Thursday, August 2, 2018

No. 280: Long-Term Care Insurance—Kanawha, Falcone, and South Carolina

Kanawha Insurance Company, based in South Carolina, sold long-term care (LTC) insurance for many years. The company stopped selling LTC insurance in 2005 and continued to administer the policies in runoff as a closed block. In 2007 Humana, Inc., a large health insurance company, acquired some Kanawha business, including the LTC block.

In November 2017, as I reported in No. 242 (11/20/17), Humana announced a definitive agreement to sell Kanawha's LTC block, along with some other Kanawha business, to Texas-based Continental General Insurance Company (CGIC), a wholly owned subsidiary of HC2 Holdings, Inc. (NYSE:HCHC). The parties anticipated the transaction would close in the third quarter of 2018, subject to various approvals, including approval by the South Carolina Department of Insurance (Department).

The Hearing Notices
On May 16, 17, and 18, 2018, the Department published notices of a public hearing to be held on June 12 "In the Matter of the Proposed Acquisition of Control of Kanawha Insurance Company, a South Carolina Domestic Insurer, by Continental General Insurance Company, a Texas Corporation." The notices appeared in several area newspapers. One of the notices is in the package offered at the end of this post.

The Public Hearing
The Department asked a retired state judge to preside at the public hearing, which lasted 79 minutes. In attendance were attorneys and other representatives of the Department, Humana, and CGIC. Also in attendance were three members of the public, one of whom spoke briefly about his concerns as a policyholder. After the public hearing, there was an "evidentiary hearing," which apparently was not open to the public.

The Transcript
In response to my request, a Department spokesman graciously provided me with a 78-page double-spaced transcript of the public hearing. However, he said persons interested in seeing the transcript normally buy it from the court reporting firm the Department uses. He therefore asked me not to make the transcript available without charge to my readers. I am honoring that request. Any interested reader may purchase the transcript from Creel Court Reporting (1-800-822-0896) for about $230.

The Conditional Approval Order
On July 12, 2018, South Carolina Director of Insurance Raymond G. Farmer issued a Final Decision and Conditional Order (Order) conditionally approving CGIC's acquisition of Kanawha's business, including the LTC block. The Order is in the package offered at the end of this post.

Financial Strength Ratings
In 2013, according to my September 2013 (final) special ratings issue of The Insurance Forum, CGIC had a B++ (Good) financial strength rating from A. M. Best Company. In April 2015 Best placed the rating under review with negative implications. In March 2016 Best withdrew the rating when HC2 declined to participate in Best's rating system. I am not aware that CGIC is currently rated for financial strength by any of the other major rating firms.

The RBC Provision
Regulators often use risk-based capital (RBC) ratios as a measure of financial strength. The numerator is "Total Adjusted Capital," which is the statutory net worth of the company with some adjustments. The denominator usually is "Company Action Level" (CAL) or "Authorized Control Level" (ACL). CAL is exactly twice ACL. Thus an RBC ratio with CAL as the denominator is exactly half the RBC ratio with ACL as the denominator. The Order includes this provision:
The acquiring company [CGIC] must maintain a minimum RBC ratio of the combined companies of 450% for two years after closing. The acquiring party and its parent, HC2, will infuse the capital necessary to maintain an RBC ratio of 450% as stated above. After the two year period has expired, the acquiring party will maintain the RBC ratio required by the domestic regulator [Texas] and shall infuse any additional capital necessary to maintain it at that level.
The Order does not indicate which RBC ratio was used. The Department spokesman confirmed my belief that ACL was the denominator. If CAL had been the denominator, the RBC ratio required by the Order would have been 225 percent.

CGIC's statutory statement for the year ended December 31, 2017 shows RBC data for the past five years. The RBC ratios, with ACL the denominator, were 571 percent for 2013, 515 percent for 2014, 537 percent for 2015, 531 percent for 2016, and 489 percent for 2017. It is not surprising that the 450 percent figure was used in the Order.

