SHENANDOAH LIFE INSURANCE
COMPANY
2301 Brambleton Avenue S.W.
Roanoke, Virginia 24015
Policyholder Information Statement, Part
One, Regarding Rehabilitation Plan
(Including Plan of Conversion), Form A
Application for Acquisition of Control, and
Proposed Termination of Rehabilitation
Proceeding
ALL POLICYHOLDERS ARE ENCOURAGED TO READ THE ENTIRE
POLICYHOLDER INFORMATION STATEMENT. POLICYHOLDERS WHO ARE
MEMBERS ARE PARTICULARLY URGED TO READ THE ENTIRE
POLICYHOLDER INFORMATION STATEMENT BEFORE DECIDING HOW TO
VOTE ON THE PLAN OF CONVERSION. MEMBERS MUST MAKE THEIR OWN
DECISION ON THE PLAN OF CONVERSION, INCLUDING THE MERITS AND
RISKS INVOLVED. CERTAIN RISKS ARE ASSOCIATED WITH THE PLAN OF
CONVERSION. PLEASE SEE THE DISCUSSION OF “RISK FACTORS APPLICABLE
TO MEMBERS AND POLICYHOLDERS” IN POLICYHOLDER INFORMATION
STATEMENT PART TWO.
YOU SHOULD ASK YOUR PERSONAL TAX ADVISOR ABOUT ANY CHANGES IN
TAX LAWS OR REGULATIONS THAT MIGHT TAKE EFFECT AFTER THE DATE
OF THIS STATEMENT, AND ABOUT THE LIKELY TAX IMPLICATIONS TO YOU
OF THE CONVERSION. WE HAVE NOT REQUESTED A PRIVATE LETTER
RULING FROM THE IRS REGARDING FEDERAL INCOME TAX CONSEQUENCES
OF THE CONVERSION. PLEASE SEE THE DISCUSSION OF “U.S. FEDERAL
INCOME TAX CONSIDERATIONS” IN THIS POLICYHOLDER INFORMATION
STATEMENT PART ONE. THE POLICYHOLDER INFORMATION STATEMENT
DOES NOT CONSTITUTE PERSONAL TAX ADVICE TO ANY PARTICULAR
POLICYHOLDER.
NO FEDERAL OR STATE COMMISSION OR SECURITIES REGULATORY
AUTHORITY HAS CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THIS POLICYHOLDER INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Policyholder Information Statement – Part One Page 2
TABLE OF CONTENTS
PAGE
SUMMARY ....................................................................................................................................4
QUESTIONS AND ANSWERS....................................................................................................4
DEVELOPMENT AND PROPOSED IMPLEMENTATION OF THE
REHABILITATION PLAN (INCLUDING PLAN OF CONVERSION) ..............................18
BENEFITS OF THE REHABILITATION PLAN ...................................................................29
VOTING ON THE PLAN OF CONVERSION ........................................................................31
TERMINATION OF MEMBERSHIP INTERESTS IF THE CONVERSION IS
CONSUMMATED.......................................................................................................................32
COMPENSATION ......................................................................................................................34
DESCRIPTION OF THE SHARES...........................................................................................38
POTENTIAL WITHDRAWAL OR AMENDMENT OF THE REHABILITATION
PLAN, AND POTENTIAL AMENDMENT OF OTHER GOVERNING DOCUMENTS ..38
U.S. FEDERAL INCOME TAX CONSIDERATIONS............................................................38
FORWARD-LOOKING STATEMENTS .................................................................................39
GLOSSARY..................................................................................................................................42
Policyholder Information Statement – Part One Page 3
SUMMARY
This summary provides an overview of the Rehabilitation Plan, including the Plan of
Conversion, pursuant to which a conversion (the “Conversion”) would be undertaken. We have
highlighted what we believe is the most important information about the Rehabilitation Plan
(including the Plan of Conversion). We urge you to read carefully the entire document and the
documents incorporated by reference to understand the material aspects of the proposed
transactions.
Throughout the Policyholder Information Statement, Parts One and Two, we use certain
defined words and phrases from time to time. These words and phrases are always capitalized
and have precise meanings. We have listed defined terms and their meanings in the Glossary at
the end of this Policyholder Information Statement Part One. When you see a capitalized word
or phrase, you should consult the Glossary for its special meaning (each term defined in the
Glossary is shown in bold type the first time it is used in this Policyholder Information Statement
Part One).
Note: This Policyholder Information Statement Part One contains important
information and explains your rights.
QUESTIONS AND ANSWERS
The following questions and answers are intended to address some basic information
regarding the elements of, and procedural matters relating to, the Plan of Conversion. These
questions and answers may not address all questions that may be important to you as a
Policyholder. Please refer to the more detailed information contained elsewhere in the
Policyholder Information Statement, Parts One and Two, and the documents incorporated by
reference, all of which you should read carefully.
Q. What is the purpose of this Policyholder Information Statement Part One?
A. Part One:
Summarizes the highlights of Shenandoah’s Rehabilitation Plan (including
the Plan of Conversion, which governs the Conversion).
Describes the formula providing Eligible Policyholders with the potential
to receive compensation, if any, in conjunction with the Conversion. (The
sufficiency of the statutory surplus for a potential distribution is
determined by the calculations described in Section 2.4 of the Stock
Purchase Agreement.)
Explains the Commission’s finding that the Company: (1) was Insolvent
as of February 12, 2009; and (2) had positive statutory surplus at the time
Policyholder Information Statement – Part One Page 4
of the October 11, 2011, hearing partly as a result of the section 38.2-1400
exemptions afforded to the Company during receivership.
Explains the vote of Members to be held at the Special Meeting on the
proposal to approve the Plan of Conversion.
Provides information to help Members decide how to vote, including
certain special considerations which may affect Policyholders’ rights and
compensation.
Clarifies that the Conversion would not diminish your guaranteed Policy
benefits, values, and rights or increase your Policy premiums or
contributions above their contractual maximum rates, with the exception
of the elimination of Members’ voting rights as a result of the Conversion,
the modification of the terms of the Participating Policies with respect to
the payment of dividends, and subject to any Extension of Moratorium on
Cash Withdrawals.
Note: Policyholders would not have to give up their Policies or lose any benefits under
those Policies as a result of the proposed Conversion.
Q. What is the purpose of the Policyholder Information Statement Part Two?
A. Part Two describes Shenandoah’s business, its financial condition, and results of
operations.
Q. Why has this Policyholder Information Statement been sent to you?
A. This Policyholder Information Statement has been sent to you because you are a
Policyholder and to inform you of the Plan of Conversion so that you are able to make an
informed decision as to whether to vote for or against it. You should have received: (1) a draft
version of the Policyholder Information Statement as proposed by the Deputy Receiver to the
Commission; and (2) this final, official version of the Policyholder Information Statement as
approved in form by the Commission, with a Proxy form attached. You should only rely on this
official Policyholder Information Statement in making a determination as to how to vote on the
Rehabilitation Plan, including the Plan of Conversion. To vote on the Plan of Conversion, you
need only submit the Proxy form via mail or online. Alternatively, you may attend the Special
Meeting and cast your vote.
Note: This Policyholder Information Statement contains important information and
explains your rights. Please read it carefully.
Q. What is the Conversion?
A. The proposed conversion consists in part of a demutualization. In a demutualization, a
mutual insurance company, which has no stockholders and is owned by its policyholders,
Policyholder Information Statement – Part One Page 5
converts to a Stock Insurance Company owned by stockholders. When a demutualization and
the sale of the resulting stock occur as part of the same transaction, as would be the case under
the Rehabilitation Plan (including the Plan of Conversion), it is sometimes called a “sponsored
demutualization.” A demutualization as proposed in the Rehabilitation Plan is called a
Conversion under applicable Virginia law and will be referred to by that term throughout this
Statement.
Shenandoah is a mutual insurance company. As explained more fully below under
“Development and Proposed Implementation of the Rehabilitation Plan (including the Plan of
Conversion) – History of Shenandoah,” the Deputy Receiver applied for the Commission’s
approval of the Rehabilitation Plan (including the Plan of Conversion), one component of which
would be the Conversion. Pursuant to the Rehabilitation Approval Order, if the Members vote
to approve the Plan of Conversion, the Conversion will become effective and Shenandoah will
become a Stock Insurance Company, if all other necessary Closing conditions are timely
satisfied. If all Closing conditions are satisfied, Shenandoah would convert from a mutual
insurance company organized under section 38.2-1001 of the Virginia Code, to a Stock
Insurance Company organized under section 38.2-1000 of the Virginia Code.
Q. Why does the Deputy Receiver propose that Shenandoah convert?
A. Shenandoah needs to raise capital in order to increase its surplus sufficiently to be
permitted to emerge from receivership, to enable the Company to continue to meet its
obligations, and to allow the Company to resume normal business operations. The Deputy
Receiver determined that selling the Company was the most feasible means to achieve these
goals. However, because Shenandoah is a mutual insurance company, it must convert to a Stock
Insurance Company in order to be sold (upon the Conversion, the Company would issue stock,
which would be sold to the new owner, with the sales price used to recapitalize the Company).
Therefore, the Conversion, pursuant to the Plan of Conversion, is an essential step in the
Rehabilitation Plan.
Immediately after Shenandoah’s Conversion and issuance of the Shares, United
Prosperity Life Insurance Company (United Prosperity), a Subsidiary of Prosperity Life
Insurance Group, LLC (PLIG), would recapitalize the Company and, through the Sale and
Acquisition, become the holder of the Shares. PLIG, in turn, is owned by investment funds
managed by Reservoir Capital Group, L.L.C. (Reservoir) and Black Diamond Capital Partners I,
L.P. (Black Diamond). Following the Sale, the Deputy Receiver does not expect the Shares to
be traded on the New York Stock Exchange or any other public market. The Deputy Receiver
would set the price of the Shares for purposes of the Sale. Apart from the issuance of the Shares
and the United Prosperity Surplus Note, the Company may not issue any other type of
securities (such as debt, common stock, preferred stock, or certain securities which are
convertible into common stock) on or prior to the Closing.
The Deputy Receiver and the Company believe that the Conversion is vital to attracting
an investor to provide the capital Shenandoah needs to emerge from receivership and state
supervision. Furthermore, as a converted Shenandoah gains financial strength, its new Stock
Insurance Company structure would provide more flexibility in raising capital and would better
Policyholder Information Statement – Part One Page 6
enable Shenandoah to pursue strategies and operating principles that should assist the Company
in regaining its former prominent position in the marketplace.
The Deputy Receiver and the Company believe that once a converted Shenandoah
emerges from receivership, the new Stock Insurance Company structure would also better enable
Shenandoah to invest in new technology and products and improve service for Policyholders.
Q. How and why was United Prosperity selected as the proposed purchaser of
converted Shenandoah?
A. Very early in the receivership, the Deputy Receiver approached potential purchasers to
acquire and inject new capital into Shenandoah as part of its rehabilitation. The Deputy Receiver
and the Company conducted extensive due diligence and research regarding potential purchasers
who expressed interest, as well as potential structures for a capital infusion. After United
Prosperity was selected as the most suitable of the interested potential purchasers, the Deputy
Receiver, the Company, and United Prosperity came to the conclusion that a United Prosperity-
sponsored conversion of Shenandoah to a Stock Insurance Company and the Sale and
Acquisition would be the optimal mechanism to quickly rehabilitate Shenandoah and re-establish
it as a financially-sound insurance company, in furtherance of the interests of Policyholders,
Members, creditors, and the public.
Q. What, if anything, would Members and Policyholders give up and/or receive in the
Conversion?
A. Members of a mutual insurance company have certain Membership Interests
(principally, the right to vote). Currently, if Shenandoah were liquidated and any assets
remained after the Company had paid all administrative expenses and approved claims of
Policyholders and other creditors pursuant to section 38.2-1509(B)(1) of the Virginia Code, the
residual assets would be distributed to Policyholders. If the Conversion becomes effective,
Shenandoah would cease to have Members and all Membership Interests would be extinguished.
As a result, Policyholders would no longer have the right to share in any residual assets upon
liquidation. Yet, if the Plan of Conversion were not approved, there is a likelihood that
Shenandoah may need to be liquidated if alternate rehabilitation efforts proposed by the Deputy
Receiver prove unsuccessful. In that scenario, if Shenandoah’s assets did not adequately exceed
its liabilities, (i) there would be no assets to distribute to Policyholders, and (ii) those
Policyholders could end up receiving less than one hundred percent (100%) of their account
values.
If the Plan of Conversion becomes effective, Shenandoah would emerge from
receivership with its financial condition strengthened such that it would have the fully paid
capital stock and surplus required by Applicable Law.
Approval of the Plan of Conversion will not increase premiums or contributions above
their contractual maximum rates, or diminish or alter the guaranteed benefits, values, and rights
of your Policy, with the exception of the elimination of Members’ voting rights as a result of the
Conversion, the modification of the terms of the Participating Policies with respect to the
Policyholder Information Statement – Part One Page 7
payment of dividends, and subject to any Extension of Moratorium on Cash Withdrawals. After
Conversion, Shenandoah’s shareholders, and not its Policyholders, would elect the Company’s
Board of Directors. The newly-elected Board of Directors would determine, at its sole
discretion, if and when to pay dividends to holders of any Participating Policy. Policyholders
would not automatically share in the divisible surplus of the Company, and holders of any
Participating Policy will receive dividends as frequently or infrequently as the newly-elected
Board of Directors chooses. Although holders of Participating Policies would still be eligible to
receive dividends, Policyholders would not be entitled to payment out of the divisible surplus.
