Exhibit 10.41
STOP LOSS REINSURANCE
AGREEMENT
Effective as of September 30, 2001,
between
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
of
Dover, Delaware,
referred to in this Agreement as "Allmerica," and
LINCOLN NATIONAL REASSURANCE COMPANY
of
Fort Wayne, Indiana,
referred to in this Agreement as "Lincoln."
TABLE OF CONTENTS
Reinsurance Coverage 1
Exclusions 1
Reinsurance Premiums 1
Reports 2
Reimbursement of Losses 2
Acknowledgments 2
Experience Refund 3
Covenants 3
Audit 4
Insolvency 4
Offset 5
Errors 5
Arbitration 5
Deferred Acquisition Cost Tax Election 6
Entire Agreement 6
Parties to the Agreement 6
Effective Date 7
Definitions 7
Execution 8
COVERAGE SCHEDULE 9
REPORT SCHEDULE 11
EXPERIENCE REFUND SCHEDULE 12
ARBITRATION SCHEDULE 13
Reinsurance Coverage
Lincoln shall reimburse Allmerica for Reinsured Claims.
(Capitalized words are defined in either the "Definitions"
article or the Schedules.)
Exclusions
A. The following items shall be excluded from the calculation
of Net Retained Claims:
(1) Claims for any benefit provided pursuant to the
Policies other than claims for Covered Benefits.
(2) Claims in excess of the Maximum Reimbursement
Amount per life.
(3) Claims resulting from Policies acquired by
Allmerica after the Effective Date through
merger, consolidation, purchase, assumption
reinsurance or otherwise, unless Lincoln
expressly agrees by means of an amendment to
this Agreement that such Policies shall be
reinsured.
(4) Any loss adjustment or unusual expenses
incurred by Allmerica in connection with the
Policies.
(5) Any punitive, exemplary, consequential or other
extracontractual damages incurred by Allmerica
in connection with the Policies.
B. Notwithstanding any other provision, coverage of excess of
loss reinsurance underwritten by Allmerica that covers any
other excess of loss reinsurance ("XL on XL Reinsurance")
is excluded from this Agreement. Losses and/or liabilities
arising out of any XL on XL Reinsurance are specifically
excluded from the coverage of this Agreement. The terms
of this exclusion controls and supersedes any provisions of
the Agreement which may be in conflict with this exclusion.
Reinsurance Premiums
As a condition precedent to Lincoln's obligation under this
Agreement, Allmerica shall pay Lincoln a reinsurance
premium of one million dollars ($1,000,000) each calendar
quarter within thirty (30) days following the end of each
calendar quarter.
1
Reports
A. Allmerica shall notify Lincoln whenever it appears likely
that Allmerica's aggregate claims under the Policies during
the Coverage Period and Renewability will exceed the
Attachment Point.
B. Within thirty (30) days following the end of each calendar
quarter, Allmerica shall submit a report to Lincoln in
substantial conformity with the Report Schedule.
C. If the report indicates that there are any incurred but
unreported claims, claims in the course of settlement or
resisted claims still to be settled, Allmerica shall submit
updated reports within twenty (20) days of the end of each
calendar quarter thereafter until all such items have been
finally settled.
Reimbursement of Losses
A. Lincoln shall accept Allmerica's good faith settlement of
claims under the Policies. However, when requested,
Allmerica shall provide Lincoln with copies of any
documentation within Allmerica's possession with respect to
specific claims under the Policies or with respect to items
used to compute Net Retained Claims or the Attachment
Point.
B. If a report submitted by Allmerica indicates an amount due
from Lincoln pursuant to this Agreement, Lincoln shall pay
the amount due within thirty (30) days after receiving the
report, except that if Lincoln reasonably concludes that it
needs to audit the validity of a claim made hereunder, the
date on which a claim payment is due from Lincoln shall be
extended until after the completion of Lincoln's audit.
Acknowledgments
A. Allmerica acknowledges having provided Lincoln with
certain information used by Lincoln in making its
underwriting decision to provide reinsurance for the
Coverage Period and Renewability.
