Sunken SHIP.

A cautionary tale.

The following piece was written by Mary Williams Walsh, managing editor of News Items. It tells the tale of the Senior Health Insurance Company of Pennsylvania, known as SHIP. It doesn’t have a happy ending.

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When Silicon Valley Bank failed last March, the rescue went off without a hitch. The trouble started on a Wednesday, a run gathered steam on Thursday, and by Friday the FDIC had put the bank into receivership. On Sunday evening, the FDIC, the Fed and the U.S. Treasury said all depositors would get their money—even big depositors who were over the FDIC’s $250,000 insurance limit. People could come and get their money first thing Monday morning. 

That’s six days, start to finish. Compare that to what can happen when an insurance company goes bust. 

The Senior Health Insurance Company of Pennsylvania, known as SHIP, was put into receivership in January 2020. Its policyholders are all over the United States—Pennsylvania is just its regulatory domicile. As it happens, SHIP went insolvent several years before the receivership. But it wasted precious time, and policyholders’ money, trying to prop itself up with fake reinsurance. It was also swindled by a failing hedge fund when it sought help. 

At last count, SHIP owed an estimated $3 billion of long-term health care to a dwindling group of policyholders whose average age is 88. It has only $230 million to pay the bills. Its policyholders are middle-class Americans whose only mistake was to try to do the right thing: to shelter themselves, and their families, from the potentially ruinous cost of skilled nursing care in old age. Now, nearly four years after SHIP went down, they’re still waiting for a resolution. 

While they wait, they’re being urged to keep paying their premiums. If they stop, they’ll lose their coverage, and all the premiums they’ve been paying for years and years will have been for nothing. But it’s hard to keep up because the premiums are rising sharply. 

The plight of these well-intentioned people has been on my mind lately because I keep hearing about potential problems with another group of insurers—the life-and-annuity companies that have been acquired by, or partnered with, private equity firms in recent years. Apollo’s acquisition of Athene in 2022 is the one you hear about the most, but there are others: the Carlyle Group and its Fortitude Re, KKR and Global Atlantic, Blackstone and Corebridge Financial, and many smaller ones. Twelve percent of U.S. life-and-annuity assets are now said to be in the hands of private equity. And the insurers have been growing like crazy, selling annuities to people planning for retirement, and group annuities to companies that no longer want to operate pension funds.

Private equity firms don’t see the life-and-annuity business the way insurance executives did in the past. They invest more aggressively. They use reinsurance creatively. Much of the activity happens offshore, where confidentiality rules make it hard to see what’s going on. But when researchers go to the trouble, they do find cause for concern. Earlier this year I described the work of a team at the Federal Reserve that said private-equity-owned life insurers “have become exponentially more vulnerable to an aggregate corporate sector shock.” The International Monetary Fund is concerned to see Bermuda reinsurance growing into a trillion-dollar-plus business, as private equity firms seek tax and regulatory advantages for their life insurers. The Bank of England has been working on an emergency lending facility for “non-banks,” such as insurers. The U.S. Labor Department is concerned about regulatory arbitrage as companies send their pension plans to life insurers, which are not bound by the federal pension law that Labor enforces.  

Even some Masters of the Universe have qualms. In October, hedge-fund founder J. Christopher Flowers told the Financial Times he was concerned to see private-equity firms pouring life insurers’ money into illiquid structured-credit deals. “One of these days, some life insurer is going to get whacked,” he said. 

The private equity firms dispute the notion that their life insurers could “get whacked.” They say they’re the ones that have reinvigorated the life insurance industry, providing fresh capital and new ideas. They should be getting thanks, not criticism. Besides, life insurers don’t have runs. How could anyone say private equity has made them vulnerable?

Ask Flowers. In 2013 he bought a majority stake in an Italian insurer, Eurovita. Four years later he sold it to the British private equity group Cinven. Last year, when interest rates rose, the value of Eurovita’s investments fell. People rushed to withdraw their money. Regulators called on Cinven to increase Eurovita’s capital, but Cinven added only about one-fourth of what was needed. Eurovita ended up in special administration, Italy’s framework for insolvent financial institutions. 

“You can have a run on a life insurance company,” Flowers said. 

What went wrong at SHIP was not a run so much as a slow death spiral. SHIP was founded in the 1980s and initially went by the name of American Travellers Life Insurance Co. A Reagan administration task force on nursing-home costs had just called for a big push to make Americans buy long-term care insurance. Public-education campaigns and tax incentives were coming. Some members of Congress wanted Medicare to pay for nursing homes, but that was out of the question. As the boomers aged, the cost would swamp the program. 

