SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 1998 Commission file number 33-23376
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Aetna Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
-----------------
None
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Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
Title of Class at July 31, 1998
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<S> <C>
Common Stock,
par value $50 55,000
</TABLE>
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
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AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income.............................. 3
Consolidated Balance Sheets.................................... 4
Consolidated Statements of Changes in Shareholder's Equity..... 5
Consolidated Statements of Cash Flows.......................... 6
Condensed Notes to Consolidated Financial Statements........... 7
Independent Auditors' Review Report............................... 12
Item 2. Management's Analysis of the Results of Operations................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 22
Signatures .................................................................. 23
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2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
------------ ------------ ----------- -----------
Total revenue 333.2 305.8 645.2 612.7
Benefits and expenses:
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 76.2 70.0 150.5 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
------------ ------------ ----------- -----------
Total benefits and expenses 277.2 266.0 549.3 523.6
------------ ------------ ----------- -----------
Income from continuing operations before income taxes 56.0 39.8 95.9 89.1
Income taxes 16.5 10.4 28.2 25.4
------------ ------------ ----------- -----------
Income from continuing operations 39.5 29.4 67.7 63.7
Income from discontinued operations, net of tax 23.5 13.7 37.3 29.8
------------ ------------ ----------- -----------
Net income $ 63.0 $ 43.1 $ 105.0 $ 93.5
============ ============ =========== ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
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<S> <C> <C>
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,536.4 and $12,912.2) $13,136.3 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $91.2 and $131.7) 99.9 147.6
Investment in affiliated mutual funds (cost: $135.1 and $78.1) 147.6 83.0
Common stock (cost: $0.3 and $0.2) 1.9 0.6
Short-term investments 81.4 95.6
Mortgage loans 12.7 12.8
Policy loans 498.7 469.6
--------- ---------
Total investments 13,978.5 14,273.0
Cash and cash equivalents 1,058.2 565.4
Short-term investments under securities loan agreement 706.4 -
Accrued investment income 159.3 163.0
Premiums due and other receivables 86.3 63.7
Deferred policy acquisition costs 1,711.6 1,654.6
Reinsurance loan to affiliate 317.5 397.2
Other assets 60.0 46.8
Separate accounts assets 26,968.4 22,982.7
--------- ---------
Total assets $45,046.2 $40,146.4
========= =========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,832.1 $ 3,785.7
Unpaid claims and claim expenses 28.7 38.0
Policyholders' funds left with the Company 11,083.8 11,121.5
--------- ---------
Total insurance reserve liabilities 14,944.6 14,945.2
Payables under securities loan agreement 706.4 -
Other liabilities 378.7 312.8
Income taxes:
Current 23.9 12.4
Deferred 88.9 72.0
Separate accounts liabilities 26,955.5 22,970.0
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Total liabilities 43,098.0 38,312.4
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Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 104.4 92.9
Retained earnings 1,423.0 1,320.3
--------- ---------
Total shareholder's equity 1,948.2 1,834.0
--------- ---------
Total liabilities and shareholder's equity $45,046.2 $40,146.4
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Six Months Ended June 30,
---------------------------
1998 1997
---- ----
Shareholder's equity, beginning of period $1,834.0 $1,609.5
Comprehensive income
Net income 105.0 93.5
Other comprehensive income, net of tax
Unrealized gains on securities ($17.7,
$0.2, pretax, respectively ) 11.5 0.1
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Total comprehensive income 116.5 93.6
-------- ---------
Other changes 0.7 3.3
Common stock dividends (3.0) (5.3)
-------- ---------
Shareholder's equity, end of period $1,948.2 $1,701.1
======== =========
See Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 105.0 $ 93.5
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Decrease (increase) in accrued investment income 3.7 (1.6)
Decrease (increase) in premiums due and other receivables 24.5 (16.8)
Increase in policy loans (29.1) (30.9)
Increase in deferred policy acquisition costs (57.0) (78.3)
Decrease in reinsurance loan to affiliate 79.7 102.7
Net increase in universal life account balances 177.5 156.8
Decrease in other insurance reserve liabilities (159.0) (97.7)
Net decrease in other liabilities and other assets (9.9) (76.3)
Increase in income taxes 27.1 3.0
Net accretion of discount on investments (26.5) (34.9)
Net realized capital gains (7.9) (9.1)
---------- ----------
Net cash provided by operating activities 128.1 10.4
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,859.7 2,274.8
Equity securities 59.1 30.5
Mortgage loans 0.1 0.1
Investment maturities and repayments of:
Debt securities available for sale 799.1 716.1
Short-term investments 89.8 10.4
Cost of investment purchases in:
Debt securities available for sale (4,237.4) (2,699.5)
Equity securities (71.8) (37.5)
Short-term investments (75.4) (107.6)
---------- ----------
Net cash provided by investing activities 423.2 187.3
---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 776.2 819.4
Withdrawals of investment contracts (833.0) (607.2)
Capital Contribution to Separate Account - (25.0)
Return of capital from Separate Account 1.3 -
Dividends paid to shareholder (3.0) (5.3)
---------- ----------
Net cash (used for) provided by financing activities (58.5) 181.9
---------- ----------
Net increase in cash and cash equivalents 492.8 379.6
Cash and cash equivalents, beginning of period 565.4 459.1
---------- ----------
Cash and cash equivalents, end of period $ 1,058.2 $ 838.7
========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 28.2 $ 44.6
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1) Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America (collectively, the "Company"). The Company has agreed to sell its
individual life insurance operations to Lincoln National Corporation
("Lincoln") and accordingly, they are classified as Discontinued
Operations. (Please refer to Note 2 below). Aetna Life Insurance and
Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings,
Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement
Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1997 financial information to conform
to the 1998 presentation. These interim statements necessarily rely heavily
on estimates, including assumptions as to annualized tax rates. In the
opinion of management, all adjustments necessary for a fair statement of
results for the interim periods have been made. All such adjustments are of
a normal, recurring nature. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes as presented in the Company's 1997
Annual Report on Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles, but that is not required for
interim reporting purposes, has been condensed or omitted.
2) Discontinued Operations - Individual Life Insurance
On May 21, 1998, the Company agreed to sell its domestic individual life
insurance business to Lincoln for approximately $1 billion in cash. The
operating results of the individual life business are presented as
Discontinued Operations. Results of the Discontinued Operations will be
included in the Company's net income until the completion of the sale. All
prior year income statement data has been restated to reflect the
presentation as Discontinued Operations. The transaction is generally in
the form of an indemnity reinsurance arrangement, under which Lincoln will
contractually assume from the Company certain policyholder liabilities and
obligations, although the Company will remain directly obligated to
policyholders. Future policy benefit insurance reserves were approximately
$3 billion as of June 30, 1998. Assets related to and supporting the life
policies will be transferred to Lincoln and the Company will record a
reinsurance receivable from Lincoln. The transaction is expected to result
in an after-tax gain of approximately $170 million, of which a significant
portion will be deferred and amortized over approximately 15 years. The
amount of the gain will depend on the actual amount of assets transferred
and liabilities contractually assumed from the Company and the remaining
related deferred acquisition cost at the closing date.
7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
2) Discontinued Operations - Individual Life Insurance (continued)
Completion of the sale, which is anticipated to occur in the fall of 1998,
is subject to state regulatory approvals and other customary conditions. In
July 1998, the Federal Trade Commission granted early termination to the
waiting period for the transaction under the Hart-Scott-Rodino Antitrust
Improvements Act.
Revenues for the individual life segment were $135.7 million and $165.9
million for the second quarters of 1998 and 1997, respectively, and $280.7
million and $303.6 million for the six months ended June 30, 1998 and 1997,
respectively. Net income was $23.5 million and $13.7 million for the second
quarters of 1998 and 1997, respectively, and $37.3 million and $29.8
million for the six months ended June 30, 1998 and 1997, respectively.
3) New Accounting Standards
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public
Accountants ("AICPA"). This statement requires that certain costs incurred
in developing internal-use computer software be capitalized, and provides
guidance for determining whether computer software is considered to be for
internal use. The Company will amortize these costs over a period of 3 to 5
years. Previously, the Company expensed the cost of internal-use computer
software as incurred. The adoption of this statement resulted in an
increase to net income of $1.7 million and $3.4 million for the three and
six months ended June 30, 1998, respectively.
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in June 1996 and provides accounting and reporting standards for transfers
of financial assets and extinguishments of liabilities.
FAS No. 125 was effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending were not effective until January 1, 1998. The adoption of those
provisions effective in 1998 did not have a material effect on the Company's
financial position or results of operations.
8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
4) Future Application of Accounting Standards
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The
manner in which companies are to record gains or losses resulting from
changes in the values of those derivatives depends on the use of the
derivative and whether it qualifies for hedge accounting. This standard is
effective at the beginning of 2000, with early adoption permitted. The
Company is currently evaluating the impact of the adoption of this
statement and the potential effect on its financial position or results of
operations.
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments, which provides
guidance for determining when an insurance or other enterprise should
recognize a liability for guaranty-fund and other insurance-related
assessments and guidance for measuring the liability. This statement is
effective for 1999 financial statements, with early adoption permitted. The
Company does not expect adoption of this statement to have a material
effect on its financial position or results of operations.
(5) Financial Instruments
The Company engages in hedging activities to manage interest rate risk.
Such hedging activities have principally consisted of using
off-balance-sheet instruments such as treasury futures. (See General
Account Investments on page 20 of the Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 3 of the Notes to
the Financial Statements in the Company's 1997 Annual Report on Form 10-K
for a description of the Company's hedging activities). The notional
amounts, carrying values and estimated fair values of the Company's open
treasury futures as of June 30, 1998 are $1,782.4 million, ($3.0) million,
and ($3.0) million, respectively. These open treasury futures are related
to hedging the interest rate risk on the assets supporting the individual
life business that is expected to be sold to Lincoln. (See Note 2 above for
further discussion on the sale of the individual life business).
9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
(6) Additional Information - Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities (excluding those related to experience rated
contractholders) were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------------------
(Millions) 1998 1997
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<S> <C> <C>
Unrealized holding gains arising during the period (1) $33.9 $28.7
Less: reclassification adjustments for amortization of net
investment discounts and gains included in net income (2) 22.4 28.6
---------------------------------------------------------------------------------------
Net unrealized gains on securities $11.5 $ 0.1
=======================================================================================
</TABLE>
(1) Pretax unrealized holding gains arising during the period were $52.1
million and $44.2 million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income were $34.4 million and $44.0
million for 1998 and 1997, respectively.
(7) Severance and Facilities Charges
During 1996, the Company was allocated severance and facilities reserves
from Aetna to reflect actions taken or to be taken to reduce the level of
corporate expenses and other costs previously absorbed by Aetna's
property-casualty operations.
Also during 1996, the Company established severance and facilities reserves
in the Financial Services and Individual Life Insurance segments to reflect
actions taken or to be taken in order to make its businesses more
competitive.
Activity for the six months ended June 30, 1998 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related
to such actions were as follows:
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Reserve Positions
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<S> <C> <C>
Balance at December 31, 1997 $ 20.8 361
Actions taken (1) (7.2) (63)
------ -----
Balance at June 30, 1998 $ 13.6 298
-------------------------------------------------------------------
</TABLE>
(1) Includes $5.3 million of severance-related actions and $1.4 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
(8) Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in a liability for
amounts material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
(9) Dividends
On January 30, 1998, the Company paid a $3.0 million dividend to HOLDCO.
The additional amount of dividends that may be paid by the Company to
HOLDCO in 1998 without prior approval by the Insurance Commissioner of the
State of Connecticut is $74.6 million.
11
<PAGE>
Independent Auditors' Review Report
The Board of Directors
Aetna Life Insurance and Annuity Company:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Life Insurance and Annuity Company and Subsidiary as of June 30, 1998, and the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 1998 and 1997, and the related condensed
consolidated statements of changes in shareholder's equity and cash flows for
the six-month periods ended June 30, 1998 and 1997. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company and Subsidiary as of December 31, 1997, and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 3,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
August 4, 1998
12
<PAGE>
Item 2. Management's Analysis of the Results of Operations
The following discussion and analysis presents a review of Aetna Life Insurance
and Annuity Company and its subsidiary (collectively, the "Company") for the
three and six months ended June 30, 1998 and 1997. This review should be read in
conjunction with the consolidated financial statements and other data presented
herein.
Consolidated Overview
Sale of Domestic Individual Life Insurance Business
On May 21, 1998, the Company agreed to sell its domestic individual life
insurance business to Lincoln National Corporation ("Lincoln") for approximately
$1 billion in cash. The transaction is generally in the form of an indemnity
reinsurance arrangement, under which Lincoln will contractually assume from the
Company certain policyholder liabilities and obligations, although the Company
will remain directly obligated to policyholders. Future policy benefit insurance
reserves were approximately $3 billion as of June 30, 1998. Assets related to
and supporting the life policies will be transferred to Lincoln and the Company
will record a reinsurance receivable from Lincoln. The transaction is expected
to result in an after-tax gain of approximately $170 million, of which a
significant portion will be deferred and amortized over approximately 15 years.
The amount of the gain will depend on the actual amount of assets transferred
and liabilities contractually assumed from the Company and the remaining related
deferred acquisition costs at the closing date.
Completion of the sale, which is anticipated to occur in the fall of 1998, is
subject to state regulatory approvals and other customary conditions. In July
1998, the Federal Trade Commission granted early termination to the waiting
period for the transaction under the Hart-Scott-Rodino Antitrust Improvements
Act.
Aetna expects to use the proceeds from the sale to finance a portion of the
purchase price of the NYLCare health business. The remaining proceeds are
expected to be used for general corporate purposes, including internal growth,
acquisitions and share repurchases.
13
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Consolidated Overview (continued)
Operating Summary:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
1998 1997 1998 1997
(Millions)
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<S> <C> <C> <C> <C>
Premiums (1) $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
- ---------------------------------------------------------------------------------------------------------
Total revenue 333.2 305.8 645.2 612.7
- ---------------------------------------------------------------------------------------------------------
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 76.2 70.0 150.5 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
- ---------------------------------------------------------------------------------------------------------
Total benefits and expenses 277.2 266.0 549.3 523.6
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 56.0 39.8 95.9 89.1
Income taxes 16.5 10.4 28.2 25.4
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations 39.5 29.4 67.7 63.7
Income from discontinued operations, net of tax 23.5 13.7 37.3 29.8
- ---------------------------------------------------------------------------------------------------------
Net income (2) $ 63.0 $ 43.1 $ 105.0 $ 93.5
=========================================================================================================
Net realized capital gains, net of tax
(included above) $ 6.6 $ 2.3 $ 4.3 $ 5.3
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 275.6 $ 298.4 $ 608.7 $ 578.6
Annuities--variable options 947.5 796.2 1,854.6 1,614.3
Discontinued Operations 129.6 117.3 260.7 237.8
--------------------------------------------------------
Total $1,352.7 $1,211.9 $2,724.0 $2,430.7
=========================================================================================================
Assets under management: (3)
Annuities--fixed options $ 11,947.1 $11,898.1
Annuities--variable options (4) 23,932.5 17,527.1
---------------------------
Subtotal Annuities 35,879.6 29,425.2
Other Investment Advisory (5) (6) 4,442.3 2,211.0
---------------------------
Financial Services 40,321.9 31,636.2
Discontinued Operations 3,267.0 2,987.0
---------------------------
Total $ 43,588.9 $34,623.2
========================================================================================================
Discontinued Operations - coverage issued $ 2,091.3 $ 2,523.0
========================================================================================================
Discontinued Operations - coverage in force $ 45,530.7 $43,278.0
========================================================================================================
</TABLE>
(1) Includes $13.7 million and $28.0 million for the three and six months ended
June 30, 1998, respectively, and $13.7 million and $30.1 million,
respectively, for the same periods a year ago, for annuity premiums on
contracts converting from the accumulation phase to payout options with
life contingencies.
(2) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $1.7 million and $3.4
million, respectively.
(3) Excludes net unrealized capital gains of $599.9 million and $318.0 million
at June 30, 1998 and 1997, respectively.
(4) Includes $6,603.3 million and $6,017.6 million at June 30, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The June 30, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The June 30, 1997 balance included $1,189.0 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
14
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Consolidated Overview (continued)
Operating Summary: (continued)
The Company's net income for the second quarter of 1998 increased $20 million
compared to the same period a year ago. Net income for the six months ended June
30, 1998 increased $12 million compared to the same period in 1997. Net income
includes income from individual life insurance operations ("Discontinued
Operations") of $24 million and $14 million for the second quarters of 1998 and
1997, respectively, and of $37 million and $30 million for the six months ended
June 30, 1998 and 1997, respectively.
The Company reported income from continuing operations for the second quarters
of 1998 and 1997 of $40 million and $29 million, respectively, and, for the six
months ended June 30, 1998 and 1997, $68 million and $64 million, respectively.
Results include Year 2000 remediation costs of $5 million (after tax) for the
second quarter of 1998 and $9 million (after tax) for the six months ended June
30, 1998, which are not allocable to the business segments. Excluding Year 2000
costs and net realized capital gains, results for the second quarter of 1998
increased $11 million, or 42%, compared to the second quarter of 1997. Results
for the six months ended June 30, 1998 increased $15 million, or 25%, from the
same period a year ago.
Assets under management increased by 21%, net of transfers (see Notes 5 and 6 to
the Consolidated Operating Summary table), primarily due to appreciation in the
stock market and additional net deposits (deposits less surrenders).
Of the $11.9 billion of fixed annuity assets under management at June 30, 1998
and 1997, 26% and 24%, respectively, were fully guaranteed and 74% and 76%,
respectively, were experience rated. The average annualized earned rate on
investments supporting fully guaranteed contracts was 7.5% and 7.8%; and, the
average annualized earned rate on investments supporting experience rated
contracts was 7.9% and 8.0% for the six months ended June 30, 1998 and 1997,
respectively. The average annualized credited rate on fully guaranteed contracts
was 6.5% and 6.7%; and, the average annualized credited rate on experience rated
contracts was 5.8% and 5.9% for each of the six months ended June 30, 1998 and
1997, respectively. The resulting annualized interest margins on fully
guaranteed contracts were 1.0% and 1.1% and, on experienced rated contracts, was
2.1% for each of the six months ended June 30, 1998 and 1997, respectively.
15
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Services
Operating Summary:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
1998 1997 1998 1997
(Millions)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums (1) $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
- ----------------------------------------------------------------------------------------------------------------
Total revenue 333.2 305.8 645.2 612.7
- ----------------------------------------------------------------------------------------------------------------
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 68.7 70.0 136.7 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
- ----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 269.7 266.0 535.5 523.6
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 63.5 39.8 109.7 89.1
Income taxes 19.1 10.4 33.0 25.4
- ----------------------------------------------------------------------------------------------------------------
Net income (2) $ 44.4 $ 29.4 $ 76.7 $ 63.7
================================================================================================================
Net realized capital gains, net of tax (included above) $ 6.6 $ 2.3 $ 4.3 $ 5.3
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 275.6 $ 298.4 $ 608.7 $ 578.6
Annuities--variable options 947.5 796.2 1,854.6 1,614.3
--------------------------------------------------------
Total $1,223.1 $1,094.6 $ 2,463.3 $ 2,192.9
================================================================================================================
Assets under management: (3)
Annuities--fixed options $11,947.1 $11,898.1
Annuities--variable options (4) 23,932.5 17,527.1
----------------------------
Subtotal Annuities 35,879.6 29,425.2
Other Investment Advisory (5) (6) 4,442.3 2,211.0
----------------------------
Total $40,321.9 $31,636.2
================================================================================================================
</TABLE>
(1) Includes $13.7 million and $28.0 million for the three and six months ended
June 30, 1998, respectively, and $13.7 million and $30.1 million,
respectively, for the same periods a year ago, for annuity premiums on
contracts converting from the accumulation phase to payout options with
life contingencies.
(2) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $1.3 million and $2.7
million, respectively, and excludes any effect of Year 2000 costs recorded
in 1998 which are not allocable to the segment.
(3) Excludes net unrealized capital gains of $507.0 million and $277.7 million
at June 30, 1998 and 1997, respectively.
(4) Includes $6,603.3 million and $6,017.6 million at June 30, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The June 30, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The June 30, 1997 balance included $ 1,189.0 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
Net income in the financial services segment for the second quarter of 1998
increased $15 million compared to the second quarter of 1997; and, net income
for the six months ended June 30, 1998 increased $13 million compared to the
same period a year ago. Excluding net realized capital gains, results for the
second quarter of 1998 increased $11 million, or 42%, from the second quarter a
year ago; and, results for the six months ended June 30, 1998 increased $15
million, or 25%, over the same period in 1997. The 1998 results reflect
increased fee income primarily from increased assets under management.
16
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Services (continued)
Assets under management increased by 22%, net of transfers (see Notes 5 and 6 to
the Consolidated Operating Summary table), primarily due to appreciation in the
stock market and additional net deposits (deposits less surrenders).
Discontinued Operations - Individual Life Insurance
Amounts reflected in the table below are summarized on the line, "Income from
discontinued operations, net of tax", in the Operating Summary table of the
Consolidated Overview section.
Operating Summary:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------
(Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 33.6 $ 63.2 $ 77.8 $ 97.7
Charges assessed against policyholders 53.7 52.4 103.4 104.6
Net investment income 49.2 49.6 97.5 99.8
Net realized capital gains 1.4 0.6 1.4 1.0
Other income (2.2) 0.1 .6 0.5
- -------------------------------------------------------------------------------------------------------
Total revenue 135.7 165.9 280.7 303.6
- -------------------------------------------------------------------------------------------------------
Current and future benefits 72.1 116.1 170.5 208.8
Operating expenses 13.4 14.6 29.4 28.3
Amortization of deferred policy acquisition costs 12.5 13.4 21.1 19.5
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 98.0 144.1 221.0 256.6
- -------------------------------------------------------------------------------------------------------
Income before income taxes 37.7 21.8 59.7 47.0
Income taxes 14.2 8.1 22.4 17.2
- -------------------------------------------------------------------------------------------------------
Net income (1) $ 23.5 $ 13.7 $ 37.3 $ 29.8
=======================================================================================================
Net realized capital gains net of tax (included above) $ 0.9 $ 0.4 $ 0.9 $ 0.6
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
Deposits not included in premiums above $129.6 $117.3 $ 260.7 $ 237.8
=======================================================================================================
Assets under management (2) $ 3,267.0 $ 2,987.0
=======================================================================================================
Individual life insurance coverage issued $ 2,091.3 $ 2,523.0
=======================================================================================================
Individual life insurance coverage in force $45,530.7 $43,278.0
=======================================================================================================
</TABLE>
(1) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $.4 million and $.7
million, respectively, and excludes any effect of Year 2000 costs recorded
in 1998 which are not allocable to the segment.
(2) Excludes net unrealized capital gains of $92.9 million and $40.3 million at
June 30, 1998 and 1997, respectively.
Excluding realized capital gains, Discontinued Operations' net income increased
$9 million, or 70%, for the second quarter of 1998 compared to the second
quarter a year ago; and, net income for the six months ended June 30, 1998
increased $7 million, or 25%, compared to the same period a year ago. Earnings
for the three and six months ended June 30, 1998 increased primarily due to
favorable mortality experience.
17
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Discontinued Operations - Individual Life Insurance (continued)
Premiums and current and future benefits reflect offsetting amounts of $56
million and $75 million for the six months ended June 30, 1998 and 1997,
respectively, related to the transition of the reinsurance agreement with Aetna
Life Insurance Company from a modified coinsurance to a coinsurance arrangement.
The Company's agreement to sell its domestic individual life insurance business
to Lincoln includes the business in force as well as access to a managing
general agent and brokerage distribution channel. The transaction is generally
in the form of an indemnity reinsurance arrangement and covers the following
lines of insurance: traditional life, universal life, sponsored life,
corporate-owned life insurance and pension life. Pension life results which are
not material to the individual life insurance business are reported in Financial
Services and not included in the following sentence. Net income from
Discontinued Operations, excluding net realized capital gains in all periods,
was $23 million for the second quarter of 1998 compared to $13 million for the
second quarter of 1997 and $36 million for the first six months of 1998 compared
to $29 million for the same period in 1997, as well as, $64 million for the year
ended December 31, 1997.
General Account Investments
The Company's invested assets were comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities, available for sale, at fair value $13,136.3 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock 99.9 147.6
Investment in affiliated mutual funds 147.6 83.0
Common stock 1.9 0.6
Short-term investments 81.4 95.6
Mortgage loans 12.7 12.8
Policy loans 498.7 469.6
------------------------------
Total Investments $13,978.5 $ 14,273.0
===========================================================================================
</TABLE>
At June 30, 1998 and December 31, 1997, the Company's carrying value of
investments in debt securities represented 94% of total general account invested
assets. For the same periods, $10.3 billion, or 79% of total debt securities,
supported experience rated products.
It is management's objective that the portfolio of debt securities be of high
quality and be well-diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies, and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at June 30, 1998 and December 31, 1997 was AA-.
18
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
The percentage of total debt securities by quality rating category is as
follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
AAA 44.0% 48.3%
AA 11.1 10.4
A 23.4 21.7
BBB 13.9 12.9
BB 4.2 3.8
B and Below 3.4 2.9
----------------------------------------------
100.0% 100.0%
==============================================
</TABLE>
The percentage of total debt securities investments by market sector is as
follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Securities 41.8% 37.4%
Residential Mortgage-Backed Securities 23.5 24.3
Foreign Securities - U.S. Dollar Denominated 11.8 12.4
Commercial/Multifamily Mortgage-Backed Securities 9.8 8.6
Asset-Backed Securities 7.4 7.7
U.S. Treasuries/Agencies 5.7 9.6
------------------------------------
100.0% 100.0%
====================================
</TABLE>
Year 2000
Year 2000 remediation costs incurred for company-owned systems and applications
were $5 million (after tax) for the second quarter of 1998 and $9 million (after
tax) for the six months ending June 30, 1998. A large majority of these costs
are currently believed to be incremental expenses that will not recur in the
Year 2000 or thereafter. Year 2000 remediation costs were not material in 1997.
See "Year 2000" in the Company's 1997 Report on Form 10-K for more detail.
19
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important risk factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions.
See "Other Matters/Regulation" and "Other Matters/Forward Looking" in the
Company's 1997 Annual Report on Form 10-K for information regarding important
factors that may materially affect the Company.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect results
of operations in future periods.
Item 5. Other Information.
Ratings
Following the announcement of Aetna's agreement to acquire New York Life
Insurance Company's NYLCare health plans business (which closed in July 1998),
as is typical standard operating procedures, all of Aetna's ratings were placed
on credit watch, until the rating agencies could do further analysis of the
transaction. In July of 1998, all of the agencies completed their annual review
of the Company with the exception of A.M. Best. Moody's and Standard & Poors
reaffirmed their ratings and removed their credit watch status. Duff & Phelps
has maintained their rating watch pending the completion of the sale of the
domestic individual life business to Lincoln. A.M. Best's rating is pending
until completion of their review.
The Company's ratings are as follows:
<TABLE>
<CAPTION>
Rating Agencies
------------------------------------------------------------
A.M. Best Duff & Phelps Moody's Standard &
Investor Service Poors
------------------------------------------------------------
<S> <C> <C> <C> <C>
Claims paying rating on
May 6, 1998 (1) A+ AA+ Aa3 AA-
Claims paying rating on
August 4, 1998 (2) A+ AA+ Aa3 AA-
(1) As of May 6, 1998, A.M. Best ratings were on review and Standard &
Poors, Moody's Investor Service and Duff & Phelps ratings were on
credit watch or review for possible downgrade.
(2) As of August 4, 1998, A.M. Best ratings are on review and Duff &
Phelps ratings are on credit watch for possible downgrade.
</TABLE>
21
<PAGE>
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
Amended and Restated Asset Purchase Agreement by and
among Aetna Life Insurance Company, Aetna Life
Insurance and Annuity Company, The Lincoln National
Life Insurance Company and Lincoln Life & Annuity
Company of New York, dated May 21, 1998. (The Company
will provide to the Securities and Exchange Commission a
copy of omitted schedules or similar attachments upon
request.)
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 21, 1998 related
to the sale of its domestic individual live insurance business.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------
(Registrant)
August 12, 1998 /s/ Deborah Koltenuk
- ------------------------- ---------------------------------
(Date) Deborah Koltenuk
Vice President, Treasurer,
and Corporate Controller
(Chief Accounting Officer)
23
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
By and Among
AETNA LIFE INSURANCE COMPANY
AETNA LIFE INSURANCE AND ANNUITY COMPANY
and
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
--------------------------
Dated as of May 21, 1998
--------------------------
<PAGE>
INDEX OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01(A) Other Assets
Schedule 1.01(B) Policy Forms
Schedule 1.01(C) Sellers' Separate Accounts
Schedule 1.01(D) Separate Account Assets
Schedule 3.03 Actions and Proceedings
Schedule 3.04 No Conflict or Violation
Schedule 3.05 Sellers' Consents and Approvals
Schedule 3.06(A) Owned Software/Licensed Software
Schedule 3.06(B) Sellers' Logos, Trademarks, Service Marks and Copyrights
Schedule 3.08 Sellers' Compliance with Laws
Schedule 3.09 Sellers' Licenses and Franchises
Schedule 3.10 Policies
Schedule 3.11 Regulatory Filings
Schedule 3.12(B) Certain Agreements with Producers
Schedule 3.13 Reinsurance
Schedule 3.14 Conduct of Business
Schedule 3.16 Contracts
Schedule 3.17 Transferred Contracts
Schedule 3.18 Transferred Assets
Schedule 3.21 Other Statements
Schedule 4.03 Actions and Proceedings
Schedule 4.05 Purchaser's Consents and Approvals
Schedule 4.07 Purchaser's Compliance with Laws
Schedule 4.08 Purchaser's Licenses and Franchises
Schedule 5.01(A) Certain Exceptions
Schedule 5.14 Certain Agreements
Schedule 5.19(A) Certain Employee Matters
Schedule 5.19(D) Hiring Conditions
Schedule 5.19(E) Severance Costs
Schedule 5.19(F) Vacation Policy
Schedule 5.27(B) IT Services
Schedule 5.32 Certain Third Party Reinsurance Agreements
</TABLE>
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Administrative Services Agreement
Exhibit B ALIAC Coinsurance Agreement
Exhibit C ALIAC (NY) Coinsurance Agreement
Exhibit D ALIC Coinsurance Agreement
Exhibit E ALIC (NY) Coinsurance Agreement
Exhibit F Bill of Sale and Assumption Agreement
Exhibit G Closing Balance Sheet
Exhibit H Closing Date Liabilities Methodology
Exhibit I NY Administrative Services Agreement
Exhibit J Recapture Fee Formula
Exhibit K Calculation of Security Trust Required Balance
Exhibit L Security Trust Agreement
Exhibit M Calculation of Separate Account Revenues
Exhibit N Transition Services Agreement Term Sheet
Exhibit O Pro Forma Statements
</TABLE>
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
This AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (the "Agreement"),
dated as of May 21, 1998, is entered into by and among Aetna Life Insurance
Company, a stock life insurance company organized under the laws of the State of
Connecticut ("ALIC"), Aetna Life Insurance and Annuity Company, a stock life
insurance company organized under the laws of the State of Connecticut ("ALIAC")
(ALIC and ALIAC are sometimes collectively referred to herein as "Sellers"), The
Lincoln National Life Insurance Company, a stock life insurance company
organized under the laws of the State of Indiana ("Purchaser"), and Lincoln Life
& Annuity Company of New York, a stock life insurance company organized under
the laws of the State of New York and a wholly owned subsidiary of Purchaser
("LLANY").
