EX-10 4 gilcore.txt GUARANTY INCOME LIFE REINSURANCE AGREEMENT REINSURANCE AGREEMENT BETWEEN GUARANTY INCOME LIFE INSURANCE COMPANY of Baton Rouge, Louisiana referred to in this Agreement as the "Company" and SECURITY NATIONAL LIFE INSURANCE COMPANY of Salt Lake City, Utah referred to in this Agreement as the "Reinsurer" TABLE OF CONTENTS Page I. Scope of Reinsurance 4 II. Liability 4 III. General Provisions 4 IV. Initial Consideration and Reinsurance Premiums 8 V. Reserve Adjustments 9 VI. Benefits 10 VII. Accounting and Settlement 11 VIII. Recapture 13 IX. Recapture Accounting and Settlement 13 X. Arbitration 14 XI. Insolvency 15 XII. Severability 15 XIII. Complete Agreement 16 XIV. Parties to Agreement 16 XV. Assignment 16 XVI. Investment of Assets 16 XVII. DAC Tax Article 16 XVIII. Execution 17 Schedule A, Policies and Amounts Reinsured 18 Schedule B, Initial Statutory, Modified Coinsurance and 19 Coinsurance Reserves and Net Profit Calculation Schedule C, Reinsurance Premiums 20 Schedule D, Expense Allowance 21 Schedule E, Modified Coinsurance Interest Rate and 22 Modco Investment Income Schedule F, Part I. Coinsurance and Modified Coinsurance Reserve Report 23 Schedule F, Part II. Loss Carry Forward Report 25 Schedule F, Part III. Experience Refund 26 Schedule F, Part IV. Quarterly Settlement Report 27 Schedule G, Policy Exhibit 28 TABLE OF CONTENTS (continued) Page Schedule H, Part I. Quarterly Statutory Reporting 29 Schedule H, Part II. Annual Statutory Reporting 30 Schedule I, Part I. DAC Tax Adjustment 31 Schedule I, Part II. Reinsurance Questionnaire 32 Schedule I, Part III. DAC Tax Exhibit 33 Schedule J, Trust Agreement 34 Schedule K, Minimum Coinsurance Reserve 35 GUARANTY INCOME LIFE INSURANCE COMPANY (the "Company") and SECURITY NATIONAL LIFE INSURANCE COMPANY (the "Reinsurer") mutually agree to reinsure on the terms and conditions set out below. This Agreement is an indemnity reinsurance Agreement solely between the Company and the Reinsurer, and performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance shall anyone other than the Company or Reinsurer have any rights under this Agreement. ARTICLE I SCOPE OF REINSURANCE 1. Policies Reinsured. The Company hereby cedes and the Reinsurer hereby reinsures, according to the terms and conditions of this Agreement, the risks under certain policies, as described in Schedule A. 2. Coverages and Exclusions. a) Only risks under the policies referred to in Paragraph 1, hereinafter referred to as the "Policies," to the extent of the limits specified in Schedule A, are reinsured under this Agreement. b) The Reinsurer will reimburse for the same form and term of nonforfeiture benefits as provided for in each reinsured policy issued by the Company in a quota share percentage corresponding to that shown in Schedule A. c) The Reinsurer shall have no liability to the Company for reimbursement of any policy loans made to policyholders with respect to the portion of the policies reinsured under this Agreement. 3. Plan of Reinsurance. Reinsurance effected under this Agreement shall be partially on a coinsurance basis and partially on a modified coinsurance basis. ARTICLE II LIABILITY Liability. The liability of the Reinsurer shall begin simultaneously with that of the Company, but not prior to the effective date of this Agreement. The reinsurance under this Agreement with respect to any policy reinsured hereunder shall be maintained in force without reduction as long as the liability of the Company under such policy remains in force without reduction, unless reinsurance under this Agreement is terminated or reduced or as otherwise provided herein. The Reinsurer's liability on any policy reinsured hereunder shall terminate with that of the Company, but shall not extend beyond the termination date of this Agreement. ARTICLE III GENERAL PROVISIONS 1. Representations and warranties of Company. a. The Company has provided the Reinsurer copies of all forms, applications, rates and values with respect to the Policies that the Reinsurer has requested and shall keep the Reinsurer promptly informed with respect to any changes or modifications to such forms, applications or rates. b. The Company will provide the Reinsurer with the latest examination of Company by the Louisiana Department of Insurance at the request of the Reinsurer. c. The Company is licensed and in good standing in Louisiana. The Company does not have any reason to believe that it is about to be placed in supervision, rehabilitation, receivership, suspension or liquidation by any insurance department. d. The Company is duly organized, validly existing and in good standing under the laws of the state of Louisiana, and has all necessary corporate power and authority to entitle it to use its name, to own, lease or otherwise hold its properties and assets, to carry on its business as currently conducted, and to perform its obligations. e. The execution, delivery and performance of this Agreement by the Company will not (i) violate or conflict with any provision of its Certificate of Incorporation or bylaws; (ii) violate or result in any breach of or constitute a default under, or give rise to a right of modification, termination or cancellation of, or accelerate the performance required by the terms of, as the case may be, any contract, lease, license, mortgage, note, or any agreement to which the Company is bound; or (iii) violate or conflict with any law, regulation, code, judgment, order, writ, injunction or decree of any court, governmental body, or administrative agency by which the Company may be bound. f. The Company has full corporate power and authority to execute, deliver and perform its obligations under this Agreement, and has taken all necessary corporate and other action to authorize the ceding of the Policies under the terms of this Agreement. g. This Agreement has been duly executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms. h. To the best of the Company's knowledge, the Policies are in compliance with all applicable requirement of law and are on forms approved in all material respects by the appropriate governmental authorities except to the extent that failure to be in compliance therewith does not have a material adverse effect. i. The assets reflected by Company on its quarterly statement to the Insurance Department of the State of Louisiana for the quarter ended September 30, 2003 a) have not decreased since that time, b) are accurately reflected as to value, c) are unencumbered, except as reflected on the statement, and d) are fully available to the Company to support its obligations to its policyholders. j. Company acknowledges the existence of a certain Reinsurance Agreement by and between Company and The Mercantile and General Life Reassurance Company of America ("Mercantile") signed by Company on February 25, 1987 and by Mercantile on October 17, 1986 and a Reinsurance Agreement by and between Company and American United Life Insurance Company with an effective date of July 18, 1983 and an Amendment thereto effective November 1, 1993 and any other reinsurance agreements, if any, between Company and other reinsurers (collectively referred to as "Third Party Reinsurance Agreements"). Company acknowledges that Reinsurer will not accept the risks associated with possible changes to the Third Party Reinsurance Agreements and further promises that this Agreement shall be treated as if the Third Party Reinsurance Agreements are in full force and effect, as constituted on the effective date of this Agreement. The Company further represents that any increase to the premiums under the Third Party Reinsurance Agreements shall be the sole responsibility and obligation of Company, unless accepted in writing by Reinsurer. 