Exhibit 10.2
REINSURANCE SLIP
COMPANY: Penn Treaty Network America Insurance Company ("PTNAIC") and
American Network Insurance Company ("ANIC") (each a
"Company", and collectively, the "Companies"), as
subsidiaries of Penn Treaty American Corporation ("PTAC").
REINSURER: Centre Solutions (Bermuda) Limited ("Reinsurer").
EFFECTIVE
DATE: December 31, 2001.
CLOSING DATE: February 19, 2002
SUBJECT
BUSINESS: All policies of individual Long Term Care insurance
underwritten by or on behalf of the Companies, in force at
the Effective Date and identified in the attached Appendix A
(each a "Policy", collectively, the "Policies").
TERRITORY: The territorial limits of this Agreement shall be identical
with those of the Subject Business.
COVERAGE: Subject to the terms, conditions and limits of this
Agreement, the Reinsurer shall indemnify each of the
Companies severally, for all Ultimate Net Loss actually paid
on Subject Business by the respective Company on or after
the Effective Date. In no event shall the Reinsurer pay
more than the Reinsurer's Aggregate Limit of Liability (as
defined herein).
REINSURANCE
PREMIUMS: 1. Reinsurance Premiums shall be paid by the Companies to
to the Reinsurer as follows:
(a) on the Closing Date, an initial premium of $601,578,667
("Initial Premium") in cash and Qualified Securities
(hereinafter defined), valued at amortised cost as of
the Effective Date, such that the cash and the Accepted
Market Value of Qualified Securities as of the
Effective Date shall be no less than $619,529,327; and
(b) on and after the Closing Date, all Net Premiums
received on or after the Effective Date (or deemed
received in the case of waived premiums) by the
Companies in connection with the Subject Business, to
be paid as and when received by the Companies except
that the Net Premiums received prior to the Closing
Date shall be paid on the Closing Date.
2. If, following the payment by the Companies of the
Initial Premium, the statutory surplus of the PTNAIC
would be reduced below $20 million as indicated by the
statutory financial statement filed by the PTNAIC in
its state of domicile as of December 31, 2001, then
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(a) the calculation of Initial Premium shall be reduced by
a Premium Adjustment (defined herein), and
(b) if the Premium Adjustment is greater than the excess of
(i) the Accepted Market Value less the amortised cost
of the Qualified Securities as measured at the
Effective Date, minus (ii) $17,950,660, or if the
Accepted Market Value less the amortised cost of the
Qualified Securities as measured at the Effective Date
is less than $17,950,660, a corresponding adjustment as
determined by the Reinsurer to any or all of the terms
of this Reinsurance Slip may be effected by the
Reinsurer, in its sole discretion, including without
limitation, an adjustment to the Reinsurer's Charge or
the Reinsurer's Aggregate Limit of Liability, in order
to restore the Reinsurer to the equivalent economic and
risk position as if the Premium Adjustment had not been
made, and
(c) the "Premium Adjustment" shall be that amount which, if
deducted from the Initial Premium, causes the statutory
surplus of PTNAIC to be $20 million as indicated by the
statutory financial statement appropriately prepared
and filed by the PTNAIC in its state of domicile as of
December 31, 2001.
INTEREST
ADJUSTMENT: In addition to the payment of Reinsurance Premiums, on the
Closing Date, interest shall be paid by the Companies to the
Reinsurer for the period from the Effective Date through the
Closing Date at an annualised rate of 6% on the total sum of
the Initial Premium payable less that amount retained in the
FWA as of the Effective Date.
FUNDS WITHHELD
ACCOUNT: The Companies collectively, shall retain from the Initial
Premium payable to the Reinsurer the total sum of
$56,000,000 of the Initial Premium and shall hold such
amount on a "Funds Withheld" basis in a funds withheld
account ("FWA") as security in accordance with the provision
hereunder relating to Security, subject further to the right
to set off in accordance with the provision hereunder
relating to Offset. The Companies must reduce the amount
retained in such FWA by remitting to the Reinsurer, in cash,
within fifteen (15) business days of the dates indicated
below, the following portions of the balance in the FWA at
each date:
December 31, 2003 1/6
December 31, 2004 1/5
December 31, 2005 1/4
December 31, 2006 1/3
December 31, 2007 1/2
December 31, 2008 100%
Notwithstanding the foregoing, the Reinsurer reserves the
right at any time and for any reason to terminate the FWA and
to demand that the Companies remit the balance in the FWA by
giving PTNAIC at least fifteen (15) business days prior
written notice (notice under this provision to PTNAIC shall
constitute notice to both Companies). In such event, the
Companies shall immediately release such security and
transfer the amount in the FWA to the Reinsurer on the
fifteenth day following delivery of such demand from the
Reinsurer.
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For so long as the FWA is maintained, the Companies, upon
written request of the Reinsurer, shall offset Ultimate Net
Loss payable by the Reinsurer under this Agreement from the
positive balance of funds maintained in the FWA. The
Reinsurer shall be under no obligation to reimburse either
Company, any successor in interest or statutory receiver,
liquidator, rehabilitator (or the like) for any Ultimate Net
Loss as long as there is a positive balance in the FWA.
The FWA shall accrue interest at a rate calculated as
follows:
(i) If the FWA is less than or equal to the amount of Penn
Treaty COLI Investments (hereinafter defined), the rate
of interest shall be equal to the greater of (a) the
actual rate of return on the Penn Treaty COLI
Investments or (b) a rate equal to ratio of the
Experience Account Investment Income divided by the
average daily balance in the Experience Account used to
calculate such credit.
(ii) If the FWA is greater than the amount of Penn Treaty
COLI Investments, the rate of interest on the balance
of the Penn Treaty COLI Investments shall be as
calculated in the immediately preceding paragraph (i),
and the rate of interest on the excess of the FWA over
the amount of Penn Treaty COLI Investments shall be as
calculated in the immediately preceding paragraph
(i)(b).
