UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended: December 31, 1996
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission file number 0-14451
Acap Corporation
(Name of small business issuer in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue
Houston, Texas 77042
Issuer's telephone number, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. [x] Yes [ ] No.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were $6,270,767.
As of March 24, 1997, 7,592 shares of the registrant's Common Stock,
excluding shares held in treasury, were issued and outstanding, and the
aggregate market value of such shares held by non-affiliates of the
registrant on such date, based on the average of the closing bid and asked
prices for such shares on such date, was $1,132,875.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB is
incorporated by reference from the registrant's 1996 Annual Report to
Stockholders. The information required by Part III, Items 9 - 12 of Form
10-KSB is incorporated by reference from the registrant's definitive
information statement to be furnished in connection with the Annual
Meeting of Stockholders to be held on or about April 28, 1997.
<PAGE>
The Exhibit Index, Part IV, Item 13, is located on page 7 of this
Form 10-KSB.
This Form 10-KSB contains a total of 159 pages including any exhibits.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [x] No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acap Corporation was incorporated under the laws of the State of Delaware
on March 18, 1985 by the management of American Capitol Insurance Company
("American Capitol") to become the parent or "holding company" of American
Capitol. Acap Corporation began operating in that capacity on
October 31, 1985. American Capitol is a Texas life insurance company
licensed in 33 states and the District of Columbia. American Capitol
began operations as a life insurance company on June 1, 1954.
Unless the context otherwise requires, the term "Acap" refers to the
consolidated group of Acap Corporation and its wholly-owned subsidiaries.
Acap primarily engages in the acquisition and servicing of existing blocks
of life insurance policies. Since September 1994, the Company has
marketed a small volume of final expense insurance and prearranged funeral
service contracts. Through its life insurance subsidiaries, Acap
maintains a broad portfolio of individual life insurance policies and
annuity contracts. Life insurance is the only industry segment material
to the operations of Acap.
Fortune National Corporation ("Fortune Corp"), a Pennsylvania corporation,
acquired a majority interest in American Capitol in 1984. In the 1985
reorganization that resulted in American Capitol becoming a wholly-owned
subsidiary of Acap, Fortune Corp's majority interest in American Capitol
was exchanged for an equivalent interest in Acap. Fortune Corp was
liquidated during 1996, leaving Fortune Corp's majority stockholder,
InsCap Corporation ("InsCap"), a Delaware corporation, with the
controlling interest in Acap, approximately 41% at December 31, 1996.
Acquisition Strategy
Acap's strategy for achieving growth and profits is based upon the
acquisition of blocks of existing life insurance policies through the
direct purchase of such blocks or indirectly through the acquisition of
life insurance companies. By acquiring blocks of life insurance directly
or through the purchase of other life insurance companies, Acap hopes to
add "new" life policies to its books more economically than through
marketing.
Generally, insurance companies can acquire policies in two ways; either by
"purchasing" them policy by policy through marketing, or by buying an
existing block of policies. Purchasing an existing block of business has
the advantage that the policies have an established "history." That is,
an existing block will have an established pattern of mortality and lapse
experience. Also, the company selling the block of existing life policies
has already absorbed the risks involved in marketing the life insurance
products. In purchasing an existing block of policies, Acap's strategy is
to set the purchase price at the sum of the expected future profits of the
block of policies discounted at a rate of return in excess of Acap's cost
of funds. Acap then attempts to improve upon the rate of return by
maintaining the acquired policies at a lower per policy cost than was used
in the pricing assumptions and by realizing a higher investment yield on
the acquired assets than was used in the pricing assumptions.
It also should be noted that the acquisition strategy has certain risks
and disadvantages. Since the marketing of life insurance products
<PAGE>
generally involves greater risks than acquiring existing blocks of life
insurance, the profit margins available through marketing may be greater
than the margins available with respect to an acquired block of life
insurance. Also, there are relatively few companies or blocks of business
meeting Acap's acquisition criteria that become available for purchase
each year. Acap's acquisition strategy requires Acap to maintain the
personnel, computer systems and physical properties necessary to
accommodate large growth phases without the guarantee that such growth
will occur.
Acquisitions to Date
Acap (i.e., its predecessor, American Capitol) switched from a traditional
marketing strategy to the current acquisition strategy in 1984 in
connection with the change in control and associated change in management
resulting from Fortune Corp's purchase of a majority of the outstanding
common stock. Acquisitions made through December 31, 1996 include:
Fortune National Life Insurance Company, acquired November 29, 1985,
which added approximately 12,447 life policies and annuity contracts
to Acap's operations.
Associated Companies, Inc., acquired January 13, 1989, which
approximately doubled the existing insurance operations of Acap.
Trans-Western Life Insurance Company, acquired February 25, 1994,
which added approximately 4,235 life policies and annuity contracts
to Acap's operations.
Family Life Insurance Company of Texas, acquired August 31, 1994,
which added approximately 46,500 life policies and annuity contracts
to Acap's operations.
Texas Imperial Life Insurance Company, acquired September 29, 1994,
which added approximately 9,750 life policies and annuity contracts
to Acap's operations.
Oakley-Metcalf Insurance Company, acquired February 2, 1995, which
added approximately 3,000 life policies to Acap's operations.
The policies of World Service Life Insurance Company of America,
acquired through coinsurance effective June 1, 1996, which added
approximately 18,000 life policies to Acap's operations. Also
effective June 1, 1996, American Capitol executed an administration
agreement with South Texas Bankers Life Insurance Company, a wholly-
owned subsidiary of World Service Life Insurance Company of America,
which added approximately 8,000 policies to Acap's operations.
Products and Markets
The policies serviced by Acap are primarily traditional whole life
policies, interest-sensitive whole life policies, term life policies,
stipulated premium whole life policies and flexible premium annuity
contracts.
Traditional whole life policies are generally characterized by a uniform
death benefit and a level periodic premium throughout the insured's
lifetime. These policies combine a savings element with insurance
protection. The savings element, called the cash value, builds at a fixed
<PAGE>
rate of interest and may be borrowed against by the policyholder and, if
the policy terminates other than through the death of the insured, may be
paid to the policyholder.
Acap's interest-sensitive whole life policies also generally have a
uniform death benefit and a level periodic premium. However, with these
policies, the interest rate credited to the savings element of the policy
may be varied at Acap's option above a guaranteed minimum rate. The
interest-sensitive policies also provide for a surrender charge in the
event that the policyholder surrenders the policy during the first ten
years following the issue date of the policy. Further, Acap may vary
below a guaranteed maximum the amount charged against the policy for
expenses and mortality costs.
Term life policies generally offer pure insurance protection (i.e., no
savings element) for a specified period. Such policies typically offer a
conversion privilege, a renewal privilege, or both. Premiums typically
are adjusted upon the exercise of either privilege.
Stipulated premium whole life policies are characterized by a uniform
death benefit and a level periodic premium throughout the insured's
lifetime, however, unlike traditional whole life policies, stipulated
premium whole life policies have no cash value.
Flexible premium annuity contracts permit the annuitant to make deposits
as he sees fit, and allow the annuitant to make withdrawals at his option,
subject to deduction of applicable surrender charges. The annuity balance
earns interest on a tax deferred basis at a rate that Acap may change
annually.
From mid-1985 until September 1994, the Company relied exclusively on its
acquisition strategy and did not actively market new business. Since
September 1994, the Company has marketed a small volume of final expense
insurance and prearranged funeral service contracts. These policies are
primarily written through independent funeral homes. The Company
currently receives new business from approximately forty funeral homes.
The following table sets forth information with respect to gross insurance
in force and net premium income of Acap during the past three years:
--------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994
--------------------------------------------------------------------------
Life insurance in force $291,396 286,803 321,859
Premium income:
Life $ 2,686 1,828 1,350
Annuity 472 547 223
-------- -------- --------
Total premiums $ 3,158 2,375 1,573
======== ======== ========
<PAGE>
The table below presents the direct collected premiums by major geographic
area for the last three years:
--------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994
--------------------------------------------------------------------------
Texas $ 3,734 4,573 2,414
Ohio 491 550 614
Indiana 432 457 503
Pennsylvania 370 399 440
Michigan 312 352 396
Other U.S. 1,882 2,122 2,298
-------- -------- --------
Total $ 7,221 8,453 6,665
======== ======== ========
The preceding tables include certain premium amounts which under Statement
of Financial Accounting Standards No. 97 ("FAS 97") are credited to
liability accounts and are not considered revenues, and exclude surrender
charges that under FAS 97 are considered revenue. The premiums of Acap
affected by FAS 97 are the premiums on interest-sensitive whole life
policies and annuity contracts.
Competition
The life insurance industry is highly competitive. There are
approximately 1,770 legal reserve life insurance companies in the United
States. Although Acap's acquisition strategy is not the standard strategy
employed in the industry, Acap must compete with a significant number of
companies, both inside and outside the life insurance industry, when
looking for an acquisition. Many of these companies have substantially
greater financial resources and larger staffs than Acap.
Acap also must compete with a significant number of other life insurance
companies to retain Acap's existing block of policies. Many of these
companies have broader and more diverse product lines together with active
agency forces, and therefore, certain of Acap's policyholders may be
induced to replace their existing policies with those provided by Acap's
competitors.
Regulation
The insurance subsidiaries of the Company are subject to regulation by the
supervisory insurance agency of each state or other jurisdiction in which
the insurance subsidiaries are licensed to do business. These supervisory
agencies have broad administrative powers relating to the granting and
revocation of licenses to transact business, the approval of policy forms,
the form and content of mandatory financial statements, capital, surplus,
reserve requirements and the types of investments that may be made. The
insurance subsidiaries are required to file detailed reports with each
supervisory agency, and its books and records are subject to examination
by each. In accordance with the insurance laws of the State of Texas (the
insurance subsidiaries' state of domicile) and the rules and practices of
the National Association of Insurance Commissioners (the "NAIC"), the
insurance subsidiaries are examined periodically by examiners from Texas.
Most states have enacted legislation or adopted administrative regulations
covering such matters as the acquisition of control of insurance companies
<PAGE>
and transactions between insurance companies and the persons controlling
them. The NAIC has recommended model legislation on these subjects that
has been adopted, with variations, by many states. The nature and extent
of the legislation and administrative regulations now in effect vary from
state to state, and in most states prior administrative approval of the
acquisition of control of an insurance company incorporated in the state,
whether by tender offer, exchange of securities, merger or otherwise, is
required, which process involves the filing of detailed information
regarding the acquiring parties and the plan of acquisition.
The insurance subsidiaries are members of an "insurance holding company
system" and are required to register as such with the State of Texas and
file periodic reports concerning their relationships with the insurance
holding company and other affiliates of the holding company. Material
transactions between members of the holding company system are required to
be "fair and reasonable" and in some cases are subject to administrative
approval, and the books, accounts and records of each party are required
to be so maintained as to clearly and accurately disclose the precise
nature and details of the transactions. Notice to or approval by the
State of Texas is required for dividends paid by the insurance
subsidiaries.
Employees
At December 31, 1996, Acap had a total of 31 employees. None of these
employees is covered by a collective bargaining agreement. Acap believes
that it has excellent relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555 Richmond Avenue,
Houston, Texas 77042. The Company holds unencumbered title to a building
containing approximately 50,000 square feet and approximately 5.5 acres of
land at that location. The Company occupies approximately 12,000 square
feet. Approximately 3,000 square feet of additional space is leased by
unaffiliated tenants. The Company's offices are suitable for the conduct
of its business and provide room for future growth. Management believes
that the property is adequately covered by insurance.
The Company's investment policy prohibits making new investments in real
estate without the prior approval of the Board of Directors. There are no
plans to make any real estate investments in the foreseeable future. If
the Company were interested in making a real estate investment, regulatory
restrictions applicable to Texas life insurance companies would prohibit
the life insurance subsidiaries from investing in real estate outside of
the United States, in residential real estate, or in any property, other
than home office property, that exceeds 5% of the insurer's statutory
assets.
The Company owns and services first mortgage loans with aggregate
principal balances at December 31, 1996 of $2,760,835. The Company's
investment policy prohibits making new investments in mortgage loans
without the prior approval of the Board of Directors. There are no plans
to make any mortgage loan investments in the foreseeable future. If the
Company were interested in making a mortgage loan investment, regulatory
restrictions applicable to Texas life insurance companies would prohibit
the life insurance subsidiaries from investing in mortgage loans on real
estate outside of the United States, in other than first liens, or in any
loan that exceeds 25% of the insurer's statutory capital and surplus.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Acap and its subsidiary are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the
opinion that the ultimate disposition of these matters will not have a
material adverse effect on Acap's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The required information regarding the market for the common equity of the
Company and related stockholder matters is incorporated herein by
reference from "Stockholder Information" on page 30 of Acap's 1996 Annual
Report to Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from "Management's
Financial Analysis" on pages 3 - 8 of Acap's 1996 Annual Report to
Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated herein by
reference from pages 9 - 29 of Acap's 1996 Annual Report to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by reference from
Acap's definitive information statement, which is to be filed pursuant to
Regulation 14C.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Location or
Exhibits Description Incorporation by Reference
3(a)(1) Certificate of Incorporation *Form 10 effective June 22,
of the Registrant dated March 1986, pages 58-61
12, 1985
3(a)(2) Certificate of Amendment to *Form 10 effective June 22,
the Certificate of 1986, pages 62-65
Incorporation of the
Registrant dated October 25,
1985
3(a)(3) Certificate of Amendment to *Form 10K dated December
the Certificate of 31, 1988, pages 51-53
Incorporation of the
Registrant dated August 22,
1986
3(a)(4) Certificate of Amendment to *Form S4, Registration No.
the Certificate of 33-27874
Incorporation of the
Registrant dated March 20,
1989
3(a)(5) Certificate of Amendment to *Form 10KSB dated December
the Certificate of 31, 1994, pages 273-276
Incorporation of the
Registrant dated May 9, 1994
3(b)(1) Bylaws of the Registrant, as *Form 10K dated December
amended 31, 1988, pages 54-68
3(b)(2) Amendment to the Bylaws of the *Form 10Q dated March 31,
Registrant 1990, page 11
4 Certificate of Designations of *Form 8K dated December 31,
the Preferred Stock of the 1986, pages 23-31
Registrant
10(a)(1) 1988 American Capitol *Form 10K dated December
Insurance Company Key Employee 31, 1988, pages 37-44
Stock Option Plan
10(a)(2) Form of Grant of Stock Option *Form 10K dated December
used in 1988 American Capitol 31, 1988, pages 45-50
Insurance Company Key Employee
Stock Option Plan
10(b)(1) Employment Contract between *Form 10KSB dated December
American Capitol Insurance 31, 1994, pages 278-290
Company and John D. Cornett
<PAGE>
Location or
Exhibits Description Incorporation by Reference
10(b)(2) Stock Purchase Agreement *Form 10KSB dated December
between American Capitol 31, 1994, pages 291-300
Insurance Company and John D.
Cornett
10(c) Supplemental Disability Income *Form 10Q dated September
Agreement between American 30, 1990, pages 12-18
Capitol Insurance Company and
William F. Guest
10(d)(1) Reinsurance Agreement between *Form 10KSB dated December
American Capitol Insurance 31, 1993, pages 10-66
Company and Crown Life
Insurance Company effective
December 31, 1992, as amended
10(d)(2) Amendment dated June 30, 1996 Pages 48-50
to the Reinsurance Agreement
between American Capitol
Insurance Company and Crown
Life Insurance Company
10(e) Employment Agreement between Pages 51-68
Texas Imperial Life Insurance
Company and Richard M. Ridley
dated October 1, 1996
10(f) Stock Purchase Agreement for *Form 10KSB dated December
Oakley-Metcalf Insurance 31, 1994, pages 162-212
Company
10(g)(1) Reinsurance Agreement *Form 10KSB dated December
effective February 2, 1995 31, 1994, pages 213-260
between Oakley-Metcalf
Insurance Company and Alabama
Reassurance Company
10(g)(2) Amendment dated January 1, Pages 69-71
1996 to the Reinsurance
Agreement between Oakley-
Metcalf Insurance Company and
Alabama Reassurance Company
10(g)(3) Amendment dated December 31, Page 72
1996 to the Reinsurance
Agreement between Texas
Imperial Life Insurance
Company and Alabama
Reassurance Company
10(h) Loan Agreement and related *Form 10KSB dated December
documents between Acap 31, 1994, pages 261-272
Corporation and Central
National Bank
<PAGE>
Location or
Exhibits Description Incorporation by Reference
10(i) Coinsurance Agreement dated Pages 73-138
June 1, 1996 between World
Service Life Insurance Company
of America and American
Capitol Insurance Company
10(j) Administration Agreement dated Pages 139-147
June 1, 1996 between South
Texas Life Insurance Agency,
Inc. and American Capitol
Insurance Company
10(k) Administration Agreement dated Pages 148-158
June 1, 1996 between South
Texas Life Insurance Company
and American Capitol Insurance
Company
11 Statement re computation of *1996 Annual Report to
per share earnings Stockholders, page 16
13 1996 Annual Report to Pages 12-47
Stockholders
22 Subsidiaries of the Registrant Page 11
27 Financial Data Schedule Page 159
_______________________________________________________
* Exhibit is incorporated by reference to the listed document.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Acap Corporation
Date: March 24, 1997
By:
/s/ William F. Guest
------------------------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the date indicated.
Date: March 24, 1997
By:
/s/ William F. Guest /s/ John D. Cornett
-------------------------- ----------------------------------
William F. Guest John D. Cornett
Chairman of the Board, Executive Vice President and
Treasurer
President and Director (Principal Financial and
(Principal Executive Officer) Accounting Officer)
/s/ R. Wellington Daniels /s/ C. Stratton Hill, Jr.
--------------------------- -----------------------------------
R. Wellington Daniels C. Stratton Hill, Jr.
Director Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
Wholly-owned subsidiary of Acap Corporation:
--------------------------------------------
American Capitol Insurance Company (Texas)
Wholly-owned subsidiaries of American Capitol Insurance Company:
----------------------------------------------------------------
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
ACAP CORPORATION
CONTENTS President's Report . . . . . . . . . . . . . . . 1
Management's Financial Analysis . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . 9
Consolidated Statements of Operations . . . . . . 10
Consolidated Statements of Stockholders' Equity . 11
Consolidated Statements of Cash Flows . . . . . . 12
Notes to Consolidated Financial Statements . . . 13
Independent Auditors' Report . . . . . . . . . . 29
Stockholder Information . . . . . . . . . . . . . 30
Directors and Officers . . . . . . . . . . . . . 31
<PAGE>
PRESIDENT'S REPORT
CORPORATE Acap Corporation is a life insurance holding
PROFILE company that focuses on the acquisition of
existing life insurance policies, either through
direct purchase or the acquisition of life
insurance companies. Adjuncts to the acquisition-
oriented growth strategy include using financial
leverage and reinsurance to make more acquisitions
and to maximize the return to stockholders,
consolidating and streamlining the operations of
acquired businesses, concentrating on a limited
number of lines of business and providing superior
customer service to improve policy retention.
Acap was formed in 1985. Acap's life insurance
operations are conducted through its wholly-owned
life insurance subsidiaries. All operations are
conducted from the corporate headquarters in
Houston, Texas. Acap's common stock is quoted on
the NASD Electronic Bulletin Board under the
symbol AKAP.
CORPORATE The Company, through its subsidiary, American
DEVELOPMENTS Capitol Insurance Company ("American Capitol"),
reinsured all of the policies in force of World
Service Life Insurance Company of America ("World
Service") on a 93.6% coinsurance basis effective
June 1, 1996. American Capitol retroceded all of
the World Service policies in force at June 1,
1996 to a reinsurer, effective June 30, 1996.
American Capitol retains the coinsurance on all
policies issued by World Service subsequent to
June 1, 1996.
American Capitol also entered contracts, effective
June 1, 1996, to provide specified administrative
functions for the 18,000 World Service policies as
well as approximately 8,000 policies owned by
World Service's subsidiary, South Texas Bankers
Life Insurance Company ("South Texas"), and the
preneed funeral contracts associated with the
South Texas policies. These transactions brought
the total number of policies administered by the
Company to approximately 105,000.
Fortune National Corporation ("Fortune"), formerly
the owner of 63.7% of the Company's outstanding
common stock, adopted a plan of dissolution and
liquidation at its annual stockholder meeting on
August 26, 1996. On August 26, 1996, Fortune had
no assets other than its holding of the Company's
common stock. Under the plan, no fractional
shares of the Company's common stock were issued.
Fortune stockholders who did not buy from the
Company enough Fortune common stock to round up
their holdings elected to sell their "odd lot"
shares of Fortune common stock to the Company. As
a result of the Company's purchase of the "odd
<PAGE>
PRESIDENT'S REPORT
lot" shares and the conversion of the Company's
holding of Fortune common stock into Company
common stock, the Company added $320,566 to
treasury stock, reducing the number of outstanding
shares of Company common stock to approximately
7,603.
During 1996, the Company sold the corporate
"shell" of one life insurance subsidiary,
realizing a pre-tax gain of $50,000, and
liquidated the corporate "shell" of another life
insurance subsidiary. As of December 31, 1996,
the Company had reduced the number of subsidiaries
to three, two life insurance companies and a
preneed funeral contract marketing company, from a
high of six subsidiaries in 1995.
RESULTS OF The Company's net income for 1996 of $658,267, or
OPERATIONS $56.79 per common share, compares to net income
for 1995 of $277,033, or $9.04 per common share.
The 1996 net income includes $275,525 in net
realized investment gains, whereas the 1995 net
income included $170,003 in net realized
investment gains. Excluding net realized
investment gains, pre-tax operating income for the
year 1996 was $385,727, compared to pre-tax
operating income in 1995 of $330,359. The Company
was able to increase revenues during 1996 without
a corresponding increase in general expenses.
Also, 1995's operating income had been adversely
affected by unusual mortality experience.
A more complete analysis of the results of operations
is included in the Management's Financial
Analysis section of this Annual Report. Stockholders
are urged to read the entire Annual Report to gain
a better understanding of the Company, its recent
financial performance and its prospects.
OUTLOOK The Company faces a number of challenges in 1997
as it attempts to build upon the results of 1996.
Competition for life insurance acquisition
candidates remains intense, with many competitors
having resources much greater than the Company's.
Also, while the Company has benefitted from a
relatively low inflation environment in recent
years, the Company has already experienced wage
inflation during 1997 due to Houston's tight job
market.
We have the staff and experience to meet the
challenges of our business plan. In keeping with
that plan, we continue to search for and evaluate
acquisition candidates.
William F. Guest, President
April 7, 1997
<PAGE>
ACAP CORPORATION
MANAGMENT'S FINANCIAL ANALYSIS
SIGNIFICANT World Service Transaction
TRANSACTIONS
Effective June 1, 1996, American Capitol Insurance
Company ("American Capitol"), a wholly-owned
subsidiary of Acap Corporation, reinsured 93.6% of
all of the policies of World Service Life
Insurance Company of America ("World Service")
pursuant to a coinsurance agreement (the
"Coinsurance Agreement"). American Capitol paid
World Service an initial ceding commission of
approximately $1.7 million. The assets
transferred to American Capitol were approximately
$19.4 million in cash, approximately $1.9 million
of mortgage loans and other assets of
approximately $.1 million.
Contemporaneous with the signing of the
Coinsurance Agreement, the parties executed an
administrative agreement (the "Administration
Agreement") whereby American Capitol agreed to
provide specified administrative functions for the
18,000 World Service policies as well as
approximately 8,000 policies owned by World
Service's subsidiary, South Texas Bankers Life
Insurance Company ("South Texas"), and the preneed
funeral contracts associated with the South Texas
policies. These transactions brought the total
number of policies administered by the Company to
approximately 105,000.
Effective June 30, 1996, American Capitol
retroceded all of the World Service policies in
force at June 1, 1996 on a 100% coinsurance basis
by amending an existing reinsurance agreement (the
"Crown Agreement") with an unaffiliated reinsurer.
American Capitol retains the coinsurance on all
policies issued by World Service subsequent to
June 1, 1996. American Capitol also retains the
administration of the policies, for which it
receives an expense allowance from the reinsurer.
An experience refund formula in the Crown
Agreement returns to American Capitol 50% of the
profits generated by the reinsured policies above
a specified threshold. Also, at American
Capitol's option, the reinsured policies may be
recaptured at a price determined by the experience
formula. This transaction, at June 30, 1996,
increased reinsurance receivables by approximately
$24.2 million to a carrying value of $51.3 million
that were associated with a single reinsurer,
Crown Life Insurance Company ("Crown"). At
December 31, 1995, Crown had assets in excess of
$7 billion and stockholders' equity of
approximately $0.4 billion. Crown is rated
"Excellent" by A.M. Best Company, an insurance
company rating organization.
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
Fortune Liquidation
Fortune National Corporation ("Fortune"), formerly
the owner of 63.7% of the Company's outstanding
common stock, adopted a plan of dissolution and
liquidation at its annual stockholder meeting on
August 26, 1996. On August 26, 1996, Fortune had
no assets other than its holding of the Company's
common stock. Under the plan, no fractional
shares of the Company's common stock were issued.
Fortune stockholders who did not buy from the
Company enough Fortune common stock to round up
their holdings elected to sell their "odd lot"
shares of Fortune common stock to the Company. As
a result of the Company's purchase of the "odd
lot" shares and the conversion of the Company's
holding of Fortune common stock into Company
common stock, the Company added $320,566 to
treasury stock, reducing the number of outstanding
shares of Company common stock to 7,603.
Land Sale
On September 10, 1996, American Capitol sold
50,000 square feet of undeveloped land to an
unaffiliated third party (the "Land Sale"). The
Company realized a pre-tax capital gain of
$222,025 on the Land Sale.
"Shell" Sale and Liquidation
During 1996, the Company sold the corporate
"shell" of one life insurance subsidiary (the
"Shell Sale"), realizing a pre-tax gain of
$50,000, and liquidated the corporate "shell" of
another life insurance subsidiary. As of December
31, 1996, the Company had reduced the number of
subsidiaries to three, two life insurance
companies and a preneed funeral contract marketing
company, from a high of six subsidiaries in 1995.
RESULTS OF Premiums and other considerations were 62% higher
OPERATIONS during 1996 in comparison to 1995. The Company
received approximately $1.2 million in premiums
during 1996 from the World Service transaction
discussed under "Significant Transactions" above.
All of the premiums reinsured as a result of the
World Service transaction for the month of June
1996, approximately $400,000, were retained by
American Capitol. Further, under the Coinsurance
Agreement, American Capitol reinsures 93.6% of all
new business produced by World Service. This new
business is not reinsured under the Crown
Agreement, and is therefore reflected in the
Company's financial statements. The volume of
World Service's new business has been declining
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
and it is uncertain how long or to what degree
World Service will continue to support new
business production.
Premiums for 1995 included approximately $500,000
in single premiums related to the conversion of
three trust-funded prepaid funeral service plans
to an insurance-funded plan. Excluding these
conversions, premiums from the Company's marketing
of final expense life insurance and insurance-
funded prepaid funeral service contracts has risen
from approximately $400,000 during 1995 to
approximately $700,000 during 1996.
Net investment income was essentially unchanged
for 1996 in comparison to 1995. Investment income
before investment expenses increased in 1996 in
comparison to 1995 as a result of the larger asset
base in 1996. However, increased investment
expenses in 1996, including a $72,000 non-
recurring item, largely offset the increase in
investment income.
Realized investment gains were $275,525 for 1996
in comparison to $170,003 for 1995. The realized
investment gains for 1996 are almost exclusively
related to the Land Sale and the Shell Sale
discussed under "Significant Transactions" above.
The realized investment gains for 1995 were the
result of (1) the sale of a "shell" subsidiary and
(2) the restructuring of the bond portfolio of a
subsidiary.
A major source of revenue for the Company is the
expense allowance the Company receives for
administering certain blocks of reinsured
policies. The expense allowance for 1996 was
essentially unchanged from 1995. The additional
expense allowance from the amendment to the Crown
Agreement to add the policies American Capitol
coinsures from World Service largely offset the
decline in the reinsurance expense allowance due
to normal policy attrition of the reinsured
policies.
The deferred gain on reinsurance is being
amortized based upon the amount of insurance in
force under the reinsurance treaties to which the
deferred gain relates. During the first half of
1995, the reinsured polices experienced an
unusually high level of terminations. This
resulted in a higher than expected amortization of
the deferred gain during that period.
Consequently, the amortization of the deferred
gain on reinsurance was $79,373 (29%) lower during
1996 in comparison to 1995.
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
As a result of the factors noted above, total
revenue was 18% higher during 1996 than during
1995. When used below, "total revenue" excludes
realized investment gains.
Death benefits were 27% of premiums and other
considerations during 1996 in comparison to 39% of
premiums and other considerations during 1995.
American Capitol had experienced an unusually high
level of mortality experience in 1995, whereas
1996's mortality experience was in line with
expected levels.
Other benefits were comparable between 1996 and
1995, with other benefits running 76% of premiums
and other considerations during 1996 in comparison
to 78% of premiums and other considerations during
1995.
Total expenses (i.e., total benefits and expenses
less total policy benefits) were 50% of total
revenue for 1996 in comparison to 58% of total
revenue for 1995. As a result of economies of
scale and stringent expense controls, the Company
was able to significantly increase revenues
through the World Service / South Texas
transactions without a corresponding increase in
total expenses.