2. Representations and warranties of Reinsurer. a. The Reinsurer is duly organized, validly existing and in good standing under the laws of the state of Utah, and has all necessary corporate power and authority to entitle it to use its name, to own, lease or otherwise hold its properties and assets, to carry on its business as currently conducted, and to perform its obligations. b. The execution, delivery and performance of this Agreement by the Reinsurer will not (i) violate or conflict with any provision of its Certificate of Incorporation or by-laws; (ii) violate or result in any breach of or constitute a default under, or give rise to a right of modification, termination or cancellation of, or accelerate the performance required by the terms of, as the case may be, any contract, lease, license, mortgage, note, or any agreement to which the Reinsurer is bound; or (iii) violate or conflict with any law, regulation, code, judgment, order, writ, injunction or decree of any court, governmental body, or administrative agency by which the Reinsurer may be bound. c. The Reinsurer has full corporate power and authority to execute, deliver and perform its obligations under this Agreement, and has taken all necessary corporate and other action to authorize the ceding of the Policies under the terms of this Agreement. d. This Agreement has been duly executed and delivered by the Reinsurer and constitutes a valid and legally binding obligation of the Reinsurer, enforceable in accordance with its terms. 3. Reinsurance Conditions. The reinsurance hereunder is subject to the same limitations and conditions as the insurance under the policies which are reinsured hereunder, except as otherwise provided herein. 4. Administration of Policies Reinsured. The Company shall administer the policies reinsured hereunder and shall perform all accounting for such policies. 5. Ownership of Assets. The Company shall retain ownership all of the assets held in relation to the U.S. Statutory Reserves on the policies reinsured hereunder, subject to Reinsurer's beneficial interest. The said assets shall be placed in trust with a mutually agreed upon financial institution. Company will continue to manage the assets placed in the trust and will be allowed to buy or sell the assets under normal business circumstances, provided that the value of the corpus of the trust remains at or above the value of the trust at its inception. The mechanics of the trust are more fully described in the Custodial Agreement between Company and Reinsurer which is incorporated herein and attached hereto as Schedule J. 6. Initial Allowance. An initial allowance shall be paid to the Company equal to $3,400,000. This Initial Allowance is due and payable on the effective date of this Agreement. This allowance is meant to reimburse the Company for all acquisition costs incurred on the reinsured business. No other allowances will be paid to the Company by the Reinsurer as reimbursement for these expenses. 7. Expense Allowance. An expense allowance for the Reinsurance Premium as described in Schedule D shall be allowed the Company for the administration of the business reinsured hereunder. 8. Age or Gender Adjustment. If the amount of any of the Company's policies reinsured under this Agreement is changed because of a misstatement of age or gender, the Reinsurer will share proportionately with the Company in all adjustments in accordance with the limitations defined in Schedule A. 9. Policy Changes. Company, under any circumstances, may not make any changes to the terms and conditions of any policies reinsured under this Agreement without the written consent of the Reinsurer. For the purpose of this Agreement, "terms and conditions of any policies" includes, but is not limited to interest crediting rates and cost of insurance rates. If Company obtains Reinsurer's written consent, a change is made in the terms and conditions of a policy issued by the Company and reinsured hereunder, which increases or reduces the liability of the Company on such policy, changes the plan of insurance or makes any other policy change, the Company and the Reinsurer shall share in such change in proportion to their respective liabilities under this Agreement except as provided in a formal exchange program as described below. A reduction in reinsurance which is not caused by the implementation of a formal exchange program will not be applied, however, to force the Company to reassume more than its regular retention limits at the time of the reduction of age at issue, mortality rating, and form of the policy or policies for which reinsurance is being terminated. If the Company makes a change in the terms and conditions of any policy reinsured hereunder, including, but not limited to, a change in the method used to calculate reserves on the policy, and such change affects the Reinsurer's liability hereunder with respect of such policy, the Company shall obtain Reinsurer's advance written consent before making any changes. For purposes of this Agreement, any such change shall be deemed to be the issuance of a new policy form by the Company. The Reinsurer shall inform the Company whether the Reinsurer will include such new policy form under this Agreement, or will terminate or modify the reinsurance hereunder in respect of such policy. In the event of a termination or modification pursuant to this Article, a terminal accounting shall be computed for all policies for which reinsurance was terminated or modified. If the calculation produces a negative amount, the Company shall pay the Reinsurer the absolute value of such amount. 10. Internal and External Replacements. Company may not make any internal or external replacements of policies reinsured under this Agreement without the written consent of Reinsurer. An internal replacement of any contracts reinsured hereunder, pursuant to a program of internal or external replacement, shall be considered reinsured contracts under the terms of this Agreement, with effect from the date of such replacement, unless the Reinsurer, at its sole discretion, chooses not to reinsure such policies. An internal replacement shall include all contracts which are reinsured under this Agreement which under a program initiated by the Company after the Effective Date of this Agreement are, within six (6) months of being surrendered, covered under a new policy written by the Company or an affiliate. An external replacement program shall consist of a program entered into by the Company with a non-affiliated company to replace the contracts reinsured hereunder for a contract with another reinsurer. 11. Oversights. If failure to pay any premiums due or to do any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. 12. Inspection. The Company shall be responsible for maintaining proper records and for handling the collection of premiums, payment of benefits, processing of policy loans and policyholder service. The Company will be responsible for computing reserves and other data necessary for the Reinsurer to file statutory and tax financial statements. At any reasonable time during business hours, either party may inspect the original papers and any and all other books or documents at the home office of the other party relating to or affecting reinsurance under this Agreement. The Company agrees to complete, at the request of the Reinsurer, a process confirming the existence of policies reinsured under this Agreement. 