It is yet to be determined whether Eligible Policyholders would receive compensation as
a result of the Conversion, but the Deputy Receiver believes that it is unlikely that there will be
enough statutory surplus for such compensation.
Q. Under what circumstances would Eligible Policyholders receive compensation if the
Conversion is consummated?
A. The Commission found that Shenandoah was Insolvent as of February 12, 2009, upon
reviewing evidence that the Company had negative $118 million of surplus on a Liquidation
Basis Accounting. Given that the Company was Insolvent as of the date of receivership, the
evidence indicates that there was no equity value owned by Policyholders at the time.
The evidence adduced at the October 11, 2011, hearing showed that the Company had
approximately $14 million of statutory surplus as of August 31, 2011. Although the Commission
found Shenandoah to have positive statutory surplus as of the hearing date, it also determined
that Shenandoah would be statutorily Insolvent were it not for the dispensation received from
certain reporting requirements of Chapter 14 of Title 38.2 of the Virginia Code available while in
receivership. Specifically, section 38.2-1400 authorizes the Commission to exempt insurers in
receivership from one or more of the investment restrictions in Chapter 14 of the Virginia Code
which place limits on the types and amounts of investments of an insurer that can be admitted
assets for statutory accounting purposes. Chapter 14 restrictions, which Shenandoah has since
been exempted from while in receivership, are further discussed in Part Two of the Policyholder
Information Statement.
Without these receivership exemptions, millions of dollars of the Company’s assets
would violate statutory restrictions and could not be included in determining statutory surplus.
Without these exemptions afforded by section 38.2-1400, as of August 31, 2011, surplus would
be greatly reduced resulting in a deficit of over $350 million on a statutory basis. The Deputy
Receiver requested and received such section 38.2-1400 exemptions from the Virginia Bureau
of Insurance.
It is unlikely that Eligible Policyholders would receive cash compensation upon
consummation of the Conversion, if approved. That said, should there be a distribution, the
amount received by each Eligible Policyholder would be determined by the four-part formula
described below under “COMPENSATION.”
Policyholder Information Statement – Part One Page 8
Q. When and how would Eligible Policyholders receive any cash to which they might
be entitled if the Conversion is consummated?
A. As stated above, it is unlikely that Eligible Policyholders would receive compensation.
However, should there be a distribution, such payments would be made as soon as practicable
after the Final Surplus Determination Date (likely to be at least a year after the Closing), and
the Company would issue and mail checks to Eligible Policyholders at the most recent addresses
on file in the Company’s records.
If it were not for the receivership, it is possible that the Company would have been
liquidated and Policyholders would have received no cash value or distribution. With the
inception of receivership, the Deputy Receiver and the Receivership Team have been able to
preserve coverages.
Q. Why will Members be asked to vote on the Plan of Conversion at the Special
Meeting?
A. A vote of the Company’s Members is required by Shenandoah’s Charter and Bylaws
and Virginia conversion law.
In order for Shenandoah’s Plan of Conversion to become effective, Virginia insurance
law and the Company’s Charter and Bylaws require that the Plan of Conversion be submitted to
a vote of Members. The Plan of Conversion must be approved by more than two-thirds of the
votes cast by Members present in person or by proxy at the Special Meeting. Each Member will
be entitled to one (1) vote, irrespective of the number of Policies held or the amounts thereof.
The location of the Special Meeting will be the Holiday Inn Roanoke-Tanglewood, 4468 Starkey
Road, Roanoke, Virginia 24018. The Special Meeting will begin at 10:00 a.m. ET and be held
on December 15, 2011.
Q. When would the Conversion be consummated?
A. Shenandoah’s conversion would be consummated when all conditions are satisfied.
Please see the discussion below under “POTENTIAL WITHDRAWAL OR AMENDMENT OF
THE REHABILITATION PLAN, AND POTENTIAL AMENDMENT OF OTHER
GOVERNING DOCUMENTS.” While the precise date is difficult to predict, the Deputy
Receiver hopes that most or all of the significant steps will have been completed by the end of
May 2012, if not sooner.
Q. What will happen if the Conversion and Acquisition are not consummated?
A. In the event that the Conversion and Acquisition are not consummated (including as a
result of Members not approving the Plan of Conversion by the requisite vote), Shenandoah’s
capital, financial condition, business, result of operations, and prospects could be materially
adversely affected. Among other things:
Policyholder Information Statement – Part One Page 9
Shenandoah would remain in receivership pursuant to section 38.2-1518
of the Virginia Code;
Shenandoah would not receive the approximately $60 million in capital
that United Prosperity proposes to pay as consideration for the
Acquisition;
Shenandoah’s financial strength ratings would likely not improve; and
Shenandoah could be subject to a hearing before the Commission to
determine if a finding of insolvency and an order of liquidation should be
entered pursuant to section 38.2-1519 of the Virginia Code.
The Guaranty Associations may be triggered (see below).
In such case, the Deputy Receiver might seek other capital-raising, acquisition,
rehabilitation, or restructuring alternatives; however, based on all efforts previously undertaken,
it is possible that the Company would not be able to enter into an alternative transaction that
would provide a sufficient amount of capital on a timely basis.
For more information regarding what could happen if the Conversion and Acquisition do
not occur, see discussion of “RISK FACTORS APPLICABLE TO MEMBERS AND
POLICYHOLDERS,” in the Policyholder Information Statement Part Two.
Q. What are the Guaranty Associations and how are they involved?
A. In each state there exists a life, accident, and health insurance guaranty association
(“Guaranty Association”) or similar entity charged with protecting the interests of policyholders
and insureds of impaired or insolvent insurers. While details vary, generally the Guaranty
Associations may guarantee, assume, or reinsure the contractual obligations of impaired insurers
to policyholders in the Guaranty Association’s state and must do so in the case of insolvent
insurers. Varying dollar limits and coverage conditions and restrictions apply which vary from
state to state. Shenandoah has not been declared an impaired or insolvent insurer.
Guaranty Associations are “triggered” by final court orders finding the insurer to be
insolvent and calling for its liquidation. No such order has been entered as to Shenandoah and
the Guaranty Associations have therefore not been triggered as against the Company.
If the Commission determines that Shenandoah is insolvent and cannot be rehabilitated it
will probably enter an order triggering the Guaranty Associations, which will then take steps to
protect the interests of Shenandoah’s insureds subject to applicable statutory restrictions. If
triggered, the Guaranty Associations may also impose a moratorium upon certain policy benefits
such as cash surrenders.
Policyholder Information Statement – Part One Page 10
Q. What role are the Guaranty Associations playing in the Rehabilitation Plan?
A. The Guaranty Associations have not been triggered and are not involved. Shenandoah
owes several Guaranty Associations money from assessments made on account of other troubled
insurers, which amounts are being held in abeyance and would be paid along with other company
liabilities under the Rehabilitation Plan.
Guaranty Association protection would also apply to Shenandoah and United Prosperity
policies after the Rehabilitation Plan.
Q. How would the Rehabilitation Plan benefit Shenandoah and its Policyholders?
A. The Deputy Receiver and the Company believe that consummation of the Rehabilitation
Plan (including the Plan of Conversion, the Sale, and the Acquisition) would yield benefits to
Policyholders by providing a needed capital infusion, thus enabling the Company to emerge from
receivership. Emergence from receivership should allow Shenandoah to maintain and fulfill its
contractual obligations and provide Policyholders with their full account values.
As you are aware, in accordance with authority granted in the Receivership Order, the
Deputy Receiver imposed the Moratorium on Cash Withdrawals, the Moratorium on
Payment of Subordinate Claims, the Moratorium on Declaration of Dividends, and the
Moratorium on Dividend Payments.
If the Members approve the Plan of Conversion, Policyholders would regain their ability
to access their cash surrender values and other payments or values associated with their policies,
subject to any Extension of Moratorium on Cash Withdrawals, to which the Hardship Request
Procedure would continue to apply.
Additionally, consummation of the Rehabilitation Plan (including the Plan of Conversion,
the Sale, and the Acquisition) would further benefit Policyholders by increasing Shenandoah’s
financial resources and its ability to invest in new technology, products, and markets, and to
improve customer service.
However, there are certain risks inherent in the Rehabilitation Plan. Please see the
discussion of “RISK FACTORS APPLICABLE TO MEMBERS AND POLICYHOLDERS,” in
the Policyholder Information Statement Part Two.
There are important differences between a mutual insurance company structure and a
Stock Insurance Company structure. For an analysis of the differences between these two types
of structures, please see the discussion below under “DEVELOPMENT AND PROPOSED
IMPLEMENTATION OF THE REHABILITATION PLAN (INCLUDING THE PLAN OF
CONVERSION).”
Note: It is important to remember that the Conversion would not be a liquidation.
The Company would remain in business after converting to a Stock Insurance Company.
Policyholder Information Statement – Part One Page 11
Alternatively, if the Plan of Conversion is not approved, a liquidation of Shenandoah would be
substantially more likely.
Q. When would the acquisition process be completed?
A. If approved by the vote of Members, and if all Closing conditions are met, then Closing is
expected to occur by the first quarter of 2012, although United Prosperity could elect to delay the
Closing until up to May 4, 2012 (the twelve (12) month anniversary of the signing of the
Agreement) in order to further stabilize the Company’s financial condition. If United Prosperity
does not elect to extend the Moratorium on Cash Withdrawals, the Company would emerge from
receivership within days of the Closing. If United Prosperity elects to extend the Moratorium on
Cash Withdrawals, the Company would remain in receivership for as much as twelve (12)
months after the Closing. The deadline for United Prosperity to elect to extend the Moratorium
on Cash Withdrawals and to elect whether to delay the Closing will be three months after the
vote of Members on the Plan of Conversion.
Q. Would Shenandoah’s name or location be changed?
A. No. For a period of at least one year following Closing, 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.
Q. Is there a web site for either United Prosperity Life Insurance Company or
Prosperity Life Insurance Group, LLC?
A. A web site does not exist for United Prosperity or PLIG.
Q. What should I do if I am a Member?
A. Review carefully the Policyholder Information Statement, Parts One and Two, and vote
on the Plan of Conversion, in person or by proxy, at the Special Meeting, by the dates and
pursuant to the procedures set forth in this Policyholder Information Statement. A Proxy form is
provided to you with this final, official Policyholder Information Statement. The Deputy
Receiver recommends that you vote YES for approval of the Plan of Conversion.
Policyholder Information Statement – Part One Page 12
Structure Before and After Conversion
The following charts display Shenandoah’s current organizational structure, and the
structure that would result from the Conversion, Sale, and Acquisition. 1
Shenandoah’s Current Organizational Structure
Policyholders of Shenandoah Life Insurance Company
Shenandoah Life Insurance Company
(A Virginia mutual insurance company)
Shenandoah’s Organizational Structure after the Conversion, Sale, and Acquisition
Prosperity Life Insurance Group, LLC
(A Delaware Limited Liability Company)
United Prosperity Life Insurance Company
(An Arizona stock life and disability insurance company)
Shenandoah Life Insurance Company
(A Virginia stock life insurance company)
1
Certain intermediate holding companies have been omitted from each chart. In
addition, the Company has two subsidiaries that have been omitted because they have no
operations and no material assets, The Brambleton Corporation and Shenandoah Investment
Sales, Inc.
Policyholder Information Statement – Part One Page 13
Key Features of the Rehabilitation Plan (Including the Plan of Conversion)
Policy benefits, values, and guarantees would not be diminished, and
Policy premiums or contributions would not be increased, in any way, 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 in that, with the exception of the elimination of
Members’ voting rights as a result of the Conversion and the modification
of the terms of the Participating Policies with respect to the payment of
dividends, and subject to any Extension of Moratorium on Cash
Withdrawals, the guaranteed benefits, values, and rights described in the
Company’s insurance policies and other contracts would not be reduced or
altered, and the premiums required to be paid as specified in the insurance
policies and other contracts would not be increased above their contractual
maximum rates. Following the conversion, the newly-elected Board of
Directors would determine, at its sole discretion, if and when to pay
dividends to holders of any Participating Policy. Policyholders would not
automatically share in the divisible surplus of the Company, and holders
of any Participating Policy will receive dividends as frequently or
infrequently as the newly-elected Board of Directors chooses. Although
holders of Participating Policies would still be eligible to receive
dividends, Policyholders would not be entitled to payment out of the
divisible surplus.
If the Members approve the Plan of Conversion and all other conditions to
the Conversion are satisfied, Shenandoah would convert from a mutual
insurance company to a Stock Insurance Company.
After converting to a Stock Insurance Company, Shenandoah would sell
the Shares to United Prosperity and become a wholly-owned subsidiary of
United Prosperity. As consideration for the Sale and to recapitalize the
Company, United Prosperity would pay the Purchase Price to
Shenandoah.
The Sale proceeds would be used to increase Shenandoah’s capital and
surplus to Policyholders, and enable Shenandoah to emerge from
receivership as a financially sound insurance company meeting or
exceeding regulatory capital and surplus requirements, enabling the
Company to resume issuing new Policies, developing new products,
investing in new technologies, and generally restoring its operations as a
Going Concern.
Upon the Conversion, Shenandoah would no longer have any Members
(i.e., current Members would lose their membership rights).
Policyholder Information Statement – Part One Page 14
Though it is unlikely that Eligible Policyholders would receive
consideration as a result of the Conversion, any payments to Eligible
Policyholders would be made by check as soon as practicable after the
Final Surplus Determination Date. The amount to be distributed will be
determined pursuant to a four-part formula described below.