B. Allmerica affirms that all assumptions made in this
underwriting material were based upon informed judgment
and are consistent with sound actuarial principles. Further,
Allmerica affirms that all facts contained in the underwriting
material were correct, complete and accurate as of the date
of the underwriting material.
2
C. Allmerica affirms that all assumptions made in preparing its
Annual Statement were based upon informed judgment and
are consistent with sound actuarial principles.
D. Allmerica affirms that there has been no Material Change in
Allmerica's financial condition and the expected experience
of the Policies between the dates of the underwriting
material and Annual Statement and the beginning of the
Coverage Period and Renewability.
E. Allmerica acknowledges that Lincoln has relied on the
underwriting material and Annual Statement when offering
to provide reinsurance for the Coverage Period and
Renewability.
Experience Refund
Lincoln shall pay Allmerica an Experience Refund if earned
in accordance with the Experience Refund Schedule.
Covenants
A. Except as set forth in paragraph D below, during the
Coverage Period and Renewability Allmerica shall not
permit a Material Change to
(1) its normal underwriting practices and procedures
when issuing Policies;
(2) its normal practices and procedures of
investigating and administering claims; and
(3) its method of determining any value used to
compute Net Retained Claims when preparing its
Annual Statement.
B. Except as set forth in paragraph D, Allmerica shall not
permit a Material Change in any other reinsurance,
proportional or nonproportional, which it maintains on the
Policies as of the beginning of the Coverage Period and
Renewability, including any Material Change to its limit of
retention on the Policies.
C. Except as set forth in paragraph D, Allmerica shall not
assign, sell, assumption reinsure or otherwise transfer any
Policy if such transfer would effect a Material Change to
Net Retained Claims.
D. Allmerica shall promptly notify Lincoln in writing of its
intent to take any action which, if performed, would breach
one or more of the covenants contained in this article. If
Lincoln determines that such action would not adversely
affect its economic interests under this Agreement, it shall
3
consent to the action by Allmerica. If Lincoln becomes
aware that any covenant contained in this article has been
breached, it may notify Allmerica in writing that this
Agreement is terminated from the beginning of the
Coverage Period and Renewability.
Audit
Lincoln may audit, at any reasonable time and at its own
expense, all records and procedures relating to reinsurance
under this Agreement. Allmerica shall cooperate in the
audit, including providing at its own expense at the office of
Lincoln any information requested by Lincoln in advance of
the audit.
Insolvency
A. In the event of the insolvency of Allmerica and the
appointment of a conservator, liquidator or statutory
successor of Allmerica, reinsurance shall be payable to such
conservator, liquidator or statutory successor on the basis of
claims allowed against Allmerica by any court of competent
jurisdiction or by the conservator, liquidator or statutory
successor of Allmerica without diminution because of the
insolvency of Allmerica or because such conservator,
liquidator or statutory successor has failed to pay all or a
portion of any claims.
B. In the event of the insolvency of Allmerica, the liquidator,
receiver or other statutory successor of Allmerica agrees to
give Lincoln written notice of the pendency of a claim on a
Policy within a reasonable time after such claim is filed in
the insolvency proceeding. During the pendency of such
claim, Lincoln may investigate the claim and interpose in
the proceeding where such claim is to be adjudicated in the
name of Allmerica (its conservator, liquidator or statutory
successor), but at its own expense, any defense or defenses
which Lincoln may deem available to Allmerica or its
conservator, liquidator or statutory successor.
C. A proportionate share of the expense thus incurred by
Lincoln shall be charged, subject to court approval, against
Allmerica as part of the expense of liquidation.
4
Offset
Any debts or credits, matured or unmatured, liquidated or
unliquidated, regardless of when they arose or where
incurred, in favor of or against either Allmerica or Lincoln
with respect to this Agreement or any other reinsurance
agreement between the parties, shall be offset and only the
balance allowed or paid. If either Allmerica or Lincoln is
under formal delinquency proceedings, this right of offset
shall be subject to the laws of the state exercising primary
jurisdiction over such delinquency proceedings.
Errors
Any Error made by either Allmerica or Lincoln in the
administration of reinsurance under this Agreement shall be
corrected by restoring both Allmerica and Lincoln to the
positions they would have occupied had no such Error
occurred.