13. Amendments. This Agreement may be amended by mutual agreement of the parties. Any such amendments shall be in writing and signed by authorized representatives of both parties. 14. Headings and Schedules. Article and paragraph headings are not a part of this Agreement and shall not affect the terms hereof. The schedules attached are a part of this Agreement. 15. Offset. Any debts or credits, matured or unmatured, liquidated or unliquidated, regardless of when they arose or were incurred, in favor of or against either the Company or the Reinsurer with respect to this Agreement are deemed mutual debts or credits, as the case may be, and shall be set off, and only the balance shall be allowed or paid. 16. Recoupment. All net amounts due either party under this Agreement, for any accounting period, shall be netted regardless of the insolvency, rehabilitation or receivership of either party. In particular, amounts due under this Agreement to one party before or after the insolvency of the other party may be recouped and only the net balance due shall be paid. 17. Currency. The currency for the purpose of this Agreement shall be United States dollars. 18. Coinsurance Reserve. The initial coinsurance reserve shall be equal to $3,400,000. Subsequently, the Coinsurance Reserve shall be equal to the difference between the Statutory Reserve and the Modified Coinsurance Reserve. The Company shall take a reserve credit, in accordance with applicable state statutes, for the portion hereunder of this Agreement that is on a coinsurance basis and the Reinsurer shall establish such amount on its books and records as its minimum reserve liability on the portion of the policies reinsured hereunder. 19. Service of Suit If the Reinsurer fails to perform any of its obligations under this Agreement, the Company may request the Reinsurer submit to the jurisdiction of a court of competent jurisdiction within the United States. The Reinsurer will comply with all reasonable requirements necessary to give such court jurisdiction over it and will abide by the final decision of such court or of any appellate court in the event of an appeal. The Reinsurer hereby designates the Commissioner of the State of Utah as its true and lawful attorney within such Commonwealth upon whom any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. This provision is not intended to conflict with or override the obligation of the parties to arbitrate disputes hereunder. Consequently, it shall only apply as necessary to enforce the terms of this Agreement or to enforce a written decision of the arbitrators. ARTICLE IV INITIAL CONSIDERATION AND REINSURANCE PREMIUMS To effect reinsurance with respect to the policies inforce on the effective date of this Agreement, the Company shall pay to the Reinsurer, the initial consideration and reinsurance premium as described in Paragraph 2 of this Article. Initial Consideration and Reinsurance Premium The initial consideration to be paid to the Reinsurer by the Company on the effective date of this Agreement will be the reinsured quota share of the US Statutory Reserve (as defined in Schedule B) as of the effective date of this Agreement, corresponding to the amount and policies reinsured, as outlined in Schedule A. During subsequent accounting periods, the Company will pay the Reinsurer the reinsurance premium determined in accordance with Schedule C, corresponding to the amount and the policies reinsured. ARTICLE V RESERVE ADJUSTMENTS 1. Initial Reserve Adjustment. Simultaneously with the payment of the initial consideration described in Article IV, by the Company to the Reinsurer, the Reinsurer shall pay to the Company an initial reserve transfer in an amount that is equal to the Modified Coinsurance Reserves, as defined in Schedule B, on the effective date of this Agreement with respect to the policies reinsured hereunder. 2. Modco Reserve Adjustments. (a) Modco reserve adjustments shall be computed quarterly by deducting ((i) + (ii)) from (iii) where items (i), (ii) and (iii) are defined as: (i) the total amount of the Modified Coinsurance Reserves, as defined in Schedule B, on the last day of the preceding accounting period on the contracts reinsured hereunder. (ii) Modco Investment Income as defined in Schedule E. (iii) the total amount of the Modified Coinsurance Reserves on the last day of the current accounting period on the policies reinsured hereunder and then in force under this Agreement. With respect, however, to the first accounting period after the effective date of this Agreement occurs, the reference in "(i)," to "the last day of the preceding accounting period" shall refer to the effective date of this Agreement. In the accounting period in which termination of this Agreement occurs, the reference in "(iii)" above to "the last day of the current accounting period" shall refer to the termination date of this Agreement. (b) For any accounting period in which "(iii)" exceeds ("(i)" + "(ii)") in (a), above, the Reinsurer shall pay the Company such excess. For any accounting period in which ("(i)" + "(ii)") exceeds "(iii)," in (a) above, the Company shall pay the Reinsurer such excess. ARTICLE VI BENEFITS 1. Notice. The Company shall have the sole responsibility for the settlement of claims with its claimants. The Company will maintain records to support its claim payments. The Reinsurer reserves the right to review those claim records, and proofs of such claim payments due or paid will be furnished to the Reinsurer upon request. 2. Liability and Payment. The Reinsurer will accept the decision of the Company on payment of benefits (defined herein) on a policy reinsured hereunder, the intent of the parties being that the Reinsurer will, in every case to which this Agreement applies and in the proportions specified herein, follow the fortunes of the Company. The Reinsurer will pay its quota share in a lump sum to the Company without regard to the form of claim settlement of the Company. Benefits shall be defined as death benefits, surrender benefits, withdrawals, dividends, annuity benefits (defined as the annuity benefits payable in accordance with the guaranteed settlement options as provided for in each policy reinsured hereunder) and other contractual policyholder benefits, net of any other Reinsurance the Company may have on the business covered by this Agreement. Punitive, exemplary or extra-contractual damages are not considered benefits under this Agreement. 3. Contested Claims. The Company will advise the Reinsurer of its intention to contest, compromise, or litigate a claim involving a policy reinsured hereunder. The Reinsurer will pay its share of the unusual expense of the contest in addition to its share of the claim itself, or it may choose not to participate in the contest. If the Reinsurer chooses not to participate, it will discharge its liability by payment of the full amount of its liability on the policy reinsured to the Company. In no event shall the following categories of expenses or liabilities be considered for purposes of this Agreement as "unusual expenses": a) routine investigation or administrative expense; b) expenses incurred in connection with a dispute or contest arising out of conflicting claims of entitlement to policy proceeds or benefits which the Company admits are payable; c) expenses, fees, settlements or judgments arising out of or in connection with claims against the Company for punitive or exemplary damages; and d) expenses, fees, settlements or judgments arising out of or in connection with claims made against the Company and based on alleged or actual bad faith, failure to exercise good faith or tortious conduct in the handling of claims or in other dealings with its policyholders. 