FACTUAL BACKGROUND

The Commissioner was appointed as conservator of respondent HIH America by this Court on March 30, 2001 and was thereafter appointed as liquidator of HIH America by this Court on May 8, 2001, pursuant to Insurance Code sections 1011 and 1016, respectively. As liquidator, the Commissioner has been directed to liquidate and wind up the business affairs of HIH America in accordance with the applicable provisions of the Insurance Code.

As part of the Commissioner's responsibilities as liquidator, Insurance Code section 1035.5, subdivision (a) provides:

Within 120 days of the issuance of an order directing the winding up and liquidation of the business of an insolvent insurer under Section 1016, the commissioner shall make application to the court for approval of a proposal to disburse the insurer's assets, from time to time as such assets become available, to the California Insurance Guarantee Association, or the California Life and Health Insurance Guarantee Association, and to any entity or person performing a similar function in another state.

On October 22, 2001, this Court approved the Commissioner's request, pursuant to Insurance Code section 1035.5, to make an initial distribution of $45,000,000 to the California Insurance Guarantee Association from a workers' compensation special deposit that the Commissioner held as trustee for payment of the Company's obligations on workers' compensation insurance transacted in this state. At the time that the Commissioner secured the approval of the Court, the Company had insufficient assets to make any additional distributions of assets to other state guaranty funds pursuant to Insurance Code section 1035.5. The Commissioner advised the Court, however, that should it become economically feasible to make additional distributions, the Commissioner would return to this Court for authorization.

Subsequently, having received substantial additional funds by virtue of a cancellation agreement with a reinsurer, the Commissioner sought approval from this Court to make an early access distribution to the California Insurance Guarantee Association and other state insurance guaranty associations or funds. On June 28, 2004, this Court approved the Commissioner's request, pursuant to Insurance Code section 1035.5, to make such a distribution in the amount of $25,000,000.

In the year 2005, as a result of several reinsurance commutations, the Commissioner received substantial additional assets and requested judicial approval to make a second early access distribution to the California Insurance Guarantee Association and other state insurance guaranty associations or funds. On December 29, 2005, this Court approved the Commissioner's request, pursuant to Insurance Code section 1035.5, to make such a distribution in the amount of approximate $85 million.

The Commissioner believes that he is in a position, and therefore now proposes, to make a third early access distribution to the California Insurance Guarantee Association and other state insurance guaranty associations or funds. Specifically, as of May 31, 2006, net available assets of the estate of HIH America totaled $87,500,845, from which the Commissioner now proposes to make a third early access distribution in the approximate amount of $51,000,000. (See attached Exhibit A ("HIH Insurance, 3rd Quarter 2006 Early Access Distribution").)

As of March 31, 2006, a total of 17 guaranty funds have paid a total of $340,856,998 in losses and loss adjustment expenses on behalf of HIH America. Specifically, the Special Fund of the Industrial Commission of Arizona has paid $782,266, the California insurance Guarantee Association has paid $310,557,420, the Colorado Insurance Guaranty Association has paid $1,111,512, the Florida Workers' Compensation Insurance Guaranty Association has paid $226,171, the Hawaii Insurance Guaranty Association has paid $1,943,010, the Illinois Insurance Guaranty Fund has paid $17,313,026, the Indiana Insurance Guaranty Association has paid $542,592, the Iowa Insurance Guaranty Association has paid $7,301, the Kentucky Insurance Guaranty Association has paid $69,150, the Michigan Property and Casualty Guaranty Association has paid $5,249,930, the Missouri Property and Casualty Insurance Guaranty Association has paid $730, the Nebraska Property and Liability Insurance Guaranty Association has paid $119,751, the Nevada Insurance Guaranty Association has paid $902,823, the Oregon Insurance Guaranty Association has paid $3,803, the Texas Property and Casualty Insurance Guaranty Association has paid $136,666, the Utah Property and Casualty Insurance Guaranty Associations has paid $49,506, and the Wisconsin Insurance Security Fund has paid $1,841,342. (See attached Exhibit B ("HIH Insurance 3rd quarter 2006 Early Access Distribution Detail of individual IGA distribution amounts").)

The Commissioner's proposal with respect to HIH America is to distribute and pay 81.6495 percent of the paid losses (including loss adjustment expenses) through March 31, 2006 of each of the above-referenced guaranty funds, for a total payment to all funds of approximately $51,000,000. (See attached Exhibit C ("HIH Insurance 3rd quarter 2006 Early Access Distribution Analysis of cumulative distribution percentage").) Subtracting the total proposed distribution of approximately $51 million from HIH America's total net available assets of $87,500,845 would leave HIH America with remaining net assets in the amount of $36,500,845. (See attached Exhibit A ("HIH insurance 3rd quarter 2006 Early Access Distribution Analysis of assets available for distribution").)