REINSURANCE
ALLOWANCE: 1. The Reinsurer shall pay to the Companies a
Reinsurance Allowance each year equal to the sum of:
(a) 17.15% of Net Premiums received by the Reinsurer during
that year (provided however, should either Company file
and implement any premium rate increases on the Subject
Business after the Effective Date the amount of Net
Premium for each Policy for the purpose of this clause
(a) only, shall be equal to the Net Premium had no
premium rate increase taken effect), plus
(b) 2.5% of Net Premiums received by the Reinsurer during
that year, plus
(c) 3.5% of:
(i) Ultimate Net Loss paid in the year, plus
(ii) the statutory claim reserve as indicated by the
statutory financial statement filed by the Company
in its state of domicile at the end of that year,
minus
(iii)the statutory claim reserve as indicated by the
statutory financial statement filed by the Company
in its state of domicile at the beginning of that
year.
2. In addition, in each of calendar years 2002 and 2003 a
fixed amount of $2,000,000 per year, shall be added to
the total Reinsurance Allowance payable to the
Companies, and a fixed amount of $1,200,000 per year in
each of calendar years 2004, 2005, 2006, and 2007,
shall be subtracted from the total Reinsurance
Allowance payable to the Companies.
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3. The amount calculated for the calendar year 2002 under
(a) above shall be increased by an amount equal to the
excess of the actual commission paid by either Company
to its producers on Subject Business in 2002 over 12.4%
of Net Premiums for 2002.
4. If the amount of Reinsurance Allowance calculated by
the above formula for any calendar year after 2002 is
greater than 25% of Net Premiums received by the
Reinsurer, the amount of the Reinsurance Allowance for
that calendar year shall be capped at a maximum of 25%
of Net Premiums. For the avoidance of any doubt, there
shall be no carryforward or carryback of any
Reinsurance Allowance capped as a result of the
foregoing limitation.
5. To the extent that Reinsurer exercises any of its
rights under paragraph 2 of the Claims Handling
Covenant and incurs any fees, costs and expenses in
connection therewith, such fees, costs or expenses
shall be deducted from the Reinsurance Allowance.
EXPERIENCE
ACCOUNT: A notional "Experience Account" shall be created by the
Reinsurer as at the Effective Date of this Agreement and
shall be maintained by the Reinsurer until all obligations of
the Reinsurer hereunder have been satisfied or discharged in
full.
The balance of the Experience Account shall be calculated by
the Reinsurer and as of any date shall be equal to:
(a) 100% of the Initial Premium received by the Reinsurer,
valued at Accepted Market Value at the Effective Date,
plus
(b) 100% of Net Subject Premiums received by the Reinsurer
on or after the Effective Date, less
(c) 100% of cumulative Ultimate Net Loss paid or payable by
the Reinsurer, less
(d) 100% of the Reinsurer's Charges, less
(e) 100% of any brokerage payments made by the Reinsurer,
not to exceed $50,000 per annum for the first six years
of the Agreement, plus
(f) the cumulative Experience Account Investment Income.
REINSURER'S
CHARGE: The Reinsurer shall deduct an annual Reinsurer's Charge from
the Experience Account in quarterly instalments, on each
January 1st, April 1st, July 1st, and October 1st, in
respect of each calendar year until the Reinsurer's
obligations hereunder have been extinguished. The
Reinsurer's Charge for any calendar year shall be calculated
as the sum of the following:
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(a) a Base Fee according to the following schedule:
(1) $2,800,000, payable in each of the first seven
(7) calendar years, then
(2) $3,360,000, payable in each of the next two (2)
calendar years, then
(3) $4,032,000, payable in each of the next two (2)
calendar years, then
(4) $5,376,000, payable in each calendar year
thereafter; plus
(b) a Reserve Charge, being a percentage of the statutory
reserves ceded to the Reinsurer hereunder, included in
the statutory financial statement appropriately
prepared and filed by the Companies in their state of
domicile at the end of the immediately preceding
calendar year, according to the following schedule:
(1) 0.400%, payable in each of the first seven (7)
calendar years, then
(2) 0.480%, payable in each of the next two (2)
calendar years, then
(3) 0.600%, payable in each of the next two (2)
calendar years, then
(4) 0.800%, payable in each calendar year
thereafter; plus
(c) a Capital Charge, being a percentage of the Notional
Capital Amount at the end of the immediately preceding
calendar year, according to the following schedule:
(1) 2.400%, payable in each of the first seven (7)
calendar years, then
(2) 2.800%, payable in each of the next two (2)
calendar years, then
(3) 3.200%, payable in each of the next two (2)
calendar years, then
(4) 4.000%, payable in each calendar year
thereafter; plus
(d) a Contract Maintenance Fee of $375,000; plus
(e) actual costs incurred by the Reinsurer in respect of
the Security.
Calendar year 2001 shall be deemed to be the "first" year
hereunder and the Reinsurer's Charge for the "first" and
"second" calendar years shall be deducted quarterly in 2002
(except that the January 1, 2002 deduction shall be deducted
as of the Closing Date). For the "first" year only, the Base
Fee, Reserve Charge, Capital Charge, and Contract Maintenance
Fee shall be 50% of the amounts specified in (a) through (d)
above, and shall be based upon statutory reserves and
Notional Capital Amount as at December 31, 2001.
NOTIONAL CAPITAL
AMOUNT: The "Notional Capital Amount" at any point in time shall be
calculated as 200% of the sum of:
(a) 2.0% of the total statutory reserves ceded to the
Reinsurer hereunder, included in the statutory
financial statements appropriately prepared and filed
by the Companies in their state of domicile at the date
of calculation, plus
(b) 5.0% of the statutory claim reserves ceded to the
Reinsurer hereunder, included in the statutory
financial statements appropriately prepared and filed
by the Companies in their state of domicile at the date
of calculation, plus
(c) 25.0% of the first $50 million of Net Premium in the
preceding twelve (12) months, plus
(d) 15.0% of the excess over $50 million of Net Premium in
the preceding twelve (12) months.