4. Assistance and Advice. On any claim on a policy reinsured hereunder, the Reinsurer will, at the request of the Company, advise and assist the Company in its determination of the liability and in the best procedure to follow with respect to a claim of doubtful validity, provided that the Reinsurer shall not be liable to the Company or to any third party for claims arising out of such advice and assistance. 5. General. It is expressly understood that all benefits reinsured hereunder this Agreement shall be netted against the Reinsurance Premium and other amounts due the Reinsurer from the Company under this Agreement. ARTICLE VII ACCOUNTING AND SETTLEMENT 1. Accounting Periods. The accounting shall be on a calendar quarter basis. The first accounting period shall begin on the 1st day of the effective date of this Agreement. The final accounting period shall run from the end of the preceding calendar quarter until the termination date of this Agreement. 2. Accounting Reports. Accounting reports (Schedules F, G, H and K) shall be submitted to the Reinsurer by the Company not later than fifteen (15) days after the end of each accounting period except in the case of calendar year end accounting reports as described in the following paragraph. Such reports shall be shown on a line of business basis as indicated on Schedule A and include information on claims, surrender values, statutory reserve adjustments and Coinsurance Reserves on a consolidated basis on the policies reinsured for the preceding accounting period. Within fifteen (15) days of the end of the calendar year, the Company shall supply the Reinsurer with the year end Accounting Reports which shall include information as shown in Schedules F, G, H and K. The Company shall make its best efforts to supply the actual data; and if the data cannot be supplied within the time limits, the Company shall produce best estimates which are trued up later. 3. Settlements. With respect to the business reinsured hereunder and within fifteen (15) days after the end of each accounting period, except for the 1st accounting period which will be the effective date of this Agreement, the Company shall pay the Reinsurer a settlement computed as follows: Initial Reinsurance Premium (In accordance with Article IV; first period only), PLUS: Premiums, in accordance with Schedule C, MINUS: Initial Allowance (Article III, Paragraph 6; first period only), MINUS: Expense Allowance, in accordance with Schedule D, PLUS: Modco Reserve Adjustment payable to the Reinsurer in accordance with Article V, MINUS: Modco Reserve Adjustment payable to the Company in accordance with Article V, MINUS: Benefits paid during the accounting period, in accordance with Article VI. MINUS: Experience Refund as defined in Article VII, paragraph 8 below. If the amount computed is positive, then such amount shall be paid to the Reinsurer by the Company. If the amount computed is negative, then the absolute value of such amount shall be paid by the Reinsurer to the Company. 4. Loss Carry Forward. At the beginning of the first accounting period, the Loss Carry Forward shall be set equal to zero. For subsequent accounting periods, the Loss Carry Forward shall be as calculated in Schedule F, Part II. 5. Amounts Due. Except as otherwise specifically provided in this Agreement, all amounts due to be paid to either the Reinsurer or the Company shall be determined on a net basis as of the last day of each accounting period. These amounts shall be due and payable within fifteen (15) days after such date. In the calculation of the net amount due in Paragraph 3 above, due regard will be given to the incidence of payment throughout the accounting periods and interest at the rate determined in accordance with Paragraph 6 below, will be credited accordingly on an exact basis, whenever possible or otherwise on a mutually agreed upon approximate basis. 6. Delayed Payment and Recalculations. If there is a delayed settlement or a recalculation of an amount due, there will be an interest charge computed at the interest rate prescribed below for the period commencing with the sixteenth (16th) day after the end of the accounting period to which the charge applies. The annual interest rate for delayed settlement shall be equal to the yield of one-year US treasuries as quoted at closing on the last Friday before the last day of the accounting period to which the charge applies, plus 100 basis points. 7. Expense and Risk Charge. The expense and risk charge in any accounting period shall be equal to 1.00% of the Coinsurance Reserve at the end of the accounting period. In no event shall the Expense and Risk Charge be payable in a given accounting period, if the Profit (Schedule B) is less than zero. 8. Experience Refund. If the Experience Refund is positive, this amount shall be paid to the Company by the Reinsurer. If the Experience Refund is negative, the absolute value of this amount shall be paid to the Reinsurer by the Company. Beginning with the second accounting period that the Coinsurance Reserve is equal to zero, if the Experience Refund is positive, then the Experience Refund will be reduced by 10%. The Experience Refund is calculated as follows: Premiums, in accordance with Schedule C, PLUS: Experience Refund Investment Income in accordance with Schedule E, MINUS: Benefits paid during the accounting period in accordance with Article VI, MINUS: Expense Allowance, in accordance with Schedule D, MINUS: Change in the Statutory Reserve in accordance with Schedule F, PLUS: Change in the Coinsurance Reserve in accordance with Schedule F, MINUS: Expense and Risk charge in accordance with Article VII, MINUS: Loss Carry Forward at the beginning of the current accounting period accumulated at the Modco Investment Income Interest Rate (as calculated in Schedule E) EQUALS: Experience Refund ARTICLE VIII RECAPTURE 1. Duration. The parties expressly recognize that this Agreement is an executory contract, and agree that it will terminate automatically in the event that the Company fails to pay any reinsurance premiums when due. In the event of this automatic termination, the Recapture Accounting and Settlement outlined in Article IX will apply. 2. Recapture. The Company may recapture the business reinsured hereunder at any time after December 31, 2004 with ninety (90) days prior written notice, if recapture will occur in the 1st, 2nd or 3rd quarter of a given year or one hundred and twenty days (120) days prior written notice, if recapture will occur in the 4th quarter of a given year. 3. Procedure. Recapture of reinsurance hereunder may be effected only subject to the recapture accounting and settlement provisions described in Article IX. ARTICLE IX RECAPTURE ACCOUNTING AND SETTLEMENT 1. Recapture Accounting. In the event that all reinsurance under this Agreement is recaptured in accordance with Article VIII, a recapture accounting and settlement shall take place. 