On November 19, Chief Administrative Judge L. Casey Manning of the Fifth Judicial Circuit in Columbia, South Carolina, blocked immediate implementation of the SHIP Rehabilitation Plan. At this writing, the fate of the SHIP Rehabilitation Plan is not known.
Showing posts sorted by date for query Ship. Sort by relevance Show all posts
Showing posts sorted by date for query Ship. Sort by relevance Show all posts
Tuesday, December 28, 2021
No. 450: The South Carolina Department of Insurance Attacks the SHIP Rehabilitation Plan
On November 16, 2021, the South Carolina Department of Insurance (SCDOI) issued a media release entitled "SCDOI Director Ray Farmer Seeks to Stop the Implementation of the Rehabilitation Plan for Senior Health Insurance Company of Pennsylvania (SHIP) in South Carolina." The first sentence of the media release reads: "Yesterday, Ray Farmer, Director of the SCDOI, took another step toward protecting consumers who have long-term care insurance with SHIP from potentially detrimental rate increases or benefit reductions."
I have written extensively about SHIP's financial problems. To review my posts about SHIP, click here or search for SHIP on my blog using the search box in the extreme upper left corner.
Monday, August 10, 2020
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
Wednesday, May 27, 2020
No. 374: Time Insurance Company—Another Long-Term Care Insurer Heads for Rehabilitation
On May 18, 2020, the Wisconsin Office of the Insurance Commissioner (OIC) issued a press release about its petition to a state court for permission to place Time Insurance Company (Time) in rehabilitation. Because Time is a long-term care (LTC) insurance company, this is a significant development in view of similar actions relating to two other LTC insurance companies: the liquidation of Penn Treaty Network America Insurance Company (Penn Treaty) and the rehabilitation of Senior Health Insurance Company of Pennsylvania (SHIP). The first sentence and the second paragraph of the OIC press release read as follows (the full press release is in the complimentary package offered at the end of this post):
Insurance Commissioner Mark Afable took measures today to help protect nearly 200,000 individuals who have long-term care insurance or other insurance policies with Time Insurance Company....
"Our filing with the court today protects nearly 200,000 consumers across the country," said Commissioner Afable. "State law requires me to act when our office believes an insurer is in financial trouble and that is what we have done today."
The Petition
The "Notice of Verified Petition and Verified Petition for Order for Rehabilitation" of Time consists of an eleven-page text and a five-page attachment. The text describes the background, lists the grounds for rehabilitation, and explains why the OIC determined that "rehabilitation is the only remaining option." The petition also states: "The Commissioner intends to file a plan of rehabilitation within 60 days of the Court's entry of the Order for Rehabilitation."
The petition provides details of a change of Time's ownership, Time's redomestication to Puerto Rico and its later redomestication back to Wisconsin, OIC's concerns about Time's risk-based capital (RBC) levels, OIC's cease and desist orders, and other significant matters. The petition is in the complimentary package offered at the end of this post.
The Statutory Statement
The petition says Time filed its statutory annual statement for the year ended December 31, 2019 on April 3, 2020. The statement shows total admitted assets of $16.2 million, total liabilities of $12.7 million, and statutory net worth of $3.5 million. On page 19.1 of the statement, there is a discussion of whether the company will be able to continue as a going concern. Selected pages of the statutory statement are in the complimentary package offered at the end of this post.
The RBC Ratios
RBC data for the past five years are shown on page 22 of Time's statutory statement for 2019. The RBC ratio at the end of each year, with company action level as the denominator of each ratio, are as follows (the RBC ratios with authorized control level as the denominator are twice the ratios shown here): 238 percent in 2015, 431 percent in 2016, 273 percent in 2017, 152 percent in 2018, and 210 percent in 2019.
An Omission
In The Insurance Forum (my monthly newsletter published from January 1974 through December 2013) and later on this blog site, I have written extensively about LTC insurance for 32 years. Recently a reader brought to my attention an important item on which I have not written.
My first article about LTC insurance was in the February 1988 issue of the Forum. It grew out of a solicitation I had received in the mail concerning a new LTC insurance product then being offered by Union Fidelity Life Insurance Company.
My second article about LTC insurance was in the August 1991 issue of the Forum. It grew out of an article in the June 1991 issue of Consumer Reports, the magazine of Consumers Union (CU). The CU article was entitled "An Empty Promise to the Elderly?" It described a CU study of 46 LTC insurance policies. None of the policies was rated "excellent" or "very good," but CU did not discuss the reason for those findings. In my August 1991 issue, I said "excellent" or "very good" LTC insurance policies would never be found because the problem of financing the LTC exposure violates insurance principles and therefore cannot be solved through private insurance.
In the July 2008 issue of the Forum, I elaborated on the discussion in my August 1991 issue. The July 2008 article is in the complimentary package offered at the end of this post.
What I have never discussed, because I have no recollection of ever having seen it, is a 16-page "Special Report" on LTC insurance published in the October 1997 issue of CU's magazine. The report included two pages of "ratings and recommendations" of 67 "comprehensive" LTC insurance policies and 47 "nursing home only" policies. The 67 "comprehensive" policies were ranked by "overall score." Six of them were rated as "very good," and none as "excellent." The top two policies on the list were "very good" Penn Treaty policies. My reader asserted that CU's October 1997 report created a huge demand for Penn Treaty's LTC insurance policies. I do not know whether his assertion is correct, but he may be right.
General Observations
I am not aware of anyone who has formally and publicly agreed with me that private LTC insurance cannot solve the problem of financing the LTC exposure. Nor am I aware of anyone who has formally and publicly disagreed with me. My views on the matter remain unchanged.
The previously mentioned July 2008 Forum article, entitled "Shortcomings of Private Insurance in Financing Long-Term Care," ends with this sentence: "I think many of those who try to address the problem [of financing long-term care] by purchasing private long-term care insurance will encounter disappointment."
