QUESTIONS AND ANSWERS REGARDING PROPOSED REHABILITATION AND CONVERSION FOR SHENANDOAH LIFE INSURANCE COMPANY June 27, 2011

Transcription

1 QUESTIONS AND ANSWERS REGARDING PROPOSED REHABILITATION AND CONVERSION FOR SHENANDOAH LIFE INSURANCE COMPANY June 27, 2011 On May 4, 2011, the Deputy Receiver of Shenandoah Life Insurance Company ( Shenandoah or the Company ) entered into a Stock Purchase Agreement with United Prosperity Life Insurance Company ( United Prosperity ) for the proposed acquisition of Shenandoah, subject to necessary approvals. On June 24, 2011, the Deputy Receiver filed with the State Corporation Commission of the Commonwealth of Virginia (the Commission ) her Application for: (A) a Final Order Approving Rehabilitation Plan (Including Plan of Conversion) and Acquisition of Control, and Granting Related Relief; and (B) a Final Order Terminating Rehabilitation Proceeding. The questions and answers below are provided with the hope that they will answer the immediate questions you may have regarding the documents filed in connection with the efforts of the Deputy Receiver and United Prosperity to rehabilitate Shenandoah. We understand that the questions and answers below are not exhaustive of all inquiries you may have, so please contact Shenandoah with any additional questions at , extension All documents are also available on the Shenandoah web site at INDEX The Rehabilitation Plan, the Plan of Conversion, and the Form A Application for Approval of the Acquisition of Control ( Form A ): Questions Notice of Hearing on Rehabilitation Plan (Including Plan of Conversion), Form A Application for Approval of the Acquisition of Control, and Final Order Terminating Rehabilitation Proceeding: Questions Proposed Policyholder Information Statement: Questions Special Meeting of Members and Member Vote: Questions

2 The Rehabilitation Plan, the Plan of Conversion, and the Form A Application for Approval of the Acquisition of Control Question 1: WHAT IS THE PURPOSE OF THE REHABILITATION PLAN (INCLUDING THE PLAN OF CONVERSION), AND HOW WAS IT DEVELOPED? The Rehabilitation Plan is a result of the combined efforts of the Deputy Receiver, United Prosperity, and their consultants and was designed to enable Shenandoah to resume its normal business operations. The Rehabilitation Plan proposes three large changes to Shenandoah: (1) its conversion from a mutual insurance company to a stock insurance company, (2) acquisition by United Prosperity, and (3) release from receivership. The Rehabilitation Plan also details how the Deputy Receiver and her consultants stabilized and valuated Shenandoah, and United Prosperity s selection from a pool of bidders as the proposed acquirer of the Company. Question 2: WHO IS UNITED PROSPERITY? United Prosperity is an Arizona-domiciled stock life and disability insurance company which is licensed in 29 states and the District of Columbia, and is a wholly-owned subsidiary of Prosperity Life Insurance Group, LLC. If required approvals are obtained from the Commission and Shenandoah s members, Shenandoah would become a wholly-owned subsidiary of United Prosperity at Closing. Question 3: HOW WILL THE REHABILITATION PLAN BENEFIT SHENANDOAH S POLICYHOLDERS, CREDITORS, AND AGENTS? The proposed capital infusion by United Prosperity is expected to stabilize Shenandoah s precarious financial condition and allow it to emerge from receivership. If the Commission approves the Final Order Terminating Rehabilitation Proceeding, payments previously deferred during the receivership, including agent commissions, asset management fees, funds due to creditors and vendors, and deferred premium taxes due to the various states and local municipalities, would be paid. In addition, policyholders would regain access to their policy funds, subject to any extension of the Moratorium on Cash Withdrawals. Also, applications to 2

