Senior Health Insurance Company of Pennsylvania (SHIP), formerly Conseco Senior Health Insurance Company (CSHI), is a long-term care (LTC) insurance company in runoff; that is, SHIP is not issuing new policies. In 2008 Indiana-based Conseco, Inc. (now CNO Financial Corp.) announced a plan to separate itself from Pennsylvania-based CSHI, a financially troubled LTC insurance subsidiary. Over 11 years, Conseco had poured $915 million into CSHI to keep the company solvent.
I wrote about Conseco's separation from CSHI in the November 2008, January 2009, and June 2009 issues of The Insurance Forum. I also wrote about SHIP in Nos. 123 (October 27, 2015), 125 (November 6, 2015), 174 (August 11, 2016), and 175 (August 18, 2016). This update is based on SHIP's recent financial statements and other developments.
The Plan of Separation
The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer ownership of CSHI to the trust, and rename the company SHIP. The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. The commissioner testified later in another matter that he approved the plan because Conseco said it would otherwise allow CSHI to become insolvent.
SHIP still has a relationship with CNO. According to a reinsurance exhibit in SHIP's 2015 financial statement, SHIP reduced its reserve liabilities by about $1 million through reinsurance ceded to Washington National Insurance Company, a subsidiary of CNO.
SHIP's Backdated Surplus Infusion
In this post I refer to "surplus" and "total adjusted capital" interchangeably because they are similar. On March 1, 2015, SHIP filed its financial statement for the year ended December 31, 2014. According to the statement, SHIP borrowed $50 million on February 19, 2015, to obtain a surplus infusion. SHIP backdated the infusion seven weeks by including it on the December 31, 2014 balance sheet. SHIP borrowed the money by issuing a five-year surplus note with an annual interest rate of 6 percent. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based company with which CNO has a reinsurance relationship.
A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.
SHIP's Situation at the End of 2014
At the end of 2014, without the $50 million backdated surplus infusion discussed above, SHIP would have had total adjusted capital of $68 million. That would have been below regulatory action level RBC (risk-based capital) of $82 million, and the commissioner would have been required to conduct a confidential investigation. With the surplus infusion, however, SHIP's total adjusted capital was $118 million ($68 million plus $50 million), which was well above regulatory action level RBC of $82 million and slightly above company action level RBC of $109 million.
SHIP's Situation at the End of 2015
On March 1, 2016, SHIP filed its financial statement for the year ended December 31, 2015. The statement shows that the company has not paid any interest on the surplus note. I do not know whether the commissioner denied the company's request for permission to pay interest, or whether the company did not request permission.
At the end of 2015, including the $50 million surplus infusion discussed above, SHIP had total adjusted capital of $94 million. That was below company action level RBC of $117 million, and the company was required to file a confidential RBC report with the commissioner indicating how the company proposed to deal with the problem. I do not know whether the company filed the report, and if so, how the company proposed to deal with the problem.
Platinum Partners
Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is a founder of Platinum Partners, a hedge fund.
On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed a grand jury indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. (See U.S.A. v. Seabrook and Huberfeld, U.S. District Court, Southern District of New York, Case No. 16-cr-467.)
On July 26, 2016, The Wall Street Journal ran a front-page article about Platinum. Beechwood was mentioned because of ties to Platinum.
Exhibits of "other long-term invested assets" in recent SHIP statements show that the company has significant holdings of Platinum-related investments. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo," by reporter Lawrence Delevingne. The article says that, as of June 30, 2016, SHIP "had at least $100 million of its assets [3.6 percent of its $2.8 billion of assets and 106 percent of its $94 million of total adjusted capital at the end of 2015] invested in Platinum's funds or companies backed by Platinum." The Reuters article quotes Brian Wegner, SHIP's president and chief executive officer, as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."
SHIP's 2015 Premium Volume
SHIP's statement for the year ended December 31, 2015 shows the company received $105 million of LTC insurance premiums in 2015. The ten leading states (in millions) were Texas ($9.9), Florida ($9.5), California ($9.5), Pennsylvania ($8.9), Illinois ($6.9), Ohio ($5.3), North Carolina ($3.8), Indiana ($3.2), Maryland ($3.0), and Michigan ($3.0).
General Observations
What will happen to SHIP remains to be seen. The company's recent net losses were $56 million in 2014, $9 million in 2015, $3 million in the first quarter of 2016, and $20 million in the second quarter of 2016. As discussed above, SHIP's total adjusted capital at the end of 2015 was below company action level RBC. It is unclear how a company in runoff and with inadequate total adjusted capital can afford to pay the interest on a surplus note, let alone repay the principal.
As I mentioned in No. 174 (August 11, 2016), Penn Treaty Network America Insurance Company, another Pennsylvania-based LTC insurance company in runoff, has been in rehabilitation for several years. The Pennsylvania insurance commissioner is the court-appointed rehabilitator. The state court judge overseeing the case is expected to rule soon on the commissioner's petition to liquidate Penn Treaty. If the judge grants the petition, state guaranty associations would become involved in the case, and other insurance companies would be required to pay assessments.
