IN THE COMMONWEALTH COURT OF PENNSYLVANIA. In re: Penn Treaty Network America Insurance Company and In re: American Network Insurance Company

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1 IN THE COMMONWEALTH COURT OF PENNSYLVANIA In re: Penn Treaty Network America Insurance Company and In re: American Network Insurance Company 1 PEN 2009 and 1 ANI 2009 FORMAL COMMENTS OF THE POLICYHOLDERS COMMITTEE ON THE SECOND AMENDED PLAN OF REHABILITATION The Committee of Policyholders of Penn Treaty Network America Insurance Company ("PTNA") and American Network Insurance Company ("ANIC"), by their 1 undersigned counsel, hereby submit formal comments on the Second Arnended Plan for the Rehabilitation of PTNA and ANIC (the "Plan"), The Committee believes the Plan should be confirmed and that it should be implemented as soon as possible following eonfirmatien. The Committee's comments largely concern issues of implementation and communication with policyholders concerning policyholder elections, 1, The Plan does not provide adequate explanation of the nature and amount of Uncovered Benefits Coverage to be provided to policyholders in Company B who have claims in excess of Guaranty Association limits, Paragraph 5 on page 36 of the Plan states: The Uncovered Benefits Asset Allocations will bc used to procure coverage actuarially determined to maximize funding of Uneovered Benefits for each policyholder taking into account the expected probability and severity of ciaims for such benefits (the Uncovered Benefits Coverage). The form of coverage is expeeted to be an extension of the period during whieh benefits will continue to be provided under the existing terms of the Companies policies. It is possible that no such coverage may be available in the market. In that case, or if it proves rnore advantageous, such coverage may be provided by ANIC. If that does not prove feasible, simple funding of benefits to the extent of each policyholder's allocable share of the Uncovered Benefits Assets rnay be the only option for providing Uncovered Benefits, TO PRESERVE FAIRNESS AND EQUITY, A POLICYHOLDER'S UNCOVERED 1

2 BENEFITS WILL BE LIMITED TO THE AMOUNT OF COVERAGE THAT CAN BE PURCHASED OR THE AMOUNT OF BENEFITS THAT CAN BE FUNDED BY THAT POLICYHOLDER'S PROPORTIONATE SHARE OF THE PTNA UNCOVERED BENEFITS FUND OR THE ANIC UNCOVERED BENEFITS FUND, AS THE CASE MAY BE, The Uncovered Benefits Coverage and the Uncovered Benefits Asset Allocations may be recalculated periodically after the Effeetive Date as warranted by changing eircumstances, such as lapses and variations in asset values, fluctuations in loss experience, claims costs, and expenses, As a result, the extent to which a policyholder's benefits may continue once Guaranty Association benefits are exhausted, or in cases in which no sueh benefits are available, may change over time. However, once a policyholder begins receiving Uncovered Benefits, bis or her Uncovered Benefits Asset Allooation will no longer be subject to recaleulation, unless limited by the exhaustion of available assets. Policyholders will not be in a position to Make informed decisions about the elections or options offered under the Plan without knowing the nature and amount of Uncovered Benefits Coverage to which they have access under the Plan, 2. Article IV, Section L ef the Plan states that "Virtually all of the Companies insurance policies would be covered under the state Guaranty Association system, subject to individual state statutory maxima and conditions, if the Companies were, placed into liquidation with a finding that the Companies aro insolvent," However, at the time of filing these objeetions, the Pennsylvania Life and Health Guaranty Association has taken that position that it is not obligated to eover long term care policyholders residing in New York state. There are approximately 600 such policyholders. The Plan must make elm: how these policyholders will he treated, If the claims of such policyholders aro treated 100% as Uncovered Benefits, then the nature and amount of Unfunded Benefits Coverage under the Plan is critical for these policyholders. 2

3 The Plan should provide that all policyholders who will not be covered by a Guaranty Association because of their residence will be notified as soon as possible, including policyholders residing outside the United States. 3, The Plan currently provides that all policies determined to be selfsustaining will be assigned to Company A, subject to the policyholders right to elect Cornpany B. The Policyholders' Committee believes that self-sustaining policies that would be fully covered within Guaranty Association Hmits should be assigned to Company B instead, unless and until the funding for Company A is shown to be sufficient to run off the policies in Company A under adverse conditions. This depends in part on the assumptions related to future claims experience that will be used in the projection model at the time when funding for Company A will be determined, Those assumptions are expected to be developed before the confirmation hearings in July. If those assumptions and sensitivity tests are satisfactory, the Committee is prepared to withdraw this objection. 4, The Plan indieutes in Article Iv, Section L that sorne Guaranty Associations may decide to limit coverage for a portion of a policy's inflation benefits based on statutory provisions that limit Guaranty Association coverage of policy provisions that are based on a rate of interest. These statutory exclusions are known as Moody's provisions, because they employ the Moody's Corporate Bond Yield Average to calculate the amount of interest the Guaranty Associations must cover usually the Moody's Average less x percent for a specified number of years before the liquidation date, and the Moody's average less y percent going forward after liquidation. E.g., 40 P.S. 991,1703(b)(2)(iii), The Plan advises that "Policyholders should evaluate these 3

