July 7, 2000 Thunor Trust Companies

Franklin American Life Closing

The assumption reinsurance agreement among Franklin American Life Insurance Company, Investors Heritage Life, NOLHGA and participating guaranty associations closed July 6. At the closing, NOLHGA transferred $42,963,863 to fund the obligations of the 12 participating guaranty associations. This amount included $33 million provided by the estate as early access to guaranty associations.

Two of the 14 affected guaranty associations, South Carolina and Virginia, had not received approval of their state departments of insurance, and did not participate in the closing. Under a letter of agreement, each will participate and fund their covered obligations as soon as they receive approval.

Task Force Chair -Chuck LaShelle;   Staff Contact - First National Life (AL)

Judgment Reversed in American Pioneer Litigation

In a May 5, 2000 opinion, the Alabama Court of Civil Appeals reversed a lower court judgment for the Receiver of First National finding, among other things, that the representations and warranties contained in the assumption reinsurance agreement survived closing and could form the basis of a subsequent claim on the part of the assuming carrier.

This case arises out of the 1996 assumption reinsurance agreement pursuant to which First National's Medicare Supplement business and certain life policies were transferred to American Pioneer Life Insurance Company. Neither NOLHGA or the state guaranty associations were parties to the assumption agreement. Upon completing its review of the transferred policies, American Pioneer discovered that statutory reserves on the life policies had been miscalculated, and were approximately $194,200 more than represented in the assumption agreement. American Pioneer filed a claim with the Receiver for the reserve deficiency. In addition, American Pioneer was successful in recovering approximately $100,400 in overpaid claims owed to the estate, and asked to offset from the recovered funds its administrative costs incurred in pursuing the recoveries.

The Receiver filed a "Petition for Instructions" with the circuit court seeking a determination as to whether it was required to pay the reserve deficiency or to allow the offset of costs. With respect to the reserve deficiency claim, the Receiver argued that the assumption agreement provided no mechanism for post-closing adjustments to reserves, and therefore provided no remedy for the assuming carrier other than the right to refuse to close. Conversely, American Pioneer argued that, under the terms of the agreement, all representations and warranties were to survive the closing, and that the agreement provided a remedy for breach of contract or breach of warranty allowing recovery for the reserve deficiency. With respect to the costs incurred in recovering First National's overpaid claims, the Receiver argued that American Pioneer had not been asked to pursue the recoveries on behalf of the estate. The Receiver further disputed the nature and validity of the expenses claimed, and denied any right of offset against the recovered funds.

The circuit court granted summary judgment in favor of the Receiver on both counts.

On appeal, the court reversed the summary judgment finding that the provision in the agreement for survival of representations and warranties was intended to create a remedy for situations such as the reserve deficiency, and that summary judgment on the issue of offset was improper in light of the existing dispute as to material facts regarding the nature of the expenses and the circumstances under which the recovery efforts were undertaken.

The case was remanded for further proceedings consistent with the appellate court decision.

Task Force Chair -Mike Marchman;   Staff Contact - Joni Forsythe

Preliminary MPC Schedule

The following is a preliminary schedule of meetings for the August 16-18 MPC meeting in San Francisco. The registration and room reservations deadlines are July 14. For more information contact Mary Ellen Cappetta at 703.787.4114. Staff is aware that some attendees have encountered difficulties in making their room reservations at the NOLHGA rate. Staff is working with the hotel and expects to have these problems resolved by Monday.

WEDNESDAY, AUGUST 16 Accounting Issues Committee 1:00 pm - 5:00 pm American Standard Life 3:00 pm - 4:00 pm THURSDAY, AUGUST 17 Joint Seminar Planning Committee 7:30 am - 8:20 am Bankers Commercial Life 7:30 am - 8:20 am Administrators' Education Steering Committee 8:30 am - 9:20 am Thunor Trust 8:30 am - 9:20 am MPC Executive Committee 9:30 am - 10:00 am American Chambers Life 10:15 am - 12:15 pm Executive Life 12:30 pm - 2:30 pm Fidelity Bankers Life 2:45 pm - 4:45 pm FRIDAY, AUGUST 18 Mid-Continent Life 7:30 am - 8:20 am MPC Meeting 8:30 am - 11:30 am

CALENDAR/CONFERENCE CALLS

July 10 Centennial Liquidator/Working Group Teleconference, 10:00 am ET July 12 American Chambers Liquidator/Working Group Teleconference 3:00 pm ET July 20-21 NOLHGA Legal Seminar, Boston, MA August 16-18 NOLHGA MPC Meeting, San Francisco, CA