0
========== ======= = ========= =
Premiums:
Life insurance................ 0 0 0 0 0
Annuity Considerations........ 340 0 0 340 0
Deposit-type funds............ 1,261,898 8,385 0 1,253,513 0
Supplementary contracts....... 1,366 0 0 1,366 0
---------- ------- - --------- -
Total................. $1,263,604 8,385 0 1,255,219 0
========== ======= = ========= =
</TABLE>
II-8
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this amendment to its Registration Statement to be signed on its
behalf, by the undersigned, thereunto duly authorized in the City of Boston and
Commonwealth of Massachusetts on this 29 day of January, 1997.
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
(Registrant)
By: John D. DesPrez III, President
--------------------------------------
John D. DesPrez III, President
Attest:
James D. Gallagher, Secretary
- -----------------------------
James D. Gallagher, Secretary
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed by the following persons in the
capacities with the Registrant and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
John D. DesPrez III Director and President January 29, 1997
- ----------------------------------------------- (Principal Executive -----------------
John D. DesPrez III Officer) (Date)
January 29, 1997
* Director -----------------
- ----------------------------------------------- (Date)
Peter S. Hutchison
January 29, 1997
* Director and Chairman of -----------------
- ----------------------------------------------- the Board (Date)
Brian L. Moore
January 29, 1997
* Vice President and -----------------
- ----------------------------------------------- Treasurer (Principal (Date)
Richard C. Hirtle Financial and Accounting
Officer) January 29, 1997
*By: JAMES D. GALLAGHER -----------------
- ----------------------------------------------- (Date)
James D. Gallagher
Attorney-in-Fact
Pursuant to Powers of Attorney
</TABLE>
II-9
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
5 Opinion and Consent of James D. Gallagher, Esq.
10(iv) Peoples Coinsurance Agreement
10(v) ITT Lyndon Reinsurance and Accounts Receivable Agreements
10(vi) Transamerica Automatic Modified -- Coinsurance Reinsurance Agreement
10(vii) Transamerica Automatic Yearly Renewable Term Reinsurance Agreement
10(viii) Amendment No. 1 to the Connecticut General Life Insurance Company Reinsurance
Agreement
23 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
North American Security Life Insurance Company
116 Huntington Avenue
Boston, MA 02116
January 29, 1997
To whom it may concern,
This opinion is written in reference to individual and group deferred fixed
annuity non-participating contracts (the "Contracts") to be issued by North
American Security Life Insurance Company, a Delaware corporaton (the "Company")
pursuant to a Registration Statement, as amended on Form S-1 (the "Registration
Statement") filed under the Securities Act of 1933, as amended (the"Act").
As General Counsel to the Company, I have examined such records and documents
and reviewed such questions of law as I deemed necessary for purposes of this
opinion.
1. The Company has been duly incorporated under the laws of the state of
Delaware and is a validly existing corporation.
2. The Contracts, when issued in accordance with the prospectus contained in the
effective Registration Statement and upon compliance with applicable local law,
will be legal and binding obligations of the Company.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to pre-effective amendment no. 1 to the Registration
Statement and to the reference to my name in the prospectus included as part of
this Registration Statement on Form S-1.
Very truly yours,
James D. Gallagher
James D. Gallagher
Vice President, Secretary
and General Counsel
<PAGE> 1
COINSURANCE AGREEMENT
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
OF DELAWARE
AND
PEOPLES SECURITY LIFE INSURANCE COMPANY
OF
NORTH CAROLINA
JUNE 30, 1995
1
<PAGE> 2
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1. Definitions 3
Section 2. Reinsurance Coverage 5
Section 3. Representations and Warranties of the Company 6
Section 4. Representations and Warranties of the Reinsurer 7
Section 5. Conditions Precedent 7
Section 6. Payments by the Company 8
Section 7. Payments by the Reinsurer 9
Section 8. Expenses and Adjustments 9
Section 9. Payment Settlement Procedures and Reports 10
Section 10. Administration of Policies 11
Section 11. Notice and Settlement of Claims 12
Section 12. Interest Rate Committee 12
Section 13. Policy Changes and New Policy Forms 13
Section 14. Oversights 13
Section 15. Tax Matters 13
Section 16. Audit of Records and Procedures 14
Section 17. Arbitration 14
Section 18. Special Provisions 15
Section 19. Insolvency 15
Section 20. Offset 16
Section 21. Parties to Agreement 16
Section 22. Effective Date and Closing Date 16
Section 23. Entire Agreement 16
Section 24. Recapture of Reinsurance 17
Section 25. Termination 17
Section 26. Marketing Materials 18
Section 27. Severability of Provisions 18
Section 28. Counterparts 18
Section 29. Amendments 18
Section 30. No Waiver 18
Section 31. Confidentiality 18
Section 32. Governing Law 19
</TABLE>
2
<PAGE> 3
6/6/95
- --------------------------------------------------------------------------------
TABLE OF CONTENTS - Continued
<TABLE>
<CAPTION>
PAGE
----
Schedules
- ---------
<S> <C> <C>
Schedule A List of Policies Included 20
Schedule B Reinsured Policies 21
Schedule C Reimbursement of Costs
Schedule D Licenses - The Company
Schedule E Approvals - The Company
Schedule F Licenses - The Reinsurer
Schedule G Approvals - The Reinsurer
Schedule H Initial Consideration
Schedule I Transfer Adjustments
Schedule J Daily Cash Settlement Procedure
</TABLE>
3
<PAGE> 4
COINSURANCE AGREEMENT
Between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
of
Delaware
hereinafter referred to as "the Company"
and
PEOPLES SECURITY LIFE INSURANCE COMPANY
of
North Carolina
hereinafter referred to as "the Reinsurer"
This Agreement, executed this 30th day of June, 1995 between the Company and The
Reinsurer as follows:
SECTION 1. - DEFINITIONS
"ACCOUNTING PERIOD": As provided in Section 9 hereof.
"AFFILIATES": Respectively, any Person which directly or indirectly
controls, or is under common control with, the Company, or any Person which
directly or indirectly controls, or is under common control with, or is
controlled by, the Reinsurer.
"BENEFIT PAYMENTS": Proceeds payable under a Reinsured Policy arising from:
annuitization; death of a Policy owner or annuitant; full or partial
withdrawal of amounts held in a Policy; or the maturity of a Policy. All
such proceeds are net of surrender charges, market value adjustments and
Premium Taxes recovered.
"BUSINESS DAY": Any references to Business Day in this Agreement will mean
the days during which the Company is open for business.
"CLOSING DATE": As provided in Section 22 hereof.
4
<PAGE> 5
"EFFECTIVE DATE": As provided in Section 22 hereof.
"EXPERIENCE REFUND": Any amount due from the Reinsurer to the Company in
excess of those provided for in Section 7 of this Agreement which is based
solely on the experience of the Reinsured Policies.
"GOVERNMENTAL AUTHORITY": Any nation or government, and province, state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial (including an arbitrator), regulatory or administrative
functions of or pertaining to government.
"INITIAL CONSIDERATION": The payment required by Section 6(a).
"MATERIAL ADVERSE EFFECT": In the case of either the Company or the Reinsurer,
as appropriate, a material adverse effect on (1) its Property, business,
operations, financial condition, liabilities or capitalization, individually or
together with their respective Affiliates taken as whole; (2) its ability to
perform its obligations under this Agreement; or (3) the validity or
enforceability of this Agreement.
"PERSON": Any natural person, corporation, partnership, business trust, limited
liability company, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or any other entity, whether acting in an
individual, fiduciary or other capacity.
"POLICY OR POLICIES": Fixed annuity contracts and variable annuity contracts
issued by the Company and covered by the terms of this Agreement as listed in
Schedule A..
"PREMIUM TAXES": State taxes levied as a percent of gross premiums received,
gross premium receipts, premiums collected, premiums collected or contracted
for, new renewal premiums, or premiums written.
"PROMOTIONAL BONUS": Those portions of new money interest rates, renewal
interest rates, settlement option rates, and annuity purchase rates for
Reinsured Policies designated by the Company that exceed the Reinsurer's
Supportable Rate.
"PROPERTY": Any right or interest in or to property of any kind whatsoever,
whether real, personal or mixed, and whether tangible or intangible.
"REINSURANCE PREMIUMS": The premiums received by the Company with respect to
Reinsured Policies after the Effective Date and prior to termination of this
Agreement.
"REINSURED POLICY OR POLICIES": The quota share percentage of the portion
of Policies as defined in Schedule B.
"REINSURED POLICY EXPENSE ALLOWANCE": Reimbursement of costs related to
Reinsured Policies as set forth in Schedule C.
5
<PAGE> 6
"REINSURER'S SUPPORTABLE RATE": New money interest rates, renewal interest
rates, settlement option rates, and annuity purchase rates for Reinsured
Policies agreed upon by a majority of the Reinsurer appointed membership of the
Interest Rate Committee provided in Section 12.
"REQUIREMENTS OF LAW": As to any Person, the certificate of limited partnership,
partnership agreement, charter and by-laws, or other organizational or governing
documents as such Person, and any treaty, constitution, law, rule, order,
regulation, statute, ordinance, code, decree, or determination of any
Governmental Authority, in each case applicable to, binding upon or affecting
any such Person or any of its Property or to which such Person or any of its
Property is subject.
"UNUSUAL EXPENSES OF LAW": As provided in Section 8 hereof.
SECTION 2. - REINSURANCE COVERAGE
(a) On the basis hereinafter stated, the Company's liability under the Policies
listed in Schedule A shall be reinsured with the Reinsurer automatically for
those portions of Policies as set forth in Schedule B.
(b) The liability of the Reinsurer for Policies shall begin simultaneously with
that of the Company but not prior to the Effective Date of this Agreement. In no
event shall reinsurance under this Agreement be in force and binding unless and
until the issuance and delivery of Policies underlying such reinsurance
constituted the doing of business in a state of the United States or the
District of Columbia in which the Company was properly licensed in good
standing.
(c) Reinsurance hereunder shall be coinsurance and shall follow the Policy
forms of the Company.
(d) The reinsurance under this Agreement with respect to any Policy shall be
maintained in force without reduction so long as and to the extent that the
liability of the Company under such Policy reinsured hereunder remains in force
without reduction, unless such reinsurance is terminated or reduced as provided
herein.
(e) Except as otherwise provided in this Agreement, the reinsurance provided
hereunder is subject to the same limitations and conditions to which the
Policies reinsured under this Agreement are subject.
(f) The Company shall notify the Reinsurer immediately, in writing, of any and
all investigations of the Company or its directors, principal officers or
shareholders conducted by a Governmental Authority.
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SECTION 3. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Reinsurer that:
(I) The Company has furnished the Reinsurer with copies of all forms,
applications, rates, and values with respect to the Policies and shall keep the
Reinsurer informed with respect to any changes or modifications to such forms,
applications, rates or values in accordance with Section 14 herein.
(II) The Company's authority to conduct an insurance business is in good
standing in all jurisdictions identified on Schedule D for the lines of business
identified therein and that it has not been placed in, nor does it have any
reason to believe that it is about to be placed in supervision, rehabilitation,
receivership, suspension or liquidation by any insurance department.
(III) The Company (1) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, (2) has all
necessary corporate power and authority to entitle it to use its name, to own,
lease or otherwise hold its properties and assets, to carry on its business as
currently conducted, to perform its obligations, and (3) is in compliance with
all Requirements of Law, except to the extent that the failure to comply
therewith could not reasonably be expected to have a Material Adverse Effect.
(IV) The Company has full corporate power and authority to execute,
deliver and perform its obligations under this Agreement, and has taken all
necessary corporate and other action to authorize the ceding of the Policies
under the terms of this Agreement. Except as shall have been obtained and set
forth on Schedule E, no consent or approval of any Person, no waiver of any
right of distraint or other similar right, and no consent, license, approval,
authorization or declaration of, filing with or other act by or in respect of
any Governmental Authority, was, is or will be required in connection with the
fulfillment of the Company's duties under this Agreement.
(V) This Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms.
(VI) The Policies are in compliance with all applicable Requirements of
Law and are on forms approved in all material respects by the appropriate
Governmental Authorities except to the extent that failure to be in compliance
therewith does not have a Material Adverse Effect.
(VII) There are no material misrepresentations or omissions contained in
the information provided to the Reinsurer prior to the date of this Agreement.
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<PAGE> 8
SECTION 4. - REPRESENTATIONS AND WARRANTIES OF THE REINSURER
The Reinsurer hereby represents and warrants to the Company that:
(I) The Reinsurer's authority to conduct an insurance business is in good
standing in all jurisdictions identified on Schedule F for the lines of business
identified therein and that it has not been placed in, nor does it have any
reason to believe that it is about to be placed in supervision, rehabilitation,
receivership, suspension or liquidation by any insurance department.
(II) The Reinsurer (1) is a corporation duly organized, validly existing
and in good standing under the laws of the State of North Carolina, (2) has all
necessary corporate power and authority to entitle it to use its name, to own,
lease or otherwise hold its properties and assets, to carry on its business as
currently conducted, to perform its obligations, and (3) is in compliance with
all Requirements of Law, except to the extent that the failure to comply
therewith could not reasonably be expected to have a Material Adverse Effect.
(III) The Reinsurer has full corporate power and authority to execute,
deliver and perform its obligations under this Agreement, and has taken all
necessary corporate and other action to authorize the reinsurance of the
Policies under the terms of this Agreement. Except as shall have been obtained
and set forth on Schedule G, no consent or approval of any Person, no waiver of
any right of distraint or other similar right, and no consent, license,
approval, authorization or declaration of, filing with or other act by or in
respect of any Governmental Authority, was, is or will be required in connection
with the fulfillment of the Reinsurer's obligations under this Agreement.
(IV) This Agreement has been duly executed and delivered by the Reinsurer
and constitutes the valid and legally binding obligation of the Reinsurer,
enforceable in accordance with its terms.
(V) There are no material misrepresentations or omissions contained in the
information provided to the Company prior to the date of this Agreement.
SECTION 5. - CONDITIONS PRECEDENT
(a) The obligations of the Company and the Reinsurer hereunder are expressly
subject to the approvals of the insurance commissioners, directors, or
superintendents, as the case may be, of the insurance departments necessary for
the consummation of the reinsurance contemplated by this Agreement, and such
approvals shall be in full force and effect, and shall not impose upon either
the Company or the Reinsurer any material conditions or other requirements that
would impose upon either party any material additional costs.
(b) The obligations of the Reinsurer hereunder are expressly subject to the
Reinsurer not having discovered prior to the Closing Date material errors,
omissions or liabilities previously
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<PAGE> 9
undisclosed to it in the due diligence investigation and documentation furnished
to the Reinsurer by the Company prior to the date hereof.
(c) The obligations of the Company hereunder are expressly subject to the
Company not having discovered prior to the Closing Date material errors,
omissions or liabilities previously undisclosed to it in the due diligence
investigation and documentation furnished to the Company by the Reinsurer prior
to the date hereof.
SECTION 6. - PAYMENTS BY THE COMPANY
(a) Initial Consideration
To effect reinsurance with respect to Policies in force on the Effective
Date, the Company shall pay to the Reinsurer in cash or other assets having a
fair market value acceptable to the Reinsurer an Initial Consideration
determined in accordance with Schedule H.
(b) Payment of Reinsurance Premiums
To effect or continue reinsurance with respect to Policies in force on or
after the Effective Date and prior to the termination of this Agreement, the
Company shall pay to the Reinsurer the Reinsurance Premiums.
(c) Promotional Bonus
The Company will pay the Reinsurer the cost assessed to the Company under
Section 18.
(d) Adjustments on Transfers
The Company will pay to the Reinsurer any amounts transferred to Reinsured
Policies, after the Effective Date, that were not previously Reinsured Policies,
less any transfer adjustments as determined in accordance with Schedule I.
(e) Payment Procedures
All amounts payable by the Company to the Reinsurer under this Section
will be made in accordance with the terms and procedures set forth in Section 9
for payments required by this Agreement.
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SECTION 7. - PAYMENTS BY THE REINSURER
(a) Benefits Payments
Benefit Payments will first be paid by the Company and the Reinsurer will
thereafter reimburse the Company for such Benefit Payments.
(b) Reinsured Policy Expense Allowances
The Reinsurer shall pay the Company the full amount of the Reinsured
Policy Expense Allowances as specified in Schedule C.
(c) Premium Taxes
The Reinsurer will reimburse the Company for Premium Taxes incurred by the
Company with respect to the Reinsured Policies.
(d) Policy Loans
Loans on Policies will be paid by the Company to Contract owners and the
Reinsurer shall fund the Company for any such loans with respect to the
Reinsured Policies and the Company shall pay the Reinsurer interest and
principal with respect to such loans as such amounts are remitted by the Policy
owner.
(e) Adjustments on Transfers
The Reinsurer will pay to the Company any amounts transferred after the
Effective Date that were not previously Reinsured Policies to Reinsured
Policies, less any transfer adjustments as determined in accordance with
Schedule H.
(f) Payment Procedures
All amounts payable by the Reinsurer to the Company under this Section
will be made in accordance with the terms and procedures set forth in Section 9
for payments required by this Agreement.
SECTION 8. - EXPENSES AND ADJUSTMENTS
(a) The Reinsurer shall bear no part of the expenses incurred in connection with
the Policies reinsured hereunder, except as otherwise provided in this
Agreement.
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(b) Any Unusual Expenses incurred by the Company in defending or investigating a
claim for Benefit Payments or in rescinding a Policy reinsured hereunder shall
be participated in by the Reinsurer in the same proportion as the Reinsured
Policy bears to the total liability under such Policy.
(c) For purposes of this Agreement, it is agreed that penalties, attorney's
fees, and interest that are imposed automatically by statute and that arise
solely out of a judgment rendered against the Company in a suit for Benefit
Payments shall be considered Unusual Expenses.
(d) The Reinsurer shall not pay the Company an Experience Refund under this
Agreement.
(e) In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as Unusual Expenses:
(1) routine investigative or administrative expenses;
(2) expenses, fees, settlements or judgments arising out of or in
connection with claims of entitlement to Benefit Payments which the Company
admits are payable;
(3) expenses, fees, settlements or judgments arising out of or in
connection with claims against the Company for punitive or exemplary damages;
and
(4) expenses, fees, settlements or judgments arising out of or in
connection with claims made against the Company and based on alleged or actual
bad faith, failure to exercise good faith, or tortious conduct.
(f) In the event that the coverage provided by Reinsured Policies is increased
or reduced because of a misstatement of age or sex, the reinsurance hereunder
shall increase or reduce proportionately.
SECTION 9. - PAYMENT SETTLEMENT PROCEDURES AND REPORTS
(a) Initial Consideration
The Company will pay an estimated Initial Consideration to the Reinsurer
on the Closing Date in the amount of $_________. Within forty-five (45) days
after the Closing Date, the Reinsurer will make a final calculation of the
Initial Consideration in accordance with Schedule H. Within five (5) Business
Days following delivery of the final calculation by the Reinsurer to the
Company, the Reinsurer or the Company, as the case may be, will pay to the other
any amount required to adjust the estimated Initial Consideration to the final
calculation.
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(b) Daily Cash Settlement
The Company and the Reinsurer will establish and maintain a daily cash
settlement procedure in accordance with the principles set forth in Schedule J,
using approximations where required, to cover substantially all of the amounts
due under this Agreement. The daily cash settlement procedures may be amended as
agreed by the parties to help minimize the amount of net settlements due at the
end of each Accounting Period.
(c) Payments Due
Except as otherwise specifically provided herein, all amounts due to be
paid to either the Reinsurer or the Company shall be determined daily on a net
basis. If such amounts cannot be determined on any day on an exact basis, such
payments will be paid on an estimated basis and any final adjustments are to be
made within fifteen (15) days after each Accounting Period as defined in
subsection (d) below.
(d) Accounting Period
The Accounting Period for this Agreement shall be a calendar month. The
Company and the Reinsurer shall each reconcile the reinsurance transactions and
payments contemplated by this Agreement in accordance with Schedule I at the end
of each Accounting Period.
(e) Reports
The Reports prescribed in Schedule I will be provided by the Company to
the Reinsurer within fifteen (15) days of the end of each Accounting Period.
SECTION 10. - ADMINISTRATION OF POLICIES
(a) The Company will have the ultimate authority for the administration of the
Policies. Notwithstanding the foregoing, the Company will administer the
Policies pursuant to servicing standards mutually agreed upon by the Company and
the Reinsurer, and in no event shall the Company administer the Policies in any
manner that is not in accordance with all Requirements of Law and with standard
industry custom, except to the extent that the failure to be in accordance with
such Requirements of Law and standard industry custom would not have a Material
Adverse Effect.
(b) The Company will indemnify and hold harmless the Reinsurer, its officers,
directors, employees, and agents (each as "Indemnified Party") from, and shall
reimburse as Indemnified Party for, all loss arising out of any claim against
such Indemnified Party arising out of any action or failure to act by the
Company or its representatives in respect of the administration of the Policies.
For purposes of this subsection, "loss" shall include all fees, costs,
penalties, judgments and expenses of any kind reasonably incurred by an
Indemnified Party in investigating, preparing for, defending against or taking
any other action with respect to a threatened or asserted claim.
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SECTION 11. - NOTICE AND SETTLEMENT OF CLAIMS
(a) The Company will promptly notify the Reinsurer in writing after receipt of
any information regarding a claim for Benefits Payments and the institution of
any legal proceeding in respect of such claim. The Reinsurer will be furnished
copies of any proofs or other documents bearing on such claim or proceeding upon
request.
(b) The Company will promptly notify the Reinsurer in writing or its intention
to contest any claims for Benefits Payments. The Reinsurer will accept the good
faith decision of the Company in settling any claim for Benefits Payments and
shall pay its share of net reinsurance liability upon receiving proper evidence
of the Company's having settled with the claimant. In no event will the
Reinsurer be required to reimburse the Company for any Benefits Payments greater
than those guaranteed by the Policies.
(c) If the Company should contest any claim or proceeding and the amount of net
liability thereby be reduced, or if at any time the Company should recover
monies from any third party in connection with or arising out of any claim
reinsured by the Reinsurer, the Reinsurer's liability hereunder shall be reduced
accordingly.
(d) Notwithstanding the foregoing, the Reinsurer shall have the right to consult
with the Company in respect of the handling of any claim and, at its own
expense, shall have the right to participate in the defense of any claim.
SECTION 12. - INTEREST RATE COMMITTEE
An Interest Rate Committee will be established by the Reinsurer and the
Company. The Committee members will be selected from the Reinsurer's and the
Company's then-current employees or their respective affiliates' employees.
There will be an equal number of members appointed to the Committee by each of
the Reinsurer and the Company and total membership will not exceed six (6)
individuals.
The Committee will be authorized to determine interest rate crediting
methodologies and to recommend new money interest rates, renewal interest rates,
settlement option rates, and annuity purchase rates for the Policies. Such
methodologies and rates will be based on indices, or other information relevant
to the appropriate maturities of the Policies. The Company has the right to
approve or reject all rates recommended by the Committee. Any Promotional Bonus
will be subject to the terms of Section 18.
The Committee will establish the procedures for its operations including,
but not limited to, determining the frequency of meetings, frequency of interest
rate reviews, maintenance of minutes for meetings of the Committee, and notice
requirements for any unscheduled meetings. Meetings will generally be conducted
by teleconference. A quorum for any meetings of the
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Committee will be at least one representative from each of the Company and the
Reinsurer. Members in attendance may cast the votes of those absent members from
their respective group.
SECTION 13. - POLICY CHANGES AND NEW POLICY FORMS
(a) If any change is made with respect to any Policies, including but not
limited to changes in the terms and conditions of a Policy issued by the
Company, or a change in the method used to calculate the reserves on a Policy,
and such change affects Reinsured Policies, the Company will notify the
Reinsurer promptly in writing of such change.
(b) For purposes of this Agreement, any of the types of changes described in
subsection (a) above will be deemed to be the issuance of a new policy form by
the Company and policies issued by the Company on such new policy form will not
automatically be considered Policies subject to this Agreement. The Reinsurer,
in its full and unfettered discretion, will decide whether the policies
utilizing the new policy form will be Policies subject to this Agreement and the
Company shall be bound by the Reinsurer's decision. The Reinsurer shall inform
the Company whether the Reinsurer wishes to include policies utilizing the new
policy form as Policies subject to this Agreement within 30 days of the notice
provided to the Reinsurer by the Company pursuant to Section 13(a) hereof.
SECTION 14. - OVERSIGHTS
If either the Company or the Reinsurer shall unintentionally perform an
obligation incorrectly or fail to perform an obligation under this Agreement or
perform an obligation incorrectly, such error or omission shall be corrected as
soon as reasonably possible after its discovery and both the Company and the
Reinsurer will be restored to the positions they would have been in had no such
error or omission occurred. For purposes of this Agreement, errors and omissions
are defined as clerical mistakes made inadvertently and exclude errors of
judgment and all other forms of errors or omissions.
SECTION 15. - TAX MATTERS
(a) Pursuant to IRC Section 848, insurance companies are required to capitalize
and amortize specified policy acquisition expenses. The amount capitalized is
determined by proxy based on a percentage of "reinsurance premiums" as defined
by the IRS regulations relating to IRC Section 848. At the Reinsurer's request,
the Company will reimburse the Reinsurer for any positive timing cost to the
Reinsurer which results from the application of IRC Section 848 to the Policies
reinsured under this Agreement and which the Reinsurer considers material. At
the Company's request, the Reinsurer will reimburse the Company for the absolute
value of any negative timing cost to the Company which results from the
application of IRC Section 848 to the Policies reinsured under this Agreement
and which the Company considers material.
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(b) The Company and the Reinsurer agree that the party with net positive
consideration under this Agreement will capitalize specified Policy acquisition
expenses with respect to the Policies reinsured under this Agreement without
regard to the general deductions limitation of IRC Section 848(c)(1). The
Company and the Reinsurer will exchange information pertaining to the amount of
net cash consideration under this Agreement each year to ensure consistency. The
Company will submit a schedule to the Reinsurer by May 1 of each year showing
its calculation of the net consideration for the preceding taxable year. The
Reinsurer may contest the calculation in writing within thirty (30) days of
receipt of the Company's schedule. Any difference will be resolved between the
parties so that consistent amounts are reported on the respective tax returns
for the preceding taxable year. This election to capitalize specified Policy
acquisition expenses without regard to the general deductions limitation is
effective for all taxable years during which this Agreement remains in effect.
SECTION 16. - AUDIT OF RECORDS AND PROCEDURES
(a) The Reinsurer and the Company each shall have the right during normal
business hours and at reasonable intervals, to audit, at the office of the
other, all records and procedures relating to reinsurance under this Agreement.
Books and records shall be maintained in accordance with prudent standards of
insurance company record keeping and must be retained for a period of at least
seven (7) years from the date of creation.
SECTION 17. - ARBITRATION
(a) It is the intention of the parties that the customs and usages of the
business of reinsurance shall be given full effect in the interpretation of this
Agreement. The parties shall act in all things with the highest good faith. A
dispute or difference between the parties with respect to the operation or
interpretation of this Agreement on which an amicable understanding cannot be
reached, including but not limited to claims for recission of the Agreement,
shall be decided by arbitration. The arbitrators are empowered to decide all
questions or issues and shall be free to reach their decisions from the
standpoint of equity and customary practices of the insurance and reinsurance
industry rather than from that of strict law.
(b) To initiate arbitration, a party shall send by certified mail, return
receipt requested, to the other party's home office a notice demanding
arbitration. The notice shall include the issues for decision and the remedies
sought. The party receiving the notice shall thereafter have thirty days within
which to respond in writing.
(c) There shall be three arbitrators who shall be active or retired officers of
0life insurance companies other than the contracting companies or their
affiliates. Each of the contracting companies shall appoint one of the
arbitrators and these two arbitrators shall select the third. In the event that
either contracting company should fail to choose an arbitrator within thirty
days after the response to the demand for arbitration, the other contracting
company may choose two arbitrators, who shall in turn choose a third arbitrator
before entering arbitration. If the two
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arbitrators are unable to agree upon the selection of a third arbitrator within
thirty days following their appointment, each arbitrator shall nominate three
candidates within ten days thereafter, two of whom the other shall decline and
the decision shall be made by drawing lots.
(d) The decision in writing of any two arbitrators when filed with the parties
hereof, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having competent
jurisdiction. Each party shall bear the expense of its own arbitrator, and with
the other party shall bear equally the expense of the third arbitrator and of
the arbitration.
(e) In the event of arbitration, the arbitration hearing shall take place in
Boston, Massachusetts, unless another location is agreed to in writing by both
the Company and the Reinsurer.
(f) This Section 17 constitutes a separate and independent agreement between the
Company and the Reinsurer and shall remain in force even after termination of
this Agreement and even if the Agreement is found wholly or partially void or is
disputed. The arbitrators shall decide upon the validity of this Agreement and,
in case of its invalidity, upon any dispute between the parties.
SECTION 18. - SPECIAL PROVISIONS
Promotional Bonus
On a case by case basis, the Reinsurer will determine the extent to which
it will share in the costs, if any, associated with a Promotional Bonus. If a
Promotional Bonus is offered by the Company without the Reinsurer's prior
written approval and agreement to share the cost of such Promotional Bonus, then
the Company shall be assessed the full amount of costs associated with the
Promotional Bonus.
SECTION 19. - INSOLVENCY
(a) In the event of the insolvency of the Company, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of the
Company, without diminution or increase because of the insolvency of the
Company.
(b) In the event of insolvency of the Company, the liquidator, receiver, or
statutory successor shall give the Reinsurer written notice of the pendency of a
claim on a Reinsured Policy within a reasonable time after such claim is filed
in the insolvency proceeding. During the pendency of any such claim, the
Reinsurer may investigate such claim and interpose in the name of the Company
(its liquidator, receiver or statutory successor), but at its own expense, in
the proceeding where such claim is to be adjudicated any defense or defenses
which the Reinsurer may deem available to the Company or its liquidator,
receiver or statutory successor.
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(c) The expense thus incurred by the Reinsurer shall be chargeable, subject to
court approval, against the Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer. Where two or more
reinsurers are participating in the same claim and a majority in interest elect
to interpose a defense or defenses to any such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expenses had been incurred by the Company.
SECTION 20. - OFFSET
Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or where incurred, in favor of or against either
the Company or the Reinsurer with respect to this Agreement or with respect to
any other claim of one party against the other under this Agreement or any other
Agreement between the parties are deemed mutual debts or credits, as the case
may be, and shall be set off dollar for dollar, and only the balance shall be
allowed or paid, regardless of the solvency of either party.
SECTION 21. - PARTIES TO AGREEMENT
(a) This is an Agreement for coinsurance solely between the Company and the
Reinsurer. The acceptance of reinsurance hereunder shall not create any right or
legal relation whatsoever between the Reinsurer and the insured or the
beneficiary under any Policy, and the Company shall be and remain solely liable
to such insured or beneficiary under any such Policy.
(b) This Agreement may not be assigned by either party without the prior written
approval of the other party. However, the Reinsurer reserves the right to
retrocede the reinsurance assumed under this Agreement to one or more of its
affiliated insurance companies. Except for the foregoing, the Reinsurer shall
not retrocede the Policies reinsured hereunder without the prior written
authorization by the Company.
SECTION 22. - EFFECTIVE DATE AND CLOSING DATE
(a) The Effective Date for the reinsurance provided under this Agreement shall
be June 30, 1995. The Closing Date for payment of the Initial Consideration will
be July 5, 1995.
SECTION 23. - ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the Company and
the Reinsurer with respect to the risks reinsured hereunder and there are no
understandings between the parties other than as expressed in this Agreement.
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SECTION 24. - RECAPTURE OF REINSURANCE
(a) The Reinsurer, or any of its affiliates to whom the Reinsurer has retroceded
any of the Policies reinsured herein, shall permit the Company to recapture the
Policies reinsured hereunder, at fair market value, based on procedures outlined
in Schedule H, without any penalty, if the Reinsurer's risk-based capital ratio
as defined in the National Association of Insurance Commissioners "Risk-Based
Capital for Life and/or Health Insurers Model Act", falls below 150% of the
"Company Action Level" at the end of any calendar quarter and remains below such
level at the end of the next two calendar quarters. The recapture shall commence
at the end of the calendar quarter during which 30 days notice is given to the
Reinsurer by the Company of the Company's intent to recapture. The initial
recapture shall relate to no more than 33 1/3% of the Policies reinsured in the
hereunder, with the remainder of the recapture, in substantially equal amounts,
to occur over a period not to exceed more than 36 months thereafter.
(b) The Reinsurer shall provide the Company with its annual risk-based capital
report and shall furnish estimated proforma risk-based capital calculations for
the quarters ending March 31, June 30, and September 30 of each year.
(c) The Policies recaptured pursuant to subsection (a) above will thereafter be
held at the Company's own risk and the Reinsurer's obligations with respect to
such Policies shall cease to exist.
SECTION 25. - TERMINATION
(a) This Agreement may be terminated at any time by either the Reinsurer or the
Company upon ninety (90) days written notice with respect to reinsurance of
Policies not yet placed in force.
(b) At the end of any Accounting Period, this Agreement shall automatically
terminate if none of the Policies reinsured hereunder are in force.
(c) The Reinsurer may terminate this Agreement upon thirty (30) days written
notice to the Company so long as such notice has been received by the Company
within five (5) days after the Reinsurer has been notified by the Company of the
closing of a transaction whereby a party unaffiliated with the Reinsurer or the
Company acquires, directly or indirectly, either (i) 10% or more of the voting
equity securities of the Company or any options or rights to subscribe to 10% or
more of such voting equity securities or other securities or instruments which
may be converted into voting equity securities of the Company or (ii) by
contract or otherwise, the power to direct or cause the direction of the
management and policies of the Company.
(d) Upon an event specified in subsection (c) above, the Reinsurer shall
transfer to the Company a total amount, in cash or assets having a fair market
value acceptable to the Company, equal to the net consideration with respect to
the Reinsured Policies in effect as of the effective
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date of such termination, calculated in a manner consistent with the pricing
mechanism utilized in determining the initial net reinsurance premium, less an
early termination allowance to the Reinsurer of 0.5% (50 basis points) of such
amount.
(e) The failure to make payments in accordance with Section 9 shall permit the
aggrieved party to terminate this Agreement with respect to all Policies
following thirty (30) days written notice to the party in default provided the
party in default has not cured such default within that notice period.
SECTION 26. - MARKETING MATERIALS
No marketing materials, prospectuses, broker communications or other
communications of the Company or the Reinsurer which refer to the other party
hereto shall be distributed in any manner without the prior approval of such
other party.
SECTION 27. - SEVERABILITY OF PROVISIONS
If any provision of this Agreement is declared null and void by any
Government Authority, each party will have the right to terminate this Agreement
upon five (5) days written notice to the other party. Upon such termination, the
transfer of funds described in Section 25(d) herein shall occur.
SECTION 28. - COUNTERPARTS
This Agreement may be executed in several counterparts and each shall have
the same force and effect as an original.
SECTION 29. - AMENDMENTS
Any amendment, alteration, modification, variation or addition to this
Agreement shall only be valid if in writing and executed by both parties hereto.
SECTION 30. - NO WAIVER
The failure of any party to enforce at any time any of the provisions of
this Agreement shall in no way be construed to be a waiver of such provisions,
nor in any way to affect the validity of this Agreement, or any part thereof, or
the rights of any party to thereafter enforce each and every provision.
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SECTION 31. - CONFIDENTIALITY
The Reinsurer or the Company, as the case may be, will handle confidential
information received from the other party in accordance with standards of care
and confidentiality that it applies to its own records, trade secrets and
proprietary information.
SECTION 32. - GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
IN WITNESS WHEREOF, NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY and PEOPLES
SECURITY LIFE INSURANCE COMPANY have by their respective officers executed this
Agreement in duplicate on the date first mentioned above.
NORTH AMERICAN SECURITY LIFE PEOPLES SECURITY LIFE
INSURANCE COMPANY INSURANCE COMPANY
Richard Hirtle Frederick C. Kessell
- ------------------------------- -----------------------------------
By By
Vice President, Treasurer & CFO Second Vice President - Investments
- ------------------------------- ------------------------------------
Title Title
John G. Vrysen
- -------------------------------
By
Vice President & Chief Actuary
- -------------------------------
Title
Date July 5, 1995
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SCHEDULES
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NORTH AMERICAN SECURITY LIFE
COINSURANCE AGREEMENT
SCHEDULE A
THE REINSURED NORTH AMERICAN SECURITY LIFE (NASL) PRODUCTS UNDER THIS AGREEMENT
ARE LISTED BELOW.
STANDARD
POLICY FORM CODE* PRODUCT ADMINISTRATIVE CODE
----------------- ---------------------------
DEFERRED ANNUITIES AND ANNUITIZATIONS WITH FIXED PAYOUT OPTIONS
NASL
Venture Fixed Annuity
204-FA VEN 4
Venture Variable Annuity (Annuitizations with fixed payout options only)
200-VA VEN 1
203-VA VEN 3
Venture Variable Annuities - Fixed Options
207.VFA VEN 7
207.VFA OWN 7
VFA.CONT, VFA.CERT VEN 8
207.VFA VEN 17
VFA.CONT,VFA.CERT VEN 18
VENTURE.001, VENTURE.005 VEN 20
VENTURE.001, VENTURE.005 VEN 21
VENTURE.003, VENTURE.004 VEN 22
VENTURE.003, VENTURE.004 VEN 23
Venture Vision Product - Fixed Options
VEN 10 VIS 5
VISION.001 VIS 25
Venture Group Unallocated Annuities - Fixed Options only
All Product Administrative
UGA codes starting with "G"
IMMEDIATE PAYOUT ANNUITIES (FIXED OPTIONS ONLY)
NASL
206-IA VEN 6 Fixed Immediate
*Slight variations to the identified policy form codes may exist by state.
<PAGE> 23
NORTH AMERICAN SECURITY LIFE
COINSURANCE AGREEMENT
SCHEDULE B
THE REINSURED NORTH AMERICAN SECURITY LIFE (NASL) RELATED PRODUCT COINSURANCE
PERCENTAGES ARE LISTED BELOW. THIS AGREEMENT COVERS THE FIXED ACCOUNT OPTIONS IN
BOTH THE ACCUMULATION (DEFERRED ) AND PAYOUT PHASES OF THESE CONTRAST. THE LOAN
COLLATERAL ACCOUNT UNDER A CONTRACT SHALL BE INCLUDED AS A FIXED ACCOUNT OPTION.
COINSURANCE
PRODUCT ADMINISTRATIVE CODE PERCENTAGE
--------------------------- ----------
DEFERRED ANNUITIES AND ANNUITIZATIONS WITH FIXED PAYOUT OPTIONS
NASL
Venture Fixed Annuity
VEN 4 100%
Venture Variable Annuity (Annuitizations with fixed payout options only)
VEN 1 100%
VEN 3 100%
Venture Variable Annuities - Fixed Options
VEN 7 100%
OWN 7 100%
VEN 8 100%
VEN 17 100%
VEN 18 100%
VEN 20 100%
VEN 21 100%
VEN 22 100%
VEN 23 100%
Venture Vision Product - Fixed Options
VIS 5 100%
VIS 25 100%
Venture Group Unallocated Annuities - Fixed Options only
All Product Administrative
codes starting with "G" 100%
IMMEDIATE PAYOUT ANNUITIES (FIXED OPTIONS ONLY)
NASL
VEN 6 Fixed Immediate 100%
<PAGE> 24
NORTH AMERICAN SECURITY LIFE
COINSURANCE AGREEMENT
SCHEDULE C
The expense reimbursements to be paid by the Reinsurer to the Company will
include a compensation allowance, issue allowance, maintenance allowance and
premium taxes paid. On any of the contracts below where no commission is paid,
the compensation allowance shall be zero.