Long-term care soon became one of the fastest growing lines of insurance. It wasn’t cheap, though. Some insurers, including American Travellers Life, sold what they called “level premium” policies, priced well below the competition. People snapped them up because they were cheaper, and the words “level premium” suggested the price would never go up. The fine print said, of course, that the price could go up. And that’s what always seemed to happen. Documents dredged up in subsequent lawsuits showed that the steep price increases were meant to make policyholders “lapse,” or give up their coverage before they were old and sick enough to file claims.

The stage was already being set for the demise of SHIP, years later. The low premiums didn’t bring in enough money to cover the eventual claims. And there were lots of claims, because long-term care policyholders didn’t lapse as much as the industry expected them to.  

In 1996, American Travellers was acquired by Conseco, an Indiana insurance conglomerate known for its breakneck growth. Its name changed to Conseco Senior Health Insurance Co. Its business practices remained the same. For years, Conseco Senior Health was one of the biggest writers of long-term care insurance in the United States. But success brought lawsuits, congressional hearings, fines, bad press, and stormy public meetings where elderly policyholders screamed “crooks!” at executives. In 2003, Conseco stopped selling new long-term care policies. 

Its plan was to “run off” its tens of thousands of existing policies. It would take decades. But years of underpricing continued to plague Conseco. Health care costs were rising, people were living longer, and there wasn’t enough money to keep up with claims. From 1998 to 2008 Conseco made 22 separate capital contributions to its Senior Health unit, for a total $915 million. It still couldn’t get out ahead of the cost. It also paid $6.3 million in fines and restitution to settle a multistate investigation. 

Shortly after paying the fines, Conseco announced that it was spinning off Senior Health Insurance Co. It would be renamed the Senior Health Insurance Company of Pennsylvania, or SHIP. Conseco was spinning it off with $2.9 billion in assets to pay the future claims of its 142,000 policyholders. SHIP’s stock would be held by an independent trust with no profit motive. There would be no shareholders clamoring for dividends. All the money was going to be used the pay claims. 

Conseco said the spinoff would cost it about $1.2 billion, but it was worth it because once SHIP was separated, it would have no more calling rights on Conseco. Conseco’s stock price rose 11.5 percent on the news.

A confidential actuarial study said SHIP was stable. But it wasn’t. It stumbled along for a few years, veering toward insolvency. That’s when it got swindled. In the spring of 2014 it engaged an advisory firm called Beechwood Re Investments, hoping to invest its way out of the hole. Beechwood claimed to be “part of a large, well-capitalized reinsurance group formed … through the use of family money and other resources accumulated during successful careers as insurance and investment professionals.” 

SHIP issued something called a “surplus note” to Beechwood. That’s a special IOU that lets a troubled insurer borrow money without recording a corresponding liability. A surplus note isn’t exactly a badge of honor, but insurers use them to bridge gaps and buy time. SHIP’s surplus note was for $50 million—just enough to keep SHIP barely solvent through the end of 2015. 

Normally an insurer gets cash for its surplus note, but Beechwood gave SHIP securities that it said were worth $50 million. SHIP was apparently satisfied, because it gave Beechwood another $270 million to invest. Beechwood even got a $33.5 million “performance bonus.”

While that was going on, SHIP hired another advisory firm, Vanbridge LLC, to help it further build up its capital and solvency. Vanbridge urged SHIP to buy reinsurance from a company in Barbados called Roebling Re Ltd.

Reinsurance can, in fact, strengthen an insurer’s balance sheet and promote stability—when it is real reinsurance, provided by a real company. That’s not what Roebling Re was. It was a shell without a penny to its name, formed, by sheerest coincidence, in the summer of 2016, just as Vanbridge was telling SHIP to get reinsurance. SHIP’s regulatory filings called Roebling Re “a non-profit-motivated reinsurer established exclusively to support insurance companies with long duration liabilities.” 

Perfect! Vanbridge helped SHIP pay Roebling Re to take over 49 percent of its long-term-care obligations—more than $1 billion. That was the first and only money Roebling Re ever had. Roebling Re then removed $100 million of the total premium and invested it with an affiliate. Some notes were also exchanged. 

The Pennsylvania insurance commissioner, Jessica Altman, would later look at this “reinsurance” deal and call it “nothing but a thinly disguised sham.” But in mid-2016 it strengthened SHIP’s balance sheet and steered it away from insolvency—at least on paper—which was just what SHIP had hired Vanbrook to do.

