Friday, May 1, 2020

No. 368: Senior Health Insurance Company of Pennsylvania—The Proposed Plan of Rehabilitation

Senior Health Insurance Company of Pennsylvania (SHIP) has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. At that time, CSHI transferred the assets and liabilities of its LTC insurance business to create SHIP. CSHI had been running off its LTC insurance business (not selling any new LTC insurance policies) for five years prior to the transfer.

For many years after 2008, SHIP's financial condition worsened, often showing risk-based capital (RBC) levels calling for formal actions by the Pennsylvania Insurance Department (Department), SHIP's primary regulator. The Department took no formal regulatory actions.

In its statutory financial statement for the year ended December 31, 2018, SHIP reported a deficit (negative surplus). Its liabilities exceeded its assets by $447 million. Still the Department took no formal regulatory action. The deficit grew to $462 million at the end of the first quarter of 2019, to $477 million at the end of the second quarter, and to $524 million at the end of the third quarter. Still the Department took no formal regulatory action.

I believe that SHIP did not file a statutory financial statement for the year ended December 31, 2019. However, according to the preliminary plan of rehabilitation (Plan) discussed in this post, SHIP's deficit at the end of 2019 was $916 million.

The Application
On January 23, 2020, Jessica E. Altman, the Pennsylvania Insurance Commissioner (Commissioner), applied to the Commonwealth Court of Pennsylvania for an order placing SHIP in rehabilitation. Here, without citations, is part of the introduction to the application:
SHIP has committed one or more acts which constitute grounds for rehabilitation. Specifically, SHIP's most recent annual statement demonstrates that the company is statutorily insolvent. Additionally, SHIP's most recent risk-based capital ("RBC") report indicates that the company's total adjusted capital is substantially below its mandatory control level RBC, therefore triggering a "mandatory control level event." Finally, the Trustees of the Senior Health Care Oversight Trust [which oversees SHIP] and SHIP's directors have consented in a signed writing to the company being placed in rehabilitation and have waived a hearing.
The Order
On January 29, President Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania issued an order approving the application because "rehabilitation has been requested by and consented to by SHIP's board of directors and the trustees of the Senior Health Care Oversight Trust." The judge appointed the Commissioner as rehabilitator, said the Commissioner may appoint a special deputy rehabilitator, and ordered the filing of a Plan on or before April 22, 2020. The Commissioner appointed Patrick H. Cantillo as special deputy rehabilitator, and engaged a group of consultants to develop the Plan. I wrote about these developments in No. 352 (January 29, 2020) and No. 354 (February 10, 2020). (IN RE: Senior Health Insurance Company of Pennsylvania In Rehabilitation, Commonwealth Court of Pennsylvania, No. 1 SHIP 2020.)

The Plan
On April 22, Cantillo filed in court a single-spaced 108-page Plan. Here are the components of the Plan, with the number of pages shown in parentheses (the full Plan is in the complimentary May 2020 package offered at the end of this post):
Table of Contents (5)
How to Provide Comments and Objections (1)
Important Notice (3)
Basic Information about the Plan (6 pages)
General Plan Details (18)
Details of Phase One of the Plan (16)
Details of Phase Two of the Plan (22)
Phase Three (1)
Other Matters (22)
Glossary (14)
The "Basic Information about the Plan" includes a "Summary Description of the Plan." Here is the first paragraph of the description:
The following description of the Plan is intended to provide policyholders the basic information required for them to make the required election(s) if the Plan is implemented as proposed. To that extent, it should also enable policyholders to decide what if any comments or formal objections they may offer in response to the request for approval of the Plan. Much more detail about the Plan and related matters is provided in the sections that follow.
The Plan has three phases. In Phase One, policies not in nonforfeiture status will be evaluated and policyholders will be offered options. In Phase Two, policyholders may be offered additional options. In Phase Three, SHIP will complete the run-off of policies. Policyholders are divided into various active and disabled categories, and are offered various options. The Plan provides some illustrations, but each of them carries this warning language:
This illustration is provided solely for the purpose of demonstrating how premiums and benefits under each option in the proposed rehabilitation plan compare to each other. Every policy is different and produces different results.
General Observations
The Plan is incredibly complex. Cantillo and those working with him obviously poured an enormous amount of effort into its preparation.

The Plan involves options under which policyholders may choose to pay increased premiums and/or receive reduced benefits, and those already on claim may choose to receive reduced benefits. Some of those premium increases and benefit reductions are likely to be large.

I do not know how Judge Leavitt will handle the Plan. However, I think the Plan will fail. Premium-paying policyholders may drop out in droves when they see the magnitude of the premium increases and benefit reductions. I hope the judge will reject the Plan and order SHIP into liquidation. That action would bring the state guaranty associations into the picture, along with assessments paid by other insurance companies. In short, I think liquidation would make it possible to lower the size of the premium increases and lower the size of the benefit reductions.

The Pandemic
While the Plan was being prepared, the COVID-19 pandemic was and still is wreaking havoc on the United States and the rest of the world. Moreover, the pandemic is having its greatest impact on the elderly. Many of them are in nursing homes, assisted living facilities, homes for the aged, retirement communities, facilities for elderly veterans, and other facilities offering long-term care services.

A paragraph entitled "Timeline" appears on page 15 of the 108-page PDF of the Plan. The paragraph talks about affording policyholders and other interested parties an opportunity to comment on the Plan. In that paragraph is the following sentence, which alludes to the pandemic:
Because of the extraordinary circumstances facing our nation, the Rehabilitator will ask the Court to provide policyholders and others a prolonged period of time to review the Plan before such comments are due.
To my knowledge, that is the only comment in the Plan about the pandemic. However, it is possible that I missed other comments.

It is morbid to contemplate how the impact of surging numbers of deaths among the elderly may affect the LTC insurance business. Such a surge would eliminate many claim payments, and therefore might improve the financial condition of SHIP and other LTC insurance companies.

Available Material
In No. 352 I offered a 27-page complimentary January 2020 package about SHIP. In No. 354 I offered a 23-page complimentary February 2020 package about SHIP. Those packages remain available.

Now I am offering a 108-page complimentary May 2020 package containing the full Plan. Email and ask for the May 2020 package about the SHIP Rehabilitation Plan.