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.
Related: Penn Treaty stops selling new policies and Pa. regulator takes control of Penn Treaty units
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 //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:
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Puerto Rico: No protection.
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Missouri and Oregon: $100,000.
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Utah: $250,000.
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Forty states and the District of Columbia: $300,000.
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Minnesota: $410,000.
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Connecticut, Louisiana and Washington state: $500,000.
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California: $554,556.
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New Jersey: Unlimited protection.
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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.