Total expenses for 1996 include approximately
$59,000 in finder's fees related to the World
Service transaction and a $40,000 charge related
to the settlement of a long-standing agent
commission dispute. Total expenses for 1995
include approximately $72,000 in non-recurring
actuarial charges related to consultations on the
Company's acquisition program and approximately
$35,000 in expense related to the settlement of a
policy dispute.
As a result of a 1995 transaction that increased
the reinsurance from 20% to 100% on each of the
life policies in force in a life insurance
subsidiary acquired August 31, 1994, the Company
incurred current (in 1995) federal income taxes of
approximately $885,000. Partially offsetting the
increase in the current federal income tax
expense, the reinsurance transaction resulted in a
deferred federal income tax benefit. These items
are the majority of the difference in federal
income tax expense between 1995 and 1996.
LIQUIDITY Liquidity of Insurance Subsidiaries
AND
CAPITAL Acap's insurance subsidiaries have a significant
RESOURCES portion of their assets invested in debt
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
instruments, short-term investments, or other
marketable securities. Although there is no
present need or intent to dispose of such
investments, the insurance subsidiaries could
liquidate portions of the investments should the
need arise. These assets should be sufficient to
meet the insurance subsidiaries' anticipated long-
term and short-term liquidity needs.
As of December 31, 1996, 99.7% of the insurance
subsidiaries' portfolios of publicly-traded bonds
are invested in securities that are rated
investment grade (i.e., rated BBB-/Baa3 or higher
by Standard & Poor or Moody). The Company's
investment policy prohibits making any new
investment in below investment grade securities
without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of
the Company's bonds are classified as available
for sale and are, accordingly, reflected in the
financial statements at fair value. The insurance
subsidiaries' liabilities are primarily long term
in nature. Therefore, long-term assets can be
purchased with the general intent to hold such
assets to maturity. It has not been the Company's
investment practice in the past to be an active
trader with its bond portfolios. It is not
expected that the insurance subsidiaries'
investment practices will change in the future.
A significant portion (34%) of the Company's bond
portfolio is invested in mortgage-backed
securities, with 95% of such mortgage-backed
securities classified as collateralized mortgage
obligations and 5% classified as pass-through
securities. Mortgage-backed securities are
purchased to diversify the portfolio from credit
risk associated with corporate bonds. The
majority of mortgage-backed securities in the
Company's investment portfolio have minimal credit
risk because the underlying collateral is
guaranteed by specified government agencies (e.g.,
GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-
backed securities are prepayment and extension
risks that arise from changes in the general level
of interest rates. As interest rates decline and
homeowners refinance their mortgages, mortgage-
backed securities prepay more rapidly than
anticipated. Conversely, as interest rates
increase, underlying mortgages prepay more slowly,
causing mortgage-backed securities principal
repayment to be extended. In general, mortgage-
backed securities provide for higher yields than
corporate debt securities of similar credit
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
quality and expected maturity to compensate for
this greater amount of cash flow risk. Due to the
underlying structure of the individual securities,
the majority of mortgage-backed securities in the
Company's investment portfolio have relatively low
cash flow variability.
The Company's investments in collateralized
mortgage obligations are primarily of the planned
amortization class (54%), Z (19%) and sequential
(26%) types. A planned amortization class tranche
is structured to provide more certain cash flows
and is therefore subject to less prepayment and
extension risk than other forms of mortgage-backed
securities. Planned amortization class securities
derive their stability at the expense of cash flow
risk for other tranches in a deal, as early
repayments are applied first to other tranches,
and cash flows originally applicable to other
tranches are first applied to the planned
amortization class tranche if that tranche's
originally scheduled cash flows are received later
than expected. The Z tranche defers all interest
to other tranches until those tranches are paid
down, at which time accumulated interest and
principal are paid to this class. The cash flows
associated with sequential tranches can vary as
interest rates fluctuate, since these tranches are
not supported by other tranches.
Under an accounting standard adopted in 1993, the
Company records its fixed maturity and equity
securities at fair value with unrealized gains and
losses, net of taxes, reported as a separate
component of stockholders' equity. Primarily as a
result of increasing interest rates during the
year, the fair value of the Company's fixed
maturity and equity securities decreased $512,422
during 1996, following a $2,186,436 increase
during 1995. The accounting standard does not
permit the Company to restate its liabilities for
changes in interest rates.
As of December 31, 1996, American Capitol held 32
mortgage loans as investments. American Capitol's
investment policy generally prohibits making new
investments in mortgage loans, except in
connection with the sale of Company-owned real
estate. However, American Capitol acquired
approximately $1.9 million in mortgage loans from
World Service during 1996 in connection with the
Coinsurance Agreement. All of the mortgage loans
acquired from World Service are personally
guaranteed by the owner of World Service. The
average principal balance of American Capitol's
mortgage loans at December 31, 1996 was $86,276
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
and the weighted average maturity was 9 years.
Mortgage loans on Tennessee properties represent
41% of the mortgage loan balances at December 31,
1996, Texas properties 33%, Alabama properties
17%, with Louisiana, Florida and Kentucky
properties representing the remainder of the
mortgage loan balances. Commercial mortgages
represent 55% of the mortgage loan balances at
December 31, 1996 with residential mortgages
constituting the balance. In general, the
performance of commercial mortgages is more
subject to changing U.S. and regional economic
conditions than residential mortgages. Mortgage
loans are far less liquid an investment than
publicly-traded securities.
At December 31, 1996, the only real estate owned
by American Capitol is the home office property,
with a book value of $1,433,942.
Liquidity of the Parent Company
On January 31, 1995, Acap borrowed $1.5 million
from Central National Bank of Waco, Texas. The
note is renewable each April 30 until fully
repaid. The note bears interest at a rate equal
to the base rate of a bank plus 1%. Principal
payments on the note are due quarterly. The note
is secured by a pledge of all the outstanding
shares of American Capitol. The loan agreement
contains certain restrictions and financial
covenants. Without the written consent of the
bank, Acap may not incur any debt, pay common
stock dividends or sell any substantial amounts of
assets. Also, American Capitol is subject to
minimum statutory earnings and capital and surplus
requirements during the loan term. The Company is
in compliance with all of the terms of the loan.
The principal payments on the bank loan are
matched by the principal payments on a surplus
debenture issued by American Capitol to Acap.
Going forward, the primary sources of funds for
Acap are payments on the surplus debenture from
American Capitol and dividends from American Capitol.
American Capitol may pay dividends in any one year
without the prior approval of regulatory authorities
as long as such dividends do not exceed certain
statutory limitations. As of December 31, 1996, the
amount of dividends available to the parent company
from American Capitol not limited by such restrictions
is approximately $500,000. Payments on the surplus
debenture may only be made to the extent statutory
capital and surplus exceeds $2 million. At
December 31, 1996, American Capitol's statutory
capital and surplus was $3,160,508.
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
The determination of statutory surplus is governed
by accounting practices prescribed or permitted by
the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would
be determined under generally accepted accounting
principles.
REINSURANCE Reinsurance plays a significant role in the
Company's operations. In accounting for
reinsurance, the Company has reported ceded
reserve credits and reinsurance claim credits as
reinsurance receivables. The cost of reinsurance
related to long-duration contracts is accounted
for over the life of the underlying reinsured
policies using assumptions consistent with those
used to account for the underlying policies. At
December 31, 1996, reinsurance receivables with a
carrying value of $51.3 million were associated
with a single reinsurer, Crown Life Insurance
Company ("Crown"). At December 31, 1995, Crown
had assets in excess of $7 billion and
stockholders' equity of approximately $0.4
billion. Crown is rated "Excellent" by A.M. Best
Company, an insurance company rating organization.
At December 31, 1996, reinsurance receivables with
a carrying value of $3.5 million were associated
with Alabama Reassurance Company ("Alabama Re").
The Alabama Re reinsurance receivables are secured
by a trust account containing a $6.2 million
letter of credit granted in favor of an insurance
subsidiary of the Company.
With regard to the policies not 100% reinsured
with Crown or Alabama Re, the Company seeks to
limit its exposure to loss on any single insured
by reinsuring the portion of risks in excess of
$50,000 on the life of any individual through
various reinsurance contracts, primarily of the
coinsurance and yearly renewable term type.
The Company is contingently liable for amounts
ceded to reinsurers in the event the reinsurers
are unable to meet their obligations assumed under
the reinsurance agreements. Acap evaluates the
financial condition of its reinsurers and monitors
concentrations of credit risk to minimize its
exposure to significant losses from reinsurer
insolvencies.
ACCOUNTING In March 1995, the Financial Accounting Standards
STANDARDS Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No.
121, which must be adopted by fiscal years
beginning after December 15, 1995, establishes
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
accounting standards for the impairment of long-
lived assets, certain identifiable intangibles,
and goodwill related to (1) those assets to be
held and used in the business, and (2) for assets
to be disposed of. The Company adopted SFAS No.
121 in 1996. In connection with the review of
goodwill required by SFAS No. 121, management
determined that, due to changes in market
conditions, the remaining amortization period of a
significant portion of the goodwill should be
reduced from 33 years to 10 years. This change
resulted in additional amortization of $135,568
during 1996.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 provides a choice for accounting for
employee stock compensation plans. A company can
elect to use the new fair-value-based method of
accounting for employee stock compensation plans,
under which compensation cost is measured and
recognized in results of operations, or continue
to account for these plans under the current
accounting standards. Entities electing to remain
with the present accounting method must make
disclosures of what net income and earnings per
share would have been if the fair-value-based
method of accounting had been applied. During
1996, the Company elected to continue to account
for employee stock compensation plans under the
current accounting standards. The Company
currently has only immaterial stock options
outstanding.
SUBSEQUENT On January 31, 1997, World Service assumed all of
EVENT the policies of South Texas, with a retroactive
effective date of June 1, 1996. Under the terms
of the Coinsurance Agreement, World Service's
assumption of the South Texas policies
automatically made the South Texas policies
subject to the Coinsurance Agreement. American
Capitol paid World Service an initial ceding
commission of approximately $100,000 related to
the South Texas policies. In anticipation of the
assumption by World Service and the resulting
coinsurance to American Capitol, South Texas had
transferred $6.8 million in assets to American
Capitol in 1996, which are reflected as a deposit
in "Other Liabilities" in the Company's December
31, 1996 balance sheet. The assets were
transferred to Crown in 1996 and are reflected in
"Reinsurance Receivables" in the Company's
December 31, 1996 balance sheet.
<PAGE>
Acap Corporation
Consolidated Balance Sheet December 31, 1996
--------------------------------------------------------------------------
ASSETS
Investments:
Fixed maturities available for sale
(amortized cost $28,523,900). . . . . . . . . . . $ 29,326,925
Equity securities (cost $14,137) . . . . . . . . . 3,575
Mortgage loans . . . . . . . . . . . . . . . . . . 2,760,835
Real estate . . . . . . . . . . . . . . . . . . . . 1,433,942
Policy loans . . . . . . . . . . . . . . . . . . . 6,185,273
Short-term investments . . . . . . . . . . . . . . 1,669,416
--------------
Total investments . . . . . . . . . . . . . . . 41,379,966
Cash . . . . . . . . . . . . . . . . . . . . . . . . 36,353
Accrued investment income . . . . . . . . . . . . . . 559,625
Reinsurance receivables . . . . . . . . . . . . . . . 57,605,194
Accounts receivable (less allowance for
uncollectible accounts of $88,387) . . . . . . . 132,189
Deferred acquisition costs . . . . . . . . . . . . . 1,664,153
Property and equipment (less accumulated depreciation
of $564,679) . . . . . . . . . . . . . . . . . . . 156,559
Costs in excess of net assets of acquired business
(less accumulated amortization of $712,464). . . . 1,961,310
Other assets . . . . . . . . . . . . . . . . . . . . 312,125
---------------
$103,807,474
===============
--------------------------------------------------------------------------
LIABILITIES
Policy liabilities:
Future policy benefits . . . . . . . . . . . . . . $ 82,737,870
Contract claims . . . . . . . . . . . . . . . . . . 789,393
--------------
Total policy liabilities . . . . . . . . . . . . 83,527,263
Other policyholders' funds . . . . . . . . . . . . . 1,859,304
Other liabilities . . . . . . . . . . . . . . . . . . 7,423,707
Deferred tax liability . . . . . . . . . . . . . . . 1,629,597
Note payable . . . . . . . . . . . . . . . . . . . . 1,062,500
Deferred gain on reinsurance . . . . . . . . . . . . 2,410,238
--------------
Total liabilities . . . . . . . . . . . . . . . 97,912,609
--------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.10 per share,
authorized, issued and outstanding 74,000 shares
(involuntary liquidation value $2,035,000) . . . . . . . 1,850,000
Common stock, par value $.10 per share, authorized
10,000 shares, issued 8,754 shares 876
Additional paid-in capital . . . . . . . . . . . . . 6,259,189
Accumulated deficit . . . . . . . . . . . . . . . . . (2,388,086)
Treasury stock, at cost, 1,151 common shares . . . . (426,419)
Net unrealized investment gains, net of taxes of $203,357 599,305
---------------
Total stockholders' equity . . . . . . . . . . . 5,894,865
---------------
$103,807,474
===============
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Operations
Years Ended December 31,
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
REVENUES
Premiums and other considerations . . . . . $2,556,529 1,581,864
Net investment income . . . . . . . . . . . 1,304,791 1,297,361
Net realized investment gains . . . . . . 275,525 170,003
Reinsurance expense allowance . . . . . . . 1,884,578 1,897,257
Amortization of deferred gain on reinsurance 198,933 278,306
Other income . . . . . . . . . . . . . . . 50,411 83,918
-----------------------
Total revenues . . . . . . . . . . . . . 6,270,767 5,308,709
-----------------------
-----------------------------------------------------------------------
BENEFITS AND EXPENSES
Death benefits . . . . . . . . . . . . . . 685,537 612,125
Other benefits . . . . . . . . . . . . . . 1,943,758 1,234,174
Commissions and general expenses . . . . . 2,514,726 2,576,224
Interest expense . . . . . . . . . . . . . 110,930 165,929
Amortization of costs in excess of net
acquired business . . . . . . . . . . . 239,662 104,095
Amortization of deferred acquisition costs 114,902 115,800
-----------------------
Total benefits and expenses . . . . . 5,609,515 4,808,347
-----------------------
------------------------------------------------------------------------
EARNINGS
Income before federal income tax expense
(benefit) . . . . . 661,252 500,362
Federal income tax expense (benefit):
Current . . . . . . . . . . . . . . . . . 111,605 1,004,727
Deferred . . . . . . . . . . . . . . . . (108,620) (781,398)
-----------------------
Net income . . . . . . . . . . . . . . . . $ 658,267 277,033
=======================
------------------------------------------------------------------------
EARNINGS PER SHARE
Net income per common share . . . . . . . . $ 56.79 9.04
========================
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31,
1996 1995
-------------------------------------------------------------------------
PREFERRED STOCK
(Including Additional Paid-in Capital) . . $ 1,850,000 1,850,000
--------------------------
------------------------------------------------------------------------
COMMON STOCK . . . . . . . . . . . . . . . . 876 876
--------------------------
------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year . . . . . . . 6,259,069 6,259,069
Change during year . . . . . . . . . . . 120 --
--------------------------
Balance, end of year . . . . . . . . . . 6,259,189 6,259,069
--------------------------
------------------------------------------------------------------------
ACCUMULATED DEFICIT
Balance, beginning of year . . . . . . . (2,854,416) (2,931,417)
Net income . . . . . . . . . . . . . . . 658,267 277,033
Preferred stock cash dividends . . . . . (191,937) (200,032)
------------------------
Balance, end of year . . . . . . . . . . (2,388,086) (2,854,416)
------------------------
------------------------------------------------------------------------
TREASURY STOCK
Balance, beginning of year . . . . . . . (105,853) (105,853)
Change during year . . . . . . . . . . . (320,566) --
------------------------
Balance, end of year . . . . . . . . . . (426,419) (105,853)
------------------------
------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance, beginning of year . . . . . . . 1,111,727 (1,074,709)
Change during year . . . . . . . . . . . (512,422) 2,186,436
------------------------
Balance, end of year . . . . . . . . . . 599,305 1,111,727
------------------------
------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . $ 5,894,865 6,261,403
========================
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Cash Flows
Years Ended December 31,
----------------------------------------------------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES ---- ----
Net income . . . . . . . . . . . . . . . . $ 658,267 277,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . 325,998 190,600
Amortization of deferred acquisition costs 114,902 115,800
Amortization of deferred gain on reinsurance (198,933) (278,306)
Premium and discount amortization . . . . 13,702 (33,640)
Realized gains on investments . . . . . . (275,525) (170,003)
Deferred federal income tax benefit . . . (108,620) (781,398)
Decrease in reinsurance receivables . . 1,851,696 1,411,458
Decrease (increase) in accrued investment income (333,623) 36,488
Increase in accounts receivable . . . . . (9,461) (97,448)
Decrease in other assets . . . . . . . . 2,857 652,387
Increase (decrease) in policy liabilities 551,695 (325,559)
Increase (decrease) in other liabilities 54,637 (219,436)
------------------------
Net cash provided by operating activities 2,647,592 777,976
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments available
for sale and principal repayments on
mortgage loans . . . . . . . 3,751,347 5,231,345
Purchases of investments available for sale (24,360,337)(8,011,380)
Proceeds from sale of real estate . . . . . 338,845 --
Net decrease in policy loans . . . . . . . 536,707 318,167
Net decrease (increase) in short-term investments (626,365)11,422,323
Proceeds from sale of subsidiary . . . . . 50,000 --
Purchase of subsidiaries . . . . . . . . . -- (1,952,300)
Proceeds from coinsurance agreement . . . . 19,371,962 --
Purchases of property and equipment . . . . (224,040) (24,746)
--------------------------
Net cash provided by (used in) investing
activities . . . . . . . . . (1,161,881) 6,983,409
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable . . -- 1,500,000
Principal payments on notes payable . . . . (250,000)(8,487,500)
Deposits on policy contracts . . . . . . . 1,135,278 1,316,280
Withdrawals from policy contracts . . . . . (2,266,312)(2,151,240)
Preferred dividends paid . . . . . . . . . (191,937) (200,032)
--------------------------
Net cash used in financing activities . . (1,572,971)(8,022,492)
--------------------------
Net decrease in cash . . . . . . . . . . . (87,260) (261,107)
Cash at beginning of year . . . . . . . . . 123,613 384,720
--------------------------
Cash at end of year . . . . . . . . . . . . $ 36,353 123,613
==========================
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY Principles of Consolidation and Nature of
OF Operations
SIGNIFICANT
ACCOUNTING The consolidated financial statements of Acap
POLICIES Corporation ("Acap" or "the Company"), include
its wholly-owned subsidiaries, American Capitol
Insurance Company ("American Capitol"); through
November 22, 1996, Family Life Insurance Company
of Texas ("Family"); Imperial Plan, Inc.
("Imperial Plan"); Texas Imperial Life Insurance
Company ("Texas Imperial"); through
September 30, 1995, Trans-Western Life Insurance
Company ("Trans-Western") and, from February 2,
1995 through December 31, 1996, Oakley-Metcalf
Insurance Company ("Oakley"). All significant
intercompany transactions and accounts have been
eliminated in consolidation. Controlling
interest in the Company, approximately 41% at
December 31, 1996, is owned by InsCap
Corporation ("InsCap").
Acap is a life insurance holding company that
focuses on the acquisition of existing life
insurance policies, either through direct
purchase or the acquisition of insurance
companies. Acap's life insurance operations are
conducted through its wholly-owned life
insurance subsidiaries. Operations are
conducted from the corporate headquarters in
Houston, Texas. Approximately half of the
Company's direct collected premium comes from
residents of the State of Texas, with no other
state generating as much as 10% of the Company's
direct collected premium.
Basis of Presentation
The consolidated financial statements have been
prepared in accordance with generally accepted
accounting principles. Such accounting
principles differ from prescribed statutory
reporting practices used by the insurance
subsidiaries in reporting to state regulatory
authorities. The more significant differences
from statutory accounting principles are:
(a) acquisition costs related to acquiring new
business are deferred and amortized over the
expected lives of the policies rather than being
charged to operations as incurred; (b) future
policy benefits are based on estimates of
mortality, interest and withdrawals generally
representing the Company's experience, which may
differ from those based on statutory mortality
and interest requirements without consideration
of withdrawals; (c) deferred federal income
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
taxes are provided for temporary differences
between assets and liabilities reported for
financial reporting purposes and reported for
federal income tax purposes; (d) certain assets
(principally furniture and equipment, agents'
debit balances and certain other receivables)
are reported as assets rather than being charged
to accumulated deficit; (e) investments in
fixed maturities available for sale are recorded
at fair value rather than at amortized cost;
and (f) for acquisitions accounted for as a
purchase, the identified net assets of the
acquired company are valued at their fair values
and the excess of the value of the consideration
over the net assets assumed is amortized over a
period not to exceed nine years, whereas, for
statutory purposes, this excess is not allowed
and acquisitions are accounted for as equity
investments.
Generally, the net assets of the Company's
insurance subsidiaries available for transfer to
the parent company are limited to the amounts
that the insurance subsidiaries' statutory net
assets exceed minimum statutory capital
requirements; however, payment of the amounts as
dividends may be subject to approval by
regulatory authorities. As of December 31,
1996, the amount of dividends available to the
parent company from subsidiaries not limited by
such restrictions is approximately $500,000.
The combined net income of the Company's
insurance subsidiaries (where applicable, from
the date such subsidiary was acquired), as
determined using statutory accounting practices,
was $812,871 and $7,454,344 for the years ended
December 31, 1996 and 1995, respectively. The
consolidated statutory stockholders' equity of
the Company's insurance subsidiaries amounted to
$3,160,508 and $2,716,261 at December 31, 1996
and 1995, respectively. The total adjusted
statutory stockholders' equity of the Company's
insurance subsidiaries exceeds the applicable
Risk-Based Capital requirements.
The preparation of financial statements in
conformity with generally accepted accounting
principles 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 amount
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain prior year amounts have been
reclassified to conform to the current year
presentation. Such reclassifications had no
impact on net income or stockholders' equity as
previously reported.
Investments
Investments are reported on the following bases:
All of the Company's debt and equity securities
are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No.
115 and are classified as available-for-sale
securities. Accordingly, such securities are
reported at fair value, with unrealized gains
and losses, net of taxes, excluded from earnings
and reported as a separate component of
stockholders' equity.
Mortgage loans on real estate are carried at
unpaid principal balances.
Policy loans are carried at their unpaid
principal balances. Policy loans consist
primarily of automatic borrowings against a
policy's cash surrender value to pay policy
premiums. Interest accrues at rates ranging
from 5% to 10%.
Real estate consists of the home office
property. The home office building is carried
at cost less accumulated depreciation.
Depreciation is computed using the straight line
method over twenty years. Accumulated
depreciation at December 31, 1996 was $92,250.
Tenant improvements are amortized over the term
of the lease. Land is carried at the lower of
cost or fair value. Foreclosed real estate is
carried at the lower of cost or fair value
determined at the date of foreclosure.
Short-term investments, consisting primarily of
commercial paper, are carried at cost.
Write-downs and other realized gains and losses,
determined on the specific identification
method, are accounted for in the consolidated
statements of operations in net realized
investment gains.
Deferred Acquisition Costs
Deferred acquisition costs are the cost of
policies acquired through the purchase of
insurance companies, representing the
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
actuarially determined present value of
projected future profits from policies in force
at the purchase date.
For interest-sensitive whole life contracts,
deferred costs are amortized in relation to the
present value of expected future gross profits
from the contracts. For traditional contracts,
deferred costs are amortized in relation to
future anticipated premiums. The deferred costs
are reviewed to determine that the unamortized
portion of such costs does not exceed
recoverable amounts. Management believes such
amounts are recoverable.
The deferred acquisition costs for the year
ended December 31, 1996 are summarized as
follows:
Balance at December 31, 1995 . . . . $1,779,055
Amortized during the year . . . . . . (114,902)
-----------
Balance at December 31, 1996 . . . . $1,664,153
===========
The amortization of deferred acquisition costs
is expected to be consistent with the above
amortization level over the next five years.
Property and Equipment
Property and equipment are carried at cost.
Depreciation is computed using the straight-line
method over the estimated useful lives, which
range from five to ten years. Depreciation
expense was $42,678 and $44,907 for the years
ended December 31, 1996 and 1995, respectively.
When assets are retired or otherwise disposed
of, the cost and related accumulated
depreciation are removed from the accounts, and
any resulting gains or losses are recognized in
income for the period. The cost of maintenance
and repairs is charged to income as incurred;
significant renewals and betterments are
capitalized.
Costs in Excess of Net Assets of Acquired
Business
The costs in excess of net assets of acquired
business are amortized on a straight-line basis
over remaining terms of five years and nine
years.
Recognition of Premium Revenue and Related
Expenses, Liability for Future Policy Benefits
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and Contract Claims
For traditional insurance contracts, premiums
are recognized as revenue when due. Benefits
and expenses are associated with earned premiums
so as to result in their recognition over the
premium paying period of the contracts. Such
recognition is accomplished by means of the
provision for future policy benefits and the
amortization of deferred policy acquisition
costs.
For contracts with mortality risk that permit
the Company to make changes in the contract
terms (such as interest-sensitive whole life
policies), premium collections and benefit
payments are accounted for as increases or
decreases to a liability account rather than as
revenue and expense. In addition, decreases to
the liability account for the costs of insurance
and policy administration and for surrender
penalties are recorded as revenues. Interest
credited to the liability account and benefit
payments made in excess of a contract liability
account balance are charged to expense.
For investment contracts without mortality risk
(such as deferred annuities), net premium
collections and benefit payments are recorded as
increases or decreases to a liability account
rather than as revenue and expense. Surrender
penalties are recorded as revenues. Interest
credited to the liability account is charged to
expense.
Reserves for traditional contracts are
calculated using the net level premium method
and assumptions as to investment yields,
mortality, withdrawals and dividends. The
assumptions are based on past and expected
experience and include provisions for possible
unfavorable deviation. These assumptions are
made at the time the contract is issued or, for
contracts acquired by purchase, at the purchase
date. Interest assumptions used to compute
reserves ranged from 4% to 9% at December 31,
1996.
Reserves for interest-sensitive whole life
policies and investment contracts are based on
the contract account balance if future benefit
payments in excess of the account balance are
not guaranteed, or the present value of future
benefit payments when such payments are
guaranteed.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The liability for contract claims represents the
liability for claims reported in excess of the
related policy benefit reserve plus an estimate
of claims incurred but not reported.
Earnings per Share
Earnings per common share were computed as
follows:
Years ended December 31,
1996 1995
---- ----
Net income . . . . . . . . . $ 658,267 277,033
Preferred dividends . . . . . (191,937) (200,032)
-------------------
466,330 77,001
Divided by weighted average
common shares outstanding 8,212 8,516
------------------
Net income per common share $ 56.79 9.04
===================
Participating Policies
Acap maintains both participating and non-
participating life insurance policies.
Participating business represented approximately
13% and 11% of the life insurance in force, and
11% and 8% of life insurance premium income at
December 31, 1996 and 1995, respectively.
Dividends to participating policyholders are
determined annually and are payable only upon
declaration of the Boards of Directors of the
insurance subsidiaries.
Federal Income Taxes
The Company accounts for income taxes in
accordance with SFAS No. 109 which requires that
a deferred tax liability be recognized for all
taxable temporary differences and a deferred tax
asset be recognized for an enterprise's
deductible temporary differences and operating
loss and tax credit carryforwards. A deferred
tax asset or liability is measured using the
marginal tax rate that is expected to apply to
the last dollars of taxable income in future
years. The effects of enacted changes in tax
laws or rates are recognized in the period that
includes the enactment date.
Statement of Cash Flows
For purposes of reporting cash flows, cash
includes cash on hand, in demand accounts, in
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
money market accounts and in savings accounts.
Accounting Standards
In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121, which must be adopted for
fiscal years beginning after December 15, 1995,
establishes accounting standards for the
impairment of long-lived assets, certain
identifiable intangibles, and goodwill related
to (1) those assets to be held and used in the
business, and (2) for assets to be disposed of.
The Company adopted SFAS No. 121 in 1996. In
connection with the review of goodwill required
by SFAS No. 121, management determined that, due
to changes in market conditions, the remaining
amortization period of a significant portion of
the goodwill should be reduced from 33 years to
10 years. This change resulted in additional
amortization of $135,368 during 1996.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 provides a choice for accounting for
employee stock compensation plans. A company
can elect to use the new fair-value-based method
of accounting for employee stock compensation
plans, under which compensation cost is measured
and recognized in results of operations, or
continue to account for these plans under the
current accounting standards. Entities electing
to remain with the present accounting method
must make disclosures of what net income and
earnings per share would have been if the fair-
value-based method of accounting had been
applied. In 1996, the Company elected not to
use the fair-value-based method. The Company
currently has only immaterial stock options
outstanding.