Since October 2013, when I began this blog, I have received hundreds of emails from disgruntled owners of LTC insurance policies. For the most part, the complaints are about substantial premium increases or difficulties encountered in the handling of claims. Often the policyholders ask for my advice on what to do. In response, I have always said I am neither an attorney nor a consultant, and am not in a position to comment beyond what I have written. I then tell each person how to obtain, through the search box in the extreme upper left corner of the home page of my blog site, my posts relating to his or her company or about LTC insurance generally. I also sometimes suggest that the person contact the state insurance department in the person's home state. Each email from a disappointed LTC insurance policyholder has been a painful experience.
Available Material
I am offering a complimentary 30-page package consisting of the OIC press release (1 page), the OIC petition (16 pages), selected pages from Time's 2019 statutory statement (8 pages), and the July 2008 Forum article (5 pages). Email jmbelth@gmail.com and ask for the May 2020 package about the rehabilitation of Time.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Friday, May 1, 2020
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.
Monday, February 10, 2020
No. 354: Senior Health Insurance Company of Pennsylvania Enters Rehabilitation by Order of a State Court
In No. 352 (January 29, 2020), I reported that Jessica K. Altman, the Pennsylvania Insurance Commissioner and primary regulator of Senior Health Insurance Company of Pennsylvania (SHIP), filed in the Commonwealth Court of Pennsylvania on January 23 an application for an order placing SHIP in rehabilitation. On January 29, President Judge Mary Hannah Leavitt issued the order 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." (See IN RE: Senior Health Insurance Company of Pennsylvania In Rehabilitation, Commonwealth Court of Pennsylvania, No. 1 SHIP 2020.)
The Leavitt Order
Judge Leavitt appointed Commissioner Altman as rehabilitator of SHIP, and said the rehabilitator may appoint a special deputy rehabilitator. The judge ordered the rehabilitator to file a preliminary plan of rehabilitation on or before April 22, 2020, including a timeline for the preparation of a final plan of rehabilitation.
The 13-page order proposed by Commissioner Altman is in the complimentary package offered at the end of No. 352. The five-page order issued by Judge Leavitt is in the complimentary package offered at the end of this post.
The Department's Press Release
On February 3, 2020, the Pennsylvania Insurance Department (Department) issued a press release announcing the rehabilitation. It said the special deputy rehabilitator is Patrick H. Cantillo. It also said more information is available on the Department's website and on SHIP's website. The press release quoted Commissioner Altman as saying (the full press release is in the complimentary package offered at the end of this post):
At this time there will be no immediate changes to the company's insurance policies. But such changes may be part of any rehabilitation plan. Pending the rehabilitation plan, claims and benefits will continue to be paid as they were before the order. It is important that policyholders continue to pay their premiums to avoid cancellation of their policies and loss of valuable insurance coverage.
The SHIP Posting
SHIP, at www.shipltc.com/rehabilitation, posted information: a short statement from SHIP, general questions, policyholder questions, agent and broker questions, other creditor questions, and a modified version of the Department's press release. The modified version includes this paragraph (all the information SHIP posted is in the complimentary package offered at the end of this post):
As is typical with financially troubled insurers, there are many contributing causes to SHIP's difficulties, including poor performance of investments and other such matters the details of which are not yet fully known to the Rehabilitator. However, one key contributing factor that is common to many long-term care insurers is that the expected cost of benefits that will be due under the insurance policies in effect greatly exceeds the assets and expected revenues from which such benefits will have to be paid. Many issues contributed to this shortfall and it is too early for the Rehabilitator to be able to identify them with specificity. One that stands out, however, is that the premiums charged historically for many, if not most, of SHIP's long-term care insurance policies were inadequate for the benefits expected to be due under such policies. In this respect, SHIP is no different than much of the LTC industry.
The Judge
Judge Leavitt has extensive experience with rehabilitations and liquidations of long-term care (LTC) insurance companies. Currently she is President Judge of the Commonwealth Court of Pennsylvania, a position to which she was elected in 2016. My experience with her work dates back to May 2012, when she handed the then Pennsylvania commissioner and his predecessor a major defeat in the case of Penn Treaty Network America Insurance Company. Briefly, here is what happened.
Joel S. Ario was the Pennsylvania commissioner from 2007 to 2010, and Michael F. Consedine succeeded him. Penn Treaty and an affiliate, LTC insurance companies, were insolvent in January 2009. Ario petitioned the court to place them in rehabilitation. The court did so, and appointed Ario the rehabilitator. In April 2009, Ario submitted to the court a preliminary rehabilitation plan, and said he planned to submit a formal plan in October 2009. Instead he petitioned to convert the plan to a liquidation. Penn Treaty and its board chairman petitioned to allow them to intervene in opposition to the liquidation petition. The court granted the petition.
The parties tried unsuccessfully to reach a settlement. A bench trial before Judge Leavitt began in January 2011. The trial was suspended while the parties tried to reach a settlement. Again the effort failed and the trial resumed in October 2011. The trial lasted 30 days and ended in February 2012. Under Pennsylvania law, the rehabilitator (then Consedine) had to prove the rehabilitation would substantially increase the risk of loss to creditors, policyholders, or the public, or would be futile. In May 2012, Judge Leavitt issued a 162-page opinion and a brief order. She ruled Consedine had not met his burden of proof, and she denied the liquidation petition. She ordered Consedine to develop a rehabilitation plan in consultation with the intervenors, and ruled the intervenors were entitled to attorney fees and costs. Here are some extraordinary comments in Judge Leavitt's ruling:
The Insurance Commissioner, wearing his hat as a regulator of the Pennsylvania insurance industry, refused to approve the Companies' actuarially justified rate increase filings in the amount requested, both before and after rehabilitation. The Commissioner has even discouraged other state regulators from approving rate increases. Now the Commissioner seeks to liquidate the Companies because their premium rates are inadequate....
The Rehabilitator's evidence showed that rate regulation is governed by politics, not actuarial evidence or legal principles. The Rehabilitator has even included Pennsylvania in the list of problem states that have refused to approve [Penn Treaty's] actuarially justified rate increase filings for [certain] policies. This case presents a serious indictment of the existing system of rate regulation of long-term care insurance.
