The reorganization of the insurance market after Law No. 25,561 of Public Emergency

1.     Introduction

The purpose of this work is to analyze the set of rules on which the insurance market is seeking to reorganize its commitments to insureds. This study is particularly directed at the situation of life and retirement insurance, which has been severely affected by the economic crisis. This because the nonperformance of the obligations assumed by the National Government with its financial creditors and the subsequent "pesification" of the obligations due, originally assumed in U.S. Dollars or in other currencies, gave rise to early surrender applications at the end of 2001 and the beginning of 2002.

In this context, on January 6, 2002 Law No. 25,561 of Public Emergency and Reform of the Exchange Regime was passed, which set forth rules, in Section 11, for the agreements entered into among individuals. It provided that the obligations due and payable derived from agreements entered into in U.S. Dollars or in any other foreign currency should be settled in Pesos at an exchange rate of US$ 1 = $ 1, as payment on account of the amount finally negotiated between the parties, having same to share "in an equitable way" the effects of the change in the exchange rate. The law provided for a 180-day term for the parties to reach an agreement regarding the new conditions of the contract. Upon expiration of such period, any of the parties may resort to the courts.

Later, Decree of Necessity and Urgency No. 214/2002 restricted the negotiating term provided for in Law No. 25,561, by setting forth, in Section 8, that the obligations to provide monetary sums in foreign currency not related to the financial system should be converted at the rate of one Peso per each U.S. Dollar, and that to same would be applied the Reference Stabilization Ratio, as published by the Central Bank of the Republic of Argentina as from February 3, 2002. In this way, the necessary negotiation between the parties to adjust the terms of the agreements in force to the new reality of the market disappeared and was replaced by an automatic conversion in the above described terms, with the obvious right to judicially request an adjustment should the resulting price not be reasonable.

Those were the rules in force as of April 3, 2002, date on which Executive Decree No. 558/2002 was published in the Official Gazette (the "Decree"), providing the basis for the regularization and reorganization scheme for insurance companies.

2.     Regularization and reorganization

The Decree is a Necessity and Urgency Decree issued in exercise of the powers vested in the National Executive Power by Section 99, paragraph 3 of the National Constitution. The Decree is intended to reorganize the functioning of the insurance business by introducing amendments to the Law on Insurers and their Control No. 20,091. It introduces changes in three aspects of insurance activity: (a) financing of insurance companies; (b) reorganization; (c) technical ratios and commitments. Below there is an analysis of each group of new provisions.

a) Changes regarding the financing of insurance companies

Until the Decree was issued, Section 29, paragraph (g) of Law No. 20,091 prevented insurers from resorting to bank credit for any purpose, except to build properties for their sale or lease, with the prior authorization of the relevant controlling authority.

The rule under analysis amended Section 29 of Law No. 20,091 by adding that "upon temporary illiquidity situations of insurers", the Superintendence of Insurance (the "SI") may exempt same from the prohibition of resorting to bank credit.

The Decree even goes beyond that, by admitting that insurers may create debt "subordinated to the general and special privileges derived from insurance contracts", always subject to the rules set forth by the controlling authority.

The above-mentioned alternatives are designed to offer more financing possibilities to insurance companies.

For further information on this matter, please see the article "Insurers may now borrow from banks and create subordinated debt", in Marval News #9 of August 30, 2002.

b) Changes regarding reorganization

In connection with the topic under analysis, the Decree contemplates the situation of the insurers that have to resort to a reorganization plan upon liquidity and solvency difficulties, and of those which, not having liquidity difficulties, elect to prepare a restructuring plan for the commitments assumed with insureds.

(i) Restructuring Plans

- Restructuring for those that experience economic-financial and liquidity difficulties (section 86 of Law No. 20,091).