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LIMIT ACCOUNT: A notional "Limit Account" shall be calculated by the
Reinsurer as at the Effective Date of this Agreement and
maintained until all obligations of the Reinsurer hereunder
have been satisfied or discharged in full as follows:
The Limit Account balance shall be calculated by the
Reinsurer and as of any date shall be equal to the following:
Part I: 1) ▇▇▇ (which is defined below and
which is credited to the Limit
Account on the Effective Date), plus
2) the Initial Premium actually
received and retained by the
Reinsurer, plus
3) 100% of the Net Subject Premiums
actually received and retained by
the Reinsurer on or after the
Effective Date, plus
4) the cumulative Annual Limit Account
Investment Credits;
less
Part II: 100% of cumulative Ultimate Net
Loss paid by the Reinsurer.
All premiums are deemed to be credited to and all Ultimate
Net Losses are deemed to be debited from the Limit Account at
the exact time when such premiums and Ultimate Net Losses are
credited to and debited from, respectively, the Experience
Account. The Annual Limit Account Investment Credit, if any,
shall be credited to the Limit Account on December 31 of the
year for which the credit was calculated.
INCREMENTAL
LIMIT AMOUNT: The Incremental Limit Amount ("▇▇▇") shall be equal to $200
million, subject however, to any reduction as a result of a
failure to obtain Required Premium Rate Increases
(hereinafter defined).
ANNUAL LIMIT
ACCOUNT
INVESTMENT
CREDIT: The Annual Limit Account Investment Credit shall be
calculated by multiplying the average daily balance
(excluding the Annual Limit Account Investment Credit for
that year) of the Limit Account for that year, or portion
thereof, by 4.5% per annum.
REINSURER'S
AGGREGATE
LIMIT OF
LIABILITY: Reinsurer's Aggregate Limit of Liability under or related to
this Agreement shall be equal to the amount in Part I of the
Limit Account.
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COMMUTATION: The Companies shall have the right to elect to commute this
Agreement only under the following circumstances (each a
"Commutation Trigger Event"):
(a) within the sixty (60) day period following one of the
following events:
(i) a change of control of either Company, including
but not limited to an acquisition, amalgamation,
merger or consolidation with any other entity or
the sale of all or substantially all of the assets
of either Company; or
(ii) an Insolvency Event with respect to either
Company; or
(iii)a material breach of the Agreement by either
Company, including without limitation (y) breach
of the Agreement's covenants, representations
and/or warranties (for the avoidance of any doubt,
including but not limited to, failure to comply
with the Required Premium Rate Increases covenant)
and (z) breach of the Reinsurer's Association
provision; and
(b) so long as no Commutation Trigger Event enumerated in
any of (a)(i-iii) above has occurred, then, with ninety
(90) days prior written notice to the Reinsurer, any
December 31 or the next business day, beginning
December 31, 2007.
The date within the sixty (60) day period following a
Commutation Trigger Event designated by the Companies in
their notice to commute, or any December 31 beginning
December 31, 2007 on which the Companies have elected to
commute, shall be known as the "Commutation Date".
The Companies' right, at their sole option, to commute this
Agreement, shall be effective only upon the occurrence of the
Commutation Trigger Events and at no other time. For the
avoidance of any doubt, should at any time a Commutation
Trigger Event enumerated in any of (a)(i-iii) above have
occurred, and the Companies have not elected to commute this
Agreement within the sixty (60) day period provided above,
neither Company shall thereafter have any right under this
Agreement to elect commutation. Further, under no
circumstance shall there be any right to commute this
Agreement in respect of one Company without concurrently
commuting this Agreement in respect of both PTNAIC and ANIC.
Upon an election to commute this Agreement as provided above,
the parties shall negotiate and execute definitive
documentation reasonably satisfactory to the parties to
effect the commutation, settlement and release of their
respective obligations and liabilities and upon the execution
of such documentation, the Reinsurer shall pay to the
Companies the Commutation Payment (hereinafter defined).
Commutation by the Companies in accordance with this
Commutation provision, and payment by the Reinsurer of the
Commutation Payment, if any, shall constitute a complete and
final settlement and release of the Reinsurer in respect of
any and all known and unknown obligations or liability of any
nature to the Companies under or related to this Agreement,
all as more specifically described in such negotiated
definitive documentation.
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In the event that this Agreement is commuted on or after
December 31, 2007, the Commutation Payment shall be equal to
the greater of a) $0 (zero) or b) the balance in the
Experience Account as of the effective date of commutation,
plus interest at a rate equal to the then current yield on
the 30 day US treasury ▇▇▇▇ from the effective date of
commutation to the payment date.
In the event that this Agreement is commuted prior to
December 31, 2007, the Commutation Payment shall be equal to
the greater of a) $0 (zero) or b) the balance in the
Experience Account as of the effective date of commutation,
plus interest at a rate equal to the then current yield on
the 30 day US treasury ▇▇▇▇ from the effective date of
commutation to the payment date, minus $2.5 million per
quarter from the effective date of commutation up to December
31, 2007 in lieu of any Reinsurer's Charge that would have
otherwise been due and payable during such time period.
Upon the occurrence of an Insolvency Event, the Reinsurer
shall be deemed to have reserved, and hereby does not waive,
any and all rights and defenses available to the Reinsurer
notwithstanding this Commutation provision.
For purposes of determining the composition of premium refund
made as Commutation Payment, in determining the components of
the notional Experience Account balance, Ultimate Net Losses
and the Reinsurer's Charges shall be considered to first
offset the Experience Account Investment Income, followed
next by the Initial Premium, and finally by the Net Premium
received by the Reinsurer on or after the Effective Date
(from earliest to latest year order).