4 issues carefully in deciding whether to elect that their policies remain or be placed in PTNA and should consider whether sueh provisions may make the coverage available in PTNA, including applicable Guaranty Association Benefits, less valuable than the coverage that would be available from ANIC," Policyholders cannot evaluate the abovementioned Moody's exclusion unless they know: (a) whether their Guaranty Association has decided to apply the Moody's provision to their inflation benefits; (b) how much of their aceumulated inflation benefits the Guaranty Association has decided to cover before and after the liquidation date; and (c) the procedures for challenging the Guaranty Association's decision, Each of these pieces of information ought to be included in the Policyholder Election Package. The Cornrnittee is of the view that decisions to lirnit Guaranty Association coverage of inflation benefits can be challenged, because inflation benefits are additions to policy limits based on additional premium and are not compensation for the use of money based on a rate of interest; and because a statute intended to limit Guaranty Associatibn coverage of inflation benefits would employ an inflation index rather than a bond yield average that is not related to inflation. 5. The Plan provides for the continuation of agents commissions on policies in Company A (Section T of Article IV), even though Company A will not be a going concern (Section Q of Arti ele-iv) and will operate in run-off mode unless it is sold. Most agents have ceased to advise and'service PTNA and ANIC policyholders. In a run-off, the payment of commissions does 'not benefit either the company or the policyholders and should not be ineluded in the funding for Company A. To the extent that commissions on policies in Company A remain a debt of Company A, payment thereof should be 4

5 postponed until the assumption of Company A's block of policies by a solvent, operating insurer, or the recapitalization and re-licensing of Company A. 6. The definition of Uncovered Benefits Reserve and Article IV, Section E indicate that the reserve will be determined by cornparing a policy's GPR to the applicable Guaranty Association limit, after present-valuing the Guaranty Association benefits and expenses. The Committee understands that the same discount rate used to compute a policy's GPR will be used to present-value the Guaranty Association benefits and expenses. If that is not the case, the Plan should so state. Likewise, Article IV, Section E indicates that separate Guaranty Association limits will apply to policies in Company 13 that were issued by ANIC and policies in Cornpany B that were issued by PTNA. If that is not the case, the Plan should so state. 7. The definition of Plan Preparation Period should be limited to six months, subject to extension by the Court, 8. The mailing of Policyholder Election Packages Should be phased so as to control. the volume of-calls to the Policyholder Services Department each week and thereby make it easier for policyholders to speak with a Policyholder Services representative on a timely basis, 9. Because the Policyholder Election Package and Election Form will be of critical importance to policyholders and to the implementation of the Plan, the Election Package and the Election Form should be informed by the engagement of consultants experienced in the communication of insurance matters to seniors as well as consultants experienced in creating effective media-based communications, including on insurance matters. The Election Package should state the costs and benefits of each option, tailored 5

6 as much as possible to the policy and the potential Guaranty Association benefits, in a format that allows easy comparison of the available options. The Election Package should include written materials and one or more video elements made available on DVD and via the web (e.g., a web-page "decision-tree" combining short, simple explanations with links to more detailed tex't and/or short video explanations). If feasible, the Plan should provide for policyholders to obtain advice free of charge frorn independent advisers who have no financial interest in the policyholders elections. In any event, policyholders should be advised to review the Election Package with a family member or trusted adviser. Policyholders should be advised that neither the Rehabilitator nor the Company nor the Policyholders Committee can tell a policyholder what would be the best choice for him or her. WHEREFORE, the Committee respectfully requests that the Rehabilitator modify the Plan or otherwise provide for implementation of the Plan in accordance with the Committee's formal comments. Respectfully subrnitted, 13y: Thomas A. Leonard, Es uire Richard P. Limburg, Esquire Obermayer Rebmann Maxwell & Hippel LLP One Penn Center, 19th Floor 1617 John F. Kennedy Blvd. Philadelphia, PA (215) Dated: February l 3,

7 CERTIFICATE OF SERVICE I certify that on February 13, 2015, I caused a true and correct copy of the forogoing Application to be served on the following persons by at the addresses indicated below: Patrick H. Cantilo Special Deputy Rehabilitator Cantilo & Bennett, LLP Century Oaks Terrace, Suite 300 Austin, TX ltep.acilg@s12:firimom Stephen W. Schwab DLP Piper LLP (US) 203 North LaSalle Street Suite 1900 Chicago, IL stcubstn.schwabgdylpip_er co m, Charles T. Richardson Faegre Baker Daniels 1050 k Street NW, Suite 400 Washington, DC Q5,11,13 Harold S. Horwieh Bingham McCutchen LLP OM State Street Hartford, CT ,41:0A,11TY Carl Buchholz DLA Piper LLP (US) One Liberty Place 1650 Market Street Philadelphia, PA carl.buchholz@dlapiper.corn Douglas Y. Christian Ballard Spahr LLP 1735 Market Street 51s1 floor Philadelphia, PA thri sti a n dgib aliardspahr.com Paul M. Hummer Saul Ewing LLP Centro Square West 1500 Market Street, 38th floor Philadelphia, PA PI) ifliiitipi@ap4s01:11 Andrew Parlen O'Melveny & Myers, LLP 1625 Bye Street, NE Washington, DC AiRltic11@a ,CNITI: Richard Lirnburg 7

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

IN THE COMMONWEALTH COURT OF PENNSYLVANIA Stephen W. Schwab (Pa. Bar ID 315169) Jayne A. Risk (Pa. Bar ID 80237) Carl H. Poedtke III (Pa. Bar ID 317282) -7300 Tel: 215.656.3300 Fax: 215.656.3301 Attorneys for Teresa D. Miller, Insurance Commissioner