At the trial, the rehabilitator's actuarial expert was an actuary at Milliman, Inc., an actuarial consulting firm. There were major differences of opinion in 60-year projections by Milliman and the intervenors' actuary. Judge Leavitt found the testimony by the intervenors' actuary more compelling than Milliman's testimony.
I wrote about the Penn Treaty incident in the August 2012 issue of The Insurance Forum, the monthly newsletter I published from January 1974 until December 2013. The article is in the complimentary package offered at the end of this post. Judge Leavitt placed Penn Treaty in liquidation on March 1, 2017, as reported in No. 208 (March 13, 2017).
General Observations
I fear the proposed rehabilitation plan to be submitted to the court by April 22 will involve a devastating combination of premium increases and benefit reductions, including benefit reductions for policyholders currently receiving benefits. Furthermore, I consider it possible that Judge Leavitt will reject the plan, and that she will order liquidation of the company. That would lead to SHIP being placed in the hands of the National Organization of Life and Health Guaranty Associations, which would coordinate the response of the state guaranty associations.
Available Material
I am offering a complimentary 23-page PDF consisting of Judge Leavitt's order (5 pages), the Department's press release (1 page), the information posted on SHIP's website (15 pages), and the August 2012 Forum article (2 pages). Email jmbelth@gmail.com and ask for the February 2020 package about the SHIP rehabilitation.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Wednesday, January 29, 2020
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
Monday, December 9, 2019
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.
Monday, November 25, 2019
No. 342: Long-Term Care Insurance and the Expanding Insolvency of Senior Health Insurance Company of Pennsylvania
Senior Health Insurance Company of Pennsylvania (SHIP), which is domiciled in Pennsylvania, has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. I wrote four articles in The Insurance Forum about the transfer of CSHI's LTC insurance business to SHIP. (The four articles are in the complimentary package offered at the end of this post.)
In No. 308 (April 11, 2019), I said SHIP was insolvent by $447 million. According to the company's financial statement for the year ended December 31, 2018 (filed March 1, 2019), total liabilities of $2.653 billion exceeded total assets of $2.206 billion. Here I report that the deficit has been expanding in 2019. I also discuss a few related matters.
Quarterly Data in 2019
According to SHIP's financial statement for the quarter ended March 31, 2019 (filed May 15), the deficit had grown to $462 million. According to the statement for the quarter ended June 30, 2019 (filed August 15), the deficit had grown to $477 million. According to the statement for the quarter ended September 30, 2019 (filed November 15, 2019), the deficit had grown to $524 million. (Six selected pages from the latest quarterly statement are in the complimentary package offered at the end of this post.)
RBC Data
The numerator of a risk-based capital (RBC) ratio is "total adjusted capital," the denominator is "company action level," and the quotient is the RBC ratio. According to SHIP's financial statement for the year ended December 31, 2018, total adjusted capital was minus $467 million, company action level was $102 million, and the RBC ratio was minus 458 percent. RBC data do not appear in quarterly statements, but the RBC ratios are negative because total adjusted capital is negative.
According to state RBC laws, when a company's RBC ratio falls below 35 percent, the company is in the "mandatory control zone," and the primary regulator—the Pennsylvania Insurance Department (Department) in this instance—is required to seek state court permission to seize control of the company. Yet the Department has not done so. I asked the National Organization of Life and Health Guaranty Associations (NOLHGA) about SHIP. NOLHGA referred me to the Department. I asked the Department about SHIP, but received no reply.
In SHIP's statement for the year ended December 31, 2018, this sentence appears: "There is not substantial doubt about the Company's ability to continue as a going concern." I do not know how a company deep in the mandatory control zone can justify that assertion. In SHIP's three quarterly statements in 2019, these two sentences appear:
On the Department's website, I recently found a "Report of Limited-Scope Examination" of SHIP as of December 31, 2016. The "Conclusion" of the report contains these comments (the full report is in the complimentary package offered at the end of this post):
The Market Conduct Examination Report
On the Department's website, I recently found a "Market Conduct Examination Report" of SHIP as of April 24, 2019. The report includes a detailed history of the company, refers to a third-party administration agreement with Long Term Care Group (LTCG), and contains the company's response. Here are two of several recommendations (the full report is in the complimentary package offered at the end of this post):
According to SHIP's financial statements, the company remains licensed in all U.S. jurisdictions except Connecticut, New York, Rhode Island, Vermont, American Samoa, Guam, Puerto Rico, and Northern Mariana Islands. In reply to my inquiries, a few of those eight jurisdictions said they have no record of the company ever being licensed there.
General Observations
Normally, when an insurance company is in financial trouble, the primary regulator seeks state court permission to seize control of the company and place it in rehabilitation or liquidation. (Liquidation would trigger state guaranty association coverage.) In this instance, however, SHIP and its predecessor, CSHI, have been in runoff mode since 2003. Because the company does not sell new policies, perhaps the thinking is that there is no need for the Department to take formal control of the company. In the absence of straight answers from the Department and NOLHGA, it appears that the Department has effectively taken control of SHIP without a court order. Stated another way, it appears that the company is "in limbo" without disclosure of the situation to the premium-paying policyholders and the recipients of benefits. To my knowledge SHIP provides no annual reports to policyholders and claimants. I think the Department should require SHIP to do so.
In No. 308 (April 11, 2019), I said SHIP was insolvent by $447 million. According to the company's financial statement for the year ended December 31, 2018 (filed March 1, 2019), total liabilities of $2.653 billion exceeded total assets of $2.206 billion. Here I report that the deficit has been expanding in 2019. I also discuss a few related matters.
Quarterly Data in 2019
According to SHIP's financial statement for the quarter ended March 31, 2019 (filed May 15), the deficit had grown to $462 million. According to the statement for the quarter ended June 30, 2019 (filed August 15), the deficit had grown to $477 million. According to the statement for the quarter ended September 30, 2019 (filed November 15, 2019), the deficit had grown to $524 million. (Six selected pages from the latest quarterly statement are in the complimentary package offered at the end of this post.)
