2014-10-08 ptna and anic second amended plan and ... and...second amended plan of rehabilitation the...

IN THE COMMONWEALTH COURT OF PENNSYLVANIA ________________________________________________

: In Re: Penn Treaty Network America : No. 1 PEN 2009 Insurance Company in Rehabilitation : ________________________________________________:

AND ________________________________________________

: In Re: American Network : No. 1 ANI 2009 Insurance Company in Rehabilitation : ________________________________________________:

SECOND AMENDED PLAN OF REHABILITATION

AND DISCLOSURE STATEMENT FOR

PENN TREATY NETWORK AMERICA INSURANCE COMPANY

AND

AMERICAN NETWORK INSURANCE COMPANY

SECOND AMENDED PLAN OF REHABILITATION

THE REHABILITATOR AND CERTAIN PARTIES WERE DIRECTED BY THE COURT TO STRIVE TO RESOLVE AS MANY OPEN ISSUES AS POSSIBLE. THIS SECOND AMENDED PLAN REFLECTS THE RESULTS OF THOSE EFFORTS. THE SECOND AMENDED PLAN DIFFERS MATERIALLY FROM THE DRAFT AMENDED PLAN OF REHABILITATION FILED ON AUGUST 8, 2014.

IMPORTANT NOTICE

THE AMENDED PLAN DESCRIBED BELOW, IF APPROVED BY THE COURT, WILL SUBSTANTIALLY AFFECT THE RIGHTS AND BENEFITS OF THE COMPANIES’ POLICYHOLDERS, CREDITORS AND OTHERS. NOTHING IN THE AMENDED PLAN OR RELATED DOCUMENTS CONSTITUTES, IS INTENDED, OR SHOULD BE TAKEN AS LEGAL, TAX, OR OTHER ADVICE FROM THE REHABILITATOR, HIS REPRESENTATIVES OR HIS CONSULTANTS. ALL PERSONS INTERESTED IN THE REHABILITATION OF THE COMPANIES

PENN TREATY NETWORK AMERICA INSURANCE COMPANY AND AMERICAN NETWORK INSURANCE COMPANY AMENDED PLAN OF REHABILITATION AND DISCLOSURE STATEMENT

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SHOULD READ THE AMENDED PLAN DOCUMENTS CAREFULLY AND CONSULT WITH THEIR OWN LEGAL, BUSINESS, FINANCIAL, TAX AND OTHER ADVISORS AS TO MATTERS CONCERNING THE AMENDED PLAN DOCUMENTS.

THE AMENDED PLAN PROPOSES THE IDENTIFICATION OF THOSE POLICIES OF LONG TERM CARE INSURANCE ISSUED BY THE COMPANIES THAT ARE ACTUARIALLY PROJECTED TO BE “SELF-SUSTAINING” AS DEFINED IN THE AMENDED PLAN AND A METHODOLOGY BY WHICH POLICYHOLDERS WHO HAVE NON-SELF-SUSTAINING LONG TERM CARE POLICIES MAY ELECT VOLUNTARY MODIFICATIONS TO MAKE SUCH POLICIES SELF-SUSTAINING. ALL LTC POLICYHOLDERS WILL HAVE THE ABILITY TO OPT OUT OF THE AMENDED PLAN AND RECEIVE GUARANTY ASSOCIATION COVERAGE, SUBJECT TO APPLICABLE STATUTORY COVERAGE LIMITS AND CONDITIONS.

THESE VOLUNTARY MODIFICATIONS TO MAKE LTC POLICIES SELF-SUSTAINING MAY INCLUDE PERMANENT REDUCTIONS IN THE BENEFITS AVAILABLE UNDER SUCH POLICIES, PERMANENT INCREASES IN THE PREMIUM RATES THAT MUST BE PAID TO MAINTAIN SUCH POLICIES IN FORCE, OR A COMBINATION OF PERMANENT BENEFIT REDUCTIONS AND RATE INCREASES. THE AMENDED PLAN DESCRIBES THE METHODOLOGY FOR SUCH MODIFICATIONS IN DETAIL BUT DOES NOT CONTAIN SPECIFIC INFORMATION ABOUT HOW THEY WOULD AFFECT ANY PARTICULAR POLICYHOLDER IF IMPLEMENTED AS PROPOSED. THE SPECIFIC MANNER IN WHICH THE AMENDED PLAN WOULD IMPACT A PARTICULAR POLICY CAN ONLY BE DETERMINED AFTER ACTUARIAL CALCULATIONS THAT WILL BE MADE DURING THE PERIOD AFTER THE AMENDED PLAN IS APPROVED BY THE COURT AND BEFORE THE AMENDED PLAN IS IMPLEMENTED, AND WILL DEPEND IN PART ON WHETHER AND TO WHAT EXTENT THE AMENDED PLAN IS MODIFIED. ONCE THE CALCULATIONS ARE MADE, EACH LTC POLICYHOLDER WILL RECEIVE PERSONALIZED INFORMATION FOR PURPOSES OF MAKING ELECTIONS PERMITTED UNDER THE AMENDED PLAN.

THE AMENDED PLAN PROVIDES FOR SELF-SUSTAINING LONG TERM CARE POLICIES TO REMAIN IN OR BE TRANSFERRED TO ANIC, WHICH WILL HAVE ASSETS AND PREMIUMS PROJECTED TO BE SUFFICIENT TO PAY PROJECTED CLAIMS AND EXPENSES AS THEY COME DUE. NON-SELF-SUSTAINING POLICIES WILL REMAIN IN OR BE TRANSFERRED TO PTNA, WHICH WILL BE LIQUIDATED TO TRIGGER GUARANTY ASSOCIATION COVERAGE FOR THE POLICIES IN PTNA (SUBJECT TO APPLICABLE STATUTORY LIMITS AND CONDITIONS). EVERY POLICYHOLDER WILL HAVE THE CHANCE TO CHOOSE BETWEEN ANIC AND PTNA, PROVIDED, HOWEVER, THAT ANIC WILL ONLY TAKE SELF-SUSTAINING LONG TERM CARE POLICIES AND LONG TERM CARE POLICIES THAT BECOME SELF-SUSTAINING THROUGH


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VOLUNTARY MODIFICATIONS.

NON-LTC INSURANCE BUSINESS HELD BY THE COMPANIES WILL BE RETAINED BY OR TRANSFERRED TO PTNA AND WILL BE COVERED BY GUARANTY ASSOCIATIONS SUBJECT TO STATUTORY LIMITS AND CONDITIONS.

This Amended Plan of Rehabilitation and Disclosure Statement (this “Amended Plan,” and together with the Exhibits, the “Amended Plan Documents”) is being provided in connection with the rehabilitation proceedings for Penn Treaty Network America Insurance Company (“PTNA”) and its wholly owned subsidiary, American Network Insurance Company (“ANIC”), each a Pennsylvania domiciled stock insurance company licensed to issue annuities and life, accident and health insurance policies (each the “Company” and together the “Companies”). The Amended Plan is being proposed pursuant to Article V of the Pennsylvania Insurance Department Act of 1921, May 17, P.L. 780, as amended, 40 P.S. § 221.1, et. seq., (“Article V”) by Michael F. Consedine, as statutory Rehabilitator of the Companies. The Amended Plan is intended to modify substantially the Plans of Rehabilitation filed herein on April 30, 2013 (the “2013 Plans”) for each of the Companies. The Amended Plan Documents supersede any and all previously submitted disclosure statements and rehabilitation plans for the Companies.

Although individual plans of rehabilitation were proposed for each of the Companies in 2013, this Amended Plan is an integrated plan of rehabilitation intended to address the circumstances of both Companies in a single consolidated effort.

If the Amended Plan is approved by the Court, it will affect the rights of persons interested in the rehabilitation of the Companies and in general such persons will only have the right to benefits and payments from the assets of the Companies as provided in the Amended Plan.

All attachments and exhibits hereto are incorporated herein. Cross references in this Amended Plan and Disclosure Statement to any section or exhibit refer to a section of or exhibit to this Amended Plan unless otherwise noted. The words “herein,” “hereof,” “hereto” and words of similar import refer to this Amended Plan and Disclosure Statement as a whole and not to any particular section.