RECITALS:
WHEREAS, Sellers are engaged in, among other things, the marketing,
issuance and administration of certain sponsored life, individual life insurance
and corporate owned life insurance policies;
WHEREAS, subject to the terms, conditions and limitations set forth in
this Agreement, Sellers desire to cede to Purchaser and LLANY and Purchaser and
LLANY desire to reinsure on a 100% indemnity basis certain liabilities of
Sellers arising under the Sellers' sponsored life, individual life insurance and
corporate owned life insurance policies, as defined herein, pursuant to the
provisions of the Coinsurance Agreements (as defined herein);
WHEREAS, subject to the terms, conditions and limitations contained in
this Agreement, the parties desire to provide for the administration of Sellers'
sponsored life, individual life insurance and corporate owned life insurance
policies pursuant to the provisions of the Administrative Services Agreement and
NY Administrative Services Agreement (as defined herein);
WHEREAS, Sellers, Purchaser and LLANY have entered into that certain
Asset Purchase Agreement dated as of May 21, 1998 (the "Original Agreement");
and
WHEREAS, the parties wish to amend and restate the Original Agreement
in its entirety to clarify and/or revise certain provisions of the Original
Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and in reliance upon the representations, warranties,
conditions and covenants contained herein, and intending to be legally bound
hereby, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms shall have the
respective meanings set forth below throughout this Agreement:
"Administrative Services Agreement" means the Administrative Services
Agreement among Sellers and Purchaser in the form of Exhibit A hereto.
"Administrative Services Agreements" means, collectively, the
Administrative Services Agreement and the NY Administrative Services Agreement.
"Affiliate" means, with respect to any Person, at the time in question,
any other Person controlling, controlled by or under common control with such
Person. "Control" (including the terms "controlling," "controlled by" and "under
common control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, the holding of
policyholders' proxies by contract other than a commercial contract for goods or
non-management services, or otherwise, unless the power is the result of an
official position with or corporate office held by the Person. Except as
provided otherwise in this Agreement, control is presumed to exist if any
Person, directly or indirectly, owns, controls, holds with the power to vote, or
holds shareholders' proxies representing 25% or more of the voting securities of
any other Person, or holds or controls sufficient policyholders' proxies, or is
entitled by contract or otherwise, to nominate, appoint or elect the majority of
the board of directors or comparable governing body of any other Person.
"ALIAC" means Aetna Life Insurance and Annuity Company, a stock life
insurance company organized under the laws of the State of Connecticut.
"ALIAC Coinsurance Agreement" means the Coinsurance Agreement between
ALIAC and Purchaser in the form of Exhibit B hereto.
"ALIAC GAAP Statements" shall have the meaning set forth in Section
3.19 hereof.
"ALIAC (NY) Coinsurance Agreement" means the Coinsurance Agreement
between
- 1 -
<PAGE>
ALIAC and LLANY in the form of Exhibit C hereto, which Exhibit C will be
substantially in the form of the ALIAC Coinsurance Agreement (except for such
changes as may be required under New York law), and will be mutually agreed to
by the parties and attached hereto within 14 days of the Contract Date.
"ALIC" means Aetna Life Insurance Company, a stock life insurance
company organized under the laws of the State of Connecticut.
"ALIC Coinsurance Agreement" means the Coinsurance Agreement between
ALIC and Purchaser in the form of Exhibit D hereto.
"ALIC (NY) Coinsurance Agreement" means the Coinsurance Agreement
between ALIC and LLANY in the form of Exhibit E hereto which Exhibit E will be
substantially in the form of the ALIC Coinsurance Agreement (except for such
changes as may be required under New York law), and will be mutually agreed to
by the parties and attached hereto within 14 days of the Contract Date.
"Allocated Employees" means employees who spend a substantial portion
(i.e., more than 15%) of their time performing services for Sellers or any of
their Affiliates in each case with respect to the Business, and other than (i)
Dedicated Employees and (ii) lawyers who are not in the Aetna Retirement
Services reporting segment.
"Ancillary Agreements" mean collectively (a) the Coinsurance
Agreements, (b) the Administrative Services Agreements, (c) the Bill of Sale and
Assumption Agreement, (d) the Security Trust Agreement(s), and (e) the
Transition Services Agreement.
"Annual Statement" means the convention form statutory annual statement
of ALIC or ALIAC, as the case may be, together with all required schedules and
supplements thereto, as filed with the Insurance Department of the State of
Connecticut.
"Antitrust Division" means the Antitrust Division of the United States
Department of Justice.
"Applicable Law" means any domestic or foreign federal, state or local
statute, law, ordinance or code, or any written rules, regulations or
administrative interpretations issued by any Governmental Authority pursuant to
any of the foregoing, and any order, writ, injunction, directive, judgment or
decree of a court of competent jurisdiction applicable to the parties hereto.
- 2 -
<PAGE>
"Assumed Employment Liabilities" means any liabilities arising out of
the employment of the Transition Employees that are assumed by Purchaser
pursuant to Section 5.19 hereof.
"Assumed Liabilities" means: (a) all Liabilities; (b) all Purchaser
Extra Contractual Obligations; (c) all Assumed Employment Liabilities; and (d)
all other liabilities, obligations or indemnities expressly assumed by Purchaser
or LLANY under the terms of this Agreement or any Ancillary Agreement.
"Bill of Sale and Assumption Agreement" means the Bill of Sale and
Assumption Agreement in the form of Exhibit F hereto.
"Blackout Period" shall have the meaning set forth in Section
5.29(a)(i) hereof.
"Books and Records" means the originals or copies of all customer
lists, policy information, policy forms and rating plans, disclosure and other
documents and filings, including statutory filings, required under all
Applicable Laws, administrative records, reinsurance records, claim records,
sales records, underwriting records, financial records, Tax records and
compliance records in the possession or control of Sellers and relating
principally to the operation of the Business, including, without limitation, any
database, magnetic or optical media (to the extent not subject to licensing
restrictions) and any other form of recorded, computer generated or stored
information or process, but excluding: (a) Sellers' original certificates of
incorporation, bylaws, corporate seals, licenses to do business, minute books
and other corporate records relating to corporate organization or
capitalization; (b) original Tax and corporate accounting records relating to
the Business; (c) any original books and records relating to the Retained
Liabilities; (d) any records that are subject to the attorney-client privilege;
and (e) the Retained Contracts and any records relating thereto.
"Business" means marketing, issuing and administering the Policies in
the United States and the other business activities reasonably related thereto,
in each case as currently conducted by ALIC or ALIAC, as the case may be, or,
where so specified herein, as to be conducted by Purchaser or LLANY following
the Closing Date.
"Business Day" means any day other than a Saturday, Sunday, a day on
which banking institutions in the State of Connecticut are permitted or
obligated by Applicable Law to be closed or a day on which the New York Stock
Exchange is closed for trading.
"Ceding Commissions" means the ceding commissions allowed to Sellers
under the terms of the Coinsurance Agreements, which shall consist of a total of
$778.5 million for the ALIAC Coinsurance Agreement and the ALIAC (NY)
Coinsurance Agreement (such amount to be
- 3 -
<PAGE>
allocated between such agreements prior to their execution) and a total of $33.5
million for the ALIC Coinsurance Agreement and the ALIC (NY) Coinsurance
Agreement (such amount to be allocated between such agreements prior to their
execution).
"Claims Notice" shall have the meaning set forth in Section 9.02
hereof.
"Closing" means the closing of the transactions contemplated by this
Agreement.
"Closing Balance Sheet" means the pro forma balance sheet of the
Business as of the last day of the second month preceding the month in which the
Closing shall occur, which shall be prepared and delivered by Sellers to
Purchaser not later than the fifth day prior to the Closing Date in the format
set forth in Exhibit G hereto.
"Closing Date" means the Effective Date; provided, however, that if
such date is not a Business Day, the Closing Date shall be the immediately
succeeding Business Day, and provided further, that the Closing may occur on
such other date as the parties may agree to in writing.
"Closing Date Liabilities" means, as of any date, the General Account
Reserves and other statutory liabilities relating to the Business, which shall
be (a) estimated and reflected in the Closing Balance Sheet as of the last day
of the second month preceding the month in which the Closing shall occur; and
(b) subsequently adjusted and reflected in the Revised Closing Balance Sheet and
Final Closing Balance Sheet as of 11:59 p.m. Eastern Time on the last day of the
month immediately preceding the month in which the Closing Date falls. The
Closing Date Liabilities shall be determined and reported in accordance with the
methodology described on Exhibit H hereto.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder.
"Coinsurance Agreements" mean collectively the ALIC Coinsurance
Agreement, ALIC (NY) Coinsurance Agreement, ALIAC Coinsurance Agreement and
ALIAC (NY) Coinsurance Agreement.
"Commission" means the United States Securities and Exchange
Commission.
"Commissions" mean all commissions, expense allowances, benefit credits
and other fees and compensation payable to Producers.
- 4 -
<PAGE>
"Complete" shall have the meaning set forth in Section 5.27(c) hereof.
"Connecticut SAP" means the statutory accounting principles and
practices prescribed or permitted by the Insurance Department of the State of
Connecticut.
"Confidential Information" shall have the meaning set forth in Section
5.18(b) hereof.
"Confidentiality Agreement" means the confidentiality agreement dated
February 4, 1998 by and among Sellers and Purchaser.
"Contract Date" means May 21, 1998.
"Critical Shared Systems" mean the following applications identified on
Schedule 3.06(A): CSW, PAIS, ARS Valuation, Life VRU, Prospectuses and Semi
Annual Mailing.
"Dedicated Employees" shall have the meaning set forth in Section 3.12
hereof.
"Direct Economic Loss" means (a) as to either Seller's rejection of any
recommendation by Purchaser or LLANY with respect to the non-guaranteed elements
of the Policies or Post-Closing Policies, the amount by which the aggregate
amount due to Policyholders in respect of the period to which such
recommendation relates exceeds the aggregate amount that would have been due to
such Policyholders in respect of such period to the extent ALIAC or ALIC, as
applicable, had followed such recommendation; and (b) as to ALIC's rejection of
any recommendation by Purchaser or LLANY with respect to dividends under the Par
Policies, the amount by which ALIC's rejection of such recommendation causes the
Par Surplus to fall below the amount required to be maintained under Section 2.8
of the ALIC Coinsurance Agreement or Section 2.8 of the ALIC (NY) Coinsurance
Agreement.
"Direct Systems" mean those systems which, as of the Closing, Sellers
are executing in a production or test environment (as opposed to a development
environment) and which support the Business exclusively. The inventory of Direct
Systems is identified on Schedule 3.06(A).
"Distribution Agreements" mean the agreements between either or both
Sellers, on the one hand, and Producers, on the other hand, with respect to the
Policies in effect as of April 13, 1998.
"Effective Date" means 12:01 a.m. Eastern Time on: (a) the first day of
the month immediately following the month in which the last of the conditions to
Closing set forth in this
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Agreement is satisfied or waived in writing, if the last of such conditions was
so satisfied or waived on or prior to the 15th day of such prior month; or (b)
the first day of the second month immediately following the month in which the
last of such conditions is so satisfied or waived, if the last of such
conditions was so satisfied or waived after the 15th day of such prior month;
provided, however, that the parties may agree that the last of such conditions
shall be deemed, for purposes of determining the Effective Date, to have been so
satisfied or waived as of any given date.
"Effective Date of Employment" shall have the meaning set forth in
Section 5.19(a) hereof.
"Effective Date of Offer" shall have the meaning set forth in Section
5.20(c) hereof.
"Election Notice" means the written notice given by either Seller to
Purchaser with respect to such Seller's election of recapture or Security Trust
remedies pursuant to Section 9.07 hereof or Articles IX of the Coinsurance
Agreements.
"Employee List" shall have the meaning set forth in Section 5.19(a)
hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all final and temporary regulations and interpretive Bulletins and
other rulings of general applicability thereunder.
"Event of Default" means any event described in Section 9.07(a) hereof
or Articles IX of the Coinsurance Agreements which gives rise to Recapture
Rights or other remedy.
"Extra Contractual Obligations" means all liabilities or obligations
arising under the Policies and Post-Closing Policies, exclusive of liabilities
or obligations arising under the express terms and conditions of the Policies
and Post-Closing Policies and the other Liabilities, but including, without
limitation, any liability for fines, penalties, forfeitures, punitive, special,
exemplary or other form of extra-contractual damages, which liabilities or
obligations arise from any act, error or omission, whether or not intentional,
negligent, in bad faith or otherwise relating to: (a) the marketing, sale,
underwriting, production, issuance, cancellation or administration of the
Policies or Post-Closing Policies; (b) the investigation, defense, trial,
settlement or handling of claims, benefits, dividends or payments under the
Policies or Post-Closing Policies; or (c) the failure to pay, the delay in
payment, or errors in calculating or administering the payment of benefits,
dividends, claims or any other amounts due or alleged to be due under or in
connection with the Policies or Post-Closing Policies.
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"Final and Binding" shall have the meaning set forth in Section 2.03(d)
hereof.
"Final Closing Balance Sheet" means the final pro forma balance sheet
of the Business as of the Closing Date prepared and delivered in accordance with
Section 2.03(d) hereof.
"FTC" means the Federal Trade Commission.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"General Account Reserves" means the general account reserves of
Sellers before reduction for accrued for expense allowances recognized in
Separate Account Reserves (without regard to the transactions contemplated by
the Coinsurance Agreements) with respect to the Policies or Post-Closing
Policies, as applicable, determined in accordance with Connecticut SAP.
"Governmental Authority" means any court, administrative or regulatory
agency or commission, or other federal, state or local governmental authority or
instrumentality, or the National Association of Securities Dealers or national
securities exchanges having jurisdiction over any party hereto.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
"Indemnified Party" shall have the meaning set forth in Section 9.02
hereof.
"Indemnifying Party" shall have the meaning set forth in Section 9.02
hereof.
"Indiana SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Indiana.
"Internally Managed Funds" mean the funds supporting the Sellers'
Separate Accounts that are managed by an Affiliate of Sellers.
"IRS" means the United States Internal Revenue Service.
"IT Services" mean the information technology, computing, distributed
computing and telecommunications services (which includes services for Y2K
Obligations, Shared Systems
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Y2K Obligations and other services for Direct Systems and Shared Systems) to be
provided by Sellers to Purchaser and LLANY after the Closing.
"IT Transition Plan" shall have the meaning set forth in Section
5.27(b)(ii) hereof.
"Knowledge of Purchaser" means the actual knowledge, after reasonable
investigation, of those persons previously identified in a writing specifically
referring to this definition in the Agreement.
"Knowledge of Sellers" means the actual knowledge, after reasonable
investigation, of those persons previously identified in a writing specifically
referring to this definition in the Agreement.
"Liabilities" means all gross liabilities and obligations arising out
of or relating to the Policies and Post-Closing Policies, other than the
Retained Liabilities and Extra Contractual Obligations. The Liabilities shall
include, without limitation: (a) the General Account Reserves; (b) all
liabilities for incurred but not reported claims, benefits, interest on death
claims or other payments arising under or relating to the Policies and
Post-Closing Policies, whether or not (i) included within the General Account
Reserves, or (ii) incurred before or after the Effective Date; (c) all
liabilities arising out of any changes to the terms and conditions of the
Policies and Post-Closing Policies mandated by Applicable Law whether or not
incurred before or after the Effective Date; (d) premium taxes due in respect of
Premiums paid on or after the Effective Date (without giving effect to any
credits due to Sellers for any guaranty fund assessments paid by Sellers prior
to Closing), and all other Tax liabilities arising out of or relating to the
Business or Post-Closing Policies for periods commencing on or after the
Effective Date (except for income Taxes imposed on Sellers under Subtitle A of
the Code); (e) assessments and similar charges in connection with participation
by Sellers, Purchaser or LLANY, whether voluntary or involuntary, in any
guaranty association established or governed by any state or other jurisdiction,
arising on account of direct Premiums paid on or after the Effective Date; (f)
Commissions payable with respect to the Policies and Post-Closing Policies to or
for the benefit of the Producers who marketed or produced the Policies, in any
case payable on or after the Effective Date; (g) any liability arising under the
Transferred Contracts; (h) premiums, payments, fees or other consideration or
amounts due on or after the Effective Date under any Third-Party Reinsurance
Agreements which are included with the Transferred Contracts; (i) all
liabilities for amounts payable on or after the Effective Date for returns or
refunds of Premiums; (j) dividends payable on or after the Effective Date on Par
Policies (whether or not such dividends are declared before or after the
Effective Date); (k) all liabilities which relate to (i) amounts transferred
from the Sellers' Separate Accounts to one of the Sellers' general accounts
pending distribution to owners
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<PAGE>
of the Variable Policies, and (ii) amounts held in a general account of one of
the Sellers pending transfer to the Sellers' Separate Accounts, and (iii) any
insurance liabilities or obligations arising under the Variable Policies
(including any Variable Policies included within the Post-Closing Policies) that
are not payable out of the assets of the relevant Seller's Separate Account; and
(l) all unclaimed property liabilities arising under or relating to the Policies
and Post-Closing Policies.
"LBMs" means the life brokerage managers and associates employed by
Sellers in connection with the Policies as of April 13, 1998.
"LIBOR" means a rate per annum equal to the three month London
Interbank Offered Rate as published in The Wall Street Journal, Eastern Edition,
in effect on the Closing Date.
"Licensed Software" shall have the meaning set forth in Section 3.06(a)
hereof.
"LLANY" means Lincoln Life & Annuity Company of New York, a stock life
insurance company organized under the laws of the State of New York.
"LLANY GAAP Statements" shall have the meaning set forth in Section
4.09 hereof.
"Look-back Employee" shall have the meaning set forth in Section
5.19(a) hereof.
"Loss" and "Losses" shall have the meanings set forth in Section
9.01(a) hereof.
"Market Value" means the market value of the assets held in a Security
Trust, determined pursuant to Section 4.01 of the Security Trust Agreement.
"Material Adverse Effect" means any matter which would reasonably be
considered materially adverse by an acquiror of the Business in the context of
the particular provision in which such phrase appears.
"Material Adverse Effect on the Business" means a material adverse
effect on the liabilities, results of operations or financial condition of the
Business considered as a whole.
"MGAs" means master or managing general agents with which the Sellers
have entered into a Distribution Agreement as of April 13, 1998.
"NAIC" means the National Association of Insurance Commissioners.
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"New York Policies" means the individual universal life, individual
corporate owned life, individual traditional life, sponsored life and individual
participating life insurance policies and participating annuities and related
documents included within the definition of Policies that are coinsured by LLANY
under the ALIAC (NY) Coinsurance Agreement and ALIC (NY) Coinsurance Agreement.
"New York SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of New York.
"NY Administrative Services Agreement" means the NY Administrative
Services Agreement among Sellers and LLANY in the form of Exhibit I hereto,
which Exhibit I will be substantially in the form of the Administrative Services
Agreement (except for such changes as may be required by New York law) and
attached hereto within 14 days of the Contract Date.
"1940 Act" means the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.
"Other Assets" mean the specific assets of Sellers listed in Schedule
1.01(A) and such other fixed assets as may be mutually agreed among the parties.
"Other Employees" shall have the meaning set forth in Section 5.19(a)
hereof.
"Owned Software" shall have the meaning set forth in Section 3.06
hereof.
"Par Policies" mean the individual participating life insurance
policies and participating annuities issued by ALIC which are included within
the Policies.
"Par Surplus" means the amount of dedicated statutory surplus relating
solely to the Par Policies, plus the Asset Valuation Reserve (AVR) and Interest
Maintenance Reserve (IMR) relating thereto, as determined in accordance with
Connecticut SAP.
"Permits" mean all licenses, permits, orders, approvals, registrations,
authorizations, qualifications and filings with all Governmental Authorities and
under all Applicable Laws required in order for Sellers, Purchaser and LLANY to
consummate the transactions contemplated by this Agreement, the Ancillary
Agreements and each of the other agreements contemplated hereby and thereby.
"Person" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization,
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<PAGE>
governmental, judicial or regulatory body, business unit, division or other
entity.
"Policies" mean all of the individual universal life, individual
corporate owned life, individual traditional life, sponsored life and individual
participating life insurance policies and participating annuities, together with
all related binders, slips and certificates (including applications therefor and
all supplements, endorsements, riders and agreements in connection therewith)
which have been issued or reinsured by ALIC or ALIAC, as the case may be, in
connection with the Business (in accordance with, and as determined by reference
to, each Seller's historical practices) which policies shall include, but not be
limited to (a) all policies issued on the policy forms included in the list of
base codes set forth on Schedule 1.01(B) and which: (i) are effected, bound or
issued on or prior to the Effective Date; and (ii) are in force as of the
Effective Date; or (iii) are subject to being renewed or reinstated in
accordance with their terms on the Effective Date; and (b) all permanent
individual life policies issued by Sellers prior to or after the Effective Date
following the exercise of conversion rights under the Sellers' individual term
life policies.
"Policyholders" means policyholders, insureds and assignees under the
Policies and Post-Closing Policies.
"Post-Closing Policies" means the contracts and policies issued by ALIC
or ALIAC, as applicable, after the Closing Date pursuant to Sections 5.29 and
5.33 hereof.
"Post-Closing Records" mean all books and records relating to the
administration of the Business by Purchaser after the Closing Date.
"Premiums" mean premiums, considerations, deposits and similar receipts
with respect to the Policies or Post-Closing Policies.
"Producers" mean all LBMs, MGAs, brokers, agents, general agents, COLI
speciality brokers, re-enrollers under Sellers' sponsored life products,
broker-dealers, producers or other Persons who market or produce the Policies
and who (a) have been appointed by Sellers, and (b) are entitled to receive
Commissions from Sellers.
"Product Guide" means the catalog of IT Services, attached hereto as
Schedule 5.27(B).
"Pro Forma Statements" shall have the meaning set forth in Section 3.21
hereof.
"Purchase Price" means One Billion U.S. Dollars ($1,000,000,000).
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"Purchaser" means The Lincoln National Life Insurance Company, a stock
life insurance company organized under the laws of the State of Indiana.
"Purchaser 401(k) Plan" shall have the meaning set forth in Section
5.19(f)(2) hereof.
"Purchaser Extra Contractual Obligations" means: (a) all Extra
Contractual Obligations to the extent such obligations arise out of acts, errors
or omissions occurring (or, in the case of omissions, failing to occur) at any
time on or after the Effective Date by either the Purchaser or LLANY or their
respective directors, officers, employees, Affiliates, agents, representatives,
successors and assigns; (b) all Sellers' Extra Contractual Obligations, except
to the extent otherwise provided in Articles VIII and IX hereof; and (c) all
liabilities or obligations to the extent such liabilities or obligations arise
out of or relate to the Sellers' administration of claims, non-guaranteed
elements, dividends and other aspects of or relating to the Policies or
Post-Closing Policies on and after the Effective Date pursuant to
recommendations from Purchaser or LLANY pursuant to the Coinsurance Agreements
or Administrative Services Agreements.
"Purchaser Indemnified Parties" shall have the meaning set forth in
Section 9.01(a) hereof.
"Purchaser Material Adverse Effect" means a material adverse effect on
the business, properties, assets, operations or financial condition of the
Purchaser or LLANY, considered in the context of the particular provision in
which such phrase appears.
"Purchaser SAP Statements" shall have the meaning set forth in Section
4.09 hereof.
"Purchaser's Defined Benefit Plan" shall have the meaning set forth in
Section 5.19(f)(4) hereof.
"Purchaser Y2K Plan" shall have the meaning set forth in Section 4.14
hereof.
"RBC" shall have the meaning set forth in Section 3.23 hereof.
"Recapture Fee" means the amount determined in accordance with the
formula set forth on Exhibit J hereto, which is payable by Purchaser to a Seller
that elects to recapture the Policies and Post-Closing Policies pursuant to
Section 9.07(d) hereof or Articles IX of the Coinsurance Agreements.
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"Recapture Event" shall have the meaning set forth in Section 9.07(b).
"Recapture Rights" mean the right of either Seller to recapture the
Policies and Post-Closing Policies pursuant to Section 9.07 hereof or Articles
IX of the Coinsurance Agreements.
"Reinsured Liabilities" means the Liabilities reinsured pursuant to the
Coinsurance Agreements.
"Required Balance" means one hundred percent (100%) of the amount equal
to (a) the Reserves on the Policies and Post-Closing Policies issued or
reinsured by ALIC or ALIAC, as the case may be, plus (b) other liabilities
relating to the Policies and Post-Closing Policies, which shall be calculated in
accordance with the methodology set forth on Exhibit K hereto, plus (c) solely
with respect to ALIC, the Par Surplus, minus (d) the amount of outstanding loans
under the Policies and Post-Closing Policies (to the extent such loans
constitute admitted assets under Connecticut SAP).
"Reserves" means the sum of all reserves and liabilities required to be
maintained by ALIC or ALIAC, as the case may be, for the Policies and
Post-Closing Policies issued or reinsured by it, calculated consistent with (a)
the reserve requirements, statutory accounting rules and actuarial principles
applicable to Sellers under the law of each state in which the Policies and
Post-Closing Policies were issued or delivered, and (b) otherwise in accordance
with the methodologies used by Sellers to calculate the reserves and liabilities
for the Policies and Post-Closing Policies in accordance with Connecticut SAP
and sound actuarial principles and any valuation bases and methods of
determining reserves as provided in the forms of Policy and Post-Closing
Policies, as applicable; provided, however, the term "Reserves" shall not
include the Separate Account Reserves.
"Retained Contracts" means all contracts, agreements, leases, software
licenses, rights, obligations or other commitments of Sellers that (a) arise out
of or are related exclusively to any business or operation of Sellers other than
the Business, or (b) arise out of or are related in any way to the Business, and
which, in the case of both clauses (a) and (b) herein, are not Transferred
Contracts.
"Retained Liabilities" means the liabilities of Sellers arising solely
from any of the following: (a) premium taxes due in respect of Premiums paid
prior to the Effective Date; (b) amounts payable prior to the Effective Date for
returns or refunds of Premiums; (c) Commissions payable with respect to the
Policies to or for the benefit of Producers, in any case payable prior to the
Effective Date; (d) assessments and similar charges in connection with
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participation by Sellers, whether voluntary or involuntary, in any guaranty
association established or governed by any state or other jurisdiction, arising
on account of direct Premiums paid prior to the Effective Date; (e) the Retained
Contracts; (f) premiums, payments, fees or other consideration or amounts due
prior to the Effective Date under the Third-Party Reinsurance Agreements; (g)
dividends payable prior to the Effective Date on Par Policies; (h) death claims
under the Policies which are reported prior to the Closing Date; (i) the pending
litigation described on Schedule 3.03; (j) interest stabilization reserve
relating to the Policies; (k) liabilities or obligations relating to the
Business to the extent such liabilities or obligations have been accrued for on
Sellers' books and records as of 11:59 p.m. Eastern Time on the day immediately
preceding the Effective Date in accordance with Connecticut SAP but are not
reflected on the Final Closing Balance Sheet; (l) Direct Economic Loss resulting
from either Seller's rejection of recommendations made by Purchaser or LLANY
with respect to the non-guaranteed elements or dividends under the Policies or
Post-Closing Policies, as applicable; provided that Sellers shall not incur or
retain any such obligation or liability for Direct Economic Loss to the extent
that implementing the relevant recommendations by Purchaser or LLANY would (i)
violate any Applicable Law, or (ii) violate or result in a breach of this
Agreement, any Ancillary Agreement or any Policy or Post-Closing Policy; and (m)
all other liabilities, obligations or indemnities expressly assumed by Sellers
under the terms of this Agreement or any Ancillary Agreement.
"Revised Closing Balance Sheet" means the pro forma balance sheet of
the Business as of the Closing Date prepared and delivered by Sellers to
Purchaser pursuant to Section 2.03(d) hereof.
"SAP Statements" shall have the meaning set forth in Section 3.20
hereof.
"Secured Policies" means Policies and Post-Closing Policies under which
the related Reinsured Liabilities are secured by a Security Trust.
"Securities Act" means the Securities Act of 1933, as amended, and all
rules and regulations thereunder.
"Security Trust" means a trust account established with a United States
financial institution reasonably acceptable to the parties hereto for the
purpose of securing the Purchaser's or LLANY's obligations to such Seller in
accordance with Section 9.07 hereof or Article IX of the Coinsurance Agreements.
