In the Matter of the Rehabilitation Case No. 10 CV 1576

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1 STATE OF WISCONSIN CIRCIDT COURT DANE COUNTY SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION In the Matter of the Rehabilitation of: Case No. 10 CV 1576 AFFIDAVIT OF ANDREW STUEHRK IN SUPPORT OF ALL STUDENT LOAN AND LLOYDS TSB BANK pic's MOTION TO MODIFY TEMPORARY INJUNCTION AND TO INTERVENE State of Connecticut ) ) ss County of Litchfield ) I, Andrew Stuehrk, being of lawful age, competent to testify, and first duly sworn upon my oath, state, based upon my own personal knowledge, as follows: I am currently a member of Barbagallo & Stuehrk, LLC, a limited liability corporation that renders services to solvent and insolvent insurance and reinsurance entities, guaranty funds, liquidators, and various other insurance related entities. My Curriculum Vitae is attached hereto as Exhibit A. 2. I was formerly a Director of Insurance and Reinsurance at Navigant Consulting, Inc. ("Navigant") from 2006 to 2009, a publicly held consulting company, where my responsibilities include being the lead on reinsurance operational reviews of insurance and reinsurance companies with a emphasis on troubled or insolvent companies. While at Navigant, I worked as retained as a consultant by the New York Liquidation Bureau in regard to troubled insurance companies, including Midland Insurance Company in Liquidation and Union Indemnity Insurance Company in Liquidation. 3. From , I worked at Kemper Insurance Company as Vice-President of Reinsurance after it was placed in run-off because of its troubled financial position. From 2003

2 - 2004, I held a similar position at The Home Insurance Company in liquidation. From , I was Acting Director of Reinsurance in treaty underwriting department at Republic Western Insurance Company. Prior thereto, from , I was Vice President, Technical Services/Commutations at Transit Casualty Company in Liquidation, where I was in charge of preparing and finalizing the commutations for the national and international reinsurance book of business of Transit, one of the largest insurance insolvencies in this country's history. My C.V. contains my employment history prior thereto. 4. I have been in the reinsurance business for twenty eight (28) years, mostly as a reinsurance manager and executive. I have rendered reinsurance consulting services to a broad number of insurance (both solvent and insolvent) and other Fortune 1000 companies. 5. I make this Affidavit in support of ALL Student Loan and Lloyds Bank's June, 2010 Motion to Modify Injunction and to Intervene. 6. From my limited review ofthe court filings in this matter, it is my understanding that, on March 21,2010, Ambac's board of directors, with the approval ofthe Commissioner of Insurance for the State of Wisconsin, voted to (1) establish the Segregated Account that is the subject of this proceeding, and (2) take the ALL policies and Lloyds Bank Surety Bond out of Ambac's General Account and transfer them to the Segregated Account, along with other liabilities. 7. Based on knowledge, information and belief, ALL Student Loan, Lloyds and others have asked for information and documentation to support the basis for many of the statements made in support of the Rehabilitator's Plan of Operation, including support for the Reinsurance Agreement, Secured Note, Collateral, and statements by the Rehabilitator that the Segregated Account was required to "have and maintain an adequate amount of capital and 2

3 surplus." I have been advised that this information was not provided to ALL Student Loan and Lloyds and I have not been able to review it. 7. I have reviewed the Verified Petition for Order of Rehabilitation of Ambac Assurance Corporation ("Ambac"). The Verified Petition, ~8(a), calls for the establishment of a Segregated Account in accordance with a "Plan of Operation." 8. I have reviewed the Plan of Operation, including Section V regarding the "Provision for Capital and Surplus," which provides that "The Segregated Account will support the liabilities allocated to it with an Aggregate Excess of Loss Reinsurance Agreement ("Reinsurance Agreement") which provides that Ambac agrees to reinsure the Segregated Account, above the amounts covered under the $2 billion Secured Note, whereby the Segregated Account may cede the losses under the Covered Policies as they come due to Ambac according to the Plan of Operation. 9. I have reviewed the Rehabilitator's Consolidated Brief in Opposition to All Motions Scheduled for Hearing on September 9, 2010 ("Consolidated Brief'). In his brief (p.18), he states that "the Segregated Account has access to all of the assets of Ambac, in pari passu with General Account policyholders, unless the payment of claims would cause Ambac's assets to fall below $100 million, a number that constitutes less than two percent of Ambac' s claim paying assets." I have further reviewed the Rehabilitator's Consolidated Briefwhere it states on page 19 that "the Segregated Account was capitalized with more than 98 percent of Ambac's current assets, despite being allocated the liabilities of less than 1,000 of the 15,000 policies. " 10. It is my understanding that the Rehabilitator asserts that Reinsurance Agreement (attaching above the Secured Note) is protecting the Segregated Account and that this 3

