IN THIS EDITION:

• Introduction
• NOLHGA Meetings
• Constituency Relationships
• Financial Activity
• MPC Activity
• NOLHGA Committee Activity
• Communications
• Legal Activity
• Systems/Technology/Web Site/Other
• Professional Development

Introduction

In August 2013, the NOLHGA Board of Directors held its most recent quarterly meeting. Relevant portions of the management report provided to the Board are included in this issue of GA Update Online.

Since the May Board meeting in Chicago, staff has focused primarily on the following matters: (i) coordination and support for insolvency task force activity; (ii) coordination of and support for the July MPC meeting and Legal Seminar; (iii) strengthening relationships with regulators, industry, and key trade associations; (iv) continued work on the Model Act and Coverage/Claims Committee initiatives; (v) work related to financial services modernization; and (vi) support for other Board and MPC committees and subgroups.

Insolvency activity continues to be focused primarily on Executive Life of New York, Penn Treaty Insurance Company (Pennsylvania), and Lincoln Memorial (Texas).

Rich Swanson (R.N. Swanson & Associates), one of NOLHGA’s long-time third party administrators, is retiring at year-end. This firm has been administering LTC claims and other medical claims for our member associations for a very long time. NOLHGA staff is currently supporting the LHICA Task Force in putting together a RFP to find a replacement TPA; in this particular case, Swanson has been administering claims since the company was ordered into liquidation in 2004. Responses to the RFP were due on August 12.

NOLHGA Meetings

2013 Annual Meeting

A number of meetings were held to plan the speaker program and social events for the 2013 Annual Meeting. We are waiting to hear back from several invited speakers, and a promotional brochure was mailed in August.

2013 Legal Seminar

The 2013 Legal Seminar was held on July 11–12 in Chicago. The program featured segments on Obamacare, Health Insurance, and the Provision of Healthcare Services; Captive Insurers and Solvency Concerns; Developments in Insurance Litigation; Tax Reform Challenges Facing the Insurance Industry; Reflections on What’s Involved in the Resolution of a SIFI; Regulator/Receivership Modernization After Dodd-Frank; New Equity Investors in the Life and Annuity Marketplace; a Report on the Federal Insurance Office; Liquidation/Jurisdictional Issues; and How Watergate Revolutionized Ethics. Speakers included Bryan P. Marsal, co-founder and co-CEO, Alvarez & Marsal; Todd Boehly, President, Guggenheim Partners; and Michael T. McRaith, Director, Federal Insurance Office. The program, which was attended by 186 people (including 153 paying registrants), received favorable reviews from the audience.

Constituency Relationships

On May 6–7, Paul Peterson attended the Northeast Regional GA Meeting in Philadelphia. Discussion topics meeting included a presentation on the guaranty association system provided by Bill Callnan and Paul Peterson to the Vermont Insurance Department, the regulator’s role in the GA, E&O/D&O insurance, independent contractor RFPs, records retention, assessment systems and processes, Class A protests, GA office space/leases, Executive Committees, lines of credit, Class A and B assessment issues, TPA usage, composite account structure and usage, accounting software and IT support, ELNY/ELIC, NOLHGA meetings/educational sessions, task force selection/working groups, business continuity, Coverage/Claims Committee activity, and consumer inquiries on annuity products.

NAIC

The following is a report on relevant NAIC Working Group activities since the last Board meeting.

ERISA Retirement Income Working Group: On June 24, the group distributed a paper prepared by the American Academy of Actuaries entitled “Risky Business: Living Longer Without Income For Life.” The paper is anticipated to be the subject of a presentation and discussion during the NAIC Summer National Meeting in August.

Federal Home Loan Bank Subgroup: During May and June, the FHLB Subgroup conducted several teleconferences for the purpose of discussing the FHLBs’ proposal to amend state receivership law. In particular, the proposal would create exemptions for FHLB secured loans from the automatic stay and voidable preference provisions of state receivership law. During the discussions, certain receivers proposed that the FHLBs provide concessions in consideration for the NAIC’s support of their proposed amendments. These concessions would include the early release of excess collateral to the receiver, the waiver of penalties for early prepayment of a loan during receivership, and the early redemption of FHLB stock held by an insurer in receivership. In response, the FHLBs have stated they are restricted by law from making these kinds of concessions. Notwithstanding the FHLBs’ position, the FHLB Subgroup has prepared a proposed guideline which addresses each of these issues. On its August 16 call, the subgroup was expected to discuss the proposed guideline and to consider whether to release the proposed guideline for a 20-day public comment period in advance of the August NAIC Meeting.

Separate Account Risk Working Group: The group met by teleconference on June 5 to receive comments on its exposure draft entitled “Non-Variable, Insulated Products/Product Characteristics with Proposed Recommendations.” The purpose of the exposure draft is to review and make recommendations on whether certain non-variable products should be issued in connection with insulated separate accounts. Various interested parties (including the ACLI) submitted comments on the exposure draft expressing concerns with the way the products were described as well as with the criteria used to determine whether the products should be eligible for insulation. In particular, several of the interested parties objected to the use of guaranty association coverage and assessments as a factor for evaluating insulation.