Conditions Precedent to Effectiveness of the Rehabilitation Plan (Including the Plan of
Conversion) That Remain to be Satisfied
The transactions contemplated by the Agreement and the Rehabilitation Plan (including
the Plan of Conversion) cannot proceed to Closing unless the following conditions are satisfied
at, or prior to, the Closing:
The Plan of Conversion shall have been approved by the affirmative vote
of more than two-thirds of all votes cast by the Members present in person
or by proxy at the Special Meeting.
The Company’s amended and restated Charter and Bylaws shall have been
approved by the Commission.
All Requisite Regulatory Approvals shall have been received, except for
such post-Closing filings of United Prosperity as may be required by any
Governmental Authority, provided that the Deputy Receiver and United
Prosperity may in their sole discretion agree to proceed to Closing before
all the Requisite Regulatory Approvals have been received and may agree
to continue seeking one or more such approvals after the Closing Date.
The absence of any court or governmental prohibition of any of the
transactions contemplated by the Agreement or the Rehabilitation Plan
(including the Plan of Conversion).
The Deputy Receiver and the Company on the one hand, and United
Prosperity on the other hand, each shall have performed in all material
respects all obligations and covenants required of them by the Agreement
at or prior to the Closing Date, and shall have provided the other with a
signed certificate to such effect.
The representations and warranties made in the Agreement by the Deputy
Receiver and the Company on the one hand, and by United Prosperity on
the other hand, shall be true and correct and each shall have provided the
other with a signed certificate to that effect.
The approvals and consents required of third parties shall have been
received without any Burdensome Condition or other payment or
accommodation, limitation, restriction, modification, or requirement
Policyholder Information Statement – Part One Page 15
having been made or agreed to by the Company without the prior written
consent of United Prosperity in its sole discretion.
The Company shall not have suffered a Company Material Adverse
Effect, and there shall have been no occurrence, circumstance, or
combination thereof (whether arising on, prior to, or after the date hereof),
including any Action or litigation pending or threatened, which, as of the
Closing Date, could reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
The Rehabilitation Approval Order shall have become the Final
Rehabilitation Approval Order in accordance with Applicable Law and
acceptable to United Prosperity and its counsel.
United Prosperity shall have confirmed that the investment portfolio of the
Company (inclusive of mortgage loans therein) does not, as of the Closing
Date, have net unrealized investment losses and other asset impairments
exceeding an agreed amount, as determined by United Prosperity in its
sole discretion.
United Prosperity shall have confirmed that the statutory surplus of the
Company as reported on line 38 of the Company’s statutory financial
statements exceeds $10 million as of the Closing Date determined in
accordance with SAP before giving effect to the transactions contemplated
by this Agreement and the Plan of Rehabilitation and after accrual of all
liabilities, current and deferred, at the Closing.
The Deputy Receiver shall have (i) caused the Company, in accordance
with the Agreement and the Plan of Rehabilitation, to repurchase; or
(ii) cooperated with United Prosperity to further the purchase by United
Prosperity, an affiliate thereof, or a third party of the Surplus Notes upon
agreed conditions.
The Deputy Receiver shall have caused a copy of opinions to her of her
counsel, Cantilo & Bennett, L.L.P., with respect to the transactions
contemplated by the Agreement and the Plan of Rehabilitation (including
the Plan of Conversion), to be delivered to United Prosperity substantially
in the form required by the Agreement.
The Deputy Receiver and the Company shall have provided to United
Prosperity a certificate, dated as of the Closing Date and signed by the
Deputy Receiver, and on behalf of the Company by the Senior Vice
President & Chief Financial Officer, and the Senior Vice President
& Chief Actuary of the Company, certifying that certain of the conditions
set forth in Section 7.2 of the Agreement (which are either described in
this section of the Policyholder Information Statement Part One or are not
Policyholder Information Statement – Part One Page 16
described herein because they have already been satisfied) have been
satisfied.
The Company shall have delivered to United Prosperity, not more than
twenty (20) days prior to the Closing Date, a statement in accordance with
Treasury Regulation §§ 1.1445-2(c)(3) and 1.897-2(h), certifying that the
Company is not, and has not been, a “United States real property holding
corporation” for purposes of Sections 897 and 1445 of the Internal
Revenue Code, and the Deputy Receiver shall have no actual knowledge
that such statement is false or receive a notice that the statement is false
pursuant to Treasury Regulation § 1.1445-4. In addition, the Company
shall have delivered to United Prosperity on the Closing Date the
notification to the IRS described in Treasury Regulation § 1.897-2(h)(2)
regarding delivery of the statement referred to in the preceding sentence,
signed on behalf of the Company by the corporate officer responsible for
such matters at the Company. The Company acknowledges that United
Prosperity may cause the Company to file such notification with the IRS
on or after the Closing Date.
No Burdensome Condition shall exist (except that this condition may be
satisfied immediately following the Closing if not satisfied at, or prior to,
the Closing).
The Deputy Receiver and the Company shall have delivered or caused to
be delivered to United Prosperity: (i) certificates, in the form required by
the Agreement, representing the Shares (which must be delivered no later
than twenty-four (24) hours after the Order Terminating Rehabilitation
Proceeding is entered if United Prosperity waives any Extension of
Moratorium on Cash Withdrawals); (ii) the United Prosperity Surplus
Note (which must be delivered no later than twenty-four (24) hours after
the Order Terminating Rehabilitation Proceeding is entered, if United
Prosperity waives any Extension of Moratorium on Cash Withdrawals);
and (iii) all records of the Company or its Subsidiaries that are not then in
the possession of the Company or its Subsidiaries.
The Bar Date shall have passed.
United Prosperity shall have provided to the Deputy Receiver and the
Company a certificate, dated as of the Closing Date and signed by the
President of United Prosperity, certifying that each of the conditions set
forth in Section 7.3 of the Agreement (which are either described in this
section of the Policyholder Information Statement Part One or are not
described herein because they have already been satisfied) has been
satisfied.
Policyholder Information Statement – Part One Page 17
United Prosperity shall have delivered or caused to be delivered to the
Deputy Receiver and the Company the Purchase Price, by wire transfer of
immediately available funds to an account of the Company specified in
writing by the Deputy Receiver to United Prosperity not less than two (2)
Business Days prior to the Closing Date (which must be delivered no later
than twenty-four (24) hours after the Order Terminating Rehabilitation
Proceeding is entered if United Prosperity waives any Extension of
Moratorium on Cash Withdrawals), such payment to be deposited into the
general account of the Company.
United Prosperity shall have obtained all Requisite Regulatory Approvals
for which it is responsible under the Agreement.
Conditions Subsequent to Effectiveness of the Rehabilitation Plan (Including the Plan of
Conversion)
The transactions contemplated by the Agreement and the Rehabilitation Plan (including
the Plan of Conversion) will not be effective unless the following conditions are satisfied: (i) the
Commission shall have entered the Order Terminating Rehabilitation Proceeding, no later
than (a) thirty (30) days after the Closing if United Prosperity does not elect to implement an
Extension of Moratorium on Cash Withdrawals, or (b) otherwise thirty (30) days after the
expiration or termination of the Moratorium on Cash Withdrawals; and (ii) within thirty (30)
days after entry of the Order Terminating Rehabilitation Proceeding that order shall have become
the Final Order Terminating Rehabilitation Proceeding.
DEVELOPMENT AND PROPOSED IMPLEMENTATION OF THE
REHABILITATION PLAN (INCLUDING PLAN OF CONVERSION)
The following is a detailed discussion of the development and proposed implementation
of the Rehabilitation Plan (including the Plan of Conversion) and the Agreement.
History of Shenandoah
Shenandoah was chartered as a Stock Insurance Company in 1914 and began operations,
selling its first Policy in 1916. In the late 1940s, strategic vision led Company leaders to plan for
further growth and ways to strengthen the Company’s financial position. As a result, the
Company was mutualized (i.e., converted from a stock insurance company to a mutual insurance
company) in 1955. In the decade prior to receivership, Shenandoah became a premier provider
of senior market products and a recognized low-cost underwriter of group dental plans,
particularly in the small case market. In 2008, Shenandoah had premiums of approximately
$284.1 million, surplus of approximately $21.5 million, a net loss of approximately
$81.5 million, and assets of approximately $1.61 billion. For the year ending 2010, Shenandoah
had premiums of approximately $72.6 million, surplus of approximately $15 million, net income
of approximately $8.9 million, and assets of approximately $1.44 billion.
Policyholder Information Statement – Part One Page 18
As described in the notice at the front of this Policyholder Information Statement Part
One, Shenandoah was placed in receivership for rehabilitation or liquidation on February 12,
2009.
Shenandoah has remained in a hazardous financial condition since being placed in
receivership. Unfortunately, the efforts of the Deputy Receiver and the rest of the Receivership
Team have been unable to fully rehabilitate the Company without an outside capital infusion.
Consideration of Options for Rehabilitation
Immediately upon inception of the receivership, the Deputy Receiver determined that the
financial condition and other attributes of the Company made it a good candidate for attempts to
rehabilitate the Company, perhaps thereby avoiding liquidation.
The Deputy Receiver, with the assistance of the Company and certain members of the
Receivership Team, evaluated other options before deciding on a conversion, which is the key
feature of the Rehabilitation Plan. One of the alternatives the Deputy Receiver had considered
was to retain Shenandoah’s current structure and seek capital infusions from other third parties.
However, after consultation with many potential investors and other interested parties, the
Deputy Receiver determined that the mutual insurance company structure does not provide
sufficient flexibility for obtaining the necessary capital infusion to allow Shenandoah to emerge
from receivership.
Additionally, the Deputy Receiver evaluated a potential internal rehabilitation pursuant to
which the Bureau of Insurance would oversee the Company and manage its affairs until its
financial condition was such that it could emerge from receivership. Although Shenandoah’s
financial condition has improved dramatically since February 12, 2009, the Deputy Receiver
believes that a capital infusion is required to fully rehabilitate the Company and ensure a strong
financial future for the Company and its Policyholders. Therefore, this second option was not
deemed to be an optimal choice.
Ultimately, the Deputy Receiver concluded that requesting proposals from potential
purchasers to sponsor the conversion of Shenandoah would be in the best interests of
Policyholders, as such a plan would have the potential to provide Shenandoah with a structure
mutually beneficial to both Policyholders and a potential purchaser. In a conversion, all or part
of the price that the purchaser pays to acquire the converted insurer can be used to provide a
capital infusion enabling the delinquent insurer to be rehabilitated and to emerge from
receivership, thereby benefitting present and future policyholders by increasing financial
resources. In turn, these additional financial resources can be used not only to resume the pre-
receivership business of insurance, but to improve the rehabilitated insurer’s business model
through investments in new technology, products, and markets, as well as improved customer
service.
Therefore, the Deputy Receiver developed the Plan of Conversion as the cornerstone of
the Rehabilitation Plan.
Policyholder Information Statement – Part One Page 19
Differences Between Mutual Insurance Companies and Stock Insurance Companies
A mutual insurance company is structured and operated differently from a stock
insurance company. The chart that follows compares and contrasts the general characteristics of
mutual insurance companies and stock insurance companies.
Mutual Insurance Company Stock Insurance Company
Who Controls the Company Members of the mutual insurance Stockholders control the
company, who are generally a company, typically by electing
subset of policyholders, the board of directors.
ultimately control the company. Stockholders and policyholders
need not be the same.
Transferability of Membership interests are not Stockholders own shares of
Membership/Ownership, transferable and cannot be stock. Common stock received
Voting separated from the underlying may be sold or transferred even
policies. Membership interests though the holder does not have
end when the policy ends. an insurance policy or elects to
retain such a policy. Similarly,
the common stock may be
retained even if the policy is
terminated or transferred.
Ability to Conduct Capital Can raise capital only through its Increased ability to raise capital:
Transactions stock subsidiaries under certain by selling stock and other
conditions, as well as through securities of the company, and
borrowing, the sale of subsidiary can use stock and other securities
stock or assets, or by increasing to pay for acquisitions.
premiums.
Policy Benefits As provided in policy. Remain as provided in policy.
Development and Proposed Implementation of the Rehabilitation Plan (Including Plan of
Conversion)
Step 1: Valuation
In order to solicit and evaluate offers for the purchase of the Company, an essential first
step was obtaining a valuation of the Company’s in-force block of insurance business, which in
turn would allow an estimation of the Company’s potential market value. Often in valuing an
enterprise, including in valuing an insurer, investment bankers or other valuation specialists
engaged for that purpose will provide a range of values within which a “market transaction” can
be expected to occur. Such a range of values takes into account the valuation of in-force blocks
of business as well as other material factors that may bear on the ultimate market transaction.
Shortly after Shenandoah was placed in receivership it became evident that if its invested
securities were “marked-to-market,” the net decline in the aggregate value of the Company’s
assets would greatly exceed its statutory surplus, thereby rendering the Company insolvent.
Application of SAP enabled the Company to avoid marking its investments to market unless they
were to be sold or were deemed Other Than Temporarily Impaired. However, a potential
Policyholder Information Statement – Part One Page 20
buyer could reasonably be expected to weigh this potential insolvency heavily in any purchase
offer. Moreover, the Company’s precarious financial position might render it incapable of
withstanding a “run on the bank” in the absence of receivership, making its Going Concern value
dubious at best. Under the circumstances, the results of a market valuation were deemed to be
less valuable and the cost and delay of undertaking one more difficult to justify. Accordingly,
the Deputy Receiver did not seek a full valuation before soliciting purchase offers. However,
and as discussed below, the Deputy Receiver did procure an actuarial valuation of the
Company’s blocks of insurance business. An overriding consideration for the Deputy Receiver
was the need to seek offers quickly, before the pendency of the receivership proceeding
eliminated a substantial portion of the Company’s value and made a sale much more difficult.