3 amend Shenandoah s certificates of authority would be filed in those states in which Shenandoah maintains a license and such filings are required. Question 4: WHY DOES SHENANDOAH NEED MORE CAPITAL? Insurance regulators and members of the insurance industry often refer to a company s capital ratio as a measure of its financial condition. While that ratio may be calculated in a variety of ways, a common formula for its determination is the sum of (i) capital and (ii) surplus and (iii) asset valuation reserve ( AVR ) of the insurer, divided by the aggregate liabilities of the insurer, excluding AVR. Shenandoah s capital ratio remained fairly steady from 2004 through 2007, but dropped substantially in 2008, due in large part to precipitous declines in the market value of Shenandoah s investments in preferred stock of Fannie Mae and Freddie Mac, among other investments. Due to this decrease in market value, the Company s reported capital ratio for year-end 2008 was 1.48% approximately 6.5% to 7.5% below the industry average for that year. On February 12, 2009, the Circuit Court of the City of Richmond, Virginia placed Shenandoah in receivership, at which time the Deputy Receiver took control of the Company s limited assets. The Deputy Receiver and her consultants have since determined Shenandoah requires additional capital to emerge from receivership, meet its continuing obligations, and resume normal business operations. The planned infusion of capital by United Prosperity would allow Shenandoah to meet regulatory requirements for surplus levels and regain control of its assets and property. Question 5: WHAT IS THE PLAN OF CONVERSION? The Plan of Conversion is one aspect of the Plan of Rehabilitation and recommends that Shenandoah convert from a mutual insurance company, owned by its members, to a stock insurance company, owned by its shareholders. This process is often referred to as demutualization. Shenandoah s members have the right to vote on the Plan of Conversion. The Policyholder Information Statement is directed towards helping members understand the many aspects of the Deputy Receiver s Plan of Conversion. 3

4 Question 6: Question 7: Question 8: Question 9: WHY IS THE DEPUTY RECEIVER RECOMMENDING A YES VOTE ON THE PLAN OF CONVERSION? The Deputy Receiver determined that selling the Company was the most feasible way to raise capital and increase Shenandoah s surplus. In order to raise capital by selling stock, Shenandoah must convert from a mutual insurance company to a stock insurance company. If the Commission and members approve the Plan of Conversion, United Prosperity would acquire Shenandoah by purchasing Shenandoah stock. In turn, proceeds from the stock sales would recapitalize Shenandoah. The Company needs to raise this sort of capital to emerge from receivership and resume normal business operations. AFTER CONVERSION AND THE SALE TO UNITED PROSPERITY, WHO WOULD CONTROL THE COMPANY? Shenandoah and its two Virginia subsidiaries would become whollyowned subsidiaries of United Prosperity. United Prosperity, as sole shareholders of Shenandoah stock, would elect a new board of directors, which would be responsible for the oversight and control of Shenandoah. IF THE CONVERSION IS APPROVED, WHO CAN PURCHASE STOCK? If approved, United Prosperity would purchase and acquire all stock issued by Shenandoah. The Deputy Receiver does not expect the shares to be traded on the New York Stock Exchange or any other public market. WILL MY POLICY BENEFITS, PREMIUMS, CONTRIBUTIONS, VALUES, OR GUARANTEES CHANGE AS A RESULT OF THE REHABILITATION PLAN? No, your policy benefits, premiums, contributions, values, and guarantees would not change as a result of the Rehabilitation Plan (including the Plan of Conversion). The Company would remain fully obligated under all of its insurance policies and other contracts, subject to any extension of Moratorium on Cash Withdrawals. It is possible that there will be some changes to dividends provisions of certain policies. Question 10: WILL THE FEDERAL GOVERNMENT TAX MY POLICY DIFFERENTLY AS A RESULT OF THE PROPOSED CONVERSION? No, your policy would not be taxed differently as a result of the proposed conversion. Please consult a tax professional for further advice. 4

5 Question 11: WHEN CAN POLICYHOLDERS EXPECT TO GAIN ACCESS TO THEIR FUNDS? If the Plan of Conversion is approved, policyholders would eventually regain access to their cash surrender values and other payments or values associated with their policies. The Stock Purchase Agreement contains a provision that allows United Prosperity to delay the Closing for up to one year following the execution of the Stock Purchase Agreement and/or extend the Moratorium on Cash Withdrawals for up to twelve (12) months from the Closing. The purpose of this delay would be to prevent a run on the bank jeopardizing Shenandoah s rehabilitation. To exercise these options, United Prosperity must notify the Deputy Receiver of its intention to delay the Closing or extend the Moratorium on Cash Withdrawals within ninety (90) days after the members vote on the Plan of Conversion If United Prosperity elects to delay the Closing or extend the Moratorium on Cash Withdrawals, Shenandoah would remain in receivership under the supervision of the Deputy Receiver during that time. Should United Prosperity not elect to extend the Moratorium on Cash Withdrawals, policyholders would have access to their funds shortly after the Closing. Agents and creditors would be paid after termination of the receivership proceeding. Question 12: Question 13: IF THE MORATORIUM ON CASH WITHDRAWALS IS EXTENDED, WOULD THE HARDSHIP REQUEST PROCEDURE REMAIN IN PLACE? Yes, the Hardship Request Procedure would remain in effect until the Moratorium on Cash Withdrawals is lifted. IF SHENANDOAH CONVERTS INTO A STOCK INSURANCE COMPANY, WILL POLICYHOLDERS RECEIVE CONSIDERATION? Whether policyholders would receive consideration under the Plan of Conversion turns in part on whether the Commission finds that the Company had sufficient statutory surplus (prior to factoring in United Prosperity s capital infusion) as of the Insolvency Determination Date. The Insolvency Determination Date will be the date as of which the Commission determines the Company s surplus for this purpose. While we do not have any information as to what date will be selected by the Commission, typically such date is one relatively close to the date of the 5