Informal comments to the Amended Plan may be sent to:

Penn Treaty and ANIC Rehabilitation Comments 3440 Lehigh Street,

Allentown, PA 18103

Informal comments may also be sent by email to [email protected]. The Rehabilitator will review all such comments and take them into account in his recommendations and decisions regarding implementation of the Amended Plan if it is approved by the Court. The Court will make provision for formal comments and objections in an Order addressing these matters.


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TABLE OF CONTENTS

Page I. SUMMARY OF AMENDED PLAN .................................................................................... 1

A. Business Division Plan ................................................................................................... 1

B. Guaranty Association Coverage ..................................................................................... 1

C. Self-Sustaining Policies .................................................................................................. 2

D. Policyholder Elections .................................................................................................... 3

E. Asset Allocations ............................................................................................................ 7

F. Continuation of Premium Payments ............................................................................. 10

G. TPACO ......................................................................................................................... 10

H. Other Amended Plan Matters ....................................................................................... 10

II. GLOSSARY ........................................................................................................................ 12

III. INTRODUCTION ............................................................................................................... 25

A. Introductory Summary ................................................................................................. 25

B. Overview ...................................................................................................................... 26

C. Disclaimers and Sources of Information ...................................................................... 30

D. Procedural History ........................................................................................................ 32

IV. THE AMENDED REHABILITATION PLAN ................................................................... 33

A. Financial Difficulties Addressed by the Amended Plan .............................................. 33

B. Remedial Measures Implemented and to be Implemented in the Amended Plan ........ 34

C. Business Division ......................................................................................................... 35

D. Policy Modifications .................................................................................................... 36

E. Policyholder Elections .................................................................................................. 43

F. Policy Transfers ............................................................................................................ 45

G. Asset Allocation ........................................................................................................... 48

H. Continuation and Waiver of Premiums ........................................................................ 52

I. Non LTC Business ....................................................................................................... 52

J. Opting out of the Amended Plan .................................................................................. 53

K. Formation of TPACO ................................................................................................... 53

L. Guaranty Association Benefits ..................................................................................... 54

M. Uncovered Benefits and Claims in excess of Guaranty Association Limits ................ 57


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N. Policy Restructuring ..................................................................................................... 60

O. Licensing Issues ........................................................................................................... 61

P. Premium Rate Increases ............................................................................................... 63

Q. Sale of ANIC ................................................................................................................ 64

R. Liquidation of PTNA .................................................................................................... 65

S. Evaluation of Amended Plan Performance .................................................................. 66

T. Agents and Creditors .................................................................................................... 67

U. Implementation of the Amended Plan .......................................................................... 68

1. Plan Design ........................................................................................................... 69

2. Plan Presentation ................................................................................................... 69

3. Plan Preparation Period ......................................................................................... 72

4. Plan Implementation ............................................................................................. 76

V. Timing of the Amended Plan ....................................................................................... 77

W. Conclusion of the Amended Plan ................................................................................. 77

X. Principles and Fairness of the Amended Plan .............................................................. 78

Y. Tax Implications of the Amended Plan ........................................................................ 79

1. Policy Modifications ............................................................................................. 80

2. Tax Issues for the Companies ............................................................................... 80

Z. Policyholders Committee ............................................................................................. 81

AA. Risks and Contingencies .............................................................................................. 81

V. MATTERS RELATED TO THE AMENDED PLAN ........................................................ 83

A. May 3, 2012, Order of the Court .................................................................................. 83

B. Intervenors .................................................................................................................... 83

C. The Multi-Party Rehabilitation Group ......................................................................... 84

VI. THE COMPANIES’ CURRENT FINANCIAL CONDITION ........................................... 85

A. Basis of Accounting ..................................................................................................... 85

B. Actuarial Firm Utilized ................................................................................................ 85

C. Summary Financial Information .................................................................................. 86

D. Assets ............................................................................................................................ 88

1. Investments ........................................................................................................... 88

2. Non-investment Assets ......................................................................................... 89

(a) Real Property .................................................................................................. 89


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(b) AINIC ............................................................................................................. 89

(c) Causes of Action ............................................................................................. 89

(d) Reinsurance ..................................................................................................... 89

E. Liabilities ...................................................................................................................... 90

1. Policy .................................................................................................................... 90

(a) Claim Reserve ................................................................................................. 90

(b) Active Life Reserves ....................................................................................... 90

(c) Actuarial Assumptions .................................................................................... 91

(d) Range of Possible Outcome/Sensitivity Testing ............................................. 93

(e) Selection of Assumptions ............................................................................... 93

(f) Policy Information by State ............................................................................ 93

2. Unsecured Creditors .............................................................................................. 95

3. Secured Creditors .................................................................................................. 95

F. Revenues ...................................................................................................................... 95

1. Premiums .............................................................................................................. 95

2. Investment Income ................................................................................................ 95

G. Expenses ....................................................................................................................... 96

1. General administrative .......................................................................................... 96

2. Commissions ......................................................................................................... 96

3. Premium Taxes ..................................................................................................... 96

4. Guaranty Association Assessments ...................................................................... 96

5. Amended Plan Implementation Specific .............................................................. 97

H. Net Cash Flows ............................................................................................................ 97

I. Projections .................................................................................................................... 97

VII. EVALUATION OF REHABILITATION ALTERNATIVES ............................................ 97

A. Exclusive Reliance on Rate Increases .......................................................................... 97

B. Uniform Benefit Reductions ........................................................................................ 97

C. Capital Infusion, Merger, Sale or Reinsurance ............................................................ 98

VIII. ONGOING REHABILITATIVE MEASURES .................................................................. 98

A. Reduction of Operating Costs ...................................................................................... 98

B. Sale of Annex ............................................................................................................... 99

C. Sale of MedSupp Book ................................................................................................. 99


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D. Development of Business Plan to Provide Third Party Policy Administration Services ...................................................................................................................................... 99

E. Contemplated Sale of AINIC ..................................................................................... 100

IX. CONCLUSION .................................................................................................................. 100

EXHIBIT A ................................................................................................................................. 101

ASSET ALLOCATION METHODOLOGIES ................................................................... 101

A. Net Accumulated Premium Method (“NAPM”) and determining a policy’s Self-Sustaining status ......................................................................................................... 102

B. Gross Premium Reserve (“GPR”) and actual asset allocations between ANIC and PTNA .......................................................................................................................... 104

C. GPR and the subdivision of PTNA’s assets ............................................................... 104

D. GPR and the individual allocation of Uncovered Benefit Assets .............................. 105

E. Re-priced Premium Method (“RPM”) and asset allocation of the Covered Benefits Assets among Guaranty Associations ........................................................................ 106

EXHIBIT B ................................................................................................................................. 108

BACKGROUND AND HISTORICAL INFORMATION ................................................. 108

I. BACKGROUND OF THE COMPANIES ........................................................................ 108

A. General History of the Companies ............................................................................. 108

B. Corporate Structure .................................................................................................... 109

C. Products ...................................................................................................................... 110

1. Long-Term Care Insurance (“OldCo” and “NewCo”) ........................................ 110

(a) Premiums and Guaranteed Renewability ...................................................... 112

(b) Benefit Triggers: Tax Qualified v. Non-Tax Qualified ............................... 113

(c) Daily Benefit Amount ................................................................................... 115

(d) Inflation Benefit ............................................................................................ 115

(e) Benefit Period and Amount .......................................................................... 116

(f) Elimination Period ........................................................................................ 116

(g) Waiver of Premium ....................................................................................... 116

(h) Restoration of Benefits ................................................................................. 116

(i) Return of Premium Benefit ........................................................................... 117

2. Other Products .................................................................................................... 117

3. Policy Count and Premium Summaries by Line of Business ............................. 119

D. LTC Pricing - Rates and Rate Increases ..................................................................... 120


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E. Industry Trends ........................................................................................................... 123

F. Current Operations ..................................................................................................... 125

1. Management ........................................................................................................ 125

2. Employees ........................................................................................................... 125

3. Third Party Service Providers ............................................................................. 125

4. Offices ................................................................................................................. 126

II. HISTORY OF CORRECTIVE EFFORTS AND ANALYSIS ......................................... 126

EXHIBIT C ................................................................................................................................. 128

INVESTMENT SCHEDULE .............................................................................................. 128

EXHIBIT D ................................................................................................................................. 129

GUARANTY ASSOCIATION TABLE ............................................................................. 129

EXHIBIT E ................................................................................................................................. 135

COMPANY LICENSE TABLE .......................................................................................... 135

EXHIBIT F ................................................................................................................................. 137

PTNA AND ANIC ANNUAL STATEMENTS ................................................................. 137


I. SUMMARY OF AMENDED PLAN THE FOLLOWING SUMMARY IS OFFERED ONLY FOR THE CONVENIENCE OF

THE READER. TO UNDERSTAND THE AMENDED PLAN FULLY, THE READER IS ADVISED TO REVIEW THE AMENDED PLAN DOCUMENTS IN THEIR ENTIRETY. IF ANY DESCRIPTIONS OF AMENDED PLAN PROVISIONS IN THIS SUMMARY ARE INCONSISTENT WITH THE CORRESPONDING DESCRIPTIONS IN SECTION IV OF THE AMENDED PLAN, SECTION IV OF THE AMENDED PLAN CONTROLS. Capitalized terms are defined in the Glossary that follows this summary.