COMPENSATION ALLOWANCE
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CHARGEBACK
PRODUCT DESCRIPTION NEW BUSINESS TRAILER/RENEWAL COMMISSION (SEE NOTE 2)
- ------------------------------------- ----------------- -------------------------------------------------------- ------------
% of
(Note 1) Fixed
Issue Issue % of Account
Products Date Age Premium Payable Value Payable Received
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Venture Fixed 4 All All 5.25% Monthly 3% of 5 yr Payable based on account value upon renewal See Note 2
(204-FA) renewal into the 5 year fixed option.
amount
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Fixed All All 5.25% Monthly N/A N/A See Note 2
Immediate 6 (206-IA)
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7, 8 Since Less 7% Daily .25% For new policy, beginning the first calendar See Note 2
(207-VFA, VFA.Cont, 7/1/91 than quarter subsequent to the 5th contract
VFA.Cert) 81* anniversary. For additions, beginning at the
later of 18 months after the premium
addition, or the first calendar quarter
subsequent to the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7, 8 Since 81-85* 4.5% Daily .25% For new policy, beginning the first calendar See Note 2
(207-VFA, VFA.Cont, 7/1/91 quarter subsequent to the 5th contract
VFA.Cert) anniversary. For additions, beginning at the
later of 18 months after the premium
addition, or the first calendar quarter
subsequent to the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7-Option A Since Less 7% Daily .25% Trail payable first calendar quarter 18 See Note 2
(207-VFA) 7/1/91 than months following issuance/additions.
81*
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7-Option A Since 81-85* 4.5% Daily .25% Trail payable first calendar quarter 18 See Note 2
(207-VFA) 7/1/91 months following issuance/additions.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7-Option B Since Less 7% Daily .25% For new policy, beginning the first calendar See Note 2
(207-VFA) 7/1/91 than quarter subsequent to the 5th contract
81* anniversary. For additions, beginning at the
later of 18 months after the premium addition,
or the first calendar quarter subsequent to
the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 7-Option B Since 81-85* 4.5% Daily .25% For new policy, beginning the first calendar See Note 2
(207-VFA) 7/1/91 quarter subsequent to the 5th contract
anniversary. For additions, beginning at the
later of 18 months after the premium addition,
or the first calendar quarter subsequent to
the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 17, 18 Since Less 8% Daily N/A N/A See Note 2
(207-VFA, VFA.Cert, 10/1/94 than
VFA.Cont.) 81*
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 17, 18 Since 81-85* 5% Daily N/A N/A See Note 2
(207-VFA, VFA.Cert, 10/1/94
VFA.Cont.)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 25
NORTH AMERICAN SECURITY LIFE
COINSURANCE AGREEMENT
SCHEDULE C, CONTINUED
COMPENSATION ALLOWANCE, continued
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CHARGEBACK
PRODUCT DESCRIPTION NEW BUSINESS TRAILER/RENEWAL COMMISSION (SEE NOTE 2)
- ------------------------------------- ----------------- -------------------------------------------------------- ------------
% of
(Note 1) Fixed
Issue Issue % of Account
Products Date Age Premium Payable Value Payable Received
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Venture 20, 22 All Less 7% Daily .25% For new policy, beginning the first See Note 2
(Venture.001, than calendar quarter subsequent to the
Venture.003 86** 5th contract anniversary. For additions,
Venture.004 beginning at the later of 18 months
Venture.005) after the premium addition, or the
first calendar quarter subsequent to
the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 20, 22 All 86-90** 4.5% Daily .25% For new policy, beginning the first See Note 2
(Venture.001, calendar quarter subsequent to the
Venture.003 5th contract anniversary. For additions,
Venture.004 beginning at the later of 18 months
Venture.005) after the premium addition, or the
first calendar quarter subsequent to
the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 21, 23 All Less 8% Daily N/A N/A See Note 2
(Venture.001, than
Venture.003 86**
Venture.004
Venture.005)
- ---------------------------------------------------------------------------------------------------------------------------------
Venture 21, 23 All 86-90** 5% Daily N/A N/A See Note 2
(Venture.001,
Venture.003
Venture.004
Venture.005)
- ---------------------------------------------------------------------------------------------------------------------------------
Vision 5, 25 All All 3.5% Daily .5% For new policy, beginning the first See Note 2
(Ven 10 and calendar quarter subsequent to the
Vision.001) 5th contract anniversary. For additions,
beginning at the later of 18 months
after the premium addition, or the
first calendar quarter subsequent to
the 5th contract anniversary.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Group All All 7.25% Daily N/A N/A See Note 2
G140P1 (UGA)
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Group All All 6.25% Daily N/A N/A See Note 2
G140P2 (UGA)
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Group All All 5.00% Daily .20% Quarterly, beginning the first See Note 2
G140P3 (UGA) calendar quarter subsequent to the
premium addition.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Group All All 3.50% Daily .40% Quarterly, beginning the first See Note 2
G140P4 (UGA) calendar quarter subsequent to the
premium addition.
- ---------------------------------------------------------------------------------------------------------------------------------
Venture Group All All .50% Daily 1.00% Quarterly, beginning the first See Note 2
G140P5 (UGA) calendar quarter subsequent to the
premium addition.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 1:
Premium includes initial and additional deposits received and invested in the
fixed fund options. Premium does not include exchanges.
<PAGE> 26
NOTE 2:
The Reinsurer is entitled to all directly related reinsured fixed
option/product commission chargebacks, payable monthly, provided that the
allowances have been paid by the Reinsurer.
* Issue age of annuitant
** Issue age of owner
<PAGE> 27
NORTH AMERICAN SECURITY LIFE
COINSURANCE AGREEMENT
SCHEDULE C, CONTINUED
ISSUE ALLOWANCE
FOR CONTRACTS INCLUDED UNDER THIS REINSURANCE AGREEMENT:
- -$50 per contract issued, prorated to fixed initial premium as a percentage of
total premium indexed at 4% per annum, payable daily based upon an estimate;
actual calculation performed at month end and settled monthly.
- -0.23% *** of fixed initial premium per contract issued, payable daily and the
allowance will reduce to .20% if the state of Pennsylvania repeals the current
2.00% front end premium tax assessed to non-qualified deferred annuities.
MAINTENANCE ALLOWANCE
FOR CONTRACTS INCLUDED UNDER THIS REINSURANCE AGREEMENT:
- -$30 per deferred contract in force, prorated to fixed account value as a
percentage of total account value. For fixed immediate payout annuities and
annuitizations $30 per contract in force prorated based upon fixed option
payment to total payment. Payable at month end.
- -0.15% (annualized) of fixed account value at month end for deferred contracts
in force .15% (annualized) of statutory reserves at month end for fixed
immediate payout annuities and annualization. Payable daily based upon an
estimate; actual calculation performed and settled monthly.
PREMIUM TAXES
Premium taxes will be paid in accordance with Section 7(c) of this reinsurance
agreement according to the following table:
- --------------------------------------------------------------------------------
STATES QUALIFIED PREMIUM NON-QUALIFIED PREMIUM
- --------------------------------------------------------------------------------
California 0.50% 2.35%
- --------------------------------------------------------------------------------
District of Columbia 2.25% 2.25%
- --------------------------------------------------------------------------------
Kansas 0.00% 2.00%
- --------------------------------------------------------------------------------
Kentucky 2.00% 2.00%
- --------------------------------------------------------------------------------
Maine 0.00% 2.00%
- --------------------------------------------------------------------------------
Nevada 0.00% 3.50%
- --------------------------------------------------------------------------------
Pennsylvania 0.00% 2.00%
- --------------------------------------------------------------------------------
Puerto Rico 1.00% 1.00%
- --------------------------------------------------------------------------------
South Dakota 0.00% 1.25%
- --------------------------------------------------------------------------------
Texas 0.04% 0.04%
- --------------------------------------------------------------------------------
West Virginia 1.00% 1.00%
- --------------------------------------------------------------------------------
Wyoming 0.00% 1.00%
- --------------------------------------------------------------------------------
NOTE: THE PREMIUM TAX RATES ABOVE ARE CURRENT RATES IN PLACE AT THE EFFECTIVE
DATE OF THE COINSURANCE AGREEMENT. PREMIUM TAX RATES UNDER THIS AGREEMENT WILL
CHANGE AS INDIVIDUAL STATES REVISE THEIR PREMIUM TAX RATES.
**REFLECTS A .03% FINANCE ALLOWANCE TO COVER FINANCING OF FRONT END PREMIUM
TAXES ON NON-QUALIFIED DEFERRED REINSURED CONTRACTS IN PENNSYLVANIA SD AND WY.
<PAGE> 28
SCHEDULE D
Insurance Licenses
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
EXPIRATION
DATE OF
STATE: CERTIFICATE: COVERAGE:
- ------ ------------ ---------
<S> <C> <C>
Alabama Permanent Life, Disability and Annuities and Variable Authority
Alaska Permanent Life (includes Annuities and Disability), Variable Annuities and Variable Life
Arizona Permanent Life (includes Annuities), Disability and Variable Authority
Arkansas Permanent Life, (includes Annuities) Disability, Variable Annuities and Variable Life
California Permanent Life (includes Annuities), Disability and Variable Annuities
Colorado Permanent Life, Annuities, Health and Accident, Credit Life, Credit Accident & Health, Group Life,
Variable Annuities, Variable Life
Connecticut 5/95 Life, (includes Annuities) Variable Annuities, Reinsurance and Variable Life
D.C. 5/1/95 Life, Annuities (individual, group and variable), and Group Life
Delaware Permanent Life (includes Annuities), Health, Credit life, Credit Health, Variable Annuities and
Variable Life
Florida Permanent Life, Annuities, Group Life and Variable Annuities
Georgia 6/30/95 Life (includes Annuities), Health and Accident and Variable Authority
Hawaii Permanent Life (includes Annuities) and Variable Authority
Idaho Permanent Life (includes Annuities and Disability) and Variable Authority
Illinois 7/95 Life (includes Annuities), Accident and Health and Variable Products
Indiana Permanent Life, Annuities, Variable Annuities and Variable Life
Iowa 6/95 Life (includes Annuities, Variable Life, Variable Annuities, and Credit Life),
Individual Accident, Individual Accident and Health,
Group Accident and Health, Individual Hospital and Medical Expenses
Kansas Permanent Life (includes Annuities) and Variable Authority
Kentucky Permanent Life, Annuities and Variable Authority
Louisiana Permanent Life (includes Annuities), Health, Accident and Variable Authority
Maine None
Maryland 6/30/95 Life (includes Annuities), Health, Variable Annuities and Variable Life
Massachusetts 6/30/95 Life (includes Annuities), Health, Accident and Variable Annuities
Michigan Permanent Life (includes Annuities), Disability and Variable Annuities
Minnesota 6/1/95 Life, Annuities and Variable Contracts
Mississippi 1/1/95 Life (includes Annuities), Variable Contracts
Missouri Permanent Life (includes Annuities) and Variable Contracts
Montana Permanent Life (includes Annuities), Disability and Variable Annuities
Nebraska 4/95 Life (includes Annuities), Health, Accident, Variable Annuities and Variable Life
Nevada Permanent Life (including Variable Annuities and Variable Life)
New Hampshire None
New Jersey 5/1/95 Life, Health, Annuities and Variable Contracts
New Mexico Permanent Life (includes Annuities), Health and Variable Annuities
North Carolina 6/30/95 Life, Annuities (includes Variable Annuities)
North Dakota Permanent Life and Annuities, Health, Accident, Variable Annuities and Variable Life
Ohio 7/1/95 Life, Accident, Health, Disability, Annuities and Variable authority
Oklahoma 2/28/95 Life (includes Annuities), Health and Accident, Variable Annuities and Variable Life
Oregon Permanent Life (includes Annuities), Health and Variable products authority
Pennsylvania 3/31/95 Life, Annuities, Variable Life and Variable Annuities
Puerto Rico 6/30/95 Life (includes Annuities), Disability and Variable Annuities
Rhode Island None
South Carolina Permanent Life (includes Annuities), Accident and Health and Variable Contracts
South Dakota Permanent Life (includes Annuities), Variable Annuities and Variable Life
Tennessee Permanent Life (includes Annuities) and Variable Contracts
Texas Permanent Life (includes Annuities), Variable Life, Accident and Health, Variable Annuities
Utah 3/1/95 Life, Disability, Annuities, Variable Life and Variable Annuities
Vermont None
Virginia 6/30/95 Life, Individual Accident & Health, Annuities, Credit Life, Credit Accident and Health,
Variable Life and Variable Annuities
Washington Permanent Life (includes Annuities), Variable Life and Variable Annuities
West Virginia 5/31/95 Life (includes Annuities and Disability), Variable authority
Wisconsin Permanent Life and Annuities, Disability, Variable Life and Variable Annuities
Wyoming Permanent Life (includes Annuities) and Variable Contracts
</TABLE>
<PAGE> 29
SCHEDULE E
Delaware Department of Insurance
<PAGE> 30
SCHEDULE F
PEOPLES SECURITY LIFE INSURANCE COMPANY
JURISDICTIONS AND LINES OF BUSINESS THEREIN
<TABLE>
<CAPTION>
STATE Line of Business
- --------------------------------------------------------------------------------
<S> <C>
Connecticut Life Nonparticipating
- --------------------------------------------------------------------------------
Delaware Life, including Annuities; Accident & Health
- --------------------------------------------------------------------------------
DC Individual Life; Group Life; Individual Accident & Health;
Group Accident & Health; Individual Annuities; Group
Annuities; Group Credit Life
- --------------------------------------------------------------------------------
Florida Life; Group Life & Annuities; Accident & Health
- --------------------------------------------------------------------------------
Georgia Life; Accident & Sickness
- --------------------------------------------------------------------------------
Illinois Life; Accident & Health
- --------------------------------------------------------------------------------
Indiana Life; Accident & Health, Annuities
- --------------------------------------------------------------------------------
Kentucky Life; Accident & Health, Annuities
- --------------------------------------------------------------------------------
Maryland Life including Annuities; Accident & Health (except variable
life and variable annuities)
- --------------------------------------------------------------------------------
Massachusetts Life; Accident & Health
- --------------------------------------------------------------------------------
Michigan Life
- --------------------------------------------------------------------------------
Missouri Life; Annuities
- --------------------------------------------------------------------------------
New Hampshire Life; Accident & Health
- --------------------------------------------------------------------------------
New Jersey Life; Accident & Health; Annuities; Nonparticipating
insurance only
- --------------------------------------------------------------------------------
North Carolina Life, including Industrial Sick Benefit
insurance; Accident & Health, including
Hospitalization Cancellable, Noncancellable,
Credit small loans, and Credit other than
small loans; Annuities (excluding variable
annuities)
- --------------------------------------------------------------------------------
Ohio Life; Accident, Sickness, Disability; Annuities
- --------------------------------------------------------------------------------
Pennsylvania Life and Annuities; Accident & Health
- --------------------------------------------------------------------------------
Rhode Island Life; Accident & Health and Annuities
- --------------------------------------------------------------------------------
South Carolina Life; Accident & Health
- --------------------------------------------------------------------------------
Tennessee Life; Accident & Health
- --------------------------------------------------------------------------------
Texas Life; Accident & Health
- --------------------------------------------------------------------------------
Vermont Life including Industrial Sick Benefit
insurance; Annuities (excluding variable
annuities); Accident & Health, including
Hospitalization Cancellable, Noncancellable,
Credit small loans, and Credit other than
small loans; Annuities
- --------------------------------------------------------------------------------
Virginia Life; Industrial Life, Credit Life; Accident & Sickness;
Annuities
- --------------------------------------------------------------------------------
West Virginia Life; Accident & Sickness
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
SCHEDULE G
COINSURANCE AGREEMENT
NONE
<PAGE> 32
SCHEDULE H
<TABLE>
<CAPTION>
IMMEDIATE ANNUITIES
POLICIES INFORCE 5/31/95 NON NY DEFERRED SETTLEMENT OPTIONS TOTAL
- ------------------------ --------------- ------------------ -----
<S> <C> <C> <C>
Statutory reserves less loans $698,296,474 $ 15,320,440 $713,616,914
Tax reserves less loans $694,497,351 $ 15,147,319 $709,644,670
Ceding Commission % of 2.544%
AV less loan balance
Account value less loans $718,858,636 N/A $718,858,636
Loan balance $ 2,737,275
Total AV $721,595,911 N/A
Consideration excluding loan $700,443,710 $ 15,404,817 $715,848,527
Loan Balance $ 2,737,275 $ 2,737,275
Net consideration $703,180,985 $ 15,404,817 $718,585,802
ADJUSTMENTS
June 1995 net activity $ 2,019,472 N/A $ 2,019,472
------------ ------------ ------------
Estimated initial Consideration $705,200,457 $ 15,404,817 $720,605,274
</TABLE>
<PAGE> 33
NASL INFORCE PRICING MEMORANDUM
PRICING ASSUMPTIONS (DEFERRED CONTRACTS)
MODELING METHODOLOGY
Each Venture product's fixed option was modeled separately and broken
out by remaining guarantee period and issue date (equal to the start of
the guarantee period). For example an inforce cell contains the 6 year
fixed option in the Venture 7 product that is part of a variable
contract issued in 1991 with 2 years remaining in the guarantee period
in 1995. Each inforce cell will then carry its unique credited rate
guaranteed for the remaining guarantee period.
After the "stub" period, i.e. the remaining guarantee period, the
renewal credited rate is 235 bps below the appropriate investment yield
for each renewing inforce cell.
The ceding commission payable is equal to the present value of
"distributable profits" (statutory profit after target surplus and
after tax over 15 years) discounted at 12% divided by 65% (100%
marginal income tax rate).
TRANSFERS
Since the funds in each issue date and guarantee period cell consist of
funds from transfers and new business, a prorata portion of the inforce
cell attributable to transfers was adjusted. The initial ceding
commission payable on the inforce cell assumes the funds consist solely
of money from new business. The adjustment is equal the present value
of future profits that are lost due to the shorter expected life of
transferred funds.
POLICY LOANS
Policy loans were modeled in aggregate. The average policy is 1.5
years old at loan inception; the average loan is 2 years old.
The outstanding loan balance was assumed to receive 100 bps. [200 bps
gross - 19 bps O/H + default - 17 bps allowance to NASL - 64 bps
required return]. Existing loans repay uniformly over the next three
years. Repayed amounts receive the PV of future profits from the
transfer schedule adjusted for interest and persistency. Surrender
charges were included based on pricing lapse rates. Non-performing
loans were treated as an increase in the partial free withdrawal rate.
LAPSES
The Company's lapse assumptions were used for all the fixed options.
These assumptions represent lapses out of the entire contract and hence
an implicit assumption is made that the transfer adjustments will make
Reinsurer whole on transfers out of the fixed options to the variable
funds.
Listed on the next page are the lapse rates FOR ALL THE FIXED OPTIONS
in Ven20 and Ven22 which are the new generation 7 yr surrender charge
products with trailer compensation starting at the end of the fifth
policy year. Variations include a 35% shock lapse (vs 25%) after the
end of the surrender charge period for products without trailer
compensation. Shock lapses and out-of-surrender-period lapses occur in
the seventh policy year for the old generation six year surrender
charge period products versus the eighth policy year in the new
generation products.
<PAGE> 34
- -------------------------------------------------------------
YEAR LAPSE % YEAR LAPSE %
- -------------------------------------------------------------
1 1.0 9 11.0
- -------------------------------------------------------------
2 2.5 10 12.0
- -------------------------------------------------------------
3 3.0 11 13.0
- -------------------------------------------------------------
4 4.0 12 14.0
- -------------------------------------------------------------
5 5.0 13 15.0
- -------------------------------------------------------------
6 6.0 14 16.0
- -------------------------------------------------------------
7 7.0 + 25.0 15 17.0
- -------------------------------------------------------------
8 10.0 16+ 100.00
- -------------------------------------------------------------
EXPENSES
Expenses include allowances to the Company and the Reinsurer's allocation of
overhead and investment expenses and also allowances for default.
- --------------------------------------------------------------------------------
EXPENSES AMOUNTS (ANNUALLY)
- --------------------------------------------------------------------------------
Maintenance Allowance $30 per contract prorated by
fixed funds divided by total
funds * + .15% of account value
- --------------------------------------------------------------------------------
Overhead, Investment Exp, .36% of account value
Default Allowance
- --------------------------------------------------------------------------------
* Note that the Reinsurer will also be receiving a prorata portion of the
$30 policy fee and hence this should net out to zero for policies less than
$100,000
ANNUITIZATIONS
Annuitizations are modeled as excess surrenders. This will slightly
understate the profitability of the product but the impact should be
minimal. Upon annuitizations Reinsurer will receive a load that covers
future maintenance expenses as well as any unamortized Deferred Acquisition
Cost.
<PAGE> 35
This means that the pricing of the deferred contract should be
neutral with respect to annuitizations.
PARTIAL FREE WITHDRAWALS
Outlined on the next page are the percent of account values that are withdrawn
free of surrender charges:
<PAGE> 36
- ---------------------------------------------
YEAR PERCENTAGE
- ---------------------------------------------
1 1.00
- ---------------------------------------------
2 1.50
- ---------------------------------------------
3 2.00
- ---------------------------------------------
4 2.50
- ---------------------------------------------
5 3.00
- ---------------------------------------------
6 3.50
- ---------------------------------------------
7 4.00 if SC applies
- ---------------------------------------------
8+ N/A
- ---------------------------------------------
MISCELLANEOUS
- --------------------------------------------------------------------------------
PRICING HORIZON 15 years
- --------------------------------------------------------------------------------
AVERAGE POLICY SIZE $35,000
- --------------------------------------------------------------------------------
AVERAGE ISSUE AGE 65
- --------------------------------------------------------------------------------
REQUIRED CAPITAL (TARGET SURPLUS) 5.5% for all fixed options
- --------------------------------------------------------------------------------
MARGINAL INCOME TAX RATE 35%
- --------------------------------------------------------------------------------
DAC TAX CAPITALIZATION 1.75% of Non-Qualified Premium
- --------------------------------------------------------------------------------
MORTALITY 75-80 basic Male ALB
- --------------------------------------------------------------------------------
STATUTORY AND TAX RESERVING
Commissioners Annuity Reserving & Valuation Model is used according to
these assumptions:
Plan Type - B for 3,5,6 and 7 year options and C for the 1
year option. Method - Issue year
<PAGE> 37
The assumptions explicitly used in modeling is a Statutory Valuation rate
of 6.75% for the 3,5,6 and 7 year options and 6% for the 1 year option. The
Tax Valuation rate used is 6.99% and these rates are valid for 1995. This
will have to be changed to price business in 1996 and future years.
INVESTMENT SPREAD AND YIELDS
Investments are in semiannual coupon bearing bonds with maturities equal to
the liability guarantee periods (i.e. bonds maturing in 2 years for the 3
yr fixed option with a remaining guarantee period of 2 years). This gives
Reinsurer a slight negative duration mismatch since the liabilities act
more like zero coupon bonds but for withdrawals and deaths during the
guarantee period.
Investment yields for these bond are equal to the June 29, 1995 Treasury
yields plus 117 BPS (e.g. the 2 yr bond will have an investment yield equal
to the 2 yr Treasury plus 117 bps). Interest rates are assumed to stay
level for the duration of the pricing period of 15 years.
PRICING ASSUMPTIONS (IMMEDIATE AND SETTLEMENT ANNUITY CONTRACTS)
- --------------------------------------------------------------------------------
REQUIRED CAPITAL 5.25%
- --------------------------------------------------------------------------------
AVERAGE POLICY SIZE $20,000
- --------------------------------------------------------------------------------
AGE Actual Age at Effective Date
- --------------------------------------------------------------------------------
MORTALITY TABLE 1983 IAM with Mortality Improvement
Projection (Scale H)
- --------------------------------------------------------------------------------
OTHERS Same as Those Used to Price Deferred
Contracts
- --------------------------------------------------------------------------------
METHOD OF CALCULATING INTEREST RATES USED TO DISCOUNT PROJECTED BENEFIT PAYMENTS
The Treasury yield curve as of June 29, 1995 is converted to an
"implied strip curve" (yield curve for zero coupon bonds). This
Treasury strip curve is then converted to an investment strip curve by
adding 117 bps across all maturities.
The rates used to discount the projected benefit payments (annual
payments) are then equal to the investment strip curve less 130 bps
(expense allowances etc.). Benefit payments beyond the 30th year are
present valued back to the 30th year using a 4% rate and are then
discounted using the 30th year discount rate.
<PAGE> 38
SCHEDULE I
TRANSFER OF ADJUSTMENTS
THIS SCHEDULE WAS DEVELOPED ON THE ASSUMPTION THE COMPANY'S ANNUITY BUSINESS
REINSURED HEREUNDER IS PREDOMINATELY SINGLE PREMIUM. IF FUTURE BUSINESS IS NOT
CONSISTENT WITH THIS ASSUMPTION, THEN THIS SCHEDULE WILL BE REVISED SO THAT THE
TABLES BELOW ARE APPLIED ON A DEPOSIT YEAR BASIS RATHER THAN A POLICY YEAR
BASIS.
I. THE FOLLOWING WILL BE APPLICABLE FOR ALL PRODUCT ADMINISTRATIVE CODES OTHER
THAN VEN7, VEN8, VEN17, VEN18, VEN20, VEN21, VEN22, VEN23, VIS5 AND VIS25.
In the event that the amount of reinsurance with respect to a particular
Policy under this Agreement increases due to a transfer of amounts from the
Separate Account to the Fixed Account, then the Company will pay to the
Reinsurer the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the initial acquisition allowance attributable to the
transferred amount into the Fixed Account;
(ii)equals the transfer adjustment factors below:
In the event that the amount of reinsurance with respect to a particular
Policy under this Agreement decreases due to a transfer of amounts from the
Fixed Account to the Separate Account, then the Reinsurer will pay to the
Company the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the initial acquisition allowance attributable to the
transferred amount into the Separate Account;
(ii)equals the transfer adjustment factors below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
POLICY DURATION TRANSFER ADJUSTMENT FACTORS
(YEARS) AS A PERCENTAGE OF
INITIAL ACQUISITION ALLOWANCE*
- --------------------------------------------------------------------------------
<S> <C> <C>
1 98
- --------------------------------------------------------------------------------
2 89
- --------------------------------------------------------------------------------
3 80
- --------------------------------------------------------------------------------
4 71
- --------------------------------------------------------------------------------
5 62
- --------------------------------------------------------------------------------
6 52
- --------------------------------------------------------------------------------
7 44
- --------------------------------------------------------------------------------
8 37
- --------------------------------------------------------------------------------
9 32
- --------------------------------------------------------------------------------
10 27
- --------------------------------------------------------------------------------
11 22
- --------------------------------------------------------------------------------
12 18
- --------------------------------------------------------------------------------
13 15
- --------------------------------------------------------------------------------
14 12
- --------------------------------------------------------------------------------
15 9
- --------------------------------------------------------------------------------
16+ 6
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
II. THE FOLLOWING WILL BE APPLICABLE FOR PRODUCT ADMINISTRATIVE CODES VEN7,
VEN8, VEN17, VEN18, VEN20, VEN21, VEN22, VEN23, VIS5, AND VIS25, FOR ISSUE
AGES WHERE FULL COMPENSATION ALLOWANCES ARE PAYABLE.
In the event that the amount of reinsurance with respect to a particular
Policy under this Agreement increases due to a transfer of amounts from the
Separate Account to the Fixed Account, then the Company will pay to the
Reinsurer the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the account value transferred into the Fixed Account;
(ii)equals the transfer adjustment factors below:
In the event that the amount of reinsurance with respect to a particular
Policy under this Agreement decreases due to a transfer of amounts from the
Fixed Account to the Separate Account, then the Reinsurer will pay to the
Company the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the account value transferee into the Separate Account;
(ii)equals the transfer adjustment factors below:
-------------------------------------------------------------------------------
TRANSFER ADJUSTMENT FACTORS
BY PRODUCT ADMINISTRATIVE CODE
POLICY DURATION AS A PERCENTAGE OF ACCOUNT VALUE TRANSFERRED*
(YEARS)
- --------------------------------------------------------------------------------
VEN7 VEN17 VEN20 VEN21 VIS5
VEN8 VEN18 VEN22 VEN23 VIS25
- --------------------------------------------------------------------------------
1 7.2 8.1 7.2 8.1 3.4
- --------------------------------------------------------------------------------
2 6.4 7.2 6.4 7.2 2.6
- --------------------------------------------------------------------------------
3 5.7 6.2 5.6 6.3 2.1
- --------------------------------------------------------------------------------
4 5.0 5.3 5.0 5.5 2.2
- --------------------------------------------------------------------------------
5 4.4 4.5 4.4 4.7 2.1
- --------------------------------------------------------------------------------
6 3.8 3.7 3.8 4.0 2.0
- --------------------------------------------------------------------------------
7 4.3 5.1 3.2 3.3 2.0
- --------------------------------------------------------------------------------
8 4.1 4.9 3.7 4.6 2.0
- --------------------------------------------------------------------------------
9 3.8 4.6 3.6 4.4 2.0
- --------------------------------------------------------------------------------
10 3.6 4.3 3.3 4.1 2.0
- --------------------------------------------------------------------------------
11 3.3 4.0 3.1 3.8 2.0
- --------------------------------------------------------------------------------
12 3.1 3.7 2.9 3.5 2.0
- --------------------------------------------------------------------------------
13 2.8 3.4 2.7 3.3 2.0
- --------------------------------------------------------------------------------
14 2.6 3.1 2.4 3.0 2.0
- --------------------------------------------------------------------------------
15 2.4 2.8 2.2 2.7 2.0
- --------------------------------------------------------------------------------
16 2.1 2.5 2.0 2.4 2.0
- --------------------------------------------------------------------------------
17 2.0 2.2 2.0 2.1 2.0
- --------------------------------------------------------------------------------
18+ 2.0 2.0 2.0 2.0 2.0
- --------------------------------------------------------------------------------
<PAGE> 40
III. THE FOLLOWING WILL BE APPLICABLE FOR PRODUCT ADMINISTRATIVE CODES VEN7,
VEN8, VEN17, VEN18, VEN20, VEN21, VEN22, AND VEN23, FOR ISSUE AGES
WHERE REDUCED COMPENSATION ALLOWANCES ARE PAYABLE.
In the event that the amount of reinsurance with respect to a
particular Policy under this Agreement increases due to a transfer of
amounts from the Separate Account to the Fixed Account, then the
Company will pay to the Reinsurer the aggregate of such amounts, less
transfer adjustments equal to (i) times (ii) where:
(i) equals the account value transferred into the Fixed Account;
(ii)equals the transfer adjustment factors below:
In the event that the amount of reinsurance with respect to a
particular Policy under this Agreement decreases due to a transfer of
amounts from the Fixed Account to the Separate Account, then the
Reinsurer will pay to the Company the aggregate of such amounts, less
transfer adjustments equal to (i) times (ii) where:
(i) equals the account value transferred into the Separate Account;
(ii)equals the transfer adjustment factors below:
================================================================================
TRANSFER ADJUSTMENT FACTORS
BY PRODUCT ADMINISTRATIVE CODE
POLICY DURATION AS A PERCENTAGE OF ACCOUNT VALUE TRANSFERRED*
(YEARS)
------------ ------------ ------------ ------------
VEN7 VEN17 VEN20 VEN21
VEN8 VEN18 VEN22 VEN23
--------------------- ------------ ------------ ------------ ------------
1 4.7 5.2 4.8 5.3
--------------------- ------------ ------------ ------------ ------------
2 4.1 4.5 4.5 5.0
--------------------- ------------ ------------ ------------ ------------
3 3.6 3.9 4.1 4.5
--------------------- ------------ ------------ ------------ ------------
4 3.0 3.2 3.5 3.9
--------------------- ------------ ------------ ------------ ------------
5 2.5 2.6 2.8 3.1
--------------------- ------------ ------------ ------------ ------------
6 2.0 2.0 2.0 2.2
--------------------- ------------ ------------ ------------ ------------
7 1.5 1.5 1.2 1.2
--------------------- ------------ ------------ ------------ ------------
8+ 1.0 1.0 1.0 1.0
================================================================================
*The Transfer Adjustment will be zero where no compensation is paid.
<PAGE> 41
COINSURANCE AGREEMENT
SCHEDULE J
The following reports and data feeds are to be provided by the Company to the
Reinsurer. The data contents will only include information related to the
reinsured business.
I. DAILY REPORTS
- Daily cash settlement statement (Schedule K) by 4:00p.m. on the
following business day.
II. MONTH END REPORTS AND DATA FEEDS(1)
A. By the third business day after month end
- Liability database reserve feed(2)
- Annuitized census data feed(3)
- Liability database and accounting activity data feeds(4)
- Policy loan progressions, reports and reconciliations
B. By the fourth business day after month end
- Month end ceding statement data feed (Schedule L)
- Exhibits and supporting data for the computation of the Policy
Expense Allowances (as defined in Schedule C) and the Adjustments
on Transfers (as defined in Schedule I).
- Statutory reserve summary by product and by company
- Progression of Deferred Account Values/Annuitized Reserves by
product and by company showing specific transactions (month only
and year to date).
- ------------------------
(1) Based upon technology and business reporting needs, the content, format, and
interim report/file substitutes will be negotiated as needed by appropriate
Accounting and Valuation staff of the Reinsurer and the Company.
(2) At a minimum, they will contain the following Company information on a
policy level basis: For the deferred business: (a) ending account value, by fund
option, duration and interest rate; (b) surrender charges; (c) owner and
annuitant age and (d) plan code.
(3) For the annuitized business: ending policy census data including annuity
option; annuitant date of birth, rated age, and sex; annuity payment frequency,
amount, option, and date of first and last payments; cost of living adjustments;
pricing date; issue date; unloaded net premium and expense loads; state; and
reserve valuation modes and rates.
(4) At a minimum, they will contain the following Company information on a
policy level basis for both deferred and annuitized business: ceding statement
activity for the period for each plan code segregated by qualified vs.
nonqualified, individual vs. group and by state.
<PAGE> 42
SCHEDULE K: DAILY CASH SETTLEMENT INFORMATION
Company
---------------------------
for Activity of:
------------------
<TABLE>
<CAPTION>
DAILY MONTH TO QUARTER YEAR TO
ACTIVITY DATE TO DATE DATE
-------- ---- ------- ----
<S> <C> <C> <C> <C>
DEFERRED ACTIVITY ONLY
(1) NEW POLICY PREMIUM
(2) TRANSFERS/EXCHANGE FROM VARIABLE
(A) TRANSFERS FROM VARIABLE TO FIXED
(B) PRODUCT EXCHANGES FROM VARIABLE TO FIXED
(C) TOTAL TRANSFERS IN [(2A) +(2B)]
(3) TOTAL INFLOW TO FIXED [(1) + (2C)]
(4) PARTIAL WITHDRAWALS (INCLUDING SWIP'S)
(5) FULL TERMINATIONS (ACCOUNT VALUE ONLY)
(6) TRANSFERS/EXCHANGES FROM FIXED
(A) TRANSFERS FROM FIXED TO VARIABLE
(B) PRODUCT EXCHANGES FROM FIXED TO VARIABLE
(C) TOTAL TRANSFERS OUT [(6A + 6B)]
(7) DEATH BENEFIT (ACCOUNT VALUE ONLY)
(8) MARKET VALUE ADJUSTMENTS COLLECTED
(9) SURRENDER CHARGES COLLECTED
(10) TOTAL OUTFLOW FROM FIXED
[(4) + (5) + (6C) +(7) - (8) - (9)]
(11) NET FIXED CASHFLOW [(3) - (10)]
(12) ALLOWANCES
(A) COMMISSIONS PAID (SEE SCHEDULE)
(B) ISSUE EXPENSES [.38% X (1)] (EST.)
(C) MAINTENANCE EXPENSES [$5,000 PER DAY] (EST.)
(D) TRANSFER SETTLEMENT [.05 X ((2C)-(6C))] (EST.)
(E) TOTAL ALLOWANCES [12A) + (12B) + (12C) + (12D)]
(13) CASH DUE TO (FROM) PSI [(11)-(12E)]
</TABLE>
PREPARED BY:
---------------------------
APPROVED BY:
---------------------------
DATE PREPARED:
-------------------------
<PAGE> 43
SCHEDULE L: MONTHLY CASH SETTLEMENT INFORMATION
Company
---------------------------
for Activity of:
------------------
<TABLE>
<CAPTION>
MONTH TO QUARTER YEAR TO
DATE TO DATE DATE
---- ------- ----
<S> <C> <C> <C>
A) DEFERRED ACTIVITY
1) NEW POLICY PREMIUM
2) TRANSFERS/EXCHANGES FROM VARIABLE
(A) TRANSFERS FROM VARIABLE TO FIXED
(B) PRODUCT EXCHANGES FROM VARIABLE TO FIXED
(C) TOTAL TRANSFERS IN [(2A) + (2B)]
3) TOTAL INFLOW TO FIXED [(1) + (2C)]
4) PARTIAL WITHDRAWALS (INCLUDING SWIP'S)
5) FULL TERMINATIONS (ACCOUNT VALUE ONLY)
6) TRANSFERS/EXCHANGES FROM FIXED
(A) TRANSFERS FROM FIXED TO VARIABLE
(B) PRODUCT EXCHANGES FROM FIXED TO VARIABLE
(C) TOTAL TRANSFERS OUT [(6A) + (6B)]
7) DEATH BENEFIT (ACCOUNT VALUE ONLY)
8) MARKET VALUE ADJUSTMENTS
(A) COLLECTED
(B) WAIVED
(C) TOTAL [(6A) + (6B)]
9) SURRENDER CHARGES
(A) COLLECTED ON WITHDRAWAL
(B) COLLECTED ON DEATH
(C) WAIVED
(D) TOTAL [(9A) + (9B) + (9C)]
10) TOTAL OUTFLOW FROM FIXED [(4) + (5) +(6C) +(7) - (8C) - (9D)]
11) NET FIXED DEFERRED CASHFLOW [(8) - (10)]
</TABLE>
<PAGE> 44
(B) PAYOUT ACTIVITY
<TABLE>
<CAPTION>
MONTH TO QUARTER YEAR TO
DATE TO DATE DATE
---- ------- ----
<S> <C> <C> <C>
(1) ANNUITIZED FUNDS (ACCOUNT VALUE)
(A) IMMEDIATE ANNUITY PREMIUM
(B) VARIABLE TO FIXED ANNUITIZATIONS
(C) FIXED TO VARIABLE ANNUITIZATIONS
(D) TOTAL ANNUITIZED FUNDS [(1A) + (1B) - (1C)]
(2) PREMIUM TAXES (BACK & FRONT-END)
(A) IMMEDIATE ANNUITY
(B) VAR/FIXED SETTLEMENT ANNUITY
(C) FIXED/FIXED SETTLEMENT ANNUITY
(D) TOTAL [(2A) + (2B) + (2C)]
(3) BENEFIT PAYMENTS
(A) IMMEDIATE ANNUITY - REGULAR
(B) IMMEDIATE ANNUITY - COMMUTED (DEATHS)
(C) SETTLEMENT ANNUITY - REGULAR
(D) SETTLEMENT ANNUITY - COMMUTED (DEATHS)
TOTAL BENEFITS [3A) + (3B) + (3C) + (3D)]
(4) NET PAYOUT ANNUITY ACTIVITY [(1D) - (2D) - (3E)]
</TABLE>
<PAGE> 45
(C) ALLOWANCES
<TABLE>
<CAPTION>
MONTH TO QUARTER YEAR TO
DATE TO DATE DATE
---- ------- ----
<S> <C> <C> <C>
(1) AGENT COMPENSATION
(A) COMMISSIONS PAID (SEE SCHEDULE)
(B) COMMISSIONS CHARGED-BACK (SEE SCHEDULE)
(C) RENEWAL COMM. ADJ. (SEE SCHEDULE)
(D) HIGH AGE ADJ. (SEE SCHEDULE)
(E) TRAILS PAID (SEE SCHEDULE)
(F) TOTAL COMPENSATION [(1A) - (1B) + (1C) - (1D) + (1E)]
(2) ISSUE EXPENSES (SEE SCHEDULE)
(3) MAINTENANCE EXPENSES (SEE SCHEDULE)
(4) TRANSFER ALLOWANCE ON NET FUND TRANSFERS TO FIXED
(INCLUDING LOANS - SEE SCHEDULE)
(5) TRANSFER ALLOWANCE ON NET PRODUCT EXCHANGES TO FIXED
(SEE SCHEDULE)
(6) PREMIUM TAX REIMBURSEMENT
(7) TOTAL ALLOWANCES [(1F) + (2) + (3) + (4) + (5) + (6)]
(D) OTHER ACTIVITY
(1) EXCESS INTEREST CREDITED
(2) POLICY LOANS
(A) LOAN PRINCIPAL PAID BACK TO FIXED
(B) LOAN INTEREST PAID BACK TO FIXED
(C) NEW LOANS FROM FIXED
(D) INTEREST ON VARIABLE PAYBACKS
(E) INTEREST CAPITALIZED ON VARIABLE LOANS
(F) INT. CREDITED ON LOANS FROM VAR.
