Monday, March 20, 2017

No. 209: Senior Health Insurance Company of Pennsylvania, a Long-Term Care Insurance Company in Runoff, Faces Increasingly Serious Financial Trouble

Senior Health Insurance Company of Pennsylvania (SHIP) is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. I wrote three major articles about SHIP in The Insurance Forum in 2008 and 2009, and posted several items on my blog in recent years. On March 1, 2017, SHIP filed in a timely manner its 230-page statutory financial statement for the year ended December 31, 2016. Here I discuss the increasingly serious financial trouble the company is facing, as reflected in that financial statement.

Selected Financial Numbers
SHIP's total assets declined from $2.9 billion at the end of 2015 to $2.7 billion at the end of 2016. Total liabilities declined from $2.8 billion at the end of 2015 to $2.7 billion at the end of 2016. Total surplus declined from $55.8 million at the end of 2015 to $28.3 million at the end of 2016. Net income declined from a net loss of $9 million in 2015 to a net loss of $39 million in 2016.

SHIP's total surplus at the end of 2015 and at the end of 2016 included a $50 million surplus note, which is discussed later. Without the surplus note, the company would have been barely solvent at the end of 2015 and would have been insolvent at the end of 2016.

SHIP's risk-based capital (RBC) ratio, where the denominator is company action level RBC, increased from 80 percent at the end of 2015 to 82 percent at the end of 2016. Those ratios are below company action level RBC of 100 percent, and above regulatory action level RBC of 75 percent. Without the surplus note, the ratio would have been 37 percent at the end of 2015, below authorized control level RBC of 50 percent, and 14 percent at the end of 2016, below mandatory control level RBC of 35 percent.

The Surplus Note
When a company issues a surplus note, the company borrows from the buyer of the surplus note. State surplus note laws allow a company to treat the borrowed money as an asset, do not require the company to establish a liability for the borrowed money, and thus allow the company to include the borrowed money as part of surplus. Payments of interest and principal on the borrowed money are not guaranteed, and the debt is subordinate to the claims of policyholders and all other creditors of the company. A company that issues a surplus note must obtain prior approval from its domiciliary regulator (the Pennsylvania insurance commissioner in the case of SHIP) before issuing the surplus note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the borrowed money.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of its financial statement for the year ended December 31, 2014. The Pennsylvania insurance commissioner allowed SHIP to reflect the borrowed money as a backdated contribution to surplus in the 2014 statement. The surplus note matures on April 1, 2020. The interest rate is 6 percent, probably payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest as of December 31, 2016, was $5.55 million.

SHIP issued the surplus note to (borrowed money from) Beechwood Re Investments, LLC. The latest financial statement says SHIP received the $50 million in cash, but the schedule of "all other long-term investments owned" at the end of 2016 shows that SHIP acquired $50 million (at a cost of about $50.2 million) of Beechwood investment offerings on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood (and thereby borrowed $50 million from Beechwood). As of December 31, 2016, the Beechwood investments had an adjusted carrying value of about $37.6 million.

Investments in Platinum Partners
Beechwood is closely related to Platinum Partners, a hedge fund in serious financial and legal trouble. It is my understanding that SHIP, when it issued the surplus note to Beechwood in February 2015, was not aware of that close relationship. The latest financial statement shows that SHIP owned about $53.8 million fair value of Platinum investment offerings at the end of 2016, and at that time the Platinum investment offerings had an adjusted carrying value of about $39.3 million.

SHIP's latest financial statement shows that during 2016 SHIP acquired Platinum investment offerings at a cost of about $32.9 million. The financial statement also shows that during 2016 SHIP disposed of Platinum investment offerings for consideration of about $28.3 million.

Reinsurance with Roebling Re
Reinsurance exhibits in SHIP's latest financial statement show that SHIP took credit for about $1.2 billion of LTC insurance reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. SHIP's latest financial statement says Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have tried without success to find information about Roebling, such as the name of its owner, the names of its senior officers, and its financial condition.

Executives
Several years ago I met personally with two top officers of SHIP: President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. During the past year, each has left SHIP. I do not know the circumstances surrounding their departures. Recently my inquiries about SHIP have been referred to a spokesman at a public relations firm in New York. The spokesman has provided answers to some of my questions, but most recently has not been able to provide responses.

General Observations
With regard to the $50 million, 6 percent, approximately five-year surplus note that SHIP issued to Beechwood in February 2015, I believe that, because of SHIP's fragile financial condition, the company will not be able to obtain permission from the commissioner to pay interest or principal on the surplus note. In other words, I believe that the purchase of the surplus note will turn out to have been an outright gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to an independent trust in Pennsylvania, Conseco said any assets left over after the LTC insurance business runs off would be donated to charity. However, Conseco said nothing about what would happen if SHIP becomes insolvent before the business runs off. I inquired at the time about that point, and the Pennsylvania Insurance Department said insolvency would be handled in accordance with Pennsylvania law. See No. 208 (posted March 13, 2017) for a discussion of Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance Company which has been in rehabilitation since 2009 and is now in liquidation.

The public documents Conseco filed in 2008 in the SHIP case said Milliman, an actuarial consulting firm, concluded in a financial report that SHIP will have sufficient assets to run off the business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania Insurance Department said the report was confidential. I had a hunch in 2008, and I believe now, that SHIP will not remain solvent long enough to run off the LTC insurance business. If SHIP has a losing year in 2017 similar to or worse than in 2016, and if SHIP and the commissioner cannot devise a plan to improve the company's financial situation, I think the commissioner would have to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material
I am offering a complimentary 36-page PDF consisting of my articles about SHIP in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and 27 selected pages from SHIP's statutory financial statement for the year ended December 31, 2016. The selected pages are those from which I drew much of the data for this post. Email jmbelth@gmail.com and ask for the March 2017 SHIP package.

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