COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, SS.

SUPREME JUDICIAL COURT
FOR SUFFOLK COUNTY
NO. SJ-2000-65
LINDA L. RUTHARDT, as she is
COMMISSIONER OF INSURANCE of the
COMMONWEALTH OF MASSACHUSETTS,

Plaintiff,



v.
TRUST INSURANCE COMPANY and
TRUST ASSURANCE COMPANY,

Defendants.

AFFIDAVIT OF
LINDA L. RUTHARDT

I, Linda L. Ruthardt, Commissioner of Insurance of the Commonwealth of Massachusetts and Temporary Receiver of Trust Insurance Company ("Trust Insurance") and Trust Assurance Company ("Trust Assurance"), collectively, "the Companies", pursuant to G.L. c. 175, § 180B, state the following.

  1. Trust Insurance is insolvent. As noted in my affidavit dated June 29, 2000, I have concluded that Trust Insurance does not have adequate resources to permit it to continue to meet its obligations in the normal course of business; that it is therefore insolvent within the meaning of G.L. c. 175, §§ 6 and 180C; and that a liquidation order should enter with the insurance guaranty funds thereby triggered. I based that conclusion on the limited liquid assets under my control as Temporary Receiver as of June 1, 2000; the significant negative cash flow experienced by the Companies from January 1, 2000 through May 31, 2000; and projections of further negative cash flow for Trust Insurance for the remainder of this year. As indicated on the attached Exhibit "A", Trust Insurance had experienced negative cash flow of $9,506,980 during the month of May, 2000 alone. For the period January 1, 2000 - May 31, 2000, the Companies experienced negative cash flow of $19,756,046. Since the filing of my Petition for Order Directing Liquidation of Trust Insurance Company and Appointment of Permanent Receiver for Trust Insurance Company and Trust Assurance Company ("Liquidation Petition"), my on-site representatives and the staff of Trust Insurance have analyzed the cash flow of the Companies for the month of June, 2000. As indicated on the attached Exhibit "B", during the month of June, 2000, Trust Insurance experienced additional negative cash flow of $10,627,894, bringing the June 30, 2000 (year to date) negative cash flow for the Companies to $31,769,486.
  2. Trust Insurance's liquid assets will shortly be exhausted. As reflected on the attached Exhibit "C", Trust Insurance had remaining liquid assets of approximately $28,000,000 as of June 1, 2000 (the "assets under the control of the Receiver" reported on Exhibit "C" less the $8,000,000 equity value of Trust Assurance, since the equity of Trust Assurance will not be available to help pay Trust Insurance claims until after Trust Insurance exhausts its own cash available to pay claims). The negative cash flow for the month of June resulted in a substantial reduction of the liquid assets of Trust Insurance to approximately $17,000,000. My on-site representatives have projected the remaining cash receipts and cash disbursements for Trust Insurance through December 31, 2000. As reflected on the attached Exhibit "D", had I not directed the cessation of payments of all general unsecured claims and pre-receivership policyholder claims of Trust Insurance on June 29, 2000, when the Liquidation Petition was filed, Trust Insurance would have exhausted its liquid assets within several months. Unless the obligations of the various state insurance guaranty funds are triggered by the entry of a liquidation order for Trust Insurance, Trust Insurance will be unable to continue to meet its obligations to policyholders and claimants within a matter of months.
  3. Trust Insurance's 1999 Annual Statement reflects negative net worth. Attached as Exhibit "E" is a copy of the unaudited Annual Statement for Trust Insurance as of December 31, 1999 ("the 1999 Annual Statement"). / It is critical to note that the 1999 Annual Statement was prepared under extremely difficult conditions. The Chief Financial Officer, Controller, Accounting Manager and Chief Actuary of Trust Insurance had all left the Company prior to the commencement of the receivership. The most recent audited financial statements for the Companies were prepared as of December 31, 1996. As noted in my previous filings, the Companies' generally poor records, multiple computer systems, and absence of normal financial controls made the preparation of the 1999 Annual Statement an enormous challenge. Since its completion, my representatives have detected significant errors in the accounting treatment of inter-company balances, among other items having a further negative effect on net worth. For those reasons, I believe that there may be material deficiencies in the accuracy of the 1999 Annual Statement. Nevertheless, the 1999 Annual Statement indicates that Trust Insurance had negative net worth of approximately $3,400,000 at December 31, 1999; one of the subsequently detected errors lowers that net worth to approximately negative $5,000,000.