For this purpose, section 31 of Law No. 20,091 was amended. When insurers are in any of the situations described in section 86 (which in general refers to economic-financial or liquidity difficulties), the SI will require them to provide the corresponding explanations and, eventually, to present a Regularization and Reorganization Plan within the subsequent fifteen days, which shall be approved by the regulator.

The change is the enumeration of the alternatives for the Regularization Plan (which is not restrictive). The options contemplated are as follows:

• Capital contribution.
• Merger.
• Administration with purchase or merger option.
• Portfolio assignment.
• Exclusion from net worth of certain assets and/or liabilities of the insurer for value to another insurer and/or to trusts created therefor.

We will comment on the last case, as the Decree intends to create a protection shield for this alternative consisting of: (i) the provisions of the Law on the Transfer of a Going Concern which will not be applicable to the procedure of exclusion of assets and/or liabilities (and therefore creditors may not oppose the exclusion procedure, and neither the insurance company whose assets are being excluded, nor the person receiving them would be liable in the event of nonperformance of the publicity, opposition and registration requirements set forth in Law No. 11,867); (ii) foreclosure on the excluded assets may not be effected, unless collection under a mortgage or pledge is sought; (iii) no precautionary measures may be ordered in connection with the excluded assets; (iv) the exclusion may not be declared ineffective in respect of the insurer's creditors, even when there was insolvency prior to the exclusion. An example in our legislation of the provision under analysis can be found in section 35 bis of Financial Institutions Law No. 21,526, which contains similar provisions regarding the exclusion of assets and liabilities of financial institutions which are being restructured.

Finally, the Decree provides that for all the duration of the insurer's restructuring process, the rules included therein will prevail over the provisions regulating the type of company and over the resolutions or acts of the supervisory bodies of the legal entity.

• Restructuring for insurers that do not incur in any of the situations described in section 86 of Law No. 20,091.

Under section 5 of the Decree, insurers that do not experience liquidity difficulties or do not register losses lower than the minimum capital may present a Regularization Plan which may contemplate the alternatives set forth in the above-mentioned section 2, and the provisions of the preceding section are fully applicable.

Insurers in this situation have a term of 180 business days after publication of the Decree to file the restructuring proposal with the SI. In this case, the rule offers different alternatives to insurers, by stating that "...The application may refer to all the entity's operations or be restricted to the effects derived from some coverages and may include waiting periods or ways for performing the insurers' obligations different from those contractually agreed".

To regulate the provisions of sections 2 and 5 of the Decree, section 9 of Executive Decree No. 905/2002 and SI Resolution No. 28,905/2002 have been issued. They were published in the Official Gazette on September 2, 2002, and provide the following guidelines to be observed by the Restructuring Plans submitted to the SI for authorization.

(ii) Payment of obligations in kind

Under section 9 of Executive Decree No. 905/2002, surrender applications in connection with life and retirement insurance purchased prior to February 3, 2002 in U.S. Dollars or in another foreign currency may be discharged with full releasing effects by means of the delivery to the insured or beneficiary of "BONOS DEL GOBIERNO NACIONAL EN DOLARES ESTADOUNIDENSES LIBOR 2012" (Government Bonds in U.S. Dollars - LIBOR 2012). This may occur if the insurer had received such notes for having exercised itself the option of converting the credits derived from rescheduled time deposits into the notes in question. This is the form of payment admissible in the proportion the insurer had of rescheduled time deposits as of February 3, 2002, taking into account all its investment portfolio. Payment shall be made for a nominal value equal to the amount of the obligation prior to January 3, 2002, with the increases registered between such time and the payment date, pursuant to the terms of the agreement, after deduction of any partial payments made. Resolution No. 28,905/2002 of the SI sets forth that the possibility of discharging the payment obligation of the amount to be paid as surrender value in kind does not include the amounts paid as from February 3, 2002 as premiums, amortization or interest.

