UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE ECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ------------- to --------------
Commission file number 0-14451
Acap Corporation
(Exact name of small business issuer as specified in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue, 2nd Floor
Houston Texas 77042
Issuer's telephone number: (713) 974-2242
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AUGUST 5, 1999
Common Stock, Par Value $.10 7,238
This Form 10-QSB contains a total of 210 pages, including any
exhibits.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet - June 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Six Months Ended
June 30, 1999 and 1998 (Unaudited) 5
Condensed Consolidated Statements of
Operations - Three Months ended
June 30, 1999 and 1998 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1999 and 1998 (Unaudited) 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 6. Exhibits 17
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 38,124,601
Mortgage loans 1,791,343
Policy loans 6,745,824
Short-term investments 2,473,649
------------
Total investments 49,135,417
Cash 133,500
Accrued investment income 569,498
Reinsurance receivable 102,603,231
Notes receivable 8,525,608
Accounts receivable (less allowance
for uncollectible accounts of $88,450) 645,603
Deferred acquisition costs 1,925,915
Property and equipment
(less accumulated depreciation of $513,407) 477,889
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,311,623) 1,362,155
Other assets 1,235,684
-----------
$166,614,500
===========
See accompanying notes to condensed consolidated financial statements.
continued . . .
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $143,406,530
Contract claims 4,504,531
-----------
Total policy liabilities 147,911,061
Other policyholders' funds 2,357,661
Deferred tax liability 443,728
Deferred gain on reinsurance 2,291,189
Deferred gain on sale of real estate 345,216
Note payable 1,437,500
Other liabilities 4,696,196
-----------
Total liabilities 159,482,551
-----------
Stockholders' equity:
Series A preferred stock, par value $.10 per share,
authorized, issued and outstanding 74,000 shares
involuntary liquidation value 2,035,000) 1,850,000
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 8,759 shares 876
Additional paid-in capital 6,259,589
Accumulated deficit (550,854)
Treasury stock, at cost, 1,521 shares (501,602)
Accumulated other comprehensive income-net
unrealized gains, net of taxes of $57,033 73,940
-----------
Total stockholders' equity 7,131,949
-----------
$166,614,500
===========
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
Revenues:
Premiums and other considerations $3,187,325 1,157,302
Net investment income 980,244 1,048,742
Net realized investment gains 843,662 85,909
Reinsurance expense allowance 2,161,073 2,585,952
Amortization of deferred gain on
reinsurance 101,809 91,205
Other income 49,959 21,960
---------- ----------
Total revenues 7,324,072 4,991,070
---------- ----------
Benefits and expenses:
Policy benefits 2,240,042 1,165,329
Commissions and general expenses 3,583,108 3,161,625
Interest expense 38,232 41,353
Amortization of deferred acquisition costs 170,756 56,306
Amortization of costs in excess of net
assets of acquired business 119,831 119,831
---------- ----------
Total benefits and expenses 6,151,969 4,544,444
---------- ----------
Income before federal income tax
expense (benefit) 1,172,103 446,626
Federal income tax expense (benefit):
Current 335,015 144,495
Deferred (143,635) (121,811)
---------- ----------
Net income $ 980,723 423,942
---------- ----------
Other comprehensive income (loss):
Net unrealized holding gains (losses)
arising during period, net of tax of
$588,791 in 1999 and $44,081 in 1998 (1,140,845) 94,967
Less: reclassification adjustment for
net gains included in net income,
net of tax of $0 in 1999 and
$21,191 in 1998 0 (45,659)
--------- ----------
Comprehensive income (loss) ($160,122) 473,250
========= ==========
Earnings per share:
Net income per share-basic $ 122.86 44.13
========== ==========
Net income per share-diluted $ 110.73 35.39
========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
Revenues:
Premiums and other considerations $2,102,010 633,045
Net investment income 498,182 541,083
Net realized investment gains 821,819 66,617
Reinsurance expense allowance 1,054,471 1,216,268
Amortization of deferred gain on
reinsurance 63,465 42,165
Other income 41,515 11,979
---------- ---------
Total revenues 4,581,462 2,511,157
---------- ---------
Benefits and expenses:
Policy benefits 1,246,394 606,929
Commissions and general expenses 2,290,297 1,503,847
Interest expense 29,386 17,796
Amortization of deferred acquisition costs 87,121 25,639
Amortization of costs in excess of net
assets of acquired business 59,915 59,915
---------- ---------
Total benefits and expenses 3,713,113 2,214,126
---------- ---------
Income before federal income tax expense
(benefit) 868,349 297,031
Federal income tax expense (benefit):
Current 220,900 52,065
Deferred (76,719) (1,947)
---------- ---------
Net income $ 724,168 246,913
---------- ---------
Other comprehensive income (loss):
Net unrealized holding gains (losses)
arising during period, net of tax of
$564,609 in 1999 and $51,111 in 1998 (505,316) 110,715
Less: reclassification adjustment for net
gains included in net income, net of tax
of $0 in 1999 and $21,401 in 1998 0 (46,108)
Comprehensive income (loss) $ 218,852 311,520
---------- ---------
Earnings per share:
Net income per share-basic $ 93.82 26.91
========== =========
Net income per share-diluted $ 90.57 26.33
========== =========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
Cash flows from operating activities:
Net income from operations $980,723 423,942
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 228,628 30,510
Net realized investment gains on investments (843,662) (85,909)
Deferred federal income tax benefit (143,635) (121,811)
Decrease in reinsurance receivables 2,552,053 304,326
Increase (decrease) in accrued investment
income (26,193) 27,329
Increase in accounts receivable (82,358) (67,315)
Increase (decrease) in other assets (864,699) 329,172
Decrease in future policy benefit liability (971,716)(1,225,468)
Decrease in contract claim liability (1,134,038) (83,946)
Decrease in other policyholders' funds
liability (493,299) (13,902)
Increase (decrease) in other liabilities 1,714,426 (561,352)
---------- ----------
Net cash provided by (used by) operating
activities 916,230 (1,044,424)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of investments available
for sale and principal repayments on
mortgage loans 1,635,485 6,206,437
Purchases of investments available for sale (4,374,078)(4,253,136)
Net decrease in policy loans 66,025 210,793
Net increase in short-term investments (900,019) (345,024)
Purchase of property and equipment (125,514) (101,176)
Proceeds from assumption agreement 2,306,481 0
---------- ----------
Net cash provided by (used in) investing
activities (1,391,620) 1,717,894
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable 1,500,000 0
Principal payments on note payable (625,000) (125,000)
Deposits on policy contracts 644,981 558,892
Withdrawals from policy contracts (939,119)(1,065,710)
Preferred dividends paid (91,344) (97,126)
Treasury stock purchases (960) (42,240)
---------- ----------
Net cash provided by (used in) financing
activities 488,558 (771,184)
---------- ----------
Net increase (decrease) in cash 13,168 (97,714)
Cash at beginning of year 120,332 97,714
---------- ----------
Cash at end of period $ 133,500 0
========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999 and the
condensed consolidated statements of operations and cash flows for the
six month periods ended June 30, 1999 and 1998, have been prepared by
Acap Corporation (the "Company"), without audit. In the opinion of
management, all adjustments (which, except as may be noted below, include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at
June 30, 1999 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's December 31, 1998 Annual Report to Stockholders. The
results of operations for the six month periods ended June 30, 1999 and
1998 are not necessarily indicative of the operating results for the full
year.
2. ACCOUNTING STANDARDS
In September 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income." SFAS No. 130, which must be adopted
for both interim and fiscal periods beginning after December 15, 1997,
establishes standards for reporting and displaying comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 130. The
Company's only components of other comprehensive income are unrealized
gains and losses on investments. As those items were previously
presented as direct charges or credits to the Company's stockholders'
equity, the only impact of adopting this standard is to reflect an
additional presentation of those items.
3. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income (less
dividends paid on preferred stock of $91,344 and $97,126 for the six
months ended June 30, 1999 and 1998, respectively) by the weighted
average common shares outstanding (7,239 at June 30, 1999 and 7,406 at
June 30, 1998).
Earnings per common share on a diluted basis is computed by dividing net
income (less dividends paid on preferred stock of $91,344 and $97,126 for
the six months ended June 30, 1999 and 1998, respectively, and less the
income statement effect of stock options as if exercised of $58,976 and
$58,976 for June 30, 1999 and 1998, respectively) by the weighted average
common shares outstanding as if such stock options were exercised (7,499
at June 30, 1999 and 7,569 at June 30, 1998).
4. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1999, stockholders' equity changed
for the following items: Decrease in net unrealized investment gains of
$1,140,845; net income of $980,723; cash dividends paid on preferred
stock of $91,344 and a net increase in treasury stock of $960.
5. UNIVERSAL TRANSACTION
On March 5, 1998, American Capitol Insurance Company ("American
Capitol"), a wholly-owned subsidiary of Acap Corporation, closed a
coinsurance transaction with Universal Life Insurance Company
("Universal"). Pursuant to the coinsurance agreement (the "Coinsurance
Agreement"), American Capitol coinsured 100% of the individual life
insurance policies of Universal in force at January 1, 1998. The
effective date of the Coinsurance Agreement was January 1, 1998.
American Capitol paid Universal an initial ceding commission of
approximately $13 million. Universal transferred approximately $40
million in assets to American Capitol in connection with the coinsurance.
Contemporaneous with the signing of the Coinsurance Agreement, the
parties executed an administrative agreement (the "Administration
Agreement") whereby American Capitol agreed to provide specified
administrative functions for the 246,011 coinsured Universal policies.
American Capitol started administering the policies beginning July 1,
1998. Between January 1, 1998 and July 1, 1998, Universal continued to
administer the policies, and American Capitol paid Universal the expense
allowance stipulated in the Administration Agreement.
Concurrent with the coinsurance of the Universal policies, American
Capitol retroceded all of the coinsured Universal policies with an
unaffiliated reinsurer. The reinsurer paid American Capitol an initial
ceding commission of approximately $13.5 million. So, while Universal
transferred $40 million to American Capitol in connection with the
coinsurance, American Capitol transferred $39.6 million in assets to the
reinsurer in connection with the retrocession. Once the reinsurer has
recovered the initial ceding commission, the reinsurer may, at American
Capitol's option, retrocede back to American Capitol 100% of the
policies. Upon this retrocession, American Capitol then pays the
reinsurer 30% of the profits generated by the policies, retaining the
other 70% of the profits. In addition, American Capitol has the right to
recapture the retrocession under certain terms and conditions. While the
retrocession is in effect, American Capitol receives an expense allowance
from the reinsurer.
6. STATESMAN TRANSACTION
On October 19, 1998, Texas Imperial Life Insurance Company, a wholly-
owned subsidiary of American Capitol
executed an agreement to acquire the stock of Statesman National Life
Insurance Company ("Statesman"). To facilitate the Statesman
acquisition, American Capitol entered into a coinsurance agreement with
Statesman dated November 17, 1998, in which American Capitol coinsured,
on a 100% quota share basis, a portion of Statesman's Medicare supplement
business effective October 31, 1998. The acquisition transaction closed
on December 16, 1998. Statesman was owned by the brother of the majority
shareholder of Acap, and, as a result, this qualified as a related party
transaction. Texas Imperial issued a promissory note of $100 to the
sellers of the Statesman stock ("Sellers"). At the time of the
acquisition of the Statesman stock by Texas Imperial, Statesman had
approximately $1.8 million in surplus debentures issued to the Sellers.
The Sellers' debentures backed the Sellers' representations and
warranties and were to be adjusted based upon the outcome of certain post-
closing price adjustments. In connection with closing, Texas Imperial
purchased an $800,000 surplus debenture from Statesman to bring
Statesman's statutory equity to the level required by the Texas
Department of Insurance (the "Department") as a condition of the
Department's approval of Texas Imperial's acquisition of Statesman. As
used herein, the "Statesman Transaction" refers to the above-described
Texas Imperial acquisition of the stock of Statesman, Texas Imperial
purchase of the $800,000 surplus debenture from Statesman, and American
Capitol coinsurance of a portion of Statesman's Medicare supplement
business.
In January, 1999, it was discovered that Statesman's claim liabilities
were significantly understated. The liability understatement exceeded
the amount of the Sellers' debentures. Given the mutual mistake of fact
upon which the stock purchase, the surplus debenture purchase and the
Department's approval of same were based, Texas Imperial, the Sellers,
and Statesman agreed to rescind the purchase of the stock and the surplus
debenture. However, the rescission required the approval of the
Department. The Department did not grant its approval. As a result,
Texas Imperial determined that the $800,000 Statesman surplus debenture
was uncollectible and recorded the realized investment loss on the
debenture and wrote off its investment in Statesman of $100. Statesman
was placed in receivership by the District Court of Travis County, Texas
250th Judicial District (the "Court") on June 10, 1999.
On June 10, 1999, the Court approved a Liquidation Plan Regarding the
Insolvency and Liquidation of The Statesman National Life Insurance
Company (the "Liquidation Plan") executed by American Capitol, Texas
Imperial, Statesman, the Department and the National Organization of Life
and Health Insurance Guaranty Associations ("NOLHGA"). Pursuant to the
Liquidation Plan, American Capitol and Texas Imperial assumed all life
insurance policies issued by Statesman since September 30, 1998 as well
as all of the Medicare supplement and hospital indemnity health insurance
policies in force in Statesman. Participating NOLHGA guaranty
associations funded the transaction with a combination of cash and
promissory notes. In determining the funding amount, among other things,
the Company received credit in an amount equal to the $800,000 surplus
debenture Texas Imperial purchased from Statesman during 1998 and which
Texas Imperial wrote off at December 31, 1998. Pursuant to the
Liquidation Plan, at a prescribed point three years after the closing of
the assumption transactions, the actual results during the three year
period of the Medicare supplement policies in question will be compared
to the projected results for that same period and, if the actual results
have been better than projected ("excess profits"), the participating
NOLHGA guaranty associations will be entitled to participate in the
excess profits as a refund in an amount prescribed by a formula set out
in the Liquidation Plan. If the actual results are worse than the
projected results, the guaranty associations are not obligated to
compensate the Company for such shortfall. The assumption transactions
closed on June 18, 1999 with an effective date of June 1, 1999.
Approximately $11 million in cash and notes were transferred to the
Company from the participating NOLHGA guaranty associations and
approximately $10 million in liabilities were transferred to the Company
in connection with the assumption transactions.
Other aspects related to the Statesman Transaction include the transfer
to the Company of policy administration system software necessary to
enable the Company to administer the Statesman Medicare supplement
policies assumed from the guaranty associations.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $105,000 and $185,177 for federal income taxes were made
for the six months ended June 30, 1999 and 1998, respectively.
Cash payments of $29,601 and $37,522 for interest expense were made
during the six months ended June 30, 1999 and 1998, respectively.
The following reflects assets acquired and liabilities assumed relative
to the assumption agreement for the policies of Statesman, the
consideration received for such assumption and the net cash flow relative
to such assumption on May 31, 1999:
Assets acquired $ 10,893,429
Liabilities assumed (10,093,429)
-----------
Gain from assumption $ 800,000
===========
Net cash from assumption:
Cash acquired $ 1,506,481
Gain from assumption 800,000
-----------
Net cash provided from assumption $ 2,306,481
===========
The following reflects assets acquired and liabilities assumed relative
to the coinsurance agreement for the policies of Universal, the
consideration given for such coinsurance and the net cash flow relative
to such coinsurance on January 1, 1998.
Assets acquired $ 39,972,696
Liabilities assumed (53,085,774)
-----------
Cost of coinsurance $(13,113,078)
===========
Cash paid for coinsurance $(13,113,078)
===========
Net cash from coinsurance:
Cash acquired $ 38,597,840
Cash paid for coinsurance (13,113,078)
-----------
Net cash provided from coinsurance $ 25,484,762
===========
The following reflects assets and liabilities transferred in connection
with a coinsurance treaty whereby all policies assumed from Universal
were 100% retroceded to an unaffiliated reinsurer, the ceding commission
received and the net cash flow related to the coinsurance treaty on
January 1,1998.
Assets transferred $(39,580,339)
Liabilities transferred 53,080,339
-----------
Net transferred $ 13,500,000
===========
Ceding commission received $ 13,500,000
===========
Net cash from coinsurance:
Cash paid (38,984,762)
Cash received from coinsurance 13,500,000
-----------
Net cash provided from coinsurance $(25,484,762)
===========
Net proceeds from coinsurance agreements $ 0
===========
8. NOTE PAYABLE
On March 31, 1999, the Company repaid the $500,000 balance on its note
from Central National Bank ("CNB") by borrowing $1,500,000 from CNB. The
note is renewable by the bank each April 30 until fully repaid. The note
bears interest at a rate equal to the base rate of a bank. Principal
payments on the note of $62,500 are due quarterly (a six year
amortization) beginning April 30, 1999. The loan agreement contains
certain restrictions and financial covenants. Without the written
consent of the bank, Acap may not incur any debt, pay common stock
dividends or sell any substantial amounts of assets. Also, American
Capitol is subject to minimum statutory earnings and capital and surplus
requirements during the loan term. The Company is in compliance with all
of the terms of the loan as of June 30, 1999.
9. NOTES RECEIVABLE
In connection with the Statesman Transaction, seven promissory notes
totaling $8,525,608 were issued by four different state guaranty
associations. The interest rate on the notes is fixed at 5.3%. The
first payment of principal of $4,437,313 along with accrued interest of
approximately $113,000 is due September 18, 1999. There are no other
scheduled payments until maturity at December 2, 2002 when the balance of
$4,088,295 and all accrued and unpaid interest is due.
The promissory notes are essentially credit risk free because the notes
are backed by all member insurers of an association. A guaranty
association has the statutory authority to assess solvent insurance
companies doing business in the state to meet its obligations. If the
maximum assessment allowed in any one year does not provide the necessary
funds, additional assessments are made as soon thereafter as permitted by
the guaranty association act.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATESMAN TRANSACTION
As used herein, "American Capitol" is American Capitol Insurance Company,
a wholly-owned subsidiary of the Company. "Texas Imperial" is Texas
Imperial Life Insurance Company, a wholly-owned subsidiary of American
Capitol.
On October 19, 1998, Texas Imperial executed an agreement to acquire the
stock of Statesman National Life Insurance Company ("Statesman"). To
facilitate the Statesman acquisition, American Capitol entered into a
coinsurance agreement with Statesman dated November 17, 1998, in which
American Capitol coinsured, on a 100% quota share basis, a portion of
Statesman's Medicare supplement business effective October 31, 1998. The
acquisition transaction closed on December 16, 1998. Statesman was owned
by the brother of the majority shareholder of Acap, and, as a result,
this qualified as a related party transaction. Texas Imperial issued a
promissory note of $100 to the sellers of the Statesman stock
("Sellers"). At the time of the acquisition of the Statesman stock by
Texas Imperial, Statesman had approximately $1.8 million in surplus
debentures issued to the Sellers. The Sellers' debentures backed the
Sellers' representations and warranties and were to be adjusted based
upon the outcome of certain post-closing price adjustments. In
connection with closing, Texas Imperial purchased an $800,000 surplus
debenture from Statesman to bring Statesman's statutory equity to the
level required by the Texas Department of Insurance (the "Department") as
a condition of the Department's approval of Texas Imperial's acquisition
of Statesman. As used herein, the "Statesman Transaction" refers to the
above-described Texas Imperial acquisition of the stock of Statesman,
Texas Imperial purchase of the $800,000 surplus debenture from Statesman,
and American Capitol coinsurance of a portion of Statesman's Medicare
supplement business.
In January, 1999, it was discovered that Statesman's claim liabilities
were significantly understated. The liability understatement exceeded
the amount of the Sellers' debentures. Given the mutual mistake of fact
upon which the stock purchase, the surplus debenture purchase and the
Department's approval of same were based, Texas Imperial, the Sellers,
and Statesman agreed to rescind the purchase of the stock and the surplus
debenture. However, the rescission required the approval of the
Department. The Department did not grant its approval. As a result,
Texas Imperial determined that the $800,000 Statesman surplus debenture
was uncollectible and recorded the realized investment loss on the
debenture and wrote off its investment in Statesman of $100. Statesman
was placed in receivership by the District Court of Travis County, Texas
250th Judicial District (the "Court") on June 10, 1999.
On June 10, 1999, the Court approved a Liquidation Plan Regarding the
Insolvency and Liquidation of The Statesman National Life Insurance
Company (the "Liquidation Plan") executed by American Capitol, Texas
Imperial, Statesman, the Department and the National Organization of Life
and Health Insurance Guaranty Associations ("NOLHGA"). Pursuant to the
Liquidation Plan, American Capitol and Texas Imperial assumed all life
insurance policies issued by Statesman since September 30, 1998 as well
as all of the Medicare supplement and hospital indemnity health insurance
policies in force in Statesman. Participating NOLHGA guaranty
associations funded the transaction with a combination of cash and
promissory notes. In determining the funding amount, among other things,
the Company received credit in an amount equal to the $800,000 surplus
debenture Texas Imperial purchased from Statesman during 1998 and which
Texas Imperial wrote off at December 31, 1998. Pursuant to the
Liquidation Plan, at a prescribed point three years after the closing of
the assumption transactions, the actual results during the three year
period of the Medicare supplement policies in question will be compared
to the projected results for that same period and, if the actual results
have been better than projected ("excess profits"), the participating
NOLHGA guaranty associations will be entitled to participate in the
excess profits as a refund in an amount prescribed by a formula set out
in the Liquidation Plan. If the actual results are worse than the
projected results, the guaranty associations are not obligated to
compensate the Company for such shortfall. The assumption transactions
closed on June 18, 1999 with an effective date of June 1, 1999.
Approximately $11 million in cash and notes were transferred to the
Company from the participating NOLHGA guaranty associations and
approximately $10 million in liabilities were transferred to the Company in
connection with the assumption transactions.
Other aspects related to the Statesman Transaction include the transfer
to the Company of policy administration system software necessary to
enable the Company to administer the Statesman Medicare supplement
policies assumed from the guaranty associations. This system enhances the
Company's policy administration capabilities considerably and the Company
expects to use it as its primary policy administration system. As
previously reported, the Company's existing policy administration systems
do not have a Year 2000 problem, and the above mentioned system, sold and
maintained by IBM, is also Year 2000 compliant. In addition, the Company
recently (May, 1999) began to market Medicare supplement policies by
recruiting former agents of Statesman and, in due course, adding
additional agents. Initially this new marketing program will be
relatively modest in scope, involving the states of Texas, Louisiana, and
Oklahoma. Through these steps, the Company has expanded its business plan
to include the administration and marketing of Medicare supplement
policies, and has positioned itself to acquire additional Medicare
supplement policies as well as accident and health insurance policies in
general.
RESULTS OF OPERATIONS
Premiums and other considerations were 175% higher during the six months
ended June 30, 1999 in comparison to the comparable period in 1998.
Premiums and other considerations were 232% higher during the three
months ended June 30, 1999 in comparison to the comparable period in
1998. The increase in premiums during 1999 is attributable to the
policies acquired from Statesman. As described above under "Statesman
Transaction," effective October 31, 1998, the Company acquired certain
Medicare supplement policies issued by Statesman and, effective May 31,
1999, acquired the balance of Statesman's Medicare supplement policies as
well as certain other life and hospital indemnity health insurance
policies.
Realized investment gains during the three months ended June 30, 1999
include $800,000 in gains related to the Liquidation Plan described above
under "Statesman Transaction." Pursuant to the Liquidation Plan, the
Company received an amount equal to the $800,000 the Company had loaned
to Statesman and written-off during 1998.
The Company receives an expense allowance for administering certain
blocks of reinsured policies. The expense allowance for the six months
ended June 30, 1999 was 16% lower than the expense allowance for the
comparable period in 1998. The expense allowance for the three months
ended June 30, 1999 was 13% lower than the expense allowance for the
comparable period in 1998. The decrease in the expense allowance during
1999 is due to attrition in the reinsured policies.
Primarily as a result of the above factors, total revenue was 47% higher
during the six months ended June 30, 1999 and 82% higher during the three
months ended June 30, 1999 in comparison to the comparable period in
1998.
Policy benefits were 70% of total premiums and other considerations
during the six months ended June 30, 1999 in comparison to 101% of total
premiums and other considerations during the comparable period in 1998.
Policy benefits were 59% of total premiums and other considerations
during the three months ended June 30, 1999 in comparison to 96% of total
premiums and other considerations during the comparable period in 1998.
The lower benefit to premium ratio during 1999 is largely attributable to
the Medicare supplement business acquired from Statesman, which had a
lower benefit to premium ratio than the balance of the Company's
business.
Total expenses (i.e., total benefits and expenses less policy benefits)
were 60% of total revenue (excluding realized investment gains) during
the six months ended June 30, 1999 in comparison to 69% of total revenue
during the comparable period in 1998. Total expenses were 66% of total
revenue during both the three months ended June 30, 1999 and the
comparable period in 1998. General expenses for the first quarter of 1998
included a one-time broker's fee of $227,500 associated with the
coinsurance of a block of policies from Universal Life Insurance Company
("Universal").
YEAR 2000 STATUS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of normal business activities. To
date, the Company has fully completed its assessment of all systems that
could be significantly affected by the Year 2000 issue. In addition, the
Company has gathered information about the Year 2000 compliance status of
material third parties with whom the Company conducts business and
continues to monitor their compliance.
The Company's policies are administered on three policy administration
systems. One of the policy administration systems was internally
developed. The Company's assessment of that system found that minor
corrections were necessary to make the system Year 2000 compliant. Those
corrections have been completed, tested, and implemented. Based on the
testing performed, the Company believes that the system is now Year 2000
compliant. The other two policy administration systems are vendor
developed and supported systems. The vendors have represented that the
systems are Year 2000 compliant. With all three policy administration
systems Year 2000 compliant, the Company is positioned to perform all
basic policy transactions without disruption.
The Company used two general ledger and accounts payable systems. One of
the systems is no longer supported by the vendor who developed the
system. The Company's assessment of that system found that extensive
modifications were needed to make the system Year 2000 complaint. The
other general ledger/accounts payable system is currently supported by
the vendor. The version of that system in production at the Company is
not Year 2000 compliant. While the Company had originally planned on
installing an updated version of the vendor's system that is Year 2000
compliant, the Company has now decided to convert to a general
ledger/accounts payable system provided by a different vendor. The
Company licensed the new system in August 1999. The Company plans on
installing the new general ledger/accounts payable system and converting
to exclusive use of that system for general ledger and accounts payable
functions by October 31, 1999.
The system used for claims processing of the Medicare supplement policies
acquired from Statesman is not Year 2000 compliant. During July 1999,
the Company licensed a vendor-supplied claims processing system. The
Company plans on installing the new claims system and to begin processing
all health claims on that system by October 31, 1999.
Certain of the Company's minor subsystems are not currently year 2000
compliant and will be remediated. The Company has completed the Year
2000 assessment of these subsystems and is approximately 80% through the
remediation of these subsystems. The Company believes that the
remediation, testing, and implementation of the subsystems will be
completed by the end of the third quarter of 1999.
As assessment of the Company's operating equipment has determined that
certain of the Company's personal computers will need to be replaced
prior to January 1, 2000.
To date, the Company has used existing internal resources to remediate
the systems that are not Year 2000 compliant, and the costs thus incurred
have not been significant. The cost of replacement of the general
ledger, accounts payable, and health claims systems is approximately
$225,000. The cost of replacing certain of the Company's personal
computers that are not Year 2000 compliant is approximately $15,000. It
is expected that existing internal resources will be used to complete the
Company's Year 2000 project.
Management of the Company believes that it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above,
the Company has not yet completed all necessary phases of the Year 2000
program. In the event that the Company does not complete any additional
phases, the Company would not be able to use its general ledger system or
the system used to pay Medicare supplement claims.
The Company has contingency plans for certain critical applications and
is working on such plans for other applications. These contingency plans
involve, among other actions, manual workarounds and adjusting staffing
strategies.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's net unrealized investment gains had
declined by $1,140,845 since December 31, 1998 to $73,940. The decrease
in invested asset values was primarily the result of an increase in
market interest rates during the first half of 1999. It is not
anticipated that the Company will need to liquidate investments prior to
their projected maturities in order to meet cash flow requirements.
On March 31, 1999, the Company repaid the $500,000 balance on its note
from Central National Bank ("CNB") by borrowing $1,500,000 from CNB. The
note is renewable by the bank each April 30 until fully repaid. The note
bears interest at a rate equal to the base rate of a bank. Principal
payments on the note of $62,500 are due quarterly (a six year
amortization) beginning April 30, 1999. The loan agreement contains
certain restrictions and financial covenants. With the written consent
of the bank, Acap may not incur any debt, pay common stock dividends or
sell any substantial amounts of assets. Also, American Capitol is
subject to minimum statutory earnings and capital and surplus
requirements during the loan term. The Company is in compliance with all
of the terms of the loan as of June 30, 1999.
CAUTIONARY STATEMENT
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein
or in any other oral or written statement by the Company or any of its
officers, directors or employees is qualified by the fact that actual
results of the Company may differ materially from such statement due to
the following important factors, among other risks and uncertainties
inherent in the Company's business: state insurance regulations, rate
competition, adverse changes in interest rates, unforeseen losses with
respect to loss and settlement expense reserves for unreported and
reported claims, and catastrophic events.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 5, 1999, a civil action (the "Action") was filed by Martin L.
Skeen and William F. Skeen ("Plaintiffs") in the Court of Chancery of the
State of Delaware (the "Court") against Acap and Acap's directors
("Defendants"). The Plaintiffs ask the Court (1) to direct the
Defendant's to pay Acap the $800,000 lost as a result of the write-off of
the surplus debenture purchased from Statesman in connection with the
Statesman Transaction, (2) to direct the Defendants to account for all of
the transactions related to the Statesman Transaction, (3) to require a
new election of directors after full disclosure with respect to the
Statesman Transaction, and (4) to award such other damages and relief as
may be appropriate, including the costs of the Action. Plaintiffs also
questioned the compensation of the Company's President in respect to the
employee benefit "Split-Dollar" insurance arrangement. The Action was
filed without advance demand or notification to the Defendants.
The Company believes that the claims by the Plaintiffs are without merit.
As noted above in the section of this report titled "Statesman
Transaction," the $800,000 related to the Statesman surplus debenture was
recovered through the transaction with NOLHGA. Further, while the
acquisition of the Statesman stock involved a related party, the Company
believes that the transaction was handled in an arms'-length manner and
that all necessary disclosures were made. The litigation is still in the
preliminary stages, and the Company is defending the actions vigorously.
ITEM 6. EXHIBITS
Liquidation Plan Regarding the insolvency and liquidation of the
Statesman National Life Insurance Company.
Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1999 to be signed on its behalf by the undersigned
thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: August 11, 1999 By: \s\William F. Guest
----------------------------
William F. Guest, President
Date: August 11, 1999 By: \s\John D. Cornett
----------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
LIQUIDATION PLAN
Regarding the insolvency and liquidation of
The Statesman National Life Insurance Company
TABLE OF CONTENTS
Page
1 RECITALS 1
2 DEFINITIONS 6
3 STATESMAN LIQUIDATION AND RECEIVERSHIP PROCEEDINGS 6
3.1 Consent and Participation of the Parties 6
3.2 Receivership Proceedings and Permanent Injunction 7
3.3 Coinsurance Agreement for Medicare Supplement Pre-Standard
Policies 7
3.4 Identification of Participating Guaranty Associations 8
3.5 Affected Associations - Claims and Premiums 9
3.6 Early Access Application. 11
3.7 Processing the Claims Backlog 12
3.8 Southern Financial Reinsurance Agreement 12
3.9 Major Medical Policies Assumed by Participating Guaranty
Associations 13
3.10 Uncovered Claims. 13
4 TRANSFER AND ASSUMPTION OF STATESMAN POLICY LIABILITIES 14
4.1 Statesman Policy Liabilities Assumed and Reinsured 14
4.1.1 Medicare Supplement Attained Age 14
4.1.4 Medicare Supplement Issue Age 15
4.2 Funding for the Policy Liabilities 15
4.2.1 Formula and Calculations 15
4.2.2 Participating Guaranty Association Funding 15
4.2.3 Enhancement from Assuming Insurer 17
4.3 Insolvency of Assuming Insurer 18
4.3.1 Texas Imperial 18
4.3.2 American Capitol 18
4.4 Receiver Cooperation in Assumption of Assumed Policies. 18
4.5 Assuming Insurer Licensing 20
4.6 Policy Form Approval and the Writing of New Business 21
4.7 Closing of Liquidation Plan and Assumption Agreements 21
4.8 Assuming Insurer Third Party Claims 22
4.9 Notice of Change of Control 23
5 LIABILITIES AND INDEMNITIES 23
5.1 Claims Processing After the Closing Date 23
5.2 Notice 23
5.3 Assuming Insurers Action After the Closing Date 24
5.4 Form A Recission 24
5.5 Administration of Assumed Policies 25
5.6 Extra-Contractual Damages 25
5.7 Covered Obligations 25
5.8 Party Conduct 26
5.9 NOLHGA 26
5.10 Claims Preserved 26
6 REPRESENTATIONS 27
6.1 Participating Guaranty Association Representations 27
6.2 NOLHGA's Representations 28
6.3 Assuming Insurers' Representations 28
6.3.1 Corporate Existence 28
6.3.2 Authority 29
6.3.3 Solvency 29
6.3.4 Fees 29
6.4 Receiver's and Commissioner's Representations and Duties 29
7 RESERVES 30
8 JURISDICTION AND ACCOUNTING PROCEDURE 30
9 NOTICE 32
10 GENERAL PROVISIONS 33
10.1 Claims Operations 33
10.2 Assuming Insurer Shareholder Distributions 33
10.3 Software Transfer to American Capitol 34
10.4 Use of Statesman Facilities Post-Closing. 34
10.5 Continuation Statesman Bank Accounts. 35
10.6 Settlement of Intercompany Transactions 36
10.7 No Third Party Beneficiaries 36
10.8 Entire Agreement 37
10.9 Amendment 37
10.10 Counterparts 37
10.11 Exhibits 37
10.12 Recitals 37
10.13 Cooperation 37
10.14 Statutory Obligations 38
10.15 Severability. 38
10.16 Express Terms 38
10.17 Continued Support 39
10.18 Confidentiality 39
10.19 Assignability 39
10.20 Compromise Agreement 40
10.21 No Construction Against Any Party 40
<PAGE>
LIQUIDATION PLAN
Regarding the insolvency and liquidation of
The Statesman National Life Insurance Company
This Liquidation Plan regarding the insolvency and liquidation of
The Statesman National Life Insurance Company ("Statesman") is entered
into this 10th day of June, 1999 by and among Jose Montemayor,
Commissioner of Insurance, Texas Department of Insurance ("TDI") in his
capacity as Commissioner and as Receiver of Statesman ("Commissioner"
and/or "Receiver" as appropriate), the National Organization of Life and
Health Insurance Guaranty Associations ("NOLHGA"), and the life and
health insurance guaranty associations affected by the insolvency and
liquidation of Statesman that elect to participate in this Liquidation
Plan ("Participating Guaranty Associations"), Texas Imperial Life
Insurance Company ("Texas Imperial"), American Capitol Insurance Company
("American Capitol") and Statesman.