"Security Trust Agreement" means the trust agreement governing the
Security Trust, which shall be substantially in the form of Exhibit L hereto.
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"Sellers' Extra Contractual Obligations" means all Extra Contractual
Obligations to the extent such obligations arise out of acts, errors or
omissions occurring (or, in the case of omissions, failing to occur) at any time
prior to the Effective Date by Sellers or their respective directors, officers,
employees, Affiliates, agents or representatives.
"Sellers' Fully Loaded Costs" means with respect to any services
provided by Sellers: (i) a proportionate share of corporate overhead computed in
accordance with the internal charge-back methodologies historically used by
Sellers, (ii) all employment related costs, including salaries, bonuses (other
than stay bonuses not agreed to by Purchaser) and all costs incurred in
providing all payroll and benefits for all employees providing such services,
(iii) any sales or use taxes incurred by Sellers in connection with providing
the services, and (iv) all reasonable out-of-pocket expenses, including
third-party charges, as long as the costs specified in (i) through (iv) above do
not collectively exceed Sellers' costs determined by their internal charge back
methodologies historically used in charging the Business for such services and
assets and such costs exclude any extraordinary third-party charges incurred by
Sellers to enable them to provide such services to an unaffiliated third party
(i.e., Purchaser).
"Sellers' Indemnified Parties" shall have the meaning set forth in
Section 9.01(b) hereof.
"Sellers" means collectively ALIC and ALIAC.
"Sellers' Separate Accounts" means the specific separate accounts of
Sellers identified on Schedule 1.01(C) hereto.
"Sellers' Y2K Plan" shall have the meaning set forth in Section 3.24
hereof.
"Separate Account Assets" means the assets described on Schedule
1.01(D) hereto which constitute the Sellers' Separate Accounts.
"Separate Account Reserves" means the reserves associated with the
Variable Policies which are held in Sellers' Separate Accounts, determined in
accordance with Connecticut SAP.
"Separate Account Revenues" means the revenues described on Exhibit M
hereto.
"Shared Systems" mean those systems which, as of the Closing, Sellers
are executing in a production environment (as opposed to a test or development
environment) and which support both the Business and other of Sellers'
businesses. The inventory of Shared Systems is identified
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on Schedule 3.06(A).
"Shared Systems Y2K Obligations" shall have the meaning set forth in
Section 5.27(c) hereof.
"Subsidiary" means, with respect to any Person on a given date (a) any
other Person of which at least 25% of the voting power of the equity securities
or equity interests is owned directly or indirectly by such Person; and (b) any
other Person the accounts of which, by virtue of an ownership interest in it by
such Person would be consolidated, in accordance with GAAP, with those of such
Person in its financial statements as of the applicable date.
"Suitable Employment" shall have the meaning set forth in Section
5.19(d)(2) hereof.
"Tax Costs" shall have the meaning set forth in Section 5.28(b) hereof.
"Taxes" (or "Tax" as the context may require) means any tax, however
denominated, imposed by any federal, state, local, municipal, territorial,
provincial or foreign government or any agency or political subdivision of any
such government (a "Taxing Authority"), including, without limitation, any tax
imposed under Subtitle A of the Code and any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, gains, goods and
services, production, documentary, recording, social security, unemployment,
disability, workers' compensation, estimated, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, capital stock, occupation, personal or real property,
environmental or windfall profit tax, premiums, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty, addition to tax or additional amount
imposed by any Taxing Authority relating thereto.
"Third Party Claim" shall have the meaning set forth in Section 9.02(a)
hereof.
"Third Party Consultant" shall have the meaning set forth in Section
2.03(d) hereof.
"Third-Party Reinsurance Agreements" mean the reinsurance agreements
identified by Purchaser on Schedule 5.32 hereto under which Sellers have ceded
liabilities to non-Affiliated reinsurers with respect to the Policies, which
Schedule 5.32 may be supplemented by Purchaser, without any requirement for
consent by Sellers, within thirty (30) calendar days of the Contract Date.
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"Transferred Assets" means: (a) cash or cash equivalents equal to the
amount as of the Closing Date of (A) Closing Date Liabilities, plus (B) the Par
Surplus, minus (C) the amount of outstanding loans under the Policies (to the
extent such loans constitute admitted assets under Connecticut SAP), minus (D)
the aggregate amounts ascribed to the Other Assets in the Closing Balance Sheet,
Revised Closing Balance Sheet or Final Closing Balance Sheet, as applicable, and
minus (F) the Purchase Price; (b) all of Sellers' rights and interests under the
Policies to receive principal and interest paid on policy loans on or after the
Effective Date; (c) the Other Assets; (d) the Books and Records; (e) the
Transferred Contracts; and (f) the Separate Account Revenues.
"Transferred Contracts" means: (a) the contracts, agreements, leases,
software licenses, rights, obligations or other commitments of Sellers (to the
extent freely assignable) used exclusively by Sellers in the Business (but
excluding the Policies and the Distribution Agreements); and (b) contracts,
agreements, leases, software licenses, rights, obligations or other commitments
relating to the Business (but excluding the Policies and the Distribution
Agreements) identified by Purchaser and (i) listed on Schedule 3.17 hereto, or
(ii) listed on the supplement to Schedule 3.17 delivered to Sellers within
thirty (30) calendar days of the Contract Date.
"Transferred Employee" shall have the meaning set forth in Section
5.19(f) hereof.
"Transition Employees" shall have the meaning set forth in Section
5.19(a) hereof.
"Transition Period" shall have the meaning set forth in Section 5.27(b)
hereof.
"Transition Services Agreement" means the Transition Services Agreement
among Sellers and Purchaser, which agreement will substantially incorporate the
terms set forth in the Transition Services Agreement Term Sheet attached hereto
as Exhibit N, the form of which shall be agreed to by the parties within 90 days
of the Contract Date.
"Trustee" means a bank or trust company reasonably acceptable to the
parties to this Agreement, which acts as trustee of a Security Trust pursuant to
the terms and conditions of a Security Trust Agreement; provided, however, that
such bank or trust company shall (a) possess assets of at least $10 billion, and
(b) be rated at least A+ by each of Moody's Investors Services, Inc. and
Standard & Poor's Corporation.
"TSA Employees" shall have the meaning set forth in Section 5.19(a)
hereof.
"Variable Policies" means the variable life insurance policies issued
by ALIAC which are
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funded, in whole or in part, by the Sellers' Separate Accounts.
"Y2K Obligations" shall have the meaning set forth in Section
5.27(b)(iii) hereof.
ARTICLE II
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
Section 2.01. Consideration Upon the terms and subject to the
conditions of this Agreement, Purchaser and LLANY shall pay to Sellers on the
Closing Date an aggregate amount equal to the Purchase Price. The Purchase Price
shall be credited to Sellers as a reduction in the amount of cash or cash
equivalents included within the Transferred Assets to be transferred by Sellers
to Purchaser and LLANY at Closing in accordance with the provisions of Sections
2.02 and 2.03 hereof.
Section 2.02. Acquisition of Transferred Assets and Assumption of
Assumed Liabilities (a) Upon the terms and subject to the conditions of this
Agreement and the payment of the Purchase Price, on the Closing Date Sellers
shall sell, assign and transfer to Purchaser or LLANY, as applicable, all of
Sellers' right, title and interest in the Transferred Assets; provided, however,
that the amount of cash or cash equivalents included within the Transferred
Assets to be transferred to Purchaser or LLANY shall be determined in accordance
with Section 2.03 and adjusted pursuant to Section 2.04 hereof. All sales,
assignments and transfers of the Transferred Assets, other than cash or cash
equivalents, shall be effected by the Bill of Sale and Assumption Agreement.
Notwithstanding anything in this Agreement to the contrary, but subject to the
provisions of Section 5.03 hereof, Sellers shall be entitled to keep and
maintain copies of all Books and Records and Post-Closing Records from and after
the Closing, and to have access to the originals of the Books and Records and
Post-Closing Records in accordance with the terms hereof.
(b) Upon the terms and subject to the conditions of this
Agreement, on the Closing Date: (i) Sellers shall cede and assign to Purchaser
or LLANY, as applicable, their respective Liabilities, and Purchaser and LLANY
shall reinsure and assume 100% of such Liabilities pursuant to the Coinsurance
Agreements; (ii) Purchaser or LLANY, as applicable, shall assume 100% of the
Purchaser Extra Contractual Obligations pursuant to the Coinsurance Agreements;
and (iii) Sellers shall transfer to Purchaser or LLANY, as applicable, and
Purchaser and LLANY shall assume from Sellers, pursuant to the Bill of Sale and
Assumption Agreement, the Assumed Employment Liabilities and all other Assumed
Liabilities.
Section 2.03. Place and Date of Closing; Balance Sheets; Cash Transfers
at
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Closing
(a) The Closing shall take place at the offices of Lord,
Bissell & Brook, 115 South LaSalle Street, Suite 3600, Chicago, Illinois, at
9:00 a.m. Central Standard Time on the Closing Date or such other time or place
as the parties may mutually agree.
(b) Not later than the fifth day prior to the Closing Date,
Sellers will deliver to Purchaser a pro forma statement of the Business in the
same format as Exhibit G hereto (the "Closing Balance Sheet"), together with a
certification of the chief financial officers of Sellers that the Closing Date
Liabilities and all other items appearing on the Closing Balance Sheet were: (i)
estimated in good faith by Sellers as of the last day of the second month
preceding the month in which the Closing shall occur; (ii) based upon the books
and records of Sellers; and (iii) calculated in a manner consistent with
Connecticut SAP and with the methodologies utilized in preparing the Pro Forma
Statements and the 1997 Annual Statements. The Closing Balance Sheet shall
reflect, among other things, the assets and liabilities that will be transferred
to, and assumed by, LLANY with respect to New York Policies pursuant to the
ALIAC(NY) Coinsurance Agreement and ALIC(NY) Coinsurance Agreement.
(c) On the Closing Date, Sellers will transfer cash or cash
equivalents to Purchaser and LLANY, as applicable, by wire transfer of
immediately available funds in U.S. Dollars to the bank account or accounts
designated to Sellers in writing by Purchaser at least five (5) Business Days
prior to the Closing Date in an aggregate amount equal to the sum of: (A) the
Closing Date Liabilities, plus (B) the Par Surplus, minus (C) the amount of
outstanding loans under the Policies (to the extent such loans constitute
admitted assets under Connecticut SAP), minus (D) the aggregate amounts ascribed
to the Other Assets, and minus (E) the Purchase Price, all as reflected on the
Closing Balance Sheet. In no event shall Sellers transfer to Purchaser or LLANY
any Separate Account Assets or Separate Account Reserves. In the event that
Sellers transfer any cash equivalents, the form of such cash equivalents and the
process for transfer will be mutually agreed to by the parties.
(d) Sellers shall, on or before the date that is forty-five
(45) calendar days after the Closing Date, deliver to Purchaser: (i) a pro forma
statement of the Business as of 11:59 p.m. Eastern Time on the day immediately
preceding the Effective Date (the "Revised Closing Balance Sheet"), in the same
format as the Closing Balance Sheet; and (ii) a certification of the chief
financial officers of Sellers to the same effect with respect to the Revised
Closing Balance Sheet as the certification delivered with respect to the Closing
Balance Sheet. Purchaser shall have the right to review the Revised Closing
Balance Sheet and comment thereon for a period of forty-five (45) calendar days
after receipt thereof. Any changes in the Revised Closing Balance
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Sheet that are agreed to by Purchaser and Sellers within such 45-day period
shall be incorporated into a final balance sheet of the Business as of 11:59
p.m. Eastern Time on the day immediately preceding the Effective Date (the
"Final Closing Balance Sheet"). In the event that Purchaser and Sellers are
unable to agree on the manner in which any item or items should be treated in
the Final Closing Balance Sheet within such 45-day period, each of Sellers, on
the one hand, and Purchaser, on the other, shall prepare separate written
reports of such item or items and refer such reports to a qualified third party
accountant or actuary, as appropriate, mutually acceptable to Purchaser and
Sellers (the "Third Party Consultant") within ten (10) Business Days after the
expiration of such 45-day period. The Third Party Consultant shall determine
within ten (10) Business Days the manner in which such item or items shall be
treated in the Final Closing Balance Sheet; provided, however, that the dollar
amount of each item in dispute shall be determined within the range of dollar
amounts proposed by Sellers on the one hand, and Purchaser on the other hand.
The determinations by the Third Party Consultant as to the items in dispute
shall be in writing and shall be Final and Binding on the parties and shall be
so reflected in the Final Closing Balance Sheet. For purposes of this Agreement,
"Final and Binding" shall mean that the aforesaid determinations shall have the
same preclusive effect for all purposes as if such determinations had been
embodied in a final judgment, no longer subject to appeal, entered by a court of
competent jurisdiction. The fees, costs and expenses of retaining the Third
Party Consultant shall be shared 50% by Sellers, on the one hand, and 50% by
Purchaser, on the other. Following the resolution of all disputed items (or, if
there is no dispute, promptly after the parties reach agreement on the Final
Closing Balance Sheet), Sellers shall prepare the Final Closing Balance Sheet
and shall deliver copies thereof to Purchaser.
Section 2.04. Post-Closing Adjustments.
(a) In the event that the aggregate amount of cash or cash
equivalents transferred by Sellers to Purchaser and LLANY on the Closing Date is
less than the amount of (A) the Closing Date Liabilities, plus (B) the Par
Surplus, minus (C) the amount of outstanding loans under the Policies (to the
extent that such loans constitute admitted assets under Connecticut SAP), minus
(D) the aggregate amounts ascribed to the Other Assets, and minus (E) the
Purchase Price, all as reflected on the Final Closing Balance Sheet, Sellers
shall transfer to Purchaser or LLANY, as applicable, additional cash or cash
equivalents equal to the amount of such difference, together with interest
thereon from and including the Closing Date to, but not including the date of,
such transfer computed at LIBOR.
(b) In the event that the aggregate amount of cash or cash
equivalents transferred to Purchaser and LLANY on the Closing Date is greater
than the amount of (A) the Closing Date Liabilities, plus (B) the Par Surplus,
minus (C) the amount of outstanding loans
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under the Policies (to the extent that such loans constitute admitted assets
under Connecticut SAP), minus (D) the aggregate amounts ascribed to the Other
Assets, and minus (E) the Purchase Price, all as reflected on the Final Closing
Balance Sheet, Purchaser or LLANY, as applicable, shall transfer to Sellers cash
or cash equivalents equal to the amount of such difference, together with
interest thereon from and including the Closing Date to, but not including the
date of, such transfer computed at LIBOR.
Section 2.05. Closing Items
(a) In addition to the transfers described in Sections 2.02
and 2.03 hereof, at the Closing one or both Sellers (as and if appropriate)
shall execute and deliver to Purchaser the following:
(i) the Coinsurance Agreements;
(ii) the Administrative Services Agreements;
(iii) the Transition Services Agreement;
(iv) the Bill of Sale and Assumption Agreement;
(v) evidence of the receipt of the consents and
approvals identified on Schedule 3.05 hereto; and
(vi) any other deliveries contemplated by Article VI or
other provisions hereof.
(b) In addition to the payment of the Purchase Price
described in Section 2.01 hereof, at the Closing the Purchaser shall execute and
deliver to Sellers the following:
(i) the Coinsurance Agreements;
(ii) the Administrative Services Agreements;
(iii) the Transition Services Agreement;
(iv) the Bill of Sale and Assumption Agreement;
(v) evidence of the receipt of the consents and
approvals identified
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on Schedule 4.05; and
(vi) any other deliveries contemplated by Article VII or
other provisions hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers hereby represent and warrant, severally and not jointly, to
Purchaser as of the Contract Date and as of the Closing Date (but as of no other
dates unless expressly so stated), it being understood that each Seller hereby
makes only those representations and warranties that specifically relate to it
or to its portion of the Business:
Section 3.01. Organization, Standing and Authority of Seller Each
Seller is duly organized, validly existing and in good standing under the laws
of the State of Connecticut and has all requisite power and authority to carry
on its operations as they are now being conducted, except where the failure to
have such authority would not, individually or in the aggregate, have a Material
Adverse Effect. Each Seller is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect.
Section 3.02. Authorization. Each Seller has all requisite corporate power and
authority to execute and deliver, and to perform its respective obligations
under, this Agreement and under each of the Ancillary Agreements to be executed
by it on or after the Closing Date. The execution and delivery by each Seller of
this Agreement and the Ancillary Agreements to be executed by it, and the
performance by each Seller of its respective obligations under such agreements,
have been duly authorized by the Sellers' respective boards of directors and by
all other necessary corporate action on the part of such Seller. This Agreement
has been duly executed and delivered by each Seller, and on the Closing Date the
Ancillary Agreements to be executed by such Seller on the Closing Date will be
duly executed and delivered by such Seller, and, subject to the due execution
and delivery by the other parties to such agreements, this Agreement and the
Ancillary Agreements executed by each Seller on or after the Closing Date will,
upon due execution and delivery, be valid and binding obligations of such
Seller, as the case may be, enforceable against such Seller in accordance with
their respective terms, subject to: (a) bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium and other similar laws now or hereafter in
effect relating to or affecting the rights of creditors of insurance companies
or creditors' rights generally; and (b) general principles of equity (regardless
of
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whether considered in a proceeding at law or in equity). Notwithstanding the
foregoing, the obligation of each Seller to execute any Ancillary Agreement
shall be subject to the fulfillment or waiver of the terms and conditions of
this Agreement.
Section 3.03. Actions and Proceedings. Except as set forth on Schedule
3.03 hereto, and except with respect to matters not relating to the Business,
there are no: (a) outstanding orders, decrees or judgments by or with any
Governmental Authority applicable to Sellers or their respective properties or
assets that, individually or in the aggregate, would have a Material Adverse
Effect; or (b) actions, suits, arbitrations or legal, administrative or other
proceedings pending or, to the Knowledge of Sellers, threatened against either
Seller, at law or in equity, or before or by any Governmental Authority or
before any arbitrator of any kind which would, individually or in the aggregate,
have a Material Adverse Effect.
Section 3.04. No Conflict or Violation. Except as set forth on Schedule
3.04 hereto, the execution, delivery and performance by each Seller of this
Agreement and the Ancillary Agreements to which either of them may become a
party and the consummation of the transactions contemplated hereby and thereby
in accordance with the respective terms and conditions hereof and thereof will
not: (a) violate any provision of the certificate of incorporation or bylaws of
either Seller; (b) violate, conflict with or result in the breach of any of the
terms of, result in any modification of the effect of, otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both, constitute) a default under, any Transferred Contract specified
on Schedule 3.17 hereto as of the Contract Date; (c) violate any order,
judgment, injunction, award or decree of any arbitrator or Governmental
Authority, or any agreement with, or condition imposed by, any arbitrator or
Governmental Authority binding upon either Seller in connection with the
Business; (d) subject to obtaining the Permits referred to in Section 3.05
hereof, violate any Applicable Law; or (e) result in a breach or violation of
any of the terms or conditions of, constitute a default under, or otherwise
cause an impairment or revocation of, any license or authorization related to
the Business, except in the case of clauses (b), (c), (d) and (e) of this
Section 3.04, for such breaches, conflicts, modifications, terminations,
violations, defaults, impairments or revocations that would not, individually or
in the aggregate, have a Material Adverse Effect.
Section 3.05. Consents and Approvals. Except for the HSR Act or as set
forth on Schedule 3.05 hereto, the execution, delivery and performance by each
Seller of this Agreement and the Ancillary Agreements to which it is a party and
the consummation of the transactions contemplated hereby and thereby in
accordance with the respective terms hereof and thereof do not require such
Seller to obtain any Permit or any consent, approval or action of, make any
filing with, or give any notice to, any Person, except for such Permits,
consents, approvals, actions,
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filings or notices the failure of which to obtain, make or give, as the case may
be, would not, individually or in the aggregate, have a Material Adverse Effect.
Section 3.06. Computer Software and Intellectual Property.
(a) Sellers have set forth on Schedule 3.06(A) hereto a true
and complete listing of all computer software programs which are owned or
licensed by Sellers and are reasonably material to the conduct of the Business.
Schedule 3.06(A) hereto also sets forth whether each such computer software
program is: (i) owned by Sellers (the "Owned Software"); or (ii) licensed by
Sellers from a third party (the "Licensed Software"). Except as set forth on
Schedule 3.06(A), Sellers have: (i) the right to use all Owned Software, free
and clear of any royalty or other similar payment obligations, claims of
infringement or alleged infringement or other lien, charge, claim or other
encumbrance of any kind, except for any such claims, liens, charges or
encumbrances that would not, individually or in the aggregate, have a Material
Adverse Effect; and (ii) the right to use the Licensed Software, which right, to
the Knowledge of Sellers, is free and clear of claims of infringement or alleged
infringement or other lien, charge, claim or other encumbrance of any kind,
except for (x) any such claims, liens, charges or encumbrances that would not,
individually or in the aggregate, have a Material Adverse Effect, or (y) such
costs, charges, fees or other payments required under the terms of the licenses,
contracts or agreements governing the Licensed Software.
(b) Except as set forth on Schedule 3.06(B) hereto (i) the
logos, trademarks, service marks and copyrights that are used in the Business
are the property of Sellers, and (ii) Sellers have the right to grant to
Purchaser and LLANY a limited license to use the logos, trademarks, service
marks and copyrights referred to above in this Section 3.06 subject to the
terms, conditions and limitations contained in this Agreement or any Ancillary
Agreement; provided, however, that the representations and warranties in
subparagraphs (i) and (ii) above are limited to the Knowledge of Sellers with
respect to all common law intellectual property issues.
Section 3.07. Brokerage and Financial Advisers. No broker, finder or
financial adviser has acted directly or indirectly as such for, or is entitled
to any compensation from, Sellers or its Affiliates in connection with this
Agreement or the transactions contemplated hereby, except Goldman, Sachs & Co.,
whose fees for services rendered in connection therewith will be paid by
Sellers.
Section 3.08. Compliance with Laws. Except (i) as set forth on Schedule
3.08, or (ii) with respect to those violations, if any, that either have been
cured prior to the Contract Date or which would not, individually or in the
aggregate, have a Material Adverse Effect on the
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Business, since January 1, 1997 neither Seller has (x) received any written
notice of any alleged violation of Applicable Law, nor (y) violated any
Applicable Law, in either case relating to the Business.
Section 3.09. Licenses and Franchises. Schedule 3.09 hereto lists (a)
all jurisdictions in which Sellers are licensed to issue the Policies; and (b)
the lines of business which Sellers are authorized to transact in each such
jurisdiction. Except as set forth on Schedule 3.09 hereto, each Seller (a) has
been duly authorized by the relevant state insurance regulatory authorities to
issue the Policies that it is currently writing, and was duly authorized to
issue the Policies that it is not currently writing at the time such Policies
were issued, in the respective states in which it conducts the Business, except
for authorizations the failure of which to have would not, individually or in
the aggregate, have a Material Adverse Effect, and (b) has all other
authorizations necessary to conduct the Business in the manner and in the areas
in which the Business is presently being conducted and all such authorizations
are valid and in full force and effect, except where the failure to have such
authorization would not, individually or in the aggregate, have a Material
Adverse Effect.
Section 3.10. Policies. The forms of Policies available for issuance,
and the states in which such forms are authorized for issuance, are described by
reference to the base codes listed on Schedule 1.01(B) hereto. Except as set
forth on Schedule 3.10 hereto, Policies as now in force are in all respects, to
the extent required under Applicable Law, on forms approved by applicable
insurance regulatory authorities or which have been filed and not objected to by
such authorities within the period provided for objection, and such forms comply
in all material respects with the Applicable Laws, except where the failure to
have obtained such approval or non-objection or the failure to so comply would
not, individually or in the aggregate, have a Material Adverse Effect.
Section 3.11. Regulatory Filings. Except as set forth on Schedule 3.11
hereto, each Seller has filed all reports, statements, documents, registrations,
filings or submissions required to be filed by such Seller with any Governmental
Authority to the extent they relate to the Business, except where the failure to
make such filings would not, individually or in the aggregate, have a Material
Adverse Effect. All such registrations, filings and submissions were in
compliance in all material respects with Applicable Law when filed or as amended
or supplemented, and no material deficiencies have been asserted in writing by
any Governmental Authority with respect to such registrations, filings or
submissions that have not been satisfied.
Section 3.12. Producers and Employees.
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(a) Sellers have provided Purchaser with: (i) a list
identifying all LBMs employed by Sellers with respect to the Policies as of
April 13, 1998 and specifying the revenues for new sales generated for the
Sellers by each such LBM with respect to the Business for calendar years 1996
and 1997; (ii) a list identifying all MGAs with which Sellers have entered into
a Distribution Agreement and specifying the revenues for new sales generated for
the Sellers by each such MGA with respect to the Business for calendar years
1996 and 1997; and (iii) a list identifying, by name, functional area, position
and title, all employees of the Sellers or any of their Affiliates who spend
approximately two-thirds of their time performing services for Sellers or any of
their Affiliates with respect to the Business ("Dedicated Employees").
(b) Except as set forth on Schedule 3.12(B), Sellers have
provided or made available to Purchaser: (i) copies of all Distribution
Agreements with LBMs and MGAs; and (ii) a summary of the compensation
arrangements (including employee benefit plans) in effect on the Contract Date
and applicable to each of the employees described in Section 3.12(a)(iii) above
who have a current base salary equal to $75,000 or more (but excluding LBMs).
Within thirty (30) calendar days of the Contract Date, Sellers will provide or
make available to Purchaser (x) a summary of the compensation arrangements for
all other employees described in Section 3.12(a)(iii) hereof, (y) a list (which
may be in electronic form) of all Producers which earned first-year or renewal
commissions during calendar year 1997, and (z) a list identifying, by name,
functional area, position and title, all Allocated Employees. Except as set
forth in the Distribution Agreements or as set forth on Schedule 3.12(B) hereto,
there are no other written agreements providing for the compensation or
indemnification of LBMs or MGAs in connection with the Business or the provision
of financing (whether in form of contract loans or otherwise). Except as set
forth on Schedule 3.12(B), each Distribution Agreement between Sellers and the
LBMs or MGAs is valid, binding and in full force and effect in accordance with
its terms, except to the extent that any failure of any such agreement to be
valid, binding and in full force and effect would not have a Material Adverse
Effect. Except as set forth on Schedule 3.12(B) hereto, neither Sellers nor, to
the Knowledge of Sellers, any LBM or MGA, is in default in any material respect
with respect to any such Distribution Agreement.
Section 3.13. Reinsurance. Except as set forth on Schedule 3.13 hereto,
there are no reinsurance agreements, written or oral, relating to any portion of
the Business under which there remains any outstanding risk or obligation.
Section 3.14. Conduct of Business. Except as expressly contemplated or
required by this Agreement or as set forth in Schedule 3.14 hereto, since
December 31, 1997: (a) Sellers have generally conducted the Business only in the
ordinary course consistent with their past practices and there has not been any
material change in the underwriting, pricing, actuarial, reserving,
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sales, marketing or agency practices or policies relating to the Business; and
(b) there has not been any event, occurrence or condition of any character that
has had, or which might reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Business, other than: (i) any event,
occurrence, development or state of circumstances or facts (including
legislative, regulatory or judicial actions) affecting the life insurance
industry generally; (ii) the effect of or changes to general market or economic
conditions (including, but not limited to, changes in interest rates); or (iii)
with respect to matters disclosed on any other Schedule to this Agreement.
Schedule 3.14 lists the aggregate dollar amount of all surrenders (which dollar
amount includes partial surrenders) and policy loans effected by Policyholders
under Policies (or contracts that would constitute Policies if they were in
effect or subject to reinstatement on the Effective Date) from and after
December 31, 1997 through March 31, 1998.
Section 3.15. Sellers' Separate Accounts and Underlying Funds. Each of
the Sellers' Separate Accounts is duly and validly established, maintained and
operated in all material respects under the laws of the State of Connecticut,
and the underlying Variable Policies provide that the assets of the Sellers'
Separate Accounts are not chargeable with liabilities arising out of any other
business that the applicable Seller may conduct. Each of the Sellers' Separate
Accounts and the funds supporting the Seller Separate Accounts that are managed
by ALIAC or an Affiliate of ALIAC (the "Internally Managed Funds") is duly
registered as an investment company under the 1940 Act (or exempt from such
registration); each of the Sellers' Separate Accounts and the Internally Managed
Funds is and has been operated in compliance with all applicable requirements of
the 1940 Act in all material respects, and Sellers have filed all reports and
amendments of their respective registration statements required to be filed, and
have been granted all exemptive relief necessary for the operations of the
Sellers' Separate Accounts and the Internally Managed Funds. Each Internally
Managed Fund is duly incorporated and in good standing under the laws of the
state of its incorporation or is a validly existing business trust under the
laws of the jurisdiction in which it was formed and is qualified as a foreign
corporation or business trust in each jurisdiction in which such qualification
is necessary, except for those jurisdictions where failure to be so qualified
would not, individually or in the aggregate, have a Material Adverse Effect. The
Variable Policies are duly and validly issued and were sold pursuant to an
effective registration statement under the Securities Act and any applicable
state securities laws and each such registration statement is currently in
effect to the extent necessary to allow Sellers to receive contributions under
such Variable Policies. Sellers have filed each prospectus and statement of
additional information, as amended or supplemented, relating to the Sellers'
Separate Accounts and Internally Managed Funds that are required to be filed,
and each such prospectus and statement of additional information, as of its
respective mailing date or date of use, complied in all material respects with
applicable securities laws.
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Section 3.16. Contracts. Schedule 3.16 lists and briefly describes each
written contract, agreement or license and, to the Knowledge of Sellers, each
unwritten arrangement to which either Seller is a party or which is binding upon
such Seller that is reasonably material to the Business considered as a whole
except for: (i) those disclosed in any other Schedule to this Agreement; (ii)
the Policies; (iii) any lease to which either Seller is a party; and (iv)
Distribution Agreements. Without limiting the generality of the foregoing, for
purposes of this Section 3.16, a contract, agreement or license is deemed
"material to the Business considered as a whole" if it is entered into in
connection with the Business and provides for annual payments by either Seller
of $250,000 or more.