CANCELLATION: If any Reinsurance Premium remains unpaid fifteen (15) days
after notice is first provided by the Reinsurer, the
Reinsurer may, at its sole option, cancel this Agreement by
providing the Companies written notice of cancellation
("Notice of Cancellation") (notice under this provision to
PTNAIC shall constitute notice to both Companies). For the
purposes of this Agreement, the Date of Cancellation shall
be the date that the overdue premium was originally due.
Following the delivery of such Notice of Cancellation by the
Reinsurer, this Agreement shall automatically be commuted on
the sixtieth (60th) day following the Date of Cancellation,
which date of commutation shall be the "Commutation Date". On
the Commutation Date, the Reinsurer shall pay to the
Companies a "Cancellation Payment" equal to greater of a) $0
(zero) or b) the balance in the Experience Account as of the
Commutation Date, plus interest at a rate equal to the then
current yield on the 30 day US treasury ▇▇▇▇ for the period
from the Commutation Date to the payment date, minus $2.5
million per quarter from the Date of Cancellation up to
December 31, 2007 in lieu of any Reinsurer's Charge that
would have otherwise been due and payable during such time
period. For the avoidance of any doubt, the Reinsurer shall
not be liable for any Commutation Payment in the event of a
Cancellation pursuant to this Cancellation provision.
Commutation of this Agreement in accordance with this
Cancellation provision, and payment by the Reinsurer of the
Cancellation Payment, if any, shall constitute a complete and
final settlement and release of the Reinsurer in respect of
any and all known and unknown obligations or liability of any
nature to the Companies under or related to this Agreement.
In furtherance of the foregoing, the parties shall negotiate
and execute definitive documentation reasonably satisfactory
to the parties to effect the commutation, settlement and
release of their respective obligations and liabilities and
upon the execution of such documentation, the Reinsurer shall
pay to the Companies the Cancellation Payment.
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SECURITY: The Reinsurer agrees to provide the Companies security in an
amount equal to the reserves reported by the respective
Companies in their statutory financial statement, by
providing for the benefit of the respective Company, any of
the following forms of security: (i) a clean, irrevocable
and unconditional letter of Credit ("Letter of Credit")
containing such provisions required by the applicable
insurance regulatory authorities issued by a mutually agreed
bank (ii) securities held in a trust account for the
benefit of the Companies, and/or (iii) cash and assets
retained by the respective Company on a funds withheld basis
(the "Funds Withheld") (or any combination thereof), of
which the respective Company shall be the beneficiary which
shall secure in full all liabilities of the Reinsurer to
such Company under this Agreement, including all policy,
premium and incurred claims reserves, with respect to this
Agreement as shown on the reports required under Reports and
Remittances. The relative amounts of the security posted by
the Reinsurer in the form of either a Trust Fund and/or a
Letter of Credit and/or on a Funds Withheld basis, shall be
at the Reinsurer's absolute and sole discretion.
OFFSET: The Reinsurer on the one hand, and the Companies on the
other hand, shall have, and may exercise at any time and
from time to time, the right to set off any balance(s),
whether on account of premiums or on account of losses or
otherwise, due from the Reinsurer on the one hand to either
of the Companies on the other hand, and from either Company
on the one hand to the Reinsurer on the other hand, under
the Agreement or under any other agreement entered into by
the parties, and may set off the same against any balance(s)
due or to become due to the former from the latter under the
same or any other agreements between the parties. Any debts
or credits, matured or unmatured, liquidated or
unliquidated, contingent or non-contingent, regardless of
when they arose or were incurred, in favor of or against
either the Companies on the one hand, or the Reinsurer on
the other hand, with respect to this Agreement or any other
agreement between the parties, regardless of whether such
balances to be offset arise from premiums, losses or
otherwise, and regardless of the capacity of the party,
whether as assuming reinsurer and/or cedant, whether as
parent, subsidiary, of affiliated party are deemed mutual
debts or credits, as the case may be, and shall be set off,
and only the net balance shall be allowed or paid. This
provision shall not be affected by the insolvency of any
party to this Agreement.
DEFINITIONS: "Accepted Market Value" of Qualified Securities shall be
determined by the Reinsurer in its sole discretion. Should
the Companies disagree with the Reinsurer's determination of
Accepted Market Value for any security presented by the
Companies for consideration as a Qualified Security, the
Companies shall have the option to liquidate that security
at the Companies' expense and the liquidated cash value
shall be included in the cash consideration to be paid.
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"Benchmark ▇▇▇▇▇▇" shall mean any commonly used investment
instrument or derivative instrument used specifically to
extend or reduce the duration of, or manage the credit risk
of, the Benchmark Investment Portfolio in order to more
closely match the anticipated future Net Subject Premium less
Ultimate Net Loss hereunder.
"Benchmark Investment Portfolio" shall mean the notional
investment portfolio consisting of publicly available
indices, which will, in the aggregate:
(a) approximately cash match the future Net Subject Premium
less Ultimate Net Loss hereunder; and
(b) have an average credit quality of AA/Aa2 by Standard
and Poors/▇▇▇▇▇'▇.
"Experience Account Investment Income" for any period shall
be equal to the total return for that period on the Benchmark
Investment Portfolio, as described below, plus or minus (as
the case may be) any gains or losses on ▇▇▇▇▇▇ used by the
Reinsurer in its reasonable discretion to manage its
investment and other risks associated with this Agreement
during that period (hereinafter "Benchmark ▇▇▇▇▇▇"), less 20
basis points per annum on the average Experience Account
balance for the period.
The Benchmark Investment Portfolio and Benchmark ▇▇▇▇▇▇ shall
be adjusted at least once annually, more often if deemed
necessary by the Reinsurer, such that conditions (a) and (b)
above are met. To the extent that public indices are not
available (including at the durations of the Net Liability),
the Reinsurer may use alternatives which, in its sole
discretion, would replicate a reasonable asset-liability
matching investment strategy for the Subject Business.