1 RECITALS
1.1 Statesman, which holds a certificate of authority under the
provisions of Chapter 3 of the Texas Insurance Code (hereinafter
referred to as the TEX. INS. CODE ANN."), is an "insurance
company" as that term is defined in TEX. INS. CODE ANN. Art.
21.28-A, Sec. 2(a), and is an "insurer" as that term is defined
in TEX. INS. CODE ANN. Art. 21.28, Sec. 1(a).
1.2 Statesman is domiciled in Texas and was incorporated on or about
December 31, 1954. At the time of this Liquidation Plan, Statesman is
a wholly-owned subsidiary of Texas Imperial, which is a wholly-owned
subsidiary of American Capitol.
1.3 American Capitol entered into a Coinsurance Agreement with
Statesman dated November 17, 1998, in which American Capitol coinsured
Statesman's "pre-standard" Medicare supplement insurance policies in
force as of October 31, 1998. Pursuant to the Coinsurance Agreement,
American Capitol paid Statesman $1,000,000 consideration.
1.4 Texas Imperial acquired all the stock of Statesman effective
December 16, 1998, pursuant to a Stock Purchase Agreement dated
October 19, 1998, as amended on November 20, 1998 and subject to
a Form A approval order issued by the Texas Department of
Insurance dated December 16, 1998. In conjunction with that
closing, Statesman issued a surplus debenture to Texas Imperial
in the original principal amount of $800,000. Prior to that
stock purchase, the majority of the ownership of Statesman (50.2
percent) was held by James L. Guest with the remaining 49.8
percent held by: Thomas M. Guest; Gina Guest Vosko; and Ronald E.
Eshelman, Trustee of the Nancy Mahon Guest Life Insurance Trust.
1.5 In January, 1999, following Texas Imperial's
acquisition of Statesman on December 16, 1998, Texas Imperial and
American Capitol met with TDI personnel and provided the
following information: (a) a miscommunication between Statesman
employees and Statesman's consulting actuary in the third quarter
of 1998 caused material errors regarding Statesman's claims
payment history which resulted in an understatement of
Statesman's third quarter reserves and insufficient premium rate
increases that became effective in 1999; (b) Statesman's third
quarter financial condition was significantly worse than
previously reported, and the fourth quarter transactions
associated with the acquisition of Texas Imperial were inadequate
to resolve the related financial consequences; (c) the mistake
regarding Statesman's claims payment history was such that it
eluded the pre-acquisition investigation performed by Texas
Imperial; (d) the officers and directors of Texas Imperial and
American Capitol, who became officers and directors of Statesman
upon closing of the acquisition on December 16, 1998, had no role
in Statesman prior to the acquisition and thus had no
responsibility for the mistake and the financial consequences
thereof; and (e) Texas Imperial, American Capitol, and Statesman
agreed that, if they had been aware of the mistake, they would
not have entered into the stock purchase agreement and related
transactions and thus they requested the Commissioner to approve
the rescission of the acquisition and related transactions. The
TDI and the Commissioner are not aware of the existence of any
evidence or documentation that is inconsistent with the above
information. However, because there has not been a requirement
that the TDI and the Commissioner verify the above information,
the TDI and the Commissioner are not in a position to, and do not
hereby confirm or deny the accuracy of the above information.
Texas Imperial and American Capitol have cooperated with, and
rendered assistance to, the TDI and NOLHGA in the development of
this Liquidation Plan.
1.6 On February 8, 1999, Statesman was placed under a
Confidential Order Creating State of Supervision, and Appointment
of Supervisor, Order No. 99-0219 (the "Supervision Order"). The
Supervision Order was based on, among other things, information
indicating that: (1) Statesman experienced a net loss of income
of approximately $3,100,000 during 1998; and (2) Statesman had a
capital and surplus deficit of approximately $600,000 as of
December 31, 1998.
1.7 In a letter dated February 3, 1999, Texas Imperial,
American Capitol and Statesman requested that the Commissioner
approve a rescission of the acquisition and related transactions
which was declined by the Commissioner in a letter dated March 4,
1999. On March 24, 1999, Texas Imperial and American Capitol
filed a petition with the Commissioner requesting a hearing on
their Petition for Rescission. On April 14, 1999, the
Commissioner denied that Petition. As part of this Liquidation
Plan, Texas Imperial and American Capitol withdraw their petition
and request for rescission and any related requests for a hearing
or appeals or further remedies in that regard.
1.8 On September 30, 1998, Southern Financial Life Insurance
Company ("Southern Financial") entered into a coinsurance
agreement with Statesman coinsuring Statesman's Individual Life
Policies (final expense policies with small face amounts). On
approximately April 19, 1999, Southern Financial filed an
assumption agreement and assumption certificates with TDI for
review and approval to assume Statesman's individual life
policies. That assumption agreement and assumption certificates
have been approved by TDI before execution of this Liquidation Plan.
1.9 Regarding the Coinsurance Agreement with Statesman
coinsuring the Medicare Supplement Pre-Standard policies,
identified in Section 1.3 above, American Capitol has submitted
an assumption agreement and assumption certificates with TDI for
review and approval to assume the Medicare Supplement Pre-
Standard policies. The assumption agreement and assumption
certificates have been approved by TDI before execution of this
Liquidation Plan.
1.10 On June 10, 1999, the Court entered an agreed Permanent
Injunction in the Receivership Proceedings which appointed the
Commissioner as Receiver for Statesman.
1.11 Statesman Policyholder Obligations.
1.11.1 As of December 16, 1998, Statesman had in force the
following blocks of insurance business with the indicated annual
premiums:
1. Medicare supplement policies ($15.6 million)
consisting of:
a. Medicare Supplement Pre-Standard ($2.1 million);
b. Medicare Supplement Issue Age ($7.9 million);
c. Medicare Supplement Attained Age ($5.6 million);
2. Hospital Indemnity policies consisting of approximately
962 hospital confinement coverage policies with an
annualized premium of $84,080 as of March 31, 1999;
3. Companion Life policies consisting of approximately 1,300
policies in force as of March 31, 1999 with an approximate
face amount total of $7,924,503 and annualized premiums of
$440,447, most of which appear to have been sold as
companions to the Medicare Supplement Attained Age
policies; and
4. Major Medical policies consisting of approximately 100
in-hospital and comprehensive coverage policies outside
of Louisiana and 33 such policies in Louisiana with
approximately $260,000 annualized premium outside of
Louisiana and $135,000 annualized premium in Louisiana.
1.11.2 A backlog of claims for benefits from Statesman
(currently estimated at 39,000 pieces of unprocessed mail) has
developed with respect to processing the claims. Each Party has
indicated its belief that implementation of this Liquidation Plan
is the best means to provide continuing insurance coverage for
the policyholders of Statesman and otherwise satisfy Statesman's
creditors.
1.12 This Liquidation Plan supersedes and replaces the Term Sheet
for a Liquidation Plan Re: Statesman National Life Insurance
Company executed by the Parties on April 20, 1999.
NOW, THEREFORE, in consideration of the foregoing premises, and
the covenants, promises and agreements set forth in this
Liquidation Plan, the Parties agree as follows:
2 DEFINITIONS
2.1 Unless otherwise specifically provided or the context so
requires, the capitalized terms set forth in this
Liquidation Plan shall have the same meaning as set
forth in Exhibit 2.1 and such definitions are
incorporated by reference as if fully set forth herein.
The American Capitol Assumption Agreement, the Texas
Imperial Assumption Agreement, the Pre-Standard
Assumption Agreement and the Settlement Agreement, which
are components of this Liquidation Plan, also utilize
the same defined terms as set forth in Exhibit 2.1.
3 STATESMAN LIQUIDATION AND RECEIVERSHIP PROCEEDINGS
3.1 Consent and Participation of the Parties.
3.1.1 After all Parties have executed this Liquidation Plan,
the Assumption Agreements, and the Settlement Agreement, the
Receiver shall file an agreed application for approval of the
Liquidation Plan, the Assumption Agreements and the Settlement
Agreement with the Court seeking approval of such agreements.
NOLHGA will enter its appearance and join in that Motion seeking
the Court's approval of such agreements. By execution of this
Liquidation Plan, Texas Imperial, American Capitol and Statesman
join in, stipulate and agree to the terms and provisions of this
Liquidation Plan and consent to the Permanent Injunction placing
Statesman under the control of the Receiver and declaring
Statesman insolvent. To the extent requested by the Receiver or
NOLHGA, Texas Imperial and American Capitol each agrees to enter
its appearance and seek approval from the Court for this
Liquidation Plan.
3.1.2 American Capitol, Texas Imperial and Statesman, each on
its own behalf and on behalf of its respective agents,
affiliates, subsidiaries, successors and assigns, hereby agree to
waive any and all actions or claims that now exist or may arise
against the TDI, the Commissioner or the Receiver and their duly
appointed designees as a result of the Commissioner's denial of
any and all requests and petition to rescind the Form A and
related transactions filed by American Capitol and Texas Imperial.
3.2 Receivership Proceedings and Permanent Injunction. A
petition has been filed seeking an order placing Statesman into
Receivership Proceedings, seeking a declaration that Statesman is
insolvent and placing Statesman under a Permanent Injunction.
Statesman, Texas Imperial, the sole stockholder of Statesman, and
American Capitol, the sole stockholder of Texas Imperial,
stipulate and agree to initiation of the Receivership Proceedings
and entry of the Permanent Injunction.
3.2 Coinsurance Agreement for Medicare Supplement Pre-
Standard Policies. Before execution of the Liquidation Plan and
to be effective before entry of the Permanent Injunction, in
accordance with the terms and provisions of the Coinsurance
Agreement (a copy of which is attached as Exhibit 3.3-A),
American Capitol converted the Coinsurance Agreement into an
assumption reinsurance agreement which is attached as Exhibit 3.3-
B and which has been approved by the TDI and consented to by
NOLHGA with the effect of causing American Capitol to assume and
reinsure the Medicare Supplement Pre-Standard policies. American
Capitol has submitted certificates of assumption to TDI for
approval and has received such approval prior to the execution of
this Liquidation Plan in the form attached as Exhibit 3.3-C. No
Participating Guaranty Association payment or distribution of
Statesman assets with respect to the policyholders affected by
the Coinsurance Agreement shall be made.
3.3 Identification of Participating Guaranty Associations.
Attached as Exhibit 3.4-A is a list of Affected Associations.
Within ten (10) days after the execution of this Liquidation Plan
by all Parties, NOLHGA shall advise the Parties of the identity
of the Participating Guaranty Associations by submitting Exhibit
3.4-B. Each Participating Guaranty Association will satisfy its
obligation to provide continuing coverage to Statesman
policyholders by participating in this Liquidation Plan and the
Assumption Agreements. If Affected Associations "opt-out" of
this Liquidation Plan so that ten percent (10%) or more of the
Covered Obligations associated with the Medicare Supplement
Attained Age policies, the Medicare Supplement Issue Age
policies, the Hospital Indemnity policies or the Companion Life
policies (with such ten percent (10%) calculated on an
independent, policy block specific basis) are not transferred to
American Capitol (or ten (10%) or more of the Medicare Supplement
Issue Age Policies with respect to Texas Imperial), then the
parties agree to renegotiate the Enhancement attributable to that
specific policy block.
3.5 Affected Associations - Claims and Premiums.
3.5.1 Upon entry of the Permanent Injunction, title to
Statesman's assets vested in the Receiver pursuant to TEX. INS.
CODE ANN. Art. 21.28, Sec. 2(b). Based on all the available
evidence as of the execution of this Liquidation Plan, the
parties anticipate that the Statesman Estate will have sufficient
assets to pay Class 1 Claims in full, to make only a partial
distribution to Class 2 claims and to make no distribution to any
other class of creditors under the Priority Statute.
Accordingly, this Liquidation Plan will have no impact on
creditors in classes other than Class 1 and Class 2.
3.5.2 Premiums and other policyholder payments related to the
American Capitol Assumed Policies which will be assumed by
American Capitol pursuant to the American Capitol Assumption
Agreement for time periods after the date of entry of the
Permanent Injunction will belong to and be the property of
American Capitol. Premiums and other policyholder payments
related to the Medicare Supplement Issue Age policies which will
be assumed by Texas Imperial pursuant to the Texas Imperial
Assumption Agreement for time periods after the date of entry of
the Permanent Injunction will belong to and be the property of
Texas Imperial. Premiums and other policyholder payments related
to the Major Medical policies for time periods after the date of
entry of the Permanent Injunction will belong to and be the
property of the Affected Associations.
3.5.3 All of each Affected Association's approved
costs and expenses of administration relating to Statesman as
well as approved expenses in handling claims and all of NOLHGA's
approved costs and expenses relating to the negotiation and
implementation of the Liquidation Plan shall constitute Class 1
priority level claims against the Statesman Estate pursuant to
the Priority Statute. All cash and Association Notes of the
Participating Guaranty Associations shall be treated as Class 2
priority claims against the Statesman Estate pursuant to the
Priority Statute. Approval of claims of Participating Guaranty
Associations and NOLHGA by the Receiver shall not be unreasonably
withheld. Payments by Affected Associations who do not become
Participating Guaranty Associations for the costs and expenses of
administration and approved expenses in handling claims relating
to Statesman will be handled in accordance with the claims
process set forth in TEX. INS. CODE ANN. Art. 21.28. If the
Receiver determines that such claims should be paid prior to the
final calculation of the Enhancement, the Affected Associations
who are not Participating Guaranty Associations shall receive a
pro rata distribution on such claims based upon an estimate of
the final payment for Class 1 and Class 2 creditor claims.
3.5.4 If the amount of funds recovered by each Participating
Guaranty Association from the Enhancement exceeds the amount of
that Participating Guaranty Association's Class 1 and Class 2
claims, combined, the balance of that Participating Guaranty
Association's share of the Enhancement shall be transmitted to
the Receiver who will distribute such transmitted funds pursuant
to the Priority Statute. In the event of an excess Enhancement
as discussed herein and if the Statesman Estate is closed at the
time the Enhancement is made, the Commissioner shall apply to
reopen the Statesman Estate to facilitate distribution of such
transmitted funds.
3.5.5 Claims of Statesman agents for commissions,
along with claims of all other creditors, will be handled in
accordance with the claims process set forth in TEX. INS. CODE
ANN. Art. 21.28.
3.6 Early Access Application.
3.6.1 Within one hundred twenty (120) days of the
commencement of the Receivership Proceedings against Statesman,
the Receiver will file with the Court an application for approval
of the Early Access Distributions contemplated in this
Liquidation Plan pursuant to the TEX. INS. CODE ANN., Art. 21.28,
Sec. 7A.
3.6.2 Subject to approval by the Court and pursuant to TEX.
INS. CODE ANN. Art. 21.28 Sec. 7A, the Receiver will make Early
Access Distributions to each Participating Guaranty Association
specified in the respective Assumption Agreement based on a pro
rata allocation set forth in Exhibit 3.6 periodically as directed
by the Court. Affected Associations which do not become
Participating Guaranty Associations will receive Early Access
Distributions on a pro rata basis in accordance with the Priority
Statute. The Receiver will use his best efforts to liquidate and
distribute Statesman's assets as soon as reasonably possible and,
in any event, on or before the Plan Termination Date.
3.6.3 To the extent any Participating Guaranty Association is
the beneficiary of a special deposit or other deposit provided
for by statute or regulation, the Participating Guaranty
Association will be deemed to have received such deposit as an
Early Access Distribution, unless the Participating Guaranty
Association has demonstrated that it has not received the benefit
of such funds. For any Participating Guaranty Association which
is the beneficiary of such a deposit, no other Early Access
Distribution shall be made until:
3.6.3.1 At the request of the Receiver, the
Participating Guaranty Association identifies in writing the
amount of the deposit and any distributions which have been made
to, or for the benefit of, the Participating Guaranty
Association; and
3.6.3.2 Each Participating Guaranty Association which is not a
beneficiary of a deposit has received distributions of
Statesman's general assets in the same pro rata amount as the
Participating Guaranty Association which is the beneficiary of
such deposit.
3.7 Processing the Claims Backlog. The Participating Guaranty
Associations, through NOLHGA, will pay for Peterson World-wide
LLP to assist in processing the existing backlog of Statesman
claims, currently estimated at 39,000 pieces of unprocessed mail,
up to a maximum cost of one hundred thousand dollars ($100,000).
Any such payments by the Participating Guaranty Associations and
NOLHGA to Peterson World-wide LLP shall constitute a Class 1
claim against the Statesman Estate. Any involvement and expenses
of Peterson World-wide LLP in excess of the involvement
associated with the above $100,000 maximum shall be at the option
of American Capitol and payment for such involvement shall be the
sole responsibility of American Capitol.
3.8 Southern Financial Reinsurance Agreement. Southern
Financial and Statesman entered into the Southern Financial
Reinsurance Agreement dated September 30, 1998, a copy of which
is attached as Exhibit 3.8. On approximately April 19, 1999,
Southern Financial filed an assumption agreement and assumption
certificates with TDI for review and approval to assume
Statesman's individual life policies. That assumption agreement
and assumption certificates have been approved by TDI before
execution of this Liquidation Plan.
3.9 Major Medical Policies Assumed by Participating
Guaranty Associations. Effective as of the Closing Date, the
Major Medical Policies will be directly assumed by each
Participating Guaranty Association responsible for such policies
in accordance with the enabling act of each Participating
Guaranty Association. The Major Medical Policies will be
administered directly by each Participating Guaranty Association
and/or pursuant to an administrative services agreement entered
into by the Participating Guaranty Association. The
Participating Guaranty Associations may attempt to transfer the
Major Medical policies to a different insurance company. The
Receiver agrees to seek approval for and make Early Access
Distributions in conjunction with the coverage provided by the
Participating Guaranty Associations with respect to the Major
Medical policies. Participating Guaranty Association payments
made for administrative services related to the Major Medical
policies constitute Class 1 claims and Participating Guaranty
Association payments for benefits under the Major Medical
policies constitute Class 2 claims.
3.10 Uncovered Claims. Based on all the evidence
available as of the date of this Liquidation Plan, no Party is
aware of any insurance benefits owed by Statesman to policy
owners, contract owners or beneficiaries which are not covered by
the Affected Associations. In the event that there are Statesman
liabilities or obligations which are not Covered Obligations,
Texas Imperial, American Capitol, or the Participating Guaranty
Association with knowledge of such uncovered obligation shall
advise the Receiver. Any such claim shall be transferred to the
Receiver for handling under TEX. INS. CODE ANN. Art. 21.28 Sec. 3.
If the Receiver determines that such claim should be paid prior
to the final calculation of the Enhancement, the Participating
Guaranty Associations consent to a pro rata distribution on such
claim based upon an estimate of the final payment for Class 1 and
Class 2 creditor claims.
4 TRANSFER AND ASSUMPTION OF STATESMAN POLICY LIABILITIES
4.1 Statesman Policy Liabilities Assumed and Reinsured. As
part of this Liquidation Plan, American Capitol, Texas
Imperial, NOLHGA and the Participating Guaranty
Associations have entered into Assumption Agreements
through which the Participating Guaranty Associations
will provide continuing coverage for covered Statesman
policyholders of Medicare Supplement Issue Age, Medicare
Supplement Attained Age policies, Hospital Indemnity
policies and Companion Life policies. The American
Capitol Assumption Agreement is attached as Exhibit 4.1-
A and the terms and provisions of the American Capitol
Assumption Agreement are incorporated as if set forth
herein. The Texas Imperial Assumption Agreement is
attached as Exhibit 4.1-B and the terms and provisions
of the Texas Imperial Assumption Agreement are
incorporated as if set forth herein.
4.1.1 Medicare Supplement Attained Age. Pursuant to the
American Capitol Assumption Agreement, on the Closing Date,
American Capitol will assume and reinsure the Medicare Supplement
Attained Age policies.
4.1.2 Hospital Indemnity. Pursuant to the American Capitol
Assumption Agreement, on the Closing Date, American Capitol will
assume and reinsure the Hospital Indemnity policies.
4.1.3 Companion Life. Pursuant to the American
Capitol Assumption Agreement, on the Closing Date, American
Capitol will assume and reinsure the Companion Life policies.
All of the Included Treaties which pertain or apply to the
Companion Life policies are identified on Exhibit III.F. to the
American Capitol Assumption Agreement. All such Included
Treaties shall be transferred to American Capitol on the Closing
Date, subject to the reinsurer's acceptance of the transfer, and
may be terminated thereafter at the election of American Capitol.
The Parties hereto shall use commercially reasonable efforts to
ensure that all such Included Treaties shall be amended,
adjusted, assigned or novated on terms and conditions
satisfactory to American Capitol on or before the Closing Date.
4.1.4 Medicare Supplement Issue Age. Pursuant to the Texas
Imperial Assumption Agreement, on the Closing Date, Texas
Imperial will assume and reinsure the Medicare Supplement Issue
Age policies.
4.2 Funding for the Policy Liabilities. In addition to assuming
and reinsuring the Statesman policy liabilities from the
Participating Guaranty Associations, the Assuming Insurer, either
American Capitol or Texas Imperial, will receive assets from the
Participating Guaranty Associations related to the Medicare
Supplement Issue Age, the Hospital Indemnity, the Companion Life
and the Medicare Supplement Attained Age policies as set forth in
the Assumption Agreements.
4.2.1 Formula and Calculations. The calculations to
determine the funding amounts are set forth in detail in the
Assumption Agreements.
4.2.2 Participating Guaranty Association Funding.
4.2.2.1 The Association Liability will be funded by a
combination of cash and/or Association Note from each
Participating Guaranty Association in the amounts specified in
the American Capitol Assumption Agreement and the Texas Imperial
Assumption Agreement. The principal of the Association Note will
accrue interest at the rate of 5.3% percent per annum. A form of
the Association Note is attached as Exhibit 4.2.2. At the
Closing, each Participating Guaranty Association shall transfer
an Association Note and/or cash to fund the Association
Liability. At Closing, the Participating Guaranty Associations
will transfer cash which, in the aggregate, will total a payment
of $2,287,225 to the Assuming Insurers. The cash payments at
Closing by the Participating Guaranty Associations shall be used
first by the Assuming Insurers to pay the claims backlog existing
on the Closing Date. Within ninety (90) days after the Closing
Date, the Participating Guaranty Associations will pay, in the
aggregate and in addition to the $2,287,225, a total of
$4,299,767 to Assuming Insurers which shall reduce their
respective Association Notes by a corresponding amount. As of
the Plan Termination Date, each Association Note will be paid in
full or in part by the applicable Participating Guaranty
Association, subject to any adjustment for the Enhancement, and
in accordance with the terms and provisions of the Association
Note. Each Association Note shall be deemed an admissible asset
on the books of the Assuming Insurer, whether American Capitol or
Texas Imperial. The parties acknowledge that the Association
Notes comply with the respective Guaranty Association enabling
acts and all applicable NAIC guidelines. However, in the event
an Association Note is determined not to be an admissible asset,
the parties will negotiate and enter into an amendment curing
such defect in good faith.
4.2.2.2 The Association Liability specified in the Assumption Agreements
shall constitute the maximum amount of funding provided by the
Participating Guaranty Associations with respect to
the Covered Obligations. In no event shall the liability of the
Participating Guaranty Associations exceed the amount of the
Association Liability as calculated in each Assumption Agreement,
except to the extent contemplated in the Accounting Procedures and
the accounting and audit process set forth in Section VI of each
Assumption Agreement. The Parties agree and by order approving
this Liquidation Plan the Court orders that the provisions of this
Liquidation Plan fully satisfy each Participating Guaranty
Association's liabilities associated with Covered Obligations.
4.2.3 Enhancement from Assuming Insurer.
4.2.3.1 As set forth in the Assumption Agreements, American
Capitol and Texas Imperial will contribute an Enhancement to each
Participating Guaranty Association calculated in the manner set
forth in Exhibit IV.B. of each Assumption Agreement. In
calculating the Enhancement, the Medicare Supplement Attained Age
and the Medicare Supplement Issue Age will be pooled along with
the Medicare Supplement Pre-Standard policies subject to the
Coinsurance Agreement.
4.2.3.2 To the extent a Participating Guaranty Association has
not paid in cash the full amount of the Association Liability as
of the Plan Termination Date, the Enhancement shall operate as a
reduction in the remaining balance of the Association Liability.
To the extent the Participating Guaranty Association has fully
funded in cash the Association Liability, American Capitol and/or
Texas Imperial shall make a cash payment in the amount of the
Enhancement to the Participating Guaranty Association as a
refund.
4.2.3.3 The opportunity for financial gain after
liquidation (except to the extent the Enhancement reduces the
Association Liability), and the exposure for financial loss lie
solely with the Assuming Insurer - either Texas Imperial or
American Capitol, with respect to all Assumed Policies.
4.3 Insolvency of Assuming Insurer
4.3.1 Texas Imperial. In the event of the insolvency of
Texas Imperial prior to the Plan Termination Date, American
Capitol shall guarantee and assume all of Texas Imperial's
policyholder liabilities with respect to the Medicare Supplement
Issue Age policies. In the event of Texas Imperial's insolvency,
any Association Notes issued to Texas Imperial will become void
and the applicable Participating Guaranty Associations shall
deliver equivalent replacement Association Notes (adjusted for
prior payments and interest) to American Capitol upon American
Capitol's assumption of the policies.
4.3.2 American Capitol. In the event of the insolvency of
American Capitol prior to the Plan Termination Date, the
obligations of the Participating Guaranty Associations under any
Association Notes issued to American Capitol are canceled and
void. In the event of such insolvency resulting in the
cancellation of the Association Notes, the Association Notes and
their corresponding policyholder liabilities shall be returned to
the appropriate Participating Guaranty Association and shall be
the sole responsibility of that Participating Guaranty
Association.
4.4 Receiver Cooperation in Assumption of Assumed Policies.
4.4.1 Except as otherwise provided in this Liquidation
Plan, the Receiver transfers, cedes and assigns to the Assuming
Insurers as of the Closing Date the Receiver's rights, privileges
and prerogatives under the Assumed Policies, if any. The
Assuming Insurers shall accept and assume the Assumed Policies
subject to all defenses, set-offs and counterclaims to which the
Receiver would be entitled with respect to such Assumed Policies.
It is expressly understood and agreed by the parties that no such
defenses, set-offs or counterclaims are waived by the execution
of this Liquidation Plan or by the consummation of any related
transactions, and that on the Closing Date, the Assuming Insurers
shall be fully subrogated to all such defenses, set-offs and
counterclaims (all of which defenses, set-offs and counterclaims
may also be asserted by the Receiver with respect to any claims
asserted against the Receiver).
4.4.2 Notwithstanding anything to the contrary in this
Liquidation Plan: (a) the Receiver retains all rights and
interests of Statesman policyholders, in equity or at law based
on violations of common law, tort law, contract law, statutory
law or other law, to which the Participating Guaranty Association
is not subrogated under its enabling statute or otherwise; (b)
the Receiver retains all privileges, prerogatives, defenses, set-
offs and counterclaims to the extent they relate to any other
obligations of the Receiver; and (c) the Assuming Insurer shall
have no claim under the Assumed Policies against the Receiver,
the Statesman Estate or any Participating Guaranty Association
except as set forth in the Assumption Agreements.
4.4.3 The Receiver agrees to execute all documents
or instruments as may be necessary to ensure that Assuming
Insurer receives, possesses and owns all moneys, checks, drafts,
money orders, postal notes and other instruments to which the
Assuming Insurers are entitled under the Assumption Agreements
related to the Assumed Policies after the Closing Date, including
endorsements so that Assuming Insurer's name shall be recognized
and accepted. The Receiver agrees that it will transfer and
deliver to Assuming Insurer any cash or other property that
Receiver may receive with respect to such receivable or other
items.
4.4.4 The Receiver agrees to transfer, assign, deliver and
convey to the Assuming Insurers, subject to the terms set forth
in this Liquidation Plan, all files and records related to the
Assumed Policies in the Receiver's possession or under the
Receiver's control. The Assuming Insurer's agree that after such
delivery, the Receiver shall be entitled, at any reasonable time
and at the Receiver's expense, to inspect, audit and copy any and
all such records and files of the Assuming Insurers and all other
records and files of the Assuming Insurers related to the Assumed
Policies. The Receiver makes no warranty or representation that
the books and records of Statesman which may be transferred are
either accurate or complete. Any and all correspondence,
premiums, records or documents coming into the possession of the
Receiver after the Closing Date directly pertaining to any
Assumed Policy shall be promptly delivered to the Assuming
Insurer by the Receiver, without charge to the Assuming Insurer.
4.5 Assuming Insurer Licensing. American Capitol will
use commercially reasonable efforts to become licensed in all
states where Statesman is licensed and where policyholders of
American Capitol Assumed Policies reside. Texas Imperial will
use commercially reasonable efforts to become licensed in all
states where Statesman was licensed and where Medicare Supplement
Issue Age policyholders reside. The Participating Guaranty
Associations will cooperate in those licensing efforts. In the
event that Texas Imperial is unsuccessful in obtaining such
licensure, Texas Imperial will use commercially reasonable
efforts, with the cooperation of the Participating Guaranty
Associations, to obtain approval from each respective state's
insurance department to assume the Medicare Supplement Issue Age
policies without the requirement of licensure in such state. If
Texas Imperial has not obtained such licensure or permission to
assume such policies, all such Medicare Supplement Issue Age
policies shall be guaranteed or one-hundred percent coinsured
directly by American Capitol.
4.6 Policy Form Approval and the Writing of New Business.
American Capitol will use commercially reasonable efforts to
acquire approval from the TDI and all other applicable
jurisdictions for American Capitol Medicare supplement policy
forms. The Participating Guaranty Associations will cooperate in
this effort. American Capitol and Texas Imperial will cause
Statesman to cease writing new business at the earliest
opportunity prior to the Closing Date; and American Capitol has
advised that Statesman ceased writing new business on May 7,
1999. In no case shall Statesman write new business after the
Closing Date.
4.7 Closing of Liquidation Plan and Assumption Agreements.
4.7.1 The Liquidation Plan and the Assumption Agreements will
close on the Closing Date. At the Closing, each Participating
Guaranty Association shall transfer cash and/or an Association
Note to fund the Association Liability.
4.7.2 Court approval of the Liquidation Plan is a
condition precedent to Closing and, in the absence of a Court
order approving this Liquidation Plan, this Liquidation Plan will
be void and unenforceable. In the event of an appeal of the
order approving this Liquidation Plan or the Permanent Injunction
or other legal challenge to this Liquidation Plan's
enforceability after Closing, the Parties agree to cooperate in
good faith to develop a plan and agreement to "unwind" the
transactions in this Liquidation Plan which would return each
Party (other than Statesman) to the status quo, to the extent
possible, in the event the appeal or other legal challenge were
successful.
4.7.3 As a condition precedent to Closing, all written
representations, recitals and affirmations made by any Party in
the Liquidation Plan shall be true and correct in all material
respects as of the Closing Date as if made at the Closing, except
for changes in the usual and ordinary course of business that,
individually or in the aggregate, do not affect materially the
financial condition, business or prospects of the Party that made
the representation that has changed or would not have a material
adverse effect on such party's ability to perform its obligations
under this Liquidation Plan. No Party may avoid its obligations
under this Agreement by asserting that its own representations
are not true and correct in all material respects as of the
Closing Date.
4.8 Assuming Insurer Third Party Claims. American
Capitol and Texas Imperial will take all steps necessary to
assert claims which in their sole discretion have a good faith
basis with a probable successful outcome (taking into account
costs and uncertainties involved in litigation), triggering
potential insurance coverage, including director and officer
liability coverage and errors and omissions coverage with respect
to those persons and entities who may be responsible for
financial loss incurred by American Capitol or Texas Imperial.
Recovery from any such claims shall be first used to reduce the
principal and interest due under Association Notes or to return
cash to the Participating Guaranty Associations up to the amount
of their Association Liability, at the discretion of each
Participating Guaranty Association.
4.9 Notice of Change of Control. If, prior to the Plan
Termination Date an anticipated change of control in an Assuming
Insurer is applied for or if an assumption reinsurance agreement
or coinsurance agreement or other reinsurance agreement is
entered into by Assuming Insurer with respect to the Assumed
Policies, the Assuming Insurer shall provide notice to all other
Parties of the requested change of control or reinsurance
transaction, including but not limited to copies of any "Form A"
filings. The reinsurance agreements and the change of control
including any reinsurance agreements shall be subject to the
approval of the TDI.
5 LIABILITIES AND INDEMNITIES
5.1 Claims Processing After the Closing Date. From and after
the Closing Date, the Assuming Insurers shall be liable for all
obligations and payments related to Assumed Policies and for
processing and paying all claims that are outstanding and unpaid
and incurred under the Assumed Policies.
5.2 Notice. The Receiver, NOLHGA, each Participating Guaranty
Association and the Assuming Insurers will notify the other
parties hereto promptly of any suit or claim brought against it
with respect to any Assumed Policy; except no notice from
Assuming Insurers shall be required with respect to any suit or
claim that is a routine claims handling dispute in the ordinary
course of business.
5.3 Assuming Insurers Action After the Closing Date. The
Assuming Insurers agree to save, defend, indemnify and hold
NOLHGA and each Participating Guaranty Association completely
free and harmless from any and all suits or claims arising out of
any action or omission of Assuming Insurer, taken with respect to
one or more Assumed Policies on or after the Closing Date,
regardless of whether the action or omission complained of is
attributable to Assuming Insurer alone or jointly with NOLHGA
and/or a Participating Guaranty Association. Where the suit
concerns or involves acts or decisions of the Participating
Guaranty Association, the applicable Participating Guaranty
Association will cooperate with Assuming Insurer in its defense
of such suit, and Assuming Insurer will notify the Participating
Guaranty Association before any settlement thereof. The payment
of all judgments and settlement agreements resulting from such
suit shall be the sole responsibility of Assuming Insurer.
5.4 Form A Recission. The Assuming Insurers release and hold
harmless the Commissioner, Receiver and TDI with respect to the
denial of all petitions and efforts by the Assuming Insurers to
rescind the Form A and related transactions, including but not
limited to the Coinsurance Agreement and any attempt to rescind
or re-characterize in any manner the $800,000 surplus debenture
transaction whereby Texas Imperial invested $800,000 into
Statesman. Furthermore, each Assuming Insurer, on its behalf and
on behalf of its agents, affiliates, subsidiaries, successors,
and assigns, waives any and all actions that now exist or may
arise, and any and all claims against TDI, the Commissioner, the
Receiver and their appointed designees, as a result of the
Commissioner's denial of all requests to rescind the Form A and
related transactions.