2. INVESTMENTS Fixed Maturity and Equity Securities
The amortized cost and fair values of
investments in fixed maturity and equity
securities as of December 31, 1996 are as
follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Fixed maturity securities
Government securities $ 3,299,334 41,032 (2,399) 3,337,967
Corporate securities 13,270,202 311,165 (85,214) 13,496,153
Asset-backed securities 2,364,367 79,737 (2,834) 2,441,270
Mortgage-backed securities 9,589,997 506,956 (45,418) 10,051,535
-----------------------------------------
28,523,900 938,890 (135,865) 29,326,925
-----------------------------------------
Equity securities 14,137 -- (10,562) 3,575
-----------------------------------------
$28,538,037 938,890 (146,427) 29,330,500
=========================================
A summary of proceeds from the sales ofinvestments
in fixed maturity securities, exclusive of proceeds
from maturities, and the gross gains and losses
realized on those sales follows:
1996 1995
---- ----
Proceeds on sales . . . . . $2,571,322 3,297,458
=======================
Gross realized gains on sales $ 37,123 149,889
Gross realized losses on sales (34,109) (43,226)
------------------------
Net realized gains on sales . 3,014 106,663
Realized gains on transactions
other than sales . . . . . 833 3,475
----------------------
Net realized gains . . . . . $ 3,847 110,138
======================
The amortized cost and estimated fair value of
fixed maturity securities at December 31, 1996,
by contractual maturity, are shown below.
Expected maturities will differ from contractual
maturities because borrowers may have the right
to call or prepay obligations with or without
call or prepayment penalties.
Amortized Fair
Cost Value
---- -----
Maturing in one year or less . . . . . . $ 399,665 402,239
Maturing after one year through five years 7,630,502 7,639,104
Maturing after five years through ten years 7,756,498 7,894,391
Maturing after ten years . . . . . . . . . 3,147,238 3,339,656
-----------------------
18,933,903 19,275,390
Mortgage-backed securities . . . . . . . . 9,589,997 10,051,535
-----------------------
$ 28,523,900 29,326,925
<PAGE>
A summary of the fair value of mortgage-backed
securities by type as of December 31, 1996
follows:
Collateralized mortgage obligations:
Planned amortization class . . . . .$ 5,190,947
Z . . . . . . . . . . . . . . . . . . 1,775,743
Sequential . . . . . . . . . . . . . 2,442,696
Other . . . . . . . . . . . . . . . . 135,201
----------
9,544,587
Pass-through securities . . . . . . . . 506,948
----------
$10,051,535
===========
With a planned amortization class security,
early repayments are applied first to other
tranches, and cash flows originally applicable
to other tranches are first applied to the
planned amortization class tranche if that
tranche's originally scheduled cash flows are
received later than expected. The Z tranche
defers all interest to other tranches until
those tranches are paid down, at which time
accumulated interest and principal are paid to
this class. Sequential tranches are not
supported by other tranches.
As of December 31, 1996, 99.7% of the Company's
fixed maturity securities were rated investment
grade (i.e., rated BBB-/Baa3 or higher by
Standard & Poor or Moody).
Mortgage Loans
The weighted average interest rate of mortgage
loans held as of December 31, 1996 was 8.6%.
The distribution of principal balances on
mortgage loans held as of December 31, 1996 by
contractual maturity follows. Actual maturities
may differ from contractual maturities because
borrowers may have the right to prepay
obligations with or without penalties.
Principal
Balance
-------
Maturing in one year or less . . . . . $ 726,249
Maturing after one year through five years 521,695
Maturing after five years through ten years 473,668
Maturing after ten years . . . . . . . 1,039,223
----------
$2,760,835
==========
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The distribution of mortgage loans by class of
loan and geographic distribution follows:
Principal
Balance
-------
Commercial loans:
Texas . . . . . . . . . . . . . . . .$ 801,431
Tennessee . . . . . . . . . . . . . . 589,306
Louisiana . . . . . . . . . . . . . . 102,847
Alabama . . . . . . . . . . . . . . . 37,935
----------
$1,531,519
==========
Residential loans:
Tennessee . . . . . . . . . . . . . .$ 542,012
Alabama . . . . . . . . . . . . . . . 441,766
Texas . . . . . . . . . . . . . . . . 106,149
Florida . . . . . . . . . . . . . . . 64,490
Louisiana . . . . . . . . . . . . . . 38,749
Kentucky . . . . . . . . . . . . . . 36,150
----------
$1,229,316
==========
Investment Income
A summary of net investment income follows:
1996 1995
---- ----
Interest on fixed maturities . . . . . . $1,300,036 1,249,118
Interest on mortgage loans . . . . . . . . 165,819 89,397
Interest on policy loans . . . . . . . . . 39,315 44,721
Interest on cash and short-term investments 55,558 114,375
Real estate income . . . . . . . . . . . . 53,461 40,600
Dividends on equity securities . . . . . . -- 5,632
Miscellaneous investment income . . . . . . 59,767 42,943
----------------------
1,673,956 1,586,786
Investment expense . . . . . . . . . . . . (369,165) (289,425)
$1,304,791 1,297,361
======================
Unrealized Investment Gains (Losses)
The change between cost and fair value for fixed
maturity and equity securities, net of taxes,
follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed Equity
Maturities Securites Total
---------- --------- -----
Balance, January 1, 1995 $ (868,930) (205,779) (1,074,709)
Change during the year 2,158,157 28,279 2,186,436
-------------------------------------
Balance, December 31,1995 1,289,227 (177,500) 1,111,727
Change during the year (689,784) 177,362 (512,422)
-------------------------------------
Balance, December 31, 1996 $ 599,443 (138) 599,305
=====================================
Net Realized Investment Gains
A summary of net realized investment gains
follows:
1996 1995
---- ----
Fixed maturities . . . . . . . . . . . . . . . $ 3,847 110,138
Equity securities
(including investment in subsidiaries). . . 49,653 59,865
Real estate . . . . . . . . . . . . . . . . . . 222,025 --
-------------------
$275,525 170,003
===================
Other Investment Disclosures
At December 31, 1996, bonds with a fair value of
$5,226,030 and a $25,000 certificate of deposit
were on deposit with various regulatory
authorities.
Investment income was not accrued on non-income
producing investments of $450,000 in 1996 and 1995.
Investments, other than investments issued or
guaranteed by the United States Government or a
United States Government agency or authority, in
excess of 10% of stockholders' equity at
December 31, 1996 were as follows:
Balance
Sheet Amount Category
------------ --------
EQCC Home Equity . . . . . . . . . . . $1,499,188 Fixed maturity
Home office building and property . . . 1,433,942 Real estate
General Electric . . . . . . . . . . . 1,155,154 Fixed maturity
Merrill Lynch . . . . . . . . . . . . . 1,101,572 Fixed maturity
American Express . . . . . . . . . . . 999,818 Short term
Bank America . . . . . . . . . . . . . 943,590 Fixed maturity
Ford Motor Credit Corporation . . . . . 875,249 Fixed maturity
Chase Manhattan Corporation . . . . . . 832,578 Fixed maturity
Goldman Sachs . . . . . . . . . . . . . 814,980 Fixed maturity
RAST . . . . . . . . . . . . . . . . . 758,438 Fixed maturity
Commercial Credit Corporation . . . . . 641,170 Fixed maturity
Coca Cola . . . . . . . . . . . . . . 632,964 Fixed maturity
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FAIR The carrying values and estimated fair values of
VALUES the Company's financial instruments as of
December 31, 1996 are as follows:
Carrying Fair
Amount Value
------ -----
Assets:
Fixed maturities . . . . . . $29,326,925 29,326,925
Equity securities . . . . . 3,575 3,575
Mortgage loans . . . . . . . 2,760,835 2,762,106
Policy loans . . . . . . . . 6,185,273 6,185,273
Short-term investments . . . 1,669,416 1,669,416
Liabilities:
Note payable . . . . . . . . 1,062,500 1,062,500
Estimated market values of publicly-traded fixed
maturity and equity securities are as reported
by an independent pricing service. Estimated
market values of fixed maturity securities not
actively traded in a liquid market are estimated
using a third party pricing system, which uses a
matrix calculation assuming a spread over U.S.
Treasury bonds.
Fair values of mortgage loans are estimated by
discounting expected cash flows, using market
interest rates currently being offered for
similar loans.
Policy loans have no stated maturity dates and
are a part of the related insurance contracts.
Accordingly, it is not practicable for the
Company to estimate a fair value for them.
For short-term investments, the carrying amount
is a reasonable estimate of fair value.
In that the note payable is a floating rate
instrument, the principal balance is a
reasonable estimate of the note's fair value.
4. NOTE As a source of funds to repay the $5 million
PAYABLE surplus debenture issued in connection with the
acquisition of Family, on January 31, 1995 the
Company borrowed $1.5 million from Central
National Bank of Waco, Texas. The note is
renewable by the bank each April 30 until fully
repaid. The note bears interest at a rate equal
to the base rate of a bank plus 1%. Principal
payments on the note of $62,500 are due
quarterly (a six year amortization) beginning
April 30, 1995. The note is secured by the
Company's pledge of all the outstanding shares
of Acap's subsidiary, American Capitol. The
loan agreement contains certain restrictions and
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial covenants. Without the written
consent of the bank, Acap may not incur any
debt, pay common stock dividends or sell any
substantial amounts of assets. Also, American
Capitol is subject to minimum statutory earnings
and capital and surplus requirements during the
loan term. The Company is in compliance with
all of the terms of the loan.
5. COMMITMENTS Leases
AND
CONTINGENCIES The Company had no material leases in 1996 or
1995.
Reinsurance
The Company accounts for reinsurance in
accordance with Statement of Financial
Accounting Standards No. 113. In accounting for
reinsurance, the Company has reported ceded
reserve credits and reinsurance claim credits as
reinsurance receivables. The cost of
reinsurance related to long-duration contracts
is accounted for over the life of the underlying
reinsured policies using assumptions consistent
with those used to account for the underlying
policies.
At December 31, 1996, reinsurance receivables
with a carrying value of $51.3 million were
associated with a single reinsurer, Crown Life
Insurance Company ("Crown"). At December 31,
1995, Crown had assets in excess of $7 billion
and stockholders' equity of approximately $0.4
billion. Crown is rated "Excellent" by A.M.
Best Company, an insurance company rating
organization. At December 31, 1996, reinsurance
receivables with a carrying value of $3.5
million were associated with Alabama Reassurance
Company ("Alabama Re"). While Alabama Re is not
currently rated by A.M. Best Company, the
Alabama Re reinsurance receivables are secured
by a trust account containing a $6.2 million
letter of credit granted in favor of an
insurance subsidiary of the Company. At
December 31, 1996, the remaining reinsurance
receivables were associated with various other
reinsurers.
The Crown and Alabama Re reinsurance treaties
are representative of a key use of reinsurance
by the Company. Immediately following the
purchase of a block of life insurance policies
through the Company's acquisition program, the
Company may reinsure all or a portion of the
acquired policies. By doing so, the Company
<PAGE>
ACAP COPRORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
seeks to recover all or a portion of the
purchase price of the acquired policies and
transfer the risks associated with the policies
to the reinsurer. The Company retains the
administration of the reinsured policies and
seeks to profit from the compensation the
Company receives from the reinsurer for such
policy administration. The Company is entitled,
but not obligated, to recapture the policies at
a price determined by a formula in the
reinsurance treaty.
With regard to the policies not 100% reinsured
with Crown or Alabama Re, the purpose of
reinsurance is to limit the Company's exposure
to loss on any single insured. The Company
reinsures the portion of risks in excess of a
maximum of $50,000 on the life of any individual
through various reinsurance contracts, primarily
of the coinsurance and yearly renewable term
type.
The Company is contingently liable for amounts
ceded to reinsurers in the event the reinsurers
are unable to meet their obligations assumed
under the reinsurance agreements. The Company
evaluates the financial condition of its
reinsurers and monitors concentrations of credit
risk to minimize its exposure to significant
losses from reinsurer insolvencies. Other than
its exposure to Crown and Alabama Re as
discussed above, management does not believe the
Company has significant concentrations of credit
risk related to reinsurance, or otherwise.
Prior to June 1, 1996, the Company had an
immaterial amount of reinsurance in force
whereby the Company was the assuming party.
Effective June 1, 1996, the Company, through
American Capitol, reinsured all of the policies
in force of World Service Life Insurance Company
of America ("World Service") on a 93.6%
coinsurance basis. American Capitol retroceded
all of the World Service policies in force at
June 1, 1996 to Crown, effective June 30, 1996.
American Capitol retains the coinsurance on all
policies issued by World Service subsequent to
June 1, 1996.
The effect of reinsurance on premiums and
benefits follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31,
1996 1995
---- ----
Direct premiums . . . . . . . . $ 6,375,153 7,884,105
Reinsurance assumed . . . . . . 1,919,915 3,655
Reinsurance ceded . . . . . . . (5,738,539) (6,305,896)
-----------------------
Net premiums . . . . . . . . . $ 2,556,529 1,581,864
=======================
Direct policy benefits . . . . $ 5,740,316 5,059,540
Reinsurance assumed . . . . . . 1,420,751 (26)
Reinsurance ceded . . . . . . . (4,531,772) (3,213,215)
-----------------------
Net policy benefits . . . . . . $ 2,629,295 1,846,299
========================
Litigation
Acap and its subsidiaries are involved in
various lawsuits and legal actions arising in
the ordinary course of operations. Management
is of the opinion that the ultimate disposition
of the matters will not have a material adverse
effect on Acap's results of operations or
financial position.
6. SUPPLEMENTAL Cash payments for interest expense for the years
INFORMATION ended December 31, 1996 and 1995 were $115,578
REGARDING and $418,876, respectively. Net cash payments
CASH FLOWS of $73,764 and $1,017,013 for federal income
taxes were made during the years ended December
31, 1996 and 1995, respectively.
The following reflects assets acquired and
liabilities assumed relative to the acquisition
by the Company of a life insurance company in
1995, and the consideration given and the net
cash flow relative to such acquisition.
Assets of acquired subsidiary . . . . . $ 4,393,403
Liabilities of acquired subsidiary . . (1,833,887)
------------
Cost of acquisition . . . . . . . . . . $ 2,559,516
============
Cash paid for acquisition . . . . . . . $ 2,559,516
============
Net cash from acquisition:
Cash of acquired company . . . . . . . $ 607,216
Cash paid for acquisition . . . . . . . (2,559,516)
------------
Net cash used by acquisition . . . . . $(1,952,300)
============
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following reflects assets acquired and
liabilities assumed relative to the coinsurance
agreement for the policies of World Service by
the Company, the consideration given for such
reinsurance and the net cash flow relative to
such coinsurance on June 1, 1996.
Assets acquired . . . . . . . . . . . . $ 21,399,538
Liabilities assumed . . . . . . . . . . (23,098,650)
-------------
Cost of reinsurance . . . . . . . . . . $ (1,699,112)
=============
Cash paid for reinsurance . . . . . . . $ (1,699,112)
=============
Net cash from coinsurance:
Cash acquired . . . . . . . . . . . . . $ 21,071,074
Cash paid for reinsurance . . . . . . . (1,699,112)
-------------
Net cash provided from coinsurance . . $ 19,371,962
=============
The following reflects assets and liabilities
transferred in connection with a coinsurance
treaty whereby all policies assumed from World
Service were 100% retroceded to an unaffiliated
reinsurer, the ceding commission received and
the net cash flow related to the coinsurance
treaty on June 30, 1996.
Assets transferred . . . . . . . . . . $ 21,519,743
Liabilities transferred . . . . . . . . (23,218,855)
------------
Net cash transferred . . . . . . . . . $ (1,699,112)
=============
Ceding commission received . . . . . . $ 1,699,112
=============
Net cash provided from coinsurance . . $ 0
=============
The following reflects assets transferred and
cash received on the sale of the Company's
wholly-owned subsidiary, Family Life Insurance
Company of Texas, to an unaffiliated third party
during the year ended December 31, 1996.
Assets transferred . . . . . . . . . . $ (307,231)
Sales price received . . . . . . . . . 357,231
-----------
Net cash provided from sale . . . . . . $ 50,000
===========
7. FEDERAL Acap and American Capitol file a consolidated
INCOME federal income tax return. The other
TAXES subsidiaries of the Company file separate
federal income tax returns. At December 31, 1996,
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acap had a remaining tax net operating loss
carryover of approximately $1,100,000 that
will expire during the years 2001 through 2010
if not previously utilized. At December 31,
1996, the Company had alternative minimum tax
carryforwards of approximately $388,000 that are
available for an indefinite period to reduce
future regular federal income taxes and tax
capital loss carryforwards of approximately
$140,000 that will expire in the year 2000 if
not previously utilized.
A portion of life insurance taxable income
generated prior to 1984 is not taxable unless it
exceeds certain statutory limitations or is
distributed to stockholders, in which case it
becomes taxable at ordinary corporate rates.
Such income is accumulated in a Policyholders'
Surplus account that, at December 31, 1996, had
a balance of approximately $4,800,000. No
provision has been made for income taxes related
to this accumulation.
A reconciliation of income tax expense for the
years 1996 and 1995 computed at the applicable
federal tax rate of 34% to the amount recorded
in the consolidated financial statements is as
follows:
1996 1995
---- ----
Federal income tax expense at statutory rate $ 224,826 170,123
Small life insurance company special deduction (204,124) (596,918)
Change in valuation allowance . . . . . . . . 247,385 616,489
Tax underpayment (refund) . . . . . . . . . . (32,478) 15,084
Other, net . . . . . . . . . . . . . . . . . (232,624) 18,551
----------------------
Total federal income tax expense . . . . . . $ 2,985 223,329
======================
The small life insurance company special
deduction noted above is available to life
insurance companies with assets under $500
million. The deduction is 60% of life insurance
taxable income under $3 million. The deduction
is phased out for life insurance taxable income
between $3 million and $15 million, with the
deduction reduced by 15% of the life insurance
taxable income in excess of $3 million.
The tax effects of temporary differences that
give rise to significant portions of the
deferred tax assets and deferred tax liabilities
at December 31, 1996 are as follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Tax Assets:
Allowance for investment losses . . . . . . . . . . . $134,238
Deferred gain on reinsurance . . . . . . . . . . . . 810,483
Net operating loss carryforwards . . . . . . . . . . 381,125
Alternative minimum tax credit carryforwards . . . . 388,006
Other . . . . . . . . . . . . . . . . . . . . . . . . 97,117
------------
Total gross deferred tax assets . . . . . . . . . . . 1,810,969
Less: Valuation allowance . . . . . . . . . . . . . (1,796,617)
------------
Deferred tax assets . . . . . . . . . . . . . . . . . 14,352
------------
Deferred Tax Liabilities:
Net unrealized gains on available-for-sale securities 203,357
Deferred policy acquisition costs . . . . . . . . . . 408,605
Policy reserves and policy funds . . . . . . . . . . 1,029,387
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,600
------------
Deferred tax liabilities . . . . . . . . . . . . . . 1,643,949
------------
Net deferred tax liability . . . . . . . . . . . . .$(1,629,597)
============
A valuation allowance of $1,796,617 was
established at December 31, 1996 against the
deferred tax asset. The net change in the total
valuation allowance for the years ended December
31, 1996 and 1995 was an increase of $247,385
and an increase of $616,489, respectively.
Management believes that it is more likely than
not that the deferred tax assets are
recoverable.
8. AMERICAN On July 18, 1988, the Board of Directors of
CAPITOL KEY American Capitol approved a Key Employee Stock
EMPLOYEE Option Plan ("the Plan"). Under the terms of
STOCK OPTION the non-qualified Plan, the Compensation
PLAN Committee of the Board of Directors of American
Capitol is authorized to grant stock options to
any employee the Compensation Committee
determines is a key employee. The stock options
may only be granted on shares of common stock of
Acap owned by American Capitol. The options
enable the grantee to purchase the common stock
to which the options relate at the fair market
value of the common stock on the date the
options were granted. The options generally
expire 20% annually over a five year period and
are exercisable immediately upon grant.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options granted for Acap Corporation
common stock are summarized as follows:
Number of Shares
----------------
Option Price 1996 1995
------------ ---- ----
Outstanding at January 1 $131 1/4 - $187 1/2 68 102
Cancelled during the year $131 1/4 -- (34)
---------------
Outstanding at December 31 $187 1/2 68 68
===============
Available for future grant 377 173
===============
9. CAPITAL Acap has two classes of capital stock:
STOCK preferred stock ($.10 par value, authorized
80,000 shares), which may be issued in series
with such dividend, liquidation, redemption,
conversion, voting, and other rights as the
Board of Directors may determine, and common
stock ($.10 par value, authorized 10,000
shares), the "Common Stock." The only series of
preferred stock outstanding is the Cumulative
Exchangeable Preferred Stock, Series A, $2.50
(Adjustable), the "Series A Preferred Stock."
Series A Preferred Stock
There are 74,000 shares of Series A Preferred
Stock authorized, issued and outstanding. Acap
pays dividends quarterly on the Series A
Preferred Stock (when and as declared by the
Board of Directors). The amount of the dividend
is based on the prime rate of a Pittsburgh bank
plus 2%. Acap has the right, if elected by the
Board of Directors, to redeem the Series A
Preferred Stock at the fixed redemption price of
$27.50 per share. The holders of Series A
Preferred Stock are entitled to liquidating
distributions of $27.50 per share. The
cumulative dividends and liquidating
distributions of the Series A Preferred Stock
are payable in preference to the Common Stock.
The Series A Preferred Stock is non-voting,
except as required by law and except that, if
six quarterly dividends are unpaid and past due,
the holders of the Series A Preferred Stock may
elect two directors to Acap's Board of
Directors. Prior to August 26, 1996, the Series
A Preferred Stock had been exchangeable, at the
option of the holders, into shares of common
stock of Fortune National Corporation
("Fortune"). Effective August 26, 1996, Fortune
adopted a plan of dissolution and liquidation.
Consequently, the exchange option of Series A
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock expired. There was no activity
related to the Series A Preferred Stock for the
two years ended December 31, 1996 other than
payments of dividends.
Common Stock
Fortune, formerly the owner of 63.7% of the
Company's outstanding Common Stock, adopted a
plan of dissolution and liquidation at its
annual stockholder meeting on August 26, 1996.
At that date, Fortune had no assets other than
its holding of the Company's Common Stock.
Under the plan, no fractional shares of the
Company's Common Stock were issued. Fortune
stockholders who did not buy from the Company
enough Fortune common stock to round up their
holdings elected to sell their "odd lot" shares
of Fortune common stock to the Company. As a
result of the Company's purchase of the "odd
lot" shares and the conversion of the Company's
holding of Fortune common stock into company
Common Stock, the Company added $320,566 (910
shares) to treasury stock, reducing the number
of outstanding shares of Company Common Stock to
approximately 7,603. There was no activity
related to the Common Stock during 1995.
10. SUBSEQUENT On January 31, 1997, World Service assumed all
EVENT of the policies of South Texas Bankers Life
Insurance Company ("South Texas"), the wholly-
owned subsidiary of World Service, with a
retroactive effective date of June 1, 1996.
Under the terms of American Capitol's
coinsurance agreement with World Service, World
Service's assumption of the South Texas policies
automatically made the South Texas policies
subject to the coinsurance agreement. American
Capitol paid World Service an initial ceding
commission of approximately $100,000 related to
the South Texas policies. In anticipation of
the assumption by World Service and the
resulting coinsurance to American Capitol, South
Texas had transferred $6.8 million in assets to
American Capitol in 1996, which are reflected as
a deposit in "Other Liabilities" in the
Company's December 31, 1996 balance sheet. The
assets were transferred to Crown in 1996 and are
reflected as "Reinsurance Receivables" in the
Company's December 31, 1996 balance sheet.
<PAGE>
ACAP CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acap Corporation
We have audited the accompanying consolidated
balance sheet of Acap Corporation and subsidiaries
as of December 31, 1996, and the related
consolidated statements of operations,
stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. These
consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated 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 consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of Acap
Corporation and subsidiaries as of December 31,
1996, and the results of their operations and their
cash flows for the years ended December 31, 1996
and 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated
financial statements, the Company adopted the
provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed
Of," in 1996.
KPMG Peat Marwick LLP
Houston, Texas
March 21, 1997
<PAGE>
ACAP CORPORATION
STOCKHOLDER INFORMATION
MARKET The common stock of Acap is traded over-the-counter
INFORMATION with activity in the stock reflected nationally on
the OTC Bulletin Board electronic quotation system
of the National Association of Securities Dealers.
The Company's stock symbol is AKAP.
The table below presents the range of closing bid
quotations for Acap's common stock during the two
most recent fiscal years.
1996 1995
---- ----
High Low High Low
---- --- ---- ---
First quarter . . . $230 180 125 100
Second quarter. . . 231 230 135 100
Third quarter . . . 245 230 135 135
Fourth quarter. . . 325 245 180 135
The prices presented are bid prices, which reflect
inter-dealer transactions and do not include retail
mark-ups and mark-downs or any commission to the
parties involved. As such, the prices may not
reflect prices in actual transactions.
HOLDERS The approximate number of holders of record of
Acap's common stock as of March 24, 1997 was 806.
DIVIDENDS Acap declared no common stock dividends in 1996 or
1995. At present, management anticipates that no
dividends will be declared or paid with respect to
Acap's common stock during 1997.
FORM 10-KSB Stockholders may receive without charge a copy of
the Company's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission by
writing to Lana S. Vaughn, Stockholder Services,
Acap Corporation, 10555 Richmond Avenue, Houston,
TX 77042.
TRANSFER The registrar and transfer agent for the Company's
AGENT common stock is Continental Stock Transfer and
Trust Company, 2 Broadway, New York, NY 10004. For
a change of name or address, or to replace lost
stock certificates, write to Continental at the
address above or call (212) 509-4000.
INVESTOR Requests for information should be directed by mail
RELATIONS to Lana S. Vaughn, Stockholder Services, Acap
Corporation, 10555 Richmond Avenue, Houston, TX
77042 or by calling (713) 974-2242.
<PAGE>
ACAP CORPORATION
STOCKHOLDER INFORMATION
INDEPENDENT The Company's financial statements for the year
AUDITORS 1996 were audited by the independent accounting
firm of KPMG Peat Marwick LLP, 700 Louisiana,
Houston, TX 77002.
ANNUAL Stockholders are invited to attend the Annual
MEETING Meeting of Stockholders which will be held on
Monday, April 28, 1997 at 8:00 a.m. at the
Company's office at 10555 Richmond Avenue, Houston,
Texas, on the second floor.
<PAGE>
ACAP CORPORATION
DIRECTORS AND OFFICERS
BOARD OF R. Wellington Daniels
DIRECTORS Investor; Retired Director of National Accounts,
OF ACAP American Cyanamid
William F. Guest
Chairman of the Board and President, Acap
Corporation
C. Stratton Hill, Jr., M.D.
Physician
OFFICERS OF William F. Guest
ACAP Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
H. Kathleen Musselwhite
Secretary and Assistant Treasurer
OFFICERS OF William F. Guest
AMERICAN Chairman of the Board
CAPITOL AND
TEXAS John D. Cornett
IMPERIAL President
H. Kathleen Musselwhite
Secretary, Treasurer and Controller
Richard M. Ridley
Vice President
Dan R. Stites
Vice President
Carolyn M. Rawlins
Assistant Secretary
Linda G. Stark
Assistant Vice President
C. Stratton Hill, Jr., M.D.
Medical Director
<PAGE>
ACAP CORPORATION
10555 Richmond Avenue Houston, Texas 77042
<PAGE>
AMENDMENT #5
applying to
TREATY 0708-OCO
between
AMERICAN CAPITOL LIFE INSURANCE COMPANY
and
CROWN LIFE INSURANCE COMPANY
The above referenced treaty is hereby amended to as follows:
Schedule A "Policies and Risk Reinsured" shall be amended to allow for the
cession of additional traditional life policies in the same proportion as
the original ceded policies reinsured hereunder assumed by the Company
from World Services Life Insurance Company of America and its subsidiary
South Texas Bankers Life Insurance Company (collectively hereinafter
referred to as the Ceders) under an assumption reinsurance treaty
effective May 31, 1996 (hereinafter collectively referred to as the World
Service Policies) and described in Attachment A which is attached hereto
and made a part hereof by this reference.
Paragraph 3.01 "Initial Portfolio Transfer" shall be amended to allow for
an additional initial portfolio transfer, as of the Effective Date of this
Amendment, on the World Service Policies in an amount calculated as set
forth therein as applied to the World Service Policies only.
Paragraph 3.02 "Initial Consideration" shall be amended for an additional
initial consideration with regards to the New Policies only, to be paid
simultaneously with the payment defined above in an amount equal to: One
Million and Nine Hundred Thousand Dollars ($1,900,000). Such amount will
be adjusted for the actual policies in force as determined by the May 31st
Actuarial Appraisal as of the date of assumption as provided for in
Section 4.2(a) of the Reinsurance and Assumption Agreements between the
Ceders and the Company. Should the Company, as of March 31, 1998, pay to
the Ceders, an additional "ceding fee" (as defined in Section 4.2(b) of
the Reinsurance and Assumption Agreements between the Company and the
Ceders, the Reinsurer shall pay to the Company such amounts, effective
simultaneously with that of the Company. In no event shall such
additional ceding consideration exceed Four Hundred Thousand Dollars
($400,000) in total.