Section 3.17. Transferred Contracts. Schedule 3.17 hereto lists certain
of the Transferred Contracts. Except as set forth on Schedule 3.17, each
Transferred Contract so listed: is valid, binding and in full force and effect
according to its terms as against either or both Sellers, as applicable, and, to
the Knowledge of Sellers, the other party or parties thereto. Except as set
forth on Schedule 3.17, neither Seller nor, to the Knowledge of Sellers, any
other party to such contract is in violation, breach or default of any such
contract or, with or without notice or lapse of time or both, would be in
violation, breach or default of any such contract, except for such violations,
breaches or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect.
Section 3.18. Transferred Assets. Except as set forth on Schedule 3.18,
Sellers have good and marketable title to all assets included within the
Transferred Assets (other than cash or cash equivalents, the Transferred
Contracts and the Other Assets), free of any lien, encumbrance, restriction,
claim, charge, or defect of title, except for any liens, encumbrances,
restrictions, claims, charges or defaults of title (a) whose effect on the value
of the relevant Transferred Asset will be collectively reflected in the current
value thereof on the Final Closing Balance Sheet, (b) identified on Schedule
3.18 hereto, or (c) with respect to assets other than cash or cash equivalents,
that would not, individually or in the aggregate, have a Material Adverse
Effect.
Section 3.19. GAAP Financial Statements. ALIAC has previously delivered
to Purchaser true, complete and correct copies of: (a) the audited balance sheet
of ALIAC for the years ended December 31, 1997 and 1996, together with the
related audited statements of income for the years then ended; and (b) the
unaudited balance sheet of ALIAC for the calendar quarter ended March 31, 1998,
together with the related unaudited statement of income for the quarter then
ended (collectively, the "ALIAC GAAP Statements"). Except as set forth therein
or in the notes thereto, the ALIAC GAAP Statements present fairly, in all
material respects, the financial position, results of operations and cash flows
of ALIAC as of the respective dates and for the respective periods covered
thereby in accordance with GAAP, applied on a consistent basis
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throughout the periods indicated, except as otherwise specifically noted
therein.
Section 3.20. Statutory Statements. Sellers have previously delivered
to Purchaser true, complete and correct copies of: (a) the Annual Statements of
Sellers as filed with the Insurance Department of the State of Connecticut for
the years ended December 31, 1997 and 1996, together with all exhibits and
schedules thereto; and (b) the quarterly statutory statements of Sellers as
filed with the Insurance Department of the State of Connecticut for the calendar
quarter ended March 31, 1998 (collectively, the "SAP Statements"). Sellers also
have provided Purchaser with a copy of the portions of the actuarial opinions
applicable to the Business for such years and supporting actuarial memoranda.
The SAP Statements present fairly, in all material respects, the statutory
financial condition of the Sellers at the respective dates thereof, and the
statutory results of operations for the periods then ended in accordance with
Connecticut SAP, applied on a consistent basis throughout the periods indicated,
except as otherwise specifically noted therein. All statutory reserves reflected
in the SAP Statements relating to the Policies were determined, in all material
respects, in accordance with Connecticut SAP and generally accepted actuarial
assumptions and meet the requirements of the insurance laws of the State of
Connecticut. There are no agreements or understandings between either Seller and
the Insurance Department of the State of Connecticut affecting the
interpretation or application of Connecticut SAP with respect to the 1997 Annual
Statements.
Section 3.21. Other Statements. (a) Sellers have previously delivered
to Purchaser certain consolidated balance sheets and consolidated income
statements relating to the Business, excluding the Par Policies, in the form
attached as Exhibit O hereto (collectively, the "Pro Forma Statements"). Except
as set forth on Schedule 3.21 hereto, the Pro Forma Statements present fairly,
in all material respects, the financial position and results of operations of
the Business (other than the Par Policies) as of December 31, 1997 and for the
year then ended in accordance with Connecticut SAP and in a manner consistent
with the methodologies utilized in preparing the 1997 Annual Statements, except
for items that were treated differently for presentation purposes and except as
otherwise described on Schedule 3.21 hereto. As of December 31, 1997 there were
no debts, liabilities or obligations of the Business, whether accrued, absolute
or contingent and whether due or to become due, which would have been required
to be disclosed in accordance with Connecticut SAP, other than (i) as set forth
on Schedule 3.21 hereto or on any Schedule hereto, or (ii) as reserved against
or otherwise reflected in the Pro Forma Statements, or (iii) such debts,
liabilities or obligations which would not, individually or in the aggregate,
have a Material Adverse Effect on the Business. Notwithstanding the foregoing,
the Sellers make no representation or warranty as to any other date or data
reflected in the Pro Forma Statements including, without limitation, any
historical data for accounting periods ending prior to December 31, 1997 and any
projected data for periods ending after December 31, 1997.
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(b) The data reflected in the Pro Forma Statements or
furnished to Tillinghast-Towers Perrin in the preparation of its actuarial
analysis reports (a copy of which was delivered to Purchaser with the
confidential memorandum of Goldman, Sachs & Co. dated January, 1998) (i) was
obtained from the books and records of Sellers, (ii) was generated from the same
underlying sources and systems that were utilized by Sellers to prepare the
Sellers' 1997 Annual Statement, and (iii) was based on the statutory liabilities
relating to the Policies, subject in each case to any limitations and
qualifications contained in such actuarial analysis reports.
(c) Neither Seller has any SAS-70 Reports. Sellers have
previously delivered to Purchaser true, complete and correct copies of external
reports prepared by auditors concerning Sellers' internal controls and
procedures relating to the Business for calendar year 1996, and no such reports
have been issued for calendar year 1997.
Section 3.22. Tax Matters. Except as previously identified to Purchaser
in writing:
(a) The assets of the Sellers' Separate Accounts are and
have been adequately diversified at all times within the meaning of Section
817(h) of the Code.
(b) To the Knowledge of Sellers, there are no "hold
harmless" tax sharing or indemnification arrangements pursuant to which Sellers
have assumed an obligation to any Person regarding the Tax qualification or
treatment of any Policy.
(c) To the Knowledge of Sellers: (i) each Policy identified
as a life insurance policy for purposes of this Agreement that was issued after
December 31, 1984 complies with the requirements of Section 7702 of the Code;
(ii) each Policy identified as a life insurance policy for purposes of this
Agreement that was issued before January 1, 1985 (x) complies with the
requirements of Section 7702 of the Code to the extent applicable to such
Policy, or (y) to the extent Section 7702 of the Code is inapplicable to such
Policy and such Policy is a flexible premium contract within the meaning of
Section 101(f) of the Code, complies with the requirements of such Section
101(f) to the extent applicable to such Policy; (iii) the holders of any Policy
that constitutes a "modified endowment contract" under Section 7702A of the Code
have been notified of the status and federal tax consequences of such Policy;
and (iv) Sellers have complied, in all material respects, with all applicable
reporting, backup withholding and disclosure requirements under the Code,
including, but not limited to, those regarding distributions with respect to the
Policies and have reported the distributions under such Policies in accordance
with Sections 72, 7702 and 7702A of the Code, except, in the case of
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clauses (i), (ii), (iii) and (iv) herein for failures to comply which would not,
individually or in the aggregate, have a Material Adverse Effect on the
Business.
Section 3.23. Risk Based Capital. The Total Adjusted Capital of each
Seller exceeds its Company Action Level Risk Based Capital ("RBC") (as those
terms are defined by Applicable Law in the State of Connecticut).
Section 3.24. Year 2000 Matters. Sellers have developed and are
actively executing a plan and implementation strategy that, to the Knowledge of
Sellers, adequately addresses the Year 2000 with respect to Sellers' software
and hardware operations relating to the Business ("Sellers' Y2K Plan"), and
Sellers are proceeding in all material respects in accordance with the
implementation schedule under the Sellers' Y2K Plan.
A copy of Sellers' Y2K Plan has previously been provided to Purchaser.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND LLANY
Purchaser and LLANY hereby represent and warrant, severally and not
jointly, to Sellers as of the Contract Date and as of the Closing Date (but as
of no other dates unless so expressly stated), it being understood that each of
Purchaser and LLANY hereby makes only those representations and warranties that
specifically relate to it:
Section 4.01. Organization, Standing and Authority. Purchaser is a
corporation duly organized and validly existing under the laws of the State of
Indiana and has all requisite power and authority to own, lease and operate its
assets, properties and business and to carry on the operations of its business
as they are now being conducted, except where the failure to have such authority
would not, individually or in the aggregate, have a Purchaser Material Adverse
Effect. LLANY is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York and has all requisite power and
authority to own, lease and operate its assets, properties and business and to
carry on the operations of the business as they are now being conducted, except
where the failure to have such authority would not, individually or in the
aggregate, have a Purchaser Material Adverse Effect. Each of Purchaser and LLANY
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where the failure to be so qualified would not, individually
or in the aggregate, have a Purchaser Material Adverse Effect.
Section 4.02. Authorization. Each of Purchaser and LLANY has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this
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Agreement and under each of the Ancillary Agreements to be executed by it on or
after the Closing Date. The execution and delivery by Purchaser and LLANY of
this Agreement and the execution and delivery of the Ancillary Agreements to be
executed by Purchaser and LLANY, and the performance by Purchaser and LLANY of
their obligations under such agreements, have been duly authorized by
Purchaser's and LLANY's board of directors and by all other necessary corporate
action on the part of the Purchaser and LLANY. This Agreement has been duly
executed and delivered by Purchaser and LLANY, and on the Closing Date the
Ancillary Agreements to be executed by Purchaser and LLANY on the Closing Date,
will be duly executed and delivered by Purchaser and LLANY and, subject to the
due execution and delivery by the other parties to such agreements, this
Agreement is, and the Ancillary Agreements executed by Purchaser and LLANY on or
after the Closing Date will, upon due execution and delivery, be valid and
binding obligations of Purchaser and LLANY, enforceable against Purchaser and
LLANY in accordance with their respective terms, subject to (a) bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium and other similar
laws now or hereafter in effect relating to or affecting the rights of creditors
of insurance companies or creditors' rights generally; and (b) general
principles of equity (regardless of whether considered in a proceeding at law or
in equity). Notwithstanding the foregoing, the obligation of Purchaser and LLANY
to execute any Ancillary Agreement shall be subject to the fulfillment or waiver
of the terms and conditions of this Agreement.
Section 4.03. Actions and Proceedings. Except as disclosed on Schedule
4.03 hereto, there are no outstanding orders, decrees or judgments by or with
any Governmental Authority applicable to Purchaser or LLANY or their respective
properties or assets that, individually or in the aggregate, have a Purchaser
Material Adverse Effect. Except as disclosed on Schedule 4.03 hereto, there are
no actions, suits, arbitrations or legal, administrative or other proceedings
pending or, to the Knowledge of Purchaser, threatened against Purchaser or
LLANY, at law or in equity, or before or by any Governmental Authority or before
any arbitrator of any kind which would, individually or in the aggregate, have a
Purchaser Material Adverse Effect.
Section 4.04. No Conflict or Violation. The execution, delivery and
performance by Purchaser and LLANY of this Agreement and the execution, delivery
and performance by each of Purchaser and LLANY of the Ancillary Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby in accordance with the respective terms and conditions hereof and
thereof will not: (a) violate any provision of the charter, bylaws or other
organizational document of Purchaser or LLANY; (b) violate, conflict with or
result in the breach of any of the terms of, result in any modification of the
effect of, otherwise give any other contracting party the right to terminate, or
constitute (or with notice or lapse of time or both, constitute) a default
under, any contract to which either Purchaser or
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LLANY is a party or by or to which either of its properties may be bound or
subject; (c) violate any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority, or any agreement with, or condition
imposed by, any arbitrator or Governmental Authority, binding upon, Purchaser or
LLANY; (d) subject to obtaining the Permits referred to in Section 4.05 hereof,
violate any Applicable Law; or (e) result in a breach or violation of any of the
terms or conditions of, constitute a default under, or otherwise cause an
impairment of, any license or authorization related to Purchaser's or LLANY's
business or necessary to enable Purchaser or LLANY to conduct the Business,
except in the case of clauses (b), (c), (d) and (e) of this Section 4.04, for
such breaches, conflicts, modifications, terminations, violations, conflicts,
breaches or defaults that would not, individually or in the aggregate, have a
Purchaser Material Adverse Effect.
Section 4.05. Consents and Approvals. Except for the HSR Act or as set
forth on Schedule 4.05 hereto, the execution, delivery and performance by
Purchaser and LLANY of this Agreement, and the execution, delivery and
performance by each of Purchaser and LLANY of the Ancillary Agreements to which
it is a party, and the consummation of the transactions contemplated hereby and
thereby in accordance with the respective terms hereof and thereof, do not
require Purchaser or LLANY to obtain any Permit or any consent, approval or
action of, make any filing with or give any notice to, any Person, except for
such Permits, consents, approvals, actions, filings or notices the failure of
which to obtain, make or give, as the case may be, would not individually or in
the aggregate have a Purchaser Material Adverse Effect.
Section 4.06. Brokerage and Financial Advisers. No broker, finder or
financial adviser has acted directly or indirectly as such for, or is entitled
to any compensation from, Purchaser or LLANY in connection with this Agreement
or the transactions contemplated hereby, except Merrill Lynch & Co., whose fees
for services rendered in connection therewith will be paid by Purchaser.
Section 4.07. Compliance with Laws. Except (i) as set forth on Schedule
4.07, or (ii) with respect to those violations, if any, that have either been
cured by Purchaser or LLANY prior to the Contract Date or which would not,
individually or in the aggregate, have a Purchaser Material Adverse Effect,
neither Purchaser nor LLANY is in violation of any Applicable Law nor has
Purchaser or LLANY received any written notice of any such alleged violation.
Section 4.08. Licenses and Franchises. Purchaser and LLANY are duly
authorized by the relevant state insurance regulatory authorities to transact
each of the lines of insurance business in each of the jurisdictions set forth
for each company on Schedule 4.08 hereto. Except as listed on Schedule 4.08
hereto, Purchaser and LLANY have all licenses and authorizations
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necessary to: (a) conduct the Business in the manner and in the areas in which
the Business is presently being conducted; and (b) perform their respective
obligations under this Agreement and each Ancillary Agreement. All such licenses
and authorizations are valid and in full force and effect, and neither Purchaser
nor LLANY is operating under any formal or informal agreement or understanding
with any Governmental Authority which restricts its authority to do business or
requires Purchaser or LLANY to take, or refrain from taking, any action. Except
as listed on Schedule 4.08 hereto, no material violations exist in respect of
any such license or authorization and no investigation or proceeding is pending
or, to the Knowledge of Purchaser, threatened, that would be reasonably likely
to result in the suspension, revocation or material limitation or restriction of
any such license or authorization and, to the Knowledge of Purchaser, there is
no reasonable basis for the assertion of any such violation or the institution
of any such proceeding or investigation.
Section 4.09. Financial Statements. (a) LLANY has previously delivered
to Sellers true, complete and correct copies of the unaudited balance sheets of
LLANY for the years ended December 31, 1997 and 1996, together with the related
unaudited statements of income for the quarter then ended (the "LLANY GAAP
Statements"). Except as set forth therein or in the notes thereto, the LLANY
GAAP Statements present fairly, in all material respects, the financial
position, results of operations and cash flows of LLANY, as of the respective
dates and for the respective periods covered thereby. Purchaser has not prepared
financial statements (whether or not audited) in accordance with GAAP since
1995.
(b) Purchaser has previously delivered to Sellers true,
complete and correct copies of (i) the annual statements of Purchaser and LLANY
as filed with the Insurance Departments of the State of Indiana (with respect to
Purchaser) and the State of New York (with respect to LLANY) for the years ended
December 31, 1997 and 1996, together with all exhibits and schedules thereto;
and (ii) the quarterly statutory statements of Purchaser and LLANY as filed with
the applicable Insurance Department for the calendar quarter ended March 31,
1998 (collectively, the "Purchaser SAP Statements"). The Purchaser SAP
Statements present fairly, in all material respects, the statutory financial
condition of Purchaser and LLANY, as applicable, at the respective dates
thereof, and their statutory results of operations for the periods then ended in
accordance with Indiana SAP or New York SAP, as applicable, applied on a
consistent basis throughout the periods indicated and consistent with each
other, except as otherwise specifically noted therein. Purchaser has previously
disclosed to Sellers any agreements or understandings between Purchaser and the
Insurance Department of the State of Indiana and any agreements or
understandings between LLANY and the Insurance Department of New York, in each
case affecting the interpretation or application of the statutory accounting
principles and practices prescribed or permitted by the Insurance Departments of
the States of Indiana and New York,
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respectively, with respect to the Purchaser SAP Statements.
(c) Purchaser and LLANY have previously delivered to Sellers
true, complete and correct copies of all SAS-70 Reports concerning Purchaser's
and LLANY's internal controls and procedures relating to calendar years 1997,
1996 and 1995.
Section 4.10. Absence of Certain Changes. Since December 31, 1997 there
has not been any change, event, occurrence, circumstance, fact or other matter
that (i) has had or is likely to have a material adverse effect on the
liabilities, results of operations or financial condition of Purchaser
considered as a whole, or (ii) would constitute an Event of Default or Recapture
Event were such change, event, occurrence, circumstance, fact or other matter to
arise after Closing.
Section 4.11. Risk Based Capital. The Total Adjusted Capital of each of
Purchaser and LLANY exceeds its Company Action Level Risk Based Capital ("RBC")
(as those terms are defined by Applicable Law in the states of Indiana (with
respect to Purchaser) and New York (with respect to LLANY)).
Section 4.12. Sufficient Funds. Purchaser and LLANY have or will have
at Closing sufficient surplus and funds available (through existing credit
arrangements or otherwise) to pay the Purchase Price and assume the Assumed
Liabilities, as applicable to Purchaser and LLANY, and to pay all fees and
expenses related to the transactions contemplated by this Agreement.
Section 4.13. Resources. Purchaser and LLANY have sufficient expertise,
trained personnel, resources, systems, controls and procedures (financial,
legal, accounting, administrative or otherwise) as may be necessary or
appropriate to discharge its obligations after Closing under the terms of this
Agreement, the Coinsurance Agreements, Administrative Services Agreements or any
other Ancillary Agreement. Notwithstanding anything to the contrary contained in
this Agreement, this representation and warranty shall not terminate or expire
until all Assumed Liabilities have been discharged or terminated in full.
Section 4.14. Year 2000 Matters. The Purchaser has developed and is
actively executing a plan and implementation strategy (the "Purchaser Y2K Plan")
that, to the Knowledge of Purchaser, adequately addresses the year 2000 with
respect to the obligations of Purchaser and LLANY under this Agreement and the
Ancillary Agreements, and Purchaser and LLANY are proceeding in all material
respects in accordance with the implementation schedule under the Purchaser Y2K
Plan.
ARTICLE V
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COVENANTS
Section 5.01. Conduct of Business. (a) Prior to the Closing, Sellers
shall: (i) in all material respects operate the Business as presently operated
and only in the ordinary course and consistent with past practice; (ii) use
commercially reasonable efforts to preserve the value of the Business; and (iii)
use commercially reasonable efforts to preserve their relationships with and
goodwill of their Producers, customers, suppliers, employees and other Persons
having business dealings with Sellers in connection with the Business.
(b) Without limiting the generality of Section 5.01(a), and
except as otherwise expressly provided in this Agreement, and except as set
forth on Schedule 5.01(A) hereto, Sellers will not, without the prior written
consent of Purchaser:
(i) enter into a material contract with respect to
the Business that would require annual payments by either Seller of
$150,000 or more, other than in the ordinary course of business
consistent with past practice;
(ii) acquire or dispose of any asset that would
constitute a Transferred Asset if owned by either Seller at Closing,
other than acquisitions or dispositions in the ordinary course of
business consistent with past practice;
(iii) make material changes to any of the
accounting principles, practices, methods or policies (including but
not limited to any reserving methods, practices or policies) employed
with respect to the Business, except as may be required as a result of
a change in Applicable Law, GAAP, Connecticut SAP or guidelines issued
by the Commission or its accounting staff;
(iv) terminate the services of any Allocated
Employee or of any of the Persons identified in Section 3.12(a) or
materially change the duties of any such Person in a manner that
adversely affects the Business, or materially reduce the amount of time
such Person spends providing such services to the Business; provided
that Purchaser shall not unnecessarily withhold its consent to any
termination or change in duties described in this Section 5.01(b)(iv);
(v) pay, discharge, compromise or satisfy any
material claims, liabilities or obligations associated with the
Business other than the payment, discharge compromise or satisfaction
of claims, liabilities or obligations in the ordinary course of
business consistent with past practice;
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(vi) enter into or terminate any reinsurance
agreement relating to the Business;
(vii) take or cause to be taken any action that
would cause Sellers' Separate Accounts to be managed other than in the
ordinary course of business consistent with past practice;
(viii) increase the Commissions, salary, wages or
benefits of any of the Persons identified pursuant to Section 3.12
except, in any case (x) as may be required under the terms of Sellers'
employment or contractual relationships with such Persons, (y) in the
ordinary course of business consistent with past practice, or (z) as
may be provided under the terms of any retention agreement, stay bonus
or similar arrangement as may be necessary or appropriate to encourage
the retention of certain Transition Employees, which agreements,
bonuses or arrangements shall be at Sellers' expense;
(ix) agree in writing or otherwise to take any of
the actions described above in this Section 5.01(b); or
(x) directly or indirectly solicit or initiate any
negotiations or discussions with, or provide any information to, or
otherwise cooperate in any other manner with any Person or group of
Persons (other than Purchaser, LLANY and their Affiliates) concerning
any direct sale or other direct disposition of the Business.
(c) Prior to Closing, Seller shall notify Purchaser as
promptly as reasonably practicable of any event or occurrence which might
reasonably be expected to have a Material Adverse Effect on the Business, other
than (i) any event, occurrence, development or state of circumstances or facts
(including legislative, regulatory or judicial actions) affecting the life
industry generally, or (ii) the effect of or changes to general market or
economic conditions (including, but not limited to, changes in interest rates).
Section 5.02. Investigations; Pre-Closing Access.
(a) During the period between the Contract Date and the
Closing Date, Purchaser shall be entitled, through its employees and
representatives and at Purchaser's expense, to make such investigation of the
assets, liabilities, business and operations of the Business, and such
examination of the Books and Records relating to the Business, as Purchaser may
reasonably request. Any investigation, examination or interview by Purchaser of
Sellers' employees and agents or access pursuant to any of the provisions of
this Section 5.02(a) or
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5.02(b) shall be conducted or occur at reasonable times during normal business
hours and upon reasonable prior notice to Sellers; provided, however, that such
actions by Purchaser shall not unreasonably interfere with either Seller's
normal business operations. The parties hereto and their respective officers,
employees, agents and representatives, including, without limitation, counsel,
investment bankers, actuarial consultants and independent public accountants,
shall cooperate with each other in connection with such review and examination.
(b) Without limiting the generality of the foregoing, during
the period between the Contract Date and the Closing Date, Sellers shall, in
accordance with mutually acceptable guidelines and procedures: (i) provide to
Purchaser and its Affiliates access to the Persons identified pursuant to
Section 3.12 and to service providers of Sellers; (ii) reasonably designate
certain Persons to serve as members of a Sellers/Purchaser transition team and
cause such Persons to devote reasonable time to transition matters; (iii) devote
reasonable resources to transition matters (such resources to include, without
limitation, office accommodations and related facilities for a substantial and
continuing presence of Purchaser's transition team members on Sellers'
premises); (iv) reasonably cooperate with Purchaser and LLANY to assist
Purchaser and LLANY in filing policy and contract forms to enable Purchaser and
LLANY to issue policies and contracts in their names substantially similar to
the Policies included in the Business; (v) consult with Purchaser regarding
Sellers' development work pertaining to systems, products, distribution and
customer and producer services; and (vi) reasonably cooperate with Purchaser in
its development work pertaining to systems, products, distribution and customer
and producer services (including but not limited to assisting Purchaser in the
training of LBMs and MGAs on Purchaser's and LLANY's products) in order to
facilitate implementation of the transition plan at the earliest feasible date.
The facilities, services and cooperation to be provided by Sellers pursuant to
this Section 5.02(b) shall be provided to Purchaser as part of the consideration
for the payment of the Purchase Price and without any additional charge
therefor.
(c) Prior to the Closing Date, Sellers shall be entitled,
through their respective employees and representatives and at Sellers' expense,
to make such investigation of the assets, liabilities, business and operations
of Purchaser and LLANY as Sellers may reasonably request. Any such investigation
or examination shall be conducted at reasonable times during normal business
hours and upon reasonable prior written notice to Purchaser and LLANY; provided,
however, that such actions by Sellers shall not unreasonably interfere with
Purchaser's and LLANY's normal business operations. The parties hereto and their
respective employees and representatives, including, without limitation,
counsel, investment bankers, actuarial consultants and independent public
accountants, shall cooperate with each other in connection with such review and
examination.
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(d) Notwithstanding any other provisions of this Section
5.02, Purchaser, LLANY and Sellers shall cooperate in implementing the
provisions of this Section 5.02 so as not to prevent or interfere with Sellers'
compliance with Section 5.01 hereof.
Section 5.03. Post-Closing Access.
(a) Following the Closing Date, Sellers shall: (i) allow
Purchaser, upon reasonable prior notice and during normal business hours,
through its employees and representatives, the right, at Purchaser's expense, to
examine and make copies of any records retained by Sellers for any reasonable
business purpose, including, without limitation, the preparation or examination
of Purchaser's or LLANY's Tax returns, regulatory filings and financial
statements, but only to the extent that such records of Sellers would otherwise
constitute Books and Records or Post-Closing Records and relate to the Business
or the conduct of the Business prior to the termination of the Transition
Services Agreement; (ii) allow Purchaser to interview the Sellers' employees for
any reasonable purpose relating to the Business, including, without limitation,
the preparation or examination of Tax returns, regulatory and statutory filings
and financial statements and the conduct of any litigation relating to the
Liabilities or otherwise, or the conduct of any regulatory, contract holder,
participant or other dispute resolution whether pending or threatened; and (iii)
maintain such records for Purchaser's examination and copying until at least the
third anniversary of the Closing Date, after which the Sellers may destroy such
records in their discretion. Access to such records shall not unreasonably
interfere with each Seller's or any successor company's business operations.
(b) Following the Closing Date, Purchaser and LLANY shall:
(i) allow Sellers, upon reasonable prior notice and during normal business
hours, through their employees and representatives, the right to (x) examine and
make copies, at Sellers' expense, of the Books and Records transferred to
Purchaser or LLANY at the Closing and the books and records relating to the
Business created and maintained by Purchaser or LLANY after the Closing Date
(the "Post-Closing Records"), and (y) interview the Purchaser's and LLANY's
employees (including the Transition Employees), in the case of either clause
(i)(x) or (i)(y), for any reasonable purpose relating to the Business,
including, without limitation, the preparation or examination of Tax returns,
regulatory and statutory filings and financial statements and the conduct of any
litigation relating to the Retained Liabilities or otherwise, or the conduct of
any regulatory, contract holder, participant or other dispute resolution whether
pending or threatened; and (ii) maintain such Books and Records and Post-Closing
Records for Sellers' examination and copying. Purchaser and LLANY shall maintain
and make available to Sellers the Books and Records and Post-Closing Records
until such time as Sellers give written permission for their destruction, which
with respect to a particular Policy or Post-Closing Policy, shall not be
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unreasonably withheld if: (A) the Policy or Post-Closing Policy to which such
Books and Records and Post-Closing Books and Records relate has been expired for
longer than three years; or (B) the applicable statute of limitations under all
applicable Tax laws has expired with respect to Books and Records relating to
Taxes. Access to such Books and Records shall not unreasonably interfere with
Purchaser's or LLANY's business operations.
Section 5.04. HSR Act Filings. Sellers, Purchaser and LLANY shall, as
promptly as practicable, cause Notification and Report Forms to be filed under
the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
in connection with the transactions contemplated by this Agreement, the
Ancillary Agreements and the other agreements contemplated hereby and thereby.
Sellers, Purchaser and LLANY shall use their respective commercially reasonable
efforts to respond as promptly as practicable to all inquiries received from the
FTC or the Antitrust Division for additional information or documentation and to
cause the waiting periods under the HSR Act to terminate or expire at the
earliest possible date.
Section 5.05. Consents and Reasonable Efforts. (a) Sellers, Purchaser
and LLANY shall cooperate and use their commercially reasonable efforts to
promptly obtain all consents, approvals and agreements of, and to promptly give
and make all notices and filings with, any Governmental Authorities, necessary
to authorize, approve or permit the consummation of the transactions
contemplated by this Agreement, the Ancillary Agreements and the other
agreements contemplated hereby and thereby, including, without limitation, the
Permits described in Sections 6.03 and 7.03. Sellers shall use their
commercially reasonable efforts to promptly obtain, and Purchaser and LLANY will
cooperate with Sellers in promptly obtaining, all other approvals and consents
to the transactions contemplated by this Agreement and the Ancillary Agreements,
including the matters set forth on Schedule 3.05 hereto and the consents of
third parties under contracts to be assigned. Purchaser and LLANY shall use
their commercially reasonable efforts to promptly obtain, and Sellers will
cooperate with Purchaser and LLANY in promptly obtaining, all approvals and
consents to the transactions contemplated by this Agreement and the Ancillary
Agreements as set forth on Schedule 4.05 hereto. Sellers, Purchaser and LLANY
will each furnish to the other such necessary information and reasonable
assistance as the other may request in connection with its preparation of
necessary filings or submissions to any Governmental Authority including,
without limitation, filings under the provisions of the HSR Act.
