Friday, November 4, 2016

No. 185: Long-Term Care Insurance—Regulatory Supervision, Rehabilitation, and Liquidation of Financially Troubled Companies

For 25 years I have been saying that the problem of financing long-term care (LTC) cannot be solved through private insurance because the LTC exposure violates important principles necessary for the proper functioning of private insurance. Thus I am not surprised that most companies in the LTC insurance business have left the business, and that some of the few remaining are in fragile financial condition. Here I discuss and provide examples of three processes that state insurance regulators use to deal with financially troubled insurance companies.

Supervision is a process that state insurance regulators use to deal with financially troubled companies. Regulators normally have the authority to place a company under supervision without obtaining court approval. In some instances, the regulator issues a supervision order openly, by making public the existence of the order and the order itself. In other instances, the regulator makes public the existence of the order but keeps the order itself confidential. In still other instances, the regulator keeps the existence of the order and the order itself confidential.

Rehabilitation and Liquidation
Rehabilitation and liquidation are two other processes that state insurance regulators use to deal with financially troubled companies. In contrast to supervision, court approval is required for rehabilitation or liquidation. The regulator files a petition in state court. If the court approves the petition, the court would appoint the regulator as rehabilitator or liquidator, and full details would be available to the public. The objective of a rehabilitation is to preserve the company so as to allow it to emerge from rehabilitation. To accomplish that objective, the rehabilitator may take such actions as modifying the company's operations, selling the company in whole or in part, merging the company into another company, or changing provisions of the company's existing policies.

Liquidation is a last resort when the regulator and the court agree that rehabilitation is futile. State guaranty associations become involved, and drastic actions may have to be taken. For example, the company may have to be wound down, and policyholders may suffer significant losses.

General American, ARM Financial, and Integrity Life
The 1999 case of Missouri-domiciled General American Life Insurance Company illustrates the use of supervision, although the incident did not involve LTC insurance. At the company's request, the Missouri department of insurance placed the company under supervision to stop a devastating run. The existence of the order became known to the public, but the department kept the order itself confidential.

My first article about supervision, which discussed the General American case, was in the October 1999 issue of The Insurance Forum. While working on the article, I learned that ARM Financial Group, Inc. and a subsidiary, Ohio-domiciled Integrity Life Insurance Company, had extensive dealings with General American. The Ohio department of insurance placed Integrity Life under a confidential supervision order, but word of the existence of the order leaked out. Pursuant to the Ohio public records law, I asked the Ohio department for a copy of the order. The department denied the request, saying the order was confidential. However, ARM Financial, a shareholder-owned company, included the order in a public filing with the Securities and Exchange Commission. I showed the order in the article about the General American case.

Ability Insurance Company
A few companies that abandoned the LTC insurance business transferred their existing policies to Nebraska-domiciled Ability Insurance Company, which is running off the policies. In December 2012 the Nebraska department of insurance placed Ability under a supervision order. The existence of the order was publicly known, and the order itself was available to the public. Here is the third of the department's seven findings of fact in the supervision order:
Based upon examination of financial statements filed by [Ability], including those filed with the Department dated September 30, 2011 and September 30, 2012, the Director has reasonable cause to believe that [Ability] is in such a condition as to render the continuance of its business hazardous to its policyholders and the general public as defined in the Nebraska Insurance Regulations, specifically, 210 Neb. Admin. Code 55 §§ 004.05 and 004.06.
In January 2013 the Nebraska department approved the acquisition of Ability by Advantage Capital Holdings, LLC, an investment company based in Wilmington, Delaware. In July 2014 the department issued an order removing Ability from under supervision. I wrote about the Ability case in the May 2013 issue of the Forum.

Two examples of liquidation, neither of which involved LTC insurance, are the International Workers Order (IWO) and Executive Life Insurance Company of New York (ELNY). IWO was liquidated during the "Red Scare" in the 1950s. ELNY was placed in rehabilitation in 1991 and remained there for 21 years until it was liquidated in 2012. I wrote about the IWO and ELNY liquidations in the August 2012 issue of the Forum.

Penn Treaty
In 2009 the Pennsylvania insurance department petitioned the court to place Pennsylvania-domiciled Penn Treaty Network America Insurance Company, an LTC insurance company, in rehabilitation. Six months later the department petitioned the court to convert the rehabilitation to a liquidation. In 2012, after lengthy proceedings including a 30-day bench trial, the judge, in a 162-page opinion and order, denied the liquidation petition and ordered the department to develop a rehabilitation plan. Later the department and the court revised the rehabilitation plan. In July 2016 the department again petitioned the court to liquidate the company. In October 2016 the judge scheduled a November 9 hearing on the liquidation petition. If the judge approves the petition, the case might have a profound impact on the U.S. system of state guaranty associations. That subject, however, is beyond the scope of this discussion. I wrote about the Penn Treaty case in the August 2012 issue of the Forum, and I plan to write again irrespective of what happens during and after the hearing.