5.5 Administration of Assumed Policies. NOLHGA, the
Participating Guaranty Associations and the Assuming Insurers
shall not bear liability for any damages awarded to any claimant
solely because of the acts or decisions of Statesman in
administering any Assumed Policy. NOLHGA and the Participating
Guaranty Associations shall not bear liability for any damages
awarded to any claimant solely because of the acts or decisions
of Assuming Insurers in administering any Assumed Policy. The
Assuming Insurers indemnify and hold harmless NOLHGA and the
Participating Guaranty Associations from any liability associated
with administering any Assumed Policy after the Closing Date.
5.6 Extra-Contractual Damages. Notwithstanding paragraphs 5.1
through 5.5, if any suit seeks consequential damages, tort
damages, punitive damages or attorneys fees or costs (referred to
as "extra-contractual damages") based upon alleged acts or
decisions of NOLHGA, the Participating Guaranty Association,
and/or the Assuming Insurer, then NOLHGA, the Participating
Guaranty Association, and/or the Assuming Insurer may retain its
own counsel and participate in and control the defense or
settlement of its own acts or decisions.
5.7 Covered Obligations. Each Participating Guaranty
Association will undertake at its expense the defense of any
suit, whenever filed, which is based or alleged to be based on
any Covered Obligation of such Participating Guaranty Association
and any decision or act solely of such Participating Guaranty
Association regarding coverage or level of benefits. The
Participating Guaranty Association will make any and all
decisions regarding management of the defense and settlement of
any such suit. The payment of all judgments and settlement
agreements resulting from such suit shall be the sole
responsibility of the Participating Guaranty Association to the
extent they actually relate to decisions or acts of the
Participating Guaranty Association prior to the Closing Date.
5.8 Party Conduct. Each Participating Guaranty Association
agrees to indemnify and hold Assuming Insurer and the Receiver
harmless against any and all loss, liability and expense,
including reasonable attorney's fees and court costs, which
result from negligent, dishonest, malicious, fraudulent or
criminal acts, by the Participating Guaranty Association, its
employees or agents. Assuming Insurer agrees to indemnify and
hold each Participating Guaranty Association and the Receiver
harmless against any and all loss, liability and expense,
including reasonable attorney's fees and court costs, which
results from negligent, dishonest, malicious, fraudulent or
criminal acts, by Assuming Insurer, its employees or agents.
5.9 NOLHGA. No liability in damages, or for indemnity or
contribution to any party to this Liquidation Plan shall arise
under this Liquidation Plan against NOLHGA for its negligent
acts. Each Participating Guaranty Association, on a pro rata
basis allocated based on its share of Covered Obligations, agrees
to indemnify and hold NOLHGA harmless against any and all loss,
liability and expense, including attorney's fees, which arise in
connection with its Covered Obligations for any negligent acts of
NOLHGA.
5.10 Claims Preserved. Consistent with this Liquidation
Plan, the Commissioner, the Receiver, NOLHGA, the Participating
Guaranty Associations, American Capitol and Texas Imperial
preserve any and all claims against Statesman and the Statesman
Estate, including claims as creditors in the Receivership
Proceedings. With respect to the statements of Texas Imperial
and American Capitol personnel as addressed in Section 1.5 of the
Liquidation Plan, NOLHGA and the Participating Guaranty
Associations have made no investigation or due diligence review
of this matter or the accuracy of the statements by
representatives of Texas Imperial and American Capitol to the
TDI, and NOLHGA and the Participating Guaranty Associations make
no representation or acknowledgment related thereto. Section 1.5
of this Liquidation Plan shall not operate as a waiver or
limitation of any rights or claims with respect to NOLHGA, the
Participating Guaranty Associations and the TDI.
6 REPRESENTATIONS
In addition to the representations and warranties
elsewhere in this Agreement, the Parties make the
following representations and warranties:
6.1 Participating Guaranty Association Representations. Each
Participating Guaranty Association represents as follows:
6.1.1 That it has the statutory authority to participate in
this Liquidation Plan and has taken all actions necessary under
its governing law to do so.
6.1.2 Each Participating Guaranty Association
acknowledges and affirms: (1) that it is obligated, pursuant to
TEX. INS. CODE ANN. Art. 21.28 Sec. 7A(a) and its agreements with
the Receiver pursuant hereto to return to the Statesman Estate,
upon request and approval by the Court, such Early Access
Distributions, together with income on assets previously
disbursed, as may be required to pay Class 1 claimants and any
federal claimants asserting priority claims under the Priority
Statute; and (2) that it is obligated to make a full report to
the Receiver, as requested by the Receiver, but no more
frequently than quarterly, accounting for the Early Access
Distributions, all disbursements made therefrom, any interest
earned by the Participating Guaranty Association on such Early
Access Distributions and any other matter as the Court may
direct.
6.2 NOLHGA's Representations. NOLHGA may not bind the Affected
Associations to the provisions of this Liquidation Plan and
executes this Liquidation Plan only in the capacity of
coordinating the joint efforts of the Affected Associations.
Before an Affected Association is bound by this Liquidation Plan,
NOLHGA's Members Participation Council must approve this
Liquidation Plan and each Affected Association must affirmatively
opt in to such Liquidation Plan or pursuant to rules established
in the NOLHGA governing documents, not opt out of this
Liquidation Plan after the passage of appropriate time periods
found within such governing documents. NOLHGA shall submit this
Liquidation Plan to its Members Participation Council for
approval, and assuming such approval, shall initiate the opt-in,
opt-out process for Affected Associations in accordance with its
governing documents.
6.3 Assuming Insurers' Representations. American Capitol and
Texas Imperial, as Assuming Insurers, each represents as follows:
6.3.1 Corporate Existence. Each Assuming Insurer represents
that it is a corporation duly organized as a stock life insurance
company, validly existing and in good standing under the laws of
the State of Texas, with power and authority to conduct the
business in which it is engaged, and has complete and
unrestricted power to enter into and consummate this Liquidation
Plan.
6.3.2 Authority. The signatory for each Assuming
Insurer below is authorized to execute this Liquidation Plan on
behalf of Assuming Insurer and bind Assuming Insurer to the terms
and conditions of this Liquidation Plan.
6.3.3 Solvency. Assuming Insurer represents it is a solvent
company not under any administrative or judicial supervision or
limitation on its operations by any court or insurance
supervisory official in any state. Assuming Insurer further
represents that no material adverse change in its financial
condition has occurred since its 1998 Annual Statement and
reasonably believes no material adverse change as aforesaid is
forthcoming, except to the extent caused by this Liquidation
Plan.
6.3.4 Fees. Assuming Insurer agrees that it has the sole
responsibility to pay any finder or other fees, due or claimed to
be due, to any party engaged by Assuming Insurer which provided
services for or assistance to Assuming Insurer as a part of the
assumption of the Assumed Policies. Assuming Insurer agrees to
hold harmless NOLHGA, the Receiver and any applicable
Participating Guaranty Association from the payment of any finder
or other fees, due or claimed to be due, to any party engaged by
Assuming Insurer because of Assuming Insurer's assumption of the
Assumed Policies.
6.4 Receiver's and Commissioner's Representations and
Duties. The Receiver and the Commissioner will cooperate with
Assuming Insurer and the Participating Guaranty Associations in
providing any ad hoc reporting and any other special reports
required to effectuate the terms of this Liquidation Plan.
Neither the Receiver nor the Commissioner has taken any action
that would impose on any other Party hereto liability for payment
of any broker, finder or similar fee in connection with the
origin, negotiation, execution or performance of this Liquidation
Plan.
7 RESERVES
7.1 American Capitol and Texas Imperial shall each maintain
minimum capital and surplus and unearned premium, health and
other reserves consistent with the laws of all jurisdictions
having regulatory authority over said companies with respect to
the Assumed Policies.
8 JURISDICTION AND ACCOUNTING PROCEDURE
8.1 This Liquidation Plan shall be governed and construed in
accordance with the laws of the State of Texas, without giving
effect to the principles of conflicts of law thereunder; except
that the Covered Obligations of each Participating Guaranty
Association shall be determined in accordance with the laws of
the state in which the Participating Guaranty Association was
created and, in particular, with regard to the enabling act
creating such Participating Guaranty Association and any such
issues shall be raised only in the state courts where such
Participating Guaranty Association is located. Each
Participating Guaranty Association reserves the right to
challenge the venue and forum of the Court to the extent that an
issue related to the interpretation of the Participating Guaranty
Association's enabling act is the subject of the proceeding.
8.2 Except for disputes addressed by the Accounting
Procedure set forth in Section 8.3 and to the extent otherwise
set forth in Section 8.1, the Parties hereby consent to the
exclusive jurisdiction of the Court to resolve any and all
disputes as amongst the parties which arise out of or relate,
directly or indirectly, to the Liquidation Plan, the Assumption
Agreements or the transactions contemplated hereby. The parties
further agree that service of process shall be effective if sent
by certified or registered mail, return receipt requested, to the
addresses as shown in Article 9 of this Liquidation Plan.
8.3 Any dispute between or among the Parties related to
calculations contemplated by this Liquidation Plan and any
related exhibits, including but not limited to the final
accounting and audits contemplated in Article VI of each
Assumption Agreement, shall be resolved by means of this
Accounting Procedure:
8.3.1 The Parties involved in the dispute shall each retain
one nationally recognized actuarial consulting firm or nationally
recognized independent certified public accounting firm, as
appropriate, which will perform the required calculations in the
manner required by the Liquidation Plan as expeditiously as
possible and issue their respective reports to the parties. If
the variation between the reports of the firms is less than five
percent (5%) of the smallest amount, the results of the
calculations shall be averaged, with the result deemed to be a
final and determinative calculation of the amount at issue. If
the reports differ by five percent (5%) or more of the smallest
amount, the firms shall choose another firm which shall perform
the calculations and issue a report to the parties. Thereafter,
the two (2) calculations that are the closest shall be averaged,
with the result deemed to be a final and determinative
calculation of the amount at issue. Each Party shall be
responsible for the payment of the fees and expenses of the
actuaries and accountants retained by them to conduct the
Accounting Procedure. The fees and expenses of the additional
firm, if any, shall be shared equally by the parties.
9 NOTICE
9.1 Any notice required or permitted to be given hereunder shall
be deemed to be given if delivered by hand or if mailed by first
class or certified mail, postage prepaid, or by postal or a
commercial express document delivery service which issues an
individual delivery receipt, to the following address:
9.1.1 If to American Capitol to:
President
American Capitol Insurance Company
10555 Richmond Ave.
Houston, Texas 77043
Fax: (713) 953-7920
9.1.2 If to Texas Imperial to:
President
Texas Imperial Life Insurance Company
10555 Richmond Ave.
Houston, Texas 77043
Fax: (713) 953-7920
9.1.3 If to Statesman to:
Receiver
c/o James Kennedy
Mail Code 110-1A
Texas Department of Insurance
333 Guadalupe Street, P.O. Box 149104
Austin, TX 78714-9101
Fax: (512) 475-1843
9.1.4 If to the Commissioner, the Receiver and/or the TDI to:
Jose Montemayor
Commissioner of Insurance
Texas Department of Insurance
333 Guadalupe Street, P.O. Box 149104
Austin, TX 78714-9101
Fax: (512) 475-1843
9.1.5 If to NOLHGA, to:
NOLHGA
Attention: President
13873 Park Center Road, Suite 329
Herndon, VA 20171- 3223
FAX: (703) 481-5209
with a copy to:
Franklin D. O'Loughlin, Esq.
Rothgerber Johnson & Lyons LLP
1200 17th Street, Suite 3000
Denver, CO 80202
FAX: (303) 623-9222
9.2 If to a Participating Guaranty Association, to the person
and address on Exhibit 3.4.
9.3 Each Party shall be responsible for notifying, in writing,
the others promptly of any change in addressee or address.
10 GENERAL PROVISIONS
10.1 Claims Operations. American Capitol and Texas Imperial
shall administer the Assumed Policies in accordance with
the performance measures as set forth in Exhibit 10.1.
The policy administration of American Capitol and Texas
Imperial are subject to financial penalties in the event
of non-compliance as set forth in Exhibit 10.1.
American Capitol and Texas Imperial agree to become
compliant with Texas law concerning claims processing
and payment with respect to the current backlog of
Statesman claims within one hundred twenty (120) days
after the Closing Date.
10.2 Assuming Insurer Shareholder Distributions. Until the Plan
Termination Date, American Capitol and Texas Imperial may not pay
shareholder dividends, may not make payments on surplus
debentures, and must not enter into management contracts, raise
salaries, bonuses or other compensation of directors, officers,
management and employees outside the ordinary course of business
with the exception of payments on American Capitol's surplus
debenture in the amount of $62,500 plus interest per quarter for
payment on the bank loan used to finance the purchase of the
American Capitol surplus debenture and dividends to fund
preferred stock dividends by Acap Corporation (the holding
company of American Capitol) based on historical payments of
approximately $50,000 per quarter and to fund Acap Corporation's
business expenses incurred in the ordinary course of business in
the amount of approximately $12,500 per quarter.
10.3 Software Transfer to American Capitol. The Parties agree to
and ratify the assignment and transfer of the LifePro licensure,
the Macola license, and the "COPS" claims system heretofore made
by Statesman to American Capitol, and acknowledge that such
transfer was made for valuable consideration, the same being an
integral part of the other transactions and agreements contained
herein. American Capitol agrees to provide free and unrestricted
access to and use of the above mentioned software systems to
NOLHGA, the Participating Guaranty Associations and the Receiver
and his appointed designees to the extent needed to carry out
their respective duties and obligations during the pendency of
the Receivership proceedings.
10.4 Use of Statesman Facilities Post-Closing. The Parties
acknowledge that American Capitol will need to take over
essentially all of the policy administration operations of
Statesman immediately following Closing, that American Capitol
will need approximately two months following Closing to prepare
to re-locate Statesman's employees and related policy
administration operations to American Capitol's offices, and
that, accordingly, American Capitol will be permitted to carry on
said operations at Statesman's offices during such time subject
to the terms of the Permanent Injunction. Statesman, American
Capitol, and the Receiver will cooperate during such transition
period, and American Capitol will pay its share of any direct
costs incurred as a result of having a continuing presence at
Statesman's offices.
10.5 Continuation Statesman Bank Accounts. The Parties agree
that to facilitate the implementation of this Liquidation Plan
and the American Capitol and Texas Imperial Assumption
Agreements, the Receiver shall designate certain Statesman bank
accounts to remain open from the date of the Permanent Injunction
until the Closing and funding pursuant to paragraph 4.2.2.1 of
this Liquidation Plan ("Interim Period"). Such designation shall
be for the purpose of allowing all outstanding Statesman checks
written from such designated accounts to clear and for the
payment of policyholder claims and operating and administrative
expenses of the Statesman Estate. During the Interim Period, and
at the discretion of the Receiver, the designated accounts may be
funded by Statesman monies and Statesman statutory deposits. Any
and all bank disbursements for the payment of policyholder claims
made during the interim period shall be considered an early
access distribution to the respective Participating Guaranty
Associations pursuant to TEX. INS. CODE ANN. art. 21.28 Sec.7A. At
the expiration of the Interim Period, the Receiver shall also
designate particular Statesman bank accounts to be transferred to
American Capitol and to Texas Imperial for the purpose of
continuing the processing of the business being assumed pursuant
to the American Capitol and Texas Imperial Assumption Agreements.
Upon such transfer, the Receiver shall withdraw all funds
belonging to the Statesman Estate and any statutory deposit funds
from the bank accounts to be transferred to American Capitol and
Texas Imperial. Thereafter pursuant to the terms of this
Liquidation Plan, American Capitol and Texas Imperial will be
solely responsible for the funding and processing of the business
assumed under their respective assumption agreements. After
Closing, American Capitol will reimburse the Receiver for all
claims paid in the Interim Period, subject to any accounting for
the premiums and costs associated with premiums after June 1,
1999.
10.6 Settlement of Intercompany Transactions. The Parties
acknowledge that all intercompany debts, obligations and other
transactions among American Capitol, Texas Imperial and Statesman
have been paid and fully settled as of the Permanent Injunction
and consent to such payment and settlement in the manner set
forth in Exhibit 10.6. The Parties further acknowledge that
Statesman shall pay American Capitol an amount equal to all
Statesman employee wages (including all related taxes, employee
insurance benefits, and 401K contributions, matching fees, and
salary deductions) that have accrued from June 1, 1999, to the
date of the Permanent Injunction. American Capitol hereby agrees
to pay such amount to the Statesman employees to satisfy and
discharge Statesman's obligations to its employees for the same.
10.7 No Third Party Beneficiaries. Nothing in this Liquidation
Plan is intended or shall be construed to give any person, other
than the Parties, any legal or equitable right, remedy or claim
under or in respect of this Liquidation Plan or any provision
contained herein.
10.8 Entire Agreement. This Liquidation Plan (including the
Assumption Agreements and all other exhibits) constitutes the
entire agreement and merges and supersedes all prior agreements,
term sheets, understandings, and negotiations, both written and
oral, among the Parties with respect to the subject matter of
this Liquidation Plan.
10.9 Amendment. This Liquidation Plan may be amended or modified
only by a writing executed by all the Parties in any way affected
by the amendment or modification, and to the extent required by
NOLHGA's Articles of Association and By-Laws, by the
Participating Guaranty Association(s). It is agreed that,
notwithstanding the submission of this Liquidation Plan for
approval by the Court, the Parties may, subject to mutual
agreement, amend this Liquidation Plan without further approval
by the Court if such amendments do not result in a material
adverse economic change to Statesman policyholders.
10.10 Counterparts. This Liquidation Plan may be executed in
separate counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
10.11 Exhibits. All exhibits are hereby incorporated by reference
into this Liquidation Plan as if they were set forth at length in
the text of this Liquidation Plan.
10.12 Recitals. The Recitals to this Liquidation Plan are hereby
incorporated by reference into this Liquidation Plan as if they
were set forth at length in the text of this Agreement.
10.13 Cooperation. The Parties agree that they will from
time to time, upon the request of any other Party and without
further consideration, execute, acknowledge, and deliver in
proper form any further instruments and take such other action as
another Party may reasonably require in order to carry out
effectively the purposes of this Liquidation Plan.
10.14 Statutory Obligations. Except as expressly stated herein,
nothing in this Liquidation Plan shall be deemed to limit,
expand, enlarge, or otherwise modify any Participating Guaranty
Association's statutory obligations, or to expand or enlarge any
person's interest in or to the assets of Statesman, or to waive
any defenses which any Participating Guaranty Association may now
or in the future have. Nothing in this Agreement shall be deemed
to limit, expand, enlarge or otherwise modify the Receiver's
statutory obligations pursuant to the Texas Insurance Code
Annotated or to waive any defenses which the Receiver or
Commissioner may have now or in the future.
10.15 Severability. If any term or provision of this Liquidation
Plan or the application thereof to any person or circumstance
shall, to any extent, be declared invalid or unenforceable by the
Court or other court of competent jurisdiction, the remainder of
this Agreement or the application of such terms or provisions to
persons or circumstances other than those as to which it is held
invalid or unenforceable, shall remain in full force and effect
to the extent that their continuance is practicable and
consistent with the original intent of the Parties.
10.16 Express Terms. This Liquidation Plan shall be construed in
accordance with its express and not its implied terms. Captions,
paragraph and section headings appearing in this Liquidation Plan
shall be used only for convenience in identifying the material
terms and provisions of the Liquidation Plan and shall not be
construed to express any other intent.
10.17 Continued Support. The Receiver shall assist the
Assuming Insurer in the orderly transfer of the business
associated with the Assumption Agreements until the Plan
Termination Date.
10.18 Confidentiality. All non-public books, records, data and
information (collectively, the "Non-Public Information")
furnished by one party to another in connection with the
transactions contemplated by this Liquidation Plan shall remain
and be deemed to be the exclusive property of the party
furnishing the Non-Public Information unless and until the
Closing occurs on the Closing Date and shall be held in the
strictest of confidence by the other Parties to the extent such
information is not publicly available (other than Non-Public
Information which has been published or made publicly available
by unauthorized disclosure of a party) and shall not be used by
such other Parties for any purpose other than consideration of
the transactions contemplated by this Liquidation Plan and for
obtaining governmental consents and approvals for such
transactions. In the event that the transactions contemplated by
this Liquidation Plan are not consummated, each party shall
return all Non-Public Information in its possession which is
deemed to be the exclusive property of any other party, together
with all copies thereof, and shall continue to hold such Non-
Public Information in strict confidence and not use such Non-
Public Information for any purpose whatsoever except as required
by law.
10.19 Assignability. No party to this Liquidation Plan may
assign, transfer, cede or convey in any manner any rights,
duties, liabilities or obligations related to this Agreement
without prior written approval of all other Parties to this
Liquidation Plan.
10.20 Compromise Agreement. This Liquidation Plan and all
negotiations, proceedings and statements made in connection with
the negotiations of this Liquidation Plan and/or in support of
its approval reflect a compromise of differing views on various
matters. It shall be without prejudice to any person or party
hereto, shall not be deemed as or construed to be an admission by
any party hereto of any act, matter, proposition or merit or lack
of merit or any claim or defense, shall not be offered in
evidence in any action or proceedings, except in connection with
the enforcement of this Liquidation Plan, and shall not
constitute a precedent for any purpose whatsoever or be any
precedential value as to any person or party hereto.
10.21 No Construction Against Any Party. This Liquidation Plan
has been structured, approved and jointly drafted by all of the
Parties hereto and, for purposes of interpreting its terms, shall
not be construed against any party as the principal draftsman
hereof.
IN WITNESS WHEREOF, this Liquidation Plan has been executed and
agreed to on the day and year subscribed.
JOSE MONTEMAYOR, Commissioner of Insurance
Texas Department of Insurance in his capacity as
Commissioner and as Receiver of Statesman National
Life Insurance Company
By: \s\ Gene C. Jamon
-----------------------------------
Name: Gene C. Jarmon
Title:Temporary Acting Commissioner of Insurance for Jose
Montemayor, Commissioner of Insurance, Commissioner's
Order No. 99-0812
AMERICAN CAPITOL INSURANCE COMPANY
By: \s\ William F. Guest
------------------------------------------
Name: William F. Guest
Title:Chairman
TEXAS IMPERIAL LIFE INSURANCE COMPANY
By: \s\ William F. Guest
------------------------------------------
Name: William F. Guest
Title:Chairman
STATESMAN NATIONAL LIFE INSURANCE COMPANY
By: \s\ William F. Guest
------------------------------------------
Name: William F. Guest
Title:Chairman
NATIONAL ORGANIZATION OF LIFE AND HEALTH INSURANCE GUARANTY
ASSOCIATIONS
By: \s\ Peter G. Gallanis
------------------------------------------
Name: Peter G. Gallanis
Title:President
STATESMAN LIQUIDATION PLAN & ASSUMPTION AGREEMENTS
EXHIBIT 2.1 - DEFINITIONS
The following defined terms are used in the Liquidation Plan,
the American Capitol Assumption Agreement and the Texas Imperial
Assumption Agreement and other exhibits to the Liquidation Plan.
2 DEFINITIONS
2.1 "Affected Association" means each life and health insurance
guaranty association which, in accordance with its respective state
governing laws, and as a result of the Receivership Proceedings,
insolvency and liquidation of Statesman, have obligations to
policyholders of Statesman.
2.2 "American Capitol" means American Capitol Insurance Company, a
Texas-domiciled life insurance company that is the sole stockholder
of Texas Imperial.
2.3 "American Capitol Assumed Policies" means the Medicare
Supplement Attained Age policies, the Hospital Indemnity policies
and the Companion Life policies.
2.4 "American Capitol Assumption Agreement" means the assumption
agreement entered into as part of this Liquidation Plan in which
American Capitol assumes and reinsures the American Capitol Assumed
Policies covered by Participating Guaranty Associations and
attached to the Liquidation Plan as an exhibit.
2.5 "Accounting Procedures" means the procedures for resolving any
dispute between or among the Parties related to calculations
contemplated by the Liquidation Plan and Assumption Agreements,
including but not limited to the accounting and audit process
contemplated in Article VI of each Assumption Agreement which
procedures are set forth in Article 8 of the Liquidation Plan.
2.6 "Association Liability" means the amount which each
Participating Guaranty Association owes to the Assuming Insurer
(whether Texas Imperial or American Capitol) for assuming the
applicable Covered Obligations as set forth in the Assumption
Agreements.
2.7 "Assumption Agreements" means the American Capitol
Assumption Agreement and the Texas Imperial Assumption Agreement.
2.8 "Association Notes" means the promissory notes, if any,
issued by any Participating Guaranty Association in compliance
with its respective enabling statute and National Association of
Insurance Commissioners guidelines, as a means for funding some
or all of its Association Liability as set forth in the
Assumption Agreements.
2.9 "Assumed Policies" means the Medicare Supplement Attained
Age policies, the Hospital Indemnity policies, the Companion Life
policies and the Medicare Supplement Issue Age policies.
2.10 "Assuming Insurer" means American Capitol and/or Texas
Imperial and includes their agents, successors and assigns.
2.11 "Class 1" and "Class 2" claims mean those level of claims in
the Priority Statute.
2.12 "Closing" means the consummation of the transactions
provided for in the Liquidation Plan to occur on the Closing Date
and does not include the consummation or completion of the
Enhancement or the accounting and audit process in Section VI. of
each Assumption Agreement.
2.13 "Closing Date" means the date on which the Closing
occurs and shall take place no later than the date the
Liquidation Plan is approved or twenty (20) days after the date
the Permanent Injunction is entered. For accounting purposes,
the Closing Date shall be deemed to be June 1, 1999.
2.14 "Coinsurance Agreement" means the coinsurance agreement made
and entered into by Statesman and American Capitol on November
17, 1998.
2.15 "Commissioner" means Jose Montemayor, Commissioner of
Insurance, Texas Department of Insurance ("TDI") in his capacity
as Commissioner and his successor.
2.16 "Companion Life" means the life policies consisting of
approximately 1,300 policies in force as of March 31, 1999 which
appear to have been sold as companions to the Medicare Supplement
Attained Age policies issued by Statesman which are also Covered
Obligations and are the subject of the American Capitol
Assumption Agreement and the Companion Life policies include all
claims outstanding and unpaid regardless of the date incurred.
2.17 "Court" means the court in the District Court of Travis
County, Texas, 250th Judicial District, with jurisdiction over
the Receivership Proceedings that enters the Permanent Injunction
and includes any Special Master to which referrals are made.
2.18 "Covered Obligation" means the obligation of a Participating
Guaranty Association to Statesman policyholders or beneficiaries
which, pursuant to each Participating Guaranty Association's
enabling act, and as a result of the insolvency and liquidation
of Statesman, have arisen or will arise on or after entry of the
Permanent Injunction.
2.19 "Early Access Distribution" means a disbursal of assets out
of Statesman's marshaled assets made by the Receiver to the
Participating Guaranty Associations pursuant to TEX. INS. CODE
ANN. art. 21.28, ' 7A(a) after reserving amounts sufficient to
allow the payment of Class 1 claims and to the extent the assets
of Statesman will allow any payment to be made on Class 2 claims,
reserving amounts sufficient to provide equal pro rata
distributions to the Class 2 claimants other than the
Participating Guaranty Associations.
2.20 "Enhancement" means the amount contributed by American
Capitol and Texas Imperial on the Plan Termination Date as set
forth in the Assumption Agreements.
2.21 "Hospital Indemnity" means the hospital indemnity policies
consisting of approximately 962 hospital confinement coverage
policies issued by Statesman which are also Covered Obligations
and are subject to the American Capitol Assumption Agreement and
the Hospital Indemnity policies include all claims outstanding
and unpaid regardless of the date incurred.
2.22 "Included Treaties" mean the reinsurance treaties to which
Statesman is a party related to the American Capitol Assumed
Policies and/or the Medicare Supplement Issue Age policies.
2.23 "Liquidation Plan" means this agreement and any amendments
hereto, including the Assumption Agreements and all other
exhibits.
2.24 "Major Medical" means the major medical policies consisting
of approximately 100 in-hospital and comprehensive coverage
policies outside of Louisiana and 33 such policies in Louisiana
issued by Statesman which are also Covered Obligations.
2.25 "Medicare Supplement Attained Age" means the attained age
Medicare supplement policies issued by Statesman which are also
Covered Obligations and are the subject of the American Capitol
Assumption Agreement and the Attained Age policies include all
claims outstanding and unpaid regardless of the date incurred.
2.26 "Medicare Supplement Issue Age" means the issue age Medicare
supplement policies issued by Statesman which are also Covered
Obligations and are the subject of the Texas Imperial Assumption
Agreement and the Medicare Supplement Issue Age policies include
all claims outstanding and unpaid regardless of the date
incurred.
2.27 "Medicare Supplement Pre-Standard" or "Pre-Standard Medicare
Supplement" means the pre-standard Medicare supplement policies
issued by Statesman which are the subject of the Coinsurance
Agreement and the Medicare Supplement Pre-Standard policies
include all claims outstanding and unpaid regardless of the date
incurred.
2.28 "Participating Guaranty Association" means each Affected
Association that agrees to participate in this Liquidation Plan.
2.29 "Parties" mean the parties whose representatives have
executed this Liquidation Plan and are limited to Statesman, the
Commissioner, the Receiver, the TDI, NOLHGA, Participating
Guaranty Associations, Texas Imperial and American Capitol.
2.30 "Permanent Injunction" means the Permanent Injunction and
Order Appointing Permanent Receiver in the Receivership
Proceedings.
2.31 "Plan Termination Date" means the date on which the
Liquidation Plan terminates and is the first business day after
December 1, 2002.
2.32 "Pre-Standard Assumption Agreement" means the agreement
whereby American Capitol assumed the Medicare Supplement Pre-
Standard policies without Participating Guaranty Association
funding.
2.33 "Priority Statute" means article 21.28, Section 8 of
the TEX. INS. CODE ANN.
2.34 "Receiver" means the Commissioner or his designee serving in
the capacity of Receiver of Statesman pursuant to TEX. INS. CODE
ANN. 21.28 '2(a).
2.35 "Receivership Proceedings" means the proceedings initiated
by the Commissioner pursuant to TEX. INS. CODE ANN. art. 21.28
against Statesman currently pending in the District Court of
Travis County, Texas, 250th Judicial District, styled Permanent
Injunction and Order Appointing Permanent Receiver, Action No. 99-
02772.
2.36 "Reserve Adjustment" means the amount necessary to provide
continuing coverage for the Covered Obligations in the amounts
set forth in Exhibit IV.A and includes a reduction of $50,000 for
the Companion Life policies and a reduction of $187,500 for the
Hospital Indemnity policies.
2.37 "Reserves" means the reserves required to be maintained
consistent with the laws of all jurisdictions having regulatory
authority over American Capitol and/or Texas Imperial solely as
related to the Covered Obligations as reflected in the financial
statements of Statesman as of January 1, 1999.
2.38 "Settlement Agreement" means the settlement of intercompany
accounts between American Capitol and Statesman representing a
settlement of various matters and attached as Exhibit 10.6 to the
Liquidation Plan.
2.39 "Southern Financial" means Southern Financial Life Insurance
Company located in Lafayette, Louisiana, which is a party to the
Southern Financial Reinsurance Agreement.
2.40 "Southern Financial Reinsurance Agreement" means the
reinsurance agreement between Statesman and Southern Financial
with an effective date of 11:59 P.M. central daylight savings
time, September 30, 1998.
2.41 "Statesman" means Statesman National Life Insurance Company,
which is the subject of the Permanent Injunction and these
Receivership Proceedings.
2.42 "Statesman Estate" means the estate of Statesman established
in accordance with the Receivership Proceedings.
2.43 "TDI" means the Texas Department of Insurance.
2.44 "Texas Imperial" means Texas Imperial Life Insurance
Company, a Texas domiciled life insurance company, which is the
sole shareholder of Statesman.
2.45 "Texas Imperial Assumption Agreement" means the assumption
agreement entered into as part of this Liquidation Plan in which
Texas Imperial assumes and reinsures the Medicare Supplement
Issue Age policies covered by Participating Guaranty Associations
and attached to the Liquidation Plan as an exhibit.
Liquidation Plan
Exhibit 3.3-A
Coinsurance Agreement
The Coinsurance Agreement is attached hereto and incorporated
herein by reference.
<PAGE>
COINSURANCE AGREEMENT
This Coinsurance Agreement ("Agreement") is made and entered
into by The Statesman National Life Insurance Company ("Statesman" or
the "Company") and American Capitol Insurance Company ("American
Capitol" or the "Reinsurer"), on this 17th day of November, 1998.
Recitals
A. Statesman is a Texas domiciled stock life insurance company.
B. As of the Effective Date of this Agreement, Statesman has in
effect "Policies" as hereinafter defined.
C. American Capitol is a Texas domiciled stock life insurance
company.
D. In accordance with the terms and conditions as set forth in this
Agreement, Statesman desires that American Capitol reinsure the
future liabilities arising under the Policies and American
Capitol desires to reinsure such future liabilities arising
under the Policies as more specifically set forth in this
Agreement, and that Statesman (or, at American Capitol's option,
American Capitol) perform the administrative services in respect
to the Policies as herein provided.
Terms and Conditions
In consideration of the mutual benefits to be received by the
parties hereto and the mutual covenants, agreements, representations
and warranties contained herein, the parties agree that the recitals
set forth above and elsewhere in this Agreement are correct in all
material respects, and further agree to the following terms and
conditions:
Article I
Definitions
Section 1.1. The following terms used in this Agreement with
initial capitalization shall have the meanings set forth below unless
the rules of grammar or form would require otherwise:
(a) "Actuarial Appraisal" means the actuarial appraisal prepared by
Gary Monnin of the Polices in force in the Company as of April
30, 1998, prepared as of May 19, 1998.
(b) "Arbitration Agreement" means that certain Arbitration Agreement
contemplated by the Stock Purchase Agreement.
(c) "Assumption Reinsurance Event" means the mailing of assumption
certificates following the election by the Reinsurer to convert
the Policies to Assumption Reinsurance.
(d) "Closing" has the meaning set forth in Section 13.1.
(e) "Ceding Fee" has the meaning set forth in Section 4.2.
(f) "Closing Date" has the meaning set forth in Section 13.1.
(g) "Closing Net Transfer Amount" has the meaning set forth in
Section 4.1.
(h) "Commission Allowance" has the meaning set forth in Section 3.3.
(i) "Defense" or "Defenses" means any (i) known or unknown, actual
or contingent, rights, defenses, offsets, counterclaims, and
cross-actions, and (ii) any and all rights, limitations, terms,
conditions, and provisions provided for in this Agreement
relative to the Policies.
