Monday, November 25, 2019

No. 342: Long-Term Care Insurance and the Expanding Insolvency of Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP), which is domiciled in Pennsylvania, has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. I wrote four articles in The Insurance Forum about the transfer of CSHI's LTC insurance business to SHIP. (The four articles are in the complimentary package offered at the end of this post.)

In No. 308 (April 11, 2019), I said SHIP was insolvent by $447 million. According to the company's financial statement for the year ended December 31, 2018 (filed March 1, 2019), total liabilities of $2.653 billion exceeded total assets of $2.206 billion. Here I report that the deficit has been expanding in 2019. I also discuss a few related matters.

Quarterly Data in 2019
According to SHIP's financial statement for the quarter ended March 31, 2019 (filed May 15), the deficit had grown to $462 million. According to the statement for the quarter ended June 30, 2019 (filed August 15), the deficit had grown to $477 million. According to the statement for the quarter ended September 30, 2019 (filed November 15, 2019), the deficit had grown to $524 million. (Six selected pages from the latest quarterly statement are in the complimentary package offered at the end of this post.)

RBC Data
The numerator of a risk-based capital (RBC) ratio is "total adjusted capital," the denominator is "company action level," and the quotient is the RBC ratio. According to SHIP's financial statement for the year ended December 31, 2018, total adjusted capital was minus $467 million, company action level was $102 million, and the RBC ratio was minus 458 percent. RBC data do not appear in quarterly statements, but the RBC ratios are negative because total adjusted capital is negative.

According to state RBC laws, when a company's RBC ratio falls below 35 percent, the company is in the "mandatory control zone," and the primary regulator—the Pennsylvania Insurance Department (Department) in this instance—is required to seek state court permission to seize control of the company. Yet the Department has not done so. I asked the National Organization of Life and Health Guaranty Associations (NOLHGA) about SHIP. NOLHGA referred me to the Department. I asked the Department about SHIP, but received no reply.

In SHIP's statement for the year ended December 31, 2018, this sentence appears: "There is not substantial doubt about the Company's ability to continue as a going concern." I do not know how a company deep in the mandatory control zone can justify that assertion. In SHIP's three quarterly statements in 2019, these two sentences appear:
The Company has suffered recurring losses from operations and has a net capital and surplus deficit. The Company is actively working with the Pennsylvania Insurance Department to develop a corrective action plan.
The Limited-Scope Examination
On the Department's website, I recently found a "Report of Limited-Scope Examination" of SHIP as of December 31, 2016. The "Conclusion" of the report contains these comments (the full report is in the complimentary package offered at the end of this post):
Although each of the Consulting Actuary's scenarios produce less favorable results than the Company's base scenario, and indicate material reserve deficiencies, the Department is making no recommendation to change the financial statement at this time.
The Company has agreed to consider several long-term monitoring suggestions from the Consulting Actuary and incorporate those monitoring suggestions as needed into future reserve studies. The Department will continue to closely monitor the Company's financial condition and operating results.
The next regularly scheduled financial condition examination of the Company will cover the five-year period ending December 31, 2018.
I asked the Department when the examination for the five-year period ending December 31, 2018 will be available. I received no reply.

The Market Conduct Examination Report
On the Department's website, I recently found a "Market Conduct Examination Report" of SHIP as of April 24, 2019. The report includes a detailed history of the company, refers to a third-party administration agreement with Long Term Care Group (LTCG), and contains the company's response. Here are two of several recommendations (the full report is in the complimentary package offered at the end of this post):
The Company must review and revise internal control procedures to ensure compliance with claims handling requirements, so that the violations relating to claim acknowledgment, status letters, acceptance or denials, and payments as noted in the Examination Report, do not occur in the future.
The Company must ensure LTCG representatives are trained to fully disclose to first-party claimants the benefits, coverages, alternative plans of care, or other provisions of the insurance policy or insurance contract when the benefits, coverages or other provisions are pertinent to a claim.
According to SHIP's financial statements, the company remains licensed in all U.S. jurisdictions except Connecticut, New York, Rhode Island, Vermont, American Samoa, Guam, Puerto Rico, and Northern Mariana Islands. In reply to my inquiries, a few of those eight jurisdictions said they have no record of the company ever being licensed there.

General Observations
Normally, when an insurance company is in financial trouble, the primary regulator seeks state court permission to seize control of the company and place it in rehabilitation or liquidation. (Liquidation would trigger state guaranty association coverage.) In this instance, however, SHIP and its predecessor, CSHI, have been in runoff mode since 2003. Because the company does not sell new policies, perhaps the thinking is that there is no need for the Department to take formal control of the company. In the absence of straight answers from the Department and NOLHGA, it appears that the Department has effectively taken control of SHIP without a court order. Stated another way, it appears that the company is "in limbo" without disclosure of the situation to the premium-paying policyholders and the recipients of benefits. To my knowledge SHIP provides no annual reports to policyholders and claimants. I think the Department should require SHIP to do so.

