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.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 209: Senior Health Insurance Company of Pennsylvania, a Long-Term Care Insurance Company in Runoff, Faces Increasingly Serious Financial Trouble

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 three major articles about SHIP in The Insurance Forum in 2008 and 2009, and posted several items on my blog in recent years. On March 1, 2017, SHIP filed in a timely manner its 230-page statutory financial statement for the year ended December 31, 2016. Here I discuss the increasingly serious financial trouble the company is facing, as reflected in that financial statement.

Selected Financial Numbers
SHIP's total assets declined from $2.9 billion at the end of 2015 to $2.7 billion at the end of 2016. Total liabilities declined from $2.8 billion at the end of 2015 to $2.7 billion at the end of 2016. Total surplus declined from $55.8 million at the end of 2015 to $28.3 million at the end of 2016. Net income declined from a net loss of $9 million in 2015 to a net loss of $39 million in 2016.

SHIP's total surplus at the end of 2015 and at the end of 2016 included a $50 million surplus note, which is discussed later. Without the surplus note, the company would have been barely solvent at the end of 2015 and would have been insolvent at the end of 2016.

SHIP's risk-based capital (RBC) ratio, where the denominator is company action level RBC, increased from 80 percent at the end of 2015 to 82 percent at the end of 2016. Those ratios are below company action level RBC of 100 percent, and above regulatory action level RBC of 75 percent. Without the surplus note, the ratio would have been 37 percent at the end of 2015, below authorized control level RBC of 50 percent, and 14 percent at the end of 2016, below mandatory control level RBC of 35 percent.

The Surplus Note
When a company issues a surplus note, the company borrows from the buyer of the surplus note. State surplus note laws allow a 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 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 surplus note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the borrowed money.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of its 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. The surplus note matures on April 1, 2020. The interest rate is 6 percent, probably payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest as of December 31, 2016, was $5.55 million.

SHIP issued the surplus note to (borrowed money from) Beechwood Re Investments, LLC. The latest financial statement says SHIP received the $50 million in cash, but the schedule of "all other long-term investments owned" at the end of 2016 shows that SHIP acquired $50 million (at a cost of about $50.2 million) of Beechwood investment offerings on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood (and thereby borrowed $50 million from Beechwood). As of December 31, 2016, the Beechwood investments had an adjusted carrying value of about $37.6 million.

Investments in Platinum Partners
Beechwood is closely related to Platinum Partners, a hedge fund in serious financial and legal trouble. It is my understanding that SHIP, when it issued the surplus note to Beechwood in February 2015, was not aware of that close relationship. The latest financial statement shows that SHIP owned about $53.8 million fair value of Platinum investment offerings at the end of 2016, and at that time the Platinum investment offerings had an adjusted carrying value of about $39.3 million.

SHIP's latest financial statement shows that during 2016 SHIP acquired Platinum investment offerings at a cost of about $32.9 million. The financial statement also shows that during 2016 SHIP disposed of Platinum investment offerings for consideration of about $28.3 million.

Reinsurance with Roebling Re
Reinsurance exhibits in SHIP's latest financial statement show that SHIP took credit for about $1.2 billion of LTC insurance reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. SHIP's latest financial statement says Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have tried without success to find information about Roebling, such as the name of its owner, the names of its senior officers, and its financial condition.

Executives
Several years ago I met personally with two top officers of SHIP: President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. During the past year, each has left SHIP. I do not know the circumstances surrounding their departures. Recently my inquiries about SHIP have been referred to a spokesman at a public relations firm in New York. The spokesman has provided answers to some of my questions, but most recently has not been able to provide responses.

General Observations
With regard to the $50 million, 6 percent, approximately five-year surplus note that SHIP issued to Beechwood in February 2015, I believe that, because of SHIP's fragile financial condition, the company will not be able to obtain permission from the commissioner to pay interest or principal on the surplus note. In other words, I believe that the purchase of the surplus note will turn out to have been an outright gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to an independent 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 the Pennsylvania Insurance Department said insolvency would be handled in accordance with Pennsylvania law. See No. 208 (posted March 13, 2017) for a discussion of Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance Company which has been in rehabilitation since 2009 and is now in liquidation.

The public documents Conseco filed in 2008 in the SHIP case said Milliman, an actuarial consulting firm, concluded in a financial report that SHIP will have sufficient assets to run off the business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania Insurance Department said the report was confidential. I had a hunch in 2008, and I believe now, that SHIP will not remain solvent long enough to run off the LTC insurance business. If SHIP has a losing year in 2017 similar to or worse than in 2016, and if SHIP and the commissioner cannot devise a plan to improve the company's financial situation, I think the commissioner would have to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material
I am offering a complimentary 36-page PDF consisting of my articles about SHIP in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and 27 selected pages from SHIP's statutory financial statement for the year ended December 31, 2016. The selected pages are those from which I drew much of the data for this post. Email jmbelth@gmail.com and ask for the March 2017 SHIP package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 229: Long-Term Care Insurance—Senior Health Insurance Company of Pennsylvania Shows How Not To Handle a Claim

In January 1996, Mary ("Molly") White, an Ohio resident aged 67 at the time, purchased a long-term care (LTC) insurance policy from American Travellers Life Insurance Company (ATL). The company later became Conseco Senior Health Insurance Company, and still later became Senior Health Insurance Company of Pennsylvania (SHIP).

In May 2013, Ruth White, who is Molly's daughter and holds power of attorney for her, filed a claim with SHIP for benefits under the policy. SHIP denied the claim. In August 2013, Ruth filed an appeal with SHIP, which denied the appeal. Since 2013, Molly's mental and physical conditions have deteriorated. Ruth filed additional claims, most recently in October 2016. SHIP denied the claims. In June 2017, Ruth filed a lawsuit against SHIP in state court in Ohio. In July 2017, SHIP removed the case to federal court.

U.S. District Judge John R. Adams is handling the case. President George W. Bush nominated him in January 2003, and the Senate confirmed him in February 2003. (See White v. SHIP, U.S. District Court, Northern District of Ohio, Case No. 5:17-cv-1531.)

The APC Rider
The ATL policy provides for benefits when the insured is in a "Long Term Care Facility" or "Assisted Living Facility." The policy also has a complimentary rider that provides benefits under an "Alternative Plan of Care" (APC) recommended by a physician.

The crux of the dispute is whether the APC rider provides benefits when Molly is at home rather than in one of the above facilities. ATL promoted the APC rider in marketing material. The company said such things as "Unlimited Coverage for Custodial, Intermediate and Skilled Care PLUS Alternate Care Benefits!" It also made it sound as though the APC rider provided a way to receive benefits at home without being admitted to one of the above facilities. The APC rider reads:

If you would otherwise qualify for benefits, we will consider paying for the cost of services you require under a written alternative plan of care. Such alternative care must be a medically acceptable alternative to Long Term Care or Home Health Care.

The alternative plan of care must be initiated by you. It must be developed and written by your physician and consistent with generally accepted medical practices. Those parts which are mutually agreeable to you, your physician and us will be adopted.

Alternative care may include but not be limited to: (1) special treatments; (2) different sites of care; or (3) modifications to your residence to accommodate your needs. Suggested services and benefit levels may be different from, or not otherwise covered by, the policy. If so, they will be paid at the levels specified in the alternative plan of care.

Agreement to participate in an alternative plan of care will not waive any of your rights or our rights under the Policy. However, the total of all benefits paid under this Rider will be an offset to those otherwise payable under the Policy to the extent that is agreed to by you and us in the written alternative plan of care. [Blogger's note: The final sentence above is in boldface type.]

