Payment of insurance with Government securities

1. Background

As from January 2002, several rules have been issued as a result of the “pesification” of the Argentine economy. Life and retirement insurers have been affected in different ways by this compulsory “pesification”.

On the one hand, most of the assets securing the performance of their obligations to their insureds have been affected by the pesification and by the different economic emergency rules. The insurers’ assets (for example, investments in government securities, bank deposits, corporate bonds) have been “pesified”, rescheduled and strongly devalued.

On the other hand, life and retirement insurers’ obligations to their insureds have fallen under the scope of Decree No. 214/2002, which sets forth that all outstanding obligations to provide funds in U.S. Dollars or in any other foreign currency not related to the financial system, existing as of February 3, 2002, will be converted into Pesos at the rate of US$ 1 = $ 1. The resulting amount will have a Reference Stabilization Ratio (the Coeficiente de Estabilización de Referencia or “CER”) applied to it, which basically reflects the daily variation of the consumer price index’s monthly evolution, as published by the INDEC . According to Decree No. 214/2002, if once the calculation has been made, the resulting value of the object, good or service were to be higher or lower than the prevailing value at the moment of payment, any of the parties may request an equitable readjustment of the price to the judge of competent jurisdiction.

Life and retirement insurers have therefore seen that:

(i) the assets securing the performance of their obligations to their insureds have suffered significant variations derived from economic emergency rules, and

(ii) their obligations to their insureds have been “pesified”.

As a result of these changes, life and retirement insurers are seeking to share the damages caused by economic emergency rules with their insureds in an equitable way.

2. Decree 905

a) Delivery of securities

Section 9 of Decree 905 provides an equitable way of sharing these damages with the insureds: insurers will be able to pay surrenders, total or partial withdrawals and loans to their insureds with government securities (Bonos del Gobierno Nacional in U.S. Dollars at Libor due 2012).

This means that instead of paying in cash, insurance companies may deliver the securities representing their investments as payment to their insureds.

This is an option for insurance companies. It is not an obligation. Therefore, it is up to each insurer to decide whether to take advantage of this benefit or not. Insureds may not refuse to receive the securities if the insurance company from which they purchased a life or retirement insurance makes use of this option.

b) Obligations subject to this option

Insurers may use this option to pay with securities obligations derived from life and retirement insurance.

This option may be exercised by insurance companies only in respect of insurance policies originally agreed in U.S. Dollars or in other foreign currency existing as of February 3, 2002.

However, not all obligations derived from these life or retirement policies may be canceled with bonds. For example, the payment of a loss under a life insurance must be made by means of a check (or wire transfer). Only surrenders, total or partial withdrawals and loans to insureds may be canceled with bonds.

c) Conditions to exercise the option

The insurer must have had in its portfolio as of February 3, 2002, rescheduled bank deposits or loans secured by the National Government.

The insurer must have exercised the option to exchange these bank deposits or these loans secured by the National Government for the Bonds of the National Government at Libor due 2012, under the option conferred by Decree 905 .

The insurer may deliver these bonds to its insureds, obtained as a result of the exchange of the rescheduled bank deposits and the loans secured by the National Government, in the proportion these rescheduled bank deposits and secured loans bear to the insurer’s total investment portfolio as of February 3, 2002.

The Superintendency of Insurance shall request information to life and retirement insurers to determine the composition of their investment portfolios as of February 3, 2002. We understand this has not yet occurred.

The insurer shall deliver bonds to its insureds for a face value equal to the amount of the insurer’s obligation (i.e., the surrender value, total or partial withdrawal or loan) by January 6, 2002, with the corresponding increases and deductions as from that date and until the payment date, according to the terms of each policy.

d) Exception

Decree 905 provides an exception to this prerogative of insurance companies, as it sets forth that it may not be used for policies in foreign currency in cases where the policy has been expressly guaranteed to the purchaser by the insurer’s head office abroad. This express guarantee must be a guarantee of the solvency of the local insurer. In this case, the obligations arising from the policy shall be canceled according to the terms originally agreed between the parties

This exception to the option to pay with government securities is clearly unconstitutional, as it introduces a discrimination violating the right of equality under the law. However, the matter has not yet been referred to the courts.

3. Conclusions

(i) Decree 905 allows life and retirement insurance companies to pay surrenders, withdrawals and loans with government securities.

(ii) Payment with government securities is only admitted in connection with policies originally agreed in foreign currency and in force as of February 3, 2002.

(iii) Payment with government securities will be for a face amount equal to the obligation to be canceled.

(iv) Payment with government securities may not exceed the proportion the rescheduled bank deposits and the loans secured by the National Government bore to the total investment portfolio of each insurance company as of February 3, 2002.