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AUTOMATIC REINSURANCE AGREEMENT
Between
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(now known as the MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA)
Boston, Massachusetts
And
SWISS RE LIFE & HEALTH AMERICA INC.
New York, New York
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AUTOMATIC REINSURANCE AGREEMENT
Contents
--------
ARTICLE I Scope of Agreement
ARTICLE II Commencement & Termination of Liability
ARTICLE III Oversights - Clerical Errors
ARTICLE IV Mortality Net Amount At Risk
ARTICLE V Reinsurance Premiums
ARTICLE VI Experience Refund
ARTICLE VII Reinsurance Administration
ARTICLE VIII Settlement of Claims
ARTICLE IX Tax Credits
ARTICLE X Regulatory Compliance
ARTICLE XI Inspection of Records
ARTICLE XII Insolvency
ARTICLE XIII Arbitration
ARTICLE XIV Rights of Offsetting Balances Due
ARTICLE XV Contract and Program Changes
ARTICLE XVI Federal Taxes
ARTICLE XVII Parties to Agreement
ARTICLE XVIII Entire Agreement
ARTICLE XIX Duration of Agreement
Signature Page
EXHIBIT A - Variable Annuities Covered Under This Agreement
EXHIBIT B - Sub-Accounts
EXHIBIT C - Experience Refund and Loss Carryforward Definitions and Formulae
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AUTOMATIC REINSURANCE AGREEMENT
THIS AGREEMENT between the NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (now
known as the MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA), a
corporation organized under the laws of the State of Delaware, hereinafter
referred to as the "Company", and SWISS RE LIFE & HEALTH AMERICA INC., a
corporation organized under the laws of the State of New York, hereinafter
referred to as "Swiss Re Life & Health", WITNESSETH AS FOLLOWS:
ARTICLE I
Scope of Agreement
1. On and after the 1st day of August, 1997, the Company will
automatically reinsure with Swiss Re Life & Health, and Swiss Re Life & Health
will automatically accept, a 50% quota share of the mortality net amount at
risk, as defined in Article IV, generated prior to annuitization or complete
surrender by the contract owner, by the Guaranteed Minimum Death Benefit
provisions within the variable annuity contracts issued by the Company as set
forth in Exhibit A.
2. Swiss Re Life & Health's maximum aggregate liability in any one
calendar year shall not exceed 3% (300 basis points) of Swiss Re Life &
Health's quota share percentage of the average aggregate account value over
each respective calendar year of coverage. This average shall be calculated by
totaling the aggregate account value as of the end of each calendar month and
dividing the result by the number of months.
3. Swiss Re Life & Health's maximum liability on any one life
reinsured hereunder shall be Two Million Dollars ($2,000,000) multiplied by the
quota share percentage reinsured by Swiss Re Life & Health specified in
paragraph 1 of this Article, and calculated as specified in Article IV of this
Agreement.
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4. This Agreement covers only the Company's liability for claims paid
under variable annuity contracts written on the contract forms specified in
Exhibit A and supported by sub-accounts which were reviewed by Swiss Re Life &
Health prior to their issuance.
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ARTICLE II
Commencement & Termination of Liability
1. On reinsurance ceded under the terms of this Agreement, the
liability of Swiss Re Life & Health shall commence simultaneously with that of
the Company, and will terminate upon the earliest of re-registration,
annuitization, surrender or termination in accordance with Article XIX.
Re-registration is a term used to describe a process in which the Beneficiary
continues the Variable Annuity Contract as the new Owner upon death of the
original Owner.
2. Swiss Re Life & Health shall be liable to reimburse claims on only
those deaths where the date of death is on or after August 1, 1997, in
accordance with Article VIII.
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ARTICLE III
Oversights - Clerical Errors
1. Should either the Company or Swiss Re Life & Health fail to comply
with any of the terms of this Agreement, and if this is shown to be
unintentional and the result of a misunderstanding, oversight or clerical error
on the part of either the Company or Swiss Re Life & Health, then this
Agreement shall not be deemed abrogated thereby, but both companies shall be
restored to the position they would have occupied had no such oversight,
misunderstanding, or clerical error occurred. Such conditions are to be
reported and corrected promptly after discovery.