CNO Financial Group
In 2008 CNO Financial Group, Inc. (then Conseco, Inc.) separated itself from Pennsylvania-domiciled Conseco Senior Health Insurance Company (CSHI), a financially troubled LTC insurance subsidiary. With the approval of the Pennsylvania insurance department, Conseco transferred CSHI to an independent trust and renamed the company Senior Health Insurance Company of Pennsylvania (SHIP). I have written about the separation, most recently in No. 182 (October 7, 2016).

In that post I also wrote about a CNO effort to separate itself from a total of about 10,000 LTC insurance policies written by two other CNO subsidiaries, which are domiciled in Indiana and New York. That effort was through reinsurance with Cayman Islands-based Beechwood Re. The Indiana and New York departments required the CNO companies to recapture the reinsurance. Also, CNO filed a lawsuit against three individuals who allegedly misled CNO by failing to disclose Beechwood's close ties to Platinum Partners, a troubled hedge fund. Although CNO's problems with Beechwood and Platinum are significant, I think the problems do not warrant supervision of the CNO companies.

SHIP, the former Conseco subsidiary, is in fragile financial condition. It has suffered operating losses, its total adjusted capital at the end of 2015 was below company action level risk-based capital, and it too is entangled with Beechwood and Platinum. Because of its financial condition, SHIP may be operating under a supervision order, but I am not aware of the existence of such an order. I have written about SHIP, most recently in No. 183 (October 19, 2016).

Genworth Financial, Inc. has long been in the LTC insurance business, and is one of the few major companies that are still in the business. Genworth has suffered significant declines in its financial strength ratings, primarily as the result of its LTC insurance business. Genworth's subsidiaries, other than those in the mortgage insurance business, are domiciled in Delaware, New York, and Virginia. Genworth is trying to reorganize in order to "isolate" its LTC insurance business. I have written about that effort, most recently in Nos. 154 and 155 (April 7 and 13, 2016). Because of its financial problems and its effort to reorganize, one or more of Genworth's companies may be operating under a supervision order, but I am not aware of the existence of such an order.

On October 23, 2016, Genworth surprised insurance observers by announcing its entry into a definitive merger agreement. If the agreement is consummated, Genworth would be an indirect, wholly owned subsidiary of China Oceanwide Holdings Group Co., Ltd., a privately held international financial holding company group headquartered in Beijing. The agreement provides for Genworth's headquarters to remain in Virginia under the current senior management. The agreement is subject to the approval of Genworth's shareholders, state insurance regulators, federal agencies in the U.S., and governmental authorities in Australia, Canada, China, and Mexico. Genworth hopes to close on the agreement by the middle of 2017.

The agreement consists of 129 single-spaced pages and additional exhibits and schedules that Genworth will make available upon request. An overview of the agreement is in a five-page, single-spaced, October 23 joint press release from China Oceanwide and Genworth. Here are the first two paragraphs of the press release:
China Oceanwide Holdings Group Co., Ltd. ("China Oceanwide") and Genworth Financial, Inc. (NYSE:GNW) ("Genworth") today announced that they have entered into a definitive agreement under which China Oceanwide has agreed to acquire all of the outstanding shares of Genworth for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The acquisition will be completed through Asia Pacific Global Capital Co. Ltd., one of China Oceanwide's investment platforms. The transaction is subject to approval by Genworth's stockholders as well as other closing conditions, including the receipt of required regulatory approvals.
As part of the transaction, China Oceanwide has additionally committed to contribute to Genworth $600 million of cash to address the debt maturing in 2018, on or before its maturity, as well as $525 million of cash to the U.S. life insurance businesses. This contribution is in addition to $175 million of cash previously committed by Genworth Holdings, Inc. to the U.S. life insurance businesses. Separately, Genworth also announced today preliminary charges unrelated to this transaction of $535 to $625 million after-tax associated with long term care insurance (LTC) claim reserves and taxes. Those items are detailed in a separate press release. The China Oceanwide transaction is expected to mitigate the negative impact of these charges on Genworth's financial flexibility and facilitate its ability to complete its previously announced U.S. life insurance restructuring plan. Genworth believes this transaction is the best strategic alternative to maximize stockholder value.
The "separate press release" referred to in the second paragraph quoted above is a three-page, single-spaced, October 23 press release from Genworth. It is entitled "Genworth Financial Announces Preliminary Charges For The Third Quarter."

General Observations
Unlike in the case of a rehabilitation or a liquidation, state insurance regulators normally have the authority to place an insurance company under supervision without court approval. The supervision may be carried out in secret, or it may be carried out publicly. Where secrecy is used, the reason is to avoid exacerbating the company's fragile financial condition. Nonetheless I question the wisdom of secret supervision because I think policyholders, shareholders, creditors, employees, agents, and other interested parties are entitled to the truth about the company's financial problems.

It is my understanding that similar secret proceedings are used in the banking business, arguably to prevent runs. Here again, however, I think a bank's customers, shareholders, creditors, employees, and other interested parties are entitled to the truth about the bank's financial problems.

Available Material
I am offering a complimentary 22-page PDF. It consists of articles from the October 1999, August 2012, and May 2013 issues of The Insurance Forum (a total of 14 pages), the five-page October 23 joint press release from China Oceanwide and Genworth, and the three-page October 23 press release from Genworth. Email and ask for the November 2016 package about LTC insurance and supervision.