The Falcone Provision
Another provision in the Order relates to Philip A. Falcone. I wrote about him in the previously mentioned No. 242, in No. 244 (12/11/17), and in No. 248 (1/11/18). The Order includes this provision:
As a continuing obligation of CGIC and in accordance with the Disclaimer of Affiliation filed with the Department by Philip A. Falcone, Chairman, President, and CEO of HC2, as supplemented by proof of the discussion of these matters with CGIC's Board of Directors and letters from Mr. James Corcoran to Director Farmer and Texas Insurance Commissioner [Kent] Sullivan, Mr. Falcone shall not have any role in the day-to-day operations of management of Kanawha or CGIC pre- or post-merger. Any subsequent change to the statements/positions in these documents must be filed with and approved by the states of South Carolina and Texas, respectively, before taking effect.
Despite his position at HC2 and the prominence of his name in the Order, Falcone did not testify under oath or appear at the public hearing. Two senior officials of CGIC testified. One was Michael W. Mazur, CGIC's president and chief executive officer. The other was James P. Corcoran, executive chairman of CGIC's board of directors. Corcoran was New York State Superintendent of Insurance from 1983 to 1990.

On April 30, 2018, HC2 filed a proxy statement with the Securities and Exchange Commission (SEC). The proxy, which announced the June 13, 2018 annual meeting of HC2 shareholders, contains a detailed, four-paragraph discussion of Falcone's problems with the SEC and with the New York State Department of Financial Services. The discussion, entitled "Certain Legal Proceedings Affecting Mr. Falcone," is in the package offered at the end of this post.

CGIC's 2017 Statutory Statement
While reviewing the RBC data in CGIC's 2017 statutory statement, I reviewed other parts of the statement. At the end of 2017, CGIC had net admitted assets of about $1.4 billion, total liabilities of about $1.3 billion, and statutory net worth of about $75 million. It had a 2017 statutory net loss of about $80,000. Note 1A of the "Notes to Financial Statements" describes briefly the plan to acquire Kanawha from Humana. The note, along with other selected pages from the statement, is in the package offered at the end of this post.

The Florida Consent Order
According to Schedule T in CGIC's 2017 statutory statement, the company's five leading states in terms of premiums (millions) are Texas ($46.5), Florida ($14.3), Georgia ($8.8), Illinois ($8.6), and North Carolina ($8.6). The company is licensed in all states except Florida and New York. I contacted the Florida Office of Insurance Regulation (FLOIR) to inquire about the interesting fact that, while Florida is CGIC's second largest market, the company is not licensed there.

In response, a spokesman sent me a Consent Order dated August 23, 2016. It said that FLOIR, based on CGIC's 2015 statutory financial statement, found the company "impaired" by about $7.5 million at the end of 2015. The Consent Order approved CGIC's voluntary surrender of its certificate of authority to do business in Florida. It is my understanding that CGIC may try to reinstate its certificate of authority. The Consent Order is in the package offered at the end of this post.

Other Requested Documents
I asked the Department for several other documents alluded to in the Order or in the hearing transcript. One is a "Confidentiality Order" and another is the public portion of the actuarial opinion for Kanawha. Those documents are in the package offered at the end of this post.

Still another document is the "Disclaimer of Affiliation," which is confidential. I also requested the biographical affidavits of the principals (I was most interested in the Falcone affidavit), but they are confidential.

General Observations
Given the volatility of the LTC insurance market and the manner in which the owners of Kanawha LTC insurance policies have been moved from company to company, it is understandable that the policyholders are concerned. I have received several emails containing expressions of concern from owners of LTC insurance policies in the Kanawha block.

I have written about transfers of policies from one insurance company to another, and the question of whether policyholders should be given the opportunity to consent to the transfer. In this case, because policyholders were given no such opportunity, I believe that their constitutional rights were violated. See No. 220 (6/1/17).

Available Material
I am offering a complimentary 42-page PDF consisting of a sample notice of the hearing (1 page), the Department's Order (3 pages), the Confidentiality Order (5 pages), the public portion of the actuarial opinion for Kanawha (12 pages), selected pages from CGIC's 2017 statutory statement (10 pages), Florida's Consent Order (8 pages), and the discussion of Falcone in HC2's recent proxy statement (3 pages). Email and ask for the August 2018 package about Kanawha's LTC insurance policies.