(Matt Rourke AP Images)

For the first time in Pennsylvania’s history, a court blocked state regulators’ bid to liquidate a long-term care insurance company (LTCI) and its subsidiary.

The company, Penn Treaty Network America Insurance Company, (PTNA) (OTC: PTYA.PK), heralded the decision as a possible turn-around for the LTCI  industry.

The decision may add pressure for state regulators to approve premium rate increases, rework benefits and consider the tax deferral status of placement of policies in plans, the company says.

Eugene J. Woznicki, chairman of the board of directors of Penn Treaty and a subsidiary, said the company’s intention now is to rehabilitate his companies and put them back into the market to serve policyholders. He said he hopes other LTC companies also are able to reemerge after this decision.

The court, which said that the regulators hadn’t looked at all the things that could be done to rehabilitate the companies, issued a decision that could be an “impetus for those companies to take another look at things, and the industry to look at this and maybe come back in,” Woznicki said in an interview. 

“It is more than just rate increases” that may have more to do with politics in some states than actuarial information, he said.

For Penn Treaty, he said, regulators might be able to start working to change some of the benefits.

“A lot of these policyholders have been around for a long time,” some of their benefits are large,  and some of the policyholders might need all of the benefits they originally purchased, he suggested.

Woznicki said the court went after states for sometimes acting politically and not on a sound actuarial or legal basis.

The decision by the Commonwealth Court of Pennsylvania to deny the Pennsylvania Insurance Department’s petitions to liquidate Penn Treaty, Allentown, Pa., and a major Penn Treaty subsidiary, American Network Insurance Company,  (ANIC), was announced May 3.

Both Penn Treaty and ANIC are subsidiaries of PTAC, Frisco, Texas. The companies’ policyholders reside in 49 states and the District of Columbia.

In a lengthy decision, Judge Mary Hannah Leavitt described the case as presenting “a serious indictment of the existing system of rate regulation of long-term care insurance.” She held that the Pennsylvania insurance commissioner (the current commissioner is Michael F. Consedine but the rehabilitation and liquidation petition actions were taken under former Commissioner Joel Ario) has “not undertaken a meaningful effort to rehabilitate the Companies and, to the contrary, has acted to frustrate rehabilitation.” 

The Commonwealth Court, agreeing with the companies, affirmed that insurance rehabilitation plans may include a reduction of benefits paid under certain policies, describing benefit reductions as an “important tool of rehabilitation,” and stating that “there is no support for the rehabilitator’s position that this court cannot modify policyholder benefits as part of an approved rehabilitation plan.”

Michael F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania vs. Penn Treaty Network American Insurance Company,  is available at http://www.penntreatyamerican.com/investornews.asp

The Pennsylvania department filed petitions that sought orders of liquidation for Penn Treaty Network America Insurance Company and ANIC Oct. 2, 2009, under then-Insurance Commissioner Ario. Penn Treaty and ANIC had initially entered rehabilitation in January 2009.

“Our comprehensive, independent evaluation has determined that the companies do not have the ability to pay future claims without significant rate increases that would have to be requested and approved in all 50 states. In the current circumstances, those rate increases simply would not be fair to policyholders,” stated Ario.

The court rejected as “unreliable” and “too pessimistic” the projections of the Pennsylvania department’s actuarial expert, Milliman, Inc., on which the department had relied to support the petitions to liquidate: “The court rejects Milliman’s projected surplus. In the space of six months Milliman increased its projections [of future claims] for PTNA by over $1 billion, a revision of a magnitude never before seen by any of the experts who testified.”    

The court, finding, “pessimism is seen throughout Milliman’s projections, whether intentional or coincidental,” and rejected the Pennsylvania department’s argument that it would be futile to continue the rehabilitation largely because it was premised upon Milliman’s projections, scathingly calling it  “a proverbial house of cards” in which the Pennsylvania department “shoots down the various proposed rehabilitation options based primarily upon speculation about what state regulators will or will not do in the context of a court ordered rehabilitation.”

“Essentially, the Rehabilitator [the Pennsylvania department] offers excuses, arguing that various rehabilitation options, i.e., rate increases,benefit reductions and transfer of policies, will not work or will be exceedingly difficult in today’s regulatory environment,” the judge wrote. “The rehabilitator’s entire futility argument is premised upon Milliman’s projections, which have fluctuated wildly and which the Court has already deemed unreliable.”