According to the last paragraph of section 9 of Decree No. 905/2002, "The prerogative of paying surrender values or total withdrawals with bonds (...) will not be applicable to those policies purchased in foreign currency, where the insurer's head office abroad has expressly guaranteed to the insured the maintenance of the solvency of the local issuing entity. In this case, the obligations of insurers arising from the policy shall be discharged according to the terms originally agreed between the parties".

For further information on this matter, please see the article "Payment of insurance with Government securities" published in Marval News #8 of July 31, 2002.

(iii) Destination of restructuring proposals

Resolution No. 28,905/2002 of the SI sets forth that restructuring proposals must be prepared per type of product and offered to all insureds, on the basis of uniform conditions, and that the principle of equality has to be guaranteed. Proposals must include all insureds covered by the same type of product.

Furthermore, same will include some clause regarding insureds that have perceived amounts (as early surrender) as payment on account (Exhibit I, paragraph 3.3 of Resolution No. 28,905/2002 of the SI). Although the rule does not contain more guidelines in that respect, it is clear that insurers may decide how they will act in connection with their ex insureds that have elected to exercise their surrender rights at an exchange rate lower than that of the U.S. Dollar at the free market, and in some cases lower than that derived from the conversion of one U.S. Dollar = one Peso plus the Reference Stabilization Ratio.

(iv) Minimum restructuring conditions

The SI has established that all proposals shall observe at least the conversion regime of one U.S. Dollar per Peso plus the Reference Stabilization Ratio as from February 3, 2002. That is the minimum value required by the SI and above which insurers may present their offers to insureds.

Furthermore, the proportion between assets and liabilities must be maintained, and therefore the restructuring of the obligations will only be admitted in the proportion in which the insurer's assets have been affected.

In the event of conversion of savings insurance policies into pure risk insurance, surrender discounts will not be admitted, fees or expenses may not be charged, and waiting periods may not be established.

(v) Acceptance of the proposal made by the insurer

Insurers shall inform to insureds the terms and conditions of their proposals by sending them prospectuses containing a description of the causes leading to the restructuring, a clear explanation of the different proposals, numerical comparative examples of the impact of the different alternatives and the period during which the offer will be in effect. This may not be less than thirty days nor longer than ninety days after approval of the plan (see point 6 of the Resolution in question).

Resolution No. 28,905/2002 of the SI submits the insurers' offer to the express acceptance of the insureds (point 6.3. of such Resolution).

c) News regarding reserves and technical ratios

The provisions regarding technical ratios have been toned down.

Section 2 of the Decree sets forth that for the purposes of making the performance of the different Restructuring Plans possible, the SI may set forth, on a temporary basis, exceptions to the relevant limits and technical ratios, and that the prohibition to enter into new agreements may not be applied (in connection with insurers that register a minimum capital deficit).

In addition, section 4 of the above rule sets forth that assets may be earmarked to back the technical commitments derived from certain contractual modalities, with prior authorization of the SI.

3.    A precedent to watch

On July 17, the Court of First Instance on Administrative Matters No. 11, in the case "Consumidores Argentinos c/ PEN - Decreto 558/2002 Superintendencia de Seguros de la Nación - s/ Amparo Ley Nº 16.986", issued a preliminary injunction ordering the National Executive Power to provisionally prevent the SI from approving regularization and reorganization plans, as well as from authorizing insurers to resort to bank credit.

The SI appealed the preliminary injunction which had been ordered and the recourse was accepted, with a stay of execution. To date, whether or not the SI will approve regularization plans is still unsettled until the National Court of Appeals on Administrative Matters issues a decision. Until then, only one restructuring plan had been approved.

Undoubtedly, given the effects of this, the precedent should be carefully analyzed, as the representativity of the plaintiff could extend to all insureds and could therefore affect the whole restructuring process of insurers.

We trust that the presentation of reasonable restructuring proposals, which could be approved by the SI and accepted by insureds, as well as a meditated interpretation of the Decree and its regulatory rules by the courts, will be necessary elements for a successful restructuring of this segment of the insurance market.