RBC Data
The numerator of a risk-based capital (RBC) ratio is "total adjusted capital," the denominator is "company action level," and the quotient is the RBC ratio. According to SHIP's financial statement for the year ended December 31, 2018, total adjusted capital was minus $467 million, company action level was $102 million, and the RBC ratio was minus 458 percent. RBC data do not appear in quarterly statements, but the RBC ratios are negative because total adjusted capital is negative.
According to state RBC laws, when a company's RBC ratio falls below 35 percent, the company is in the "mandatory control zone," and the primary regulator—the Pennsylvania Insurance Department (Department) in this instance—is required to seek state court permission to seize control of the company. Yet the Department has not done so. I asked the National Organization of Life and Health Guaranty Associations (NOLHGA) about SHIP. NOLHGA referred me to the Department. I asked the Department about SHIP, but received no reply.
In SHIP's statement for the year ended December 31, 2018, this sentence appears: "There is not substantial doubt about the Company's ability to continue as a going concern." I do not know how a company deep in the mandatory control zone can justify that assertion. In SHIP's three quarterly statements in 2019, these two sentences appear:
The Company has suffered recurring losses from operations and has a net capital and surplus deficit. The Company is actively working with the Pennsylvania Insurance Department to develop a corrective action plan.The Limited-Scope Examination
On the Department's website, I recently found a "Report of Limited-Scope Examination" of SHIP as of December 31, 2016. The "Conclusion" of the report contains these comments (the full report is in the complimentary package offered at the end of this post):
Although each of the Consulting Actuary's scenarios produce less favorable results than the Company's base scenario, and indicate material reserve deficiencies, the Department is making no recommendation to change the financial statement at this time.
The Company has agreed to consider several long-term monitoring suggestions from the Consulting Actuary and incorporate those monitoring suggestions as needed into future reserve studies. The Department will continue to closely monitor the Company's financial condition and operating results.
The next regularly scheduled financial condition examination of the Company will cover the five-year period ending December 31, 2018.I asked the Department when the examination for the five-year period ending December 31, 2018 will be available. I received no reply.
The Market Conduct Examination Report
On the Department's website, I recently found a "Market Conduct Examination Report" of SHIP as of April 24, 2019. The report includes a detailed history of the company, refers to a third-party administration agreement with Long Term Care Group (LTCG), and contains the company's response. Here are two of several recommendations (the full report is in the complimentary package offered at the end of this post):
The Company must review and revise internal control procedures to ensure compliance with claims handling requirements, so that the violations relating to claim acknowledgment, status letters, acceptance or denials, and payments as noted in the Examination Report, do not occur in the future.
The Company must ensure LTCG representatives are trained to fully disclose to first-party claimants the benefits, coverages, alternative plans of care, or other provisions of the insurance policy or insurance contract when the benefits, coverages or other provisions are pertinent to a claim.Licensing
According to SHIP's financial statements, the company remains licensed in all U.S. jurisdictions except Connecticut, New York, Rhode Island, Vermont, American Samoa, Guam, Puerto Rico, and Northern Mariana Islands. In reply to my inquiries, a few of those eight jurisdictions said they have no record of the company ever being licensed there.
General Observations
Normally, when an insurance company is in financial trouble, the primary regulator seeks state court permission to seize control of the company and place it in rehabilitation or liquidation. (Liquidation would trigger state guaranty association coverage.) In this instance, however, SHIP and its predecessor, CSHI, have been in runoff mode since 2003. Because the company does not sell new policies, perhaps the thinking is that there is no need for the Department to take formal control of the company. In the absence of straight answers from the Department and NOLHGA, it appears that the Department has effectively taken control of SHIP without a court order. Stated another way, it appears that the company is "in limbo" without disclosure of the situation to the premium-paying policyholders and the recipients of benefits. To my knowledge SHIP provides no annual reports to policyholders and claimants. I think the Department should require SHIP to do so.
There is another way to look at this highly unusual regulatory procedure. The "in limbo" status of SHIP's policyholders and claimants may continue for many years—probably decades—until the assets run out. At that point the company would have to close down, cancel the policies, and stop benefit payments to claimants. The situation raises important questions: when and how should the company's status be disclosed to (1) premium-paying policyholders that they likely will not receive the benefits promised under their policies, and (2) claimants that their benefit payments likely will stop. This doomsday scenario is the result of "kicking the can down the road" and leaving the problem in the hands of a future generation of regulators.
When this item is posted, I will send it to the Department. I will say I plan to write a follow-up, and will ask the Department for a statement about SHIP in a form suitable for inclusion in the follow-up. I will impose no limitation on the length of the statement, but will ask the Department to provide the statement within three weeks.
Available Material
I am offering a complimentary 49-page PDF consisting of the four Forum articles (10 pages), selected pages from the latest quarterly statement (6 pages), the limited-scope examination report (6 pages), and the market conduct examination report (27 pages). Email jmbelth@gmail.com and ask for the December 2019 SHIP package.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Thursday, October 17, 2019
No. 337: Long-Term Care Insurance—Another Class Action Lawsuit Against Genworth
On September 21, 2018, Richard F. Burkhart and four other individuals filed a class action lawsuit against Genworth Financial, Inc. (Genworth) and four affiliates relating to long-term care (LTC) insurance. The plaintiffs filed the lawsuit in state court in Delaware, where Genworth and several of its affiliates were organized. On January 29, 2019, according to the docket, the plaintiffs filed a confidential, unredacted version of an amended complaint, which I have not seen. On February 5, 2019, the plaintiffs filed a redacted version of the amended complaint, which I discuss in this post. (See Burkhart v. Genworth, Court of Chancery, State of Delaware, Case No. 2018-0691.)
The Parties
Three plaintiffs are Massachusetts residents and two are Connecticut residents. Three of them bought LTC insurance policies during the 2002-2004 period from General Electric Capital Assurance Company, a predecessor of Genworth Life Insurance Company (GLIC). One bought an LTC insurance policy in 2013 from GLIC. One is an agent who sold LTC insurance policies and other policies issued by GLIC. The defendants are Genworth, GLIC, and three other Genworth affiliates.