(G) REDUCTION DUE FIXED & VARIABLE DECREMENTS (ASSET FUND)
(H) NET LOAN CASHFLOW [(2A) + (2B) - (2C) + (2D) + (2E) - (2F) + (2G)]
(3) TOTAL OTHER ACTIVITY [(1) + (2H)]
(E) CASH DUE TO (FROM) PSI [(A11) + (B4) - (C7) + (D3)]
(F) CASH PAID TO (FROM) PSI DURING MONTH
(G) MONTHLY TRUE-UP [(E) - (F)]
</TABLE>
<PAGE> 46
(H) SUMMARY RECONCILIATION OF DAILY AND MONTHLY DEFERRED ANNUITY ACTIVITY
(1) TRUE-UP OF DAILY ITEMS (MONTHLY DEFERRED ANNUITY AND
ALLOWANCES) [(A1) +(A2C) - (A4) -(A5) - (A6C) - (A7) + (A8A) +
(A9A)
-(C1A) - (C2) - C3) - (C4)-C5)]
(2) CASH PAID TO (FROM ) PSI DURING MONTH
(3) DIFFERENCE [(H1) - (H2)]*
(I) ITEMIZED RECONCILIATION OF DAILY AND MONTHLY DEFERRED ANNUITY ACTIVITY
(I) (II)
CUMULATIVE MONTHLY
DAILY TRUE-UP
----- -------
(1) TRANSFERS/EXCHANGES FROM VARIABLE
(A) TRANSFERS FROM VARIABLE TO FIXED
(B) PRODUCT EXCHANGES FROM VARIABLE TO FIXED
(C) TOTAL TRANSFERS IN [(1A) + (1B)]
(2) TRANSFERS/EXCHANGE FROM FIXED
(A) TRANSFERS FROM FIXED TO VARIABLE
(B) PRODUCT EXCHANGES FROM FIXED TO VARIABLE
(C) TOTAL TRANSFERS OUT [(2A) + (2B)]
(3) ALLOWANCES
(A) COMMISSIONS PAID
(B) ISSUE EXPENSES
(C) MAINTENANCE EXPENSES
(D) TRANSFER SETTLEMENT
(E) TOTAL
(4) TOTAL [I1) - (I2) - (I3)]
(5) VARIANCES*
(LINE 4 COLUMN (I) LESS COLUMN (II)
PREPARED BY:
-------------------------------
APPROVED BY:
-------------------------------
DATE PREPARED:
-----------------------------
*SEE ATTACHED EXPLANATION IF THESE ITEMS ARE NOT EQUAL
<PAGE> 47
Company
---------------------------
for Activity of:
------------------
<TABLE>
<CAPTION>
MONTH TO QUARTER YEAR TO
DATE TO DATE DATE
---- ------- ----
<S> <C> <C> <C>
(1) FIXED TO FIXED TRANSFERS/EXCHANGES
(A) TRANSFERS FROM FIXED TO FIXED
(B) PRODUCT EXCHANGES FROM FIXED TO FIXED
(C) FIXED/FIXED ANNUITIZATIONS (ACCOUNT VALUE)
(2) ADMIN FEES COLLECTED
(3) DEFERRED ANNUITY INTEREST CREDITED
(4) NUMBER OF POLICIES IN FORCE
(A) DEFERRED
(B) PAYOUT
(5) FIXED PREMIUMS IN SUSPENSE (DETAIL ATTACHED)
(6) FIXED ACCOUNT CLAIMS NOT YET PROCESSED
(7) POLICY LOAN RECONCILIATION - COLLATERAL ACCOUNT
(A) COLLATERAL ACCOUNT AT BEG. OF PERIOD
(B) NEW LOANS TAKEN
(C) REDUCTION DUE TO SURRENDER
(D) REDUCTION DUE TO MATURITY
(E) REDUCTION DUE TO ANNUITIZATION
(F) REDUCTION DUE TO DEATH
(G) PRINCIPAL REPAID
(H) INTEREST CREDITED TO COLLATERAL ACCOUNT
(I) INTEREST CAPITALIZED DUE NON-PAYMENT
(J) COLLATERAL ACCOUNT AT END OF PERIOD
[(7A) + (7B) - (7C) - (7D) - (7E) - (7F) - (7G) -
(7H) + (7I)] (K) CHANGE TO COLLATERAL ACCOUNT [(7J) - (7A)] (L)
INTEREST EXPENSE ACCRUED BUT NOT CREDITED TO COLLATERAL FUND
(8) POLICY LOAN RECONCILIATION - ASSET FUND
(A) ASSET FUND AT BEG. OF PERIOD
(B) NEW LOANS TAKEN
(C) REDUCTION DUE TO SURRENDER
(D) REDUCTION DU TO MATURITY
(E) REDUCTION DUE TO ANNUITIZATION
(F) REDUCTION DUE TO DEATH
(G) PRINCIPAL REPAID
(H) INTEREST CAPITALIZED
(I) ASSET FUND END OF PERIOD
[(7A) + (7B) - (7C) - (7D) - (7E) - (7F) - (7G) + (7H)]
(J) INT. INC. ACCRUED BUT NOT CAP. ON ASSET FUND
</TABLE>
PREPARED BY:
-------------------------------
APPROVED BY:
-------------------------------
DATE PREPARED:
-----------------------------
<PAGE> 48
SCHEDULE M
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
COINSURANCE AGREEMENT
The reinsured, North American Security Life Insurance Company ("NASL"),
will achieve the service standards set forth below when dealing with Reinsured
Portions of Policies reinsured under this Agreement.
NASL will:
1) Answer telephones within 30 seconds of the call being received during
Business Days;
2) Issue new Policies within 2 full Business Days of all requirements needed
to issue a Policy having been received by NASL at its office in Boston,
Massachusetts;
3) Complete processing of Policy terminations and withdrawals within 2 full
Business Days of all requirements needed for such transactions having been
received by NASL at its office in Boston, Massachusetts;
4) Complete processing of all non-financial Policy changes within 5 full
Business Days of all requirements needed for such transactions having been
received by NASL at its office in Boston, Massachusetts; and
5) Send Letters of Acceptance regarding 1035 exchanges within 5 full Business
Days of receipt by NASL at its office in Boston, Massachusetts.
6) Release commission payments to Broker Dealers within 2 full Business Days
of receipt of Commission Statements/Checks by NASL at its office in Boston,
Massachusetts.
NASL will meet the above standards, on average, 90% of the time.
In any event, NASL will employ service standards for the Reinsured Portions at
least at the same target level as those used for the Policies in their entirety.
Target is defined in the NASL Incentive Pay Plan for Annuity Customer Service.
In the event targets are revised, NASL will notify Peoples in writing within 30
days of any such revisions becoming effective.
<PAGE> 1
REINSURANCE AGREEMENT
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
DOVER, DELAWARE
REFERRED TO AS THE "CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
ST. LOUIS, MISSOURI
REFERRED TO AS THE "REINSURER"
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I GENERAL PROVISIONS 2
ARTICLE II INITIAL CONSIDERATION AND REINSURANCE PREMIUMS 8
ARTICLE III COMMISSIONS AND ALLOWANCES 11
ARTICLE IV BENEFIT PAYMENTS 17
ARTICLE V RESERVE ADJUSTMENTS 20
ARTICLE VI EXPENSE AND RISK CHARGES 22
ARTICLE VII REINSURANCE GAINS AND LOSSES 24
ARTICLE VIII LOSS CARRYFORWARD 25
ARTICLE IX EXPERIENCE REFUND 27
ARTICLE X ACCOUNTING AND SETTLEMENTS 29
ARTICLE XI DURATION AND RECAPTURE 33
ARTICLE XII TERMINAL ACCOUNTING AND SETTLEMENT 35
ARTICLE XIII REPRESENTATIONS 37
ARTICLE XIV ARBITRATION 38
ARTICLE XV INSOLVENCY 40
ARTICLE XVI EXECUTION AND EFFECTIVE DATE 41
SCHEDULE A ANNUITIES AND RISKS REINSURED 42
SCHEDULE B QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS 43
SCHEDULE C MODIFIED COINSURANCE RESERVE INVESTMENT CREDIT 46
SCHEDULE D CEDING COMPANY DATA 47
EXHIBIT A ACCOUNTS RECEIVABLE AGREEMENT
<PAGE> 3
REINSURANCE AGREEMENT
This Agreement is made and entered into by and between North American Security
Life Insurance Company (hereinafter referred to as the "Ceding Company") and
ITT Lyndon Life Insurance Company (hereinafter referred to as the "Reinsurer").
The Ceding Company and the Reinsurer mutually agree to reinsure on the terms
and conditions stated herein. This Agreement is an indemnity reinsurance
agreement solely between the Ceding Company and the Reinsurer, and performance
of the obligations of each party under this Agreement will be rendered solely
to the other party. In no instance will anyone other than the Ceding Company
or the Reinsurer have any rights under this Agreement, and the Ceding Company
will be and remain the only party hereunder that is liable to any insured,
policyowner or beneficiary under any annuity reinsured hereunder.
- 1 -
<PAGE> 4
ARTICLE I
GENERAL PROVISIONS
1. Annuities and Risks Reinsured. The Reinsurer agrees to indemnify the
Ceding Company for, and the Ceding Company agrees to reinsure with the
Reinsurer, according to the terms and conditions hereof, the portion
of the risks under the annuities described in Schedule A attached
hereto.
2. Coverages and Exclusions.
A. Only the variable annuities described in Schedule A are
reinsured under this Agreement.
B. The Reinsurer will not participate in any loans on annuities
reinsured hereunder.
3. Plan of Reinsurance. This indemnity reinsurance will be on a
modified-coinsurance basis. The Ceding Company will retain, control
and own all assets held in relation to the Modified Coinsurance
Reserve.
4. Dividends to Policyowners. The Reinsurer will have no liability to
the Ceding Company for reimbursement of, and will not reimburse the
Ceding Company for, dividends to policyowners.
5. Expenses. The Reinsurer will bear no part of the expenses incurred in
connection with the annuities reinsured hereunder, except as otherwise
provided herein.
- 2 -
<PAGE> 5
6. Annuity Changes. The Ceding Company must provide written notification
to the Reinsurer of any change which affects the original terms or
conditions of any annuity reinsured hereunder within fifteen (15) days
after the change takes effect. The Reinsurer will provide written
notification to the Ceding Company as to the Reinsurer's acceptance or
rejection of the change within fifteen (15) days after receipt of
notice of the change. If the Reinsurer accepts any such change, the
Reinsurer will share in any increase or decrease in the Ceding
Company's liability that results from such change in the same
proportion as the portion of the annuities reinsured hereunder. If
the Reinsurer rejects any such change, the Reinsurer's liability under
this Agreement will be determined as if no such change had occurred.
7. No Extracontractual Damages. The Reinsurer does not indemnify the
Ceding Company for, and will not be liable for, any extracontractual
damages or extracontractual liability of any kind whatsoever resulting
from fraud, oppression, bad faith, strict liability, or negligent,
reckless or intentional wrongs on the part of the Ceding Company or
its directors, officers, employees and agents. The following types of
damages are examples of damages that would be excluded from this
Agreement for the conduct described above: actual damages, damages for
emotional distress, and punitive or exemplary damages.
8. Annuity Administration. The Ceding Company will administer the
annuities reinsured hereunder and will perform all accounting for such
- 3 -
<PAGE> 6
annuities; provided, however, that the Reinsurer reserves the right to
participate in claims administration.
9. Inspection. At any reasonable time, the Reinsurer may inspect, during
normal business hours, at the principal office of the Ceding Company,
the original papers and any and all other books or documents relating
to or affecting reinsurance under this Agreement. The Reinsurer will
not use any information obtained through any inspection pursuant to
this Paragraph for any purpose not relating to reinsurance hereunder.
10. Taxes. The allowance for any premium taxes paid in connection with
the annuities reinsured hereunder is included in the Commissions and
Allowances as described in Article III. The Reinsurer will not
reimburse the Ceding Company for any other taxes paid by the Ceding
Company in connection with the annuities reinsured hereunder.
11. Proxy Tax Reimbursement. Pursuant to IRC Section 848, insurance
companies are required to capitalize and amortize specified policy
acquisition expenses. The amount capitalized is determined by proxy
based on a percentage of "reinsurance premiums" as defined in the IRS
regulations relating to IRC Section 848. At the Reinsurer's request,
the Ceding Company will reimburse the Reinsurer for any positive
timing cost to the Reinsurer which results from the application of IRC
Section 848 to the annuities reinsured hereunder and which the
Reinsurer considers material. At the Ceding Company's request, the
Reinsurer will reimburse the Ceding Company for the absolute value of
any negative
- 4 -
<PAGE> 7
timing cost to the Ceding Company which results from the application
of IRC Section 848 to the annuities reinsured hereunder and which the
Ceding Company considers material.
12. Election to Determine Specified Policy Acquisition Expenses. The
Ceding Company and the Reinsurer agree that the party with net
positive consideration under this Agreement will capitalize specified
policy acquisition expenses with respect to annuities reinsured under
this Agreement without regard to the general deductions limitation of
Section 848(c)(1) of the Internal Revenue Code of 1986, as amended.
The Ceding Company and the Reinsurer will exchange information
pertaining to the amount of net consideration under this Agreement
each year to ensure consistency. The Ceding Company will submit a
schedule to the Reinsurer by May 1 of each year showing its
calculation of the net consideration for the preceding taxable year.
The Reinsurer may contest the calculation in writing within thirty
(30) days of receipt of the Ceding Company's schedule. Any
differences will be resolved between the parties so that consistent
amounts are reported on the respective tax returns for the preceding
taxable year. This election to capitalize specified policy
acquisition expenses without regard to the general deductions
limitation is effective for all taxable years during which this
Agreement remains in effect.
13. Condition. The reinsurance hereunder is subject to the same
limitations and conditions as the annuities issued by the Ceding
Company which are reinsured hereunder, except as otherwise provided in
this Agreement.
- 5 -
<PAGE> 8
14. Misunderstandings and Oversights. If any failure to pay amounts due
or to perform any other act required by this Agreement is
unintentional and caused by misunderstanding or oversight, the Ceding
Company and the Reinsurer will adjust the situation to what it would
have been had the misunderstanding or oversight not occurred.
15. Adjustments. If the Ceding Company's liability under any of the
annuities reinsured hereunder is changed because of a misstatement of
age, sex or any other material fact, the Reinsurer will share in the
change proportionately to the amount reinsured hereunder, and will
make any and all proportional adjustments with the Ceding Company.
16. Reinstatements. If an annuity reinsured hereunder is surrendered or
annuitized, and is subsequently reinstated while this Agreement is in
force, the reinsurance for such annuity will be reinstated
automatically. The Ceding Company will pay the Reinsurer the
Reinsurer's proportionate share of all amounts received by the Ceding
Company in connection with the reinstatement of the annuity plus any
amounts previously refunded to the Ceding Company by the Reinsurer in
connection with the lapse of the annuity.
17. Assignment. The Ceding Company may not assign any of its rights,
duties or obligations under this Agreement without prior written
consent of the Reinsurer.
- 6 -
<PAGE> 9
18. Amendments. This Agreement may be amended only by written agreement
of the parties.
19. Entire Agreement. The terms expressed herein constitute the entire
agreement between the parties with respect to the annuities reinsured
hereunder. There are no understandings between the parties with
respect to the annuities reinsured hereunder other than as expressed
in this Agreement.
- 7 -
<PAGE> 10
ARTICLE II
INITIAL CONSIDERATION AND REINSURANCE PREMIUMS
1. Initial Consideration. The Ceding Company will pay the Reinsurer an
Initial Consideration equal to 100 percent of the Modified Coinsurance
Reserve, as defined in Article V, Paragraph 3, calculated as of the
Effective Date of this Agreement. Simultaneously with the payment of
the Initial Consideration, the Ceding Company will withhold on behalf
of the Reinsurer 3.2 percent of the Initial Consideration, calculated
as of the Effective Date of this Agreement, in accordance with
Paragraph 3 below, but not to exceed $15 million.
2. Reinsurance Premiums. The Ceding Company will pay the Reinsurer
Reinsurance Premiums on all annuities in effect under this Agreement
in an amount equal to that portion of the gross premiums collected by
the Ceding Company during the current Accounting Period which
corresponds to the portion of the annuities reinsured hereunder. The
Reinsurance Premiums paid to the Reinsurer by the Ceding Company will
be remitted to the Reinsurer at the end of the Accounting Period
during which the gross premiums were collected by the Ceding Company
and the Reinsurer will treat any such Reinsurance Premiums as paid
premium for annual statement purposes, regardless of the mode of
collection by the Ceding Company on the annuities reinsured hereunder.
3. Funds Withheld. The Ceding Company and the Reinsurer have entered
into the "Accounts Receivable Agreement" attached to this Agreement as
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<PAGE> 11
Exhibit A. Pursuant to the terms of the Accounts Receivable
Agreement, the Ceding Company will withhold on behalf of the Reinsurer
the amount described in Paragraph 1 above. The amount withheld by the
Ceding Company will be credited to the Reinsurer and will be
considered as an amount held on behalf of the Reinsurer. The
Reinsurer will consider such amount as a receivable and the Ceding
Company will consider such amount as a payable. Such amount withheld
will be subject to repayment in accordance with the terms of the
Accounts Receivable Agreement. The Funds Withheld at the end of each
Accounting Period will be equal to (i) minus (ii), where:
(i) equals the Funds Withheld at the end of the preceding
Accounting Period; and
(ii) equals any payment by the Ceding Company to the
Reinsurer of any amount withheld, as described in
item (i) above, during the Accounting Period in
accordance with the Accounts Receivable Agreement.
With respect, however, to the Accounting Period during which the
Effective Date of this Agreement occurs, the reference in (i) above to
"the end of the preceding Accounting Period" means 3.2 percent of the
Initial Consideration, but not to exceed $15 million, determined in
accordance with Paragraph 1 above.
In no event will the Funds Withheld at the end of any Accounting
Period exceed 50 percent of the Ceding Company's total statutory
capital and surplus as of the end of the preceding calendar year.
- 9 -
<PAGE> 12
4. Interest Expense Charge. The Ceding Company will pay the Reinsurer an
Interest Expense Charge at the end of each Accounting Period equal to
[(i) x (ii)] + [(iii) x (iv)], where:
(i) equals any amounts withheld in accordance with item
(i) of Paragraph 3 above, which have not been paid by
the Ceding Company to the Reinsurer at the end of the
preceding Accounting Period and for which payment is
not due to the Reinsurer as described in the Accounts
Receivable Agreement;
(ii) equals the Interest Expense Rate as described in
Paragraph 5 below;
(iii) equals any amounts withheld in accordance with item
(i) of Paragraph 3 above, which have not been paid by
the Ceding Company to the Reinsurer at the end of the
preceding Accounting Period and for which payment is
due to the Reinsurer as described in the Accounts
Receivable Agreement; and
(iv) equals the Loss Carryforward Rate described in
Article VIII, Paragraph 2.
5. Interest Expense Rate. For the Accounting Periods beginning January
1, 1994 through December 31, 1998, the Interest Expense Rate at the
end of each Accounting Period will be equal to 1.7715 percent. For
Accounting Periods beginning January 1, 1999 and thereafter, the
Interest Expense Rate at the end of each Accounting Period will be
equal to the Loss Carryforward Rate as described in Article VIII,
Paragraph 2.
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<PAGE> 13
ARTICLE III
COMMISSIONS AND ALLOWANCES
1. Ceding Commission. Simultaneously with the payment of the Initial
Consideration, the Reinsurer will pay a Ceding Commission to the
Ceding Company of 2.2 percent of the Initial Consideration as
described in Article II, Paragraph 1, but not to exceed $10 million.
2. Unamortized Ceding Commission. The Unamortized Ceding Commission at
the end of each Accounting Period equals (i) minus (ii), where:
(i) equals the Unamortized Ceding Commission at the end
of the preceding Accounting Period; and
(ii) equals the Unamortized Ceding Commission Adjustment
determined in accordance with Paragraph 3 below.
With respect, however, to the Accounting Period during which the
Effective Date of this Agreement occurs, the reference in (i) to the
"end of the preceding Accounting Period" refers to the Effective Date
of this Agreement immediately after the Ceding Commission, as
described in Paragraph 1, has been paid. The Unamortized Ceding
Commission may never be less than zero. In the Accounting Period
during which (i) minus (ii) as described above, first becomes zero or
negative, then, for that and all subsequent Accounting Periods, the
Unamortized Ceding Commission will be set equal to zero.
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<PAGE> 14
3. Unamortized Ceding Commission Adjustment. The Unamortized Ceding
Commission Adjustment at the end of each Accounting Period equals (i)
minus (ii) minus (iii) minus (iv) minus (v), where:
(i) equals the Reinsurance Gain or Reinsurance Loss
determined in accordance with Article VII;
(ii) equals the Loss Carryforward at the end of the
preceding Accounting Period with accrued interest
thereon, determined in accordance with Article VIII,
Paragraph 1, item (i);
(iii) equals the Interest Expense Charge determined in
accordance with Article II, Paragraph 4;
(iv) equals the Interest on the Unamortized Ceding
Commission determined in accordance with Paragraph 9
below; and
(v) equals the Expense and Risk Charge determined in
accordance with Article VI, Paragraph 2.
However, in no event will the Unamortized Ceding Commission Adjustment
be less than zero or exceed the lesser of:
(1) the Unamortized Ceding Commission at the end of the
preceding Accounting Period determined in accordance
with Paragraph 2 above, or
(2) the Maximum Unamortized Ceding Commission Adjustment
as described in Paragraph 4 below.
Notwithstanding anything to the contrary in this Agreement, if the
Unamortized Ceding Commission at the end of any Accounting Period is
still positive, but has been reduced during any Accounting Period by
an amount less than the Maximum Unamortized Ceding Commission
Adjustment
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<PAGE> 15
described in Paragraph 4 below, then such shortfall can be recovered
from future positive Unamortized Ceding Commission Adjustments.
4. Maximum Unamortized Ceding Commission Adjustment. The Maximum
Unamortized Ceding Commission Adjustment for each Accounting Period is
as follows:
<TABLE>
<CAPTION>
For Accounting Maximum Unamortized
Periods Ending During Ceding Commission Adjustment
--------------------- ----------------------------
<S> <C>
1994 through 1998 $ 500,000
1999 and thereafter $2,000,000
</TABLE>
However, if in any Accounting Period (a) the Termination Rate as
described in Paragraph 5 below, is greater than 0.30, and/or (b) the
Investment Credit Accumulation Rate as described in Paragraph 6 below,
is less than zero, then the Reinsurer may elect to define the Maximum
Withheld Ceding Commission Adjustment as any amount up to $10 million
for the first Accounting Period in the current calendar year and for
all Accounting Periods thereafter.
5. Termination Rate. The Termination Rate in any Accounting Period
equals 1 - [(i) divided by (ii)], where:
(i) equals the total number of annuities reinsured
hereunder and described in Schedule A, as of the date
the current Accounting Period ends; and
(ii) equals the total number of annuities reinsured
hereunder and described in Schedule A, as of the date
one year prior to the date the current Accounting
Period ends.
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<PAGE> 16
6. Investment Credit Accumulation Rate. The Investment Credit
Accumulation Rate in any Accounting Period equals (i) / [.5 x {(ii) +
(iii)}], where:
(i) equals the Modified Coinsurance Reserve Investment
Credit as described in Schedule C, for the current
Accounting Period;
(ii) equals the portion of the account value for the
annuities reinsured hereunder which corresponds to
the portion of the annuities reinsured hereunder at
the beginning of the current Accounting Period; and
(iii) equals the portion of the account value for the
annuities reinsured hereunder which corresponds to
the portion of the annuities reinsured hereunder at
the end of the current Accounting Period.
7. Allowances for Commissions and Expenses. The Reinsurer will pay the
Ceding Company Allowances for Commissions and Expenses for each
Accounting Period, subsequent to the initial Accounting Period, equal
to (i) plus (ii) plus (iii) plus (iv), where:
(i) equals (a) times (b), where:
(a) equals $7.50 times the quota share percentage
of the annuities reinsured hereunder as
described in Schedule A; and
(b) equals the number of annuities reinsured
hereunder and described in Schedule A, and
inforce at the end of the current Accounting
Period;
(ii) equals .0125 percent times that portion of the
account value of the annuities reinsured hereunder
which corresponds to
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<PAGE> 17
the portion of the annuities reinsured hereunder as
of the end of the current Accounting Period;
(iii) equals the Trailer Commission, as defined below,
times that portion of the account value of the
Venture Variable Annuity 3 annuities reinsured
hereunder which corresponds to the portion of the
Venture Variable Annuity 3 annuities reinsured
hereunder and described in Schedule A, as of the end
of the current Accounting Period; and
(iv) equals .25 percent times that portion of the account
value, attributable to purchase payments received by
the Ceding Company thirteen months or more prior to
their trailer commission payment dates, of the
Venture Vision annuities reinsured hereunder which
corresponds to the portion of the Venture Vision
annuities reinsured hereunder and described in
Schedule A, as of the end of the current Accounting
Period.
The Trailer Commission for Venture Variable Annuity 3 annuities for
each Accounting Period is defined below:
<TABLE>
<CAPTION>
For Accounting
Periods Ending During Trailer Commission
--------------------- ------------------
<S> <C>
1994 .04%
1995 .05%
1996 .055%
1997 and thereafter .0625%
</TABLE>
8. Allowances for Death Benefit Guarantee. The Reinsurer will pay the
Ceding Company Allowances for Death Benefit Guarantee for each
- 15 -
<PAGE> 18
Accounting Period, subsequent to the initial Accounting Period, as an
allowance for costs of the minimum death benefit guarantee on the
annuities reinsured hereunder, equal to the sum of:
(i) .0375 percent times that portion of the account value
of the Venture Vision annuities reinsured hereunder
which corresponds to the portion of the Venture
Vision annuities reinsured hereunder and described in
Schedule A, as of the end of the current Accounting
Period, plus
(ii) .0125 percent times that portion of the account value
of the Venture Variable Annuity 3 annuities reinsured
hereunder which corresponds to the portion of the
Venture Variable Annuity 3 annuities reinsured
hereunder and described in Schedule A, as of the end
of the current Accounting Period.
9. Interest on the Unamortized Ceding Commission. The Ceding Company
will pay the Reinsurer Interest on the Unamortized Ceding Commission
at the end of each Accounting Period, subsequent to the initial
Accounting Period, equal to the Unamortized Ceding Commission at the
end of the preceding Accounting Period determined in accordance with
Paragraph 2 above, times the Interest Expense Rate described in
Article II, Paragraph 5.
- 16 -
<PAGE> 19
ARTICLE IV
BENEFIT PAYMENTS
1. Benefit Payments. Benefit Payments, as referred to in this Agreement,
means the Reinsurer's quota share of (i) Claims as described in
Paragraph 2 below, (ii) Cash Surrender Values as described in
Paragraph 3 below, and (iii) Annuity Benefits as described in
Paragraph 7 below.
2. Claims. The Reinsurer will pay the Ceding Company Claims. The term
"Claims," whenever used for purposes of this Agreement, means that
portion of death benefits paid by the Ceding Company on annuities
reinsured hereunder which is equal to the Reinsurer's quota share of
the account value of those annuities.
3. Cash Surrender Values. The Reinsurer will pay the Ceding Company that
portion of the Cash Surrender Values paid by the Ceding Company on
annuities reinsured hereunder which corresponds to the portion of the
annuities reinsured hereunder.
4. Notice. The Ceding Company will notify the Reinsurer promptly after
receipt of any information regarding Claims on annuities reinsured
hereunder. The reinsurance claim and copies of notification, claim
papers, and proofs will be furnished the Reinsurer upon request.
5. Liability and Payment. The Reinsurer will accept the decision of the
Ceding Company with respect to payment of Claims on annuities
reinsured
- 17 -
<PAGE> 20
hereunder. The Reinsurer will pay its proportionate share of Claims
in a lump sum to the Ceding Company without regard to the form of
settlement by the Ceding Company.
6. Contested Claims. The Ceding Company will advise the Reinsurer of its
intention to contest, compromise or litigate Claims involving
annuities reinsured hereunder. The Reinsurer will pay its share of
the expenses of such contests, in addition to its share of Claims, or
it may choose not to participate. If the Reinsurer chooses not to
participate, it will discharge its liability by payment to the Ceding
Company of the full amount of its liability on the annuity reinsured.
7. Annuity Benefits.
A. The Reinsurer will be liable, on a coinsurance basis, for its
portion of annuity payments made on any annuity reinsured
hereunder if the annuity payments are based on the fixed
settlement options at terms guaranteed in the annuity at the
time of issue of the annuity.
B. The Reinsurer will be liable, on a modified coinsurance basis,
for its portion of annuity payments made on any annuity
reinsured hereunder if the annuity payments are based on
variable settlement options at terms guaranteed in the annuity
at the time of issue of the annuity.
C. The Reinsurer will not be liable for the reinsurance of any
annuity annuitizing at terms more favorable than those
guaranteed at the time of issue of such annuity. In the event
that the
- 18 -
<PAGE> 21
Ceding Company allows annuitization at terms more favorable
than those guaranteed in the annuity at the time of issue of
such annuity, such annuity will be considered surrendered and
the Reinsurer will pay the Ceding Company that portion of the
annuity account value applied to the annuitization which
corresponds to the portion of the annuities reinsured
hereunder. No further obligation or liability will exist for
the Reinsurer for such annuitized annuities.
- 19 -
<PAGE> 22
ARTICLE V
RESERVE ADJUSTMENTS
1. Initial Reserve Adjustment. Simultaneously with the payment of the
Initial Consideration described in Article II, Paragraph 1, by the
Ceding Company to the Reinsurer, the Reinsurer will pay the Ceding
Company an Initial Reserve Adjustment in an amount that is equal to
the Modified Coinsurance Reserve determined in accordance with
Paragraph 3 below, on the Effective Date of this Agreement.
2. Modified Coinsurance Reserve Adjustment.
A. The Modified Coinsurance Reserve Adjustment will be computed
each Accounting Period equal to (i) minus (ii) minus (iii),
where:
(i) equals the Modified Coinsurance Reserve at the end of
the current Accounting Period on the annuities
reinsured hereunder;
(ii) equals the Modified Coinsurance Reserve at the end of
the preceding Accounting Period on the annuities
reinsured hereunder; and
(iii) equals the Modified Coinsurance Reserve Investment
Credit described in Schedule C.
With respect, however, to the Accounting Period during which
the Effective Date of this Agreement occurs, the reference in
(ii) above to "the end of the preceding Accounting Period"
refers to the Effective Date of this Agreement immediately
after the Initial Reserve Adjustment, as described in
Paragraph 1 above, has
- 20 -
<PAGE> 23
occurred. In the Accounting Period in which termination of
this Agreement occurs, the reference in (i) above to "the end
of the current Accounting Period" refers to the terminal
accounting date as described in Article XII, Paragraph 2.
B. For any Accounting Period in which the amount computed in A.
above is positive, the Reinsurer will pay the Ceding Company
such amount. For any Accounting Period in which the amount
computed in A. above is negative, the Ceding Company will pay
the Reinsurer the absolute value of such amount.
3. Modified Coinsurance Reserve. The term "Modified Coinsurance
Reserve," as used in this Agreement, means the statutory reserve held
by the Ceding Company with respect to the annuities reinsured
hereunder.
4. Reserve Strengthening. Any increase in reserves resulting from a
reserve strengthening with respect to the annuities reinsured
hereunder will be paid by the Ceding Company to the Reinsurer at the
end of the Accounting Period during which the reserve strengthening
occurs.
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<PAGE> 24
ARTICLE VI
EXPENSE AND RISK CHARGES
1. Initial Expense and Risk Charge. The Initial Expense and Risk Charge
for the initial Accounting Period, payable to the Reinsurer by the
Ceding Company will be 1 percent times the Ceding Commission
determined in accordance with Article III, Paragraph 1.
2. Expense and Risk Charge. The Expense and Risk Charge for each
Accounting Period subsequent to the initial Accounting Period, payable
to the Reinsurer by the Ceding Company, will be equal to the sum of
(i) and (ii), where:
(i) equals the Expense and Risk Charge Rate, as defined
below, times the Loss Carryforward for the preceding
Accounting Period, with accrued interest thereon,
determined in accordance with Article VIII, Paragraph
1, item (i); and
(ii) equals the Expense and Risk Charge Rate, as defined
below, times the Expense and Risk Charge Base, as
defined below.
The Expense and Risk Charge Rate for each Accounting Period is defined
as follows:
<TABLE>
<CAPTION>
For Accounting Expense and
Periods Ending During Risk Charge Rate
--------------------- ----------------
<S> <C>
1994 through 1998 .4125%
1999 and thereafter .4142%
</TABLE>
The Expense and Risk Charge Base for each Accounting Period is defined
as follows:
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<PAGE> 25
For Accounting
Periods Ending During Expense and Risk Charge Base
- --------------------- ----------------------------
1994 through 1998 greater of either (a) the Unamortized Ceding
Commission at the end of the preceding Accounting
Period determined in accordance with Article III,
Paragraph 2, minus the Maximum Unamortized Ceding
Commission Adjustment determined in accordance
with Article III, Paragraph 4, or (b) quantity
(iii) as defined below, but never less than zero
1999 and thereafter (iii) below, but never less than zero, where:
(iii) equals (a) plus (b) minus (c) minus (d) minus (e),
where:
(a) equals the Unamortized Ceding Commission at
the end of the preceding Accounting Period
determined in accordance with Article III,
Paragraph 2;
(b) equals the absolute value of any Reinsurance
Loss determined in accordance with Article
VII;
(c) equals any Reinsurance Gain determined in
accordance with Article VII;
(d) equals the Interest Expense Charge determined
in accordance with Article II, Paragraph 4;
and
(e) equals the Interest on the Unamortized Ceding
Commission determined in accordance with
Article III, Paragraph 9.
In no event will the Expense and Risk Charge payable be less than
$20,000 for any Accounting Period after December 31, 1998.
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<PAGE> 26
ARTICLE VII
REINSURANCE GAINS AND LOSSES
Formula. A Reinsurance Gain or Reinsurance Loss will be calculated for each
Accounting Period and will be equal to the excess of (i) over (ii), where:
(i) equals the Reinsurance Premiums determined in accordance with
Article II, Paragraph 2; and
(ii) equals the sum of:
(a) Benefit Payments, as described in Article IV, plus
(b) the Modified Coinsurance Reserve Adjustment,
determined in accordance with Article V, Paragraph 2,
plus
(c) Allowances for Commissions and Expenses determined in
accordance with Article III, Paragraph 7, plus
(d) Allowances for Death Benefit Guarantee determined in
accordance with Article III, Paragraph 8.
A Reinsurance Gain results if the excess of (i) over (ii) is positive. A
Reinsurance Loss results if the excess of (i) over (ii) is negative.
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<PAGE> 27
ARTICLE VIII
LOSS CARRYFORWARD
1. Formula. The Loss Carryforward at the end of each Accounting Period
will be equal to (i) minus (ii) plus (iii) plus (iv) plus (v) plus
(vi), where:
(i) equals the Loss Carryforward at the end of the
preceding Accounting Period (except that, for the
initial Accounting Period, the preceding Accounting
Period Loss Carryforward will be zero) accumulated to
the end of the current Accounting Period at an
interest rate equal to the Loss Carryforward Rate
described in Paragraph 2 below;
(ii) equals any Reinsurance Gain determined in accordance
with Article VII;
(iii) equals the absolute value of any Reinsurance Loss
determined in accordance with Article VII;
(iv) equals the Interest Expense Charge determined in
accordance with Article II, Paragraph 4;
(v) equals the Interest on the Unamortized Ceding
Commission determined in accordance with Article III,
Paragraph 9; and
(vi) equals the Expense and Risk Charge determined in
accordance with Article VI, Paragraph 2.
If the above calculation yields a negative amount, then the Loss
Carryforward will be set equal to zero.
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<PAGE> 28
2. Loss Carryforward Rate. The Loss Carryforward Rate at the end of each
Accounting Period will be equal to 43.75 basis points plus (i) divided
by (ii), where:
(i) equals the ninety day (90) transfer pricing rate as
determined by ITT Financial Corporations's Treasury
Department for ITT Financial Corporation debt as of
the date the current Accounting Period begins; and
(ii) equals four.
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<PAGE> 29
ARTICLE IX
EXPERIENCE REFUND
1. General. An Experience Refund will be paid by the Reinsurer to the
Ceding Company at the end of each Accounting Period with respect to
the reinsurance hereunder, if the operation of the Experience Refund
formula detailed in Paragraph 2 below produces a positive amount for
that Accounting Period. If the operation of the Experience Refund
formula produces a negative amount for that Accounting Period, then
the Experience Refund will be zero and the Loss Carryforward
provisions of Article VIII will apply. No Experience Refund will be
paid by the Reinsurer to the Ceding Company after the earliest of: (a)
the Unamortized Ceding Commission as described in Article III,
Paragraph 2, becomes zero, or (b) the Ceding Company withholds amounts
in accordance with Article II, Paragraph 3, item (i) for which payment
is due to the Reinsurer as described in the Accounts Receivable
Agreement.