The Deputy Receiver engaged Oliver Wyman to perform a valuation of Shenandoah’s
in-force life and annuity blocks of business, for presentation to potential purchasers. The
valuation included the review of certain Company assumptions, including after-tax discount rates
and future projections of statutory income, as well as all the customary elements of income,
including premiums, investment income, claims, expenses, taxes, and changes in policy reserves.
Additionally, the cash flows of the policy liabilities and their supporting assets were projected
using best estimate assumptions for future experience, based primarily on the Company’s pre-
receivership experience. The Oliver Wyman valuation did not model Shenandoah’s actual
investment assets but made assumptions on investment returns. In addition, the valuation did not
take into account the amount of overhead expenses of the Company and did not model certain
blocks of business. These and other material factors that were not considered in the Oliver
Wyman valuation would all affect the actual market and actuarial values of the Company.
Oliver Wyman reported in its valuation that Shenandoah’s in-force life and annuity
blocks of business, as of March 31, 2009, had a wide range of values, suggesting that potential
purchasers could be interested in a market transaction under the right circumstances. These
values ranged from $102.5 million to $173.4 million, depending on discount rates and cost of
capital assumptions. Ultimate market valuation would give consideration to all factors affecting
the Company, including a number of risks not addressed in the actuarial valuation. Oliver
Wyman’s actuarial report, including the opinions expressed therein, was made available to
potential purchasers. Although actuarial methods have limitations and the valuation of in-force
business is an estimate which can change significantly based on the assumptions used, rather
than a precise mathematical calculation, the report met its goal of helping potential purchasers
assess Shenandoah’s future value as a Going Concern, if rehabilitated and recapitalized.
Step 2: Selection of Proposed Purchasing Party
Early in the receivership, the Deputy Receiver determined that Policyholders and
creditors would be best served by the Deputy Receiver seeking a purchaser or strategic partner
for the Company as quickly as possible. On the Deputy Receiver’s instructions, the Receivership
Team moved expeditiously to determine whether the Company could be sold on favorable terms.
As those principally responsible for seeking potential purchasers of Shenandoah, outside counsel
to the Deputy Receiver used their extensive network of contacts in the industry to compile a list
of parties who: (1) might be interested in participating in the acquisition of Shenandoah, and (2)
were likely to have demonstrable ability to do so effectively. Additional candidates presented
themselves upon learning of Shenandoah’s receivership. Because many such parties are publicly
Policyholder Information Statement – Part One Page 21
traded corporations, an essential element of this stage was assurance by the Deputy Receiver that
their requests for anonymity would be respected. For that reason, the potential purchasers with
whom the Receivership Team communicated cannot be identified herein.
After the Receivership Team compiled a list of potential purchasers interested in
participating in the rehabilitation of the Company, the next step was to determine which of the
candidates were sufficiently qualified to warrant further communication. To that end, the
Deputy Receiver and the Receivership Team ascertained the sophistication and financial
condition of the candidates, and each candidate was provided with information about the
Company, subject to various limitations and protections of confidentiality.
A request for acquisition proposals (the “RFAP”) was then sent to interested parties,
describing the Company and the anticipated transaction. The RFAP included a deadline by
which all potential purchasers were required to submit letters of intent including the following
information:
1. Biographical information about the proposed acquiring party or parties;
2. Description of the proposed transaction and amount of the proposed
consideration;
3. Explanation of the source and nature of the proposed consideration;
4. Explanation of any contingencies or reservations;
5. Plans for existing Policies;
6. Plans for the Company’s investment portfolio;
7. Plans for the Company’s Roanoke operations and staff;
8. Plans to make material changes in the Company;
9. Proposed due diligence plan and timeline to complete the acquisition; and
10. Agreement to bear all costs incurred in submitting a letter of intent.
Eleven potential purchasers submitted letters of intent in response to the RFAP. The
Receivership Team analyzed the letters of intent to determine each proposed transaction’s likely
financial impact on the Company and, indirectly, on Policyholders and creditors. Based on the
Receivership Team’s analysis of the eleven letters of intent, the Deputy Receiver selected five
potential purchasers as finalists for further consideration.
On March 26, 2009, the Deputy Receiver sent follow-up letters to the five finalists,
offering opportunities to visit Shenandoah and interview key members of Shenandoah’s staff and
the Receivership Team.
The Receivership Team assessed the financial qualifications of each finalist and
formulated and applied criteria by which to further evaluate the five finalists’ letters of intent.
Upon completion of this further evaluation, the Deputy Receiver concluded that none of the five
finalists’ letters of intent offered sufficient value to the Company, its Policyholders, and
creditors. On June 22, 2009, the Deputy Receiver issued a new request for acquisition proposals
(the “New RFAP”), in which interested parties were required to execute a confidentiality
agreement, fully disclose their identities, and demonstrate the financial wherewithal to invest at
least $100 million of capital in Shenandoah. The New RFAP outlined three phases for the
Policyholder Information Statement – Part One Page 22
acquisition process: (1) due diligence analysis of Shenandoah, (2) evaluation of all bid proposals
and selection of a final candidate, and (3) completion of regulatory and other necessary steps to
complete the transaction.
The second phase commenced on October 30, 2009, with three parties submitting
proposals for the acquisition of Shenandoah. Upon review and consideration, the Deputy
Receiver decided to allow additional time for two of the three parties to submit revised
proposals. On December 9, 2009, and once again on December 31, 2009, the two remaining
parties submitted their revised acquisition proposals. After a thorough review by the
Receivership Team, the Deputy Receiver selected Black Diamond as the company with the
strongest and most synergistic proposal. Black Diamond had submitted its proposal on its own
behalf and that of Reservoir, its business partner. In due course, Black Diamond and Reservoir
formed PLIG and its subsidiary United Prosperity to complete the proposed transactions. For the
sake of simplicity and convenience, throughout this and related documents the buyer will be
identified as United Prosperity though specific steps may have been taken by Black Diamond,
Reservoir, or PLIG before United Prosperity was formed and became the contracting party.
United Prosperity, an Arizona-domiciled stock life and disability insurance company, was
acquired by Prosperity Life Insurance Group, Inc., a wholly-owned subsidiary of PLIG, on
October 14, 2010. Under its new management, United Prosperity has begun a process to acquire
licenses in additional jurisdictions where it is not currently authorized to do business.
Concurrently, efforts are underway to develop additional insurance products for the company.
On March 29, 2010, the Deputy Receiver advised United Prosperity that it was the
preferred acquisition candidate, on condition that United Prosperity: (1) commit to a capital
infusion of at least $60 million, which could be increased up to $100 million, if necessary to
attain a 350% Risk-Based Capital level; (2) be principally responsible for addressing and
resolving the regulatory and legal issues raised by the proposed acquisition; and (3) work with
the Receivership Team to prepare an acceptable rehabilitation plan.
Step 3: Additional Due Diligence, and Negotiation and Execution of the Agreement
After the Deputy Receiver selected United Prosperity as the proposed purchaser, the
Receivership Team and United Prosperity undertook additional due diligence subject to the
provisions of an exclusivity agreement. They also began negotiating and drafting the
Agreement, which sets forth the terms and structure of the proposed transaction. The Agreement
contemplates that after the Commission approves the Rehabilitation Plan (including the Plan of
Conversion) and the Form A Application for Acquisition of Control, determines the solvency
or insolvency of Shenandoah and, if Solvent, determines the Company’s adjusted statutory
surplus (prior to factoring in United Prosperity’s capital infusion), and if the Members approve
the Plan of Conversion by the required vote, the Deputy Receiver, the Company, and United
Prosperity would, if all other Closing conditions were satisfied, proceed as follows:
Shenandoah would be converted and issue the Shares;
Policyholder Information Statement – Part One Page 23
United Prosperity would pay the Purchase Price to recapitalize the
Company and in consideration for the Shares and the United Prosperity
Surplus Note;
All current Policies would continue as before the Conversion, subject only
to any Extension of Moratorium on Cash Withdrawals (to which the
Hardship Request Procedure would continue to apply); more precisely, the
Company would remain fully obligated under all of its insurance policies
and other contracts in that, with the exception of the elimination of
Members’ voting rights as a result of the Conversion and the modification
with respect to the payment of dividends, and subject to any Extension of
Moratorium on Cash Withdrawals, the guaranteed benefits, values, and
rights described in the Company’s insurance policies and other contracts
would not be reduced or altered, and the premiums required to be paid as
specified in the insurance policies and other contracts would not be
increased above their contractual maximum rates. The newly-elected
Board of Directors would determine, at its sole discretion, if and when to
pay dividends to holders of any Participating Policy. Policyholders would
not automatically share in the divisible surplus of the Company, and
holders of any Participating Policy would receive dividends as frequently
or infrequently as the newly-elected Board of Directors chooses.
Although holders of Participating Policies would still be eligible to receive
dividends, Policyholders would not be entitled to payment out of the
divisible surplus.
The Company would work to re-establish relationships with insurance
marketing organizations and other former distributors in preparation for
the time, after entry of the Order Terminating Rehabilitation Proceeding,
that it chooses to resume writing new business, whether through existing
product lines or new product lines the Company may develop;
United Prosperity would also work with the Company’s current staff to
communicate to Policyholders the Company’s improving financial
condition and the details of any Extension of Moratorium on Cash
Withdrawals.
The Company would resume normal business operations in stages,
beginning with stabilization, followed by the expiration of any Extension
of Moratorium on Cash Withdrawals and, after entry of the Order
Terminating Rehabilitation Proceeding, resuming full possession of its
property and the management and conduct of its affairs under the control
of United Prosperity, which would cause the Company to operate in
accordance with all Applicable Law and the provisions of the
Rehabilitation Plan.
Policyholder Information Statement – Part One Page 24
United Prosperity would devote time and effort to rebuilding the
Company’s personnel, as well as the Company’s reputation in the
insurance industry and the local community.
Step 4: Development of the Rehabilitation Plan (Including Plan of Conversion)
Independently of the acquisition proposal process, the Deputy Receiver identified the
following principal goals of rehabilitation efforts in furtherance of the best interests of
Policyholders and creditors: (1) to restore the Company to a financial condition that would
enable it to fulfill its Policy obligations, (2) to fully rehabilitate the Company by restoring the
Company’s financial strength and bringing the Company into compliance with applicable
solvency standards, (3) to protect the interests of Policyholders and creditors from the causes of
the receivership, and (4) to restore the Company’s position in the Roanoke community.
In furtherance of those general goals, and in light of the existing constraints and the
importance of assuring that Company operations would not undermine Policyholder values or
impose unacceptable burdens on Policyholder interests, the Receivership Team determined that it
would need to:
1. Strictly control cash flow;
2. Identify and address Policyholder hardships;
3. Reduce or eliminate unnecessary operations; and
4. Improve operating results.
In the longer term and on a broader scale, a rehabilitation plan would have to be
structured so as to provide adequate protection to Policyholders and creditors while preserving
the possibility that the Company would survive as a viable entity. In part, this would entail:
1. Identifying fully the Company’s liabilities;
2. Insulating Policyholders from the potential harm of a weak capital
structure and inadequacies in the asset portfolio;
3. Making adequate provision for the interests of Eligible Policyholders;
4. Establishing a mechanism for the effective discharge of general creditor
claims; and
5. Maximizing acceptability of a rehabilitation plan to responsible regulators.
Having identified these factors, the Receivership Team and United Prosperity
commenced the task of developing the Rehabilitation Plan (including the Plan of Conversion),
attached to the Application as Exhibit A, which they believe could be implemented within a
reasonable time frame.
Policyholder Information Statement – Part One Page 25
Step 5: Approval by the Deputy Receiver
Had the Company not been placed in receivership, the Board of Directors would have
been required to approve the proposed Conversion and Acquisition by United Prosperity.
However, by virtue of the Receivership Order and the Order Appointing Deputy Receiver, the
Deputy Receiver exercises the powers that, prior to receivership, were vested in the officers and
boards of directors of the Company and its Subsidiaries, and the officers and directors are
permanently enjoined and restrained from exercising any of those powers except with leave of
the Commission or the Deputy Receiver. Neither the Commission nor the Deputy Receiver has
requested the boards of directors to exercise any powers of corporate governance during the
receivership, and the boards of directors have not exercised any such powers during the
receivership. Accordingly, in those instances in which board approval would have been required
for aspects of the Rehabilitation Plan the requirement is satisfied by the Deputy Receiver’s
approval. To that end, the Deputy Receiver has determined that the Conversion contemplated as
part of the Rehabilitation Plan (including the Plan of Conversion) would be in the best interests
of Members, Policyholders, creditors, and the public. By executing the Agreement, the Deputy
Receiver effectively approved the Rehabilitation Plan (including the Plan of Conversion), which
was an exhibit incorporated by reference in the Agreement.
Step 6: Approval by the Commission, Subject to a Vote of the Members on the Plan of
Conversion, Determination of Solvency or Insolvency and, if Solvent, Determination of
Shenandoah’s Adjusted Statutory Surplus (Prior to Factoring in United Prosperity’s
Capital Infusion)
Pursuant to section 38.2-1518 of the Virginia Code, if the Commission acting as Receiver
finds that it is in the best interests of the Policyholders and creditors of a delinquent insurer that it
be rehabilitated, the Commission may through the Deputy Receiver prepare a plan of
rehabilitation, which may include a provision imposing liens upon the net equities of
Policyholders and, in the case of life insurers, a provision imposing a moratorium upon the loan
or cash surrender values of the policies for whatever period of time is necessary (see discussion
of the Extension of Moratorium on Cash Withdrawals in the Rehabilitation Plan attached to the
Application as Exhibit A). After providing notice and a hearing, the Commission may approve,
disapprove, or modify a plan of rehabilitation.