In calculating the amount of payment to each guaranty fund, the Commissioner has offset from the proposed distribution the amount of any statutory deposit held by HIH America in that particular state, pursuant to Insurance Code section 1035.5, subdivision (d), and has also deducted the amount of any first and second early access distribution. The Commissioner proposes to distribute and pay each guaranty fund the following amount:

(See attached Exhibit B ("HIH Insurance 3rd quarter 2006 Early Access Distribution Detail of individual IGA distribution amounts").)

In distributing $46,481,580 to the California Insurance Guarantee Association, the Commissioner has credited a previous early access distribution of $207,086,992.

In distributing $140,673 to the Colorado Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $766,871 (the State of Colorado has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)).

In distributing $45,067 to the Florida Workers' Compensation Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $139,600 (the State of Florida has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)).

In distributing $226,787 to the Hawaii Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $1,359,671 (the State of Hawaii has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)).

In distributing $2,526,446 to the Illinois Insurance Guaranty Fund, the Commissioner has credited a previous early access distribution of $5,885,949 and has offset statutory deposits of HIH America on deposit with the State of Illinois in the total amount of $5,723,604, for a total credit of $11,609,553.

In distributing $120,409 to the Indiana Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $255,060 and has offset statutory deposits of HIH America on deposit with the State of Indiana in the total amount of $67,555, for a total credit of $322,615.

In distributing $750 to the Iowa Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $5,211 (the State of Iowa has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)).

In distributing $891,264 to the Michigan Property and Casualty insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $3,369,416 and has statutory deposits of HIH America on deposit with the State of Michigan in the total amount of $25,861, for a total credit in the amount of $3,395,277.

In distributing $15,832 to the Nebraska Property and Liability insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $81,944 (the State of Nebraska has no special deposits to offset pursuant to insurance Code section 1035.5, subdivision (d)).

In distributing $93,337 to the Nevada Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $443,813 and has offset statutory deposits of HIH America on deposit with the State of Nevada in the total amount of $200,000, for a total credit of $643,813.

In distributing $111,587 to the Texas Property & Casualty Insurance Association, the Commissioner has made no previous early access distributions which would constitute a credit against the distribution. Moreover, Texas has released to the Commissioner a statutory deposit it once held in the amount of $105,000, which will no longer be offset against its distribution pursuant to Insurance Code section 1035.5, subdivision (a).

In distributing $11,711 to the Utah Property and Casualty Insurance Guaranty Association, the Commissioner has credited a previous early access distribution of $28,710 (the State of Utah has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)).

In distributing $194,955 to the Wisconsin Insurance Guaranty Fund, the Commissioner has credited a previous early access distribution of $1,308,491 (the State of Wisconsin has no special deposits to offset pursuant to Insurance Code section 1035.5, subdivision (d)). (See attached Exhibit D ("HIH Insurance 3rd quarter 2006 Early Access Distribution Detail of prior distributions, stat deposit offsets, and other credits").)

No distribution will be made to the Special Fund of the Industrial Commission of Arizona, which has paid $782,266 in losses, because Arizona still has a balance of $1,359,138 remaining in its special deposit of $1,997,854.

No distribution will be made to the Kentucky Insurance Guaranty Association, which has paid $69,150 in losses, because after crediting its last distribution of $62,319, its participation in the current early access distribution would result in payment of its claims in excess of the gross cumulative distribution percentage of 81.6495 percent.

No distribution will be made to the Missouri Insurance Guaranty Association, which has paid $730 in losses on behalf of HIH America, because the State of Missouri still has $121,566 remaining on its special deposit of $122,162.

No distribution will be made to the Oregon Insurance Guaranty Association, which has paid $3,803 in losses on behalf of HIH America, because the State of Oregon still has a balance of $962,504 remaining in its special deposit of $965,609. (See attached Exhibit B ("HIH Insurance 3rd quarter 2006 Early Access Distribution Detail of individual IGA distribution amounts").)

In accordance with insurance Code section 1035.5, subdivision (b)(1), the Commissioner has reserved certain amounts of the estate's assets for the payment of expenses of administration and the payment of claims of secured creditors and claims falling within the priorities established in Insurance Code section 1033, subdivisions (a)(1) and (a)(2). Subtracting the total proposed distribution of approximately $51,000,000 from available net assets of $87,500,845 leaves remaining net assets in the amount of $36,500,845 for the payment of expenses of administration, and all other unrecorded liabilities and contingencies. The Commissioner will seek approval of an additional early access distribution when such liabilities and contingencies become known and are quantified, or if estate closure is imminent, the Commissioner will seek this Court's authorization for a final distribution.

In accordance with Insurance Code section 1035.5, subdivision (b)(4), the Commissioner has secured from the 13 guaranty funds receiving a distribution an agreement to return the distributed assets, as required, to pay claims of secured creditors and claims falling within the priorities established in Insurance Code section 1033, subdivisions (a)(l) and (a)(2).

As detailed above, the Commissioner has complied with the requirements of Insurance Code section 1035.5 for disbursement of assets to insurance guaranty associations and, accordingly, this Court should approve the instant application.