SEC Considerations Working Group: This group met by teleconference on June 6 to review an outline prepared by NOLHGA’s outside counsel on the potential federal security law issues arising from the receivership of a company writing variable products. The next steps are for the group to develop positions on the issues and to schedule a meeting with the U.S. Securities and Exchange Commission to discuss the issues.

Financial Activity

The Accounting Department has been involved in the development of the 2014 preliminary operating budget and with preparations for and coordination of materials for the Finance Committee’s August 6 meeting with representatives of major insolvency task forces. In addition to routine accounting-related tasks, staff also calculated and mailed the first quarter 2013 quarterly assessments.

A total of $12.2 million was distributed to affected members (a combination of $9.5 million in early access distributions and $300,000 in premium collection refunds related to Lincoln Memorial; $156,000 due to a quarterly true-up of escrow account activity related to Life & Health Insurance Company of America; and $2.2 million and $51,000 in premium collection refunds related to National States and Universal Life/Booker T. Washington, respectively); $5.6 million was distributed to TPAs and receivers to fund claims and expenses for four active insolvencies, and $15.2 million was distributed to a reinsurer due to an assumption reinsurance agreement related to Lumbermens Mutual.

Assessment Data Survey

The task force reviewed data survey filings for 85 annuity writing companies (the top 75 companies writing annuity business and an additional 10 companies randomly selected from the next 75 writing companies). Of these 85, 54 companies required follow-up. The primary topics of inquiry dealt with changes in premium volume between 2012 and 2011, accounting and reporting of deposit and separate account premiums, and fee income reporting on separate account business.

An additional 29 companies were sent follow-up inquiries for items dealing with separate account fee income reporting and erroneous amounts reported in the unallocated annuity account on the exhibit.

Data requests were also sent to 161 P&C companies, asking them to confirm the health premiums obtained from the P&C annual statement (note that the data survey exhibits are NOT part of the P&C annual statement; data must be compiled by accessing information on the state pages and then requesting the companies to confirm the data), and to 40 Blue Cross/Blue Shield companies (these were companies that failed to file the data survey exhibits, so a manual request has been sent to them; absent a response, Schedule T premium data will be used).

Compilation of Medicare-related premium data was begun to identify which companies have excluded the premium and in what states.

MPC Activity

Insolvency Task Force Checklist Subgroup

This subgroup has been charged to create a supplement to the MPC Insolvency Guidelines for use by new or less-experienced task force members. It will not be an index of tasks, but more of a resource guide detailing the actions and responsibilities of the task force throughout the stages of the liquidation.

The subgroup held a conference call on May 20 to further discuss the intent and the purpose of the supplement. The subgroup also reviewed the Guidelines’ chapter summaries prepared by several of the subgroup members.

The subgroup held an in-person meeting in conjunction with the July MPC in Chicago to discuss the format of the resource guide, the timeline for the project, and next steps. The subgroup plans on submitting a draft to the MPC Executive Committee prior to the January 2014 MPC.

GA Best Practices Committee

This group is in the process of updating previously developed best practices guidelines. The guidelines can be used as a useful self-evaluation tool by administrators (regardless of the differences in size and scope of the individual associations) to evaluate their specific practices. The group expects to have a finished work product by the January 2014 MPC meeting.

D&O Subgroup

Staff has continued work with the MPC’s Directors and Officers Liability Coverage Subgroup to investigate and facilitate access to D&O Coverage for interested guaranty associations. As a next step, the subgroup will be providing the members with an interim report on its work, along with sample policies and application forms, and an overview of the issues addressed to date. In addition, the subgroup will make a presentation to the members in conjunction with the October MPC meeting. The subgroup has selected a lead broker/underwriter team to assist with that presentation, which will include providing information on coverage, exclusions, limits and retentions, as well as the policy form and application process.

NOLHGA Committee Activity

Communications Committee

The committee’s Social Media Subgroup, co-chaired by Bart Boles (Texas) and Jan Funk (Indiana), met by teleconference to review its report to the Communications Committee detailing its findings and recommendations. The report should be submitted to the committee in the third quarter.

The committee’s GA Web Site Redesign Subgroup met by teleconference to review a new design for the template used by the 44 guaranty association Web sites hosted by NOLHGA. The design was approved, and a working model is currently being constructed. The subgroup hopes to have a new template for the sites ready by the end of the third quarter.

Coverage/Claims Committee

The committee met on June 20 in Chicago. In addition, various committee subgroups met by teleconference in furtherance of: (1) updating the committee’s Mission Statement, (2) identifying federal securities law issues that might affect guaranty associations and receivers in the receivership of an insurer writing variable business, and (3) creating a compilation of prior committee work for distribution to guaranty associations and posting to NOLHGA’s Web site.