There is another way to look at this highly unusual regulatory procedure. The "in limbo" status of SHIP's policyholders and claimants may continue for many years—probably decades—until the assets run out. At that point the company would have to close down, cancel the policies, and stop benefit payments to claimants. The situation raises important questions: when and how should the company's status be disclosed to (1) premium-paying policyholders that they likely will not receive the benefits promised under their policies, and (2) claimants that their benefit payments likely will stop. This doomsday scenario is the result of "kicking the can down the road" and leaving the problem in the hands of a future generation of regulators.

When this item is posted, I will send it to the Department. I will say I plan to write a follow-up, and will ask the Department for a statement about SHIP in a form suitable for inclusion in the follow-up. I will impose no limitation on the length of the statement, but will ask the Department to provide the statement within three weeks.

Available Material
I am offering a complimentary 49-page PDF consisting of the four Forum articles (10 pages), selected pages from the latest quarterly statement (6 pages), the limited-scope examination report (6 pages), and the market conduct examination report (27 pages). Email and ask for the December 2019 SHIP package.


Friday, November 15, 2019

No. 341: The Age 100 Problem—Another Update on the Lebbin Lawsuit Against Transamerica

In No. 331 (September 6, 2019), I posted an update about a 2017 lawsuit by Gary H. Lebbin—at the time he was almost 100—and the Lebbin-Spector Family Trust ("Trust"). The trustees of the Trust are Gary's two children. The defendant is Transamerica Life Insurance Company. Here I provide another update. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

Recent Developments
On February 5, 2019, by which time Gary was afflicted with dementia, Transamerica settled with him for $10,000. On February 22 the Trust filed an amended complaint that omitted Gary as a plaintiff, leaving the Trust as the only plaintiff. The amended complaint included five counts: declaratory relief, breach of contract, breach of the covenant of good faith and fair dealing, reformation, and rescission. On July 19 the judge granted the Trust's claim for breach of contract. The other four counts were denied by the judge or withdrawn by the Trust.

On July 30 the judge canceled the trial, which had been set for August 5. The parties said they had agreed to resolve the case, but they had not agreed on the damages for the Trust's breach-of-contract claim. The damages thus became the only remaining issue in the case. Had there been a trial, it would have been interesting to see what the jury would have said about the amount of damages. The judge set a briefing schedule under which the Trust was required to file its motion for summary judgment (MSJ) on damages by August 30.

The Trust's MSJ on Damages
On that date the Trust filed its MSJ on damages. The Trust requested a return of all premiums paid to Transamerica—a total of $1,670,140.91 plus prejudgment interest. The prejudgment interest rates the Trust suggested are the Florida statutory rates at the time of each premium payment. The Trust said it would provide the interest figure prior to the entry of final judgment.

Transamerica's Response
The briefing schedule required Transamerica to file its response to the Trust's MSJ by October 10. On that date the company filed a massive amount of material, including a document opposing the Trust's MSJ, a cross-motion for summary judgment, a memorandum of law, a response to the Trust's statement of undisputed material facts, 48 exhibits, and three supplemental declarations in opposition to the Trust's MSJ. Here is the first paragraph of Transamerica's opposition document. (The full opposition document is in the complimentary package offered at the end of this post.) It is important for the reader of the paragraph to understand that each of the two policies was a second-to-die universal life policy.
The result sought by Plaintiffs in this case would turn fundamental principles of insurance law and justice on their head. Gary Lebbin purchased two life insurance Policies insuring himself and his wife with a total death benefit of $3.2 million. Mr. Lebbin was fully aware that the Policies provided that, if both insureds died before each was 100 years old, the Policies would pay the death benefit. If either insured lived to be 100, the Policies would terminate and instead pay any cash value. Mr. Lebbin was a very sophisticated businessman who worked with expert brokers in purchasing these Policies, and personally managed them for 24 years. His management fully and repeatedly comported with and ratified this understanding of the Policies. In managing the Policies, Mr. Lebbin could either pay just enough premium to maintain the Policies to age 100, or he could pay sufficient premiums to build a cash value upon termination. He paid only the minimum premium because he believed he would not live to be 100, and he wanted the least expensive insurance.
The Trust's Reply
The briefing schedule required the Trust to reply to Transamerica's response by November 8. On that date the Trust filed its reply in support of its MSJ for damages, its response to Transamerica's cross-motion for summary judgment, and a motion to strike or disregard the supplemental declarations. Here, without citations, is the first paragraph of the Trust's reply in support of its MSJ for damages (the full reply document is in the complimentary package offered at the end of this post):
Transamerica argues that, regardless of the measure of damages the Court selects for Transamerica's wrongful termination of the Policies, Plaintiffs should not be compensated in any fashion for Transamerica's breach of contract. According to Transamerica's concept of "insurance law and justice," a life insurance company can breach its life insurance policies by improperly terminating them and yet retain millions of dollars in premium, interest, investment gains, profits, and reserved death benefits. Transamerica asks the Court to put Transamerica in a better position than if it had performed under the Policies, notwithstanding that the Policies have been adjudged so "incomprehensible" as to be "rendered ambiguous." [Emphasis in original.]
General Observations
The briefing schedule on damages requires Transamerica to file any response to the Trust's reply by November 25. As I understand it, after briefing is completed, the judge will rule on the damages for the Trust's breach-of-contract claim. I plan to prepare yet another update on this case after the judge rules on the damages.

