Now, some fear Penn Treaty’s failure is a signal of more trouble to come in the long-term-care sector.
“Liquidation is rare, but it does happen in bunches sometimes,” said Robert Hunter, director of insurance for the Consumer Federation of America. The organization has been warning about problems with long-term-care insurance since the early 1990s. In essence, companies underestimated the true cost of coverage and are struggling now to make good on all their promises.
“There is definitely talk in the street that it’s still a high-risk situation for quite a few companies,” he said. “It’s not a healthy situation.”
Michelle Leonard, a Penn Treaty policyholder in Venus, Fla., said she was shocked to learn of the liquidation.
“It’s time for me to go to a facility to live out my days,” she said, explaining that she had already selected a group home, submitted an application and been accepted (but had not yet sold her house). “They may not take me now. I may not have enough assets to go in.”
Each state has a so-called guarantee fund to rescue policyholders in insurance failures. The funds pay people’s claims, up to a predetermined limit that varies by state. The limit is $300,000 in Florida.
“But how long does that take?” Ms. Leonard wondered. She said that she had not yet heard from the guarantee fund, but added that she had received mailings instructing her to keep on paying her monthly premium in full, even if it rises, or else her coverage would be canceled.
“Oh, hey! We’re going down the toilet but keep paying your premium,” she said, mocking the letters. “It’s very upsetting.”
Other Penn Treaty customers agreed. “That’s why we have C.P.A.s and actuaries and insurance professionals — to run the business properly,” said Charley Sproule, a policyholder in Harrisburg, Pa. “In my opinion, the actuaries and executives and the board should be held legally liable for this, but they won’t. They’ll get off scot-free.”
In Pennsylvania, the guarantee limit is also $300,000. Mr. Spoule said the cash value of his policy was close to double that — $573,000. So is the cash value of a separate policy held by his wife, Mary Lou.
Mr. Sproule said that his mother lived to be 100 and spent her final years in a nursing home. The care was expensive enough to wipe out all of her assets in just three years, including the value of her house. After that, she had to turn to Medicaid, the government health program for the poor.
“That’s why we bought insurance, so that all of our assets wouldn’t be gobbled up by nursing-home costs,” Mr. Sproule said.
In liquidation, the policies will be canceled, and the guarantee fund will take care of $300,000 worth of claims. “We end up suffering about a 48 percent loss,” Mr. Sproule said. It took the couple 18 years to build up their policies’ value to $573,000 apiece. Mr. Sproule said he was sure it was too late to go out and buy coverage to replace what they had lost.
“We’re probably uninsurable,” he said. “You buy long-term-care insurance when you’re young and healthy, because that’s how you pay the lower premium.”
They were also encouraged by a federally financed program in which states urged their residents to buy long-term-care insurance. The goal was to keep Medicaid from being overwhelmed by tens of millions of aging baby boomers.
The Sproules, Ms. Leonard and all the rest of Penn Treaty’s policyholders have spent the last nine years in a strange legal limbo. State insurance regulators in Pennsylvania first petitioned the Commonwealth Court of Pennsylvania to order liquidation in 2009, which is standard procedure.
But then the standard playbook went out the window. Droves of insurance agents challenged the petition in court. That’s because as long as Penn Treaty stayed out of liquidation, they would keep receiving their sales commissions, which they said they were constitutionally entitled to.
Health insurers fought the liquidation, too. State guarantee funds, it turns out, are not funded at all. When an insurance company goes under, all the surviving companies in that line of business are required to chip into the guarantor, with assessments based on their market share.
Long-term-care insurance is classified as health insurance, so health insurers would get the assessment — even the ones that steered clear of long-term-care insurance and never sold a single policy. They were aghast at having to pay for other people’s mistakes.
Some of the staunchest opposition came from Penn Treaty’s corporate parent, the Penn Treaty American Corporation of Frisco, Tex. Its chief executive, Eugene J. Woznicki, said that the insurer was viable and could be put back on its feet if only state insurance regulators would grant adequate rate increases. In court filings, he heaped blame on the Pennsylvania Insurance Department in particular.
“The commissioner has deference,” he said in an interview. “He can make decisions that he thinks are the right ones and not be challenged.”
As it happens, Penn Treaty’s financial problems date back at least to 2001, when the company noticed its claims were higher than expected. Executives worked with regulators on a “corrective action plan,” which included fresh capital, reinsurance and a series of rate increases. But insurance rates are approved state by state, and while some granted the prescribed increases, others (including Pennsylvania) did not.
“This case presents a serious indictment of the existing system of rate regulation of long-term-care insurance,” Judge Mary Hannah Leavitt said in a 2012 opinion. By refusing to grant the rate increase, Pennsylvania “showed that rate regulation is governed by politics, not actuarial evidence or legal principles.”
The 2001 rehabilitation plan may have been a lost cause, but things play out slowly in this corner of the insurance business. While Penn Treaty’s troubles mounted, its offshore insurance deals gave it an appearance of normalcy. The biggest, with a reinsurer in Dublin, removed more than $1 billion in liabilities from Penn Treaty’s balance sheet, making it look robust, despite the faltering corrective-action plan.
And then, in the financial turmoil of 2008, Penn Treaty and its Irish reinsurer had a falling-out. Penn Treaty had to take back the $1 billion of liabilities, blowing a hole in its balance sheet. That was the beginning of the end. A year later, the Pennsylvania Insurance Department said the situation was irretrievable and asked the court for a liquidation order.
“It was the best option,” said the spokesman for the Insurance Department, Ron Ruman. “The company was not viable, and this would provide the maximum protection under law for the consumers.”
But the court wrangling went on for nearly nine years before Judge Leavitt finally ordered the liquidation, in March. During that time, Penn Treaty’s financial condition deteriorated further. And for nine years, policyholders didn’t know if their insurer was dead or alive — but they kept getting those letters instructing them to keep paying their monthly premiums or they would lose everything.
Policyholders who had already moved into nursing homes or other care facilities did have their claims paid throughout the proceedings.
But those who didn’t make the move yet, like Ms. Leonard, will in some cases bear losses. They are waiting now to hear how much. A few states cap guarantee-fund relief at $100,000. Others, like California and Connecticut, guarantee $500,000 and more. New Jersey is said to have no limit at all, but some analysts question that promise, especially if another big long-term-care insurer fails.
“I’m sure I speak for everybody else: We’re all confused,” said Ms. Leonard, a retired member of the faculty at Nova Southeastern University. She said she had asked for updates on the nine-year court proceedings, but thought it was a class-action lawsuit. She was surprised to learn it was something else.
“If this was not a class-action suit, then why was it not?” she said. “There needs to be a class-action suit. It seems to me they need to be made an example of and made to honor their policies.”