Pennsylvania insurance regulators have finally won court permission to shut down a major long-term care insurer, after seven hard years of legal battles.
Commonwealth Judge Mary Hannah Leavitt agreed earlier this month to let Teresa Miller, the Pennsylvania commissioner, liquidate Penn Treaty Network America Insurance Company.
The liquidation could affect 76,000 policyholders, and thousands of agents.
Penn Treaty helped create the U.S. long-term care insurance market. At the company’s peak, in 2000, it had about 250,000 policies in force and $363 million in annual premium revenue.
But Penn Treaty discovered it had set premiums too low, and it had trouble getting rates up to a sustainable level. The company operated at the edge of rehabilitation for years.
The company stopped selling new policies in October 2008, and the Pennsylvania Department of Insurance got Leavitt to approve a rehabilitation order in January 2009.
Pennsylvania regulators first sought Leavitt’s permission to convert the rehabilitation process into a liquidation process in October 2009.
Eugene Woznicki, the chairman of the insurance company’s parent company, Penn Treaty American Corp., fought for years to win approval for a plan to put at least part of the insurance company back on its feet. Insurance regulators, policyholders and the guaranty associations were skeptical. Lack of new sales weakened the insurance company’s financial strength and made the idea of reviving it look even more impractical.
In 2008, before Penn Treaty entered rehabilitation, it and a subsidiary, American National Insurance Company, had $1.1 billion in admitted assets and $1.2 billion in liabilities.
In 2015, the company had just $656 million in assets and $4.4 billion in liabilities.
Now, Leavitt’s liquidation order will let Miller shift much of the responsibility for the liabilities to the guaranty associations.
Agents who hope to collect any Penn Treaty commission payments owed will have to line up behind the policyholders. Policyholders will have to contend with the mysterious, unpredictable guaranty association system.
Here’s a look at more of what agents need to know about Penn Treaty, the liquidation process, and how the guaranty association system might work, based mainly on commonwealth court pleadings.
Regulators blasted Penn Treaty for having weak finances, but they refused to let it raise rates. (Photo: Thinkstock)
1. The history
Irving Levit, a military veteran who was born in 1929, got licensed as a life insurance agent in 1961. In 1972, he used $50,000 in borrowed money to start Penn Treaty.
The Allentown, Pennsylvania-based company grew rapidly. It became one of the biggest issuers of long-term care insurance in the United States, with stock that traded on the New York Stock Exchange under the symbol PTA.
By 1997, Levit felt confident enough to turn management of the company over to his 30-year-son, Glen Levit.
Just three years later, in 2000, Glen Levit suddenly entered the hospital with leukemia and died.
Around the same time, the Wall Street Journal ran an article quoting consumer advocates and others who accused Penn Treaty of setting premiums too low on purpose. Some local newspapers picked up the story from a Wall Street Journal wire service affiliate.
Irving Levit wrote a letter to one of the newspapers that picked up the article, the South Florida Sun Sentinel, to try to counter the effects of the article.
“Penn Treaty American Corp.’s success is attributable not to aggressive underwriting or pricing, but to our commitment to providing insurance products that help consumers afford the type of long-term care that best satisfies their medical and quality of life needs,” Levit wrote.
But the damage was done: State insurance regulators began to pay extra attention to Penn Treaty because of concerns about its solvency. Yet they refused to let the company increase its premiums, because of a belief that Penn Treaty and a few other companies were the only ones that had mispriced long-term care insurance.
Penn Treaty’s slide toward insurance department supervision started in early September 2001, when the Arizona Department of Insurance suspended its license to sell new coverage.
Irving Levit gave up his positions as president and chairman in 2003, but the executives who took over after him did not have any more success than Levit did at overcoming the original underpricing problem.
Penn Treaty lost its New York Stock Exchange listing in 2008, mainly because of its regulatory situation.
Related: Ario: LTC subs may come out of rehab
Penn Treaty may still be paying close to 5,000 LTCI claims per year. (Photo: Thinkstock)
2. The company
The Penn Treaty liquidation affects two separate but related insurance companies: Penn Treaty Network America Insurance Company and American Network Insurance Company.