The Amended Plan for the rehabilitation of the Companies is a consolidated plan for

PTNA and ANIC that proposes to divide the viable Long Term Care (LTC) insurance business of PTNA and ANIC from the non-viable business. The viable LTC business will be collected in “Company A” and will consist of Self-Sustaining LTC Policies as defined in the Amended Plan. The non-viable business will be collected in “Company B” and will consist initially of Non-Self-Sustaining LTC policies and non-LTC policies. For reasons discussed in Subsection IV.C, below, the Rehabilitator has concluded that ANIC should be Company A and PTNA should be Company B.

A. Business Division Plan

The central element of the Amended Plan is the division of the Companies’ LTC insurance business into Self-Sustaining and Non-Self-Sustaining blocks of business. PTNA and ANIC both have a mix of Self-Sustaining and Non-Self-Sustaining policies. Therefore, it will be necessary to move Self-Sustaining LTC policies from PTNA over to ANIC, and Non-Self-Sustaining LTC policies from ANIC over to PTNA, so that ANIC will have only Self-Sustaining LTC policies, and PTNA will have all the Non-Self-Sustaining LTC policies. Non-LTC policies in ANIC will also be transferred to PTNA. The Amended Plan will provide every LTC policyholder the option of having his or her LTC policy placed or held either in ANIC or PTNA, though many policyholders would have to modify their policies voluntarily (through increased premium rates or reduced benefits) in order to make them Self-Sustaining so that they can be placed or remain in ANIC.

Following the business division, ANIC is designed to have the contractual obligation and the ability to pay projected claims in full on the Self-Sustaining LTC policies it will have. The Amended Plan contemplates that ANIC will be financially viable in the sense that it will be projected to have sufficient assets and revenues to meet its liabilities as they come due, though it will not have sufficient statutory surplus to be permitted to operate independently and write new insurance business. Subject to regulatory requirements, ANIC could eventually be sold and resume independent insurance business with an infusion of additional capital, or ANIC could sell its block of business to another insurer.

B. Guaranty Association Coverage PTNA will be placed in liquidation, and its remaining policyholders (after the transfer of

policies to and from ANIC) will be entitled to receive benefits from their state life and health insurance Guaranty Associations. Guaranty Association benefits will be triggered in all states


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other than New York (where neither Company was licensed) by the entry of an order for liquidation and a finding that PTNA is insolvent. Guaranty Associations generally pay according to policy terms, but are subject to statutory limits and conditions. A GUARANTY ASSOCIATION GENERALLY WILL PAY UP TO THE POLICY LIMIT OR THE STATUTORY LIMIT, WHICHEVER IS LESS. NOTE THAT THE GUARANTY ASSOCIATION LIMIT IS PER POLICYHOLDER (WITHIN EACH COMPANY), NOT PER POLICY. As discussed below, the Amended Plan provides for some additional coverage in cases where a policyholder’s claim is within policy limits but exceeds the applicable Guaranty Association limits (the “Uncovered Benefits”). The Amended Plan provides for the formation of a liquidating trust (the “Trust”) to administer the Uncovered Benefits. The Trust will be governed by a board of Trustees appointed by the Rehabilitator. The Amended Plan also provides for the possibility that another insurer or ANIC will provide Uncovered Benefits Coverage, in which case formation of the Trust may not be necessary.

Each policyholder will only be entitled to receive benefits from one Guaranty

Association, determined by the laws of each state. Generally, if a policyholder is entitled to receive benefits from the Guaranty Association of his or her state of residence no further inquiry is necessary. However, when that is not the case, the Pennsylvania Life and Health Insurance Guaranty Association (PLHIGA) may be required to provide such benefits because the Companies are domiciled in this state. Each Guaranty Association makes its own coverage determinations in accordance with applicable law. Neither the Rehabilitator nor PTNA is responsible for the coverage decisions of the Guaranty Associations. The Guaranty Associations may establish a special insurer (the “GA Captive”) to coordinate the administration and payment of benefits by all the Guaranty Associations.

C. Self-Sustaining Policies The Rehabilitator will determine which LTC policies are Self-Sustaining with the

assistance of PWC and the Companies’ actuaries. A policy will be considered Self-Sustaining if the present value of expected future premiums, plus an allocation of the issuing Company’s assets, equals or exceeds the present value of expected future claims for benefits and an allocated portion of future company expenses. Put another way, the Allocated Assets for the policy must equal or exceed the policy’s Gross Premium Reserve (i.e., the present value of expected future claims and expenses minus the present value of expected future premiums).

Solely for purposes of determining which policies are Self-Sustaining, the Rehabilitator

and the actuaries will allocate each Company’s assets using the Net Accumulated Premium Method (NAPM) described in Exhibit A of this Amended Plan. ANIC assets will be allocated among ANIC policies, and PTNA assets will be allocated among PTNA policies. If a policy’s NAPM allocation equals or exceeds the policy’s GPR, the policy will be identified as Self-Sustaining. NOTE THAT THE NAPM ALLOCATION WILL NOT GIVE A POLICYHOLDER THE RIGHT TO ANY SPECIFIC SHARE OF COMPANY ASSETS. Policyholders will have only the contract rights specified in their policies, the right to make choices permitted by the Amended Plan, and the rights granted by applicable law.


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D. Policyholder Elections A hallmark of the Amended Plan is that every LTC policyholder has the opportunity to

choose whether his or her policy will be placed in ANIC or PTNA. A policyholder who has a Self-Sustaining LTC policy may elect to have his or her policy remain or be placed in either ANIC for rehabilitation or PTNA for liquidation. Likewise, a policyholder who has a Non-Self-Sustaining LTC policy will have the option to have his or her policy placed either in ANIC (subject to voluntary modification) or in PTNA. Due to the very small number of non-LTC policies and the resulting volatility of that business, the non-LTC policyholders will not be offered a choice between ANIC and PTNA. Their policies will be placed in PTNA and receive Guaranty Association benefits.

For Non-Self-Sustaining LTC policyholders, the election to have their policies remain or

be placed in ANIC will require that they voluntarily modify their policies to make them Self-Sustaining. IF A POLICYHOLDER ELECTS VOLUNTARILY TO MODIFY HIS OR HER POLICY, ONCE THE MODIFICATION IS MADE IT WILL BE PERMANENT AND IRREVERSIBLE. In most cases, voluntary policy modifications can take the form of increased premium rates, reduced benefits, or a combination of the two. The maximum allowable voluntary premium rate increase will be 100%. Any additional modification needed to make a policy Self-Sustaining will have to take the form of reduced benefits. (The Amended Plan does not allow policyholders to convert their policies to Reduced Paid Up policies, except as required by policy provisions or by applicable law, e.g., upon the imposition of involuntary rate increases.) It is likely that the Rehabilitator will seek from the Internal Revenue Service of the Department of the Treasury (the “IRS”) a favorable private letter ruling (“PLR”) to the effect that policy modifications under the Amended Plan would not produce taxable deemed exchanges or other adverse tax consequences for policyholders.

For purposes of electing voluntary policy modifications under the Amended Plan,

reducing benefits will take the form of reducing the policy’s Maximum Benefit Amount. For a policy that has a stated maximum benefit period, the policy’s Maximum Benefit Amount is the maximum daily benefit times the number of days in the maximum benefit period. Thus, a policy having a maximum daily benefit of $200 and a maximum benefit period of three years would have a Maximum Benefit Amount of $200 x 3 years x 365 days = $219,000. A policy that has unlimited or lifetime benefits does not have a defined Maximum Benefit Amount. Under the Amended Plan, an unlimited policy’s actuarially calculated GPR will be used as a proxy for a Maximum Benefit Amount.