(j) "Documents and Records" means all of the files, books and
records, in paper and/or electronic data format, required for,
and customarily used by, the Company in maintaining, recording
and reporting the information and transactions pertaining to the
Policies such that the Policies can be reasonably and accurately
administered and serviced.
(k) "Effective Date" means the effective date of this Agreement,
that is, October 31, 1998.
(l) "Intercompany Service Agreement" means that certain document
related to and contemplated by the Stock Purchase Agreement
which the Company and the Reinsurer are to execute and deliver
in the event the stock purchase contemplated by the Stock
Purchase Agreement closes.
(m) "Policies" or "Policy" shall have the following meanings.
"Policies" shall mean all of the Company's "pre-standard"
Medicare Supplement insurance policies in force as of October
31, 1998, which shall be set forth in the list of such policies
provided to the Reinsurer pursuant to Section 13.2 (a) below,
and which individually shall be referred to as "Policy."
(n) "Policy Assets" has the meaning set forth in Section 10.5.
(0) "Policy Obligations" means benefits under and by virtue of the
terms of the Policies that arise and become payable on account
of a claim or other event covered by the terms of the Policies
occurring after the Effective Date, and as further defined in
Article II.
(p) "Right of Recapture" and related definitions have the respective
meanings set forth in Section 4.4.
(q) "Stock Purchase Agreement" means that certain agreement between
the owners of the stock of the Company and the Reinsurer's
wholly owned subsidiary, Texas Imperial Life Insurance Company,
in respect to which a "Form A" application for approval of the
stock purchase transaction is currently pending before the TDI.
(r) "Reserves" and "Claims Reserves" have the meaning set forth in
Section 10.5.
(s) "TDI" means the Texas Department of Insurance.
Article II
Reinsurance of Policy Obligations
Section 2.1. Ceding. Subject to the terms and conditions of
this Agreement, the Company hereby cedes to the Reinsurer and the
Reinsurer hereby reinsures one hundred percent (100%) of the Policy
Obligations. Except for the Policy Obligations, the Company shall
continue to have all liabilities, including any liabilities relating
to any agreements or commitments issued in connection with the
Policies which are not recognized or reserved for on the books of the
Company, or arising out of the marketing, servicing or other
relationships between the Company and any person, agent or entity,
the Company shall indemnify the Reinsurer and hold the Reinsurer
harmless from all liabilities and costs incurred by the Reinsurer in
respect to claims, disputes, or litigation involving any such
liabilities not specifically reinsured by the Reinsurer hereunder, as
more fully set forth in Article XIV below.
Section 2.2. Standard of Performance; Liability. As set forth
below, the Company shall continue to provide administrative services
relating to the Policies. The Company, and not the Reinsurer, shall
be liable for any claims or Policy benefits that arise or become
payable by virtue of any claim or other event occurring on or before
the Effective Date. The Company, and not the Reinsurer, shall be
liable for any actions, inactions, errors, or omissions made by the
Company and/or any of its respective employees, agents, and
representatives in the solicitation, sale, servicing, renewal, or
processing of any claim under the Policies or in communications with
insureds, beneficiaries, or any other third party with respect to the
Policies or on account of any event or fact occurring on, before, or
after the Effective Date. The Company shall handle and pay the
claims in its ordinary course of business that were incurred on or
before the Effective Date but reported to the Reinsurer or the
Company after the Effective Date, such payments to be made out of and
to the extent of the Claim Reserves transferred to the Reinsurer
pursuant to Section 10.5 below.
Section 2.3. Duration of Risk. Except as otherwise provided
herein, this Agreement shall be unlimited in duration.
Section 2.4. Reinsurer's Liability. The Reinsurer's liability
in respect to the Policy Obligations will begin simultaneously with
the Company's liability, but not prior to the day after the Effective
Date of this Agreement. The Reinsurer's liability in respect to the
Policy Obligations will terminate simultaneously with the Company's
liability, except as otherwise provided herein.
Article III
ADMINISTRATION
Section 3.1. Administration. The Company shall perform the
policy administration and data processing services in respect to the
Policies as follows:
(a) The Company shall maintain at its principal administrative
office for the duration of this Agreement adequate books and
records of all transactions between the Company, the Reinsurer,
and the insureds, and other parties to whom the Company's
business relates and the regulatory agencies to whom the Company
reports.
(b) The Company shall use due care and diligence in performing the
work and services to be performed hereunder and agrees that it
will correct any errors which are caused by the Company, its
authorized agents, employees, programs, or data processing
equipment, and it shall be liable to the Reinsurer for any
damages or expenses incurred by the Reinsurer as a consequence
of such errors. The administrative services shall be performed
in keeping with the standards and practices that are customary
in the industry in respect to the administration of insurance
policies like or similar to the Policies, and in compliance with
applicable laws and regulations, and in compliance with the
Company's responsibilities set forth in this Agreement.
(c) From and after the Effective Date, the Reinsurer, on behalf of
the Company, shall, or shall cause its duly appointed actuary or
representative to, file with and obtain approval from all
applicable regulatory authorities for rate increases with
respect to the Policies reinsured under this Agreement in
amounts determined solely by the Reinsurer up to amounts
permitted by applicable law based upon all relevant factors,
including without limitation, the loss experience for the
Policies. The Company irrevocably appoints the Reinsurer as its
agent to prepare, execute on its behalf, file and prosecute such
application, and agrees to cause its officers to sign any
documents required or appropriate to be signed by such officers
in connection therewith. The Company agrees to deliver to the
Reinsurer within thirty (30) days after the end of each calendar
quarter a written report showing the loss experience on the
Policies reinsured under this Agreement for the preceding
quarter, and to promptly provide to the Reinsurer any other
information reasonably requested by the Reinsurer relating to
the Policies reinsured under this Agreement. It is acknowledged
and agreed that the making of timely rate increase filings under
this Agreement is a material inducement to the Reinsurer
agreeing to enter into this Agreement and that absent the
commitment by the Company to provide the aforesaid information
to the Reinsurer on a timely basis, the Reinsurer would not have
entered into this Agreement. The Company hereby agrees to
indemnify and hold harmless the Reinsurer from and against any
and all costs, damages, expenses and liabilities suffered or
incurred by the Reinsurer resulting from the Company's material
breach of this Article III.
(d) The Reinsurer, its employees or authorized representatives may
audit, inspect and examine, during regular business hours, at
the home office of the Company, provided that three working days
advance written notice has been given, any and all books,
records, statements, correspondence, reports, or other documents
that relate to the Policies. The Company agrees to provide a
reasonable work space for such audit, inspection or examination
and to cooperate fully and to faithfully disclose the existence
of and produce any and all materials reasonably requested by
such auditors, investigators, or examiners. The expense of such
audit shall be borne solely by the Reinsurer, and the Company
shall be entitled to reimbursement for expenses reasonably
incurred by such audit. The Reinsurer agrees to conduct such
audit in a courteous, prompt, professional and reasonable
manner, and to provide prompt written disclosure to the Company
of any discrepancy or variance (when compared to any previously
reported information) discovered by the Reinsurer.
(e) The Company shall perform the subject services for the fee of 2%
of monthly earned premiums plus 7% of monthly claims paid, which
shall be paid monthly to the Company as part of the Monthly Cash
Settlement.
(f) The Company's obligation to provide administrative services
relating to the Policies may not be terminated by either party
so long as the Policies are subject to this Agreement, except in
the event of the closing of the stock purchase as contemplated
by the Stock Purchase Agreement as stated below, and except for
the Reinsurer's right to take over the administration of the
Policies as herein provided.
(g) The parties recognize that if the stock purchase contemplated by
the Stock Purchase Agreement closes, the administration of the
Policies shall be taken over and assumed by the Reinsurer and
performed as provided in that certain "Intercompany Services
Agreement" entered into by the parties in conjunction with the
Stock Purchase Agreement. Therefore, the Company's obligation
to provide administrative services relating to the Policies will
be superseded by the Intercompany Services Agreement in such
event, but otherwise the Company's administration of the
Policies shall continue in effect as herein provided.
(h) In the event the aforesaid stock purchase does not close, the
Reinsurer shall have the right, in its sole discretion, to take
over and assume the administrative services in respect to the
Policies. In such event, the Company agrees that it will
assign, convey, transfer and deliver to the Reinsurer on the
date designated by the Reinsurer all of the "Documents and
Records" relating to the Policies. In such event, the
administration of the Policies shall be governed by the
applicable provisions of the Intercompany Services Agreement.
Such right shall not be exercisable during the Recapture Period.
To exercise such right, the Reinsurer shall give written notice
to the Company not less than thirty days in advance of the
effective date of the transfer of administration, and shall
designate in such notice the effective date of such transfer,
which shall be the end of a calendar month.
Section 3.2. Premiums. The Reinsurer shall be entitled to all
premiums collected on the Policies after the Effective Date,
including any premiums paid in advance to the Company, which shall be
delivered by the Company to the Reinsurer at Closing. The Company,
in its capacity as administrator of the Policies, shall receive and
administer premiums and other payments with respect to the Polices
received by the Company, shall pay all Policy Obligations, and shall
account for any and all such collected premiums and payments as of
the end of each calendar month.
Section 3.3. Commission Allowance. The Reinsurer shall pay the
Company a commission allowance equal to the lesser of (a) the actual
commission liability that the Company has from time to time or (b)
the commissions due to agents as set forth on the Actuarial
Appraisal. Except for the Commission Allowance payable to the
Company as aforesaid, the Reinsurer shall not be liable for any
liabilities, losses, or expenses arising from claims of agents,
brokers or other parties for commissions, service fees, or producer
compensation, and the Company shall indemnify and hold the Reinsurer
harmless from any liabilities, losses, or expenses from claims of
agents, brokers or other parties for such commissions, service fees,
or producer compensation, and for any other claims of a similar or
related nature, as more fully set forth in Article XIV below.
Section 3.4. Premium Taxes and Premium Assessments. The
Reinsurer shall reimburse the Company for any and all assessments and
premium taxes paid by the Company based upon and measured by the
amount of premium income attributable to the Policies in respect to
such premiums due after the Effective Date that become payable on
account of such Policies by any state, county, parish, or municipal
authority.
Section 3.5. Income Tax. The Company and the Reinsurer shall
each be separately and solely liable for its respective Federal
Income Tax liabilities, other taxes or fees imposed by any
governmental authority, including any "DAC" taxable income that may
be incurred as a result of the reinsurance of the Policies by the
Reinsurer.
The Company and the Reinsurer 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 for the taxable year ended
December 31, 1998, and for all subsequent taxable years for which
this Agreement remains in effect unless such election is terminated
by mutual written agreement of the parties hereto with the consent,
if required, of the Commissioner of the Internal Revenue Service.
As used in this Section 3.5, the term "party" will refer to either
the Company or the Reinsurer as appropriate.
The terms used in this Section 3.5 are defined by reference to
Treasury Regulation Section 1.848-2 in effect as of December 29,
1992. The term "net consideration" will refer to either net
consideration as defined in Treasury Regulation Section 1.848-2(f) or
"gross premium and other consideration" as defined in Treasury
Regulation Section 1.848-2(b) as appropriate.
Both parties agree to identify this Agreement as one for which the
joint election under Treasury Regulation Section 1.848-2(g)(8) has
been made in a schedule attached to their respective federal income
tax returns for the taxable period ended December 31, 1998.
The party with the positive net 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).
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.
The Company will submit a schedule to the Reinsurer by May 1st of
each year of its calculations 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.
The Reinsurer may contest such calculation by providing an
alternative calculation to the Company in writing within forty-five
(45) 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 year.
If the Reinsurer disputes 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 forty-five (45) 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. If the
parties fail to reach agreement on an amount of net consideration,
the dispute shall be resolved by arbitration as provided herein.
Section 3.6. Payment of Benefits. The Reinsurer shall be
liable for any and all claims and other Policy benefits falling
within the scope of the Policy Obligations that become due and
payable after the Effective Date. Except as otherwise provided in
this Agreement, the Company, as administrator, shall service and pay,
on behalf of the Reinsurer, all such claims and other Policy benefits
falling within the scope of the Policy Obligations directly to the
policyholders or other authorized assignees of such benefits in the
ordinary course of business in accordance with the terms and
conditions of such Policies, other applicable documentation (if any)
and applicable law. In the event of any claim that falls outside of
the scope of the Policy Obligations, or exceeds the benefits provided
by such Policies, and/or if such claim is attributable to the Company
in any way, the Reinsurer's liability in respect to such claim shall
be limited to the amount payable that falls within the scope of the
Policy Obligations. In the event of a claim that is questionable
regarding whether it is covered by the terms and conditions of the
subject Policy, the Company shall not pay such claim without seeking
instructions from the Reinsurer, and shall make a written request to
the Reinsurer for written instructions regarding the Reinsurer's
decision regarding the amount, if any, to pay in respect to such
claim. The Reinsurer shall promptly respond to such request and
shall be solely liable for the consequences of paying less than the
full amount claimed, if such lesser payment is directed by the
Reinsurer.
Section 3.7. Payment of Policy Claims. Except as provided in
Section 3.6, the Company shall pay claims or other benefits on the
Policies reinsured hereunder without seeking instructions from the
Reinsurer and in accordance with its responsibilities as
administrator of the Policies.
Section 3.8. Dividends to Policyholders. All of the Policies
are non-participating Policies, meaning that dividends are not
payable thereon. If there is any exception, the Company shall have
sole discretion and control regarding the declaration and payment of
dividends to the holders of the Policies during any and all calendar
months for which this Agreement is in effect. The Company shall be
solely responsible for funding the payment of any such dividends.
The Reinsurer shall not be liable in respect to any claim against the
Reinsurer relating to the declaration or payment of any dividend
(whether declared and/or paid before, on or after the Effective
Date), or the failure to declare or pay any dividend, and the Company
shall indemnify and hold the Reinsurer harmless in respect to any
such claim, as more fully set forth in Article XIV.
Section 3.9. Contested Claims. In the event of a claim based
on a Policy against the Company or the Reinsurer that does not
involve a Policy Obligation which results in a dispute, compromise,
or litigation ("contest"), the Company shall have the sole
responsibility for defending such claim, and all related costs,
including attorneys' fees, settlement payments, judgments, etc. In
the event of a claim involving only a Policy Obligation which results
in a contest, the Reinsurer shall have the sole responsibility for
defending such claim, and all related costs, including attorneys'
fees, settlement payments, judgments, etc. In the event of a claim
involving a Policy Obligation and any other matter which results in a
contest, the Reinsurer and the Company will share, in proportion to
the ultimately determined respective liabilities, the costs of the
contest in addition to the amount of the claim itself, or the
Reinsurer may elect (as herein provided) not to participate. The
management of such contest shall be the sole responsibility of the
Reinsurer; provided, however, that the Company, at its election and
expense, shall have the right to be present and/or represented in any
and all proceedings related thereto. Notwithstanding the foregoing,
if the Reinsurer elects not to participate in such contest, the
Reinsurer may discharge its liability by agreeing to pay to the
Company the full amount of the Policy Obligation liability on the
subject Policy, in which case all aspects (including costs,
assessments, judgments, etc.) of the contest incurred after such
payment is made by the Reinsurer shall be the sole responsibility of
the Company.
Article IV
Transfer of Assets and Ceding Fee
Section 4.1. Transfer of Assets. The Company shall transfer to
the Reinsurer an amount of assets equal to the Reserves as of October 31,
1998, as defined in Section 10.5, less the "Ceding Fee" set forth
in Section 4.2 ("Closing Net Transfer Amount"). The composition of
the assets so transferred shall be cash plus the Policy Assets as of
October 31, 1998.
Section 4.2. Ceding Fee. The "Ceding Fee" shall be $1 million.
Section 4.3. Conversion of Coinsurance of the Policies to
Assumption Reinsurance. By this Agreement the type of reinsurance in
place means that the Policies remain in the name of the Company and
the Policy Obligations are transferred to the Reinsurer (typically
referred to as "coinsurance"). Upon the occurrence of an Assumption
Reinsurance Event, the Reinsurer shall assume the Policies in effect
on the effective date thereof (the "Assumption Effective Date") by
mailing to holders of such Policies an assumption certificate as set
forth in this Section 4.3 whereby the affected Policies will be
transferred to, and assumed directly by, the Reinsurer (referred to
herein as the "assumption" of the Policies in force on the Assumption
Effective Date, or "assumption reinsurance"). The election by the
Reinsurer, in its sole discretion, to convert the coinsurance to
assumption reinsurance shall be subject to the fulfillment of the
following conditions: (a) such assumption of the Policies shall
comprise all of the Policies in force as of the Assumption Effective
Date (subject to any exceptions herein set forth); (b) the election
to convert shall be given by written notice to the Company not less
thirty (30) days in advance of the Assumption Effective Date; (c)
such notice shall designate the Assumption Effective Date (which date
shall be the end of a month following the date of such notice, which
month shall be not more than 12 months from the date of such notice);
(d) the Reinsurer shall be obligated to effect the assumption of the
Policies only to the extent set forth in this Section 4.3; (e) there
shall be no litigation or threat of litigation by a third party or
regulatory opposition seeking or threatening to prevent such
assumption reinsurance or making claims or threats against the
Company or the Reinsurer based on market misconduct on the part of
the Company; and (f) the right of recapture stated in Section 4.4
shall have expired and the Company shall not have exercised its right
of recapture. To the extent that such assumption certificate is
subject to regulatory approval prior to the mailing of same, the
Reinsurer shall make commercially reasonable efforts to obtain such
approvals at its own expense. The Reinsurer shall make commercially
reasonable efforts to obtain such approvals and to mail such
assumption certificates to the affected policyholders within six
months following the Assumption Effective Date (except that the
Reinsurer shall not be obligated to obtain a license to do business
in any state in which it is not licensed at such time as a condition
of sending assumption certificates to affected policyholders in such
state). In the event that regulatory approval is not obtained in
respect to any state in which regulatory approval is required as a
condition to sending assumption certificates to affected
policyholders in such state, the Reinsurer shall not be obligated to
send assumption certificates to affected policyholders in such state,
and the affected Policies shall continue to be governed by this
Agreement as coinsurance (except, see below regarding dissolution of
the Company). To the extent that affected policyholders in any state
have the right to elect to reject the subject assumption and in fact
exercise such election, the affected Policies shall continue to be
governed by this Agreement as coinsurance. In the event of the
assumption of the Policies as aforesaid, the Reinsurer shall have to
option to perform all administration and data processing
responsibilities relating thereto beginning after the Assumption
Effective Date. Following the assumption of the Policies, the
Reinsurer's liabilities in respect to such assumed Policies shall
continue to be limited to the Policy Obligations and shall not be
enlarged by virtue of the conversion of the form of reinsurance from
coinsurance (as set forth in this Agreement) to assumption
reinsurance, and the Company shall continue to have all liabilities
in respect to the assumed Policies except (a) the Policy Obligations
and any of the Reinsurer's liabilities resulting from the Reinsurer's
role as administrator, if the Reinsurer elects to administer the
Policies, and (b) the Company's obligation to indemnify the Reinsurer
and hold the Reinsurer harmless from all liabilities not specifically
transferred to and assumed by the Reinsurer hereunder shall continue
as set forth in this Agreement. In the event the Company is
dissolved, voluntarily or involuntarily, or placed in receivership,
and if the conversion from coinsurance to assumption reinsurance has
not theretofore occurred, the conversion from coinsurance to
assumption reinsurance shall take place automatically, provided the
following conditions are fulfilled: (a) the Assumption Effective
Date shall be not later than the effective date of the dissolution of
the Company or the date on which receivership commences, as the case
may be and (b) the Reinsurer shall obtain required approvals in the
affected states. It is the understanding of the parties that
assumption reinsurance occurring in connection with the dissolution
of the ceding company does not involve the acceptance of the affected
policyholders and, therefore, to that extent, the condition that
affected policyholders have the option to elect not to be assumed by
the Reinsurer will not apply. In the event of the assumption of the
Policies in connection with the Company's dissolution or receivership
as aforesaid, the Reinsurer shall perform all administration and data
processing responsibilities relating thereto. Following such
assumption of the Policies, the Reinsurer's liabilities in respect to
the Policies shall continue to be limited to the Policy Obligations
and liabilities resulting from its role as administrator of the
Policies, and shall not be enlarged by virtue of the conversion of
the form of reinsurance from coinsurance (as set forth in this
Agreement) to assumption reinsurance; the Company shall continue to
have all liabilities not specifically included within the Policy
Obligations or resulting from the Reinsurer's role as administrator
of the Policies; the Company's obligation to indemnify the Reinsurer
and hold the Reinsurer harmless from all liabilities not specifically
reinsured by the Reinsurer hereunder shall continue as set forth in
this Agreement.
Section 4.4. Right of Recapture. If the purchase of the stock
contemplated by the Stock Purchase Agreement does not close within
the Recapture Period (defined below), the Company, in its sole
discretion, shall have the right, but not the obligation, to
recapture the Policies at any time within six months following the
Effective Date (the "Recapture Period"). Such right shall be
exercisable by the Company's giving written notice to the Reinsurer
within the Recapture Period and designating the effective date of the
recapture, which shall be a date at the end of a month within the
Recapture Period ("Recapture Date"). Upon the exercise of the right
of recapture as aforesaid, the coinsurance of the Policies shall
terminate as of the Recapture Date, and thereafter the Company, and
not the Reinsurer, shall have all liabilities of the Policies. The
Company and the Reinsurer shall make such payment in cash that is
necessary to restore the parties to the position that they would have
had in respect to the Policies if the coinsurance had not occurred,
except that the Reinsurer shall be entitled to five percent (5%) of
the gross premium income received on the Policies during the period
starting the day following the Effective Date and ending on the
Recapture Date (the "Recapture Fee").
ARTICLE V
ACCOUNTING AND SETTLEMENT
Section 5.1. Agreement Accounting Period. The accounting
period for this Agreement shall be on a calendar month basis unless
otherwise specified herein. The first report shall be for the month
beginning November 1, 1998.
Section 5.2. Monthly Cash Settlements. No later than the 20th
of each month, beginning in December, 1998, the Company shall prepare
and deliver to the Reinsurer a "Monthly Cash Settlement" covering the
immediately preceding calendar month, which shall provide an
accounting in respect to the matters called for in this Article V.
Within five (5) working days after the receipt by the Reinsurer of
each Monthly Cash Settlement (the "Monthly Cash Settlement Date"),
the Company shall pay to the Reinsurer (for such accounting period):
(a) the premiums as defined in Section 3.2;
Simultaneously, the Reinsurer shall pay to the Company:
(c) the Commission Allowance as defined in Section 3.3;
(d) the Policy benefits as defined in Section 3.6;
(e) the premium assessment as defined in Section 3.4; and
(f) a service fee equal to 2% of the premiums received by the
Company and 7% of the claims paid by the Company during such
month.
Section 5.3. Amounts Due Monthly. Except as otherwise
specifically provided in this Agreement, all amounts due to be paid
to either the Company or the Reinsurer under this Agreement on a
monthly basis shall be determined on a net basis as of the last day
of each calendar month and shall be due and payable on or before the
Monthly Cash Settlement Date. If the amounts, as defined in Section
5.2 above, cannot be determined at such date on an exact basis as set
forth herein, such payments will be paid in accordance with an
approximate amount determined by the Reinsurer, which amount shall be
adjusted to the actual amount determined as soon as practicable
thereafter.
Section 5.4. Delayed Payments. For purposes of Section 5.3
above, if there is a delayed settlement of a payment due, interest
will be added, in an amount calculated as: the amount of the payment
which is delinquent, multiplied by ten percent (10%), multiplied by
the number of days such amount has been delinquent, regardless of
holidays or weekends, and divided by the whole number 365. For
purposes of this paragraph, a payment shall be deemed to be
delinquent after the Monthly Cash Settlement Date.
Section 5.5. Offset of Payments. All monies due either to the
Company or to the Reinsurer under this Agreement shall be offset
against each other, dollar for dollar, regardless of any insolvency
of either party.
Article VI
MUTUAL COVENANTS
Section 6.1. Covenants. The Reinsurer and the Company mutually
agree as follows:
(a) to indemnify, defend and hold harmless the other, its directors,
officers, employees and agents from any and all claims, actions,
suits, judgments, damages (including punitive or exemplary
damages), fines and other proceedings, whether civil, criminal
(only to the extent permitted by law or public policy),
administrative, investigative or otherwise, together with all
costs, expenses and other amounts, including attorney's fees,
arising out of any failure of the indemnifying party to perform
its duties, obligations or responsibilities to the other party,
its directors, officers, employees and agents, under this
Agreement, as more fully set forth in Article XIV; and
(b) the Company shall be solely liable for claims arising out of any
breach of any duty on the part of the Company to any holder,
insured, assignee, beneficiary or other claimant under any
Policy, and the Reinsurer's liabilities shall arise solely from
its obligation to pay amounts coming due under the terms of the
Policies within the scope of the Policy Obligations, and any
liability on the part of the Reinsurer to the Company resulting
solely from the Reinsurer's role as administrator pursuant to
the Intercompany Services Agreement, if applicable. Except for
the Reinsurer's role as administrator as aforesaid, the Company
shall remain solely liable for all fines, penalties or other
assessments imposed against the Company by any Insurance
Department or other governmental entity for any conduct of the
Company, its employees or authorized representatives, which was
not expressly authorized, in writing, by the Reinsurer; and
(c) any and all materials, information, proposals, studies or other
documents relative to this Agreement are confidential and
proprietary. Neither party shall disclose, directly or
indirectly, any information obtained from the other party,
relative to this Agreement, to any third party without the
express written consent of the other unless applicable statute,
law or regulation requires such disclosure, except as may be
required pursuant to the Arbitration Agreement.
Section 6.2. Policy Conservation. The Company covenants and
warrants that it will take no action that would encourage the holders
of the Policies to surrender, reduce or otherwise terminate their
existing coverages either through direct or indirect acts, including
but not limited to, a plan of internal replacement. Also, the
Company will not permit its employees, agents or other
representatives to re-write any of the Policies or to encourage the
holders of the Policies to surrender, reduce or otherwise terminate
their existing coverages either through direct or indirect acts, and
shall have an express Company policy of prohibiting its employees,
agents or other representatives from re-writing any of the Policies
and an express Company policy of directing its employees, agents and
other representatives to encourage the retention and conservation of
the Policies. "Re-writing" as used in the immediately preceding
sentence means the soliciting and accepting of applications for
insurance policies which relate to or cause the termination of an
existing Policy (such as, for example, a transaction involving,
contemplating or resulting in the replacement of a Policy by another
insurance policy).
ARTICLE VII
ARBITRATION
Section 7.1. Agreement. All disputes and differences between
the Company and the Reinsurer pertaining to this Agreement and the
related Intercompany Services Agreement (if applicable) on which an
agreement cannot be reached by the parties will be decided by
arbitration, regardless of the insolvency of either party, unless the
conservator, receiver, liquidator, or statutory successor is
specifically exempted from an arbitration proceeding by applicable
state law. Such arbitration shall be conducted in accordance with
the Arbitration Agreement, which agreement is incorporated herein by
reference thereto for all purposes. The parties agree that, in the
event the stock purchase contemplated by the Stock Purchase Agreement
does not close, the parties will execute and deliver to each other
the Arbitration Agreement contemplated by the Stock Purchase
Agreement within thirty days from the date on which the parties
terminate their obligation to close pursuant to the Stock Purchase
Agreement.
ARTICLE VIII
INSOLVENCY OR DISSOLUTION
Section 8.1. Insolvency. In the event of the Company's
insolvency, the Reinsurer's contractual liability on the Policies
shall continue to be determined by all the terms, conditions and
limitations under this Agreement, but the Reinsurer will make
settlement (1) directly to the Company's liquidator, receiver or
statutory successor, and (2) without increase or diminution because
of the Company's insolvency. The liquidator, receiver or statutory
successor of the Company shall give the Reinsurer written notice of
the pendency of a claim against the Company on any Policy within a
reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of any such claim, the Reinsurer may
investigate such claim and interpose in the Company's name (or in the
name of the Company's liquidator, receiver or statutory successor),
in the proceeding in which such claim is to be adjudicated, any
Defense or Defenses which the Reinsurer may deem available to the
Company or its liquidator, receiver or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable, subject
to court approval, against the Company as a 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 the Reinsurer.
Article IX
Termination
Section 9.1. Termination. This Agreement may be terminated as
follows:
(a) at any time prior to Closing by mutual written consent of the
Company and the Reinsurer;
(b) by the Company on or before Closing if the conditions set forth
in Section 12.2 have not been satisfied or waived in writing by
the Company on or before the Closing Date;
(c) by the Reinsurer if this Agreement has not been approved by the
TDI on or before November 20, 1998;
(d) by the Reinsurer if the conditions set forth in Section 12.3
have not been satisfied or waived in writing by the Reinsurer on
or before the Closing Date; or
(e) by the Company or the Reinsurer if the conditions set forth in
Section 12.1 have not been satisfied or waived in writing by the
Company or the Reinsurer, as the case may be, on or before the
Closing Date.
Section 9.2. Effect of Termination. In the event of any
termination of this Agreement, if one party is entitled to terminate
this Agreement as herein provided in Sections 9.1 (b), (d) or (e),
such party shall have the option (in lieu of electing to terminate
this Agreement) to enforce this Agreement by filing suit for specific
performance against the other party for any breach of any of the
provisions of this Agreement, and/or to recover damages incurred by
such party, including all reasonable costs of any nature whatsoever
incurred in the enforcement of its rights under this Agreement.
Article X
Representations and Warranties of the Company
The Company hereby represents and warrants to the Reinsurer
that:
Section 10.1. Organization and Existence. The Company is a
Texas-domiciled stock insurance company duly incorporated, validly
existing, and in good standing under the corporation and insurance
laws of the State of Texas. The Company has all requisite corporate
power and authority to carry on its business as it is now being
conducted, and to own, lease, and operate its properties, subject to
such regulatory approvals as may apply.
Section 10.2. Qualification and Power. The Company is duly
qualified and in good standing to do business in every jurisdiction
in which such qualification is necessary because of the nature of its
business or of the properties owned, leased, or operated by it,
except the parties recognize that the Company's state licenses have
been suspended in most jurisdictions and the Company is currently
subject to supervision under Texas law.
Section 10.3. Validity: No Violation. Subject to the Company's
right of termination as set forth in Article IX and such TDI
approvals as may apply, this Agreement is a valid and binding
obligation of the Company, enforceable against it in accordance with
its terms and conditions. Neither the execution and delivery of this
Agreement, nor the Company's compliance with any of the provisions of
this Agreement, will:
(a) conflict with or result in a breach of any provision of the
Articles of Incorporation or Bylaws of the Company, or result in
a default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms,
conditions, or provisions of any note, lien, bond, mortgage,
indenture, license, lease, agreement, consent order, or other
instrument or obligation to which the Company is a party or by
which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any
court, administrative agency, or governmental body applicable to
the Company or to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without
notice, the passage of time or both), the maturity of any
liability of the Company to be accelerated or increased.
Section 10.4. Except for approvals required as set forth in
Article IX, no authorization, consent or approval of, or filing with,
any public body or authority is necessary for the Company to obtain
for the consummation of this Agreement, and except as set forth in
Section 12.1(b) hereof. No authorization, consent or approval of any
other person or entity is necessary for the Company to obtain for the
consummation of the transactions contemplated by this Agreement, and
no person or entity has an option, right of first refusal or
preferential right to purchase all or any part of the Policies or
that is otherwise triggered as a result of the transactions
contemplated hereby.
Section 10.5. The reserves and other Policy-related liabilities
with respect to each of the Policies were, or will be, established on
the books of the Company as of October 31, 1998, (i) were, or will
be, calculated and determined in accordance with generally accepted
actuarial and statutory accounting standards consistently applied,
(ii) were, or will be, based on actuarial assumptions that are in
accordance with those specified in the related Policies, (iii) meet
the requirements of the insurance laws of the State of Texas, and
(iv) in the aggregate are not less the amounts that would be required
for lines 2, 4.2, and 9 of page 3 of the Company's Annual Statement
if such Annual Statement were prepared as of the Effective Date. In
addition, the reserves for the period ended October 31, 1998 were, or
will be, established on the books of the Company with respect to the
reported but unpaid as well as the incurred but unreported policy
claims ("Claims Reserves") (i) were, or will be, calculated and
determined in accordance with generally accepted actuarial and
statutory accounting standards consistently applied, (ii) are, or
will be, sufficient to pay all of the liabilities in respect to such
claims incurred before November 1, 1998, and (iii) meet, or will
meet, the requirements of the insurance laws of the State of Texas.
The reserves as set forth in this Section 10.5 shall be referred to
in this Agreement as "Reserves." While the Claims Reserves shall be
established as aforesaid, if the claims paid by the Reinsurer
attributable to the Policies which were incurred on or before the
Effective Date are in the aggregate more than the amount of the
related Claims Reserves, the Company shall reimburse the Reinsurer
for the amount of the excess within 30 days following written notice
from the Reinsurer identifying the payment or payments in excess, as
aforesaid. If, after twelve (12) months from the Effective Date, the
aggregate claims attributable to the related Claims Reserves are less
than the Claims Reserves, then the Reinsurer shall pay the Company
the amount by which the related Claims Reserves exceeds the aggregate
amount of such claims. The due premium asset with respect to each of
the Policies for the period ended October 31, 1998, were, or will be,
established on the books of the Company (i) were, or will be,
calculated and determined in accordance with generally accepted
actuarial and statutory accounting standards consistently applied and
(ii) meet, or will meet, the requirements of the insurance laws of
the State of Texas. Such due premium asset shall be referred to in
this Agreement as "Policy Assets." In the event any portion of the
due premium asset is not collected within ninety (90) days of the
Effective Date, the Company will pay the Reinsurer an amount equal to
such uncollected due premium asset.
Section 10.6. Since December 31, 1997, there has not been any
material adverse change, or changes in the Policies or operations of
the Company taken as a whole which in the aggregate may be deemed
materially adverse to the Policies, or which could affect the
validity or enforceability of this Agreement, consummation of the
transactions contemplated hereby or compliance with the terms hereof
by the Company. For purposes of this Section, "Historical Policy
Data" means the Policy Assets, Reserves, and Policy statistical
information and results as reflected in the Company's Annual
Statements (as filed by the Company with insurance regulators on the
NAIC Convention Blank) for the years 1996-1997. The Historical
Policy Data were prepared and presented in conformity with statutory
accounting practices prescribed or permitted by applicable insurance
regulatory laws and regulations applied on a consistent basis and
presented completely and accurately such data at the respective dates
and for the respective periods indicated therein.