Legally, American Network is a child of Penn Treaty Network America. Penn Treaty Network America, in turn, is a child of Penn Treaty American Corp.
In 2008, as Penn Treaty Network America and its child were about to enter rehabilitation, the companies had about 142,000 policyholders and $284 million in annual premium revenue, along with 17,000 independent agents.
Pennsylvania regulators estimated after they put Penn Treaty in rehabilitation that the company had been paying about $180 million in long-term care insurance benefits per year on behalf of about 8,000 to 9,000 claimants, or about $20,000 in benefits per claimants.
Recent revenue figures were not immediately available, but, if Penn Treaty continues to collect about $2,000 per year in premiums per policyholder, its 76,000 policyholders might be paying about $150 million in premiums per year.
Penn Treaty filed a long-term care insurance claim processing report with District of Columbia insurance regulators. That report shows the company received about 4,694 LTCI claims in 2015, or one claim for every 14 policies.
Patrick Cantilo, the special deputy rehabilitator in charge of Penn Treaty, estimated in November that, if nothing changes, Penn Treaty Network America will be insolvent at the end of 2018, and American National will be insolvent in 2023.
Related: Ario: LTC subs may come out of rehab
Correction: The name of Penn Treaty Network America's subsidiary was give incorrectly in an earlier version of this article. The correct name is American Network Insurance Company.
Producers and other creditors will have 30 days to get claims in after the liquidation notices appear. (Image: iStock)
3. Claim procedures
The Pennsylvania liquidation notice calls for any entity that has assets related to Penn Treaty to send them to the liquidator: Teresa Miller.
Agents and brokers are supposed to send all commissions and premiums, whether collected or uncollected, to the liquidator within 30 days.
The liquidator is supposed to publish a liquidation notice in the national edition of the Wall Street Journal and in newspapers near Penn Treaty offices. Producers, policyholders and others will have 30 days after the publication of the notice to file claims.
The Penn Treaty liquidation managers have published additional information for agents and brokers on a private, producer-only section of Penn Treaty’s website, at https://arc.penntreaty.com/.
NOLHGA makes a point of being nebulous. (Image: Thinkstock)
4. Guaranty association protection
The Kansas City, Missouri-based National Association of Insurance Commissioners (NAIC) develops standards for state guaranty associations. But the NAIC standards are recommendations, not requirements. Each state can decide what standards to adopt.
A Herndon, Virginia-based group, the National Organization of Life and Health Guaranty Associations, helps coordinate and represent the state guaranty associations.
The guaranty associations intentionally keep a low profile, in part because of a fear that publicizing the availability of a guaranty fund could keep insurers, agents and consumers from doing everything they can to minimize the impact of insurer insolvency risk.
The associations may also keep a low profile because few have substantial cash reserves. When an insurer in a state fails, the guaranty association responsible gets the cash to cover the failed insurer’s obligations by imposing assessments on the member insurers. States typically cap the maximum assessment for a year at 2 percent of an insurer’s net written premium revenue.
In 1991, the failure of Executive Life Insurance Company of California and a sister company in New York led to a total of about $3.7 billion in assessments.
Since then, a typical liquidation has led to assessments of less than $200 million per failure, according to NOLHGA.
Because of the way guaranty associations break up the assessment payment totals, the system has kept the total amount of payments made in any given year to less than $1 billion, and to less than $300 million in eight of the 25 years from 1991 through 2015.
Penn Treaty liquidators may handle any policyholders in New York City and other parts of New York state separately. (Photo: Allison Bell/LHP)
5. How guaranty association protection works
For now, at least, Penn Treaty policyholders are supposed to keep paying their premiums the same way, to the same address, or through the same website.
“Failure to pay applicable premiums on time may cause your policy to terminate and you to lose guaranty association coverage protection,” according to the Penn Treaty liquidation managers.
Penn Treaty managers say a policyholder’s location could affect the kind of guaranty association protection the policyholder will get.
“Even if your policy was purchased in another state, the guaranty association protection generally will be provided by the guaranty association in your state of residence at the time of liquidation,” the managers write.
Lawyers for the policyholders have estimated that about 600 live in New York state. But a separate Penn Treaty subsidiary covers those policyholders, and the Pennsylvania regulators and NOLHGA do not say what will happen to them.