By way of example, suppose the present value of a policy’s expected future claims and

allocated expenses exceeds the present value of expected future premiums by $100,000 and the NAPM Asset Allocation only reduces the difference to $50,000. To make the policy Self-Sustaining, the policyholder could agree to pay enough extra annual premium to increase by $50,000 the present value of expected future premium payments. Alternatively, the policyholder could agree to reduce the Maximum Benefit Amount just enough to reduce the present value of expected future claims and expenses by $50,000, or the policyholder could agree to combine a premium increase with a reduced Maximum Benefit Amount. In the case of an unlimited policy,


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the policyholder would have to agree to a definite Maximum Benefit Amount, and the policy would cease to be unlimited.

The Companies’ actuaries will calculate the voluntary premium rate increases and the

benefit period reductions for each Non-Self-Sustaining LTC policy to become Self-Sustaining and be placed or remain in ANIC. Each Active Policyholder who has a Non-Self-Sustaining LTC policy will receive a personalized statement showing a range of premium increases and the corresponding Maximum Benefit Amounts that would make his or her policy Self-Sustaining if the premium were increased by 0%, 25%, 50%, 75% and 100%, or if less than 100%, the actual percentage necessary to make the policy Self-Sustaining. Beyond a 100% premium increase, only Maximum Benefit Amount reductions will be shown. The statement will also show the Maximum Benefit Amount, the Uncovered Benefits amount (if any), and the annual premium for the same policy, if placed in PTNA. See Section IV.D for illustrative examples.

In cases where a policy’s current Maximum Benefit Amount (or GPR) is at or below the

applicable Guaranty Association limit, modifying a Non-Self-Sustaining policy to qualify to remain or be placed in ANIC will not result in additional coverage or be necessary to avoid a reduction in coverage. Policyholders should evaluate carefully the desirability of electing modifications under these circumstances.

Non-Self-Sustaining policyholders who are on claim or RPU status at the time of

policyholder elections will not have the option to increase their premiums and will only be able to make their policies Self-Sustaining by reducing their Maximum Benefit Amount. Other policyholders who will not have the option to increase their premiums are the Non-Self-Sustaining policyholders who are not on claim at the time of policyholder elections, but who later go on claim before the Effective Date. Even if they have previously elected a premium increase, they will only be allowed to reduce their Maximum Benefit Amount, or to change their election to have their policies remain or be placed in PTNA. By contrast, Self-Sustaining LTC policyholders will be able to choose between ANIC and PTNA, but will not have the option to modify their policies.

The following flow chart illustrates policyholder elections envisioned by the Amended

Plan and their consequences. For purposes of this chart, the following definitions (also contained in the Glossary) may be helpful:

“Gross Premium Reserve” or “GPR” means the present value as of the valuation date of expected benefits unpaid, expected expenses unpaid, and unearned or expected premiums, adjusted for future premium increases reasonably expected to be put into effect and including provision for moderately adverse developments. GPR is the reserve amount that results from performing a Gross Premium Valuation (GPV). Expected expenses include commissions and premium taxes in the case of ANIC (which will be in rehabilitation), but not in the case of PTNA (which will be in liquidation and unable to pay them).

“Net Accumulated Premium” means the total gross premiums paid under a policy from inception until the valuation date, less the Expected Losses for that policy.


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“Net Accumulated Premium Method” or “NAPM” means allocation of assets in proportion to the Net Accumulated Premium of the relevant policies.

“Non-Self-Sustaining Policy” means a policy the Gross Premium Reserve (GPR) of which exceeds the assets allocated to it using the Net Accumulated Premium Method (NAPM).

“Self-Sustaining Policy” means a policy for which the assets allocated using the Net Accumulated Premium Method (NAPM) equal or exceed its Gross Premium Reserve (GPR).


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The following two charts provide more detail about elections available to policyholders in specific circumstances:


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E. Asset Allocations An important element of the Amended Plan is how the Companies’ assets as of the

Effective Date will be allocated. Provision will first be made for the costs and expenses of administering the rehabilitation proceedings and implementing the Amended Plan, including incurred but unpaid administrative expense claims. The remaining assets will then be allocated


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between ANIC, PTNA, the Guaranty Associations, and the Trust (or the insurer providing Uncovered Benefits Coverage), as described below.

In the first instance, each Company’s assets will be allocated with respect to each

Company’s policies in proportion to each policy’s Net Accumulated Premium. This approach, referred to as the Net Accumulated Premium Method, is intended to comply with the requirement in the Court’s Order of May 3, 2012, that the “plan of rehabilitation must address and eliminate the inadequate and unfairly discriminatory premium rates for the OldCo business.” The Amended Plan seeks to do so by allocating assets in proportion to the total Net Premium actually paid by each policyholder. For purposes of this exercise, the Net Premium is the sum of the premiums a policyholder has paid, multiplied by a percentage equal to 100% minus the loss ratio set when the policy was issued (typically around 60%). Thus, policyholders who paid more premiums or whose policies were better priced will tend to have higher NAPM allocated assets. As a result, their policies will require less modification to become Self-Sustaining, if they are not already Self-Sustaining. The NAPM asset allocation is solely for purposes of determining whether a policy is or is not Self-Sustaining. A technical explanation of the Net Accumulated Premium Method can be found in Exhibit A. The NAPM Asset Allocation will only be performed as of the Determination Date and will not be changed thereafter. NOTE THAT ASSET ALLOCATIONS WITH RESPECT TO INDIVIDUAL POLICIES OR GROUPS OF POLICIES DO NOT ACTUALLY REFLECT OWNERSHIP BY A POLICYHOLDER OF ANY PARTICULAR SUM OR PORTION OF THE COMPANIES’ ASSETS AND ARE SOLELY FOR PURPOSES OF IMPLEMENTING THE AMENDED PLAN.

After all policyholders who choose to do so have made the elections contemplated by the

Amended Plan, the Rehabilitator will determine which policies will be held by ANIC on the Effective Date and which by PTNA. In cases where the policyholders have not made an election, Self-Sustaining policies will be placed or remain in ANIC by default, and those which are not Self-Sustaining will be placed or remain in PTNA by default.

Once the Rehabilitator has identified the policies to be held in ANIC as of the Effective

Date, the Rehabilitator will allocate assets to ANIC as follows. The policies to be held in ANIC will be grouped into 96 Risk Classes according to their risk characteristics. For each Risk Class the Rehabilitator will determine the aggregate Statutory Reserve (the reserve required by Pennsylvania insurance laws) and the aggregate GPR of its component policies. ANIC will then retain or receive assets equal to the higher of the aggregate Statutory Reserve or aggregate GPR in each Risk Class (the ANIC Assets). Although this amount is in many cases less than the aggregate NAPM assets for the same Risk Class, the Rehabilitator believes the capitalization of ANIC as of the Effective Date will be reasonably adequate for ANIC to pay claims and expenses as they come due over the life of the policies, because:

1. ANIC’s projected liabilities (aggregate GPR) as of the Effective Date will be

based on conservative actuarial projections that assume moderately worse experience in the future than the actuaries believe is likely to occur.

2. As a result, the aggregate GPR or liability for a Risk Class will in many cases be greater than the aggregate Statutory Reserve for the same Risk Class based on assumptions set at the time of issue or updated under the Amended Plan.


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3. Matching assets to a conservative estimate of liabilities means that ANIC’s assets will effectively contain a cushion in case ANIC’s experience deviates adversely from the actuarial projections.

ANIC will retain or receive the sum of all ANIC Assets as of the Effective Date. All remaining assets will be transferred to or retained by PTNA.