2. Formula. The Experience Refund at the end of each Accounting Period
will be equal to (i) minus (ii), where:
(i) equals the Reinsurance Gain or Reinsurance Loss
determined in accordance with Article VII; and
(ii) equals the sum of:
(a) the Loss Carryforward for the preceding
Accounting Period, with accrued interest
thereon, determined in accordance with
Article VIII, item (i), plus
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<PAGE> 30
(b) the Interest Expense Charge determined in
accordance with Article II, Paragraph 4, plus
(c) the Interest on the Unamortized Ceding
Commission determined in accordance with
Article III, Paragraph 9, plus
(d) the Expense and Risk Charge determined in
accordance with Article VI, Paragraph 2, plus
(c) the Unamortized Ceding Commission Adjustment
determined in accordance with Article III,
Paragraph 3.
- 28 -
<PAGE> 31
ARTICLE X
ACCOUNTING AND SETTLEMENTS
1. Quarterly Accounting Period. Each Accounting Period under this
Agreement will be a calendar quarter, except that: (a) the initial
Accounting Period runs from the Effective Date of this Agreement
through the last day of the calendar quarter during which the
Effective Date of this Agreement falls, and (b) the final Accounting
Period runs from the end of the preceding Accounting Period until the
terminal accounting date of this Agreement as described in Article
XII, Paragraph 2. However, the Reinsurer reserves the right to adjust
all accounting and settlements to a calendar year-to-date basis.
2. Quarterly Accounting Reports. Quarterly accounting reports in the
form of Schedule B will be submitted to the Reinsurer by the Ceding
Company for each Accounting Period not later than fifteen (15) days
after the end of each Accounting Period. Such reports will include
information on the amount of Initial Consideration, Reinsurance
Premiums, Ceding Commission, Allowances for Commissions and Expenses,
Allowances for Death Benefit Guarantee, Benefit Payments, Reinsurance
Gains and Losses, Experience Refund, Loss Carryforward, Funds
Withheld, Interest Expense Charge, Unamortized Ceding Commission,
Unamortized Ceding Commission Adjustment, Interest on the Unamortized
Ceding Commission, Expense and Risk Charges and Modified Coinsurance
Reserve.
- 29 -
<PAGE> 32
3. Initial Quarterly Settlement.
A. Within fifteen (15) days after the initial Accounting Period,
the Ceding Company will pay the Reinsurer the sum of: (i) the
Initial Consideration determined in accordance with Article
II, Paragraph 1, plus (ii) the Initial Expense and Risk Charge
determined in accordance with Article VI, Paragraph 1.
B. Simultaneously, the Reinsurer will pay the Ceding Company the
sum of: (i) the Initial Reserve Adjustment determined in
accordance with Article V, Paragraph 1, plus (ii) the Ceding
Commission determined in accordance with Article III,
Paragraph 1.
4. Quarterly Settlements.
A. Within fifteen (15) days after the end of each Accounting
Period, the Ceding Company will pay the Reinsurer the sum of:
(i) the Reinsurance Premiums determined in accordance with
Article II, Paragraph 2, plus (ii) any Modified Coinsurance
Reserve Adjustment payable to the Reinsurer determined in
accordance with Article V, Paragraph 2, plus (iii) any Funds
Withheld payable to the Reinsurer during the current
Accounting Period in accordance with the terms of the Accounts
Receivable Agreement determined in accordance with Article II,
Paragraph 3, item (ii).
B. Simultaneously, the Reinsurer will pay the Ceding Company the
sum of: (i) the amount of Benefit Payments paid during the
Accounting Period as described in Article IV, plus (ii)
Allowances for Commissions and Expenses determined in
accordance with Article III, Paragraph 7, plus (iii)
Allowances for Death Benefit
- 30 -
<PAGE> 33
Guarantee determined in accordance with Article III, Paragraph
8, plus (iv) any Modified Coinsurance Reserve Adjustment
payable to the Ceding Company determined in accordance with
Article V, Paragraph 2, plus (v) any Experience Refund
determined in accordance with Article IX.
5. Amounts Due Quarterly. Except as otherwise specifically provided in
this Agreement, all amounts due to be paid to either the Ceding
Company or the Reinsurer under this Agreement will be determined on a
net basis as of the last day of each Accounting Period and will be due
as of such date and payable within fifteen (15) days after the end of
the Accounting Period.
6. Annual Accounting Reports. The Ceding Company will provide the
Reinsurer with annual accounting reports within thirty (30) days after
the end of the calendar year for which such reports are prepared.
These reports will contain sufficient information about the annuities
reinsured hereunder to enable the Reinsurer to prepare its annual
financial reports and to verify the information reported in Schedule
B, and will include Exhibit 8 by reserve basis, Page 7, Page 23 and
Schedule S of the Annual Statement.
7. Estimations. If the amounts, as described in Paragraphs 3 and 4
above, cannot be determined by the dates described in Paragraph 5
above, on an exact basis, such payments will be paid in accordance
with a mutually agreed upon formula which will approximate the actual
payments.
- 31 -
<PAGE> 34
Adjustments will then be made to reflect actual amounts when they
become available.
8. Delayed Payments. For purposes of Paragraph 5 above, if there is a
delayed settlement of a payment due, there will be an interest
penalty, at the Interest Expense Rate described in Article II,
Paragraph 5, for the period that the amount is overdue. For purposes
of this Paragraph, a payment will be considered overdue thirty (30)
days after the date such payment is due.
9. Offset of Payments. All monies due either the Ceding Company or the
Reinsurer under this Agreement or any other agreements will be offset
against each other, dollar for dollar, regardless of any insolvency of
either party.
- 32 -
<PAGE> 35
ARTICLE XI
DURATION AND RECAPTURE
1. Duration. Except as otherwise provided herein, this Agreement is
unlimited in duration.
2. Reinsurer's Liability. The liability of the Reinsurer with respect to
any annuity reinsured hereunder will begin simultaneously with that of
the Ceding Company, but not prior to the Effective Date of this
Agreement. The Reinsurer's liability with respect to any annuity
reinsured hereunder will terminate on the earliest of: (i) the date
such annuity is recaptured; (ii) the date the Ceding Company's
liability on such annuity is terminated; or (iii) the date this
Agreement is terminated. Termination of the Reinsurer's liability is
subject to payments in respect of such liability in accordance with
the provisions of Article XII of this Agreement. In no event should
the interpretation of this Paragraph imply a unilateral right of the
Reinsurer to terminate this Agreement.
3. Termination for Nonpayment of Reinsurance Premiums or Other Amounts
Due. If the Ceding Company fails to pay the Reinsurance Premiums or
any other amounts due to the Reinsurer pursuant to this Agreement,
within sixty (60) days after the end of any Accounting Period, the
Reinsurer may terminate this Agreement, subject to thirty (30) days
prior written notice to the Ceding Company.
- 33 -
<PAGE> 36
4. Recapture. Annuities reinsured hereunder will be eligible for
recapture, at the option of the Ceding Company, on any January 1,
following the fifth anniversary of the Effective Date of this
Agreement, subject to ninety (90) days prior written notice, or on any
other date which is mutually agreed to in writing. If the Ceding
Company opts to recapture, then the Ceding Company must recapture all
of the annuities reinsured hereunder. In no event may the Ceding
Company recapture anything other than 100 percent of all annuities
reinsured hereunder.
5. Internal Replacements. Should the Ceding Company, its affiliates,
successors or assigns, initiate a program of Internal Replacement that
would include any of the annuities reinsured hereunder, the Ceding
Company will immediately notify the Reinsurer. The Reinsurer may
elect to treat such annuities as recaptured rather than surrendered,
and such recapture will apply to all annuities reinsured hereunder.
For purposes of this Agreement, the term "Internal Replacement" means
any instance in which a policy or any portion of the cash value of an
annuity is exchanged for another policy or annuity, not covered under
this Agreement, which is written by the Ceding Company, its
affiliates, successors or assigns.
- 34 -
<PAGE> 37
ARTICLE XII
TERMINAL ACCOUNTING AND SETTLEMENT
1. Terminal Accounting. In the event that this Agreement is terminated
in accordance with Article XI, Paragraph 3, or all reinsurance under
this Agreement is recaptured in accordance with Article XI, Paragraph
4, a Terminal Accounting and Settlement will take place.
2. Date. The terminal accounting date will be the earliest of: (1) the
effective date of recapture pursuant to any notice of recapture given
under this Agreement, (2) the effective date of termination pursuant
to any notice of termination given under this Agreement, or (3) any
other date mutually agreed to in writing.
3. Settlement. The Terminal Accounting and Settlement will consist of:
(a) The quarterly settlement as provided in Article X,
Paragraph 4, computed as of the terminal accounting
date; and
(b) payment by the Ceding Company to the Reinsurer of a
Terminal Reserve equal to the Modified Coinsurance
Reserve on the annuities reinsured hereunder as of
the terminal accounting date;
(c) payment by the Reinsurer to the Ceding Company of a
Terminal Reserve Adjustment equal to the Modified
Coinsurance Reserve on the annuities reinsured
hereunder as of the terminal accounting date;
- 35 -
<PAGE> 38
(d) payment by the Ceding Company to the Reinsurer of a
Terminal Ceding Commission Adjustment equal to any
Unamortized Ceding Commission as described in Article
III, Paragraph 2, as of the terminal accounting date;
(e) payment by the Ceding Company to the Reinsurer of any
Funds Withheld determined in accordance with Article
II, Paragraph 3, as of the terminal accounting date;
and
(f) payment by the Ceding Company to the Reinsurer of any
Loss Carryforward as described in Article VIII,
calculated as of the terminal accounting date.
If the calculation of the Terminal Accounting and Settlement produces
an amount owing to the Ceding Company, such amount will be paid by the
Reinsurer to the Ceding Company. If the calculation of the Terminal
Accounting and Settlement produces an amount owing to the Reinsurer,
such amount will be paid by the Ceding Company to the Reinsurer.
4. Supplementary Accounting and Settlement. In the event that,
subsequent to the Terminal Accounting and Settlement as provided
above, a change is made with respect to any amounts due, a
supplementary accounting will take place pursuant to Paragraph 3
above. Any amount owed to the Ceding Company or to the Reinsurer by
reason of such supplementary accounting will be paid promptly upon the
completion thereof.
- 36 -
<PAGE> 39
ARTICLE XIII
REPRESENTATIONS
Representations. The Ceding Company acknowledges that, at the Reinsurer's
request, it has provided the Reinsurer with the Ceding Company Data described
in Schedule D prior to the execution of this Agreement by the Reinsurer. The
Ceding Company represents that all factual information contained in the Ceding
Company Data is complete and accurate as of the date the document containing
the information was prepared. The Ceding Company further represents that any
assumptions made in preparing the Ceding Company Data were based upon informed
judgment and are consistent with sound actuarial principles. The Ceding
Company further represents that it is not aware of any omissions, errors,
changes or discrepancies which would materially affect the Ceding Company Data.
The Reinsurer has relied on such data and the foregoing representations in
entering into this Agreement.
- 37 -
<PAGE> 40
ARTICLE XIV
ARBITRATION
1. General. All disputes and differences between the Ceding Company and
the Reinsurer on which an agreement cannot be reached will be decided
by arbitration. The arbitrators will construe this Agreement from the
standpoint of practical business and equitable principles and the
customs and practices of the insurance and reinsurance business,
rather than from the standpoint of strict law. The parties intend
that the arbitrators will make their decision with a view to effecting
the intent of this Agreement.
2. Method. Three arbitrators will decide any differences. They must be
impartial and present or former officers of life insurance companies
other than the parties to this Agreement or any company owned by, or
affiliated with, either party. One of the arbitrators will be
appointed by the Reinsurer, another by the Ceding Company, and the two
arbitrators thus selected will select a third arbitrator before
arbitration begins. Should one of the parties decline to select an
arbitrator within thirty (30) days after the date of a written request
to do so, or should the two arbitrators selected by the parties not be
able to agree upon the choice of a third, the appointment(s) will be
left to the President of the American Arbitration Association or its
successor. The arbitrators will decide by a majority of votes and
their decision will be final and binding upon the parties. The costs
of arbitration, including the fees of the arbitrators, will be shared
equally by the parties unless the
- 38 -
<PAGE> 41
arbitrators decide otherwise. Any counsel fees incurred by a party in
the conduct of arbitration will be paid by the party incurring the
fees.
- 39 -
<PAGE> 42
ARTICLE XV
INSOLVENCY
Insolvency. In the event of the Ceding Company's insolvency, any payments due
the Ceding Company from the Reinsurer pursuant to the terms of this Agreement
will be made directly to the Ceding Company or its liquidator, receiver or
statutory successor. The reinsurance will be payable by the Reinsurer on the
basis of the liability of the Ceding Company under the annuities reinsured
without diminution because of the insolvency of the Ceding Company. The
liquidator, receiver or statutory successor of the Ceding Company will give the
Reinsurer written notice of the pendency of a claim against the Ceding Company
on any annuity reinsured within a reasonable time after such claim is filed in
the insolvency proceeding. During the pendency of any such claim, the
Reinsurer may investigate such claim and interpose in the Ceding Company's name
(or in the name of the Ceding Company's liquidator, receiver or statutory
successor), in the proceeding where such claim is to be adjudicated, any
defense or defenses which the Reinsurer may deem available to the Ceding
Company or its liquidator, receiver or statutory successor. The expense thus
incurred by the Reinsurer will be chargeable, subject to court approval,
against the Ceding Company as a part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Ceding
Company solely as a result of the defense undertaken by the Reinsurer.
- 40 -
<PAGE> 43
ARTICLE XVI
EXECUTION AND EFFECTIVE DATE
In witness of the above, this Agreement is executed in duplicate on the dates
indicated below with an Effective Date of December 31, 1993.
NORTH AMERICAN SECURITY LIFE
ATTEST: INSURANCE COMPANY ("Ceding Company")
By: William Atherton By: John G. Vrysen
------------------------ ------------------------
Title: President Title: V.P. & Actuary
------------------------ ------------------------
Date: 12/30/93 Date: 12/30/93
------------------------ ------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Roland G. Anderson By: Frank A. Alvarez
------------------------ ------------------------
Title: Exec. V.P. & Chief Actuary Title: Exec. V.P.
------------------------ ------------------------
Date: 12/29/93 Date: 12/29/93
------------------------ ------------------------
- 41 -
<PAGE> 44
SCHEDULE A
ANNUITIES AND RISKS REINSURED
Annuities and Risks Reinsured. The amount of reinsurance under this Agreement
will be a quota share of the Ceding Company's net liability on those variable
annuities issued by the Ceding Company and described below:
<TABLE>
<CAPTION>
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
<S> <C> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 95% VEN 10
</TABLE>
"Net liability," as used in this Agreement, means the Ceding Company's
liability on annuities reinsured hereunder.
- 42 -
<PAGE> 45
SCHEDULE B
QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS
FROM CEDING COMPANY TO REINSURER
Accounting Period: ______________
Calendar Year: _________________
Date Report Completed: __________
1. Initial Consideration (Article II, Paragraph 1)*
a. Amount of Initial Consideration paid
to Reinsurer ________
b. Amount of Initial Consideration withheld by
Ceding Company ________
Initial Consideration = a + b ________
2. Reinsurance Premiums (Article II, Paragraph 2) ________
3. Benefit Payments (Article IV)
a. Death Benefits ________
b. Cash Surrender Values ________
c. Annuity Benefits ________
Benefit Payments = a + b + c ________
4. Initial Reserve Adjustment (Article V, Paragraph 1)* ________
5. Modified Coinsurance Reserve Adjustment (Article V, Paragraph 2)
a. Modified Coinsurance Reserve end of
preceding Accounting Period ________
b. Modified Coinsurance Reserve end of
current Accounting Period ________
c. Equals b - a ________
d. Modified Coinsurance Reserve Investment
Credit (Schedule C) ________
Modified Coinsurance Reserve Adjustment = c - d ________
6. Reinsurance Gain = 2 - 3 - 5 - 14 - 15
(If negative, see Article VII) ________
7. Reinsurance Loss = 2 - 3 - 5 - 14 - 15
(If positive, see Article VII) ________
8. Loss Carryforward [Article VIII, Paragraph 1, item (i)] ________
9. Initial Expense and Risk Charge (Article VI, Paragraph 1)* ________
10. Expense and Risk Charge (Article VI, Paragraph 2) ________
11. Ceding Commission (Article III, Paragraph 1)* ________
- 43 -
<PAGE> 46
12. Unamortized Ceding Commission (Article III, Paragraph 2) ________
13. Unamortized Ceding Commission Adjustment
(Article III, Paragraph 3) ________
14. Allowances for Commissions and Expenses
(Article III, Paragraph 7) ________
15. Allowances for Death Benefit Guarantee
(Article III, Paragraph 8) ________
16. Experience Refund = 6 + 7 - 8 - 10 - 13 - 19 - 20
(If negative, see Article IX) ________
17. Funds Withheld payment [Article II, Paragraph 3, item (ii)] ________
18. Funds Withheld = 1a - 16 (Article II, Paragraph 3) ________
19. Interest Expense Charge (Article II, Paragraph 4) ________
20. Interest on the Unamortized Ceding Commission
(Article III, Paragraph 9) ________
21. Cash Settlement =
1a + 2 - 3 - 4 - 5 + 9 - 11 - 14 - 15 - 16 + 17 ========
*Initial Accounting Period, only.
Supplemental Information
<TABLE>
<CAPTION>
Venture
Total Variable Venture
Number Annuity 3 Vision Total
of Account Account Account Loss
Annuities Value Value Value Carryforward
--------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Beginning of Period
--------- --------- ------- ------- ------------
+ Additions
--------- --------- ------- ------- ------------
- - Terminations
--------- --------- ------- ------- ------------
End of Period
========= ========= ======= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Venture Venture
Variable Vision
Annuity 3 Number
Number of of
Annuities Annuities
--------- ---------
<S> <C> <C>
Beginning of Period
--------- ---------
+ Additions
--------- ---------
- - Terminations
--------- ---------
End of Period
========= =========
</TABLE>
- 44 -
<PAGE> 47
Termination Rate (Article III, Paragraph 5)
a. Total number of annuities reinsured hereunder
as of date current Accounting Period ends _________
b. Total number of annuities reinsured hereunder
as of the date one year prior to the date the
current Accounting Period ends _________
c. Termination Rate 1 - (a / b) =========
Investment Credit Accumulation Rate (Article III, Paragraph 6)
a. Modified Coinsurance Reserve Investment Credit _________
b. Account value at beginning of current
Accounting Period _________
c. Account value at end of current Accounting Period _________
d. Investment Credit Accumulation Rate
a / [.5 x (b + c)] =========
- 45 -
<PAGE> 48
SCHEDULE C
MODIFIED COINSURANCE RESERVE INVESTMENT CREDIT
Modified Coinsurance Reserve Investment Credit. The Modified Coinsurance
Reserve Investment Credit is equal to the portion of the sum of all accrued
investment income and capital gains and losses, realized and unrealized, on the
Ceding Company's Separate Account for the current Accounting Period which
corresponds to the portion of the annuities reinsured hereunder. The Modified
Coinsurance Reserve Investment Credit will not be adjusted for income taxes or
changes in any provision for taxes, investment management fees, or charges for
mortality or expense risks.
- 46 -
<PAGE> 49
SCHEDULE D
CEDING COMPANY DATA
o Package from John Vrysen of the Ceding Company to John Laughlin of the
Reinsurer containing:
o 1993 Reinsurance Proposal
o Section 1 of 1994 Ceding Company Business Plan
o Ceding Company Annuity Sales Summary as of September 30, 1993
o Ceding Company 1992 IRIS Ratios and Company Response
o North American Life Insurance Company/Ceding Company Guarantee
Agreement
o VENTURE VARIABLE ANNUITY 3 Product Kit
o VENTURE VISION Product Kit
o Ceding Company March 1993 Quarterly Statement
o Ceding Company June 1993 Quarterly Statement
o Ceding Company 1992 NAIC Annual Statement
o Ceding Company 1992 NAIC Separate Account Statement
o Package from John Vrysen of the Ceding Company to John Laughlin of the
Reinsurer containing:
o Supplement No. 1 to the 1993 Reinsurance Proposal Dated
November 12, 1993
o Policy Forms for VENTURE VISION and VENTURE VARIABLE ANNUITY 3
o Projected Runoff of the Existing Closed Block of VENTURE
VARIABLE ANNUITY 3
o Pricing Runs using Chalke PTS for VENTURE VISION and VENTURE
VARIABLE ANNUITY 3
o Telephone conversations with John Vrysen of the Ceding Company on
December 27, 1993 regarding:
o Expense allowances: Except for the trail commissions and the
allowance for the minimum death benefit guarantee, direct
variable expenses are approximately 45% - 50% of total pricing
expenses. Death Benefit guarantee costs 5 basis points
annually for VENTURE VARIABLE ANNUITY 3; 15 basis points
annually for VENTURE VISION
o Revised projection of 1993 VENTURE VISION premiums: $110
million
o December 23, 1993 Account Values are $606 million for VENTURE
VARIABLE ANNUITY 3 and $107 million for VENTURE VISION
- 47 -
<PAGE> 50
AMENDMENT ONE
ATTACHED TO AND MADE A PART OF THE
REINSURANCE AGREEMENT NUMBER 1293-104
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
"CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
"REINSURER"
<PAGE> 51
The Ceding Company and the Reinsurer agree to amend this Reinsurance Agreement
as follows:
I. ARTICLE II, INITIAL CONSIDERATION AND REINSURANCE PREMIUMS, Paragraphs
2, 3 and 4, are replaced in their entirety by the following:
2. Reinsurance Premiums. At the end of each Accounting Period,
the Ceding Company will pay the Reinsurer Reinsurance Premiums
on all annuities in effect under this Agreement in an amount
equal to that portion of the gross premiums collected by the
Ceding Company during the Accounting Period which corresponds
to the portion of the annuities reinsured hereunder. The
Reinsurer will treat any such Reinsurance Premiums as paid
premium for annual statement purposes, regardless of the mode
of collection by the Ceding Company on the annuities reinsured
hereunder.
The Ceding Company will withhold on behalf of the Reinsurer,
in accordance with Paragraph 3 below, an amount equal to (i)
times (ii), but not to exceed $6 million for the current
calendar year, where:
(i) equals the Funds Withheld Rate, as described
in Schedule E, Paragraph 1; and
(ii) equals Reinsurance Premiums, determined in
accordance with this Paragraph 2.
3. Funds Withheld. The Ceding Company and the Reinsurer have
entered into the "Accounts Receivable Agreement" attached to
this Agreement as Exhibit A. Pursuant to the terms of the
Accounts Receivable Agreement, the Ceding Company will
withhold on behalf
- 1 -
<PAGE> 52
of the Reinsurer the amounts described in Paragraphs 1 and 2
above. The amount withheld by the Ceding Company will be
credited to the Reinsurer and will be considered as an amount
held on behalf of the Reinsurer. The Reinsurer will consider
such amount as a receivable and the Ceding Company will
consider such amount as a payable. Such amount withheld will
be subject to repayment in accordance with the terms of the
Accounts Receivable Agreement. The Funds Withheld at the end
of each Accounting Period will be equal to (i) plus (ii) minus
(iii), where:
(i) equals the Funds Withheld at the end of the
preceding Accounting Period;
(ii) equals the Funds Withheld Rate, as described
in Schedule E, Paragraph 1, times the
Reinsurance Premiums, determined in
accordance with Paragraph 2 above, but not to
exceed $6 million for the current calendar
year; and
(iii) equals any payment by the Ceding Company to
the Reinsurer of any amount withheld, as
described in items (i) and (ii) above, during
the Accounting Period in accordance with the
Accounts Receivable Agreement.
With respect, however, to the Accounting Period during which
the Effective Date of this Agreement occurs, the reference in
(i) above to "the Funds Withheld at the end of the preceding
Accounting Period" means 3.2 percent of the Initial
Consideration, determined in accordance with Paragraph 1
above, but not to exceed $15 million.
- 2 -
<PAGE> 53
In no event will the Funds Withheld at the end of any
Accounting Period exceed 50 percent of the Ceding Company's
total statutory capital and surplus as of the end of the
preceding calendar year.
4. Interest Expense Charge. The Ceding Company will pay the
Reinsurer an Interest Expense Charge at the end of each
Accounting Period equal to [(i) x (ii)] + [(iii) x (iv)] +
[(v) x (vi)] + [(vii) x (viii)] + [(ix) x (x)] + [(xi) x
(xii)], where:
(i) equals any amounts withheld in accordance
with Paragraph 1 above, as of the end of
the preceding Accounting Period and for
which payment is not yet due to the
Reinsurer, as described in the Accounts
Receivable Agreement;
(ii) equals the Interest Expense Rate, as
described in Paragraph 5 below;
(iii) equals, for the Accounting Periods
beginning April 1, 1994 and thereafter, any
amounts withheld, in accordance with
Paragraph 2 above, during the first
Accounting Period in the 1994 calendar year
and for which payment is not yet due to the
Reinsurer, as described in the Accounts
Receivable Agreement;
(iv) equals,
o for the Accounting Periods beginning
April 1, 1994 through December 31,
1994, 43.75 basis points, plus [(a)
/ (b)] x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
- 3 -
<PAGE> 54
Treasury Department for ITT
Financial Corporation debt
for the number of days
remaining in the current
calendar year measured from
the quarterly settlement
date, as described in Article
X, for the first Accounting
Period in the 1994 calendar
year;
(b) equals the number of days
remaining in the current
calendar year measured from
the quarterly settlement
date, as described in Article
X, for the first Accounting
Period in the 1994 calendar
year; and
(c) equals,
o for the Accounting Period
beginning April 1, 1994, the
number of days remaining in
the Accounting Period
measured from the quarterly
settlement date, as described
in Article X, for the first
Accounting Period in the 1994
calendar year; and
o for the Accounting Periods
beginning July 1, 1994 and
October 1, 1994, the number
of days in the current
Accounting Period;
- 4 -
<PAGE> 55
o for the Accounting Periods beginning
January 1, 1995 and thereafter, the
Loss Carryforward Rate, described in
Article VIII, Paragraph 2;
(v) equals, for the Accounting Periods
beginning July 1, 1994 and thereafter, any
amounts withheld, in accordance with
Paragraph 2 above, during the second
Accounting Period in the 1994 calendar year
and for which payment is not yet due to the
Reinsurer, as described in the Accounts
Receivable Agreement;
(vi) equals,
o for the Accounting Periods beginning
July 1, 1994 and October 1, 1994,
43.75 basis points, plus [(a) / (b)]
x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
Treasury Department for ITT
Financial Corporation debt
for the number of days
remaining in the current
calendar year measured from
the quarterly settlement
date, as described in Article
X, for the second Accounting
Period in the 1994 calendar
year;
(b) equals the number of days
remaining in the current
calendar year measured from
the quarterly settlement
date, as described in
- 5 -
<PAGE> 56
Article X, for the second Accounting
Period in the 1994 calendar year; and
(c) equals,
o for the Accounting Period
beginning July 1, 1994, the
number of days remaining in
the Accounting Period
measured from the quarterly
settlement date, as described
in Article X, for the second
Accounting Period in the 1994
calendar year; and
o for the Accounting Periods
beginning October 1, 1994,
the number of days in the
current Accounting Period;
(vii) equals, for the Accounting Periods
beginning October 1, 1994 and thereafter,
any amounts withheld, in accordance with
Paragraph 2 above, during the third
Accounting Period in the 1994 calendar year
and for which payment is not yet due to the
Reinsurer, as described in the Accounts
Receivable Agreement;
(viii) equals,
o for the Accounting Periods beginning
October 1, 1994, 43.75 basis points,
plus [(a) / (b)] x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
- 6 -
<PAGE> 57
Treasury Department for ITT
Financial Corporation debt for
the number of days remaining in
the current calendar year
measured from the quarterly
settlement date, as described in
Article X, for the third
Accounting Period in the 1994
calendar year;
(b) equals the number of days
remaining in the current
calendar year measured from the
quarterly settlement date, as
described in Article X, for the
third Accounting Period in the
1994 calendar year; and
(c) equals the number of days
remaining in the Accounting
Period measured from the
quarterly settlement date, as
described in Article X, for the
third Accounting Period in the
1994 calendar year; and
o for the Accounting Periods beginning
January 1, 1995 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2;
(ix) equals, for the Accounting Periods
beginning January 1, 1995 and thereafter,
any amounts withheld, in accordance with
Paragraph 2 above, during the fourth
Accounting Period in the 1994 calendar year
and for which payment is not yet due to the
Reinsurer, as described in the Accounts
Receivable Agreement;
- 7 -
<PAGE> 58
(x) equals,
o for the Accounting Period beginning
January 1, 1995, [(a) / (b)] x (c),
where:
(a) equals the Loss Carryforward
Rate, as described in Article
VIII, Paragraph 2;
(b) equals the number of days in
the current Accounting Period;
and
(c) equals the number of days
remaining in the Accounting
Period measured from the
quarterly settlement date, as
described in Article X, for the
fourth Accounting Period in the
1994 calendar year; and
o for the Accounting Periods beginning
April 1, 1995 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2;
(xi) equals any amounts withheld in accordance
with items (i) and (ii) of Paragraph 3
above, which have not been paid by the
Ceding Company to the Reinsurer at the end
of the preceding Accounting Period and for
which payment is due to the Reinsurer, as
described in the Accounts Receivable
Agreement; and
(xii) equals the Loss Carryforward Rate, as
described in Article VIII, Paragraph 2.
II. ARTICLE III, COMMISSIONS AND ALLOWANCES, Paragraphs 1, 2, 3, 4, 6, 7
and 9, are replaced in their entirety by the following:
- 8 -
<PAGE> 59
1. Ceding Commission. Simultaneously with the payment of the
Initial Consideration, the Reinsurer will pay a Ceding
Commission to the Ceding Company of 2.2 percent of the Initial
Consideration, as described in Article II, Paragraph 1, but
not to exceed $10 million. For Accounting Periods beginning
January 1, 1994 and thereafter, the Reinsurer will pay a
Ceding Commission to the Ceding Company equal to the Ceding
Commission Rate, as described in Schedule E, Paragraph 2,
times the Reinsurance Premiums, determined in accordance with
Article II, Paragraph 2, but not to exceed $4 million for the
current calendar year.
2. Unamortized Ceding Commission. The Unamortized Ceding
Commission at the end of each Accounting Period equals (i)
plus (ii) minus (iii), where:
(i) equals the Unamortized Ceding Commission at
the end of the preceding Accounting Period;
(ii) equals the Ceding Commission Rate, as
described in Schedule E, Paragraph 2, times
the Reinsurance Premiums, determined in
accordance with Article II, Paragraph 2,
but not to exceed $4 million for the
current calendar year; and
(iii) equals the Unamortized Ceding Commission
Adjustment, determined in accordance with
Paragraph 3 below.
With respect, however, to the Accounting Period during which
the Effective Date of this Agreement occurs, the reference in
(i) to the "end of the preceding Accounting Period" refers to
the Effective Date of this Agreement immediately after the
Ceding
- 9 -
<PAGE> 60
Commission, as described in Paragraph 1 above, has been paid.
The Unamortized Ceding Commission may never be less than zero.
In the Accounting Period during which (i) plus (ii) minus
(iii) as described above, first becomes zero or negative,
then, for that and all subsequent Accounting Periods, the
Unamortized Ceding Commission will be set equal to zero.
3. Unamortized Ceding Commission Adjustment. The Unamortized
Ceding Commission Adjustment at the end of each Accounting
Period equals (i) minus (ii) minus (iii) minus (iv) minus (v),
where:
(i) equals the Reinsurance Gain or Reinsurance
Loss, determined in accordance with Article
VII;
(ii) equals the Loss Carryforward, determined in
accordance with Article VIII, Paragraph 1,
item (i), at the end of the preceding
Accounting Period with accrued interest
thereon;
(iii) equals the Interest Expense Charge,
determined in accordance with Article II,
Paragraph 4;
(iv) equals the Interest on the Unamortized
Ceding Commission, determined in accordance
with Paragraph 9 below; and
(v) equals the Expense and Risk Charge,
determined in accordance with Article VI,
Paragraph 2.
However, in no event will the Unamortized Ceding Commission
Adjustment be less than zero or exceed the lesser of:
(1) the sum of (A) plus (B), where:
- 10 -
<PAGE> 61
(A) equals the Unamortized Ceding
Commission, determined in accordance
with Paragraph 2 above, at the end
of the preceding Accounting Period;
and
(B) equals the Ceding Commission Rate,
as described in Article III,
Paragraph 1, times the Reinsurance
Premiums, determined in accordance
with Article II, Paragraph 2, but
not to exceed $4 million for the
current calendar year, or
(2) the Maximum Unamortized Ceding Commission
Adjustment, as described in Paragraph 4
below.
Notwithstanding anything to the contrary in this Agreement, if
the Unamortized Ceding Commission at the end of any Accounting
Period is still positive, but has been reduced during any
Accounting Period by an amount less than the Maximum
Unamortized Ceding Commission Adjustment, as described in
Paragraph 4 below, then such shortfall can be recovered from
future positive Unamortized Ceding Commission Adjustments.
4. Maximum Unamortized Ceding Commission Adjustment. The Maximum
Unamortized Ceding Commission Adjustment for each Accounting
Period is as follows:
- 11 -
<PAGE> 62
<TABLE>
<CAPTION>
Maximum Maximum
Unamortized Unamortized
Ceding Ceding
Commission Commission
For Adjustment Adjustment Maximum
Account- (For Amounts (For Amounts Unamortized
ing Paid During Paid During Ceding
Periods Initial 1994 Commission
Ending Accounting Calendar Adjustment
During Period) Year) (Total)
------ ----------- ----------- ----------
<S> <C> <C> <C>
1994 $500,000 $ 0 $500,000
1995 through
1998 $500,000 $200,000 $700,000
1999 $ 0 $200,000 $200,000
2000 and there-
after $ 0 $ 0 $ 0
</TABLE>
However, if in any Accounting Period (a) the Termination Rate,
as described in Paragraph 5 below, is greater than 0.30,
and/or (b) the Investment Credit Accumulation Rate, as
described in Paragraph 6 below, is less than zero, then the
Reinsurer may elect to define the Maximum Withheld Ceding
Commission Adjustment as any amount up to $14 million for the
first Accounting Period in the current calendar year and for
all Accounting Periods thereafter.
6. Investment Credit Accumulation Rate. For Accounting Periods
beginning January 1, 1995 and thereafter, the Investment
CreditAccumulation Rate in any Accounting Period equals (i) /
[.5 x {(ii) + (iii)}], where:
(i) equals the Modified Coinsurance Reserve
Investment Credit, as described in Schedule
C, for the current Accounting Period and the
three Accounting Periods immediately
preceding the current Accounting Period;
- 12 -
<PAGE> 63
(ii) equals the portion of the account value for
the annuities reinsured hereunder which
corresponds to the portion of the annuities
reinsured hereunder as of the date one year
prior to the date the current Accounting
Period ends; and
(iii) equals the portion of the account value for
the annuities reinsured hereunder which
corresponds to the portion of the annuities
reinsured hereunder as of the date the
current Accounting Period ends.
7. Allowances for Commissions and Expenses. The Reinsurer will
pay the Ceding Company Allowances for Commissions and Expenses
for each Accounting Period, equal to (i) plus (ii) plus (iii)
plus (iv) plus (v) plus (vi), where:
(i) equals (a) times (b), where:
(a) equals $7.50 times the quota share
percentage of the annuities
reinsured hereunder, as described in
Schedule A; and
(b) equals the number of annuities
reinsured hereunder and described in
Schedule A, and inforce at the end
of the current Accounting Period;
(ii) equals .0125 percent times that portion of
the account value of the annuities reinsured
hereunder which corresponds to the portion of
the annuities reinsured hereunder as of the
end of the current Accounting Period;
- 13 -
<PAGE> 64
(iii) equals the Trailer Commission, as defined
below, times that portion of the account
value of the Venture Variable Annuity 3
annuities reinsured hereunder which
corresponds to the portion of the Venture
Variable Annuity 3 annuities reinsured
hereunder and described in Schedule A, as of
the end of the current Accounting Period;
(iv) equals (a) times (b), where:
(a) equals the Reinsurance Premiums,
determined in accordance with
Article II, Paragraph 2, with
respect to the Venture Variable
Annuity 3 annuities reinsured
hereunder which corresponds to the
portion of the Venture Variable
Annuity 3 annuities reinsured
hereunder and described in Schedule
A; and
(b) equals,
o for the Accounting Periods
beginning January 1, 1994
through October 1, 1994, 5.33
percent, and
o for the Accounting Periods
beginning January 1, 1995 and
thereafter, 7 percent;
(v) equals .25 percent times that portion of the
account value, attributable to purchase
payments received by the Ceding Company
thirteen (13) months or more prior to their
trailer commission payment dates, of the
Venture Vision annuities reinsured hereunder
which
- 14 -
<PAGE> 65
corresponds to the portion of the Venture
Vision annuities reinsured hereunder and
described in Schedule A, as of the end of the
current Accounting Period; and
(vi) equals (a) times (b), where:
(a) equals the portion of Reinsurance
Premiums, determined in accordance
with Article II, Paragraph 2,
received by the Ceding Company
thirteen (13) months or more after
the issue date of each Venture
Vision annuity reinsured hereunder
which corresponds to the portion of
the Venture Vision annuities
reinsured hereunder and described in
Schedule A; and
(b) equals,
o for the Accounting Periods
beginning January 1, 1994
through October 1, 1994, 1.83
percent, and
o for the Accounting Periods
beginning January 1, 1995 and
thereafter, 3.5 percent.