The liquidation managers give long-term care insurance benefits protection limits for the other states.
Here are the limits:
Puerto Rico: No protection.
Missouri and Oregon: $100,000.
Forty states and the District of Columbia: $300,000.
Connecticut, Louisiana and Washington state: $500,000.
New Jersey: Unlimited protection.
Teresa Miller, Pennsylvania's commissioner, says the limits could affect benefits payments for about half of the Penn Treaty LTCI policyholders.
It’s not clear how the guaranty associations will decide which LTCI benefits are protected and which are not.
In connection with much smaller annuity issuer failures, for example, guaranty associations have avoided covering rich benefits growth guarantees.
In a footnote at the bottom of the guide to state guaranty association protection maximums, the Penn Treaty liquidation manager states: “The determination of which guaranty association will provide coverage and the amount of coverage provided will depend on several factors, including your state of residency, where the insurance company was licensed, and whether any statutory coverage exclusions or limitations apply.”
Penn Treaty liquidators say LTC Reinsurance PCC will operate under the jurisdiction of District of Columbia regulators. (Photo: Thinkstock)
6. LTC Reinsurance PCC
The Penn Treaty liquidation managers say some states teamed up to start their own insurer, LTC Reinsurance PCC, to handle Penn Treaty liquidation efforts for their residents.
A captive insurer is an insurance company that’s owned and controlled by one or more insureds.
A protected cell company is an insurer set up in such a way that each separate part, or cell, is capitalized separately. Legally, the assets and liabilities in each cell are supposed to be separate from the assets and liabilities in the other cells.
LTC Reinsurance PCC was “formed by certain state guaranty associations with the help of NOLHGA and licensed under the laws of the District of Columbia,” according to the liquidation managers.
LTC Reinsurance PCC does not appear to be have registration information in the D.C. captive insurer or business entity licensing databases at this time.
Fred Futterman, an insurance company lawyer who serves on the board of the New Jersey Life & Health Insurance Guarantee Association, says in his LinkedIn entry that he serves on the LTC Reinsurance board. He describes LTC Reinsurance as a “captive insurance company administering an insolvent company with assets managed of over $3.5 billion nationally.”
The same companies that sell HealthCare.gov policies may also have to pay Penn Treaty assessments. (Image: CMS)
7. Affordable Care Act connection
Today, regulators and guaranty associations in most states classify long-term care insurance as a health insurance product, even though most of the companies that sold the product were either life and annuity companies or companies that focused almost exclusively on selling long-term care insurance.
Because of that tradition, many of the insurers that will be on the hook for paying the Penn Treaty insolvency assessments will be health insurers.
Here’s a list of insurers that have included Penn Treaty assessment estimates in recent financial filings:
Aflac Inc.: $10 million to $20 million.
Anthem Inc.: $190 million to $220 million.
Cigna Corp.: $85 million.
Humana Inc.: $20 million.
UnitedHealth Group Inc.: $350 million.
Health insurers have argued that regulators ought to get the life insurance companies to help pay the assessments. They are not happy about the idea of having to deal with turmoil with the Affordable Care Act, and at HealthCare.gov, and also having to pay guaranty fund assessments that have nothing to do with their core business.
Patrick Cantilo, the special deputy rehabilitator for the Penn Treaty rehabilitation effort, is supporting the idea of spreading the LTCI failure burden to life insurers, in comment letters written to express his own, personal opinion about the subject.
He recently addressed the topic in a comment letter sent to the NAIC.
“While it is impossible to design an assessment mechanism that will be viewed as perfectly fair by all assessed insurers, the disparity between the group of companies engaged in the sale of LTCI products and the group of companies likely to be assessed for the failure of such insurers is striking,” Cantilo writes in the letter. “In the case of the Penn Treaty companies, for example more than 75 percent of the aggregate assessment is likely to be borne by health insurers though they did not sell the product.”
For Eugene Woznicki, influence over Penn Treaty's taxes provided negotiating leverage. (Photo: Allison Bell/LHP)
8. The tax fight
When Irving Levit, the founder of Penn Treaty, left the company’s board in 2005, Eugene Woznicki took his seat.