(b) The parties hereto agree that they will consult with
each other with respect to the obtaining of all Permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary or
advisable to consummate the transactions
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contemplated by this Agreement and the Ancillary Agreements and each party will
keep the other apprised of the status of matters relating to completion of the
transactions contemplated herein. The form of any filings, registrations or
notifications required to be made by any party shall be subject to the prior
approval of the other party or parties hereto, which approval shall not be
unreasonably withheld or delayed, except that no party shall be obligated to
share confidential or proprietary information with the other parties in
connection with such filings. The party responsible for a filing as set forth
above shall promptly deliver to the other party evidence of the filing of all
filings, registrations and notifications relating thereto and any supplement,
amendment or item of additional information in connection therewith. The party
responsible for a filing shall also promptly deliver to the other party a copy
of each material notice, order, opinion and other item of correspondence
received by such filing party from any Governmental Authority in respect of any
such filings. In exercising the foregoing rights and obligations, Sellers,
Purchaser and LLANY shall act reasonably and as promptly as practicable.
Sellers, Purchaser and LLANY shall promptly advise each other upon receiving any
communication from any Governmental Authority whose consent or approval is
required for consummation of the transactions contemplated by this Agreement or
the Ancillary Agreement which causes such party to believe that there is a
reasonable likelihood that any requisite regulatory approval will not be
obtained or that the receipt of any such approval will be materially delayed.
(c) With respect to the Variable Policies, ALIAC and
Purchaser shall cooperate and use commercially reasonable efforts to obtain any
necessary approvals by ALIAC regarding the substitution of a mutual fund
including, but not limited to, a mutual fund managed by Purchaser or an
Affiliate of Purchaser, for any and all mutual funds, including but not limited
to any Internally Managed Fund, that support the Sellers' Separate Accounts, to
obtain any required approvals from the Commission in connection therewith and to
enter into a participation agreement to effect such substitution (which
participation agreement shall be reasonably satisfactory to Purchaser and ALIAC
in all material respects) and to obtain all other consents, approvals and
agreements of, and to give and make all notices and filings with, any other
Governmental Authorities necessary to authorize, approve or permit the
consummation of the substitution referred to herein. ALIAC and Purchaser, as the
case may be, shall use commercially reasonable efforts to obtain, and each such
party will cooperate with the other parties in obtaining, all other approvals
and consents to the substitution described in the immediately preceding
sentence. Notwithstanding anything to the contrary contained in this Section
5.05(c): (i) with respect to all Policies designated "Aetna Vest I Policies,"
Purchaser shall not take any action that would cause the sum of mortality and
expense charges and mutual fund advisory fees to exceed the maximum charges
permitted (which charges have been disclosed to Purchaser) with respect to any
investment option offered to the owners of such Policies; and (ii) Purchaser
shall reimburse ALIAC for any and all costs, whether direct or indirect,
incurred by
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ALIAC in connection with the mutual fund substitutions contemplated herein.
Section 5.06. Representations and Warranties. From the date hereof
through the Closing Date: (a) Sellers shall use their commercially reasonable
efforts to conduct their affairs in such a manner so that, except as otherwise
contemplated or permitted by this Agreement, the representations and warranties
contained in Article III shall continue to be true, complete and correct in all
material respects on and as of the Closing Date as if made on and as of the
Closing Date, except for representations and warranties that are expressly
stated to be made as of an earlier date; (b) Purchaser and LLANY shall use their
commercially reasonable efforts to conduct their affairs in such a manner so
that, except as otherwise contemplated or permitted by this Agreement, the
representations and warranties as to Purchaser and LLANY contained in Article IV
shall continue to be true and correct in all material respects on and as of the
Closing Date as if made on and as of the Closing Date except for representations
and warranties that are expressly stated to be made as of an earlier date; (c)
Sellers shall notify Purchaser promptly of any event, condition or circumstance,
to the Knowledge of Sellers, occurring from the date hereof through the Closing
Date that would constitute a violation or breach of this Agreement by Sellers,
Purchaser or LLANY; and (d) Purchaser shall notify Sellers promptly of any
event, condition or circumstance, to the Knowledge of Purchaser, occurring from
the date hereof through the Closing Date that would constitute a violation or
breach of this Agreement by Purchaser, LLANY or Sellers.
Section 5.07. Updating Schedules. In connection with the Closing,
Sellers, Purchaser and LLANY will promptly supplement or amend the various
Schedules to this Agreement to reflect any matter which, if existing, occurring
or known on the Contract Date should have been so disclosed, or which is
necessary to correct any information in such Schedules which was or has been
rendered inaccurate thereby; provided, however, that for purposes of determining
the rights and obligations of the parties under this Agreement, any such
supplemental or amended disclosure by any party shall not be deemed to have been
disclosed as of the Contract Date, to constitute a part of, or an amendment or
supplement to, such party's Schedules, or to cure any breach or inaccuracy of a
representation or warranty unless so agreed to in writing by the other party,
which agreement shall not be unreasonably withheld if such supplemental or
amended disclosure is not reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect on the Business or a material adverse effect
on the liabilities, results of operations or financial condition of Purchaser
considered as a whole, as the case may be.
Section 5.08. Further Assurances.
(a) Upon the terms and subject to the conditions herein
provided, on and
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prior to the Closing Date each of Sellers, Purchaser and LLANY shall use
commercially reasonable efforts to take, or cause to be taken, all action or do,
or cause to be done, all things or execute any documents necessary, proper or
advisable under Applicable Laws or otherwise to consummate and make effective
the transactions contemplated by this Agreement, the Ancillary Agreements and
the other agreements contemplated hereby and thereby.
(b) On and after the Closing Date, Sellers, Purchaser and
LLANY shall take all reasonably appropriate action and execute any additional
documents, instruments or conveyances of any kind (not containing additional
representations and warranties) which may be reasonably necessary to carry out
any of the provisions hereof, including, without limitation, putting Purchaser
and LLANY in full possession and operating control of the Transferred Assets and
the Business and giving effect to the assumption of the Assumed Liabilities by
Purchaser and LLANY as contemplated hereby and thereby.
Section 5.09. Expenses. Except as otherwise specifically provided in
this Agreement or the Ancillary Agreements, the parties to this Agreement shall
bear their respective expenses incurred in connection with the preparation,
execution and performance of this Agreement and the Ancillary Agreements and the
transactions contemplated hereby and thereby including, without limitation, all
fees and expenses of agents, representatives, counsel, investment bankers,
actuaries and accountants; provided, however, that (a) Purchaser shall pay the
cost of the filing fees in connection with the filings by any of the parties
hereto with the FTC and the Antitrust Division under the HSR Act with respect to
the transactions contemplated hereby; and (b) Purchaser shall bear the cost of
obtaining required Permits, insurance regulatory approvals, consents and orders
for the implementation of the Coinsurance Agreements and Administrative Services
Agreements in any state or jurisdiction the laws of which require Purchaser or
LLANY to obtain such approval, consent or order; and (c) Sellers shall bear the
cost of obtaining required approvals, consents and orders for the implementation
of the Coinsurance Agreements and Administrative Services Agreements from
Connecticut, New York and any other state or jurisdiction the laws of which
require Sellers to obtain such approval, consent or order.
Section 5.10. Coinsurance Agreements. At the Closing (a) ALIAC and
Purchaser shall execute and deliver to each other the ALIAC Coinsurance
Agreement; (b) ALIAC and LLANY shall execute and deliver to each other the ALIAC
(NY) Coinsurance Agreement; (c) ALIC and Purchaser shall execute and deliver to
each other the ALIC Coinsurance Agreement; and (d) ALIC and LLANY shall execute
and deliver to each other the ALIC (NY) Coinsurance Agreement. Each of the
Coinsurance Agreements shall be effective as of the Effective Date.
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Section 5.11. Administrative Services Agreements. At the Closing, (a)
Sellers and Purchaser shall execute and deliver to each other the Administrative
Services Agreement, and (b) Sellers and LLANY shall execute and deliver to each
other the NY Administrative Services Agreement. Each of the Administrative
Services Agreement and NY Administrative Services Agreement shall be effective
as of the Effective Date. Not later than sixty (60) calendar days after the
Contract Date, Purchaser, LLANY and Sellers will use their respective
commercially reasonable efforts to identify any additional services to be
rendered by Purchaser and LLANY, as applicable, under the terms of the
Administrative Services Agreement, which services shall be listed on Schedule
2.01 thereto, and be consistent with current practices.
Section 5.12. Bill of Sale. At the Closing, Sellers, Purchaser and
LLANY shall execute and deliver to each other the Bill of Sale and Assumption
Agreement, which shall be effective as of the Effective Date.
Section 5.13. Transition Services Agreement. At the Closing, Sellers
and Purchaser shall execute and deliver to each other the Transition Services
Agreement, which shall be effective as of the Effective Date, and the general
terms of which are described on the Transition Services Agreement Term Sheet
attached hereto as Exhibit N.
Section 5.14. Certain Agreements. Prior to Closing: (a) each Seller
agrees to use its commercially reasonable efforts to assign to Purchaser or
LLANY, as applicable, all of its rights and obligations under the Transferred
Contracts to the extent such rights and obligations relate to the Business,
provided, however, that Purchaser shall pay or reimburse Sellers for 50% of any
payments, fees, costs or expenses required to be paid by Sellers to the
counterparty to any Transferred Contract in connection with obtaining any such
assignments; provided further that if Sellers are not able to obtain any
required consent to the assignment of a Transferred Contract, Sellers shall
provide or cause to be provided to Purchaser the services called for by such
Transferred Contract on substantially the same price (which shall be paid by
Purchaser) and terms as are set forth in such Transferred Contract; and (b) the
reinsurance agreements or arrangements relating to the Business between ALIC and
ALIAC, as described and set forth on Schedule 5.14 hereto shall be continued,
terminated or modified, as the case may be, in the manner described on Schedule
5.14 effective as of the Effective Date, in either case on terms and conditions
reasonably satisfactory to Sellers and Purchaser.
Section 5.15. DAC Tax. The Sellers, Purchaser and LLANY agree to make
the election contemplated by Section 848 of the Code in accordance with the
terms, conditions and procedures contained in Article VIII of the Coinsurance
Agreements.
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Section 5.16. Bank Accounts and Lockboxes. Pursuant to the Bill of Sale
and Assumption Agreement, Sellers shall transfer to Purchaser or LLANY, as
applicable, the bank accounts and lock-boxes of Sellers to the extent used
solely in the operation of the Business. Sellers shall execute such additional
agreements and instruments as may be reasonably required by a particular bank to
effectuate the transfer to Purchaser of such bank accounts and lock-boxes.
Section 5.17. Intentionally Deleted.
Section 5.18. Confidentiality. (a) Each party hereto (with both
Sellers, on the one hand, and Purchaser and LLANY, on the other hand, considered
to be one party for purposes of this Section 5.18) will hold, and will cause
their respective directors, officers, shareholders, employees, Affiliates,
agents, representatives, advisors and consultants (including, without
limitation, attorneys, investment bankers, actuarial consultants and independent
public accounts) to hold, in strict confidence the Confidential Information (as
defined herein) from any other Person unless:
(i) a party is compelled to disclose the
Confidential Information by judicial or administrative process
(including without limitation in connection with obtaining the
necessary approvals of this Agreement and the Ancillary Agreements and
transactions contemplated hereby and thereby by Governmental
Authorities) or by other requirements of Applicable Law; provided,
however, that if, in the course of any legal or administrative
proceedings or as otherwise required by Applicable Law or a
Governmental Authority, either party is requested or required to
disclose Confidential Information, such party will, prior to any
disclosure and within five (5) Business Days, notify the other party in
writing and provide the other party with copies of any such written
request or demand so that the other party may seek a protective order
or other appropriate remedy or waive in writing the provisions of this
Section 5.18 to the extent necessary (provided that one or the other be
done). The parties shall cooperate with each other to obtain a
protective order or other reliable assurance that confidential
treatment will be afforded to designated portions of the Confidential
Information. If no protective order or other remedy is obtained and the
other party has not waived compliance with this Section 5.18, and if
either party is, based upon the written advice of its counsel (which
counsel shall be reasonably acceptable to the other party), legally
required to disclose Confidential Information under Applicable Law,
then such party may do so without liability to the other party, except
that disclosure of Confidential Information shall be limited to the
information actually required to be disclosed pursuant to Applicable
Law; or
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(ii) the Confidential Information is disclosed in
an action or proceeding brought by a party hereto in pursuit of its
rights or in the exercise of its remedies hereunder.
(b) For purposes of this Agreement, "Confidential
Information" is defined as all documents and information concerning the other
party or any of its Affiliates furnished to it by the other party or such other
party's representatives in connection with this Agreement or the transactions
contemplated hereby, except that Confidential Information shall not include
documents or information that can be shown to have (i) been already in the
possession of the party, provided that such information is not known by such
party to be subject to another confidentiality agreement with or other
obligation of secrecy to the other party or another party, or (ii) become
generally available to the public other than as a result of a disclosure by the
party or become available to the party on a non-confidential basis from a source
other than the other party or its directors, officers, shareholders, employees,
Affiliates, agents, representatives, advisors or consultants, provided that such
source is not known, after due inquiry, to be bound by a confidentiality
agreement with or other obligation of secrecy to the other party or another
party; provided, however, that following the Closing the foregoing restrictions
will not apply to Purchaser's use of documents and information concerning the
Business furnished by Sellers hereunder including, without limitation,
Purchaser's disclosure to prospective purchasers of the sponsored Business from
Purchaser of such documents and information relating to the sponsored Business.
Notwithstanding the foregoing, in the event the transactions contemplated hereby
are not consummated and this Agreement is terminated, the parties' obligations
to maintain the confidentiality of such documents and information shall be
governed by the Confidentiality Agreement.
Section 5.19. Employment Obligations. In furtherance of the
transactions contemplated by this Agreement and the Ancillary Agreements,
Sellers and Purchaser agree as follows:
(a) Identification of Employees.
(i) In accordance with Section 3.12, Sellers have
provided or shall provide Purchaser with a list of the Allocated
Employees and the Dedicated Employees (jointly referred to herein as
the "Employee List"). No later than 60 days after the Contract Date,
Purchaser will identify from the Employee List those Dedicated and
Allocated Employees whose services Purchaser or its Affiliates wish to
engage after the Closing Date and who will be offered Suitable
Employment (as defined below) (Persons being offered Suitable
Employment by Purchaser or its Affiliates are referred to herein as
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the "Transition Employees"); provided, however, that notwithstanding
anything to the contrary herein, Sellers shall be required to give
Purchaser access to no less than one Allocated Employee for each full
time equivalent allocated to the Business. Persons appearing on the
Employee List who are not Transition Employees but who will provide
services in accordance with the Transition Services Agreement are
referred to herein as "TSA Employees." Persons appearing on the
Employee List who are neither Transition Employees nor TSA Employees
are referred to herein as "Other Employees." All such offers of
Suitable Employment shall be made to the identified employees no later
than sixty (60) days after the Contract Date and shall be effective as
of January 1, 1999 (the "Effective Date of Employment"). Purchaser
will make offers of Suitable Employment as set forth on Schedule
5.19(A) hereto.
(ii) In the event that within 60 days of the
Contract Date, it is determined that there are specific employees of
Sellers or any of their Affiliates who, for any significant period
ending between October 15, 1997 and April 15, 1998, spent at least
two-thirds of their time performing services at a professional,
technical, supervisory or higher level for Sellers or any of their
Affiliates with respect to the Business and who do not appear on the
Employee List (the "Look-back Employees"), Purchaser may have access to
such Look-back Employees (in accordance with Section 5.02 hereof) and
may within 60 days of the Contract Date make offers of Suitable
Employment (consistent with the nature of such employee's position when
performing services for the Business) to such Look-back Employees.
Notwithstanding anything in this Agreement to the contrary, Sellers
shall not be required to terminate the employment relationship of any
such Look-back Employee who does not accept an offer of Suitable
Employment. Any such Look-back Employee who receives an offer of
Suitable Employment shall be deemed a Transition Employee for purposes
of Section 5.19(d)(1) of this Agreement. Any such Look-back Employee
who accepts an offer of Suitable Employment shall be deemed a
Transferred Employee under this Agreement as of the Effective Date of
Employment.
(b) Transition Employees.
In the event that any Transition Employee's employment terminates prior
to the Effective Date of Employment (as defined above), Sellers, after
consulting with Purchaser, shall use commercially reasonable efforts to replace
such Transition Employee in order to maintain staffing levels that are
appropriate with respect to the Business. Any such replacement employee shall be
deemed to be a Transition Employee for purposes of this Agreement. During the
period between the Closing Date and the Effective Date of Employment, the
Transition Employees shall remain employees of Sellers or their Affiliates.
During such period, Sellers will provide the
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administrative services requested by Purchaser that are reasonably necessary to
service and administer the Business in accordance with the Transition Services
Agreement. Up to the Effective Date of Employment, the Transition Employees
shall perform the activities requested by Purchaser but shall remain under the
direction and control of Sellers and Sellers shall retain the right to terminate
such Transition Employees. In the event that Sellers terminate a Transition
Employee without Purchaser's consent (which consent shall not be unreasonably
withheld), Sellers shall be responsible for payment of related severance costs,
if any. Purchaser will pay or reimburse Sellers for all costs for providing the
services of the Transition Employees, including but not limited to Sellers'
Fully Loaded Costs. Other than increases in salary or wages in the ordinary
course of business and any changes in benefits disclosed in Schedule 5.01(A),
Purchaser shall not be responsible for reimbursement for increases in the
compensation and benefits of Transition Employees during the period between the
Closing Date and the Effective Date of Employment without the prior written
approval of Purchaser. In the event that the bonus and/or benefits paid to or
provided on behalf of any Transition Employee during or for such period include
amounts attributable to an entire year or any portion of a year greater than the
period of time during which the Transition Employee was providing services under
this Section 5.19(b), then Purchaser shall reimburse to Sellers only the pro
rata portion of such bonus and/or benefits based on the period of time during
which the Transition Employee provided services under this Section 5.19(b).
(c) Transition Services Management Team. Purchaser and
Sellers will establish a Transition Services Management Team, which will consist
of one manager from each of Purchaser and Sellers, each of whom are familiar
with the Business. The purpose of the Transition Services Management Team will
be to coordinate transition activities during the period of time between the
Contract Date and the Closing Date and thereafter consistent with Purchaser's
business objectives.
(d) Prohibition on Hiring; Suitable Employment.
(1) The employment or other relationship with Sellers or
any of their Affiliates of any Transition Employee who (i) is an Allocated
Employee who as of the Closing Date has accepted an offer of Suitable Employment
with Purchaser or its Affiliates, (ii) is a Dedicated Employee, or (iii) is a
Look-back Employee who as of the Closing Date has accepted an offer of Suitable
Employment with Purchaser or its Affiliates, shall be terminated as of the
Effective Date of Employment. Aetna Retirement Services, Inc. and/or its
wholly-owned Subsidiaries shall be prohibited from hiring such Transition
Employee for 24 months following the Closing Date, and Aetna Inc. and/or its
Affiliates (other than Aetna Retirement Services, Inc. or its wholly-owned
Subsidiaries) shall be prohibited from hiring such Transition Employee for
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12 months following the Closing Date; provided, however, that such prohibitions
shall not apply to a Transition Employee who has accepted an offer of Suitable
Employment in the event that (i) Purchaser sells the Business (or any portion of
the Business in which such Transition Employee spends substantially all of his
or her time) to an acquiror that does not give such Transition Employee an offer
of Suitable Employment, or (ii) Purchaser or any subsequent acquiror of all or
any portion of the Business terminates the employment of such Transition
Employee. Following the twelfth month after the Closing Date and until the end
of the twenty-fourth month after the Closing Date, Aetna Inc. and/or its
Affiliates (other than Aetna Retirement Services, Inc. or its wholly-owned
Subsidiaries) may hire any such Transition Employee subject to the conditions
described on Schedule 5.19(D) hereto; provided that such conditions shall not
apply to the hiring of any Transition Employee in the circumstances described in
the proviso of the immediately preceding sentence.
(2) As used herein, "Suitable Employment" shall mean,
with respect to an employee, a position: (i) that is consistent with the nature
of such employee's position with Sellers or their Affiliates or Purchaser or its
Affiliates, as applicable; (ii) that is within 20 miles of the geographic
location at which such employee was performing his or her services for Sellers
or their Affiliates or Purchaser or its Affiliates, as applicable; and (iii)
with a salary at least at the level the employee was receiving from Sellers or
their Affiliates immediately prior to the Closing Date, or, in the case of a
sale of the Business or any portion of the Business by Purchaser, with a salary
at least at the level the employee was receiving from Purchaser or its
Affiliates immediately prior to the closing date of such sale.
(e) Severance.
(1) Sellers shall be responsible for any Severance Costs
(as defined on Schedule 5.19(E) hereto) incurred with respect to any Other
Employee who is terminated by Sellers; provided however, that if Purchaser or
any of its Affiliates hires any Other Employee within the period ending 12
months after the Closing Date, Purchaser shall reimburse Sellers for all
Severance Costs paid by Sellers to such employee.
(2) Purchaser shall reimburse Sellers for Severance
Costs incurred with respect to any TSA Employee who is a Dedicated Employee, who
does not receive an offer of Suitable Employment from Purchaser and who is
terminated by Sellers within 90 days following the date on which the services
performed by such TSA Employee are no longer provided by Sellers to Purchaser
under the Transition Services Agreement; provided however, that if Sellers or
any of their Affiliates rehire any such TSA Employee who is a Dedicated Employee
within the period ending 12 months after the Closing Date, Sellers shall
reimburse
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Purchaser for all Severance Costs so paid by Purchaser to Sellers with respect
to such employee; provided further, that notwithstanding the foregoing, Sellers
shall not be required to reimburse Purchaser for any Severance Costs in
connection with the rehiring of any employee in the event Purchaser sells the
Business (or any portion of the Business in which such employee spends
substantially all of his or her time) to an acquiror that does not give such
employee an offer of Suitable Employment, and such rehiring takes place after
the date which is 6 months following the Closing Date.
(f) Employee Benefits. Except as otherwise specifically
provided herein, Purchaser shall provide benefits to each Transition Employee
who accepts employment with Purchaser ("Transferred Employee") under the
employee benefit plans, programs and arrangements (including but not limited to
severance arrangements) of Purchaser and its Affiliates on the same terms and
conditions as such benefits are provided to similarly situated employees of
Purchaser. Purchaser and its Affiliates shall waive or cause to be waived,
except to the extent that such waiver is prohibited by applicable law, any
waiting period, probationary period, pre-existing condition exclusion, evidence
of insurability requirement, or similar condition with respect to initial
participation under any plan, program, or arrangement established, maintained,
or contributed to by Purchaser or any of its Affiliates to provide health, life
insurance, or disability benefits with respect to each Transferred Employee who
has satisfied the comparable eligibility, insurability or other requirements
being waived under Sellers' comparable plans immediately prior to the Effective
Date of Employment. Each Transferred Employee shall be credited with the service
and compensation of such Transferred Employee with Sellers or their Affiliates
up to the Effective Date of Employment to the same extent as if such service had
been performed for Purchaser or any of its Affiliates and such compensation had
been paid by Purchaser or any of its Affiliates for all purposes (other than
with respect to any "nonqualified deferred compensation plan" maintained by
Purchaser or any of its Affiliates) in connection with determining such
Transferred Employee's eligibility for, and vesting, benefit accrual and
entitlements under, all employee benefit plans, programs and arrangements,
including but not limited to vacation and sick days, severance, defined benefit
pension plan, 401(k) plan and retiree medical benefits. Without limiting the
generality of the foregoing, as of the Effective Date of Employment, Purchaser
shall provide the following benefits to Transferred Employees:
(1) Severance. For the period beginning on the Effective
Date of Employment and ending on December 31, 1999, Purchaser shall provide
Transferred Employees with severance benefits that are no less favorable than
the severance benefits that would have been provided by Sellers to such
Transferred Employees immediately prior to the Closing Date.
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(2) 401(k) Plan. Each Transferred Employee who is
eligible to participate in the Aetna Services, Inc. Incentive Savings Plan
immediately before the Effective Date of Employment shall be eligible to
participate in the Lincoln National Corporation Employees' Savings and Profit
Sharing Plan ("Purchaser 401(k) Plan"), as of the Effective Date of Employment.
(3) Health, Dental, Disability and Vision Insurance.
Purchaser shall provide Transferred Employees with health, dental, disability
and vision insurance on the same terms and conditions as such benefits are
provided to similarly situated employees of Purchaser.
(4) Defined Benefit Pension Plan. Each Transferred
Employee shall be eligible to participate in the Lincoln National Corporation
Employees' Retirement Plan ("Purchaser's Defined Benefit Plan") in accordance
with the applicable provisions of such plan as amended from time to time.
Sellers shall retain all liabilities and obligations with respect to benefits
accrued by Transferred Employees under the Retirement Plan for Employees of
Aetna Services, Inc. Purchaser shall be permitted to reduce the aggregate of the
accrued benefits under Purchaser's Defined Benefit Plan of each Transferred
Employee who commences participation thereunder by the amount of such
Transferred Employee's benefits payable under the Sellers' Defined Benefit
Pension Plan, but not below the amount the Transferred Employee would have
received had the Transferred Employee been treated by Purchaser as a new hire as
of the Effective Date of Employment. The calculation of the amounts to be offset
shall be determined in accordance with the guidelines, which shall be mutually
determined by the parties within 60 days of the Contract Date. Such guidelines
will provide that the calculation will be made as of normal retirement date or
current age (if older) and Sellers' plan benefit will be calculated using
Sellers' plan formula in effect as of the Contract Date. On the date which is
the later of March 31, 1999 or 3 months from the Effective Date of Employment
for a Transferred Employee, Sellers shall provide to Purchaser a schedule
containing compensation and other relevant data required to determine for
purposes of calculating pension benefits under Purchaser's Defined Benefit Plan.
(5) Retiree Medical Insurance. For the period beginning
on the Effective Date of Employment and ending on December 31, 1999, Purchaser
shall provide each Transferred Employee access to retiree medical insurance
coverage with eligibility and terms and conditions no less favorable than those
provided by Purchaser to similarly situated employees immediately prior to the
Effective Date of Employment.
(6) Vacation and Sick Pay. Purchaser will provide
vacation and sick
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pay benefits to all Transferred Employees on the same terms and conditions as
such benefits are provided to similarly situated employees of Purchaser;
provided however, that each Transferred Employee shall be credited as of the
Effective Date of Employment with at least the number of vacation days
calculated under Sellers' vacation policy effective immediately prior to the
Closing Date as generally described on Schedule 5.19(F) hereto.
(g) Employment Obligations. Except as otherwise specifically
provided in this Section 5.19, (i) Sellers shall retain liability for all
salary, commissions and other compensation and benefits of any kind due any
Person appearing on the Employee List on account of employment by Sellers before
the Effective Date of Employment, and (ii) Purchaser shall assume liability for
all salary, commissions and other compensation and benefits of any kind earned
on and after the Effective Date of Employment by any Transferred Employee.
(h) No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Sellers, Purchaser
and LLANY and their respective successors and permitted assigns.
Section 5.20. Provision of Transitional Services.
(a) Transition Services Agreement. For a period of six (6)
months after the Closing Date, but subject to a longer period for certain
services as specified in the Transition Services Agreement, Sellers agree to
provide, through TSA Employees, through Transition Employees (until January 1,
1999) and/or other employees, or, with Purchaser's consent (not to be
unreasonably withheld), cause a third party to provide, such services requested
by Purchaser that are reasonably necessary to service and administer the
Business in accordance with the Transition Services Agreement; provided however,
that in no event shall Purchaser's consent be required in connection with the
use or engagement by either Seller (or any of Sellers' Affiliates) of any third
party to provide information technology, data processing or other related
services. The terms and duration of such interim servicing relationships shall
be governed by the Transition Services Agreement. Sellers and Purchaser shall
use their respective commercially reasonable efforts to agree to the terms of
the Transition Services Agreement not later than (90) calendar days after the
Contract Date. Not later than ninety (90) days after the Contract Date,
Purchaser will provide Sellers with a detailed description of the types and
duration of interim transition services it will request to be provided under the
Transition Services Agreement. Subject to the particular terms of the Transition
Services Agreement, Purchaser shall reimburse Sellers for all of Sellers' Fully
Loaded Costs in rendering such interim services.
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(b) TSA Employees. During the term of the Transition
Services Agreement, the TSA Employees shall remain under the direction and
control of Sellers and Sellers shall retain the right to terminate TSA
Employees. In the event that Sellers terminate a TSA Employee during the term of
the Transition Services Agreement without Purchaser's consent, Sellers, and not
Purchaser, shall be responsible for payment of related severance costs, if any.
In the event that any TSA Employee's employment terminates prior to the
expiration of the Transition Services Agreement, Sellers, after consulting with
Purchaser, shall have the right to replace such TSA Employee in order to
maintain staffing levels that Sellers believe are appropriate in order to
fulfill their obligations under the Transition Services Agreement. If, in the
opinion of Sellers, it is necessary or advisable to hire additional persons to
perform the requested services under the Transition Services Agreement, Sellers,
after consulting with Purchaser, shall have the right to hire such persons as
TSA Employees.
(c) Prohibitions on Hiring. Upon the expiration of the
Transition Services Agreement, at the option of Sellers, each TSA Employee's
employment with Sellers or their Affiliates may be terminated as of the
expiration of the Transition Services Agreement. If Purchaser or any of its
Affiliates makes an offer of Suitable Employment to a TSA Employee no later than
60 days prior to the expiration of the Transition Services Agreement, and such
TSA Employee then accepts such offer, Aetna Retirement Services, Inc. or its
wholly-owned Subsidiaries shall be prohibited from hiring such TSA Employee for
a period beginning 60 days following receipt by the TSA Employee of such offer
of Suitable Employment ("Effective Date of Offer") and ending 12 months after
the Effective Date of Offer; provided however, that such prohibitions shall not
apply to a TSA Employee who has accepted an offer of Suitable Employment in the
event that (i) Purchaser sells the Business (or any portion of the Business in
which such TSA Employee spends substantially all of his or her time) to an
acquiror that does not give such TSA Employee an offer of Suitable Employment,
or (ii) Purchaser or any subsequent acquiror of all or any portion of the
Business terminates the employment of such TSA Employee. Any TSA Employee who
accepts an offer of Suitable Employment shall be deemed a Transferred Employee
as of such employee's effective date of employment. Any TSA Employee who accepts
an offer of Suitable Employment shall be deemed a Transferred Employee as of the
date the TSA Employee becomes an employee of Purchaser or any of its Affiliates,
and notwithstanding any provision of this Agreement to the contrary, such date
shall be such TSA Employee's "Effective Date of Employment" for purposes of this
Agreement.