The assets retained or received by PTNA will be further allocated between the Guaranty

Associations and the Trust (or the insurer providing Uncovered Benefits Coverage), as follows. The policies in PTNA will be treated as having claims equal to their actuarially determined GPR. For each policy in PTNA as of the Effective Date, the Rehabilitator will determine whether the GPR is fully covered by the available Guaranty Association coverage (i.e., whether the existing GPR is less than or equal to the GPR taking into account the applicable statutory coverage limit as determined by the relevant Guaranty Association in accordance with applicable law). If a policy’s GPR exceeds the GPR determined when taking into account the statutory coverage limit, the claim will be divided into a covered portion (the policy’s Covered Benefits) and an uncovered portion (the policy’s Uncovered Benefits). The Rehabilitator will determine the total of the Covered Benefits and the Uncovered Benefits for all the PTNA policies and will use the ratio of each to the aggregate amount of Covered and Uncovered Benefits to allocate the PTNA assets proportionately between Uncovered Benefits and Covered Benefits.

The Covered Benefits Assets will be turned over to the Guaranty Associations (or to the GA Captive on their behalf) to pay part of the cost of Guaranty Association coverage for the PTNA policies, and will be allocated among the Guaranty Associations using a method developed by the Guaranty Associations called the Re-Priced Premium Method. The allocation of assets among Guaranty Associations has no effect on the Guaranty Associations’ statutory obligations to PTNA policyholders. Moreover, the Covered Benefits Assets are far less than the amount of those obligations. For these reasons, the allocation of the Covered Benefits Assets among Guaranty Associations has no practical effect on policyholders or other creditors of PTNA. Nevertheless, a technical description of the Re-Priced Premium Method is attached for information purposes as Exhibit A.

The benefits provided to PTNA policyholders by the Guaranty Associations will exceed

the benefits that can be funded by the assets transferred to the Guaranty Associations for that purpose. To that extent, the additional benefits provided by the Guaranty Associations over what can be funded by the assets transferred to the Guaranty Associations constitute enhancements of the PTNA policies under the Amended Plan.

The Uncovered Benefits Assets will be turned over to the Trust for the funding of

Uncovered Benefits Coverage in accordance with the Amended Plan. See Subsection IV.M, below. The Uncovered Benefits Assets will be used to procure coverage actuarially determined to maximize the funding of Uncovered Benefits for each policyholder (the Uncovered Benefits Coverage). It is possible that no such coverage may be available in the market. In that case, or if it proves more advantageous, such coverage may be provided by ANIC. If that does not prove feasible, the Trust will simply fund benefits to the extent of available assets. TO PRESERVE FAIRNESS AND EQUITY, A POLICYHOLDER’S UNCOVERED BENEFITS WILL BE


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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 UNCOVERED BENEFITS FUND. The Uncovered Benefits Coverage for any policyholder will not be guaranteed and may be recalculated periodically after the Effective Date in light of emerging experience, such as lapses and variations in asset values, and fluctuations in loss experience, claims costs, and expenses.

F. Continuation of Premium Payments Except as provided by their policies, policyholders in ANIC and PTNA must continue

paying premiums to avoid cancellation of their policies. From the Effective Date forward, policyholders in ANIC who modified their premium rates will be required to continue paying premiums at the modified rate they selected. For policies in PTNA, the premiums will be collected by the Guaranty Associations. Once the Guaranty Association benefits are exhausted as to a policyholder, that policyholder’s obligation to continue paying premiums on that policy will cease. The only benefits that the policyholder may receive thereafter are the Uncovered Benefits provided by the Amended Plan.

G. TPACO If the Plan is approved, the Rehabilitator intends to form a third party administration

company as a subsidiary of PTNA (TPACO) and transfer to it all of the infrastructure and resources necessary to administer LTC and other insurance for the Companies, including staff, information management hardware and software, service and support contracts, leases, real estate, and other facilities and equipment. TPACO will contract with the Trust, ANIC, and PTNA to administer their respective blocks of the Companies’ insurance business (including the Uncovered Benefits) and the wind-down of PTNA’s affairs at cost, from and after the Effective Date. It is expected that TPACO will also contract with the GA Captive to provide insurance administration services at cost, but it is possible that the Guaranty Associations may select a different third party administrator.

H. Other Amended Plan Matters If conditions are favorable, the Rehabilitator may solicit offers to purchase ANIC or

ANIC’s block of business. While the Rehabilitator is hopeful that ANIC will exit rehabilitation successfully, if it becomes incapable of fulfilling its contractual obligations to policyholders and is placed into liquidation, its policies will also have Guaranty Association protection. Thus, the Amended Plan does not require a policyholder to give up the Guaranty Association safety net when electing to have his or her policy placed in ANIC. However, voluntary policy modifications made as part of that election will binding and will carry over for purposes of Guaranty Association coverage in the event that ANIC is ever declared insolvent and liquidated.

Both ANIC and PTNA have certain licensing issues that need to be addressed for the

Amended Plan to work. ANIC’s license has been suspended in twenty-two states. In the absence of special agreements or dispensation, the restoration of ANIC’s suspended licenses will require remediation of the deficits that resulted in the suspension, including restoration of capital and surplus levels to the statutory minimum required in the particular state. ANIC’s license has


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expired or been revoked in another seven states. If there are no special agreements, ANIC must submit applications for new licenses in those states in which its license has expired or been revoked.

ANIC has been licensed in five states in which PTNA has not been licensed: Kansas,

Maine, Massachusetts, New Jersey and West Virginia. Non-Self-Sustaining policies held by residents of these five states will be placed in PTNA for liquidation. The Amended Plan contemplates that the Guaranty Associations of Kansas, Maine, Massachusetts, New Jersey and West Virginia will provide Covered Benefits to the policyholders with Non-Self-Sustaining policies (issued originally by ANIC but transferred to PTNA under the Amended Plan) who reside in these five states, even though PTNA has not been licensed and has not been a Guaranty Association member in those states. It will be necessary for the state insurance regulators and Guaranty Associations in these five states to determine that PTNA can be treated as a member insurer or otherwise determine that Guaranty Association coverage can be provided to residents of those states.

PTNA has been licensed in four states in which ANIC has not been licensed: Alaska,

Iowa, Michigan, and Wisconsin. Self-Sustaining policies held by residents of those four states would be transferred to ANIC unless the policyholders elect otherwise. Furthermore, Non-Self-Sustaining policyholders in those four states may elect to modify their policies so as to make them Self-Sustaining and have them placed in ANIC. It will be necessary for insurance officials in Alaska, Iowa, Michigan, and Wisconsin to authorize ANIC to assume policies from PTNA that are held by residents of those four states. That authorization could come in the form of admitting and licensing ANIC to do the relevant line of insurance business in those states or in the form of a more limited authorization. To the extent that ANIC will later seek to sell new business in those states a broader license will be preferable.

The Companies have accrued debts to various creditors, including commissioned agents, Guaranty Associations, and taxing authorities. Those debts fall into two categories, those that were incurred before the inception of rehabilitation proceedings on January 6, 2009, (“Pre-Rehabilitation Debts”), and those that have been incurred since as part of the rehabilitation (“Rehabilitation Debts”). Because the Companies have been found to be insolvent, were they to be liquidated their assets would have to be distributed in accordance with the provisions of 40 P.S. § 221.44. The Pre-Rehabilitation Debts and debts inferior in statutory priority to those owed to policyholders could not be paid until all policyholder liabilities were paid in full. However, as a result of the Companies’ insolvency, policyholders could not be paid in full in liquidation and no payments could therefore be made on the Pre-Rehabilitation Debts and those of priority lower than policyholder liabilities. Under the Amended Plan, all of ANIC’s Pre-Rehabilitation Debts and debt inferior to policyholder claims incurred before the Effective Date will be transferred to PTNA and managed in the course of PTNA’s liquidation unless the Rehabilitator determines that such transfer is not necessary for the success of the Amended Plan. In the absence of unexpected and material improvement in the financial condition of PTNA, it is unlikely that any payment could be made on these debts. The Rehabilitation Debts of both Companies are costs and expenses of administration within the purview of 40 P.S. § 221.44 and will continue to be paid currently. In addition, ANIC will pay agents’ commissions arising from premium it collects after the Effective Date. PTNA will not do so.


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The implementation of the Amended Plan comprises four phases. The first was the Plan

Design phase, during which the structure of the plan was devised and the views of the “MPRG Parties” were sought and incorporated as the Rehabilitator deemed appropriate. The second phase is the Plan Presentation phase, during which the Amended Plan is filed with the Commonwealth Court, after which the Rehabilitator will solicit formal comments and objections, and in due course a hearing will be held as to whether the Amended Plan should be approved, modified or rejected. Assuming that the Court approves the Amended Plan (with or without modifications), the third phase will be the Plan Preparation Period, during which all the steps necessary to carry out the Amended Plan will be taken, to the extent that they have not already been accomplished. This phase should last no more than six months, but may be extended by the Court. The last phase will be the Plan Implementation phase, during which all the steps necessary to make the Amended Plan operational as approved will be taken.

