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Liquidation of Penn Treaty could trigger 'ultimate insolvency'

Thepending liquidation of PennTreaty Network America Insurance Co. and American Network InsuranceCo., collectively known as Penn Treaty, is gearing up to be the largest-everinsolvency in the U.S. insurance industry, with hefty projected liabilities forsome states and projected shortfalls that are not yet public, according toindustry and guaranty association memos.

A chart ofstate-by-state data on estimated assets and liabilities in a post-liquidationscenario prepared by a leading long-term care insurance actuary projects thatmany states are facing towering net liabilities for LTC policyholders for thePenn Treaty companies. The two related companies, Penn Treaty Network AmericaInsurance Co. (PTNA) and American Network Insurance Co. (ANIC), are beinghandled together.

InCalifornia alone, net liabilities are estimated at about $382.2 million,according to one calculation. Florida is facing net liabilities of nearly$354.0 million while Arizona, New Jersey, Pennsylvania, Texas, Virginia andWashington State each show net liabilities north of $100 million.

Thetotal net liabilities of all the states were calculated at more than $2.58billion. On a gross basis, the amount is over $3 billion, excluding assets.However, PTNA is projectedto run out of assets in 2018, and the much smaller ANIC is projectedto run out of assets in 2023, according to court filings by the Pennsylvaniainsurance commissioner.

Theprojections were provided in a June 16 memo to the National Organization ofLife and Health Guaranty Associations officials. Its author, Vincent Bodnar,chief actuary of consultancy the Long Term Care Group Inc., is serving as aconsultant to the NOLHGA Task Force on Penn Treaty/ANIC, NOLHGA director ofcommunications Sean McKenna said.

Bodnarsaid the values in the chart he created are estimates of potential guarantyassociation covered net liabilities if the companies were placed intoliquidation at year-end 2015. The net liabilities are the difference betweenthe gross liabilities of the combined PTNA and ANIC, which include projectedclaims, administrative costs and premiums, minus their assets. The gross andnet liabilities reflect only the coverage up to the state caps on the guarantyfunds.

Bodnaracknowledged that there will be a gap between what the guaranty associationswill be able to cover and what policyholders are due. He said he had quantifiedit but was not at liberty to share the calculated amount. One lawyer whostudies insurance insolvencies says it will be a "tragedy."

Insolvency could hit somestates hard

Forexample, many state limits top out at $300,000 in coverage and, while some LTCpolicies may cover up to $160,000, some offered unlimited benefits when theywere underwritten. The companies that wrote these policies did not count onlow? policy lapse rate?s?, the longevity of the policyholders and the depressedinterest rate environment, observers have noted. ?The cost of a nursing home isabout $92,000 per year now, according to presentations made at a Genworth LTCconference in Washington, D.C. on Sept. 22.

PTNAis insolvent by morethan $3.82 billion, an amount that "will deepen over time," accordingto the July 27 liquidation petition by the Pennsylvania insurance commissioner.ANIC is insolvent by more than $511 million, and that insolvency will alsodeepen over time, stated the liquidation petition for ANIC, also filed July 27.

Thisis going to "sock the big states pretty hard," but there will be ashape and time horizon to the liabilities, said the lawyer source.

Thisperson said the situation could go off "like a nuclear bomb," sincePenn Treaty's insolvency is so big, and is in an insurance segment not used tohandling insolvencies or very long-tail claims of uncertain duration anduncertain amounts.

"Thisis sort of the ultimate insolvency," this person said.

Therepercussions are big not only for the health insurers and others that will beassessed by the statue guaranty funds, but for policyholders. Health insurersare said to be livid about the costs they will shoulder ??when they view LTC asnot part of their line of insurance. According to the guaranty fund statutes,LTC? is classified under health insurance, ?so ?the ?industry assessments? tothe guaranty funds will be borne? ?by guaranty associations' ?member healthinsurers. While health insurers can get a premium tax credit for the?se???payments? to the guaranty funds, not all states offer this ?premium tax?credit. For example, California does not?, and it is the state with the mostPenn Treaty liabilities. There are concerns that the ?big price tag for the?assessments will hurt ?health insurers' cash flow in the short term,?potentially? ?affecting their balance sheets. ?

Aconsortium of health insurers have intervened in the liquidation proceedings and threatenedlitigation on some issues as they try to work out disputed coverage andadministrative issues.

?Whilethe coverage issues are uncertain and the shortfall ?amounts are still unclear,the source with legal expertise said two things appear certain: One, there willbe a huge demand on the state guaranty association system; and two, there willbe many "little old ladies in nursing homes" who won't get theirclaims fully paid, so they will go "bouncing into Medicaid," whichpays less, and nursing homes will panic, resulting in major problems.

Potential gulf between claimpayout limits and policy value

ASept. 8 memo from the Nebraska Life and Health Insurance Guaranty Associationto guaranty association member companies stated that the state associations'response to the liquidations will be a "large undertaking, but NOLHGA andits member guaranty associations have successfully handled more than 100insolvencies in their 30-plus-year history, including large, multi-billiondollar cases."

However,"this will be the worst liquidation in the history of insurance. … Theliability is just so large," said one source familiar with the Executive Life InsuranceCompany of New York, or ELNY, insolvency, which approached $2 billion andincluded a life insurance voluntary fund to help mitigate the guaranty fundshortfall.

Whilethe task force formed by NOLHGA when Penn Treaty was taken into rehabilitationin 2009 has been preparing for years, the guaranty associations, if triggered,will be providing coverage for more than $3 billion in policy benefits forabout 78,000 policyholders, and "this coverage will continue fordecades," the Nebraska memo stated. The legal counsel for the Nebraskaassociation referred questions to NOLHGA's McKenna.

"Wedo not foresee any guaranty associations having trouble meeting theirobligations on a timely basis. The guaranty associations have ample financialcapacity to meet those obligations," McKenna said in an email.

Whilehe said there are likely to be some assets in the estate after liquidation thatcould cover benefits beyond guaranty association coverage levels, "thereare unlikely to be enough estate assets to cover all policy claims that exceedthe claims that the associations will cover."

Thereare also discussions under way to create a not-for-profit captive insurer todistribute benefits to policyholders, as was pioneered in the ELNY case.  

Guaranty Association BenefitsCompany, domiciled in Washington, D.C., was created by the 40 stateguaranty associations triggered by ELNY's liquidation. Health insurers aretrying to get on the board of the captive as its structure is still beingdebated, according to a source familiar with the deliberations.

McKennaconfirmed that the guaranty associations are considering establishing a captivereinsurer and noted that they are still hammering out the details.