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ARTICLE IV
Mortality Net Amount At Risk
----------------------------
1. The mortality net amount at risk for each variable annuity contract
reinsured hereunder shall be calculated as of the last day of each calendar
month and shall be calculated as described below, except that the amount shall
not be less than zero and shall not be greater than the product of ($2,000,000)
per life and the quota share percentage reinsured by Swiss Re Life & Health.
VNAR = 50% of [(SA - Separate Account CSV) +
Max(0, Contractual GMDB - FA - SA)]
where:
SA = Separate Account Assets.
FA = Fixed Account Assets.
SC = Total surrender charges under all contracts
reinsured.
SASC% = SA/(SA + FA), an aggregate measure recalculated
monthly.
Separate Account CSV = SA - (SASC% * SC)
The contractual death benefit and the contract value shall be as described in
the variable annuity contract forms specified in Exhibit A.
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ARTICLE V
Reinsurance Premiums
--------------------
1. (a) Reinsurance premiums shall be calculated monthly. The initial
reinsurance premium shall be equal to the minimum monthly premium rate
as described in paragraph 1(b), below. Subsequent reinsurance premiums
shall be equal to 150% of the prior calendar month's death claim
reimbursement, subject to the minimum and maximum monthly premiums
stated in 1(b) and 1(c), below.
(b) The minimum monthly premium shall be equal to the product of the
current minimum monthly premium rate and Swiss Re Life & Health's quota
share percentage of the greater of the average aggregate account values
and the average aggregate GMDB over each calendar month of all variable
annuities reinsured hereunder.
The current minimum monthly premium rate shall be equal to
PRODUCT BASIS POINTS
One Time Nine (9) Year Ratchet 0.625
(until contract termination)
(c) The maximum monthly premium shall be equal to the product of the
current maximum monthly premium rate and Swiss Re Life & Health's quota
share percentage of the greater of the average aggregate account values
and the average aggregate GMDB over each calendar month of all variable
annuities reinsured hereunder.
The current maximum monthly premium rate shall be equal to
PRODUCT BASIS POINTS
One Time Nine (9) Year Ratchet 1.0417
(until contract termination)
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2. The total reinsurance premium shall be reduced by the ratio of:
the sum of the mortality net amounts at risk in excess of $1 million
on any lives reinsured hereunder multiplied by the quota share
percentage reinsured by Swiss Re Life & Health
to
the total mortality net amounts at risk on all variable annuity
contracts reinsured hereunder multiplied by the quota share percentage
reinsured by Swiss Re Life & Health.
3. The monthly reinsurance premium shall be due and payable on a calendar
quarterly basis as described in Article VII.
4. The reinsurance premium rates described above shall remain in effect as
long as the death benefit design, the contract fees, the mortality and expense
charges, the administration fees, and the surrender charges in effect at the
inception of this Agreement remain unchanged.
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ARTICLE VI
Experience Refund
1. Swiss Re Life & Health shall pay the Company an experience refund equal
to 50% of the Adjusted Profit, as defined in Exhibit C, for all variable
annuity contracts covered under this Agreement as set forth in Exhibit A.
2. The refund shall be calculated each calendar quarter by Swiss Re Life &
Health and settled annually by July 31st of each year.