Section 5.21. Separate Account Revenues. Commencing with the month
after the month in which the Closing occurs, ALIAC shall pay to Purchaser or
LLANY, or Purchaser or LLANY shall pay to ALIAC, if negative, on a monthly
basis, an amount equal to 100% of the Separate Account Revenues, as determined
under Exhibit M; provided, however, that unless
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otherwise agreed by the parties, the amount so to be paid shall be settled in
accordance with the accounting procedures contained in the ALIAC Coinsurance
Agreement and ALIAC (NY) Coinsurance Agreement.
Section 5.22. Use of Sellers' Names, Logos or Service Marks. Except as
provided in the Administrative Services Agreements, and subject in any case to
the terms thereof, neither Purchaser nor LLANY shall use the names, trademarks,
logos or service marks of Sellers or any of their Affiliates in any way or
manner not specifically authorized in writing by Sellers.
Section 5.23. Communications with Policyholders. All communications
with Policyholders by Sellers, Purchaser or LLANY in connection with the
reinsurance of the Policies under the Coinsurance Agreements or the servicing of
the Policies and Post-Closing Policies under the Administrative Services
Agreements or any other transaction contemplated thereby shall be in such form
as shall be mutually agreed upon by the parties hereto prior to any release
thereof which agreement shall not be unreasonably withheld, except for
communications with Policyholders as may be required to enable Sellers,
Purchaser or LLANY, as applicable, to service the Policies and Post-Closing
Policies in the ordinary course of business and in accordance with the
applicable provisions of the Coinsurance Agreements, Administrative Services
Agreements and Transition Services Agreement. Sellers, Purchaser and LLANY agree
to cooperate with each other regarding the preparation and distribution of any
such communications to Policyholders.
Section 5.24. Non-Solicitation of Business.
(a) In the event the transactions contemplated hereby are
not consummated and this Agreement is terminated, all restrictions on Purchaser
and LLANY contained in the Confidentiality Agreement concerning (i) the
solicitation of officers and employees of Sellers and their Affiliates (which
restrictions shall apply for two years from the date on which the Agreement is
terminated notwithstanding anything to the contrary contained in the
Confidentiality Agreement); and (ii) the solicitation, diversion or replacement
of the Business, any other business, customer or Policyholder of the Sellers or
their Affiliates, and any Person contained on the Lists (as defined in the
Confidentiality Agreement) shall continue to apply to Purchaser and LLANY in
accordance with the terms of the Confidentiality Agreement except as otherwise
provided herein.
(b) Sellers recognize that the provisions of Sections 5.18,
5.19(d) and 5.20(c) are reasonable and necessary for Purchaser's protection.
Purchaser and LLANY recognize that the provisions of Sections 5.18, 5.24(a) and
5.24(b) are reasonable and necessary
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for Sellers' protection, and Sellers, Purchaser and LLANY acknowledge that any
breach of Sections 5.18 5.19(d), 5.20(c), 5.24(a) or 5.24(b) will cause
irreparable injury to Sellers, Purchaser or LLANY, as the case may be, which
injury will not be reasonable measurable or compensable by money damages.
Accordingly, each of the parties hereto agrees that it shall be entitled without
posting any bond to an injunction or injunctions to prevent breaches of the
provisions of Sections 5.18, 5.19(d), 5.20(c), 5.24(a) or 5.24(b) and to enforce
specifically the terms and provisions hereof in any action instituted in
accordance with Section 11.07 hereof in addition to any other remedy to which
such party may be entitled at law or equity.
(c) If any provision of Section 5.19(d) or 5.20(c) or of
this Section 5.24 is held unenforceable because of the scope or duration of its
applicability, the court making such determinations shall have the power to
modify such scope or duration and such provisions shall then be applicable in
such modified form.
Section 5.25. Intentionally Deleted.
Section 5.26. Purchaser Year 2000 Matters. (a) Purchaser shall use
commercially reasonable efforts to achieve the implementation objectives in the
Purchaser Y2K Plan to the extent that such implementation materially affects
Purchaser's ability to perform its obligations under this Agreement or any
Ancillary Agreement.
(b) From the date Purchaser assumes responsibility for year
2000 remediation for the Direct Systems, and until such time as the Purchaser
Y2K Plan has been fully implemented, Purchaser shall provide to Sellers in
writing each month a report setting forth in reasonable detail the status of
Purchaser's activities in connection with its implementation objectives in the
Purchaser Y2K Plan to the extent that such implementation materially affects
Purchaser's ability to perform its obligations under this Agreement or any
Ancillary Agreement.
(c) Without limiting any other right or remedy of Sellers
under this Agreement or any Ancillary Agreement, upon Purchaser's failure to
achieve the implementation objectives regarding year 2000 remediation for the
Direct Systems in the manner required to enable Purchaser to discharge its
obligations and perform the services required under this Agreement and the
Ancillary Agreements, then notwithstanding any other provision of the Agreement
or the Ancillary Agreements, Sellers may, in their sole discretion (i) require
Purchaser to increase the resources allocated to their Year 2000 remediation
efforts with respect to the Direct Systems by an amount that Sellers, in their
reasonable opinion, believe will rectify the deficient progress or (ii) after
July 1, 1999, elect to (x) recapture and run the Direct Systems or (y) appoint a
third party vendor to implement the Purchaser Y2K Plan with respect to the
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Direct Systems to Sellers' reasonable satisfaction. Purchaser shall pay all
costs associated with the Sellers taking action pursuant to this Section
5.26(c).
Section 5.27. IT Services/Sellers Year 2000 Matters.
(a) IT Services. During the Transition Period, as defined
below, Sellers will make available to Purchaser and LLANY, at Purchaser's and
LLANY's expense, the IT Services set forth in the Product Guide and as provided
in this Section 5.27. Sellers are making such IT Services available to Purchaser
and LLANY as an accommodation and, in no event, will Sellers' liability for any
damages whatsoever arising from Sellers' delivery of, or failure to deliver, the
IT Services exceed the total price actually paid by Purchaser and LLANY for the
IT Services.
(b) Transition Matters.
(i) Except as set forth in Section 5.27(b)(iii),
Sellers will provide the IT Services for a period of not more than twenty-four
(24) months (the "Transition Period"), commencing upon Closing.
(ii) Within sixty (60) days after the Contract Date,
Purchaser, LLANY and Sellers will use their respective commercially reasonable
efforts to jointly develop a detailed plan (the "IT Transition Plan") which
shall identify the IT Services that Purchaser and LLANY wish to buy from the
Product Guide during the Transition Period; provided that applications support
services labor will be limited to production support for Shared Systems, Y2K
Obligations and Shared Y2K Obligations, and reasonable efforts for migrating the
Direct Systems and the Shared Systems to Purchaser. Upon sixty (60) days written
notice to Sellers, Purchaser and LLANY may add to the IT Services that they wish
to buy or terminate any one or more of such IT Services. The IT Transition Plan
shall include, among other items, a specific implementation plan for the Y2K
Obligations (as defined below) to be provided by Sellers. The implementation
plan will identify the information technology Dedicated Employees who shall be
available to Sellers to perform services reasonably required by Sellers to
comply with the Y2K Obligations. During the period from January 1, 1999 through
March 31, 1999, any information technology Dedicated Employee who is a
Transferred Employee and who is reasonably required by Sellers to comply with
the Y2K Obligations pursuant to the implementation plan referred to in the
immediately preceding sentence shall remain under the immediate supervision and
direction of the Sellers' information technology managers responsible for the
implementation of the Y2K Obligations.
(iii) From Closing through March 31, 1999, Sellers
shall retain
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responsibility for Year 2000 remediating for the Direct Systems as described in
Section 5.27(c) ("Y2K Obligations"); provided however, that except as set forth
in Section 5.27(c), there shall be no Y2K Obligations for the following
applications which are described on Schedule 3.06(A): ACS/PRODUCER PAYROLL, ACS
COMMISSION SYSTEM BRIDGES, FASTFORMS, INSGIFT, INSMARK, KETLEY BACKROOM
TECHNICIAN, VITAL SIGNS, FINA-EASE, NUMBER CRUNCHER, INTEFLEX/WINF LEX, ESTATE
TAX CONCEPTS, 1998 TAX FACTS, FIELD GUIDE and CRESCENDO. After March 31, 1999
and until the end of the Transition Period, Sellers shall provide only
computing, distributed computing and telecommunications services for the Direct
Systems.
(iv) Sellers shall have control of all aspects of
the Shared Systems prior to and after Closing. Sellers will maintain such
systems in accordance with their own business objectives and, in no event, will
Sellers upgrade, modify or change the Shared Systems to accommodate Purchaser's
or LLANY's business needs. Sellers will, however, offer ongoing production
support and transition-related services in connection with the Shared Systems.
(v) Purchaser and LLANY will comply with Sellers' IT
security, code asset management, and other environmental standards of which they
have been given reasonably sufficient notice. Such standards include, without
limitation, upgrading Direct Systems so as to remain compatible with Sellers'
operating environment. Notwithstanding the foregoing, Purchaser may elect not to
participate in upgrades provided that Purchaser pays all costs associated with
such election not to upgrade.
(c) Year 2000 Matters. Sellers' implementation goals with
respect to Year 2000 compliance in connection with the following Direct Systems,
together with the final completion date for each of the four listed categories,
are set forth below:
Product/Policy Administration Systems - Final Completion Date: March 31, 1999
Complete LIAS Renewal and Year 2000 no later than March 31, 1999
Complete (Vantage One) V1-UL Renewal and Year 2000 no later than
January 31, 1999
Complete Vantage ISWL Renewal and Year 2000 no later than October 31,
1998
Complete Vantage Traditional Renewal and Year 2000 no later than
October 31, 1998
Complete Index Renewal and Year 2000 no later than January 31, 1999
New Business Systems - Final Completion Date: March 31, 1999
Finish LCNB Renewal Assessment and Remediation no later than March 31,
1999
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Finish Suite, TUMS, MIB and EP Renewal Assessment and Remediation no
later than March 31, 1999
Finish Renewal Assessment and Remediation Commission Rate Table no
later than March 31, 1999
Finish Renewal Assessment and Remediation for any other New Business
system by March 31, 1999
Within 30 days after the Contract Date, Sellers and Purchaser will
review options for eliminating and/or reducing the need for Renewal and
Year 2000 for the New Business Systems and will implement any mutually
agreeable option, thereby increasing the ability to redirect resources
to other Direct Systems.
Sponsored Systems - Final Completion Date: January 31, 1999
Complete NBU for Renewal and Year 2000 no later than October 31, 1998
Complete PC Enroller Renewal and Year 2000 no later than January 31,
1999
Complete PDS Renewal and Year 2000 no later than January 31, 1999
Sales Support - Final Completion Date: December 31, 1998
Complete validation of Year 2000 compliance for FIPSCO Illustration
Systems and FIPSCO feeds for Renewal and Year 2000 by December 31, 1998
Complete inventory, Year 2000 assessment of work to be done, and plan
for other Sales Support Software thirty (30) days after the Contract
Date.
COLI - 90 days after the Contract Date, Sellers will develop a plan to
Y2K Test Andessa and BTI interfaces with a target completion not later than
February 28, 1999.
"Complete" is defined to mean remediation of computer program code,
testing computer program code, testing computer programs, implementing into
production, and running under Sellers' "Year 2000 approval process" (in Year
2000+ environment).
During such time as Sellers shall retain Y2K Obligations, Sellers shall
provide to Purchaser each month a report setting forth in reasonable detail the
status of the Sellers' activities in connection with their Y2K Obligations with
regard to the four categories of Direct Systems (i.e., the Product/Policy
Administration Systems, New Business Systems, Sponsored Systems and Sales
Support System). In the event Purchaser, in its reasonable judgment, determines
that Sellers are not making sufficient progress in meeting their Y2K Obligations
with regard to any
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category such that Purchaser reasonably believes that the implementation goals
will not be met on schedule, it shall have the option to assume Sellers' Y2K
Obligations through the use of third party consultants at its cost. In the event
Purchaser assumes Sellers' Y2K Obligations, Sellers shall be relieved of any
further liability for Y2K implementation with respect to any category of Direct
Systems.
Sellers and Purchaser agree that it would be impossible to determine
with any reasonable accuracy the amount of prospective damages with respect to a
failure to meet Sellers' Y2 Obligations described herein. In the event Sellers
retain responsibility for Y2K Obligations for any category of the Direct Systems
and Sellers deviate from the implementation timetable in any material respect,
Sellers shall pay Purchasers as follows: if the material deviation occurs with
respect to the final completion date for Product/Policy Administration, the
payment shall be $3 million; with respect to the final completion date for New
Business Systems, $.5 million; with respect to the final completion date for
Sponsored Systems, $1 million and with respect to the final completion date for
Sales Support Systems, $.5 million. Sellers and Purchaser agree that the damages
set forth above are reasonable and not a penalty, based upon the facts and
circumstances of the parties at the time of entering into this Agreement, with
due regard to future expectations. The foregoing shall be the Purchaser's sole
and exclusive remedy for any losses it may suffer in connection with Sellers'
undertaking the Y2K Obligations.
Sellers' implementation goals with respect to Year 2000 compliance for
Critical Shared Systems are set forth in the Sellers' Y2K Plan ("Shared Systems
Y2K Obligations"). After the Contract Date, Sellers shall provide to Purchaser
each month a report setting forth in reasonable detail the status of Sellers'
activities in connection with their Shared Systems Y2K Obligations with regard
to the Critical Shared Systems. In the event Purchaser, in its reasonable
judgment, determines that Sellers are not making sufficient progress in meeting
their Y2K Obligations with regard to the Critical Shared Systems such that
Purchaser is likely to suffer materially therefrom, Purchaser may require
Sellers to increase the resources allocated to meeting their Y2K Obligations
with regard to the Critical Shared Systems by an amount that Purchaser, in its
reasonable opinion, believes will rectify the deficient progress. Such
additional resources shall be paid for by Sellers only to the extent necessary
to rectify the deficient progress, provided however, that notwithstanding the
foregoing, in no event will Sellers pay for resources after the Closing. With
respect to Year 2000 compliance issues for the Shared Systems, Sellers shall
reasonably treat the Business in a manner similar in all material respects to
the other businesses of Sellers that such Shared Systems support.
(d) Fees for IT Services. The fees charged by Sellers for
the IT Services will not exceed the Sellers' Fully Loaded Costs as defined in
Section 5.19(b).
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(e) Volume of Services. The IT Services will accommodate
volumes consistent with Sellers' historical provision of services to the
Business, as well as reasonable volume changes consistent with the ordinary
course of operations of the Business. The IT Services will also accommodate a
reasonable volume of transition services.
(f) Service Levels. Sellers, Purchaser and LLANY will agree
upon service level standards for the IT Services, which shall be no lower than
the historical service levels provided by Sellers to the Business.
(g) Access to Purchaser's and LLANY's Applications. Sellers
will provide reasonable scheduling capacity to Purchaser and LLANY, consistent
with Sellers' other operations, for purposes of applying changes (consistent
with subsection (b)(iv) above) to the Direct Systems and Shared Systems running
in Sellers' computing environments.
(h) Security. Sellers will provide physical and data
security procedures for the Business running in Sellers' data center at levels
consistent with Sellers' historical level of physical and data security
procedures provided to the Business.
(i) Intentionally Omitted.
(j) Orderly Transfer. Sellers will use their commercially
reasonable efforts to assist and cooperate with Purchaser and LLANY in the
orderly transfer of the Business, including without limitation, the Direct
Systems and Shared Systems. Sellers will provide Purchaser and LLANY a
reasonable level of access to Sellers' personnel skilled in delivering the IT
Services for purposes of general consultation and knowledge transfer related to
the Business. All costs of such transfer, including all applicable taxes, will
be borne by Purchaser and LLANY.
(k) Proprietary Software Versions. Sellers will provide to
Purchaser and LLANY a non-exclusive license to use the Shared Systems and an
exclusive license (which Purchaser may sublicense in connection with the sale of
part or all of the Business) to use the Direct Systems, and transfer to
Purchaser and LLANY (i) the then current version, in source code form and
including all available documentation, of the Direct Systems on Closing, and
(ii) the then current version, in source code form and including all available
documentation, of each Shared System as of termination of the IT Services
associated with each such Shared System. Notwithstanding the foregoing, prior to
transfer of the Shared Systems pursuant to the IT Transition Plan, any upgrades,
modifications or improvements to the Shared Systems that Sellers
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may have made between the Closing and the termination of the IT Services must be
purchased by Purchaser or LLANY at Sellers' Fully Loaded Cost or each such
upgrade, modification and improvement not so purchased may be removed at the
sole discretion of Sellers. The version so transferred shall be AS IS, without
warranty of any kind, and may only be used by Purchaser and LLANY in support of
the Business and, in no event, may the licensed software be used by Purchaser
and LLANY in support of any business that competes with Aetna Inc. or any of its
Affiliates.
(l) License Fees. Prior to delivery of the Direct Systems or
Shared Systems to Purchaser or LLANY, Sellers shall arrange for and Purchaser
and LLANY, on the one hand, and Sellers, on the other hand, shall share equally
any license fees associated with the re-licensing, transfer or assignment of
third party software license agreements from Sellers to Purchaser or LLANY.
(m) Data. Sellers will archive all data related to the
Business consistent with its current practices. Purchaser may review Sellers'
archiving practices for a period of 75 days following the Contract Date. Sellers
will accommodate reasonable requests for modification of such practices,
provided that Purchaser shall pay all expenses associated therewith.
Section 5.28. Certain Product Tax Matters. (a) ALIAC or ALIC, as
applicable, shall, after the Closing, at Purchaser's written request given prior
to the date which is 18 months after the Closing Date, use commercially
reasonable efforts to obtain such relief as Purchaser shall reasonably require
(including obtaining a waiver from, or entering into a settlement or closing
agreement with, the IRS or the affected Policyholder) to the extent such relief
relates to non-compliance by ALIAC or ALIC prior to the Effective Date with any
product tax requirement or limitation contained in Sections 101(f), 817(h), 7702
and 7702A of the Code regarding any Policy identified in such request; provided,
however, that Purchaser shall not require such relief if the holders of any
Policy that constitutes a "modified endowment contract" under Section 7702A of
the Code have been notified of the status and federal tax consequences of such
Policy; and provided further that, in identifying Policies for which such relief
is required, Purchaser and LLANY, in good faith, shall (i) use the same
standards applicable to their own businesses in determining whether
non-compliance with such Code provisions has occurred, and (ii) not request such
relief (including obtaining a waiver from, or entering into a settlement or
closing agreement with, the IRS or the affected Policyholder) if Purchaser or
LLANY would not reasonably request such relief with respect to their own
businesses. ALIAC, ALIC and Purchaser shall cooperate with each other in good
faith in resolving matters subject to this Section 5.28 and any disputes
relating thereto, such cooperation to include, but not be limited to, (A)
participating in discussions, negotiations, settlements and communications with,
and agreeing to the form and
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content of agreements, documents and other written submissions to, the IRS and
any affected Policyholder, and (B) evaluating appropriate alternative remedies
and relief in light of all relevant legal and business factors.
(b) Any request by Purchaser pursuant to Section 5.28(a)
shall be treated as a Claims Notice under Section 9.01(a)(i) hereof. Prior to
the time that the $30 million deductible provided for in Section 9.05(a)(i)
hereof has been exhausted, Purchaser shall bear all costs, expenses, liabilities
and obligations incurred by ALIC, ALIAC or Purchaser in connection with
obtaining such relief (including any toll charge or penalty levied by a Taxing
Authority and payments of Taxes or payments to Policyholders made as a result of
non-compliance but excluding any internal costs and expenses incurred by ALIAC
or ALIC) (collectively, "Tax Costs") and shall, promptly upon ALIAC's or ALIC's
request therefor, reimburse ALIAC or ALIC, as applicable, for all Tax Costs in
complying with this Section 5.28. Any Tax Costs incurred by Purchaser hereunder,
including reimbursement payments to ALIAC and ALIC, shall be applied against the
deductible in Section 9.05(a) hereof; provided, however, that (i) any internal
costs or expenses incurred by Purchaser or LLANY, and (ii) any internal or
external costs incurred by Purchaser or LLANY in identifying Policies subject to
this Section 5.28 shall not be applied against the deductible or included within
Sellers' indemnification obligation. To the extent that such deductible has been
exhausted: (x) Purchaser shall not make further reimbursement payments to ALIAC
or ALIC for their Tax Costs incurred in complying with this Section 5.28; and
(y) any Tax Costs incurred by Purchaser hereunder in excess of the deductible
shall be treated as payments for which Purchaser is entitled to indemnification
under this Agreement, subject to the limitation contained in Section 9.05(a)(ii)
hereof.
(c) Purchaser or LLANY, as applicable, hereby assumes any
and all costs, expenses, toll charges, penalties and other liabilities and
obligations to the extent that such liabilities and obligations arise from
Purchaser's or LLANY's non-compliance with any product tax requirement or
limitation contained in Sections 101(f), 817(h), 7702 and 7702A of the Code
regarding any Policy and Post-Closing Policy, provided that such non-compliance
first arises after the Effective Date. Seller, Purchaser and LLANY agree that
all of such costs, expenses, toll charges, liabilities and obligations
constitute matters for which Sellers are entitled to indemnification under this
Agreement.
(d) Notwithstanding anything to the contrary in this
Agreement, this Section 5.28 sets forth the sole and exclusive remedies of
Purchaser and LLANY for any and all Tax matters.
Section 5.29. Sellers' Non-Compete.
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(a) (i) Except as otherwise set forth in this Agreement,
from the Closing Date through the third anniversary of the Closing Date
(the "Blackout Period"), neither Sellers nor any of their Affiliates
will manufacture, issue, distribute or sell, in the United States,
individual life insurance products or corporate owned life insurance.
(ii) In any state in which any Seller is issuing
Post-Closing Policies (as defined in Section 5.33 hereof), and during the period
such Seller is issuing such Post-Closing Policies, Sellers may continue to
issue, sell or distribute individual life insurance products in Sellers' names
and in substantially the same manner as prior to the Closing Date. For purposes
of this Agreement, all such products issued, sold or distributed during such
period will be deemed to be included within the definition of "Post-Closing
Policies" and will be subject to the Coinsurance Agreements, Transition Services
Agreement and Administrative Services Agreements, as applicable.
(iii) The restrictions in subparagraph (i) above do not
apply to:
(a) group life insurance;
(b) group life conversions to individual life
insurance;
(c) international life insurance business
(including conversions and exchanges to individual U.S. life
policies);
(d) investments in the ordinary course of
business in which the Sellers and their Affiliates do not
obtain Control of another life insurance company;
(e) reinsurance; or
(f) individual life insurance issued in the
United States by another insurance company acquired after
the Closing Date by any Seller or any of its Affiliates;
provided, however, that during the Blackout Period: (x) none
of the individual life insurance products sold by such
acquired company will contain the name "Aetna"; (y) neither
Sellers nor any of their Affiliates will change the name of
the acquired company to include the name "Aetna," provided
that Sellers and their Affiliates may use the Aetna name and
associated logos and marks as permitted or
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required by applicable insurance advertising laws to
identify the acquired company as an affiliate of Aetna Inc.
or any of its Affiliates; and (z) the aggregate amount of
new premiums for individual life insurance products sold
through the acquired company's master or managing general
agents will not increase, in any calendar year during the
Blackout Period, by more than 15% over the aggregate amount
of new premiums for individual life insurance products sold
by the acquired company through such master or managing
general agents during the immediately preceding calendar
year.
(iv) Notwithstanding anything to the contrary in this
Section 5.29, Sellers and their Affiliates may endorse, distribute and actively
market individual life insurance products (none of which products will contain
the name "Aetna") issued by insurance companies other than Sellers and their
Affiliates to banks, broker-dealers, national wirehouses (e.g., Smith Barney
Inc. and PaineWebber Group Inc.) and Sellers' career annuity agents. Nothing in
this Section 5.29 shall preclude Sellers and their Affiliates from obtaining
individual life insurance products (and sales support services) from any
intermediaries, or directly from insurance companies other than Sellers and
their Affiliates, in order to fulfill client requirements in the ordinary course
of business. For purposes of this subparagraph, the definition of "Affiliates"
shall not include insurance companies acquired after the Closing Date as
described in subparagraph (iii)(f) above.
(b) Sellers and Purchaser acknowledge that any damage caused
to Purchaser by reason of the breach by either Seller or any of their respective
successors in interest of this Section 5.29 could not be adequately compensated
for in monetary damages alone; therefore, each party agrees that in addition to
any other remedies, at law or otherwise, Purchaser shall be entitled to specific
performance of this Section 5.29 or an injunction to be issued by a court of
competent jurisdiction (subject to Section 11.07 hereof) restraining and
enjoining any violation of this Section 5.29.
(c) It is the intent and desire of the parties to this
Agreement that the provisions of this Section 5.29 shall be enforced to the
fullest extent permissible under applicable law. Accordingly, if any particular
portion of this Section 5.29 shall be adjudicated to be invalid or
unenforceable, this Section 5.29 shall be amended to delete therefrom the
portion thus adjudicated to be invalid and unenforceable under such law.
Section 5.30. Sponsored Business. In the event that Purchaser elects to
sell the
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sponsored life business to a third party, and if such third party wishes to
reinsure the sponsored life business on an assumption basis, ALIAC shall
negotiate in good faith with Purchaser and such third party to enter into
assumption reinsurance agreements and to effectuate such reinsurance; provided,
however, that: (a) the identity of such third party and the terms of such
reinsurance shall be approved by ALIAC, which approval shall not be unreasonably
withheld; (b) Purchaser shall reimburse ALIAC for any and all direct and
indirect costs incurred by ALIAC (including reasonable costs and fees of counsel
including the allocated cost of internal legal service) in connection with the
negotiation, execution and delivery of such agreements (including, but not
limited to, obtaining any required regulatory approvals relating thereto); (c)
Sellers shall have determined that such transaction will not result in adverse
Tax consequences or otherwise materially adversely affect Sellers' ability to
preserve the financial statement reporting benefits of the transactions
contemplated by this Agreement. Notwithstanding any such determination by
Sellers, Purchasers shall indemnify and hold Sellers harmless against any such
Tax or other obligations and liabilities. Nothing contained in this Section 5.30
is intended or shall be construed to authorize Purchaser or LLANY to delegate,
assign or transfer to any third party any servicing or other right or obligation
relating to the sponsored life business or other aspects of the Business without
Sellers' prior written consent, which consent will not be unreasonably withheld.
Section 5.31. Distribution Arrangements. Prior to the Closing, and
during the period Sellers are issuing Post-Closing Policies (as defined in
Section 5.33), Sellers shall use commercially reasonable efforts to keep in
place all contractual arrangements and maintain all regulatory approvals
necessary to permit Producers to (i) sell Sellers' products during the time
periods specified in Section 5.33, and (ii) receive any trailing commissions
payable on Sellers' products previously sold by the Producers; provided,
however, that nothing in this sentence shall relieve Purchaser, LLANY or any
affiliate of Purchaser or LLANY of any obligation under the Administrative
Services Agreements. Prior to the Closing Date, Sellers shall provide to
Purchaser a list (which may be in electronic form) of all licensed Producers as
of April 13, 1998.
Section 5.32. Reinsurance Treaties. Prior to Closing, each Seller
agrees to use commercially reasonable efforts to assign all of its rights and
obligations under the reinsurance treaties listed on Schedule 5.32 hereto to
which it is a party and to obtain any endorsements from the reinsurers
thereunder to the extent necessary to ensure that Purchaser and LLANY are
entitled to enforce such treaties against the reinsurers in their own names,
with respect to the Policies; provided, however, that Sellers shall be under no
obligation to make payments or incur other liabilities to any Person in
connection with such assignments and endorsements. If Sellers are unable to
obtain such assignments or endorsements notwithstanding such efforts, Sellers
shall place Purchaser and LLANY in the same net economic position as if such
assignments or
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endorsements had been obtained (which actions may consist of Sellers continuing
to use commercially reasonable efforts to enforce their rights under such
treaties and ensuring that all benefits thereunder received, directly or
indirectly, by Sellers flow to Purchaser and LLANY, as applicable).
Section 5.33. Post-Closing Policies.
(a) Commencing on the Closing Date and for a period of six
months thereafter, as requested in writing by Purchaser or LLANY, as applicable,
and subject to Sections 5.33(b) and (c) hereof, Sellers shall issue policies of
the type that would be included in the Policies in effect on the Closing Date
(the "Post-Closing Policies"), provided that Sellers shall not be required to
issue Post-Closing Policies pursuant to this Section 5.33 in any state if
Purchaser or LLANY, as the case may be, has obtained insurance department
approval of its own forms corresponding to the Policies in such state; provided
however, that Sellers acknowledge that following such approval in any state
Sellers will continue to accept new applications for a reasonable period (not to
exceed two (2) weeks) and for as much additional time as is necessary to issue
policies based upon applications received prior to the end of such two (2) week
period, in order to permit Purchaser to complete an orderly transition to its
policy forms. Purchaser shall use its commercially reasonable efforts to obtain
the policy form approvals referred to in the previous sentence as soon as
practicable after the date hereof.