2. Date. The recapture accounting date shall be the effective date of recapture pursuant to any notice of recapture given under this Agreement or such other date as shall be mutually agreed to in writing. 3. Settlement. The recapture accounting and settlement shall consist of: a) the settlements as provided in Article VII, computed as of the recapture accounting date; b) payment by the Company to the Reinsurer of an amount equal to the Statutory Reserve minus the coinsurance reserve hereunder as of the recapture accounting date; and c) payment by the Reinsurer to the Company of a recapture consideration equal to the US Statutory Reserve (as defined in Schedule B) as of the recapture accounting date. d) An additional recapture adjustment equal to the coinsurance reserve as of the recapture date of this Agreement shall be paid by the Company to the Reinsurer. If the calculation of the recapture accounting and settlement produces an amount owing to the Company, such amount shall be paid promptly by the Reinsurer to the Company. If the calculation of the recapture accounting and settlement produces an amount owing to the Reinsurer, such amount shall be paid promptly by the Company to the Reinsurer. 4. Supplementary Accounting and Settlement. In the event that, subsequent to the recapture accounting and settlement as above provided, a change is made with respect to any amount taken into account pursuant to Article VII, a supplementary accounting shall take place pursuant to Paragraph 3 of this Article. Any amount owed to the Reinsurer or to the Company by reason of such supplementary accounting shall be paid promptly upon the completion thereof. ARTICLE X ARBITRATION It is the intention of the Reinsurer and the Company that the customs and practices of the insurance and reinsurance industry will be given full effect in the operation and interpretation of this Agreement. The parties agree to act in all things with the highest good faith. If the Reinsurer or the Company cannot mutually resolve a dispute which arises out of or relates to this Agreement, however, the dispute will be decided through arbitration. The arbitrators will base their decision on the terms and conditions of this Agreement plus, as necessary, on the customs and practices of the insurance and the reinsurance industry rather than solely on a strict interpretation of the applicable law; there will be no appeal from their decision, and any court having jurisdiction of the subject matter and the parties may reduce that decision to judgment. To initiate arbitration, either the Company or the Reinsurer will notify the other party by Certified Mail of its desire to arbitrate, stating the nature of its dispute and the remedy sought. The party to which the notice is sent will respond to the notification in writing within ten (10) days of its receipt. There will be three arbitrators who will be current or former officers of life insurance companies other than the contracting companies, their subsidiaries or affiliates. Each of the contracting companies will appoint one of the arbitrators and these two arbitrators will select the third. If either party refuses or neglects to appoint an arbitrator within sixty (60) days, the other party may appoint the second arbitrator. If the two arbitrators do not agree on a third arbitrator within sixty (60) days of their appointment, each of the arbitrators will nominate three individuals. Each arbitrator will then decline two of the nominations presented by the other arbitrator. The third arbitrator will then be chosen from the remaining two nominations by drawing lots. It is agreed that each of the three arbitrators should be impartial regarding the dispute and should resolve the dispute on the basis described in the first paragraph of this Article. Therefore at no time will either the Company or the Reinsurer contact or otherwise communicate with any person who is to be or has been designated as a candidate to serve as an arbitrator concerning the dispute, except upon the basis of jointly drafted communications provided by both the Company and the Reinsurer to inform the arbitrators of the nature and facts of the dispute. Likewise, any written or oral arguments provided to the arbitrators concerning the dispute will be coordinated with the other party and will be provided simultaneously to the other party or will take place in the presence of the other party. Further, at no time will any arbitrator be informed that the arbitrator has been named or chosen by one party or the other. The arbitration hearing will be held in a place and on the date fixed by the arbitrators. In no event will this date be later than six (6) months after the appointment of the third arbitrator. As soon as possible, the arbitrators will establish pre-arbitration procedures as warranted by the facts and issues of the particular case. At least ten (10) days prior to the arbitration hearing, each party will provide the other party and the arbitrators with a detailed statement of the facts and arguments it will present at the arbitration hearing. The arbitrators may consider any relevant evidence, they will give evidence such weight as they deem it entitled to after consideration of any objections raised concerning it. The party initiating the arbitration will have the burden of proving its case by a preponderance of the evidence. Each party may examine any witnesses who testify at the arbitration. The cost of the arbitration will be shared equally by both parties unless the arbitrators decide otherwise. This Article shall survive termination of this Agreement. ARTICLE XI INSOLVENCY In the event (i) Company comes under any supervision by a state regulator or in the event Company shall (ii) apply for or consent in the appointment of, or the taking of possession by, a receiver, custodian, regulator trustee or liquidator of itself or of all or a substantial part of its assets, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code, (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization or winding up, or (vi) take any action for the purpose of effecting any of the foregoing, or a proceeding or case shall be commenced without the application or consent of Company in any court or forum of competent jurisdiction seeking (a) its liquidation , reorganization, dissolution or winding-up, (b) the appointment of a trustee, receiver, custodian, liquidator or the like of Company or of all or any substantial part of its assets, or (c) similar relief in respect of Company under any law relating to bankruptcy, insolvency, reorganization or winding up, Reinsurer shall have the option, in its sole discretion, to convert this Agreement to an Assumption Reinsurance Agreement one day prior to such insolvency or other actions described in this Article XI, and Reinsurer may assume all or a part of the Reinsured Policies identified in Schedule A as of one day prior to the date thereof. In the event of the insolvency of Company, all reinsurance that is payable directly to the liquidator, receiver, or statutory successor of Company, shall be without diminution or increase because of the insolvency of Company. In the event of insolvency of Company, the liquidator, receiver, or statutory successor shall give Reinsurer written notice of the pendency of a claim on a policy reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of any such claim, Reinsurer may investigate such claim and interpose in the name of Company (its liquidator, receiver or statutory successor), but at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which Reinsurer