Denial Letters
As mentioned earlier, SHIP denied the claims and appeals that Ruth submitted. For example, in a June 2013 letter to Molly's physician, a SHIP "care manager" said:

In order to evaluate Mary White's eligibility for benefits, we reviewed care plan assessment, care notes, and the results of a recent onsite nursing assessment, have spoken to Ruth White and have determined that Mary White needs assistance with bathing, dressing, toileting, transferring, mobility, and continence.

It is our understanding that Mary White does not desire to receive services in a nursing home setting and wishes to receive care at home. However, Mary White's policy covers Long Term Care Facility or Assisted Living Facility care, only.

In an August 2013 letter to Ruth, the same care manager said it differently. Here are the two key paragraphs:

You requested benefits under your Alternative Plan of Care rider. In order to determine your eligibility, both you and your physician submitted information on whether admission to a nursing home would otherwise be required for your condition, that your care needs can adequately be met at home and a plan of care describing the type of services sufficient to support your care needs at home. We will not pay benefits for any type of Alternative Care unless we are first reasonably satisfied that you would otherwise require nursing home confinement.

We have carefully reviewed the circumstances of your claim, as well as the information your physician submitted on your behalf. Your physician did not recommend nursing home confinement or indicate that you require a level of care that requires nursing home confinement. In addition, we have carefully considered the circumstances of your claim, including the type, level and frequency of care you have received, as well as the reasons you submitted for making this request. We have determined that we are unable to approve your request for coverage of care outside of an eligible Long Term Care Facility or Assisted Living Facility. This denial is based on the lack of proper medical documentation to support the request that covered benefits, under the policy, are not suitable for you.

The Lawsuit
On June 15, 2017, Ruth filed a breach of contract lawsuit against SHIP in the Summit County (Ohio) Court of Common Pleas (Case No. CV-2017-06-2489). On July 20, SHIP removed the case to federal court and filed its answer to the complaint. The next day, the case was assigned to Judge Adams, who immediately issued a case management conference scheduling order. Here are some but not all the elements of the order:

• Judge Adams set the case management conference for July 31.
• He ordered lead counsel and parties with full settlement authority to be present and have calendars available for scheduling.
• He ordered any undue hardship motions or motions to continue to be filed by July 26.
• He ordered, in the event of a motion for continuance, that counsel confer and agree on three alternative dates not later than August 7.
• He ordered the plaintiff to make a settlement offer by July 27, and he ordered the defendant to respond with a settlement offer by July 28.

On July 26, the parties filed a joint report on their planning meeting. On July 27, Ruth filed initial disclosures, a demand for $87,000, plus estimates of $20,000 in attorney fees and $11,300 in costs. The next day, SHIP filed an offer of $17,500. On July 31, at the case management conference, the case was placed on the expedited track. On the same day, Ruth filed additional documents.

SHIP Data
I asked the insurance department in Pennsylvania, SHIP's state of domicile, how many consumer complaints it received in recent years against the company. A spokesman said the department received 25 complaints in 2013, 20 in 2014, 19 in 2015, 26 in 2016, and 11 thus far in 2017.

According to SHIP's statutory statement for 2016, Pennsylvania is the fourth largest state by LTC premiums (after Texas, California, and Florida). By extrapolation from Pennsylvania's 26 complaints in 2016, I estimate there were 300 consumer complaints filed against SHIP in 2016 with all the state insurance departments combined. I think 300 is a large number for a company with capital and surplus of only $28 million at the end of 2016.

In SHIP's statutory financial statements, page 4, line 13 shows "Disability benefits and benefits under accident and health contracts." The figures (in millions) in SHIP's four most recent annual statements are $415 in 2013, $412 in 2014, $414 in 2015, and $309 in 2016. I think the 2016 figure is a sharp drop from the figures in the three prior years.

Long Term Care Group
Long Term Care Group (LTCG) is an LTC insurance administration company. I believe that LTCG administers claims against SHIP. All the SHIP letters I have seen in this case show SHIP at P.O. Box 64913, St. Paul, MN 55164. One of LTCG's locations is in Eden Prairie, a suburb of the Twin Cities. The SHIP/LTCG contract probably says SHIP bears sole responsibility for the claims practices described in this post.

My Inquiry to SHIP
In view of the SHIP data and the LTCG situation mentioned above, I decided to ask SHIP a few questions. I sent them to the New York firm that handles media relations for SHIP. I asked:

1. Is Long Term Care Group handling claims for SHIP? If so, which office of LTCG? If not, who is handling claims for SHIP?
2. Is SHIP in the process of denying all claims? Irrespective of your answer, please indicate the number of new claims approved and the number of new claims denied in 2013, 2014, 2015, 2016, and thus far in 2017.
3. Is SHIP in the process of discontinuing as many previously approved claims as possible? Irrespective of your answer, please indicate the number of previously approved claims discontinued (other than by death of the insured) in 2013, 2014, 2015, 2016, and thus far in 2017.

An official of the media relations firm responded promptly. He said SHIP has no comment on the questions.

General Observations
I am writing about this case because I think SHIP's claim denial letters are outrageous. They are not only gibberish but also seem to conflict with the language of the APC rider. However, I decided not to go into further detail here. Instead, interested readers are invited to obtain the complimentary package I offer at the end of this post. The package contains the ATL policy, including the APC rider, and seven denial letters.

I think the case grabbed the attention of Judge Adams, because he has been moving it along with lightning speed. I hope that the parties settle the case quickly to avoid lengthy delays that would be caused by discovery efforts and a jury trial.

In addition to the White case, I am aware of only two other lawsuits ever filed against SHIP relating to claims practices. I wrote about one of those cases in the May 2012 and November 2013 issues of The Insurance Forum. (See Hall v. SHIP, Superior Court, State of California, County of San Bernardino, Case No. CIVRS 1200996.) I have not written about the other case, which initially was against a SHIP predecessor but eventually involved SHIP. (See Gottlieb v. Conseco Senior Health, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

If there were about 300 consumer complaints filed nationally in 2016 against SHIP, it seems reasonable to ask why there have not been many lawsuits. I think the answer is that we are talking about caregivers who are busy tending to the needs of some of our most vulnerable citizens. After the caregiver loses the claim struggle with SHIP, after a state insurance department's consumer complaint division tells the caregiver the insurance department cannot act as the insured's attorney, and after a private attorney approached by the caregiver says a lawsuit against SHIP would be a long legal battle with a doubtful outcome, the caregiver simply gives up.

As I have reported, SHIP is an LTC insurance company in runoff (not selling new policies) and is in fragile financial condition. Indeed, SHIP would have been insolvent at the end of 2016 without a $50 million surplus note on which it has not paid any interest.

Yet the four officers whose names appear on the first page of SHIP's 2016 statutory financial statement appear to be getting by. According to data filed with the insurance department in Nebraska, Paul Lorentz received total compensation of $411,886 in 2016, Ginger Danough $396,423, Barry Staldine $325,403, and Kristine Rickard $239,154.

Available Material
I am offering a 53-page complimentary PDF consisting of the state court complaint (3 pages), SHIP's answer including exhibits (24 pages), seven denial letters (10 pages), the case management conference scheduling order without exhibits (5 pages), Ruth's demand for $87,000 (2 pages), Ruth's preliminary budget estimate (1 page), SHIP's offer of $17,500 (3 pages), and the two articles in The Insurance Forum about the Hall v. SHIP case (5 pages). Email jmbelth@gmail.com and ask for the August 2017 package about the White v. SHIP case.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 352: Pennsylvania Moves To Place Senior Health Insurance Company of Pennsylvania in Rehabilitation

Background

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. CSHI had been running off the business since 2003.