Section 10.7. There are no claims, actions, suits,
investigations and administrative, arbitration or other proceedings
(i) pending against the Company with respect to the Policies or (ii)
threatened against the Company with respect to the Policies. The
Company is not subject to or in default with respect to any order,
writ, judgment, decree, injunction or similar order of any court or
any foreign, federal, state or other governmental body. There are no
claims, actions, suits, investigations or administrative, arbitration
or other proceedings pending or threatened against or affecting the
Company which individually or in the aggregate could have a material
adverse effect on the Polices which could affect the validity or
enforceability of this Agreement, consummation by the Company of the
transactions contemplated hereby or compliance by the Company with
the terms of this Agreement, and (ii) the Company is not subject to
or in default with respect to any order, writ, judgment, decree,
injunction or similar order of any court or any foreign, federal,
state or other governmental body, the result of which being subject
to or of which default individually or in the aggregate could have a
material adverse effect on the Polices or which could affect the
validity or enforceability of this Agreement, consummation by the
Company of the transactions contemplated hereby or compliance by the
Company with the terms of this Agreement. The Parties acknowledge
that the Company is subject to regulatory supervision by the TDI.
Section 10.8. The Company is in compliance in all respects with
all laws, ordinances, regulations, orders, judgments, injunctions, or
decrees of any court, arbitrator or governmental authority where the
failure to comply, individually or in the aggregate, could reasonably
be expected to have a material adverse effect on the Policies.
Section 10.9. The Company is not in default under any of the
terms, provisions or conditions of any contract between the Company
and any of its agents, past or present. The failure of any agent who
wrote Policies for the Company to have been duly licensed (for the
type of business which such agent wrote) as an agent in the
particular jurisdiction in which such agent wrote for the Company
will not individually or in the aggregate have a material adverse
effect on the Policies of the Company. To the knowledge of the
Company, there is no actual or threatened plan on the part of any
insurance agent or broker to rewrite any of the Policies.
Section 10.10.
(a) it has been the practice of the Company to send all
communications involving holders of the Policies directly to the
affected policyholders, and the Documents and Records of the
Company to be delivered to the Reinsurer contain adequate
information to enable the Reinsurer (if it becomes administrator
of the Policies) to send written notifications or other
communications directly to each policyholder whose policy or
contract is included in the Policies;
(b) except for lists provided to the Company's reinsurers for the
purpose of reinsurance transactions and accounting in the
ordinary course of business, no lists or master list of all or
any substantial number of the holders of the Policies has been
provided by the Company to any of its agents, representatives or
third party except to the Company's consulting actuary, and such
lists or master list are not available in the public domain; and
(c) no policyholder or group of policyholders, which individually or
in the aggregate account for five percent or more of the premium
income included in the Policies has threatened to terminate its
or their relationship with the Company.
Section 10.11. With respect to each of the Policies:
(a) the Company is a party to each of such Policies and owns all of
the rights and interests of an insuring, reinsuring or ceding
party, as the case may be, in and to each of such Policies, free
and clear of any Lien;
(b) each of such Policies is in full force and effect and
constitutes a valid and legally binding obligation of each of
the parties thereto in accordance with its terms; the
transactions contemplated by this Agreement will not affect the
validity or binding character of any such Policy; the Company is
not in violation, breach or default of any such Policy and no
event has occurred which (with or without notice or lapse of
time or both) constitutes a breach or default by the Company
under any such Policy and no such Policy contains any provision
providing that the other party thereto may terminate the same by
reason of the transactions contemplated by this Agreement or any
other provision which would be altered or otherwise become
applicable by reason of such transactions;
(c) such Policies are, to the extent required under applicable law,
on forms approved by the insurance regulatory authority of the
jurisdiction where issued or have been filed with and not
objected to by such authority within the period provided for
objection;
(d) all current benefits payable by the Company under any such
Policy have been paid or will be paid in the ordinary course of
business under the terms of the Policies under which they arose
or to the satisfaction of the parties thereto;
(e) no such Policy entitles the holder thereof or any other person
or entity to receive dividends or similar benefits in which the
right to receive such dividends or benefits is determined other
than at the discretion of the board of directors of the Company;
(f) the underwriting standards utilized and ratings applied by the
Company with respect to Policies issued by the Company conform
in all material respects to customary insurance industry
practices as such practices apply to the markets in which the
Company has sold its policies and, with respect to any such
Policy reinsured in whole or in part, conform in all material
respects to the standards and ratings required pursuant to the
terms of the related reinsurance, coinsurance or other similar
Policy;
(g) each of such Policy was issued and has been serviced in the
ordinary course of business; and
(h) there has been no discrimination in violation of applicable
insurance laws among the policyholders whose policies and
contracts of insurance are included in such Policies with
respect to the rates charged such policyholders for the
insurance in force afforded such policyholders by such Policies.
Section 10.12. The Documents and Records are accurate and
complete in all material respects and, in all material respects,
completely record and reflect all of the Company's liabilities and
obligations. The Policy records are sufficiently well labeled and
organized to permit reasonable access (by industry standards) and
there are no deficiencies in the Documents and Records which could
reasonably be expected to have a material adverse effect on either
the Reinsurer's satisfaction of its obligations in respect of the
Policies or the servicing by the Reinsurer of the Policies in
accordance with customary insurance industry practices. There are no
facts or other circumstances that would prevent the Reinsurer (or
which raises a material probability that the Reinsurer might be
prevented) from servicing the Policies in accordance with customary
insurance industry practice and in the manner in which the Policies
have been serviced prior to the Effective Date.
Section 10.13. Neither this Agreement nor any certificate or
document furnished by the Company to the Reinsurer in connection with
this Agreement or the transactions contemplated hereby contains any
untrue statement of material fact or omits to state a material fact
necessary to make the statements herein or therein not misleading in
light of the circumstances in which they were made.
Section 10.14. Survival of Representations and Warranties. The
representations and warranties of the Company contained in this
Article X and elsewhere in this Agreement shall survive the Closing
until all of the liabilities reinsured hereunder have been discharged
or otherwise expire.
Article XI
Representations and Warranties of the Reinsurer
The Reinsurer hereby represents and warrants to the Company
that:
Section 11.1. Organization and Existence. The Reinsurer is a
Texas-domiciled stock insurance company duly incorporated, validly
existing, and in good standing under the corporation and insurance
laws of the State of Texas. The Reinsurer has all requisite
corporate power and authority to carry on its business as it is now
being conducted, and to own, lease, and operate its properties.
Section 11.2. Qualification and Power. The Reinsurer is duly
qualified and in good standing to do business in every jurisdiction
in which such qualification is necessary because of the nature of its
business or of the properties owned, leased, or operated by it.
Section 11.3. Validity; No Violation. Subject to the
Reinsurer's right of termination as set forth in Article IX, this
Agreement is a valid and binding obligation of the Reinsurer,
enforceable against it in accordance with its terms and conditions.
Neither the execution and delivery of this Agreement, nor the
Reinsurer's compliance with any of the provisions of this Agreement,
will:
(a) conflict with or result in a breach of any provision of the
Articles of Incorporation or Bylaws of the Reinsurer, or result
in a default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms,
conditions, or provisions of any note, lien, bond, mortgage,
indenture, license, lease, agreement, consent order, or other
instrument or obligation to which the Reinsurer is a party or by
which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any
court, administrative agency, or governmental body applicable to
the Reinsurer or to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without
notice, the passage of time or both), the maturity of any
liability of the Reinsurer to be accelerated or increased.
Section 11.4. Survival of Representations and Warranties. The
representations and warranties of the Reinsurer contained in this
Article XI and elsewhere in this Agreement shall survive the Closing
until all of the liabilities reinsured and assumed hereunder have
been discharged or otherwise expired.
Article XII
Covenants and Conditions Precedent to Closing
Section 12.1. The obligations of each of the parties hereto to
proceed with the Closing were subject to the fulfillment (unless
waived by each party in writing), prior to or at the Closing, of each
of the following conditions:
(a) No suit, action or other proceeding shall have been initiated
and be pending or be threatened by any governmental agency in
which it is sought to restrain, prohibit, invalidate, modify or
condition, or set aside, the transactions contemplated by this
Agreement, and no statute, rule or regulation having such effect
shall have been promulgated or enacted, nor shall any such suit,
action or proceeding have been initiated by any other third
party not affiliated with the parties hereto in which such third
party shall have obtained preliminary or permanent injunctive
relief or which, in the opinion of counsel to either party, has
a reasonable likelihood of success; provided, however, that each
party shall use reasonable efforts in good faith to cause such
suit, action or proceeding, or the threat thereof, to be
dismissed or withdrawn, to cause such injunction to be dissolved
or vacated or to cause such statute, rule or regulation to be
repealed or rescinded.
(b) The receipt of the required approval of this Agreement from the
TDI.
(c) The parties shall execute and deliver at Closing the
Administrative Services Agreement.
Section 12.2. The obligations of the Company to proceed with
the Closing are subject to the fulfillment (unless waived by the
Company in writing), prior to or at the Closing, of each of the
following conditions:
(a) The representations and warranties of the Reinsurer contained in
Article X of this Agreement shall be true and correct in all
material respects at and as of the Closing, as if each such
representation and warranty had been made as of the Closing.
(b) The Reinsurer shall have performed and complied in all material
respects with all covenants, agreements, obligations,
commitments and conditions required by this Agreement to be
performed or complied with prior to or at the Closing.
(c) The Reinsurer shall have delivered to the Company a certificate
dated the Closing Date and signed by the president or a vice
president of the Reinsurer certifying to the fulfillment of the
conditions specified in this Section 12.2.
(d) The Reinsurer shall have delivered to the Company at the Closing
such other documents as the Company may reasonably request.
Section 12.3. The obligations of the Reinsurer to proceed with
the Closing are subject to the fulfillment (unless waived by the
Reinsurer in writing), prior to or at the Closing, of each of the
following conditions:
(a) The representations and warranties of the Company contained in
Article X of this Agreement shall be true and correct in all
material respects at and as of the Closing, as if each such
representation and warranty had been made as of the Closing.
(b) The Company shall have performed and complied in all material
respects with all covenants, agreements, obligations,
commitments and conditions required by this Agreement to be
performed or complied with prior to or at the Closing.
(c) The Company shall have delivered to the Reinsurer a certificate
dated the Closing Date and signed by the president or a vice
president of the Company certifying to the fulfillment of the
conditions specified in this Section 12.3.
(d) The Company shall have delivered to the Reinsurer at the Closing
such other documents as the Reinsurer may reasonably request,
including evidence reasonably satisfactory to the Reinsurer that
this Agreement and the related agreements have been approved by
the Company's Board of Directors.
(e) The Reinsurer, by and through its designated representatives,
shall have completed to its satisfaction a legal, financial and
business due diligence review and investigation of the Policies
and related information, and in the course of such due diligence
review and investigation the Reinsurer shall not have discovered
any facts, information, potential risks, or other problems which
the Reinsurer reasonably believes to have an actual or potential
adverse impact or effect on the Policies, or upon the respective
values of the Policies, as a result of the consummation of the
subject transactions relative to the information heretofore
furnished to the Reinsurer by the Company; and that the Policy-
related assumptions used in the Actuarial Appraisal are
reasonably supported by the historical performance of the
Policies, and the modeling and sampling decisions and related
methodology are reasonable.
Section 12.4. Cooperation. The parties shall assist and
cooperate with each other by making all reasonable efforts to seek
and obtain the aforementioned approvals and any other approvals the
parties agree are necessary or advisable, and each party shall bear
its own expenses related thereto.
Article XIII
Closing
Section 13.1. Time and Location. The closing of the
transactions contemplated by this Agreement ("Closing") shall take
place on at 10 A. M., local time, on November 20, 1998, except that
Closing may occur on a different time and date by mutual written
agreement of the parties (the "Closing Date").
Section 13.2. Deliveries by the Company. At Closing the
Company shall deliver to the Reinsurer (a) an accounting as of
October 31, 1998, in contract level detail as to the Policies,
including a detail listing of the Policies, which are the subject of
this Agreement, and (b) the assets comprising the Closing Net
Transfer Assets shown on Schedule 4.1 by wire transfer.
ARTICLE XIV
INDEMNIFICATION
Section 14.1 Losses. As used in this Agreement, "Loss" and/or
"Losses" shall mean all claims, lawsuits, proceedings by insurance
regulatory authorities or any other regulatory authority,
investigations, expenses, settlements, assessments, obligations,
damages, losses, deficiencies, interest, late charges, adjustments,
costs, judgments, payments, liabilities, refunds, taxes, fines and
penalties, including, without limitation, costs and expenses of
litigation and reasonable attorneys' fees, reasonable actuarial and
accounting fees and reasonable costs of investigations.
Section 14.2 Indemnity by the Company. The Company shall
indemnify, defend and hold harmless the Reinsurer and the Reinsurer's
subsidiaries and affiliates including, without limitation, its
officers, directors, employees and shareholders and those of its
subsidiaries and affiliates from and against Losses that arise out
of:
(a) the non-performance of any covenants, warranties,
agreements, obligations or commitments contained in this
Agreement or in any exhibit, schedule, certificate or other
document delivered pursuant hereto required to be performed by
the Company; or
(b) the fact that any representation or warranty made by
the Company contained in this Agreement or in any exhibit,
schedule, certificate or other document delivered pursuant
hereto was untrue as of the Closing Date (determined as if such
representation or warranty had been made as of the Closing
Date).
Section 14.3 Indemnity by the Reinsurer. The Reinsurer shall
indemnify, defend and hold harmless the Company from and against
Losses that arise out of:
(a) the non-performance of any covenants, warranties,
agreements, obligations or commitments contained in this
Agreement or in any exhibit, schedule, certificate or other
document delivered pursuant hereto required to be performed by
the Reinsurer; or
(b) the fact that any representation or warranty made by
the Reinsurer contained in this Agreement or in any exhibit,
schedule, certificate or other document delivered pursuant
hereto was untrue as of the Closing Date (determined as if such
representation or warranty had been made as of the Closing
Date).
Section 14.4 Payment. Payment required to be made to any party
entitled to indemnification hereunder shall be made within ten days
after receipt of an invoice or claim ("claim") therefor from a party
seeking indemnification. In the event of any dispute with respect to
a party's obligation to make any such payment, the parties shall use
their best efforts to resolve such dispute as promptly as
practicable. In any event, however, that the claim made by a party
entitled to indemnification hereunder is not paid in full within said
10 day period, such party (the "Indemnity" as hereinafter defined)
shall be entitled to initiate arbitration proceedings in accordance
with the Arbitration Agreement. Any such payment amount shall
include interest thereon at the rate of ten percent (10%) per annum
(compounded annually) which shall accrue beginning on the first day
of the obligation that resulted in a finding that an amount became
payable, and shall continue to accrue until paid.
Section 14.5 Notice. Any person, corporation or other legal
entity entitled to indemnification under this Agreement, as the case
may be, making a claim under this Article XIV is hereinafter referred
to as the "Indemnitee" and the party against whom such claim is
asserted is hereinafter referred to as the "Indemnitor." All claims
by any Indemnitee under this Article XIV shall be asserted by
Indemnitee delivering or causing to be delivered, to Indemnitor, a
written notice (the "Claim Notice") describing in reasonable detail
the facts or circumstances which may result in a claim of Loss.
(Such claim of Loss is hereinafter referred to as an "Asserted
Liability.") Indemnitee shall use reasonable efforts to give the
Claim Notice not later than the earlier of:
(i) Three months after the time at which Indemnitee is
notified in writing, actually becomes aware of or otherwise
obtains actual knowledge of any action, proceeding,
investigation, demand or claim (whether actual or threatened) or
any other circumstance or state of facts which could give rise
to an Asserted Liability, or
(ii) With respect to any Asserted Liability which has
become the subject of proceedings before any court or tribunal
or in which Indemnitee has been served with legal process within
such time as would allow Indemnitor to timely file responsive
pleadings in such proceeding or action.
If a claim is not given by the Indemnitee as herein provided,
the Indemnitee shall be entitled to indemnification hereunder only
(i) if the Indemnitee can establish that the time elapsed between the
time the Claims Notice should have been given pursuant to this
Agreement and the actual giving of the Claims Notice is reasonable
under all the circumstances, (ii) to the extent that the Indemnitee
can establish that the Indemnitor has not been prejudiced by such
time elapsed, or (iii) if the Indemnitee can establish that the
Indemnitor received actual notice of such Asserted Liability from a
party other than the Indemnitee, or otherwise had actual notice of
the basic facts constituting the Asserted Liability, within the time
periods specified in this Agreement or that the receipt of such
notice satisfies the requirements of either clause (i) or (ii) of
this paragraph.
Section 14.6 Defense of Claims.
(a) Subject to the limitations hereinafter set forth,
Indemnitor shall have the right to control the contest of any
Asserted Liability and shall defend, at its own expense and by
its own counsel, any Asserted Liability. If Indemnitor does not
notify Indemnitee in writing within sixty days after receipt of
the Claim Notice, or within the time period prior to the date on
which responsive pleadings must be filed, whichever is less,
that it elects to undertake the defense thereof, Indemnitee
shall have the right to defend the Asserted Liability with
counsel of its choosing reasonably satisfactory to Indemnitor.
Even in the event that Indemnitor does not notify Indemnitee
that it elects to undertake the defense of an Asserted Liability
within the applicable time periods set forth in this Agreement,
Indemnitor shall have the right to assume the defense of such
Asserted Liability, and to select counsel reasonably
satisfactory to Indemnitee, at any time prior to settlement or
final determination thereof; provided, however, that in such
event Indemnitor shall be responsible for and shall pay (or
reimburse Indemnitee for) the fees and expenses of counsel
employed by Indemnitee prior to Indemnitor's assumption of the
defense of any such Asserted Liability.
(b) In the event that Indemnitor commences or thereafter
assumes the defense of any Asserted Liability as provided in
this Agreement, Indemnitee shall have the right to employ
separate counsel with respect to such claim and to participate
in the defense thereof, provided that the fees and expenses of
counsel employed by Indemnitee shall be at the expense of
Indemnitee unless the employment of such counsel has been
specifically authorized in writing by Indemnitor.
Section 14.7 Cooperation. After the Closing Date, the
Reinsurer and the Company shall each cooperate fully with the other
(including, without limitation, affording the other an opportunity to
participate in the defense) as to all Asserted Liabilities, shall
make available to the other as reasonably requested all information,
records and documents relating thereto and shall preserve all such
information, records and documents until the termination of any
claim. The Reinsurer and the Company shall each also make available
to the other, as reasonably requested, its personnel, agents and
other representatives who are responsible for preparing or
maintaining information, records or other documents, or who may have
particular knowledge with respect to any such Asserted Liability.
Section 14.8 No Insurance. The indemnifications provided in
this Agreement shall not be construed as a form of insurance and
shall be binding upon and inure to the benefit of the Reinsurer, and
the Company; and the indemnification provisions shall apply with full
force and effect notwithstanding the fact the Indemnitee has
insurance covering all or a portion of the Losses.
ARTICLE XV
SURVIVAL OF OBLIGATIONS
Unless otherwise specifically set forth in this Agreement or in
any of the exhibits, schedules, certificates or other agreements
delivered pursuant hereto, all covenants, representations and
warranties and other obligations of the parties hereto as expressed
in this Agreement shall survive indefinitely. Any obligation
resulting from or arising out of the non-performance of any such
covenant, agreement, obligation or commitment or of any
representation or warranty being untrue as of the Closing Date as to
which a written notice of possible Loss shall have been given to the
indemnifying party in accordance with the requirements of Article XIV
hereof shall survive, as to matters identified with particularity in
such notice, until the resolution of the matters referred to therein.
Unless otherwise specifically set forth herein or in any of the
exhibits, schedules, certificates or other agreements delivered
pursuant hereto, in case of any representation or warranty being
untrue as of the Closing Date or any non-performance of any covenant,
agreement, obligation or commitment contained in this Agreement, or
in any exhibit, schedule, certificate or other agreement delivered
pursuant hereto, the exclusive remedy therefor shall be
indemnification pursuant to Article XIV hereof, except to the extent
the remedy of specific performance may be available under applicable
equitable principles.
Article XVI
Miscellaneous Provisions
Section 16.1. Extracontractual Damages. The Reinsurer does not
agree to indemnify the Company for, and shall not be liable for, any
extracontractual damages or liability of any kind whatsoever of the
Company's, except for any of the Reinsurer's obligations as
administrator of the Policies, if applicable.
Section 16.2. Misunderstandings and Oversights. If any failure
to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by oversight, the Company and
the Reinsurer will adjust the situation to what it would have been
had the oversight not occurred.
Section 16.3. Facility of Reinsurance. The Company shall not
enter into any other reinsurance agreements, including assumption
reinsurance that would cover the Policies, or by any other act impair
the value of the Policies ceded to the Reinsurer under this
Agreement, without the express written approval of the Reinsurer.
Section 16.4. Policy Changes. The Company shall not make any
changes after the Effective Date of this Agreement in the provisions
and conditions of the Policies.
Section 16.5. Law and Venue. It is agreed that this Agreement
is subject to and is to be interpreted in accordance with the laws of
the State of Texas. Venue for any action, suit or other proceeding
shall be exclusively in Harris County, Texas.
Section 16.6. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be
deemed an original, but all of which shall constitute one and the
same instrument.
Section 16.7. Severability. In the event that any provision or
term of this Agreement shall be held by any court to be illegal or
unenforceable, all of the other terms and provisions shall remain in
full force and effect, except if the provision or term held to be
illegal or unenforceable is also held to be a material part of this
Agreement such that the party in whose favor the material term or
provision was stipulated herein would not have entered into this
Agreement without such term or provision, then the party in whose
favor the material term or provision was stipulated shall have the
right, upon such holding, to terminate this Agreement.
Section 16.8. Amendments. This Agreement shall be amended only
by mutual consent and written agreement executed and delivered by the
parties.
Section 16.9. Schedules and Paragraph Headings. Schedules
attached hereto are made a part of this Agreement. Paragraph
headings are provided for reference purposes only and are not made a
part of this Agreement.
Section 16.10. Financial Reports. The Company and the
Reinsurer each agree to furnish the other with their respective NAIC
Annual and Quarterly Statements, as required by their respective
state laws within five (5) days after such reports are filed with
such respective states.
Section 16.11. Survival. The representations, warranties,
covenants and agreements respectively made by the Company and the
Reinsurer in this Agreement shall survive the termination or
expiration of this Agreement.
Section 16.12. Notices. Any notices made pursuant to this
Agreement shall be in writing and shall be deemed to have been duly
given on the date of delivery if delivered personally (including
overnight delivery service) or by facsimile transmission to the party
to whom notice is given, or on the third day after mailing if mailed
to the party to whom notice is to be given by certified mail, return
receipt requested, and properly addressed as follows:
If to the Company:
The Statesman National Life Insurance Company
Attn: Eugene L. Ligon, President
3518 Montrose Blvd.
Houston, Texas 77006
FAX: (713) 630-7520
If to the Reinsurer:
American Capitol Insurance Company
Attn: William F. Guest, Chairman
10555 Richmond Avenue
Houston, Texas 77042
FAX: (713) 953-7920
Any party to this Agreement may change the address to which notice is
to be delivered to such party under this Section 16.12 by delivering
written notice to that effect to the other party in accordance with
this Section 16.12. Any document delivered via facsimile
transmission shall be treated as the original for all purposes unless
the original is substituted therefor.
Section 16.13. Understanding of Agreement. The Parties agree
that the drafting of this Agreement has been a joint effort and no
special weight or presumption should arise in favor of or against
either Party based on whether one Party or the other was more
responsible for the drafting of this Agreement. Each Party has
consulted with its accounting, actuarial and legal advisers in
respect to the negotiations and the drafting of this Agreement. Each
Party has read and understands this Agreement, and each party agrees
that it shall not be entitled to claim a failure to understand the
meaning and effect of this Agreement, or any part thereof, as a
defense under any circumstances.
Section 16.14. Assignment. No party may assign this Agreement
or any of its rights, interests, or obligations hereunder without the
prior written consent of the other party, if the assignment is to an
entity other than an affiliate of the Reinsurer.
Section 16.15. Broker Fees. Each party hereby represents and
warrants that it has not taken any action that would impose on any
other party hereto liability for payment of any broker, finder, or
similar fee in connection with the origin, negotiation, execution, or
performance of this Agreement.
Section 16.16. Cooperation. The parties agree that they will
from time to time, upon the request of any other party and without
further consideration, execute, acknowledge, and deliver in proper
form any further instruments and take such other action as the other
party may reasonably require in order to carry out effectively the
intent of this Agreement.
Section 16.17. Entire Agreement. This Agreement constitutes
the entire agreement and understanding of the parties pertaining to
the subject matter contained in this Agreement and supersedes all
prior and contemporaneous oral and written agreements,
representations, and understandings of the parties (provided,
however, that the values assigned to the Policies, including the post-
closing adjustment values, as set forth in the Stock Purchase
Agreement shall not be affected by this Agreement).
Section 16.18. Exhibits and Schedules. All exhibits and
schedules attached to and referenced in this Agreement are hereby
incorporated by reference into this Agreement as if they were set
forth at length in the text of this Agreement.
Section 16.19. Expenses. Unless otherwise expressly provided
in this Agreement, each party shall pay all of its own costs, fees,
and expenses incurred or to be incurred in negotiating and preparing
this Agreement and in closing and carrying out the transactions
contemplated by this Agreement.
Section 16.20. Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, that provision shall not apply and shall be omitted to
the extent so contrary, prohibited, or invalid; but the remainder of
this Agreement shall not be invalidated and shall be given full force
and effect insofar as possible.
Section 16.21. Successors. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Section 16.22. Third Party Beneficiaries. Except as to the
holders of the Policies, nothing in this Agreement, whether express
or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons or entities other than the
parties to it and their respective successors and permitted assigns.
In addition, nothing in this Agreement is intended to relieve or
discharge the obligation or liability of any third person or entity
to any party to this Agreement or give any third person or entity any
right of subrogation or action against any party to this Agreement.
Section 16.23. Waiver of Compliance. The party for whose
benefit a warranty, representation, covenant, or condition is
intended may waive any inaccuracies in the warranties and
representations contained in the Agreement or waive compliance with
any of the covenants, warranties, or conditions contained herein and
so waive performance of any of the obligations of the other party and
any defaults under this Agreement, but to be effective any such
waiver must be in writing signed by the party granting such waiver.
A waiver shall not affect or impair, however, the waiving party's
rights with respect to any other warranty, representation, or
covenant or any default hereunder not specifically waived, nor shall
any waiver constitute a continuing waiver.
Section 16.24. Waiver of Right to Trail by Jury. The Company
and the Reinsurer both expressly waive any right to trial by jury of
any claim, demand, action or cause of action (a) arising under this
Agreement or any other instrument or document executed or delivered
in connection herewith, or (b) in any way connected or incident to
the dealing of the parties hereto in connection with the transactions
related hereto, in each case whether now existing or hereafter
arising; and the Company and the Reinsurer both hereby agree and
consent that any such claim, demand, action or cause of action shall
be decided by arbitration and to the extent applicable by a court
trial without a jury, and that any party to this Agreement may file
an original counterpart or a copy of this Agreement with any court as
written evidence of the consent of the Company and the Reinsurer to
the waiver of the right to trial by jury.
IN WITNESS WHEREOF, the parties have caused their duly
authorized representatives to execute this Agreement as of the date
first written above.
THE STATESMAN NATIONAL LIFE INSURANCE COMPANY
By: /s/Eugene L. Ligon, President
-------------------------------
Eugene L. Ligon, President
Witness: /s/Ronald E. Eshelman
------------------------------
Corporate Officer
Ronald E. Eshelman, Secretary
Printed Name and Title
AMERICAN CAPITOL INSURANCE COMPANY
By:/s/ William F. Guest
-------------------------------
William F. Guest, Chairman
Witness: /s/John Cornett
-------------------------------
Corporate Officer
John Cornett, President
Printed Name and Title
Liquidation Plan
Exhibit 3.3-B
Medicare Supplement Pre-Standard Assumption Agreement
The Medicare Supplement Pre-Standard Assumption Agreement is
attached hereto and incorporated herein by reference.
<PAGE>
PRE-STANDARD ASSUMPTION AGREEMENT AMENDMENT
I. RECITALS
A. This is an amendment ("Amendment") to that certain
"Assumption Reinsurance Agreement" dated March 12, 1999, between
Statesman National Life Insurance Company (referred to therein
and herein as "Statesman") and American Capitol Insurance Company
(referred to therein and herein as "American Capitol" and
"Reinsurer"), who are the parties to this Amendment, and who are
sometimes referred to herein collectively as the "Parties." The
effective date of this Amendment is June 1, 1999.
B. This Amendment is entered into in advance of the agreement
by the Parties on a plan regarding Statesman ("Liquidation Plan")
developed by the Parties along with Jose Montemayor, Commissioner
of Insurance, Texas Department of Insurance ("TDI") in his
capacity as Commissioner and as Receiver of Statesman
("Commissioner" and/or "Receiver" as appropriate), and Texas
Imperial Life Insurance Company ("Texas Imperial"), the National
Organization of Life and Health Insurance Guaranty Associations
("NOLHGA"), and the life and health insurance guaranty
associations affected by the insolvency and liquidation of
Statesman that elect to participate in the Liquidation Plan (the
"Participating Guaranty Associations"). References are sometimes
made herein to the Liquidation Plan for various purposes. The
recitals from the Liquidation Plan are incorporated herein.
C. The policies that are the subject of the Assumption
Reinsurance Agreement and this Amendment are the same policies
that are the subject of the Coinsurance Agreement which was
entered into between the Parties hereto effective October 31,
1998, and is also identified in the Liquidation Plan.
NOW, THEREFORE, in consideration of the foregoing premises, and
the covenants, promises
and agreements set forth in this Amendment, the Parties agree as
follows:
II. DEFINITIONS
Unless otherwise specifically provided or the context so
requires, the capitalized terms set forth in this Amendment
Agreement shall have the same meaning as set forth in Exhibit 2.1
to the Liquidation Plan and such definitions are incorporated by
reference as if fully set forth herein.
III. AMENDMENT
This Amendment amends the above identified "Assumption
Reinsurance Agreement" in the manner and to the extent set forth
herein. If the event any provision or provisions contained herein
is in conflict with, or is inconsistent with, any provision or
provisions contained in the Assumption Reinsurance Agreement, the
provision or provisions contained herein shall control, override,
and supersede such conflicting or inconsistent provision or
provisions contained in the Assumption Reinsurance Agreement.
IV. ASSUMPTION OF THE STATESMAN PRE-STANDARD MEDICARE
SUPPLEMENT POLICIES
A. Pre-Standard Medicare Supplement Policies
1. Statesman. Subject to the terms and conditions of this
Amendment, Statesman transfers, cedes and assigns to American
Capitol as of June 1, 1999, the Pre-Standard Medicare Supplement
Policies and all rights, privileges and prerogatives thereunder.
The Pre-Standard Medicare Supplement Policies are reflected in
Exhibit III.A.1. American Capitol shall have no liability for any
obligations of Statesman, other than the Pre-Standard Medicare
Supplement Policies.
2. Assuming Insurer. Subject to the terms and conditions of
this Amendment, American Capitol assumes as of 12:01 a.m. on June
1, 1999, the Pre-Standard Medicare Supplement Policies to the
same extent and with the same effect as if American Capitol had
issued the Pre-Standard Medicare Supplement Policies directly.
3. Assumption Certificate. As soon as possible after June 1,
1999, American Capitol shall deliver an assumption certificate to
policyholders of the Pre-Standard Medicare Supplement Policies
substantially in the form of Exhibit III.A.3. and subject to the
approval of the Commissioner and NOLHGA.
B. Same Terms and Conditions. All Pre-Standard Medicare
Supplement Policies assumed by American Capitol shall be subject
in all respects to the same terms and conditions of the subject
policies as issued by Statesman. Notwithstanding anything to the
contrary herein contained, American Capitol does not assume, and
shall not be liable for, any liabilities that are not based
solely on the terms and provisions of the Pre-Standard Medicare
Supplement Policies. American Capitol shall accept and assume the
Pre-Standard Medicare Supplement Policies subject to all
defenses, set-offs and counterclaims to which Statesman would be
entitled with respect to such Pre-Standard Medicare Supplement
Policies. It is expressly understood and agreed by the parties
that no such defenses, set-offs or counterclaims are waived by
the execution of the Assumption Reinsurance Agreement or this
Amendment, the Liquidation Plan or by the consummation of any
related transactions, and that on June 1, 1999, American Capitol
shall be fully subrogated to all such defenses, set-offs and
counterclaims (all of which defenses, set-offs and counterclaims
may also be asserted by Statesman with respect to any claims that
may be asserted against it).
C. Assignment of Rights. Statesman hereby assigns to American
Capitol all of its privileges and prerogatives contained within
or related to the Pre-Standard Medicare Supplement Policies,
including, but not limited to, all defenses, including
contestability based upon material misstatements in the
applications for such Pre-Standard Medicare Supplement Policies,
set-offs and counterclaims to which Statesman would be entitled
with respect to such Pre-Standard Medicare Supplement Policies.
D. Reinstatement. American Capitol agrees to reinstate any Pre-
Standard Medicare Supplement Policy which on June 1, 1999, by its
terms was entitled to reinstatement, provided that all
requirements necessary to procure reinstatement of such a policy
under its terms are fulfilled to the satisfaction of American
Capitol. Upon such reinstatement of any such lapsed policy, it
shall for all purposes be treated as if it has been in force from
the date on which it lapsed, except that it shall be subject to
all the terms and conditions of the Assumption Reinsurance
Agreement and this Amendment as may be pertinent to the class of
policy in which it was or should have been included.
E. Errors and Omissions. Inadvertent errors or omissions shall
not relieve any party from liability provided that the error or
omission is rectified as soon as practicable after discovery.
Upon discovery of an error or omission, the party discovering the
error or omission shall notify any other parties affected by the
error or omission. All parties agree to cooperate and work
together, in good faith, to resolve any problems or losses caused
by any such error or omission. Such good faith cooperation may
include, but is not limited to, assumption of Statesman policies,
transfer of assets and complete documentation of the error or
omission.
V. CLOSING.
The Closing Date of the Assumption Reinsurance Agreement and this
Amendment shall take place upon execution of this Amendment by
the parties hereto.
VI. DISPUTES
To the extent that disputes or disagreements exist regarding the
final accounting and/or audits thereof, and the parties are
unable to resolve those disputes, the disputes shall be resolved
by means of the Accounting Procedure as specified in the
Liquidation Plan.
VII. PREMIUMS AND OTHER RECEIPTS
A. The parties acknowledge that the settlements required to be
made by and between the parties to the Coinsurance Agreement have
been made through May, 1999, which fact is also reflected in the
"Settlement Agreement" to which American Capitol and Statesman
are parties as set forth in the Liquidation Plan.
B. All policyholder payments related to the Pre-Standard
Medicare Supplement Policies for periods on or after June 1,
1999, shall be the sole property of American Capitol. All
policyholder payments related to the Pre-Standard Medicare
Supplement Policies for periods before June 1, 1999, shall be the
sole property of Statesman.