Legal Committee

The committee’s PPACA Review Drafting Subgroup met by teleconference on June 27 to review a preliminary draft report on the implications of the Patient Protection and Affordable Care Act to guaranty associations. In addition, the committee’s Amicus Subgroup authorized NOLHGA to file (jointly with the NCIGF and PCI) a supplemental amicus brief in the Georgia Insurer’s Insolvency Pool vs. Hulsey case. As previously reported, this case concerns the Georgia Pool’s standing to challenge amendments to its enabling act that retroactively provided coverage for a special class of claimants. The purpose of the supplemental brief was to respond to an amicus brief filed in support of the other side, which argued that the Pool was a governmental entity.

Communications

GA Update

The first 2013 issue of GA Update was mailed to subscribers in May. Work on the second issue began in early August.

Insolvency Support

Work on the design for the Web site for GABC, the company that will fulfill the guaranty associations' obligations to ELNY payees, was completed. The site went live on August 8.

NOLHGA Journal

The June 2013 issue of the NOLHGA Journal included an update on the unclaimed property issue, an article describing NOLHGA’s recent outreach efforts to the Departments of Treasury and Labor, and the President’s column, which highlighted several key facets of the U.S. guaranty system safety net.

Legal Activity

In addition to initiatives and projects mentioned elsewhere in this report, Legal Department staff members have been engaged in the following activities:GA Model Act Initiative: Staff continued work with the ACLI and individual states on updating guaranty association laws across the country. During 2013, 10 states have introduced legislation to update their guaranty association acts, with 8 of those states having enacted legislation.

MPC Security Procedures: The Security Advisory Committee met regularly by teleconference to support implementation/compliance with the MPC Security Procedures. The committee’s efforts included: (1) ongoing work with individual guaranty associations and other system participants regarding compliance issues, (2) distributing an annual compliance questionnaire to guaranty associations, and (3) sponsoring an in-person training session for security officials during the July MPC meeting.

Other Matters: Staff has (1) commenced negotiations with Westlaw and Lexis for a renewal contract for electronic legal research services, (2) worked with NOLHGA’s IT staff to develop a confidentiality agreement for use with outside IT consultants and a mobile device policy for NOLHGA staff, and (3) provided “help desk” support for various member requests, including with respect to the GA Model Act, receivership law, and coverage issues.

Systems/Technology/Web Site/Other

Member Support

The Systems Department provided extensive support to the Security Advisory Committee and individual guaranty associations with respect to compliance with the MPC Security Procedures.

Network Systems Status

Vicor Business Services, a software accounting/consulting firm, assisted the Systems Department in upgrading the SAGE 100 (formally MAS-90) software to the latest version.

Other than addressing minor day-to-day technical issues, we continued to maintain servers, workstations, and laptops with the latest security server updates and service packs.

Technical Assistance for Guaranty Association Administrators

Technical support was provided continually to administrators during the quarter by answering technical support calls, responding to e-mails, and offering IT-related recommendations. In addition, the Systems Department contacted all administrators, introducing them to our member outreach program. Administrators were generally appreciative to learn how NOLHGA is extending technical services to our members and about a few of the department’s new initiatives.

To improve our service to the members, the department developed and distributed a brief technology survey. Forty-four administrators have responded. We will continue to evaluate their responses and improve our efforts to assist our members in moving forward with technology.

In addition, the department is encouraging more administrators to subscribe to a professional email service (which incorporates the name of the organization in the domain). As a service to administrators, the department began offering professional email accounts several years ago, and recently has upgraded to an email-hosting solution through Google that offers additional email storage and features such as over-the-air synchronization of email, calendar, and contacts. The department will be cancelling email-hosting services through Everyone.net by the end of the third quarter, and we are currently working to assist existing subscribers in upgrading to the new email service.

Web Site Updates

The quarterly request to all insolvency task force staff contacts for updates to their insolvency Web pages on the public and password-protected sections of the NOLHGA Web site was sent out. Several updates were made to various Web pages.

Professional Development

During May and June, Joni Forsythe participated in the following webinars: (1) “Mobile Privacy: An Overview of Legal and Legislative Developments,” which covered legal and technical considerations relating to the use of mobile devices for personal and professional purposes; (2) “Data Breach Insurance: Keys to New Liabilities, Policies and Clauses,” which covered developments in cyber security insurance; and (3) “Ethical Tools to Defuse Incivility,” which was sponsored by the American Bar Association.

On June 27, Bill O’Sullivan participated in a webinar sponsored by the American Counsel Corporation entitled “Responding to Data Landmines: How to Manage the Inevitable Data Breach.”

Gus Estrada attended a “Preparing for Leadership” seminar presented by the American Management Association (AMA) in June.