The Trailer Commission for Venture Variable Annuity 3
annuities for each Accounting Period is defined below:
- 15 -
<PAGE> 66
<TABLE>
<CAPTION>
For Accounting
Periods Ending During Trailer Commission
--------------------- ---------------------------
<S> <C>
1994 .04%
1995 .05%
1996 .055%
1997 and thereafter .0625%
</TABLE>
9. Interest on the Unamortized Ceding Commission. The Ceding
Company will pay the Reinsurer Interest on the Unamortized
Ceding Commission at the end of each Accounting Period,
subsequent to the initial Accounting Period, equal to [(i) x
(ii)] + [(iii) x (iv)] + [(v) x (vi)] + [(vii) x (viii)] +
[(ix) x (x)], where:
(i) equals the portion of the Unamortized
Ceding Commission, determined in accordance
with Paragraph 2 above, paid by the
Reinsurer to the Ceding Company as Ceding
Commission during the initial Accounting
Period in accordance with Paragraph 1
above, calculated as of the end of the
preceding Accounting Period;
(ii) equals the Interest Expense Rate, as
described in Article II, Paragraph 5;
(iii) equals, for the Accounting Periods
beginning April 1, 1994 and thereafter, the
portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above,
- 16 -
<PAGE> 67
for the first Accounting Period in the 1994
calendar year;
(iv) equals,
o for the Accounting Periods beginning
April 1, 1994 through December 31,
1994, 43.75 basis points, plus [(a)
/ (b)] x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
Treasury Department for ITT
Financial Corporation debt for
the number of days remaining
in the current calendar year
measured from the quarterly
settlement date, as described
in Article X, for the first
Accounting Period in the 1994
calendar year;
(b) equals the number of days
remaining in the current
calendar year measured from
the quarterly settlement date,
as described in Article X, for
the first Accounting Period in
the 1994 calendar year; and
(c) equals,
o for the Accounting
Period beginning April
1, 1994, the number of
days remaining in the
Accounting Period
measured from the
quarterly settlement
date, as described in
- 17 -
<PAGE> 68
Article X, for the first
Accounting Period in the
1994 calendar year; and
o for the Accounting
Periods beginning July
1, 1994 and October 1,
1994, the number of days
in the current
Accounting Period; and
o for the Accounting Periods beginning
January 1, 1995 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2;
(v) equals, for the Accounting Periods
beginning July 1, 1994 and thereafter, the
portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above, for the
second Accounting Period in the 1994
calendar year; and
(vi) equals,
o for the Accounting Periods beginning
July 1, 1994 and October 1, 1994,
43.75 basis points, plus [(a) / (b)]
x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
Treasury Department for ITT
Financial Corporation debt for
the number of days
- 18 -
<PAGE> 69
remaining in the current
calendar year measured from the
quarterly settlement date, as
described in Article X, for the
second Accounting Period in the
1994 calendar year;
(b) equals the number of days
remaining in the current
calendar year measured from the
quarterly settlement date, as
described in Article X, for the
second Accounting Period in the
1994 calendar year; and
(c) equals,
o for the Accounting Period
beginning July 1, 1994, the
number of days remaining in the
Accounting Period measured from
the quarterly settlement date,
as described in Article X, for
the second Accounting Period in
the 1994 calendar year; and
o for the Accounting Period
beginning October 1, 1994, the
number of days in the current
Accounting Period;
(vii) equals, for the Accounting Periods
beginning October 1, 1994 and thereafter,
the portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the
- 19 -
<PAGE> 70
Reinsurer to the Ceding Company as Ceding
Commission, in accordance with Paragraph 1
above, for the third Accounting Period in
the 1994 calendar year;
(viii) equals,
o for the Accounting Period beginning
October 1, 1994, 43.75 basis points,
plus [(a) / (b)] x (c), where:
(a) equals the funds transfer
pricing rate as determined by
ITT Financial Corporation's
Treasury Department for ITT
Financial Corporation debt for
the number of days remaining in
the current calendar year
measured from the quarterly
settlement date, as described in
Article X, for the third
Accounting Period in the 1994
calendar year;
(b) equals the number of days
remaining in the current
calendar year measured from the
quarterly settlement date, as
described in Article X, for the
third Accounting Period in the
1994 calendar year;
(c) equals the number of days
remaining in the Accounting
Period measured from the
quarterly settlement date, as
described in
- 20 -
<PAGE> 71
Article X, for the third
Accounting Period in the 1994
calendar year; and
o for the Accounting Periods beginning
January 1, 1995 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2;
(ix) equals, for the Accounting Periods
beginning January 1, 1995 and thereafter,
the portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above, for the
fourth Accounting Period in the 1994
calendar year; and
(x) equals,
o for the Accounting Period beginning
January 1, 1995, [(a) / (b)] x (c),
where:
(a) equals the Loss Carryforward
Rate, as described in Article
VIII, Paragraph 2;
(b) equals the number of days in
the current Accounting
Period; and
(c) equals the number of days
remaining in the Accounting
Period measured from the
quarterly settlement date, as
described in Article X, for
the fourth Accounting Period
in the 1994 calendar year;
and
- 21 -
<PAGE> 72
o for the Accounting Periods beginning
April 1, 1995 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2.
III. ARTICLE XI, DURATION AND RECAPTURE, Paragraph 5, is replaced in its
entirety by the following:
5. Internal Replacements. Should the Ceding Company, its
affiliates, successors or assigns, initiate a program of
Internal Replacement that would include any of the annuities
reinsured hereunder, the Ceding Company will immediately
notify the Reinsurer. The Reinsurer may elect to treat such
annuities as recaptured rather than surrendered, and such
recapture will apply to all annuities reinsured hereunder.
For purposes of this Agreement, the term "Internal
Replacement" means any instance in which an annuity or any
portion of the cash value of an annuity is exchanged for
another policy or annuity, not covered under this Agreement,
which is written by the Ceding Company, its affiliates,
successors or assigns. Internal Replacements initiated by
policyholders and allowed by the Ceding Company will not be
considered Internal Replacements for purposes of this
Paragraph unless the total cash value rolled over by such
Internal Replacements in any four consecutive Accounting
Periods exceeds 10 percent of the account values as of the
date one year prior to the date the current Accounting Period
ends.
- 22 -
<PAGE> 73
IV. ARTICLE VI, EXPENSE AND RISK CHARGES, Paragraph 2, is replaced in its
entirety by the following:
2. Expense and Risk Charge. The Expense and Risk Charge for each
Accounting Period subsequent to the initial Accounting Period,
payable to the Reinsurer by the Ceding Company, will be equal
to the sum of (i) and (ii), where:
(i) equals the Expense and Risk Charge Rate, as
defined below, times the Loss Carryforward,
determined in accordance with Article VIII,
Paragraph 1, item (i), at the end of the
preceding Accounting Period, with accrued
interest thereon; and
(ii) equals the Expense and Risk Charge Rate, as
defined below, times the Expense and Risk
Charge Base, as defined below.
The Expense and Risk Charge Rate for each Accounting Period is
defined as follows:
<TABLE>
<CAPTION>
For Accounting Expense and
Periods Ending During Risk Charge Rate
--------------------- ----------------
<S> <C>
1994 through 1999 .4125%
2000 and thereafter .4142%
</TABLE>
The Expense and Risk Charge Base for each Accounting Period is
defined as follows:
- 23 -
<PAGE> 74
For Accounting
Periods Ending During Expense and Risk Charge Base
--------------------- ----------------------------
1994 through 1999 greater of either (a) the
Unamortized Ceding
Commission, determined in
accordance with Article III,
Paragraph 2, at the end of
the preceding Accounting
Period, plus the Ceding
Commission Rate, as described
in Article III, Paragraph 1,
times the Reinsurance
Premiums, determined in
accordance with Article II,
Paragraph 2, but not to
exceed $4 million for the
current calendar year, minus
the Maximum Unamortized
Ceding Commission Adjustment,
determined in accordance with
Article III, Paragraph 4, or
(b) quantity (iii) as defined
below, but never less than
zero
2000 and thereafter (iii) below, but never less
than zero, where:
(iii) equals (a) plus (b) plus (c) minus (d)
minus (e) minus (f), where:
(a) equals the Unamortized Ceding
Commission, determined in accordance
with Article III, Paragraph 2, at
the end of the preceding Accounting
Period;
(b) equals the Ceding Commission Rate,
as described in Article III,
Paragraph 1, times the Reinsurance
Premiums, determined in accordance
with Article II, Paragraph 2, but
not to exceed $4 million for the
current calendar year;
(c) equals the absolute value of any
Reinsurance Loss, determined in
accordance with Article VII;
- 24 -
<PAGE> 75
(d) equals any Reinsurance Gain,
determined in accordance with Article
VII;
(e) equals the Interest Expense Charge,
determined in accordance with Article
II, Paragraph 4; and
(f) equals the Interest on the
Unamortized Ceding Commission,
determined in accordance with
Article III, Paragraph 9.
In no event will the Expense and Risk Charge payable be less
than $20,000 for any Accounting Period after December 31, 1999.
V. ARTICLE X, ACCOUNTING AND SETTLEMENTS, Paragraph 4, is replaced in its
entirety by the following:
4. Quarterly Settlements.
A. Within fifteen (15) days after the end of each
Accounting Period, the Ceding Company will pay the
Reinsurer the sum of: (i) the Reinsurance Premiums
paid by the Ceding Company to the Reinsurer during the
current Accounting Period, determined in accordance
with Article II, Paragraph 2, plus (ii) any Modified
Coinsurance Reserve Adjustment payable to the
Reinsurer, determined in accordance with Article V,
Paragraph 2, plus (iii) any Funds Withheld payable to
the Reinsurer during the current Accounting Period in
accordance with the terms of the Accounts Receivable
Agreement, determined in accordance with Article II,
Paragraph 3, item (ii).
- 25 -
<PAGE> 76
B. Simultaneously, the Reinsurer will pay the Ceding
Company the sum of: (i) the amount of Benefit
Payments, as described in Article IV, plus (ii)
Allowances for Commissions and Expenses, determined in
accordance with Article III, Paragraph 7, plus (iii)
Allowances for Death Benefit Guarantee, determined in
accordance with Article III, Paragraph 8, plus (iv)
any Modified Coinsurance Reserve Adjustment payable to
the Ceding Company, determined in accordance with
Article V, Paragraph 2, plus (v) any Experience
Refund, determined in accordance with Article IX.
VI. SCHEDULE A, ANNUITIES AND RISKS REINSURED, is replaced in its entirety
by the following:
Annuities and Risks Reinsured. The amount of reinsurance
under this Agreement will be a quota share of the Ceding
Company's net liability on those variable annuities issued by
the Ceding Company and described below:
<TABLE>
<CAPTION>
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
<S> <C> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 - 1994 95% VEN 10
</TABLE>
"Net liability," as used in this Agreement, means the Ceding
Company's liability on annuities reinsured hereunder.
VII. SCHEDULE B, QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS, is replaced
in its entirety by Exhibit A.
- 26 -
<PAGE> 77
VIII. The following SCHEDULE E, RATES, is added to this Agreement:
SCHEDULE E
RATES
1. Funds Withheld Rate. The Funds Withheld Rate for each
Accounting Period is defined as follows:
<TABLE>
<CAPTION>
For Accounting Funds
Period Ending During Withheld Rate
-------------------- -------------
<S> <C>
1993 0%
1994 2.5%
1995 and thereafter 0%
</TABLE>
2. Ceding Commission Rate. The Ceding Commission Rate for each
Accounting Period, subsequent to the initial Accounting
Period, is defined as follows:
<TABLE>
<CAPTION>
For Accounting Ceding
Periods Ending During Commission Rate
--------------------- ---------------
<S> <C>
1994 1.67%
1995 and thereafter 0%
</TABLE>
- 27 -
<PAGE> 78
In witness of the above, this Amendment One is executed in duplicate on the
dates indicated below, with an Effective Date of January 1, 1994.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Ceding Company")
By: James D. Gallagher By: John G. Vrysen
------------------------- ------------------------
Title: V.P., Secretary
& General Counsel Title: V.P. & Actuary
------------------------- -------------------------
Date: 6/28/94 Date: 6/28/94
------------------------- -------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
------------------------- -------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
------------------------- -------------------------
Date: 6/29/94 Date: 6/29/94
------------------------- ------------------------
- 28 -
<PAGE> 79
EXHIBIT A
SCHEDULE B
QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS
FROM CEDING COMPANY TO REINSURER
Accounting Period: ______________
Calendar Year: _________________
Date Report Completed: __________
1. Initial Consideration (Article II, Paragraph 1)*
a. Initial Consideration ________
b. Amount of Initial Consideration withheld by
Ceding Company ________
Portion of Initial Consideration paid in cash
= a - b ________
2. Reinsurance Premiums (Article II, Paragraph 2)
a. Reinsurance Premiums
A. Venture Variable Annuity 3 Reinsurance
Premiums
--------
B. Venture Vision Reinsurance Premiums -
first policy year
--------
C. Venture Vision Reinsurance Premiums -
renewal
--------
Total Reinsurance Premiums = A + B + C
---------
b. Amount of Reinsurance Premiums withheld by
Ceding Company
---------
Portion of Reinsurance Premiums paid in cash
= a - b ________
--------
3. Benefit Payments (Article IV)
a. Death Benefits --------
b. Cash Surrender Values --------
c. Annuity Benefits --------
Benefit Payments = a + b + c
--------
4. Initial Reserve Adjustment (Article V, Paragraph 1)*
--------
5. Modified Coinsurance Reserve Adjustment (Article V, Paragraph 2)
a. Modified Coinsurance Reserve end of
preceding Accounting Period --------
b. Modified Coinsurance Reserve end of
current Accounting Period --------
c. Equals b - a --------
d. Modified Coinsurance Reserve Investment
Credit (Schedule C) --------
Modified Coinsurance Reserve Adjustment = c - d
--------
- 29 -
<PAGE> 80
6. Reinsurance Gain = 2a - 3 - 5 - 14 - 15
(If negative, see Article VII) ________
<PAGE> 81
EXHIBIT A continued
7. Reinsurance Loss = 2a - 3 - 5 - 14 - 15
(If positive, see Article VII) ________
8. Loss Carryforward [Article VIII, Paragraph 1, item (i)] ________
9. Initial Expense and Risk Charge (Article VI, Paragraph 1)* ________
10. Expense and Risk Charge (Article VI, Paragraph 2) ________
11. Ceding Commission (Article III, Paragraph 1) ________
12. Unamortized Ceding Commission (Article III, Paragraph 2) ________
13. Unamortized Ceding Commission Adjustment
(Article III, Paragraph 3) ________
14. Allowances for Commissions and Expenses
(Article III, Paragraph 7) ________
15. Allowances for Death Benefit Guarantee
(Article III, Paragraph 8) ________
16. Experience Refund = 6 + 7 - 8 - 10 - 13 - 19 - 20
(If negative, see Article IX) ________
17. Funds Withheld payment [Article II, Paragraph 3, item (ii)] ________
18. Funds Withheld = Prior 18 + 1b + 2b - 17
(Article II, Paragraph 3) ________
19. Interest Expense Charge (Article II, Paragraph 4) ________
20. Interest on the Unamortized Ceding Commission
(Article III, Paragraph 9) ________
21. Cash Settlement =
1 + 2 - 3 - 4 - 5 + 9 - 11 - 14 - 15 - 16 + 17 ========
*Initial Accounting Period, only.
Supplemental Information
<TABLE>
<CAPTION>
Venture
Total Variable Venture
Number Annuity 3 Vision Total
of Account Account Account Loss
Annuities Value Value Value Carryforward
--------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Beginning of Period
--------- --------- ------- ------- ------------
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
+ Additions
--------- --------- ------- ------- ------------
- - Terminations
--------- --------- ------- ------- ------------
End of Period
========= ========= ======= ======= ============
</TABLE>
<PAGE> 83
EXHIBIT A continued
<TABLE>
<CAPTION>
Venture Venture
Variable Vision
Annuity 3 Number
Number of of
Annuities Annuities
--------- ---------
<S> <C> <C>
Beginning of Period
--------- ---------
+ Additions
--------- ---------
- - Terminations
--------- ---------
End of Period
========= =========
</TABLE>
Termination Rate (Article III, Paragraph 5)
a. Total number of annuities reinsured hereunder as of
date current Accounting Period ends ________
b. Total number of annuities reinsured hereunder as of
the date one year prior to the date the current
Accounting Period ends ________
c. Termination Rate 1 - (a / b) ========
Investment Credit Accumulation Rate (Article III, Paragraph 6)
a. Modified Coinsurance Reserve Investment Credit
Current Accounting Period ________
First most recent Accounting Period ________
Second most recent Accounting Period ________
Third most recent Accounting Period ________ ________
b. Account value as of date one year prior to date
current Accounting Period ends ________
c. Account value as of date current Accounting Period ends ________
d. Investment Credit Accumulation Rate
a / [.5 x (b + c)] ========
Allowances for Commissions and Expenses (Article III, Paragraph 7)
a. $7.50 x quota share reinsured hereunder x number of annuities
reinsured hereunder and inforce at end of current Accounting
Period _________
b. .0125 x portion of account value of annuities reinsured
<PAGE> 84
hereunder at end of current Accounting Period _________
<PAGE> 85
EXHIBIT A continued
c. Trailer Commission x portion of account value of Venture
Variable Annuity 3 annuities reinsured hereunder and inforce
at end of current Accounting Period _________
d. ___% x Reinsurance Premiums with respect to Venture Variable
Annuity 3 annuities reinsured hereunder _________
e. .25% x portion of account value, attributable to purchase
payments received by Ceding Company thirteen months or more
prior to their trailer commission dates, of Venture Vision
annuities reinsured hereunder and inforce at end of current
Accounting Period _________
f. ___% x renewal Reinsurance Premiums with respect to Venture
Vision annuities reinsured hereunder _________
g. Allowances for Commissions and Expenses =
a + b + c + d + e + f =========
<PAGE> 86
AMENDMENT TWO
ATTACHED TO AND MADE A PART OF THE
REINSURANCE AGREEMENT NUMBER 1293-104
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
"CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
"REINSURER"
<PAGE> 87
The Ceding Company and the Reinsurer agree to amend this Reinsurance Agreement
as follows:
I. SCHEDULE A, ANNUITIES AND RISKS REINSURED, is replaced in its entirety by
the following:
Annuities and Risks Reinsured. The amount of reinsurance under this
agreement will be a quota share of the Ceding Company's net liability
on those variable annuities issued by the Ceding Company and described
below:
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 - 1994 95% VEN 10
Venture Vision 1994 95% VISION.001
"Net liability," as used in this Agreement, means the Ceding Company's
liability on annuities reinsured hereunder.
II. The following is added to SCHEDULE D, CEDING COMPANY DATA:
- Letter dated September 14, 1994 from Larry Seller of the Ceding
Company to Jeffrey Stevenson of the Reinsurer containing the Venture
Vision 25 policy form and a chart showing a comparison of Vision 25
and Vision 5
-1-
<PAGE> 88
In witness of the above, this Amendment Two is executed in duplicate on the date
indicated below, with an Effective Date of January 1, 1994.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Ceding Company")
By: James D. Gallagher By: John G. Vrysen
----------------------------- --------------------------------
Title: V.P., Secretary
& General Counsel Title: V.P. & Actuary
----------------------------- --------------------------------
Date: 10/10/94 Date: 10/10/94
----------------------------- --------------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
----------------------------- --------------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
----------------------------- --------------------------------
Date: 10/5/94 Date: 10/5/94
----------------------------- --------------------------------
-2-
<PAGE> 89
AMENDMENT THREE
ATTACHED TO AND MADE A PART OF THE
REINSURANCE AGREEMENT NUMBER 1293-104
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
"CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
"REINSURER"
<PAGE> 90
The Ceding Company and the Reinsurer agree to amend this Reinsurance Agreement
as follows:
I. ARTICLE II, INITIAL CONSIDERATION AND REINSURANCE PREMIUMS, Paragraphs 1, 3
and 4, are replaced in their entirety by the following:
1. Initial Consideration. On the Effective Date of this Agreement, the
Ceding Company will pay the Reinsurer an Initial Consideration equal
to 100 percent of the Modified Coinsurance Reserve, as defined in
Article V, Paragraph 3, calculated as of the Effective Date of this
Agreement with respect to the annuities assumed as of such date and
described in Schedule A. Simultaneously with the payment of the
Initial Consideration, the Ceding Company will withhold on behalf of
the Reinsurer 3.2 percent of the Initial Consideration, calculated as
of the Effective Date of this Agreement, in accordance with Paragraph
3 below, but not to exceed $15 million. On December 31, 1994, the
Ceding Company will pay the Reinsurer a Supplemental Consideration
equal to 100 percent of the Modified Coinsurance Reserve, as defined
in Article V, Paragraph 3, calculated as of December 31, 1994 with
respect to the annuities assumed as of December 31, 1994 and described
in Schedule A.
3. Funds Withheld. The Ceding Company and the Reinsurer have entered into
the "Accounts Receivable Agreement" attached to this Agreement as
Exhibit A. Pursuant to the terms of the Accounts Receivable Agreement,
the Ceding Company will withhold on behalf of the Reinsurer the
amounts described in Paragraphs 1 and 2
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above. The amount withheld by the Ceding Company will be credited to
the Reinsurer and will be considered as an amount held on behalf of
the Reinsurer. The Reinsurer will consider such amount as a receivable
and the Ceding Company will consider such amount as a payable. Such
amount withheld will be subject to repayment in accordance with the
terms of the Accounts Receivable Agreement. The Funds Withheld at the
end of each Accounting Period will be equal to (i) plus (ii) minus
(iii), where:
(i) equals the Funds Withheld at the end of the preceding
Accounting Period;
(ii) for the Accounting Period ending March 31, 1994 through
September 30, 1994 only, equals the Funds Withheld Rate, as
described in Schedule E, Paragraph 1, times the Reinsurance
Premiums, determined in accordance with Paragraph 2 above,
but not to exceed $6 million for the current calendar year;
and
(iii)equals any payment by the Ceding Company to the Reinsurer
of any amount withheld, as described in items (i) and (ii)
above, during the Accounting Period in accordance with the
Accounts Receivable Agreement.
With respect, however, to the Accounting Period during which the Effective
Date of this Agreement occurs, the reference in (i) above to "the Funds
Withheld at the end of the preceding Accounting Period" means 3.2 percent
of the Initial Consideration, determined in accordance with Paragraph 1
above, but not to exceed $15 million.
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In no event will the Funds Withheld at the end of any Accounting Period
exceed 50 percent of the Ceding Company's total statutory capital and
surplus as of the end of the preceding calendar year.
4. Interest Expense Charge. The Ceding Company will pay the Reinsurer an
Interest Expense Charge at the end of each Accounting Period equal to [(i)
x (ii)] + [(iii) x (iv)] + [(v) x (vi)] + [(vii) x (viii)] + [(ix) x (x)],
where:
(i) equals any amounts withheld in accordance with Paragraph 1 above, as
of the end of the preceding Accounting Period and for which payment is
not yet due to the Reinsurer, as described in the Accounts Receivable
Agreement;
(ii) equals the Interest Expense Rate, as described in Paragraph 5 below;
(iii)equals, for the Accounting Periods beginning April 1, 1994 and
thereafter, any amounts withheld, in accordance with Paragraph 2
above, during the first Accounting Period in the 1994 calendar year
and for which payment is not yet due to the Reinsurer, as described in
the Accounts Receivable Agreement;
(iv) equals,
- for the Accounting Periods beginning April 1, 1994 through
December 31, 1994, 43.75 basis points, plus [(a) / (b)] x (c),
where:
(a) equals the funds transfer pricing rate as determined by ITT
Financial Corporation's
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<PAGE> 93
Treasury Department for ITT Financial Corporation debt for
the number of days remaining in the current calendar year
measured from the quarterly settlement date, as described in
Article X, for the first Accounting Period in the 1994
calendar year;
(b) equals the number of days remaining in the current calendar
year measured from the quarterly settlement date, as
described in Article X, for the first Accounting Period in
the 1994 calendar year; and
(c) equals,
- for the Accounting Period beginning April 1, 1994, the
number of days remaining in the Accounting Period
measured from the quarterly settlement date, as
described in Article X, for the first Accounting Period
in the 1994 calendar year; and
- for the Accounting Periods beginning July 1, 1994 and
October 1, 1994, the number of days in the current
Accounting Period;
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<PAGE> 94
- for the Accounting Periods beginning January 1, 1995
and thereafter, the Loss Carryforward Rate, described
in Article VIII, Paragraph 2;
(v) equals, for the Accounting Periods beginning July 1, 1994
and thereafter, any amounts withheld, in accordance with
Paragraph 2 above, during the second Accounting Period in
the 1994 calendar year and for which payment is not yet due
to the Reinsurer, as described in the Accounts Receivable
Agreement;
(vi) equals,
- for the Accounting Periods beginning July 1, 1994 and
October 1, 1994, 43.75 basis points, plus [(a) / (b)] x
(c), where:
(a) equals the funds transfer pricing rate as
determined by ITT Financial Corporation's Treasury
Department for ITT Financial Corporation debt for
the number of days remaining in the current
calendar year measured from the quarterly
settlement date, as described in Article X, for
the second Accounting Period in the 1994 calendar
year;
(b) equals the number of days remaining in the current
calendar year measured from the quarterly
settlement date, as described in
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<PAGE> 95
Article X, for the second Accounting Period in the 1994
calendar year; and
(c) equals,
- for the Accounting Period beginning July 1, 1994,
the number of days remaining in the Accounting
Period measured from the quarterly settlement
date, as described in Article X, for the second
Accounting Period in the 1994 calendar year; and
- for the Accounting Periods beginning October 1,
1994, the number of days in the current Accounting
Period; (vii) equals, for the Accounting Periods
beginning October 1, 1994 and thereafter, any
amounts withheld, in accordance with Paragraph 2
above, during the third Accounting Period in the
1994 calendar year and for which payment is not
yet due to the Reinsurer, as described in the
Accounts Receivable Agreement;
(viii) equals,
- for the Accounting Periods beginning October 1,
1994, 43.75 basis points, plus [(a) / (b)] x (c),
where:
(a) equals the funds transfer pricing rate as
determined by ITT Financial Corporation's
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<PAGE> 96
Treasury Department for ITT Financial Corporation
debt for the number of days remaining in the
current calendar year measured from the quarterly
settlement date, as described in Article X, for
the third Accounting Period in the 1994 calendar
year;
(b) equals the number of days remaining in the current
calendar year measured from the quarterly
settlement date, as described in Article X, for
the third Accounting Period in the 1994 calendar
year; and
(c) equals the number of days remaining in the
Accounting Period measured from the quarterly
settlement date, as described in Article X, for
the third Accounting Period in the 1994 calendar
year; and
- for the Accounting Periods beginning January 1, 1995
and thereafter, the Loss Carryforward Rate, as
described in Article VIII, Paragraph 2;
(ix) equals any amounts withheld in accordance with items (i) and
(ii) of Paragraph 3 above, which have not been paid by the
Ceding Company to the Reinsurer at the end of the preceding
Accounting Period and for which payment is due to the
Reinsurer, as described in the Accounts Receivable
Agreement; and
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<PAGE> 97
(x) equals the Loss Carryforward Rate, as described in Article
VIII, Paragraph 2.
II. ARTICLE III, COMMISSIONS AND ALLOWANCES, Paragraphs 1, 2, 4, 5 and 6, are
replaced in their entirety by the following:
1. Ceding Commission. Simultaneously with the payment of the Initial
Consideration, the Reinsurer will pay a Ceding Commission to the
Ceding Company equal to 2.2 percent times the Initial Consideration,
determined in accordance with Article II, Paragraph 1, but not to
exceed $10 million. Simultaneously with the payment of the
Supplemental Consideration, the Reinsurer will pay a Ceding Commission
to the Ceding Company equal to 3.58 percent times the Supplemental
Consideration, determined in accordance with Article II, Paragraph 1,
but not to exceed $5.2 million. For Accounting Periods beginning
January 1, 1994 and thereafter, the Reinsurer will pay a Ceding
Commission to the Ceding Company equal to the Ceding Commission Rate,
as described in Schedule E, Paragraph 2, times the Reinsurance
Premiums, determined in accordance with Article II, Paragraph 2, but
not to exceed $4 million for the current calendar year.
2. Unamortized Ceding Commission. The Unamortized Ceding Commission at
the end of each Accounting Period equals (i) plus (ii) plus (iii)
minus (iv), where:
(i) equals the Unamortized Ceding Commission at the end of the
preceding Accounting Period;
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<PAGE> 98
(ii) equals the Ceding Commission Rate, as described in Schedule
E, Paragraph 2, times the Reinsurance Premiums, determined
in accordance with Article II, Paragraph 2, but not to
exceed $4 million for the current calendar year;
(iii) for the Accounting Period ending December 31, 1994 only,
equals 3.58 percent times the Supplemental Consideration,
determined in accordance with Article II, Paragraph 1, but
not to exceed $5.2 million; and
(iv) equals the Unamortized Ceding Commission Adjustment,
determined in accordance with Paragraph 3 below.
With respect, however, to the Accounting Period during which the
Effective Date of this Agreement occurs, the reference in (i) to the
"end of the preceding Accounting Period" refers to the Effective Date
of this Agreement immediately after the Ceding Commission, as
described in Paragraph 1 above, has been paid. The Unamortized Ceding
Commission may never be less than zero. In the Accounting Period
during which (i) plus (ii) plus (iii) minus (iv) as described above,
first becomes zero or negative, then, for that and all subsequent
Accounting Periods, the Unamortized Ceding Commission will be set
equal to zero.
4. Maximum Unamortized Ceding Commission Adjustment. The Maximum
Unamortized Ceding Commission Adjustment for each Accounting Period is
as follows:
Maximum Unamortized
Ceding Commission Maximum Unamortized
Adjustment Ceding Commission
For Accounting (For Amounts Paid Adjustment (For
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<PAGE> 99
Periods Ending During Initial Amounts Paid During
During Accounting Period) 1994 Calendar Year)
-------------- -------------------- -------------------
1994 $500,000 $0
1995 through $500,000 5 percent of the
1998 cumulative Ceding
Commission paid by the
Reinsurer to the Ceding
Company during the 1994
calendar year in
accordance with Article
III, Paragraph 1
1999 $ 0 5 percent of the
cumulative Ceding
Commission paid by the
Reinsurer to the Ceding
Company during the 1994
calendar year in
accordance with Article
III, Paragraph 1
2000 and thereafter $ 0 $0
However, if in any Accounting Period (a) the Termination Rate,
as described in Paragraph 5 below, is greater than 0.30,
and/or (b) the Investment Credit Accumulation Rate, as
described in Paragraph 6 below, is less than zero, then the
Reinsurer may elect to define the Maximum Withheld Ceding
Commission Adjustment as any amount up to $14 million for the
first Accounting Period in the current calendar year and for
all Accounting Periods thereafter.
5. Termination Rate. For Accounting Periods beginning January
1, 1995 and thereafter, the Termination Rate in any
Accounting Period equals 1 - [(i) / (ii)], where:
(i) equals the total number of annuities reinsured
hereunder and described in Schedule A, as of the date
the current Accounting Period ends; and
(ii) equals the total number of annuities reinsured
hereunder and described in Schedule A, as of the date
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<PAGE> 100
one year prior to the date the current Accounting
Period ends.
6. Investment Credit Accumulation Rate. For Accounting Periods beginning
January 1, 1996 and thereafter, the Investment Credit
Accumulation Rate in any Accounting Period equals
(i) / [.5 x {(ii) + (iii)}], where:
(i) equals the Modified Coinsurance Reserve Investment
Credit, as described in Schedule C, for the current
Accounting Period and the three Accounting Periods
immediately preceding the current Accounting Period;
(ii) equals the portion of the account value for the
annuities reinsured hereunder which corresponds to the
portion of the annuities reinsured hereunder as of the
date one year prior to the date the current Accounting
Period ends; and
(iii) equals the portion of the account value for the
annuities reinsured hereunder which corresponds to the
portion of the annuities reinsured hereunder as of the
date the current Accounting Period ends.
III. ARTICLE VI, EXPENSE AND RISK CHARGES, Paragraph 2, is replaced in its
entirety by the following:
2. Expense and Risk Charge. The Expense and Risk Charge for each
Accounting Period subsequent to the initial Accounting Period, payable
to the Reinsurer by the Ceding Company, will be equal to (i) plus (ii)
plus (iii), where:
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(i) equals the Expense and Risk Charge Rate, as defined below, times
the Loss Carryforward, determined in accordance with Article
VIII, Paragraph 1, item (i), at the end of the preceding
Accounting Period, with accrued interest thereon;
(ii) equals the Expense and Risk Charge Rate, as defined below, times
the Expense and Risk Charge Base, as defined below; and
(iii)for the Accounting Period ending December 31, 1994 only, equals
1.0 percent times 3.2 percent of the Supplemental Consideration,
determined in accordance with Article II, Paragraph 1, but not to
exceed 1.65 percent times $5.2 million.
The Expense and Risk Charge Rate for each Accounting Period is defined as
follows:
For Accounting Expense and
Periods Ending During Risk Charge Rate
--------------------- ----------------
1994 through 1999 .4125%
2000 and thereafter .4142%
The Expense and Risk Charge Base for each Accounting Period is defined as
follows:
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For Accounting Expense and
Periods Ending During Risk Charge Base
--------------------- ----------------
1994 through 1999 greater of either (a) the Unamortized Ceding Commission,
determined in accordance with Article III,
Paragraph 2, at the end of the preceding Accounting
Period, plus the Ceding Commission Rate, as
described in Article III, Paragraph 1, times the
Reinsurance Premiums, determined in accordance with
Article II, Paragraph 2, but not to exceed $4
million for the current calendar year, minus the
Maximum Unamortized Ceding Commission Adjustment,
determined in accordance with Article III,
Paragraph 4, or (b) quantity (iv) as defined below,
but never less than zero
2000 and thereafter (iv) below, but never less than zero, where:
(iv) equals (a) plus (b) plus (c) minus (d) minus (e) minus (f), where:
(a) equals the Unamortized Ceding Commission, determined in
accordance with Article III, Paragraph 2, at the end of the
preceding Accounting Period;
(b) equals the Ceding Commission Rate, as described in Article III,
Paragraph 1, times the Reinsurance Premiums, determined in
accordance with Article II, Paragraph 2, but not to exceed $4
million for the current calendar year;
(c) equals the absolute value of any Reinsurance Loss, determined in
accordance with Article VII;
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<PAGE> 103
(d) equals any Reinsurance Gain, determined in accordance with
Article VII;
(e) equals the Interest Expense Charge, determined in accordance with
Article II, Paragraph 4; and
(f) equals the Interest on the Unamortized Ceding Commission,
determined in accordance with Article III, Paragraph 9.
In no event will the Expense and Risk Charge payable be less than $20,000
for any Accounting Period after December 31, 1999.
IV. ARTICLE VII, REINSURANCE GAINS AND LOSSES, is replaced in its entirety by
the following:
Formula. A Reinsurance Gain or Reinsurance Loss will be calculated for each
Accounting Period and will be equal to the excess of (i) over (ii), where:
(i) equals the sum of:
(a) Reinsurance Premiums, determined in accordance with Article II,
Paragraph 2, plus
(b) any Supplemental Consideration payable during the current
Accounting Period, determined in accordance with Article II,
Paragraph 1; and
(ii) equals the sum of:
(a) Benefit Payments, as described in Article IV, plus
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(b) the Modified Coinsurance Reserve Adjustment, determined in
accordance with Article V, Paragraph 2, plus
(c) Allowances for Commissions and Expenses, determined in accordance
with Article III, Paragraph 7, plus
(d) Allowances for Death Benefit Guarantee, determined in accordance
with Article III, Paragraph 8.
A Reinsurance Gain results if the excess of (i) over (ii) is positive. A
Reinsurance Loss results if the excess of (i) over (ii) is negative.
V. ARTICLE X, ACCOUNTING AND SETTLEMENTS, Paragraphs 2 and 4, are replaced in
their entirety by the following:
2. Quarterly Accounting Reports. Quarterly accounting reports in the form
of Schedule B will be submitted to the Reinsurer by the Ceding Company
for each Accounting Period not later than fifteen (15) days after the
end of each Accounting Period. Such reports will include information
on the amount of Initial Consideration, Supplemental Consideration,
Reinsurance Premiums, Ceding Commission, Allowances for Commissions
and Expenses, Allowances for Death Benefit Guarantee, Benefit
Payments, Reinsurance Gains and Losses, Experience Refund, Loss
Carryforward, Funds Withheld, Interest Expense Charge, Unamortized
Ceding Commission, Unamortized Ceding Commission Adjustment, Interest
on the
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<PAGE> 105
Unamortized Ceding Commission, Expense and Risk Charges and Modified
Coinsurance Reserve.
4. Quarterly Settlements.
A. Within fifteen (15) days after the end of each Accounting Period,
the Ceding Company will pay the Reinsurer the sum of: (i) the
Reinsurance Premiums paid by the Ceding Company to the Reinsurer
during the current Accounting Period, determined in accordance
with Article II, Paragraph 2, plus (ii) any Modified Coinsurance
Reserve Adjustment payable to the Reinsurer, determined in
accordance with Article V, Paragraph 2, plus (iii) any Funds
Withheld payable to the Reinsurer during the current Accounting
Period in accordance with the terms of the Accounts Receivable
Agreement, determined in accordance with Article II, Paragraph 3,
item (iv), plus (iv) any Supplemental Consideration payable
during the current Accounting Period, determined in accordance
with Article II, Paragraph 1.
B. Simultaneously, the Reinsurer will pay the Ceding Company the sum
of: (i) the amount of Benefit Payments, as described in Article
IV, plus (ii) Allowances for Commissions and Expenses, determined
in accordance with Article III, Paragraph 7, plus (iii)
Allowances for Death Benefit Guarantee, determined in accordance
with Article III, Paragraph 8, plus (iv) any Modified Coinsurance
Reserve Adjustment payable to the Ceding Company, determined in
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accordance with Article V, Paragraph 2, plus (v) any Experience
Refund, determined in accordance with Article IX.
VI. SCHEDULE A, ANNUITIES AND RISKS REINSURED, is replaced in its entirety by
the following:
Annuities and Risks Reinsured. Beginning on the Effective Date of this
Agreement, the Reinsurer reinsures a quota share of the Ceding
Company's net liability on those variable annuities issued by the
Ceding Company and described below:
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 - 1994 95% VEN 10
Venture Vision 1994 95% VISION.001
Beginning on December 31, 1994, under this Agreement the Reinsurer also
reinsures an additional 31 percent quota share of the Ceding Company's net
liability on those variable annuities issued by the Ceding Company and
described below:
Contract and
Plan Issue Years Certificate Numbers
---- ----------- -------------------
Venture Variable
Annuity 3 1987 - 1993 203-VA
"Net liability," as used in this Agreement, means the Ceding Company's
liability on annuities reinsured hereunder.
VII. SCHEDULE B, QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS, is replaced in
its entirety by Exhibit A.
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VIII The following is added to SCHEDULE D, CEDING COMPANY DATA:
- Quarterly settlement reports received under this Agreement since
inception
- The Modified Coinsurance Reserve equals the statutory reserve with
respect to the annuities reinsured hereunder, excluding mortality
reserves
In witness of the above, this Amendment Three is executed in duplicate on the
dates indicated below, with an Effective Date of December 31, 1994.