may deem available to Company or its liquidator, receiver or statutory successor. The expense thus incurred by Reinsurer shall be chargeable, subject to court approval, against Company as part of the expense of liquidation to the extent of a proportionate share of the benefit that may accrue to Company solely as a result of the defense undertaken by Reinsurer. Where two or more reinsurers are participating in the same claim and a majority in interest elect to interpose a defense or defenses to any such claim, the expense shall be apportioned in accordance with the terms of the Agreement as though such expenses had been incurred by Company. ARTICLE XII SEVERABILITY To the extent that this Agreement may be in conflict with any applicable law or regulation, this Agreement shall be amended, at the mutual agreement of both the Company and the Reinsurer, to the extent possible, to comply with such law and regulation. If any term or provision of this Agreement shall be found by a court of competent jurisdiction to be illegal or otherwise unenforceable, the same shall not invalidate the whole of this Agreement, but such term or provision shall be deemed modified to the extent necessary in the court's opinion to render such term or provision enforceable, and the rights and obligations of the parties shall be construed and enforced accordingly preserving to the fullest permissible extent the intent and agreements of the parties set forth herein. ARTICLE XIII COMPLETE AGREEMENT This Agreement shall constitute the entire agreement between the parties with respect to the reinsurance of the business covered and there are no understandings between the parties other than as expressed in this Agreement. Furthermore, this Agreement may not be altered, modified or in any way amended except by instrument in writing duly executed by the proper officials of all parties. ARTICLE XIV PARTIES TO AGREEMENT This is an agreement for indemnity reinsurance solely between the Company and the Reinsurer. The acceptance of reinsurance hereunder shall not create any right or legal relation whatsoever between the Reinsurer and the insured or the beneficiary under any policy reinsured hereunder. ARTICLE XV ASSIGNMENT None of the rights or obligations under this Agreement may be assigned by either the Reinsurer or the Company, nor may the policies reinsured under this Agreement be sold, reinsured under an agreement of assumption reinsurance, or transferred in any other fashion without the written consent of both the Company and the Reinsurer. Consent will not be unreasonably withheld, provided the assignment, sale, assumption reinsurance, or transfer does not have a material effect on the risks transferred or the economic results to the party requested to consent. This provision shall not prohibit either party from retroceding the insurance policies on an indemnity basis. ARTICLE XVI INVESTMENT OF ASSETS The Company shall maintain all assets which support the U.S. Statutory reserve associated with the policies described in Schedule A under this Agreement in a trust, escrow or other special account in order to specifically identify the assets used to support the U.S. Statutory reserve. ARTICLE XVII DAC TAX ARTICLE If the Business reinsured hereunder includes for US Federal Income Tax purposes Specified Insurance Contracts pursuant to Section 848 of the Internal Revenue Code or the Final Income Tax Regulations thereunder, the Company and the Reinsurer, with respect to this Agreement, agree to make the election provided in Section 1.848-2(g)(8) of the Final Income Tax Regulations issued December 28, 1992 under Section 848 of the Internal Revenue Code of 1986. The specifics of this election are set forth in Schedule I. ARTICLE XVIII EXECUTION In witness of the above, this Agreement is signed in duplicate at the dates and placed indicated with an effective date of October 1, 2003. GUARANTY INCOME LIFE INSURANCE COMPANY By: -------------------------------- Witness: --------------------------- Title: ----------------------------- Title: ----------------------------- Date: ----------------------------- Date: ----------------------------- SECURITY NATIONAL LIFE INSURANCE COMPANY By: -------------------------------- Witness: --------------------------- Title: ----------------------------- Title: ----------------------------- Date: ----------------------------- Date: ----------------------------- SCHEDULE A POLICIES AND AMOUNTS REINSURED The proportion of the policies reinsured under this Agreement shall be a 100% quota share of the retained amounts for all policies in force as of October 1, 2003. The business reinsured under this Agreement is as follows: (1) 100% of Company's Direct Traditional Life Business; (2) 100% of Company's Direct Universal Life Business; and (3) 100% of Company's Security Plus Deferred Annuities Included in this contract is an authenticated compact disc containing a detailed listing of policies reinsured hereunder. This listing shall contain policy number, line of business, death benefit, retained amount, U.S. statutory reserve and an Excel spreadsheet that comprises the Company's and Reinsurer's understanding of the mechanics of this Agreement. SCHEDULE B INITIAL STATUTORY, MODIFIED COINSURANCE AND COINSURANCE RESERVES And NET PROFIT CALCULATION (1) As of the effective date of this Agreement, the Coinsurance Reserve shall be equal to the Initial Allowance (Article III). At the effective date of this Agreement, the Modified Coinsurance Reserve shall be equal to the difference between the US Statutory Reserve and the Coinsurance Reserve. US Statutory Reserve is defined as the statutory mean reserve plus advance premiums less net due and deferred premiums plus the claim liability on the quota share of the reinsured policies. (2) For each accounting period after the first accounting period after the effective date of this Agreement, the PROFIT and NET PROFIT shall be determined as follows: A - Shall be equal to: The Reinsurance Premiums received during the accounting period, PLUS: Experience Refund Investment Income earned during the accounting period as defined in Schedule E, MINUS: The Allowances for expenses and percentage of premium compensation reimbursement during the accounting period as defined in Schedule D, MINUS: Benefits paid during the accounting period as defined in Article VI. B - PROFIT shall be defined and computed as follows: A as defined above, MINUS: The Statutory Reserve at the end of the current accounting period as defined in Paragraph (1) above, PLUS: The Statutory Reserve at the beginning of the current accounting period as defined in Paragraph (1) above. C - NET PROFIT shall be defined and computed as follows: If PROFIT is greater than zero, but less than the Preliminary Risk Fee (which is equal to 1.0 % times the Coinsurance Reserve at the beginning of the current accounting period), then the NET PROFIT is equal to zero. Otherwise the NET PROFIT is equal to: B as defined above, MINUS: The Loss Carry Forward at beginning of the current period (Schedule F, Part II). The Coinsurance Reserve at the end of the current accounting period shall be equal to the difference between the Statutory Reserve at the end of the current accounting period and the Modified Coinsurance Reserve at the end of the current accounting period. At no time shall the Coinsurance Reserve be less than zero. SCHEDULE C REINSURANCE PREMIUMS The premium to be paid to the Reinsurer by the Company will be equal to the reinsured