Arbitration
A. If Allmerica and Lincoln cannot mutually resolve a dispute
regarding the interpretation or operation of this Agreement,
the dispute shall be decided through arbitration as set forth
in the Arbitration Schedule. The arbitrators shall base their
decision on the terms and conditions of this Agreement plus,
as necessary, on the customs and practices of the insurance
and reinsurance industry rather than solely on a strict
interpretation of the applicable law. There shall be no
appeal from their decision, except that either party may
petition a court having jurisdiction over the parties and the
subject matter to reduce the arbitrator's decision to
judgment.
B. The parties intend this article to be enforceable in
accordance with the Federal Arbitration Act (9 U.S.C.,
Section 1) including any amendments to that Act which are
subsequently adopted. In the event that either party refuses
to submit to arbitration as required by paragraph A, the other
party may request a United States Federal District Court to
compel arbitration in accordance with the Federal
Arbitration Act. Both parties consent to the jurisdiction of
such court to enforce this article and to confirm and enforce
the performance of any award of the arbitrators.
5
Deferred Acquisition Cost Tax Election
A. Lincoln and Allmerica each acknowledge that it is subject to
taxation under Subchapter "L" of the Internal Revenue Code
of 1986 (the "Code").
B. With respect to this Agreement, Lincoln and Allmerica
agree to the following pursuant to Section 1.848-2(g)(8) of
the Income Tax Regulations issued December 1992,
whereby
(1) each party shall attach a schedule to its federal
income tax return which identifies this
Agreement for which the joint election under the
Regulation has been made;
(2) the party with net positive consideration, as
defined in the Regulation promulgated under
Code Section 848, for this Agreement for each
taxable year, shall capitalize specified policy
acquisition expenses with respect to this
Agreement without regard to the general
deductions limitation of Section 848(c)(1);
(3) each party agrees to exchange information
pertaining to the amount of net consideration
under this Agreement each year to ensure
consistency; and
(4) this election shall be effective for the year that
this Agreement was entered into and for all
subsequent years that this Agreement remains in
effect.
Entire Agreement
A. This Agreement represents the entire agreement between
Allmerica and Lincoln and supersedes any prior oral or
written agreements between the parties regarding its subject
matter.
B. No modification of this Agreement shall be effective unless
set forth in a written amendment executed by both parties.
C. A waiver of a right created by this Agreement shall
constitute a waiver only with respect to the particular
circumstance for which it is given and not a waiver of any
future circumstance.
Parties to the Agreement
This is an Agreement for indemnity reinsurance solely
between Allmerica and Lincoln. The acceptance of
reinsurance under this Agreement shall not create any right
or legal relation between Lincoln and any policyowner,
insured or beneficiary under any Policy.
6
Effective Date
The Effective Date of this Agreement is set forth in the
Coverage Schedule.
Definitions
A. Annual Statement - the annual financial statement filed by
Allmerica with the insurance regulatory body of its state,
province or country of domicile computed in accordance
with all applicable laws and regulations of such jurisdiction.
B. Error - any isolated, inadvertent deviation from the terms of
this Agreement resulting from the act or omission of an
employee of either Allmerica or Lincoln whose principal
function is administrative in nature.
C. Material Change - a modification to a practice, procedure
or condition which a prudent insurance executive would
consider as likely to impact on experience under this
Agreement.
D. Net Retained Claims - claims for Covered Benefits
incurred by Allmerica during the Treaty Year and retained
by it at its own risk without benefit of reinsurance other than
that provided pursuant to this Agreement. "Net Retained
Claims" shall be computed in the same manner as that used
to prepare Allmerica's Annual Statement and the
underwriting material. They shall equal
(1) paid claims incurred during the Treaty Year for
Covered Benefits under the Policies; less
(2) reinsurance proceeds deemed recoverable
pursuant to other reinsurance agreements; less
(3) amounts therein which exceed the Maximum
Reimbursement Amount per Life.
E. Reimbursement Percentage - the percentage specified in
the Coverage Schedule used to compute the portion of Net
Retained Claims in excess of the Attachment Point which
are to be reimbursed by Lincoln.
