Friday, January 27, 2017

No. 200: NOLHGA and a Coalition of Health Insurance Companies Enter into a Secret Settlement Agreement Relating to Penn Treaty's Long-Term Care Insurance

In November 2016, the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) entered into a secret settlement agreement with a coalition of health insurance companies relating to the likely liquidation of Penn Treaty, a long-term care (LTC) insurance company. In January 2017, when I learned of the agreement, I asked NOLHGA for a copy of it. A spokesman said the parties to the agreement "have not authorized its publication."

A one-paragraph description of the Penn Treaty situation is on NOLHGA's website. It reads:
Penn Treaty Network America Insurance Company, headquartered in Allentown, Pennsylvania, and its subsidiary, American Network Insurance Company, were placed into rehabilitation by the Pennsylvania insurance commissioner on January 6, 2009. Penn Treaty and American Network provided long-term care insurance to over 126,000 policyholders in all 50 states and the District of Columbia. The Commissioner filed petitions for liquidation on October 2, 2009 and amended petitions for liquidation on October 23, 2009. The court rejected the petitions in an order dated May 3, 2012. On July 27, 2016, petitions were filed by the Receiver [the insurance commissioner] in the Commonwealth Court of Pennsylvania seeking the liquidation of Penn Treaty and American Network.
My first discussion of Penn Treaty was in the August 2012 issue of The Insurance Forum. I focused on the extraordinary May 2012 court order issued by Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania (she is now President Judge of the Commonwealth Court) rejecting the Pennsylvania insurance commissioner's petition to liquidate the company. I also discussed Penn Treaty in several posts on my blog. For example, see No. 191 (posted December 9, 2016).

Areas of Concern
With regard to the likely liquidation of Penn Treaty, there are several areas of concern for other health insurance companies. First, state insurance guaranty associations do not have any money. The funds they receive to cover the shortfall in a liquidated insurance company come from assessments against surviving insurance companies.

Second, the insurance companies assessed after the failure of an LTC insurance company are health insurance companies, irrespective of whether they have ever sold LTC insurance. Most health insurance companies have sold little or no LTC insurance.

Third, there are upper limits on the amounts that can be assessed against a company. Also, an assessed company can recover the assessments over time through state premium tax credits, thus shifting the financial burden of the liquidation to state taxpayers. Nonetheless, it stands to reason that health insurance companies—especially those that have sold little or no LTC insurance—are unhappy about having to pay large assessments in connection with Penn Treaty and other possible LTC insurance company failures in the future.

Fourth, the "hole" at Penn Treaty is very large. The company's assets are about $700 million and the present value of the company's liabilities to policyholders is estimated at up to about $4 billion.

A Comment by UnitedHealth Group
UnitedHealth Group (NYSE:UNH) undoubtedly is one of the health insurance companies in the coalition that entered into the settlement agreement with NOLHGA. On January 17, 2017, UNH held an earnings conference call concerning results for the fourth quarter and full year of 2016. David S. Wichmann, president and chief financial officer of UNH, was one of the company officials who participated in the presentation. According to a transcript of the earnings conference call, he made these comments about the Penn Treaty situation:
We should touch briefly on Penn Treaty, an industry topic we first discussed in 2010 that finally seems to be resolving. Penn Treaty is a financially distressed long-term care insurance company, with no affiliation to us. While we have never sold long-term care policies, under state laws, health insurers will be assessed a share of the guarantee funds needed to protect Penn Treaty's policyholders. We expect to accrue an approximately $350 million operating charge for our portion of the assessment. This charge will be funded over several years and the cash will be largely recovered through premium tax credits over time.
While this outcome is well known, current accounting practice only allows this charge to be recognized when a final court order of liquidation is entered. When that ultimately occurs, we will incorporate the impact on GAAP earnings, while excluding it from adjusted earnings per share.
The Agreement
My efforts to obtain a copy of the settlement agreement have not been successful. What follows here is my understanding of the major components of the agreement.

First, what may be the most important component of the agreement is a national premium increase strategy. Presumably it applies to procedures that state guaranty associations will follow, after they have taken over Penn Treaty, in seeking permission from state insurance regulators to increase LTC premiums paid by Penn Treaty policyholders. The guaranty associations in almost all the states have signed on to this component of the agreement. I do not know whether the agreement says anything about the size of premium increases that can be imposed on Penn Treaty policyholders, or about the frequency of those premium increases.

Second, the agreement provides for state guaranty associations to obtain access to Penn Treaty's assets immediately after the liquidation petition is approved by the court. The petition is in the hands of President Judge Leavitt, and she is expected to rule on it after March 1, 2017.

Third, the agreement provides for governance of Penn Treaty. It also provides for use of a third party administrator to handle day-to-day functions of Penn Treaty, including such matters as collection of premiums and payment of claims. Most of the state guaranty associations are participating in this provision through Penn Treaty, but a few will work through NOLHGA. Most of the state guaranty associations have signed on to this component of the agreement.

Fourth, the agreement provides for use of reinsurance, presumably to cover some of Penn Treaty's reserve liabilities. Most of the state guaranty associations have signed on to this component of the agreement.

The NAIC Involvement
I recently learned that the National Association of Insurance Commissioners (NAIC) has a Receivership Model Law Working Group. The group is looking at issues and implications of LTC insurance company insolvencies for receivership practices and processes, the system of state guaranty associations, and the applicability of certain provisions of the NAIC's Life and Health Insurance Guaranty Association Model Act. The group is co-chaired by regulators in Texas and Washington State. At this time I do not know what progress the group has made.

General Observations
At least some provisions of the settlement agreement between NOLHGA and the health insurance companies may have a significant impact on Penn Treaty's policyholders, especially the provisions of the agreement relating to the national premium increase strategy. For that reason, I think it is inappropriate for NOLHGA, the state guaranty associations, the state insurance regulators, and the health insurance companies to treat the agreement as a confidential document. I cannot conceive of a justification for secrecy.

Available Material
I regret that I cannot make the settlement agreement available. I will prepare a follow-up to this post when and if I obtain the agreement. In the meantime, in addition to the discussions of Penn Treaty on my blog in No. 191 and other posts, I am now offering a complimentary 177-page PDF consisting of the article in the August 2012 issue of The insurance Forum (4 pages) and Judge Leavitt's May 2012 memorandum and order (173 pages). Email and ask for the 2012 material relating to Penn Treaty.