September 26, 2008

Commissioner Joel Ario

Pennsylvania Department of Insurance 
1326 Strawberry Square
Harrisburg, PA 17120

Re: Proposed Plan to Transfer Conseco Senior Health Insurance Company to Senior Health Care

Oversight Trust

Dear Commissioner Ario:

I am a policyholder attorney with 22 years experience in disability and long term care insurance (LTCI).  Managing the largest disability and long-term care litigation practice in the country I review 3,000 new cases a month.  I am committed to protecting seniors, especially in the area of long-term care. There is no greater threat to the financial security of so many elderly than Conseco’s plan to move its closed LTCI block to an independent trust.

Conseco’s proposed Trust in the LTC arena is without precedent.  In my opinion it will easily imperil many of the 142,000 affected policyholders. I ask and urge you to disapprove the plan or delay approval and allow a public hearing.  With so many senior citizens affected, why the rush for approval?

I ask you to take action and focus on three areas of concern I have with Conseco’s plan: the lack of transparency and policyholder involvement, the increased financial risk policyholders will bear if the plan is allowed to proceed and the precedent the plan will set.

Transparency and Policyholder Involvement

When Conseco presented its’ plan to investors on August 11, 2008, the company said it was a “balanced solution for all of Conseco’s constituents.”  Shareholders, management and regulators were fully informed of the plan and its financial details.   Those who stand to lose the most if the plan fails - the policyholders - were deliberately left out.  Leaving thousands of “senior constituents” without a voice in an untested plan is not in the DOI’s interest and it absolves Conseco of its corporate responsibility.

Apparently the actuarial report prepared by Milliman, Inc was sent to the DOI but is unavailable to the public.  How do we test actuarial reserves, cash flow testing assumptions validating reserves, assess whether premium waiver reserves should include premium increase assumptions if the report is unavailable?  Since the report is unavailable who is the person responsible for reserve adequacy?  I am asking the DOI to provide the document to me so I can find my own answers.  Will you provide the report to me?

I understand that by Conseco’s clever crafting, the proposed transaction merely amounts to a change of ownership.  Using an oversight in Pennsylvania trust law to prevent seniors from receiving notice they are being shuffled off to an eleventh hour trust, does not seem fair.   These seniors have done nothing wrong and come to the DOI with clean hands. They have held up their end of the bargain, paying rich premiums to Conseco insurance.  The best Conseco can say is a notice was placed in the Pennsylvania Bulletin.  Who in the world has the Pennsylvania Bulletin on their Google alert besides me? 

Conseco policyholders were assured of peace of mind and financial security when they bought their coverage.  They were sold this coverage.  They have received shoddy claim practices that added insult to their sicknesses.  Market conduct investigations led by your Department of Insurance resulted in multi-million dollar fines, repeated rate increases with no ceiling in sight; now, they get no warning, no real notice and no opportunity to be heard.  What is wrong with this picture?

What peace will these 142,000 policyholders have without your intervention?  What is fair or right about a short comment period none of these senior paying policyholders will ever know about?  These are the same senior citizens that supported and fought for our country.  Don’t they deserve your department’s vigilant help and support?

These are the same seniors that can’t toilet, dress, or feed themselves.  Some are cognitively impaired and all of them are elderly.  These are the folks that should be searching the Pennsylvania Bulletin for information, then take on a billion dollar insurance company? 

As Commissioner, you have the power to enforce your department’s mission.  That mission is “To provide a premier regulatory environment which promotes the best insurance marketplace to serve consumers.”  Your mission should include educating consumers to make informed decisions and giving them tools so they are protected. 

To keep 142,000 seniors in the dark, in the face of Conseco’s highly questionable plan is wrong. The Department you oversee has the power to right that wrong.  Will you and your department step in and provide the transparency you promised, that is lacking? 

Policyholder Risks

At a minimum, Conseco’s plan enters uncharted waters.

• Capital Resources – Due to the mutual nature of the proposed trust, all of the claim risks and future capital needs will be borne by the policyholders themselves.  Rather than sharing the volatility risk with a well capitalized partner, policyholders will now shoulder it amongst themselves.
  
  Conseco’s answer to this dilemma is a one time capital contribution of $175 million.  $125 million of that contribution is in the form of senior debt.  The market value was set at $125 million yet it assumed an interest rate of 6%.  Is that realistic for a company with junk bond status? What about Conseco’s 100 million dollar exposure to AIG, Washington Mutual and Lehman brothers?
  