F. Reinsured Claims - the reimbursement percentage of Net
Retained Claims incurred by Allmerica pursuant to the
Policies during the Treaty Year which exceeds the
Attachment Point, provided that Lincoln's reimbursement
shall not exceed the Aggregate Maximum Reimbursement
Amount.
7
Execution
Allmerica and Lincoln, by their respective officers, executed this
Agreement in duplicate on the dates shown below. As of the Effective Date,
this Agreement consists of
o this Stop Loss Reinsurance Agreement numbered 5;
o a Coverage Schedule;
o a Report Schedule;
o an Experience Refund Schedule; and
o an Arbitration Schedule.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Signed at ______________________
By______________________________
Title___________________________
Date____________________________
By______________________________
Title___________________________
Date____________________________
LINCOLN NATIONAL REASSURANCE COMPANY
Signed at Fort Wayne, Indiana
By______________________________
Vice President
Date____________________________
By______________________________
Assistant Secretary
Date____________________________
8
COVERAGE SCHEDULE
(Effective as of September 30, 2001)
to
Agreement Number 5
The following terms are to be read in conjunction with the Agreement:
Effective Date: September 30, 2001
Coverage Period and
Renewability: 12:01 a.m. on October 1, 2001, and ending on
September 30, 2004, subject to the termination
clause below. However, at the end of each
calendar quarter the Coverage Period shall be
extended by three (3) months, unless thirty (30)
days advance written notice is given by one party
to another of non-renewal.
Treaty Year: Starts on the Effective Date and lasts one (1)
calendar year. Treaty Year is renewed by one (1)
calendar year at the end of each Treaty Year
while the Coverage Period and Renewability is in
effect.
Termination: (1) Lincoln shall have the right to terminate this
Agreement in the event of change in control
of Allmerica.
(2) Allmerica shall have the right to
extraordinary termination of this Agreement
at the end of any calendar quarter. Allmerica
must give thirty (30) days advance written
notice of extraordinary termination to
Lincoln. In the event of extraordinary
termination by Allmerica, payments for the
calendar quarter, as outlined in the Report
Schedule, due from Lincoln shall be made
plus payment by Allmerica to Lincoln of the
absolute value of the Experience Refund Loss
Carryforward plus payment by Allmerica to
Lincoln of the extraordinary termination fee.
9
The extraordinary termination fee shall be
equal to the value in the following
extraordinary termination schedule:
Allmerica Extraordinary
Terminates in Year Termination Fee
------------------ ---------------
2001 $300,000
2002 300,000
2003 200,000
2004+ 100,000
The extraordinary termination fee shall be waived
if Allmerica is not given reserve credit by
regulators in its domiciliary state.
Policies: All variable annuities in force at the effective
date. At the end of each calendar quarter, if there
is not a notice of non-renewal, the date for
allowing in force Policies is extended by three (3)
months.
Covered Benefits: Guaranteed Minimum Death Benefit, defined as
excess of death benefit over account value at time
of death.
Aggregate Maximum
Reimbursement Amount: Forty million dollars ($40,000,000) per Treaty
Year.
Maximum Reimbursement
Amount per Life: One million dollars ($1,000,000).
Attachment Point: Forty million dollars ($40,000,000) per Treaty
Year.
Reimbursement
Percentage: One hundred percent (100%).
10
REPORT SCHEDULE
(Effective as of September 30, 2001)
to
Agreement Number 5
Submitted By___________________
As of_________________
to
Lincoln National Reassurance Company
For the Coverage Period and Renewability from ______ to ______
1. Total incurred claims for Covered Benefits
2. Reserve for claims in course of settlement, incurred but unreported
claims, resisted claims, etc.