Paragraph 3.07 "Administration" shall be amended to included additional
monthly administration allowances to be applied on the World Services
Policies only as follows:
a) For all World Service Policies in premium paying status $1.38
b) For all World Service Policies that are Paid-up reduced $0.85
Paid-up or on an extended term basis
Plus 2% of the Reinsurance Premiums as defined in Paragraph 3.02 of
this Treaty for the World Service Policies only
Schedule C.02 "Experience Refund Formula" shall be amended to specifically
include the additional initial consideration as defined above to be
included in the formula as initial consideration as provided for therein.
Schedule D.03 "Determination of Segregated Asset Account Balance" shall be
amended to specifically include the initial premium (initial portfolio
transfer as described above) and initial ceding commission as described
above on the World Services Policies only for purposes of determining the
new Segregated Asset Account Balance.
The net amount payable to the Reinsurer as of the effective date of this
Amendment by virtue of having accepted these additional policies for
reinsurance may be directly deposited by the Company, into the Segregated
Asset Account and any and all such deposit shall be deemed receipt by the
Reinsurer.
EFFECTIVE DATE AND EXECUTION OF AMENDMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate, with an Effective Date of June 30, 1996.
AMERICAN CAPITOL INSURANCE COMPANY (Company)
Attest:
By: /s/John D. Cornett, President By: /s/Paul L. Clancy, Secretary
Date: July 10, 1996 Date: July 10, 1996
CROWN LIFE INSURANCE COMPANY (Reinsurer)
Attest:
By: /s/Remi H. Houle By: /s/Julie Verda
VP Reinsurance Operations
Date: July 12, 1996 Date: July 12, 1996
RIDLEY EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into by
and between TEXAS IMPERIAL LIFE INSURANCE COMPANY ("Employer"), a Texas
life insurance company, and RICHARD M. RIDLEY ("Employee"), an individual
resident of Beaumont, Jefferson County, Texas. Employer's "parent" is
American Capitol Insurance Company, Houston, Texas ("American Capitol" or
"Parent"), and there are other companies, and may be other companies in
the future, that are related to Employer by virtue of common ownership
("affiliates").
1. Employment. Employer hereby employs Employee to perform the
duties and render the services hereinafter set forth and Employee hereby
accepts said employment and agrees to perform and render said duties and
services faithfully and diligently, all upon the terms and conditions and
for the term hereinafter set forth.
2. Duties. During the term of this Agreement, Employee will,
during customary working hours, devote his full time and attention and
give his best efforts and skill exclusively to the business, progress,
success, profit, advantage, benefit and interests of Employer and its
parent, subsidiary and/or affiliated corporations in the capacity of Vice-
President, Director of Marketing of Employer, and shall diligently perform
such tasks and services that are in keeping with the job description
attached hereto as Exhibit A, or other reasonable duties as may be
assigned to Employee from time to time, all of which duties, tasks, and/or
services shall be such as are within the scope of the position for which
he is employed as indicated by Exhibit A.
3. Term. The term of Employee's employment under this Agreement is
one (1) year, commencing October 1, 1996.
4. Compensation. As compensation for all services to be rendered
by Employee in any capacity hereunder, including services as a director or
officer of Parent or any subsidiary or affiliate of Employer as may be
properly designated or requested by Employer, Employer shall pay to
Employee a gross salary in equal semimonthly installments at an annual
rate of seventy-five thousand dollars ($75,000) per year. "Gross salary"
as used herein shall mean the amount of salary before any deductions for
social security withholding, federal income tax or cost of Employee's
share of Company benefits exclusive of retirement plan payments by
Employee, if any, bonuses, if any, and commissions. In addition to the
salary compensation as herein provided, Employee shall be entitled to
commission payments as set forth in Exhibit B attached hereto ("Employee
Commissions").
5. Expenses. In addition to his base salary as provided in
paragraph 4, Employee shall be reimbursed for any and all reasonable costs
and expenses incurred by Employee in performance of his services and
duties as specified in this Agreement, including, but not limited to,
reasonable business expenses incurred in connection with travel and
entertainment. However, unless approved in advance by Employer, such
expenses must be of the type and amount that are within the established
practice relating to travel and entertainment expenses usually approved
from time to time by Employer or Employer's parent for its executive
officers and employees. These expenses shall be reimbursed to Employee,
based on written requests submitted in a mutually acceptable format. Such
written requests shall include receipts or other verifiable evidence of
the amount and nature of the expenditure for which reimbursement is
sought. The expense reimbursements shall be paid to Employee in a regular
pay period no longer than 30 days following submission for reimbursement.
6. Employee Benefit Plans. During the term of this Agreement,
Employee shall have the right to participate in each of Employer's benefit
plans available to employees of Employer. Parent has provided a specific
written description of the current benefits for Employee and all other
employees of Employer. Such specific description shall be incorporated
into and made a part of this Agreement and shall be acceptable to
Employee.
7. Other Benefits. The compensation and other benefits agreed to
be paid to Employee by Employer in this Agreement shall not operate in any
manner as a limitation of any type upon or as a direction, express or
implied, against the exercise by the Board of Directors of Employer, of
its power, authority and discretion to grant bonuses or other additional
direct or indirect benefits or compensation to or on behalf of Employee
if, in the business judgment of such Board, such action is in the best
interest of Employer.
8. Employee's Disability or Death.
(a) (1) In the event Employee, during the term of this Agreement,
becomes physically or mentally disabled (as hereinafter defined), Employee
will be deemed to have resigned as of the commencement of such disability
unless otherwise agreed to in writing by Employer and Employee, and in
such event Employer shall continue to pay to Employee all amounts, except
salary, that may be due from Employer to Employee.
(2) For federal income tax purposes, all payments provided for
in this section, to the extent that they do not represent disability
benefits provided under an insurance policy premiums for which are paid by
Employee, are intended to be taxable to Employee and deductible by the
Employer.
(3) "Disability" shall mean the inability, either mental or
physical, to perform the necessary functions of the Employee's position of
employment with the Employer, by reason of the illness or incapacity of
Employee. Employee shall be deemed to be disabled for the purpose of this
Agreement if Employer's Parent's Medical Director, after consultation with
a licensed physician or physicians of Employee's choice, shall determine
that Employee, whether by reason of accident, illness or mental or
physical infirmity, is not able to carry on with adequate vigor and
competence the duties assigned him under this Agreement. Such
determination shall be binding on Employer and Employee.
(b) Employer and Employee understand and agree that Employer may
from time to time carry group disability insurance on behalf of Employee,
premiums for which may be shared by Employer and Employee. Any payments
made to Employee under such a disability policy shall be in addition to
Employer's duty to pay any amounts that may be due to Employee as
hereinabove stated.
(c) In the event that Employee shall die during the term of this
Agreement, the Agreement shall terminate as of the last day of the
calendar month during which his death shall occur, and Employer shall pay
to the estate of Employee all amounts due from Employer to Employee,
including salary to the end of the month in which his death occurred, if
such date is not the final day of such month.
9. Termination. This Agreement may be terminated by Employer or
Employee as follows:
9.1 By Employer. Without cause, Employer may terminate this
Agreement at any time upon not less than sixty (60) days advance written
notice to Employee. In such event, Employee shall continue to render his
services at the option of Employer up to the effective date of
termination, in which case Employer shall continue to pay to Employee
following the expiration of such sixty (60) day period, all amounts,
except salary, that may be due from Employer to Employee. In the event
Employer does not elect to terminate Employee's services during such sixty
(60) day period, or a portion thereof, and Employee fails or refuses
without significant cause (such as disability) to render such services,
Employer shall not be obligated to pay to Employee any further
compensation, salary or otherwise.
9.2 By Employee. Without cause, Employee may terminate this
Agreement upon not less than sixty (60) days advance written notice to
Employer. In such event, Employee shall continue to render his services
at the option of Employer up to the effective date of termination, in
which case Employer shall continue to pay to Employee following the
expiration of such sixty (60) day period all amounts, except salary, that
may be due from Employer to Employee. In the event Employer does not
elect to terminate Employee's services during such sixty (60) day period,
or a portion thereof, and Employee fails or refuses without significant
cause (such as disability) to render such services, Employer shall not be
obligated to pay to Employee any further compensation, salary or
otherwise.
9.3 By Employer. "For cause," Employer may terminate this Agreement
by providing Employee written notice to that effect and this Agreement and
Employee's employment hereunder shall terminate immediately upon receipt
of such notice by Employee as herein provided. If termination is "for
cause," Employee will not be entitled to any further salary or
compensation or benefits of any kind following the date of such
termination. "For cause" shall mean conviction of a crime involving moral
turpitude or willful misconduct or a substantial neglect of duties which
in the judgement of the Employer's Board of Directors adversely affects
the Employer and/or its affiliates. "For cause" shall also mean any
occurrence or event which constitutes a breach of this Agreement by
Employee or Employee's failure to continue to render his services to
Employer as required under this Agreement.
9.4 Resignation from Board. Employee understands and agrees that
upon submitting or receiving notice of termination of his employment with
Employer as provided herein, and if Employee is a member of the Board of
Directors of Employer or any of its affiliates at such time, he shall
immediately submit in writing to Employer his resignation as a member of
such Board of Directors.
10. Disclosure of Information. Employee recognizes and acknowledges
that he will have possession of and/or access to certain confidential
information and data of the Employer and/or its affiliates, and that such
information and data constitutes valuable, special and unique property of
the Employer whether accumulated or obtained by Employee or otherwise.
Employee will not, during or after the term of this Agreement, without the
prior approval of Employer, voluntarily disclose any such confidential
information or data to any person or firm, corporation, association or
other person or entity, or use such confidential information or data for
any reason or purpose, otherwise than for the benefit of Employer or its
affiliates. As used herein, "confidential information and data" means
information disclosed to, or accumulated or obtained by, Employee or known
by Employee as a consequence of or through his employment by the Employer
or its affiliates, not generally known in the life and health insurance
industry in which the Employer is engaged, about the products, processes,
systems and services of Employer and its affiliates, including, but not
limited to, computer programs and software, identities of and information
concerning companies or blocks of business that may be available for
acquisition, lists of policyholders and reinsurers, lists of agents and
information pertaining to their sales activities, sales volume and/or
commission levels, sales or marketing information pertaining to funeral
homes, copies of insurance policies and reinsurance agreements,
information contained in accounting or actuarial studies or reports
performed by or at the request of Employer and its affiliates, and
internal documents relating to policies, procedures, methods or positions.
Upon termination of his employment with the Employer, all documents,
records, lists, notebooks, and similar collections or compilations of such
confidential information or data, including all copies thereof, then in
Employee's possession or in the possession of third parties under the
control of Employee, whether prepared by him or others, will be delivered
to the Employer by Employee. The obligations of this Section shall not
apply to confidential information and data that: (i) at the time of
Employee's employment by Employer was in the public domain; (ii) is or
becomes generally available in the public domain other than pursuant to a
breach by Employee of his obligations under this Section; or (iii)
Employee can show was acquired, or is acquired after the date of this
Agreement, from a third party (other than from a third party at the
Employer's request) and such third party did not obtain such confidential
information and data from any Employee of Employer subject to or in
violation of obligations similar to those set forth in this Section.
11. No Compete. In the event of termination of this Agreement by
either the Employer or Employee, Employee agrees that he will not,
directly or indirectly, participate in, assist in any way, or solicit, the
rewriting of any insurance policies or annuities issued by Employer to
insureds as of the date of termination. Employee agrees that, for a
period of eighteen months following the date of termination of this
Agreement, he shall not, directly or indirectly, for his own benefit or
for the benefit of any other person or entity, negotiate with, recruit or
hire, or attempt to negotiate with, recruit or hire, any of the Agents (as
herein defined) of Employer or its affiliates who are Agents of Employer
or its affiliates within the four months immediately preceding the date of
termination of this Agreement, and shall not interfere with Employer's
business relationship with said Agents. An "Agent" is any insurance agent
appointed by Employer to act as such on Employer's behalf but shall not
include any employee of a funeral home or funeral home affiliate, and such
employees shall be included herein in the definition of "Protected Funeral
Home." A "Protected Funeral Home" shall be any one of the funeral homes
designated by Employer on a list of funeral homes provided to Employee
which in the aggregate account for sixty-five percent (65%) of all
insurance policies sold by employees of such funeral homes for Employer
during the six months (or twelve months, as elected by Employer at the
time of creating the list) immediately preceding the date of termination
of this Agreement. Employee agrees that, for a period of eighteen months
following the date of termination of this Agreement, he shall not,
directly or indirectly, for his own benefit or the benefit of any other
person or entity, negotiate with, recruit or hire, or attempt to negotiate
with, recruit or hire any employees of a Protected Funeral Home, and shall
not interfere with Employer's business relationship with any such
Protected Funeral Home.
12. Other Employment. During the term of this Agreement, Employee
shall not, without the prior written approval of Employer, seek out,
engage in, negotiate for or accept any employment, commercial activity or
enterprise or gainful occupation with any other employer, person or
entity. Employee shall report to Employer in writing any offer of
employment or proposal that Employee enter into negotiations leading to an
offer of employment received by Employee from any other party, such
written report to be delivered within five (5) days from the receipt of
any such offer or proposal. Notwithstanding anything to the contrary
herein contained, at any time following ten (10) months from the effective
date of this Agreement, or at any time after Employee gives notice to
Employer of termination of this Agreement pursuant to Section 9.2,
Employee may seek out, negotiate for and accept employment or gainful
occupation with any other employer, person or entity.
13. Other Permissible Activities. Notwithstanding any provision
herein contained, Employee shall not be prohibited from engaging in non-
profit, charitable or community activities, investing or trading in stocks
or bonds or other forms of passive investment for Employee's account or
family account, or engage in other business activities unrelated to the
sale of preneed funeral contracts funded by life insurance, so long as
such activities do not involve the management and/or ownership of a
business enterprise, are of a passive nature only (such as the management
of an investment portfolio), do not require a significant amount of time,
and do not materially interfere with Employee's performance hereunder.
14. Miscellaneous.
14.1 Notices. Any notices made pursuant to this Agreement
shall be in writing and shall be deemed to have been duly given on the
date of delivery if delivered personally (including overnight delivery
service) or by facsimile transmission to the party to whom notice is give,
or on the third day after mailing if mailed to the party to whom notice is
to be given by certified mail, return receipt requested, and properly
addressed as follows:
If to Employer:
American Capitol Insurance Company
P. O. Box 42814
Houston, Texas 77242
Attention: President
-or-
American Capitol Insurance Company
10555 Richmond Avenue
Houston, Texas 77042
Attention: President
FAX: 713-953-7920
If to Employee:
Richard M. Ridley
Texas Imperial Life Insurance Company
P. O. Box 7070
Beaumont, Texas 77726-1700
-or-
Richard M. Ridley
Texas Imperial Life Insurance Company
4335 Laurel Avenue
Beaumont, Texas 77707
FAX: 409-899-1444
Any party to this Agreement may change the address to which notice is
to be delivered under this Section by delivering written notice to that
effect to the other party in accordance with this Section. Any document
delivered via facsimile transmission shall be treated as though it is an
original for all purposes.
14.2 Amendments. This Agreement and any attachments
incorporated by reference constitute the entire agreement between the
parties and may not be amended, supplemented, waived, or terminated except
by written instrument executed by the parties. This Agreement supersedes
all other agreements on this subject, written or oral, contemporaneous or
prior.
14.3 Waiver. No waiver of any provision of this Agreement
shall be effective unless in writing signed by the party making such
waiver and no such waiver shall constitute a waiver of any other provision
of this Agreement, nor shall such waiver constitute a waiver of any
subsequent breach of such provision.
14.4 Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successors
and assigns. Notwithstanding anything herein to the contrary, this
Agreement is not assignable by Employee.
14.5 Governing Law. The validity, construction, and
enforcement of this Agreement shall be governed by the laws of the State
of Texas. In the event of a dispute concerning this Agreement, the
parties agree that venue lies in a court of competent jurisdiction in
Harris County, Texas.
14.6 Severability. If any provision of this Agreement is
declared unenforceable by a court of last resort, such declaration shall
not effect the validity of any other provisions of this Agreement.
14.7 Construction. The headings contained in this Agreement
are for reference purposes only and shall not affect this Agreement in any
manner whatsoever. Whenever required by the context, any gender shall
include any other gender, the singular shall include the plural, and the
plural shall include the singular.
14.8 Time for Performance. If the time for performance of any
obligation set forth in this Agreement falls on a Saturday, Sunday, or
legal holiday, compliance with such obligation on the next business day
following such Saturday, Sunday or legal holiday shall be deemed
acceptable.
14.9 Counterparts. This Agreement may be executed in multiple
and/or separate counterparts, each of which shall be deemed an original
but all of which shall be deemed one instrument.
14.10 Authorization. The making and performance by Employer of
this Agreement have been duly authorized by all necessary corporate
actions of Employer, and the undersigned representative of Employer is
fully empowered and authorized to execute this Agreement on its behalf.
This Agreement is executed to be effective as of October 1, 1996.
EMPLOYER:
TEXAS IMPERIAL LIFE INSURANCE COMPANY
By: /s/John D.Cornett, President
EMPLOYEE:
/s/Richard M. Ridley
REINSURANCE AMENDMENT 2
Treaty No. CMC-0902
between
Texas Imperial Life Insurance Company
and
Alabama Reassurance Company, Inc.
WHEREAS, Texas Imperial Life Insurance Company (the "Company") and Alabama
Reassurance Company, Inc. (the "Reinsurer") are parties to a reinsurance
agreement (#CMC-0902)(this "Agreement")and
WHEREAS, the Company and the Reinsurer are also parties to two other
reinsurance agreements (the "Other Agreements"), covering business the
Company assumed from Trans-Western Life Insurance Company (#OCO-0802) and
Family Life Insurance Company of Texas (#CMC-0804), and
WHEREAS, the Company and Reinsurer would realize administrative
efficiencies by consolidating the business reinsured under the Other
Agreements with the business reinsured under this Agreement, it is
therefore
AGREED, as follows:
a) the "Policies and Risks Reinsured" as defined in Schedule A to
this Agreement is hereby amended to add the business listed on
the respective Schedules A of the Other Agreements; and
b) the "Mod-co percentage" as defined in 5.01(b) of this Agreement,
as of the effective date of this Amendment shall be sixty-five
percent (65%); and
c) the "Administration Expense Allowance" as defined in 3/02(e) is
hereby amended to "an annual rate of three and one-half percent
(3.5%)of the statutory reserve on the portion of the policies
reinsured hereunder as of the beginning of the accounting period
for which this calculation is being made plus any actual state,
county, or parish premium taxes paid by the Company on the
portion of the premiums reinsured hereunder"; and
d) the "Reinsurer's Minimum Profit Retention" is hereby amended to
"fifty basis point (0.5%) of the coinsurance reserve established
in accordance with 5.03, as of the beginning of the then current
accounting period".
The effective date of this Amendment is January 1, 1996.
On Behalf of Texas Imperial Life Insurance (Company)
/s/John D. Cornett, President 12/29/95
On Behalf of Alabama Reinsurance Company, Inc. (Reinsurer)
/s/Rodney Windham, VP & Actuary 12/22/95
<PAGE>
SCHEDULE A
POLICIES AND RISKS REINSURED
----------------------------
Under this Agreement, the Reinsurer reinsures 100% of the following risks
on the blocks of ordinary life insurance policies issued or assumed by the
Company and described below:
FORM DESCRIPTION QUOTA SHARE
WL CHAMBERLAIN 3.5% 100%
GDBWL CHAMBERLAIN 3.5% 100%
10PL 1958 CSO 3% 100%
WL 1958 CSO 3.5% 100%
10PL 1980 CSO 4% SEX DISTINCT 100%
20PL 1980 CSO 4% SEX DISTINCT 100%
10PL 1980 CSO 6% SEX DISTINCT 100%
15PL 1980 CSO 6% SEX DISTINCT 100%
20PL 1980 CSO 6% SEX DISTINCT 100%
PUWL 1958 CSO (ANB) 3.5% NL 100%
FPA FLEXIBLE PREMIUM ANNUITIES 100%
SPWL 1980 CSO ALB 5.25% 100%
SPRP 5 PAY, 2YR RETURN OF PREM 100%
10PRP 10 PAY, 2YR RETURN OF PREM 100%
Originally Trans-Western treaty
<PAGE>
SCHEDULE A
POLICIES AND RISKS REINSURED
----------------------------
Under this Agreement, the Reinsurer reinsures a 20% quota share of the
risks on the blocks of insurance policies issued by the Company and
described below:
VALUATION POLICY COUNT
CODE DESCRIPTION as of 8/1/94
--------------------------------------------------------------------
M161 CHAMBERLAIN 3.5% 14,193
M121 CHAMBERLAIN 2.5% 738
O143 58CSO ANB MALE 3% CRVM 186
0163 58CSO ANB MALE 3.5% CRVM 1,863
N143 41CSO 3% CRVM 77
S163 58CSO ALB MALE 3.5% CRVM 156
M122 CHAMBERLAIN 2.5% 1,202
M121 CHAMBERLAIN 3.5% 21,631
0141 PAID UP - 58CSO ANB MALE 3% NL 83
M161 PAID UP - CHAMBERLAIN 3.5% 2
M162 PAID UP - 58CSO ANB MALE 3% CRVM 16
0143 FULLY PAID UP - 58CSO ANB MALE 3% CRVM 7
0143 ETI - 58CSO ANB MALE 3% CRVM 43
Originally Family Life Treaty
REINSURANCE AMENDMENT 3
Treaty No. CMC-0902
between
Texas Imperial Life Insurance Company
and
Alabama Reassurance Company
Whereas, Texas Imperial Life Insurance Company (the "Company") and Alabama
Reassurance Company (the "Reinsurer") are parties to a reinsurance
agreement (#CMC-0902)(the "Agreement") and
Whereas, the Company and the Reinsurer want to increase the coinsurance
reserve amount under the Agreement at December 31, 1996 by $300,000, it is
therefore
Agreed as follows:
(a) the "Coinsurance Reserve" as defined in Section 5.02 of the Agreement
shall at December 31, 1996 be set at the amount equal to the sum of
(1) the amount of the Coinsurance Reserve at December 31, 1996 but
for this amendment and (2) $300,000.
(b) the "Coinsurance Percentage" as defined in Section 5.02 of the
Agreement shall at December 31, 1996 equal the Coinsurance Reserve as
calculated in Paragraph (a) above divided by the gross statutory
reserves covered by the Agreement at December 31, 1996.
(c) the "Mod-Co Percentage" as defined in Section 5.01(b) of the
Agreement shall at December 31, 1996 equal 100% less the Coinsurance
Percentage calculated in Paragraph(b) above.
Texas Imperial Life Insurance Company
By: Attested by:
/s/John D. Cornett /s/Kathy Musselwhite
(name) (name)
President Controller & Treasurer
(title) (title)
December 20, 1996 December 20, 1996
(date) (date)
Alabama Reassurance Company
By: Attested by:
/s/Rodney Windham /s/Sam Phelps
(name) (name)
Vice President & Actuary Secretary
(title) (title)
December 31, 1996 December 31, 1996
(date) (date)
COINSURANCE AGREEMENT
This Coinsurance Agreement ("Agreement") is made and entered into by
World Service Life Insurance Company of America ("World Service" or the
"Company") and American Capitol Insurance Company ("Reinsurer").
Recitals
A. World Service is an Alabama domiciled stock life insurance company.
B. As of the Effective Date of this Agreement, World Service has in
effect "Policies" as hereinafter defined, the holders of which
reside in six (6) states in which World Service is licensed and
otherwise qualified to do business.
C. Reinsurer is a Texas domiciled stock life insurance company licensed
or otherwise qualified to do business in all jurisdictions where
holders of the Policies reside except Tennessee and Kentucky.
D. In accordance with the terms and conditions as set forth in this
Agreement, World Service desires that Reinsurer reinsure a portion
of the future liabilities arising under the Policies and Reinsurer
desires to reinsure such portion of the future liabilities arising
under the Policies as more specifically set forth in this Agreement.
E. Prior to the drafting of this particular Agreement, the parties
entered into an agreement known as the "Agreement and Reinsurance
and Assumption" dated May 9, 1996, and effective on the Effective
Date hereof (the "Assumption Agreement") and subsequently modified
said agreement by entering into an agreement known as the
"Reinsurance Agreement" also effective on the Effective Date (the
"Reinsurance Agreement"). This Agreement is for the purpose of
consolidating the said two agreements into a single, "stand-alone"
document. Accordingly, this Agreement supersedes the Assumption
Agreement and the Reinsurance Agreement and said two agreements
shall be referred to for interpretation purposes as set forth in
Section 14.21 below. The parties' intention is that this Agreement
has the effect of said two agreements and by and large the language
of said two agreements has been transferred to this Agreement.
Nevertheless, some of the language and provisions of said two
agreements have been altered or deleted to account for the passage
of time and the fact that some of the provisions of the Assumption
Agreement have been rendered moot by virtue of the changes made by
the Reinsurance Agreement. The future tense is sometimes used in
this Agreement in order to capture language that was appropriate at
the time, even though this document is drafted by the parties in
October, 1996, and many of the identified events and conditions have
transpired or changed.
Terms and Conditions
In consideration of the mutual benefits to be received by the
parties hereto and the mutual covenants and agreements contained herein,
the parties agree that the recitals set forth above are hereby adopted
and made a part of this Agreement, and further agree to the following
terms and conditions:
1
<PAGE>
Article I
Definitions
Except as defined elsewhere in this Agreement, terms used with
initial capitalization when the rules of grammar or form would not so
require have the meanings set forth below:
(a) The term "Policies" shall mean all of World Service's life insurance
and annuity policies in force with issue dates prior to the
Effective Date on such policy forms and plans as were used in the
May 31 Actuarial Appraisal, and which individually shall be referred
to as "Policy." In addition, World Service continues to market
policies on and subsequent to the Effective Date, which policies are
included in the definition of the "Policies" or "Policy" except as
to policies marketed subsequent to the termination of the marketing
arrangement between the parties as provided in Section 9.1 below, or
as to policies otherwise excluded from the marketing arrangement as
provided in Section 9.1(d) below. If the South Texas Bankers
Policies are added to the Policies as set forth in Section 14.4
below, such polices shall include all of South Texas Bankers life
insurance and annuity policies in force with issue dates prior to
the Effective Date on such policy forms and plans as were used in
the May 31 Actuarial Appraisal.
(b) The term "Transfer Value" means the consideration to be transferred
to Reinsurer from World Service, not including the effect of the
Ceding Fee, as set forth in Section 4.1.
(c) The term "Ceding Fee" has the meaning set forth in Section 4.2.
(d) The terms "Reserves" and "IBNR Claims Reserves" have the meaning set
forth in Section 10.5.
(e) The term "Closing" has the meaning set forth in Section 13.1.
(f) The term "Closing Date" has the meaning set forth in Section 13.2.
(g) The term "Commissions" has the meaning set forth in Section 3.4.
(h) The term "Reinsured Policy Obligations" or "Policy Obligations"
means benefits under and by virtue of the terms of the Policies that
arise and become payable on account of a death or other event
covered by the terms of the Policies occurring on or after the
Effective Date, and as further defined in Section 2.2.
(i) "Reinsurer's Portion," "Company's Portion" and "Coinsurance Ratio"
have the meanings set forth in Section 2.1, subject to the revisions
in Section 14.4 as, if and when the South Texas Bankers policies are
assumed by World Service as provided in Section 14.4.
(j) "Assumption Agreement" and "Reinsurance Agreement" have the meaning
set forth in the above Recitals.
(k) "Administration Agreement" has the meaning set forth in Section 2.2.
(l) The terms "Defense" or "Defenses" means any (i) known or unknown,
actual or contingent, rights, defenses, offsets, counterclaims, and
2
<PAGE>
cross-actions, and (ii) any and all rights, limitations, terms,
conditions, and provisions provided for in this Agreement relative
to the assumption of the Policies.
(m) The term "Effective Date" means June 1, 1996.
(n) The term "Documents and Records" has the meaning set forth in
Section 12.4.
(o) The term "December 31 Actuarial Appraisal" means the actuarial
appraisal prepared by Actuarial Resources Corporation based on the
insurance and annuity polices in force in World Service as of
December 31, 1995, and referred to therein as the "WSL05" policies,
prepared as of April 9, 1996, and delivered to Reinsurer April 16,
1996.
(p) The term "May 31 Actuarial Appraisal" has the meaning set forth in
Section 4.2.
(q) The term "South Texas Bankers" means South Texas Bankers Life
Insurance Company, a Texas life insurance corporation which is a
wholly owned subsidiary of World Service.
(r) The term "South Texas Bankers Agreement" means a Reinsurance and
Assumption Agreement (similar to the Assumption Agreement) entered
into between Reinsurer and South Texas Bankers on or about the same
date as the Assumption Agreement was entered into, and was closed
by the parties on the same date as the Closing Date of this
Agreement, subject to regulatory approval.