  Conseco has pumped nearly $1 billion over the last 10 years to keep its LTC block solvent and $220 million was required just last year.  It is unfathomable that $175 million will meet all the capital needs of the Trust for the remainder of time.  Conseco will have no obligation to contribute more capital to the Trust, yet it reaped the premiums from these same seniors when they were young and healthy.  It doesn’t seem fair that as these same seniors are ready to access their benefits the company no longer sees them as an asset.
  
  Simply put, the policyholders will be on their own once the trust is established and will not have a capital partner to buffer foreseen and unforeseen events.  If the block needs additional capital, is poorly managed, has any other problems, remediation will have to come from the policyholders themselves.  This is not insurance, it is self insurance. It is not what these policyholders signed up for and have been paying for, for years.
  
  
•  In the event of a Trust default, policyholders once again will be left holding the bag. 
• Finally, what is the upside to the Pennsylvania Department of Insurance if or when this Trust fails?  Won’t these policyholders be seeking help from your state’s guarantee insurance fund?
  
  

Rate Increases – The single greatest burden policyholders will suffer if the Trust is approved will be a continuing series of debilitating rate increases.  Repeated rate increases will ultimately bring this block and our seniors to their knees.

To date, regulators have made Conseco share the pain resulting from the block’s grossly inadequate initial rates.  This has only been fair, as none of the block’s failings are the fault of the policyholders. Conseco’s insureds believed what they were told at the time of sale, when the deal was closed, “Their rates were expected to remain level for life.”

Despite Conseco’s capital contributions, many policyholders have had to endure tripled rates since they purchased their policy.  By way of example, some couples are now paying in excess of $20,000 a year and have paid nearly $200,000 over their life.  In many cases, cumulative premiums paid, now exceed maximum policy benefits.

Conseco’s actuarial consultants project the need for five rate increases to raise an additional $300 million to $400 million in order to keep the block solvent.  That staggering number assumes that the block’s future liability unfolds as planned, an assumption that has hardly played out to date.  A rate burden of this magnitude will cripple many seniors and happen at the time they need the coverage the most.  

Is that the time these 80 year olds, sick and infirm are expected to go out and shop for new coverage?

Further aggravating this troubling situation is a large number of policyholders will soon have no premium obligations whatsoever.  Waiver of premium provisions in the American Travelers Life block are waived for life when one or the other policyholder dies or is on claim.  Unfortunately, most of these same seniors are in their late 70’s.  The remaining base of policyholders will be forced to lapse and forfeit their coverage.

Since policyholders will be without a capital partner to share the financial burden increases will be swift and sharp. Unless this Trust is stopped there will be no room or resources to help those that become casualties.

It is this cruel rate mechanism that most strongly argues against Conseco’s plan. Adoption of the trust will leave a diminishing base of premium payers without an adequate revenue source that will collapse under its own weight.  It will be aging seniors that have faithfully paid their premiums that pay the highest price.

• Claims - Claim disputes rely on an outside source of capital for balanced resolution.  When fellow policyholders are left to fund bad faith and emotional distress, incentives become unclear and fair resolution is impossible. The result will be forced cannibalization.  Competition for diminishing Trust resources will force the block to feed upon itself.  Claim disputes will compound the effects of a diminishing premium payer base and accelerate the problem.
  
  

Precedent

Approval of Conseco's plan would establish a very dark precedent.  No block of LTCI policies has ever been subjected to such a restructuring; regulators will be on uncertain ground particularly as the block begins to fail. 

Other insurers with troubled blocks will see the Conseco trust as a perfect solution to unload their own problems.  Departments of Insurance around the country will be dealing with the template you have enabled, endorsed. When these trusts fail, the price will be hundreds of thousands of elderly policyholders with no protection in their time of greatest need.

In short, Conseco’s trust could well become the toxic waste dump template for the rest of the LTCI industry’s underperforming blocks.

Conclusion

A.M. Best painted Conseco’s grim reality late last year: “A.M. Best remains highly cautious on the future performance of the LTC block and has diminished confidence in Conseco’s ability to generate consistent operating results in the near to medium term.”  This was A. M. Bests’ conclusion about the block with a capital partner.  To leave 142,000 policyholders at the mercy of fate without a capital partner is sentencing them to financial ruin.

Conseco claimed in its August 11 presentation that the plan was a “Balanced solution for the 142,000 policyholders.”  Conseco’s plan is anything but balanced. 

I ask and urge you on behalf of long-term policyholders everywhere to disapprove this Trust or in the alternative extend by 120 – 150 days the comment period.

Thank you for the opportunity to share my views,

Respectfully,

Frank N. Darras, 

Shernoff Bidart Darras Echeverria LLP