Monday, March 13, 2017

No. 208: Long-Term Care Insurer Penn Treaty Enters Court-Ordered Liquidation

On March 1, 2017, President Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania ordered Penn Treaty Network America Insurance Company (Allentown, PA) and its subsidiary, American Network Insurance Company (collectively, Penn Treaty), into liquidation. (Judge Leavitt became President Judge in January 2012.) On the same day, Teresa Miller, the Pennsylvania insurance commissioner, issued a press release and a "commissioner's statement." Penn Treaty was prominent in the long-term care (LTC) insurance business.

In January 2009, Penn Treaty became insolvent. Joel Ario, then the Pennsylvania insurance commissioner, petitioned the court to place the company in rehabilitation. In April 2009, the court granted the petition. In October 2009, Ario petitioned the court to place the company in liquidation, but a top Penn Treaty official opposed the petition. Under Pennsylvania law, in a liquidation proceeding, the rehabilitator (the insurance commissioner) has the burden of proving that continuing the rehabilitation would substantially increase the risk to creditors, policyholders, and the public, or would be futile.

During 2010, the parties tried unsuccessfully to reach a settlement. A bench trial before Judge Leavitt began in January 2011. The trial was suspended while the parties tried again, unsuccessfully, to reach a settlement. The trial resumed in October 2011, lasted 30 trial days, and ended in February 2012.

On May 3, 2012, Judge Leavitt handed down a 162-page opinion and a brief order. She ruled that the rehabilitator (by then Michael Consedine was the insurance commissioner) had failed to meet his burden of proof. The judge denied the liquidation petition and ordered Consedine to develop a rehabilitation plan. Consedine did so, and the judge approved it. Since then the rehabilitation plan has been amended twice. Now it has been converted into a liquidation plan under the current commissioner.

The Liquidation Orders
In the orders Judge Leavitt issued recently to the two Penn Treaty companies, she terminated the rehabilitations of the companies, declared them insolvent, ordered them liquidated, and appointed Miller (and any successor commissioner) the liquidator. The judge vested the liquidator with title to the companies' assets, specified the procedures to be followed in the liquidation, and transferred the companies' policy obligations to the state guaranty associations (GAs).

Information about the liquidation is on the Penn Treaty website ( One item there is a listing of the LTC insurance limit for each of the GAs. The limits are $300,000 for most GAs. The exceptions are California ($554,556), Connecticut ($500,000), Louisiana ($500,000), Minnesota ($410,000), Missouri ($100,000), New Jersey (unlimited, subject to policy and statutory provisions and exclusions), Oregon ($100,000), Puerto Rico (no coverage for LTC insurance), Utah ($250,000), and Washington State ($500,000). In other words, after Penn Treaty's assets are exhausted, and after the GA limit is reached, a policyholder would not be entitled to further payments.

GAs have no funds. Instead, state GA laws provide for surviving insurance companies to compensate, through assessments, for the inadequacy of the assets of the company being liquidated. Virtually all of Penn Treaty's business was LTC insurance.

I have not examined the various state GA laws. However, I have six understandings about which companies will be assessed in the Penn Treaty failure and the amounts those companies will be assessed. First, LTC insurance is part of the health insurance industry, and therefore surviving health insurance companies (even those which have never sold LTC insurance) will be assessed. Second, the amounts assessed will be based on each surviving company's health insurance premiums. Third, there are upper limits on the amount that can be assessed against each company. Fourth, each assessed company can recover the amount assessed through future state tax credits, thus shifting the burden of the liquidation on to state taxpayers. Fifth, some health insurance companies have argued that the burden of the Penn Treaty failure should be spread more broadly to include life insurance companies. Sixth, amending all the state GA laws to make such a change would be controversial, would require years to complete, and might never be completed.

My NOLHGA Inquiry
Because the National Organization of Life and Health Guaranty Associations (NOLHGA) is coordinating the Penn Treaty liquidation, I asked NOLHGA for a list of companies that will be assessed and the amount that each company will be assessed. A spokesman for NOLHGA said the data I asked for is not yet available. He said that a "company's assessment responsibility to a GA for Penn Treaty will be roughly proportionate to its share of the health premiums reported by all of that GA's member companies."