Then the wheels started coming off. SHIP didn’t know it yet, but Beechwood wasn’t “part of a large, well-capitalized reinsurance group” laden with old family money. Beechwood had been set up to help raise money for Platinum Partners, a failing hedge fund that desperately needed cash to pay clients who wanted their money back. That’s where Beechwood had put SHIP’s $270 million.  

In June 2016, a Beechwood official was arrested for bribing a union official—$60,000 cash, delivered in a Ferragamo bag—to place $20 million of the New York City prison guards’ pension fund with Platinum Partners. Journalists spent the summer and fall digging up clues about Beechwood and its ties to Platinum Partners. Beechwood kept telling SHIP that its money was safe, but it wasn’t. In December, top officials of Platinum Partners were arrested and charged with a $1 billion fraud. 

Not long after that, Roebling Re exhausted the money SHIP had given it to take over SHIP’s policy obligations. The Pennsylvania insurance commissioner leaned on SHIP to terminate the “reinsurance” deal, which she considered a sham. 

In 2017, when the purported reinsurance was still in force, SHIP looked solvent—narrowly—with assets worth $12 million than its obligations. But in 2018, once it had unwound the sham deal with Roebling Re, SHIP was insolvent by $466 million.

“SHIP expended millions of dollars in the Roebling Re transaction and has nothing to show for it except a worsened financial condition,” Altman said in a court filing. 

State law required Altman to take over SHIP, and she did—but she didn’t liquidate it. That remains a sore point. 

When an insurer has gone insolvent, as SHIP has, the usual response is liquidation. Experts are called in to find as many of the company’s assets as they can before any more can be frittered away on bogus reinsurance or other ploys. Whatever can be collected will be used to provide some semblance of coverage to the policyholders. 

Insurers, you see, don’t have an FDIC to swoop in, take control, and give people their money. They have a system of state guarantors instead. The guarantors aren’t pre-funded, like the FDIC. Rather, they get money for the policyholders by turning to each of the viable insurers in the relevant line of business—long-term care, in this case—and assess each one, based on their market share in that state. At the end of the year, the insurers can write their assessments off their taxes. It’s a slow process, and there’s never enough money collected to make the policyholders whole. 

But none of that happened in SHIP’s case. After Pennsylvania seized it, the state decided instead to put it into “rehabilitation.” This hasn’t been tried before with a failed long-term care insurer. Pennsylvania engaged a rehabilitator to come up with a plan to bring SHIP back to life. The rehab calls, in effect, for the policyholders to rescue their own company, by giving it more money. 

Pennsylvania mailed packets to all the policyholders, telling them they should choose whether they would rather a) pay higher premiums and keep their policies in force; b) keep paying their current premium but give up a lot of their coverage; or c) stop paying their premiums and let their coverage lapse. 

The mailing caused an outcry. Many of the recipients live outside Pennsylvania, under the protection of their own state insurance commissioners. Some of those commissioners took umbrage at Pennsylvania for reaching across state lines with a rate increase. 

“The actions of SHIP and Pennsylvania are a direct affront to our state authority,” said the insurance commissioner of North Dakota.

Remember Silicon Valley Bank’s rescue? On Day Five, the FDIC, Fed and Treasury stepped up and jointly told the public what the terms would be. Nothing like that is happening in SHIP’s case. Various insurance commissioners went to court in their own states, seeking cease-and-desist orders to stop Pennsylvania from contacting their constituents. Pennsylvania argued that its state insurance law was binding.

“The insurer’s assets are not intended to be separately controlled by all 50 states,” said Pennsylvania’s acting commissioner, Michael Humphreys, Jessica Altman having resigned shortly after the rehab began. “Such a construct would be nearly impossible to administer.” 

Humphreys has been trying to corral all the insurance commissioners in a Pennsylvania court and get the long-awaited, unprecedented rehabilitation of SHIP underway. 

Some states are now on board, but others are still holding out. Washington State’s commissioner, Mike Kreidler, just went back to court in November, saying Pennsylvania’s letters to policyholders were misleading. He wants to block the rehab plan’s enforcement in Washington. 

Pennsylvania’s Commonwealth Court said out-of-state cease-and-desist orders were “nullities.” It ordered Kreidler to stop interfering. 

Kreidler didn’t stop. He said SHIP has a deficit of $1.2 billion, and Pennsylvania’s rehab plan “places nearly all of the burden of eliminating [it] on the roughly 25,000 remaining policyholders, whose average age is 88.” 

SHIP is a small company in the grand scheme of things, but its problems are so severe it’s hard to imagine any fair solution in its remaining policyholders’ lifetimes. Shouldn’t we be designing a better insolvency protocol for insurers, before one of those huge private-equity-owned life insurers “gets whacked?”