For many years, SHIP's financial condition has been worsening. In March 2019, SHIP filed with the Pennsylvania Insurance Department (Department), SHIP's primary regulator, the company's statutory financial statement for the year ended December 31, 2018. (The statement was signed on February 26, postmarked on March 1, and received by the Department on March 5.) The statement showed that SHIP's liabilities of $2.653 billion exceeded its assets of $2.206 billion by $447 million. The Department at that time took no action to place the company in rehabilitation. I wrote about the insolvency in No. 308 (April 11, 2019).

The insolvency 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. I wrote about the expanding insolvency in No. 342 (November 25, 2019).

In the quarterly statements, SHIP said it is "actively working with the Pennsylvania Insurance Department to develop a corrective plan." During 2019, because of SHIP's failure to maintain sufficient capital, at least three states suspended the company's certificate of authority: Idaho on May 15, Iowa on July 8, and Alaska on November 6.

The Application

On January 23, 2020, Jessica E. Altman, the Pennsylvania Insurance Commissioner (Commissioner), filed with the Commonwealth Court of Pennsylvania an "Application for Order Placing Senior Health Insurance Company of Pennsylvania in Rehabilitation." The application contains numerous exhibits, one of which is a "Proposed Order of 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 and SHIP's directors have consented in a signed writing to the company being placed in rehabilitation and have waived a hearing.

A section of the application discusses rehabilitation. That section includes comments such as these:

SHIP's financial condition is dire. The Commissioner's staff and consultants have spent some time working with the Trustees and SHIP management to obtain as accurate as possible a financial picture of SHIP's affairs. They have advised the Commissioner that it may be possible to devise and implement a plan for the rehabilitation of SHIP that would produce for policyholders a result no less beneficial than would be produced by a liquidation, and perhaps materially better than that.

Because of the gravity of SHIP's financial difficulties, there can be no assurance that the rehabilitation efforts will be successful....

It is probable that the plan, when implemented, will require modification of existing contracts, premium rate increases, and other measures that in combination will reduce or eliminate SHIP's deficit.

Attached to the application as an exhibit is SHIP's statutory financial statement for 2018. The application and the proposed rehabilitation order, but without the other exhibits, are in the complimentary package offered at the end of this post. (See Altman v. SHIP, Commonwealth Court of Pennsylvania, Docket No. 1 SHIP 2020.)

The Milliman Role

Milliman Inc., an actuarial consulting firm, played a pivotal role in the 2008 transfer from CSHI to the Senior Health Care Oversight Trust in Pennsylvania. In public documents filed at the time, Conseco said Milliman had concluded in a financial report that SHIP would have enough assets to run off the LTC insurance business. I did not believe it. I asked Conseco and the Department for the report, so that I could see what assumptions Milliman had made. Both denied my request. I hope the report becomes public some day so we can find out whether Milliman used assumptions that were inappropriate or Conseco characterized the report inaccurately.

General Observations

For all practical purposes, SHIP has been in rehabilitation under the supervision of the Department since the filing in early 2019 of its statutory financial statement for 2018, and probably for several years before that filing. The problem is that the rehabilitation, as far as SHIP's premium-paying policyholders and claimants are concerned, was in essence a secret. Thus they did not have the opportunity to take actions that might have provided them with some protection against the consequences of SHIP's "dire" financial condition. What form of disclosure will now be made to them, and when the disclosure will be made, remain to be seen.

I am indebted to Elizabeth "Liz" Festa. She is a long-time business and financial services reporter with a specialty in insurance regulatory and legislative coverage at the federal and state level. She is based in Washington, D.C. Her January 24 article in the Washington Insurance Rider was my first knowledge of the Commissioner's court application regarding SHIP.

Available Material

I am offering a complimentary 27-page PDF consisting of the Commissioner's application (without exhibits) for the rehabilitation of SHIP (14 pages) and the proposed rehabilitation order (13 pages). Email jmbelth@gmail.com and ask for the January 2020 package about the application for the rehabilitation of SHIP.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 344: Long-Term Care Insurance—More on the Insolvency of Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP) is based in Pennsylvania and is regulated primarily by the Pennsylvania Insurance Department (Department). SHIP has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. The CSHI LTC insurance business was in runoff for five years before SHIP took over the business. In No. 308 (April 11, 2019) and No. 342 (November 25, 2019), I wrote about the insolvency of SHIP. Here I discuss my correspondence with the Department and with the National Organization of Life and Health Guaranty Associations (NOLHGA) after No. 342 was posted.

Correspondence with the Department

In No. 342 I said I would send it to the Department upon posting, mention my plan to post a follow-up, and request from the Department a statement about SHIP in a form suitable for inclusion in the follow-up. When No. 342 was posted, I forwarded it to Joseph DiMemmo, CPA. He is the Department's Deputy Insurance Commissioner for Corporate and Financial Regulation of Insurance Companies. I imposed no length limit, and said this in the email:

Below is No. 342, which was posted this morning. As indicated, I hereby request a statement regarding SHIP from the Pennsylvania Insurance Department. I need the statement by 5:00 p.m. Eastern time on Monday, December 16, 2019. Please acknowledge receipt of this email. Thank you.

An hour later he sent a two-word reply: "As requested." He attached the 51-page SHIP statutory statement for the quarter ended September 30, 2019. An hour later I said:

Thank you for SHIP's statutory statement for the quarter ended September 30, 2019. As pointed out in No. 342, I already had that statement. Is the Pennsylvania Insurance Department planning to comply with my request for a statement about SHIP by December 16?

The next day I asked him whether I may anticipate a statement about SHIP from the Department by December 16. He replied a day later:

The Department is aware of the issues raised in your article and does not comment on the financial affairs of insurers beyond what is public information. Other regulators are also aware of the issues raised and understand we are working with the company to address them. Thank you for your interest.

Correspondence with NOLHGA

On November 26 I forwarded No. 342 to NOLHGA. The next day I informed NOLHGA of the Department's comments, and said:

I hereby request a statement regarding SHIP from NOLHGA by 5:00 p.m. Eastern time on Monday, December 16, in a form suitable for publication in my follow-up blog post. Please acknowledge receipt of this email and indicate whether I may anticipate a statement from you. Thank you for your assistance.

Half an hour later a NOLHGA spokesperson provided a one-sentence response: "We defer to the Pennsylvania Department, but thank you for checking with us."

The Penn Treaty Case

Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company (together, "Penn Treaty") are LTC insurance companies based in Pennsylvania and regulated primarily by the Department there. In 2009 the Department petitioned a state court to liquidate Penn Treaty. After a long dispute, including a trial, the court denied the petition and ordered Penn Treaty to be placed in rehabilitation. The rehabilitation failed. On March 1, 2017, the court ordered the Department to place Penn Treaty in liquidation. NOLHGA and the state guaranty associations are now involved.

Penn Treaty's website (penntreaty.com) and NOLHGA's website (nolhga.com) provide extensive information about Penn Treaty's liquidation. By contrast, SHIP's website (shipltc.com) and NOLHGA's website say nothing about SHIP's insolvency. As for the Department's website (insurance.pa.gov), some information about SHIP may be found through a search (I provided some of that information in a complimentary package offered in No. 342), but SHIP's policyholders and claimants have no means—other than through lengthy, complex, and hard-to-obtain statutory statements—by which to learn the company is insolvent.