Article II
Reinsurance of Policy Obligations
Section 2.1. Ceding. Subject to the terms and conditions of this
Agreement, the Company hereby cedes to Reinsurer and Reinsurer hereby
reinsures Ninety Three and Sixty Hundredths percent (93.60%) (the
"Reinsurer's Portion") of the Policy Obligations. The portion of the
Policy Obligations not reinsured is sometimes referred to herein as the
"Company's Portion" and the numerical relationship (93.60/6.40) is
sometimes referred to herein as the "Coinsurance Ratio." (Referring to
Section 14.4 below, in the event the Company assumes the South Texas
Bankers Policies, the Coinsurance Ratio shall change, retroactive to the
Effective Date, in accordance with Section 14.4 below.) Apart from the
Policy Obligations allocated between the Reinsurer and the Company in
accordance with the Coinsurance Ratio, the Company shall continue to have
all liabilities not specifically reinsured by the Reinsurer hereunder,
including any liabilities relating to pre-need contracts issued in
connection with the Policies, and the Company shall indemnify the
Reinsurer and hold the Reinsurer harmless from all liabilities not
specifically reinsured by the Reinsurer hereunder, including any costs
incurred by the Reinsurer in respect to claims or litigation involving
any such liabilities not specifically reinsured by the Reinsurer
hereunder.
Section 2.2. Standard of Performance; Liability. Concurrently with
the Effective Date of this Agreement, Reinsurer and the Company have
entered into a "Policy Administration and Data Processing Services
3
<PAGE>
Agreement," attached hereto as Exhibit 3.1 ("Administration Agreement.")
Beginning on the Effective Date, Reinsurer shall be liable for the
payment of the Reinsurer's Portion of the Policy Obligations. Except for
payments of claims relating to IBNR claims as set forth in Section 4.1,
Reinsurer shall not be liable for any claims or Policy benefits that
arise or become payable by virtue of a death or other event occurring
before the Effective Date. Reinsurer shall not be liable for any
actions, inactions, errors, or omissions made by World Service, and any
of its respective employees, agents, and representatives in the
solicitation, sale, servicing, renewal, or processing of any claim under
the Policies or in communications with insureds, beneficiaries, or any
other third party with respect to the Policies or otherwise.
Section 2.3. Duration of Risk. Except as otherwise provided
herein, this Agreement shall be unlimited in duration.
Section 2.4. Reinsurer's Liability. The Reinsurer's Portion of the
liability with respect to any Policy will begin simultaneously with that
of the Company's, but not prior to the Effective Date of this Agreement.
The Reinsurer's Portion of the liability with respect to any Policy will
terminate simultaneously with that of the Company's.
Section 2.5. Recapture. The Reinsurer's Portion of the Policies is
eligible for recapture commencing after the twelfth (12th) consecutive
month of this Agreement provided the Company gives the Reinsurer ninety
(90) days advance notice as set forth below of its intent to recapture
such policies, and further provided that: (a) such recapture comprises
all of the Policies, (b) such notice designates the effective date of the
intended recapture (which date shall be the end of a month that ends
after the expiration of the aforesaid ninety (90) day period), (c) the
Company pays the Reinsurer a recapture fee to be determined as of the
effective date of the recapture and (d) such recapture fee shall be an
amount equal to the sum of (i) the value of the Reinsurer's Portion of
the Policies that is being recaptured determined by an actuarial
valuation performed in respect to the Policies as of the effective date
of the recapture subject to such valuation being acceptable to and agreed
to by both the Company and the Reinsurer, the cost of which shall be
borne by the Company, plus (ii) a recapture "premium" in an amount equal
to twenty-three percent (23%) of the value determined by said actuarial
valuation, plus (iii) all amounts due to the Reinsurer from the Company
as a result of the Monthly Cash Settlements as set forth in Section 5.3
below through the effective date of recapture. In the event of recapture
as aforesaid, the Company shall assume and be responsible for all
liabilities of the recaptured Policies and all administration and data
processing responsibilities relating thereto, thereby totally and
absolutely relieving the Reinsurer, as of the effective date of such
recapture, of all of its responsibilities and liabilities otherwise
existing by virtue of this Agreement. The Reinsurer shall transfer to
the Company within thirty (30) days following the effective date of the
recapture assets equal to the Reinsurer's Portion of the liabilities of
the recaptured Policies. Such assets shall consist of the policy assets
associated with the Reinsurer's Portion of the Policies (i.e., policy
loans and due and deferred premiums) and the balance, at the election of
the Reinsurer, shall consist of cash, or investment grade bonds valued so
as to have a yield to maturity equal to seven percent (7%), or the
mortgage loans heretofore transferred to the Reinsurer by the Company in
connection with the Assumption Reinsurance Agreement (valued at the
4
<PAGE>
aggregate amount of the loan balances of said loans at the effective date
of the recapture), or a combination thereof.
Section 2.6. Election to Transfer Company's Portion to Reinsurer.
At any time, the Company may elect to transfer the Company's Portion of
the Policy liabilities to the Reinsurer ("transfer") provided that: (a)
such transfer comprises all of the Company's Portion of the Policy
liabilities, (b) such notice designates the effective date of the
intended transfer (which date shall be the end of a month), (c) the
Reinsurer pays the Company a transfer fee to be determined as of the
effective date of the recapture and (d) such transfer fee shall be an
amount equal to (i) the value of the Company's Portion of the Policies
that is being transferred determined by an actuarial valuation performed
in respect to the Policies as of the effective date of the transfer
subject to such valuation being acceptable to and agreed to by both the
Company and the Reinsurer, the cost of which shall be borne by the
Company, less (ii) all amounts due to the Reinsurer from the Company as a
result of the Monthly Cash Settlements as set forth in Section 5.3 below
through the effective date of transfer. In the event of transfer as
aforesaid, the Reinsurer shall assume and be responsible for the
Reinsurer's Portion as well as the Company's Portion of the Policy
liabilities (as of the effective date of such transfer) and shall
continue to perform all administration and data processing
responsibilities relating thereto. Except for the fact that the
Reinsurer's Portion of the Reinsured Policy Obligations shall increase to
100% as a result of such transfer if it occurs, the Company shall
continue to have all liabilities not specifically included in the
Reinsurer's Portion as so increased, including any liabilities relating
to pre-need contracts issued in connection with the Policies, and the
Company shall indemnify the Reinsurer and hold the Reinsurer harmless
from all liabilities not specifically reinsured by the Reinsurer
hereunder, including any costs incurred by the Reinsurer in respect to
claims or litigation involving any such liabilities not specifically
reinsured by the Reinsurer hereunder. The Company shall transfer to the
Reinsurer no later than the effective date of the transfer assets equal
to the Company's Portion of the liabilities of the Policies. Such assets
shall consist of the policy assets associated with the Company's Portion
(i.e., policy loans and due and deferred premiums) and the balance shall
be cash.
Article III
ADMINISTRATION
Section 3.1. Administration. The Reinsurer shall perform the
policy administration and data processing services for the Policies
beginning on the Effective Date in accordance with the Administration
Agreement as set forth in Exhibit 3.1. The Reinsurer shall be entitled
to collect and retain a servicing fee as set forth in said Exhibit 3.1.
Section 3.2. Policy Loans. The Company and the Reinsurer shall
share monthly all interest earned, on an incurred basis, on any of the
outstanding policy loans on the Policies. The Company shall pay to the
Reinsurer the Reinsurer's portion of the decrease, if any, in the
principal balance on any outstanding policy loans on the Policies. The
Reinsurer shall pay to the Company the Reinsurer's portion of the
increase, if any, in the principal balance on any outstanding policy
loans on the Policies.
5
<PAGE>
Section 3.3. Premiums. The Reinsurer and the Company shall be
entitled to share all premiums collected on the Policies in proportion to
the Coinsurance Ratio established by this Agreement as of and following
the Effective Date of this Agreement. The Reinsurer, in its capacity as
administrator of the Policies as herein provided, shall receive and
administer premiums remitted to the Company, and shall account for any
and all such collected premiums as of the end of each calendar month to
the Company as part of the Monthly Cash Settlement as set forth below.
The Company shall not change the premium rates with respect to business
subject to this Agreement and issued subsequent to May 31, 1996, without
the express written consent of the Reinsurer.
Section 3.4. Commission Allowance. Subject to the limitations
expressed in the immediately succeeding sentence, with respect to
Policies issued on or before May 31, 1996, the Reinsurer shall reimburse
the Company as a part of the Monthly Cash Settlement the Reinsurer's
Portion of the actual Commissions earned on the Policies by the Company's
agents based on the commission schedules in force as of the Effective
Date of this Agreement. Such commissions shall not exceed, however, the
amount or amounts, as the case may be, shown in the December 31 Actuarial
Appraisal in respect to the Transferred Policies ("Commissions"). World
Service agrees to indemnify and hold Reinsurer harmless from any
liability, loss, or expense from claims of agents or brokers for
commissions, service fees, or producer compensation in excess of said
Commissions. With respect to Policies issued subsequent to May 31, 1996,
the Reinsurer shall pay (i.e., allow) the Company as a part of the
Monthly Cash Settlement the Reinsurer's Portion of the Commissions
calculated in accordance with Exhibit 3.4 attached hereto. There shall
be no increases to any of the commission schedules referred to herein
without the express written consent of the Reinsurer.
Section 3.5. Premium Assessment Reimbursement. The Reinsurer
shall pay to the Company as a part of the Monthly Cash Settlement the
Reinsurer's Portion of any and all assessments based upon and measured by
the amount of premium income attributable to the Policies, including
premium taxes, paid by the Company on account of such Policies by any
state, county, parish, or municipal authority.
Section 3.6. Income Tax Reimbursement. The Company and the
Reinsurer agree to remain liable for their respective Federal Income Tax
liabilities, including any "DAC" taxable income that may be incurred by
the reinsurance of the Policies by the Reinsurer.
Section 3.7. Payment of Benefits. Except as otherwise provided
in this Agreement, the Reinsurer, as administrator governed by the
provisions of Exhibit 3.1, shall service and pay, on behalf of the
Company, all claims and other Policy benefits (with the exception of
policyholder dividends, which shall be governed as set forth in Section
3.8 below) falling within the scope of the Reinsured Policy Obligations
directly to the policyholders or other designated beneficiaries of the
Policies in the ordinary course of business in accordance with the terms
and conditions of such Policies, other documentation and applicable law.
In the event of any claim that, in the Reinsurer's sole discretion, falls
outside of the terms and conditions of such Policies, or exceeds the
benefits provided by such Policies, the Reinsurer shall seek instructions
from the Company and shall respond to and pay or refuse to pay, as the
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case may be, such claim in compliance with such instructions, in which
case the Reinsurer's liability in respect to such claim shall be limited
to its share of the Policy liability that falls within the limits of the
Policy and its terms and conditions. The failure on the part of the
Company to issue instructions, or a delay by the Company in issuing
instructions which are requested, shall be deemed to be instructions to
refuse to pay such claim unless and until the receipt by the Reinsurer of
instructions to the contrary. Instructions shall be deemed not to be
issued unless and until the same are received by the Reinsurer in
writing. The Reinsurer shall maintain records of the servicing of claims
such that the Company will be able to conduct an audit of such servicing
as herein provided.
Section 3.8. Liability and Payment. Except as provided in
Section 3.7 of this Agreement, the Company will accept the decision of
the Reinsurer on payment of a claim or other benefit on a Policy
reinsured hereunder. The Reinsurer and the Company shall share monthly
the cost of the claims and other benefits on the Policies as herein set
forth.
Section 3.9. Dividends to Policyholders. The Company shall have
sole discretion and control regarding the declaration and payment of
dividends to the holders of the Policies during any and all calendar
months for which this Agreement is in effect. If the amount of such
dividends exceeds the amount needed to provide for a 1% increase in the
original face amount of participating Policies, the Company shall be
solely responsible for funding the payment of the portion of such
dividends that is in excess of 1%; otherwise, dividends paid in respect
to the Policies shall be shared, based on the Coinsurance Ratio, by the
Reinsurer and the Company as set forth herein. The Reinsurer shall not
be liable in respect to any claim against the Reinsurer relating to the
declaration or payment of any dividend, or the failure to declare or pay
any dividend, and the Company shall indemnify and hold the Reinsurer
harmless in respect to any such claim.
Section 3.10. Contested Claims. In the event of a decision by
the Company to contest, compromise, or litigate a claim involving a
Policy pursuant to Section 3.7 or Section 3.8 of this Agreement, the
Reinsurer and the Company will share, based on the Coinsurance Ratio, the
costs of the contest in addition to the amount of the claim itself, or
the Reinsurer may choose not to participate. However, if the Reinsurer
chooses not to participate, it will discharge its liability by agreeing
to pay to the Company the full amount of the Reinsurer's liability on the
subject Policy, in which case all aspects (including costs, assessments,
judgments, etc.) of the contest, compromise and/or litigation shall be
the sole responsibility of the Company. The Reinsurer, at its election
and expense, shall have the right to be present and/or represented in any
related proceedings.
Article IV
Transfer of Assets and Ceding Fee
Section 4.1. Transfer of Assets. At the time of Closing, the
Company transferred to Reinsurer an amount of assets equal to the
Reserves and other policy liabilities attributable to the Policies
determined from the policy data maintained by the Company as of December
31, 1995, less a "Ceding Fee," pursuant to the Assumption Agreement
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subject to a recalculation of the assets, liabilities and the Ceding Fee
based on the policy data maintained by the Company as of May 31, 1996, as
contemplated by the Assumption Agreement. In connection with such
recalculation, the parties agreed to change the transaction from 100%
assumption reinsurance (as the Assumption Agreement contemplated) to a
partial coinsurance, which agreement was documented in the Reinsurance
Agreement. The Reinsurance Agreement resolved also the projected re-
evaluation of the Policies in 1998, and also the matter of any need to
make adjustments for the IBNR reserves. This Coinsurance Agreement is a
restatement of the agreement set forth in the Assumption Agreement as
modified by the Reinsurance Agreement. The calculation of assets for
purposes of transfer pursuant to the Assumption Agreement were adjusted
pursuant to the Reinsurance Agreement and such adjustments are set forth
in Exhibit 4.1 attached hereto, and said adjustments are hereby accepted
and agreed to by the parties in complete and final settlement of all
matters to be adjusted as contemplated by the Assumption Agreement.
Section 4.2. Ceding Fee. In the manner described in Section 4.1,
the Ceding Fee was determined by an Actuarial Valuation using policy data
maintained by the Company as of December 31, 1995, and was subsequently
updated in a May 31 Actuarial Appraisal using policy data maintained by
the Company as of May 31, 1996, and changes agreed upon by the parties,
as contemplated by the Assumption Agreement. The Reinsurance Agreement
resolved all matters contemplated by the Assumption Agreement, the
results of which are set forth in said Exhibit 4.1. Said Exhibit 4.1 has
three versions: (a) the aforementioned adjustments affecting the
Company's Policies only, (b) the aforementioned adjustments affecting
South Texas Bankers Policies only (in respect to which, see Section 14.4
below) and (c) the aforementioned adjustments consolidating the
adjustments affecting the Company's and South Texas Bankers Policies (in
respect to which, see Section 14.4 below). The Ceding Fee adjustment is
set forth in Exhibit 4.1.
ARTICLE V
ACCOUNTING AND SETTLEMENT
Section 5.1. Agreement Accounting Period. The accounting period
for this Agreement shall be on a calendar month basis unless otherwise
specified herein. The first report was for the period beginning June 1,
1996, through August 31, 1996 and has been submitted by the Reinsurer to
the Company and settled.
Section 5.2. Monthly Report. Within fifteen (15) working days
after the end of each calendar month following the period identified in
Section 5.1, the Reinsurer will submit to the Company a Monthly Cash
Settlement (as defined in Section 5.3 below) report which shall contain
the amount of premiums, commissions, administration expense allowances,
benefits, dividends to policyholders, reserves, outstanding policy loans
and interest incurred thereon, due and unpaid premiums, due and deferred
premiums, any and all claim reserves as calculated in accordance with
NAIC Convention Blank Exhibit 11, and number of Policies and in force for
such calendar month.
Section 5.3. Monthly Cash Settlements. Within five (5) working
days after the receipt of each Monthly Cash Settlement report as
specified in Sections 5.1 and 5.2, the Company shall pay to the Reinsurer
the Reinsurer's Portion (for such accounting period) of:
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(a) the net amount of premiums as defined in Section 3.3; and
(b) the interest on outstanding policy loans as defined in Section
3.2; and
(c) the decrease, if any, in outstanding policy loans as defined in
Section 3.2.
Simultaneously, the Company shall pay to the Reinsurer the Company's
Portion of the administration fees as defined in Section 3.1.
Simultaneously, the Reinsurer shall pay to the Company the Reinsurer's
Portion of:
(d) the commission allowances as defined in Section 3.4; and
(e) the Policy benefit payments as defined in Section 3.7; and
(f) the dividends to policyholders as defined in Section 3.8; and
(g) the increase, if any, in outstanding policy loans as defined in
Section 3.2; and
(h) the premium assessment reimbursement as defined in Section 3.5.
The settlement as above described is sometimes referred to in this
Agreement as the "Monthly Cash Settlement."
Section 5.4. Amounts Due Monthly. Except as otherwise
specifically provided in this Agreement, all amounts due to be paid to
either the Company or the Reinsurer under this Agreement on a monthly
basis shall be determined on a net basis as of the last day of each
calendar month and shall be due and payable as of such date. If the
amounts, as defined in Section 5.3 above, cannot be determined at such
dates as defined herein on an exact basis, such payments will be paid in
accordance with an approximate amount determined by the Reinsurer, which
amount shall be adjusted to the actual amount determined as soon as
practicable thereafter.
Section 5.5. Delayed Payments. For purposes of Section 5.4
above, if there is a delayed settlement of a payment due, interest will
be added, in an amount calculated as: the amount of the payment which is
delinquent, multiplied by ten percent (10%), multiplied by the number of
days such amount has been delinquent, regardless of holidays or weekends,
and divided by the whole number 365. For purposes of this paragraph, a
payment shall be deemed to be delinquent after five (5) working days from
the date such payment is due. For purposes of this Agreement, the number
of days a payment is delinquent shall commence on the day following the
date such payment is due, as defined above, and shall end on the date
such payment is received by the party entitled to receipt.
Section 5.6. Offset of Payments. All monies due either to the
Company or to the Reinsurer under this Agreement shall be offset against
each other, dollar for dollar, regardless of any insolvency of either
party.
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Article VI
MUTUAL COVENANTS
Section 6.1. Covenants. The Reinsurer and the Company agree as
follows:
(a) to indemnify, defend and hold harmless the other, its directors,
officers, employees and agents from any and all claims, actions,
suits, judgments, damages (including punitive or exemplary
damages), fines and other proceedings, whether civil, criminal
(only to the extent permitted by law or public policy),
administrative, investigative or otherwise, together with all
costs, expenses and other amounts, including attorney's fees,
arising out of any failure to performance its duties, obligations
or responsibilities to the other party, its directors, officers,
employees and agents, under this Agreement; and
(b) the Reinsurer shall have no obligation arising out of any breach
of any duty on the part of the Company to any holder, insured,
assignee, beneficiary or other claimant under any Policy. Except
for any liability on the part of the Reinsurer to the Company
resulting solely from any negligence on the part of the Reinsurer
as administrator, the Company shall remain solely liable for all
fines, penalties or other assessments imposed against the Company
by any Insurance Department or other governmental entity for any
conduct of the Company, its employees or authorized
representatives, which was not expressly authorized, in writing,
by the Reinsurer; and
(c) any and all materials, information, proposals, studies or other
documents relative to this Agreement are confidential and
proprietary. Neither party shall disclose, directly or
indirectly, any information obtained from the other party,
relative to this Agreement, to any third party without the express
written consent of the other unless applicable statute, law or
regulation requires such disclosure.
Section 6.2. Policy Conservation. The Company warrants that it
will take no action that would encourage the holders of the Policies to
surrender, reduce or otherwise terminate their existing coverages either
through direct or indirect acts, including but not limited to, a plan of
internal replacement.
Section 6.3. Fees Payable. Each of the parties hereto represents
that no commission, fee or compensation is due to any third person by
virtue of having negotiated or arranged the transactions herein, except
that Reinsurer shall be solely responsible for the payment of a finder's
fee to Trent & Associates of Oklahoma City, Oklahoma. Each of the
parties agrees to pay all costs incurred by it for actuarial, legal and
other services received or utilized in connection herewith.
ARTICLE VII
ARBITRATION
Section 7.1. Agreement. Except for matters relating to recapture
and transfer as set forth in Section 2.5 and Section 2.6, respectively,
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all disputes and differences between the Company and the Reinsurer on
which an agreement cannot be reached will be decided by arbitration,
regardless of the insolvency of either party, unless the conservator,
receiver, liquidator, or statutory successor is specifically exempted
from an arbitration proceeding by applicable state law. Such arbitration
shall be conducted in accordance with Exhibit 7.1 attached hereto and
made a part hereof.
ARTICLE VIII
INSOLVENCY
Section 8.1. Agreement. In the event of the Company's
insolvency, the Reinsurer's contractual liability on the Policies shall
continue to be determined by all the terms, conditions and limitations
under this Agreement, but the Reinsurer will make settlement (1) directly
to the Company's liquidator, receiver or statutory successor, and (2)
without increase or diminution because of the Company's insolvency. The
liquidator, receiver or statutory successor of the Company shall give the
Reinsurer written notice of the pendency of a claim against the Company
on any 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 Company's name
(or in the name of the 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 Company
or its liquidator, receiver or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the Company as a 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.
Article IX
Termination
Section 9.1. Termination With Respect to New Business. This
Agreement may be terminated with regard to new business only as follows:
(a) By the Company, on any date following the first twelve (12) months
upon written notice by the Company to the Reinsurer as herein
provided following the expiration of ninety (90) days from the
date on which such notice is given; or
(b) By the Reinsurer, upon written notice by the Reinsurer to the
Company as herein provided following the expiration of ninety (90)
days from the date on which such notice is given; or
(c) By either party, upon advance written notice to the other party as
herein provided, for "cause" as herein defined, provided such
notice sets forth with reasonable detail the specific facts and
nature of the "cause" (or "causes" as the case may be) on which
the terminating party is relying in exercising its right of
termination under this subparagraph. "Cause" means a material
breach of this Agreement by a party which has the effect of
materially jeopardizing the interest of the other party or
materially burdening the ability of the other party to perform its
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responsibilities under this Agreement, or the occurrence of an
event or set of facts that renders a party incapable of performing
its responsibilities under this Agreement.
(d) Notwithstanding anything to the contrary herein contained, in
respect to applications submitted by an agent of the Company
subsequent to May 31, 1996, the Reinsurer, by giving written
notice to the Company, may refuse to reinsure policies, beginning
after such notice is given, issued on such applications by such
agent if the Reinsurer in its sole discretion decides that the
applications submitted by such agent are materially below the
quality of the applications generally being received from other
agents, or that such agent's applications materially fall below
the Reinsurer's underwriting standards, or that such agent has a
history or record of performance or conduct that would be
unacceptable when measured by relevant industry standards.
Article X
Representations and Warranties of World Service
World Service hereby represents and warrants to Reinsurer that:
Section 10.1. Organization and Existence. World Service is an
Alabama-domiciled stock insurance company duly incorporated, validly
existing, and in good standing under the corporation and insurance laws
of the State of Alabama. World Service has all requisite corporate power
and authority to carry on its business as it is now being conducted, and
to own, lease, and operate its properties.
Section 10.2. Qualification and Power. World Service is duly
qualified and in good standing to do business in every jurisdiction in
which such qualification is necessary because of the nature of its
business or of the properties owned, leased, or operated by it.
Section 10.3. Validity: No Violation. This Agreement is a valid
and binding obligation of World Service, enforceable against it in
accordance with its terms and conditions. Neither the execution and
delivery of this Agreement, nor World Service's compliance with any of
the provisions of this Agreement, will:
(a) conflict with or result in a breach of any provision of the
Articles of Incorporation or Bylaws of World Service, or result in
a default (or give rise to any right of termination, cancellation,
or acceleration) under any of the terms, conditions, or provisions
of any note, lien, bond, mortgage, indenture, license, lease,
agreement, consent order, or other instrument or obligation to
which World Service is a party or by which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any
court, administrative agency, or governmental body applicable to
World Service or to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without
notice, the passage of time or both), the maturity of any
liability of World Service to be accelerated or increased.
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Section 10.4. No authorization, consent or approval of, or filing
with, any public body or authority is necessary for World Service to
obtain for the consummation of this Agreement, except that such
transaction requires the approvals, authorizations and clearances
contemplated by Section 12.1(b) hereof. No authorization, consent or
approval of any other person or entity is necessary for World Service to
obtain for the consummation of the transactions contemplated by this
Agreement, and no person or entity has an option, right of first refusal
or preferential right to purchase all or any part of the Policies or that
is otherwise triggered as a result of the transactions contemplated
hereby.
Section 10.5. The reserves with respect to each of the Policies
included in the Policies for the period ended May 31, 1996 and
established on the books of World Service (i) were calculated and
determined in accordance with generally accepted actuarial and statutory
accounting standards consistently applied, (ii) are based on actuarial
assumptions that are in accordance with those specified in the related
Policies and (iii) meet the requirements of the insurance laws of the
State of Texas. The reserves for the period ended May 31, 1996 and
established on the books of World Service with respect to the incurred
but unreported policy claims are referred to herein as the "IBNR Claims
Reserves." The reserves as set forth in this Section 10.5 shall be
referred to in this Agreement as "Reserves."
Section 10.6. Since December 31, 1995, there has not been any
material adverse change, or changes in the Policies or operations of
World Service taken as a whole which in the aggregate may be deemed
materially adverse or which could affect the validity or enforceability
of this Agreement, consummation of the transactions contemplated hereby
or compliance with the terms hereof by World Service.
Section 10.7. World Service has the right to use, free and clear
of any royalty or other payment obligations, claims of infringement or
alleged infringement or other lien or encumbrance, all systems software
included in or used to process the Policies and no third party will be
entitled to any payment or other benefit as a result of the transfer the
data processing system by World Service to Reinsurer in accordance with
this Agreement.
Section 10.8. There are no claims, actions, suits, investigations
and administrative, arbitration or other proceedings (i) pending against
World Service with respect to the Policies or (ii) threatened against
World Service with respect to the Policies. World Service is not subject
to or in default with respect to any order, writ, judgment, decree,
injunction or similar order of any court or any foreign, federal, state
or other governmental body. There are no claims, actions, suits,
investigations or administrative, arbitration or other proceedings
pending or threatened against or affecting World Service which
individually or in the aggregate could have a material adverse effect on
the Polices which could affect the validity or enforceability of this
Agreement, consummation by World Service of the transactions contemplated
hereby or compliance by World Service with the terms of this Agreement,
and (ii) World Service is not subject to or in default with respect to
any order, writ, judgment, decree, injunction or similar order of any
court or any foreign, federal, state or other governmental body, the
result of which being subject to or of which default individually or in
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the aggregate could have a material adverse effect on the Polices or
which could affect the validity or enforceability of this Agreement,
consummation by World Service of the transactions contemplated hereby or
compliance by World Service with the terms of this Agreement.
Section 10.9. World Service is in compliance in all respects with
all laws, ordinances, regulations, orders, judgments, injunctions, or
decrees of any court, arbitrator or governmental authority where the
failure to comply, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Policies.
Section 10.10. The Actuarial Appraisal referred to in Section 4.1
includes all commissions which are payable to agents of World Service.
World Service is not in default under any of the terms, provisions or
conditions of any contract between World Service and any of its agents,
past or present. The failure of any agent who wrote business for World
Service to have been duly licensed (for the type of business which such
agent wrote) as an agent in the particular jurisdiction in which such
agent wrote for World Service will not individually or in the aggregate
have a material adverse effect on the Policies of World Service. To the
knowledge of World Service, there is no actual or threatened plan on the
part of any insurance agent or broker to rewrite any of the policies or
contracts of insurance included in the Policies.
Section 10.11.
(a) It has been the practice of World Service to send all
communications involving policyholders directly to the affected
policyholders, and the Documents and Records of World Service to
be delivered to Reinsurer contain adequate information to enable
Reinsurer as administrator to send written notifications or other
communications directly to each policyholder whose policy or
contract is included in the Policies;
(b) no master list of all or any substantial number of the holders of
the Policies has been provided by World Service to any third party
except to World Service's consulting actuary, and such master list
is not available in the public domain; and
(c) no policyholder or group of policyholders, which individually or
in the aggregate account for five percent or more of the premium
income included in the Policies has threatened to terminate its or
their relationship with World Service.
Section 10.12. With respect to each of the Policies:
(a) World Service is a party to each of such and owns all of the
rights and interests of an insuring, reinsuring or ceding party,
as the case may be, in and to each of such Policies, free and
clear of any Lien;
(b) each of such Policies is in full force and effect and constitutes
a valid and legally binding obligation of each of the parties
thereto in accordance with its terms; the transactions
contemplated by this Agreement will not affect the validity or
binding character of any such Policy; World Service is not in
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violation, breach or default of any such Policy and no event has
occurred which (with or without notice or lapse of time or both)
constitutes a breach or default by World Service under any such
Policy and no such Policy contains any provision providing that
the other party thereto may terminate the same by reason of the
transactions contemplated by this Agreement or any other provision
which would be altered or otherwise become applicable by reason of
such transactions;
(c) such Policies are, to the extent required under applicable law, on
forms approved by the insurance regulatory authority of the
jurisdiction where issued or have been filed with and not objected
to by such authority within the period provided for objection;
(d) all current benefits payable by World Service under any such
Policy have been paid or will be paid in the ordinary course of
business under the terms of the Policies under which they arose or
to the satisfaction of the parties thereto;
(e) no such Policy entitles the holder thereof or any other person or
entity to receive dividends or similar benefits in which the right
to receive such dividends or benefits is determined other than at
the discretion of the board of directors of World Service;
(f) the underwriting standards utilized and ratings applied by World
Service with respect to Policies issued by World Service conform
in all material respects to customary insurance industry practices
as such practices apply to the markets in which World Service has
sold its policies and, with respect to any such Policy reinsured
in whole or in part, conform in all material respects to the
standards and ratings required pursuant to the terms of the
related reinsurance, coinsurance or other similar Policy;
(g) each of such Policy was issued and has been serviced in the
ordinary course of business; and
(h) there has been no discrimination in violation of applicable
insurance laws among the policyholders whose policies and
contracts of insurance are included in such Policies with respect
to the rates charged such policyholders for the insurance in force
afforded such policyholders by such Policies.