Because the Rehabilitation Plan includes a proposed Conversion pursuant to the Plan of
Conversion, the Commission was required to comply with section 38.2-1005.1(B) of the Virginia
Code, pursuant to which the Commission may not approve a plan of conversion unless, after
giving Policyholders notice and an opportunity to be heard, the Commission determines that:
(1) the terms and conditions of the plan are fair and equitable to the Policyholders, (2) the plan is
subject to approval by a vote of more than two-thirds of all votes cast on the plan at a meeting of
the Members called for that purpose at which a quorum is present, and (3) the plan allocates and
directs that the entire stock ownership interests and other consideration to be distributed pursuant
to the plan of conversion be distributed to the Policyholders.
An important issue was whether and to what extent Shenandoah was Solvent or
Insolvent. The Company was not yet reported to be Insolvent on the date of receivership.
Policyholder Information Statement – Part One Page 26
However, it was possible that if examined on a liquidation basis of accounting, Shenandoah
might have been deemed to be Insolvent, particularly without the benefit of the receivership
exemptions to Chapter 14 of Title 38.2 of the Virginia Code, discussed in the Policyholder
Information Statement Part Two. Improvements in the broader economy combined with
measures implemented by the Deputy Receiver served to ameliorate substantially the Company’s
financial condition during receivership. However, the broader economy and the capital markets
in which are invested Shenandoah’s assets remain relatively volatile, making predictions of
future financial results particularly speculative. The Rehabilitation Plan contemplated that the
Commission would make a finding as to whether or not Shenandoah was Solvent or Insolvent
and the consequences of such finding with respect to the aggregate amount of the distribution, if
any, that would be made to Eligible Policyholders.
Pursuant to the Rehabilitation Plan, Shenandoah would be acquired by, and become an
Affiliate of, United Prosperity (the “Acquisition”), and Shenandoah and United Prosperity would
become part of the same Insurance Holding Company System. Therefore, pursuant to Article
5 of Chapter 13 of the Virginia Insurance Code (Title 38.2 of the Virginia Code), United
Prosperity filed a Form A Application for Acquisition of Control. The Commission was required
to approve the Form A Application for Acquisition of Control unless, after giving notice and
opportunity to be heard, it determined that: (1) after the change of control, Shenandoah would
not be able to satisfy the requirements for the issuance of a license to write the classes of
insurance for which it is presently licensed; (2) the acquisition of control would lessen
competition substantially or tend to create a monopoly in insurance in Virginia; (3) the financial
condition of any acquiring Person might jeopardize the financial stability of Shenandoah, or
prejudice the interests of the Policyholders; (4) any plans or proposals of the acquiring party to
liquidate Shenandoah, sell its assets, or consolidate or merge it with any other Person, or to make
any other material change in its business or corporate structure or management, are unfair and
unreasonable to Policyholders and not in the public interest; (5) the competence, experience, and
integrity of those Persons who would control the operation of Shenandoah are such that it would
not be in the interest of Policyholders and of the public to permit the acquisition of control; or
(6) after the change of control, Shenandoah’s surplus to Policyholders would not be reasonable
in relation to its outstanding liabilities or adequate to its financial needs.
On June 27, 2011, the Commission entered a scheduling order setting for October 11,
2011, a single hearing on all relief requested in the Application, and establishing notice and
response procedures.
The hearing was held as scheduled and, on October 20, 2011, the Commission entered
the Rehabilitation Approval Order. In the Rehabilitation Approval Order, the Commission found
Shenandoah Insolvent on February 12, 2009, on a liquidation basis, both because: (1) its
liabilities exceeded its assets; and (2) without the receivership, it could not have met its
obligations in the ordinary course of business. The Company was found to have a net asset
deficit as of the day of receivership of $118.2 million on a Liquidation Basis of Accounting.
As of the date of the October 11, 2011, hearing and subject to the benefit of section 38.2-
1400 of the Virginia Code exemptions, Shenandoah had statutory surplus of approximately $14
million. The Commission found that although Shenandoah properly reported it was Solvent on a
Policyholder Information Statement – Part One Page 27
statutory basis as of year end 2009 and 2010, it would have been statutorily Insolvent on those
dates and today if it were not for certain dispensation from reporting requirements of Section
38.2-1400 available due to the receivership. A more thorough discussion of Shenandoah’s
historical and present financial condition is available in Part Two of the Policyholder
Information Statement.
At this time it remains uncertain whether Eligible Policyholders will receive a
distribution upon consummation of the Conversion, which will be determined by the formula in
Section 2.4 of the Agreement. The evidence at the Rehabilitation hearing established that, given
that the Company was Insolvent as of February 12, 2009, there was no equity value owned by
Policyholders at the time. If it were not for the receivership, it is highly probable that the
Company would have been liquidated and Policyholders would have received no cash value or
distribution. With the inception of receivership, the Deputy Receiver and the Receivership Team
have been able to preserve coverages.
The Rehabilitation Approval Order also approved the Form A.
Step 7: The Special Meeting of Members to Vote on the Plan of Conversion
Because the Commission approved the Rehabilitation Plan (including the Plan of
Conversion), the Plan of Conversion is being submitted to a vote of the Members at a Special
Meeting called for that purpose. The Charter and Bylaws permit voting by proxy. For further
information regarding the vote of the Members, please see the discussion below under “VOTING
ON THE PLAN OF CONVERSION,” as well as the following documents that are enclosed with
this mailing: the Policyholder Information Statement, Parts One and Two, the Notice of Special
Meeting and Vote of Members on Plan of Conversion, and the Proxy form.
Step 8: Conversion, Sale, and Acquisition and Corporate Form After the Conversion
If the Members approve the Plan of Conversion by the requisite vote, and all Closing
conditions have been satisfied, the Conversion, Sale, and Acquisition would be consummated
simultaneously. On that date, all Membership Interests in Shenandoah would be extinguished
and Shenandoah would issue the Shares, all of which would be sold to, and acquired by, United
Prosperity, such that Shenandoah and all of its Subsidiaries would remain separate entities but
would be wholly-owned Subsidiaries of United Prosperity. Shenandoah would continue as a
Virginia Stock Insurance Company, and Policyholders would retain their Policies and the
benefits provided thereby, subject to any Extension of Moratorium on Cash Withdrawals (to
which the Hardship Request Procedure would continue to apply).
Immediately after consummation of the Conversion and Sale, Shenandoah would have
the fully paid capital stock and surplus required by Applicable Law, as well as an RBC ratio
almost twice of what is required in Virginia.
United Prosperity proposes to restore the Company to robust financial health and
successful market performance, focusing its activities in those market segments for which it
would be positioned most favorably given recent developments. It is anticipated that the
Policyholder Information Statement – Part One Page 28
Company would remain in Roanoke and would continue to be domiciled in Virginia for the
foreseeable future.
Step 9: Potential Distribution to Eligible Policyholders
Typically, when a mutual insurance company converts (i.e., converts to a Stock Insurance
Company) its value or some other specified amount is distributed to those of its Policyholders
deemed under Applicable Law to be its owners for that purpose. However, the aggregate amount
and allocation of any distribution are matters that vary widely from jurisdiction to jurisdiction
and transaction to transaction. As discussed at Step 6, Virginia insurance law contemplates “that
the entire stock ownership interests and other consideration to be distributed pursuant to the
plan of conversion be distributed to the policyholders . . . .” However, Virginia law does not
address the conversion of an insurer that has been placed in receivership and/or is Insolvent. Nor
does any other Virginia law address whether the members of an Insolvent mutual insurance
company in receivership are entitled to any stock ownership interests in the new stock company,
or other consideration, upon conversion of the delinquent insurer to a Stock Insurance Company
as part of a plan of rehabilitation.
As previously discussed, the Commission determined in the Rehabilitation Approval
Order that: (1) as of February 12, 2009, the Company was Insolvent; (2) Shenandoah had
positive statutory surplus at the date of the hearing; and (3) without the dispensation afforded to
insurers in receivership, Shenandoah would still be statutorily Insolvent. If the Members
approve the Plan of Conversion and the Conversion is consummated, it remains unknown
whether Eligible Policyholders would receive compensation but the Deputy Receiver believes
that it is unlikely that they will do so. Please see the discussion below at “COMPENSATION.”
BENEFITS OF THE REHABILITATION PLAN
The Deputy Receiver and United Prosperity intend the Rehabilitation Plan to be a
comprehensive plan for the satisfaction of the Company’s obligations to its Policyholders and
creditors, and the eventual rebuilding of Shenandoah into a financially strong, viable company.
Benefits to Policyholders
After comprehensive and diligent review, the Deputy Receiver has determined that
Policyholders would benefit in several significant ways under the Rehabilitation Plan, the
Agreement, and the transactions contemplated thereunder. United Prosperity’s capital infusion
would restore Shenandoah to financial strength and enable it to resume the sale of insurance
products to the public. In addition, United Prosperity’s presence as a strong financial sponsor
would further protect and secure the value of Policy benefits, subject temporarily to any
Extension of Moratorium on Cash Withdrawals (to which the Hardship Request Procedure would
continue to apply).
Additionally, Policyholders would derive significant intangible benefits from the
Rehabilitation Plan. Policyholders would resume dealing with the Company as a Going Concern
and would see a path for return to normal operations and resumption of their usual business
relationship. The trust and confidence that exists between an insurance provider and its
Policyholder Information Statement – Part One Page 29
Policyholders is of significant importance, and the financial stability and further success of the
Company after acquisition by United Prosperity would help to bolster these imperative traits.
Although it remains uncertain whether Eligible Policyholders would receive a
distribution upon consummation of the Conversion, the benefit of preserving all insurance
coverage remains.
Benefits to General Creditors
In addition to obligations under its Policies, Shenandoah has obligations to a variety of
creditors with claims subordinate to Policy obligations. These include such items as amounts
claimed as due for materials and services, unpaid broker and agent commissions, and extra-
contractual claims of Policyholders.
Pursuant to the authority granted by the Receivership Order and Order Appointing
Deputy Receiver, payment for goods and/or services provided before February 12, 2009, have
been deferred as general creditor claims. Exempted from this blanket deferral of payments for
pre-receivership non-Policy obligations is the payment of state license fees or other fees that are
required to avoid revocation of Shenandoah’s certificates of authority.
As of September 30, 2011, the Deputy Receiver had deferred the payment by the
Company of nearly $10.8 million in creditor claims subordinate to Policy claims, to include pre-
receivership premium taxes (approximately $594,710.94 in premium taxes for year 2008, and
$636,789.19 in premium taxes for year 2009) and $60,967 for years 2008 and 2009 in penalties
and interest billed to date by various states for non-payment of premium taxes. A complete
rehabilitation of Shenandoah and settlement of these claims would certainly be of great benefit to
these creditors to whom those amounts are due. In contrast, if the Commission were to order that
Shenandoah be liquidated, creditors would very likely not receive a complete and timely
settlement of their claims.
If all conditions are satisfied and the Rehabilitation Plan is completed, one result will be
full payment of undisputed and approved creditor claims subordinate to Policy claims.
Additionally, Shenandoah would pay the deferred premium taxes upon emerging from
receivership in order to continue doing business in the states as to which the payment of pre-
receivership premium taxes had been deferred.
Benefits to Employees and the Community
Although not a requirement or a consideration under section 38.2-1518 of the Virginia
Code, the Deputy Receiver submits that Shenandoah’s employees and the larger community
would also benefit from completion of the Rehabilitation Plan. First and foremost, a number of
jobs would be preserved which might otherwise be lost in an alternative liquidation scenario. In
addition, once the Company re-establishes relationships with insurance agencies and independent
marketing organizations, and resumes writing new business, it may choose to hire or to rehire
additional employees, which would have a positive impact on the local economy. Furthermore,
the Company would also be expected to engage consultants to assist in the development of new
insurance products. Even those employees who might be retained in a liquidation scenario
Policyholder Information Statement – Part One Page 30
would fare better if the Rehabilitation Plan were completed. Many of Shenandoah’s employees
have resigned as the result of uncertainty regarding the Company’s future. With the completion
of the Rehabilitation Plan, employee morale should improve significantly. Unlike the negative
ramifications of liquidation, acquisition by United Prosperity would re-establish the financial
strength of Shenandoah and provide significant benefits to the City of Roanoke and the
Commonwealth of Virginia, in terms of the impact on employment and tax revenues.
VOTING ON THE PLAN OF CONVERSION
Eligibility to Vote
Pursuant to Virginia law and Shenandoah’s Charter, Members may vote on the Plan of
Conversion at the Special Meeting or by proxy. Most, but not all, Policyholders are Members
(see the Glossary for definitions). Each Member will be entitled to one (1) vote, irrespective of
the number of Policies held or the amount thereof.
Vote Required for Approval
Pursuant to Virginia law and Shenandoah’s Charter and Bylaws, the Plan of Conversion
must be approved by more than two-thirds of the votes cast by the Members present in person or
by proxy at the Special Meeting.
How Members Can Vote
A Member can vote in person at the Special Meeting, or by completing, signing, and
returning the Proxy to Shenandoah c/o TAG Proxy Services, either by mail or online, at least ten
(10) days prior to the date of the Special Meeting. Members can provide further instructions on
the Proxy form regarding how to cast their vote. If no further instructions are provided, your
vote will be submitted in accordance with the Deputy Receiver’s recommendation to approve the
Plan of Conversion.