The Amended Plan has many other important elements and conditions. The foregoing is

only a brief summary of certain key elements of the Amended Plan, and the more complete description that follows in Part IV must be read in its entirety to more fully understand the proposed business division and the conditions and limitations of the Amended Plan. The Amended Plan should also be read in the context of the information provided in Parts V through VIII below, and the Exhibits.

II. GLOSSARY

For purposes of the Amended Plan Documents, and unless otherwise specifically provided or the context otherwise requires, the terms set forth below shall have the following meanings:

“Active Block” means the LTC insurance policies issued by the Companies that remain in force and are not on Claim.

“Active Life Reserve” or “Statutory Active Life Reserve” means the excess of the present value of future benefits over the present value of future Net Premiums. Net Premiums do not include provisions for any expenses and are typically set at policy issue. The assumptions used in statutory active life reserve calculations are locked-in and several of the assumptions are prescribed by law.

“Active Policies” or “Active Policyholders” have the same meaning as Policies Not on Claim and Policyholders Not on Claim, respectively.

“ADL” means Activities of Daily Living such as eating, bathing, dressing, ambulating, transferring, toileting and continence.

“Agent” means any insurance agent, broker or producer that solicited, sold or placed insurance business issued or assumed by the Companies or any of their predecessors. “Agent Group” means the group of the Companies’ agents who have appeared in this proceeding and includes: 5 Star Companies, LLC, A Best Brokerage Service, Inc., Acsia


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Long Term Care, Inc., American Enterprises Marketing Corporation, American Independent Marketing, American Insurance Planners, Leonard Anderson, Association Member Benefits Advisors, Richard D. Baskerville, James P. Bosley, Richard L. Brown, Louis Brownstone, California Long Term Care Insurance Services, Inc., Linda S. Capierseho, Michael M. Capierseho, Capstone LTC Advisors, Century Senior Services, Cher-Britt Service Company, Cornerstone Senior Services, Mark David Cohn, Dean L. Wilde Agency, Inc., Ken Dehn, William Ebert, Phyllis Ellis, Sheila English, Lorifjelstad, J. Peter Freed, Stephen D. Forman, G.A. Legg & Assoc., Linda A. Gardner, Gardner Group, Michael M. Gerulis, Jr., Global Commission Funding LLC, GoldenCare USA, Inc., Danny Gordon, James W. Grigg, Imh Electronics, Inc., James Grigg Consortium, Paul Hamilton, Paul Hauser, Greg Hickman, Barbara Quaife Hopkins, Carl Hoskins, Irv Levit Insurance Management Corp., Robert Isenhower, Jim Sines Insurance Agency, Michael J. Kahn, David Kitaen, William Laufbahn, Geoffrey A. Legg, Lehmann Wood Johnson, Inc., Judy Levit, Long Term Care Assoc., Inc., LS Associates, LTC Advisors, LTC Financial Partners, LLC, LTC Global Group, Long Term Care, LLC, Norman E. Lyon, Randall A. Hargett, Barbara Haselden, Stacy Macdonald, Macdonald Insurance, Medical Insurers Assoc. of Va, Inc., Michael M. Gerulis, Jr. Insurance Agency, M.J. Kahn & Associates, Inc., David D. Morgan, Jerry W. Morgan, Steven Moskowitz, National Coverage Agency Financial Services, National Coverage Agency, Inc., Larry Novick, Larry Obermoller, Lawrence J. Ochs, Tim O'Loughlin, One Way Financial & Estate Solutions, Inc., John B. Owen, Personal Health Services, Inc., Mario G. Posteraro, Premier Senior Marketing, LLC, Public Employees Insurance Company Agency, Inc., Elizabeth W.Raring, Robert Raring, Marion J. Reitmeyer, Robert Riendl, Richard Rosen Insurance, Mel D. Rose, Richard E. Rosen, Linda L. Sandvall, Sarasota Health & Financial Services, Inc., Thomas A. Schueth, Senior Care Consultants, Jim Sines, Craig Smith, Maurice Solie, Specialty Planners, Inc., Ken Story, Matthew R. Sussman, Barbara Taube, The Gjurasic/Story Group, LLC, Ron Triebwasser, United Insurance Group Agency, Inc., Larry Van Boening, Vavak-Reitmeyer & Assoc. Insurance, John W. Wane, Western Asset Protection, Inc., William E. Laufbaum Agency, William L. McAree Insurance Agency, Inc., William Terry Wood, and John Yesbeck. “A&H Policies” means the non-LTC insurance policies issued by the Companies that remain in force on the Effective Date and are more fully described as “Other Products” in Section I.C.2 of Exhibit B.

“AINIC” means American Independent Network Insurance Company of New York, a wholly-owned subsidiary of ANIC that is licensed only in the state of New York.

“Allocable Assets” means the total value of both of the Companies’ liquid invested assets combined, after making provision for costs and expenses of administration and accrued but unpaid claim payments.

“Allocated Assets” means, for each Company LTC policy or group of policies, the portion of the Allocable Assets nominally allocated to that policy or group of policies in accordance with the terms of, and solely for the purposes described in, the Amended Plan. For purposes of determining Self-Sustaining Policies, the allocation will be made


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using the Net Accumulated Premium Method described in Subsection IV.G of the Amended Plan. All asset allocations are nominal and do not give any policyholder a right to any Allocated Assets or any particular sum of money.

“Amended Plan” means this Amended Plan of Rehabilitation and Disclosure Statement for ANIC and PTNA.

“Amended Plan Documents” means this Amended Plan of Rehabilitation and Disclosure Statement together with the Schedules, Exhibits and Tables appended to it.

“ANIC” means American Network Insurance Company, a wholly owned subsidiary of PTNA which is referred to herein as the Company or one of the Companies.

“ANIC A&H Allocable Assets” means, as of a given date, the portion of ANIC Allocable Assets that are allocated to ANIC on account of its A&H Policies, determined in proportion to the share of total Statutory Reserves for ANIC that consists of Statutory Reserves for the A&H Policies. “ANIC Allocable Assets” means, as of a given date, the portion of Allocable Assets that are allocated to ANIC under the provisions of the Amended Plan.

“ANIC Assets” means the value of assets that ANIC must hold as of the Effective Date on account of the policies to be placed or retained in ANIC under the Amended Plan. For each Risk Class of policies, ANIC Assets will be equal in aggregate value to the greater of the aggregate Statutory Reserve and aggregate Gross Premium Reserve (GPR) for the policies in the Risk Class. “ANIC LTC Allocable Assets” means, as of a given date, the portion of ANIC Allocable Assets that are allocated to ANIC on account of its LTC policies, determined by subtracting the ANIC A&H Allocable Assets from the ANIC Allocable Assets.

“Annex Property” means the property at 2010 Bevin Drive, Allentown, PA, a 18,552 square foot facility formerly owned by PTNA and sold in March of 2013.

“Approval Order” means an Order from the Commonwealth Court approving the Amended Plan.

“Article V” means Article V of the Pennsylvania Insurance Department Act of 1921, May 17, P.L. 780, as amended, 40 P.S. § 221.1, et. seq.

“Bar Date” means a date to be set by the Court by which all claims against PTNA (including those arising from liabilities of ANIC that are transferred to PTNA pursuant to the Amended Plan) must have been filed with the Liquidator, together with the proof required by 40 P.S. § 221.38, in order to be entitled to payment to the extent of available assets and subject to the order of distribution promulgated in 40 P.S. § 221.44.


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“Broadbill” means Broadbill Partners, LP, its affiliates, predecessors and successors as stockholders of PTAC.

“Brookfield” means Brookfield Investment Management, Inc., the firm retained by the Companies from 2005 to 2014 to manage their investment assets in accordance with guidelines established by the Companies.

“Business Division” means the collection of all the Companies’ Self-Sustaining LTC policies in ANIC, and the collection of all the Companies Non-Self-Sustaining LTC policies and non-LTC policies in PTNA, subject to LTC policyholder elections to be placed in ANIC or PTNA, and the transfer of assets from PTNA to ANIC as may be required to establish the ANIC Assets.

