Conseco's LTC policyholders face benefit cuts, or worse
The benefits of some 164,000 long term care policyholders at Conseco Senior Health Insurance Co. may be endangered as they are moved to an independent trust.
The move has observers thinking about the fate of Conseco Senior's sister company, Bankers Life and Casualty Co. of Chicago, the third-largest LTC provider, as well as that of other underwriters.
With $561.8 million of premium in force as of yearend 2007, Bankers Life is the third largest writer of LTC, according to LifePlans Inc. of Waltham, Mass.
Bensalem, Pa-based Conseco Senior, a subsidiary of Conseco Inc. of Carmel, Ind., is a victim of its own underwriting, signing on more policyholders than it could afford and leading to the creation of the trust — an industry first, critics said.
HARSH WORDS
"This product is oversold, underpriced and poorly performing be-cause they underwrote everybody," said Frank N. Darras, managing partner of Shernoff Bidart Darras & Echeverria LLP of Claremont, Calif. "These policyholders will either lapse on their payments or the unhealthy people will be so ill, there won't be enough premiums to keep the trust going."A Conseco spokeswoman wrote in an e-mail that the proposed approach "is a balanced solution from all perspectives," but she would not provide further comment.
Last Tuesday marked the end of a public comment period for Conseco's proposed formation of the Senior Health Care Transition Trust, expected to take place in the fourth quarter, pending approval from Pennsylvania Insurance Commissioner Joel Ario.
The trust, which will later be folded into an independent trust run by John W. Wells, senior vice president of Conseco's LTC business, will offload 142,000 policies under Conseco Senior, plus another 22,000 policies from other Conseco insurers.
This transition would relieve the parent of a variety of pressures. Conseco Senior, which no longer writes business, has cost Conseco nearly $1 billion over the past decade.
In May, the subsidiary was also the subject of a 40-state regulatory examination of its claim practices, which led to a $2.3 million fine and a $26 million investment by the parent to improve its business systems (InvestmentNews, May 19).
The investigation also found that Bankers Life had inadequate sales compliance practices.
Conseco reported a second-quarter loss of $487.1 million, or $2.64 a diluted share.
Conseco also disclosed recently that it held $103 million in securities with American International Group Inc. and Lehman Brothers Holdings Inc., both of New York, and Washington Mutual Inc. of Seattle.
"A firm like Conseco, which is challenged in the credit world, will find more difficulty in doing business over the next few years until it finds a way to provide comfort to its clients," said Sean Egan, founding principal at Egan-Jones Ratings Co. of Haverford, Pa.
Conseco's troubles raise questions about Conseco Senior's viability, as the subsidiary will take an initial $175 million infusion from its parent and an $11 million contribution once the trust is finalized, bringing its total adjusted capital to about $300 million.
RATE INCREASES
After those injections, there will be no additional help from Conseco to fund the costs of those policies, and a series of five premium rate increases — if approved by the Pennsylvania Insurance Department — will fund the trust.Last year, Conseco Senior requested five rate increases of 25% each on its LTC policies, according to the Pennsylvania Bulletin, a weekly state-run rulemaking gazette in Harrisburg.
That capitalization plan could be doomed, said to Philip J. Bieluch, an Avon, Conn., consultant at Insurance Strategies Consulting LLC, a West Des Moines, Iowa, actuarial firm.
A spike in premium rates could force healthy policyholders to terminate their LTC insurance with Conseco Senior, leaving the unhealthy with coverage that is so costly that the premiums approach the cost of the claim for each contract, he said.
Additionally, the $175 million infusion from parent Conseco includes a $125 million senior note with an assumed interest rate of 6%, which isn't realistic for a company with poor credit ratings, Mr. Bieluch said.
If the spinoff is approved, policyholders in other subsidiaries could benefit, as the management will focus on its other businesses and diversify their offerings, according to Rosemarie Mirabella, analyst at A.M Best Co. Inc. in Oldwick, N.J.
COGNITIVE PROBLEMS
"The thing with long term care is that you get profitability now because you're collecting premiums and paying no claims, but you may have higher-than-expected morbidity and lower mortality — that doesn't show up until the block gets seasoned over time," Ms. Mirabella said.
Because of that uncertainty, she wouldn't speculate about Bankers Life's LTC book, which Mr. Bieluch thinks is "solid."
Observers recalled that Bankers Life Holding Corp. of Chicago was a reputable company prior to its merger with Conseco in 1996, and they hope it avoids Conseco Senior's LTC contagion.
"[Bankers] was a competitive company with a good product," said James Souza, an agent with Michael Wish Insurance Agency in Avon, Mass. "It was disheartening to hear they got eaten by Conseco."
In the future, excessive underwriting may require the establishment of an insurance guarantee fund that is paid for by taxes on the industry to help support carriers who can't afford to provide benefits, Ms. Mirabella said.