The NOLHGA spokesman sent me a memorandum dated June 16, 2016 from Long Term Care Group, Inc. (LTCG), which is an LTC insurance administration firm. LTCG is working with Commissioner Miller, NOLHGA, and the GAs on the Penn Treaty case. The LTCG memorandum alludes to a "Common Interest and Confidentiality Agreement," which probably is the secret agreement to which I referred in No. 200 (posted January 27, 2017). Included in the LTCG memorandum is a tabulation showing for each state, and for each of the two Penn Treaty companies separately, estimates of the number of policies, the gross liabilities, the assets, and the net liabilities. The total number of policies was 78,661, gross liabilities were about $3.0 billion, assets were about $434 million, and net liabilities were about $2.6 billion. Regarding the tabulation, the spokesman said:
Please note that the estimates are based on year-end 2015 information. We expect the results of ongoing claim payments over 2016 and the first two months of 2017 will have a significant impact on the final liquidation date projections.
My Survey of Companies
I asked several shareholder-owned companies for their estimates of the amounts they will be assessed in connection with the Penn Treaty liquidation. Several referred me to their 10-K reports filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2016. Some also said they will comment further in their 10-Q reports filed with the SEC for the quarter ended March 31, 2017. I reviewed the 10-K reports of those companies and those of several other shareholder-owned companies. Here are the results of my survey:
Aetna: $230 million.
AFLAC: $10 million to $20 million.
Anthem: $190 million to $220 million.
Centene: Nothing found in 10-K.
CIGNA: $85 million after tax.
CNO Financial: Nothing found in 10-K.
Genworth: Referred me to the 10-K, in which the company said in part: "[W]e have not established any accruals for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. We will continue to monitor the situation and may record a liability and expense in future reporting periods."
Humana: $30 million.
Manulife: The Canadian parent of John Hancock. Manulife did not respond to my inquiry, and the relevant financial statement for the year ended December 31, 2016 has not yet been filed with the SEC.
MetLife: A spokesman said there is no estimate yet.
Prudential: $47.9 million for Penn Treaty, Executive Life, and Lincoln Memorial combined.
UnitedHealth: $350 million.
Unum: $12 million to $15 million after tax.
Three Other Inquiries
I wrote to New York Life, a mutual company that is in the LTC insurance business. A spokesman said there is no schedule or general interrogatory in the statutory financial statement requiring the company to disclose this detail. He said that, if it were material, the company would disclose it in the company's audited financial statement and potentially in a footnote in the company's statutory financial statement.

I wrote to Northwestern Mutual Life, which has a subsidiary (Northwestern Long Term Care) in the LTC insurance business. A spokeswoman said the company reports the total liability for assessments by all GAs as a "reserve for guaranty fund" write-in for line 25 on page 3 (the liability page) of the statutory financial statement. The figures in the two companies' statutory financial statements as of December 31, 2016 are $33.5 million for the parent company and $5.9 million for the subsidiary.

I wrote to a spokesman for Senior Health Insurance Company of Pennsylvania (SHIP), an LTC insurance company in runoff. I have written extensively about SHIP. The company does not file reports with the SEC. SHIP's spokesman was unable to obtain a response to my inquiry, and there is no relevant write-in for line 25 on page 3 of SHIP's statutory financial statement for the year ended December 31, 2016.

General Observations
I think the lack of a requirement in statutory financial statements for disclosure of the magnitude of the assessments against surviving insurance companies in the Penn Treaty case is unfortunate. I also think the lack of such a disclosure requirement is an example of the difference between the disclosure imposed by federal securities regulators on shareholder-owned insurance companies and the less rigorous disclosure imposed by state insurance regulators on mutual insurance companies.

The failure of Penn Treaty is one of the largest in American insurance history. I fear that the "hole" is so large that many Penn Treaty policyholders will not receive all the benefits they have been promised. I am also concerned that the Penn Treaty liquidation will adversely affect the public perception of the financial stability of not only LTC insurance, but also health insurance generally and even life insurance.

Available Material
I am offering a complimentary 21-page PDF consisting of Commissioner Miller's press release (2 pages), her commissioner's statement (3 pages), the liquidation order for Penn Treaty (6 pages), the liquidation order for American Network (6 pages), and the LTCG memorandum NOLHGA sent me (4 pages). Email and ask for the March 2017 package relating to Penn Treaty.