“CAP” means a Corrective Action Plan.

“Claim Reserve” means the Disabled Life Reserve plus the reserve for pending and incurred but not reported claim payments as further defined herein.

“Company” or “Companies” means PTNA and/or ANIC as the context indicates.

“Conning” means Conning, Inc., the firm retained by the Companies in 2009 to provide them with investment advisory services.

“Cost of Insurance” means the amount of premium expected to fund future policyholder benefits. It does not include amounts for future operating expenses and profits.

“Court” means the Commonwealth Court of Pennsylvania.

“Covered Benefits” means the amount of policy benefits provided by the Companies’ insurance policies that are within the limits, conditions and scope of coverage of the responsible Guaranty Association taking into account the residence and other attributes of the policyholders as determined by the responsible Guaranty Association in accordance with applicable law.

“Covered Benefits Assets” means the portion of PTNA assets, as of the Effective Date, allocated to the discharge of Covered Benefits, which will be distributed to the responsible Guaranty Associations.

“Covered Benefits Reserve” means, for policies placed or retained in PTNA under the Amended Plan, the gross premium reserve (GPR) determined as of the Effective Date as if the benefits are limited to the amount covered by the responsible Guaranty Association.

“Determination Date” means a date before the Effective Date to be selected by the Rehabilitator pursuant to this Amended Plan as of which it will be determined by the Rehabilitator through actuarial evaluation which of the Companies’ LTC policies are Self-Sustaining.


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“Disabled Life” means a policyholder on Claim.

“Disabled Life Reserve” or “DLR” means the present value of expected future benefits calculated for each policyholder listed in the Companies’ records as a policyholder on Claim.

“Effective Date” means the date as of which the Business Division of the Companies (including all policyholder elections, the transfer of assets from PTNA to ANIC, and the other steps described in Section IV.U.4) will become effective following the approval of the Amended Plan.

“Elimination Period” means the time period during which a policyholder’s circumstances qualify for long term care insurance benefits but for which no such benefits are yet payable by the Companies. The Elimination Period is similar to a deductible period. The length of the elimination period varies by policy. The majority of the Companies’ policies include elimination periods of zero-days, 30-days, 60-days, 90-days, and 120-days, although the Companies have some polices with elimination periods up to 365 days.

“ERA 1” refers to OldCo policies issued prior to 2002.

“ERA 2” refers to NewCo policies issued after 2001.

“Expected Losses” means the average future benefit payments and increases in reserves calculated for a given policy using original issue assumptions, including its demographic characteristics, policy characteristics, assumed claim incidence rates, assumed claim termination rates, and assumed claim intensity.

“FBR” means Friedman, Billings, Ramsey & Co., Inc., which was retained by PTAC in December 2007 to assist its Board of Directors in the review of strategic alternatives to enhance shareholder value.

“Final Approval Date” means the date upon which the Approval Order becomes final and non-appealable or upon which an appellate Order affirming the Approval Order has itself become final and no longer appealable.

“Funding Gap” means the gap between: (1) the sum of (a) the amount of the Companies’ assets, (b) projected future premiums, and (c) projected earnings in investments and (2) the amount of the Companies’ future policy benefit payment obligations and other expenses, determined collectively or individually for ANIC and PTNA.

“GA Captive” means a captive insurer formed or to be formed and administered by the Guaranty Associations collectively to assist them in providing Covered Benefits efficiently.


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“Gross Premium” means the periodic payments that are required to keep the policy in force. The rates used to establish the Gross Premium are typically filed with, and subject to approval of, insurance regulators. In contrast to Net Premium, Gross Premium includes provisions for expenses and profit margins.

“Gross Premium Reserve” or “GPR” means the present value as of the valuation date of expected benefits unpaid, expected expenses unpaid, and unearned or expected premiums, adjusted for future premium increases reasonably expected to be put into effect and including provision for moderately adverse developments. GPR is the reserve amount that results from performing a GPV. Expected expenses include commissions and premium taxes in the case of ANIC (which will be in rehabilitation), but not in the case of PTNA (which will be in liquidation and unable to pay them).

“Gross Premium Valuation” or “GPV” is the determination of the present value of expected future benefits and related expenses less the present value of expected future premiums at current rates where “expected” consists of best estimate assumptions including a provision for moderately adverse deviation. The gross premium valuation process is used in determining the GPR.

“Guaranty Association” means the Life and Health Insurance Guaranty Association or equivalent organization established pursuant to the laws of each state for the protection of policyholders of impaired and insolvent life and health insurance companies. The table in Exhibit D identifies the specific laws and contact information for each state’s Guaranty Association.

“Guaranty Association Benefits” under the Amended Plan means the benefits which a policyholder who is in PTNA as of the Effective Date is entitled to receive from the state Guaranty Association that is responsible for that policyholder following the placement of PTNA into liquidation as provided in this Amended Plan. The table in Exhibit D specifies the statutory limits applicable to such LTC benefits under the laws of each state.

“Health Insurers” means the following insurers who are participating in the legal proceedings for the rehabilitation of PTNA and ANIC: Aetna Life Insurance Company, Cigna Corporation, UnitedHealthcare Insurance Company, and WellPoint, Inc.

“HIPAA” means the Health Insurance Portability and Accountability Act of 1996.

“IFRPV (Covered Amount)” means the IFRPV amount equal to the policy’s Covered Benefits Assets allocated to that policy as of the Effective Date.

“IFRPV (Uncovered Amount)” means the IFRPV amount equal to the policy’s Uncovered Benefits Assets allocated to that policy as of the Effective Date.

“Imagine International” means Imagine International Reinsurance Limited, an off-shore Non-admitted insurance company that previously provided reinsurance to the Companies.


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“Inflation Protection” means riders purchased by policyholders that provide for defined increases in benefits at regular intervals in order to protect against the effects of inflation on the cost of care.

“Initial Funded Restructured Policy Value” or “IFRPV” means a policy value equal to the portion of the liabilities arising under the policy that the Company responsible for the policy can reasonably be expected to meet based on future premiums and allocated assets. For a Self-Sustaining Policy, the IFRPV will be equal to the full amount of those liabilities.

“Instrumental Activities of Daily Living” or “IADL” means such activities as meal preparation, shopping and travel, light housekeeping, laundry, telephoning, money handling, taking medications, and bill paying.

“Insurance Regulatory Authority” means with respect to any state or the District of Columbia, the jurisdiction’s applicable insurance department or equivalent regulatory agency or authority.

“Intervenors” means PTAC and Eugene J. Woznicki.

“January 6th Order” means the January, 2009, Order of the Commonwealth Court placing the Companies in rehabilitation.

“Limited Benefit Period” means any Maximum Benefit Period that is subject to a stated limit by the terms of the policy. It refers to a policy that is not a lifetime or unlimited benefit policy.

“Liquidation Benefits” means the benefits a policyholder would reasonably be expected to receive if the issuing Company were liquidated under the provisions of Article V, taking into account the Companies’ history, the orders of the Court, the risks and uncertainties of the liquidation process, and the effect of Guaranty Association coverage.

“Liquidation Petitions” means the Petitions for Liquidation of PTNA and ANIC, as amended, filed by the Rehabilitator with the Court in October 2009.

“LTC” means long term care.

“Maximum Benefit Amount” means the dollar maximum in benefits available under a LTC policy.

“Maximum Benefit Period” means the maximum time (typically stated as number of days, either lapsed time or days of service provided) during which benefits will be available under a LTC policy. Benefits are usually defined in the contract to be a maximum amount payable per day or per month, for a maximum number of years. However, in some policies if the claimant uses less than the maximum amount permissible in a given period, the unused excess typically serves to lengthen the maximum number of years under what is known as the ‘pool of money’ clause. Benefits


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commence after satisfaction of an elimination period and continue until the recovery or death of the claimant or until the ‘pool of money’ has been exhausted. In these cases the Maximum Benefit Period is expressed as a dollar amount. Under other policies (sometimes called “days of care” policies) reducing the daily benefit amount utilized does not extend the benefit period. For these policies the Maximum Benefit Period is expressed as number of days. In either case, voluntary modifications by the policyholder in order to make Non-Self-Sustaining Policies Self-Sustaining under the Amended Plan may have the effect of reducing the Maximum Benefit Period.