How to Vote by Proxy
If you do not intend to vote in person at the Special Meeting, or if you are not sure
whether you will be able to attend the Special Meeting, you are requested to complete, sign, and
return the Proxy to Shenandoah c/o TAG Proxy Services. If you choose, you may provide
further instructions on the Proxy by checking “Yes” to approve the Plan of Conversion, or “No”
to oppose the Plan of Conversion. After completing and signing your Proxy, please insert the
Proxy in the postage pre-paid envelope which has been included and deposit it in the United
States mail. If you have misplaced the envelope, you may send your Proxy to Shenandoah Life
Insurance Company c/o TAG Proxy Services, P.O. Box 6500, Carlstadt, New Jersey 07072-
0500.
Alternatively, you may also submit your Proxy online at www.proxyonline.us, by
following the instructions provided on the web site. In the event you submit your Proxy by mail
and online, the last vote received by Shenandoah will be counted.
Policyholder Information Statement – Part One Page 31
In order to be counted, your Proxy must be RECEIVED by Shenandoah c/o TAG Proxy
Services, no later than ten (10) calendar days prior to the date of the Special Meeting, regardless
of whether you submit your Proxy by mail or online. Please submit your Proxy far enough in
advance to be received by Shenandoah in time to be counted. If you vote online or by mail but
appear at the Special Meeting in person to cast your vote, that vote will revoke your previously
submitted Proxy. You may wish to keep a copy of your Proxy for your records.
How to Vote in Person
If you would like to cast your vote in person you may do so at the Special Meeting. You
need not bring your Proxy to the Special Meeting to vote in person, and your vote cast in person
will revoke your previous vote, if any, submitted by mail or online. The Special Meeting will be
held at the Holiday Inn Roanoke-Tanglewood, 4468 Starkey Road, Roanoke, Virginia 24018, on
Thursday, December 15, 2011, at 10:00 a.m. ET.
Whether to Vote in Person
Recognizing the burden of requiring attendance at the Special Meeting, this process is
designed so that THERE WILL BE NO DISADVANTAGE FROM VOTING BY PROXY
RATHER THAN ATTENDING IN PERSON. The Policyholder Information Statement, the
Notice of Special Meeting and Vote of Members on Plan of Conversion, and the Proxy form are
designed to provide all interested Policyholders all of the information reasonably deemed
necessary to make a decision regarding how to vote and THERE IS NO PLAN TO PROVIDE
ADDITIONAL OR DIFFERENT INFORMATION TO THOSE WHO APPEAR IN PERSON.
Moreover, VOTES CAST IN PERSON WILL BE GIVEN THE SAME WEIGHT AS THOSE
SUBMITTED BY PROXY.
TERMINATION OF MEMBERSHIP INTERESTS IF
THE CONVERSION IS CONSUMMATED
In addition to the rights under their respective policies, those who purchase policies from
mutual insurance companies receive membership interests (principally, the right to elect directors
and the right to receive a proportionate share of the residual value of the company if it
liquidates). Accordingly, the Members currently have Membership Interests. However, as is
typical in the industry, Policyholders generally have provided proxies authorizing Shenandoah’s
Board of Directors to cast these votes on their behalf.
The Membership Interests would be extinguished upon the Conversion. After
consummation of the Conversion, United Prosperity would be the Company’s sole stockholder
and would have sole authority to vote for directors as well as other important matters. The
termination of Membership Interests would not increase premiums or contributions, or diminish
the guaranteed benefits, values, and rights of your Policy, with the exception of the elimination
of Members’ voting rights as a result of the Conversion and the modification of the terms of the
Participating Policies with respect to the payment of dividends, and subject to any Extension of
Moratorium on Cash Withdrawals. The newly-elected Board of Directors would determine, at
Policyholder Information Statement – Part One Page 32
its sole discretion, if and when to pay dividends to holders of any Participating Policy.
Policyholders would not automatically share in the divisible surplus of the Company, and holders
of any Participating Policy would receive dividends as frequently or infrequently as the newly-
elected Board of Directors chooses. Although holders of Participating Policies would still be
eligible to receive dividends, Policyholders would not be entitled to payment out of the divisible
surplus.
Typically, policyholders of a solvent converting mutual insurance company would, in
consideration for the extinguishment of their membership interests, be entitled upon conversion
to receive compensation that may take the form of shares of stock, cash, or policy credits.
Specifically, Virginia law requires that a plan of conversion allocate and direct that the entire
stock ownership interests and other consideration to be distributed pursuant to the plan be
distributed to the policyholders. The manner in which the Plan of Conversion proposes to satisfy
this requirement is discussed below under “COMPENSATION.”
If the Conversion is not consummated, because the Members do not approve the Plan of
Conversion by the requisite vote or for some other reasons, Shenandoah will remain in
receivership and alternative rehabilitation efforts will be considered. If it were to appear to the
Commission that such further efforts to rehabilitate the Company would be useless and the
Commission therefore were to enter an order of liquidation, it is possible that Shenandoah’s
liabilities would exceed the market value of its assets, such that there would be no residual value
to distribute to Policyholders. Thus, Policyholders could receive less in liquidation than they
would receive if Members approve the Plan of Conversion, and the Conversion were
consummated.
Comparison of Your Rights Before and After Conversion
After the Conversion, if the Company were liquidated, any residual value would be
distributed solely to the stockholder (i.e., United Prosperity) of converted Shenandoah, a Stock
Insurance Company. Below is a comparison of your rights before and after the Conversion
proposed by the Plan of Conversion:
Rights Before Conversion After Conversion
Policy Provisions In effect. In effect.
Policy Dividends Prior to receivership, policy Would be payable as declared by the
(for dividend-paying policies) dividends were payable as newly formed Board of Directors with
declared by the Board of United Prosperity representatives.
Directors.
Financial Rights Policyholders have the right Policyholders would not have any right to
(Other than Policy) to participate in the share in any distribution of residual value
distribution of any residual if the Company is liquidated. Any
value in the event that residual value would be distributed to
Shenandoah is liquidated. Shenandoah’s stockholders (i.e., United
Prosperity).
Policyholder Information Statement – Part One Page 33
Right to Vote Members may vote at annual Policyholders would not have the right to
meetings or special meetings on vote on any matters unless they become
certain matters, such as the stockholders of Shenandoah’s sole
election of directors or whether to shareholder (i.e., United Prosperity), in
approve the Plan of Conversion, which case they would have the voting
and other matters. rights of stockholders of the sole
shareholder (United Prosperity).
COMPENSATION
The Commission found Shenandoah Solvent in its Rehabilitation Approval Order, upon
reviewing the most recent financial data with approximately $14,099,000 in statutory surplus as
of August 31, 2011, partly a result of the benefit of the section 38.2-1400 of the Virginia Code
exemptions. Per the terms of the Agreement, Eligible Policyholders will receive a distribution
equal in the aggregate to the year-end 2010 statutory surplus of the Company after certain
adjustments. Shenandoah’s statutory surplus as of December 31, 2010, was $15,004,259.00.
While the adjustments will be made following the Plan’s commencement, it is likely that a
distribution will not be made after the adjustments have been accounted for, including the
deduction of the tax effect of the Surplus Note repurchase and the $10 million subtraction
accounted for in the Agreement.
The evidence adduced at the Rehabilitation Hearing established that the Company was
Insolvent as of the date of receivership so that there was no equity value owned by Policyholders
at the beginning of receivership. If a distribution is made, it is expected to be minimal.
The description below summarizes the mechanism established in Section 2.4 of the
Agreement, which should be reviewed carefully to understand the formula fully.
Calculation of the Adjusted Surplus Amount
The “Initial Surplus Amount” would be determined from the annual audited statutory
statements of the Company filed with the Bureau of Insurance, and any amendments, corrections,
or revisions thereto, as of and for the year ended December 31, 2010. The “Adjusted Surplus
Amount” would be calculated as follows:
Policyholder Information Statement – Part One Page 34
(1) The Initial Surplus Amount;
Minus
(2) Any amounts required to be reserved as a result of any unrecorded audit
differences of the Company identified by the Company’s auditors that, if
recorded, would reduce the Company’s statutory surplus;
Minus
(3) $10,000,000; and
Minus
(4) (a) The cost paid (or payable) to purchase or repurchase and cancel the
Surplus Notes (including the tax cost of doing so, net of any related tax
benefits, based on a 35 percent tax rate), if the Surplus Notes are
purchased or repurchased and cancelled prior to the Closing Date; or
(b) the outstanding principal amount of the Surplus Notes and accrued
unpaid interest thereon, if the Surplus Notes are not purchased or
repurchased and cancelled, and remains outstanding, as of the Closing
Date. In no event, however, would this deduction exceed the amount by
which the Company’s liability on account of the Surplus Notes would be
reduced as a result of such purchase or repurchase and cancellation.
Upon the Closing, the Company would deposit an amount equal to the Adjusted Surplus
Amount, if positive, into the Policyholder Account. The Company will invest the funds held in
the Policyholder Account on terms consistent with the investment guidelines of the Company
applicable to the Company’s investment portfolio. As of the Final Surplus Determination Date,
the Adjusted Surplus Amount would be further adjusted to arrive at the “Final Surplus
Amount.” Table 1 illustrates this calculation of the Adjusted Surplus Amount.
TABLE 1. Adjusted Surplus Amount
Surplus Notes
ADJUSTED Statutory Adjustment (tax-
SURPLUS surplus as of inclusive cost to $10 million
AMOUNT = 12/31/2010 - purchase, or -
principal amount)
Calculation of the Final Surplus Amount for Distribution to Eligible Policyholders
Policyholder Information Statement – Part One Page 35
As of the Final Surplus Determination Date, the Final Surplus Amount would be
calculated as:
(1) The Adjusted Surplus Amount deposited into the Policyholder Account;
Plus or Minus
(2) Any investment gain (added) or loss (subtracted), as the case may be, on
the assets held in the Policyholder Account;
Minus
(3) (x) Any payments made by the Company and (y) any amount by which the
value of the Company has diminished, but for which the Company has
made no payment, as result of a breach by the Company or the Deputy
Receiver of any of the representations and warranties of the Company
made in the Agreement or the failure of the Company or the Deputy
Receiver to perform any covenant made in the Agreement;
Plus
(4) Any payments made by the Company as a result of any breach by United
Prosperity of any of the representations and warranties of United
Prosperity made in the Agreement or the failure of United Prosperity to
perform any covenant made in the Agreement;
Minus
(5) The amount of any unrecorded audit differences of the Company
identified by the Company’s auditors that, if recorded, would reduce the
Company’s statutory surplus and that were not taken into account in
determining the Adjusted Surplus Amount;
Take Into Account, and Adjust For
(6) (a) The net after-tax cost paid (or payable) to purchase or repurchase and
cancel the Surplus Notes (including the tax cost of doing so, net of any
related tax benefits, based on a 35 percent tax rate), if the Surplus Notes
are purchased or repurchased and cancelled after the Closing Date; or (b)
the reduction, if any, since the Closing Date in the outstanding principal
amount of the Surplus Notes (plus the amount of accrued unpaid interest
thereon), if the Surplus Notes have not been purchased or repurchased and
cancelled, and remains outstanding, as of the Final Surplus Determination
Date. In no event, however, would this deduction exceed the amount by
which the Company’s liability on account of the Surplus Notes would be
reduced as a result of such purchase or repurchase and cancellation;
Policyholder Information Statement – Part One Page 36
Minus
(7) All reasonably incurred, and projected to be incurred, costs of
administering the Policyholder Account, including the cost of preparing
and delivering any payments to Eligible Policyholders; and
Minus
(8) The amount of any tax imposed (based on the actual corporate tax rate that
applies to the repurchase of the Surplus Notes) on the earnings or gain on
the assets held in the Policyholder Account.
Table 2 illustrates the calculation of the Final Surplus Amount.
TABLE 2. Final Surplus Amount
United Prosperity
Net gain Payments All Tax imposed
or loss on for Payments Change in reasonable on earnings
Final Adjusted invested Company for Surplus Notes costs to or gain on
Surplus Surplus assets in or Deputy Prosperity Adjustment administer assets held in
Amount = Amount + Policy - - Receiver + breach +/- - Policy - - Policy-
holder breach holder holder
Account Account Account
Payments to be Distributed to Eligible Policyholders
If the Final Surplus Amount is positive, each Eligible Policyholder would receive a
distribution.
The amount paid to any particular Eligible Policyholder would be equal to:
(1) The Final Surplus Amount;
Divided by
(2) The total number of Policies in force as of the Closing Date;
Multiplied by
(3) The number of Policies the particular Eligible Policyholder had in force as
of the Closing Date (for this purpose, Policies with multiple named
Policyholders would be treated as fractional Policies – thus, for example,
where a Policy has two named Policyholders, each of them would be
Policyholder Information Statement – Part One Page 37
credited with half of that Policy for purposes of determining the number of
Policies each Eligible Policyholder had in force at Closing).
The number of Policies you have in force as of the Closing Date will depend on whether
or not you keep those Policies in force. Table 3 illustrates the final payments to be distributed to
Eligible Policyholders.