"ECO Loss" shall mean all actual, potential, or threatened
loss or liability of the Company, of any form or nature
whatsoever, whether in contract, tort, or otherwise, that
arises out of or in any way relates to any conduct or
inaction of the Company or anyone acting on behalf of the
Company (whether by actual or apparent authority of the
Company) under or relating to the Subject Business
(including, loss or liability arising because of the failure
by the Company to settle within the limit of any Policy, or
by reason of alleged or actual negligence, fraud or bad faith
in rejecting an offer of settlement), other than (a)
allocated loss adjustment expenses and (b) benefits or
liability under the Policies in accordance with their strict
terms. For the avoidance of doubt, ECO Loss includes (x)
amounts paid in settlement of claims that seek or purport to
assert liability of the Company for amounts that, if such
claim were proved, would be ECO Loss and (y) all costs,
charges, and expenses, including without limitation
attorneys' fees, of the Company in defending any such claim.
"Insolvency Event" shall mean with respect to either Company,
(a) a winding up petition is presented against the Company,
a provisional liquidator is appointed in respect of the
Company, the Company is placed into administration,
administrative receivership, rehabilitation,
liquidation, conservatorship, receivership, (or the
like), in relation to all or any part of its affairs or
any other similar or equivalent event under the law of
any competent jurisdiction in the United States; or
(b) the Company becomes subject to any other similar
insolvency process (whether under the laws of any
competent jurisdiction in the United States or
elsewhere);
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(c) the Company is unable to pay its debts as and when they
fall due in accordance with the terms of the debt
obligations; or
(d) a department of insurance or commissioner thereof
having jurisdiction over the Company determines that
the Company is statutorily insolvent, financially
impaired, has failed to cure a deficiency with the time
prescribed, has failed to comply with an order of such
department of insurance or commissioner thereof, or
otherwise determines that grounds exist for
conservation, rehabilitation or liquidation of the
Company under applicable insurance statutes.
"Material Breach Event" shall have the meaning given to it in
paragraph 4 of the Required Premium Rate Increases Covenant.
"Net Liability" shall mean the Net Subject Premium less
Ultimate Net Loss.
"Net Premiums" shall mean gross premiums written (including
waived premiums) less return premiums, less premiums for
reinsurance which would inure to the benefit of the Reinsurer
under this Agreement (whether or not such reinsurance is
collectible), plus expense allowances received under any such
reinsurance.
"Net Subject Premiums" shall mean Net Premiums less the
Reinsurance Allowance less Federal Excise Tax.
"Penn Treaty COLI Investments" shall mean the life insurance
policies issued by American General Insurance Company and
held by the Companies as listed in Appendix C.
"Qualified Securities" shall mean securities that are
acceptable to the Reinsurer in its sole discretion as part of
the Initial Premium.
"Rate Adjusted Net Premium" shall mean the Net Premium that
would have been charged to the Company's policyholders had
the Company filed for and been granted Required Premium Rate
Increases. The parties agree that for the purposes of
determining the Rate Adjusted Net Premium, the Company shall
be deemed to have been granted rate increases in respect of
any Required Premium Rate Increase filing on the 180th day
subsequent to the Mandatory Filing Date (hereinafter
defined).
"Regulatory Risk Event" shall have the meaning given to it in
paragraph 2 of the Regulatory Risk Covenant.
"Required Premium Rate Increases" shall mean the rate
increases that would be, or then have been, as the case may
be, granted to the Companies had they filed for and been
granted rate increases in a manner consistent with the
Required Premium Rate Increase Covenant of this Agreement.
"Ultimate Net Loss" shall mean the actual benefit or loss
(including waived premiums on benefits or loss incurred on or
after the Effective Date, but excluding all loss adjustment
expenses) paid or settled by or on behalf of the Company on
Subject Business after the Effective Date on its net retained
liability after making deductions for all recoveries,
subrogations and all inuring reinsurance whether or not
collectible. Ultimate Net Loss shall not include any amount
paid or settled by or on behalf of the Company for any ECO
Loss.
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COVENANTS: Including, but not limited to:
Policy Forms: Each of the Companies covenants and agrees that
it shall not effect any material amendment, modification or
other change, in the terms, coverages, conditions,
limitations or exclusions in any of the Policies or in any
Policy form issued in connection with the Subject Business,
without the prior written consent of the Reinsurer, which
consent can be granted or withheld in Reinsurer's sole
discretion, for any reason or no reason, except however, for
any such change that is explicitly provided for by applicable
law or insurance regulation. If the Company has effected any
prohibited material amendment, modification or other change
to any of the Policies without first securing the Reinsurer's
consent, the reinsurance provided under this Agreement, and
the Reinsurer's liability with respect thereto, will cover
Ultimate Net Loss arising from such Policies determined as if
such change had not been made.
Claims Handling:
1. The Companies covenant and agree that (a) their claims
administration practices and procedures (i) shall not
materially deviate from "agreed and Best Practice" claims
administration practices and procedures (as such term is
commonly understood in the industry) and (ii) shall be
maintained, at a minimum, at no less of a level of
performance than were in place on the Effective Date. Failure
to comply with this covenant shall constitute a material
breach of the Agreement, and (b) Reinsurer or its designee
shall have the right to audit and inspect the Companies'
claims administration practices and procedures from time to
time as Reinsurer may deem desirable, including, but not
limited to, regular and open access to the Companies' books,
records, systems and personnel.
2. Reinsurer's remedies in the event of such material breach
shall include, but not be limited to (i) the right to take
control of claims administration and/or the right to replace
either or both of the Companies as claims administrator with
a substitute claims administrator of the Reinsurer's choosing
at the Companies' sole expense and/or the right to institute
an oversight process of the Companies as claims administrator
at the Companies' sole expense, and (ii) an automatic
adjustment to the reinsurance provided under this Agreement,
and the Reinsurer's liability with respect thereto, such that
this Agreement will cover Ultimate Net Loss arising from such
Policies determined as if such deviation did not occur and
such level of performance had been maintained.