C. All money, checks, drafts, money orders, postal notes, and
other instruments received on or after June 1, 1999, for premiums
on the Pre-Standard Medicare Supplement Policies which are the
sole property of American Capitol shall be forthwith transferred
and delivered to American Capitol and any such instruments, when
so delivered, shall bear all endorsements required to effect the
transfer of same to American Capitol. As of and following June
1, 1999, American Capitol shall have all the rights of Statesman
under outstanding bank draft authorizations from policyholders
which authorized Statesman to draw on the policyholder's account
to automatically withhold from policyholder's accounts and
transmit to Statesman funds to apply to premium on the Pre-
Standard Medicare Supplement Policies. So far as permitted by
the laws of the applicable states, American Capitol, as part of
the Assumption Reinsurance Agreement and this Amendment, American
Capitol assumes the guaranty obligations of Statesman, if any,
with respect to such bank drafts authorizations outstanding on
June 1, 1999. American Capitol shall have the right and
authority to collect for the account of American Capitol all
receivables and other items which shall be transferred by
Statesman to American Capitol and to endorse without recourse and
without warranties of any kind the name of Statesman on any
checks or the evidences of indebtedness received by American
Capitol on account of any such receivables or other items.
VIII.RECORDS
A. Statesman agrees to transfer, assign, deliver and convey to
American Capitol, subject to the terms set forth in the
Amendment, all files and records related to the Pre-Standard
Medicare Supplement Policies in its possession or under its
control. American Capitol agrees that after such delivery,
Statesman shall be entitled, at any reasonable time and at its
expense, to inspect, audit and copy any and all such records and
files of American Capitol and all other records and files of
American Capitol relating to the Pre-Standard Medicare Supplement
Policies.
B. Any and all correspondence, premiums, records or documents
coming into the possession of Statesman on or after June 1, 1999,
directly pertaining to any Pre-Standard Medicare Supplement
Policies shall be promptly delivered to American Capitol by
Statesman, without charge to American Capitol.
IX. RESERVES
The parties acknowledge that assets equal to the reserve
liability relating to the Pre-Standard Medicare Supplement
Policies have already been settled between the parties, and no
transfer of funds or assets are involved in the change of the
reinsurance from coinsurance pursuant to the Coinsurance
Agreement to the Assumption Reinsurance Agreement and this
Amendment.
X. JURISDITION AND ACCOUNTING PROCEDURE
The provisions and requirements related to jurisdiction and the
Accounting Procedure from the Liquidation Plan apply to this
Amendment and are incorporated herein by reference.
XI. NOTICE
The provisions and requirements related to notice from the
Liquidation Plan apply to this Amendment and are incorporated
herein by reference.
XII. GENERAL PROVISIONS
The general provisions from the Liquidation Plan apply to this
Amendment and are incorporated herein by reference. Specifically,
and without limitation of the foregoing, the obligations of the
Receiver regarding the Assumed Policies as set forth in Sections
4.4.3 and 4.4.4 of the Liquidation Plan shall apply as well to
the Pre-Standard Medicare Supplement Policies the same as if
"Assumed Policies" were to read "Assumed Policies and the Pre-
Standard Medicare Supplement Policies heretofore assumed by
American Capitol from Statesman."
IN WITNESS WHREOF, this Amendment has been executed on the day
and year subscribed.
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest Date: June 1, 1999
-------------------------------
William F. Guest, Chairman
STATESMAN NATIONAL LIFE INSURANCE COMPANY
By: /s/John D. Cornett, President Date: June 1, 1999
-------------------------------
John D. Cornett, President
Liquidation Plan
Exhibit 3.3-C
Medicare Supplement Pre-Standard Assumption Certificates
The Medicare Supplement Pre-Standard Assumption Certificate
is attached hereto and incorporated herein by reference.
<PAGE>
AMERICAN CAPITOL INSURANCE COMPANY
POLICY NUMBER:
INSURED:
CERTIFICATE OF ASSUMPTION
This is to certify that AMERICAN CAPITOL INSURANCE COMPANY
("American Capitol"), a life insurance company organized and
existing under the laws of the State of Texas with offices in
Houston, Texas, has assumed and reinsured all contractual
obligations existing under the policy identified above heretofore
issued or assumed by STATESMAN NATIONAL LIFE INSURANCE COMPANY
("Statesman") in accordance with the terms and conditions
thereof, the same as if such policy had been originally issued
with all its terms, covenants, stipulations and provisions, by
American Capitol. This Certificate of Assumption is being issued
in accordance with the terms and conditions of an Assumption
Agreement entered into between American Capitol and Statesman.
The Effective Date of this Certificate of Assumption is June 1,
1999.
Future payments of benefits and claims will be made by American
Capitol, and all premium payments, claims and correspondence
relating to the policy should be sent to:
Mailing Address Delivery Address
P. O. Box 42814 10555 Richmond Avenue, 2nd Floor
Houston, TX 77242-2814 Houston, TX 77042
IN WITNESS WHEREOF, AMERICAN CAPITOL INSURANCE COMPANY has caused
this Certificate to be signed by its duly authorized officers as
of the effective date.
/s/H. Kathleen Musselwhite /s/John D. Cornett, President
- -------------------------------- -----------------------------
H. Kathleen Musselwhite, Secretary John D. Cornett, President
THIS CERTIFICATE BECOMES A PART OF YOUR POLICY AND SHOULD BE
ATTACHED THERETO.
ISSU###-##-####
LIQUIDATION PLAN
REGARDING THE INSOLVENCY AND LIQUIDATION OF
THE STATESMAN NATIONAL LIFE INSURANCE COMPANY
EXHIBIT 3.4-A
LIST OF AFFECTED ASSOCIATIONS
DATE:
__________________________
This Exhibit 3.4-A to the Liquidation Plan contains a list
of those life and health insurance guarantee associations which,
according to the current records of Statesman, constitute
Affected Associations as that term is defined in the Liquidation
Plan definitions. .
Arizona Life & Disability Insurance Guaranty Fund
Jack King, Executive Director
3443 North Central Avenue, Suite 1000
Phoenix, AZ 85012
(602) 248-0685
(602) 248-0780 (fax)
Arkansas Life & Disability Insurance Guaranty Association
Allan W. Horne, Administrator
Horne, Hollingsworth & Parker
401 W. Capital, Suite 501
Little Rock, AR 72201
(501) 376-4731
(501) 372-7142 (fax)
California Life & Health Insurance Guarantee Association
Peter C. Leonard, Executive Director
8383 Wiltshire Boulevard, Suite 815
Beverly Hills, CA 90211
(323) 782-0182
(323) 782-8108 (fax)
(Colorado) Life & Health Insurance Protection Association
Jamie Kelldorf, Administrator
475 17th Street, Suite 820
Denver, CO 80202
(303) 292-5022
(303) 292-4663 (fax)
Delaware Life & Health Insurance Guaranty Association
John J. Falkenbach, Executive Director
220 Continental Drive, Suite 309
Newark, DE 19713
(302) 456-3656
(302) 456-3680 (fax)
District of Columbia Life & Health Insurance Guaranty Association
Robert M. Willis, Administrator
1200-G Street, N.W., Suite 800
Washington, DC 20005
(202) 434-8771
(202) 347-2990 (fax)
Florida Life & Health Insurance Guaranty Association
William E. Falck, Executive Director
653-1 W. Eighth St., Suite 4060
Jacksonville, FL 32209-6511
(904) 355-6401
(904) 549-3l90 (fax)
Idaho Life & Health Insurance Guaranty Association
Betty J. Olsson, Executive Director
1327 South Five Mile Road
Boise, ID 83709
(208) 378-9510
(208) 378-9510 (fax)
Illinois Life & Health Insurance Guaranty Association
Daniel A. Orth, Executive Director
8420 W. Bryn Mawr Avenue, Suite 550
Chicago, IL 60631-3404
(773) 714-8050
(773) 714-8052 (fax)
Indiana Life & Health Insurance Guaranty Association
Phillip A. Hammond, Executive Director
251 East Ohio Street, Suite 1070
Indianapolis, IN 46201-2143
(317) 636-8204
(317) 264-2395 (fax)
Iowa Life & Health Insurance Guaranty Association
Luther L. Hill, Administrator
c/a Nyemaster & Goode
700 Walnut Street, Suite 1600
Des Moines, IA 50309
(515) 283-3163
(515) 283-8018 (fax)
Kansas Life & Health Insurance Guaranty Association
Linda Becker, Administrator
2909 S.W. Maupin Lane
Topeka, KS 66614-4139
(785) 271-1199
(785) 272-0242 (fax)
Louisiana Life & Health Insurance Guaranty Association
Phyllis Perron, Executive Director
451 Florida St., N. Tower, Suite 1400
Baton Rouge, LA 70801
(504) 381-0656
(504) 344-1132 (fax)
(Maryland) Life & Health Insurance Guaranty Corporation
John S. Boritas, Executive Director
9199 Reisterstown Road, Suite 216-C
Owings Mills, MD 21117-6050
(410) 998-3907
(410) 998-3909 (fax)
Michigan Life & Health Insurance GuarantyAssociation
John C. Colpean, Administrator
c/o Colpean Associates, P.C.
230 N. Washington Square, Suite 316
Lansing, MI 48933-1312
(517) 487-2525
(517) 487-1010 (fax)
Missouri Life & Health Insurance Guaranty Association
Charles F. Rein, Executive Director
520 Dix Road, Suite D
Jefferson City, MO 65109
(573) 634-8455
(573) 634-8488 (fax)
Montana Life & Health Insurance Guaranty Association
Jamie Kelldorf, Administrator
475 17th Street, Suite 820
Denver, CO 80202
(303) 292-5022
(303) 292-4663 (fax)
Nebraska Life & Health Insurance Guaranty Association
Sonya S. Ekart, Administrator
1900 First Bank Building
Lincoln, NE 68508
(402) 474-6900
(402) 474-5393 (fax)
Nevada Life & Health Insurance Guaranty Association
Benedict J. Dasher, Chairman
One East First Street, Suite 1211
Reno, NV 89501
(775) 329-8387
(775) 323-4997 (fax)
New Mexico Life Insurance Guaranty Association
Sye D. Leer, Administrator
2705 Juan Talo B-2 N.E.
Albuquerque, NM 87112
(505) 237-9397
(505) 237-9496 (fax)
North Dakota Life & Health Insurance Guaranty Association
James C. Beckstrom, Executive Director
818 Main Avenue
Fargo, ND 58103
(701) 235-4108
(701) 241-9017 (fax)
Ohio Life & Health Insurance Guaranty Association
Frank A. Gartland, President
1840 Mackenzie Drive
Columbus, OH 43220
(614) 442-6601
(614) 442-0004 (fax)
Oklahoma life & Health Insurance Guaranty Association
Horace G. Rhodes, Administrator
Kerr, Irvine, Rhodes & Ables
201 Robert S. Kerr Ave., Suite 600
Oklahoma City, OK 73102
(405) 272-9221
(405) 236-3121 (fax)
Oregon Life & Health Insurance Guaranty Association
James B. Kleen, Administrator
c/o JBK & Associates
3541 Elderberry Drive, South
Salem, OR 97302
(503) 588-1974
(503) 588-2029 (fax)
South Carolina Life, Accident & Health Insurance Guaranty Association
Andrea H. Bowers, Administrator
2926 Wexford Drive N.E.
Orangeburg, SC 29115
(803) 536-9874
(803) 536-2636 (fax)
Tennessee Life & Health Insurance Guaranty Association
Dan H. Elrod, Administrator
511 Union Street, 25th Floor
Nashville, TN 37219
(615) 242-8758
(615) 256-8197 (fax)
Texas Life, Accident, Health & Hospital Service Insurance
Guaranty Association
Charles S. LaShelle, Executive Director
LaShelle, Coffman & Boles, Ltd.
301 Congress, Suite 500
Austin, TX 78701
(512) 499-0004
(512) 472-1450 (fax)
Utah Life & Disability Insurance Guaranty Association
Arthur 0. Dummer, Administrator
c/o The Donner Company
955 East Pioneer Road
Draper, UT 81020
(801) 572-5066
(801) 572-5067 (fax)
Virginia Life, Accident & Sickness Insurance Guaranty Association
Margaret M. Parker
c/o APM Management Services, Inc.
8001 Franklin Farms Drive, Suite 238
Richmond, VA 23229
(804) 282-2240
(804) 282-1816 (fax)
Washington Life & Disability Insurance Guaranty Association
R. Neil Rucksdashel, Executive Director
12514 S.E. 16th Street
Bellevue, WA 98005
(425) 562-3123
(425) 746-1861 (fax)
Wyoming Life & Health Insurance Guaranty Association
Jamie Kelldorf, Administrator
475 17th Street, Suite 820
Denver, CO 80202
(303) 292-5022
(303) 292-4663 (fax)
LIQUIDATION PLAN
REGARDING THE INSOLVENCY AND LIQUIDATION OF
THE STATESMAN NATIONAL LIFE INSURANCE COMPANY
EXHIBIT 3.4-B
LIST OF PARTICIPATING GUARANTY ASSOCIATIONS
DATE:
__________________________
This Exhibit 3.4-B to the Liquidation Plan contains a list of
those life and health insurance guarantee associations which,
pursuant to the rules and by-laws of NOLHGA and in accordance with
the Liquidation Plan, have become Participating Guaranty
Associations as that term is defined in the Liquidation Plan.
Arizona Life & Disability Insurance Guaranty Fund
Jack King, Executive Director
3443 North Central Avenue, Suite 1000
Phoenix, AZ 85012
(602) 248-0685
(602) 248-0780 (fax)
Arkansas Life & Disability Insurance Guaranty Association
Allan W. Horne, Administrator
Horne, Hollingsworth & Parker
401 W. Capital, Suite 501
Little Rock, AR 72201
(501) 376-4731
(501) 372-7142 (fax)
California Life & Health Insurance Guarantee Association
Peter C. Leonard, Executive Director
8383 Wiltshire Boulevard, Suite 815
Beverly Hills, CA 90211
(323) 782-0182
(323) 782-8108 (fax)
(Colorado) Life & Health Insurance Protection Association
Jamie Kelldorf, Administrator
475 17th Street, Suite 820
Denver, CO 80202
(303) 292-5022
(303) 292-4663 (fax)
Delaware Life & Health Insurance Guaranty Association
John J. Falkenbach, Executive Director
220 Continental Drive, Suite 309
Newark, DE 19713
(302) 456-3656
(302) 456-3680 (fax)
District of Columbia Life & Health Insurance Guaranty Association
Robert M. Willis, Administrator
1200-G Street, N.W., Suite 800
Washington, DC 20005
(202) 434-8771
(202) 347-2990 (fax)
Florida life & Health Insurance Guaranty Association
William E. Falck, Executive Director
653-1 W. Eighth St., Suite 4060
Jacksonville, FL 32209-6511
(904) 355-6401
(904) 549-3l90 (fax)
Idaho Life & Health Insurance Guaranty Association
Betty J. Olsson, Executive Director
1327 South Five Mile Road
Boise, ID 83709
(208) 378-9510
(208) 378-9510 (fax)
Illinois Life & Health Insurance Guaranty Association
Daniel A. Orth, Executive Director
8420 W. Bryn Mawr Avenue, Suite 550
Chicago, IL 60631-3404
(773) 714-8050
(773) 714-8052 (fax)
Indiana Life & Health Insurance Guaranty Association
Phillip A. Hammond, Executive Director
251 East Ohio Street, Suite 1070
Indianapolis, IN 46201-2143
(317) 636-8204
(317) 264-2395 (fax)
Iowa Life & Health Insurance Guaranty Association
Luther L. Hill, Administrator
c/a Nyemaster & Goode
700 Walnut Street, Suite 1600
Des Moines, IA 50309
(515) 283-3163
(515) 283-8018 (fax)
Louisiana Life & Health Insurance Guaranty Association
Phyllis Perron, Executive Director
451 Florida St., N. Tower, Suite 1400
Baton Rouge, LA 70801
(504) 381-0656
(504) 344-1132 (fax)
(Maryland) Life & Health Insurance Guaranty Corporation
John S. Boritas, Executive Director
9199 Reisterstown Road, Suite 216-C
Owings Mills, MD 21117-6050
(410) 998-3907
(410) 998-3909 (fax)
Michigan Life & Health Insurance Guaranty Association
John C. Colpean, Administrator
c/o Colpean Associates, P.C.
230 N. Washington Square, Suite 316
Lansing, MI 48933-1312
(517) 487-2525
(517) 487-1010 (fax)
Missouri Life & Health Insurance Guaranty Association
Charles F. Rein, Executive Director
520 Dix Road, Suite D
Jefferson City, MO 65109
(573) 634-8455
(573) 634-8488 (fax)
Montana Life & Health Insurance Guaranty Association
Jamie Kelldorf, Administrator
475 17th Street, Suite 820
Denver, CO 80202
(303) 292-5022
(303) 292-4663 (fax)
Nebraska Life & Health Insurance Guaranty Association
Sonya S. Ekart, Administrator
1900 First Bank Building
Lincoln, NE 68508
(402) 474-6900
(402) 474-5393 (fax)
Nevada Life & Health Insurance Guaranty Association
Benedict J. Dasher, Chairman
One East First Street, Suite 1211
Reno, NV 89501
(775) 329-8387
(775) 323-4997 (fax)
New Mexico Life Insurance Guaranty Association
Sye D. Leer, Administrator
2705 Juan Talo B-2 N.E.
Albuquerque, NM 87112
(505) 237-9397
(505) 237-9496 (fax)
North Dakota Life & Health Insurance Guaranty Association
James C. Beckstrom, Executive Director
818 Main Avenue
Fargo, ND 58103
(701) 235-4108
(701) 241-9017 (fax)
Ohio Life & Health Insurance Guaranty Association
Frank A. Gartland, President
1840 Mackenzie Drive
Columbus, OH 43220
(614) 442-6601
(614) 442-0004 (fax)
Oklahoma life & Health Insurance Guaranty Association
Horace G. Rhodes, Administrator
Kerr, Irvine, Rhodes & Ables
201 Robert S. Kerr Ave., Suite 600
Oklahoma City, OK 73102
(405) 272-9221
(405) 236-3121 (fax)
Oregon Life & Health Insurance Guaranty Association
James B. Kleen, Administrator
c/o JBK & Associates
3541 Elderberry Drive, South
Salem, OR 97302
(503) 588-1974
(503) 588-2029 (fax)
South Carolina Life, Accident & Health Insurance Guaranty
Association
Andrea H. Bowers, Administrator
2926 Wexford Drive N.E.
Orangeburg, SC 29115
(803) 536-9874
(803) 536-2636 (fax)
Tennessee Life & Health Insurance Guaranty Association
Dan H. Elrod, Administrator
511 Union Street, 25th Floor
Nashville, TN 37219
(615) 242-8758
(615) 256-8197 (fax)
Texas Life, Accident, Health & Hospital Service Insurance Guaranty
Association
Charles S. LaShelle, Executive Director
LaShelle, Coffman & Boles, Ltd.
301 Congress, Suite 500
Austin, TX 78701
(512) 499-0004
(512) 472-1450 (fax)
Utah Life & Disability Insurance Guaranty Association
Arthur 0. Dummer, Administrator
c/o The Donner Company
955 East Pioneer Road
Draper, UT 81020
(801) 572-5066
(801) 572-5067 (fax)
Virginia Life, Accident & Sickness Insurance Guaranty Association
Margaret M. Parker
c/o APM Management Services, Inc.
8001 Franklin Farms Drive, Suite 238
Richmond, VA 23229
(804) 282-2240
(804) 282-1816 (fax)
Washington Life & Disability Insurance Guaranty Association
R. Neil Rucksdashel, Executive Director
12514 S.E. 16th Street
Bellevue, WA 98005
(425) 562-3123
(425) 746-1861 (fax)
Liquidation Plan
Exhibit 3.6
Early Access Distribution Pro Rata Allocation
Class 1 Claims
Early access distributions for Class 1 claims of Participating
Guaranty Associations shall be made pursuant to the proposal
contemplated in Tex. Ins. Code Art. 21.28, Section 7A and the
Liquidation Plan.
Class 2 Claims
The pro rata allocation for early access distributions to the
Participating Guaranty Associations with respect to Class 2 claims
under Tex. Ins. Code Art. 21.28, Section 8 is attached hereto and
incorporated herein by reference.
<PAGE>
Early Assess Pro Rate Distribution Among GA's
Line of Total Major Grand Total Percentage
Business State by State Med. w/o Maj. Med. by State
- -------- ------ --------- ------ ------------- ----------
All Alabama 0 0 0 0.0000%
Blocks Alaska 0 0 0 0.0000%
of Arizona 4,033 142 3,891 0.0359%
Business Arkansas 1,597,022 56,425 1,540,597 14.2160%
California 564 20 544 0.0050%
Colorado 1,989 70 1,919 0.0177%
Connecticut 0 0 0 0.0000%
Delaware 0 0 0 0.0000%
Dist of Col 428 15 413 0.0038%
Florida 2,974 105 2,869 0.0265%
Georgia 0 0 0 0.0000%
Hawaii 0 0 0 0.0000%
Idaho 41 1 40 0.0004%
Illinois 1,454 51 1,403 0.0129%
Indiana 1,712 60 1,651 0.0152%
Iowa 65 2 62 0.0006%
Kansas 2,777 98 2,679 0.0247%
Kentucky 0 0 0 0.0000%
Louisiana 4,745,295 167,657 4,577,637 42.2406%
Maine 0 0 0 0.0000%
Maryland 456 16 439 0.0041%
Massachusetts 0 0 0 0.0000%
Michigan 1,840 65 1,775 0.0164%
Minnesota 0 0 0 0.0000%
Mississippi 0 0 0 0.0000%
Missouri 4,152 147 4,005 0.0370%
Montana 0 0 0 0.0000%
Nebraska 1,019 36 983 0.0091%
Nevada 256 9 247 0.0023%
New Hampshire 0 0 0 0.0000%
New Jersey 0 0 0 0.0000%
New Mexico 2,913 103 2,810 0.0259%
New York 0 0 0 0.0000%
North Carolina 0 0 0 0.0000%
North Dakota 38 1 36 0.0003%
Ohio 281 10 271 0.0025%
Oklahoma 2,168,891 76,630 2,092,261 19.3066%
Oregon 840 30 810 0.0075%
Pennsylvania 0 0 0 0.0000%
Puerto Rico 0 0 0 0.0000%
Rhode Island 0 0 0 0.0000%
South Carolina 1,080 38 1,042 0.0096%
South Dakota 0 0 0 0.0000%
Tennessee 98 3 94 0.0009%
Texas 2,690,932 95,074 2,595,858 23.9535%
Utah 203 7 196 0.0018%
Vermont 0 0 0 0.0000%
Virginia 911 32 879 0.0081%
Washington 1,615 57 1,558 0.0144%
West Virginia 0 0 0 0.0000%
Wisconsin 0 0 0 0.0000%
Wyoming 83 3 80 0.0007%
---------- ------- ----------
Total 11,233,961 396,910 10,837,051
Policy Holder claims based on Association Liability with premium by
state and subject to adjustment per Liquidation Plan
Liquidation Plan
Exhibit 3.8
Southern Financial Reinsurance Agreement
The unsigned version of the southern Financial Reinsurance
Agreement is attached hereto and incorporation herein by reference.
This version will be executed and substituted for the unsigned
version and is effective as of April 1, 1999.
<PAGE>
ASSUMPTION AGREEMENT
between
STATESMAN NATIONAL LIFE INSURANCE COMPANY
Houston, Texas
(hereinafter called the Company)
and
SOUTHERN FINANCIAL LIFE INSURANCE COMPANY
Lafayette, Louisiana
(hereinafter called the Reinsurer)
WHEREAS, the Company and the Reinsurer had entered into a
Reinsurance Agreement effective September 30, 1998 coinsuring
certain individual life and annuity policies; and
WHEREAS, this Agreement gave the right to the Reinsurer to
subsequently assume these policies; and
WHEREAS, the Company and the Reinsurer now desires for the Reinsurer
to assume those policies remaining in force on April 1, 1999:
NOW THEREFORE, for valuable consideration and in consideration of
the mutual covenants contained herein, both parties agree:
Reinsurer shall assume all policies originally coinsured on
September 30, 1998 and remaining in force on April 1, 1999 (the Date
of Assumption). The Reinsurer will assume all liabilities and
obligations of the Company under the policies to the same extent and
with the same effect as if the Reinsurer had issued the policies
directly. On and after the Date of Assumption, Reinsurer shall:
1. Notify all policyholders of the change in carriers.
2. Shall be entitled to collect all premiums due and payable on
and after the Date of Assumption.
3. Shall pay all death benefits, cash surrenders, and any other
policy benefits incurred on and after the Assumption Date.
4. Shall pay all commission payments to agents on premiums
collected on and after the Assumption Date.
5. Shall pay all premium taxes incurred on premiums collected on
and after the Assumption Date.
6. The policies assumed by the Reinsurer shall be subject in all
respects to the same terms and conditions as issued by the Company.
The Assumption Certificate to be used to effect this agreement is
attached hereto and made a part of this Agreement. Assumption
Certificates shall be mailed to individual policyholders within 45
days after receiving approval of this agreement by the Texas
Department of Insurance.
IN WITNESS WHEREOF, the parties hereto have caused this Reinsurance
Agreement to be duly executed in duplicate this ---- day of -----
- -------, 1999.
FOR: STATESMAN NATIONAL LIFE INSURANCE COMPANY
Houston, Texas
- -------------------- ------------------------------------------
Attest:
FOR: SOUTHERN FINANCIAL LIFE INSURANCE COMPANY
Lafayette, Louisiana
- -------------------- -----------------------------------------
Attest:
1American Capitol Assumption Agreement - Exhibit 4.1-A to the L
iquidation Plan
AGREEMENT
for
ASSUMPTION REINSURANCE
by and among
the NATIONAL ORGANIZATION OF LIFE AND HEALTH
INSURANCE GUARANTY ASSOCIATIONS
and its Participating Life and Health Insurance Guaranty Associations
and the
AMERICAN CAPITOL INSURANCE COMPANY
Concerning
THE STATESMAN NATIONAL LIFE INSURANCE COMPANY IN LIQUIDATION
TABLE OF CONTENTS
Page
I. RECITALS 1
II. DEFINITIONS 1
III. ASSUMPTION OF AMERICAN CAPITOL ASSUMED POLICIES 1
A. American Capitol Assumed Policies 1
1. Participating Guaranty Associations 1
2. Assuming Insurer 2
3. Assumption Certificate 2
B. Same Terms and Conditions 2
C. Assignment of Rights 2
D. Reinstatement 3
E. Errors and Omissions 3
F. Third Party Reinsurance 4
IV. POLICY CALCULATIONS AND PAYMENT OBLIGATIONS 4
A. Association Liability 4
B. American Capitol Enhancement 4
V. CLOSING 5
VI. ACCOUNTING AND AUDIT PROCESS 5
A. Accounting 5
B. Audit 5
C. Accounting Date 6
D. Disputes 6
VII. PREMIUMS AND OTHER RECEIPTS 6
VIII.RECORDS 7
IX. LIABILITIES AND INDEMNITIES 7
X. REPRESENTATIONS 8
XI. RESERVES 8
XII. JURISDICTION AND ACCOUNTING PROCEDURE 8
XIII.NOTICE 8
XIV. INSOLVENCY OF AMERICAN CAPITOL 8
XV. GENERAL PROVISIONS 9
I. RECITALS
A. This agreement for assumption reinsurance ("American
Capitol Assumption Agreement") regarding the insolvency and
liquidation of The Statesman National Life Insurance Company
("Statesman") is entered into this 10th day of June, 1999
by and among the National Organization of Life and Health
Insurance Guaranty Associations ("NOLHGA"), and the life and
health insurance guaranty associations affected by the
insolvency and liquidation of Statesman that elect to
participate in this Liquidation Plan ("Participating
Guaranty Associations"), and American Capitol Insurance
Company ("American Capitol" and "Assuming Insurer").
B. This American Capitol Assumption Agreement is entered into
contemporaneously with the Liquidation Plan and the recitals from
the Liquidation Plan are incorporated herein.
NOW, THEREFORE, in consideration of the foregoing premises, and
the covenants, promises and agreements set forth in this American
Capitol Assumption Agreement and the Liquidation Plan, the
Parties agree as follows:
II. DEFINITIONS
Unless otherwise specifically provided or the context so
requires, the capitalized terms set forth in this American
Capitol Assumption Agreement shall have the same meaning as set
forth in Exhibit 2.1 to the Liquidation Plan and such definitions
are incorporated by reference as if fully set forth herein.
III. ASSUMPTION OF AMERICAN CAPITOL ASSUMED POLICIES
A. American Capitol Assumed Policies.
1. Participating Guaranty Associations. Subject to the terms
and conditions of this American Capitol Assumption Agreement, by
virtue of the Permanent Injunction and the Liquidation Plan and
pursuant to their statutory authority, the Participating Guaranty
Associations transfer, cede and assign to Assuming Insurer as of
the Closing Date the American Capitol Assumed Policies and all
rights, privileges and prerogatives thereunder. The American
Capitol Assumed Policies are reflected in Exhibit III.A.1.
American Capitol shall have no liability for any obligations of
Statesman, other than the American Capitol Assumed Policies and
as otherwise provided in the Liquidation Plan.
2. Assuming Insurer. Subject to the terms and conditions of
this American Capitol Assumption Agreement and the Liquidation
Plan, American Capitol assumes effective as of 12:01 a.m. on June
1, 1999 the American Capitol Assumed Policies, to the same extent
and with the same effect as if American Capitol had issued the
American Capitol Assumed Policies directly.
3. Assumption Certificate. As soon as possible after Closing
Date, American Capitol shall deliver an assumption certificate to
policyholders of the American Capitol Assumed Policies
substantially in the form of Exhibit III.A.3. and subject to the
approval of the Commissioner and NOLHGA.
B. Same Terms and Conditions. All American Capitol Assumed
Policies assumed by American Capitol shall be subject in all
respects to the same terms and conditions of the policies and
contracts as issued by Statesman. Notwithstanding anything to
the contrary contained herein, American Capitol does not assume,
and shall not be liable for, any liabilities that are not (a)
Covered Obligations, (b) claims based on policy terms and
provisions, or (c) liabilities expressly provided in the
Liquidation Plan. American Capitol shall accept and assume the
American Capitol Assumed Policies subject to all defenses, set-
offs and counterclaims to which the Participating Guaranty
Associations would be entitled with respect to such American
Capitol Assumed Policies. It is expressly understood and agreed
by the parties that no such defenses, set-offs or counterclaims
are waived by the execution of this American Capitol Assumption
Agreement, the Liquidation Plan or by the consummation of any
related transactions, and that on the Closing Date, American
Capitol shall be fully subrogated to all such defenses, set-offs
and counterclaims (all of which defenses, set-offs and
counterclaims may also be asserted by Statesman or any
Participating Guaranty Association, as the case may be, with
respect to any claims that may be asserted against them).
C. Assignment of Rights. Each Participating Guaranty
Association, severally, hereby assign to American Capitol all of
their respective privileges and prerogatives and the privileges
and prerogatives of Statesman, if any, contained within or
related to the American Capitol Assumed Policies, including, but
not limited to, all defenses, including contestability based upon
material misstatements in the applications for such American
Capitol Assumed Policies, set-offs and counterclaims to which
Statesman or the Participating Guaranty Association would be
entitled with respect to such American Capitol Assumed Policies;
provided that: (a) each Participating Guaranty Association
retains all rights and interests of policyholders against the
Statesman Estate to which the Participating Guaranty Association
is entitled pursuant to its enabling act and the Priority Statute
and all rights and interests of policyholders, in equity or at
law based on violations of common law, tort law, contract law,
statutory law or other law, to which the Participating Guaranty
Association is subrogated pursuant to its enabling act;
(b) American Capitol shall have no claim under the American
Capitol Assumed Policies against the Statesman Estate or any
Participating Guaranty Association except as otherwise set forth
in this American Capitol Assumption Agreement; and (c) American
Capitol shall have no privileges, prerogatives, defenses, set-
offs and counterclaims relating to reinsurance treaties in force,
except for Included Treaties.
D. Reinstatement. American Capitol agrees to reinstate any
American Capitol Assumed Policies policy which on the Closing
Date by its terms was entitled to reinstatement, provided that
all requirements necessary to procure reinstatement of such a
policy under its terms are fulfilled to the satisfaction of
American Capitol. Upon such reinstatement of any such lapsed
policy, it shall for all purposes be treated as if it has been in
force from the date on which it lapsed, except that it shall be
subject to all the terms and conditions of this American Capitol
Assumption Agreement as may be pertinent to the class of the
policy in which it was or should have been included. In the
event of such reinstatement, an appropriate adjustment shall be
made to the reserves or account values, as applicable, the
Enhancement, or the reinstated policy and any amounts due shall
be paid pursuant to this American Capitol Assumption Agreement;
provided that no such adjustment shall be made from and after the
Plan Termination Date.
E. Errors and Omissions. After the Plan Termination Date,
inadvertent errors or omissions shall not relieve any Party from
liability provided that the error or omission is rectified as
soon as practicable after discovery. Upon discovery of an error
or omission, the Party discovering the error or omission shall
notify any other parties affected by the error or omission. All
Parties agree to cooperate and work together, in good faith, to
resolve, consistent with the terms of the Liquidation Plan, any
problems or losses caused by any such error or omission. Such
good faith cooperation may include, but is not limited to,
assumption of Statesman policies, transfer of assets and complete
documentation of the error or omission.
F. Third Party Reinsurance. All of the Included Treaties which
pertain or apply to the American Capitol Assumed Policies, are
identified on Exhibit III.F. hereto. All such Included Treaties
shall be transferred to American Capitol on the Closing Date,
subject to the reinsurer's acceptance of the transfer, and may be
terminated thereafter at the election of American Capitol. The
Parties hereto shall use commercially reasonable efforts to
ensure that all such Included Treaties shall be amended,
adjusted, assigned or novated on terms and conditions
satisfactory to American Capitol on or before the Closing Date.
IV. POLICY CALCULATIONS AND PAYMENT OBLIGATIONS
A. Association Liability.
1. The Association Liability for the American Capitol Assumed
Policies shall be calculated by the following formula: American
Capitol Assumed Policies Reserves PLUS Reserve Adjustment EQUALS
Association Liability. The American Capitol Assumed Policies
reserves, the methodology for the reserve adjustment and the
detailed calculation for each Participating Guaranty
Association's Association Liability is set forth in Exhibit IV.A.
which shall include a break-down by specific policy block type:
Medical Supplement Attained Age; Companion Life; and Hospital
Indemnity.
2. On the Closing Date, each Participating Guaranty Association
shall deliver to American Capitol its Association Liability in
the manner set forth in the Liquidation Plan.