The Amended Complaint
The amended complaint describes how Genworth and its affiliates allegedly reduced GLIC's capital to the detriment of policyholders and agents. Here is the first paragraph of the introduction (the amended complaint is in the complimentary package offered at the end of this post):
This action challenges a deliberate, long-term scheme by defendant Genworth, an insurance holding company, and by its affiliated defendants, to bleed capital from GLIC, a wholly-owned insurance subsidiary of Genworth upon which over a million policyholders depend for long-term care insurance benefits in the event that they become disabled. This conduct has profoundly harmed and will continue to harm GLIC policyholders and the agents through whom such policyholders purchased insurance. Absent injunctive and other equitable relief, defendants' conduct will leave the policyholders at critical risk at the point in their lives when they have greatest need for the benefits provided by the policies.
The amended complaint describes how Genworth allegedly used fraudulent transfers to remove assets and capital support from GLIC for the benefit of other Genworth companies, shareholders, bondholders, and management, to the detriment of GLIC, its policyholders, and its agents. Among the allegedly fraudulent transfers are substantial dividends, the termination of a reinsurance transaction, and the proposed merger with China Oceanwide. The amended complaint includes four counts: (1) Intentional Fraudulent Transfer—Payment of GLIC Dividends, (2) Constructive Fraudulent Transfer—Payment of GLIC Dividends, (3) Intentional Fraudulent Transfer—Reinsurance Termination, and (4) Constructive Fraudulent Transfer—Reinsurance Termination. The plaintiffs seek, among other things, an unwinding of the reinsurance termination, an unwinding of the GLIC dividends, attorney fees, and costs.
The Redactions
The redactions are three paragraphs (24 lines) in the amended complaint. Here are four paragraphs preceding and four paragraphs following the redactions:
60. There is substantial evidence that was not known or discoverable by Plaintiffs at the time the GLIC dividends were paid that demonstrates that Genworth knew full well that GLIC's DLR [disabled life/claim reserve] was inadequate long before it corrected the DLR in November 2014 and again in 2016, and rather than correct the inaccuracies in the Statutory Financial Statements filed with the [Delaware] Department, Genworth suppressed the adverse information.
61. In January 2014, Genworth hired James Boyle as the CEO of its U.S. Life Insurance Division ("Division"), which included the long-term care business of GLIC. Shortly thereafter, Lynne Patterson was hired as the Division's interim CFO. In May 2014, Patterson began a review and investigation of the underlying actuarial assumptions for long-term care reserves.
62. On information and belief, in early June 2014, following a series of meetings with the actuaries involved in developing the reserves, Patterson discovered that the assumptions the actuaries were using to develop the reserves had been "back-fitted" to meet the demands of senior management and were unreliable. Boyle and Patterson shared their concerns with Genworth's CFO, Martin Klein, on June 16, 2014.
63. On July 16, 2014, Boyle advised Genworth's Audit Committee: that John Nigh, the Division's chief actuary, and Loida Abraham, a supervising actuary, had attempted to manipulate actuarial assumptions to reduce long-term care claim reserves; that Genworth's chief actuary, Robert Vrolyk, on June 6, 2014, had admitted to Boyle that based on independent work Vrolyk had performed, there may have been an error in Genworth's long-term care claim reserve calculations of as much as 20%, or approximately $500-600 million; that three in-house actuaries overseen by Patterson to prepare a new "clean-slate" estimate of long-term care claim reserves using actual claims experience had arrived at a claim reserve that was $800 million higher than previously stated; that assumptions underlying the long-term care claim reserve announced in December 2013 had not been properly peer-reviewed, and that the documentation needed to support the claim reserve announced in December 2013 was incomplete or missing; and that Boyle and Patterson were being isolated and that efforts were being made to slow down a final conclusion regarding the claim reserve's adequacy and amount. Those efforts included directions to Milliman, an independent actuarial firm that Genworth had retained, to eliminate its validation of the proposed $800 million claim reserve adjustment.
64. Five lines redacted.
65. Seven lines redacted.
66. Five lines redacted.
67. Seven lines redacted.
68. On information and belief, in or around mid-July 2014, Boyle gave a "red alert" warning to Genworth's Board of Directors.
69. Less than two weeks later, on July 28, 2014, Boyle and Patterson resigned, about six months after joining the company. Genworth issued a press release stating that Thomas J. McInerney, Genworth's CEO, would also assume the duties of CEO of the Division effective immediately.
70. Immediately following the resignation of Boyle and Patterson, on a July 30, 2014 investor conference call, McInerney, who was now CEO of both Genworth and the Division, revealed that Genworth would be conducting a detailed review of its DLR assumptions, methodology and process, and that changes to the assumptions for the DLR could be required as a result.
71. On November 6, 2014, Genworth's management disclosed during an earnings call with investors that the DLR for its long-term care policies had been understated by $589 million in the Statutory Financial Statements filed with the [Delaware] Department, resulting in a reserve restatement in that amount (the "2014 DLR Restatement"). During that call, Klein, Genworth's CFO, stated that approximately half of this overall increase in the DLR was attributable to "updating" assumptions regarding claim termination rates, including adjusting the average length of claim assumption to reflect Genworth's actual experience between 2010 and 2013, the period during which the GLIC Dividends were paid.
The Motion to Dismiss
On March 13, 2019, Genworth filed a motion to dismiss. Here is the first paragraph of the summary (the full motion to dismiss is in the complimentary package offered at the end of this post):The named plaintiffs in this purported nationwide class action are long term care ("LTC") insurance policyholders of defendant Genworth Life Insurance Company ("GLIC") and agents who sold LTC policies for GLIC. The policyholder Plaintiffs have been insured continuously since they bought their policies. Not one alleges to have ever made an LTC policy claim, let alone that a claim has gone unpaid. The agent Plaintiffs are compensated through commissions paid each time an annual premium is paid on an LTC policy they sold; they also do not allege that GLIC has ever failed to pay them a commission they are owed. Plaintiffs nonetheless ask this Court to reverse GLIC's payment of $410 million in dividends between 2012 and 2015 to its corporate shareholder parent and to unwind a 2016 merger of subsidiaries because, at some unspecified point in the distant future, GLIC might have insufficient assets to pay their possible LTC claims and commissions. Plaintiffs assert that these were fraudulent transfers of GLIC's assets to other Genworth affiliates. This action should be dismissed in its entirety because Plaintiffs fail to allege an actual or imminent injury sufficient to confer standing in this Court.