The case was apparently replete with heartfelt language, not only when, for example, the judge’s order termed the rehabilitator’s tactic to draw on “hoary Pennsylvania precedent that predates the modern statutory insurance insolvency scheme,” to briefs filed by unnamed parties, it seems.

At times, some briefs “lapsed into invective, using too many adjectives and excessively intense adjectives,” Judge Leavitt said in a footnote in her 160-plus page decision. 

Milliman had not returned a call by press time. The Pennsylvania department spokeswoman could not immediately answer whether Milliman would continue to be used in this case. 

The companies’ actuarial expert, Karl Volkmar of United Health Actuarial Services, had his actuarial approach accepted instead, the companies noted.

According to the American Association for Long-Term Care Insurance, Westlake Village, Calif., more than 10 million Americans have purchased LTCI policies. Many companies have recently decided to no longer sell LTCI policies because of their inability to obtain actuarially justified premium rate increases from state insurance departments, Penn Treaty said in a press release. 

“Over the years, many of those states’ insurance departments, including Pennsylvania’s, have denied or not fully approved the actuarially justified rate increases to which the Companies are entitled,” the company stated. 

Indeed, analysts in the New York office of Fitch Ratings found that insurers may be leaving the private LTCI market partly because of states’ efforts to regulate LTCI premium changes. The Fitch analysts gave that assessment in March, after Prudential Financial Inc., Newark, N.J. (NYSE:PRU), said it was ending sales of individual LTCI coverage.  Many LTCI insurers were over-optimistic when they originally priced older policies, and unusually low interest rates are keeping them from correcting pricing errors with investment earnings, the Fitch analysts say.

The Penn Treaty companies’ policies issued before 2002 are referred to as OldCo policies.  While the policies issued after 2002 do not need premium rate increases at this time, Penn Treaty stated, the OldCo policies do require rate increases. If the companies don’t get what they say are justified premium rate increases, actuarial projections suggest that there will be insufficient funds to meet the companies’ future obligations, Penn Treaty warned.

The court ordered that the Pennsylvania department “shall develop a plan of rehabilitation of the Companies, in consultation with the Intervenors [Woznicki and PTAC], and shall submit a plan no later than ninety (90) days following the date of this order.”

In the meantime, the Pennsylvania department is “looking at our options regarding our appeal rights,” said Rosanne Placey, a department spokeswoman. ”At this point, I don’t know if we’ve made a final decision. We are weighing our appeal rights.”

Right now the company continues to operate in rehabilitation and claims are paid as they become due. 

The order said that the United Health actuarial expert used by the companies projected statutory surplus of PTNA to be negative $333 million and ANIC to be $600,000 as of Dec. 31, 2009. Although the court rejected Milliman’s projected surplus and its increased claim projections, it did write in a footnote that PTNA and ANIC need a surplus of $1.5 million to be solvent, suggesting that the companies were insolvent. The question becomes, at what point will the company not be able to pay policyholder claims, Placey noted. The job of the regulators is to protect policyholders and marshal available money from assets to pay policyholder claims, but those assets can run out.

The Penn Treaty companies, PTNA and ANIC issued LTCI policies that cover certain long-term health care costs of policyholders nationwide, helping pay for custodial or skilled care in a nursing home, an assisted living facility, or a person’s home. LTCI policyholders are guaranteed the right to renew policies irrespective of their age or health as long as the policyholder pays premiums. The policies permit future premium rate increases if actuarially supported for the entire policy form. Increases usually must be approved by the insurance department of the state in which the policyholder resides.

It is not known if this is the first rejection of a liquidation request from a state insurance regulator; it seems to be so for an LTCI insurer. Long term care insurance pricing and coverage, and its survival as an industry has been a conundrum for awhile, with an aging, long-lived population seeking ways to continue to fully fund care in their last years, even as attempts by the federal and local governments stall and seize up and start again. 

A federal LTC program — the Community Living Assistance Services and Supports (CLASS) program — was due to begin enrollment in October 2012. U.S. Health and Human Services Secretary Kathleen Sebelius halted implementation in an letter to Congress sent in October 2011 after determining HHS could not meet the statutory requirement that the program be actuarially sound over 75 years.