  4. Many Trust Insurance assets are illiquid. As noted in my previous submissions, certain of Trust Insurance's most significant assets are subject to competing claims to ownership as well as being illiquid. These assets include the corporate headquarters property in Taunton, Massachusetts, a large parcel of undeveloped land in Taunton ("the Northwoods Site"), and computer software and hardware. The values of these assets are highly uncertain, the timing of their conversion to cash (available to pay claims) difficult to predict, and the proceeds on their disposition will be subject to competing claims of ownership.
  5. Fleet claims an interest in the Corporate Headquarters property. Pursuant to statutory accounting principles, this real estate asset was carried at a value of $7,988,536 in the 1999 Annual Statement. As is the case generally with commercial real estate, I believe that the actual market value of the property will be greatly affected by the rental income stream which a prospective buyer can expect to realize. Although the Companies' operations continue to be housed in this facility, there is significant unused space, which will grow as the operations of the Companies continue to wind down. For that reason, my representatives have had preliminary discussions with interested parties concerning possible lease or sale transactions. However, as previously noted in my affidavit dated May 10, 2000, Fleet National Bank ("Fleet") has challenged the 1999 transfer of ownership of this property from a subsidiary of Trust Group, Inc. ("Group") to Trust Insurance as a fraudulent conveyance in an action entitled Fleet National Bank v. Trust Group, Inc., et al., No. 00-0585-G (Suffolk Superior Court). Copies of the complaint and certain orders in that action are attached as Exhibit "G". On information and belief, Group has defaulted on a $20,000,000 loan from Fleet. Therefore, I believe it likely that any proceeds from the eventual disposition of this asset will be the subject of dispute with Fleet and possibly with Group. Any such proceeds are thus extremely unlikely to be available to pay claims during the remaining months of 2000.
  6. Fleet claims an interest in the Northwoods Site. The Northwoods Site was carried at a value of $2,811,124 in the 1999 Annual Statement. The Northwoods Site was conveyed by Group to Trust Insurance in 1998. On information and belief, prior to receivership, former management had explored for several years the potential for commercial development of this property. During the period from 1996 - 1998, it appears that management intended for Group to develop the site, with Trust Insurance to relocate to the site as its "anchor tenant". In June, 1999, it seems that approach was abandoned, and offers were solicited from prospective purchasers of the Northwoods Site. Although former management began to explore the possibility of a joint venture development of the Northwoods Site with Hall Properties Inc. ("Hall") in December, 1999, the proposed "Agreement to Form Joint Venture" simply provided for a 120 day feasibility study by Hall. A copy of that proposed agreement is attached as Exhibit "H". Joint venture documentation was not negotiated, and any values ascribed to the potential development rights appear to be speculative. In light of Trust Insurance's financial condition, the disposition of the Northwoods Site is currently being pursued by my representatives. I have determined to offer the Northwoods Site for sale. Requests for proposals were solicited from real estate brokers. The brokers who submitted proposals to market the property estimated its value at a level significantly below that indicated in Group's opposition to the Liquidation Petition. A broker has been engaged from that group and active solicitation is expected to begin shortly. However, as is the case with the corporate headquarters property, the value, timing of disposition, and competing claims to any sale proceeds / make it extremely unlikely that there will be sale proceeds from the Northwoods Site available to pay claims during 2000.