General Observations

When No. 342 was posted, a reader asked what I thought should be done about SHIP. In response, I pointed out that I had said the Department should require SHIP to send annual reports to policyholders and claimants. I made the suggestion because I think policyholders and claimants have a right to know the company is insolvent. Such reports should not only mention the insolvency but also should include more than a mere indication that SHIP is working with the Department to address the problem. I recognize that disclosure of SHIP's insolvency to its policyholders and claimants may hasten the doomsday scenario I mentioned in No. 342, where the company's assets run out. However, I see no way for SHIP and the Department to address the company's insolvency without obtaining court authorization to place the company in liquidation, thus bringing NOLHGA and the state guaranty associations into the process.

I plan to post another follow-up in March 2020, after I see SHIP's statutory statement for the year ended December 31, 2019. However, I may post a follow-up sooner if I learn of any important developments.

Available Material

In No. 342 I offered a complimentary 49-page PDF consisting of four articles in The Insurance Forum about the creation of SHIP, selected pages from SHIP's statutory statement for the quarter ended September 30, 2019 (6 pages), a limited-scope examination report on SHIP as of year-end 2016 (6 pages), and a market conduct examination report on SHIP as of April 2019 (27 pages). The package is still available. Email jmbelth@gmail.com and ask for the December 2019 SHIP package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 180: Long-Term Care Insurance—An Update on Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP), formerly Conseco Senior Health Insurance Company (CSHI), is a long-term care (LTC) insurance company in runoff; that is, SHIP is not issuing new policies. In 2008 Indiana-based Conseco, Inc. (now CNO Financial Corp.) announced a plan to separate itself from Pennsylvania-based CSHI, a financially troubled LTC insurance subsidiary. Over 11 years, Conseco had poured $915 million into CSHI to keep the company solvent.

I wrote about Conseco's separation from CSHI in the November 2008, January 2009, and June 2009 issues of The Insurance Forum. I also wrote about SHIP in Nos. 123 (October 27, 2015), 125 (November 6, 2015), 174 (August 11, 2016), and 175 (August 18, 2016). This update is based on SHIP's recent financial statements and other developments.

The Plan of Separation
The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer ownership of CSHI to the trust, and rename the company SHIP. The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. The commissioner testified later in another matter that he approved the plan because Conseco said it would otherwise allow CSHI to become insolvent.

SHIP still has a relationship with CNO. According to a reinsurance exhibit in SHIP's 2015 financial statement, SHIP reduced its reserve liabilities by about $1 million through reinsurance ceded to Washington National Insurance Company, a subsidiary of CNO.

SHIP's Backdated Surplus Infusion
In this post I refer to "surplus" and "total adjusted capital" interchangeably because they are similar. On March 1, 2015, SHIP filed its financial statement for the year ended December 31, 2014. According to the statement, SHIP borrowed $50 million on February 19, 2015, to obtain a surplus infusion. SHIP backdated the infusion seven weeks by including it on the December 31, 2014 balance sheet. SHIP borrowed the money by issuing a five-year surplus note with an annual interest rate of 6 percent. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based company with which CNO has a reinsurance relationship.

A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.

SHIP's Situation at the End of 2014
At the end of 2014, without the $50 million backdated surplus infusion discussed above, SHIP would have had total adjusted capital of $68 million. That would have been below regulatory action level RBC (risk-based capital) of $82 million, and the commissioner would have been required to conduct a confidential investigation. With the surplus infusion, however, SHIP's total adjusted capital was $118 million ($68 million plus $50 million), which was well above regulatory action level RBC of $82 million and slightly above company action level RBC of $109 million.

SHIP's Situation at the End of 2015
On March 1, 2016, SHIP filed its financial statement for the year ended December 31, 2015. The statement shows that the company has not paid any interest on the surplus note. I do not know whether the commissioner denied the company's request for permission to pay interest, or whether the company did not request permission.

At the end of 2015, including the $50 million surplus infusion discussed above, SHIP had total adjusted capital of $94 million. That was below company action level RBC of $117 million, and the company was required to file a confidential RBC report with the commissioner indicating how the company proposed to deal with the problem. I do not know whether the company filed the report, and if so, how the company proposed to deal with the problem.

Platinum Partners
Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is a founder of Platinum Partners, a hedge fund.

On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed a grand jury indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. (See U.S.A. v. Seabrook and Huberfeld, U.S. District Court, Southern District of New York, Case No. 16-cr-467.)

On July 26, 2016, The Wall Street Journal ran a front-page article about Platinum. Beechwood was mentioned because of ties to Platinum.

Exhibits of "other long-term invested assets" in recent SHIP statements show that the company has significant holdings of Platinum-related investments. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo," by reporter Lawrence Delevingne. The article says that, as of June 30, 2016, SHIP "had at least $100 million of its assets [3.6 percent of its $2.8 billion of assets and 106 percent of its $94 million of total adjusted capital at the end of 2015] invested in Platinum's funds or companies backed by Platinum." The Reuters article quotes Brian Wegner, SHIP's president and chief executive officer, as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."

SHIP's 2015 Premium Volume
SHIP's statement for the year ended December 31, 2015 shows the company received $105 million of LTC insurance premiums in 2015. The ten leading states (in millions) were Texas ($9.9), Florida ($9.5), California ($9.5), Pennsylvania ($8.9), Illinois ($6.9), Ohio ($5.3), North Carolina ($3.8), Indiana ($3.2), Maryland ($3.0), and Michigan ($3.0).

General Observations
What will happen to SHIP remains to be seen. The company's recent net losses were $56 million in 2014, $9 million in 2015, $3 million in the first quarter of 2016, and $20 million in the second quarter of 2016. As discussed above, SHIP's total adjusted capital at the end of 2015 was below company action level RBC. It is unclear how a company in runoff and with inadequate total adjusted capital can afford to pay the interest on a surplus note, let alone repay the principal.

As I mentioned in No. 174 (August 11, 2016), Penn Treaty Network America Insurance Company, another Pennsylvania-based LTC insurance company in runoff, has been in rehabilitation for several years. The Pennsylvania insurance commissioner is the court-appointed rehabilitator. The state court judge overseeing the case is expected to rule soon on the commissioner's petition to liquidate Penn Treaty. If the judge grants the petition, state guaranty associations would become involved in the case, and other insurance companies would be required to pay assessments.

Available Material
I am offering a complimentary 20-page PDF consisting of the articles in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and the indictment filed against Seabrook and Huberfeld (11 pages). Email jmbelth@gmail.com and ask for the LTC/SHIP package dated September 19, 2016.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 182: Long-Term Care Insurance Liabilities Return to the Forefront at CNO Financial (Formerly Conseco)

On September 29, 2016, two developments brought long-term care insurance reserve liabilities back to the forefront at CNO Financial Group, Inc. (CNO), which formerly was Conseco, Inc. First, CNO filed an 8-K (significant event) report with the Securities and Exchange Commission. Second, two CNO subsidiaries, New York-domiciled Bankers Conseco Life Insurance Company and Indiana-domiciled Washington National Insurance Company, filed a federal court lawsuit (referred to here as "CNO's complaint") against three individuals associated with Beechwood Re, a Cayman Islands-based reinsurance company, and Platinum Partners, a New York-based hedge fund. On the same day, Reuters posted an article by reporter Lawrence Delevingne about CNO's 8-K report and CNO's complaint.

Background

In No. 180 (posted September 19, 2016), I described how CNO (then Conseco) separated itself in 2008 from a financially troubled long-term care insurance subsidiary that was in runoff. With the approval of the Pennsylvania insurance commissioner, CNO transferred the subsidiary, Pennsylvania-domiciled Conseco Senior Health Insurance Company, to an independent trust and renamed it Senior Health Insurance Company of Pennsylvania (SHIP).