6 hearing. If the Commission deems Shenandoah solvent as of a yet-to-bedetermined date, policyholders may receive a distribution after Closing. The Policyholder Information Statement contains information about the formula used to calculate policyholder distributions. Question 14: WHAT HAPPENS IF THE COMMISSION FINDS THAT SHENANDOAH IS INSOLVENT AT THE HEARING? Question 15: If the Commission determines that Shenandoah is insolvent, there would be no distribution of funds paid to the policyholders. Per the Virginia Code, insolvency is determined by whether the insurer has liabilities in excess of its assets, or is unable to pay its obligations as they become due in the usual course of business. The Commission will not consider United Prosperity s capital infusion into the Company when determining Shenandoah s solvency. IF THE PLAN OF CONVERSION IS APPROVED, HOW WOULD POLICYHOLDER RIGHTS CHANGE? Members of a mutual insurance company have certain membership interests. Conversion of the Company into a stock insurance company will entail a loss of some of these special rights and interests. For example, members of a mutual insurance company ultimately control the company by exercising their right to vote on important decisions. By voting at the Special Meeting on the Plan of Conversion, members are exercising their rights as a member of a mutual insurance company. In addition, members can receive dividends under participating policies and can participate in the distribution of any residual value in the event that Shenandoah is liquidated. By contrast, stock life insurance companies are owned by their shareholders. If members approve the Plan of Conversion and the conversion occurs, members would no longer have voting rights, and policyholders would not participate in the distribution of any residual value in the event that Shenandoah is later liquidated. There may also be changes in the dividends provisions of certain policies. Question 16: WHAT IS A FORM A APPLICATION FOR APPROVAL OF THE ACQUISITION OF CONTROL? The Form A is a statutorily required form filed by a prospective purchaser of a domestic insurance company asking that the Commission approve the acquisition. The Form A provides details on the background information 6

7 of the purchaser, biographical information for the proposed board of directors and executive officers, the purchaser s financial ability to successfully purchase and operate the domestic insurance company, and the purchaser s future plans for the company. United Prosperity s Form A has been filed with the Commission and can also be accessed on the Shenandoah web site. Question 17: Question 18: Question 19: THE APPLICATION REFERENCES A PROOF OF CLAIM PROCESS. WHAT IS THAT PROCESS? If members approve the Plan of Conversion, the Deputy Receiver will establish a period for filing proofs of claim against Shenandoah, as well as a date when that filing period will end the Bar Date. The Deputy Receiver will provide policyholders and creditors with publication notices of the Bar Date, instructions on how to file a claim, and a form for filing a claim. Claims subject to the Bar Date but filed after the Bar Date would be precluded from payment. DOES EVERYONE HAVE TO FILE A CLAIM, OR ARE THERE CLAIMS THAT ARE NOT SUBJECT TO THE BAR DATE? Claims that do not have to be filed by the Bar Date to be considered for payment are: (1) claims of members, insureds, policyholders, subscribers, or creditors for benefits contemplated by the Rehabilitation Plan; (2) claims currently pending before the Deputy Receiver or the Commission in accordance with the Receivership Appeal Procedure; (3) claims for administrative expense for payment of services rendered or goods supplied to Shenandoah at the request of the Deputy Receiver subsequent to February 12, 2009; and (4) claims arising after the date of the Rehabilitation Approval Order. WHERE IS SHENANDOAH IN THE RECEIVERSHIP PROCESS? The Plan of Rehabilitation describes five phases of receivership. Phase One, stabilization of the Company, remains an ongoing process. Phase Two has been partially completed the Deputy Receiver has developed the Rehabilitation Plan, but it has not yet been approved by the Commission. As a part of Phase Three, if Commission approval is received, Shenandoah members will have an opportunity to vote on the Plan of Conversion at the Special Meeting. 7