3. Incurred and paid claims for Covered Benefits [1 - 2]
4. Reinsurance recoverable from other reinsurance
5. Claims in excess of the Maximum Reimbursement Amount per Life
6. Net Retained Claims [3 - 4 - 5]
7. Attachment Point
8. Reimbursement Percentage
9. Excess claims (greater of zero dollars ($0) and [(6 - 7) * 8])
10. Aggregate Maximum Reimbursement Amount
11. Total Reinsured Claims for Treaty Year at end of calendar quarter
(lesser of 9 and 10)
12. Total Reinsured Claims for Treaty Year at beginning of calendar
quarter
13. Reinsured Claims due from Lincoln for calendar quarter [11 - 12]
14. Reinsurance premium
15. Risk Premium Charge
16. Cumulative Experience Refund at beginning of quarter
17. Experience Refund Loss Carryforward at beginning of quarter
18. Cumulative Experience Refund at end of quarter (greater of zero
dollars ($0) and [16 + 14 - 13 - 15 - 17])
19. Experience Refund Loss Carryforward at end of quarter (greater of zero
dollars ($0) and [- (16 + 14 - 13 - 15 - 17)])
20. Experience Refund to Allmerica (greater of zero dollars ($0) and [18 -
16])
21. Net payment due Lincoln (from Lincoln if negative) [14 - 13 - 18 + 16]
11
EXPERIENCE REFUND SCHEDULE
(Effective as of September 30, 2001)
to
Agreement Number 5
A. Experience Refund
1. The Experience Refund shall be computed with respect to a Treaty
Year and shall be calculated on an accrued basis each calendar
quarter. The Cumulative Experience Refund shall be equal to the
greater of zero dollars ($0) and the following formula amount:
(a) Cumulative Experience Refund at end of prior calendar
quarter; plus
(b) Reinsurance premiums paid during calendar quarter; less
(b) Reinsured Claims for calendar quarter; less
(c) Risk Premium Charge for calendar quarter.
2. The Experience Refund due Allmerica from Lincoln shall equal the
greater of zero dollars ($0) and the Cumulative Experience Refund
at the end of the current calendar quarter less the Cumulative
Experience Refund at the end of the prior calendar quarter.
3. If the formula amount for the Cumulative Experience Refund is
negative, a loss carryforward shall be created. The Experience
Refund Loss Carryforward shall equal the absolute value of such
amount. The Experience Refund Loss Carryforward shall be deducted
in the calculation of the Cumulative Experience Refund at the end
of the next calendar quarter.
B. Risk Premium Charge
For each calendar quarter, the Risk Premium Charge is thirty-seven thousand
five hundred dollars ($37,500) plus .25 percent (0.25%) of reserve credit
taken plus reimbursement of cost, paid by Lincoln to its retrocessionaire,
of letters of credit used to support reserve credit taken by Lincoln.
12
ARBITRATION SCHEDULE
(Effective as of September 30, 2001)
to
Agreement Number 5
Any controversy or claim arising out of or relating to this Agreement shall
be settled by arbitration.
There must be three (3) arbitrators who must be impartial and must be
present or former officers of life insurance or life reinsurance companies
other than the parties or their affiliates. Each of the parties shall
appoint one (1) of the arbitrators and these two (2) arbitrators shall
select the third (the "Umpire"). In the event that either party should fail
to choose an arbitrator within thirty (30) days following a written request
by the other party to do so, the requesting party may choose two (2)
arbitrators who shall in turn choose an Umpire before entering upon
arbitration. If the two (2) arbitrators fail to agree upon the selection of
an Umpire within thirty (30) days following their appointment, either party
may ask ARIAS-US to appoint the Umpire. However, if ARIAS-US is unable to
appoint an Umpire who is impartial and who is or was an officer of a life
insurance or life reinsurance company other than the parties or their
affiliates, then either party may ask a court to appoint the Umpire
pursuant to the Uniform Arbitration Act or any similar statute empowering
the court to appoint an arbitrator, in which case the requirement that the
Umpire be a present or former officer of a life insurance or life
reinsurance company shall be waived.
The arbitrators shall decide all matters by majority vote. They shall
establish the procedural rules for the arbitration and allocate among the
parties the expenses of the arbitration. They shall interpret this
Agreement as an honorable engagement and are not bound by the strict
formalities of law. They are not empowered to assess punitive damages.
The arbitration panel shall determine all arbitration schedules and
procedural rules. Organizational and other meetings shall be held in
Worcester, Massachusetts, unless the panel shall select another location.
The award agreed by the arbitrators will be final, and judgement may be
entered upon it in any court having jurisdiction.
13