Section 10.13. The Documents and Records are accurate and
complete in all material respects and there are no deficiencies in the
Documents and Records which could reasonably be expected to have a
material adverse effect on either Reinsurer's satisfaction of its
obligations in respect of the Policies or the servicing by Reinsurer of
the Policies in accordance with customary insurance industry practices.
There are no facts or other circumstances that would prevent the
Reinsurer (or which raises a material probability that the Reinsurer
might be prevented) from servicing the Policies in accordance with
customary insurance industry practice and in the manner in which the
Policies have been serviced prior to the Effective Date.
Section 10.14. As of the Effective Date, neither this Agreement
nor any certificate or document furnished by World Service to Reinsurer
in connection with this Agreement or the transactions contemplated hereby
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contains any untrue statement of material fact or omits to state a
material fact necessary to make the statements herein or therein not
misleading in light of the circumstances in which they were made.
Section 10.15. Survival of Representations and Warranties. The
representations and warranties of World Service contained in this Article
X and elsewhere in this Agreement shall survive the Closing until all of
the liabilities reinsured hereunder have been discharged or otherwise
expire.
Article XI
Representations and Warranties of Reinsurer
Reinsurer hereby represents and warrants to World Service that:
Section 11.1. Organization and Existence. Reinsurer is a Texas-
domiciled stock insurance company duly incorporated, validly existing,
and in good standing under the corporation and insurance laws of the
State of Texas. Reinsurer has all requisite corporate power and
authority to carry on its business as it is now being conducted, and to
own, lease, and operate its properties.
Section 11.2. Qualification and Power. Reinsurer is duly
qualified and in good standing to do business in every jurisdiction in
which such qualification is necessary because of the nature of its
business or of the properties owned, leased, or operated by it.
Section 11.3. Validity; No Violation. This Agreement is a valid
and binding obligation of Reinsurer, enforceable against it in accordance
with its terms and conditions. Neither the execution and delivery of
this Agreement, nor Reinsurer's compliance with any of the provisions of
this Agreement, will:
(a) conflict with or result in a breach of any provision of the
Articles of Incorporation or Bylaws of Reinsurer, or result in a
default (or give rise to any right of termination, cancellation,
or acceleration) under any of the terms, conditions, or provisions
of any note, lien, bond, mortgage, indenture, license, lease,
agreement, consent order, or other instrument or obligation to
which Reinsurer is a party or by which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any
court, administrative agency, or governmental body applicable to
Reinsurer or to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without
notice, the passage of time or both), the maturity of any
liability of Reinsurer to be accelerated or increased.
Section 11.4. Survival of Representations and Warranties. The
representations and warranties of Reinsurer contained in this Article XI
and elsewhere in this Agreement shall survive the Closing until all of
the liabilities reinsured and assumed hereunder have been discharged or
otherwise expired.
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Article XII
Covenants and Conditions Precedent to Closing
Section 12.1. The obligations of each of the parties hereto to
proceed with the Closing were subject to the fulfillment (unless waived
by each party in writing), prior to or at the Closing, of each of the
following conditions:
(a) No suit, action or other proceeding shall have been initiated and
be pending or be threatened by any governmental agency in which it
is sought to restrain, prohibit, invalidate, modify or condition,
or set aside, the transactions contemplated by this Agreement, and
no statute, rule or regulation having such effect shall have been
promulgated or enacted, nor shall any such suit, action or
proceeding have been initiated by any other third party not
affiliated with the parties hereto in which such third party shall
have obtained preliminary or permanent injunctive relief or which,
in the opinion of counsel to either party, has a reasonable
likelihood of success; provided, however, that each party shall
use reasonable efforts in good faith to cause such suit, action or
proceeding, or the threat thereof, to be dismissed or withdrawn,
to cause such injunction to be dissolved or vacated or to cause
such statute, rule or regulation to be repealed or rescinded.
(b) The receipt of the required approval of this Agreement from
regulatory authorities.
Section 12.2. The obligations of World Service to proceed with
the Closing were subject to the fulfillment (unless waived by Reinsurer
in writing), prior to or at the Closing, of each of the following
conditions:
(a) The representations and warranties of Reinsurer contained in
Article XII of this Agreement shall be true and correct in all
material respects at and as of the Closing, as if each such
representation and warranty had been made as of the Closing.
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(b) Reinsurer shall have performed and complied in all material
respects with all covenants, agreements, obligations, commitments
and conditions required by this Agreement to be performed or
complied with prior to or at the Closing.
(c) Reinsurer shall have delivered to World Service a certificate
dated the Closing Date and signed by the president or a vice
president of Reinsurer certifying to the fulfillment of the
conditions specified in this Section 12.2.
(d) Reinsurer shall have delivered to World Service at the Closing
such other documents as World Service may reasonably request.
Section 12.3. The obligations of Reinsurer to proceed with the
Closing are subject to the fulfillment (unless waived by Reinsurer in
writing), prior to or at the Closing, of each of the following
conditions:
(a) The representations and warranties of World Service contained in
Article XII of this Agreement shall be true and correct in all
material respects at and as of the Closing, as if each such
representation and warranty had been made as of the Closing.
(b) World Service shall have performed and complied in all material
respects with all covenants, agreements, obligations, commitments
and conditions required by this Agreement to be performed or
complied with prior to or at the Closing.
(c) World Service shall have delivered to Reinsurer a certificate
dated the Closing Date and signed by the president or a vice
president of World Service certifying to the fulfillment of the
conditions specified in this Section 12.3.
(d) World Service shall have delivered to Reinsurer at the Closing
such other documents as Reinsurer may reasonably request.
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Section 12.4. Documents and Records. World Service gave
Reinsurer access to records and information concerning the Policies prior
to the Closing and in connection with the transfer of the administration
of the Policies to Reinsurer. World Service agrees to deliver to
Reinsurer all of World Service's files, books, and records to the extent
not already delivered to Reinsurer, relating to the Policies ("Documents
and Records") without charge. World Service transferred, delivered,
assigned and conveyed to Reinsurer on the Closing Date all of its data
processing equipment, hardware and related implements, as well as all
related operating and processing software, within World Service's
possession or control ("data processing system"), used for the purpose of
administration and servicing of the Policies without charge. In
connection with such data processing system, World Service does hereby
assign and transfer to Reinsurer without charge all of its rights, title
and interests in any service contracts, licenses, permits or agreements
used or useful in operating or supporting the data processing system.
Section 12.5. Cooperation. The parties shall assist and
cooperate with each other by making all reasonable efforts to seek and
obtain the aforementioned approvals and any other approvals the parties
agree are necessary or advisable, and each party shall bear its own
expenses related thereto.
Article XIII
Closing
Section 13.1. Time and Location. The closing of the transactions
contemplated by this Agreement ("Closing") took place on May 31, 1996
(the "Closing Date"), subject to regulatory approval.
Section 13.2. Deliveries by World Service. At Closing World
Service delivered to Reinsurer the following:
(a) an accounting in contract level detail as to the Policies,
including a detail listing of the contracts and the payment
obligations thereunder, which are the subject of this Agreement,
and which also shall show the Transfer Value owed by World Service
to Reinsurer pursuant to the calculations provided in Schedule
4.1, and
(b) Reinsurer's share of any premiums or other receipts, if any,
received by World Service in connection with the Policies
attributable to any premiums or other amounts due or payable on or
after the Effective Date.
Article XIV
Miscellaneous Provisions
Section 14.1. Extracontractual Damages. The Reinsurer does not
agree to indemnify the Company for, and shall not be liable for, any
extracontractual damages or liability of any kind whatsoever of the
Company's.
Section 14.2. 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 Company
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<PAGE>
and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred.
Section 14.3. Facility of Reinsurance. The Company shall not
enter into any other reinsurance agreements, including assumption
reinsurance, that would cover the Policies, without the express written
approval of the Reinsurer, except that the Company may coinsure the
Company's Portion of the Policies without the Reinsurer's permission
provided such coinsurance does not diminish the Company's obligations and
liabilities under this Agreement.
Section 14.4. South Texas Bankers Life Insurance Company. On or
soon after the time of the execution and delivery of this Agreement, the
Company will enter into an agreement with South Texas Bankers to assume
all of South Texas Bankers insurance policies in force ("South Texas
Bankers Policies") that were the subject of the South Texas Bankers
Agreement effective June 1, 1996, with certain amendments thereto,
between the Reinsurer and South Texas Bankers similar in all material
respects to the Assumption Agreement as herein above identified between
Reinsurer and the Company, except that said South Texas Bankers Agreement
involved the South Texas Bankers Policies. If the Company assumes the
South Texas Bankers Policies as aforesaid, the Reinsurer and the Company
agree that such policies will be merged into the Policies covered by this
Agreement effective as of the Effective Date, and shall thereafter for
all purposes become a part of the Polices covered by this Agreement. In
that case, the Company agrees that it shall assume and be fully
responsible for South Texas Bankers' obligations, covenants,
representations, warranties, liabilities and indemnification agreements
and all other responsibilities contained in said South Texas Bankers
Agreement in respect to the South Texas Bankers Policies or otherwise,
except in any instance in which an explicit modification is stated herein
and in any instance in which there is a conflict between the express
terms and conditions of the South Texas Bankers Agreement and this
Agreement, in which case this Agreement shall supersede the South Texas
Bankers Agreement. In that case, and referring to Sections 3.01 and 3.02
above, the Reinsurer has already received the "Transfer Value," and South
Texas Bankers has already received the "Ceding Fee" as described in
Section 4.1 and Section 4.2 of the South Texas Bankers Agreement. If the
Company assumes the South Texas Bankers Policies as aforesaid, then the
provisions of Section 4.1 and Section 4.2 above shall apply to the South
Texas Bankers Agreement, and the consolidated version of Exhibit 4.2
shall express the adjustments accepted and agreed to by the Parties as
called for by Section 4.1 and Section 4.2 of this Agreement. Further, if
the Company assumes the South Texas Bankers Policies as aforesaid, then,
effective as of the Effective Date, the Reinsurer's Portion shall be
Ninety One and Forty-Two Hundredths percent (91.42%) and the Company's
Portion shall be Seven and Eight and Fifty-Eight Hundredths percent
(8.58%), and all accounting and settlement as provided in this Agreement
shall be adjusted accordingly, retroactively to the Effective Date.
Pending such assumption of the South Texas Bankers Policies as aforesaid,
the Coinsurance Ratio between the Company and the Reinsurer shall be as
stated in Section 2.1, but upon the consummation of the assumption of the
South Texas Bankers Policies as aforesaid the Coinsurance Ratio shall be
for all purposes, effective as of the Effective Date, 91.42/8.58.
20
<PAGE>
Section 14.5. Policy Changes. The Company shall not make any
changes after the Effective Date of this Agreement in the provisions and
conditions of the Policies.
Section 14.6. Audit. The Company or the Reinsurer, their
respective employees or authorized representatives may audit, inspect and
examine, during regular business hours, at the home office of the Company
or the Reinsurer, provided that three working days advance notice has
been given to the other party, any and all books, records, statements,
correspondence, reports, trust accounts and their related documents or
other documents that relate to the Policies. The audited party agrees to
provide a reasonable work space for such audit, inspection or examination
and to cooperate fully and to faithfully disclose the existence of and
produce any and all necessary and reasonable materials requested by such
auditors, investigators, or examiners. The expense of the respective
party's employee(s) or authorized representative(s) engaged in such
activities shall be borne solely by such party. The auditing party
agrees to conduct such audit in a courteous, prompt, professional and
reasonable manner, and to provide immediate written disclosure to the
audited party of any discrepancy or variance (when compared to any
previously reported information) discovered by the auditing party.
Section 14.7. Integration. [The provisions of this Section 14.7
are deleted because they are incorporated in Section 14.24.]
Section 14.8. Law and Venue. This Agreement has been finally
executed in the State of Texas and is subject to and is to be interpreted
in accordance with the laws of the State of Texas. Venue for any action,
suit or other proceeding shall be exclusively in Harris County Texas.
The parties agree to waive any other venue.
Section 14.9. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be
deemed an original, but all of which shall constitute one and the same
instrument.
Section 14.10. Severability. In the event that any provision or
term of this Agreement shall be held by any court to be illegal or
unenforceable, all of the other terms and provisions shall remain in full
force and effect, except if the provision or term held to be illegal or
unenforceable is also held to be a material part of this Agreement such
that the party in whose favor the material term or provision was
stipulated herein would not have entered into this Agreement without such
term or provision, then the party in whose favor the material term or
provision was stipulated shall have the right, upon such holding, to
terminate this Agreement.
Section 14.11. Amendments. This Agreement shall be amended only
by mutual consent and written agreement executed and delivered by the
parties.
Section 14.12. Schedules and Paragraph Headings. Schedules
attached hereto are made a part of this Agreement. Paragraph headings
are provided for reference purposes only and are not made a part of this
Agreement.
Section 14.13. Financial Reports. The Company and the Reinsurer
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<PAGE>
each agree to furnish the other with their respective NAIC Annual and
Quarterly Statements, as required by their respective state laws within
five (5) days after such reports are due to be filed with such respective
states.
Section 14.14. Survival. The representations, warranties,
covenants and agreements respectively made by the Company and the
Reinsurer in this Agreement shall survive the termination or expiration
of this Agreement.
Section 14.15. Notices. Any notices made pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given
on the date of delivery if delivered personally (including overnight
delivery service) or by facsimile transmission to the party to whom
notice is give, or on the third day after mailing if mailed to the party
to whom notice is to be given by certified mail, return receipt
requested, and properly addressed as follows:
If to the Company:
World Service Life Insurance Company of America
Attn: Mr. Jack G. Heffington,
Vice Chairman and General Counsel
300 South Jefferson Street
Winchester, TN 37398
FAX: (615) 962-4926
If to the Reinsurer:
American Capitol Insurance Company
Attn: Mr. William F. Guest, Chairman
10555 Richmond Avenue
Houston, Texas 77042
FAX: (713) 953-7920
Any party to this Agreement may change the address to which notice
is to be delivered under this Section 10.15 by delivering written
notice to that effect to the other party in accordance with this
Section 14.15. Any document delivered via facsimile transmission shall be
treated as though it is an original for all purposes.
Section 14.16. Subject to Regulatory Approval. The parties
acknowledge that the Policies are being administered by the Reinsurer
based on the transfer of the Policies and related files and data
processing system and equipment to the Reinsurer pursuant to the
Assumption Agreement which has not been fully consummated and which will
be consummated upon the consummation of this Agreement. In the meantime,
the parties agree that the Reinsurer's administration of such Policies
shall be governed in any case by the provisions of Exhibit 3.1.
Moreover, the South Texas Bankers Policies, which are not initially
included as a part of the Policies that are the subject of this Agreement
but may be subsequently added to such Policies, shall continue to be
administered by the Reinsurer, and which administration shall be governed
by the provisions of Exhibit 3.1. The parties further acknowledge that
this Agreement may be subject to certain regulatory approvals, as well as
the approval of Crown Life Insurance Company ("Crown") (an insurance
22
<PAGE>
company that has provided certain reinsurance to the Reinsurer in respect
to the Policies as of the time when the Assumption Reinsurance Agreement
was entered), which approval the parties agree to seek diligently and in
good faith. However, in the event such approvals are not received, or if
one or more of such approvals contain conditions that modify this
Agreement materially and which are unacceptable to either party, then
this Agreement shall be subject to rescission in which case the parties
shall be restored to the positions they would have had if this
transaction had not occurred, recognizing the Reinsurer's entitlement to
compensation for administering the Policies in the interim pursuant to
Exhibit 3.1 as aforesaid.
Section 14.17. Understanding of Agreement. The Parties agree
that the drafting of this Agreement has been a joint effort and no
special weight or presumption should arise in favor of or against either
Party based on whether one Party or the other was more responsible for
the drafting of this Agreement. Each Party has consulted with its
accounting, actuarial and legal advisers in respect to the negotiations
and the drafting of this Agreement and each Party has read and
understands this Agreement.
Section 14.18. Assignment. No party may assign this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written consent of the other party, if the assignment is to an entity
other than an affiliate of Reinsurer.
Section 14.19. Broker Fees. Each party hereby represents and
warrants that it has not taken any action that would impose on any other
party hereto liability for payment of any broker, finder, or similar fee
in connection with the origin, negotiation, execution, or performance of
this Agreement, except that Reinsurer shall be solely responsible for the
payment of a finder's fee to Trent & Associates of Oklahoma City,
Oklahoma.
Section 14.20. Cooperation. The parties agree that they will
from time to time, upon the request of any other party and without
further consideration, execute, acknowledge, and deliver in proper form
any further instruments and take such other action as the other party may
reasonably require in order to carry out effectively the intent of this
Agreement.
Section 14.21. Entire Agreement. Except as otherwise stated in
this Section 14.21, this Agreement constitutes the entire understanding
of the parties pertaining to the subject matter contained in this
Agreement and supersedes all prior and contemporaneous oral and written
agreements, representations, and understandings of the parties. For the
purpose of interpretation of this Agreement, if any provision is
ambiguous, inconsistent with or in conflict with another provision of
this Agreement, or uncertain as to its meaning for any reason, reference
should be made to the Assumption Agreement as modified by the Reinsurance
Agreement for the purpose of clarification and/or resolution, which shall
have priority over any oral or other written statements or agreements
that would otherwise be available under applicable rules of evidence that
would be legitimately applied by any court or arbitration panel, as the
case may be. Furthermore, reference should be made to the South Texas
Assumption Reinsurance Agreement for purposes of Section 14.4.
23
<PAGE>
Section 14.22. Exhibits and Schedules. All exhibits and
schedules attached to and referenced in this Agreement are hereby
incorporated by reference into this Agreement as if they were set forth
at length in the text of this Agreement.
Section 14.23. Expenses. Each party shall pay all of its own
costs, fees, and expenses incurred or to be incurred in negotiating and
preparing this Agreement and in closing and carrying out the transactions
contemplated by this Agreement.
Section 14.24. Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, that provision shall not apply and shall be omitted to the
extent so contrary, prohibited, or invalid; but the remainder of this
Agreement shall not be invalidated and shall be given full force and
effect insofar as possible.
Section 14.25. Successors. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 14.26. Third Party Beneficiaries. Except as to the
holders of the Policies, nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason
of this Agreement on any persons other than the parties to it and their
respective successors and permitted assigns. In addition, nothing in
this Agreement is intended to relieve or discharge the obligation or
liability of any third person to any party to this Agreement or give any
third person any right of subrogation or action against any party to this
Agreement.
Section 14.27. Waiver of Compliance. The party for whose benefit
a warranty, representation, covenant, or condition is intended may in
writing waive any inaccuracies in the warranties and representations
contained in the Agreement or waive compliance with any of the covenants
or conditions contained herein and so waive performance of any of the
obligations of the other party and any defaults under this Agreement. A
24
<PAGE>
waiver shall not affect or impair, however, the waiving party's rights
with respect to any other warranty, representation, or covenant or any
default hereunder not specifically waived, nor shall any waiver
constitute a continuing waiver.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the Effective Date.
WORLD SERVICE LIFE INSURANCE COMPANY OF AMERICA
By: /s/Jack G. Heffington
Vice-Chairman/General Counsel
Witness: /s/
Corporate Officer
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest
Chairman
Witness:
Corporate Officer
25
<PAGE>
Exhibit 4.1
WORLD SERVICE POLICIES - POST CLOSING ADJUSTMENT
Gross AC Portion WS Portion
Calculation of Transfer Value ------ ---------- ----------
Transfer Value as of May 31, 1996
---------------------------------
Aggregate reserve for life policies 17,221,732 16,119,541 1,102,191
Policy and contract claims 93,007 87,055 5,952
Premiums received in advance 33,174 31,051 2,123
Dividend liability 100,501 94,069 6,432
Commission liability 11,571 10,830 741
Unearned investment income-policy loans 1,663 1,557 106
Remittances and items not allocated 0 0 0
----------------------------------
17,461,648 16,344,103 1,117,545
==================================
Assets to be Transferred As Of May 31, 1996
-------------------------------------------
Policy assets:
Policy loans 93,519 87,534 5,985
Life insurance premiums deferred
and uncollected 590,862 553,047 37,815
Accrued investment income-policy
loans 925 866 59
----------------------------------
Policy assets to be transferred 685,306 641,446 43,860
Cash Portion to be transferred 15,566,008 14,569,784 996,225
Adjusted Ceding Fee to be retained
by World Service 1,210,334 1,132,872 77,461
----------------------------------
17,461,648 16,344,103 1,117,545
==================================
Calculation of Ceding Fee
Based on May 31 Actuarial Appraisal
May 31, 1996 Ceding Fee before
adjustments 743,013
Plus dividend adjustment 597,321
Less proportionate share of
mortality adjustment (130,000)
-----------
Adjusted Ceding Fee 1,210,334
===========
<PAGE>
Calculation of Reinsurance Percentage
A: Cash Portion as of May 31, 1996
(from above) 15,566,008 14,569,784
B: Cash Portion as of December 31,
1995 (already transferred)
Mortgage loans 2,008,336
Cash 13,561,933
----------
14,570,269 (14,570,269)
------------------------
Reinsurance Percentage (B/A) 93.60%
==========
Cash to be transferred to (from)
American Capitol (485)
============
<PAGE>
Exhibit 4.1
SOUTH TEXAS BANKERS POLICIES - POST CLOSING ADJUSTMENT
Gross AC Portion STB Portion
Calculation of Transfer Value ------ ---------- -----------
Transfer Value as of May 31, 1996
---------------------------------
Aggregate reserve for life policies 7,736,446 6,736,124 1,000,322
Policy and contract claims 68,007 59,214 8,793
Premiums received in advance 75,653 65,871 9,782
Dividend liability 46,083 40,124 5,959
Commission liability 10,331 8,995 1,336
Unearned investment income-policy loans 0 0 0
Remittances and items not allocated 109,527 95,365 14,162
---------------------------------
8,046,047 7,005,693 1,040,354
=================================
Assets to be Transferred As Of May 31, 1996
-------------------------------------------
Policy assets:
Policy loans 0 0 0
Life insurance premiums deferred
and uncollected 106,634 92,846 13,788
Accrued investment income-policy loans 0 0 0
---------------------------------
Policy assets to be transferred 106,634 92,846 13,788
Cash Portion to be transferred 7,821,098 6,809,830 1,011,268
Adjusted Ceding Fee to be retained
by World Service 118,315 103,017 15,298
---------------------------------
8,046,047 7,005,693 1,040,354
=================================
Calculation of Ceding Fee
Based on May 31 Actuarial Appraisal
May 31, 1996 Ceding Fee before
adjustments 188,315
Plus dividend adjustment 0
Less proportionate share of
mortality adjustment (70,000)
---------
Adjusted Ceding Fee 118,315
=========
<PAGE>
Calculation of Reinsurance Percentage
A: Cash Portion as of May 31, 1996
(from above) 7,821,098 6,809,830
B: Cash Portion as of December 31,
1995 (already transferred)
Mortgage loans 0
Cash 6,810,029
----------
6,810,029 (6,810,029)
----------------------
Reinsurance Percentage (B/A) 87.07%
============
Cash to be transferred to (from)
American Capitol (199)
===========
<PAGE>
Exhibit 4.1
WS/STB COMBINED - POST CLOSING ADJUSTMENT
Gross AC Portion WS Portion
Calculation of Transfer Value ------ ---------- -----------
Transfer Value as of May 31, 1996
---------------------------------
Aggregate reserve for life policies 24,958,178 22,816,766 2,141,412
Policy and contract claims 161,014 147,199 13,815
Premiums received in advance 108,827 99,490 9,337
Dividend liability 146,584 134,007 12,577
Commission liability 21,902 20,023 1,879
Unearned investment income-policy loans 1,663 1,520 143
Remittances and items not allocated 109,527 100,130 9,397
----------------------------------
25,507,695 23,319,135 2,188,560
==================================
Assets to be Transferred As Of May 31, 1996
-------------------------------------------
Policy assets:
Policy loans 93,519 85,495 8,024
Life insurance premiums deferred
and uncollected 697,496 637,651 59,845
Accrued investment income-policy
loans 925 846 79
---------------------------------
Policy assets to be transferred 791,940 723,992 67,948
Cash Portion to be transferred 23,387,106 21,380,492 2,006,614
Adjusted Ceding Fee to be retained
by World Service 1,328,649 1,214,651 113,998
----------------------------------
25,507,695 23,319,135 2,188,560
==================================
Calculation of Ceding Fee
Based on May 31 Actuarial Appraisal
May 31, 1996 Ceding Fee before
adjustments 931,328
Plus dividend adjustment 597,321
Less proportionate share of
mortality adjustment (200,000)
---------
Adjusted Ceding Fee 1,328,649
=========
<PAGE>
Calculation of Reinsurance Percentage
A: Cash Portion as of May 31, 1996
(from above) 23,387,106 21,380,492
----------
B: Cash Portion as of December 31,
1995 (already transferred)
Mortgage loans 2,008,336
Cash 19,371,962
----------
21,380,298 (21,380,298)
----------------------
Reinsurance Percentage (B/A) 91.42%
===========
Cash to be transferred to (from)
American Capitol (194)
============
<PAGE>
EXHIBIT 3.1
POLICY ADMINISTRATION AND DATA PROCESSING
SERVICES AGREEMENT
American Capitol Insurance Company, hereinafter referred to as
Administrator, and World Service Life Insurance Company of America,
hereinafter referred to as Client, agree as follows:
During the term of this agreement ("Agreement"), Administrator will
perform for Client in respect to Client's policies the policy
administration and data processing services hereinafter designated in this
Agreement and exhibits attached hereto and made a part hereof for all
purposes. The policies that are the subject of this Agreement consist of
the policies defined as the "Policies" in the Reinsurance Agreement
("Reinsurance Agreement") to which this Agreement is attached as an
exhibit.
Client shall designate the person or persons to whom Administrator will
report. Client will keep Administrator informed of its corporate policy
or changes in policy to enable Administrator to carry out the subject
services for Client in an efficient manner. Client shall appoint one or
more of Administrator's officers as its attorney-in-fact to act for Client
in performing routine functions in the course of administering Client's
policies and performing data processing services as called for by this
Agreement. At any time during the term of this Agreement, Administrator
may enter into a consulting agreement with one or more employees of Client
to provide consulting services to Administrator regarding the
administration of the subject policies and the related marketing
operation, and Administrator shall be solely responsible for fees relating
thereto.
Administrator shall safeguard all data and information relating to
Client's business to the same extent that Administrator safeguards such
data and information relating to its own business, provided, however, if
such data or information is available to the general public, is known or
in the possession of Administrator prior to the date of this Agreement, or
is known or in the possession of Administrator prior to actual receipt by
Administrator of such information or data from client or is rightfully
obtained from third parties, Administrator shall bear no responsibility
for its disclosure, inadvertently or otherwise.
Client agrees that all systems, including data processing programs, discs,
tapes, documentations, manuals, specifications, ideas, applications,
routines, formulas, and techniques relating to the subject services
furnished, owned, licensed or developed by Administrator shall and may be
used by Administrator during the term of this Agreement and at any time
thereafter and shall be and remain the sole property of Administrator. If
Client furnished Administrator with any system related to its business,
said system shall remain the sole property of Administrator, and
Administrator may use such system or any other system to administer the
subject policies.
In the event of termination of this Agreement, Administrator may, at its
option, retain any property or data in its possession that belongs to
Client until all sums due Administrator pursuant to this Agreement are
1
<PAGE>
paid, including such additional charges as may be determined by
Administrator and Client to be reasonable and necessary to effect an
orderly termination of the work and services then being performed by
Administrator and to assure and protect the orderly and timely
perpetuation of the Client's business as affected by such work and
services. Upon termination of this Agreement, Client shall instruct
Administrator in writing as to the disposition of all such property or
data within ninety (90) days.
Administrator shall use due care and diligence in performing the work and
services to be performed hereunder and agrees that it will correct any
errors which are caused solely by Administrator, its authorized agents,
employees, programs, or data processing equipment and machines, and its
liability for such errors shall be limited to the correction of same
within a reasonable time as full compensation for any and all damages
which may result from such error or errors and in any event, the liability
of Administrator to Client or any other party for any and all losses or
damages directly or indirectly arising out of this Agreement or the
performance hereof, shall not exceed the performance of the particular
task which gives rise to such loss or damages and such amount shall
constitute an agreed amount of liquidated damages for such losses and
damages. The parties recognize the liability that Administrator has in
respect to the subject policies in its capacity as Reinsurer under the
Reinsurance Agreement and, except as hereinabove stated, Administrator
shall not incur any additional liability by virtue of its role and
responsibilities as Administrator pursuant to this Agreement.