The Opposition to the Motion to Dismiss
On April 26, 2019, the plaintiffs filed an opposition to the motion to dismiss. Here is the first paragraph (the full opposition is in the complimentary package offered at the end of this post):
In their Motion to Dismiss, Defendants posit a classic Catch-22. They argue first that Plaintiffs sued too soon, because Defendant Genworth Life Insurance Company ("GLIC") has not (yet) defaulted on the relevant insurance policies. At the same time, Defendants argue Plaintiffs sued too late, because the challenged transfers cannot be avoided more than four years after they were made. That is, Plaintiffs must wait decades until they are infirm and GLIC collapses, at which point they will be told it is too late to avoid the challenged transfers. Catch-22. [Emphasis in original.]
The Reply to the Opposition to the Motion to Dismiss
On June 14, 2019, Genworth filed a reply to the opposition to the motion to dismiss. Here, without citations, is the first paragraph of the summary (the full reply is in the complimentary package offered at the end of this post):
Plaintiffs assert repeatedly that Defendants' 2012-2015 dividend payments and purported "Reinsurance Termination" caused them "injury," but Plaintiffs do not plead facts demonstrating that any such injury is actual or imminent. Their Answering Brief admits that "GLIC has not yet defaulted" on any obligations to Plaintiffs. Their Amended Complaint can only conclusorily [sic] speculate that GLIC "will likely become unable to pay its policyholders and agents in full" at some indeterminate point in the far future. And Plaintiffs also admit that "the maturity date and scope of any particular policyholder's claim is unknowable."
General Observations
Oral argument on Genworth's motion to dismiss is scheduled for October 21, 2019. It will be interesting to see the judge's ruling on the motion to dismiss.
With regard to the redactions in the amended complaint, they probably reflect Milliman's findings, which Milliman probably submitted to Genworth on a confidential basis. I have been through this before.
In 2008, when Conseco transferred its LTC insurance company to a trust that would own Senior Health Insurance Company of Pennsylvania (SHIP), Conseco told the Pennsylvania Insurance Department that Milliman had prepared a report saying the assets transferred would be sufficient to run off all of SHIP's LTC insurance business. I tried to obtain the Milliman report, but Conseco and the Department said it was confidential. As I reported in No. 308 (April 11, 2019), SHIP's liabilities of $2.653 billion at the end of 2018 exceeded its assets of $2.206 billion, leaving the company insolvent by $447 million. The deficit was $481 million as of March 31, 2019, and $496 million as of June 30, 2019. Many years remain before all of SHIP's LTC insurance business runs off.
As a layman—I am not an attorney—I read the documents in this case. In my opinion, the arguments advanced by the plaintiffs are stronger than those advanced by the defendants, although others who read the documents may feel differently. If the lawsuit survives the motion to dismiss, the case should be followed closely. However, like other such lawsuits, the case is likely to be settled before trial. I plan to report further developments.
Available Material
I am offering a complimentary 227-page PDF consisting of the amended complaint (65 pages), the motion to dismiss the amended complaint (60 pages), the opposition to the motion to dismiss the amended complaint (64 pages), and the reply to the opposition to the motion to dismiss the amended complaint (38 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Burkhart v. Genworth.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Wednesday, August 28, 2019
No. 329: Long-Term Care Insurance—The Markopolos Whistleblower Report on General Electric
On August 15, 2019, Harry M. Markopolos released a 175-page whistleblower report alleging that General Electric Company (GE) is a "bigger fraud than Enron" and is "headed toward bankruptcy." One part of the report relates to GE's accounting for its long-term care (LTC) insurance legacy problem. Another part relates to GE's accounting for a 2017 investment involving a pair of oil and gas businesses. In this post I discuss only the LTC insurance portion of the report.
Harry Markopolos
Markopolos, now aged 62, was born in Erie, Pennsylvania. He received a bachelor's degree in business from Loyola College in Maryland in 1981, and a master's degree in finance from Boston College in 1997. He is a Chartered Financial Analyst and a Certified Fraud Examiner. His name is familiar to those who followed the collapse of the massive Ponzi scheme operated by Bernard Madoff.
Several books have been written about Madoff. One is a 2010 book entitled No One Would Listen: A True Financial Thriller, which is a personal account by Markopolos. David Einhorn, a prominent hedge fund manager and short seller, wrote the December 2009 foreword. In view of recent developments, it is ironic that Einhorn's foreword asks: "How statistically different was Bernie Madoff's track record from General Electric's 100-quarter record of continual earnings growth...?"
Another is a superb 2011 book entitled The Wizard of Lies: Bernie Madoff and the Death of Trust by Diana B. Henriques of The New York Times. She mentions Markopolos prominently because he was one of the first to become suspicious of Madoff. She also describes his several unsuccessful efforts to persuade the Securities and Exchange Commission (SEC) and other regulators to investigate Madoff.
The Markopolos Report
The Markopolos report includes a six-page summary and one page of disclosures. Here is the first paragraph of the summary (the full summary and the page of disclosures are in the complimentary package offered at the end of this post):
This is my accounting fraud team's ninth insurance fraud case in the past nine years and it's the biggest, bigger than Enron and WorldCom combined. In fact, GE's $38 billion in accounting fraud amounts to over 40% of GE's market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds. Enron's CEO Jeff Skilling resigned on August 14, 2001, Enron was downgraded to junk status on November 28, and it filed for bankruptcy protection on December 2. On March 11, 2002, WorldCom received document requests from the SEC related to its accounting and loans to officers. On April 30 CEO Bernie Ebbers resigned regarding his $400 million in personal loans from the company. Then on June 25 CFO Scott Sullivan was fired before WorldCom filed Chapter 11 on July 21. It has been 17 years since WorldCom so we are long overdue for something like GE. As you read our slide deck, you will see that GE utilizes many of the same accounting tricks Enron did, so much so that we have taken to calling this the "GEnron" case.