NORTH AMERICAN SECURITY LIFE
ATTEST: INSURANCE COMPANY ("Ceding Company")
By: James D. Gallagher By: John G. Vrysen
-------------------------------- -----------------------------------
Title: V.P., Secretary
& General Counsel Title: V.P. & Actuary
------------------------------ --------------------------------
Date: 12/30/94 Date: 12/30/94
------------------------------ --------------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
-------------------------------- -----------------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
------------------------------ --------------------------------
Date: 12/28/94 Date: 12/28/94
------------------------------ --------------------------------
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EXHIBIT A
SCHEDULE B
QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS
FROM CEDING COMPANY TO REINSURER
Accounting Period:
-------------
Calendar Year:
-----------------
Date Report Completed:
---------
1. Initial Consideration (Article II, Paragraph 1)*
a. Initial Consideration
--------
b. Amount of Initial Consideration withheld by
Ceding Company
--------
Portion of Initial Consideration paid in cash
= a - b
---------
2. Supplemental Consideration (Article II, Paragraph 1)
---------
3. Reinsurance Premiums (Article II, Paragraph 2)
a. Reinsurance Premiums
A. Venture Variable Annuity 3 Reinsurance
Premiums
--------
B. Venture Vision Reinsurance Premiums -
first policy year
--------
C. Venture Vision Reinsurance Premiums -
renewal
--------
Total Reinsurance Premiums = A + B + C
---------
b. Amount of Reinsurance Premiums withheld by
Ceding Company
--------
Portion of Reinsurance Premiums paid in cash
= a - b
---------
4. Benefit Payments (Article IV)
a. Death Benefits
--------
b. Cash Surrender Values
--------
c. Annuity Benefits
--------
Benefit Payments = a + b + c
---------
5. Initial Reserve Adjustment (Article V, Paragraph 1)*
---------
6. Modified Coinsurance Reserve Adjustment (Article V, Paragraph 2)
a. Modified Coinsurance Reserve end of
preceding Accounting Period
--------
b. Modified Coinsurance Reserve end of
current Accounting Period
--------
c. Equals b - a
--------
d. Modified Coinsurance Reserve Investment
--------
<PAGE> 109
Credit (Schedule C)
--------
Modified Coinsurance Reserve Adjustment = c - d
---------
<PAGE> 110
EXHIBIT A continued
7. Reinsurance Gain = 2a - 3a - 4 - 6 - 15 - 16
(If negative, see Article VII)
---------
8. Reinsurance Loss = 2a - 3a - 4 - 6 - 15 - 16
(If positive, see Article VII)
---------
9. Loss Carryforward [Article VIII, Paragraph 1, item (i)]
---------
10. Initial Expense and Risk Charge (Article VI, Paragraph 1)*
---------
11. Expense and Risk Charge (Article VI, Paragraph 2)
---------
12. Ceding Commission (Article III, Paragraph 1)
---------
13. Unamortized Ceding Commission (Article III, Paragraph 2)
---------
14. Unamortized Ceding Commission Adjustment
(Article III, Paragraph 3)
---------
15. Allowances for Commissions and Expenses
(Article III, Paragraph 7)
---------
16. Allowances for Death Benefit Guarantee
(Article III, Paragraph 8)
---------
17. Experience Refund = 7 + 8 - 9 - 11 - 14 - 20 - 21
(If negative, see Article IX)
---------
18. Funds Withheld payment [Article II, Paragraph 3, item (ii)]
---------
19. Funds Withheld = Prior 19 + 1b + 2b - 18
(Article II, Paragraph 3)
---------
20. Interest Expense Charge (Article II, Paragraph 4)
---------
21. Interest on the Unamortized Ceding Commission
(Article III, Paragraph 9)
---------
22. Cash Settlement =
1 + 2 + 3 - 4 - 5 - 6 + 10 - 12 - 15 - 16 - 17 + 18
---------
*Initial Accounting Period, only.
<PAGE> 111
EXHIBIT A continued
Supplemental Information
Venture
Total Variable Venture
Number Annuity 3 Vision Total
of Account Account Account Loss
Annuities Value Value Value Carryforward
--------- ----- ----- ----- ------------
Beginning of Period
--------- ----- ----- ----- ------------
+ Additions
--------- ----- ----- ----- ------------
- - Terminations
--------- ----- ----- ----- ------------
End of Period
--------- ----- ----- ----- ------------
Venture Venture
Variable Vision
Annuity 3 Number
Number of of
Annuities Annuities
--------- ---------
Beginning of Period
--------- ---------
+ Additions
--------- ---------
- - Terminations
--------- ---------
End of Period
--------- ---------
Termination Rate (Article III, Paragraph 5)
a. Total number of annuities reinsured hereunder as of
date current Accounting Period ends
---------
b. Total number of annuities reinsured hereunder as of
the date one year prior to the date the current
Accounting Period ends
---------
c. Termination Rate 1 - (a / b)
---------
Investment Credit Accumulation Rate (Article III, Paragraph 6)
a. Modified Coinsurance Reserve Investment Credit
Current Accounting Period
---------
First most recent Accounting Period
---------
Second most recent Accounting Period
---------
Third most recent Accounting Period
---------
b. Account value as of date one year prior to date
current Accounting Period ends
---------
c. Account value as of date current Accounting Period ends
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---------
d. Investment Credit Accumulation Rate
a / [.5 x (b + c)]
---------
<PAGE> 113
EXHIBIT A continued
Allowances for Commissions and Expenses (Article III, Paragraph 7)
a. $7.50 x quota share reinsured hereunder x number of annuities
reinsured hereunder and inforce at end of current Accounting
Period
---------
b. .0125 x portion of account value of annuities reinsured
hereunder at end of current Accounting Period
---------
c. Trailer Commission x portion of account value of Venture
Variable Annuity 3 annuities reinsured hereunder and inforce
at end of current Accounting Period
---------
d. ___% x Reinsurance Premiums with respect to Venture Variable
Annuity 3 annuities reinsured hereunder
---------
e. .25% x portion of account value, attributable to purchase payments
received by Ceding Company thirteen months or more prior to their trailer
commission dates, of Venture Vision annuities reinsured hereunder and
inforce at end of current Accounting Period
---------
f. ___% x renewal Reinsurance Premiums with respect to Venture
Vision annuities reinsured hereunder
---------
g. Allowances for Commissions and Expenses =
a + b + c + d + e + f
---------
<PAGE> 114
AMENDMENT FOUR
ATTACHED TO AND MADE A PART OF THE
REINSURANCE AGREEMENT NUMBER 1293-104
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
"CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
"REINSURER"
<PAGE> 115
The Ceding Company and the Reinsurer agree to amend this Reinsurance Agreement
as follows:
I. ARTICLE III, COMMISSIONS AND ALLOWANCES, Paragraphs 1, 2 and 4, are
replaced in their entirety by the following:
1. Ceding Commission. Simultaneously with the payment of the
Initial Consideration, the Reinsurer will pay a Ceding
Commission to the Ceding Company equal to 2.2 percent times
the Initial Consideration, determined in accordance with
Article II, Paragraph 1, but not to exceed $10 million.
Simultaneously with the payment of the Supplemental
Consideration, the Reinsurer will pay a Ceding Commission to
the Ceding Company equal to 3.58 percent times the
Supplemental Consideration, determined in accordance with
Article II, Paragraph 1, but not to exceed $5.2 million. For
Accounting Periods beginning January 1, 1994 and thereafter,
the Reinsurer will pay a Ceding Commission to the Ceding
Company equal to the Ceding Commission Rate, as described in
Schedule E, Paragraph 2, times the Reinsurance Premiums,
determined in accordance with Article II, Paragraph 2, but not
to exceed $1 million for the 1995 calendar year.
2. Unamortized Ceding Commission. The Unamortized Ceding
Commission at the end of each Accounting Period equals (i)
plus (ii) plus (iii) minus (iv), where:
(i) equals the Unamortized Ceding Commission at
the end of the preceding Accounting Period;
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<PAGE> 116
(ii) equals the Ceding Commission Rate, as
described in Schedule E, Paragraph 2, times
the Reinsurance Premiums, determined in
accordance with Article II, Paragraph 2, but
not to exceed $1 million for the 1995
calendar year;
(iii) for the Accounting Period ending December 31,
1994 only, equals 3.58 percent times the
Supplemental Consideration, determined in
accordance with Article II, Paragraph 1, but
not to exceed $5.2 million; and
(iv) equals the Unamortized Ceding Commission
Adjustment, determined in accordance with
Paragraph 3 below.
With respect, however, to the Accounting Period during which
the Effective Date of this Agreement occurs, the reference in
(i) to the "end of the preceding Accounting Period" refers to
the Effective Date of this Agreement immediately after the
Ceding Commission, as described in Paragraph 1 above, has been
paid. The Unamortized Ceding Commission may never be less
than zero. In the Accounting Period during which (i) plus
(ii) plus (iii) minus (iv) as described above, first becomes
zero or negative, then, for that and all subsequent Accounting
Periods, the Unamortized Ceding Commission will be set equal
to zero.
4. Maximum Unamortized Ceding Commission Adjustment. The Maximum
Unamortized Ceding Commission Adjustment for each Accounting
Period is as follows:
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<PAGE> 117
<TABLE>
<CAPTION>
Maximum Unamortized
Ceding Commission Maximum Unamortized
Adjustment Ceding Commission
For Accounting (For Amounts Paid Adjustment (For Amounts
Periods Ending During Initial Paid After Initial
During Accounting Period) Accounting Period)
-------------- --------------------------- ---------------------------------
<S> <C> <C>
1994 $500,000 $0
1995 $500,000 5 percent of the cumalative Ceding Commission paid by
the Reinsurer to the Ceding Company during the 1994
calendar year in accordance with Article III,
Paragraph 1
1996 through 1998 $500,000 5 percent of the cuma- lative Ceding Commission paid
by the Reinsurer to the Ceding Company during the
1994 and 1995 calendar years in accordance with
Article III, Paragraph 1
1999 $ 0 5 percent of the cuma- lative Ceding Commission paid
by the Reinsurer to the Ceding Company during the
1994 and 1995 calendar years in accordance with
Article III, Paragraph 1
2000 $ 0 5 percent of the cuma- lative Ceding Commission
paid by the Reinsurer to the Ceding Company during
the 1995 calendar year in accordance with Article
III, Paragraph 1
2001 and thereafter $ 0 $0
</TABLE>
However, if in any Accounting Period (a) the Termination Rate,
as described in Paragraph 5 below, is greater than 0.30,
and/or (b) the Investment Credit Accumulation Rate, as
described in Paragraph 6 below, is less than zero, then the
Reinsurer may elect to define
- 3 -
<PAGE> 118
the Maximum Withheld Ceding Commission Adjustment as any
amount up to $14 million for the first Accounting Period in
the current calendar year and for all Accounting Periods
thereafter.
II. Effective January 1, 1995, ARTICLE III, COMMISSIONS AND ALLOWANCES,
Paragraph 9, is replaced in its entirety by the following:
9. Interest on the Unamortized Ceding Commission. The Ceding
Company will pay the Reinsurer Interest on the Unamortized
Ceding Commission at the end of each Accounting Period,
subsequent to the initial Accounting Period, equal to [(i) x
(ii)] + [(iii) x (iv)] + [(v) x (vi)] + [(vii) x (viii)] +
[(ix) x (x)], where:
(i) equals the portion of the Unamortized
Ceding Commission, determined in accordance
with Paragraph 2 above, paid by the
Reinsurer to the Ceding Company as Ceding
Commission during the initial Accounting
Period in accordance with Paragraph 1
above, calculated as of the end of the
preceding Accounting Period;
(ii) equals the Interest Expense Rate, as
described in Article II, Paragraph 5;
(iii) equals the portion of the Unamortized
Ceding Commission, determined in accordance
with Paragraph 2 above, paid by the
Reinsurer to the Ceding Company as Ceding
Commission, in accordance with Paragraph 1
above, for the 1994 calendar year:
- 4 -
<PAGE> 119
(iv) equals the Loss Carryforward Rate, as
described in Article VIII, Paragraph 2;
(v) equals, for the Accounting Periods
beginning July 1, 1995 and thereafter, the
portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above, for the
first and second Accounting Period in the
1995 calendar year; and
(vi) equals,
o for the Accounting Period beginning
July 1, 1995, [(a) / (b)] x (c),
where:
(a) equals the Loss Carryforward
Rate, as described in Article
VIII, Paragraph 2;
(b) equals the number of days in
the current Accounting Period;
and
(c) equals the number of days
remaining in the current
Accounting Period measured from
the quarterly settlement date,
as described in Article X, for
the second Accounting Period in
the 1995 calendar year; and
o for the Accounting Periods beginning
October 1, 1995 and thereafter,
equals the Loss Carryforward Rate,
as described in Article VIII,
Paragraph 2;
- 5 -
<PAGE> 120
(vii) equals, for the Accounting Periods
beginning October 1, 1995 and thereafter,
the portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above, for the
third Accounting Period in the 1995
calendar year;
(viii) equals,
o for the Accounting Period beginning
October 1, 1995, [(a) / (b)] x (c),
where:
(a) equals the Loss Carryforward
Rate, as described in Article
VIII, Paragraph 2;
(b) equals the number of days in
the current Accounting Period;
and
(c) equals the number of days
remaining in the current
Accounting Period measured from
the quarterly settlement date,
as described in Article X, for
the third Accounting Period in
the 1995 calendar year; and
o for the Accounting Periods beginning
January 1, 1996 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2;
- 6 -
<PAGE> 121
(ix) equals, for the Accounting Periods
beginning January 1, 1996 and thereafter,
the portion of the Unamortized Ceding
Commission, determined in accordance with
Paragraph 2 above, paid by the Reinsurer to
the Ceding Company as Ceding Commission, in
accordance with Paragraph 1 above, for the
fourth Accounting Period in the 1995
calendar year; and
(x) equals,
o for the Accounting Period beginning
January 1, 1996, [(a) / (b)] x (c),
where:
(a) equals the Loss Carryforward
Rate, as described in Article
VIII, Paragraph 2;
(b) equals the number of days in
the current Accounting Period;
and
(c) equals the number of days
remaining in the current
Accounting Period measured from
the quarterly settlement date,
as described in Article X, for
the fourth Accounting Period in
the 1995 calendar year; and
o for the Accounting Periods beginning
April 1, 1996 and thereafter, the
Loss Carryforward Rate, as described
in Article VIII, Paragraph 2.
- 7 -
<PAGE> 122
III. ARTICLE VI, EXPENSE AND RISK CHARGES, Paragraph 2, is replaced in its
entirety by the following:
2. Expense and Risk Charge. The Expense and Risk Charge for each
Accounting Period subsequent to the initial Accounting Period,
payable to the Reinsurer by the Ceding Company, will be equal
to (i) plus (ii) plus (iii), where:
(i) equals the Expense and Risk Charge Rate, as
defined below, times the Loss Carryforward,
determined in accordance with Article VIII,
Paragraph 1, item (i), at the end of the
preceding Accounting Period, with accrued
interest thereon;
(ii) equals the Expense and Risk Charge Rate, as
defined below, times the Expense and Risk
Charge Base, as defined below; and
(iii) for the Accounting Period ending December
31, 1994 only, equals 1.0 percent times 3.2
percent of the Supplemental Consideration,
determined in accordance with Article II,
Paragraph 1, but not to exceed 1.65 percent
times $5.2 million.
The Expense and Risk Charge Rate for each Accounting Period is
defined as follows:
<TABLE>
<CAPTION>
For Accounting Expense and
Periods Ending During Risk Charge Rate
--------------------- ----------------
<S> <C>
1994 through 2000 .4125%
2001 and thereafter .4142%
</TABLE>
The Expense and Risk Charge Base for each Accounting Period is
defined as follows:
- 8 -
<PAGE> 123
<TABLE>
<CAPTION>
For Accounting
Periods Ending During Expense and Risk Charge Base
--------------------- ----------------------------
<S> <C>
1994 through 2000 greater of either (a) the
Unamortized Ceding
Commission, determined in
accordance with Article III,
Paragraph 2, at the end of
the preceding Accounting
Period, plus the Ceding
Commission Rate, as described
in Article III, Paragraph 1,
times the Reinsurance
Premiums, determined in
accordance with Article II,
Paragraph 2, but not to
exceed $1 million for the
1995 calendar year, minus the
Maximum Unamortized Ceding
Commission Adjustment,
determined in accordance with
Article III, Paragraph 4, or
(b) quantity (iv) as defined
below, but never less than
zero
2001 and thereafter (iv) below, but never less
than zero, where:
</TABLE>
(iv) equals (a) plus (b) plus (c) minus (d)
minus (e) minus (f), where:
(a) equals the Unamortized Ceding
Commission, determined in accordance
with Article III, Paragraph 2, at
the end of the preceding Accounting
Period;
(b) equals the Ceding Commission Rate,
as described in Article III,
Paragraph 1, times the Reinsurance
Premiums, determined in accordance
with Article II, Paragraph 2, but
not to exceed $1 million for the
1995 calendar year;
(c) equals the absolute value of any
Reinsurance Loss, determined in
accordance with Article VII;
- 9 -
<PAGE> 124
(d) equals any Reinsurance Gain,
determined in accordance with Article
VII;
(e) equals the Interest Expense Charge,
determined in accordance with Article
II, Paragraph 4; and
(f) equals the Interest on the
Unamortized Ceding Commission,
determined in accordance with
Article III, Paragraph 9.
In no event will the Expense and Risk Charge payable be less
than $20,000 for any Accounting Period after December 31, 2000.
IV. Effective July 1, 1995, ARTICLE VIII, LOSS CARRYFORWARD, Paragraph 2,
is replaced in its entirety by the following:
2. Loss Carryforward Rate. The Loss Carryforward Rate at the end
of each Accounting Period will be equal to 51.25 basis points,
plus the quantity (i) divided by (ii), where:
(i) equals the H.15 annualized rate for three
month Commercial Paper as published by the
Federal Reserve as of the date the current
Accounting Period begins; and
(ii) equals four.
V. SCHEDULE A, ANNUITIES AND RISKS REINSURED, is replaced in its entirety
by the following:
Annuities and Risks Reinsured. Beginning on the Effective
Date of this Agreement, the Reinsurer reinsures a quota share
of the
- 10 -
<PAGE> 125
Ceding Company's net liability on those variable annuities
issued by the Ceding Company and described below:
<TABLE>
<CAPTION>
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
<S> <C> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 - 1995 95% VEN 10
Venture Vision 1994 - 1995 95% VISION.001
</TABLE>
Beginning on December 31, 1994, under this Agreement the
Reinsurer also reinsures an additional 31 percent quota share
of the Ceding Company's net liability on those variable
annuities issued by the Ceding Company and described below:
<TABLE>
<CAPTION>
Contract and
Plan Issue Years Certificate Numbers
---- ----------- -------------------
<S> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 203-VA
</TABLE>
"Net liability," as used in this Agreement, means the Ceding
Company's liability on annuities reinsured hereunder.
VI. The following is added to SCHEDULE D, CEDING COMPANY DATA:
o Quarterly settlement reports received under this Agreement
since inception
VII. SCHEDULE E, RATES, Paragraph 2, is replaced in its entirety by the
following:
2. Ceding Commission Rate. The Ceding Commission Rate for each
Accounting Period, subsequent to the initial Accounting
Period, is defined as follows:
<TABLE>
<CAPTION>
For Accounting Ceding
Periods Ending During Commission Rate
--------------------- ---------------
<S> <C>
</TABLE>
- 11 -
<PAGE> 126
<TABLE>
<S> <C>
1994 and 1995 1.67%
1996 and thereafter 0%
</TABLE>
- 12 -
<PAGE> 127
In witness of the above, this Amendment Four is executed in duplicate on the
dates indicated below, with an Effective Date of January 1, 1995.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Ceding Company")
By: James D. Gallagher By: John G. Vrysen
--------------------------- ---------------------------
Title: V.P., Secretary
& General Counsel Title: V.P. & Actuary
--------------------------- ---------------------------
Date: 6/29/95 Date: 6/29/95
--------------------------- ---------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
--------------------------- ---------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
--------------------------- ---------------------------
Date: 6/29/95 Date: 6/29/95
--------------------------- ---------------------------
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<PAGE> 128
AMENDMENT FIVE
ATTACHED TO AND MADE A PART OF THE
REINSURANCE AGREEMENT NUMBER 1293-104
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
"CEDING COMPANY"
AND
ITT LYNDON LIFE INSURANCE COMPANY
"REINSURER"
<PAGE> 129
The Ceding Company and the Reinsurer agree to amend this Reinsurance Agreement
as follows:
I. ARTICLE II, INITIAL CONSIDERATION AND REINSURANCE PREMIUMS, Paragraph
2, is replaced in its entirety by the following:
2. Reinsurance Premiums. At the end of each Accounting Period,
the Ceding Company will pay the Reinsurer Reinsurance Premiums
on all annuities in effect under this Agreement in an amount
equal to the sum of: (i) that portion of the gross premiums
collected by the Ceding Company during the Accounting Period
which corresponds to the portion of the annuities reinsured
hereunder, plus (ii) beginning May 1, 1995 and thereafter,
that portion of the statutory reserves on the quota share
reinsured hereunder which are associated with the portion of
the account values transferred from fixed accounts to variable
accounts with respect to the annuities reinsured hereunder.
The Reinsurer will treat any such Reinsurance Premiums as paid
premium for annual statement purposes, regardless of the mode
of collection by the Ceding Company on the annuities reinsured
hereunder.
The Ceding Company will withhold on behalf of the Reinsurer,
in accordance with Paragraph 3 below, an amount equal to (i)
times (ii), but not to exceed $6 million for the current
calendar year, where:
(i) equals the Funds Withheld Rate, as described
in Schedule E, Paragraph 1; and
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<PAGE> 130
(ii) equals Reinsurance Premiums, determined in
accordance with this Paragraph 2.
II. ARTICLE III, COMMISSIONS AND ALLOWANCES, Paragraphs 2 and 7, are
replaced in their entirety by the following:
2. Unamortized Ceding Commission. The Unamortized Ceding
Commission at the end of each Accounting Period equals (i)
plus (ii) plus (iii) minus (iv), where:
(i) equals the Unamortized Ceding Commission at
the end of the preceding Accounting Period;
(ii) equals the Ceding Commission Rate, as
described in Schedule E, Paragraph 2, times
the Reinsurance Premiums, determined in
accordance with Article II, Paragraph 2, but
not to exceed $1 million for the 1995
calendar year;
(iii) for the Accounting Period ending December 31,
1994 only, equals 3.58 percent times the
Supplemental Consideration, determined in
accordance with Article II, Paragraph 1, but
not to exceed $5.2 million; and
(iv) equals the Unamortized Ceding Commission
Adjustment, determined in accordance with
Paragraph 3 below.
With respect, however, to the Accounting Period during which
the Effective Date of this Agreement occurs, the reference in
(i) to the "end of the preceding Accounting Period" refers to
the Effective Date of this Agreement immediately after the
Ceding Commission, as described in Paragraph 1 above, has been
paid. The
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<PAGE> 131
Unamortized Ceding Commission may never be less than zero. In
the Accounting Period during which (i) plus (ii) plus (iii)
minus (iv) as described above, first becomes zero or negative,
then, for that and all subsequent Accounting Periods, the
Unamortized Ceding Commission will be set equal to zero.
Notwithstanding the above, any portion of the Unamortized
Ceding Commission which corresponds to the portion of the
annuities recaptured pursuant to the second sentence of
Paragraph 4, Article XI, will be paid by the Ceding Company to
the Reinsurer, in accordance with Article XII, Paragraph 3(d),
in an amount equal to [(v) / (vi)] x (vii), where:
(v) equals the portion of the account value, with
respect to the portion of the annuities
reinsured hereunder transferred from variable
accounts to fixed accounts and treated as
recaptured, in accordance with Article XI,
Paragraph 4;
(vi) equals the portion of the account value, at
the end of the preceding Accounting Period
with respect to the portion of the annuities
reinsured hereunder; and
(vii) equals the Unamortized Ceding Commission,
determined in accordance with item (i) above,
at the end of the preceding Accounting
Period.
7. Allowances for Commissions and Expenses. The Reinsurer will
pay the Ceding Company Allowances for Commissions and Expenses
for
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<PAGE> 132
each Accounting Period, equal to (i) plus (ii) plus (iii)
plus (iv) plus (v) plus (vi), where:
(i) equals (a) times (b) times (c), where:
(a) equals $7.50 times the quota share
percentage of the annuities
reinsured hereunder, as described in
Schedule A;
(b) equals the number of annuities
reinsured hereunder and described in
Schedule A, and inforce at the end
of the current Accounting Period;
and
(c) equals the total account value
invested in variable accounts with
respect to the annuities reinsured
hereunder, divided by the total
account value invested in fixed and
variable accounts with respect to
the annuities reinsured hereunder;
and
(ii) equals .0125 percent times that portion of
the account value of the annuities reinsured
hereunder which corresponds to the portion of
the annuities reinsured hereunder as of the
end of the current Accounting Period;
(iii) equals the Trailer Commission, as defined
below, times that portion of the account
value of the Venture Variable Annuity 3
annuities reinsured hereunder which
corresponds to the portion of the Venture
Variable Annuity 3 annuities reinsured
hereunder and described
-4-
<PAGE> 133
in Schedule A, as of the end of the current
Accounting Period;
(iv) equals (a) times (b), where:
(a) equals the Reinsurance Premiums,
determined in accordance with
Article II, Paragraph 2, with
respect to the Venture Variable
Annuity 3 annuities reinsured
hereunder which corresponds to the
portion of the Venture Variable
Annuity 3 annuities reinsured
hereunder and described in Schedule
A; and
(b) equals,
o for the Accounting Periods
beginning January 1, 1994
through October 1, 1994, 5.33
percent, and
o for the Accounting Periods
beginning January 1, 1995 and
thereafter, 7 percent;
(v) equals .25 percent times that portion of the
account value, attributable to purchase
payments received by the Ceding Company
thirteen (13) months or more prior to their
trailer commission payment dates, of the
Venture Vision annuities reinsured hereunder
which corresponds to the portion of the
Venture Vision annuities reinsured hereunder
and described in Schedule A, as of the end of
the current Accounting Period; and
(vi) equals (a) times (b), where:
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<PAGE> 134
(a) equals the portion of Reinsurance
Premiums, determined in accordance
with Article II, Paragraph 2,
received by the Ceding Company
thirteen (13) months or more after
the issue date of each Venture
Vision annuity reinsured hereunder
which corresponds to the portion of
the Venture Vision annuities
reinsured hereunder and described in
Schedule A; and
(b) equals,
o for the Accounting Periods
beginning January 1, 1994
through October 1, 1994, 1.83
percent, and
o for the Accounting Periods
beginning January 1, 1995
and thereafter, 3.5 percent.
The Trailer Commission for Venture Variable Annuity 3
annuities for each Accounting Period is defined below:
<TABLE>
<CAPTION>
For Accounting
Periods Ending During Trailer Commission
--------------------- ------------------
<S> <C>
1994 .04%
1995 .05%
1996 .055%
1997 and thereafter .0625%
</TABLE>
III. The following Paragraph 10 is added to ARTICLE X, ACCOUNTING AND
SETTLEMENTS:
-6-
<PAGE> 135
10. Partial Recapture. If a portion of the annuities reinsured
hereunder is recaptured, as described in Article XI, Paragraph
4, then the quarterly settlements described above will
thereafter be made with respect to the portion of the policies
not recaptured. Adjustments in the amounts due from either
the Ceding Company or the Reinsurer will be made accordingly.
IV. ARTICLE XI, DURATION AND RECAPTURE, Paragraphs 4 and 5, are replaced
in their entirety by the following:
4. Recapture. Annuities reinsured hereunder will be eligible for
recapture, at the option of the Ceding Company, on any January
1, following the fifth anniversary of the Effective Date of
this Agreement, subject to ninety (90) days prior written
notice, or on any other date which is mutually agreed to in
writing. However, in the event that any portion of the
account values related to any annuity reinsured hereunder is
transferred from variable accounts to fixed accounts, then the
corresponding portion of such annuity will be treated as
recaptured. Except for the fixed account transfers described
above, if the Ceding Company opts to recapture, then the
Ceding Company must recapture all of the annuities reinsured
hereunder. In no event may the Ceding Company recapture
anything other than 100 percent of all annuities reinsured
hereunder.
5. Internal Replacements. Should the Ceding Company, its
affiliates, successors or assigns, initiate a program of
Internal Replacement that would include any of the annuities
reinsured hereunder, the
-7-
<PAGE> 136
Ceding Company will immediately notify the Reinsurer. The
Reinsurer may elect to treat such annuities as recaptured
rather than surrendered and such recapture will apply to all
annuities reinsured hereunder, except that the transfer of any
portion of the annuities reinsured hereunder from variable
accounts to fixed accounts will be treated as a partial
recapture, as described in Article XI, Paragraph 4. For
purposes of this Agreement, the term "Internal Replacement"
means any instance in which an annuity or any portion of the
cash value of an annuity is exchanged for another policy or
annuity, not covered under this Agreement, which is written by
the Ceding Company, its affiliates, successors or assigns.
V. ARTICLE XII, TERMINAL ACCOUNTING AND SETTLEMENT, Paragraphs 1 and 3,
are replaced in their entirety by the following:
1. Terminal Accounting. In the event that all or a portion of
the reinsurance under this Agreement is terminated in
accordance with Article XI, Paragraph 3, or recaptured in
accordance with Article XI, Paragraph 4, a Terminal Accounting
and Settlement will take place.
3. Settlement. The Terminal Accounting and Settlement will
consist of:
(a) the quarterly settlement as provided in Article X,
Paragraph 4, computed as of the terminal accounting
date; and
-8-
<PAGE> 137
(b) payment by the Ceding Company to the Reinsurer of an
amount equal to the Modified Coinsurance Reserve on
the annuities reinsured hereunder as of the terminal
accounting date; and
(c) payment by the Reinsurer to the Ceding Company of a
Terminal Reserve Adjustment equal to the Modified
Coinsurance Reserve on the annuities reinsured
hereunder as of the terminal accounting date;
(d) payment by the Ceding Company to the Reinsurer of a
Terminal Ceding Commission Adjustment equal to any
Unamortized Ceding Commission, as described in
Article III, Paragraph 2, as of the terminal
accounting date;
(e) payment by the Ceding Company to the Reinsurer of any
Funds Withheld, determined in accordance with Article
II, Paragraph 3, as of the terminal accounting date;
and
(f) payment by the Ceding Company to the Reinsurer of any
Loss Carryforward, as described in Article VIII,
calculated as of the terminal accounting date.
If only a portion of the annuities is recaptured, as described
in Article XI, Paragraph 4, then the Terminal Accounting and
Settlement described above, will be made with respect to only
the portion of such annuities recaptured, excluding item (e)
above. If the calculation of the Terminal Accounting and
Settlement produces an
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<PAGE> 138
amount owing to the Ceding Company, such amount will be paid
by the Reinsurer to the Ceding Company. If the calculation of
the Terminal Accounting and Settlement produces an amount
owing to the Reinsurer, such amount will be paid by the Ceding
Company to the Reinsurer.
VI. SCHEDULE A, ANNUITIES AND RISKS REINSURED, is replaced in its entirety
by the following:
Annuities and Risks Reinsured. Beginning on the Effective
Date of this Agreement, the Reinsurer reinsures a quota share
of the Ceding Company's net liability with respect to a
portion of the account values invested in variable accounts
under those variable annuities issued by the Ceding Company
and described below:
<TABLE>
<CAPTION>
Quota Contract and
Plan Issue Years Share Certificate Numbers
---- ----------- ----- -------------------
<S> <C> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 64% 203-VA
Venture Vision 1993 - 1995 95% VEN 10
Venture Vision 1994 - 1995 95% VISION.001
</TABLE>
Beginning on December 31, 1994, under this Agreement the
Reinsurer also reinsures an additional 31 percent quota share
of the Ceding Company's net liability with respect to a
portion of the account values invested in variable accounts
under those variable annuities issued by the Ceding Company
and described below:
<TABLE>
<CAPTION>
Contract and
Plan Issue Years Certificate Numbers
---- ----------- -------------------
<S> <C> <C>
Venture Variable
Annuity 3 1987 - 1993 203-VA
</TABLE>
"Net liability," as used in this Agreement, means the Ceding
Company's liability on annuities reinsured hereunder, net of
other reinsurance.
-10-
<PAGE> 139
VIII. Effective January 1, 1995, SCHEDULE B, QUARTERLY REPORT OF ACTIVITY
AND SETTLEMENTS, is replaced in its entirety by Exhibit A.
IX. The following information is added to SCHEDULE D, CEDING COMPANY DATA:
o Quarterly accounting settlement reports for this Agreement
received by the Reinsurer since inception
o Telephone conversation of September 5, 1995 between Grace
Rokosz of the Ceding Company and Doris Azarcon of the
Reinsurer, which included the representation that the fixed
account portion of the annuities reinsured hereunder are ceded
to other reinsurers.
-11-
<PAGE> 140
In witness of the above, this Amendment Five is executed in duplicate on the
dates indicated below with an Effective Date of May 1, 1995.
NORTH AMERICAN SECURITY LIFE
ATTEST: INSURANCE COMPANY ("Ceding Company")
By: Richard Hirtle By: John G. Vrysen
------------------------ ------------------------
Title: V.P., Treasurer & CFO Title: V.P. & Chief Actuary
------------------------ ------------------------
Date: 9/28/95 Date: 9/28/95
------------------------ ------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: John P. Laughlin By: Frank Alvarez
------------------------ ------------------------
Title: Vice President Title: Exec. V.P.
------------------------ ------------------------
Date: 9/27/95 Date: 9/27/95
------------------------ ------------------------
-12-
<PAGE> 141
EXHIBIT A
SCHEDULE B
QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS
FROM CEDING COMPANY TO REINSURER
Accounting Period: ______________
Calendar Year: _________________
Date Report Completed: __________
1. Initial Consideration (Article II, Paragraph 1)*
a. Initial Consideration --------
b. Amount of Initial Consideration withheld by
Ceding Company --------
Portion of Initial Consideration paid in cash
= a - b --------
2. Supplemental Consideration (Article II, Paragraph 1)
--------
3. Reinsurance Premiums (Article II, Paragraph 2)
a. Reinsurance Premiums
A. Venture Variable Annuity 3 Reinsurance
gross premiums --------
B. Venture Vision Reinsurance Premiums -
first policy year gross premiums --------
C. Venture Vision Reinsurance Premiums -
renewal gross premiums --------
D. Statutory reserves transferred from fixed
accounts to variable accounts [item (ii)] --------
Total Reinsurance Premiums = A + B + C + D ---------
b. Amount of Reinsurance Premiums withheld by
Ceding Company --------
Portion of Reinsurance Premiums paid in cash
= a - b ---------
4. Benefit Payments (Article IV)
a. Death Benefits --------
b. Cash Surrender Values --------
c. Annuity Benefits --------
Benefit Payments = a + b + c
--------
5. Initial Reserve Adjustment (Article V, Paragraph 1)*
--------
6. Modified Coinsurance Reserve Adjustment (Article V, Paragraph 2)
a. Modified Coinsurance Reserve end of
preceding Accounting Period --------
b. Modified Coinsurance Reserve end of
current Accounting Period --------
c. Equals b - a --------
d. Modified Coinsurance Reserve Investment
Credit (Schedule C) --------
<PAGE> 142
Modified Coinsurance Reserve Adjustment = c - d ________
<PAGE> 143
EXHIBIT A CONTINUED
7. Reinsurance Gain = 2a - 3a - 4 - 6 - 15 - 16
(If negative, see Article VII) ________
8. Reinsurance Loss = 2a - 3a - 4 - 6 - 15 - 16
(If positive, see Article VII) ________
9. Loss Carryforward [Article VIII, Paragraph 1, item (i)] ________
10. Initial Expense and Risk Charge (Article VI, Paragraph 1)* ________
11. Expense and Risk Charge (Article VI, Paragraph 2) ________
12. Ceding Commission (Article III, Paragraph 1) ________
13. Unamortized Ceding Commission (Article III, Paragraph 2) ________
14. Unamortized Ceding Commission Adjustment
(Article III, Paragraph 3) ________
15. Allowances for Commissions and Expenses
(Article III, Paragraph 7) ________
16. Allowances for Death Benefit Guarantee
(Article III, Paragraph 8) ________
17. Experience Refund = 7 + 8 - 9 - 11 - 14 - 20 - 21
(If negative, see Article IX) ________
18. Funds Withheld payment [Article II, Paragraph 3, item (ii)] ________
19. Funds Withheld = Prior 19 + 1b + 2b - 18
(Article II, Paragraph 3) ________
20. Interest Expense Charge (Article II, Paragraph 4) ________
21. Interest on the Unamortized Ceding Commission
(Article III, Paragraph 9) ________
22. Cash Settlement =
1 + 2 + 3 - 4 - 5 - 6 + 10 - 12 - 15 - 16 - 17 + 18 ========
*Initial Accounting Period, only.
Terminal Accounting and Settlement (Partial recapture)
(Article XII, Paragraph 3)
A. Modified Coinsurance Reserve (Article V, Paragraph 3) ________
B. Terminal Reserve Adjustment (Article V, Paragraph 3) ________
<PAGE> 144
EXHIBIT A CONTINUED
C. Terminal Ceding Commission (Article III, Paragraph 2)
a. Account value at end of preceding Accounting
Period with respect to portion of annuities
reinsured hereunder transferred from variable
accounts to fixed accounts --------
b. Account value at end of preceding Accounting
Period with respect to portion of annuities
reinsured hereunder --------
c. Unamortized Ceding Commission at end of
preceding Accounting Period --------
Terminal Ceding Commission = (a / b) x c --------
D. Portion of Loss Carryforward with respect to portion
of annuities reinsured hereunder transferred from
variable accounts to fixed accounts (Article VIII)
--------
Cash Settlement = A - B + C + D ========
Supplemental Information
<TABLE>
<CAPTION>
Venture
Total Variable Venture
Number Annuity 3 Vision Total
of Account Account Account Loss
Annuities Value Value Value Carryforward
--------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Beginning of Period --------- --------- ------- ------- ------------
+ Additions --------- --------- ------- ------- ------------
- - Terminations --------- --------- ------- ------- ------------
End of Period ========= ========= ======= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Venture Venture
Variable Vision
Annuity 3 Number
Number of of
Annuities Annuities
--------- ---------
<S> <C> <C>
Beginning of Period --------- ---------
+ Additions --------- ---------
- - Terminations --------- ---------
End of Period ========= =========
</TABLE>
Termination Rate (Article III, Paragraph 5)
a. Total number of annuities reinsured hereunder as of
date current Accounting Period ends ________
b. Total number of annuities reinsured hereunder as of
the date one year prior to the date the current
Accounting Period ends ________
<PAGE> 145
c. Termination Rate 1 - (a / b) ========
<PAGE> 146
EXHIBIT A CONTINUED
Investment Credit Accumulation Rate (Article III, Paragraph 6)
- -----------------------------------
a. Modified Coinsurance Reserve Investment Credit
Current Accounting Period --------
First most recent Accounting Period --------
Second most recent Accounting Period --------
Third most recent Accounting Period
-------- --------
b. Account value as of date one year prior to date
current Accounting Period ends --------
c. Account value as of date current Accounting Period ends
--------
d. Investment Credit Accumulation Rate
a / [.5 x (b + c)] ========
Allowances for Commissions and Expenses (Article III, Paragraph 7)
- ---------------------------------------
a. $7.50 x quota share reinsured hereunder x number of annuities
reinsured hereunder and inforce at end of current Accounting
Period ---------
b. Total account value invested in variable accounts on
annuities reinsured hereunder / total account value
invested in fixed and variable accounts on annuities
reinsured hereunder ---------
c. .0125 x portion of account value of annuities reinsured
hereunder at end of current Accounting Period ---------
d. Trailer Commission x portion of account value of Venture
Variable Annuity 3 annuities reinsured hereunder and inforce
at end of current Accounting Period ---------
e. ___% x Reinsurance Premiums with respect to Venture Variable
Annuity 3 annuities reinsured hereunder ---------
f. .25% x portion of account value, attributable to purchase
payments received by Ceding Company thirteen months or more
prior to their trailer commission dates, of Venture Vision
annuities reinsured hereunder and inforce at end of current
Accounting Period ---------
g. ___% x renewal Reinsurance Premiums with respect to Venture
Vision annuities reinsured hereunder ---------
h. Allowances for Commissions and Expenses =
[a x b] + c + d + e + f + g =========
<PAGE> 147
EXHIBIT A
ACCOUNTS RECEIVABLE AGREEMENT
THIS AGREEMENT, effective as of December 31, 1993, is made and entered into by
and between North American Security Life Insurance Company, a corporation
organized and existing under the laws of the State of Delaware (hereinafter
referred to as the "Borrower") and ITT Lyndon Life Insurance Company, a
corporation organized and existing under the laws of the state of Missouri
(hereinafter referred to as the "Lender").