In the same post I explained how SHIP enhanced its surplus by borrowing money, through a surplus note, from Beechwood, which has close ties to Platinum. I indicated that SHIP invested a significant amount of assets in Platinum offerings, but was trying to divest itself of those investments. I also described SHIP's fragile financial condition, with total adjusted capital at the end of 2015 (including the surplus infusion from Beechwood) below company action level risk-based capital.

CNO's 8-K Report

Bankers Conseco Life and Washington National transferred their long-term care insurance reserve liabilities to Beechwood through reinsurance agreements that required Beechwood to maintain quality assets in trust to meet its obligations under those agreements. CNO's 8-K report explains how CNO and its regulators, through examinations, learned that Beechwood and Platinum were tied closely together, that Beechwood had invested its reinsurance trust assets in Platinum's offerings, that those offerings were not in compliance with state laws and regulations governing reinsurance trust assets, and that the transfers of liabilities from the CNO subsidiaries to Beechwood therefore were not valid.

The text of CNO's 8-K report describes the problems. The report also contains three exhibits: a regulatory demand letter from the New York Department of Financial Services to Bankers Conseco Life, a regulatory demand letter from the Indiana Department of Insurance to Washington National, and a CNO press release. The demand letters assert that the assets held in trust by Beechwood under the reinsurance agreements do not comply with state laws and regulations, and threaten disciplinary action unless the problems are resolved promptly.

CNO's Complaint

CNO's complaint describes the close ties between Beechwood and Platinum. It alleges, for example, that Beechwood officials are also Platinum officials. The defendants are Moshe Feuer, Scott Taylor, and David Levy. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 16-cv-7646.)

The complaint describes how the reinsurance agreements came about, and how the defendants allegedly misled the plaintiffs into entering into the agreements. The complaint mentions SHIP's investments in Platinum's offerings, but does not mention SHIP's surplus note relationship with Beechwood. I discuss that relationship below. The complaint lists 12 counts of alleged wrongdoing, including three counts of violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act:

1. Breach of Fiduciary Duty
2. Aiding and Abetting a Breach of Fiduciary Duty
3. Fraudulent Misrepresentation/Fraudulent Concealment
4. Aiding and Abetting a Fraud
5. Violation of RICO—18 U.S.C. §1962(c)
6. Violation of RICO—18 U.S.C. §1962(a)
7. RICO Conspiracy—18 U.S.C. §1962(d)
8. Civil Conspiracy to Commit Fraud
9. In the Alternative, Negligent Misrepresentation
10. In the Alternative, Negligence
11. In the Alternative, Gross Negligence
12. In the Alternative, Unjust Enrichment

CNO's complaint was assigned to U.S. District Court Judge Edgardo Ramos, a 2011 Obama nominee. U.S. Magistrate Judge Barbara C. Moses was also assigned to the case.

The SHIP/Beechwood Surplus Note

A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.

On February 19, 2015, SHIP borrowed $50 million from Beechwood by issuing a five-year surplus note with the permission of the Pennsylvania insurance commissioner. The interest rate is 6 percent. The surplus infusion was reflected in SHIP's December 31, 2014 financial statement, which was filed March 1, 2015.

Questions for SHIP
After the September 29 developments described above, I wrote to Brian Wegner, president and chief executive officer of SHIP. I asked:

1. Have you paid any interest on the surplus note? If your answer is yes, please indicate dates and amounts, and please send me the letter(s) you received from the Pennsylvania commissioner approving the payment(s). If your answer is no, please explain whether this means the surplus note is in default.


2. Did Beechwood agree to lend you the $50 million in exchange for your investment in Platinum's offerings? If your answer is yes, please indicate the date on which you began investing in Platinum's offerings. If your answer is no, please explain what prompted you to borrow from Beechwood (rather than someone else) and what prompted you to invest in Platinum's offerings.

I asked for answers "on the record" and indicated a response date. I did not receive a response directly from SHIP. Instead I received a telephone call on behalf of SHIP from a media relations person in New York. He said he would try to obtain detailed answers to my questions by the response date, but he was not able to do so. I plan to prepare a follow-up post when and if SHIP provides detailed answers.

General Observations
As mentioned in No. 180, exhibits of "other long-term invested assets" in recent SHIP statements show that the company had significant investments in Platinum's offerings. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo." According to the article, SHIP, as of June 30, 2016, had at least $100 million of Platinum's offerings (3.6 percent of SHIP's assets). The article quoted SHIP's Brian Wegner as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."

Normally interest on surplus notes is payable semiannually. With regard to the 6 percent surplus note through which SHIP borrowed $50 million from Beechwood to increase SHIP's surplus, I think SHIP has missed three semiannual interest payments of $1.5 million each, for a total of $4.5 million. Therefore, I think SHIP is in default on the surplus note. However, I am not aware of any action taken against SHIP by Beechwood or by the Pennsylvania insurance commissioner.

I think the SHIP/Beechwood surplus note was not an arm's-length transaction, because an interest rate of 6 percent does not compensate Beechwood for the risk involved in lending money to SHIP, which was in fragile financial condition at the time of the loan, and still is. I believe that the $50 million was a gift from Beechwood to SHIP in exchange for SHIP making investments in Platinum's offerings.

Available Material
I am offering a 71-page complimentary PDF consisting of CNO's 14-page 8-K report (including the three exhibits) and CNO's 57-page complaint against three individuals associated with Beechwood and Platinum. Email jmbelth@gmail.com and ask for the October 2016 CNO/Beechwood package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 183: The Surplus Note at Senior Health Insurance Company of Pennsylvania—Further Information and a Correction

Senior Health Insurance Company of Pennsylvania (SHIP) is a long-term care insurance company in runoff. On February 19, 2015, SHIP issued a $50 million five-year surplus note to Beechwood Re, a Cayman Islands-based reinsurance company. The interest rate is 6 percent. SHIP used the $50 million as an urgently needed surplus infusion. The infusion was shown in SHIP's December 31, 2014 financial statement, which was filed with the Pennsylvania insurance department on March 1, 2015. I wrote about the SHIP/Beechwood surplus note in Nos. 123 (10/27/15), 125 (11/6/15), 174 (8/11/16), 180 (9/19/16), and 182 (10/7/16). Here I provide further information and correct a statement I made in No. 182.

The Bizarre Nature of a Surplus Note
A surplus note is a bizarre financial instrument. The money received by the company issuing the note increases the company's surplus. That happens because state surplus note laws say the company issuing the note does not have to establish a liability. A surplus note is subordinate to all the company's obligations. A surplus note can be issued only with the prior approval of the insurance commissioner in the issuing company's state of domicile. Interest and principal payments on a surplus note can be made only with the prior approval of the commissioner.

The Unpaid Interest
In No. 182, I said SHIP missed three $1.5 million semiannual interest payments on the surplus note (in August 2015, February 2016, and August 2016) for a total of $4.5 million. A SHIP spokesman confirmed that the company has not made interest payments. I asked him whether SHIP asked the Pennsylvania commissioner for permission to pay interest and was denied permission, or whether SHIP did not ask for permission. He said SHIP did not ask for permission to pay interest.

In No. 182, I also said the failure to pay interest means the surplus note is in default. One of my readers said the failure to pay interest on a surplus note is not a default. His comment prompted me to look closely at the wording of SHIP's surplus note. I asked SHIP for a copy of the surplus note, but the spokesman said SHIP would not provide it.