Available Material
I am offering a complimentary 20-page PDF consisting of the articles in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and the indictment filed against Seabrook and Huberfeld (11 pages). Email jmbelth@gmail.com and ask for the LTC/SHIP package dated September 19, 2016.
I wrote about Conseco's separation from CSHI in the November 2008, January 2009, and June 2009 issues of The Insurance Forum. I also wrote about SHIP in Nos. 123 (October 27, 2015), 125 (November 6, 2015), 174 (August 11, 2016), and 175 (August 18, 2016). This update is based on SHIP's recent financial statements and other developments.
The Plan of Separation
The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer ownership of CSHI to the trust, and rename the company SHIP. The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. The commissioner testified later in another matter that he approved the plan because Conseco said it would otherwise allow CSHI to become insolvent.
SHIP still has a relationship with CNO. According to a reinsurance exhibit in SHIP's 2015 financial statement, SHIP reduced its reserve liabilities by about $1 million through reinsurance ceded to Washington National Insurance Company, a subsidiary of CNO.
SHIP's Backdated Surplus Infusion
In this post I refer to "surplus" and "total adjusted capital" interchangeably because they are similar. On March 1, 2015, SHIP filed its financial statement for the year ended December 31, 2014. According to the statement, SHIP borrowed $50 million on February 19, 2015, to obtain a surplus infusion. SHIP backdated the infusion seven weeks by including it on the December 31, 2014 balance sheet. SHIP borrowed the money by issuing a five-year surplus note with an annual interest rate of 6 percent. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based company with which CNO has a reinsurance relationship.
A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.
SHIP's Situation at the End of 2014
At the end of 2014, without the $50 million backdated surplus infusion discussed above, SHIP would have had total adjusted capital of $68 million. That would have been below regulatory action level RBC (risk-based capital) of $82 million, and the commissioner would have been required to conduct a confidential investigation. With the surplus infusion, however, SHIP's total adjusted capital was $118 million ($68 million plus $50 million), which was well above regulatory action level RBC of $82 million and slightly above company action level RBC of $109 million.
SHIP's Situation at the End of 2015
On March 1, 2016, SHIP filed its financial statement for the year ended December 31, 2015. The statement shows that the company has not paid any interest on the surplus note. I do not know whether the commissioner denied the company's request for permission to pay interest, or whether the company did not request permission.
At the end of 2015, including the $50 million surplus infusion discussed above, SHIP had total adjusted capital of $94 million. That was below company action level RBC of $117 million, and the company was required to file a confidential RBC report with the commissioner indicating how the company proposed to deal with the problem. I do not know whether the company filed the report, and if so, how the company proposed to deal with the problem.
Platinum Partners
Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is a founder of Platinum Partners, a hedge fund.
On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed a grand jury indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. (See U.S.A. v. Seabrook and Huberfeld, U.S. District Court, Southern District of New York, Case No. 16-cr-467.)
On July 26, 2016, The Wall Street Journal ran a front-page article about Platinum. Beechwood was mentioned because of ties to Platinum.
Exhibits of "other long-term invested assets" in recent SHIP statements show that the company has significant holdings of Platinum-related investments. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo," by reporter Lawrence Delevingne. The article says that, as of June 30, 2016, SHIP "had at least $100 million of its assets [3.6 percent of its $2.8 billion of assets and 106 percent of its $94 million of total adjusted capital at the end of 2015] invested in Platinum's funds or companies backed by Platinum." The Reuters article quotes Brian Wegner, SHIP's president and chief executive officer, as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."
SHIP's 2015 Premium Volume
SHIP's statement for the year ended December 31, 2015 shows the company received $105 million of LTC insurance premiums in 2015. The ten leading states (in millions) were Texas ($9.9), Florida ($9.5), California ($9.5), Pennsylvania ($8.9), Illinois ($6.9), Ohio ($5.3), North Carolina ($3.8), Indiana ($3.2), Maryland ($3.0), and Michigan ($3.0).
General Observations
What will happen to SHIP remains to be seen. The company's recent net losses were $56 million in 2014, $9 million in 2015, $3 million in the first quarter of 2016, and $20 million in the second quarter of 2016. As discussed above, SHIP's total adjusted capital at the end of 2015 was below company action level RBC. It is unclear how a company in runoff and with inadequate total adjusted capital can afford to pay the interest on a surplus note, let alone repay the principal.
As I mentioned in No. 174 (August 11, 2016), Penn Treaty Network America Insurance Company, another Pennsylvania-based LTC insurance company in runoff, has been in rehabilitation for several years. The Pennsylvania insurance commissioner is the court-appointed rehabilitator. The state court judge overseeing the case is expected to rule soon on the commissioner's petition to liquidate Penn Treaty. If the judge grants the petition, state guaranty associations would become involved in the case, and other insurance companies would be required to pay assessments.
Available Material
I am offering a complimentary 20-page PDF consisting of the articles in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and the indictment filed against Seabrook and Huberfeld (11 pages). Email jmbelth@gmail.com and ask for the LTC/SHIP package dated September 19, 2016.
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Email: jmbelth@gmail.com
Blog: www.josephmbelth.com