WITNESSETH
WHEREAS the Borrower and the Lender have entered into Reinsurance Agreement
Number 1293-104 with an effective date of December 31, 1993 (hereinafter
referred to as the "Reinsurance Agreement"), a copy of which is attached to
this Agreement and incorporated herein by reference; and
WHEREAS the Borrower desires to withhold on behalf of the Lender a specified
percentage of the Initial Consideration, but not to exceed $15 million, as
described in Article II, Paragraph 1, of the Reinsurance Agreement, such amount
withheld to be paid by the Borrower to the Lender at a later date.
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, the Borrower and the Lender agree as follows:
-1-
<PAGE> 148
ARTICLE I
PROVISIONS RELATING TO THE ACCOUNTS RECEIVABLE
1. Accounts Receivable. The term "Accounts Receivable," as used in this
Agreement, means the Funds Withheld, determined in accordance with
Article II, Paragraph 3 of the Reinsurance Agreement, and represents
funds withheld by the Borrower from the Lender in accordance with the
terms of Article II, Paragraphs 1, 2 and 4 of the Reinsurance
Agreement. The Funds Withheld under the Reinsurance Agreement are
considered to be amounts held on behalf of the Lender. The Lender
will record such amounts as a receivable and the Borrower will record
such amounts as a payable. The Accounts Receivable will be subject to
the Repayment provisions specified in Paragraphs 2 and 3 below.
2. Scheduled Repayment. The Borrower will repay a portion of the
Accounts Receivable at the end of each calendar year in an amount
equal to the Scheduled Repayment Amount. The Scheduled Repayment
Amount will be equal to the Repayment Schedule Percentage, as defined
below, times the Accounts Receivable, as described in Paragraph 1
above, as of the Effective Date of this Agreement. The Repayment
Schedule Percentage at the end of each calendar year is defined below:
<TABLE>
<CAPTION>
Calendar Year Repayment Schedule Percentage
------------- -----------------------------
<S> <C>
1994 20%
1995 20%
1996 20%
1997 20%
1998 20%
</TABLE>
-2-
<PAGE> 149
3. Non-Scheduled Repayment. The Accounts Receivable, as described in
Paragraph 1 above, will be paid by the Borrower to the Lender within
fifteen (15) days after the earlier of:
(a) the date the Lender elects to receive payment from
the Borrower of any portion of the Accounts
Receivable as described in Paragraph 4 below; or
(b) the terminal accounting date, as described in Article
XII, Paragraph 2 of the Reinsurance Agreement, as
part of the Terminal Accounting and Settlement as
described in Article XII, Paragraph 3, item (e) of
the Reinsurance Agreement.
4. Events of Default and Remedies Therefor. Any one or more of the
following in any calendar year will constitute an Event of Default as
used in this Agreement:
(a) the insurance claims paying ability rating assigned
to the Borrower by Standard and Poor's Corporation
falls below A;
(b) default for a period in excess of sixty (60) days
with respect to the repayment of the portion of the
Accounts Receivable payable by the Borrower to the
Lender at the end of the calendar year, as described
in Paragraph 2 above;
(c) any material representation, warranty or other
statement made by the Borrower herein or in any
statement or certificate furnished in connection
with, or pursuant to, the transactions contemplated
hereunder, or in compliance
-3-
<PAGE> 150
with the terms hereof, proves untrue in any material
respect as of the date of the issuance of making
thereof;
(d) violation of any of the Borrower Covenants contained
in Article II, Paragraph 3;
(e) the Borrower files for bankruptcy or admits in
writing its inability to pay its debts as they mature
or makes an assignment for the benefit of creditors;
(f) the Borrower applies for or consents to the
appointment of a trustee, custodian, receiver or
liquidator for the Borrower or for the major part of
the property of the Borrower;
(g) bankruptcy, reorganization, insolvency or other
proceedings for relief under any bankruptcy,
reorganization, insolvency or similar law or laws for
the relief of debtors, are instituted against the
Borrower and are consented to or are not dismissed
within sixty (60) days after such institution; and/or
(h) the non-observance or non-performance of any other
provision of this Agreement which is not remedied
within thirty (30) days after written notice thereof
to the Borrower by the Lender;
When any Event of Default described above occurs, then the Lender may
elect to receive payment from the Borrower of any portion of the
Accounts Receivable, as described in Paragraph 1 above, as of the end
of the calendar year.
-4-
<PAGE> 151
ARTICLE II
MISCELLANEOUS PROVISIONS
1. Duration of Agreement. This Agreement will remain in effect while the
Reinsurance Agreement is in effect.
2. Borrower's Representation and Warranties. The Borrower represents and
warrants as follows:
(a) Corporate Existence and Power. The Borrower is a
corporation duly incorporated, validly existing and
in good standing under the laws of Delaware, and has
all corporate powers and all material governmental
licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
(b) Corporate and Governmental Authorization. The
execution, delivery and performance of this Agreement
by the Borrower and the transactions contemplated
hereby are within the Borrower's corporate power,
have been duly authorized by all necessary corporate
actions, require no action by or in respect of, or
filing with, any governmental body, agency or
official and do not contravene, or constitute a
default under, any provision of applicable law or
regulation or of the Certificate of Incorporation of
the Borrower or of any agreement, judgment,
injunction, order, decree or other instrument binding
upon the Borrower.
-5-
<PAGE> 152
(c) Binding Effect. This Agreement and the Reinsurance
Agreement constitute valid and binding obligations of
the Borrower, and are enforceable against the
Borrower in accordance with their terms, except as:
(1) the enforceability thereof may be affected by
bankruptcy, reorganization, insolvency or similar
laws affecting the enforcement of creditor's rights
generally and (2) rights of acceleration and the
availability of equitable remedies may be limited by
equitable principles of general applicability.
(d) Litigation. There is no action, suit or proceeding
pending, or to the knowledge of the Borrower
threatened, against or affecting the Borrower before
any court or arbitrator or any governmental body,
agency or official which could reasonably be expected
to have a material adverse effect on the business of
the Borrower, or which in any manner questions the
validity of this Agreement or the Reinsurance
Agreement.
3. Borrower Covenants. The Borrower agrees that so long as this
Agreement is in effect:
(a) the Borrower will do all things necessary to preserve
and keep in full force and effect its corporate
existence, rights and franchises granted by law or
otherwise; provided, however, that nothing in this
Paragraph will prevent the abandonment or termination
of the existence and franchises of any subsidiary or
any rights of the Borrower if such
-6-
<PAGE> 153
abandonment or termination is in the best interest of
the Borrower and not disadvantageous in any material
respect to the Lender;
(b) the Borrower will duly pay and discharge all taxes,
assessments and other governmental charges upon or
against the Borrower or its properties, as well as
all other liabilities of the Borrower, before the
same become delinquent and before penalties accrue
thereon, unless and to the extent that the same are
being contested in good faith and by appropriate
proceedings;
(c) the Borrower will maintain a minimum of $25 million
of statutory capital and surplus as reflected in its
Annual Statement filed with the Delaware Insurance
Department;
(d) the Borrower will maintain a minimum risk-based
capital ratio of 225 percent of the NAIC authorized
control level, as defined for 1993, as of December 31
of each calendar year; and
(e) the Borrower will maintain sufficient statutory
capital and surplus such that the ratio of total debt
to total statutory capital and surplus, plus
transfers to separate accounts (as described on Page
3, Line 13A of the 1993 Annual Statement, adjusted
for the final business day's activities of the
reporting period), does not exceed 75 percent at the
end of any calendar year; provided that this covenant
may be waived or modified if the Borrower and the
Lender mutually agree to
-7-
<PAGE> 154
do so, and provided, further, that if such ratio does
exceed 75 percent at the end of any calendar year,
the Borrower may repay a portion of the Accounts
Receivable, as described in Article I, Paragraph 1,
in order to reduce the ratio below 75 percent.
4. Amendments and Waivers. This Agreement may be amended only by written
agreement of the parties. Any provision of this Agreement may be
waived only by the written agreement of the parties.
5. Arbitration. The Lender and the Borrower agree to arbitrate all
disputes hereunder. Any arbitration under this Agreement will be
conducted in accordance with Article XIV of the Reinsurance Agreement.
6. Assignment. Neither party may assign any of its rights, duties or
obligations under this Agreement without the prior written consent of
the other party.
-8-
<PAGE> 155
In witness of the above, this Accounts Receivable Agreement is executed in
duplicate on the dates indicated below.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Ceding Company")
By: William J. Atherton By: John G. Vrysen
---------------------------- ----------------------------
Title: President Title: V.P. & Chief Actuary
---------------------------- ----------------------------
Date: 12/30/93 Date: 12/30/93
---------------------------- ----------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: By: Frank A. Alvarez
---------------------------- ----------------------------
Title: Secretary Title: Exec. V.P.
---------------------------- ----------------------------
Date: 12/29/93 Date: 12/29/93
---------------------------- ----------------------------
-9-
<PAGE> 156
AMENDMENT ONE
ATTACHED TO AND MADE A PART OF THE
ACCOUNTS RECEIVABLE AGREEMENT
EFFECTIVE DECEMBER 31, 1993
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
("BORROWER")
AND
ITT LYNDON LIFE INSURANCE COMPANY
("LENDER")
The Borrower and the Lender agree to amend this Accounts Receivable Agreement
as follows:
ARTICLE I, PROVISIONS RELATING TO THE ACCOUNTS RECEIVABLE, Paragraph 2, is
replaced in its entirety by the following:
2. Scheduled Repayment. The Borrower will repay a portion of the
Accounts Receivable at the end of each calendar year in an amount
equal to the Scheduled Repayment Amount as defined below:
<TABLE>
<CAPTION>
Calendar Year Scheduled Repayment Amount
------------- --------------------------
<S> <C>
1994 $3,000,000
</TABLE>
-1-
<PAGE> 157
<TABLE>
<CAPTION>
Calendar Year Scheduled Repayment Amount
------------- --------------------------
<S> <C>
1995 through 1998 $3,000,000, plus 20 percent times the lesser of (a) 2.5 percent
times the total Reinsurance Premiums, determined in accordance with
Article II, Paragraph 2, of the Reinsurance Agreement, for the
calendar year 1994, or (b) $6,000,000
1999 20 percent times the lesser of (a) 2.5 percent times the total
Reinsurance Premiums, determined in accordance with Article II,
Paragraph 2, of the Reinsurance Agreement, for the calendar year
1994, or (b) $6,000,000
</TABLE>
In witness of the above, this Amendment One is executed in duplicate on the
dates indicated below, with an Effective Date of January 1, 1994.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Borrower")
By: James D. Gallagher By: John G. Vrysen
---------------------------- ----------------------------
Title: V.P., Secretary
----------------------------
& General Counsel
----------------------------
Title: V.P. & Actuary
----------------------------
Date: 6/28/94 Date: 6/28/94
---------------------------- ----------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
---------------------------- ----------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
---------------------------- ----------------------------
Date: 6/29/94 Date: 6/29/94
---------------------------- ----------------------------
-2-
<PAGE> 158
AMENDMENT TWO
ATTACHED TO AND MADE A PART OF THE
ACCOUNTS RECEIVABLE AGREEMENT
EFFECTIVE DECEMBER 31, 1993
BETWEEN
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
("BORROWER")
AND
ITT LYNDON LIFE INSURANCE COMPANY
("LENDER")
The Borrower and the Lender agree to amend this Accounts Receivable Agreement
as follows:
ARTICLE I, PROVISIONS RELATING TO THE ACCOUNTS RECEIVABLE, Paragraph 2, is
replaced in its entirety by the following:
2. Scheduled Repayment. The Borrower will repay a portion of the
Accounts Receivable at the end of each calendar year in an amount
equal to the Scheduled Repayment Amount as defined below:
<TABLE>
<CAPTION>
Calendar Year Scheduled Repayment Amount
------------- --------------------------
<S> <C>
1994 $6,064,196
</TABLE>
-1-
<PAGE> 159
<TABLE>
<CAPTION>
Calendar Year Scheduled Repayment Amount
------------- --------------------------
<S> <C>
1995 through 1998 $3,000,000
</TABLE>
In witness of the above, this Amendment Two is executed in duplicate on the
dates indicated below, with an Effective Date of December 31, 1994.
NORTH AMERICAN SECURITY LIFE INSURANCE
ATTEST: COMPANY ("Borrower")
By: James D. Gallagher By: John G. Vrysen
---------------------------- ----------------------------
Title: V.P., Secretary
----------------------------
& General Counsel
----------------------------
Title: V.P. & Actuary
----------------------------
Date: 12/30/94 Date: 12/30/94
---------------------------- ----------------------------
ITT LYNDON LIFE INSURANCE COMPANY
ATTEST: ("Reinsurer")
By: Jeffrey G. Stevenson By: Frank A. Alvarez
---------------------------- ----------------------------
Title: V.P. & Deputy Chief Actuary Title: Executive V.P.
---------------------------- ----------------------------
Date: 12/22/94 Date: 12/22/94
---------------------------- ----------------------------
-2-
<PAGE> 1
Reinsurance Agreement
No. 5090-01
for
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
<PAGE> 2
Automatic Modified-Coinsurance (Mod-Co) Reinsurance Agreement
(No. 5090-01)
Between
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
of Boston, Massachusetts
(Reinsured referred to as you, your)
and
TRANSAMERICA OCCIDENTAL
LIFE INSURANCE COMPANY
of Los Angeles, California
(Reinsurer referred to as we, us, our)
Effective November 1, 1995
<PAGE> 3
CONTENTS
ARTICLES
I Automatic Reinsurance . . . . . . . . . . . . . . . . . . 1
II Liability . . . . . . . . . . . . . . . . . . . . . . . . 1
III Plan and Amount of Insurance . . . . . . . . . . . . . . 2
IV Reinsurance Premiums . . . . . . . . . . . . . . . . . . 2
V Payments by Reinsurer . . . . . . . . . . . . . . . . . . 2
VI Reporting . . . . . . . . . . . . . . . . . . . . . . . . 3
VII Annuitization . . . . . . . . . . . . . . . . . . . . . . 3
VIII Deposits of the Reserve . . . . . . . . . . . . . . . . . 3
IX Interest Credit on Modified Coinsurance Reserve
and Modified Coinsurance Reserve Adjustment . . . . . . . 4
X Account Payable Liability and Reserve Basis . . . . . . . 4
XI General Provisions . . . . . . . . . . . . . . . . . . . 4
XII Recapture . . . . . . . . . . . . . . . . . . . . . . . . 6
XIII Exclusion of the Fixed Account . . . . . . . . . . . . . 6
XIV Arbitration . . . . . . . . . . . . . . . . . . . . . . . 7
XV Improper Solicitation of Policyowners . . . . . . . . . . 8
XVI DAC Tax - Section 1.848-2(g)(8) Election . . . . . . . . 8
XVII Duration of Agreement . . . . . . . . . . . . . . . . . . 9
VIII Modification of Allowances and Product Design . . . . . . 9
XIX Entire Agreement . . . . . . . . . . . . . . . . . . . . 10
XX Execution . . . . . . . . . . . . . . . . . . . . . . . . 11
SCHEDULES
A Business Reinsured
B Basis of Reinsurance
C Monthly Settlement Report
D Commission and Expense Allowances
E Monthly Business Management Report
F Annual Report
G Interest Credit on Modified Coinsurance Reserve
H Modified Coinsurance Reserve Adjustment
I Transfer Factors
All schedules attached will be considered part of this agreement.
<PAGE> 4
ARTICLE I
AUTOMATIC REINSURANCE
1. Insurance. The Reinsured will cede and the Reinsurer will accept as
reinsurance the policies written by the Reinsured as shown in Schedule
A. No riders or supplementary benefits are included under this
Agreement.
2. Coverages. The policies reinsured in Schedule A are the Variable
Universal Life policies issued after November 1, 1995. Reinsurance
will be limited in percentage as provided in Schedule B.
3. This Agreement will cover only the Variable Account of the policies.
The Fixed Account will be excluded from this Agreement as set forth in
Article XIII.
ARTICLE II
LIABILITY
1. Liability. The liability of the Reinsurer on any reinsurance under
this Agreement begins upon the effective date of this Agreement as set
forth in Article XX, Execution, and ends after all policies reinsured
have been terminated. The liability of the Reinsurer to the Reinsured
under this Agreement will be coexisting with the liability of the
Reinsured under the policies reinsured.
2. The liability of the Reinsurer shall be settled and paid to the
Reinsured monthly on the basis of the monthly reports prepared by the
Reinsured in the form of Schedule C. Payment of any amount due to be
paid by the Reinsurer or the Reinsured shall be determined on a net
basis and shall be paid within ten (10) days after receipt of the
monthly report.
3. This is a contract solely between the Reinsured and the Reinsurer.
The obligations under this contract of the Reinsurer are solely to the
Reinsured and those of the Reinsured solely to the Reinsurer.
<PAGE> 5
ARTICLE III
PLAN AND AMOUNT OF INSURANCE
1. Plan. Reinsurance under this Agreement will be on the modified
coinsurance basis in accordance with the policy forms issued by the
Reinsured and listed on Schedule A.
2. Reduction and Terminations. If any of the policies reinsured under
this Agreement are reduced or terminated by transfers to the fixed
account, payment of a death benefit, withdrawal or surrender, the
reinsurance will be reduced proportionately.
ARTICLE IV
REINSURANCE PREMIUMS
The premium to be paid to the Reinsurer by the Reinsured with respect to each
policy reinsured, as specified in Schedule A, will be the quota share
percentage, as specified in Schedule B, of the gross premium corresponding to
the reinsured portion of the policy.
ARTICLE V
PAYMENTS BY REINSURER
1. Benefits
The Reinsurer shall pay the Reinsured the Reinsurer's quota share of
(a) the death benefits paid by the Reinsured,
(b) the surrender values paid by the Reinsured,
(c) the withdrawal benefits paid by the Reinsured and
(d) the policy proceeds at the commencement of a settlement
option, in the event that the policy proceeds, death benefits
or surrender values, are paid in accordance with a settlement
option under the contract.
2. Commission and Expense Allowances. The Reinsurer will pay the
Reinsured commission and expense allowances as outlined in Schedule D
on the Reinsurer's quota share portion of the policies. The
maintenance expense allowances will be paid to the Reinsured monthly,
beginning at the end of the calendar month in which the contract is
issued.
2
<PAGE> 6
ARTICLE VI
REPORTING
1. The Reinsured will provide the Reinsurer with information necessary to
properly account for the business reinsured.
2. Not later than ten (10) days after the end of each month, the
Reinsured will submit a report substantially in accordance with
Schedule C. The Reinsured agrees to provide or make available to the
Reinsurer such documentation as may be necessary to support the items
reported.
3. Not later than twenty (20) days after the end of each calendar
quarter, the Reinsured will submit a report substantially in
accordance with Schedule E.
4. Not later than forty-five (45) days after the end of each calendar
year, the Reinsured will submit a report substantially in accordance
with Schedule F.
ARTICLE VII
ANNUITIZATION
Any policy annuitizing (going into pay-out status under an immediate annuity
plan) shall be deemed to be recaptured by the Reinsured.
ARTICLE VIII
DEPOSITS OF THE RESERVE
1. The Reinsurer shall deposit with the Reinsured the reserves for the
business reinsured under this Agreement.
2. For the purpose of this Article, reserves are defined to be the total
Account Value of the policies reinsured.
3
<PAGE> 7
ARTICLE IX
INTEREST CREDIT ON MODIFIED COINSURANCE RESERVE
AND MODIFIED COINSURANCE RESERVE ADJUSTMENT
1 The Reinsurer shall receive an interest credit on the modified
coinsurance reserve. The amount of the credit will be determined as
set forth in Schedule G.
2. The Reinsured shall receive a modified coinsurance reserve adjustment.
The amount of the adjustment will be determined as set forth in
Schedule H.
3. Both the interest credit and the reserve adjustment will be made at
the end of each month.
ARTICLE X
ACCOUNT PAYABLE LIABILITY AND RESERVE BASIS
1. The Reinsured shall set up an Account Payable liability in its
financial statements equal to the difference between the total Account
Value of the reinsured policies and the total Statutory Reserve of the
policies as determined in Schedule H. The Reinsurer shall set up an
Account Receivable asset equal to the Account Payable liability set up
by the Reinsured.
2. For purposes of Section 1 of this Article, the Statutory Reserve shall
be calculated by the Reinsured according to the "Commissioner's
Reserve Valuation Method" as prescribed in the Standard Valuation Law.
ARTICLE XI
GENERAL PROVISIONS
1. Reinsurance Conditions. The reinsurance is subject to the same
limitations and conditions as the insurance under the policy or
policies written by the Reinsured on which the reinsurance is based.
2. Expenses. In no event will the Reinsurer have any liability for any
extra-contractual damages which are rendered against the Reinsured as
a result of acts, omissions or course of conduct committed by the
Reinsured in connection with the contracts reinsured under this
Agreement. In no event will the Reinsured have any liability for
extra-contractual damages against the Reinsurer as a result of acts,
omissions, or course of conduct committed by the Reinsurer in
connection with the reinsurance of the contracts under this Agreement.
4
<PAGE> 8
3. Oversights. If failure to pay any premium due or to perform any other
act required by this Agreement is unintentional and is caused by
misunderstanding or oversight, the Reinsured and the Reinsurer will
adjust the situation to what it would have been had the
misunderstanding or oversight not occurred.
4. Inspection. At any reasonable time, the Reinsurer and the Reinsured
may inspect the original papers and any other books or documents at
the Home Office of the other relating to or affecting reinsurance
under this Agreement.
It is mutually agreed by the Reinsured and the Reinsurer that any
information that is made available for inspection under this section
of the Agreement shall be kept confidential and under no circumstances
may this information be disclosed to, or made available for inspection
by, any third party without the prior consent of the other contracting
party.
5. Assignment or transfer. In no event shall either the Reinsured or the
Reinsurer assign any of its rights, duties or obligations under this
Agreement without the prior written approval of the other party. Such
approval shall not unreasonably be withheld.
In no event shall either the Reinsured or the Reinsurer transfer
either the policies reinsured under this Agreement or the reinsurance
without the prior written approval of the other party. Such approval
shall not unreasonably be withheld.
6. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be
construed in accordance with the applicable federal law and the laws
of the State of Delaware.
7. Premium Taxes. The Reinsurer will pay the Reinsured 2.25% of
reinsurance premiums to provide reimbursement for any premium taxes
which the Reinsured will be required to pay on the reinsurance
premiums payable under this Agreement.
8. Insolvency. In the event of the declared insolvency of the Reinsured,
and the appointment of a domiciliary liquidator, receiver, conservator
or statutory successor for the Reinsured, this reinsurance shall be
payable immediately upon demand, with reasonable provision for
verification, directly to the Reinsured or its domiciliary liquidator,
receiver, conservator or statutory successor, on the basis of the
liability of the Reinsured without diminution because of the
insolvency of the Reinsured or because the liquidator, receiver,
conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim.
For purposes of the paragraph above, the Reinsurer and the Reinsured
shall consider any balance due and unpaid, whether on account of
premiums, allowances, losses or claims expenses, to be mutual debts or
credits under this Agreement and will offset, if permitted under the
applicable law. Only the balance will be considered in determining
the liability of the Reinsurer.
Every liquidator, receiver, conservator or statutory successor of the
Reinsured or guaranty fund or association shall give written notice to
the Reinsurer of the pendency of a claim involving the Reinsured
indicating which of the policies would involve possible liability on
the part of the Reinsurer to the Reinsured or its domiciliary
liquidator, receiver, conservator or statutory successor, within a
reasonable amount of time after the claim is filed in the
conservation, liquidation, receivership or other proceeding.
5
<PAGE> 9
During the pendency of any claim, the Reinsurer may investigate the
same and interpose, at its own expense, in the proceeding where that
claim is to be adjudicated, any defense or defenses that it may deem
available to the Reinsured, to its policyholder, or to any liquidator,
receiver or statutory successor of the Reinsured or guaranty fund or
association. The expenses thus incurred by the Reinsurer will be
chargeable, subject to approval of the applicable court, against the
Reinsured as part of the expense of conservation or liquidation to the
extent of a pro rata share of the benefit which may accrue to the
Reinsured as a result of the defense undertaken by the Reinsurer.
This reinsurance shall be payable directly by the Reinsurer to the
Reinsured or to its domiciliary liquidator, receiver, conservator or
statutory successor, except as expressly required otherwise by
applicable insurance law.
9. Insolvency of the Reinsurer. In the event of the insolvency,
bankruptcy, receivership, rehabilitation or dissolution of the
Reinsurer, the Reinsured may retain all or any portion of any amount
then due or which may become due to the Reinsurer under this Agreement
and use such amounts for the purposes of paying any and all
liabilities of the Reinsurer incurred under this Agreement. When all
such liability hereunder has been discharged, the Reinsured shall pay
the Reinsurer, its successor or statutory receiver, the balance of
such amounts withheld as may remain.
ARTICLE XII
RECAPTURE
1. With the exception of the provisions in Article VII and in Section 2
of this Article, business reinsured under this Agreement will not be
eligible for recapture.
2. Business reinsured under this Agreement may be recaptured after the
end of the twentieth policy year. The Reinsured shall notify the
Reinsurer at least thirty (30) days prior to the end of the twentieth
policy year if the Reinsured elects to recapture such business.
3. Upon recapture, the Reinsurer will pay the Reinsured an amount for
each recaptured policy equal to the surrender value of the policy.
The Reinsured will transfer to the Reinsurer the modified coinsurance
reserve of the policy which equals the Account Value of the policy.
ARTICLE XIII
EXCLUSION OF THE FIXED ACCOUNT
1. The Fixed Account of the policies will be excluded from this
Agreement. Any transfers between the Fixed Account and the Variable
Account will be subject to a transfer adjustment as specified in
Sections 2 and 3 of this Article.
6
<PAGE> 10
2. For any transfer from the Variable Account to the Fixed Account, the
Reinsured shall pay the Reinsurer a transfer adjustment which equals
the quota share of the amount transferred multiplied by the applicable
Transfer Factor as provided in Schedule I.
3. For any transfer from the Fixed Account to the Variable Account, the
Reinsurer shall pay the Reinsured a transfer adjustment which equals
the quota share of the amount transferred multiplied by the applicable
Transfer Factor as provided in Schedule I.
ARTICLE XIV
ARBITRATION
1. Any controversy or claim arising out of or relating to this Agreement
will be settled by arbitration.
2. There must be three arbitrators who will be active, prior or retired
officers of life insurance companies other than the contracting
companies or their subsidiaries or affiliates. Each of the
contracting companies will appoint one of the arbitrators and these
two arbitrators will select the third.
In the event either contracting company fails to choose an arbitrator
within thirty (30) days after the other contracting company has given
written notice of its arbitrator appointment, the contracting company
which has given written notice may choose two arbitrators who shall in
turn choose a third arbitrator before entering arbitration. If the
two arbitrators are unable to agree upon the selection of a third
arbitrator within thirty (30) days following their appointment, each
arbitrator shall nominate three candidates within ten days thereafter,
and the final selection shall be made a court of competent
jurisdiction from among the submitted names (three each) or any other
persons the court finds to be a qualified and impartial arbitrator.
3. With regard to (2) above, arbitration must be conducted in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association which will be in effect on the date of delivery of demand
for arbitration.
4. Each contracting company shall pay its arbitrator and its arbitration
expenses and the two companies shall share equally the third
arbitrator's expenses.
5. The award agreed by the arbitrators will be final and binding upon the
parties, and judgment may be entered upon it in any court having
jurisdiction.
7
<PAGE> 11
ARTICLE XV
IMPROPER SOLICITATION OF POLICYOWNERS
1. Neither party shall contact or authorize any other person to contact
owners of the policies for the purpose of soliciting surrender of
the policies, conversion of the policies to another form of insurance,
making policy loans or withdrawals without prior written approval of
the other party.
2. The Reinsured will not cause or permit the existence of this
Reinsurance Agreement to be communicated to any current or prospective
policyholder without the prior written approval of the Reinsurer,
except as where required by state or federal laws. In the event this
provision is violated, the Reinsurer may terminate this Agreement by
giving ninety (90) days' written notice of termination.
ARTICLE XVI
DAC TAX - SECTION 1.848-2(G)(8) ELECTION
The Reinsured 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 1993 and for all subsequent taxable years for which this
Agreement remains in effect.
1. The term "party" will refer to either the Reinsured or the Reinsurer
as appropriate.
2. The terms used in this Article are defined by reference to Regulation
Section 1.848-2 in effect December 1992.
3. The party with the net positive 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).
4. 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.
5. The Reinsured will submit a schedule to the Reinsurer by May 1 of each
year of its calculation of the net consideration for the preceding
calendar year. This schedule of calculations will be accompanied by a
statement signed by an officer of the Reinsured stating that the
Reinsured will report such net consideration in its tax return for the
preceding calendar year.
6. The Reinsurer may contest such calculation by providing an alternative
calculation to the Reinsured in writing within 30 days of the
Reinsurer's receipt of the Reinsured's calculation. If the Reinsurer
does not so notify the Reinsured, the Reinsurer will report the net
consideration as determined by the Reinsured in the Reinsurer's tax
return for the previous calendar year.
8
<PAGE> 12
7. If the Reinsurer contests the Reinsured'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 of the date
the Reinsurer submits its alternative calculation. If the Reinsured
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.
ARTICLE XVII
DURATION OF AGREEMENT
1. Submission or acceptance of new business under this Agreement may be
terminated at any time after December 31, 1998, by either company
giving ninety (90) days' written notice of termination. The day the
notice is deposited in the mail addressed to the Home Office, or to an
Officer of either company, will be the first day of the ninety-day
period.
2. During the ninety (90) day period, this Agreement will continue to be
in force.
3. After termination, you and we are both liable under the terms of this
Agreement for all automatic reinsurance which becomes effective prior
to termination of this Agreement. After termination we are both
liable for all automatic and facultative reinsurance which has an
application date on or before the effective date of the termination.
ARTICLE XVIII
MODIFICATION OF ALLOWANCES AND PRODUCT DESIGN
1. All reinsurance premium rates and reinsurance expense allowances
specified in this Agreement will be guaranteed until November 1, 1996.
2. After November 1, 1996, we reserve the right to examine the actual to
expected experience of the business and revise the reinsurance premium
rates and reinsurance expense allowances. You agree to provide, upon
request, any report or information reasonably required by us to make
the examination.
3. You may also review the experience to determine your expected profit
based on actual experience to determine if any modifications are
required. The modifications allowed may include upon your request an
increase in policy cost factors, or changes in compensation,
reinsurance expense allowance, underwriting practices, or any other
aspect of the reinsurance arrangement.
9
<PAGE> 13
4. Requested modifications shall only apply to new business and shall be
implemented only upon mutual agreement. If new terms are not mutually
agreed to within ninety (90) days after the date the proposal of the
new reinsurance arrangement and/or any product design changes are
made, this Reinsurance Agreement will terminate.
5. Nothing in this article shall be construed as limiting your right to
request the redesign of the products reinsured under this treaty.
Examples of reasons that might cause you to request such a redesign
include, but would not be limited to: to adjust pricing to take into
account emerging experience that is more favorable than that assumed
in the pricing; to adjust pricing to compensate for any adverse
deviations from pricing assumptions; or to accommodate new financial
objectives.
ARTICLE XIX
ENTIRE AGREEMENT
This Agreement shall constitute the entire agreement between the parties with
respect to the business being reinsured hereunder. There are no understandings
between the parties other than as expressed in this Agreement. Any change or
modification to this Agreement shall be null and void unless made by amendment
to this Agreement and signed by both parties.
10
<PAGE> 14
ARTICLE XX
EXECUTION
In witness of the above, this Agreement is signed in duplicate at the dates and
places indicated and shall be effective as of November 1, 1995.
NORTH AMERICAN SECURITY LIFE TRANSAMERICA OCCIDENTAL
INSURANCE COMPANY LIFE INSURANCE COMPANY
at Boston, Massachusetts, at Charlotte, North Carolina,
On April 15, 1996. On April 12, 1996
------------------------- -------------------------
By: Hugh McHaffie By:
------------------------- -------------------------
Title: Vice President & Product Actuary
By: Richard Hirtle By: David Fairhall
------------------------- -------------------------
Title: Sr. Vice President, CFO Second Vice President
11
<PAGE> 15
SCHEDULE A
BUSINESS REINSURED
- - TYPE OF BUSINESS Individual and last survivor life
insurance issued by you. The insureds
must be residents of the United States
and issue age 80 or under.
- - PLANS OF INSURANCE Venture Life (all policy form numbers
beginning with "VENLIFE"). The Fixed
Accounts of the policies are excluded
from this Agreement subject to provisions
of Article XIII.
<PAGE> 16
SCHEDULE B
BASIS OF REINSURANCE
The amount of reinsurance under this Agreement shall be the Reinsurer's quota
share percentage shown below of the liability of the Reinsured on all policies
in the forms listed in Schedule A. The reinsurance will cover only the
Variable Account of the policy.
- - QUOTA SHARE PERCENTAGE 50%
- - JUMBO LIMIT $10,000,000
- - BINDING LIMIT $3,500,000
- - YEARS TO RECAPTURE 20
The specific amount of reinsurance is as follows:
50% times VDB
where:
TDB = Total Death Benefit
VDB = Variable Death Benefit
TAV = Total Account Value, including loan
collateral account VAV = Variable Account
Value, sum of all separate account
investment options
VDB = TDB times (VAV / TAV).
<PAGE> 17
SCHEDULE C
MONTHLY SETTLEMENT REPORT
A. Due Reinsurer
(1) Initial Premium Ceded
(2) Additional/Renewal Premiums Ceded
(3) Interest Credit on Modified Coinsurance Reserve (per
Schedule G)
(4) Transfers-in from the Fixed Account
(5) Adjustment for transfers from the Variable Account to the
Fixed Account (per Article XIII)
(6) Total Amount Due Reinsurer (Total 1-5)
B. Due Reinsured
(1) Commission and Expense Allowances (per Article V)
(a) Commission Allowance
(b) Per Policy Issue Expense Allowance
(c) Sales and Marketing Expense Allowance
(d) Maintenance Expense Allowance
Subtotal
(2) Benefits Ceded
(a) Surrenders
(b) Transfers Out to Fixed
(c) Penalty Free Surrender
(d) Partial Withdrawals
(e) Death Claims
Subtotal
(3) Adjustment for transfers from the Fixed Account to the
Variable Account (per Article XIII)
(4) Adjustment for Additional/Renewal Premium
(5) Modified Coinsurance Reserve Adjustment (per Article IX)
(6) Premium Tax Reimbursement
(7) Total Amount Due Reinsured = (1) + (2) + (3) + (4) + (5) + (6)
C. Balance During the Period = A(6) - B(7)
If positive, the balance is due to be paid by the Reinsured.
If negative, the balance is due to be paid by the Reinsurer.
The above information shall be provided by the Reinsured on an aggregate basis.
The individual policy data shall be available to the Reinsurer on a computer
tape or diskette upon request.
<PAGE> 18
SCHEDULE D
COMMISSION AND EXPENSE ALLOWANCES
1. Expense Allowances. The Reinsurer will grant the Reinsured the
following expense allowances on the portion of the business reinsured:
Policy Issue Expense
0.40% of reinsurance premiums paid on the effective date of
the policy
90% of the Quota Share Percentage of $165
90% of the Quota Share Percentage of additional $165, if the
policy is issued on a joint life basis
0.005% of premium for incorrect investment allocations
Total
Maintenance Expense (First and Renewal Years)
0.215% of variable funds annually, payable monthly
90% of the Quota Share Percentage of $40.00 per year, payable
monthly
Total
Sales and Marketing Develop Expense (% of Premium)
0.145% of variable funds payable monthly in arrears
Additional 0.12% of variable funds payable monthly in arrears,
if the policy is issued on a joint life basis
Total
2. Commission Allowances. The Reinsurer will grant the Reinsured
commission allowances, on the reinsured business following the
schedule below:
8.5% of reinsurance premiums
0.03% of variable funds payable annually
Total
<PAGE> 19
SCHEDULE E
QUARTERLY BUSINESS MANAGEMENT REPORT
A. Informational Reports
1. Actual to Expected Mortality Report
2. Persistency Report
3. Production Report - Distribution of Premiums by Issue
Age (initial and renewal)
Distribution of Face Amount by Issue
Age Distribution of Average Premium
by Issue Age
4. Reserve Report showing the statutory reserves, account values
and cash surrender values
5. Policy Loads Report showing the mortality and expense risk
charges and the administration charges, and other charges
deducted from the contract values.
<PAGE> 20
SCHEDULE F
ANNUAL REPORT
The annual report shall provide the following information:
A. Exhibits 1 and 8 from the NAIC-prescribed annual statement
B. Page 6, "Analysis of Increase in Reserve" from the
NAIC-prescribed annual statement.
<PAGE> 21
SCHEDULE G
INTEREST CREDIT ON MODIFIED COINSURANCE RESERVE
The amount of the interest credit payable by the Reinsured to the Reinsurer
will be determined according to the schedule below:
A. Account Value as of the beginning of the month _________
B. Increases in Account Value during the month
(1) Initial Premiums _________
(2) Additional/Renewal Premium
(3) Transfers-in from the Fixed Account _________
(4) Total increase ((1) + (2) +(3)) _________
C. Decreases in Account Value during the month
(1) Deaths benefits paid
(2) Benefits Paid Upon Surrender
(3) Deferred Sales Charge Deductions
(4) Partial Withdrawals _________
(5) Transfers-out to the Fixed Account _________
(6) M&E Deductions _________
(7) Cost of Insurance Deductions _________
(8) Miscellaneous Charges _________
(9) Total Decrease (sum of (1) through (8)) _________
D. Additional Revenue Fee Reimbursement
(0.45% of variable funds, payable monthly) _________
E. Account Value as of the end of the month _________
F. Interest Credit on Modified Coinsurance Reserve as of the
end of the month (i.e., increase in policyholders' accounts
attributable to investment fund increases)
= E - A - B(4) + C(9) + D _________
<PAGE> 22
SCHEDULE H
MODIFIED COINSURANCE RESERVE ADJUSTMENT
The reserve adjustment will be calculated as (B) minus (A), where (A) and (B)
are defined as follows:
Increase in Mod-Co Reserve Payable by the Reinsurer to the Reinsured:
A. Account Value as of the beginning of the month _________
B. Account Value as of the end of the month _________
C. Increase in Mod-Co Reserve (B - A) _________
D. Statutory Reserve - End of Month _________
E. Account Payable to Reinsurer - End of Month (B - D) _________
<PAGE> 23
SCHEDULE I
TRANSFER ADJUSTMENTS
In the event that the amount of reinsurance with respect to a particular
contract under the reinsurance agreement increases due to a transfer of amounts
from the Fixed Account to the Separate Account, then the Company will pay to
the Reinsurer the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the account value transferred into the Separate
Account, and
(ii) equals the transfer adjustment factors in the
table below.