4 Reinsurance Agreement, along with the Secured Note, is a significant part of the basis for his assertion that the Segregated Account "has access to all of the assets of Ambac" other than the $100 million minimum statutory surplus amount. 11. It is important to note that, the reinsurer under the Reinsurance Agreement is the same company that issued the underlying insurance policies that it is now purporting to reinsure. That is, Ambac issued the policies that are now in the Segregated Account and it is now the reinsurer of those same policies. Thus, if the Reinsurance Agreement purports to affords the same protection as the policy and truly provide "access to the assets of the General Account of Ambac," it should be 100% reinsurance above the Secured Note and as solid as the insurance policy that it replaces. It does not do so by any means. 12. A Reinsurance Agreement that provides true protection to the cedent that is transferring the risks would and should have a "follow the settlements" clause that typically provides language to the following effect: All claims involving this reinsurance, when settled by the Company, shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements, and in addition thereto, in the ratio that the Reinsurer's loss payment bears to the Company's gross loss payment, its proportion of expenses, other than Company salaries and office expenses, incurred by the Company in the investigation and settlement of claims or suits and, with the prior consent of the Reinsurer to trial court proceedings, its proportion of court costs and interest on any judgment or award. (This clause is hereinafter referred to as the "Follow the Settlements" clause. 13. The Reinsurance Agreement in this case not only does not have such a "follow the settlements" clause but it has a clause that provides for somewhat the opposite, i.e. for the reinsurer to not be bound in certain instances. The Reinsurance Agreement, 1.02 has a "finite aggregate reinsurance" section that calls for payment of cash claim payments, including ALAE, loss settlements, commutations and various other payments. It also provides for payments of 4

5 secured notes but only for surplus notes issued to claimants if the cash or interest payments are authorized for payment by the Rehabilitator. However, all of these payments must be "in accordance with the Plan of Rehabilitation and not otherwise disapproved by the Rehabilitator." This would effectively allow the Rehabilitator to order the Segregated Account to cover claims by amending the Plan of Rehabilitation while at the same time refusing to cover the same claim when presented to the Reinsurer, which is actually the General Account of what was the same company. This is not the case with contracts between a policyholder and an insurance company negotiated at arm's length in the marketplace where a party may rely on the sanctity of the contract. In short, the reinsurance contract is capable of being rendered illusory, one-sided, of dubious value and may afford little actual protection for the policyholders. 14. Section 4.01 of the Reinsurance Agreement purports to be a standard "follow the fortunes" clause, which is the hallmark of a reinsurance contract. However, it has a significant caveat whereby the protection of the Segregated Account, as the cedent, under such a clause is again illusory, as it states that the reinsurer's liability follows that ofthe cedent "except as modified by the Plan of Rehabilitation" and again, no such Plan has been filed and any such plan, may be modified by the Rehabilitator and the Court at any time. The follow the fortune clause is very significant protection for the cedent under a reinsurance clause and, if it is severely undercut in this manner, the reinsurance contract as a whole is undercut. 15. In the absence of a "follow the settlements" clause and with a "follow the fortunes" clause that has a caveat that makes it effectively unenforceable, the Reinsurance Agreement is hardly the same as permitting the creditors of the Segregated Account to have "access to all of the assets of Ambac." 5

6 16. The role of any reinsurance analyst representing the cedent, in this case the Segregated Account, is to ensure that the reinsurer is fmancially viable. In this case, not only is there a pre-set "aggregate limit" on the reinsurance (the coverage cease if there is less than the $100 million surplus level), but the Reinsurance Agreement was executed after it was well established that Ambac and its parent holding company were in a "fmancially hazardous condition." Based on my knowledge experience and training, it would be unreasonable for any cedent to enter into this Reinsurance Agreement with the same company with which it had the direct policies, but with less rights. 17. The Reinsurance Agreement also has an "Insolvency Clause," which is necessary to be in a reinsurance contract if the ceding company wishes to take credit for the reinsurance on its fmancial statements. The interesting aspect of this clause in this case is that, in the event of the insolvency, under Wisconsin law, the reinsurer Ambac will have to pay the proceeds ofthe reinsurance to the Receiver to the policyholders of the Segregated Account to be divided equally, i.e. there can be no preferential treatment of one policyholder or third party claimant over another. This was also no doubt necessary under all of the reinsurance contracts that Ambac had with its reinsurers prior to the establishment ofthe Segregated Account. It is only through the Plan of Rehabilitation that there is an attempt to avoid this result. 6

7 FURTHER AFFIANT SAYETH NAUGHT. J1 ~~ ~L-jfi"b~ Andrew Stuehrk ~~ 5+ Subscribed and sworn to before me this I day of_-.:...5&-=-~.s:...e--=-i ElY1_-_i5~E=-Q.~_,2010. WITNESS my hand and official seal. ~ '-~' ypubhc k:\tccr\pwc\stuehrk.affidavit.doc RAQUELPEART Notary Public State of New York No.01PE QualHled in Nassau County My Commission Expires October 06,2012 7