To obtain the Markopolos report, go to www.gefraud.com. Indicate your name and email address, and confirm you have read the disclosures.
The GE Statements
On August 15, 2019, GE issued a two-page statement entitled "GE Addresses Claims by Harry Markopolos." Here are the first paragraph and the first two sentences of the second paragraph (the full statement is in the complimentary package offered at the end of this post):
The claims made by Mr. Markopolos are meritless. The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.
Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds. Such funds are financially motivated to attempt to generate short selling in a company's stock to create unnecessary volatility.
The statement went on to address the allegations. GE also issued investor updates on August 16 and 19. Here is a paragraph about LTC insurance (underlining in the original) in the August 19 update (the two updates are in the complimentary package offered at the end of this post):
It's important to recognize that there are several characteristics of industry long-term care blocks of business, including coverage and cash benefit options. In addition, GE is a reinsurer that has a variety of contractual relationships and is not responsible for 100% of every claim on every life. And recall how reserves work: the 2017 $15 billion increase to statutory reserves, to be recognized through 2024, was established to cover future claims in addition to claims already incurred.
The Fitch Report
On August 20, 2019, Fitch Ratings, a major rating firm, released a 16-page special report entitled "U.S. Long-Term Care Update: Legacy Exposures Continue to Plague Insurers." The fact that Fitch released the report five days after release of the Markopolos report presumably was a coincidence, but the Fitch report caused more problems for GE. Here is the first paragraph of the executive summary:
Highest Risk Product Exposure. Fitch Ratings ranks legacy individual long-term care (LTC) product exposures among the riskiest products marketed by U.S. life insurers. Our concerns mirror those of insurers that divested this risk or exited the market altogether, including volatile performance, high reserve and statutory capital requirements, as well as heightened exposure to interest rate-related risks. These all have the potential to introduce volatility in companies' capital and earnings generation capabilities for years after policies are issued.
The Fitch report includes a table entitled "Fitch's Individual LTC Observations by Insurer." The table shows, among other things, the "reserve adequacy" of 16 companies that currently offer or have offered LTC insurance. The five companies with "below average" reserve adequacy are Genworth Financial, GE Insurance Operations (including Employers Reassurance Corporation and Union Fidelity Life Insurance Company), UNUM Group, AEGON Americas, and Senior Health Insurance Company of Pennsylvania (SHIP). The seven companies with "above average" reserve adequacy are Manulife Financial, MetLife, Thrivent Financial, CNO Financial Group, Northwestern Mutual, New York Life, and Massachusetts Mutual.
An appendix in the Fitch report provides an update on SHIP. The final paragraph of the update reads:
In 2018 the company also reported reserve strengthening actions of approximately $359 million, driven by revisions in key morbidity, claims cost, lapse and investment yield assumptions. This, along with SHIP's reported asset impairments, led to a reported surplus deficit of about $466.9 million as of December 31, 2018. While we note the company continues to work closely with regulatory bodies, Fitch views SHIP as remaining on-track to becoming the industry's next insolvent LTC writer requiring guaranty fund assessments from the industry.
Regular readers of this blog know I have posted several items about SHIP. The most recent is No. 308 (April 11, 2019) entitled "Long-Term Care Insurance and the Insolvency of Senior Health Insurance Company of Pennsylvania."
Fitch denied my request for permission to include its LTC update in the complimentary package I am offering at the end of this post. However, the firm issued a press release on how to access the report. (The press release is in the complimentary package offered at the end of this post.)
The Litigation
In No. 298 (December 10, 2018), I posted my most recent discussion of the massive legacy problem at GE relating to LTC insurance. I said the then lawsuit, which had been consolidated with other similar lawsuits, was in the hands of U.S. District Judge Jesse M. Burman of the Southern District of New York. On September 20, 2018, GE filed a motion to dismiss the latest consolidated complaint, along with documents in support of the motion. On October 12 the plaintiffs opposed the motion to dismiss the latest consolidated complaint.
On February 27, 2019, new plaintiffs filed a lawsuit against GE, along with a statement that the new case was related to the old case. The next day, the new case was accepted as related to the old case and assigned to Judge Burman. On March 4 the judge ordered the parties in both cases to confer and submit to him a joint letter on how to proceed. On March 13 the parties submitted the joint letter. On March 15 the judge adopted the suggestion that the parties submit another joint letter on how to proceed within two weeks after the judge rules on the pending motion to dismiss the old case. At this writing (late August) the judge has not ruled on the motion to dismiss the old case. (The new case is Touchstone v. GE, U.S. District Court, Southern District of New York, Case No. 1:19-cv-1876.)
General Observations
The Markopolos report is complex, and I do not understand its full implications. Nor am I aware of the status of any investigation of GE by the SEC or any other regulatory agencies. I plan to write again when I learn of any significant developments.
In this post I showed the opening section of GE's August 15 statement about the Markopolos report. In my opinion, the ad hominem attack is unfortunate. It is standard practice for an independent researcher to maintain a distance from the object of the research. An important reason is that to share the research in advance would provide the object of the research with an opportunity to delay and possibly prevent publication in a variety of ways. That is why independent journalists do not share the results of their work in advance with the objects of their news stories.
Available Material
I am offering a complimentary 20-page PDF consisting of the summary and disclosures in the Markopolos report (7 pages), the three GE statements about the Markopolos report (10 pages), and the Fitch press release about the Fitch report (3 pages). Email jmbelth@gmail.com and ask for the August 2019 package about LTC insurance and the Markopolos report on GE.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Monday, April 22, 2019
No. 310: Long-Term Care Insurance and the National Association of Insurance Commissioners
In No. 308 (posted April 11, 2019), I discussed the insolvency of Senior Health Insurance Company of Pennsylvania (SHIP), a long-term care (LTC) insurance company in run-off. On April 10, the National Association of Insurance Commissioners (NAIC) issued a press release entitled "NAIC Prioritizes Long-Term Care Insurance" and subtitled "State regulators form executive-level task force." The NAIC's press release is in the complimentary package offered at the end of this post.