B. American Capitol Enhancement. On or before September 1, 2002
and in accordance with the Liquidation Plan, American
Capitol will contribute an Enhancement to each Participating
Guaranty Association pursuant to the calculations set forth in
Exhibit IV.B. for the Medicare Supplement Attained Age policies.
On the Closing Date, American Capitol will contribute a Reserve
Adjustment with respect to the Companion Life and Hospital
Indemnity policies which amounts shall be allocated to each
Participating Guaranty Association in accordance with its related
Association Liability as set forth in Exhibit IV.A.
V. CLOSING
Subject to the terms, conditions and limitations of the
Liquidation Plan, the Closing of this American Capitol Assumption
Agreement shall take place on the Closing Date contemporaneously
with the Closing of the Liquidation Plan.
VI. ACCOUNTING AND AUDIT PROCESS
A. Accounting.
1. On or before April 1, 2000, American Capitol shall prepare
and deliver to NOLHGA a one-year accounting and statement of
policy reserves, account values premiums and claims related to
American Capitol Assumed Policies for the prior calendar year.
That accounting shall be presented substantially in the form of
Exhibit VI.A.
2. Along with the one-year accounting, American Capitol shall
make available to NOLHGA and each Participating Guaranty
Association sufficient detail and documentation to support an
audit at the contract level.
3. On or before April 1, 2001, American Capitol shall prepare
and deliver to NOLHGA a second-year accounting and statement of
reserves, account values, premiums and claims related to the
American Capitol Assumed Policies in the same format as the one-
year report along with the contract level.
4 On or before April 1, 2002, American Capitol shall prepare
and deliver to NOLHGA a third-year accounting and statement of
reserves, account values, premiums and claims related to the
American Capitol Assumed Policies in the same format as the one-
year report along with the contract level.
5. On or before September 1, 2002, American Capitol shall
prepare and deliver to NOLHGA and to each Participating Guaranty
Association (to the extent related to that Participating Guaranty
Association's Covered Obligations) a final accounting and
statement of reserves, account values, premiums and claims
related to the American Capitol Assumed Policies for all three
years and any payment due.
B. Audit. On or before the first business day three (3) months
after receipt of each year's accounting, and statement of
reserves, account values, premiums and claims related to the
American Capitol Assumed Policies, NOLHGA and each Participating
Guaranty Association, shall each, separately, complete its audit
and communicate any areas of dispute or disagreement with
American Capitol's accounting.
C. Accounting Date.
1. Subject to the accounting and audit process set forth in
this Article VI, all amounts and calculations, including the
Enhancement, shall be final, due and payable on the Plan
Termination Date.
2. The exhibits to this American Capitol Assumption Agreement
and the obligations of each Party under this American Capitol
Assumption Agreement, shall be adjusted in accordance with the
audited annual accountings and the terms and provisions of the
Liquidation Plan.
D. Disputes. To the extent that disputes or disagreements
exist regarding the final accounting and/or audits thereof, and
the parties are unable to resolve those disputes, the disputes
shall be resolved by means of the Accounting Procedure as
specified in the Liquidation Plan.
VII. PREMIUMS AND OTHER RECEIPTS
A. All policyholder payments related to the American
Capitol Assumed Policies for periods after the Closing Date
shall be the sole property of American Capitol. All
policyholder payments related to the American Capitol
Assumed Policies for periods before the Closing Date shall
be the sole property of Statesman.
B. All moneys, checks, drafts, money orders, postal notes, and
other instruments received after the Closing Date for premiums on
the American Capitol Assumed Policies which are the sole property
of American Capitol shall be forthwith transferred and delivered
to American Capitol and any such instruments, when so delivered,
shall bear all endorsements required to effect the transfer of
same to American Capitol. As of and following the Closing Date,
American Capitol shall have all the rights of Statesman under
outstanding bank draft authorizations from policyholders which
authorized Statesman to draw on the policyholder's account to
automatically withhold from policyholder's accounts and transmit
to Statesman funds to apply to premium on the American Capitol
Assumed Policies. So far as permitted by the laws of the
applicable states, American Capitol, as part of this American
Capitol Assumption Agreement, assumes the guaranty obligations of
Statesman, if any, with respect to such bank drafts
authorizations outstanding on the Closing Date. American Capitol
shall have the right and authority to collect for the account of
American Capitol all receivables and other items which shall be
transferred by Statesman to American Capitol and to endorse
without recourse and without warranties of any kind the name of
Statesman on any checks or the evidences of indebtedness received
by American Capitol on account of any such receivables or other
items.
VIII.RECORDS
A. Each Participating Guaranty Association agrees to
transfer, assign, deliver and convey to American Capitol,
subject to the terms set forth in this Agreement, all files
and records related to the American Capitol Assumed Policies
in their possession or under their control. American
Capitol agrees that after such delivery, the Participating
Guaranty Associations and/or NOLHGA shall be entitled, at
any reasonable time and at their expense, to inspect, audit
and copy any and all such records and files of American
Capitol and all other records and files of American Capitol
relating to the American Capitol Assumed Policies.
B. Neither NOLHGA nor any Participating Guaranty Association
makes any warranty or representation that the books and records
of Statesman which may be transferred to American Capitol may or
shall be either accurate or complete.
C. Any and all correspondence, premiums, records or documents
coming into the possession of a Participating Guaranty
Association after the Closing Date directly pertaining to any
American Capitol Assumed Policies policy shall be promptly
delivered to American Capitol by the Participating Guaranty
Association, without charge to American Capitol.
IX. LIABILITIES AND INDEMNITIES
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the liabilities and indemnities from the Liquidation Plan
apply to this American Capitol Assumption Agreement and are
incorporated herein by reference.
X. REPRESENTATIONS
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the representations from the Liquidation Plan apply to this
American Capitol Assumption Agreement and are incorporated herein
by reference.
XI. RESERVES
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the requirements related to American Capitol's reserve
maintenance from the Liquidation Plan apply to this American
Capitol Assumption Agreement and are incorporated herein by
reference.
XII. JURISDICTION AND ACCOUNTING PROCEDURE
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the provisions and requirements related to jurisdiction and
the Accounting Procedure from the Liquidation Plan apply to this
American Capitol Assumption Agreement and are incorporated herein
by reference.
XIII.NOTICE
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the notice provisions from the Liquidation Plan apply to
this American Capitol Assumption Agreement and are incorporated
herein by reference.
XIV. INSOLVENCY OF AMERICAN CAPITOL
In the event of the insolvency of American Capitol prior to the
Plan Termination Date, the obligations of the Participating
Guaranty Associations under any Association Notes issued to
American Capitol are canceled and void. In the event of such
insolvency resulting in the cancellation of the Association
Notes, the Association Notes and their corresponding policyholder
liabilities shall be returned to the appropriate Participating
Guaranty Association and shall be the sole responsibility of that
Participating Guaranty Association.
XV. GENERAL PROVISIONS
The Parties acknowledge that this American Capitol Assumption
Agreement is entered into as part of the Liquidation Plan and
that the general provisions from the Liquidation Plan apply to
this American Capitol Assumption Agreement and are incorporated
herein by reference. Regardless of any specific references, the
Parties acknowledge and agree that this American Capitol
Assumption Agreement is to be performed pursuant to, and
interpreted consistent with, the terms and provisions from the
Liquidation Plan.
IN WITNESS WHEREOF, this American Capitol Assumption Agreement
has been executed on the day and year subscribed.
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest Date: June 10, 1999
--------------------
Name: William F. Guest
Title: Chairman of the Board
NATIONAL ORGANIZATION OF LIFE AND HEALTH INSURANCE GUARANTY
ASSOCIATIONS
By: /s/Peter J. Gallanis Date: June 10, 1999
--------------------
Name: Peter J. Gallanis
Title: President
American Capitol Assumption Agreement
Exhibit III.A.1.
Identification of American Capitol Assumed Policies
The American Capitol Assumed Policies have been identified
in a policyholder listing which is in the possession of the
parties. The information in those lists is confidential and not
made a part of the filing with the Court. However, the
policyholder information is a part of the Assumption Agreements
and is incorporated herein by reference.
American Capitol Assumption Agreement
Exhibit III.A.3.
Assumption Certificate
The American Capitol Assumption Certificate is attached hereto
and incorporated herein by reference.
<PAGE>
AMERICAN CAPITOL INSURANCE COMPANY
POLICY NUMBER:
INSURED:
CERTIFICATE OF ASSUMPTION
This is to certify that AMERICAN CAPITOL INSURANCE COMPANY
("American Capitol"), a life insurance company organized and
existing under the laws of the State of Texas with offices in
Houston, Texas, has assumed and reinsured all of the contractual
obligations existing under the policy identified above heretofore
issued or assumed by STATESMAN NATIONAL LIFE INSURANCE COMPANY
("Statesman") in accordance with the terms and conditions thereof,
the same as if such policy had been originally issued with all its
terms, covenants, stipulations and provisions, by American Capitol.
This Certificate of Assumption is being issued in accordance with
the terms and conditions of an Assumption Agreement entered into
among American Capitol, the National Organization of Life and Health
Guaranty Associations and the Participating Guaranty Associations.
The Effective Date of this Certificate of Assumption is June 1,
1999.
Future payments of benefits and claims will be made by American
Capitol, and all premium payments, claims and correspondence
relating to the policy should be sent to:
Mailing Address Delivery Address
P. O. Box 42814 10555 Richmond Avenue, 2nd Floor
Houston, TX 77242-2814 Houston, TX 77042
IN WITNESS WHEREOF, AMERICAN CAPITOL INSURANCE COMPANY has caused
this Certificate to be signed by its duly authorized officers as of
the effective date.
/s/H. Kathleen Musselwhite /s/John D. Cornett
- --------------------------- ------------------------
H. Kathleen Musselwhite, John D. Cornett,
Secretary President
THIS CERTIFICATE BECOMES A PART OF YOUR POLICY AND SHOULD BE
ATTACHED THERETO.
ISSU###-##-####
American Capitol Assumption Certificate
Exhibit III.F
Included Treaties
There are no Included Treaties which pertain or apply
to the American Capitol Assumed Policies, except that
Companion Life policies are subject a reinsurance agreement
with Optimum Re Insurance Company of Dallas, Texas providing
reinsurance for all amounts of excess of $25,000 and that
reinsurance agreement is an Included Treaty.
American Capitol Assumption Agreement
Exhibit IV.A
Association Liability
Exhibit IV.A is attached hereto and incorporated herein by reference.
Calculation of Association Liability at Closing to American Capitol
Medicare Supplement Attained Age
Percentage
Reserve Funding
State Reserves Adjustments By Block Total
Alabama 0 0 0.0000% 0
Alaska 0 0 0.0000% 0
Arizona 120 26 0.0061% 146
Arkansas 1,978 422 0.1000% 2,400
California 0 0 0.0000% 0
Colorado 0 0 0.0000% 0
Connecticut 0 0 0.0000% 0
Delaware 0 0 0.0000% 0
District of Colombia 0 0 0.0000% 0
Florida 0 0 0.0000% 0
Georgia 0 0 0.0000% 0
Hawaii 0 0 0.0000% 0
Idaho 0 0 0.0000% 0
Illinois 0 0 0.0000% 0
Indiana 0 0 0.0000% 0
Iowa 0 0 0.0000% 0
Kansas 0 0 0.0000% 0
Kentucky 0 0 0.0000% 0
Louisiana 115,928 24,703 5.8594% 140,631
Maine 0 0 0.0000% 0
Maryland 0 0 0.0000% 0
Massachusetts 0 0 0.0000% 0
Michigan 0 0 0.0000% 0
Minnesota 0 0 0.0000% 0
Mississippi 0 0 0.0000% 0
Missouri 1,775 378 0.0987% 2,154
Montana 0 0 0.0000% 0
Nebraska 810 173 0.0410% 983
Nevada 0 0 0.0000% 0
New Hampshire 0 0 0.0000% 0
New Jersey 0 0 0.0000% 0
New Mexico 654 139 0.0330% 793
New York 0 0 0.0000% 0
North Carolina 0 0 0.0000% 0
North Dakota 0 0 0.0000% 0
Ohio 0 0 0.0000% 0
Oklahoma 789,006 168,132 39.8795% 957,138
Oregon 0 0 0.0000% 0
Pennsylvania 0 0 0.0000% 0
Puerto Rico 0 0 0.0000% 0
Rhode Island 0 0 0.0000% 0
South Carolina 0 0 0.0000% 0
South Dakota 0 0 0.0000% 0
Tennessee 0 0 0.0000% 0
Texas 1,068,094 227,604 53.9857% 1,295,698
Utah 0 0 0.0000% 0
Vermont 0 0 0.0000% 0
Virginia 0 0 0.0000% 0
Washington 110 23 0.0025% 133
West Virginia 0 0 0.0000% 0
Wisconsin 0 0 0.0000% 0
Wyoming 0 0 0.0000% 0
---------------------------------------------------
1,089,485 421,700 100.0000% 2,400,075
=====================================================
<PAGE>
Medicare Supplement Issue Age
Percentage
Reserve Funding
State Reserves Adjustments By Block Total
Alabama 0 0 0.0000% 0
Alaska 0 0 0.0000% 0
Arizona 1,185 1,502 0.0321% 2,687
Arkansas 678,271 859,352 18.3685% 1,537,623
California 135 171 0.0037% 306
Colorado 788 998 0.0213% 1,785
Connecticut 0 0 0.0000% 0
Delaware 0 0 0.0000% 0
District of Colombia 141 178 0.0038% 319
Florida 1,108 1,404 0.0300% 2,513
Georgia 0 0 0.0000% 0
Hawaii 0 0 0.0000% 0
Idaho 0 0 0.0000% 0
Illinois 584 740 0.0158% 1,323
Indiana 584 740 0.0158% 1,323
Iowa 0 0 0.0000% 0
Kansas 1,107 1,402 0.0300% 2,509
Kentucky 0 0 0.0000% 0
Louisiana 1,956,901 2,479,343 52.9955% 4,436,244
Maine 0 0 0.0000% 0
Maryland 194 246 0.0052% 439
Massachusetts 0 0 0.0000% 0
Michigan 715 905 0.0194% 1,620
Minnesota 0 0 0.0000% 0
Mississippi 0 0 0.0000% 0
Missouri 761 964 0.0206% 1,724
Montana 0 0 0.0000% 0
Nebraska 810 173 0.0410% 983
Nevada 57 72 0.0015% 129
New Hampshire 0 0 0.0000% 0
New Jersey 0 0 0.0000% 0
New Mexico 0 0 0.0000% 0
New York 0 0 0.0000% 0
North Carolina 0 0 0.0000% 0
North Dakota 0 0 0.0000% 0
Ohio 0 0 0.0000% 0
Oklahoma 500,276 633,837 13.5481% 1,134,113
Oregon 338 428 0.0092% 767
Pennsylvania 0 0 0.0000% 0
Puerto Rico 0 0 0.0000% 0
Rhode Island 0 0 0.0000% 0
South Carolina 359 455 0.0097% 815
South Dakota 0 0 0.0000% 0
Tennessee 0 0 0.0000% 0
Texas 548,508 694,945 14.8543% 1,243,452
Utah 86 110 0.0023% 196
Vermont 0 0 0.0000% 0
Virginia 388 491 0.0105% 879
Washington 93 117 0.0025% 210
West Virginia 0 0 0.0000% 0
Wisconsin 0 0 0.0000% 0
Wyoming 0 0 0.0000% 0
---------------------------------------------------
3,692,578 4,678,400 100.0000% 8,370,978
====================================================
<PAGE>
Hospital Indemnity
Percentage
Reserve Funding
State Reserves Adjustments By Block Total
Alabama 0 0 0.0000% 0
Alaska 0 0 0.0000% 0
Arizona 3,221 (3,006) 1.6031% 216
Arkansas 1,748 (1,631) 0.8699% 117
California 724 (675) 0.3602% 48
Colorado 407 (379) 0.2024% 27
Connecticut 0 0 0.0000% 0
Delaware 0 0 0.0000% 0
District of Colombia 286 (267) 0.1425% 19
Florida 1,085 (1,013) 0.5401% 73
Georgia 0 0 0.0000% 0
Hawaii 0 0 0.0000% 0
Idaho 121 (113) 0.0603% 8
Illinois 242 (226) 0.1205% 16
Indiana 999 (932) 0.4971% 67
Iowa 190 (177) 0.0046% 13
Kansas 518 (483) 0.2576% 35
Kentucky 0 0 0.0000% 0
Louisiana 2,320 (2,165) 1.1547% 155
Maine 0 0 0.0000% 0
Maryland 0 0 0.0000% 0
Massachusetts 0 0 0.0000% 0
Michigan 471 (440) 0.2346% 32
Minnesota 0 0 0.0000% 0
Mississippi 0 0 0.0000% 0
Missouri 387 (361) 0.1924% 26
Montana 0 0 0.0000% 0
Nebraska 0 0 0.0000% 0
Nevada 359 (335) 0.1789% 24
New Hampshire 0 0 0.0000% 0
New Jersey 0 0 0.0000% 0
New Mexico 6,141 (5,730) 3.0558% 411
New York 0 0 0.0000% 0
North Carolina 0 0 0.0000% 0
North Dakota 110 (103) 0.0548% 7
Ohio 824 (769) 0.4101% 55
Oklahoma 3,078 (2,871) 1.5315% 206
Oregon 132 (123) 0.0658% 9
Pennsylvania 0 0 0.0000% 0
Puerto Rico 0 0 0.0000% 0
Rhode Island 0 0 0.0000% 0
South Carolina 692 (646) 0.3445% 46
South Dakota 0 0 0.0000% 0
Tennessee 286 (267) 0.1425% 19
Texas 172,666 (161,108) 85.9242% 11,559
Utah 0 0 0.0000% 0
Vermont 0 0 0.0000% 0
Virginia 0 0 0.0000% 0
Washington 3,700 (3,453) 1.8414% 248
West Virginia 0 0 0.0000% 0
Wisconsin 0 0 0.0000% 0
Wyoming 242 (226) 0.1206% 16
---------------------------------------------------
200,952 (187,500) 100.0000% 13,452
====================================================
<PAGE>
Companion Life
Percentage
Reserve Funding
State Reserves Adjustments By Block Total
Alabama 0 0 0.0000% 0
Alaska 0 0 0.0000% 0
Arizona 1,644 (802) 1.6031% 842
Arkansas 892 (435) 0.8699% 457
California 369 (180) 0.3602% 189
Colorado 208 (101) 0.2024% 106
Connecticut 0 0 0.0000% 0
Delaware 0 0 0.0000% 0
District of Colombia 146 (71) 0.1425% 75
Florida 554 (270) 0.5401% 284
Georgia 0 0 0.0000% 0
Hawaii 0 0 0.0000% 0
Idaho 62 (30) 0.0603% 32
Illinois 124 (60) 0.1205% 63
Indiana 510 (249) 0.4971% 261
Iowa 97 (47) 0.0046% 50
Kansas 264 (129) 0.2576% 135
Kentucky 0 0 0.0000% 0
Louisiana 1,184 (577) 1.1547% 607
Maine 0 0 0.0000% 0
Maryland 0 0 0.0000% 0
Massachusetts 0 0 0.0000% 0
Michigan 241 (17) 0.2346% 123
Minnesota 0 0 0.0000% 0
Mississippi 0 0 0.0000% 0
Missouri 197 (96) 0.1924% 101
Montana 0 0 0.0000% 0
Nebraska 0 0 0.0000% 0
Nevada 183 (89) 0.1789% 94
New Hampshire 0 0 0.0000% 0
New Jersey 0 0 0.0000% 0
New Mexico 3,134 (1,528) 3.0558% 1,606
New York 0 0 0.0000% 0
North Carolina 0 0 0.0000% 0
North Dakota 56 (27) 0.0548% 29
Ohio 421 (205) 0.4101% 215
Oklahoma 1,570 (766) 1.5315% 805
Oregon 67 (33) 0.0658% 35
Pennsylvania 0 0 0.0000% 0
Puerto Rico 0 0 0.0000% 0
Rhode Island 0 0 0.0000% 0
South Carolina 353 (172) 0.3445% 181
South Dakota 0 0 0.0000% 0
Tennessee 146 (71) 0.1425% 75
Texas 88,112 (42,962) 85.9242% 45,150
Utah 0 0 0.0000% 0
Vermont 0 0 0.0000% 0
Virginia 0 0 0.0000% 0
Washington 1,888 (921) 1.8414% 968
West Virginia 0 0 0.0000% 0
Wisconsin 0 0 0.0000% 0
Wyoming 124 (60) 0.1206% 63
---------------------------------------------------
102,546 (50,000) 100.0000% 52,546
====================================================
<PAGE>
Grand Total by State
Reserve
State Reserves Adjustments Total
Alabama 0 0 0
Alaska 0 0 0
Arizona 6,170 (2,280) 3,891
Arkansas 682,890 857,708 1,540,597
California 1,228 (684) 544
Colorado 1,402 517 1,919
Connecticut 0 0 0
Delaware 0 0 0
District of Colombia 573 (160) 413
Florida 2,748 120 2,869
Georgia 0 0 0
Hawaii 0 0 0
Idaho 183 (143) 40
Illinois 949 453 1,403
Indiana 2,093 (441) 1,651
Iowa 287 (225) 62
Kansas 1,889 790 2,679
Kentucky 0 0 0
Louisiana 2,076,333 2,501,304 4,577,637
Maine 0 0 0
Maryland 194 246 439
Massachusetts 0 0 0
Michigan 1,426 348 1,775
Minnesota 0 0 0
Mississippi 0 0 0
Missouri 3,120 885 4,005
Montana 0 0 0
Nebraska 810 173 983
Nevada 600 (353) 247
New Hampshire 0 0 0
New Jersey 0 0 0
New Mexico 9,928 (7,118) 2,810
New York 0 0 0
North Carolina 0 0 0
North Dakota 166 (130) 36
Ohio 1,245 (974) 271
Oklahoma 1,293,930 798,331 2,092,261
Oregon 538 272 810
Pennsylvania 0 0 0
Puerto Rico 0 0 0
Rhode Island 0 0 0
South Carolina 1,405 (363) 1,042
South Dakota 0 0 0
Tennessee 433 (338) 94
Texas 1,877,380 718,479 2,595,858
Utah 86 110 196
Vermont 0 0 0
Virginia 388 491 879
Washington 5,791 (4,233) 1,558
West Virginia 0 0 0
Wisconsin 0 0 0
Wyoming 366 (286) 80
---------------------------------------------------
5,974,551 4,862,500 10,837,051
====================================================
American Capitol Assumption Agreement
Exhibit IV.B. - Enhancement
Methodology for Sharing Statutory Gains and Losses Between
American Capitol and Guaranty Associations
Objective
The Parties' objective is to have a formula-driven methodology for
adjusting the financial deficiency funding provided by the guaranty
associations. The adjustment should take place in a reasonable
time, such as 3 years, after closing such that the uncertainty as to
the potential profitability of the business is significantly
reduced. The adjustment will take the form of a sharing of
statutory gains and losses (actual gains/losses plus updated
projected gains/losses) to the extent they exceed the gains/losses
that were "expected" as of the closing date upon which the financial
deficiency funding was based. The methodology for determining the
adjustment should have an appropriate balance between equity to the
Parties and simplicity to administer. To the extent possible, the
calculation formulas should use factors agreed upon at closing and
not be subject to renewed negotiation at the time of settlement.
Initial Data
Initial Funding by GAs: $5.1 million, by agreement, representing
the sum of the $1.8 million AC investment in
Statesman and $3.3 million present value of
expected future losses on the three blocks of
business.
Effective Date: 6/1/99 for Attained Age and Issue Age blocks.
11/1/98 for the Pre-Standard block, which was the
effective date of AC's coinsurance of that block.
Projected Policy Count and Statutory Gains and Losses:
Attained Age: Use D. Hawkin's latest projection (4/30/99),
which was basis for agreed funding. It has a
valuation date of 1/1/99.
Pre-Standard: Use G.P. Monnin's Test Code 502 since it is the
medium shock lapse/anti-selection scenario and,
when combined with the Attained Age projection,
results in a 20% rate of return on the $1 million
allowance from American Capitol for these two
blocks in the development of the $5.1 million
funding. It has a valuation date of 4/1/99. Use
AC's reported gain of $122,900 on this block for
the period 11/1/98 to 3/31/99.
Issue Age: Use D. Hawkin's latest projection (4/30/99, with
reduced commissions) adjusted by reducing each year's
projected gains or losses, consistent with American Capitol's
method of arriving at a $4.3 million present value. It has
a valuation date of 1/1/99.
Projected Pre-Tax Statutory Gains/Losses
Year 502 Issue Attained
Ending Pre-Standard Age Age Total
12/31/1998 49,160 49,160
12/31/1999 360,491 -1,809,351 -98,912 -1,547,772
12/31/2000 289,554 -1,437,091 -114,696 -1,262,233
12/31/2001 245,205 -960,868 -115,623 -831,286
12/31/2002 206,563 -566,222 -94,944 -454,603
12/31/2003 169,814 -222,650 -69,372 -122,208
12/31/2004 143,879 17,593 129,010 290,482
12/31/2005 121,014 67,844 278,021 466,879
12/31/2006 101,940 77,284 286,960 466,184
12/31/2007 84,716 68,365 296,086 449,167
12/31/2008 70,219 50,311 300,489 421,019
Projected Policy Count
Year 502 Issue Attained
Ending Pre-Standard Age Age Total
12/31/1998
12/31/1999 1,092 6,193 5,787 13,072
12/31/2000 780 4,954 4,538 10,272
12/31/2001 557 3,964 3,765 8,286
12/31/2002 434 3,171 3,170 6,775
12/31/2003 341 2,537 2,693 5,571
12/31/2004 270 2,029 2,289 4,588
12/31/2005 215 1,623 1,946 3,784
12/31/2006 171 1,299 1,654 3,124
12/31/2007 136 1,039 1,406 2,581
12/31/2008 108 831 1,195 2,134
Investment Earnings Rate: 5.3%, as used in projections
Discount Rate:
Pre-Standard: 20%
Issue Age: 5.3%
Attained Age: 20%
Assumed Present Value, as of 12/31/01 of Future Statutory Gains and
Losses Per Policy In Force at 12/31/01:
Pre-Standard: $935
Issue Age: -132
Attained Age: 101
e.g., Attained Age = [(-$94,944 ) 1.20) + (-$69,372 ) 1.202) + ... +
($300,489 ) 1.20 )]) 3,765 pols.
Annuity Factor at 12/31/01:
Pre-Standard: 1.80
Issue Age: 2.70
Attained Age: 2.19
e.g., Attained Age = [(3,170 ) 1.20) + (2,693 ) 1,20 ) + ... +
(1,195 ) 1.207)] ) 3,765
Statutory Gains and Losses Share Percentage to GAs:
Excess of Expected Over Actual 0%
First $500,000 of Excess of Actual over Expected 50%
Next $500,000 of Excess of Actual over Expected 75%
Over $1,000,000 of Excess of Actual over Expected 90%
Additional Active Life, Unearned Premium, and Claim Reserves at
Effective Date:
For Attained Age and Issue Age, reserves as booked by Statesman
at 12/31/98 and funded by GAs.
For Pre-Standard, reserves as transferred by Statesman to AC at
11/1/98.
Tabular factors for future Additional Active Life Reserves will
be same as used in projections.
Experience Period for Determining Final Settlement: Effective Date
through 12/31/01.
Final Settlement Date: September 1, 2002, which will allow the use
of June, 2002 paid claims on 2001 and prior
incurrals to estimate the 12/31/01 claim reserves.
Data Needed at Final Settlement
Number of policies in force at 12/31/01 for each product.
"Actual" Statutory Gains and Losses on each of 3 blocks for each calendar
year from effective date to 12/31/01, with corresponding policy years of
exposure. Exposure will be tabulated using monthly policy counts.
Any policies that are converted/re-written to American Capitol/Texas
Imperial Medicare Supplement policy forms will be tracked for purposes of
this enhancement calculation and the appropriate gain/loss data included
in the calculation as if the conversion did not take place.
Actual Statutory Gains and Losses during first 3 years:
An accounting will be done for the three blocks after each
calendar yearend. A final accounting will be done after
paid claims through 6/30/02 are reported. The formula will
be:
Actual Statutory Gain/Loss = Earned Premium
+ Interest on Reserves(5.3% H Avg. policy
+ claim reserve balance)
- Paid Claims*
- Increase in Claim Reserve @
- Increase in Additional Active Life Reserve @
- Earned Commissions
- Accrued Premium Tax
- Maintenance Expense Allowance (8% of
Earned Premium)
@ For the period 1/1/99 through the Closing Date, Earned
Commissions on the Issue Age business will be calculated as
20.8% of collected premium.
*Paid claims includes amounts paid in settlement of claims,
including judgments, but does not include any portion of a
settlement or judgment attributable to American Capitol's or
Texas Imperial's policy administration services.
3 Beginning reserve will be 12/31/98 reserves for Issue Age
and Attained Age.
The only item that should require estimation is the 12/31/01
claim liability still remaining unpaid as of 6/30/02.
Example for policy years of exposure:
Attained Age
Policies In Force
1/99 5,600
2/99 5,550
3/99 5,500
4/99 5,450
5/99 5,400
6/99 5,350
7/99 5,300
8/99 5,250
9/99 5,200
10/99 5,150
11/99 5,100
12/99 5,050
Total Exposure Months 63,900
divided by 12
Total Policy Years of Exposure 5,325
Calculation Process
Actual Statutory Gains and Losses will be determined, according
to the formula, for each of the three blocks separately for
each calendar year from the Effective Date through 12/31/01.
Within each block, the sum of the actual Statutory Gains and
Losses will be compared to the sum of the expected Statutory
Gains and Losses over the same period and the excess of actual
over expected will be divided by the number of policy years of
exposure during the experience period to get the Excess
Statutory Gains and Losses Per Policy Per Year for each block.
The Excess Statutory Gains and Losses Per Policy Per Year is
multiplied by the number of policies in force for each block
at 12/31/01 and then multiplied by an annuity factor (unique
to each block) to get the Present Value, as of 12/31/01, of
Excess Statutory Gains and Losses over the remaining 7 years
of the projection period through 12/31/08.
The number of policies in force at 12/31/01 for each block are
multiplied by an annuity factor, unique to each block, to get
the Present Value, as of 12/31/01, of Expected Statutory Gains
and Losses over the remaining 7 years of the projection
period.
The actual Statutory Gains and Losses in each calendar year
through 12/31/01, the Present Value of Excess Statutory Gains
and Losses as of 12/31/01, and the Present Value of Expected
Statutory Gains and Losses as of 12/31/01 are discounted to
12/31/98 at each block's discount rate and added to the
accumulated gain from the Pre-Standard block prior to
12/31/98. This amount is the total "actual" Statutory Gains
and Losses for American Capitol.
The total "actual" Gains and Losses is compared to the total
"expected" Gains and Losses of -$3,300,000. To the extent
the actual gains and losses exceeds the expected gains and
losses, the excess is refunded to the guaranty associations
according to the following schedule:
First $500,000 of Excess 50%
Next $500,000 of Excess 75%
Over $1,000,000 of Excess 90%
The refund to the guaranty associations will not exceed the
$5,100,000 of initial funding provided by the guaranty
associations, accumulated at the rate of 5.3% from closing until
the date of the refund payment.
Exhibit IV B-1
Total Expected Profits and Expected Return
(as agreed upon)
Effective Date - attained Age & Issue Age Blocks 6/1/99
Effective Date - Pre-Standard Block 11/1/98
Investment Earnings Rate 5.3%
Pre-Standard & Attained Age Discount Rate 20.0%
Issue Age Discount Rate 5.3%
Projected Pre-Tax Statutory Gains/Losses
Year 502 Issue Attained
Ending Pre-Standard Age Age Total
K 12/31/1998 49,160 49,160
L 12/31/1999 360,491 -1,809,351 -98,912 -1,547,772
M 12/31/2000 289,554 -1,437,091 -114,696 -1,262,233
N 12/31/2001 245,205 -960,868 -115,623 -831,286
O 12/31/2002 206,563 -566,222 -94,944 -454,603
P 12/31/2003 169,814 -222,650 -69,372 -122,208
Q 12/31/2004 143,879 17,593 129,010 290,482
R 12/31/2005 121,014 67,844 278,021 466,879
S 12/31/2006 101,940 77,284 286,960 466,184
T 12/31/2007 84,716 68,365 296,086 449,167
U 12/31/2008 70,219 50,311 300,489 421,019
V This line intentionally left blank
W This line intentionally left blank
Projected Policy Count
Year 502 Issue Attained
Ending Pre-Standard Age Age Total
K 12/31/1998
L 12/31/1999 1,092 6,193 5,787 13,072
M 12/31/2000 780 4,954 4,538 10,272
N 12/31/2001 557 3,964 3,765 8,286
O 12/31/2002 434 3,171 3,170 6,775
P 12/31/2003 341 2,537 2,693 5,571
Q 12/31/2004 270 2,029 2,289 4,588
R 12/31/2005 215 1,623 1,946 3,784
S 12/31/2006 171 1,299 1,654 3,124
T 12/31/2007 136 1,039 1,406 2,581
U 12/31/2008 108 831 1,195 2,134
V This line intentionally left blank
W This line intentionally left blank
502 Pre- Issue Attained
Standard Age Age Total
X Expected Profits
K+L+M+N 944,410 (3,583,616) (189,909) (2,829,115)
Y Annuity Factor PV
of Profits O through
U)/Policy Count (N) 1.80 2.70 2.19
Note: Pre-Standard and Attained Age use 20% and Issue Age uses 5.3%.
Exhibit IV B-2
Actual Profit (Note: Amount Below are for Illustrative Purposes Only)
(from Exhibit VI A at the end of Year 3)
Year Pre- Issue Attained
Ending Standard Age Age Total
Z 12/31/1998 49,160
AA 12/31/1999 460,491 (12,709,351) 1,088 (1,247,772)*
AB 12/31/2000 389,554 (1,337,091) (14,696) (962,233)*
AC 12/31/2001 345,205 (860,868) (15,623) (531,286)*
-------------------------------------------------
AD 1,244,410 (3,907,310) (29,231) (2,692,131)@
===========
* Amounts are for illustrative purposes only and will change
based upon actual experience
@ = Z+AA+AB+AC
Exhibit IV B-3
Policies (Note: Amounts Below are for Illustrative Purposes Only)
(from Exhibit VI A at the end of Year Three)
Pre- Issue Attained
Standard Age Age Total
AE Policy Years of Exposure 3,300 16,429 15,607 35,336 *
AF Policies in Force at End
of Year Three 557 3,964 3,765 8,236 *
Assumed Present Value of Future Profits Per Policy in Force at
End of Year Three
Pre- Issue Attained
Standard Age Age Total
AG Policies in Force at End
of Year Three 557 3,964 3,765 8,236
AH Present Value PV of
Profits (O though U) 520,620 (523,380) 379,782 377,023
AI PV/Policies AH/AG 935 (132) 101 46
* Amounts are for illustrative purposes only and will change
based upon actual experience.