Therefore I reviewed the offering circulars for surplus notes issued by several large mutual life insurance companies in the 1990s. Through the review, I learned that my reference to default was incorrect, and that my reader was correct. Here is some language in one of the circulars:

• Each payment of interest on and the payment of principal of the Notes may be made only out of [the Company's] surplus and with the prior approval of the Insurance Commissioner of [the Company's state of domicile] if, in the judgment of the Commissioner, the financial condition of [the Company] warrants the making of such payments.
• The Notes will constitute debt obligations of the type generally referred to as "surplus notes." The net proceeds of the issuance of the Notes will be recorded by [the Company] as additional admitted assets. For statutory accounting purposes, however, the Notes are not part of the legal liabilities of [the Company]. Accordingly, [the Company's] surplus will be increased by the net proceeds from the sale of the Notes.
• Any such payment [of interest or principal] will reduce [the Company's] surplus.
• If the Commissioner does not approve a payment of interest on or principal of the Notes, the applicable interest payment date or the maturity date, as the case may be, will be extended until such time, if any, as such approval is obtained. Interest will continue to accrue on any unpaid principal amount of the Notes (but not on unpaid interest the payment of which has not been approved) during the period of such extension.
• The Notes will be expressly subordinate in right of payment to all existing and future Senior Indebtedness and Policy Claims of [the Company], including all future indebtedness issued, incurred or guaranteed by [the Company], other than any future surplus notes or similar obligations of [the Company].
• To the extent authorized by [the Company's] Board of Directors, [the Company] may continue to declare policyholder dividends and to make dividend payments on its participating policies regardless of the effect any such declaration or payment may have on the Commissioner's decision regarding the payment of interest on or principal of the Notes. [Note: I believe that SHIP does not offer participating policies, but I included this point to help readers gain a further understanding of surplus notes.]

In short, if interest or principal payments are not made, the due dates of the payments would be extended indefinitely. Thus the party that purchases a surplus note would have no recourse if the company that issued the surplus note misses interest or principal payments.

The Invention of Surplus Notes
Surplus notes were invented more than a century ago as a vehicle through which a mutual insurance company in financial trouble can obtain a surplus infusion. A mutual company has no shareholders who can provide a surplus infusion. Also, a company cannot obtain a surplus infusion by borrowing the money through an ordinary loan, because the asset (cash) received would be offset by a liability and there would be no increase in surplus. The early state surplus note laws allowed only mutual companies to issue surplus notes, but the laws were later amended to allow stock companies to issue them.

The Income Tax Issue
A question arose concerning federal income taxation of the interest an insurance company pays on a surplus note. Insurance companies argued that the interest is deductible because it is interest on debt. The Internal Revenue Service (IRS) argued that the interest is not deductible because it is in the nature of a dividend on stock. The insurance companies won the argument, but it made little difference at the time because surplus notes were issued only in small amounts by companies in financial trouble.

The Revolution of 1993
Then came the revolution of 1993, which I discussed in the February 1994 issue of The Insurance Forum. Prudential Insurance Company of America, a mutual company at the time, was not in financial trouble. Yet the company issued $300 million of surplus notes in a private offering. The company used the net proceeds to prefund a voluntary employee benefit association (VEBA) providing certain post-retirement benefits for certain employees. The company used surplus notes solely for one reason: the interest was deductible. Goldman, Sachs & Co., Prudential's adviser on the surplus note offering, put it succinctly: 62 percent of the contribution to the VEBA came from Prudential and the other 38 percent came from the IRS. The transaction also could be viewed as increasing our annual deficit, increasing our national debt, and burdening other taxpayers.

At the end of 1981, small life insurance companies in financial trouble had about $400 million of surplus notes outstanding. Prudential's 1993 action touched off an avalanche of surplus note offerings by major insurance companies that were not in financial trouble. By the end of 2012 (based on the final tabulation I published in the August 2013 issue of the Forum), life insurance companies had $28 billion of surplus notes outstanding, and property insurance companies had $14 billion outstanding.

For many years the only holdouts among major life insurance companies were Northwestern Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America. When they succumbed to the temptation to issue surplus notes, I wrote about their actions in the August 2010 issue of the Forum.

The surplus note activity that began in 1993 stemmed from the deductibility of the interest paid on surplus notes. I think the IRS was correct. A surplus note is not a "debt obligation" (despite what offering circulars say), and the interest paid on a surplus note is not interest on debt. I think the interest is in the nature of a shareholder dividend, which is not deductible.

An Interesting Coincidence
In SHIP's annual statement for the year ended December 31, 2015, Schedule BA - Part 2 shows "other long-term invested assets acquired." The schedule says SHIP, on February 19, 2015, acquired an "other long-term invested asset" from "Beechwood Re Investments" for $50,168,039. SHIP made the acquisition on the very day SHIP issued the surplus note to Beechwood Re, and the cost of the acquisition was almost identical to the amount of the surplus note. In other words, on that day SHIP received a $50 million surplus infusion from Beechwood pursuant to the surplus note, and SHIP handed over about $50 million to Beechwood.

General Observations
In No. 182, I expressed the belief that the SHIP/Beechwood surplus note was not an arm's-length transaction, because an interest rate of 6 percent did not compensate Beechwood for the risk involved in lending money to SHIP, a company which was at the time and still is in fragile financial condition. I also expressed the belief that the $50 million surplus infusion was a gift from Beechwood in exchange for SHIP's investing money with Beechwood. The schedule in SHIP's 2015 statement supports my beliefs.

The "other long-term investments" schedule in SHIP's 2015 statement shows some SHIP investments in Platinum Partners, a hedge fund, near the end of 2015. The SHIP spokesman said SHIP was deceived, because in early 2015 Beechwood did not tell SHIP about Beechwood's close ties to Platinum, and because Beechwood transferred the invested funds to Platinum without SHIP's knowledge or consent. Those SHIP allegations resemble the allegations in CNO Financial Group's lawsuit against Platinum/Beechwood officials. I discussed the lawsuit in No. 182.

Available Material
I am offering a 15-page complimentary PDF consisting of excerpts from the February 1994, August 2010, and August 2013 issues of The Insurance Forum. Email jmbelth@gmail.com and ask for the October 2016 surplus note package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 281: Senior Health Insurance Company of Pennsylvania Goes to Court

On July 24, 2018, Senior Health Insurance Company of Pennsylvania (SHIP) filed a complaint in federal court against Beechwood Re, several related entities, and several individuals. SHIP is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. The lawsuit alleges massive wrongdoing by Beechwood in investing SHIP's assets.

I have written extensively about SHIP, including several posts about the company's deteriorating financial condition, and several posts about lawsuits in which disgruntled claimants were plaintiffs and SHIP was the defendant. I think this is the first case in which SHIP is the plaintiff. (See SHIP v. Beechwood, U.S. District Court, Southern District of New York, Case No. 1:18-cv-6658.)

Outsourcing

In No. 263 (April 23, 2018), I wrote about SHIP's "outsourcing" of functions, as described in the compamy's "2017 Management's Discussion and Analysis." SHIP said it "operates from its offices in Carmel, Indiana, and utilizes third-party providers for key functions." Among those providers are "asset managers for investment portfolio management and accounting." That function is the subject of the recent lawsuit. SHIP also uses Long Term Care Group, Inc. as a third-party administrator for policy and claim administration, "actuarial professionals for pricing and valuation," an affiliate named Fuzion Analytics, LLC for administration of the company, and a public relations firm for media activities. There is no need to outsource the marketing function because the company is in runoff.

The Defendants

The company defendants are Beechwood Re Ltd.; B Asset Manager, L.P.; Beechwood Bermuda International, Ltd.; Beechwood Re Investments, LLC (aka Beechwood Investors, LLC); and Illumin Capital Management, LP. The individual defendants are Moshe M. Feuer (aka Mark Feuer), Scott A. Taylor, David I. Levy, and Dhruv Narain.