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ARTICLE VII
Reinsurance Administration
--------------------------
1. Within 30 days of the end of each calendar quarter, the Company will
furnish Swiss Re Life & Health a separate electronic report for each Guaranteed
Minimum Death Benefit design specified in Exhibit A, valued as of the last day
of that calendar quarter. Each report will indicate for all inforce annuities
reinsured hereunder:
a) Annuitant's name, sex, date of birth and social security
number
b) Owner's name, sex, date of birth and social security number
c) Contract number
d) Contract issue date
e) Contract form number
f) Current contract separate account value
g) Current contract value fixed account value
h) Cumulative net considerations
i) Current contract minimum guaranteed death benefit
j) Current contract death benefit
k) Current contract cash surrender value
l) Current variable net amount at risk
2. Additionally, within 30 days of the end of each calendar quarter, the
Company will furnish Swiss Re Life & Health a separate paper report for each
GMDB design and tax status combination specified in Exhibit A, summarizing the
following data:
a) Reinsurance premiums due Swiss Re Life & Health
b) Death claim reimbursements due the Company
c) Total number of contracts reinsured
d) Total current contract separate account value
e) Total current fixed account value
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f) Total cumulative net considerations
g) Total current guaranteed minimum death benefit
h) Total current death benefit
i) Total current cash surrender value
j) Total current variable risk amount
3. If the net balance is due Swiss Re Life & Health, the amount due
shall be remitted with the report statement. If the net balance is due the
Company, Swiss Re Life & Health shall remit the amount to the Company within 10
days of the receipt of the report.
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ARTICLE VIII
Settlement of Claims
1. The claims that are eligible for reimbursement are only those that the
Company is required to pay on deaths that occur on or after the effective date
of this Agreement.
2. In the event the Company provides satisfactory proof of claim to Swiss
Re Life & Health, claim settlements made by the Company shall be unconditionally
binding on Swiss Re Life & Health.
3. The death claim reimbursed by Swiss Re Life & Health shall be
determined as of the date due proof of death is received at the Company's
Annuity Service office.
4. Within 30 days of the end of each calendar quarter, the Company shall
notify Swiss Re Life & Health of the reinsured death benefits paid in that
calendar quarter and Swiss Re Life & Health will reimburse the Company, as
provided in Article VII, for the reinsured benefits.
5. Settlements by Swiss Re Life & Health shall be in a lump sum
regardless of the mode of payment made by the Company to the beneficiary.
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ARTICLE IX
Tax Credits
1. Swiss Re Life & Health shall not reimburse the Company for state
premium taxes.
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ARTICLE X
Regulatory Compliance
1. Swiss Re Life & Health agrees to comply with all regulatory
directives required to permit the Company to receive statutory reserve credit
for the reinsurance ceded under this Agreement.
2. The Company warrants that it has secured all necessary federal
and state licenses and approvals, and that it is operating in compliance with
federal investment laws and state investment and insurance laws and regulations.
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ARTICLE XI
Inspection of Records
1. Swiss Re Life & Health shall have the right at all reasonable
times and for any reasonable purpose to inspect at the office of the Company
all records referring to reinsurance ceded to Swiss Re Life & Health.
2. Likewise, the Company shall have the right at all reasonable
times and for any reasonable purpose to inspect at the offices of Swiss Re Life
& Health all records pertaining to reinsurance ceded to Swiss Re Life & Health
by the Company. Swiss Re Life & Health shall also provide reasonable access,
during regular business hours, to records pertaining to such reinsurance to any
regulator having authority over the Company's products and operations.
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ARTICLE XII
INSOLVENCY
1. In the event of the insolvency of the Company, all reinsurance made,
ceded, renewed or otherwise becoming effective under this Agreement shall be
payable by Swiss Re Life & Health directly to the Company or to its liquidator,
receiver, or statutory successor on the basis of the liability of the Company
under the contract reinsured without diminution because of the insolvency of the
Company. It is understood, however, that in the event of the insolvency of the
Company, the liquidator, receiver or statutory successor of the insolvent
Company shall give written notice of the pendency of a claim against the
insolvent Company on the policy reinsured within a reasonable time after such
claim is filed in the insolvency proceeding and that, during the pendency of
such claim, Swiss Re Life & Health may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be adjudicated, any
defense or defenses which it may deem available to the Company or to its
liquidator, receiver or statutory successor.
2. It is further understood that the expense thus incurred by Swiss Re Life
& Health shall be chargeable, subject to court approval, against the insolvent
Company as part of the expense of liquidation to the extent of a proportionate
share of the benefit which may accrue to the Company solely as a result of the
defense undertaken by Swiss Re Life & Health. Where two or more assuming
insurers are involved in the same claim and a majority in interest elect to
interpose defense to such claim, the expense shall be apportioned in accordance
with the terms of this Reinsurance Agreement as though such expense had been
incurred by the Company.