3. In furtherance and not in limitation of the foregoing
paragraphs 1 and 2, the Final Wording documenting this
Agreement shall outline in explicit detail: such "agreed and
Best Practice" claims administration practices and
procedures; the expected standards of claims administration
performance; Reinsurer's audit and inspection rights of the
foregoing (including without limitation regular and open
access to the Companies' books, records, systems and
personnel); and the circumstances under which Reinsurer shall
be permitted to assert control of claims administration
and/or substitute a claims administrator of the Reinsurer's
choosing in lieu of the Companies and/or institute oversight
of the Companies as claims administrator. The Reinsurer shall
have the right in its reasonable discretion to set the
standards to implement the foregoing.
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4. The Companies shall cooperate fully with the Reinsurer in
all reasonable respects in furtherance of the covenants and
commitments outlined in this Claims Handling provision. The
Reinsurer shall be entitled to injunctive relief to enforce
any of the foregoing obligations of the Companies and all
Reinsurer's remedies with respect thereto.
Regulatory Risk:
1. The Companies represent and warrant that:
(i) at the Effective Date, each of their long-term
care Policy forms is a guaranteed renewable accident
and health policy form, and as such are eligible for
actuarially supported premium rate increases (which
may arise, among other reasons, from adverse
deviation in actual claims experience or from
changes in future expected claims experience) under
statutory practices and procedures in all
jurisdictions in which the Companies are licensed to
conduct business; and
(ii) they have been successful in obtaining premium
rate increases historically, and have not been
subjected to significant risk arising from (i)
regulatory action that is inconsistent with
established statutory practices and procedures or
(ii) legislation that has prevented their ability to
obtain all or the majority of their requested
premium rate increases.
2. "Regulatory Risk Event" shall mean the failure to obtain a
Required Premium Rate Increase as a result of any matter
beyond the reasonable control of the Companies, including any
changes in applicable statute, law, rule, regulation,
governmental practice, policy and procedure, NAIC-adopted
model law, or regulatory action or inaction, affecting the
Companies' Policies, products or rates.
3. Whenever a Regulatory Risk Event occurs, a reduction shall
be made to the Reinsurer's Aggregate Limit Of Liability under
this Agreement and will be calculated as a reduction to the
▇▇▇, in that the ▇▇▇ shall be reduced by the sum of all Limit
Amount Deductions, notwithstanding the initial value of the
▇▇▇ as defined herein. The Limit Amount Deduction for any
calendar year (or any part thereof) shall be equal to 50% of
the difference of the Rate Adjusted Net Premium for that year
(or part thereof) less Net Premium for that year (or part
thereof), discounted from the middle of that year (if a full
calendar year, or the middle of such shorter period of time,
if less than a full calendar year) back to December 31, 2001
at an effective annual interest rate of 4.5%. The sum of all
Limit Amount Deductions shall not exceed the ▇▇▇.
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Required Premium Rate Increases:
1. The Companies shall use best efforts in good faith to file
and obtain approval for increases in premium rates on the
Subject Business to maintain the prospective loss ratio
(based upon revised expected experience) for the Subject
Business at the level approved by the relevant regulatory
authorities in the most recent, prior to the Effective Date,
filing of the relevant policy form. In furtherance of this
obligation to file and obtain approval for premium rate
increases, in order to assure the Companies' regular review
of the performance of the Subject Business, the Companies
further covenant and agree that they shall conduct an
analysis of the Subject Business to ascertain its loss ratio
no less than once every six (6) months, which analysis shall
be conducted over the course of no more than thirty (30) days
and subject to audit by the Reinsurer in accordance with the
audit and inspection provisions of this Agreement. In the
event that any such analysis indicates that the Companies
would be required to file and obtain approval for premium
rate increases to maintain the prospective loss ratio for the
Subject Business, the Companies shall submit any such
required premium rate increase filing no later than thirty
(30) days following such determination (to wit, no more than
sixty (60) days following the commencement of any such
review) (the "Mandatory Filing Date", and if no such review
is conducted or commenced (whether or not in violation of
this Agreement) the "Mandatory Filing Date" shall be deemed
to be the sixtieth (60th) day following the end of such six
(6) month period), and shall use their best efforts to secure
approval of said filing. Failure to comply with this covenant
shall constitute a material breach of the Agreement.
2. Obligatory Rate Increases.
(a) In furtherance and not in limitation of the foregoing
paragraph, the Companies shall be obligated to file for
increases in premium rates on the Subject Business in
each jurisdiction, if at any time, the Company or the
Reinsurer has reason to believe that future morbidity
experience is likely to be worse than projected at the
Effective Date or at the date of the most recent
premium rate increase, if later, and that such
deterioration in expected morbidity would justify an
increase in premium rates of 5% or more if filed by the
Company. In furtherance of this obligation to file for
premium rate increases, in order to assure the
Companies' regular review of the future morbidity
experience of the Subject Business, the Companies
further covenant and agree that they shall conduct an
analysis of the Subject Business to ascertain the
future morbidity experience no less than once annually
prior to March 31 of each year for the calendar year
ending on the immediately preceding December 31, which
analysis shall be conducted over the course of no more
than thirty (30) days and subject to audit by the
Reinsurer in accordance with the audit and inspection
provisions of this Agreement. In the event that any
such analysis indicates that the Companies would be
required to file for premium rate increases, the
Companies shall effect any such filing no later than
the Mandatory Filing Date, and shall use their best
efforts to secure approval of said filing.