Exhibit IV B-4
Excess Profits (Note: Amounts Below are for Illustrative Purposes Only)
502 Pre- Issue Attained
Standard Age Age Total
AJ Excess Profits Per
Policy Per Year
(X-AD)/AE 90.91 -19.70 10.30 3.88 *
AK PV of Excess Profits
at End of Year Three
Y*AF*AJ 91,165 (210,853) 84,874 (34,814)*
* Amounts are for illustrative purposes only and will change
based upon actual experience.
Exhibit IV B-5
Total "Actual" Return to American Capitol as of Effective Date
(Note: Amounts Below are for Illustrative Purposes Only)
Source
AL Present Value of Excess Profits AK times Discount Factor
AM Present Value of Expected Profits AH times Discount Factor
AN Actual Profit Pre-Closing Z
AO Actual Profit Year 1 AA
AP Actual Profit Year 2 AB
AQ Actual Profit Year 3 AC
Pre-Standard Issue Age Attained Age
AL 56,922 (184,518) 52,994
AM 325,065 (458,012) 237,128
AN 49,160 0 0
AO 414,030 (1,658,624) 978
AP 291,875 (1,232,110) (11,011)
AQ 215,539 (753,350) (9,755)
Years of Discount Discount Factor
Discount Factor at 5.3% at 20% Total
AL 2.583 0.87510 0.62438 (74,603) *
AM 2.583 0.87510 0.62438 104,180 *
AN 0.000 1.00000 1.00000 49,160
AO 0.583 0.97032 0.89911 (1,243,616) *
AP 1.583 0.92149 0.74926 (941,245) *
AQ 2.583 0.87510 0.62438 (547,566) *
(2,663,689) *
Note: Pre-Standard and Attained Age are discounted at 20%, Issue
Age is discounted at 5.3%.
* Amounts are for illustrative purposes only and will change
based upon actual experience.
American Capitol Assumption Agreement
Exhibit VI.A.
Accounting Form
Exhibit VI.A. is attached hereto and incorporated herein by
reference.
<PAGE>
Summary Each year After Closing Date
Report for Calendar Year XXXX
Pre-Standard Issue Age Attained Age
Beginning of Year
Unearned Premium Reserve
Advance Premium
Due and Unpaid Premium
Additional Active Life Reserve
Claim Reserve
End of Year
Unearned Premium Reserve
Advance Premium
Due and Unpaid Premium
Additional Active Life Reserve
Claim Reserve
Policies in Force
Collected Premium
Earned Premium
Interest on Reserves
Paid Claims
Increase in Claim Reserve
Increase in Additional Active Life Reserve
Earned Commissions
Accrued Premium Tax
Maintenance Expense Allowance
Statutory Gain/Loss
Policy Years of Exposure
1Texas Imperial Assumption Agreement - Exhibit 4.1-B to the Liq
uidation Plan
AGREEMENT
for
ASSUMPTION REINSURANCE
by and among
the NATIONAL ORGANIZATION OF LIFE AND HEALTH
INSURANCE GUARANTY ASSOCIATIONS
and its Participating Life and Health Insurance Guaranty Associations
and the
TEXAS IMPERIAL LIFE INSURANCE COMPANY
Concerning
THE STATESMAN NATIONAL LIFE INSURANCE COMPANY IN LIQUIDATION
TABLE OF CONTENTS
Page
I. RECITALS 1
II. DEFINITIONS 1
III. ASSUMPTION OF MEDICARE SUPPLEMENT ISSUE AGE POLICIES 1
A. Medicare Supplement Issue Age Policies 1
1. Participating Guaranty Associations 1
2. Assuming Insurer 2
3. Assumption Certificate 2
B. Same Terms and Conditions 2
C. Assignment of Rights 2
D. Reinstatement 3
E. Errors and Omissions 3
F. Third Party Reinsurance 4
IV. POLICY CALCULATIONS AND PAYMENT OBLIGATIONS 4
A. Association Liability 4
B. Texas Imperial Enhancement 4
V. CLOSING 4
VI. ACCOUNTING AND AUDIT PROCESS 5
A. Accounting 5
B. Audit 5
C. Accounting Date 6
D. Disputes 6
VII. PREMIUMS AND OTHER RECEIPTS 6
VIII.RECORDS 7
IX. LIABILITIES AND INDEMNITIES 7
X. REPRESENTATIONS 7
XI. RESERVES 8
XII. JURISDICTION AND ACCOUNTING PROCEDURE 8
XIII.NOTICE 8
XIV. INSOLVENCY OF TEXAS IMPERIAL 8
XV. GENERAL PROVISIONS 9
I. RECITALS
A. This agreement for assumption reinsurance ("Texas
Imperial Assumption Agreement") regarding the insolvency and
liquidation of The Statesman National Life Insurance Company
("Statesman") is entered into this 10th day of June, 1999
by and among the National Organization of Life and Health
Insurance Guaranty Associations ("NOLHGA"), and the life and
health insurance guaranty associations affected by the
insolvency and liquidation of Statesman that elect to
participate in this Liquidation Plan ("Participating
Guaranty Associations"), and Texas Imperial Life Insurance
Company ("Texas Imperial" and "Assuming Insurer").
B. This Texas Imperial Assumption Agreement is entered into
contemporaneously with the Liquidation Plan and the recitals from
the Liquidation Plan are incorporated herein.
NOW, THEREFORE, in consideration of the foregoing premises, and
the covenants, promises and agreements set forth in this Texas
Imperial Assumption Agreement and the Liquidation Plan, the
Parties agree as follows:
II. DEFINITIONS
Unless otherwise specifically provided or the context so
requires, the capitalized terms set forth in this Texas Imperial
Assumption Agreement shall have the same meaning as set forth in
Exhibit 2.1 to the Liquidation Plan and such definitions are
incorporated by reference as if fully set forth herein.
III. ASSUMPTION OF MEDICARE SUPPLEMENT ISSUE AGE POLICIES
A. Medicare Supplement Issue Age Policies.
1. Participating Guaranty Associations. Subject to the terms
and conditions of this Texas Imperial Assumption Agreement, by
virtue of the Permanent Injunction and the Liquidation Plan and
pursuant to their statutory authority, the Participating Guaranty
Associations transfer, cede and assign to Assuming Insurer as of
the Closing Date the Medicare Supplement Issue Age policies and
all rights, privileges and prerogatives thereunder. The Medicare
Supplement Issue Age policies are reflected in Exhibit III.A.1.
Texas Imperial shall have no liability for any obligations of
Statesman, other than the Medicare Supplement Issue Age policies
and as otherwise provided in the Liquidation Plan.
2. Assuming Insurer. Subject to the terms and conditions of
this Texas Imperial Assumption Agreement and the Liquidation
Plan, Texas Imperial assumes effective as of 12:01 a.m. on June 1,
1999, the Medicare Supplement Issue Age policies, to the same
extent and with the same effect as if Texas Imperial had issued
the Medicare Supplement Issue Age policies directly.
3. Assumption Certificate. As soon as possible after Closing
Date, Texas Imperial shall deliver an assumption certificate to
policyholders of the Medicare Supplement Issue Age policies
substantially in the form of Exhibit III.A.3. and subject to the
approval of the Commissioner and NOLHGA.
B. Same Terms and Conditions. All Medicare Supplement Issue
Age policies assumed by Texas Imperial shall be subject in all
respects to the same terms and conditions of the policies and
contracts as issued by Statesman. Notwithstanding anything to
the contrary contained herein, Texas Imperial does not assume and
shall not be liable for, any liabilities that are not (a) Covered
Obligations, (b) claims based on policy terms and provisions, or
(c) liabilities expressly provided in the Liquidation Plan.
Texas Imperial shall accept and assume the Medicare Supplement
Issue Age policies subject to all defenses, set-offs and
counterclaims to which the Participating Guaranty Associations
would be entitled with respect to such Medicare Supplement Issue
Age policies. It is expressly understood and agreed by the
parties that no such defenses, set-offs or counterclaims are
waived by the execution of this Texas Imperial Assumption
Agreement, the Liquidation Plan or by the consummation of any
related transactions, and that on the Closing Date, Texas
Imperial shall be fully subrogated to all such defenses, set-offs
and counterclaims (all of which defenses, set-offs and
counterclaims may also be asserted by Statesman or any
Participating Guaranty Association, as the case may be, with
respect to any claims that may be asserted against them).
C. Assignment of Rights. Each Participating Guaranty
Association, severally, hereby assign to Texas Imperial all of
their respective privileges and prerogatives and the privileges
and prerogatives of Statesman, if any, contained within or
related to the Medicare Supplement Issue Age policies, including,
but not limited to, all defenses, including contestability based
upon material misstatements in the applications for such Medicare
Supplement Issue Age policies, set-offs and counterclaims to
which Statesman or the Participating Guaranty Association would
be entitled with respect to such Medicare Supplement Issue Age
policies; provided that: (a) each Participating Guaranty
Association retains all rights and interests of policyholders
against the Statesman Estate to which the Participating Guaranty
Association is entitled pursuant to its enabling act and the
Priority Statute and all rights and interests of policyholders,
in equity or at law based on violations of common law, tort law,
contract law, statutory law or other law, to which the
Participating Guaranty Association is subrogated pursuant to its
enabling act; (b) Texas Imperial shall have no claim under the
Medicare Supplement Issue Age policies against the Statesman
Estate or any Participating Guaranty Association except as
otherwise set forth in this Texas Imperial Assumption Agreement;
and (c) Texas Imperial shall have no privileges, prerogatives,
defenses, set-offs and counterclaims relating to reinsurance
treaties in force, except for Included Treaties.
D. Reinstatement. Texas Imperial agrees to reinstate any
Medicare Supplement Issue Age policy which on the Closing Date by
its terms was entitled to reinstatement, provided that all
requirements necessary to procure reinstatement of such a policy
under its terms are fulfilled to the satisfaction of Texas
Imperial. Upon such reinstatement of any such lapsed policy, it
shall for all purposes be treated as if it has been in force from
the date on which it lapsed, except that it shall be subject to
all the terms and conditions of this Texas Imperial Assumption
Agreement as may be pertinent to the class of the policy in which
it was or should have been included. In the event of such
reinstatement, an appropriate adjustment shall be made to the
reserves or account values, as applicable, the Enhancement, or
the reinstated policy and any amounts due shall be paid pursuant
to this Texas Imperial Assumption Agreement; provided that no
such adjustment shall be made from and after the Plan Termination
Date.
E. Errors and Omissions. After the Plan Termination Date,
inadvertent errors or omissions shall not relieve any Party from
liability provided that the error or omission is rectified as
soon as practicable after discovery. Upon discovery of an error
or omission, the Party discovering the error or omission shall
notify any other parties affected by the error or omission. All
Parties agree to cooperate and work together, in good faith, to
resolve, consistent with the terms of the Liquidation Plan, any
problems or losses caused by any such error or omission. Such
good faith cooperation may include, but is not limited to,
assumption of Statesman policies, transfer of assets and complete
documentation of the error or omission.
F. Third Party Reinsurance. All of the Included Treaties which
pertain or apply to the Medicare Supplement Issue Age policies,
are identified on Exhibit III.F. hereto. All such Included
Treaties shall be transferred to Texas Imperial on the Closing
Date, subject to the reinsurer's acceptance of the transfer, and
may be terminated thereafter at the election of Texas Imperial.
The Parties hereto shall use commercially reasonable efforts to
ensure that all such Included Treaties shall be amended,
adjusted, assigned or novated on terms and conditions
satisfactory to Texas Imperial on or before the Closing Date.
IV. POLICY CALCULATIONS AND PAYMENT OBLIGATIONS
A. Association Liability.
1. The Association Liability for the Medicare Supplement Issue
Age policies shall be calculated by the following formula:
Medicare Supplement Issue Age Reserves PLUS Reserve Adjustment
EQUALS Association Liability. The Medicare Supplement Issue Age
reserves, the methodology for the reserve adjustment and the
detailed calculation for each Participating Guaranty
Association's Association Liability is set forth in Exhibit IV.A.
2. On the Closing Date, each Participating Guaranty Association
shall deliver to Texas Imperial its Association Liability in the
manner set forth in the Liquidation Plan.
B. Texas Imperial Enhancement. On or before September 1, 2002
and in accordance with the Liquidation Plan, Texas Imperial will
contribute an Enhancement to each Participating Guaranty
Association pursuant to the calculations set forth in Exhibit
IV.B.
V. CLOSING
Subject to the terms, conditions and limitations of the
Liquidation Plan, the Closing of this Texas Imperial Assumption
Agreement shall take place on the Closing Date contemporaneously
with the Closing of the Liquidation Plan.
VI. ACCOUNTING AND AUDIT PROCESS
A. Accounting.
1. On or before April 1, 2000, Texas Imperial shall prepare and
deliver to NOLHGA a one-year accounting and statement of policy
reserves, account values premiums and claims related to Medicare
Supplement Issue Age policies for the prior calendar year. That
accounting shall be presented substantially in the form of
Exhibit VI.A.
2. Along with the one-year accounting, Texas Imperial shall
make available to NOLHGA and each Participating Guaranty
Association sufficient detail and documentation to support an
audit at the contract level.
3. On or before April 1, 2001, Texas Imperial shall prepare and
deliver to NOLHGA a second-year accounting and statement of
reserves, account values, premiums and claims related to the
Medicare Supplement Issue Age policies in the same format as the
one-year report along with the contract level.
4. On or before April 1, 2002, Texas Imperial shall prepare and
deliver to NOLHGA a third-year accounting and statement of
reserves, account values, premiums and claims related to the
Medicare Supplement Issue Age policies in the same format as the
one-year report along with the contract level.
5. On or before September 1, 2002, Texas Imperial shall prepare
and deliver to NOLHGA and to each Participating Guaranty
Association (to the extent related to that Participating Guaranty
Association's Covered Obligations) a final accounting and
statement of reserves, account values, premiums and claims
related to the Medicare Supplement Issue Age policies for all
three years and any payment due.
B. Audit. On or before the first business day three (3)
months after receipt of each year's accounting, and statement of
reserves, account values, premiums and claims related to the
Medicare Supplement Issue Age policies, NOLHGA and each
Participating Guaranty Association, shall each, separately,
complete its audit and communicate any areas of dispute or
disagreement with Texas Imperial's accounting.
C. Accounting Date.
1. Subject to the accounting and audit process set forth in
this Article VI, all amounts and calculations, including the
Enhancement, shall be final, due and payable on the Plan
Termination Date.
2. The exhibits to this Texas Imperial Assumption Agreement and
the obligations of each Party under this Texas Imperial
Assumption Agreement, shall be adjusted in accordance with the
audited annual accountings and the terms and provisions of the
Liquidation Plan.
D. Disputes. To the extent that disputes or disagreements
exist regarding the final accounting and/or audits thereof, and
the parties are unable to resolve those disputes, the disputes
shall be resolved by means of the Accounting Procedure as
specified in the Liquidation Plan.
VII. PREMIUMS AND OTHER RECEIPTS
A. All policyholder payments related to the Medicare
Supplement Issue Age policies for periods after the Closing
Date shall be the sole property of Texas Imperial. All
policyholder payments related to the Medicare Supplement
Issue Age policies for periods before the Closing Date shall
be the sole property of Statesman.
B. All moneys, checks, drafts, money orders, postal notes, and
other instruments received after the Closing Date for premiums on
the Medicare Supplement Issue Age policies which are the sole
property of Texas Imperial shall be forthwith transferred and
delivered to Texas Imperial and any such instruments, when so
delivered, shall bear all endorsements required to effect the
transfer of same to Texas Imperial. As of and following the
Closing Date, Texas Imperial shall have all the rights of
Statesman under outstanding bank draft authorizations from
policyholders which authorized Statesman to draw on the
policyholder's account to automatically withhold from
policyholder's accounts and transmit to Statesman funds to apply
to premium on the Medicare Supplement Issue Age policies. So far
as permitted by the laws of the applicable states, Texas
Imperial, as part of this Texas Imperial Assumption Agreement,
assumes the guaranty obligations of Statesman, if any, with
respect to such bank drafts authorizations outstanding on the
Closing Date. Texas Imperial shall have the right and authority
to collect for the account of Texas Imperial all receivables and
other items which shall be transferred by Statesman to Texas
Imperial and to endorse without recourse and without warranties
of any kind the name of Statesman on any checks or the evidences
of indebtedness received by Texas Imperial on account of any such
receivables or other items.
VIII.RECORDS
A. Each Participating Guaranty Association agrees to
transfer, assign, deliver and convey to Texas Imperial,
subject to the terms set forth in this Agreement, all files
and records related to the Medicare Supplement Issue Age
policies in their possession or under their control. Texas
Imperial agrees that after such delivery, the Participating
Guaranty Associations and/or NOLHGA shall be entitled, at
any reasonable time and at their expense, to inspect, audit
and copy any and all such records and files of Texas
Imperial and all other records and files of Texas Imperial
relating to the Medicare Supplement Issue Age policies.
B. Neither NOLHGA nor any Participating Guaranty Association
makes any warranty or representation that the books and records
of Statesman which may be transferred to Texas Imperial may or
shall be either accurate or complete.
C. Any and all correspondence, premiums, records or documents
coming into the possession of a Participating Guaranty
Association after the Closing Date directly pertaining to any
Medicare Supplement Issue Age policy shall be promptly delivered
to Texas Imperial by the Participating Guaranty Association,
without charge to Texas Imperial.
IX. LIABILITIES AND INDEMNITIES
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the liabilities and indemnities from the Liquidation Plan
apply to this Texas Imperial Assumption Agreement and are
incorporated herein by reference.
X. REPRESENTATIONS
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the representations from the Liquidation Plan apply to this
Texas Imperial Assumption Agreement and are incorporated herein
by reference.
XI. RESERVES
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the requirements related to Texas Imperial's reserve
maintenance from the Liquidation Plan apply to this Texas
Imperial Assumption Agreement and are incorporated herein by
reference.
XII. JURISDICTION AND ACCOUNTING PROCEDURE
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the provisions and requirements related to jurisdiction and
the Accounting Procedure from the Liquidation Plan apply to this
Texas Imperial Assumption Agreement and are incorporated herein
by reference.
XIII. NOTICE
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the notice provisions from the Liquidation Plan apply to
this Texas Imperial Assumption Agreement and are incorporated
herein by reference.
XIV. INSOLVENCY OF TEXAS IMPERIAL
In the event of the insolvency of Texas Imperial prior to the
Plan Termination Date, American Capitol shall guarantee and
assume all of Texas Imperial's policyholder liabilities with
respect to the Medicare Supplement Issue Age policies. In the
event of Texas Imperial's insolvency, any Association Notes
issued to Texas Imperial will become void and the applicable
Participating Guaranty Associations shall deliver equivalent
replacement Association Notes to American Capitol upon American
Capitol's assumption of the policies.
XV. GENERAL PROVISIONS
The Parties acknowledge that this Texas Imperial Assumption
Agreement is entered into as part of the Liquidation Plan and
that the general provisions from the Liquidation Plan apply to
this Texas Imperial Assumption Agreement and are incorporated
herein by reference. Regardless of any specific references, the
Parties acknowledge and agree that this Texas Imperial Assumption
Agreement is to be performed pursuant to, and interpreted
consistent with, the terms and provisions from the Liquidation
Plan.
IN WITNESS WHEREOF, this Texas Imperial Assumption Agreement
has been executed on the day and year subscribed.
TEXAS IMPERIAL LIFE INSURANCE COMPANY
By: /s/William F. Guest Date: June 10, 1999
-----------------------
Name: William F. Guest
Title: Chairman of the Board
NATIONAL ORGANIZATION OF LIFE AND HEALTH INSURANCE GUARANTY
ASSOCIATIONS
By: /s/Peter G. Gallanis Date: June 10, 1999
--------------------------
Name: Peter G. Gallanis
Title: President
Texas Imperial Assumption Agreement
Exhibit III.A.1.
Identification of Medicare Supplement Issue Age Policies
The Medicare Supplement Issue Age policies have been identified
in a policyholder listing which is in the possession of the parties.
The information in those lists is confidential and not made a part of
the filing with the Court. However, the policyholder information is
a part of the Assumption Agreements and is incorporated herein by
reference.
Texas Imperial Assumption Certificate
Exhibit III.A.3.
Assumption Certificate
The Texas Imperial Assumption Certificate is attached hereto
and incorporated herein by reference.
TEXAS IMPERIAL LIFE INSURANCE COMPANY
A Stipulated Premium Company
POLICY NUMBER:
INSURED:
CERTIFICATE OF ASSUMPTION
This is to certify that TEXAS IMPERIAL LIFE INSURANCE COMPANY
("Texas Imperial"), a life insurance company organized and
existing under the laws of the State of Texas with offices in
Houston, Texas, has assumed and reinsured all of the contractual
obligations existing under the policy identified above heretofore
issued or assumed by STATESMAN NATIONAL LIFE INSURANCE COMPANY
("Statesman") in accordance with the terms and conditions
thereof, the same as if such policy had been originally issued
with all its terms, covenants, stipulations and provisions, by
American Capitol. This Certificate of Assumption is being issued
in accordance with the terms and conditions of an Assumption
Agreement entered into among Texas Imperial, the National
Organization of Life and Health Guaranty Associations and the
Participating Guaranty Associations.
The Effective Date of this Certificate of Assumption is June 1,
1999.
Future payments of benefits and claims will be made by Texas
Imperial, and all premium payments, claims and correspondence
relating to the policy should be sent to:
Mailing Address Delivery Address
P. O. Box 42813 10555 Richmond Avenue, 2nd Floor
Houston, TX 77242-2813 Houston, TX 77042
IN WITNESS WHEREOF, TEXAS IMPERIAL LIFE INSURANCE COMPANY has
caused this Certificate to be signed by its duly authorized
officers as of the effective date.
- ----------------------------- --------------------------
H. Kathleen Musselwhite, John D. Cornett,
Secretary President
THIS CERTIFICATE BECOMES A PART OF YOUR POLICY AND SHOULD BE
ATTACHED THERETO.
ISSU###-##-####
Texas Imperial Assumption Agreement
Exhibit III.F
Included Treaties
There are no Included Treaties which pertain or apply to the
Medicare Supplement Issue Age policies.
Texas Imperial Assumption Agreement
Exhibit IV.A.
Association Liability
Exhibit IV.A. from the American Capitol assumption agreement
contains the Association Liability information for the Medicare
Supplement Issue Age policies and, to that extent, is incorporated
herein by reference.
Texas Imperial Assumption Agreement
Exhibit IV.B - Enhancement
Methodology for Sharing Statutory Gains and Losses Between
American Capitol and Guaranty Associations
Exhibit IV.B from the American Capitol Assumption
Agreement contains the Enhancement information for the
Medicare Supplement Issue Age policies and, to that extent,
is incorporated herein by reference.
Texas Imperial Assumption Agreement
Exhibit VI.A.
Accounting Form
Exhibit VI.A. from the American Capitol Assumption Agreement
contains the Accounting Form for the Medicare Supplement Issue Age
policies and, to that extent, is incorporated herein by reference.
<PAGE>
Summary Each year After Closing Date
Report for Calendar Year XXXX
Pre-Standard Issue Age Attained Age
Beginning of Year
Unearned Premium Reserve
Advance Premium
Due and Unpaid Premium
Additional Active Life Reserve
Claim Reserve
End of Year
Unearned Premium Reserve
Advance Premium
Due and Unpaid Premium
Additional Active Life Reserve
Claim Reserve
Policies in Force
Collected Premium
Earned Premium
Interest on Reserves
Paid Claims
Increase in Claim Reserve
Increase in Additional Active Life Reserve
Earned Commissions
Accrued Premium Tax
Maintenance Expense Allowance
Statutory Gain/Loss
Policy Years of Exposure
LIQUIDATION PLAN
Exhibit 4.2.2 - Form of Association Note
NON-NEGOTIABLE
PROMISSORY NOTE
Principal Amount
$----------------
(subject to adjustment
as described below)
Effective Date: ---------------
For value received pursuant to the Liquidation Plan regarding the
insolvency and liquidation of the Statesman National Life Insurance
Company ("Liquidation Plan") and the <American Capitol Assumption
Agreement or Texas Imperial Assumption Agreement> ("Assumption
Agreement") and the ---------- Life and Health Insurance Guaranty
Association as a Participating Guaranty Association ("Maker"),
promises to pay to the order of <American Capitol Insurance Company
or Texas Imperial Life Insurance Company> or assigns ("Holder") the
principal sum of $--------. The principal sum identified herein is
subject to adjustment in accordance with the Liquidation Plan and
the Assumption Agreement.
The principal amount outstanding shall earn interest at a fixed rate
equal to 5.3%.
The first payment of said principal shall be made on the first
business day ninety days after the Liquidation Plan Closing Date,
in an amount equal to $---------- with all accrued and unpaid
interest due and payable on that date. The second and final
payment of said principal shall be made on the first business day
after the Plan Termination Date, with all accrued and unpaid
principal and interest due and payable on that date. These
payments are subject to adjustment in accordance with the terms
of the Liquidation Plan and Assumption Agreement, including but
not limited to Article VI of the Assumption Agreement and a
reduction in the form of the Enhancement. Each payment by Maker
shall be made to Holder by means of immediately available cash or
by wire transfer to ---------_; Account No. --------or at such
other address as the Holder shall designate.
Maker waives presentment for payment, protest and demand, notice
of protest, demand and or dishonor and nonpayment of this Note,
and consents that Holder may but shall not be required to extend
the time of payment for a one year period up to and including the
sixth anniversary of the Closing Date or otherwise modify the
terms of payment of any part or the whole of the debt evidenced
by this Note, at the request of Maker, and such consent shall not
alter or diminish the liability of any person.
Maker agrees to pay all costs of collection, including reasonable
attorneys' fees, in case the principal sum under this Note or any
payment due by Maker for the principal or any interest thereon is
not paid at the respective maturity thereof.
Maker reserves the right to prepay this Note in full or partially
at any time without any premium or penalty. Prepayments shall be
applied first to reduce accrued unpaid interest, then to reduce
the principal balance due on the next scheduled installment
payment.
This Note shall be construed in accordance with the Liquidation
Plan, including but not limited to, the Jurisdiction and
Accounting Procedure in Section 8 of the Liquidation Plan.
Pursuant to the Liquidation Plan, this Note is an admissible
asset on the books of Holder.
Maker and Holder stipulate that, in the event Maker fails to
fulfill its obligations on this promissory note, the note and the
related liabilities will revert back to Maker.
The covenants of Maker contained in this Note shall be binding
upon its successors and assigns.
If any provisions of this Note shall be determined to be invalid
or unenforceable under law, such determination shall not affect
the validity or enforcement of the remaining provisions of this
Note.
IN WITNESS WHEREOF, the undersigned Maker has caused this Note to
be executed the day and year first above written.
- -----------------Life & Health Insurance Guaranty Association
By: -------------------------------------
Chairman of the -------------- Life &
Health Insurance Guaranty Association
Date: -------------------------------------
Liquidation Plan
Exhibit 10.1
American Capitol and Texas Imperial ("Assuming Insurer")
Policy and Claim Administration Standards
In accordance with Section 10.1 of the Liquidation Plan, Assuming
Insurer shall, within 120 days after closing, become and remain in
compliance with Texas Insurance Code, article 21.55. The provisions
of this Exhibit 10.1 shall remain in full force and effect through
the Plan Termination Date. The following details specific
requirements for claims processing time and accuracy standards,
which standards shall begin in effect 120 days after Closing.
1. Processing Time Standards
1.1 Individual Benefit Claims
Ninety-five percent (95%) of all of the individual benefit
claims filed with the Assuming Insurer will be acknowledged
within fifteen (15) days of the date the claim is filed or
deemed to be filed, and will be adjudicated, or a further
request for information will be sent, within sixty (60) days
of the date the claim is filed or deemed to be filed.
1.2 Continued Periodic Benefits
Ninety-five percent (95%) of all continued periodic
benefits, e.g. continuing disability payments under
policies administered by Assuming Insurer, will be
processed and paid or rejected within thirty (30) days of
the receipt of the necessary proof of continued coverage.
2. Processing Accuracy Standards
2.1 Claim Processing Accuracy
Assuming Insurer agrees to maintain a monthly claim
accuracy rate of no less than ninety-two percent (92%) as
determined by either selected or random audits to be
performed by NOLHGA at the discretion of NOLHGA.
An error is any determination made by Assuming Insurer
resulting in any incorrect payment or denial of policy
benefits, as indicated by the policy, unless the error is
the result of inaccurate or incomplete information
provided to Assuming Insurer by NOLHGA. The accuracy rate
percentage is calculated by dividing the number of correct
claims reviewed by the total number of claims in the
review sample. The review sample will be no less than ten
percent (10%) of the number of claims processed during the
review period.
2.2 Financial Accuracy
Assuming Insurer agrees to maintain monthly financial
accuracy of ninety-five percent (95%) as determined by
either selected or random audits performed by NOLHGA at
the discretion of NOLHGA.
Financial accuracy is calculated as the sum of the
absolute value of the total detected overpayments and
underpayments divided by total correct benefits payable
in the review sample, unless the overpayment or
underpayment is the result of inaccurate or incomplete
information furnished Assuming Insurer by NOLHGA. This
figure is subtracted from one hundred percent (100%) to
obtain the accuracy ratio. The review sample will be
no less than ten percent (10%) of the number of claims
processed during the review period.
3. Penalties
In addition to any other remedies, the following penalties
shall apply.
3.1 Fifteen percent (15%) penalties
A penalty of fifteen percent (15%) of the Maintenance
Expense Allowance as set forth in Exhibit IV.B of the
Assumption Agreements shall be levied for either
financial accuracy below ninety-five percent (95%) and
at or above ninety-two percent (92%) or for claim
processing accuracy below ninety-two percent (92%) and
at or above eighty-eight percent (88%).
3.2 Twenty percent (20%) penalties
A penalty of twenty percent (20%) of the Maintenance
Expense Allowance as set forth in Exhibit IV.B. of the
Assumption Agreements shall be levied for either
financial accuracy below ninety-two percent (92%) or
for claim processing accuracy below eighty-eight
percent (88%).
3.3 Penalty Payments
No more frequently than once each quarter, any and all
penalties will be assessed by NOLHGA. Payments shall
be made directly by Assuming Insurer to NOLHGA and then
allocated by NOLHGA among the Participating Guaranty
Associations on a pro rata basis.
4. Other Items and Definitions
All terms used herein shall have the same definitions and
meanings as specified in the Liquidation Plan and the Texas
Insurance Code, article 21.55.
4.1 Exemption from Compliance
In the event the Assuming Insurer determines that, for
any reason over which it has no control, the above
standards cannot reasonably be met, Assuming Insurer
shall, within thirty (30) days of the date of such
determination, report such determination to NOLHGA.
This report shall include a description of the reasons
for the inability to meet the performance standard and
a description of the action taken or to be taken by
Assuming Insurer to resolve the problem.
4.2 Claim Defined
A claim is any policy benefit for which Assuming
Insurer is obligated by statute to provide.
4.3 Claim Deemed Filed
A claim is deemed to be filed upon receipt by Assuming
Insurer of information that reasonably notifies
Assuming Insurer of the existence of a claim. A formal
AProof of Claim@ is not required. The receipt of the
policy files from a Receiver will constitute the filing
of a claim for continuation of coverage, but not for
specific claims.
4.4 Complaint Log
Assuming Insurer shall maintain a complaint log in a
form approved by NOLHGA which includes the name of
claimant, name of insured, date and nature of
complaint, action taken, and date of resolution. A
copy of the log shall be submitted to NOLHGA on or
before the tenth (10th) day of each month.
4.5 Filing Date for Claims
The date on which Assuming Insurer is deemed to have
received the claim will be the date an individual claim
is received.
4.6 Reporting
Assuming Insurer will deliver to NOLHGA a written
report, based on the Assuming Insurer's internal
quality control review identifying the claims
processing accuracy on a quarterly basis. Upon
NOLHGA's request, the Assuming Insurer will provide
NOLHGA with access to additional documents, data and
information related to the claims processing
calculations.
EXHIBIT 10.6
Statesman National Life Insurance Company and American Capitol
Insurance Company have made an accounting to each other regarding
the items or matters listed below and have made a full and final
settlement regarding same, as follows:
Due from (to) Statesman to American Capitol:
1. Settlement of the coinsurance agreement between American
Capitol and Statesman through May 31, 1999, and other intercompany
transactions reflected on the attached "American Capitol/Statesman
Intercompany Transactions": $(25,861.00)
2. Settlement of services rendered by employees of one company to
the other (12-16-98 to date of receivership) as shown on the
attached "Summary of Services": 101,530.42
3. Settlement of benefit to one company of invoices paid by the
other Company (12-16-98 to date of receivership) as shown on the
attached "Memo" from J. Wesley McComb To Tom Green dated May 17,
1999: (3,105.00)
4. Payment by Statesman of employee wages and related taxes and
benefits (but excluding accrued vacation benefits) as shown on the
attached listing of employees and related pay, etc.:
33,382.54
--------------
"Net" due by Statesman to American Capitol: $ 105,946.96*
Accordingly, the payment by Statesman of $105,946.96* constitutes a
full and final settlement of the above matters.
There were no matters to settle between Statesman and Texas
Imperial, although Texas Imperial owns all of the stock of Statesman
and a surplus debenture in the principal amount of $800,000.
*Item 4 has been calculated through June 9, but if the date of the
receivership (expected to be June 10) should be postpone, this
amount will be deemed to automatically increase by the "per diem"
amount ($3,391.50) shown on the subject attachment.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 38,124,601
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,791,343
<REAL-ESTATE> 0
<TOTAL-INVEST> 49,135,417
<CASH> 133,500
<RECOVER-REINSURE> 102,603,231
<DEFERRED-ACQUISITION> 2,233,468
<TOTAL-ASSETS> 166,922,053
<POLICY-LOSSES> 143,406,530
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,504,531
<POLICY-HOLDER-FUNDS> 2,357,661
<NOTES-PAYABLE> 1,437,500
0
1,850,000
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3,187,325
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<OTHER-INCOME> 49,959
<BENEFITS> 2,240,042
<UNDERWRITING-AMORTIZATION> 170,756
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<INCOME-PRETAX> 1,172,103
<INCOME-TAX> 191,380
<INCOME-CONTINUING> 980,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980,723
<EPS-BASIC> 122.86
<EPS-DILUTED> 110.73
<RESERVE-OPEN> 1,659,756
<PROVISION-CURRENT> 0
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<PAYMENTS-CURRENT> 585,278
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<RESERVE-CLOSE> 4,504,531
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</TABLE>
