CRL Central Reserve life
INSURANCE COMPANY
November 12, 1998
Provident American Corporation
P. O. Box 511
Norristown, Pennsylvania 19404-0511
ATTN: Xx. Xxxxx X. Xxxxxxx
Chairman and Chief Executive Officer
RE: Acquisition of Provident American Life
and Health Insurance Company ("PALHIC")
Gentlemen:
This letter is to memorialize a binding agreement between Provident American
Corporation ("PAMCO"), joined in by its subsidiary, Provident Indemnity Life
Insurance Company ("PILIC"), and Central Reserve Life Insurance Company ("CRL')
with respect to the purchase of PALHIC by CRL from PILIC, subject to all
required regulatory approvals.
This letter will also evidence our agreement with respect to the ongoing
relationship between XXXXX and CRL. The agreements between the parties, which
have been approved by all necessary corporate action, are as follows:
1. Purchase of PALHIC. Subject to regulatory approval, on or
before January 1, 1999, CRL will purchase all of the stock
of all classes of PALHIC for an amount equal to the adjusted
capital and surplus of PALHIC, with its assets and
liabilities to be only those approved by CRL. PALHIC will
maintain reserves deemed adequate by the Chicago office of
Milliman & Xxxxxxxxx at closing with a reserve true-up after
one year guaranteed by XXXXX.
2. PILIC Reinsurance. All of the in force health business of
PALHIC will be reinsured to PILIC prior to the closing, and
the life insurance in force in PALHIC will be also reinsured
to PILIC. At closing, there will be no insurance in force in
PALHIC that is not reinsured to PILIC, and PALHIC will have
no operations or employees.
Provident American Corporation
November 12, 1998
Page 2
3. Payment to PILIC. Subject to regulatory approval and
approval of CRL's purchase of PALHIC, CRL, joined in by
Reassurance Company of Hannover ("RCH"), will enter into a
quota-share reinsurance agreement with PILIC to reinsure all
of the health business in PILIC, constituting approximately
$100 million in premium (the "Ceded Block"). CRL, joined in
by RCH, will make a $10 million cash payment (the "Ceding
Commission") to PILIC in connection with the reinsurance.
Profits from the Ceded Block will be retained by CRL and RCH
until they have recaptured the entire Ceding Commission,
together with any losses incurred and interest thereon at
12% per annum.
4) PAMCO Guarantee. The first $5 million of the Ceding
Commission shall be an unconditional payment. PAMCO will
unconditionally guarantee that the balance of the Ceding
Commission, together with interest at 12%, will be paid to
CRL from cumulative profits of the Ceded Block, or PAMCO
will otherwise pay such amount to CRL. As security for this
guarantee, XXXXX will execute a security agreement in favor
of CRL granting CRL a first lien with respect to the stock
of PILIC. This agreement will contain the usual lender
covenants regarding corporate governance and other matters.
PAMCO's guarantee will be in default if CRL does not receive
at least $10 million in profits plus interest within five
(5) years after closing. After CRL recovers the Ceding
Commission plus interest and other amounts due, PILIC shall
be entitled to receive an amount equal to 2/3 (two-thirds)
of the policy fees paid with respect to the Ceded Block for
1999 and 1/3 (one-third) of such fees for 2000 from the
profits derived from the Ceded Block, but not otherwise. CRL
shall have no further obligation to PILIC or PAMCO with
respect to the Ceded Block.
5. Continued Marketing. At closing, PAMCO and its affiliate,
Provident Health Services, will transfer to PALHIC and CRL
all of their rights under any agreements with agents and
brokers for the sale of health insurance, and PAMCO and
PILIC will enter into non-competition, non-solicitation
agreements regarding such agents with respect to the future
sale of health insurance products. PALHIC will continue to
issue HealthQuest, Solution and AdvantaEdge policies or
similar policies (the "PALHIC
Provident American Corporation
November 12, 1998
Page 3
Policies") for a period of three (3) years following the
closing and will make such policies available for sale by
the existing agency force of PALHIC and agents recruited by
their hierarchy (the "PALHIC Agents") during that time
period. CRL will establish a mechanism to track the business
written by such PALHIC agents.
6. PILIC Reinsurance. During 1999, PILIC may reinsure up to 20%
of the PALHIC policies issued after closing and, thereafter,
up to 50% of such policies issued after 1999 for a period of
four (4) additional years from the first anniversary of the
date of closing. Policy fees for such products will be
shared based on the quota-share ratio, except that PALHIC
shall be entitled to retain all application fees.