8 BARBAGALLO & STUEHRK C. Andrew Stuehrk C. Andrew Stuehrk Principal Barbagallo & Stuehrk P.O. Box 311 Lakeville, CT Cell: Office: Fax: Other offices: Los Angeles & Chicago Professional History Principal, Barbagallo & Stuehrk Director, Navigant Consulting Vice President Reinsurance, Kemper Insurance Company Vice President Reinsurance Support, The Home Insurance Company (in liquidation) Acting Director of Reinsurance, Republic Western Insurance Company Vice President Commutations, Transit Casualty Company (in liquidation) Senior Analyst, San Francisco Re International Treaty Underwriter, Allstate Re Education BA - Vanderbilt University A reinsurance professional with 28 years of broad-based ceded and assumed experience with an emphasis on financial analysis, commutation negotiation and claims run-off; possesses a detailed focus to complex problem solving, as well as project management and goal-oriented tasks. An independent, creative yet objective thinker, who adapts to and affects fast changing work environments, creates systems and procedures, and demonstrates vital team leadership qualities at an executive level. Professional Experience NAVIGANT CONSULTING, INC., New York, NY Director, Insurance & Reinsurance, Key member of international consulting firm s insurance practice with client base requiring expedient resolutions to target operating and management challenges, including reinsurance recovery analysis and collection, forensic transactional auditing, litigation support, direct/assumed claims processing and legacy data IT systems integration. Expanded current engagements based on immediate, measurable results for clients, and produced new business based on deeply established industry expertise. KEMPER INSURANCE COMPANY, Long Grove, IL Vice President Reinsurance, Member of Kemper s senior executive team charged with managing daily operations of sixty-five staff members. Goals include billing and collecting $1 billion in paid recoverable annually and reporting $3.5 billion in reserves. Reduced turnaround time in noticing and invoicing, consolidated multiple-source facultative registers to increase cessions, streamlined accounting and cash input functions to eliminate manual redundancies; results include reduction in overdue receivable by 30 days. Maintained vital operating standards under a heavily audited (internal/external) environment while encouraging positive team effort from department personnel. Page 1

9 BARBAGALLO & STUEHRK C. Andrew Stuehrk HOME INSURANCE COMPANY IN LIQUIDATION, New York, NY Vice President Reinsurance/Support, Insurance Department Consultant: Overall accomplishment during two month engagement was to initiate, manage and anticipate the intrinsic data flow for the transition from the status of rehabilitation into liquidation of Home Insurance Co. Hired full time in July, 2003 as one of the Executive Team. Created infrastructure to seamlessly integrate liquidation process (Proof of Claims) into insurance & reinsurance departments. System created and functioning within three months of insolvency date, which expanded to be the central repository for managing the liquidation business of Home. REPUBLIC WESTERN INSURANCE COMPANY, Phoenix, AZ Acting Director of Reinsurance Treaty Underwriting Department, Acting Director of Reinsurance in treaty underwriting department providing objective, practical recommendations to this client s senior officers for a viable renewal book, run-off strategies, commutation negotiation and ceded reinsurance purchase alternatives for three books of business. Provided hands-on training to full-time staff within original three-month consulting engagement timeframe and extended the assignment under the directive of senior management to further coalesce assumed reinsurance accounting and claim departments activities into a proactive, achievementbased structure. TRANSIT CASUALTY COMPANY IN RECEIVERSHIP, Los Angeles, CA Vice President, Technical Services/Commutations, Department manager responsible for the implementation of Receivership s reinsurance collection policy, as well as control of all ceded ultimate liability data for over 500 reinsurers, including the underwriting and accounting reconstruction for Transit s reinsurance and retrocessional covers. Effectively negotiated ceded commutations, which maximized reinsurance asset recovery from both national and international clients; part of nine-person management team that collected over $800 million twice the anticipated result. Directed team of seven that coordinated project tasks with actuarial, claims, accounting and legal affairs departments to facilitate mediation, arbitration and litigation, resulting in successful judgments. Managed Lotus Notes Project which ensured data accuracy and enhanced management reporting; databases expedited current incurred loss positions for all non-commuted reinsurers. SAN FRANCISCO REINSURANCE COMPANY, San Francisco, CA Senior Analyst, Finance & Planning Department, Interfaced with Senior Management to consolidate multiple sources of financial and expense data for annual budget and strategic planning. Researched domestic ceding company financial data to determine acceptable client security. Developed quarterly reviews for senior management of troubled Page 2

10 BARBAGALLO & STUEHRK C. Andrew Stuehrk companies for the assumed and ceded book, as well as prepared target ultimate loss values of key commutation candidates. Deputy Underwriter/ International Evaluated and made underwriting recommendations on assumed reinsurance proposals to clients in 12 European markets with responsibility for the XOL book. ALLSTATE INSURANCE COMPANY, South Barrington, IL International Reinsurance Underwriter, Trainee in treaty underwriting department for 20 Latin American markets. Page 3

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