Facing a large and growing surplus deficit, Senior Health Insurance Co. of Pennsylvania is working with the Pennsylvania Insurance Department to fashion what it characterized in a regulatory filing as "an acceptable voluntary rehabilitation plan."
The long-term care insurer, which is operated with a solvent run-off objective by an independent trust, previously disclosed efforts to develop a corrective action plan after reporting year-end 2018 capital and surplus of negative $466.9 million. A brief update on the nature those discussions came in the company's 2018 audited financial statement, which S&P Global Market Intelligence obtained June 20.
In that filing, Senior Health's independent auditor issued a qualified opinion regarding the company's accounting for certain investments in its statutory financial statements and cautioned that the existence of the surplus deficit raises "substantial doubt" about its ability to continue as a going concern.
Senior Health reported a surplus of negative $481.3 million as of March 31 in its most recent quarterly statement; it incurred a $13.1 million net loss in the first quarter. Under statutory accounting principles, the company's deficit would have approached $591 million on that date as it benefits from a permitted practice granted by the Pennsylvania regulator pertaining to the amortization of the interest maintenance reserve. The company ended 2017 with positive surplus but sustained a $499.9 million net loss in 2018 as it added $358.6 million in premium deficiency reserves and recorded $147.5 million in other-than-temporary impairment losses on certain illiquid investments.
A U.S. insurance company would typically be subject to enhanced regulatory oversight or control to the extent its total adjusted capital falls below 200% of its authorized control level risk-based capital. But Senior Health said that the Pennsylvania regulator had allowed it to operate with a ratio in excess of 100% due to its "unique run-off nature" and thus did not need the levels of capital an active insurer would require.
Senior Health said it had been working with the regulator under a letter agreement since February 2018 regarding its surplus position. Its authorized control level RBC ratio fell to 141.7% at year-end 2017, as calculated by S&P Global Market Intelligence, from 164% a year earlier. The net loss-fueled deficit put the ratio in a mandatory control level position as of Dec. 31, 2018.
The company cautioned in the audited financial statement that the regulator could begin liquidation proceedings to the extent it does not accept a rehabilitation plan.
Pennsylvania received court approval to liquidate other long-term care insurers — Penn Treaty Network America Insurance Co. and American Network Insurance Co. — effective March 1, 2017, as it concluded that the companies' financial difficulties were too substantial to be remedied through a rehabilitation process that began in January 2009. State guaranty associations assumed responsibility for the company's policies at that time.
Senior Health, a one-time subsidiary of CNO Financial Group Inc., has operated in its current independent structure since 2008 — managing a closed block of group and individual long-term care policies written on policy forms that were generally sold in the 1980s, 1990s and early 2000s.
The largest U.S. long-term care insurers by active life reserves at year-end 2018 were Genworth Financial Inc., Manulife Financial Corp.'s John Hancock, MetLife Inc., CNA Financial Corp. and Unum Group. Among those companies, only Genworth continues to sell new long-term care policies.
Senior Health encountered many of the same challenges as other companies with run-off blocks of long-term care business, including persistently low interest rates, lower-than-expected mortality rates and fewer lapses relative to original policy pricing assumptions. The company specifically cited reduced expectations for improvement in morbidity, higher morbidity cost and lowered investment earning assumptions in recording the large addition to premium deficiency reserves in 2018.
Its impairments generally pertained to holdings of what the company characterized as illiquid private placement securities purchased by certain former investment managers. The company said that it plans to liquidate those investments over multiple years in a manner that maximizes value as opposed to engaging in a "fire sale." Independent auditor Eide Bailly LLP explained in its discussion of the qualified opinion that it was unable to obtain sufficient audit evidence regarding the assumptions used by Senior Health to value certain of those investments.
"[T]he determination of the carrying value, fair value and the amount of ... write-downs is uncertain due to the nature of these investments and in some cases, their related litigation matters," the auditor wrote. Senior Health confirmed in the audited financial statement that it has been named as a defendant in several legal actions related to the investments, including one complaint filed June 7 in the Delaware Chancery Court by the liquidators of a Platinum Partners fund.
The filing noted that the determination of fair value and any other-than-temporary impairment of the investments at issue is subject to "a high degree of estimation." The fair value of the relevant assets totaled $77.3 million at year-end 2018, down from $226.8 million a year earlier.