The Judge

The case has been assigned to Senior U.S. District Court Judge Jed S. Rakoff. President Clinton nominated him in October 1995, and the Senate confirmed him in December 1995. He assumed senior status in December 2010. Magistrate Judge Ona T. Wang was also designated.

The Thrust of the Case

The thrust of the case may be gleaned from the first three paragraphs of the "Nature of the Action" section of the complaint. They read:

1. This action arises from Beechwood's deceit, intentional misconduct, and extreme incompetence in the promotion and sale of investments to SHIP and in Beechwood's subsequent mismanagement and misuse of $320 million in policyholder reserves entrusted to it by SHIP through and related to three Investment Management Agreements (the "IMAs").
2. The IMAs guaranteed SHIP an annual return of 5.85 percent, based on what Beechwood represented to be a conservative investment strategy that would be appropriate to SHIP's status as an insurer in run-off. Beechwood failed to deliver on the guaranteed returns and also has failed to deliver all of SHIP's investment principal back to it. Defendants failed to deliver because, once they secured control over SHIP's funds for investment, they jettisoned their promises to invest safely and in SHIP's best interest. Beechwood instead used SHIP's funds to prop up and perpetuate highly speculative, distressed, and fraudulently valued investments that did not suit or benefit SHIP.
3. Beechwood also favored its own interests and the interests of undisclosed but related third parties and affiliates who conspired with and effectively controlled Beechwood, all to SHIP's detriment. These related parties were associated with Platinum Partners, described in more detail below. Many of the individuals who were granted improper access to, and who benefited from the improper use of, SHIP's funds ultimately were indicted in federal court for their misdeeds. Defendant Levy and others are scheduled for criminal trial on January 7, 2019 for at least some of their Platinum-related actions.

The Related Litigation

SHIP's complaint mentions two criminal cases and two civil cases, all of which were filed in 2016. I have written about them. Here I provide brief updates, in the order in which they were initially filed.

U.S.A. v. Seabrook
When I wrote about this criminal case in No. 180 (September 19, 2016), I said Norman Seabrook was a former official of New York City's Correction Officers Benevolent Association (COBA) and his fellow defendant Murray Huberfeld was the founder of Platinum Partners, a hedge fund. They were charged with two criminal counts: (1) conspiracy to commit honest services wire fraud and (2) honest services wire fraud. The indictment alleged a "kickback scheme" under which COBA funds were invested in offerings of Platinum. A 17-day trial began October 24, 2017, and ended with a hung jury.

On May 17, 2018, a superseding three-count indictment was filed against the defendants. Eight days later a superseding one-count information was filed against Huberfeld, he entered a guilty plea, and his sentencing was set for September 14. The retrial of Seabrook was set for August 1. (See U.S.A. v. Seabrook, U.S. District Court, Southern District of New York, Case No. 1:16-cr-467.)

Bankers Conseco Life v. Feuer
When I wrote about this civil case in No. 182 (October 7, 2016), I said the complaint lists 12 counts of alleged wrongdoing, including three counts of violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. The plaintiffs were Bankers Conseco Life Insurance Company and Washington National Insurance Company, which are subsidiaries of CNO Financial Group, Inc. The defendants were Feuer, Taylor, and Levy.

On June 15, 2017, Taylor filed a motion to compel arbitration. On March 15, 2018, the judge granted the motion to compel arbitration and stayed the case pending arbitration. On April 27, 2018, the plaintiffs filed a motion for an interlocutory appeal; the motion has not yet been fully briefed. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 1-16-cv-7646.)

U.S.A. v. Nordlicht
When I wrote about this criminal case in No. 195 (January 3, 2017), I said that, in December 2016, seven individuals associated with Platinum were charged in an eight-count indictment. The defendants are Mark Nordlicht, David Levy, Uri Landesman, Joseph Sanfillippo, Joseph Mann, Daniel Small, and Jeffrey Shulse. In July 2018 the judge set the trial of the first six defendants to begin January 7, 2019, with the trial of Shulse to begin promptly after the trial of the other six defendants ends. (See U.S.A. v. Nordlicht, U.S. District Court, Eastern District of New York, Case No. 1:16-cr-640.)

SEC v. Platinum
When I wrote about this civil case in No. 195 (January 3, 2017), I said that the Securities and Exchange Commission (SEC) filled a complaint in December 2016 against two Platinum units and the same seven individuals charged in the Nordlicht criminal case. The complaint includes 11 claims for relief. In January 2017 the judge appointed a receiver. The case is proceeding, but no trial date has been set. (See SEC v. Platinum, U.S. District Court, Eastern District of New York, Case No. 1:16-cv-6848.)

General Observations
SHIP's lawsuit against Beechwood's entities and several individuals is in its early stages. I think it will end in a confidential settlement. However, the defendants are wrapped up in other litigation—both criminal and civil—that is likely to leave them without the resources necessary for a significant settlement. I think the fate of the lawsuit rests heavily on the outcomes of the other cases discussed in this post. I am puzzled about the long delay in SHIP's filing of its lawsuit, and I am in doubt about the wisdom of SHIP's use of its limited resources to mount this legal action. Despite these concerns, I plan to follow the case and report on significant developments.

Available Material
I am offering a complimentary 86-page PDF containing SHIP's complaint. Email jmbelth@gmail.com and ask for the August 2018 package containing SHIP's lawsuit against Beechwood.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 386: SHIP (In Rehabilitation) Sends an Important Notice to Policyholders and Others

In No. 368 (May 1, 2020), I wrote about the proposed plan of rehabilitation of Senior Health Insurance Company of Pennsylvania (SHIP). On July 10, 2020, SHIP (In Rehabilitation) sent policyholders and other interested parties a 19-page "Important Notice to Policyholders, Agents, Creditors, and Persons Interested in the Affairs of Senior Health Insurance Company of Pennsylvania (In Rehabilitation)" ("Notice"). The Notice did not appear on the SHIP website or on the website of the Pennsylvania Department of Insurance (Department). I learned of the Notice from a SHIP policyholder. I asked the Department for a copy of the Notice, and the Department sent it to me.

The Notice

The Notice includes a table of contents, a cover letter from Special Deputy Rehabilitator Patrick H. Cantillo, a "Notice of Application for Approval of Plan of Rehabilitation," "Frequently Asked Questions and Answers," and a "Summary Description of the Plan." The Notice is here.

The Liquidation Issue

Two of the frequently asked questions relate to the liquidation issue. Here are those questions and answers:

Question 11. Is there a possibility that the Company will be liquidated? Yes, liquidation is possible. The Commonwealth Court of Pennsylvania could decide at some time in the future to place SHIP into liquidation.

Question 12: What would happen if the Company was liquidated? In the event that SHIP would be ordered into liquidation, it is probable that state insurance guaranty associations would continue coverage for policyholders up to applicable statutory coverage limits. Generally, guaranty associations become responsible for an insurer's obligations only if the insurer is found by the court to be insolvent and placed in liquidation. SHIP has not been found by the court to be insolvent and has not been placed in liquidation. Therefore, no guaranty association is responsible for SHIP's policy obligations at this time. That will change if SHIP is placed in liquidation. All states other than New Jersey cap the amount of guaranty association coverage available for their residents. It is also likely, based on past experience, that the guaranty associations if triggered in a liquidation of SHIP would raise the insurance rates policyholders are required to pay and offer policy modification options in lieu of rate increases. For information about state guaranty associations, please visit www.nolhga.com.