The New Task Force
The chair of the new NAIC task force is Virginia Commissioner Scott A. White, and the vice chair is Colorado Commissioner Michael Conway. The first meeting of the task force is tentatively scheduled for Kansas City in connection with what the NAIC calls an "Insurance Summit" relating to "Where Innovation Meets Regulation." It is not surprising that insurance regulators in Florida (home of many retirees), Pennsylvania (home of Penn Treaty and SHIP), South Carolina (home of Kanawha), and Virginia (home of Genworth) are among those instrumental in forming the new task force.
On April 12, I sent No. 308 to the Virginia Bureau of Insurance and asked for confirmation of my belief that Commissioner White is chairing the new task force because Genworth is based in Virginia. In response, a spokesperson referred me to the NAIC. On April 15, I made the same request to the NAIC. An NAIC spokesperson responded, but did not answer the question I asked.
The Upcoming Virginia Hearing
On March 15, 2019, the Virginia Bureau of Insurance issued a press release announcing a public hearing to be held in Richmond on May 21. The Bureau said it is inviting public comment on recent LTC insurance premium rate increase requests the Bureau has received from numerous insurance companies. The Bureau said public comments for the hearing record may be submitted in advance by April 22. I am submitting this blog post for the hearing record. The Bureau's press release is in the complimentary package offered at the end of this post.
A Few Articles About LTC Insurance
I have been writing about LTC insurance for three decades. Several of the early articles appeared in my monthly newsletter, The Insurance Forum, which I began in 1974 and ended in 2013. Four of the Forum articles about LTC insurance are discussed briefly here, and are in the complimentary package offered at the end of this post.
My first article about LTC insurance was in the February 1988 issue of the Forum. It was in the form of an open letter to Danny Thomas, the legendary entertainer and philanthropist who founded St. Jude's Children's Research Hospital in Memphis. Thomas had endorsed an LTC insurance policy offered by Union Fidelity Life Insurance Company, but I felt the policy presented serious problems for anyone who purchased it. Thomas did not respond to my open letter, but a company officer told me the company was no longer selling the policy.
Within a few years, many companies had begun selling LTC insurance. The August 1991 issue of Consumer Reports, the magazine of Consumers Union (CU), contained a study entitled "Gotcha! The Traps in Long Term Care Insurance." CU identified some "fair" LTC insurance policies and some "poor" policies, but no "excellent" or "good" policies. I wrote about the CU study in the August 1991 issue of the Forum. I explained that an "excellent" or "good" policy could never be found, because the LTC exposure violates important insurance principles. For example, the potential loss should be of a type that is fortuitous; that is, the potential loss should be of a type that occurs by chance and should not be within the control of the insured person or family members. Another example is that the potential loss should be definite; that is, the potential loss should be of a type in which there is little room for dispute over whether a loss of the type covered by the insurance has occurred.
In the May 1997 issue of the Forum, I wrote about a promotional letter used by General Electric Capital Assurance Company in selling LTC insurance. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes in your health." I told a company officer that, although the sentence was technically correct, it was deceptive because the policy allowed the company to increase the premiums. The company officer explained why he thought the sentence was not deceptive. However, the company removed the sentence from its promotional letters.
In the July 2008 issue of the Forum, I expressed the opinion that the problem of financing the LTC exposure could not be solved through the mechanism of private insurance. There I expanded on what I had said earlier about the important insurance principles that LTC insurance violates. I also identified several other considerations that render private LTC insurance unworkable.
In the July 2008 issue of the Forum, I expressed the opinion that the problem of financing the LTC exposure could not be solved through the mechanism of private insurance. There I expanded on what I had said earlier about the important insurance principles that LTC insurance violates. I also identified several other considerations that render private LTC insurance unworkable.
A Few Blog Posts about LTC Insurance
When I shut down the Forum, I started a blog on which I have continued to write about LTC insurance. Here I describe briefly three such blog posts, and provide links to them.
In No. 191 (posted December 9, 2016), I wrote about a looming catastrophe for the LTC insurance business. I discussed, among other matters, the financial problems at Penn Treaty, an LTC insurance company that had become insolvent in 2009. I also discussed a Congressional hearing that was prompted by sharp premium increases on LTC group insurance coverage purchased by federal government employees.
In No. 223 (posted June 23, 2017), I explained why it is wrong for state governments to help private LTC insurance companies sell the coverage to citizens of those states. I mentioned, among other matters, a mailing to residents of California over the signature of the California governor, and a similar mailing to residents of Indiana over the signature of the Indiana governor. The letters implied that LTC insurance coverage was endorsed by the respective states.
In No. 257 (posted March 12, 2018), I wrote about a major problem that had surfaced at General Electric. The company announced that, after a review of some old LTC insurance policies, the company had to increase its liabilities relating to those policies by about $15 billion. The announcement shocked the market and prompted intense discussion of the problems associated with LTC insurance.
General Observations
I believe that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. In my view, there are only two solutions to the problem. One is through personal savings, an approach I described in the July 2008 Forum article.
The other solution is through mandatory coverage that would be part of a federal program of universal health insurance. I say mandatory, because we already have evidence that a national voluntary plan would not be workable. A national voluntary plan called "Community Living Assistance Services and Supports" ("CLASS") was part of the 2010 Patient Protection and Affordable Care Act. Experts in the Department of Health and Human Services tried, without success, to devise a workable voluntary CLASS program, but it never got off the ground and was quietly repealed.
The new NAIC task force is the most recent effort to address the problems associated with LTC insurance. I think it will meet with the same fate as earlier efforts unless it recognizes that "personal savings" and a "mandatory federal program" are the only workable solutions to the problem of financing the LTC exposure.
Available Material
I am offering a complimentary 14-page PDF consisting of the NAIC's press release (1 page), the Virginia Bureau's press release (1 page), and the four Forum articles mentioned in this post (12 pages). Email jmbelth@gmail.com and ask for the April 2019 LTC insurance package.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com
Thursday, April 11, 2019
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
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
Subscribe to:
Posts (Atom)