Client warrants that it is duly authorized to enter into this Agreement
and that Administrator has in no way caused or induced Client to breach
any contracted obligation and Client agrees to indemnify and hold harmless
Administrator from any claim or claims.
This Agreement and the exhibits attached hereto or made a part hereof
constitute the entire agreement of the parties on the subject of policy
administration and data processing services. Any modifications or
amendments must be in writing signed by both parties.
The parties hereto expressly agree that each will comply with all
applicable federal, state and local laws, the violation of which may
adversely affect the performance of this Agreement.
The charges hereinafter set forth in Exhibit C attached hereto shall be
billed as a part of the monthly accounting made by Administrator in its
capacity as Reinsurer as set forth in the Reinsurance Agreement, and shall
be allocated between the parties thereto (referred to in such Reinsurance
Agreement as the Reinsurer and Company) as set forth in such Reinsurance
Agreement.
Client agrees that in the event of default in any of the covenants or
agreements contained herein or in payment of the charges provided herein
and in exhibit or exhibits attached hereto or made a part hereof, that it
will pay all costs and expenses of enforcement or collection, including
reasonable attorney's fees, which may arise or accrue.
This Agreement may not be terminated by either party during the existence
of the Reinsurance Agreement, and shall automatically terminate when the
Reinsurance Agreement terminates, unless the parties agree otherwise in
writing.
2
<PAGE>
This Agreement is effective as of June 1, 1996.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto, their successors and legal representatives, and shall not
be assigned by either party without the prior written consent of the other
party.
This Agreement shall be construed under the Laws of the State of Texas and
should any portion be invalid or unenforceable, for any reason, it shall
not affect the remainder of this Agreement which shall be valid and
binding.
IN WITNESS WHEREOF, this Agreement is an Exhibit to the above
mentioned Reinsurance Agreement. The parties, by executing and delivering
said Reinsurance Agreement, intend to adopt this Agreement as though it
had been separately executed and delivered by the parties.
3
<PAGE>
EXHIBIT A
MANAGEMENT
The Client's responsibility shall be:
1. To provide from its Board of Directors or an Officer instructions
regarding its corporate policy, products, growth and general operations of
the Company and such other instructions as are called for herein. To
select one or more officers of the Client to whom the Administrator is to
report and from whom the Administrator is to receive instructions. To
designate and appoint not less than two officers of Administrator to act
as Client's attorney-in-fact to perform in Client's place and stead the
routine policy transactions, such as policy issuance and claims payments
and such other functions as the parties may deem appropriate.
2. To provide financial interface and receive the financial reports from
Administrator.
3. To provide marketing interface and receive the marketing reports from
Administrator.
The Administrator's responsibilities shall be:
1. To perform the subject services in keeping with corporate policy of
the Client as communicated by the Client to Administrator.
2. To provide financial information relating to the subject policies
sufficient to enable Client to complete requirements of the various state
insurance departments, file premium tax, advertising and miscellaneous
reporting forms as required by the states.
MARKETING
The Client's responsibility shall be:
To select the products, marketing systems, brochures, agents' training and
instruction, commissions and other agent compensation, and personnel to
operate the marketing efforts of the Client. The Client is solely
responsible for recruiting, training, assisting, monitoring, supervising,
terminating (if called for) and the market conduct of the Client's agents.
The Administrator's responsibility shall be: None.
UNDERWRITING/ISSUE
The Client's responsibility shall be:
To set underwriting standards and guidelines as conditions for issuance of
new policies and reinstatement of policies that are eligible for
reinstatement.
The Administrator's responsibility shall be:
To issue new polices and reinstate policies consistent with underwriting
standards and guidelines provided by Client.
<PAGE>
CLAIMS SERVICE
The Client's responsibilities shall be:
To inform Administrator of its claims-paying policies and guidelines
respecting routine claims processing. To issue instructions to
Administrator in respect to claims that are other than routine or in
respect to which Administrator requests instructions. To inform
Administrator of all notices of claims when notice thereof is not sent
directly to Administrator.
The Administrator's responsibility shall be:
To verify and pay all claims in accordance with Client's policies,
guidelines and, when applicable, instructions.
POLICYHOLDER SERVICE
The Client's Responsibilities shall be:
To inform Administrator of its policies and guidelines respecting routine
policyholder service. To issue instructions to Administrator in respect
to policyholder service matters that are other than routine or in respect
to which Administrator requests instructions. To inform Administrator of
all communication received from policyholders when such communication is
not received directly by Administrator.
The Administrator's Responsibility shall be:
To answer and process all inquiries received, including cash surrenders,
policy loans, reinstatement requests and policy changes, in keeping with
Client's guidelines.
BILLING/COLLECTION
The Client's responsibility shall be: None, except to remit to
Administrator promptly any premiums or other payments in respect to the
subject policies received by the Client.
The Administrator's responsibilities:
To provide billing notices either through pre-authorized check or direct
bills for modal premiums when due. To provide late notices and lapse
notices in the event mode premiums are not received when due. To collect
and deposit in the Client's account all premiums received and reconcile on
a daily basis premium collections and deposits. In this regard, the
Client hereby authorizes the Administrator to establish one or more bank
accounts in the name of the Client in respect to which the Administrator's
officers are hereby authorized to sign and transact business in the same
manner that it operates banking accounts in its own name. The Client will
provide in a timely manner appropriate resolutions by its Board of
Directors and certifications by its officers to facilitate the above.
<PAGE>
INVESTMENTS
The Client's responsibility shall be:
The Client as the Company in the Reinsurance Agreement is solely
responsible for the assets covering its share of policy liabilities as set
forth in the Reinsurance Agreement and the Client shall be solely
responsible for the investments relating to such assets, as well as its
other assets.
The Administrator's responsibility shall be:
The Administrator as the Reinsurer in the Reinsurance Agreement is solely
responsible for the assets covering its share of policy liabilities as set
forth in the Reinsurance Agreement and the Administrator shall be solely
responsible for the investments relating to such assets, as well as its
other assets.
ACTUARIAL
The Client's responsibility shall be:
To be responsible for its share of the costs of actuarial services
selected by Administrator as set forth below. Client shall be solely
responsible for any actuarial services that it may require for matters not
related to the subject policies or any actuarial services that are for the
exclusive benefit of the Client.
The Administrator's responsibility shall be:
To select a qualified actuary to perform all actuarial work, reviews and
certifications required in respect to the subject policies for the benefit
of the Client and Administrator in their roles as the Company and the
Reinsurer, respectively, in the Reinsurance Agreement. The costs thereof
shall be borne by the Company and the Reinsurer as a part of the monthly
accounting as provided in the Reinsurance Agreement, except that in any
instance in which such actuarial services are performed for the exclusive
benefit of either the Company or the Reinsurer, as the case may be, such
party shall bear the entire cost of the subject services.
ACCOUNTING, TAXES, REPORTING AND REGULATORY COMPLIANCE
The Client's responsibility shall be:
To inform Administrator of the Officer to whom Administrator is to report
and to inform Administrator of any specific format required to interface
with Company in respect to accounting procedures, taxes and tax reporting,
financial reporting and regulatory compliance. Client shall be solely
responsible for its accounting functions, taxes and tax reporting,
financial reporting and regulatory compliance.
The Administrator's responsibility shall be:
To provide sufficient policy data and information to Client to enable
client to record all accounting entries on Client's books to properly
account for all transactions implemented by Administrator in respect to
the subject policies.
<PAGE>
COMMISSIONS
The Client's responsibility shall be:
Subject to the provisions and limitations in the Reinsurance Agreement, to
make all commission and other compensation arrangements with its agents.
The Administrator's responsibility shall be:
To prepare agent commission statements and disburse funds to agents based
on the results of the commission statements.
POLICY DIVIDENDS
The Client's responsibility shall be:
To determine and declare all dividends to be paid in respect to the
subject policies and to instruct Administrator accordingly.
The Administrator's responsibility shall be:
To pay or otherwise credit dividends to the subject policies in accordance
with Client's instructions. The Administrator shall be entitled to rely
upon and implement the dividend scales and practices of the Client that
exist as of the Effective Date of this Agreement and continuing thereafter
until changed in writing by the Client. When changed in writing by the
Client, the Administrator shall implement the change or changes in respect
thereto until a subsequent change in writing by the Client.
<PAGE>
EXHIBIT B
DATA PROCESSING SERVICES
The Client's responsibility shall be:
To furnish data to Administrator in a timely manner where data is not
directly received by Administrator.
The Administrator's responsibilities shall be:
To provide all data processing services necessary to the normal
administration of the subject policies as called for by this Agreement.
<PAGE>
Exhibit C
FEES
Client will be charged monthly according to the following schedule. Said
charges will be allocated between Client and Administrator in their
respective capacities as Company and Reinsurer as part of the monthly
accounting as set forth in the Reinsurance Agreement.
Maintenance
Monthly Fee Per Policy
Policy Status In Force (Beginning of Month)
Premium Paying ............................. $2.19
Fully Paid Up ............................. 1.36
Reduced Paid Up.............................. .84
Policy Issue
Fee per policy issued....................... $35.00
Inflation
On each anniversary of the Effective Date of this Agreement, the per
policy fees will increase 3% (compounded).
Direct Expenses of Client
The Client will be solely responsible for actual costs incurred in
marketing new business and for fees of attorneys, accountants, tax
advisers and other consultants or professionals, if any (unless
specifically otherwise provided for elsewhere in this Agreement). Client
will also be solely responsible for any fees incurred by Administrator to
obtain and maintain a Third Party Administrator's license (if such license
is required).
<PAGE>
EXHIBIT 7.1
ARBITRATION AGREEMENT
This agreement ("Arbitration Agreement") is made between American
Capitol Insurance Company ("American Capitol"), a Texas domiciled life
insurance company with its principal office in Houston, Texas, and World
Service Life Insurance Company of America ("World Service"), an Alabama
domiciled life insurance company with its principal office in Winchester,
Tennessee, to be effective on June 1, 1996.
WHEREAS, American Capitol and World Service have entered into an
Agreement of Reinsurance and Assumption ("Assumption Reinsurance
Agreement"), supplemented and amended by a Reinsurance Agreement
("Reinsurance Agreement") effective June 1, 1996, (collectively referred
to as "Reinsurance") relating to certain life insurance policies, and
WHEREAS, the Parties desire to provide for an efficient and
expeditious way in which to resolve any disputes that might arise between
the Parties in respect to said Reinsurance.
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
1.1 The above recitations are true and correct.
1.2 The following words when appearing in this Arbitration Agreement with
initial capital letters shall have the meaning ascribed to them as
follows:
(a) "Party" shall mean either American Capitol or World Service.
(b) "Reinsurance" shall mean the reinsurance relationship between the
established by the Agreement of Assumption Reinsurance and the
Reinsurance Agreement identified herein, including written amendments
thereto.
(c) "Arbitrator" shall mean one of the three arbitrators selected as
herein provided. "American Capitol's Arbitrator" shall mean the
Arbitrator designated as such by American Capitol. "World Service's
Arbitrator" shall mean the Arbitrator designated as such by World
Service. "Parties' Arbitrators" shall mean American Capitol's
Arbitrator and World Service's Arbitrator. The "Third Arbitrator"
shall mean the Arbitrator selected by the Parties' Arbitrators as
herein provided. The "Arbitration Committee" shall mean the three
Arbitrators acting as a committee in their capacity as arbitrators.
An Arbitrator must be an actuary, either actively engaged in private
practice in the United States or an employee of a life insurance
company domiciled in the United States, who has had experience in the
valuation of blocks of life insurance business, who has signed one or
more annual statements filed by a United States domiciled life
insurance company with insurance regulatory departments, and who has
been a member in good standing of the Society of Actuaries for a
continuous period of not less than five (5) years.
<PAGE>
(d) "Claimant" shall mean the Party who initiates the arbitration process
by filing a Claim. "Respondent" shall mean the other Party.
"Counter-Claimant" shall mean the Respondent in the event the
Respondent files a Counter-Claim.
(e) "Claim" shall mean the written statement given by the Claimant as
herein provided to the Respondent, describing how and to what extent
the Claimant believes that it has suffered damages as a result of the
breach of the Reinsurance by the Respondent.
(f) "Response" shall mean the written statement given by the Respondent
as herein provided to the Claimant, setting forth Respondent's
explanation and defenses explaining why Respondent believes it is not
liable to Claimant as claimed by Claimant.
(g) "Counter-Claim" shall mean the written statement given by the
Respondent as herein provided to the Claimant, describing how and to
what extent the Respondent believes that it has suffered damages as a
result of the breach of the Reinsurance by the Claimant.
(h) "Counter-Response" shall mean the written statement given by the
Claimant as herein provided to the Respondent, setting forth
Claimant's explanation and defenses explaining why Claimant believes
it is not liable to Respondent as claimed by the Respondent.
(i) "Arbitration Award" (or "Award") shall mean the conclusion or
judgment reached by the Arbitrators, or any two of them, when reduced
to writing and signed by them or any two of them and delivered to the
Parties as herein provided, which written statement shall set forth a
sum of money deemed to be the damages suffered by the prevailing
Party, plus interest if applicable in the opinion of the Arbitrators
(or any two of them), at a rate deemed by them to be fair, plus the
setting of a per diem rate of interest to be added for each day
thereafter the Award is not paid, plus a reasonable amount for
expenses, including attorney's fees, costs of accounting, actuarial
(including the cost of the Party's designated actuary) and other
professional assistance and other costs, to be added to the Award
only if the Arbitrators (or any two of them) believe that the losing
Party was guilty of misconduct which misconduct contributed to the
initiation of the arbitration process which otherwise would not have
been necessary, or which misconduct unduly protracted and/or
increased the expense of the arbitration process. "Misconduct" as
used in the immediately preceding sentence shall include conduct such
as the taking of a frivolous position or positions that prolongs or
exacerbates the arbitration process, or the refusal or unreasonable
delay in responding to written requests by the Arbitration Committee
for information.
(j) The "Commencement Date" shall have the meaning set forth in
Section 2.3.
1.3 In the event of one of the parties disagrees with the other Party in
respect to any matter claimed to be covered by the Reinsurance, the
Claimant shall give its Claim to the Respondent. The Claim shall set
forth the nature of the claim and sufficient facts relating thereto, as
well as documentation to the extent available, to provide to the
Respondent a reasonably complete description and explanation regarding the
Claim. The Claim must be given within ninety (90) days from the date on
which the Claimant first became aware of the facts that form the basis of
<PAGE>
the Claim and that a disagreement exists in respect to same. Within
thirty (30) days from the date of receipt by the Respondent of said Claim,
Respondent shall give its Response setting forth sufficient facts relating
thereto, as well as documentation to the extent available, to provide to
the Claimant a reasonably complete description and explanation regarding
the Respondent's defense. If Respondent has knowledge at the time of
giving its Response of a Counter-Claim that Respondent desires to submit
for arbitration, whether relating to Claimant's Claim or otherwise,
Respondent must give its Counter-Claim as a part of its Response (such
Counter-Claim setting forth sufficient facts relating thereto, as well as
documentation to the extent available, to provide a reasonably complete
description and explanation regarding the Respondent's Counter-Claim, in
which case Claimant must provide a Counter-Response within thirty (30)
days from the date of receipt by the Claimant of said Counter-claim,
setting forth sufficient facts relating thereto, as well as documentation
to the extent available, to provide a reasonably complete description and
explanation regarding the Claimant"s defense to such Counter-Claim.
ARTICLE II
2.1 After the arbitration process has been initiated as aforesaid, and
within thirty (30) days from the date on which the Response was given (or
within thirty (30) days from the date on which the Counter-Response was
given, if applicable), each Party must designate in writing to the other
Party its Arbitrator. Such designation by the Claimant and the Respondent
shall have the effect of certifying by such Party that, to the best of its
knowledge after reasonable investigation and inquiry, the actuary
designated as its Arbitrator has read this Arbitration Agreement, the
Claim and Response (and Counter-claim and Counter-response, if
applicable), understands the qualifications required to serve as an
Arbitrator under this Arbitration Agreement, and has agreed that he or she
is accordingly qualified and is willing to serve and comply with the terms
of this Arbitration Agreement. To signify such agreement, each such
Arbitrator shall sign copies of this Arbitration Agreement and deliver a
signed copy to each Party and to the other Arbitrator.
2.2 From the date on which both Parties have designated their respective
Arbitrators as aforesaid, and thereafter throughout the arbitration
process, including the selection of the Third Arbitrator as hereinafter
set forth, the Arbitrators shall not engage in any ex parte communications
with the Parties or their representatives. They may, but only at their
initiative, engage in communications with the Parties or their
representatives in writing, by telephone conference or meetings, but only
in a manner that involves both Parties (or their representatives) on an
equal access opportunity who shall be privy to all elements of such
communications. The Arbitration Committee shall obtain from each Party a
designated officer to be responsible for all communications on behalf of
such Party (the "Party's Designated Officer").
2.3 The Parties' Arbitrators shall promptly select the Third
Arbitrator and together the three Arbitrators shall constitute the
Arbitration Committee. The Parties' Arbitrator shall attempt to select as
the Third Arbitrator an actuary with qualifications and experience that
they deem to be most relevant to the issues presented based on their
review of the Claim and Response (and Counter-Claim and Counter-Response,
if applicable), also keeping in mind the logistics and costs in the
calling of meetings, but in any case the selection of the Third Arbitrator
as aforesaid shall be final. The Third Arbitrator shall signify his or
her agreement to serve as the Third Arbitrator by signing copies of this
<PAGE>
Arbitration Agreement and immediately providing a signed copy to each
Party and to the Parties' Arbitrators. The arbitration process shall be
deemed to commence on the date on which the Third Arbitrator signifies his
or her acceptance by delivering copies of this Arbitration Agreement to
the Parties signed by him or her as herein provided ("Commencement Date").
The Parties agree that they will not at any time attempt to influence the
selection of the Third Arbitrator and shall not at any time attempt to
influence the arbitration process or its outcome except in the course of
any non-ex parte communications permitted hereunder. The Parties'
Arbitrator shall diligently try to secure the Third Arbitrator within
thirty (30) days from the date on which both of the Parties' Arbitrators
agree to serve. If the Parties' Arbitrators are not able to arrange for
the services of a Third Arbitrator within thirty (30) days as aforesaid,
they shall notify the Parties to that effect so that the Parties, if they
choose, can agree upon an amended procedure to accommodate the process,
but if no such agreement is made within fifteen (15) days from the receipt
by both Parties of the aforesaid notice from the Parties' Arbitrators, the
arbitration shall be deemed to be terminated.
2.4 The signature of each Arbitrator affixed to a copy of this
Arbitration Agreement shall certify that, to the best of his knowledge and
belief, he has no conflict of interest in performing his services as an
Arbitrator and that neither he nor his employer, affiliates or his firm
("firm" shall include all partners, employees, associates and affiliates
of the firm), as the case may be, has any financial or familial
relationship with either of the other two Arbitrators or their employers
or firms, or (except for each of the Parties' Arbitrators relationship
with the Party designating such Arbitrator) either of the Parties or their
partners, employees, associates or affiliates, as the case may be, and
that neither he nor his firm has or expects to have any interest in the
outcome of the arbitration or the dispute between the Parties (except for
compensation for the their services as Arbitrators as herein provided).
2.5 The signature of each Arbitrator affixed to this Arbitration
Agreement shall signify his or her commitment to serve as an Arbitrator in
a professional and efficient manner, to complete the arbitration process,
and to make himself available to do so in a reasonably expeditious manner.
In the event either of the Parties' Arbitrators becomes unable to proceed
as an Arbitrator, due to resignation, death, incapacity or otherwise, the
Party who designated such Arbitrator shall designate a replacement
Arbitrator within thirty (30) days from the date on which said Party
becomes aware of the fact that its previously designated Arbitrator became
unable to serve as aforesaid. Failure to designate the replacement
Arbitrator within the thirty (30) days as aforesaid will constitute a
default by such Party and thereby authorize the other two Arbitrators to
proceed with the power and authority of the Arbitration Committee under
this Agreement. In the event the Third Arbitrator becomes unable to
proceed as an Arbitrator, due to resignation, death, incapacity or
otherwise, the Parties' Arbitrators shall proceed to select a replacement
Third Arbitrator within thirty (30) days from the date on which the
Parties' Arbitrators become aware of the fact that the Third Arbitrator
became unable to serve as aforesaid. If the Parties' Arbitrators are
unable to select a replacement Third Arbitrator within thirty (30) days as
aforesaid, they shall notify the Parties to that effect so that the
Parties, if they choose, can agree upon an amended procedure to
accommodate the process, but if no such agreement is made within fifteen
(15) days from the receipt by both Parties of the aforesaid notice from
the Parties' Arbitrators, the arbitration shall be deemed to be
terminated. Any subsequent inability of an Arbitrator to continue to
<PAGE>
serve as such shall result in a replacement in the same manner as stated
above.
2.6 Each Arbitrator shall be entitled to compensation for his
services as an Arbitrator as herein provided (which shall be in accordance
with the standards in the Society of Actuaries and such actuary's
contemporaneous billing practices) and to reimbursement for reasonable
costs incurred by him as an Arbitrator. If his charges for his services
are based on an hourly rate, he shall provide notice in advance of the
amount of his hourly rate and information regarding his billing standards.
He shall maintain contemporaneous records of the time expended by him
during the arbitration process, the date on which the time was expended
and a brief description of the activity involved, which shall be provided
as support for his bill. Charges for costs to be reimbursed shall be
supported by commercially reasonable documentation. American Capitol's
Arbitrator shall be accountable as aforesaid only to American Capitol who
shall be solely responsible for paying such Arbitrator's bills. World
Service's Arbitrator shall be accountable as aforesaid only to World
Service who shall be solely responsible for paying such Arbitrator's
bills. The Third Arbitrator shall be accountable to both American Capitol
and World Service as aforesaid and American Capitol shall be responsible
for paying one/half of the Third Arbitrator's bills and World Service
shall be responsible for paying one/half of the Third Arbitrator's bills.
Each Arbitrator shall make advance arrangements to his satisfaction
regarding responsibility for the payments of his bills. Each Party shall
execute and deliver to any Arbitrator as requested an agreement to hold
such Arbitrator harmless from any and all liability and expense
attributable to serving as an Arbitrator hereunder, except for bad faith
and misconduct (as judged by ethical standards applicable to members of
the Society of Actuaries). Bills may be submitted monthly and shall be
payable within ten (10) days of receipt.
ARTICLE III
3.1 The Third Arbitrator shall serve as chairman of the Arbitration
Committee and as such shall be responsible for calling meetings and for
making the efforts to move the process along so as to complete it in an
expeditious and efficient manner. The Arbitrators shall take into account
the Claim and response (and the Counter-Claim and Counter-response, if
applicable) and such other information as they may deem relevant. The
Arbitration Committee may, in its discretion, invite each Party to present
its case at a hearing in the presence of the Arbitration Committee and in
the presence of the other Party, at which hearing testimony of witnesses
and other evidence may be presented. Such hearing shall follow,
informally, the format of a judicial hearing, and each Party shall be
entitled to be represented by an attorney. However, the proceedings shall
take place in the manner directed by the Arbitration Committee. The
Arbitration Committee is authorized to make such additional investigations
as they may deem to be reasonable including the employment of experts or
professionals as consultants, and shall be reimbursed for the costs of
same as an expense of the Third Arbitrator. The Arbitration Committee, if
it requests information from a Party that may involve a significant cost
to such Party to produce, may decide, and so notify such Party in writing,
that such cost will be assessed as an expense of the Third Arbitrator, so
that such Party will receive reimbursement for same. In the event an
issue arises and the Arbitrators are unable to concur unanimously upon its
resolution, and a disposition of such issue is required in order to
proceed with the arbitration, the Third Arbitrator shall reduce the matter
to writing which, when signed by any two of the Arbitrators, shall be a
conclusive resolution of the issue, and the arbitration shall proceed
accordingly. While it is recognized that the Parties' Arbitrators have
been designated by the Parties, during the arbitration process they shall
not feel obligated to act as advocates for the Party who designated them,
but instead they shall consider that their primary obligation is to assist
in determining a reasonable, just and prompt resolution of the dispute or
disputes to which agreement of at least two Arbitrators can be achieved.
The Arbitrators shall make reasonable efforts to maintain as confidential
the arbitration process, its status or progress or any indication of its
outcome, and the information disclosed to them in the course of the
arbitration. The Arbitrators shall not discuss the arbitration matters
between themselves or with anyone else unless all three Arbitrators are
present and participating.
3.2 The Arbitration Committee shall make its best efforts to
complete the arbitration process within thirty (30) days from the
Commencement Date. The conclusion of the arbitration shall be when any
two of the Arbitrators sign a written statement that adequately
encompasses all of the issues in dispute, showing a single money award as
an award of damages if appropriate (the "Arbitration Award"). It would be
<PAGE>
desirable, but not necessary, for all three Arbitrators to sign the
Arbitration Award. The Arbitration Award signed as aforesaid in duplicate
originals shall be delivered promptly to each of the Parties, to be
received by each Party on the same date.
3.3 In the event the Arbitration Committee determines that it is unable
to resolve the dispute or disputes and obtain the signatures of two of the
Arbitrators on an Arbitration Award, the Third Arbitrator shall so notify
the Parties at that time, and in any event the Third Arbitrator must send
such notice within sixty (60) days from the Commencement Date. During the
course of the arbitration process if the likelihood that an Arbitration
Award cannot be agreed upon by the Arbitration Committee, the Third
Arbitrator, in his sole discretion, may communicate such information to
the Parties (avoiding ex parte communications) to allow the Parties an
opportunity to correct the problem that seems to be hindering the process.
However, notwithstanding anything to the contrary herein contained, if the
Arbitration Committee has not agreed upon an Arbitration Award on or
before ninety (90) days following the Commencement Date, and if the
arbitration process is not amended by the Parties prior thereto as
aforesaid, the Arbitration Committee shall be deemed to be dissolved and
the arbitration shall be deemed to be terminated; provided, however, that
either Party may extend the aforesaid ninety (90) day period by and
additional thirty (30) days by giving written notice to the other Party
and to the Arbitrators to that effect prior to the end of the aforesaid
ninety (90) day period.
3.4 If one of the Parties commits a material breach of this
Arbitration Agreement the other Party shall be entitled to a ruling from
the Arbitration Committee in support of such Party's position, including
an Arbitration Award that follows therefrom. Furthermore, if the
arbitration does not result in the an Arbitration Award as set forth in
Section 3.2 and if the primary cause for such failure is a material breach
of this Arbitration Agreement by one of the Parties (referred to in this
section as the "first Party"), and if the other Party (referred to in this
Section as the "second Party") has not committed (prior to the
aforementioned breach) a material breach, then the second Party shall be
entitled to a ruling from the Arbitration Committee in support of the
second Party's position, including an Arbitrator's award that follows
therefrom. "Primary cause" as used in the immediately preceding sentence
shall mean a material breach of this Arbitration Agreement which
materially hindered the progress of the arbitration process, or prevented<PAGE>
the arbitration from taking place or being completed or which improperly
influenced, or improperly attempted to influence, the outcome of the
arbitration. A "material breach" as used in this Section shall mean a
breach of this Arbitration Agreement but for which the arbitration process
would have been able to run its course on schedule and with the prospect
for successful alternative dispute resolution that could reasonably have
been expected.
ARTICLE IV
4.1 The Parties shall be bound by the Arbitration Award for all purposes,
and the such award shall not be subject to appeal to a court or subject to
modification or replacement by a court. The prevailing Party shall be
entitled to apply to any court having jurisdiction over the Parties to
have such court render judgement in favor of the prevailing Party against
the losing Party as set forth in the Arbitration Award.
<PAGE>
4.2 The only purpose of this Arbitration Agreement is to resolve all
disputes regarding the Reinsurance and no other issues are intended to be
addressed hereby. If the arbitration process does not result in the
establishment of an Arbitration Award as aforesaid, neither Party shall be
prejudiced by the arbitration proceedings in any subsequent proceedings
regarding the Reinsurance.
4.3 This Arbitration Agreement shall be binding upon the Parties and
their successors and heirs, as the case may be, and no amendment hereto
shall be binding unless signed by the Parties.
4.4 Written communications required or permitted under this Agreement
shall be made as herein provided. Signatures reflected in facsimile
transmissions shall be as binding as original signatures. Notices
received by facsimile transmissions shall be effective on the day of
transmission. American Capitol's facsimile telephone number is (713) 953
7920 and World Service's facsimile telephone number is (615) 962-4926.
"Overnight" deliveries shall be deemed to be received on the business day
following dispatch to the addresses of the respective addressees. Regular
mail deliveries shall be deemed to be received on the third day following
posting to the addresses of the respective addressees. A copy of any
written communication sent by an Arbitrator to another Arbitrator shall be
sent to both other Arbitrators; if sent to a Party, copies shall be sent
to both Parties. A copy of any written communication sent by a Party to
an Arbitrator shall be sent to the other Party and the other Arbitrators.