“Maximum Daily Benefit” means a maximum daily dollar amount available on a covered day of care as specified in the policy.

“May 3rd Order” means the Opinion and Order issued by the Court on May 3, 2012, as amended, which denied the Rehabilitator’s Liquidation Petitions and directed the Rehabilitator to file a plan of rehabilitation.

“Milliman” means Milliman, Inc., the actuarial firm previously retained by the Companies and the Rehabilitator.

“MPRG” means the Multi Party Rehabilitation Group constituted by the Rehabilitator for the resolution of issues arising under the 2013 Plans or development of alternative rehabilitation plans. It consists of the SDR and his legal counsel and advisors; the Policyholders Committee through its legal counsel, Messrs. Thomas Leonard and Richard Limburg, of Obermayer, Rebmann, Maxwell & Hippel, LLP, and the Committee’s consulting actuary, the Intervenors and their legal counsel and advisors, NOLHGA and its legal counsel and advisors, the Health Insurers and their legal counsel and advisors, the Agents Group and its legal counsel, and Broadbill and its legal counsel and advisors. Together these are the “MPRG Parties.”

“NAIC” means the National Association of Insurance Commissioners.

“Net Accumulated Premium” means the total gross premiums paid under a policy from inception until the valuation date, less the Expected Losses for that policy.

“Net Accumulated Premium Method” or “NAPM” means allocation of assets in proportion to the Net Accumulated Premium of the relevant policies as is more fully explained in Exhibit A.

“Net Premium” means the part of the Gross Premium that is intended to cover the cost of future claims, as opposed to future operating expenses and profit margin. The Net Premium is typically set at issue.

“NewCo Policies” means LTC policies sold by the Companies in 2002 and later years and are also referred to in the Amended Plan as ERA 2 policies.

“NISHD” means Network Insurance Senior Health Division, Inc., a direct wholly owned subsidiary of PTNA.


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“NOLHGA” means the National Organization of Life and Health Insurance Guaranty Associations, a voluntary association of the life and health insurance Guaranty Associations of all 50 states and the District of Columbia.

“Non-Forfeiture Option” or “NFO” means an option to exchange an existing LTC policy for a reduced paid up contract on which no future premiums need be paid by the policyholder but under which benefits are limited to premiums previously paid less benefits previously received.

“Non-Self-Sustaining Policy” means a LTC policy the Gross Premium Reserve (GPR) of which exceeds the assets allocated to it using the Net Accumulated Premium Method (NAPM). It is a policy for which current premium rates are inadequate given assets available to be allocated to it and its projected liability for benefits and expenses.

“Non-Tax-Qualified” or “NTQ” is a type of LTC policy that does not conform to the legal standards for Tax Qualified policies and was formerly called “traditional” long term care insurance. It often includes a benefit “trigger” called a “medical necessity” trigger under which the insurer is obligated to pay if the policyholder’s own doctor, or that doctor in conjunction with someone from the insurance company, determines that the policyholder needs covered care for any medical reason. The United States Department of the Treasury has not fully clarified the tax status of premiums paid for and benefits received under a NTQ long-term care insurance policy as precisely as the status of benefits received under a tax qualified policy. Therefore, the federal taxation of benefits under a NTQ policy is not certain.

“OldCo Policies” means LTC policies sold by the Companies prior to 2002 and are also referred to in the Amended Plan as ERA 1 policies.

“On Claim” refers to a policyholder who is receiving policy benefits or a policy under which benefits are being provided by the Companies.

“Paid-Up Policy” means an in force policy that is paid in full and no longer requires premium payments under its terms.

“Penn Treaty Liquidating Trust” or the “Trust” means the liquidating trust to be formed to administer Uncovered Benefits.

“PID” means the Pennsylvania Insurance Department.

“PIMCO” means Pacific Investment Management Company, LLC, the firm retained by the Companies beginning in 2014 to manage their investment assets in accordance with guidelines established by the Companies.

“Plan Preparation Period” means the time between the Final Approval Date and the Effective Date of the Amended Plan, during which preparatory steps necessary to implement the Amended Plan will be completed. It includes the period during which policyholders will make elections under the Amended Plan.


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“Policyholder Election Date” means the date by which the Rehabilitator must receive properly completed Policyholder Election Forms in order to give them effect.

“Policyholder Election Form” means the form on which policyholders (1) select in which Company they want their policies retained or held, and (2) select the modifications necessary in those cases in which Non-Self-Sustaining Policies must be modified to be made Self-Sustaining so that they will be placed or retained in ANIC. See Subsection IV.E of the Amended Plan.

“Policyholder Election Package” means the materials, including the Policyholder Election Form, to be sent to policyholders by the Rehabilitator so that they may make the elections available under the Amended Plan.

“Policyholders” means holders of insurance policies and certificate holders under group insurance policies.

“Policyholders Committee” means the committee of policyholders appointed by the Court during the September 24, 2013, Hearing to represent the interests of PTNA and ANIC policyholders in the development of rehabilitation plans.

“Policies Not on Claim” or “Policyholders Not on Claim” means policies or policyholders that have not been terminated due to Non-payment of premiums, cancellation or exhaustion of benefits and also are not listed in the Companies’ records as having been approved for benefit payments or in the process of being approved for benefit payments as of the Determination Date.

“Policies on Claim” or “Policyholders on Claim” means policies or policyholders listed on the Companies’ records as having been approved for benefit payments or in the process of being approved for benefit payments as of the Determination Date.

“Policy Value” means a policy’s GPR.

“Preliminary Plan” means the Preliminary Report and Plan of Rehabilitation for the Companies filed by the Rehabilitator with the Court on April 6, 2009.

“Premium Waiver” means a policy provision that allows a policyholder to stop paying premiums during a period of covered care and maintain the policy in force.

“Private Letter Ruling” or “PLR” means an interpretation of statutes or administrative rules sought or obtained from the IRS as to their application to a specific element or potential consequence of the Amended Plan.

“PTAC” means Penn Treaty American Corporation.

“PTLIC” means Penn Treaty Life Insurance Company.


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“PTNA” means Penn Treaty Network America Insurance Company, a Pennsylvania domiciled stock insurance Company licensed to issue annuities and life, accident and health insurance policies, and also is referred to herein as the Company or one of the Companies.

“PTNA A&H Allocable Assets” means, as of a given date, the portion of PTNA Allocable Assets that are allocated to PTNA on account of its A&H Policies, determined in proportion to the share of total Statutory Reserves for PTNA that consists of Statutory Reserves for the A&H Policies.

“PTNA Allocable Assets” means, as of a given date, the portion of Allocable Assets that are allocated to PTNA under the provisions of the Amended Plan.

“PTNA Assets” means the value of assets that PTNA will hold as of the Effective Date on account of the policies to be placed or retained in PTNA under the Amended Plan and will consist of the balance of the Allocable Assets after subtracting the ANIC Allocable Assets.

“PTNA LTC Allocable Assets” means, as of a given date, the portion of PTNA Allocable Assets that are allocated to PTNA on account of its LTC policies, determined by subtracting the PTNA A&H Allocable Assets from the total PTNA Allocable Assets.

“PWC” means PricewaterhouseCoopers LLP, the consulting firm whose actuaries were retained by the Rehabilitator in 2012 in connection with the 2013 Plans and which continues to serve as the Rehabilitator’s actuarial consultant.

“Rehabilitator” means Michael F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania, and his successors in office, in the capacity of Statutory Rehabilitator of the Companies. Pursuant to his statutory authority to do so, the Rehabilitator has delegated broad responsibility to the Special Deputy Rehabilitator and in the Amended Plan Documents references to either should be interpreted as including both unless specified otherwise.

“Re-priced Premium” means for a particular policy the premium amount, at the level that would have been adequate if charged and collected from inception so that no premium increases would have been projected to be necessary, as actuarially determined using current assumptions for interest, mortality, lapses, morbidity, administrative expenses, and other actuarial assumptions.

“RPU” means a reduced (benefits) paid-up policy on which no future premium is due and which provides reduced paid up benefits.

“Restoration of Benefits” means a LTC insurance policy feature under which the Maximum Benefit Period for a policyholder who has received benefits will be restored to the original Maximum Benefit Period after receiving some or all claim benefits if the policyholder does not need or receive care during a specified period of time (such as 180 days).