Woznicki, a longtime Frisco, Texas, insurance company distributor, became the chairman of Penn Treaty American Corp. in 2007.
Woznicki has been a ferocious defender of Penn Treaty ever since.
When Pennsylvania took the company over, Woznicki pushed, over and over, for regulators to let Penn Treaty increase its premiums, and for regulators to let him put the company’s more profitable business in an “A” company, which would probably survive as a going concern, and leave the less profitable business in a “B” company, which would probably die.
Regulators, policyholders and some other commenters were skeptical about that approach.
Pennsylvania regulators argued that consumers would have accepted premium increases of 300 percent or more, just to keep long-term care insurance coverage from a company with reputation problems.
Leavitt ultimately rejected the Woznicki rehabilitation efforts.
But Woznicki used Penn Treaty American Corp.’s ability to influence the income tax obligations of the insurance company subsidiaries to keep Pennsylvania regulators talking to him.
Teresa Miller, the current Pennsylvania insurance commissioner, decided last spring to settle the dispute. She eventually persuaded Woznicki to accept $10 million to end his court fights and work with the liquidation managers to maximize the value of Penn Treaty’s tax assets.
Pennsylvania Commonwealth Judge Mary Hannah Leavitt blessed the settlement in September 2016. “The court agrees with the settling parties that it is a reasonable amount to achieve ‘peace,’” Leavitt said.
Letting the litigation between the rehabilitator and Penn Treaty American Corp. continue could burn through the insurance companies’ assets, and the tax asset dispute at the heart of the litigation was complicated and could lead to a $20 million tax liability for the insurance companies, Leavitt wrote.
A group of health insurers and a group of LTCI agents tried to appeal that ruling to the Pennsylvania Supreme Court, but they ended up discontinuing their appeals in November.
If you were on the list of agent intervenors: Collecting any Penn Treaty commissions owed might be challenging. (Photo: Thinkstock)
9. Agents’ fight
Agents have been involved in the Penn Treaty case because they hoped Woznicki’s efforts to revive the company could help revive Penn Treaty as an LTCI issuer, and, possibly, help them get paid.
Leavitt wrote that the agents had no legal standing to get in between Teresa Miller and Woznicki.
But “agents are potential future claimants against the estates and can file a proof of claim,” Leavitt ruled.
The Penn Treaty liquidation has created work for many lawyers. (Image: iStock)
10. Liquidation players
The Penn Treaty litigation in Pennsylvania has helped create work for many lawyers.
Here’s a look of some of the lawyers playing prominent roles in the proceedings.
Penn Treaty rehabilitation manager:
Patrick Cantilo, Cantilo & Bennett L.L.P. (Austin, Texas).
Preston M. Buckman, department counsel for insurance, Governor’s Office of General Counsel.
Yen Lucas and Amy Daubert, Pennsylvania Department of Insurance.
James Reeves Potts, Cozen O’Connor P.C. (Philadelphia).
National Organization of Life and Health Guaranty Associations:
Caryn M. Glawe and Jane Dall Wilson, Faegre Baker Daniels LLP (Indianapolis).
Charles T. Richardson, Faegre Baker Daniels LLP (Washington).
Mark Bradshaw, Stevens and Lee (Harrisburg, Pennsylvania).
Deborah Ann Ellingboe, Faegre Baker Daniels LLP, Minneapolis.
Thomas A. Leonard and Richard P. Limburg, Obermayer, Rebmann, Maxwell & Hippel LLP (Philadelphia).
Penn Treaty American Corp:
Douglas Christian and Benjamin Schmidt, Ballard Spahr LLP (Philadelphia).
The health insurers:
Harold S. Horwich, Benjamin Cordiano and Michael D’Agostino, in the Hartford, Connecticut office of Morgan, Lewis & Bockius LLP.
John P. Lavelle, Jr., Morgan, Lewis & Bockius LLP (Philadelphia).
Donald-Bruce Abrams, Morgan, Lewis & Bockius LLP (Boston).
The agents and brokers:
Paul Hummer and James Gkonos, Saul Ewing LLP (Philadelphia).
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