IN WITNESS WHEREOF, this Arbitration Agreement is an Exhibit to the
above mentioned Reinsurance Agreement. The Parties, by executing and
delivering said Reinsurance Agreement, intend to adopt this Arbitration
Agreement as though it had been separately executed and delivered by the
Parties. Signature lines are set forth below for the use of the
Arbitrators as hereinabove set forth.
American Capitol's Arbitrator: World Service's Arbitrator:
------------------------------ ---------------------------
------------------------------ ---------------------------
Printed Name Printed Name
Date:------------------------- Date:----------------------
Third Arbitrator:
------------------------------
------------------------------
Printed Name
Date:-------------------------
<PAGE>
ADMINISTRATION SERVICES AGREEMENT
WHEREAS, South Texas Bankers Life Insurance Company Agency, Inc.
("Agency") is the holder of Permit #937 issued by the Texas Department of
Banking as a seller of preneed contracts; and
WHEREAS, South Texas Bankers Life Insurance Company ("STB") is a
Texas domiciled life insurance company that has acted as a life insurance
depository to fund preneed contracts issued by Agency; and
WHEREAS, together they have administered the preneed contracts of
Agency in respect to the business needs and applicable regulations
affecting the preneed contracts issued by Agency; and
WHEREAS, American Capitol Insurance Company ("American Capitol") has
entered into an agreement with World Service Life Insurance Company of
America ("World Service"), the parent of STB, to administer World
Service's insurance policies which will include STB's insurance polices
when the same are reinsured and assumed by World Service which STB and
World Service expect to accomplish in due course; and
WHEREAS, in the interim, STB has arranged for American Capitol to
administer the insurance policies in force in STB; and
WHEREAS, American Capitol, acting as Agency's agent, is willing to
provide administration services to Agency in respect to the preneed
contracts; and
WHEREAS, as a result of American Capitol's assumption of the role of
administrator as herein provided, STB's obligations to Agency shall
terminate;
NOW, THEREFORE, American Capitol, hereinafter referred to as
"Administrator," and Agency, referred to as "Client," agree as follows:
Administrator and Client acknowledge and confirm that the preneed
contracts that are the subject of this administration agreement were
issued or assumed by Client and funded by insurance policies issued by
STB; that STB's insurance policies are to be assumed by its parent, World
Service, subject to approval of the Texas Department of Insurance; that
American Capitol and World Service have entered into an Administrative and
Data Processing Agreement (the "World Service Administration Agreement")
providing for American Capitol to provide services therein set forth in
respect to World Service's insurance policies; that the STB policies, when
the assumption by World Service is consummated, will become a part of the
World Service insurance policies that are the subject of the World Service
Administration Agreement; that STB and American Capitol intend to enter
into an "interim" administration agreement similar to the World Service
Administration Agreement pending the consummation of the assumption by
World Service of the STB insurance policies; and that this agreement, when
signed by STB, will also signify that Administrator, as administrator for
STB's insurance policies, is acting for STB in its role as the issuer of
the subject insurance policies until such policies are assumed by World
Service, when Administrator will be acting for World Service in its role
as issuer of the subject (formerly STB's) insurance policies.
Page 1 of 7 (including Exhibit A)
<PAGE>
During the term of this agreement ("Agreement"), Administrator will
perform for Client in respect to Client's preneed contracts administration
services hereinafter designated in this Agreement and Exhibit A attached
hereto and made a part hereof for all purposes. The preneed contracts
that are the subject of this Agreement consist of the preneed contracts
issued by Agency as a result of marketing same directly to the public as
well as preneed contracts issued or assumed by Agency in respect to
conversions whereby preneed contracts funded by trust funds were converted
to funding by insurance policies issued by STB.
Client shall designate the person or persons to whom Administrator will
report. Client will keep Administrator informed of its corporate policy
or changes in policy to enable Administrator to carry out the subject
services for Client in an efficient manner. Client shall appoint one or
more of Administrator's officers as its attorney-in-fact to act for Client
in performing routine functions in the course of providing to Client the
administration services as called for by this Agreement. At any time
during the term of this Agreement, Administrator may enter into a
consulting agreement with one or more employees of Client to provide
consulting services to Administrator regarding the subject administration
services, and Administrator shall be solely responsible for fees relating
thereto.
Administrator shall safeguard all data and information relating to
Client's business to the same extent that Administrator safeguards
comparable data and information relating to its own business; provided,
however, if such data or information is available to the general public,
is known by or is in the possession of Administrator prior to the date of
this Agreement, or is known by or is in the possession of Administrator
prior to actual receipt by Administrator of such information or data from
Client or is rightfully obtained from third parties, Administrator shall
bear no responsibility for its disclosure, inadvertently or otherwise.
Client agrees that all systems, including data processing programs, discs,
tapes, documentations, manuals, specifications, ideas, applications,
routines, formulas, and techniques relating to the subject services
furnished, owned, licensed or developed by Administrator shall and may be
used by Administrator during the term of this Agreement and at any time
thereafter and shall be and remain the sole property of Administrator.
Administrator acknowledges that the subject preneed contracts, related
documents and data have been transferred to Administrator to be used in
connection with the performance by Administrator of its responsibilities
hereunder. Administrator has not verified, and is not responsible for,
the completeness or the correctness of the data furnished as a part of the
preneed contracts, and will be entitled to rely upon the data as
furnished, and will use commercially reasonable efforts to make such
corrections and additions as may be called for in the course of
administration. Administrator shall not be liable for, and Client shall
hold harmless from and indemnify Administrator for, all costs, claims and
actions (including reasonable costs of investigations accounting and
attorneys fees) based on or arising out of Client's obligations pursuant
to the preneed contracts, except that Administrator shall be responsible
for commercially reasonable performance of its administration duties set
forth in this Agreement.
Page 2 of 7 (including Exhibit A)
<PAGE>
Administrator and Client hereby agree that the fees and expense
reimbursements provided for in the administrative agreement between World
Service and American Capitol referred to above, and incorporated herein by
reference for all purposes, include the fees and expense reimbursements to
which Administrator is entitled for its services hereunder, except to the
extent explicitly identified and set forth herein.
In the event of termination of this Agreement, Administrator may, at its
option, retain any property, including the preneed contracts, related
documents and data in its possession that belongs to Client until all sums
due Administrator pursuant to this Agreement are paid, including such
additional charges as may be determined by Administrator and Client to be
reasonable and necessary to effect an orderly termination of the work and
services then being performed by Administrator and to assure and protect
the orderly and timely perpetuation of the Client's business as affected
by such work and services. Upon termination of this Agreement, Client
shall instruct Administrator in writing as to the disposition of all such
property or data within ninety (90) days.
Administrator shall use due care and diligence in performing the work and
services to be performed hereunder and agrees that it will correct any
errors which are caused solely by Administrator, its authorized agents,
employees, programs, or data processing equipment and machines, and its
liability for such errors shall be limited to the correction of same
within a reasonable time as full compensation for any and all damages
which may result from such error or errors and in any event, the liability
of Administrator to Client or any other party for any and all losses or
damages directly or indirectly arising out of this Agreement or the
performance hereof, shall not exceed the performance of the particular
task which gives rise to such loss or damages and such amount shall
constitute an agreed amount of liquidated damages for such losses and
damages. The parties acknowledge and agree that Administrator does not
assume, and shall not ever have, any liability on account of or in respect
to Agency's obligations based on or associated with the preneed contracts
that are the subject of this administration services agreement, and that
Administrator's relationship and responsibility in respect to such preneed
contracts is solely that of an agent for Client performing administration
services as herein provided. Client agrees to indemnify Administrator
for, and hold Administrator harmless from, any and all costs or expenses
incurred by Administrator as a result of any claim or litigation seeking
to hold Administrator liable for any of Client's obligations based on or
associated with the preneed contracts.
Client warrants that it is duly authorized to enter into this Agreement
and that Administrator has in no way caused or induced Client to breach
any contracted obligation.
This Agreement and the exhibit attached hereto or referred to herein and
made a part hereof constitute the entire agreement of the parties on the
subject of policy administration and data processing services. Any
modifications or amendments must be in writing signed by both parties.
The parties hereto expressly agree that each will comply with all
applicable federal, state and local laws, the violation of which may
adversely affect the performance of this Agreement.
Page 3 of 7 (including Exhibit A)
<PAGE>
Client agrees that in the event of default in any of the covenants or
agreements contained herein or in payment of the charges provided herein
and in the exhibit attached hereto or made a part hereof, that it will pay
all costs and expenses of enforcement or collection, including reasonable
attorney's fees, which may arise or accrue.
This Agreement may not be terminated by either party during the existence
of that certain Reinsurance Agreement between American Capitol and World
Service, and shall automatically terminate when said Reinsurance Agreement
terminates, unless the parties agree otherwise in writing.
This Agreement is effective as of June 1, 1996.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto, their successors and legal representatives, and shall not
be assigned by either party without the prior written consent of the other
party.
This Agreement shall be construed under the Laws of the State of Texas and
should any portion be invalid or unenforceable, for any reason, it shall
not affect the remainder of this Agreement which shall be valid and
binding. This Agreement is executed and delivered by the parties in
Harris County, Texas, to be performed in Harris County, Texas.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
signed and delivered by its duly authorized officers.
South Texas Bankers Insurance Agency, Inc.
By: /s/Jack G. Heffington
President
American Capitol Insurance Company
By: /s/John D. Cornett
President
South Texas Bankers Life Insurance Company
By: /s/Jack G. Heffington
President
Page 4 of 9 (including Exhibit A)
<PAGE>
MANAGEMENT
The Client's responsibility shall be:
1. To provide from its Board of Directors or an Officer instructions
regarding its corporate policy, products, growth and general operations of
the Company and such other instructions as are called for herein. To
select one or more officers of the Client to whom the Administrator is to
report and from whom the Administrator is to receive instructions. To
designate and appoint not less than two officers of Administrator to act
as Client's attorney-in-fact to perform in Client's place and stead the
routine transactions, such as contract issuance and claims payments and
such other functions as the parties may deem appropriate.
2. To provide financial interface and receive the financial reports from
Administrator.
3. In the event Client resumes marketing, to provide marketing interface
and receive the marketing reports from Administrator.
The Administrator's responsibilities shall be:
1. To perform the subject services in keeping with corporate policy of
the Client as communicated by the Client to Administrator.
2. To provide information relating to the subject contracts sufficient to
enable Client to complete requirements of the Texas Department of Banking.
MARKETING
The Client's responsibility shall be:
To select the products, marketing systems, brochures, agents' training and
instruction, commissions and other agent compensation, and personnel to
operate the marketing efforts of the Client. The Client is solely
responsible for recruiting, training, assisting, monitoring, supervising,
terminating (if called for) and the market conduct of the Client's agents.
The Administrator's responsibility shall be: None.
ISSUE
The Client's responsibility shall be:
To set standards and guidelines as conditions for issuance of new
contracts.
The Administrator's responsibility shall be:
To issue new contracts consistent with the standards and guidelines
provided by Client.
CONTRACT MAINTENANCE
The Client's Responsibilities shall be:
Page 5 of 7 (including Exhibit A)
<PAGE>
To inform Administrator of its policies and guidelines respecting routine
contract maintenance. To issue instructions to Administrator in respect
to contract maintenance matters that are other than routine or in respect
to which Administrator requests instructions. To inform Administrator of
all communication received from contract purchasers and service providers
when such communication is not received directly by Administrator.
The Administrator's Responsibility shall be:
To answer and process all inquiries received, including cancellations and
contract changes, in keeping with Client's guidelines.
BILLING/COLLECTION
The Client's responsibility shall be: To inform Administrator of its
policies and guidelines respecting billing and collection. To remit to
Administrator promptly any payments in respect to the subject preneed
contracts received by the Client. Client specifically authorizes
Administrator to bill the preneed contract owners (i.e., customers)
directly, in the form of premium notices (in its role as administrator of
the subject insurance policies for STB or World Service, as the case may
be), and to apply payments made by customers directly as premium credits
on the relevant policies that have been purchased to fund the subject
preneed contracts, to avoid the duplicative process of first billing and
collecting payments on the preneed contracts by Administrator on behalf of
Client and the payment by Administrator on behalf of Client to STB or
World Service, as the case may be, the insurer, of the collected amounts
as premiums on the subject policies.
The Administrator's responsibilities shall be:
To bill in accordance with this Agreement and Client's policies and
guidelines.
CLAIMS
The Client's responsibility shall be: To inform Administrator of its
policies and guidelines respecting claims handling. To remit to
Administrator promptly any claims in respect to the subject preneed
contracts received by the Client. Client specifically authorizes
Administrator to arrange to have payment of claims made directly by STB or
World Service, as the case may be, instead of requiring Administrator, on
behalf of Client, to apply itself as administrator on behalf of STB or
World Service, as the case may be, as insurer, for the insurance policy
proceeds and then, in turn, paying same to the recipient of the preneed
contract benefit.
The Administrator's responsibilities shall be:
To pay claims in accordance with this Agreement and Client's policies and
guidelines.
ACCOUNTING, TAXES, REPORTING AND REGULATORY COMPLIANCE
The Client's responsibility shall be:
To inform Administrator of the Officer to whom Administrator is to report
and to inform Administrator of any specific format required to interface
Page 6 of 7 (including Exhibit A)
<PAGE>
with Company in respect to accounting procedures, taxes and tax reporting,
financial reporting and regulatory compliance. Client shall be solely
responsible for its accounting functions, taxes and tax reporting,
financial reporting and regulatory compliance.
The Administrator's responsibility shall be:
To provide sufficient contract data and information to Client to enable
client to record all accounting entries on Client's books to properly
account for all transactions implemented by Administrator in respect to
the subject contracts. To make contract data and information relating to
Client's business available to examiners acting for the Texas Banking
Department in the performance of regulatory examinations of Client.
[Signatures appear on page 4]
Page 7 of 7 (including Exhibit A)
POLICY ADMINISTRATION AND DATA PROCESSING
SERVICES AGREEMENT
American Capitol Insurance Company, hereinafter referred to as
Administrator, and South Texas Bankers Life Insurance Company, hereinafter
referred to as Client, agree as follows:
During the term of this agreement ("Agreement"), Administrator will
perform for Client in respect to Client's policies the policy
administration and data processing services hereinafter designated in this
Agreement and exhibits attached hereto and made a part hereof for all
purposes. The policies that are the subject of this Agreement consist of
all of Client's inforce policies as of, and from the date of, June 1,
1996.
Administrator and Client acknowledge and confirm that Client is a wholly
owned subsidiary of World Service Life Insurance Company of America
("World Service"); that World Service and Administrator have entered into
an administration agreement similar to this Agreement in respect to World
Service's policies ("World Service Administration Agreement") (except that
Client does not engage in marketing of new policies and therefore no
marketing and underwriting guidelines or services are involved in the case
of this Agreement); that, in addition, Administrator entered into a
coinsurance agreement ("Coinsurance Agreement") with World Service
covering its policies in force which has a provision for monthly
settlement which includes the fees and expenses payable by World Service
to Administrator (for services pursuant to the World Service
Administrative Agreement) as a part of the monthly settlement pursuant to
the Coinsurance Agreement; that World Service is in the process of
assuming all of Client's policies, subject to required approval by
regulatory authorities, following which Client is to be dissolved and
liquidated into World Service; that, upon consummation of such assumption,
the policies that are the subject of this Agreement will become a part of
World Service's policies and thereby become subject to the World Service
Administration Agreement (as well as the aforesaid Coinsurance Agreement,
and which are being treated on an interim basis as though the subject
policies are a part of World Service's policies for purposes of the
Coinsurance Agreement); that this Agreement is intended to have the effect
on the parties hereto as though the subject policies were included in the
World Service Administration Agreement; that the fees and expenses payable
by Client to Administrator pursuant to this Agreement will be accounted
for in the settlement between World Service and Administrator in the
monthly settlement pursuant to the Coinsurance Agreement; that
Administrator is authorized to commingle the premiums received in respect
to the subject policies with the premiums received in respect to the World
Service policies; and that World Service is accountable to Client for
settling the financial interests between Client and World Service that are
involved in the aforementioned monthly settlement.
Client shall designate the person or persons to whom Administrator will
report. Client will keep Administrator informed of its corporate policy
or changes in policy to enable Administrator to carry out the subject
services for Client in an efficient manner. Client shall appoint one or
more of Administrator's officers as its attorney-in-fact to act for Client
Page 1 of 9 (including Exhibits)
<PAGE>
in performing routine functions in the course of administering Client's
policies and performing data processing services as called for by this
Agreement. At any time during the term of this Agreement, Administrator
may enter into a consulting agreement with one or more employees of Client
to provide consulting services to Administrator regarding the
administration of the subject policies and the related marketing
operation, and Administrator shall be solely responsible for fees relating
thereto.
Administrator shall safeguard all data and information relating to
Client's business to the same extent that Administrator safeguards such
data and information relating to its own business, provided, however, if
such data or information is available to the general public, is known or
in the possession of Administrator prior to the date of this Agreement, or
is known or in the possession of Administrator prior to actual receipt by
Administrator of such information or data from client or is rightfully
obtained from third parties, Administrator shall bear no responsibility
for its disclosure, inadvertently or otherwise.
Client agrees that all systems, including data processing programs, discs,
tapes, documentations, manuals, specifications, ideas, applications,
routines, formulas, and techniques relating to the subject services
furnished, owned, licensed or developed by Administrator shall and may be
used by Administrator during the term of this Agreement and at any time
thereafter and shall be and remain the sole property of Administrator. If
Client furnished Administrator with any system related to its business,
said system shall remain the sole property of Administrator, and
Administrator may use such system or any other system to administer the
subject policies.
Administrator acknowledges that it received the policy files and related
documents and data in respect to the subject policies from Client and has
been administering same since June 1, 1996.
In the event of termination of this Agreement, Administrator may, at its
option, retain any property or data in its possession that belongs to
Client until all sums due Administrator pursuant to this Agreement are
paid, including such additional charges as may be determined by
Administrator and Client to be reasonable and necessary to effect an
orderly termination of the work and services then being performed by
Administrator and to assure and protect the orderly and timely
perpetuation of the Client's business as affected by such work and
services. Upon termination of this Agreement, Client shall instruct
Administrator in writing as to the disposition of all such property or
data within ninety (90) days.
Administrator shall use due care and diligence in performing the work and
services to be performed hereunder and agrees that it will correct any
errors which are caused solely by Administrator, its authorized agents,
employees, programs, or data processing equipment and machines, and its
liability for such errors shall be limited to the correction of same
within a reasonable time as full compensation for any and all damages
which may result from such error or errors and in any event, the liability
of Administrator to Client or any other party for any and all losses or
damages directly or indirectly arising out of this Agreement or the
performance hereof, shall not exceed the performance of the particular
task which gives rise to such loss or damages and such amount shall
Page 2 of 9 (including Exhibits)
<PAGE>
constitute an agreed amount of liquidated damages for such losses and
damages. The parties recognize the liability that Administrator has in
respect to the subject policies in its capacity as Reinsurer under the
Reinsurance Agreement and, except as hereinabove stated, Administrator
shall not incur any additional liability by virtue of its role and
responsibilities as Administrator pursuant to this Agreement.
Client warrants that it is duly authorized to enter into this Agreement
and that Administrator has in no way caused or induced Client to breach
any contracted obligation and Client agrees to indemnify and hold harmless
Administrator from any claim or claims. Notwithstanding the foregoing,
this Agreement is subject to the approval of the Texas Department of
Insurance.
This Agreement and the exhibits attached hereto or made a part hereof
constitute the entire agreement of the parties on the subject of policy
administration and data processing services. Any modifications or
amendments must be in writing signed by both parties.
The parties hereto expressly agree that each will comply with all
applicable federal, state and local laws, the violation of which may
adversely affect the performance of this Agreement.
Client agrees that in the event of default in any of the covenants or
agreements contained herein or in payment of the charges provided herein
and in exhibit or exhibits attached hereto or made a part hereof, that it
will pay all costs and expenses of enforcement or collection, including
reasonable attorney's fees, which may arise or accrue.
This Agreement may not be terminated by either party during the existence
of the Coinsurance Agreement, and shall automatically terminate when the
Coinsurance Agreement terminates, unless the parties agree otherwise in
writing.
This Agreement is effective as of June 1, 1996.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto, their successors and legal representatives, and shall not
be assigned by either party without the prior written consent of the other
party.
This Agreement shall be construed under the Laws of the State of Texas and
should any portion be invalid or unenforceable, for any reason, it shall
not affect the remainder of this Agreement which shall be valid and
binding. This Agreement is entered into and is performable in Harris
County, Texas.
IN WITNESS WHEREOF, the parties execute and deliver this Agreement.
American Capitol Insurance Company, Administrator
By: /s/William F. Guest, Chairman
South Texas Bankers Life Insurance Company, Client
By: /s/Jack G. Heffington, Vice Chairman
Page 3 of 9 (including Exhibits)
<PAGE>
EXHIBIT A
MANAGEMENT
The Client's responsibility shall be:
1. To provide from its Board of Directors or an Officer instructions
regarding its corporate policy, products, growth and general operations of
the Company and such other instructions as are called for herein. To
select one or more officers of the Client to whom the Administrator is to
report and from whom the Administrator is to receive instructions. To
designate and appoint not less than two officers of Administrator to act
as Client's attorney-in-fact to perform in Client's place and stead the
routine policy transactions, such as policy issuance and claims payments
and such other functions as the parties may deem appropriate.
2. To provide financial interface and receive the financial reports from
Administrator.
3. To provide marketing interface and receive the marketing reports from
Administrator.
The Administrator's responsibilities shall be:
1. To perform the subject services in keeping with corporate policy of
the Client as communicated by the Client to Administrator.
2. To provide financial information relating to the subject policies
sufficient to enable Client to complete requirements of the various state
insurance departments, file premium tax, advertising and miscellaneous
reporting forms as required by the states.
CLAIMS SERVICE
The Client's responsibilities shall be:
To inform Administrator of its claims-paying policies and guidelines
respecting routine claims processing. To issue instructions to
Administrator in respect to claims that are other than routine or in
respect to which Administrator requests instructions. To inform
Administrator of all notices of claims when notice thereof is not sent
directly to Administrator.
The Administrator's responsibility shall be:
To verify and pay all claims in accordance with Client's policies,
guidelines and, when applicable, instructions.
POLICYHOLDER SERVICE
The Client's Responsibilities shall be:
To inform Administrator of its policies and guidelines respecting routine
policyholder service. To issue instructions to Administrator in respect
to policyholder service matters that are other than routine or in respect
to which Administrator requests instructions. To inform Administrator of
Page 4 of 9 (including Exhibits)
<PAGE>
all communication received from policyholders when such communication is
not received directly by Administrator.
The Administrator's Responsibility shall be:
To answer and process all inquiries received, including cash surrenders,
policy loans, reinstatement requests and policy changes, in keeping with
Client's guidelines.
BILLING/COLLECTION
The Client's responsibility shall be: None, except to remit to
Administrator promptly any premiums or other payments in respect to the
subject policies received by the Client.
The Administrator's responsibilities:
To provide billing notices either through pre-authorized check or direct
bills for modal premiums when due. To provide late notices and lapse
notices in the event mode premiums are not received when due. To collect
and deposit in the Client's account all premiums received and reconcile on
a daily basis premium collections and deposits. In this regard, the
Client hereby authorizes the Administrator to establish one or more bank
accounts in the name of the Client in respect to which the Administrator's
officers are hereby authorized to sign and transact business in the same
manner that it operates banking accounts in its own name. The Client will
provide in a timely manner appropriate resolutions by its Board of
Directors and certifications by its officers to facilitate the above.
INVESTMENTS
The Client's responsibility shall be:
The Client as the Company in the Reinsurance Agreement is solely
responsible for the assets covering its share of policy liabilities as set
forth in the Reinsurance Agreement and the Client shall be solely
responsible for the investments relating to such assets, as well as its
other assets.
The Administrator's responsibility shall be:
The Administrator as the Reinsurer in the Reinsurance Agreement is solely
responsible for the assets covering its share of policy liabilities as set
forth in the Reinsurance Agreement and the Administrator shall be solely
responsible for the investments relating to such assets, as well as its
other assets.
ACTUARIAL
The Client's responsibility shall be:
To be responsible for its share of the costs of actuarial services
selected by Administrator as set forth below. Client shall be solely
responsible for any actuarial services that it may require for matters not
Page 5 of 9 (including Exhibits)
<PAGE>
related to the subject policies or any actuarial services that are for the
exclusive benefit of the Client.
The Administrator's responsibility shall be:
To select a qualified actuary to perform all actuarial work, reviews and
certifications required in respect to the subject policies for the benefit
of the Client and Administrator in their roles as the Company and the
Reinsurer, respectively, in the Reinsurance Agreement. The costs thereof
shall be borne by the Company and the Reinsurer as a part of the monthly
accounting as provided in the Reinsurance Agreement, except that in any
instance in which such actuarial services are performed for the exclusive
benefit of either the Company or the Reinsurer, as the case may be, such
party shall bear the entire cost of the subject services.
ACCOUNTING, TAXES, REPORTING AND REGULATORY COMPLIANCE
The Client's responsibility shall be:
To inform Administrator of the Officer to whom Administrator is to report
and to inform Administrator of any specific format required to interface
with Company in respect to accounting procedures, taxes and tax reporting,
financial reporting and regulatory compliance. Client shall be solely
responsible for its accounting functions, taxes and tax reporting,
financial reporting and regulatory compliance.
The Administrator's responsibility shall be:
To provide sufficient policy data and information to Client to enable
client to record all accounting entries on Client's books to properly
account for all transactions implemented by Administrator in respect to
the subject policies.
COMMISSIONS
The Client's responsibility shall be:
Subject to the provisions and limitations in the Reinsurance Agreement, to
make all commission and other compensation arrangements with its agents.
The Administrator's responsibility shall be:
To prepare agent commission statements and disburse funds to agents based
on the results of the commission statements.
POLICY DIVIDENDS
The Client's responsibility shall be:
To determine and declare all dividends to be paid in respect to the
subject policies and to instruct Administrator accordingly.
The Administrator's responsibility shall be:
To pay or otherwise credit dividends to the subject policies in accordance
with Client's instructions. The Administrator shall be entitled to rely
Page 6 of 9 (including Exhibits)
<PAGE>
upon and implement the dividend scales and practices of the Client that
exist as of the Effective Date of this Agreement and continuing thereafter
until changed in writing by the Client. When changed in writing by the
Client, the Administrator shall implement the change or changes in respect
thereto until a subsequent change in writing by the Client.
Page 7 of 9 (including Exhibits)
<PAGE>
EXHIBIT B
DATA PROCESSING SERVICES
The Client's responsibility shall be:
To furnish data to Administrator in a timely manner where data is not
directly received by Administrator.
The Administrator's responsibilities shall be:
To provide all data processing services necessary to the normal
administration of the subject policies as called for by this Agreement.
Page 8 of 9 (including Exhibits)
<PAGE>
Exhibit C
FEES
Client will be charged monthly according to the following schedule. Said
charges will be allocated between Client and Administrator in their
respective capacities as Company and Reinsurer as part of the monthly
accounting as set forth in the Reinsurance Agreement.
Maintenance
Monthly Fee Per Policy
Policy Status In Force (Beginning of Month)
Premium Paying ............................. $2.19
Fully Paid Up ............................. 1.36
Reduced Paid Up............................. .84
Policy Issue
Fee per policy issued...................... $35.00
Inflation
On each anniversary of the Effective Date of this Agreement, the per
policy fees will increase 3% (compounded).
Direct Expenses of Client
The Client will be solely responsible for actual costs incurred in
marketing new business and for fees of attorneys, accountants, tax
advisers and other consultants or professionals, if any (unless
specifically otherwise provided for elsewhere in this Agreement). Client
will also be solely responsible for any fees incurred by Administrator to
obtain and maintain a Third Party Administrator's license (if such license
is required).
Page 9 of 9 (including Exhibits)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORAMTION EXTRACTED FROM DECEMBER 31,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 29,326,925
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,575
<MORTGAGE> 2,760,835
<REAL-ESTATE> 1,433,942
<TOTAL-INVEST> 41,379,966
<CASH> 36,353
<RECOVER-REINSURE> 57,605,194
<DEFERRED-ACQUISITION> 1,664,153
<TOTAL-ASSETS> 103,807,474
<POLICY-LOSSES> 82,737,870
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 789,393
<POLICY-HOLDER-FUNDS> 1,859,304
<NOTES-PAYABLE> 1,062,500
0
1,850,000
<COMMON> 876
<OTHER-SE> 4,043,989
<TOTAL-LIABILITY-AND-EQUITY> 103,807,474
2,556,529
<INVESTMENT-INCOME> 1,304,791
<INVESTMENT-GAINS> 275,525
<OTHER-INCOME> 50,411
<BENEFITS> 2,629,295
<UNDERWRITING-AMORTIZATION> 114,902
<UNDERWRITING-OTHER> 2,514,726
<INCOME-PRETAX> 661,252
<INCOME-TAX> 2,985
<INCOME-CONTINUING> 658,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 658,267
<EPS-PRIMARY> 56.79
<EPS-DILUTED> 0
<RESERVE-OPEN> 778,380
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 685,537
<PAYMENTS-PRIOR> 612,125
<RESERVE-CLOSE> 789,393
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