(b) The parties agree that they shall be deemed to have a
"reason to believe" that future morbidity experience is
likely to be worse than projected at the Effective Date
or at the date of the most recent premium rate
increase, and that such deterioration in expected
morbidity would justify an increase in premium rates of
5% or more if filed by the Company if, at the end of
any calendar year the ratio of (i) divided by (ii) is
greater than 105%, where
(i) is the actual paid claims on new claims incurred
since the Effective Date or since the end of the
calendar year of the most recent premium rate
increase, if later, plus the claim reserve at the
end of that calendar year in respect of claims
since the Effective Date or since the end of the
calendar year of the most recent premium rate
increase, if later, calculated in accordance with
the US GAAP actuarial reserve basis at the end of
the calendar year, and
14
(ii) is the expected paid claims on new claims expected
to be incurred since the Effective Date or since
the end of the calendar year of the most recent
premium rate increase, if later, plus the claim
reserve at the end of that calendar year in
respect of claims incurred since the Effective
Date or since the end of the calendar year of the
most recent premium rate increase, if later,
calculated in accordance with the US GAAP
actuarial reserve basis at the Effective Date or
at the end of the calendar year date of the most
recent premium rate increase, if later.
(c) The amount of the rate increase requested by the
Company under the Obligatory Rate Increase shall not be
less than the rate increase which would, if approved,
project the prospective loss ratio of the Subject
Business to be the prospective loss ratio shown in the
most recent premium rate increase filings, or in the
original filing of the relevant policy form if no
previous rate increase has taken place.
3. If the Companies fail to comply with their obligations
under the immediately preceding paragraph 2, Obligatory Rate
Increases, then it shall be deemed in all cases to constitute
a material breach of the covenant set forth in paragraph 1.
4. A "Material Breach Event" shall mean the failure to obtain
Required Premium Rate Increases for any reason or no reason,
including but not limited to a breach by the Companies of
their obligation under the immediately preceding paragraphs 1
and 2; provided however, that a Material Breach Event shall
not include the failure to obtain Required Premium Rate
Increases as a result of a Regulatory Risk Event.
5. Whenever a Material Breach Event occurs, in addition to
any other remedy available to Reinsurer in law or in equity,
a reduction shall be made to the Reinsurer's Aggregate Limit
Of Liability under this Agreement and will be calculated as a
reduction to the ▇▇▇, in that the ▇▇▇ shall be reduced by the
sum of all Limit Amount Deductions, notwithstanding the
initial value of the ▇▇▇ as defined herein. The Limit Amount
Deduction for any calendar year (or any part thereof) shall
be equal to 50% of the difference of the Rate Adjusted Net
Premium for that year (or part thereof) less Net Premium for
that year (or part thereof), discounted from the middle of
that year (if a full calendar year, or the middle of such
shorter period of time, if less than a full calendar year)
back to December 31, 2001 at an effective annual interest
rate of 4.5%. The sum of all Limit Amount Deductions shall
not exceed the ▇▇▇.
6. All determinations affecting whether to seek increases in
premium rates, or the amount of such increases, shall be
based on actuarial assumptions ultimately agreed upon by the
Reinsurer and the Companies. Any dispute regarding actuarial
assumptions shall be resolved in accordance with the
Arbitration provision. For the avoidance of any doubt, any
resolution of such Arbitration in favour of the Reinsurer
with regard to actuarial assumptions underlying any filing
pursuant to this Required Premium Rate Increase Covenant,
shall obligate the Companies to file for premium rate
increases in accordance with this Required Premium Rate
Increase Covenant.
15
Notice of Regulatory Action: The Companies covenant and agree
to notify the Reinsurer within twenty-four (24) hours after
either Company receives notice of any regulatory action,
order, proceeding, or planned or threatened regulatory
intervention or oversight by any regulatory agency having
jurisdiction over either Company in connection with such
Company's financial condition, including, but not limited to,
any notice of impairment, corrective order, risk based
capital deficiency, or other similar threatened regulatory
action. The Companies covenant and agree to send written
notice to the Reinsurer, and to the extent allowed by
applicable law, copies of any documentation received from the
applicable regulatory agency in connection with the
regulatory action intervention or oversight. The Companies
also covenant and agree to provide the Reinsurer with such
financial information as the Reinsurer may request from time
to time.
REINSURER'S RIGHT
OF ASSOCIATION: As a condition precedent to the payment by the Reinsurer of
any Ultimate Net Loss arising under this Agreement:
(a) at any time, and from time to time, the Reinsurer may
investigate any claim or claims arising under any
Policy and may interpose, at the Reinsurer's own
expense, in any claim adjudication, suit or proceeding,
including but not limited to, any proceeding where the
claim is to be adjudicated, any defences that it may
deem available to the Company or its statutory
receiver, conservator, liquidator, rehabilitator (or
the like); and
(b) the Company or its statutory receiver, conservator,
liquidator, rehabilitator (or the like), will afford
the Reinsurer the opportunity to be associated with the
Company in the manner set forth in the immediately
preceding subparagraph (a), at the Reinsurer's own
expense, and shall cooperate with the Reinsurer in all
respects in the investigation and defence of such claim
or claims.
COMMON
UNDERSTANDING: The Companies and the Reinsurer hereby acknowledge and agree
that this Agreement has been negotiated and entered into in
good faith and at arms length. The Companies and the
Reinsurer hereby acknowledge and agree that the terms and
conditions of this Agreement are fair and reasonable under
the circumstances.
UTMOST GOOD
FAITH: The performance of obligations by each of the Companies on
the one hand, and the Reinsurer on the other hand, arising
under or related to this Agreement shall be in accordance
with utmost good faith and fair dealing.
ADDITIONAL
REPRESENTATIONS
AND WARRANTIES: Without in any way limiting the application of Utmost Good
Faith, the Companies each further represents and warrants
as follows:
(a) all of the policy forms and riders issued as the
Policies referenced in Appendix A are in material
compliance with all applicable regulations and laws;
16
(b) each of the Policies was written on a Policy form that
complies with regulatory requirements in the state of
issue;
(c) the Companies have provided a listing prior to the
Closing Date of all market conduct examinations
conducted within the last ten (10) years by any
regulatory authority having jurisdiction over each
Company, and copies of the reports thereon. No material
limitation or restriction has been imposed upon either
Companies' operations arising out of or related to any
policy administration or claims handling practices;
(d) neither Company is currently subject to any regulatory
action, order or proceeding, and its senior management,
officers and directors are not aware of any threatened
regulatory action, order or proceeding relating to
either Company's financial condition, except as
expressly set forth and described in Appendix B;
(e) this Agreement constitutes the legal, valid and binding
obligation of the Companies and PTAC enforceable in all
respects in accordance with its terms; and
(f) the appropriate regulatory agencies having authority
over the Companies and the subject matter of this
Agreement have reviewed and approved this Agreement in
accordance with applicable law.