Available Material
My previous posts about the Lebbin case, in addition to the above-mentioned No. 331, are Nos. 226, 241, 269, and 327. In each of those posts, I offered a complimentary package containing additional material. Those packages are still available.

Now I am offering a complimentary 55-page package consisting of Transamerica's October 10 opposition document (28 pages) and the Trust's November 8 reply document (27 pages). Email and ask for the November 2019 package about Lebbin v. Transamerica.


Monday, November 11, 2019

No. 340: The Markopolos Book about the Madoff Ponzi Scheme

In No. 329 (August 28, 2019), I wrote about a whistleblower report by Harry M. Markopolos alleging that General Electric Company (GE) is a "Bigger fraud than Enron" and is "headed toward bankruptcy." One part of the report relates to GE's accounting for its long-term care (LTC) insurance legacy problem, a subject that has been of great interest to me for a long time.

In that post I mentioned a 2010 book entitled No One Would Listen: A True Financial Thriller, a personal account by Markopolos of his efforts to expose the massive Ponzi scheme Bernard Madoff operated for many years. When I wrote that post, I had not read the Markopolos book. I have now read it, and it is excellent.

The Markopolos Book
The 354-page Markopolos book consists of nine chapters following the front matter, and also includes an epilogue, three appendixes, a note on sources, acknowledgments, biographical information about the author, and an index. The entire book is a good read, but the most interesting section begins with Chapter 7 entitled "More Red Flags Than the Soviet Union" and ends with the collapse of Madoff's scheme. The first two paragraphs of Chapter 1 illustrate the author's writing style:
On the morning of December 11, 2008, a New York real estate developer on a JetBlue flight from New York to Los Angeles was watching CNBC on the small back-seat television. A crawl across the bottom of the screen reported that Bernard Madoff, a legendary Wall Street figure and the former chairman of NASDAQ had been arrested for running the largest Ponzi scheme in history. The developer sat silently for several seconds, absorbing that news. No, that couldn't be right, he thought, but the message streamed across the screen again. Turning to his wife, he said that he knew that she wasn't going to believe what he was about to tell her, but apparently Bernie Madoff was a crook and the millions of dollars that they had invested with him were lost. He was right—she didn't believe him. Instead, she waved off the thought. "That's not possible," she said, and returned to the magazine she was reading.
The stunned developer stood up and walked to the rear of the plane, where the flight attendants had gathered in the galley. "Excuse me," he said politely, "but I'm going to be leaving now. So would you please open the door for me? And don't worry—I won't need a parachute."
The Report of the SEC OIG
On December 11, 2008, Madoff confessed and was arrested. The Securities and Exchange Commission (SEC) charged him with securities fraud for a multi-billion dollar Ponzi scheme he had perpetrated on clients of his firm, and the U.S. Attorney in the Southern District of New York indicted him on criminal charges.

On December 18, 2008, the SEC Office of Inspector General (OIG) issued a document preservation notice to the entire SEC. On March 12, 2009, Madoff pled guilty to all charges. On June 29, 2009, he was sentenced to serve 150 years in prison.

On August 31, 2009, H. David Kotz, the inspector general of the SEC, issued a major report. The complimentary package offered at the end of this post includes the entire public version of the report. Here is the first paragraph in the concluding section of the report:
The OIG investigation found that the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading and should have led to a thorough examination and/or investigation of the possibility that Madoff was operating a Ponzi scheme. However, the OIG found that although the SEC conducted five examinations and investigations of Madoff based upon these substantive complaints, they never took the necessary and basic steps to determine if Madoff was misrepresenting his trading. We also found that had these efforts been made with appropriate follow-up, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.
The Recent GE 10-Q Report
On October 30, 2019, GE filed its 10-Q report for the quarter ended September 30, 2019. The report contains information about GE's legacy LTC insurance business. The information is on pages 27-31 and 65-66 of the report. Those pages are in the complimentary package offered at the end of this post.

General Observations
In the above mentioned No. 329, I expressed the opinion that the ad hominem attack against Markopolos in GE's initial response to the release of the Markopolos report was unfortunate. The 11th edition of Merriam-Webster's Collegiate Dictionary defines "ad hominem" as "marked by or being an attack on an opponent's character rather than by an answer to the contentions made." After reading the Markopolos book, I feel more strongly about GE's initial response to the Markopolos report.

Available Material
In the above mentioned No. 329, I offered a complimentary 20-page package containing some information about the Markopolos report on GE. That package is still available.

Now I offer a complimentary 484-page PDF consisting of excerpts from GE's recent 10-Q report (7 pages) and the full 2009 SEC OIG report on Madoff (477 pages). Email and ask for the November 2019 package about the 2010 Markopolos book.