quota share of the gross premium received by the Company corresponding to the policies reinsured less any other reinsurance premiums net of commission and expense allowance on the covered business. SCHEDULE D ADMINISTRATIVE EXPENSE ALLOWANCE The Reinsurer shall reimburse the Company for the expenses it incurs associated with the portion of the policies reinsured hereunder up to the following maximums. No additional allowances will be paid to the Company by the Reinsurer as reimbursement for these expenses. Renewal Commission Allowance - Actual ---------------------------- Maintenance Expense Allowance - Actual up to a maximum of $1.25 per policy per accounting period. Taxes and Licenses Fee - Actual up to a maximum of 2.5% of gross premium for all issues, all years. SCHEDULE E MODIFIED COINSURANCE INTEREST RATE AND MODCO INVESTMENT INCOME The Modco Interest Rate (MIR) shall be defined as follows: MIR = 2 x (I + CG) - INVEXP --------------------- A + B - I - C G where: I = the Net Investment Income on the assets held in the account, as described in Article XVI, during the current accounting period; A = the book value of the assets held in the account, as described in Article XVI, at the end of the prior accounting period; B = the book value of the assets held in the account, as described in Article XVI, at the end of the current accounting period; CG = is net realized and unrealized capital gains (losses), as defined in the statutory annual statement, on the assets held in the account, as described in Article XVI, during the current accounting period. InvExp = .00125 (per quarter) The Modco Investment Income for a given accounting period is equal to (1) plus (2) where, (1) equals the Modco Interest Rate times the Modco Reserve at the beginning of the accounting period, and (2) equals (a) times [(1) above - (b) + (c)], where, (a) equals 50% times the Modco Interest Rate, (b) equals the Benefits paid during the accounting period (Article VI), and (c) equals the new premium paid during the accounting period (Schedule C). The Experience Refund Investment Income for a given accounting period is equal to (1) plus (2) where, (1) equals the Modco Interest Rate times: the Statutory Reserve at the beginning of the accounting period, minus the Coinsurance Reserve at the beginning of the accounting period. and (2) equals (a) times [(1) above - (b) + (c)], where, (a) equals 50% times the Modco Interest Rate, (d) equals the Benefits paid during the accounting period (Article VI), and (e) equals the new premium paid during the accounting period (Schedule C). SCHEDULE F, PART I COINSURANCE AND MODIFIED COINSURANCE RESERVE REPORT QUARTERLY REPORT FOR GUARANTY INCOME LIFE INSURANCE COMPANY FOR PERIOD ENDING _________________________________ CHANGE IN MODIFIED COINSURANCE RESERVE: Statutory Reserve at the end of the current accounting period ------------------ LESS: Statutory Reserve at the beginning of the current accounting period ------------------ PLUS: Change in Coinsurance Reserve (Schedule K) ------------------ Change in Modified Coinsurance Reserve ------------------ MODIFIED COINSURANCE RESERVE: Modified Coinsurance Reserve at the beginning of the current period (Schedule B) ------------------ PLUS: Change in Modified Coinsurance Reserve ------------------ Modified Coinsurance Reserve at the end of the current period ------------------ COINSURANCE RESERVE: Statutory Reserve at the end of the current period (Schedule B) ------------------ LESS: Modified Coinsurance Reserve at the end of the current period ------------------ Coinsurance Reserve at the end of the period ------------------ SCHEDULE F, PART I (continued) COINSURANCE AND MODIFIED COINSURANCE RESERVE REPORT QUARTERLY REPORT FOR GUARANTY INCOME LIFE INSURANCE COMPANY FOR PERIOD ENDING _________________________________ MODIFIED COINSURANCE (MODCO) RESERVE ADJUSTMENT Change in Modified Coinsurance Reserve ------------------ LESS: Modco Investment Income (Schedule E) ------------------ Modified Coinsurance Reserve Adjustment ------------------ SCHEDULE F, PART II LOSS CARRY FORWARD REPORT QUARTERLY REPORT FOR GUARANTY INCOME LIFE INSURANCE COMPANY FOR THE PERIOD ENDING ------------------- Loss Carry Forward at the end of the prior accounting period ------------------- PLUS: Modco Interest (Schedule E) on previous items ------------------- EQUALS: Loss Carry Forward at the beginning of the current accounting period ------------------- PLUS: Expense and Risk Charge due for accounting period but not paid due to negative Profit (Schedule B) ------------------- LESS: Profit (Item B on Schedule B), if positive; zero otherwise -------------------- Loss Carry Forward at the end of the current accounting period -------------------- N.B. The Loss Carry Forward at the end of the current accounting period shall not be less than zero. SCHEDULE F, PART III EXPERIENCE REFUND QUARTERLY REPORT FOR GUARANTY LIFE INSURANCE COMPANY FOR PERIOD ENDING ------------------- Premiums- (Schedule C) ------------------- Plus: Experience Refund Investment Income ------------------- Minus: Expense Allowance (Schedule D) ------------------- Minus: Benefits (Article VI) ------------------- Minus: Change in Statutory Reserves ------------------- Minus: Change in Coinsurance Reserves ------------------- Equals: Preliminary Experience Refund ------------------- Minus: Expense and Risk Charge (0.01 * Coinsurance Reserve at end of accounting period) ------------------ Minus: Loss Carry Forward at beginning of the accounting Period (Schedule F, Part II) ------------------- Equals: Experience Refund ==================== Loss Carry Forward Addition (If Experience Refund is negative, the Loss Carry Forward Addition is the absolute value of the Preliminary Experience Refund; else zero) -------------------- SCHEDULE F, PART IV QUARTERLY SETTLEMENT REPORT QUARTERLY REPORT FOR GUARANTY INCOME LIFE INSURANCE COMPANY FOR PERIOD ENDING ------------------- Premiums (Schedule C) ------------------- PLUS: Modco Reserve Adjustment payable to the Reinsurer (Article V) ------------------- LESS: Modco Reserve Adjustment payable to the Company (Article V) ------------------- LESS: Expense Allowance (Schedule D) ------------------- LESS: Benefits (Article VI) ------------------- LESS: Experience Refund (Schedule F, Part III) ------------------- Net Settlement due to the Reinsurer (the Company) =================== SCHEDULE G POLICY EXHIBIT Exhibit of Annuities with Life Contingencies # Policies Annual Income 1. Outstanding at end of previous year ------------ ------------- 2. Issued during the year ------------ ------------- 3. Transferred from issuance account during the year ------------ ------------- 4. Totals ------------ ------------- 5. Other net changes during the year ------------ ------------- 6. Outstanding at end of the year ------------ ------------- Classification of Annuities with Life Contingencies Outstanding at the End of the Period # Policies Annual Income 7. Income, now payable ------------ ------------- 8. Deferred, fully paid ------------ ------------- 9. Deferred, not fully paid ------------ ------------- 10. Totals ------------ ------------- NAIC Page 7 Information Analysis of Increase in Reserves and Deposit Funds During the Year 1. Reserve, December 31 of prior year ------------ ------------ 2. Tabular Net Premiums ------------ ------------ 4. Tabular Interest ------------ ------------ 5. Tabular less Actual Reserve Released ------------ ------------ 11. Reserve Released by