3. In the event of the insolvency of Swiss Re Life & Health and the
appointment of receivers therefor, the liability of Swiss Re Life & Health shall
not terminate but shall continue with respect to the reinsurance ceded to Swiss
Re Life & Health by the Company prior to the date of such insolvency or
appointment, and the Company shall have a security interest in any and all sums
held by or under deposit in the name of Swiss Re Life & Health.
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ARTICLE XIII
ARBITRATION
1. In the event of any difference arising hereafter between the contracting
parties with reference to any transaction under this Agreement, the same shall
be referred to three arbitrators who must be current or former executive
officers of life insurance or life reinsurance companies other than the two
parties to this Agreement or their affiliates, each of the contracting companies
to appoint one of the arbitrators and such two arbitrators to select the third.
If either party refuses or neglects to appoint an arbitrator within 60 days
after receipt of the written request for arbitration, the other party may
appoint a second arbitrator.
2. If the two arbitrators fail to agree on the selection of a third
arbitrator within 60 days of their appointment, each of them shall name three
individuals, of whom the other shall decline two, and the decision shall be made
by drawing lots.
3. The arbitrators shall consider this Reinsurance Agreement not merely as
a legal document but also as a gentlemen's agreement. In resolving the dispute,
the arbitrators will give full consideration to the customs and practices of the
life insurance and life reinsurance industry, insofar as they are not in
conflict with the specific terms of this Agreement. The arbitrators shall decide
by a majority vote. There shall be no appeal from their written decision.
4. Unless the arbitrators decide otherwise, each party shall bear the
expense of its own arbitration, including its arbitrator and outside attorney
fees, and shall jointly and equally bear with the other party the expense of
the third arbitrator. Any remaining costs of the arbitration proceedings shall
be apportioned by the Board of Arbitrators.
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ARTICLE XIV
Right of Offsetting Balances Due
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1. The Company and Swiss Re Life & Health shall have, and may exercise at
any time, the right to offset any balance or balances due one party to the
other, its successors or assigns, against balances due the other party under
this Agreement or under any other Agreements or Contracts previously or
subsequently entered into between the Company and Swiss Re Life & Health. This
right of offset shall not be affected or diminished because of insolvency of
either party to this Agreement.
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ARTICLE XV
Contract and Program Changes
----------------------------
1. The Company may amend, substitute, add or delete variable investment
funds to the separate accounts supporting the annuity contract as described in
the contract general provisions. No such change will be made by the Company
without prior notification to Swiss Re Life & Health and without the prior
approval of the Securities and Exchange Commission, if necessary. The Company
agrees to maintain at all times a satisfactory selection of core investment
options with characteristics similar to those listed in Exhibit B.
2. The Company will also give Swiss Re Life & Health advance notice of
any other changes to its annuity product design, its fees and charges, its
distribution systems and/or methods, or the addition of any riders to any
contract form reinsured hereunder.
3. Should any such change result in a material increase in the reinsured
net amount at risk and/or material decrease in the reinsurance premiums due,
Swiss Re Life & Health shall have the right to modify any of the terms of this
Agreement.
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ARTICLE XVI
Federal Taxes
1. The Company and Swiss Re Life & Health hereby agree to the following
pursuant to Section 1.848-2(g)(8) of the Income Tax Regulation issued December
1992, under Section 848 of the Internal Revenue Code of 1986, as amended. This
election shall be effective as of the Effective Date of this Agreement and for
all subsequent taxable years for which this Agreement remains in effect.
(a) The term "party" will refer to either the Company or Swiss Re
Life & Health, as appropriate.
(b) The terms used in this Article are defined by reference to
Regulation 1.848-2 in effect December 1992.
(c) The party with the net positive consideration for this Agreement
for each taxable year will capitalize specified policy
acquisition expenses with respect to this Agreement without
regard to the general deductions limitation of Section 848(c)(1).
(d) Both parties agree to exchange information pertaining to the
amount of net consideration under this Agreement each year to
ensure consistency or as otherwise required by the Internal
Revenue Service.
