GAAP issues

The annuities are being classified as SFAS 97 limited – payment contracts. Given the single
premium nature, there are no acquisition costs that will be deferred and capitalized per
SFAS 60. GAAP benefit and expense reserves are established in accordance with SFAS 60,
allowing for a provision for adverse deviation (PAD). A deferred profit reserve is
established such that there will be no GAAP profit or loss at time of issue.

SFAS 97 Limited-Payment Contracts

(the premium paying period is shorter than the benefit period)

The collection of premium does not represent the completion of the earning process. (The
basic premise of GAAP is that revenue is not recognized until an exchange has taken place
and the earning process is complete or virtually complete). For limited-payment contracts,
revenue recognition will generally be based upon premium and the profit is recognized over
the period of the risk.

Specifically, any gross premium (i.e., the premium charged to a policyholder) received in
excess of the net premium premium (i.e, the portion of the gross premium required to
provide all benefits an expenses), shall be deferred and recognized in income in a constant
relationship with the amount of expected future benefit payments. This deferral of the
excess of gross premiums over net premiums is not unearned premiums or unearned
revenues.
This deferral is of profit and should be considered a deferred profit reserve.

For limited-payment contracts, the liability for policy benefits shall be established in
accordance with the provisions of SFAS 60 following the long-duration insurance contract
accounting and reporting guidelines.

SFAS 60 Reserving: Long- Duration Insurance Contracts.

A liability for future policy benefits shall be accrued when premium revenue is recognized
on long-duration insurance contracts. The liability, which represents the present value of
future benefits to be paid to or on behalf of policyholders and related expenses less the
present value of future net premiums shall be estimated using methods that include
assumptions ( e.g., estimates of expected investment yields, mortality, morbidity,
terminations, expenses, etc.) applicable at the time the insurance contracts are made.

- Investments : Interest assumptions used ins estimating the liability for future policy
benefits shall be based on estimates of pre-tax investment yields, net of related
investment expenses, expected at the time the insurance contracts are made.
The interest assumption for each block of new insurance contracts (i.e., a group of
insurance contracts that may be limited to contracts issued under the same plan in a
particular year) shall be consistent with circumstances then present such as actual
yields, trends in yields, portfolio mix and maturities, and the insurance company’s
general investment experience.
- Mortality: Mortality assumptions used in estimating the liability for future policy
benefits shall be based on estimates of expected mortality.

- Expenses: Expenses assumptions used in estimating the liability for future policy
benefits shall be based on estimates of expected nonlevel costs, such as termination or
settlement costs, and costs after the premium-paying period. Renewal expense
assumptions shall consider the possible effect of inflation on those expenses.

The assumptions shall include provision for the risk of adverse deviation. In addition,
original assumptions shall continue to be used in subsequent accounting periods to
determine changes in the liability for future policy benefits (i.e., the “ lock – in concept”)
unless a premium deficiency exists. Changes in the liability for future policy benefits that
result from its periodic estimation for financial accounting and reporting purposes shall be
recognized in the statement of operations in the period in which the changes occur.

Disclosures: The methods and assumptions used in estimating the liability for future policy
benefits with the disclosure of the average rate of assumed investments yields in effect for
the current year.