WHEREFORE, the Commissioner respectfully requests, based on this Application, that this Court issue an Order:

1. Approving the Commissioner's proposal to disburse a total of approximately $51,000,000 of the net assets of the estate of HIH America to the 13 state guaranty associations and funds set forth above and in the amounts set forth above.
2. Authorizing the Commissioner to take any and all action necessary to accomplish the purposes of the Order requested herein.

VERIFICATION

I, Mohsen Sultan, state that I am an Estate Trust Officer for the California Insurance Commissioner's Conservation & Liquidation Office. My duties include managing and supervising for the Conservation & Liquidation Office the administration of insurance companies that have been conserved and liquidated by the California Insurance Commissioner. I have been managing the affairs of HIH America Compensation & Liability Insurance Company since April 2005.

I have read the VERIFIED APPLICATION FOR ORDER APPROVING PROPOSAL FOR THIRD DISTRIBUTION OF ASSETS TO STATE INSURANCE GUARANTY ASSOCIATIONS OR FUNDS and know the contents thereof; If called upon to testify, I could competently testify to matters contained in the Verified Application as they are personally known to me, except as to the matters which are therein stated upon information and belief and as to those matters, I believe them to be true. The statements contained in the Verified Application are based upon information that has been assembled by authorized employees of the Conservation & Liquidation Office from the official records maintained there under my supervision. I am informed and believe that the statements based upon those records are true. As to those matters that are within my own personal knowledge, the statements are true.

I declare under penalty of perjury that the foregoing is true and correct.

Executed on Sept 29^th, 2006 in San Francisco, California.

The proposal for which the Commissioner seeks court approval in this application fully satisfies the statutory provisions of section 1035.5. First, the Commissioner will retain general assets of HIH America in the amount of $36,500,845 to fund the estate's general administrative expenses and claims of secured creditors, pursuant to Insurance Code section 1035.5, subdivision (b)(l). Second, the Commissioner proposes to disburse, on a pro rata basis, to each of the 13 guaranty funds eligible for a distribution, funds which the Commissioner has determined to be the "available assets" of the estate, pursuant to section 1035.5, subdivisions (b)(2) & (c). Third, the proposal provides for an equitable allocation of certain assets to the state insurance guaranty funds, pursuant to section 1035.5, subdivision (b)(3). Fourth, disbursement of the assets will be subject to an agreement by each of the state insurance guaranty funds to, if necessary, return assets previously disbursed to pay claims of secured creditors, pursuant to section 1035.5, subdivision (b)(4). Fifth, disbursements of the assets will also be subject to an agreement by each of the state insurance guaranty funds to make a full report to the Commissioner accounting for all assets disbursed to each fund, all disbursements made therefrom, and any interest earned by the guaranty fund on the assets, as required by section 1035.5, subdivision (b)(5). Finally, the Commissioner will offset the amount disbursed to any entity or person performing a function in any other state similar to that function performed by the California Insurance Guarantee Association by the amount of any statutory deposit, premiums, or any other asset that HIH America held in that state, pursuant to section 1035, subdivision (d). Notice of this application has been given in accordance with the provisions of section 1035, subdivision (e).

Furthermore, apart from satisfying the statutory provisions of the regulation of workers' compensation insurance provided for under the Insurance Code, the Commissioner's proposal falls within the ambit of his broad statutory discretion. The California Legislature has afforded to the Commissioner, acting in his capacity as the court-appointed liquidator of an insolvent insurer, substantial discretion under the Insurance Code to fashion appropriate procedures necessary to carry out his statutory duties. (Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 824-825; Carpenter v. Pacific Mut. Life Ins. Co. (1937) 10 Cal.2d 307, 329.) As the court-appointed liquidator of HIH America, the Commissioner has the express authority to, among other things, take such actions as he deems necessary to "carry on and conduct the business and affairs" of the Company. (Ins. Code, § 1037, subd. (a).) Section 1037, subdivisions (a) and (b) provide, in pertinent part, as follows:

Section 1037 further provides the Commissioner, as the appointed liquidator of HIH America, with unspecified "[g]eneral powers" which shall not be construed to exclude:

In this case, the Commissioner's proposal falls within the ambit of his broad statutory discretion under section 1037. (See Carpenter, supra, 10 Cal.2d 307 [seizure of insurance company by Commissioner may lawfully be made without court order and trial court had power to ratify and confirm Commissioner's actions]; Garris v. Carpenter (1939) 33 Cal.App.2d 649 [Commissioner exercises very broad judgment and discretion in performance of duties].) Judicial approval of the Commissioner's proposal, and the Agreement entered into with each of the 13 state insurance guaranty funds, will ensure that the conduct of the business and the winding down of HIH America are conducted efficiently and in the best interests of its policyholders and creditors.

CONCLUSION

For all of the foregoing reasons, the Commissioner respectfully requests that the verified application for an order approving the proposal for a third distribution of assets to a total of 13 state insurance guaranty funds be approved.

Dated: September 28, 2006