(e) The Company will submit a schedule to Swiss Re Life & Health by
May 1 of each year of its calculation of the net consideration
for the preceding calendar year. This schedule of calculations
will be accompanied by a statement stating that the Company will
report such net consideration in its tax return for the preceding
calendar year.
(f) Swiss Re Life & Health may contest such calculation by providing
an alternative calculation to the Company by June 1. If Swiss Re
Life & Health does not so notify the Company, the Company will
report the net consideration as determined by the Company in the
Company's tax return for the previous calendar year.
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(g) If Swiss Re Life & Health contests the Company's
calculation of the net consideration, the parties will
act in good faith to reach an agreement as to the
correct amount by July 1. If the Company and Swiss Re
Life & Health reach agreement on an amount of the net
consideration, each party shall report such amount in
their respective tax returns for the previous calendar
year.
2. Swiss Re Life & Health and the Company represent and warrant
that they are subject to U.S. taxation under Subchapter L of Chapter 1 of the
Internal Revenue Code.
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ARTICLE XVII
Parties to Agreement
1. This Agreement is an indemnity reinsurance agreement solely
between the Company and Swiss Re Life & Health. The acceptance of reinsurance
hereunder shall not create any right or legal relation whatever between Swiss
Re Life & Health and the annuitant, owner, beneficiary or any other party under
any contracts of the Company which may be reinsured hereunder, and the Company
shall be and remain solely liable to such parties under such contracts
reinsured hereunder.
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ARTICLE XVIII
Entire Agreement
1. This Agreement shall constitute the entire agreement between the
parties with respect to business reinsured hereunder. There are no
understandings between the parties other than as expressed in this Agreement
and any change or modification of this Agreement shall be null and void unless
made by amendment to the Agreement and signed by both parties.
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ARTICLE XIX
Duration of Agreement
1. New business shall be ceded under this Agreement until August 1, 1998.
As of that date, the reinsurance facility may be renewed subject to mutually
acceptable terms.
2. Upon 180 days written notice, either the Company or Swiss Re Life &
Health may cancel this Agreement any time on or after the first anniversary of
this Agreement. Inforce business ceded hereunder shall not be affected if the
Company and Swiss Re Life & Health fail to reach acceptable terms for new
business.
3. Any time on or after the fifteenth anniversary of this Agreement, the
Company may, upon 90 days written notice, irrevocably elect to cancel the
reinsurance in force under this Agreement, provided the loss carryforward,
calculated as described in Exhibit C of this Agreement, is non-negative. Upon
election, the reinsurance shall be recaptured at a constant rate by reducing
the quota share percentage set forth in Article I, paragraph 1, by 1.4% per
month. The reduction shall begin in the month of election and continue for 36
consecutive months. The quota share percentage will then be equal to 0% and the
reinsurance ceded hereunder shall be fully recaptured and this Agreement shall
then be terminated.
4. Should the Company fail to pay reinsurance premiums when due, Swiss Re
Life & Health may give the Company thirty (30) days notice, after reinsurance
premiums are ninety (90) days or more in arrears, that reinsurance coverage on
the affected reinsurance is suspended. The reinsurance coverage will be
reinstated at the option of Swiss Re Life & Health upon receipt of all the
overdue premiums. However, Swiss Re Life & Health shall have no liability for
claims that occur during a period of suspension. Also, suspension of
reinsurance coverage shall not relieve the Company of liability for premiums
due Swiss Re Life & Health.
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IN WITNESS WHEREOF, the Company and Swiss Re Life & Health have caused their
names to be subscribed and duly attested hereunder by their respective
Authorized Officers.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(now known as the MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA)
By:________________________________ Attest:________________________________
Title:_____________________________ Title:_________________________________
Date:______________________________ Date:__________________________________
SWISS RE LIFE & HEALTH AMERICA INC.
By:________________________________ Attest:________________________________
Title:_____________________________ Title:_________________________________
Date:______________________________ Date:__________________________________
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EXHIBIT A
Variable Annuities Covered Under This Agreement
I. Contracts Covered:
The Venture Vantage Combination Fixed and Variable Annuity with One Time
Nine Year Ratchet Benefit.