Table 3. Amount Paid to Each Eligible Policyholder
Number of
Amount paid to Final Surplus Total number of policies
each Policyholder = Amount (Table 3) ÷ policies in force × Policyholder had
at Closing in force at
Closing
DESCRIPTION OF THE SHARES
Converted Shenandoah would initially issue the Shares. As the sole holder of the Shares,
United Prosperity would be entitled to such dividends as might be declared by the Board of
Directors out of funds legally available for that purpose after payment of dividends on any
preferred stock outstanding (the Company would not issue any shares of preferred stock pursuant
to the Plan of Conversion). Subject to the voting restrictions described below, holders of the
Shares (i.e., United Prosperity) would be entitled to one vote for each of the Shares on all matters
upon which the Company’s stockholders are entitled to vote.
POTENTIAL WITHDRAWAL OR AMENDMENT OF THE REHABILITATION PLAN,
AND POTENTIAL AMENDMENT OF OTHER GOVERNING DOCUMENTS
The Deputy Receiver may withdraw the Rehabilitation Plan at any time before the
Closing Date. The Deputy Receiver or the Commission may also amend the Rehabilitation Plan
at any time prior to Closing, subject to the Commission’s approval. After the Closing, the
Company’s Charter and Bylaws, and United Prosperity’s Articles of Incorporation and Bylaws,
could be amended in accordance with their terms and with Applicable Law.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
NOTHING HEREIN IS INTENDED AS, NOR SHALL CONSTITUTE, TAX OR LEGAL
ADVICE. IT IS STRONGLY RECOMMENDED THAT POLICYHOLDERS CONCERNED
ABOUT POSSIBLE TAX CONSEQUENCES CONSULT THEIR TAX ADVISORS ABOUT
SUCH MATTERS. THE DISCUSSION BELOW IS PROVIDED ONLY AS GENERAL
INFORMATION.
Policyholder Information Statement – Part One Page 38
Consummation of the Rehabilitation Plan would not cause your Policy to be considered a
newly-issued policy for tax purposes. As a result, the tax rules that currently determine whether
your Policy is treated as life insurance, an annuity, or a modified endowment contract, or
whether Policy loan interest is deductible, would continue to apply. Thus, if your Policy was
issued before changes in the tax treatment of newly-issued Policies of the same type as your
Policy, treatment of your Policy under prior law would not be affected adversely by the
Rehabilitation Plan.
Members Receiving Cash
As previously discussed, it is unlikely that Members will receive a cash distribution.
Should Members receive a cash distribution, the full amount of the cash would generally be
taxed as a long-term capital gain for the year it is received. Individuals who are United States
citizens or residents should generally report the amount of any compensation received in
connection with the Conversion on Schedule D of IRS Form 1040 as a gain from “Shenandoah
Life Insurance Company membership/conversion.” Shenandoah would report the cash payment
to the IRS in a manner consistent with that treatment.
Note: You should consult a qualified tax advisor to determine the federal, state, and
local tax consequences of the Rehabilitation Plan in your particular situation. In addition,
your advisor should advise you of any changes in tax laws or regulations that might take effect
after the date of this Policyholder Information Statement Part One.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in the Policyholder Information Statement, Parts One
and Two, are not historical facts but rather are forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties, and other factors, which may cause
the actual results to differ materially from the forward-looking statements. Words such as
“anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,”
“might,” “will,” “would,” “continue,” “project,” and similar expressions, as well as statements in
the future tense, identify forward-looking statements.
These forward-looking statements are not guarantees of the Company’s future
performance and are subject to risks and uncertainties that could cause the Company’s actual
results after consummation of the proposed Conversion, Sale, and Acquisition to differ
materially from the results contemplated by the forward-looking statements. These risks and
uncertainties include, but are not limited to:
Shenandoah’s ability to consummate the Conversion, Sale, and
Acquisition (including obtaining necessary Member approval for the Plan
of Conversion) and realize the anticipated benefits thereof;
The validity of assumptions and methodologies used by the Deputy
Receiver and the Receivership Team in analyzing the proposed
Conversion, Sale, and Acquisition and in predicting the Company’s
Policyholder Information Statement – Part One Page 39
further capital and liquidity needs and the inability to predict with
certainty any future scenarios;
Uncertainties relating to rating agencies’ future ratings of the Company;
Uncertainties in the Company’s ability to raise equity capital or other
sources of funding to support future capital and liquidity needs;
Uncertainties relating to future actions that could be taken by creditors,
regulators, and other third parties relating to the Company’s ratings and
financial condition;
Risks arising from the Company’s investment strategy, including risks
related to the market value of its investments, fluctuations in interest rates,
and the Company’s need for liquidity;
Developments in global financial markets that could affect the Company’s
investment portfolio and fee income;
Subjectivity in determining the amount of allowances and impairments
taken on certain of the Company’s investments;
Changes in the rate of customer withdrawals;
Impairments of other financial institutions;
Terrorist attacks on the United States and the impact of such attacks on the
economy in general and particularly on the Company’s business;
Loss of the services of any of the Company’s key employees;
A computer system failure or security breach;
The competitive environment in which the Company operates and
associated pricing pressures;
Tax changes that could affect the Company’s effective tax rate or that
could decrease the demand for Shenandoah products, including proposals
that would affect the taxation of life insurance companies and that would
diminish the tax-favored treatment of certain Shenandoah products; and
Changes in accounting principles.
The effect of these factors and potential future events is difficult to predict. New factors
emerge from time to time and the Deputy Receiver and her staff cannot assess the financial
impact of any such factor on the Company’s business or the extent to which any factor, or
Policyholder Information Statement – Part One Page 40
combination of factors, could cause results to differ materially from those contained in any
forward-looking statement. Any forward-looking statement speaks only as of the date of the
Policyholder Information Statement, Parts One and Two, and neither the Deputy Receiver nor
any of her representatives undertakes any obligation to update any forward-looking statements to
reflect events or circumstances after the date of such statement, or the occurrence of
unanticipated events.
Policyholder Information Statement – Part One Page 41
GLOSSARY
The following are brief explanations of certain terms used in the Policyholder
Information Statement, Parts One and Two.
Acquisition: United Prosperity’s proposed acquisition of Shenandoah, upon consummation of
the Sale at Closing, pursuant to the Rehabilitation Plan.
Action: Any pending or threatened civil, criminal, regulatory or administrative suits, actions,
proceedings, claims, controversies, assessments, litigations, arbitrations, mediations, audits,
inquiries, investigations, hearings, charges, complaints, demands, notices or Governmental
Authority investigations (whether at law or equity, before or by any Governmental Authority or
before any arbitrator), excluding ordinary course claims for Policy or contract benefits made with
respect to Policies or contracts issued by the Company for which a reserve has been established.
Affiliate: As defined by section 38.2-1322 of the Virginia Code, the “Affiliate” of a specific
Person or a Person “affiliated” with a specific Person means a Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under common control with
the Person specified.
Agreement: The Stock Purchase Agreement between the Deputy Receiver, Shenandoah, and
United Prosperity dated May 4, 2011.
Applicable Law: All laws, published rules, statutes, regulations, policies and codes and
judgments, injunctions, orders, decrees, licenses, permits, and all other requirements of
Governmental Authorities applicable to the Person, place, and situation in question.
Application: The Deputy Receiver’s application, filed on June 24, 2011, for the Commission’s
entry of: (A) an order, final for purposes of Commission Rules 8:9 and 8:10, approving the
Rehabilitation Plan (including the Plan of Conversion), approving the Form A, and granting
related relief; and (B) an order, final for purposes of Commission Rules 8:9 and 8:10,
terminating the rehabilitation proceeding upon satisfaction of the conditions set forth in section
38.2-1519(A) of the Virginia Code.
Bar Date: The deadline implemented by directive of the Deputy Receiver (subject to specified
exceptions) for Members, insureds, Policyholders, subscribers, and creditors to file claims
arising against Shenandoah before the date of the Rehabilitation Approval Order, such filing
period to be no less than ninety (90) days, nor more than three hundred sixty-five (365) days,
following the date of the Deputy Receiver’s issuance of the directive.
Black Diamond: Black Diamond Capital Partners I, L.P., which together with Reservoir
manages the investment funds that own PLIG, which in turn owns United Prosperity.
Board of Directors or Board: The Company’s board of directors.
Burdensome Condition: The existence of: (i) a Company Regulatory Agreement; or (ii) any
restraint, condition, restriction, limitation, requirement, or restrictive or punitive measure
Policyholder Information Statement – Part One Page 42
(including dividend restrictions and capital requirements) applicable to the Company or any of
its Subsidiaries, in either case of clauses (i) or (ii), imposed by the Commission, any of its
divisions, including the Bureau of Insurance, or any other Governmental Authority as a result of
the Company having been in receivership, emerging therefrom or otherwise, other than as
specifically contemplated by the Rehabilitation Plan.
Bureau of Insurance: The Commission’s Bureau of Insurance.
Business Day: Any day that is not a Saturday, or Sunday, or other day on which commercial
banks in Virginia, Texas, Delaware, or New York are required or authorized to be closed.
Bylaws: The Company’s bylaws.
Charter: The Company’s charter.
Closing: The closing of the Conversion, the Sale, and the other transactions contemplated by the
Stock Purchase Agreement.
Closing Date: The date on which the Closing will take place.
Commission: The State Corporation Commission of the Commonwealth of Virginia.
Commissioner: The Commissioner of Insurance of the Commonwealth of Virginia.
Company: Shenandoah Life Insurance Company.
Company Material Adverse Effect: A material adverse effect (A) on the ability of the Deputy
Receiver or the Company to timely consummate the transactions contemplated by the Agreement
and the Plan of Rehabilitation or to perform its respective obligations under the Agreement and
the Plan of Rehabilitation; or (B) on the business, assets, properties, operations, or condition
(financial or otherwise) of the Company and its Subsidiaries, taken as a whole; provided, that
(with respect to clause (B) of this definition) any adverse change or effect arising out of, or
resulting from, or attributable to, the following shall be excluded from any determination of
Company Material Adverse Effect: (i) the execution or announcement of, or the consummation
of, the transactions contemplated by the Agreement and the Plan of Rehabilitation (including the
adverse effect of any loss or threatened loss of, or disruption or threatened disruption in, any
customer, reinsurer, policyholder, supplier, professional association and/or vendor relationships
or loss of personnel resulting from such execution, announcement, or consummation); or
(ii) actions taken or omitted by the Deputy Receiver or the Company at the direction of, or with
the prior written consent of, United Prosperity. For the purposes of clause (B) of the foregoing,
without limiting the exceptions set forth in clauses (i) and (ii) above, a Company Material
Adverse Effect shall (a) be conclusively presumed to have occurred with respect to the Company
and any adverse change or effect that results, or could reasonably be expected to result, in a
reduction of more than $1,000,000 in the surplus of the Company, calculated in accordance with
SAP at and as of December 31, 2009, (b) be conclusively presumed not to have occurred with
respect to the Company and any adverse change or effect that does not result, or reasonably
Policyholder Information Statement – Part One Page 43
could not be expected to result, in a reduction of more than $1,000,000 in the surplus of the
Company, calculated in accordance with SAP at and as of December 31, 2009.
Company Regulatory Agreement: Other than generally applicable requirements of Applicable
Law, and other than in connection with the Receivership Order and other related orders issued by
the Commission, any cease and desist or other order issued by any Governmental Authority
applicable to the Company or any of its Subsidiaries, or any written agreement, consent
agreement, memorandum of understanding of the Company or any of its Subsidiaries with any
Governmental Authority, or any commitment letter or similar written undertaking sent to any
Governmental Authority by the Company or any of its Subsidiaries, or any order, directive, or
supervisory letter of any Governmental Authority applicable to the Company or any of its
Subsidiaries, or any board resolutions adopted at the request of any Governmental Authority by
the Company or any of its Subsidiaries, that: (i) requires any investments of the Company or any
of its Subsidiaries to be treated as non-admitted assets; (ii) requires divestiture of any
investments of the Company or any of its Subsidiaries; (iii) in any manner imposes any
requirements on the Company in respect of risk-based capital requirements that add to or
otherwise modify the risk-based capital requirements imposed under the Insurance Laws; (iv) in
any manner relates to the ability of the Company or any of its Subsidiaries to pay or declare
dividends, distributions, or other payments to security holders or policyholders of the Company
or any of its Subsidiaries, respectively; or (v) restricts in any material respect the conduct of the
business, credit policies or the Company’s management or any of its Subsidiaries.
Conversion: The conversion of Shenandoah from a mutual insurance company to a Stock
Insurance Company pursuant to the Plan of Conversion and section 38.2-1005.1 of the Virginia
Code.
Deputy Receiver: As of the date of the Agreement, Jacqueline K. Cunningham, Commissioner
of Insurance for the Bureau of Insurance, State Corporation Commission for the Commonwealth
of Virginia, who was appointed by the Commission to serve as Deputy Receiver of Shenandoah
and thereby placed in charge of its rehabilitation. Commissioner Cunningham was preceded in
those offices by Alfred W. Gross, who retired effective December 31, 2010.
Eligible Policyholder: A Policyholder of the Company who held an in-force Policy or Policies
on the Closing Date. Whether a Policy is in force is determined based on the Company’s
records. In general, a Policy is in force on a given day if it has been issued and is in effect. A
Policy that is in force will remain in force as long as it has not matured (by death or otherwise),
been surrendered, or otherwise terminated. A Policy is not considered to have matured by death
until written notice of the insured’s death has been received in Shenandoah’s administrative
office. If a Policy has lapsed for nonpayment of premiums, it will generally remain in force
during any applicable grace period.
Extension of Moratorium on Cash Withdrawals: An extension of the Moratorium on Cash
Withdrawals (for no more than twelve months from the date of Closing), to be exercised, at
United Prosperity’s option, no later than ninety (90) days from the date of the Members’ vote on
the Plan of Conversion.
