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Ario Wants Insurer Liquidated

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Pennsylvania Insurance Commissioner Joel Ario has concluded that Penn Treaty Network America is in worse shape than he originally thought, and he has asked a state court for permission to liquidate it.

The Pennsylvania Insurance Department says Penn Treaty Network’s liabilities exceed its assets by more than $1 billion, according to court filings.

About 98% of the company’s policyholders own long term care insurance policies, the department says. Penn Treaty Network and a subsidiary, American Network Insurance Company, provide LTC insurance for more than 120,000 policyholders in all 50 states and the District of Columbia.

If the court grants Ario’s request, the approval would end a year-long effort by Ario and executives at Penn Treaty Network’s parent company, Penn Treaty American Corp., Allentown, Pa., to rehabilitate Penn Treaty Network and American Network. Ario placed the companies in rehabilitation in January in the hope of finding a buyer that could take them over.

Ario has spoken with several potential buyers for Penn Treaty Network but ultimately concluded that none was a viable option to save the company, a department spokeswoman says.

As of June 30, Penn Treaty Network’s total statutory capital and surplus were negative by more than $1.3 billion, according to Milliman Inc., Seattle, an actuarial consultant advising Ario on the rehabilitation effort. An estimate in December 2008 had reckoned the company was in the red by only $224 million, according to court papers.

Penn Treaty American Corp. helped create the modern U.S. LTC insurance market.

Most of Penn Treaty Network’s problems involved older LTC policies that it sold before 2001, when it suspended sales of LTC insurance. The company had concluded at the time that premiums on the older policies were far too low.

In January 2002, the company filed a corrective action plan with the state and resumed selling LTC insurance.

At the time, the company raised premiums on the older policies, which represented about 81% of the company’s LTC business. But now Milliman has concluded that premiums on the older policies are “significantly lower than is necessary to provide adequate reserves for the coverages provided by those policies,” according to court papers filed by Ario’s department.

Some states granted rate increases requested by the companies for the older policies, but many did not, leaving inadequate premiums to support the coverage under the policies. Moreover, Milliman found that even the newer LTC policies sold by the company were “not as profitable as was previously believed,” the department says in a court filing.

Keeping Penn Treaty Network solvent would require aggregate premium rate increases on its older policies of as much as 153% by July 2010, the department says.

“There is no reasonable likelihood that rate increases of that magnitude could be obtained [from the states], let alone be obtained in the required time period,” the department says.

The Pennsylvania Insurance Department rehabilitator also has concluded that increases of such magnitude would be too harmful to policyholders.

“We have instead petitioned for an orderly liquidation of all company assets in which policyholders’ claim payments are our number one priority,” the department says in a statement. “Additionally, active long term care policies will not be canceled, except by the policyholder, so they will be transitioned to the states’ guaranty funds once an order takes effect.

Guaranty funds have the right to assess other insurance companies to cover policyholder claims up to coverage limits that typically range from $100,000 to $200,000, depending on the state.

According to the National Organization of Life & Health Insurance Guaranty Associations, Herndon, Va., 23 states cover claims for failed insurers up to $100,000, while 29 jurisdictions, including the District of Columbia and Puerto Rico, cover at least $200,000. Most of the latter cover up to $300,000, while New Jersey provides for unlimited coverage.

Median LTC costs this year range from $39,000 to $74,000 a year, depending on the type of care needed, according to aGenworth Financial Inc., Richmond, Va. With the average stay in a nursing home averaging 3 years, costs can easily exceed $200,000 for a single LTC event, Genworth says.

In July, Milliman estimated that 7% to 10% of Penn Treaty’s policy holders would likely exceed guaranty association coverage limits if they filed LTC claims. Since then, the company has estimated the percentage that could exceed guaranty limits could be higher.

But “the conclusion that most policyholders will not in fact exceed their guaranty association coverage remains unchanged,” the Pennsylvania department says in court papers.

Even policyholders whose claims exceed guaranty fund limits would be better off with the company in liquidation, according to the department. That’s because they would get 100% of their claim paid until they reached their policy’s coverage limit, without suffering from the payment reduction they might experience if the firm were placed in rehabilitation, the department says.

Continued payments under rehabilitation give preference to early claims over later ones, the department says. Moreover, unless the company were liquidated, agents’ commissions for policies they sold would deplete Penn Treaty Network’s estate at the rate of almost $2 million per month, the department says.

Even if Penn Treaty Network were allowed to raise rates by 60% over the next 10 years and remain in rehabilitation, it would still exhaust its assets by 2025 and leave $2.2 billion in remaining policyholder liabilities, the department estimates.