7. Limitation on Expenses. Maximum expense allowances with
respect to the policies which are the subject of the
reinsurance described in Paragraph No. 6 above shall be 43%
of collected premium for first year (administration 1O%,
premium tax 3%, commission 28%, marketing expenses 2%) and
26% for subsequent years (administration 10%, premium tax
3%, commissions 13%). In addition, CRL will receive a 3%
administrative payment with respect to policies issued after
closing, which fee will reduce to 2% for total policies
under administration which exceed $100 million of premium in
force. Additionally, managed care costs will be paid as
incurred.
8. Ceded Block Agreements. With respect to the Ceded Block, CRL
will assume administrative responsibility for such business
effective at closing. In this regard, CRL will assume the
obligations to Health Plan Services ("HPS") under PAHLIC's
existing contract with HPS, except that CRL will not be
responsible for the Base Service Fee and Loss Ratio
Management Fee ($95,000 per month) to HPS and will only be
required to pay the percentage payment with respect to claim
services, and not the $6.00 per claim charge presently being
paid. CRL will administer the Ceded Block for administration
costs equal to the HPS costs plus 2-1/2% for other
administrative costs plus premium taxes and managed care
costs. In addition, CRL will receive a 3% administrative
payment with respect to policies issued after closing, which
fee will reduce to 2% for total policies under
administration which exceed $100 million of premium in
force.
Provident American Corporation
November 12, 1998
Page 4
9. Personnel and Facilities. At closing, PILIC will furnish to
CRL on a contract basis such employees as CRL may designate
to assist in the transition of the Ceded Block to CRL's
administrative facility in Cleveland. CRL will reimburse
PILIC for the costs of such employees and will lease the
PILIC's facilities and all of the equipment utilized in
connection with the health insurance business on a
month-to-month basis for a payment of $20,000 per month,
such lease to be cancelable by CRL on ninety (90) days
notice. With respect to the employees provided by PILIC, CRL
will make a payment to PILIC for distribution to such
employees equal to four (4) weeks' pay at such time as such
employees are no longer needed by CPL.
10. Internet Sales. PALHIC will provide health insurance
products for Internet sale through HealthAxis for a
three-year period. PILIC may reinsure such products on a
50/50 quota-share basis, except that the maximum first-year
expense allowance shall not exceed 28% with commission
expense reduced to 15% and marketing expense eliminated and
the second-year expense allowance shall not exceed 21% with
commission expense reduced to 8%. In addition, HealthAxis
will be entitled to retain all administrative fees until it
has recovered the payments made to initiate the Internet
program. Thereafter, fees will be split as set forth in
Paragraph No. 6 above. CRL will also be entitled to a 2%
administrative payment with respect to all Internet
policies.
11. Additional Internet Products. CRL will also work to develop
additional health insurance products for sale over the
Internet through HealthAxis and enter into reinsurance
agreements with PILIC consistent with those described above.
Provident American Corporation
November 12, 1998
Page 5
12. PAMCO/PILIC Undertaking. PAMCO and PILIC jointly agree to
obtain the cancellation of all existing reinsurance
agreements with respect to the Ceded Block immediately prior
no closing and to hold CRL harmless from any amounts due to
any reinsurer in this regard. Further, XXXXX agrees to
indemnify PALHIC and CRL from any claims with respect to
HPS, other than the ongoing claims services obligation
assumed, and from any and all employee claims of PILIC or
PALHIC employees with respect to pension plans, stock
purchase plans, or other employee benefits arising prior to
the closing, and from any claims regarding the sale by
PALHIC of debit life insurance to Life and Health Insurance
Company of America in 1996.
If the above sets forth our agreements and understandings, please sign below to
so indicate and to bind PAMCO and its affiliates to the terms of this agreement.
Sincerely,
CENTRAL RESERVE LIFE INSURANCE COMPANY
By: /s/ Xxxxx X. Xxxxxxx
Provident American Corporation
November 12, 1998
Page 6
AGREED AND accepted THIS 12th DAY OF NOVEMBER, 1998.
PROVIDENT AMERICAN CORPORATION
By: /s/ Xxxxx X. Xxxxxxx
-------------------------------
Authorized Officer
PROVIDENT INDEMNITY LIFE INSURANCE COMPANY
By: /s/ Xxxxx X. Xxxxxxx
-------------------------------
Authorized Officer
PROVIDENT AMERICAN LIFE AND HEALTH INSURANCE
COMPANY
By: /s/ Xxxxx X. Xxxxxxx
-------------------------------
Authorized Officer