Fifth Directive: The Deputy Receiver’s Fifth Directive Regarding Declaration of Dividends.
Policyholder Information Statement – Part One Page 44
Final Order Terminating Rehabilitation Proceeding: The Order Terminating Rehabilitation
Proceeding once it has become a final, non-appealable and preclusive order under all Applicable
Law.
Final Rehabilitation Approval Order: The Rehabilitation Approval Order once it has become a
final, non-appealable and preclusive order under all Applicable Law.
Final Surplus Determination Date: The date as of which the amount to be distributed to
Eligible Policyholders is finally calculated, to be the later to occur of (x) the first anniversary of
the Closing Date, and (y) the date of termination of any Extension of Moratorium on Cash
Withdrawals pursuant to the Plan of Rehabilitation.
Form A Application for Approval of the Acquisition of Control (“Form A”): Refers to the
application that United Prosperity is required to file for the Commission’s approval of United
Prosperity’s proposed acquisition of control over Shenandoah, pursuant to Article 5 of Chapter
13 of the Virginia Insurance Code (VA. CODE ANN. § 38.2-1322, et seq.).
GAAP: Generally accepted accounting principles, which is an accounting method used by
businesses other than insurance companies, under which financial results are reported on a Going
Concern basis rather than on a liquidation basis.
Going Concern: The continuing operations of a company as a business.
Governmental Authority: Any United States federal, state, or local, or any supra-national or
non-U.S. governmental, quasi-governmental, regulatory, or administrative authority,
instrumentality, agency, body, or commission, self-regulatory organization, or any court,
tribunal, or judicial or arbitral body (including any branch, department, agency, or political
subdivision thereof).
Hardship Request Procedure: Procedure, established by the Second Directive, for hardship
exemptions from the Moratorium on Cash Withdrawals.
Insolvent: Pursuant to section 38.2-1501 of the Virginia Code, the condition of an insurer that
(i) has liabilities in excess of assets, or (ii) is unable to pay its obligations as they become due in
the usual course of business.
Insurance Holding Company System: Upon consummation of the proposed Conversion, Sale,
and Acquisition on the Closing Date, United Prosperity, Shenandoah, and Shenandoah’s
Subsidiaries would comprise an Insurance Holding Company System, which section 38.2-1322
of the Virginia Code defines as “two or more affiliated persons, one or more of which is a person
licensed pursuant to [the Virginia Insurance Code].” Specifically, United Prosperity,
Shenandoah, and Shenandoah’s Subsidiaries would be Affiliates, and Shenandoah would be a
Subsidiary of United Prosperity.
Insurance Laws: All Applicable Law applicable to the business of insurance and the regulation
of insurance holding companies, whether domestic or foreign, and all applicable orders and
Policyholder Information Statement – Part One Page 45
directives of Governmental Authorities and market conduct recommendations resulting from
market conduct examinations of insurance regulators.
IRS: The Internal Revenue Service.
Liquidation Basis Accounting: A basis of accounting under which assets are recorded at their
net realizable value and liabilities are recorded at their estimated settlement amounts. Under
Liquidation Basis Accounting, no value is assigned to certain intangible assets such as good will,
Going Concern value, or agency organization, the value of which would be lost in liquidation.
Liquidation Basis Accounting also decreases a company’s value by, among other things, the
estimated expenses that would be incurred pending liquidation and commissions that would be
payable upon the liquidation of investments.
Liquidation Value: The value of an insurance company determined by applying Liquidation
Basis Accounting.
Member: A Qualified Policyholder (see definition of Qualified Policyholder, below).
Membership Interests: A Person’s rights as a Member of Shenandoah. These include all rights
arising prior to the Conversion under Shenandoah’s Charter or Bylaws or otherwise by law (i.e.,
principally, the right to elect directors and the right to receive a proportionate share of the
residual value of the company if it liquidates). The term “Membership Interests” does not
include rights expressly conferred on Policyholders by their Shenandoah Policies, such as the
right to receive declared Policy dividends. If the Conversion is consummated, all Membership
Interests would be extinguished upon the Conversion.
Moratorium on Cash Withdrawals: The Deputy Receiver’s imposition, as directed on February
12, 2009, by the Order Appointing Deputy Receiver, of a moratorium on policy loans (other than
automatic loans), payment of cash or surrender values, surrenders, fund transfers, cash-outs, and
similar payments and certain contract changes or conversions pending further orders, subject to
adjustment as and when the Deputy Receiver finds that circumstances are appropriate. See also
definition of “Extension of Moratorium on Cash Withdrawals.”
Moratorium on Declaration of Dividends: The Deputy Receiver’s imposition, by the Fifth
Directive, of an indefinite suspension on the declaration of any future dividends, effective
December 31, 2009.
Moratorium on Dividend Payments: The Deputy Receiver’s imposition, by the Third
Directive, of an indefinite suspension, effective May 20, 2009, on the payment of dividends
declared by the Board of Directors on July 25, 2008, that remain currently unpaid, and all
interest accrued thereon, to holders of Participating Policies in 2009.
Moratorium on Payment of Subordinate Claims: The Deputy Receiver’s imposition, pursuant
to the authority vested by the Receivership Order and the Order Appointing Deputy Receiver, of
a moratorium on the payment of any and all claims subordinate in priority to policy claims.
NAIC: The National Association of Insurance Commissioners.
Policyholder Information Statement – Part One Page 46
Oliver Wyman: Oliver Wyman Actuarial Consulting, Inc.
Order Appointing Deputy Receiver: The Order Appointing Deputy Receiver for Conservation
and Rehabilitation, dated February 12, 2009, which appointed Alfred W. Gross as Deputy
Receiver of Shenandoah. Effective December 31, 2010, Mr. Gross retired from his position as
the Commissioner of the Bureau of Insurance and, therefore, as Deputy Receiver. Effective
January 1, 2011, Jacqueline K. Cunningham was appointed the Bureau of Insurance’s new
Commissioner, and by Commission order dated January 10, 2011, assumed the responsibilities
of Deputy Receiver of Shenandoah effective January 1, 2011.
Order Terminating Rehabilitation Proceeding: The order contemplated in section 38.2-1519 of
the Virginia Code, expected to be obtained following the Closing Date and no later than seven
(7) days following the expiration of any Moratorium on Cash Withdrawals by which the
Commission would terminate the rehabilitation proceeding and permit Shenandoah to resume
possession of its property and the management and conduct of its affairs, and not containing any
provisions inconsistent with the transactions as contemplated by the Agreement, determined on
an economic basis.
Other Than Temporarily Impaired (“OTTI”): A term used by the Financial Accounting
Standards Board (“FASB”) and Securities and Exchange Commission (“SEC”), denoting when a
loss in market value of an investment in debt or equity securities must be recognized on a
company’s financial statements.
Participating Policy: A Policy which is eligible to receive dividends if so declared by the Board
of Directors. After Conversion, Policyholders would not automatically share in the divisible
surplus of the Company, and holders of any Participating Policy would receive dividends as
frequently or infrequently as the newly-elected Board of Directors chooses.
Person: An individual, corporation, partnership (general or limited), limited liability company,
association, trust, or other entity or organization, including any Governmental Authority.
Plan of Conversion: The plan of Conversion of the Company to be filed, pursuant to section
38.2-1005.1 of the Virginia Code, with the Commission as part of the Rehabilitation Plan.
PLIG: Prosperity Life Insurance Group, LLC, a Delaware limited liability corporation which
wholly owns United Prosperity and is itself owned by investment funds managed by Reservoir
and Black Diamond.
Policy: An individual life insurance policy, individual health insurance policy, individual
annuity, or other individual policy of insurance issued by Shenandoah, or a group life insurance
policy, group health insurance policy, group annuity, or other form of group insurance policy
issued by Shenandoah.
Policyholder: The owner of an individual Policy or the employer or other holder of a group
Policy.
Policyholder Information Statement – Part One Page 47
Policyholder Account: A special account to be used, into which the Adjusted Surplus Amount,
if positive, will be deposited on the Closing Date if the Conversion is consummated, and the
funds in which will be invested on terms consistent with the investment guidelines of the
Company applicable to the Company’s investment portfolio. See discussion under
“COMPENSATION” in the Policyholder Information Statement Part One.
Purchase Price: The amount to be paid by United Prosperity for the Shares, the United
Prosperity Surplus Note, and to recapitalize the Company.
Qualified Policyholder: Pursuant to Shenandoah’s Charter: (1) a Policyholder, (2) whose
Policy had been in force for at least one year preceding January 1 of the year in which the
Special Meeting is held (i.e., whose Policy has been in force since January 1, 2010, or earlier);
and (3) who is at least eighteen years old, if a natural person. A Qualified Policyholder, also
referred to as a Member, is entitled to vote at the Special Meeting.
RBC: See definition of Risk-Based Capital.
Receivership Manager: Donald C. Beatty, who was appointed to manage the efforts of the
Deputy Receiver to stabilize the financial condition of Shenandoah.
Receivership Order: The Final Order Appointing Receiver for Rehabilitation or Liquidation,
entered on February 12, 2009, by the Circuit Court for the City of Richmond pursuant to Title
38.2, Chapters 10 and 15 of the Virginia Code, appointing the Commission as Receiver of
Shenandoah.
Receivership Team: Collectively, the Deputy Receiver, the Receivership Manager, Cantilo &
Bennett L.L.P., D’Antonio Technologies, L.L.C., Rector & Associates, Inc., Scribner, Hall &
Thompson, LLP, The Nolte Law Firm, P.C., Thompson McMullan, and Troutman Sanders LLP.
Rehabilitation Approval Order: The order, a copy of which is attached hereto as Exhibit A, that
the Commission entered after proper notice and an opportunity to be heard by all interested
parties: (i) approving the Rehabilitation Plan pursuant to section 38.2-1518 of the Virginia
Code; (ii) approving the Plan of Conversion, subject to the required vote of the Members,
pursuant to section 38.2-1005.1 of the Virginia Code; (iii) approving the Form A pursuant to
Article 5 of Chapter 13 of the Virginia Insurance Code (VA. CODE ANN. § 38.2-1322, et seq.);
(iv) finding for purposes of section 38.2-1519(A) of the Virginia Code that completion of the
Rehabilitation Plan would satisfy the requirements for terminating the rehabilitation proceedings;
(v) directing the Deputy Receiver to notify the Commission when the conditions for terminating
the rehabilitation proceeding will have been satisfied; and (vi) granting related relief requested in
the Application.
Rehabilitation Plan: The plan to rehabilitate Shenandoah so that it can emerge from
receivership, including the Plan of Conversion.
Policyholder Information Statement – Part One Page 48
Requisite Regulatory Approvals: All approvals of Governmental Authorities, including the
filing of applications, notices and forms with, and the obtaining of approvals from, all
Governmental Authorities regulating the business of insurance under the Insurance Laws,
pursuant to the Insurance Laws, and the expiration of any applicable waiting periods in respect
thereof, required to consummate the transactions contemplated by the Agreement and the Plan of
Rehabilitation.
Reservoir: Reservoir Capital Group, L.L.C., which together with Black Diamond manages the
investment funds that own PLIG, which in turn owns United Prosperity.
Risk-Based Capital (“RBC”): The capital that an insurance company maintains to protect
against the inherent risks in the insurer’s operations (e.g., underwriting risk, credit risk, asset
depreciation risk, off-balance-sheet risk).
Sale: The sale of the Shares to United Prosperity.
SAP: Statutory accounting principles, which are those accounting principles that insurance
companies are required or permitted by state law and regulations to use in reporting their
financial statements to state insurance departments. Such principles differ from GAAP in some
important respects and generally reflect a liquidation basis rather than a going concern basis.
Second Directive: The Deputy Receiver’s Second Directive Adopting Receivership Appeal
Procedure and Hardship Request Procedure, effective February 19, 2009.
Shares: 1,000 shares of newly created common stock, par value $.01 per share, to be issued by
the Company effective upon the Conversion, representing all of the issued and outstanding
shares of capital stock of the Company.
Solvent: Not Insolvent (see definition of Insolvent).
Special Meeting: A special meeting of Members, to be held at 10:00 a.m. ET, on December 15,
2011, at the Holiday Inn Roanoke-Tanglewood, 4468 Starkey Road, Roanoke, Virginia 24018,
for purposes of a vote of the Members on the Plan of Conversion.
Stock Insurance Company: An insurance company organized and owned by stockholders, as
distinguished from a mutual insurance company, which is owned by policyholders/members.
Subsidiary: As defined by section 38.2-1322 of the Virginia Code, “‘Subsidiary’ of a specified
Person means an affiliate directly or indirectly controlled by that Person through one or more
intermediaries.”
Surplus Notes: The surplus notes that were issued in the initial aggregate amount of $20 million
pursuant to that certain Indenture, dated as of September 15, 2004, by and between Shenandoah,
as issuer, and Wilmington Trust Company, as surplus note trustee.
Policyholder Information Statement – Part One Page 49
TAG Proxy Services: An unaffiliated third party retained by the Deputy Receiver to tabulate the
proxy voting. TAG Proxy Services is located at P.O. Box 6500, Carlstadt, New Jersey 07072-
0500.
Third Directive: The Third Directive Placing Moratorium on Payment of Dividends.
United Prosperity: United Prosperity Life Insurance Company, an Arizona stock life and
disability insurance company.
United Prosperity Surplus Note: A surplus note in the amount of $27,500,000 to be issued by
the Company to United Prosperity in exchange for part of the Purchase Price.
Policyholder Information Statement – Part One Page 50