General Observations

The above discussion of liquidation, especially the answer to Question 12, is a disservice to policyholders because it is misleading. A company is solvent when its assets exceed its liabilities. A company is insolvent when its liabilities exceed its assets. While it is true that "SHIP has not been found by the court to be insolvent and has not been placed in liquidation," the reason is that the court was not asked to make such a finding.

On January 23, 2020, as discussed in No. 368, the Department applied to the court for an order placing SHIP in rehabilitation. The application showed that SHIP has been insolvent for some time. The application said SHIP's statutory financial statement for the year ended December 31, 2018 showed that SHIP's liabilities exceeded its assets by $447 million. The application also said SHIP's liabilities exceeded its assets at the end of 2019 by $916 million.

On January 29, 2020, President Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania approved 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." In short, it is misleading to imply or suggest that SHIP is not insolvent.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 308: Long-Term Care Insurance and the Insolvency of Senior Health Insurance Company of Pennsylvania

On April 3, 2019, I obtained the statutory annual statement of Senior Health Insurance Company of Pennsylvania (SHIP) for the year ended December 31, 2018. SHIP has been running off the long-term care (LTC) insurance business of the former 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 articles are in the complimentary package offered at the end of this post.

The Insolvency

SHIP's 2018 statement (on pages 2 and 3) shows that total liabilities of $2.66 billion exceed total admitted assets of $2.22 billion by $0.44 billion. Thus the company is insolvent. Also, the statement (on page 4) shows that the company incurred a net loss of $0.5 billion in 2018. Those pages are in the complimentary package offered at the end of this post.

I have posted several items about SHIP on my blog, and have commented from time to time about the worsening financial condition of the company. My most recent prior post, based on the company's 2017 statement, is in No. 260 (April 2, 2018).

A Puzzling Sentence

SHIP's 2018 statement (on page 19.2) contains this sentence: "There is not substantial doubt about the Company's ability to continue as a going concern." I find puzzling the inclusion of such a sentence in the financial statement of an insolvent company. Page 19.2 is in the complimentary package offered at the end of this post.

The Jurat

In the SHIP statement I obtained, the jurat section at the bottom of page 1 shows the names of three officers: Barry Lee Staldine, President and Chief Executive Officer; Ginger Susan Darrough, Chief Financial Officer and Treasurer; and Kristine Tejano Rickard, Secretary. However, there were no signatures of those officers, the notary section was blank, and there was no indication of when the Pennsylvania department received the statement. I contacted the department, and a spokesperson promptly sent me a copy of page 1 showing the signatures, the notarization dated February 26, and the department's March 5 receipt stamp. Both versions of page 1 are in the complimentary package offered at the end of this post.

Directors and Affiliates

The directors listed on page 1 in SHIP's 2018 statement are Staldine, Darrough, Julianne Marie Bowler, Cecil Dale Bykerk, John Martin Morrison, Gregory Vincent Serio, and Thomas Edward Hampton.

According to page 19.12 in the 2018 statement, SHIP is affiliated with Fuzion Analytics, Inc., and both are wholly owned subsidiaries of the Senior Health Care Oversight Trust. SHIP and Fuzion have a management agreement under which SHIP paid $15.5 million to Fuzion in 2018. According to page 19.11 in the 2018 statement, SHIP, Fuzion, and the Oversight Trust file consolidated federal income tax returns. Pages 19.11 and 19.12 are in the complimentary package offered at the end of this post.

Risk-Based Capital

When I discuss risk-based capital (RBC) ratios, I refer to the ratio where the numerator is total adjusted capital and the denominator is company action level RBC, and where the RBC ratio is expressed as a percentage. According to page 22 in SHIP's 2018 statement, the company's RBC ratios were 108 in 2014 (red flag zone), 80 in 2015 (company action zone), 82 in 2016 (company action zone), and 71 in 2017 (regulatory action zone). For 2018, total adjusted capital is minus $466.8 million, authorized control level RBC is $51.3 million, and company action level RBC (twice the authorized control level RBC) is $102.6 million. Thus the RBC ratio for 2018 is minus 455 percent (minus $466.8 million divided by $102.6 million), which means the company is deep in the mandatory control zone. I described the history and nature of RBC ratios in the August 2011 issue of the Forum. Page 22 of the statement and the relevant pages from the August 2011 issue are in the complimentary package offered at the end of this post.

The Surplus Note

In 2015 SHIP issued a $50 million surplus note, which has an impact on the financial condition of the company. Without the note, the company's RBC ratios at the ends of 2015, 2016, and 2017 would have been in the mandatory control zone. SHIP has not repaid any portion of the principal of the note, and has not paid any interest on the note. At the end of 2018, according to page 19.13 in the 2018 statement, the amount of unpaid interest on the note is $11.55 million, so that the total amount of the note is now $61.55 million. I wrote about the note in No. 260. Page 19.13 is in the complimentary package offered at the end of this post.

My Requests

When an insurance company becomes insolvent, it is common practice for the insurance commissioner in the company's state of domicile (Pennsylvania in this case) to seek state court permission to assume control of the company and place it in rehabilitation. When I learned of SHIP's insolvency, I wrote to the Pennsylvania department. I said I was planning a blog post, and asked for a short statement suitable for inclusion in the post. In reply, a spokesperson said:

In terms of the financial statement, we can say we are aware of the company's financial situation from their annual statement. Beyond that, we are prohibited by law from discussing a company's financial status.

I sent a similar request to the National Organization of Life and Health Guaranty Associations (NOLHGA). In reply, a spokesperson said:

It has been reported that the Pennsylvania Insurance Department has given the Senior Health Insurance Company of Pennsylvania 90 days to submit a plan for the continued operation of the company. We continue to monitor the situation, and our member life and health insurance guaranty associations stand ready to provide protection to policyholders should the need arise.

General Observations

SHIP has been a run-off company from its inception, and therefore does not sell new policies. Also, the company's financial condition has been worsening for many years. For those reasons it is possible that the company, for all practical purposes, has been under the direct control of the Pennsylvania commissioner for many years. Thus the commissioner may have felt there was no need to ask the court's permission to formalize control. That is why I sought comments from the Pennsylvania department and from NOLHGA.

With regard to the response from NOLHGA, I do not know how SHIP can erase a deficit of almost half a billion dollars. Further, in view of the current distressed state of the LTC insurance market, I believe that any efforts to rehabilitate the company, or to sell part or all of the company, are doomed to failure. I think the Pennsylvania commissioner will seek court permission to liquidate the company.

A Late Note

Just before this item was posted, I saw a report that SHIP entered into a letter agreement in February 2018 with the Pennsylvania department regarding the company's financial condition (probably the matter referred to in NOLHGA's statement to me). The report also said the company has filed its "Management's Discussion and Analysis" (MD&A) relating to the 2018 statement. I immediately requested the letter agreement and the MD&A from the Pennsylvania department. With regard to the letter agreement, the department spokesperson said the department "does not confirm information regarding a company's financial status unless and until formal action occurs."  The spokesperson sent me the MD&A.  I have reviewed it, and have no comment on it.  However, I am including it in the complimentary package offered at the end of this post.

Available Material

I am offering a complimentary 37-page PDF consisting of the four articles in the Forum about the transfer of CSHI's LTC insurance business to SHIP (10 pages), relevant pages about RBC ratios from the August 2011 issue of the Forum (6 pages), pages of SHIP's 2018 statement from which I drew information for this post (10 pages), and the company's MD&A (11 pages). Email jmbelth@gmail.com and ask for the April 2019 SHIP package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

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

Background

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 jmbelth@gmail.com and ask for the May 2020 package about the SHIP Rehabilitation Plan.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com