(b) (i) Commencing on the Closing Date and for a period of
12 months thereafter, as requested in writing by Purchaser or LLANY, as
applicable, Sellers shall issue Post-Closing Policies in New Jersey and New
York; and (ii) commencing on the Closing Date and for a period of 24 months
thereafter, as requested in writing by Purchaser or LLANY, as applicable,
Sellers shall issue Post-Closing Policies which constitute corporate owned life
insurance policies and, in the case of either clause (i) or (ii) herein, for
which Purchaser or LLANY, as applicable, has not obtained the policy form
approvals referred to in Section 5.33(a) notwithstanding their commercially
reasonable efforts to do so. Sellers' obligation to issue Post-Closing Policies
under this Section 5.33(b) shall terminate on the same basis as such obligations
terminate under Section 5.33(a). As consideration for Sellers' agreement to
issue such corporate owned life insurance policies, Purchaser or LLANY, as
applicable, shall pay to Sellers a 1% override commission on the gross Premium
generated by all such policies issued by Sellers pursuant to clause (ii) of this
Section 5.33(b) during the period commencing on the first anniversary of the
Closing Date and terminating on the second anniversary of the Closing Date.
(c) Any Post-Closing Policy issued by Sellers pursuant to
Section 5.33(a) or (b) will be reinsured by Purchaser or LLANY, as applicable,
and administered by Sellers,
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Purchaser or LLANY, as applicable, in accordance with the Coinsurance
Agreements, Transition Services Agreement and Administrative Services
Agreements.
Section 5.34. Resources. Purchaser and LLANY will continue to have and
maintain during the term of the Coinsurance Agreements and Administrative
Services Agreements sufficient expertise, trained personnel, resources, systems,
controls and procedures (financial, legal, accounting, administrative or
otherwise) as may be necessary or appropriate to discharge their respective
obligations after Closing under the terms of this Agreement, the Coinsurance
Agreements, Administrative Services Agreements or any other Ancillary Agreement.
Notwithstanding anything to the contrary contained in this Agreement, this
covenant shall not terminate or expire until all Assumed Liabilities have been
discharged or terminated in full.
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE
The obligations of Purchaser under this Agreement are subject to the
satisfaction on or prior to the Closing of the following conditions, any one or
more of which may be waived by it to the extent permitted by law:
Section 6.01. Representations, Warranties and Covenants. (a) Sellers
shall have performed in all material respects all of their obligations under
this Agreement required to be performed by them on or prior to the Closing Date;
(b) any breaches of the representations and warranties of Sellers contained in
this Agreement shall not, in the aggregate, have had, nor could they reasonably
be expected to have, a Material Adverse Effect on the Business (ignoring, for
this purpose, any materiality qualifier in any such representation or warranty);
and (c) Purchaser shall have received a certificate signed by the Chief
Financial Officer of ALIAC and Vice President of ALIC to the effect that the
foregoing conditions have been satisfied.
Section 6.02. Other Agreements. The Ancillary Agreements which are to
be executed and delivered on the Closing Date and each of the other agreements
and instruments contemplated hereby and thereby to which either or both of
Sellers are parties, shall have been duly executed and delivered by such
Seller(s) on the Closing Date and each of such agreements, documents and
instruments shall be in full force and effect with respect to such Seller(s) on
the Closing Date.
Section 6.03. Governmental and Regulatory Consents and Approvals.
(a) All Permits listed on Schedules 3.05 and 4.05 hereto
shall have been
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obtained on terms and conditions which would not, in the reasonable business
judgment of Purchaser, result in a material adverse effect on the Business
considered as a whole. Such Permits shall be in full force and effect and
Purchaser shall have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of such Permits.
(b) The waiting period prescribed by the HSR Act shall have
expired or early termination thereof shall have been granted.
Section 6.04. Possession of Assets; Instruments of Conveyance. Sellers
shall have delivered to Purchaser or LLANY, as applicable, possession of the
Transferred Assets to be transferred on the Closing Date and shall have
transferred to Purchaser or LLANY all of the right, title and interest of
Sellers in and to such assets as provided in this Agreement and the Ancillary
Agreements.
Section 6.05. Injunction. There shall be no effective injunction, writ,
preliminary restraining order or any order of any nature issued by a court of
competent jurisdiction, directing that the transactions provided for herein not
be consummated as herein provided.
Section 6.06. Other Documents. Sellers shall have delivered to
Purchaser (a) a copy of the resolutions (in form and substance reasonably
satisfactory to Purchaser) duly adopted by the board of directors of each Seller
authorizing the execution, delivery and performance of the Agreement and
Ancillary Agreements by Sellers, certified (in form and substance reasonably
satisfactory to Purchaser) by the Secretary or an Assistant Secretary of each
Seller; (b) certificates (in form and substance reasonably satisfactory to
Purchaser) of the Secretary or an Assistant Secretary as to the incumbency and
signatures of the officers of Sellers executing the Agreement and the Ancillary
Agreements to be executed and delivered on the Closing Date; and (c) such other
documents, certificates or records as Purchaser or its counsel may reasonably
request.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS TO CLOSE
The obligations of each Seller under this Agreement are subject to the
satisfaction on or prior to the Closing of the following conditions, any one or
more of which may be waived by it to the extent permitted by law:
Section 7.01. Representations, Warranties and Covenants. (a) Purchaser
and LLANY shall have performed in all material respects all of their respective
obligations under
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this Agreement required to be performed by them at or prior to the Closing Date;
(b) any breaches of the representations and warranties of Purchaser or LLANY
contained in this Agreement shall not, in the aggregate, have had a material
adverse effect on the liabilities, results of operations or financial condition
of Purchaser taken as a whole (ignoring, for this purpose, any materiality
qualifier in any such representation or warranty); and (c) Sellers shall have
received a certificate signed by the Chief Financial Officers of Purchaser and
LLANY to the effect that the foregoing conditions have been satisfied.
Section 7.02. Other Agreements. The Ancillary Agreements which are to
be executed and delivered on the Closing Date and each of the other agreements
and instruments contemplated hereby and thereby to which Purchaser or LLANY is a
party shall have been duly executed and delivered by Purchaser and LLANY on the
Closing Date and each of such agreements and instruments shall be in full force
and effect with respect to Purchaser on the Closing Date.
Section 7.03. Governmental and Regulatory Consents and Approvals. (a)
All Permits listed on Schedules 3.05 and 4.05 hereto shall have been obtained on
terms and conditions which are reasonably acceptable to Sellers and which would
not, in the reasonable business judgment of Sellers, result in the imposition on
Sellers or any Affiliate or any of their respective businesses of any material
cost, liability or restriction not consented to by Sellers or such Affiliate.
Such permits shall be in full force and effect, and Sellers shall have been
furnished with appropriate evidence, reasonably satisfactory to them and their
counsel, of the granting of such Permits.
(b) The waiting period prescribed by the HSR Act shall have
expired or early termination thereof shall have been granted.
Section 7.04. Injunction. There shall be no effective injunction, writ,
preliminary restraining order or any order of any nature issued by a court of
competent jurisdiction, directing that the transactions provided for herein not
be consummated as herein provided.
Section 7.05. Certain Changes. No event, occurrence, fact, condition or
matter shall have occurred and be continuing which, if such event, occurrence,
fact, condition or matter were to occur after Closing, would constitute an Event
of Default or Recapture Event pursuant to Section 9.07 hereof.
Section 7.06. Other Documents. Purchaser shall have delivered to
Sellers: (a) a copy of the resolutions or resolutions (in form and substance
reasonably satisfactory to Sellers) duly
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adopted by the board of directors of the Purchaser authorizing the execution,
delivery and performance of the Agreement and Ancillary Agreements by Purchaser,
certified (in form and substance reasonably satisfactory to Sellers) by the
Secretary or an Assistant Secretary of the Purchaser; (b) certificates (in form
and substance reasonably satisfactory to Sellers) of the Secretary or an
Assistant Secretary as to the incumbency and signatures of the officers of
Purchaser executing the Agreement and the Ancillary Agreements to be executed
and delivered on the Closing Date; and (c) such other documents, certificates or
records as Sellers or their counsel may reasonably request.
ARTICLE VIII
SURVIVAL
Section 8.01. Survival of Representations, Warranties, Covenants and
Certain Indemnities.
(a) All representations and warranties of the parties hereto
contained in this Agreement and all covenants, undertakings and agreements
contained in this Agreement to be performed or complied with at or prior to the
Closing Date shall survive the execution and delivery hereof; provided, however,
that all such representations, warranties, covenants, undertakings and
agreements shall terminate and expire on the date that is 18 months after the
Closing Date, except: (i) that the representations and warranties contained in
Sections 3.07, 4.06, 4.13 and 4.14 hereof shall survive indefinitely; and (ii)
with respect to matters as to which a Claims Notice shall have been given
conforming to the requirements of Section 9.02 or 9.03 by a party hereto prior
to such expiration date.
(b) The covenants, undertakings and agreements of the
parties contained in this Agreement, any Ancillary Agreement and in any
document, agreement, obligation or instrument contemplated hereby or thereby to
be performed or complied with after the Closing (including, without limitation,
Section 5.34 hereof), shall survive without limitation as to time except as may
otherwise be provided under the terms of this Agreement, any Ancillary Agreement
or such related documents, agreements, obligations or instruments.
(c) Sellers' obligation to indemnify Purchaser Indemnified
Parties (as defined in Section 9.01 hereof) against Sellers' Extra Contractual
Obligations under Article IX and any Ancillary Agreement shall terminate and
expire on the date that is 54 months after the Closing Date with respect to all
claims for Sellers' Extra Contractual Obligations, other than such claims for
which a Claims Notice conforming to the requirements of Section 9.02 shall have
been given to Sellers by Purchaser or LLANY prior to such expiration date.
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ARTICLE IX
INDEMNIFICATION AND OTHER RIGHTS
Section 9.01. Obligation to Indemnify.
(a) Subject to the limitations on survivability set forth in
Article VIII and to the limitations set forth in this Article IX, each Seller,
severally and not jointly, agrees to indemnify, defend and hold harmless
Purchaser and LLANY and their respective directors, officers, employees,
representatives (excluding the Producers), Affiliates, successors and permitted
assigns (collectively, the "Purchaser Indemnified Parties") from and against all
Losses (as hereinafter defined) asserted against, imposed upon or incurred by
any Purchaser Indemnified Party arising from: (i) any breach of or inaccuracy in
the representations and warranties made by such Seller contained in Article III
hereof for such period of survival as provided in Section 8.01(a) hereof; (ii)
any breach, nonfulfillment or default in the performance of any of the covenants
and agreements of such Seller contained in this Agreement or in any Ancillary
Agreement; (iii) the Retained Liabilities of such Seller; (iv) Sellers' Extra
Contractual Obligations for such period of survival as provided in Section
8.01(c) hereof; (v) any other matter for which such Seller has agreed to
indemnify Purchaser under the Coinsurance Agreements, Administrative Services
Agreements or other Ancillary Agreement; and (vi) any enforcement of this
indemnity.
As used in this Article IX and this Agreement, "Loss" and/or "Losses"
shall mean actions, claims, losses, liabilities, damages, costs, expenses
(including reasonable attorneys' fees), interest and penalties.
(b) Subject to the limitations on survivability set forth in
Article VIII and to the limitations set forth in this Article IX, Purchaser and
LLANY, severally and not jointly, agree to indemnify, defend and hold harmless
Sellers and their respective directors, officers, employees, representatives
(excluding the Producers), Affiliates, successors and permitted assigns
(collectively, the "Sellers' Indemnified Parties") from and against all Losses
asserted against, imposed upon or incurred by any Sellers' Indemnified Party
arising from: (i) any breach of or inaccuracy in the representations and
warranties made by Purchaser or LLANY contained in Article IV hereof for such
period of survival as provided in Section 8.01(a) hereof; (ii) any breach,
nonfulfillment or default in the performance of any of the covenants and
agreements of Purchaser or LLANY contained in this Agreement or in any Ancillary
Agreement; (iii) the Assumed Liabilities (including, but not limited to, all
claims that constitute Sellers' Extra Contractual Obligations but for which
Sellers' indemnification obligation has expired pursuant
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to Section 8.01(c) hereof); (iv) any other matter for which Purchaser or LLANY
has agreed to indemnify Sellers under the Coinsurance Agreements, Administrative
Services Agreements or other Ancillary Agreements; and (v) any enforcement of
this indemnity.
Section 9.02. Claims Notice. (a) In the event that either Purchaser or
LLANY or one of the Sellers wishes to assert a claim for indemnification
hereunder (including, but not limited to, claims arising from a claim or demand
made, or an action, proceeding or investigation instituted, by any Person not a
party to this Agreement that may result in a Loss for which indemnification is
claimed under this Article IX (a "Third Party Claim")), such party seeking
indemnification (the "Indemnified Party") shall give written notice (a "Claims
Notice") to the other party (the "Indemnifying Party"). Such Claims Notice shall
be delivered to the Indemnifying Party as promptly as practicable, specifying in
detail the facts constituting the basis for, and the amount of, the claim
asserted. The failure by any Indemnified Party to notify the Indemnifying Party
as promptly as practicable shall relieve any Indemnifying Party from its
indemnification obligations only to the extent such failure or other actions
taken by the Indemnified Party in response to such claim shall actually
prejudice an Indemnifying Party; provided however, that notwithstanding the
foregoing, an Indemnifying Party shall have no obligations to indemnify an
Indemnified Party if a Claims Notice containing the information specified above
is not received by the Indemnifying Party prior to the termination of the
applicable periods described in Sections 8.01(a) and 8.01(c).
(b) Subject to the provisions of Section 9.02(c), upon
receipt of a Claims Notice the Indemnifying Party shall have the right to assume
the defense and control of Third Party Claims. In the event the Indemnifying
Party exercises such rights to assume the defense and control of a Third Party
Claim, the Indemnified Party shall have the right but not the obligation
reasonably to participate in (but not control) the defense of Third Party Claims
with its own counsel and at its own expense. Any election by an Indemnifying
Party whether to assume the defense of a Third Party Claim must be received by
the Indemnified Party within a reasonable time period after receipt of the
Indemnified Party's Claims Notice, and failure to send such notice within a
reasonable time shall be deemed an election not to defend. If the Indemnifying
Party elects to assume the defense of a Third Party Claim, the Indemnifying
Party shall select counsel, contractors and consultants of recognized standing
and competence after consultation with the Indemnified Party; shall take all
steps necessary in the defense or settlement of such Third Party Claims; and
shall at all times diligently and promptly pursue the resolution of such Third
Party Claims. The Indemnified Party shall, and shall cause each of its
directors, officers, employees, agents, representatives, Affiliates and
permitted assigns to, cooperate fully with the Indemnifying Party in the defense
of any Third Party Claim defended by the Indemnifying Party, which cooperation
shall include, without limitation, designating a
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liaison counsel to whom the Indemnifying Party may direct notices and other
communications, using reasonable efforts to make witnesses available, and
providing records and documents to the extent such witnesses, records and
documents are relevant to the Third Party Claim.
(c) The Indemnifying Party shall be authorized to consent to
a settlement of, or the entry of any judgment arising from, any Third Party
Claim as to which the Indemnifying Party has assumed the defense in accordance
with the terms of Section 9.02(b), without the consent of any Indemnified Party,
but only to the extent that such settlement or entry of judgment (i) provides
solely for the payment of money, and (ii) provides a complete release of, or
dismissal with prejudice of claims against, any Indemnified Party potentially
affected by such Third Party Claim from all matters that were or could have been
asserted in connection with such claims. In the event that either Seller is the
Indemnifying Party, the amounts of any settlement or judgment paid by such
Seller in connection with Third Party Claims arising out of Sellers' Extra
Contractual Obligations or misrepresentations and breaches of warranty referred
to in Section 9.01(a)(i) shall be applied against the applicable deductibles set
forth in Section 9.05(a)(i) hereof. Further, Purchaser shall pay, or shall
reimburse Sellers for, the amount of such settlement or judgment to the extent
that the applicable deductibles as described in Section 9.05(a)(i) have not been
exhausted. In the event that Purchaser or LLANY is the Indemnifying Party, the
amounts of any settlement or judgment paid by Purchaser or LLANY in connection
with Third Party Claims arising out of misrepresentations and breaches of
warranty referred to in Section 9.01(b)(i) shall be applied against the
deductible amount set forth in Section 9.05(a)(ix) hereof. Further, the relevant
Seller shall pay, or shall reimburse Purchaser or LLANY for, the amount of such
settlement or entry of judgment to the extent that the deductible as described
in Section 9.05(a)(ix) has not been exhausted. Except as provided above,
settlement or consent to entry of judgment shall require the prior approval of
the Indemnified Party, such approval not to be unreasonably withheld. If
requested by the Indemnifying Party, the Indemnified Party will cooperate with
the Indemnifying Party and its counsel in contesting any Third Party Claim, or,
if appropriate and related to the Third Party Claim in question, in making any
counterclaim or cross-complaint against any Person (other than the Indemnified
Party or its directors, officers, employees, agents, representatives,
Affiliates, successors and permitted assigns). In the event that either Seller
is the Indemnifying Party and such Seller declines to assume the defense of a
Third Party Claim arising out of Sellers' Extra Contractual Obligations or
misrepresentations and breaches of warranty referred to in Section 9.01(a)(i),
any costs or expenses incurred by Purchaser in connection with such Third Party
Claims and Sellers' Extra Contractual Obligations shall be applied against the
applicable deductible set forth in Section 9.05(a)(i) hereof. Further, Purchaser
also shall pay, or shall reimburse Sellers for, the amount of such settlement or
judgment to the extent that the applicable deductibles as described in Section
9.01(a)(i) have not been exhausted. In the event that Purchaser or LLANY is the
Indemnifying Party and declines
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to assume the defense of a Third Party Claim arising out of misrepresentations
and breaches of warranty referred to in Section 9.01(b)(i), any costs or
expenses incurred by the relevant Seller in connection with such Third Party
Claims shall be applied against the deductible amount set forth in Section
9.05(a)(ix) hereof. Further, the relevant Seller also shall pay, or shall
reimburse Purchaser or LLANY for, any amounts paid or to be paid by Purchaser or
LLANY in connection with any such settlement or entry of judgment to the extent
that the deductible as described in Section 9.05(a)(ix) has not been exhausted.
Unless and until the Indemnifying Party elects to defend the Third Party Claim,
the Indemnified Party shall have the right, at its option and at the Indemnified
Party's expense to do so in such manner as it reasonably deems appropriate;
provided, however, that Indemnified Party shall not settle or compromise any
Third Party Claim for which it seeks indemnification hereunder without the prior
written consent of the Indemnifying Party (which shall not be unreasonably
withheld).
Section 9.03. Procedures for Direct Claims. In the event any
Indemnified Party shall have a claim for indemnity against any Indemnifying
Party that does not involve a Third Party Claim, the Indemnified Party shall
deliver written notice of such claim with reasonable promptness to the
Indemnifying Party specifying in detail the facts constituting the basis for,
and the amount of, the claim asserted. Provided that notice is delivered prior
to any applicable expiration date, the failure by any Indemnified Party so to
notify the Indemnifying Party shall not relieve the Indemnifying Party from any
Loss that it may have to such Indemnified Party with respect to any claim made
pursuant to this Section 9.03, it being understood that notices for claims in
respect of a breach of a representation, warranty, covenant, undertaking or
agreement must be delivered prior to the expiration of the survival period
applicable thereto.
Section 9.04. Indemnification Payments. Any payment arising under this
Article IX shall be made by wire transfer of immediately available funds to such
account or accounts as the Indemnified Party shall designate to the Indemnifying
Party in writing; provided that, such payments shall be made, without
duplication or double-counting, only to Purchaser or Sellers, respectively. In
no event shall ALIC or ALIAC, as the case may be, be responsible for paying any
indemnification obligation incurred by the other to Purchaser.
Section 9.05. Limitations on Indemnification Obligations.
(a) In addition to any other limitations contained in
Articles VIII and IX hereof, the obligations of Sellers, Purchaser and LLANY to
indemnify any Purchaser Indemnified Party or Sellers' Indemnified Party, as the
case may be, are subject to, and limited by, the following:
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(i) Sellers shall be obligated to provide
indemnification under this Article IX or under any Ancillary Agreement
on account of any misrepresentation or breach of warranty only to the
extent that the aggregate dollar amount of Losses with respect to all
misrepresentations and breaches of warranty referred to in Section
9.01(a)(i) exceeds $30 million, but only for the amount in excess of
$30 million. Sellers further shall be obligated to provide
indemnification under this Article IX on account of Sellers' Extra
Contractual Obligations only to the extent that the aggregate dollar
amount of Losses incurred by Purchaser or LLANY, as applicable, with
respect to such Sellers' Extra Contractual Obligations exceeds $10
million, but only for the amount in excess of $10 million. Losses
incurred by Purchaser, or LLANY, if any, with respect to Sellers' Extra
Contractual Obligations shall be applied against the $30 million
deductible provided for above, except to the extent that such Losses
exceed $10 million and are indemnified by Sellers.
(ii) The maximum aggregate liability of Sellers for
indemnification for all Losses subject to indemnification under this
Article IX including, without limitation, any amount paid pursuant to
Section 9.05(a)(i) shall be $500 million; provided however, that Losses
that constitute Direct Economic Losses shall not be subject to such
$500 million limitation.
(iii) Each Indemnified Party shall be obligated to use
its commercially reasonable efforts to mitigate to the extent
reasonably practicable the amount of any Losses for which it is
entitled to seek indemnification hereunder.
(iv) Upon making any indemnification payment, the
Indemnifying Party will, to the extent of such payment, be subrogated
to all rights of the Indemnified Party against any third party in
respect of the Loss to which the payment relates; provided, however,
that until the Indemnified Party recovers full payment of its Loss, any
and all claims of the Indemnifying Party against any such third party
on account of said payment are hereby made expressly subordinated and
subjected in right of payment to the Indemnified Party's rights against
such third party. Without limiting the generality of any other
provision hereof, each such Indemnified Party and Indemnifying Party
will duly execute upon request all instruments reasonably necessary to
evidence and perfect the above-described subrogation and subordination
rights.
(v) The amount of any Losses sustained by an Indemnified
Party and owed by an Indemnifying Party shall be reduced by any amount
received by such Indemnified Party with respect thereto under any
insurance or reinsurance coverage or
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from any other party alleged to be responsible therefor. The
Indemnified Party shall use reasonable efforts to collect any amounts
available under such insurance or reinsurance coverage and from such
other party alleged to have responsibility. If the Indemnified Party
receives an amount under insurance or reinsurance coverage or from
such other party with respect to Losses sustained at any time
subsequent to any indemnification actually paid pursuant to this
Article IX, then, subject to the immediately preceding sentence, such
Indemnified Party shall promptly reimburse the applicable Indemnifying
Party for any such indemnification payment actually made by such
Indemnifying Party up to the actual amount of insurance actually
received.
(vi) Any indemnification payments recoverable by an
Indemnified Party pursuant to this Article IX shall be net of any
Federal or state income tax benefits to such Indemnified Party as a
result of the Loss as to which the payment is made, provided that if
the payment so recoverable will result in an increase in the income
taxable for Federal or state income tax purposes by the Indemnified
Party, the amount of the payment will be increased so that the
Indemnified Party will receive on an after tax basis the full amount of
the indemnification contemplated by this Article IX.
(vii) Purchaser acknowledges and agrees that,
notwithstanding anything to the contrary contained in Article III of
this Agreement, Sellers make no representation, warranty, guaranty or
covenant regarding, and shall have no obligation to indemnify the
Purchaser Indemnified Parties with respect to, the ultimate adequacy or
sufficiency of any reserves reflected, or the ultimate collectibility
of any reinsurance recoverable reported as an asset or contra-liability
in any financial statement, book, record or account of the Sellers
including, but not limited to, the Statutory Statements, ALIAC GAAP
Statements, the Pro Forma Statements, the Closing Balance Sheet,
Revised Closing Balance Sheet and Final Closing Balance Sheet.
(viii) During the periods set forth in Sections 8.01(a)
and 8.01(c) during which Sellers have certain obligations to indemnify
Purchaser, and Purchaser has certain obligations to indemnify Sellers,
Purchaser, on the one hand, and Sellers, on the other hand, shall, no
less than annually, provide the other party with a written statement
summarizing any Claims Notices provided to such other party to date,
and setting forth the Losses incurred by such party for which such
party is claiming indemnification against the other party in accordance
with this Article IX.
(ix) Purchaser and LLANY shall be obligated to provide
indemnification under this Article IX or under any Ancillary Agreement
on account of
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any misrepresentation or breach of warranty only to the extent that
the aggregate dollar amount of Losses with respect to all
misrepresentations and breaches of warranty referred to in Section
9.01(b)(i) exceeds $10 million, but only for the amount in excess of
$10 million.
(b) Intentionally Omitted.
Section 9.06. Exclusivity. If the Closing occurs, and further subject
in any case to (i) the right to enforce the indemnities provided for in this
Article IX, and (ii) to any rights and remedies provided under Section 9.07
hereof or in any Ancillary Agreement, and to the extent permitted by Applicable
Law, the indemnities provided for in this Article IX shall be the exclusive
remedies of the parties hereto and their respective officers, directors,
employees, agents and Affiliates for any breach of or inaccuracy in any
representation or warranty or any breach, nonfulfillment or default in the
performance of any of the covenants or agreements contained in this Agreement
(but not any such covenants or agreements to the extent they are by their terms
to be performed after the Closing Date), and the parties shall not be entitled
to a rescission of this Agreement or to any further indemnification rights or
claims of any nature whatsoever in respect thereof (including, without
limitation, any common law rights of contribution), all of which the parties
hereto hereby waive.
Section 9.07. Security Trust Account and Recapture Rights.
(a) Events of Default. From and after the Closing Date, any
of the following occurrences shall constitute an event that entitles either
Seller to require Purchaser or LLANY, as applicable, to deposit and maintain
assets in a Security Trust in accordance with the terms and conditions of this
Section 9.07 and Articles IX of the Coinsurance Agreements (individually or
collectively, as the context indicates, an "Event of Default"):
(i) Purchaser or LLANY ceases to maintain any of (A) an
A.M. Best Company rating of at least B++, (B) a Standard & Poor's
Corporation insurer financial strength rating of at least BBB-, and (C)
a Moody's Investors Services, Inc. claims-paying ability rating of at
least Baa3; or
(ii) Purchaser or LLANY fails to (A) maintain a ratio of
(i) Total Adjusted Capital (as defined in the Risk-Based Capital (RBC)
Model Act or in the rules and procedures prescribed from time to time
by the NAIC with respect thereto) to (ii) the Company Action Level RBC
(as defined in the Risk-Based Capital (RBC) Model Act or in the rules
and procedures prescribed from time to time by the NAIC with respect
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thereto) of at least 185 percent, or (B) maintain a Standard & Poor's
Corporation's capital adequacy ratio of at least 115 percent; or
(iii) (A) Purchaser or LLANY ceases to be licensed as a
life insurer or ceases to qualify as an accredited reinsurer in a
particular jurisdiction under circumstances that would cause one or
both Sellers to be denied credit for reinsurance ceded under the
Coinsurance Agreements on the financial statements filed by such Seller
in said jurisdiction, or (B) either Seller is denied credit for
reinsurance ceded under the Coinsurance Agreements on the financial
statements filed by such Seller in any jurisdiction; or
(iv) a petition for insolvency, rehabilitation,
conservation, supervision, liquidation or similar proceeding is filed
by or against Purchaser or LLANY or its statutory representative in any
jurisdiction; or
(v) any Person other than one of the Affiliates of
Purchaser or LLANY in existence on the Closing Date acquires or assumes
(A) Control of Purchaser or LLANY, whether by merger, consolidation,
stock acquisition or otherwise (including, without limitation, the
acquisition or assumption of the power to direct Purchaser's or LLANY's
management and policies by means of a management or services agreement
or other contractual arrangement) or (B) all or substantially all of
the assets or liabilities of Purchaser or LLANY by reinsurance (whether
indemnity or assumption) or otherwise; or
(vi) any Coinsurance Agreement is terminated in
accordance with its terms; or
(vii) Purchaser or LLANY, as applicable, fails to
transfer from its general account to its segregated account for the Par
Policies (which segregated account is contemplated by Section 2.6 of
the ALIC Coinsurance Agreement and Section 2.6 of the ALIC (NY)
Coinsurance Agreement) assets of a type, quality and value necessary to
maintain the Par Surplus at the level contemplated by Section 2.8 of
the ALIC Coinsurance Agreement and Section 2.8 of the ALIC (NY)
Coinsurance Agreement.
The occurrence of any Event of Default shall entitle either Seller to elect to
require Purchaser or LLANY, as applicable, to establish a Security Trust whether
or not such an occurrence constitutes a Recapture Event, provided, that such
Seller has not delivered an Election Notice electing recapture.