8 If approved by the vote of members and if all Closing conditions are met, Closing is expected to occur by the first quarter of 2012 (Phase Four). However, United Prosperity can elect, at its sole discretion, to delay the Closing by up to twelve (12) months from the execution of the Stock Purchase Agreement. During the last phase, Phase Five, the rehabilitation proceeding would be terminated. Shenandoah, under the new ownership and control of United Prosperity, would resume possession of its property and the management and conduct of its affairs. Question 20: Question 21: WHAT IS THE EXPECTED TIMETABLE? While the process is complicated and detailed, there are certain milestones that are very important. One was the filing of United Prosperity s Form A, which has already occurred. The next key step is the filing of the Application for Approval of Rehabilitation Plan, which has also just occurred. The next milestone will be the hearing upon the application, set by the Commission for October 11, How quickly after that the next steps occur will depend on whether there is opposition to the Plan at the hearing. If the Plan is approved, we expect that Policyholders will be given a chance to vote on it shortly after the approval order is entered. If the Policyholders approve the Plan, we would move quickly to implement it by closing on the transaction. As explained above, United Prosperity will at that time have the option of extending the timeline (for example to reduce the chances of a harmful run on the bank ). WHAT CONDITIONS MUST OCCUR AT OR PRIOR TO CLOSING? The conditions to Closing are numerous, and detailed in the Policyholder Information Statement. Among some of the conditions to Closing are the following: (1) all necessary requisite regulatory approvals shall have been received, (2) the investment portfolio of the Company may not, as of the Closing Date, have net unrealized investment losses and other asset impairments exceeding an agreed undisclosed amount, (3) the statutory surplus of the Company must exceed $10 million as of the Closing Date (before giving effect to the transactions contemplated by the Rehabilitation Plan and after accrual of all liabilities, current and deferred, at the Closing), and (4) a surplus note to which the Company is the issuer, must be purchased or otherwise consummated for an agreed undisclosed amount. 8

9 Notice of Hearing for Approval of the Rehabilitation Plan (Including Plan of Conversion), Form A Application for Approval of the Acquisition of Control, and Final Order Terminating Rehabilitation Proceeding Question 22: Question 23: Question 24: WHY DID I RECEIVE A BOOKLET OF INFORMATION PROVIDING NOTICE OF A HEARING ON THE REHABILITATION PLAN, FORM A APPLICATION, AND PROPOSED FINAL ORDER TERMINATING THE REHABILITATION PROCEEDING? As a policyholder, vendor, creditor, or party interested in Shenandoah, you have the right to attend a hearing on, and object to, the Proposed Rehabilitation Plan, Form A, and Final Order Terminating Rehabilitation Proceeding. The booklet will provide you with the requisite information to make an informed decision as to whether you should file an objection. The hearing will be held on October 11, 2011, in the Second Floor Courtroom of the State Corporation Commission, Tyler Building, 2 nd Floor, 1300 East Main Street, Richmond, Virginia. IF I DID NOT RECEIVE THE DOCUMENTS, HOW DO I OBTAIN COPIES? Copies of these documents are available on the Shenandoah web site at Further, you can: (1) call Shenandoah at , extension 2090, and request that copies be mailed to you; or (2) request the copies by writing to Shenandoah at 2301 Brambleton Avenue SW, Roanoke, Virginia In addition, you can elect to receive these documents electronically by logging onto the Shenandoah web site to make this election. CAN I ATTEND THE HEARING AND OBJECT TO THE PROPOSED PLAN OF REHABILITATION (INCLUDING THE PLAN OF CONVERSION), THE FORM A APPLICATION, AND THE PROPOSED ORDER TERMINATING THE REHABILITATION PROCEEDING? Yes. All persons who want to object must file a Notice of Objection with the Commission and provide copies to the Deputy Receiver containing: (1) a precise statement of their interest in the proceeding, (2) a statement of the specific relief sought to the extent known at that time, and (3) the factual and legal basis for the relief they are seeking. 9