INDEMNIFICATION: The Companies, and PTAC on behalf of the Companies, agree to
indemnify and hold harmless, jointly and severally to the
fullest extent permitted by law, the Reinsurer for any and
all loss, cost and expense (including reasonable attorneys
fees) resulting from each and every material breach of the
covenants, representations, warranties and terms set forth in
this Agreement.
INSOLVENCY: The reinsurance provided by this Agreement and each and every
reinsurance agreement hereafter entered into by and between
the parties hereto shall be payable by the Reinsurer
directly to the respective Company or to their respective
liquidator, receiver or statutory successor on the basis of
liability of such Company under the contract or contracts
reinsured without diminution or increase because of the
insolvency of such Companies.
Upon the occurrence of an Insolvency Event in respect of a
Company, the liquidator, receiver or statutory successor of
such Company shall give written notice of the pendency of
each claim against the Company on a policy or bond reinsured
within a reasonable time after such claim is filed in the
insolvency proceeding; and during the pendency of such claim,
the Reinsurer may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be
adjudicated any defense or defenses which it may deem
available to the Company, its liquidator, receiver or
statutory successor. The expense thus incurred by the
Reinsurer shall be chargeable, subject to court approval,
against the Company as part of the expense of liquidation to
the extent of such proportionate share of the benefit as
shall accrue to the Company solely as a result of the
defenses undertaken by the Reinsurer.
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The reinsurance shall be payable as provided herein, except
as otherwise provided in law, or except (a) where the
contract specifically provides another payee of such
reinsurance upon the occurrence of an Insolvency Event in
respect of a Company and (b) where the Reinsurer with the
consent of the direct insured or insureds has assumed such
policy obligations of the Company as direct obligations of
the Reinsurer to the payees under such policies and in
substitution for the obligations of the Company to such
payees.
GENERAL
CONDITIONS: Access to Records (broad audit and inspection)
Administration (except as provided hereunder, Companies to
provide all servicing of policies)
Amendments and Alterations
Arbitration (▇▇▇▇▇) (disputes specifically relating
to actuarial assumptions must take into consideration the
opinion of a nationally recognised actuarial firm
acceptable to both the Reinsurer on the one hand, and the
Companies on the other hand)
Assignment
Choice of Law (New York)
Currency (U.S.$)
Errors and Omissions (inadvertent)
Federal Excise Tax (Company responsible for tax on Initial
Premium, but shall be entitled to withhold for tax on
subsequent Reinsurance Premiums)
Finder fee (to be paid by Reinsurer to Finder; such payment
to be subtracted from the Experience Account)
Insolvency Fund Exclusion
Integration
No Third Party Rights
No Implied Waiver
No program of internal replacement without the explicit
consent of and in sole discretion of Reinsurer (lapse and
adverse selection protection)
Notice
Other reinsurances (to be maintained and to inure to benefit
of Reinsurer, except financial reinsurance to be
commuted; all such reinsurance shall inure to the benefit
of the Reinsurer under this Agreement whether or not such
reinsurance is collectible).
Report and Remittances (monthly in arrears)
Service of Suit
Severability (reformation)
Others
EXCLUSIONS: ECO Loss
War
Terrorism
Nuclear
Other to be agreed.
[remainder of page left blank intentionally]
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FINAL WORDING: To be agreed.
IN WITNESS WHEREOF, the Parties have hereunto set their hand as of the day and
year first above written.
Centre Solutions (Bermuda) Limited Penn Treaty American Corporation
By: By:
-------------------------- ----------------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇ Name:
Title: Vice President Title:
Penn Treaty Network America Insurance
Company
By:
----------------------------------
Name:
Title:
American Network Insurance Company
By:
----------------------------------
Name:
Title:
19
Appendix A - List of Policies
All Policies of individual Long Term Care insurance listed in the CD-ROM
delivered to the Reinsurer and the Company by ▇▇▇▇▇▇▇▇▇▇▇ Towers ▇▇▇▇▇▇ under
cover of their letter dated February 14, 2002.
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Appendix B - Details of Regulatory Action against the Companies currently
underway
1. The Companies have been required to file a Corrective Action Plan in
Pennsylvania.
2. A letter from the Companies has been filed in the following states
committing to the suspension of new business writing in the relevant state
until December 15, 2001. No further approval from the relevant state is
required in respect of this voluntary suspension.
Alabama Massachusetts Oregon
Delaware Minnesota Rhode Island
Hawaii Mississippi South Dakota
Indiana Montana Utah
Iowa Nebraska Washington
Louisiana Nevada West Virginia
Maine North Dakota Wyoming
3. A letter from the Companies has been filed in the following states
committing to the suspension of new business writing in the relevant state
until December 15, 2001. Insurance Commissioner approval from the relevant
state is required to resume sales of new policies.
Arizona Kentucky Pennsylvania
California Maryland Tennessee
Colorado Michigan Virginia
Florida New Jersey Vermont
Kansas Ohio Wisconsin
4. A suspension order has been issued by the Insurance Commissioner in the
following states:
Arkansas Idaho North Carolina
Arizona Illinois Oklahoma
Connecticut Missouri South Carolina
District of Columbia New Hampshire Texas
Georgia New Mexico
21
Appendix C - Penn Treaty COLI Investments
All 335 policies issued to the Companies by American General Life Insurance
Company under Group Flexible Premium Variable Life Insurance Policy Number
CML0000015, with an agreed value of $54,478,424 as at December 31, 2001.
22