"I've heard through industry contacts that the insurers made mistakes in projections of how long policies are kept in force, thus causing higher expenses," said Austin A. Frye, founder of the Frye Financial Center in Aventura, Fla.
E-mail Darla Mercado at dmercado@investmentnews.com.
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Posted September 29, 2008 | 03:53 PM (EST)
Huffington Post
Bayoneting the Wounded
By Deborah Senn
Read More: Bonnie Burns, Conseco, Conseco Senior Health Insurance Company, CSHIC, Insurance, Insurance Policy, Long Term Care, LTC, Regulation, Senior Health Insurance Of Pennsylvania, Senior Health Insurance Trust, SHIP, Business News
We are just seeing the tip of the iceberg-- the direct consequences, the unintended consequences, the compounding consequences of the Wall Street meltdown and the era of lax regulation. On September 18, the day Lehman Bros. died, Conseco, the Indiana-based insurer lost its $100 million dollar investment in that investment bank. Conseco is also invested in AIG--at this point we don't know what impact the AIG debacle will have on Conseco. We do know that Conseco'a stock has been placed on the SEC's no-short list, and has retreated 40 percent to $4.78 since Sept. 18. Investors may be edgy because the company has seen hard times before for other reasons, having sought bankruptcy protection between 2002 and 2003.
This week, Conseco will again be in the spotlight for reasons having to do with its troubled insurance operations. Tuesday (September 30, 2008) will be a determinative day for Conseco's 149,000 long-term care insurance (LTC) policyholders, and virtually none of them know anything about it. It is the last day to comment on the company's proposal to the Pennsylvania Insurance Commissioner to spin-off of its long term care insurance business. The proposal calls for Conseco Senior Health Insurance Company (CSHIC) to divest itself of its long-term care policies by placing them in an independent trust, Senior Health Insurance of Pennsylvania (SHIP).
More long-term care policies are sold in
What Ms. Burns, and famed insurance professor Joseph Belth (Indiana University) are worried about is this: if Pennsylvania allows Conseco to dump its long-term care book of business, then every other long-term care insurance company in trouble -- and there are lots -- will want the same treatment by their regulators.
LTC insurance is in financial trouble and generally elderly policyholders have already absorbed dreadful premium increases of 60 percent or more in recent years. However, these financial wounds are nothing compared to the hurt that currently looms over them.
A brief history. Long-term care insurance was invented in the 1980's (kind of like credit default swaps invented in the 1990's). Originally, it was primarily designed for coverage of that final stay in the nursing home. The product has expanded with the times and changes in senior living. In its exuberance to sell its new product and carve out a significant market share, insurers ignored the scant actuarial data and experience available with which to price it. Prospective policyholders were known to be sensitive to price, and insurance marketers wanted a product that was less expensive than the competition's. Actuaries obliged them by relying on a game of poker in which they made liberal (and oftentimes unsupportable) estimates of the number of people who would allow their policies to lapse.
These policyholders, so the theory goes, would pay premiums for a few years thereby contributing to reserves but never filing a claim. It was essentially money for nothing-- pure gravy-- and high lapse rate assumptions were used to justify lower premiums. Nothing could possibly go wrong unless policyholders hung onto their policies come hell or high water. And they did.
Twenty years or so later, the chickens have come home to roost. The policyholders are filing claims. And, although long-term care insurance was sold as a product with level premiums-- in other words, your rates aren't going to go up-- because the rates are front loaded, policyholders in the last ten years have experienced 25, 50 and 100% rate increases.
The decision for regulators is complex. The Conseco long-term care business may already be headed for insolvency. Conseco has offered a capital infusion of $175 million as part of the spin-off package. But no one knows if Conseco can make good on their promise. The new "SHIP" as the company would be called, would have to sink or swim on its own-- that means for sure, more premium increases for Conseco policyholders. In the middle of the AIG/deregulation mess, there have been repeated calls for transparency. In his comments filed on September 25, Professor Belth has discussed a Conseco sponsored actuarial report that the Pennsylvania Insurance Department has not released, and Conseco has told Professor Belth is confidential. Transparency, what transparency? Professor Belth believes the report contains solvency projections for the Conseco long-term care unit and the stated need for five big successive rate increases!
And, as I said, the policyholders appear to be in the dark. Professor Belth points out that the Pennsylvania Department has issued no press release, nor sent any direct communications to policyholders. He cites to the fact that two
So, what's a regulator to do? What is best for the policyholders? Prof. Belth opined that if the Pennsylvania Department puts the company into insolvency immediately-- which he says is inevitable-- then there is a chance to rehabilitate it or sell the company. If the
Perhaps instead of calling the new trust entity SHIP, it should be named the Senior Health Insurance Trust. You figure out the initials.