Contract Form Number -- Venture APP 01, and all state variations
Product Code -- VTG20
II. Contract Issue Dates:
Contracts issued by the Company on and after August 1, 1997 and before
August 1, 1998.
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EXHIBIT B
Sub-Accounts
I. Trust Portfolio
Pacific Rim Emerging Markets Fund
Science & Technology Fund
International Small Cap Fund
Emerging Growth Fund
Pilgrim ▇▇▇▇▇▇ Growth Fund
Small/Mid Cap Fund
International Stock Fund
Worldwide Growth Fund
Global Equity Fund
▇▇▇▇▇▇▇▇▇ Small Company Value Fund (available October 1, 1997)
Growth Fund
Equity Fund
Quantitative Equity Fund
Blue Chip Growth Fund
Real Estate Securities Fund
Value Fund
International Growth and Income Fund
Growth and Income Fund
Equity-Income Fund
Balanced Fund
Aggressive Asset Allocation Fund
High Yield Fund
Moderate Asset Allocation Fund
Conservative Asset Allocation Fund
Strategic Bond Fund
Global Government Bond Fund
Capital Growth Bond Fund
Investment Quality Bond Fund
U. S. Government Securities Fund
Money Market Fund
Lifestyle Aggressive 1000 Fund
Lifestyle Growth 820 Fund
Lifestyle Balanced 640 Fund
Lifestyle Moderate 460 Fund
Lifestyle Conservative 280 Fund
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EXHIBIT C
Experience Refund and Loss Carryforward
Definitions and Formulae
t = current month
q = current quarter
(sum symbol)AV(t) = Sum total of Swiss Re Life & Health's quota share
percentage of account values at end of month t
Avg. AV(t) = 50% of ((sum symbol)AV(t-1) + (sum symbol)AV(t))
(sum symbol)GMDB(t) = Sum total of Swiss Re Life & Health's quota share
percentage of guaranteed minimum death benefits at
end of month t
Avg. GMDB(t) = 50% of ((sum symbol)GMDB(t-1) + (sum symbol)GMDB(t))
APR = annualized premium rate for each product combination
MPR = Monthly premium rate for each product combination
= (APR divided by 12)
RP(t) = Reinsurance premiums due at end of month t
= 150% DBR(t-1), subject to:
Min. = MPR x Minimum multiple x greater of (Avg. AV(t))
or (100% of Avg. GMDB(t))
Max. = MPR x Maximum multiple x greater of (Avg. Av(t))
or (100% of Avg. GMDB(t))
Min. Multiple = 1.0000
Max. Multiple = 1.6667
RP(1) = MPR x greater of (Avg. AV(1.)) or (Avg. GMDB(1))
DBR(t) = Death benefit recoveries in month t
= Sum of individual reinsured variable net risk amounts
reimbursed upon death
DBR(o) = 0
AdjP(t) = Adjusted profit for all products reinsured hereunder
for month t
= RP(t) - DBR(t) - MEC(t) - CHGRES(t) + CFWD(t)
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EXHIBIT C, continued
AdjP(o) = 0
AdjP(y) = Adjusted profit for calendar year y
CHGRES(t) = Change in reinsurance reserves for month t
MEC(t) = Monthly expense charge for month t, applied to average
aggregate account value over the month
= (2.0 basis points divided by 12) x Avg. AV(t)
CFWD(t) = Carryforward from month (t-1), adjusted for interest
= AdjP(t-1) x (1 + CIR(t))
When t = 13, 25, 37...., then CFWD(t)
= (AdjP(t-1) - Refund ((t-1)/12) x (1 + CIR(t))
CIR(t) = Carryforward interest rate for month t
= (Avg. U.S. Treasury ▇▇▇▇ rate for month t + 2.0%)
divided by 12
PR(y) = Payout ratio for year y
= 1.0 if AdjP(y) > 0, otherwise 0
Refund(y) = 50% of adjusted profit for year y, provided it is positive
= 50% x AdjP(y) x PR(y)