10 Question 25: HOW DO I FILE AN OBJECTION TO THE PLAN OF REHABILITATION, THE FORM A, OR THE PROPOSED ORDER TERMINATING THE REHABILITATION PROCEEDING? All Notices of Objection can be filed with the Commission electronically in the manner described by the Commission s guidelines for electronic filing at If you choose to file hard copies of your Notice of Objection with the Commission, you must deliver the original and fifteen (15) copies to Joel H. Peck, Clerk, State Corporation Commission, c/o Document Control Center, P.O. Box 2118, Richmond, Virginia To serve the Deputy Receiver with your Notice of Objection, please provide a copy to: (1) Donald C. Beatty, Receivership Manager, Shenandoah Life Insurance Company, in Receivership, 2301 Brambleton Avenue, Roanoke, Virginia 24015, and (2) Patrick H. Cantilo, Esquire, Counsel for the Deputy Receiver, Century Oaks Terrace, Suite 300, Austin, Texas 78758, and at the following address: service@cb-firm.com. Proposed Policyholder Information Statement Question 26: Question 27: WHAT IS THE PURPOSE OF THE POLICYHOLDER INFORMATION STATEMENT? The Policyholder Information Statement includes a summary of the Deputy Receiver s Rehabilitation Plan (including the Plan of Conversion), an explanation of Shenandoah and its business (including financial statements), notice of a Special Meeting where members may vote on the Plan of Conversion, and a proxy form, for those members who cannot physically attend the Special Meeting. The Policyholder Information Statement explains the circumstances surrounding Shenandoah s receivership, the benefits and potential risks of the Rehabilitation Plan (including the Plan of Conversion), and Shenandoah s past and present financial condition. WHY IS IT A PROPOSED POLICYHOLDER INFORMATION STATEMENT? At the Hearing on the Rehabilitation Plan, the Form A, and the Final Order Terminating the Rehabilitation Proceeding, the Deputy Receiver will be seeking the Commission s approval of the Proposed Policyholder Information Statement. How the Commission rules on various aspects of the Rehabilitation Plan could alter some information in the Proposed Policyholder Information Statement. 10

11 Question 28: AFTER THE HEARING, WILL A FINAL POLICYHOLDER INFORMATION STATEMENT BE PROVIDED? Yes. The final Policyholder Information Statement, which will include the date and time of the Special Meeting, will be mailed to all policyholders with in-force policies. Special Meeting of Members and Member Vote Question 29: WHO IS ENTITLED TO VOTE AT THE SPECIAL MEETING? Pursuant to Shenandoah s Bylaws and Charter, only qualified policyholders, or members, are entitled to vote. A member is: (1) a policyholder; (2) whose policy has been in force for at least one year preceding January 1 of the year in which the Special Meeting is held; and (3) who is at least eighteen years old, if a natural person. Question 30: Question 31: Question 32: Question 33: MUST I BE PRESENT AT THE SPECIAL MEETING TO CAST MY VOTE? No. If you are a member, you may cast your vote for or against the Plan of Conversion by mailing your proxy form provided with the Policyholder Information Statement to Shenandoah Life Insurance Company, 2301 Brambleton Avenue SW, Roanoke, Virginia Your proxy form must be received no later than 10 days prior to the date of the Special Meeting. Alternatively, you may submit your proxy form online and/or vote online at HOW MANY VOTES ARE NEEDED TO APPROVE THE PLAN OF CONVERSION? The Plan of Conversion will be approved if two-thirds of the votes cast are in favor of the Plan of Conversion. WHAT HAPPENS IF I WANT TO CHANGE MY VOTE, OR IF I LATER DECIDE TO ATTEND AND VOTE AT THE SPECIAL MEETING? You may change your previous vote by mail or online if it is received no later than ten (10) days prior to the date of the Special Meeting. Your last vote received by the Company will be the vote counted. If you attend and vote at the Special Meeting, that vote will replace any previous vote cast. IF MEMBERS APPROVE THE PLAN OF CONVERSION, WOULD SHENANDOAH S NAME OR LOCATION BE CHANGED? 11

12 Question 34: No. Shenandoah would continue doing business under its current name, as a wholly-owned subsidiary of United Prosperity, and would operate and be regulated as a stock life insurance company domiciled in the Commonwealth of Virginia. WHAT HAPPENS IF THE MEMBERS VOTE TO REJECT THE PLAN OF CONVERSION? The Plan of Conversion would allow Shenandoah to recapitalize with the sale of its shares. If members do not approve the Plan of Conversion, Shenandoah s capital, financial condition, business, and prospects may suffer. Shenandoah would remain in receivership, and eventually may be placed in liquidation. Further, the Moratorium on Cash Withdrawals would stay in place, Shenandoah would be unable to issue new policies, and would have fewer assets from which to pay policyholder claims or to make payments to creditors. 12