Monday, April 2, 2018

No. 260: Long-Term Care Insurance—The Worsening Financial Condition of Senior Health Insurance Company of Pennsylvania

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 about SHIP in The Insurance Forum, and have posted several items about SHIP on my blog. In No. 209 (posted March 20, 2017) I wrote about increasing financial problems at SHIP based on its statutory financial statement for the year ended December 31, 2016. On March 1, 2018, SHIP filed its 228-page statutory financial statement for the year ended December 31, 2017. In this follow-up I discuss the company's worsening financial condition.

Selected Financial Numbers
SHIP's total assets declined from $2.74 billion at the end of 2016 to $2.69 billion at the end of 2017. During the same period, total liabilities declined from $2.72 billion to $2.68 billion, total surplus declined from $28.02 million to $12.65 million, and net income rose from a net loss of $46.00 million to a net loss of $13.95 million.

Risk-Based Capital
SHIP's risk-based capital (RBC) ratios, where the numerator is total adjusted capital and the denominator is company action level RBC, have been generally declining in recent years. SHIP's RBC ratios, expressed as percentages, were 126 in 2013, 108 in 2014, 80 in 2015, 82 in 2016, and 71 in 2017. The RBC ratio in 2013 was in the adequate zone (125 and above), in 2014 was in the red flag zone (100 to 124), in 2015 and 2016 was in the company action zone (75 to 99), and in 2017 was in the regulatory action zone (50 to 74). I described the history and nature of RBC ratios in the August 2011 issue of The Insurance Forum. The description is in the complimentary package offered at the end of this post.

The Surplus Note
When an insurance company issues a surplus note, the company borrows money from the buyer of the note. State surplus note laws allow an insurance 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 insurance 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 note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the note. I described the history and nature of surplus notes in the August 2011 issue of The Insurance Forum. The description is in the complimentary package offered at the end of this post.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of the statutory 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.

SHIP's surplus note matures on April 1, 2020. The interest rate is 6 percent, apparently payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest on the note was $8.55 million as of December 31, 2017. Thus the full amount of the note at the end of 2017 was $58.55 million.

The surplus note has a significant impact on SHIP's financial position. Total surplus at the end of 2016 and at the end of 2017 included the note, without which SHIP would have been insolvent at the end of 2016 and 2017. Also, without the note, the RBC ratio in 2014 would have been in the regulatory action zone, and the RBC ratios in 2015, 2016, and 2017 would have been in the mandatory control zone (below 35).

SHIP issued the surplus note to Beechwood Re Investments LLC. According to SHIP's 2017 financial statement, SHIP received $50.17 million of "Beechwood Investments" on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood. As of December 31, 2017, the Beechwood investments had an adjusted carrying value of $37.63 million.

Investments in Platinum Partners
Beechwood is related to Platinum Partners, a hedge fund in serious financial and legal trouble. In subsequent litigation SHIP said it was not aware of that relationship when SHIP issued the surplus note to Beechwood in 2015. At the end of 2017, SHIP owned $39.34 million fair value of Platinum investments for which SHIP had paid $41.6 million. Also, during 2017 SHIP disposed of Platinum investments for $1.25 million, for which it had paid $1.30 million.

Reinsurance with Roebling Re
SHIP took credit in 2017 for $1.13 billion of reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have no information about Roebling, such as the name of its owner, the names of its senior officers, or its financial condition.

Officers, Directors, and Affiliates
Several years ago two top officers of SHIP were President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. They responded promptly to my inquiries. They later left SHIP. I do not know the circumstances surrounding their departures. My inquiries about SHIP are now handled by a public relations firm in New York.

The officers listed in SHIP's 2017 financial statement are President and Chief Executive Officer Barry Lee Staldine, Chief Financial Officer Ginger Susan Darrough, Secretary Kristine Tejano Rickard, and Treasurer John Edward Robinson. The directors listed, in addition to Staldine and Darrough, are Julianne Marie Bowler, Cecil Dale Bykerk, John Martin Morrison, Gregory Vincent Serio (former New York State superintendent of insurance), and Thomas Edward Hampton.

SHIP and Fuzion Analytics Inc. are wholly owned subsidiaries of the Senior Health Care Oversight Trust. SHIP and Fuzion have a management agreement under which SHIP paid $18.09 million to Fuzion in 2017. SHIP, Fuzion, and the Senior Health Care Oversight Trust file consolidated federal income tax returns.

General Observations
With regard to the surplus note that SHIP issued to Beechwood in 2015, I believe that, because of SHIP's fragile financial condition, the company has not obtained and will not obtain the Pennsylvania insurance commissioner's permission to pay interest or principal on the note. Thus the note is nothing more than a gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to the Senior Health Care Oversight 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 a spokesman for the Pennsylvania insurance commissioner said the insolvency would be handled in accordance with Pennsylvania law. In No. 208 (posted March 13, 2017) I discussed Penn Treaty Network America Insurance Company and an affiliate, Pennsylvania-domiciled LTC insurance companies which entered into rehabilitation in 2009, and in 2017 were ordered into liquidation by a Pennsylvania court judge.

The public documents Conseco filed in 2008 in the SHIP case said Milliman Inc., an actuarial consulting firm, concluded in a financial report that SHIP will have enough assets to run off its LTC insurance business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania insurance commissioner said the report was confidential. I believed in 2008, and I still believe, that SHIP will not remain solvent long enough to run off its LTC insurance business. If SHIP has a losing year in 2018 similar to or worse than in 2017, and if SHIP and the Pennsylvania insurance commissioner cannot devise a plan to strengthen the company, I think it would be necessary for the commissioner to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material
I am offering a complimentary 37-page PDF consisting of my two articles in the August 2011 issue of the Forum (10 pages) and selected pages from SHIP's 2017 financial statement from which I drew much of the information for this post (27 pages). Email jmbelth@gmail.com and ask for the April 2018 SHIP package.

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