Other Termination (net) ---------- ------------ 12. Annuity Benefits ------------ ------------ 15. Reserve, December 31 of current year ------------ ------------ SCHEDULE H, PART I QUARTERLY STATUTORY REPORTING 1. Initial Reinsurance Premium (first period only) 2. Annual Reinsurance Premiums 3. Initial Expense Allowance (first year only) 4. Renewal Expense Allowance 5. Cash Surrenders, Withdrawals 6. Death Benefits 7. Annuity Benefits 8. State Premium Taxes 9. Modified Coinsurance Reserve, Beginning of Period 10. Modified Coinsurance Reserve, End of Period 11. Interest on Modified Coinsurance Reserve 12. Reserve Adjustment [(10) - (9) - (11)] 13. Expense and Profit Charge SCHEDULE H, Part II ANNUAL STATUTORY REPORTING All references in the table below are to the Company's annual statement as filed with the department of insurance in the Company's state of domicile. Exhibit/Schedule Title Analysis of Increase in Reserves 5 Aggregate Reserves 5A Changes in Bases of Valuation 8, Part 1,2 Policy and Contract Claims (Liability End of Year and Incurred During Year) Exhibit of Life Insurance S-Part 3C, Section 1 Reinsurance Assumed on Life Insurance In addition, the Company shall provide the Reinsurer with a Statement of actuarial opinion, certifying as to the adequacy of the reserves being held by Company with regards to the business reinsured (Schedule A). SCHEDULE I, PART I DAC TAX ADJUSTMENT The Company and the Reinsurer hereby agree to the following pursuant to Section 1.848-2(g)(8) of the Income Tax Regulations issued December 28, 1992, under Section 848 of the Internal Revenue Code of 1986, as amended. This election shall be effective for 2003 for all subsequent taxable years for which this Agreement remains in effect. 1. The term "party" will refer to either the Company or the Reinsurer as appropriate. 2. The terms used in this Article are defined by reference to Regulation Section 1.848-2 in effect December 28, 1992. 3. The party with the net positive consideration for this Agreement for each taxable year will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1). 4. Both parties agree to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. 5. The Company upon the approval of the Reinsurer will submit a schedule (Schedule I, Part III) to the Reinsurer by May 1 of each year of its calculation of the net consideration for the preceding calendar year. This schedule of calculations will be accompanied by a statement signed by an officer of the Company stating that the Company will report such net consideration in its tax return for the preceding calendar year. 6. The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) days of the Reinsurer's receipt of the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer will report the net consideration as determined by the Company in the Reinsurer's tax return for the previous calendar year. 7. If the Reinsurer 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 within thirty (30) days of the date the Reinsurer submits its alternative calculation. If the Company and the Reinsurer reach agreement on an amount of net consideration, each party shall report such amount in their respective tax returns for the previous calendar year. 8. The Reinsurer shall complete the Reinsurance Questionnaire (Schedule I, Part II) and submit it to the Company with the information required by Schedule I, Part III. GUARANTY INCOME LIFE INSURANCE COMPANY By: --------------------------------------- Title: ------------------------------------ Date: ------------------------------------- SECURITY NATIONAL LIFE INSURANCE COMPANY By: --------------------------------------- Title: ------------------------------------ Date: _______________________________ SCHEDULE I, PART II REINSURANCE QUESTIONNAIRE Reinsurance Questionnaire for Federal Income Tax Determinations The purpose of this questionnaire is to secure sufficient information to allow the Company to account properly under the federal income tax rules for the reinsurance transactions it has with the Reinsurer. Please provide the Company with the following information: 1. Are you either: A. company that is subject to US taxation directly under the provisions of subchapter L of chapter 1 of the Internal Revenue Code (i.e., an insurance company liable for filing Form 1120L or Form 1120-PC), or Answer: X Yes ____ No B. company that is subject indirectly to US taxation under the provisions of subpart F of subchapter N of chapter 1 of the Internal Revenue Code, (i.e., a "controlled foreign corporation" with the meaning of Internal Revenue Code ss. 957). Answer: ____Yes X No 2. If your answer to 1. above is no, have you entered into a closing agreement with the Internal Revenue Service to be subject to US taxation with respect to reinsurance income pursuant to Treasury Regulation ss.1.848-2(h) (2)(ii) (B)? Answer: ____Yes ____ No (if your answer is yes, please provide a copy of the closing agreement). Security National Life Insurance Company Signed by: ----------------------------------------------------- Title: ----------------------------------------------------- Date: ----------------------------------------------------- SCHEDULE I, PART III DAC TAX EXHIBIT DAC TAX CAPITALIZED AMOUNTS FOR THE YEAR ENDING ----------------------------------------------------- ON REINSURANCE CEDED TO ----------------------------------------------- GROSS BASIS: TYPE CF TREATY GROSS PREMIUM CAPITALIZED AMOUNT -------------- ------------- ------------------ FULL NETTING BASIS: TYPE OF POLICY CAPITALIZED TREATY PREMIUM ALLOWANCES CLAIMS BENEFITS AMOUNT ------ ------- ---------- ------ -------- ------ Coinsurance Modco TOTAL CAPITALIZED AMOUNTS ON A FULL NETTING BASIS: ------------------------- To be reported in conformity with Section 848 of the Internal Revenue Code Signed By: ----------------------------------------------------- Title: ----------------------------------------------------- Signature: ----------------------------------------------------- Date: ----------------------------------------------------- SCHEDULE J TRUST AGREEMENT SCHEDULE K CHANGE IN COINSURANCE RESERVE Quarterly Report for GUARANTY LIFE INSURANCE COMPANY For Period Ending ------------------- If the Coinsurance Reserve at the beginning of the accounting period is equal to $0, Change in Coinsurance Reserve is equal to zero. _______________ a. Coinsurance Reserve at the beginning of accounting period _______________ b. Net Profit (Schedule B), if positive: else, zero _______________ c. Minimum Coinsurance Reserve at the end of the accounting period _______________ d. [c - a] _______________ If the Coinsurance Reserve at the beginning of the accounting period is positive, the change in Coinsurance Reserve is equal to the lesser of b and d ________________ Memorandum Account as of 12/31/07 ---------------- At the end of the accounting period ending 12/31/07, the Memorandum Account will be used to reduce the Coinsurance Reserve, but not less than zero. Change in Coinsurance Reserve for the period ----------------- MINIMUM COINSURANCE RESERVE: Minimum Coinsurance Reserve at the beginning of the accounting period ________________ LESS: Quarterly Amortization $200,000.00 ----------- Minimum Coinsurance Reserve at the end of the Accounting period _____________ MEMORANDUM ACCOUNT Memorandum Account at the beginning of the accounting period ______________ PLUS: If b is greater than d, then b minus d ______________ Memorandum Account at the end of the accounting period ______________