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(b) Recapture Events. From and after the Closing Date, and
whether or not an Event of Default has occurred or Security Trust has been
established pursuant to Section 9.07(a) hereto, any of the following occurrences
shall constitute an event that entitles either Seller to exercise the recapture
remedy set forth in this Section 9.07 and Articles IX of the Coinsurance
Agreements (individually or collectively, as the context indicates, a "Recapture
Event"):
(i) Purchaser or LLANY ceases to maintain any of (A) an
A.M. Best Company rating of at least B+, (B) a Standard & Poor's
Corporation insurer financial strength rating of at least BB+, and (C)
a Moody's Investors Services, Inc. claims-paying ability rating of at
least Ba1; or
(ii) Purchaser or LLANY fails to (A) maintain a ratio of
(i) Total Adjusted Capital (as defined in the Risk-Based Capital (RBC)
Model Act or in the rules and procedures prescribed from time to time
by the NAIC with respect thereto) to (ii) the Company Action Level RBC
(as defined in the Risk-Based Capital (RBC) Model Act or in the rules
and procedures prescribed from time to time by the NAIC with respect
thereto) of at least 160 percent; or (B) maintain a Standard & Poor's
Corporation's capital adequacy ratio of at least 100 percent; or
(iii) a petition for insolvency, rehabilitation,
conservation, supervision, liquidation or similar proceeding is filed
by or against Purchaser or LLANY or their statutory representatives in
any jurisdiction; or
(iv) within thirty (30) calendar days of its receipt of
a demand therefor delivered pursuant to Section 9.07(d), Purchaser or
LLANY fail to execute the Security Trust Agreement or deposit and
maintain assets in trust on the terms provided in Section 9.07(f) and
in the Security Trust Agreement(s), provided, however, that the Seller
which makes the demand therefor executes such Trust Agreement
contemporaneously with the delivery of the demand; or
(v) any Coinsurance Agreement is terminated in
accordance with its terms; or
(vi) within thirty (30) calendar days of the termination
of any Administrative Services Agreement in accordance with its terms,
(A) Purchaser or LLANY does not take all steps necessary to arrange for
a third-party administrator acceptable to Sellers in their sole
discretion, reasonably exercised, to provide all
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administrative services to be provided pursuant to the terminated
Administrative Services Agreement(s) at the cost of Purchaser or LLANY
or (B) such third-party administrator fails to enter into
administrative service agreement(s) with Sellers, satisfactory in form
and substance to Sellers in their sole discretion, reasonably
exercised; or
(vii) A judgment or order is entered by a court of
competent jurisdiction declaring the invalidity of the Security Trust
or finding that the assets held in a Security Trust are general assets
of Purchaser or LLANY or otherwise do not constitute a "secured claim"
within the meaning of the laws of Purchaser's or LLANY's domiciliary
state; or
(viii) the Seller for whose benefit a Security Trust is
established pursuant to Section 9.07(a)(iii) is denied credit on its
financial statements filed in any jurisdiction with respect to the
reinsurance provided by Purchaser or LLANY, and Purchaser or LLANY does
not take all steps necessary to enable such Seller to obtain credit on
its financial statements within thirty (30) calendar days of
Purchaser's or LLANY's receipt of written notice from such Seller as to
the occurrence described herein; or
(ix) Purchaser or LLANY, as applicable, fails to
transfer from its general account to its segregated account for the Par
Policies (which segregated account is contemplated by Section 2.6 of
the ALIC Coinsurance Agreement and Section 2.6 of the ALIC (NY)
Coinsurance Agreement) assets of a type, quality and value necessary to
maintain the Par Surplus at the level contemplated by Section 2.8 of
the ALIC Coinsurance Agreement and Section 2.8 of the ALIC (NY)
Coinsurance Agreement.
The occurrence of any Recapture Event shall entitle either Seller to elect
recapture remedies hereunder regardless of whether (1) such an occurrence also
constitutes an Event of Default, (2) Purchaser has previously established a
Security Trust or (3) either Seller has previously delivered an Election Notice
requiring Purchaser to establish a Security Trust.
(c) Notice to Sellers. Purchaser and LLANY shall provide
Sellers with:
(i) written notice of any downgrade in Purchaser's or
LLANY's A.M. Best Company rating or Standard & Poor's Corporation or
Moody's Investors Services, Inc. insurer financial strength or
claims-paying ability rating within three (3) Business Days after
Purchaser's or LLANY's receipt of notice of such adjustment;
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(ii) a written report of the calculation of Purchaser's
and LLANY's Total Adjusted Capital and Authorized Control Level RBC and
Standard & Poor's Corporation's capital adequacy ratio as of the end of
each calendar quarter within fifteen (15) Business Days after the end
of such quarter;
(iii) written notice of the occurrence of any Event of
Default or Recapture Event within two (2) Business Days after its
occurrence; and
(iv) not less than annually, a written report, in form
reasonably satisfactory to the Sellers, from Purchasers and LLANY
certifying that no Event of Default or Recapture Event has occurred
during the period covered by such report or is continuing as of the
last day of such period, together with the appropriate calculations and
backup reasonably necessary to substantiate the bases of Purchaser's
and LLANY's certification.
Sellers may, at their own expense, review Purchaser's and LLANY's books and
records to confirm the risk-based capital calculations provided by Purchaser and
LLANY pursuant to Section 9.07(c)(ii). In addition, Purchaser and LLANY shall
(A) cooperate fully with Sellers and promptly respond to Sellers' inquiries form
time to time concerning the Purchaser's and LLANY's financial condition,
operating results and any events, occurrences or other matters which arise on
and after the Effective Date and which reasonably relate to the Business or
Purchaser's and LLANY's ability to perform and discharge their respective
obligations under this Agreement or the Ancillary Agreements; and (B) provide to
Sellers such financial statements, reports, internal control letters and reports
prepared by auditors and other third parties, SAS-70 Reports and other documents
of Purchaser and LLANY as Sellers may reasonably request from time to time.
(d) Election of Remedies. Upon the occurrence of any Event
of Default, each Seller may elect to require Purchaser or LLANY, as applicable,
to maintain assets in a Security Trust for the purpose of securing the Reinsured
Liabilities under the Policies and Post-Closing Policies ceded by it to
Purchaser and LLANY pursuant to the Coinsurance Agreements. Upon the occurrence
of any Recapture Event, each Seller may elect to recapture, subject to the terms
and conditions set forth below and in the Coinsurance Agreements all, but not
less than all, of the Policies and Post-Closing Policies ceded by it to
Purchaser and LLANY pursuant to the Coinsurance Agreements. Notwithstanding the
foregoing, in the event such Event of Default or Recapture Event relates solely
to LLANY, the remedies provided herein shall apply only to the Policies and
Post-Closing Policies coinsured pursuant to the ALIAC (NY) Coinsurance
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Agreement and ALIC (NY) Coinsurance Agreement. Each Seller electing either or
both of these remedies shall give Purchaser or LLANY, as applicable, written
notice of its election (the "Election Notice") specifying (x) the grounds for
the exercise of its remedies pursuant to this Section 9.07 and either (y) if it
elects to recapture the Policies and Post-Closing Policies, the fact of
recapture and the effective date of recapture or (z) if it elects a Security
Trust, the fact that Purchaser or LLANY, as applicable, is obligated to execute
the Security Trust Agreement and to deposit and maintain assets in such Security
Trust for the purpose of securing such Reinsured Liabilities (the "Secured
Policies"). The Purchaser may unwind and terminate a Security Trust if, prior to
the second anniversary of the date on which the Event of Default which
originally gave rise to the establishment of such Security Trust occurred, both
(A) the original Event of Default has been cured or remediated, and (B) no new
Event of Default or Recapture Event has occurred; provided, that (i) prior to
such second anniversary date, neither Seller has properly provided an Election
Notice to recapture the Policies and Post-Closing Policies ceded by it; and (ii)
the termination of the Security Trust shall not prejudice or be deemed a waiver
of Sellers' right to demand the establishment of a new Security Trust or elect
recapture upon the occurrence of any other or new Event of Default or Recapture
Event.
(e) Recapture. Any recapture by Sellers shall not be deemed
to have been consummated until (i) the Seller electing recapture has given
Purchaser an Election Notice pursuant to Section 9.07(d); and (ii) such Seller
has received payment of the entire Recapture Fee as determined in accordance
with Exhibit J hereto. If the Reinsured Liabilities under the Policies and
Post-Closing Policies to be recaptured are secured pursuant to a Security Trust
established pursuant to Section 9.07(f), the Seller electing recapture may, in
its sole discretion, withdraw assets from the Security Trust having an aggregate
Market Value (determined pursuant to the Security Trust Agreement governing such
Security Trust) not to exceed the amount of the Recapture Fee. Purchaser shall
promptly pay such Seller the full amount of the Recapture Fee, reduced by the
amount, if any, withdrawn from the Security Trust. Following the consummation of
the recapture of Policies and Post-Closing Policies pursuant to this Section
9.07(e), no additional premiums, deposits or other amounts payable under such
Policies and Post-Closing Policies shall be ceded to Purchaser pursuant to the
Coinsurance Agreements.
(f) Security Trust.
(i) Establishment of the Security Trust. Within thirty
(30) calendar days of any Seller's delivery to Purchaser or LLANY of an
Election Notice requiring that Purchaser or LLANY secure the Reinsured
Liabilities ceded by such Seller with a Security Trust, the Purchaser
or LLANY, as applicable, shall execute the Security Trust Agreement and
deposit into an account with the Trustee (the "Security Trust"), naming
the Seller as the sole
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beneficiary thereof, assets having a market value in an amount no less
than the Required Balance for the purpose of securing the Reinsured
Liabilities. The Security Trust Agreement shall be substantially in
the form of Exhibit L hereto.
(ii) Trust Assets. At the direction of Purchaser or
LLANY, as applicable, the assets held in any Security Trust shall be
held in the form of (A) cash and cash-equivalents, (B) certificates of
deposit, (C) obligations of the United States Government or its
agencies, (D) investment grade bonds, (E) whole (not participations)
investment grade (as determined in accordance with Purchaser's internal
rating systems) commercial mortgages; provided that the aggregate
market value of such commercial mortgages held in the Security Trust
shall not exceed 15% of the aggregate market value of the assets held
in the Security Trust; and (F) straight Ginnie Mae, Freddie Mac and
Fannie Mae 30-year mortgage-backed securities rated AA+ and above;
provided that the aggregate market value of such mortgage-backed
securities held in the Security Trust shall not exceed 15% of the
aggregate market value of the assets held in the Security Trust; and
provided, further, that in the event a Security Trust is established
pursuant to Section 9.07(a)(v), the assets held in the Security Trust
may be invested in accordance with Purchaser's internal investment
policies for its individual life insurance business, a copy of which
has been provided to Sellers. The aggregate Market Value of the assets
held in such Security Trust shall at all times be at least equal to the
Required Balance. As long as the Security Trust Agreement remains in
force, the Purchaser or LLANY, as applicable, shall calculate the
Required Balance as of the last day of each calendar month and report
the amount of the Required Balance to the Sellers and Trustee within
ten (10) Business Days after the end of such month. In connection with
such calculation, Sellers shall direct the Trustee to make the payment
to Purchaser of any amounts in the Security Trust which exceed the
Required Balance, and Purchaser or LLANY, as applicable, shall promptly
deposit in the Security Trust such additional permitted assets as may
be necessary to increase the Market Value of the Security Trust assets
to the Required Balance. The form and duration of assets to be held in
the Security Trust shall be appropriate in light of the Reinsured
Liabilities under the Secured Policies. Prior to delivering any assets
for deposit in the Security Trust, Purchaser and LLANY shall execute
assignments or endorsements in blank of all of Purchaser's and LLANY's
right, title and interest in such assets (according to procedures set
forth in the Security Trust Agreement), so that the Seller named as
beneficiary of such Security Trust, or the Trustee upon Seller's
direction, may whenever necessary negotiate title to any such assets
without consent or signature from Purchaser, LLANY or any other entity.
(iii) Permitted Withdrawals. The Seller named as
beneficiary of a Security Trust may withdraw assets from such Security
Trust at any time and from time to time, notwithstanding any other
provisions of this Agreement or the Ancillary Agreements, and such
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assets may be utilized and applied by such Seller, or any successor by
operation of law of such Seller, including, without limitation, any
liquidator, rehabilitator, receiver or conservator of such Seller,
without diminution because of insolvency on the part of such Seller,
Purchaser or LLANY; provided, however, that Sellers may only withdraw
such assets for one or more of the following purposes:
(A) to reimburse Seller for any Reinsured
Liabilities under the Secured Policies paid by
Seller to the extent not paid by Purchaser or
LLANY when due;
(B) to make payment to Purchaser or LLANY of any
amounts that exceed the Required Balance;
(C) to pay all or any portion of any Recapture Fee
due in connection with the recapture of the
Secured Policies; or
(D) to pay any other amounts that are due to Sellers
under this Agreement or any of the Ancillary
Agreements to the extent not paid directly to
Sellers by Purchaser or LLANY when due.
(g) Resort to Collateral. Notwithstanding the remedies
contemplated by this Section 9.07 and the Ancillary Agreements, Sellers may, in
their sole discretion, require direct payment by Purchaser or LLANY of any sum
in default under this Agreement or the Ancillary Agreements in lieu of
exercising the remedies in this Section 9.07, and it shall be no defense to any
such claim that Sellers might have had recourse to a Security Trust or recapture
remedy.
(h) Certain Remedies. Sellers, Purchaser and LLANY
acknowledge that any damage caused to Sellers by reason of the breach by
Purchaser or LLANY or any of their respective successors in interest of this
Section 9.07 could not be adequately compensated for in monetary damages alone;
therefore, each party agrees that, in addition to any other remedies at law or
otherwise, Sellers shall be entitled to specific performance of this Section
9.07 or an injunction to be issued by a court of competent jurisdiction pursuant
to Section 11.07 hereof restraining and enjoining any violation of this Section
9.07, in addition to such other equitable or legal remedies as such court may
determine. Purchaser and LLANY hereby release, waive and discharge any and all
claims and causes of action asserting in any way that: (a) any Security Trust is
not valid, binding or enforceable; and (b) any remedy of either Seller
including, without limitation, Seller's recapture and Security Trust remedies
hereunder and under Articles IX of the Coinsurance Agreements are not valid,
binding or enforceable. Purchaser and LLANY are forever estopped and barred from
making any such assertion in any context or forum whatsoever.
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ARTICLE X
TERMINATION PRIOR TO CLOSING
Section 10.01. Termination of Agreement. This Agreement may be
terminated at any time prior to the Closing:
(a) by Sellers or Purchaser in writing, if there shall be
any order, writ, injunction or decree of any Governmental Authorities binding on
Purchaser or Sellers, which prohibits or restrains Purchaser or Sellers from
consummating the transactions contemplated hereby; provided, that Purchaser or
Sellers, as the case may be, shall have used their commercially reasonable
efforts to have any such order, writ, injunction or decree lifted and the same
shall not have been lifted by October 31, 1998;
(b) by either of Sellers or Purchaser in writing, if the
Closing has not occurred on or prior to October 31, 1998 unless the absence of
such occurrence shall be due to the failure of the party seeking to terminate
this Agreement to materially perform each of its obligations under this
Agreement required to be performed by it on or prior to the Closing Date;
provided, however, that if the Closing hereunder has not occurred due solely to
the failure of a party to receive a required approval from a Governmental
Authority, the parties agree to extend the October 31, 1998 termination date to
December 31, 1998, and to use their respective commercially reasonable efforts
to obtain such approval.
(c) by Purchaser: (i) if there has been a misrepresentation
on the part of Sellers in any representation or warranty of Sellers contained
herein or in any certificate or other instrument delivered or furnished to
Purchaser pursuant hereto, and such misrepresentation had has or would
reasonably be expected to have a Material Adverse Effect on the Business
(ignoring, for this purpose, any materiality qualifier in such representation or
warranty), or (ii) if there has been any failure on the part of Sellers to
comply with or perform any of their agreements, covenants or obligations
hereunder and such failure has had or could reasonably be expected to have a
Material Adverse Effect on the Business and such noncompliance or nonperformance
shall not have been (x) cured or eliminated by Sellers within ten (10) business
days following receipt by Sellers of written notice thereof from Purchaser; or
(y) waived by Purchaser on or before the Closing Date;
(d) by either Seller: (i) if there has been a
misrepresentation on the part of Purchaser or LLANY in any representation or
warranty of Purchaser or LLANY contained herein or in any certificate or other
instrument delivered or furnished to Sellers pursuant hereto
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and such misrepresentation has had or would reasonably be expected to have a
material adverse affect on the liabilities, results of operations or financial
condition of Purchaser taken as a whole (ignoring, for this purpose, any
materiality qualifier in such representation or warranty), or (ii) if there has
been any failure on the part of Purchaser or LLANY to comply with or perform any
of their respective agreements, covenants or obligations hereunder and such
failure has had or could reasonably be expected to have a material adverse
effect on the liabilities, results of operations or financial condition of
Purchaser taken as a whole, and such noncompliance or nonperformance shall not
have been (x) cured or eliminated by Purchaser or LLANY within ten (10) business
days following receipt by Purchaser or LLANY of written notice thereof from
Sellers; or (y) waived by Sellers on or before the Closing Date;
(e) at any time on or prior to the Closing Date, by mutual
written consent of Sellers and Purchaser.
Section 10.02. Survival. If this Agreement is terminated and the
transactions contemplated hereby are not consummated as described above, this
Agreement shall become null and void and of no further force and effect, except
that, in the event of such a termination because of any breach (a) the breaching
party shall be liable to the other party for all actual damages arising directly
from such breach, including but not limited to, reasonable consultant fees and
expenses; and (b) the obligations arising under Sections 5.24, 11.01, 11.06 and
11.07 shall remain in full force and effect. In no event shall any party be
entitled to consequential damages including, but not limited to, damages for
lost profits, following a termination of this Agreement.
ARTICLE XI
MISCELLANEOUS
Section 11.01. Publicity. Except as may otherwise be required by
Applicable Law, no release or announcement concerning this Agreement or the
Ancillary Agreements or the transactions contemplated hereby or thereby shall be
made without the prior written approval of the other party, which approval shall
not be unreasonably withheld or delayed. The parties hereto shall cooperate with
each other in making any release or announcement.
Section 11.02. Confidentiality. In addition and subject to the
covenants and limitations contained in Section 5.18 hereof, the parties agree
that, other than as agreed or as required to implement the transactions
contemplated hereby, the parties will keep confidential the terms and conditions
of this Agreement and the Ancillary Agreements, including, without limitation,
the Schedules hereto and thereto, except as otherwise required by Applicable Law
or
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court or judicial process (including, without limitation, pursuant to any
federal or state securities laws or the rules of any stock exchange or
self-regulatory organization or pursuant to any legal, regulatory or legislative
proceedings).
Section 11.03. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally (by
courier or otherwise), telegraphed, sent by certified or registered mail,
postage prepaid and return receipt requested, or by express mail or other
nationally recognized overnight or same-day delivery service. Any such notice
shall be deemed given when so delivered personally or by such delivery service,
telegraphed or, if mailed, three days after the date of deposit in the United
States mails, as follows:
(a) if to Sellers:
Aetna Life Insurance Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Chief Financial Officer
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, CT 06156
Attention: Chief Financial Officer
with copies (which shall not constitute notice) to:
Aetna Retirement Services, Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: General Counsel
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
Attention: James R. Dwyer
(b) if to Purchaser or LLANY:
The Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
Attention: Carl Baker
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if to LLANY:
Lincoln Life & Annuity Company of New York
120 Madison Street, Suite 1700
Syracuse, NY 13202
Attention: Philip L. Holstein
with a copy (which shall not constitute notice) to:
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: David A. Massey
Any party may, by notice given in accordance with this Section 11.03 to the
other parties, designate another address or person for receipt of notices
hereunder provided that notice of such a change shall be effective upon receipt.
Section 11.04. Entire Agreement. This Agreement (including the
Ancillary Agreements, the other agreements contemplated hereby and thereby, and
the Exhibits and Schedules hereto and thereto) contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, with respect thereto, except that the terms
of the Confidentiality Agreement shall continue to bind the parties hereto in
the event this Agreement is terminated pursuant to Section 10.01 hereof. Without
limiting the generality of the foregoing sentence, the only representations and
warranties made by the parties hereto with respect to the subject matter hereof
are the representations and warranties contained in this Agreement and the
Schedules and Exhibits hereto. The inclusion of any item in the Schedules is not
evidence of the materiality of such item for the purposes of this Agreement or
evidence that such item was required to be disclosed therein.
Section 11.05. Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies. This Agreement and the Ancillary Agreements may be
amended, superseded, canceled, renewed or extended, and the terms hereof may be
waived, only by a written instrument signed by each of the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party on exercising any right, power or privilege hereunder shall operate as a
waiver thereof, or shall any waiver on the part of any party of any right, power
or privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and, unless provided otherwise in this Agreement or in the Ancillary
Agreements, are not exclusive of any rights or remedies that any
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party may otherwise have at law or in equity.
Section 11.06. Governing Law. THIS AGREEMENT AND THE ANCILLARY
AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CONNECTICUT, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
Section 11.07. Venue and Jurisdiction. Sellers and Purchaser hereby
irrevocably submit to the exclusive jurisdiction of any state or federal court
of general and competent jurisdiction located within the City or County of
Hartford, State of Connecticut, with respect to any legal action or proceeding
arising out of or connected with this Agreement or the Ancillary Agreements.
Section 11.08. Binding Effect; Assignment. This Agreement and the
Ancillary Agreements shall be binding upon and inure to the benefit of the
parties and their respective successors, permitted assigns and legal
representatives. Unless otherwise provided herein or in the Ancillary
Agreements, neither this Agreement nor any Ancillary Agreement, or any right or
obligation hereunder and thereunder (including, but not limited to, any
servicing obligation under the Administrative Services Agreements), may be
assigned by any party (in whole or in part) without the prior written consent of
the other parties hereto.
Section 11.09. Interpretation.
(a) The parties intend that the terms of the Agreement
shall, to the fullest extent possible, be interpreted and applied consistently
with the terms of the Ancillary Agreements.
(b) The parties acknowledge and agree that, except as
specifically provided herein, they may pursue judicial remedies at law or equity
in the event of a dispute with respect to the interpretation or construction of
the Agreement.
(c) For purposes of the Agreement and the Ancillary
Agreements, the words "hereof," "herein," "hereby" and other words of similar
import refer to this Agreement as a whole unless otherwise indicated. Whenever
the singular is used herein, the same shall include the plural, and whenever the
plural is used herein, the same shall include the singular, where appropriate.
Section 11.10. No Third Party Beneficiaries. Nothing in this Agreement
or the
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Ancillary Agreements is intended or shall be construed to give any Person
(including, but not limited to, the Policyholders, Producers, the Transition
Employees or other employees of Sellers), other than the parties hereto, their
successors and permitted assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or the Ancillary Agreements or any
provision contained herein or therein.
Section 11.11. Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all, of
the parties hereto.
Section 11.12. Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
Section 11.13. Dollar Reference. All dollar references in this
Agreement are to the currency of the United States.
Section 11.14. Performance Following Closing. Nothing in this Agreement
shall be construed to limit any covenant or agreement of the parties hereto
which by its terms contemplates performance after the Closing including, but not
limited to, any covenant or agreement contained in the Ancillary Agreements.
Section 11.15. No Prejudice. The parties agree that this Agreement and
the Ancillary Agreements have been jointly negotiated and drafted by the parties
hereto and that the terms hereof and thereof shall not be construed in favor of
or against any party on account of its participation in such negotiations and
drafting.
- 90 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: __________________________________
Name: __________________________________
Title: __________________________________
AETNA LIFE INSURANCE COMPANY
By: __________________________________
Name: __________________________________
Title: __________________________________
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: __________________________________
Name: __________________________________
Title: __________________________________
LINCOLN LIFE AND ANNUITY COMPANY
OF NEW YORK
By: __________________________________
Name: __________________________________
Title: __________________________________
- 91 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE I DEFINITIONS.......................................................................2
Section 1.01. Definitions....................................................2
ARTICLE II TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES................................20
Section 2.01. Consideration.................................................20
Section 2.02. Acquisition of Transferred Assets and Assumption of
Assumed Liabilities...........................................20
Section 2.03. Place and Date of Closing; Balance Sheets; Cash Transfers
at Closing....................................................21
Section 2.04. Post-Closing Adjustments......................................22
Section 2.05. Closing Items.................................................23
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS......................................24
Section 3.01. Organization, Standing and Authority of Seller................24
Section 3.02. Authorization.................................................24
Section 3.03. Actions and Proceedings.......................................25
Section 3.04. No Conflict or Violation......................................25
Section 3.05. Consents and Approvals........................................26
Section 3.06. Computer Software and Intellectual Property...................26
Section 3.07. Brokerage and Financial Advisers..............................27
Section 3.08. Compliance with Laws..........................................27
Section 3.09. Licenses and Franchises.......................................27
Section 3.10. Policies......................................................27
Section 3.11. Regulatory Filings............................................28
Section 3.12. Producers and Employees.......................................28
Section 3.13. Reinsurance...................................................29
Section 3.14. Conduct of Business...........................................29
Section 3.15. Sellers' Separate Accounts and Underlying Funds...............29
Section 3.16. Contracts.....................................................30
Section 3.17. Transferred Contracts.........................................30
Section 3.18. Transferred Assets............................................31
Section 3.19. GAAP Financial Statements.....................................31
Section 3.20. Statutory Statements..........................................31
Section 3.21. Other Statements. ...........................................32
Section 3.22. Tax Matters...................................................33
Section 3.23. Risk Based Capital............................................33
Section 3.24. Year 2000 Matters. ...........................................33
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND LLANY...........................34
Section 4.01. Organization, Standing and Authority..........................34
Section 4.02. Authorization.................................................34
Section 4.03. Actions and Proceedings.......................................35
i
<PAGE>
Section 4.04. No Conflict or Violation......................................35
Section 4.05. Consents and Approvals........................................36
Section 4.06. Brokerage and Financial Advisers..............................36
Section 4.07. Compliance with Laws..........................................36
Section 4.08. Licenses and Franchises.......................................36
Section 4.09. Financial Statements..........................................37
Section 4.10. Absence of Certain Changes....................................38
Section 4.11. Risk Based Capital............................................38
Section 4.12. Sufficient Funds..............................................38
Section 4.13. Resources.....................................................38
Section 4.14. Year 2000 Matters.............................................38
ARTICLE V COVENANTS........................................................................39
Section 5.01. Conduct of Business...........................................39
Section 5.02. Investigations; Pre-Closing Access............................41
Section 5.03. Post-Closing Access...........................................42
Section 5.04. HSR Act Filings...............................................43
Section 5.05. Consents and Reasonable Efforts...............................43
Section 5.06. Representations and Warranties................................45
Section 5.07. Updating Schedules............................................46
Section 5.08. Further Assurances............................................46
Section 5.09. Expenses......................................................47
Section 5.10. Coinsurance Agreements........................................47
Section 5.11. Administrative Services Agreements............................47
Section 5.12. Bill of Sale..................................................48
Section 5.13. Transition Services Agreement.................................48
Section 5.14. Certain Agreements............................................48
Section 5.15. DAC Tax.......................................................48
Section 5.16. Bank Accounts and Lockboxes...................................48
Section 5.17. Intentionally Deleted.........................................48
Section 5.18. Confidentiality...............................................49
Section 5.19. Employment Obligations........................................50
Section 5.20. Provision of Transitional Services............................56
Section 5.21. Separate Account Revenues.....................................58
Section 5.22. Use of Sellers' Names, Logos or Service Marks.................58
Section 5.23. Communications with Policyholders.............................58
Section 5.24. Non-Solicitation of Business..................................58
Section 5.25. Intentionally Deleted.........................................59
Section 5.26. Purchaser Year 2000 Matters...................................59
Section 5.27. IT Services/Sellers Year 2000 Matters.........................60
Section 5.28. Certain Product Tax Matters...................................66
Section 5.29. Sellers' Non-Compete..........................................67
Section 5.30. Sponsored Business............................................69
Section 5.31. Distribution Arrangements.....................................70
Section 5.32. Reinsurance Treaties..........................................70
Section 5.33. Post-Closing Policies.........................................71
ii
<PAGE>
Section 5.34. Resources.....................................................72
ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER
TO CLOSE..........................................................................72
Section 6.01. Representations, Warranties and Covenants.....................72
Section 6.02. Other Agreements..............................................72
Section 6.03. Governmental and Regulatory Consents and Approvals............73
Section 6.04. Possession of Assets; Instruments of Conveyance...............73
Section 6.05. Injunction....................................................73
Section 6.06. Other Documents...............................................73
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS
TO CLOSE..........................................................................74
Section 7.01. Representations, Warranties and Covenants.....................74
Section 7.02. Other Agreements..............................................74
Section 7.03. Governmental and Regulatory Consents and Approvals............74
Section 7.04. Injunction....................................................75
Section 7.05. Certain Changes...............................................75
Section 7.06. Other Documents...............................................75
ARTICLE VIII SURVIVAL......................................................................75
Section 8.01. Survival of Representations, Warranties, Covenants
and Certain Indemnities.......................................75
ARTICLE IX INDEMNIFICATION AND OTHER RIGHTS................................................76
Section 9.01. Obligation to Indemnify.......................................76
Section 9.02. Claims Notice.................................................77
Section 9.03. Procedures for Direct Claims..................................79
Section 9.04. Indemnification Payments......................................80
Section 9.05. Limitations on Indemnification Obligations....................80
Section 9.06. Exclusivity...................................................82
Section 9.07. Security Trust Account and Recapture Rights...................83
ARTICLE X TERMINATION PRIOR TO CLOSING.....................................................90
Section 10.01. Termination of Agreement......................................90
Section 10.02. Survival......................................................92
ARTICLE XI MISCELLANEOUS...................................................................92
Section 11.01. Publicity.....................................................92
Section 11.02. Confidentiality...............................................92
Section 11.03. Notices.......................................................92
Section 11.04. Entire Agreement..............................................94
Section 11.05. Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies......................................94
Section 11.06. Governing Law.................................................94
Section 11.07. Venue and Jurisdiction........................................95
iii
<PAGE>
Section 11.08. Binding Effect; Assignment....................................95
Section 11.09. Interpretation................................................95
Section 11.10. No Third Party Beneficiaries..................................95
Section 11.11. Counterparts..................................................96
Section 11.12. Headings......................................................96
Section 11.13. Dollar References.............................................96
Section 11.14. Performance Following Closing.................................96
Section 11.15. No Prejudice..................................................96
</TABLE>
iv
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements contained in the Form 10-Q for the
six months ended June 30, 1998 for the Aetna Life Insurance and Annuity Company
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000837010
<NAME> Aetna Life Insurance and Annuity Company
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 13,136
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 249
<MORTGAGE> 13
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,979
<CASH> 1,058
<RECOVER-REINSURE> 24
<DEFERRED-ACQUISITION> 1,712
<TOTAL-ASSETS> 45,046
<POLICY-LOSSES> 3,831
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 29
<POLICY-HOLDER-FUNDS> 11,084
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,945
<TOTAL-LIABILITY-AND-EQUITY> 45,046
34
<INVESTMENT-INCOME> 428
<INVESTMENT-GAINS> 7
<OTHER-INCOME> 14
<BENEFITS> 348
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 96
<INCOME-TAX> 28
<INCOME-CONTINUING> 68
<DISCONTINUED> 37
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