  7. Competing claims to the Trust Enterprise computer system. As noted in my First Status Report, during 1998 and 1999, Trust Insurance was engaged in the development of a new computer technology ("Trust Enterprise") with American International Technology Enterprises, Inc. ("AITE"), an affiliate of the American International Group of insurance companies. Upon information and belief, in 1999, former management decided to pursue the possible joint marketing of Trust Enterprise to other insurance companies with AITE. However, AITE is presently asserting claims against Trust Insurance and Group which exceed $6 million, allegedly attributable to unpaid development costs of Trust Enterprise. AITE indicated that title to the software may not have passed since the consideration for its development has not been paid. In addition, Fleet obtained an attachment on the day prior to the commencement of the receivership, which purports to apply to all computer equipment. My representatives have engaged in discussions with both AITE and Fleet, in an attempt to permit AITE to begin the marketing of the Trust Enterprise system on a non-exclusive basis. Concurrently, the staff of Trust Insurance is continuing to work with AITE to address certain limitations to the Trust Enterprise system, particularly with respect to reporting of data to the Massachusetts Merit Rating Board and Commonwealth Automobile Reinsurers. For all of these reasons, the value (if any) which will be realized by Trust Insurance from the marketing of the Trust Enterprise system remains highly speculative.
  8. Trust Insurance's claim against Commonwealth Automobile Reinsurers is being pursued. As noted in my First Status Report, I have recused myself from all matters pertaining to the February, 2000 remand decision by the Massachusetts Appeals Court in the matter of Trust Insurance v. Commissioner of Insurance, et al, No. 98-P-233. See Exhibit "I". In order to assure that Trust Insurance has the ability to fully pursue the matter, in my capacity as Temporary Receiver, I have authorized the continued representation of Trust Insurance by the firm of Sally and Fitch, (See Exhibit "J") the counsel which Trust Insurance had previously engaged for the litigation. Sally and Fitch has continued to pursue the arguments advanced by Trust Insurance, with the assistance of the staff of Trust Insurance, and my on-site representatives.
  9. We have had extensive communications with Group. Since the election of Paul Cantiani as President and Chief Executive Officer of Group by its Board of Directors in March, 2000, I personally met twice with Mr. Cantiani and other members of his Board of Directors. The tenor of those meetings was cordial and businesslike. My on-site representatives, staff and counsel have had numerous meetings with Mr. Cantiani and other directors of Group. In addition, Mr. Cantiani has requested copies of considerable documentation concerning the Companies' assets and expenditures, focusing primarily on the period of time prior to the commencement of the receivership. Mr. Cantiani represented to me that he needed that information in order: first, to attempt to develop a rehabilitation plan for the Companies; and, secondly, to investigate possible causes of action against Group's former senior management. Consistent with my other objectives as Temporary Receiver and available resources, during April, 2000 my on-site representatives provided numerous documents requested by Mr. Cantiani. These documents primarily related to his objective of developing a plan of rehabilitation for the Companies, since that objective was considerably more time-sensitive. During May, 2000, Mr. Cantiani engaged the services of Morrison, Mahoney and Miller, LLP ("Morrison") to assist in the preparation of such a rehabilitation plan. My counsel then met with two lawyers from Morrison, and outlined my objectives for any such plan as Temporary Receiver. Unfortunately, neither Group nor Mr. Cantiani ever submitted any such plan.
  10. I have regularly updated the Court on the Receivership and, as in all other Massachusetts insurer receiverships, I will seek its approval before disposing of any material asset. Since the inception of the receivership proceedings on February 10, 2000, I have provided periodic updates to the Court in my First Status Report (dated April 10, 2000), my affidavit in support of Motion for Order Approving Cancellation of Policies (dated May 10, 2000), and in my affidavit in support of the Liquidation Petition (dated June 29, 2000). It is my intent to continue to report to the Court on the progress of these proceedings at least quarterly. I will of course seek the Court's approval before disposing of any material asset, including the corporate headquarters, Northwoods Site, and Trust Enterprise.

Signed under the pains and penalties of perjury this __ day of July, 2000.

Signed under the pains and penalties of perjury this ___ day of June, 2000.

_____________________________________
Linda L. Ruthardt, Commissioner of
Insurance and Temporary Receiver of
Trust Insurance Company and Trust
Assurance Company