In the event that the amount of reinsurance with respect to a particular
contract under the reinsurance agreement decreases due to a transfer of amounts
from the Separate Account to the Fixed Account, then the Reinsurer will pay to
the Company the aggregate of such amounts, less transfer adjustments equal to
(i) times (ii) where:
(i) equals the account value transferred into the Fixed Account,
and
(ii) equals the transfer adjustment factors in the table
below.
<TABLE>
<CAPTION>
Policy Transfer Adjustment Factors Policy Transfer Adjustment Factors
Year Single Life Last Survivor Year Single Life Last Survivor
<S> <C> <C> <C> <C> <C>
1 11..2% 11.6% 11 5.2% 5.0%
2 10..3% 10.7% 12 4.9% 4.6%
3 9.4% 9.6% 13 4.5% 4.2%
4 8.8% 8.9% 14 4.0% 3.8%
5 8.2% 8.1% 15 3.6% 3.3%
6 7.6% 7.4% 16 3.1% 2.9%
7 7.0% 6.8% 17 2.6% 2.3%
8 6.3% 6.1% 18 2.0% 2.0%
9 6.0% 5.7% 19 2.0% 2.0%
10 5.7% 5.4% 20 2.0% 2.0%
</TABLE>
<PAGE> 1
Reinsurance Agreement
No. 5090-02
for
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
<PAGE> 2
Automatic Yearly Renewable Term (YRT) Reinsurance Agreement
(No. 5090-02)
Between
NORTH AMERICAN SECURITY
LIFE INSURANCE COMPANY
of Boston, Massachusetts
(Reinsured referred to as you, your)
and
TRANSAMERICA OCCIDENTAL
LIFE INSURANCE COMPANY
of Los Angeles, California
(Reinsurer referred to as we, us, our)
Effective November 1, 1995
<PAGE> 3
CONTENTS
ARTICLES
<TABLE>
<S> <C> <C>
I Basis of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 1
II Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
III Formal Cession . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
IV Plans of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 3
V Reinsurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . 3
VI Premium Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 4
VII Oversights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
VIII Reductions, Terminations and Changes . . . . . . . . . . . . . . . . 5
IX Increase In Retention . . . . . . . . . . . . . . . . . . . . . . . . 6
X Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
XI Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
XII Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
XIII Inspection of Records . . . . . . . . . . . . . . . . . . . . . . . . 9
XIV Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
XV Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
XVI Parties to Agreement . . . . . . . . . . . . . . . . . . . . . . . 10
XVII DAC Tax - Section 1.848-2(g)(8) Election . . . . . . . . . . . . . 10
VIII Duration of Agreement . . . . . . . . . . . . . . . . . . . . . . . 11
XIX Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SCHEDULES
A Specifications
B Benefits
C Definitions
EXHIBITS
I Retention Limits
II Reinsurance Premiums
III YRT Rate Schedules
</TABLE>
All schedules and exhibits attached will be considered part of this agreement.
TRANSAMERICA REINSURANCE
<PAGE> 4
ARTICLE I
BASIS OF REINSURANCE
Reinsurance under this Agreement must be life insurance as stated in Schedule
A. You must automatically reinsure the life insurance for the plans as stated
in Schedule A and any additional benefits listed in Schedule B.
1. REQUIREMENTS FOR AUTOMATIC REINSURANCE:
A. Each individual risk must be a resident of the United States.
B. Each individual risk must be underwritten according to your standard
underwriting practices and guidelines.
C. Any risk offered on a facultative basis by you to us or any other
company will not qualify for automatic reinsurance.
D. The maximum issue age on any risk will be age 80.
E. The mortality rating on each individual risk must not exceed Table 16,
Table P, 500% or its equivalent on a flat extra premium basis.
F. The maximum amount of insurance issued and applied for in all
companies on each risk must not exceed the jumbo limits as stated in
Schedule A.
G. On each individual risk, you must retain the amounts of insurance as
stated in Exhibit I.
H. The maximum amounts of insurance to be reinsured on each individual
risk must not exceed the automatic binding limits as stated in
Schedule A.
2. REQUIREMENTS FOR FACULTATIVE REINSURANCE:
A. Plan of Insurance Listed in Schedule A:
(1) If the Requirements for Automatic Reinsurance are met but you
prefer to apply for facultative reinsurance, then you must submit
to us all the papers relating to the insurability of the
individual risk for facultative reinsurance.
(2) If Requirements for Automatic Reinsurance are not met, then you
must submit to us all the papers relating to the insurability of
the individual risk for facultative reinsurance.
B. Plan of Insurance Not Listed in Schedule A:
You may submit an application for facultative reinsurance on any of
your other plans of insurance.
3. Copies of all the papers relating to the insurability of the individual
risk must be sent to us for facultative reinsurance. After we have
examined the papers sent, we will promptly notify you of our
1
<PAGE> 5
final underwriting offer or our underwriting offer subject to additional
requirements. Our final underwriting offer on the individual risk will
automatically terminate when one of the following situations occurs:
(1) The date we receive notice from you of the withdrawal of your
application, or
(2) 120 days after we made our offer or
(3) The date specified in our approval to extend our offer.
4. In no event will we be liable for reinsurance unless the issuance of the
insurance, issued directly by you, constituted the doing of business in a
jurisdiction in which you are properly licensed.
ARTICLE II
LIABILITY
1. Our liability for automatic reinsurance will begin simultaneously with your
liability.
2. Our liability for facultative reinsurance on the individual risk will begin
simultaneously with your liability once we have accepted the application in
writing for facultative reinsurance and you have accepted our offer.
3. Our liability for reinsurance on the individual risk will terminate when
your liability terminates.
4. The initial and subsequent reinsurance premiums must be received by us on a
timely basis for us to maintain our liability of each individual risk.
ARTICLE III
FORMAL CESSION
You will inform us of any reinsurance by submitting a monthly accounting
statement as described in Article VI.
ARTICLE IV
2
<PAGE> 6
PLANS OF REINSURANCE
1. Life reinsurance will be on the basis as stated in Schedule B.
2. When requested, you must furnish us with a copy of each policy, rider, rate
book and cash value table which applies to the life insurance reinsured.
ARTICLE V
REINSURANCE PREMIUMS
1. Life Reinsurance Premiums.
A. Life Reinsurance Premiums Paid on a Yearly Renewable Term Basis.
The life reinsurance premium on the net amount at risk will be
determined from Exhibit II.
B. Deficiency Reserves of the Yearly Renewable Term Premiums.
We anticipate that the premium rates in Exhibit III will be continued
indefinitely for all of the life reinsurance to which such rates will
apply.
However, because of technical questions in some states regarding
deficiency reserves, if any one or more of such premium rates for any
policy year or years after the third will be less than the net premium
rate or rates based on the 1980 CSO Table for the applicable mortality
rating with interest at the rate specified in the Standard Valuation
Law, then, in that event, only the latter rate will be guaranteed by
us.
3
<PAGE> 7
ARTICLE VI
PREMIUM ACCOUNTING
1. Payment of Reinsurance Premiums
A. The reinsurance premiums will be paid to us on the basis stated in
Exhibit II.
B. Within twenty-five (25) days after the close of each month, you will
send us a copy of a statement listing first year and renewal
reinsurance premiums less refunds and allowances (dividends and cash
values, if applicable) and other data mutually agreed upon by both
parties.
C. If the net reinsurance premium balance is payable to us, you must
include this payment with your statement. If the net reinsurance
premium balance is not received by us or a statement is not prepared
and sent to us within twenty-five (25) days after the close of the
month, the reinsurance premiums for all of the reinsurance risks
listed on the statement will be delinquent.
D. If the net reinsurance premium balance is payable to you, we must
remit our payment to you within thirty days after receiving your
statement.
2. Termination Because of Non-Payment of Premium.
When reinsurance premiums are delinquent, we have the right to terminate
the reinsurance risks on the statement by giving you thirty (30) days'
written notice. As of the close of this thirty (30) day period, all of our
liability will terminate for:
A. The risks described in the preceding sentence and
B. The risks where the reinsurance premiums became delinquent during the
thirty (30) day period.
Regardless of these terminations, you will continue to be liable to us for
all unpaid reinsurance premiums earned by us.
3. Reinstatement of a Delinquent Statement.
You may reinstate the terminated risks within sixty (60) days after the
effective date of termination by paying the unpaid reinsurance premiums for
the risks in force prior to the termination. However, we will not be
liable for any claim incurred between the date of termination and
reinstatement. The effective date of reinstatement will be the day we
receive the required back premiums.
4. Currency.
The reinsurance premiums and benefits payable under this Agreement will be
payable in the lawful money of the United States.
5. Within sixty (60) days following the close of each calendar year, you will
send us an inforce listing of all policies reinsured under this Agreement.
4
<PAGE> 8
ARTICLE VII
OVERSIGHTS
If there is an unintentional oversight or misunderstanding in the
administration of this Agreement by either company, it can be corrected
provided the correction takes place promptly after the time the oversight or
misunderstanding is first discovered. Both companies will be restored to the
position they would have occupied had the oversight or misunderstanding not
occurred. Interest at a rate to be determined annually will be payable on any
premiums or allowances due as a result of the oversight or misunderstanding.
ARTICLE VIII
REDUCTIONS, TERMINATIONS AND CHANGES
1. If there is a contractual or non-contractual replacement or change in the
insurance reinsured under this Agreement where full underwriting evidence
according to your regular underwriting rules is not required, the insurance
will continue to be reinsured with us under this Agreement.
2. If the insurance reinsured under this Agreement increases and
A. The increase is subject to new underwriting evidence, the provisions
of Article I shall apply to the increase in reinsurance.
B. The increase is not subject to new underwriting evidence, we will
accept automatically the increase in reinsurance but not to exceed our
automatic binding limit.
3. If the insurance reinsured under this Agreement is increased or reduced,
the reinsurance for the individual risk involved will be increased or
reduced by the same amount on the effective date of increase or reduction.
If an individual life is shared by more than one reinsurer, our share of
the increase or decrease will be the same percentage as our initial
reinsurance on the individual risk.
4. If any portion of the total insurance retained by you on an individual life
reduces or terminates, any reinsurance under this Agreement based on the
same life will also be reduced or terminated. You will reduce your
reinsurance by applying the retention limits which were in effect at the
time the policy was issued. You will not be required to retain an amount
in excess of your regular retention limit for the age, mortality rating and
risk classification at the time of issue for any policy on which
reinsurance is being reduced.
You must first reduce the reinsurance of the insurance which has the same
mortality rating as the terminated insurance. If further reduction is
required, the reinsurance to be terminated or reduced will be determined by
chronological order in which the reinsurance was first reinsured.
5. If the insurance for a risk is shared by more than one reinsurer, our
percentage of the increased or reduced reinsurance will be the same as our
initial percentage of reinsurance of the individual risk.
5
<PAGE> 9
6. If insurance reinsured under this Agreement is terminated, the reinsurance
for the individual risk involved will be terminated on the effective date
of termination.
7. On facultative reinsurance, if you wish to reduce the mortality rating,
this reduction will be subject to the facultative provisions of this
Agreement.
8. If at the time of a contractual or non-contractual change, you elect not to
continue to reinsure the risk with us, you must pay us an early recapture
charge as negotiated with us.
9. We will refund to you all unearned reinsurance premiums not including
policy fees, less applicable allowances, arising from reductions,
terminations and changes as described in this Article.
10. Changes as a result of extended term or reduced paid-up will be handled
like reductions.
ARTICLE IX
INCREASE IN RETENTION
1. If you should increase the retention limits as listed in Exhibit I, prompt
written notice of the increase must be given to us.
2. You will have the option of recapturing the reinsurance under this
Agreement when your retention limit increases, and following the number of
policy years until recapture as stated in Schedule A. You may exercise
your option to recapture by giving written notice to us within ninety days
after the effective date of the increase.
3. If you exercise your option to recapture, then
A. You must reduce the reinsurance on each individual life on which you
retained your maximum retention limit for the age and mortality rating
that was in effect at the time the reinsurance was ceded to us.
B. No recapture will be made to reinsurance on an individual life if (a)
you retained a special retention limit less than your maximum
retention limit for the age and mortality rating in effect at the time
the reinsurance was ceded to us, or if (b) you did not retain
insurance on the life.
C. You must increase your total amount of insurance on the individual
life up to your new retention limit by reducing the reinsurance. If
an individual life is shared by more than one reinsurer, our
percentage of the reduced reinsurance will be the same percentage as
our initial reinsurance on the individual risk.
D. The reduction of reinsurance will become effective on the policy
anniversary date immediately following the effective date of your
increase in retention limits.
6
<PAGE> 10
ARTICLE X
REINSTATEMENT
If insurance lapses for nonpayment of premium and is reinstated under your
terms and rules, the reinsurance will be reinstated by us. You must pay us all
back reinsurance premiums in the same manner as you received insurance premiums
under your policy.
ARTICLE XI
EXPENSES
You must pay the expense of all medical examinations, inspection fees and other
charges in connection with the issuance of the insurance.
ARTICLE XII
CLAIMS
1. Our liability for the insurance benefits reinsured under this Agreement
will be the same as your liability for such benefits. All reinsurance
claim settlements will be subject to the terms and conditions of the
particular contract under which you are liable.
2. When you are advised of a claim, you must promptly notify us.
3. If a claim is made under incontestable insurance reinsured under this
Agreement and if you retained fifty percent or more of the insurance at the
time of issue, we will abide the issue as it is settled by you. When you
request payment of the reinsurance proceeds, you must deliver a copy of the
proof of death and the claimant's statement to us.
4. If a claim is made under either (a) incontestable insurance and if you
retained less than fifty percent of the insurance at the time of issue, or
(b) contestable insurance reinsured under this Agreement, you must submit a
copy of all papers connected with the claim to us. After reviewing all the
claim papers, we will give our opinion as to how we would handle the claim
had it been ours. We must give our opinion within ten working days after
we receive a copy of all papers connected with the claim. If we do not
respond within this ten (10) day period, it will be presumed we are
agreeable to the payment of the claim. However, given your relationship
with your claimant, you are not obligated to follow our opinion.
7
<PAGE> 11
5. Payment of reinsurance proceeds will be made in a single sum regardless of
your mode of settlement.
6. A. You must promptly notify us of your intent to contest insurance
reinsured under this Agreement or to assert defenses to a claim for
such insurance. If your contest of such insurance results in the
reduction of your liability, we will share in this reduction. Our
percentage of the reduction will be our net amount of risk on the
individual life as it relates to your total net amount at risk on the
date of the death of the insured.
B. If we should decline to participate in the contest or assertion of
defenses, we will then release all of our liability by paying you the
full amount of reinsurance and not sharing in any subsequent reduction
in liability.
7. If the amount of insurance provided by the policy or policies reinsured
under this Agreement is increased or reduced because of a misstatement of
age or sex established after the death of the insured, we will share with
you in this increase or reduction. Our share of this increase or reduction
will be the percentage that our net liability relates to your total net
liability and that of other reinsurers, immediately prior to this increase
or reduction. In the case of reinsurance on the yearly renewable term
basis, our reinsurance will be calculated from the inception date of the
policy on the adjusted amounts using the premiums and reserves applicable
to the correct age or sex. Any adjustment in reinsurance premiums will be
made without interest.
8. If a claim is approved for disability waiver of premium insurance reinsured
under this Agreement, you will continue to pay the reinsurance premiums to
us. We will reimburse you for our share of the annual liability, less any
commissions not paid to your agent.
9. You must pay the routine expenses incurred in connection with settling
claims. These expenses may include compensation of agents and employees
and the cost of routine investigations.
10. We will share with you all expenses that are not routine. Expenses that
are not routine are those directly incurred in connection with the contest
or the possibility of a contest of insurance or the assertion of defenses.
These expenses will be shared in proportion to the net sum at risk for both
of us. However, if we have released our liability under Section 6. of this
Article, we will not share in any expenses incurred after our date of
release.
11. In the case of a claim described under:
A. Section 3 of this Article, in no event will we have any liability for
any Extra-Contractual Damages which are rendered against you as a
result of acts, omissions or course of conduct committed by you in
connection with the insurance reinsured under this Agreement.
B. Section 4 of this Article and if you followed our opinion, we
recognize that circumstances may arise under which we, in equity,
should share, to the extent permitted by law, in paying certain
assessed damages. Such circumstances are difficult to define in
advance, but involve those situations in which we were an active party
in the act, omission or course of conduct which ultimately resulted in
the assessment of such damages. The extent of such sharing is
dependent on good faith assessment of culpability in each case, but
all factors being equal, the division of any such assessment would be
in proportion to what impact our opinion had on such damages.
8
<PAGE> 12
ARTICLE XIII
INSPECTION OF RECORDS
We will have the right, at any reasonable time, to inspect your books and
documents which relate to your reinsurance under this Agreement.
ARTICLE XIV
INSOLVENCY
1. If you become insolvent, all of the reinsurance due you will be paid
immediately upon demand directly to your liquidator (receiver or statutory
successor), without decrease.
2. If you become insolvent, the liquidator will give us written notice of a
pending claim against you for insurance reinsured under this Agreement
within a reasonable time after the claim is filed in the insolvency
proceeding. During the insolvency proceedings where the claim is to be
settled, we may investigate this pending claim and mediate in your or your
liquidator's name, but at our own expense, with any defense or defenses
which we may believe available to you or your liquidator.
3. The expenses incurred by us will be chargeable, subject to court approval,
against you as part of the expense of liquidation. The benefit which you
may accumulate solely as a result of the defense undertaken by us will be
shared proportionately. Where two or more reinsurers are involved in the
same claim and a majority in interest elect to mediate a defense or
defenses to this claim, the expense will be shared as though such expense
had been incurred by you.
ARTICLE XV
ARBITRATION
1. Any controversy or claim arising out of or relating to this Agreement will
be settled by arbitration.
2. There must be three arbitrators who will be active, prior or retired
officers of life insurance companies other than the contracting companies
or their subsidiaries or affiliates. Each of the contracting companies
will appoint one of the arbitrators and these two arbitrators will select
the third.
9
<PAGE> 13
In the event either contracting company fails to choose an arbitrator
within thirty (30) days after the other contracting company has given
written notice of its arbitrator appointment, the contracting company which
has given written notice may choose two arbitrators who shall in turn
choose a third arbitrator before entering arbitration. If the two
arbitrators are unable to agree upon the selection of a third arbitrator
within thirty (30) days following their appointment, each arbitrator shall
nominate three candidates within ten (10) days thereafter, and the final
selection shall be made a court of competent jurisdiction from among the
submitted names (three each) or any other persons the court finds to be a
qualified and impartial arbitrator.
3. With regard to (2) above, arbitration must be conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
which will be in effect on the date of delivery of demand for arbitration.
4. Each contracting company shall pay its arbitrator and its arbitration
expenses and the two companies shall share equally the third arbitrator's
expenses.
5. The award made by the arbitrators will be final, and judgment may be
entered upon it in any court having jurisdiction.
ARTICLE XVI
PARTIES TO AGREEMENT
This is an Agreement solely between you and us. There will be no legal
relationship between us and any person having an interest of any kind in any of
your insurance.
ARTICLE XVII
DAC TAX
SECTION 1.848-2(G) (8) ELECTION
If applicable, both of us 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 will be effective
for all subsequent taxable years for which this Agreement remains in effect.
1. The term "party" will refer to either you or us as appropriate.
2. The terms used in this Article are defined by reference to Regulation
Section 1.848-2 in effect December 1992.
10
<PAGE> 14
3. The party with the net positive 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).
4. Both of us 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.
5. You will submit a schedule to us by May 1 of each year of your calculation
of the net consideration for the preceding calendar year. This schedule of
calculations will be accompanied by a statement signed by one of your
officers stating that you will report such net consideration in your tax
return for the preceding calendar year.
6. We may contest such calculation by providing an alternative calculation to
you in writing within thirty (30) days of our receipt of your calculation.
If we do not so notify you, we will report the net consideration as
determined by you in our tax return for the previous calendar year.
7. If we contest your calculation of the net consideration, both of us will act
in good faith to reach an agreement as to the correct amount within thirty
(30) days of the date we submit our alternative calculation. If both of us
reach agreement on an amount of net consideration, each of us will report
such amount in their respective tax returns for the previous calendar year.
ARTICLE XVIII
DURATION OF AGREEMENT
1. This Agreement may be terminated at any time by either company after
December 31, 1998, by giving ninety (90) days' written notice of
termination. The day the notice is deposited in the mail addressed to the
Home Office or to an Officer of either company will be the first day of the
ninety (90) day period.
2. During the ninety (90) day period, this Agreement will continue to be in
force.
3. After termination, you and we are both liable under the terms of this
Agreement for all automatic reinsurance which becomes effective prior to
termination of this Agreement. After termination we are both liable for
all automatic and facultative reinsurance which has an application date on
or before the effective date of the termination.
11
<PAGE> 15
ARTICLE XIX
EXECUTION
In witness of the above, this Agreement is signed in duplicate at the dates and
places indicated and shall be effective as of November 1, 1995.
Executed in duplicate by Executed in duplicate by
NORTH AMERICAN SECURITY LIFE TRANSAMERICA OCCIDENTAL
INSURANCE COMPANY LIFE INSURANCE COMPANY
at Boston, Massachusetts, at Charlotte, North
Carolina,
on April 15, 1996 on April 15, 1996
------------------------------- -------------------------------
By: Hugh McHaffie By:
------------------------------- -------------------------------
Title: Vice President & Vice President
Product Actuary
By: Richard Hirtle By: David Fairhall
------------------------------- -------------------------------
Title: Senior Vice President Second Vice President
& CFO
12
<PAGE> 16
SCHEDULE A
SPECIFICATIONS
# TYPE OF BUSINESS Individual and last survivor life
insurance issued by you. The insureds
must be residents of the United States
and issue age 80 or under.
# PLANS OF INSURANCE Venture Life (all policy form numbers
beginning with "VENLIFE")
# BASIS OF REINSURANCE 80% Quota Share of Net Amount at Risk in
Excess of your Retention Limit as stated
in Exhibit I.
# JUMBO LIMIT Life $10,000,000
# BINDING LIMIT Life $3,500,000
# POLICY YEARS
UNTIL RECAPTURE Yearly Renewable Term 20 years
<PAGE> 17
SCHEDULE B
BENEFITS
The following benefits are reinsured under this Agreement:
LIFE (Level) Life reinsurance will be on the yearly renewable term basis
for the net amount at risk. The net amount at risk will be
the insurance face amount less the cash surrender value, and
will be determined on a monthly basis.
The Reinsured's total net amount at risk is equal to the
following:
80% of {(TDB - FAV - VCSV) - 50% of (VDB - VCSV) -
Retention Limit as defined in Exhibit I}
where:
TDB = Total Death Benefit
VDB = Variable Death Benefit
FDB = Fixed Death Benefit
TCSV = Total Cash Surrender Value
VCSV = Variable Cash Surrender Value
VCSV = Fixed Cash Surrender Value
TAV = Total Account Value, including loan collateral account
VAV = Variable Account Value, sum of all separate account
investment options
FAV = Fixed Account Value, including loan collateral account
DEBT = Total Outstanding Debt under the contract
VDB = TDB times (VAV / TAV)
FDB = TDB times (FAV / TAV)
VCSV = TCSV times (VAV / TAV)
FCSV = TCSV times (FAV / TAV).
<PAGE> 18
SCHEDULE C
DEFINITIONS
1. AUTOMATIC Insurance which must be ceded by the
Reinsured in accordance with the terms of
the Agreement and must be accepted by the
Reinsurer.
2. EXCESS The Reinsurer agrees to reimburse the
Reinsured for all losses or a large
portion of the losses over the
Reinsured's retention. The Reinsurer
becomes involved in a loss only after the
loss has exceeded the Reinsured's
retention.
3. FACULTATIVE Insurance which the Reinsured has the
option to cede and the Reinsurer has the
option to accept or decline individual
risks. The agreement merely reflects how
individual facultative reinsurance shall
be handled.
4. INITIAL
MINIMUM AMOUNT The smallest amount of reinsurance
permitted at the inception of the
reinsurance transaction.
5. LIFE PREMIUMS Yearly Renewable Term (YRT) - Under the
YRT method, the Reinsured transfers to
the Reinsurer the mortality risk on
either a net amount at risk basis or on
an approximation of the net amount at
risk basis.
Flat Extra - Flat extra ratings usually
apply to applicants in hazardous
occupations or avocations or with certain
physical impairments of a temporary
nature.
Substandard Table Extra - Substandard
table extra ratings usually apply to
physically impaired lives.
6. NET AMOUNT AT RISK For permanent insurance, the difference
between the face amount and the policy
mean valuation reserve. For term
insurance, the full face amount of the
term insurance.
7. POINT-IN-SCALE Based on the issue age and duration of
the original policy reinsured.
8. POLICY DATE The effective date shown on the actual
policy.
9. QUOTA SHARE A form of reinsurance indemnifying the
Reinsured against a fixed percentage of
loss on each risk covered in the
Agreement.
<PAGE> 19
10. RECAPTURE The right to not reinsure business
previously reinsured, up through your
standard retention limits, following the
twentieth policy anniversary. Exercising
right or not exercising right applies
uniformly to all business submitted on an
automatic basis.
11. REINSURED (YOU, YOUR) A company which transfers all or part of
the insurance it has written to another
company.
12. REINSURER
(WE, US, OUR) A company which assumes all or part of
the insurance written by another company.
13. REPLACEMENT Contractual - An option provided in the
policy which allows for replacement of
one policy for another without evidence
of insurability.
Non-Contractual - An option not provided
in the policy. However, replacement of
one policy for another must be with new
evidence of insurability.
14. RETENTION The amount of insurance which the
Reinsured keeps for its own account and
does not reinsure in any way.
15. RISK Insurance on an individual life or joint
lives for last survivor insurance.
<PAGE> 20
EXHIBIT I
RETENTION LIMITS
1. LIFE: Minimum of {50% of (VDB - VCSV) + 100% of (FDB - FAV);
$100,000}
where VDB, VCSV, FDB, and FAV are defined as in Schedule B.
<PAGE> 21
EXHIBIT II
REINSURANCE PREMIUMS
1. Reinsurance premiums under this Agreement will be payable on a monthly
basis regardless of how you receive premiums from your insured. The YRT
reinsurance premiums are guaranteed for the first three policy years.
2. STANDARD AND SUBSTANDARD
TABLE EXTRA PREMIUMS The substandard table extra premium will
be an additional 25% per table rating of
the rates set forth in Exhibit III.
3. RENEWAL AND
CONVERSION OF
INSURANCE The renewal and conversion of insurance
shall be considered as a continuation of
the original insurance. Future premiums
will be calculated on a point-in-scale
basis using the applicable rates in the
Agreement.
4. PREMIUM TAX We will pay the you 2.25% of reinsurance
premiums to provide reimbursement for any
premium taxes which you will be required
to pay on the reinsurance premiums
payable under this Agreement.
<PAGE> 22
EXHIBIT III
YRT RATE SCHEDULES
<PAGE> 1
AMENDMENT No. 1
to the Variable Annuity Guaranteed Death Benefit Reinsurance Agreement
Effective July 1, 1995
between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
It is agreed by the two companies that the attached Schedule B will be
substituted for the corresponding schedule attached to this Agreement.
This amendment will be effective March 1, 1996.
In witness whereof, this amendment is signed in duplicate on the dates
indicated at the home office of each company.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
By Hugh McHaffie
--------------------------------------
Date July 31, 1996
------------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By Timothy Ruark
--------------------------------------
Date July 26, 1996
------------------------------------
North American Security Life CIGNA Reinsurance
VEN 7,8,17,18 of Amendment No. 1
July 1, 1995 Effective March 1, 1996
<PAGE> 2
SCHEDULE B
Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Date
VENTURE April 5, 1987
All contracts beginning with FORM NUMBER 207, except; exclude Form 207-VFA-NY;
include FORM VFA-MN; include all certificates beginning with FORM VFA-CERT
All contracts beginning with FORM NUMBER 207, which have FORM ENDORSEMENT.005
attached, except; exclude form 207-VFA-NY; include contracts issued in Montana
which use FORM ENDORSEMENT.005.94
All contracts beginning with FORM VFA-MN with FORM ENDORSEMENT.005 attached
All certificates beginning with FORM VFA-CERT with FORM ENDORSEMENT.007 attached
Policy Description
Flexible Purchase Payment Individual Deferred Combination Fixed and Variable
Annuity Contract Non-Participating
* Includes All State Variations except as noted
North American Security Life CIGNA Reinsurance
VEN 7,8,17,18 of Amendment No. 1
July 1, 1995 Effective March 1, 1996
<PAGE> 3
SCHEDULE B
Fund Date Fund Description
VARIABLE FUNDS:
January 9, 1995 International Growth & Income Trust
February 19, 1993 Value Equity Trust
May 1, 1989 U.S. Government Securities Trust
February 19, 1993 Strategic Bond Trust
April 23, 1991 Growth & Income Trust
June 18, 1985 Investment Quality Bond Trust
June 18, 1985 Money Market Trust
June 18, 1985 Equity Trust
August 3, 1989 Conservative Asset Allocation Trust
August 3, 1989 Moderate Asset Allocation Trust
August 3, 1989 Aggressive Asset Allocation Trust
December 11, 1992 Pasadena Growth Trust
March 18, 1988 Global Equity Trust
March 18, 1988 Global Government Bond Trust
March 4, 1996 International Small Cap Trust
March 4, 1996 Small/Mid Cap Trust
July 15, 1996 Growth Trust
FIXED FUNDS:
August 8, 1989 One Year
August 8, 1989 Three Year
August 8, 1989 Six Year
North American Security Life CIGNA Reinsurance
VEN 7,8,17,18 of Amendment No. 1
July 1, 1995 Effective March 1, 1996
<PAGE> 4
AMENDMENT No. 1
to the Variable Annuity Guaranteed Death Benefit Reinsurance Agreement
Effective July 1, 1995
between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
It is agreed by the two companies that the attached Schedule B will be
substituted for the corresponding schedule attached to this Agreement.
This amendment will be effective March 1, 1996.
In witness whereof, this amendment is signed in duplicate on the dates
indicated at the home office of each company.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
By Hugh McHaffie
--------------------------------------
Date July 31, 1996
------------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By Timothy Ruark
--------------------------------------
Date July 26, 1996
------------------------------------
North American Security Life CIGNA Reinsurance
VEN3 of Amendment No. 1
July 1, 1995 Effective March 1, 1996
<PAGE> 5
SCHEDULE B
Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Policy Description Date
VENTURE Flexible Purchase Payment May 5, 1987
Forms beginning with 302 and Individual Deferred Variable
endorsed with either Annuity Contract Non-Participating
301-VER 9/89 or
ENDORSEMENT.008
* Includes All State Variations
Fund Date Fund Description
VARIABLE FUNDS:
January 9, 1995 International Growth & Income Trust
February 19, 1993 Value Equity Trust
May 1, 1989 U.S. Government Securities Trust
February 19, 1993 Strategic Bond Trust
April 23, 1991 Growth & Income Trust
June 18, 1985 Investment Quality Bond Trust
June 18, 1985 Money Market Trust
June 18, 1985 Equity Trust
August 3, 1989 Conservative Asset Allocation Trust
August 3, 1989 Moderate Asset Allocation Trust
August 3, 1989 Aggressive Asset Allocation Trust
December 11, 1992 Pasadena Growth Trust
March 18, 1988 Global Equity Trust
March 18, 1988 Global Government Bond Trust
March 4, 1996 International Small Cap Trust
March 4, 1996 Small/Mid Cap Trust
July 15, 1996 Growth Trust
North American Security Life CIGNA Reinsurance
VEN 3 of Amendment No. 1
July 1, 1995 Effective March 1, 1996
<PAGE> 6
AMENDMENT No. 1
to the Variable Annuity Guaranteed Death Benefit Reinsurance Agreement
Effective July 1, 1995
between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
It is agreed by the two companies that the attached Schedule B will be
substituted for the corresponding schedule attached to this Agreement.
This amendment will be effective March 1, 1996.
In witness whereof, this amendment is signed in duplicate on the dates
indicated at the home office of each company.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
By Hugh McHaffie
-------------------------------------
Date July 31, 1996
-----------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By Timothy Ruark
-------------------------------------
Date July 26, 1996
-----------------------------------
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VEN 20,21,22,23 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 7
SCHEDULE B
Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Policy Description Date
------------------------------------------------------------------------
All contracts with Form Numbers: Flexible Purchase Payment August 15, 1987
VENTURE.001 Individual Deferred Variable
VENTURE.001.94 Annuity Contract
VENTURE.005 Non-Participating
All Certificates with Form Number:
VENTURE.003
* Includes All State Variations
Fund Date Fund Description
-------------------------------------------------------------
VARIABLE FUNDS:
January 9, 1995 International Growth & Income Trust
February 19, 1993 Value Equity Trust
May 1, 1989 U.S. Government Securities Trust
February 19, 1993 Strategic Bond Trust
April 23, 1991 Growth & Income Trust
June 18, 1985 Investment Quality Bond Trust
June 18, 1985 Money Market Trust
June 18, 1985 Equity Trust
August 3, 1989 Conservative Asset Allocation Trust
August 3, 1989 Moderate Asset Allocation Trust
August 3, 1989 Aggressive Asset Allocation Trust
December 11, 1992 Pasadena Growth Trust
March 18, 1988 Global Equity Trust
March 18, 1988 Global Government Bond Trust
March 4, 1996 International Small Cap Trust
March 4, 1996 Small/Mid Cap Trust
July 15, 1996 Growth Trust
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VEN 20,21,22,23 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 8
SCHEDULE B
FIXED FUNDS:
August 8, 1989 One Year
August 8, 1989 Three Year
August 8, 1989 Five Year
August 15, 1994 Seven Year
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VEN 20,21,22,23 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 9
AMENDMENT No. 1
to the Variable Annuity Guaranteed Death Benefit Reinsurance Agreement
Effective July 1, 1995
between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
It is agreed by the two companies that the attached Schedule B will be
substituted for the corresponding schedule attached to this Agreement.
This amendment will be effective March 1, 1996.
In witness whereof, this amendment is signed in duplicate on the dates
indicated at the home office of each company.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
By Hugh McHaffie
------------------------------------
Date July 31, 1996
-----------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By Timothy Ruark
------------------------------------
Date July 26, 1996
------------------------------------
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VISION.001 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 10
SCHEDULE B
Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Policy Description Date
-----------------------------------------------------------------------
VISION.001 Flexible Purchase Payment August 15, 1987
Individual Deferred Combination Fixed
and Variable Annuity Contract
Non-Participating
* Includes All State Variations
Fund Date Fund Description
-------------------------------------------------------------
VARIABLE FUNDS:
January 9, 1995 International Growth & Income Trust
February 19, 1993 Value Equity Trust
May 1, 1989 U.S. Government Securities Trust
February 19, 1993 Strategic Bond Trust
April 23, 1991 Growth & Income Trust
June 18, 1985 Investment Quality Bond Trust
June 18, 1985 Money Market Trust
June 18, 1985 Equity Trust
August 3, 1989 Conservative Asset Allocation Trust
August 3, 1989 Moderate Asset Allocation Trust
August 3, 1989 Aggressive Asset Allocation Trust
December 11, 1992 Pasadena Growth Trust
March 18, 1988 Global Equity Trust
March 18, 1988 Global Government Bond Trust
March 4, 1996 International Small Cap Trust
March 4, 1996 Small/Mid Cap Trust
July 15, 1996 Growth Trust
FIXED FUNDS:
May 1, 1995 One Year
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VISION.001 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 11
AMENDMENT No. 1
to the Variable Annuity Guaranteed Death Benefit Reinsurance Agreement
Effective July 1, 1995
between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
It is agreed by the two companies that the attached Schedule B will be
substituted for the corresponding schedule attached to this Agreement.
This amendment will be effective March 1, 1996.
In witness whereof, this amendment is signed in duplicate on the dates
indicated at the home office of each company.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
By Hugh McHaffie
--------------------------------
Date July 31, 1996
--------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By Timothy Ruark
---------------------------------
Date July 26, 1996
---------------------------------
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VISION.001 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 12
SCHEDULE B
Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Policy Description Date
-------------------------------------------------------------------------
VISION.001 Flexible Purchase Payment August 15, 1987
Individual Deferred Combination Fixed
and Variable Annuity Contract
Non-Participating
* Includes All State Variations
Fund Date Fund Description
-------------------------------------------------------------
VARIABLE FUNDS:
January 9, 1995 International Growth & Income Trust
February 19, 1993 Value Equity Trust
May 1, 1989 U.S. Government Securities Trust
February 19, 1993 Strategic Bond Trust
April 23, 1991 Growth & Income Trust
June 18, 1985 Investment Quality Bond Trust
June 18, 1985 Money Market Trust
June 18, 1985 Equity Trust
August 3, 1989 Conservative Asset Allocation Trust
August 3, 1989 Moderate Asset Allocation Trust
August 3, 1989 Aggressive Asset Allocation Trust
December 11, 1992 Pasadena Growth Trust
March 18, 1988 Global Equity Trust
March 18, 1988 Global Government Bond Trust
March 4, 1996 International Small Cap Trust
March 4, 1996 Small/Mid Cap Trust
July 15, 1996 Growth Trust
FIXED FUNDS:
May 1, 1995 One Year
NORTH AMERICAN SECURITY LIFE CIGNA REINSURANCE
VISION.001 OF AMENDMENT NO. 1
JULY 1, 1995 EFFECTIVE MARCH 1, 1996
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Pre Effective Amendment No. 1 under the
Securities Act of 1933 to this Registration Statement on Form S-1 (File No.
33-6011) of (i) our report dated February 23, 1996, on our audit of the
financial statements of North American Security Life Insurance Company and (ii)
Schedule I - selected financial data. We also consent to the reference to our
firm under the caption "Independent Accountants."
Coopers & Lybrand L.L.P.
-----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 28, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF FINANCIAL POSITION STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 16,281,452
<DEBT-CARRYING-VALUE> 16,281,452
<DEBT-MARKET-VALUE> 16,647,857
<EQUITIES> 20,097,789
<MORTGAGE> 0
<REAL-ESTATE> 4,847,164
<TOTAL-INVEST> 41,226,405
<CASH> 1,797,230
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 4,962,503,876
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,141,918
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 107,865,148
0
0
<COMMON> 2,600,000
<OTHER-SE> 47,557,984
<TOTAL-LIABILITY-AND-EQUITY> 4,962,503,876
991,551,945
<INVESTMENT-INCOME> 35,909,722
<INVESTMENT-GAINS> (2,632,952)
<OTHER-INCOME> 0
<BENEFITS> 269,688,906
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (7,287,985)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,287,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,287,985)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF FINANCIAL POSITION STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9 MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 8,275,246
<DEBT-CARRYING-VALUE> 8,275,246
<DEBT-MARKET-VALUE> 8,275,246
<EQUITIES> 34,887,683
<MORTGAGE> 0
<REAL-ESTATE> 3,397,885
<TOTAL-INVEST> 46,719,740
<CASH> 14,136,515
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 6,078,607,252
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,724,547
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 143,491,352
0
0
<COMMON> 2,600,000
<OTHER-SE> 59,775,549
<TOTAL-LIABILITY-AND-EQUITY> 6,078,607,252
790,323,073
<INVESTMENT-INCOME> 4,040,557
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 269,335,442
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (940,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (940,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (940,010)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
