GA Update Online is intended for NOLHGA’s guaranty association members only. The contents are confidential and should not be shared with third parties. NOLHGA reserves all rights with respect to applicable privileges from disclosure.

IN THIS EDITION:

• Introduction
• Overview of NOLHGA Activities
• NOLHGA Committee Activities
• MPC Update
• NAIC Update
• Financial Activity
• Legal Department
• Communications Update
• Systems & Technology
• Constituency Relationships

Introduction

Welcome to the first issue of GA Update Online, an e-mail newsletter for guaranty association professionals that features updates on insolvency-related activity and other matters that affect guaranty associations.

In 2007, the NOLHGA Board asked that relevant sections of the quarterly management report provided to the Board be made available to NOLHGA’s members to better inform them of the various activities of the organization. Quarterly issues of GA Update Online will contain this information, but the newsletter will also be used to inform member guaranty associations of important matters—major insolvency activity, updates on federal legislation, NAIC activity, etc.—in a timely manner.

Overview of NOLHGA Activities

Since the Board and Annual Meetings on Amelia Island in October 2007, staff has focused primarily on the following responsibilities and activities: (i) insolvency management and support of insolvency task force activity; (ii) year-end activities relating to personnel; (iii) planning and preparation for the January MPC meeting and technology workshop; (iv) NAIC activities; (v) providing technical advice to Congress and to the Department of Treasury on pending optional federal charter legislation and related matters; (vi) working with the Executive Committee on finalizing the performance criteria related to the 2008 organizational goals and developing for Board consideration a detailed plan to involve state board members; and (vii) working with representatives of the Finance Committee to finalize a process for greater committee involvement.

Insolvency activity is currently focused primarily on the following cases: Executive Life of New York (New York); Executive Life/Altus (California); London Pacific (North Carolina); Benicorp (Indiana); the Thunor Trust Company cases (Mississippi, Oklahoma, Arkansas, and Tennessee); and Life & Health Insurance Company of America (Pennsylvania).

NOLHGA Committee Activities

Accounting Issues Committee

The Accounting Guidelines Manual was completely reformatted and reorganized in an effort to make it more user-friendly for guaranty associations and to promote consistency among members. Also, sections on Proof of Claims and instructions for completing Form 990 were updated. The manual was produced in both a PDF version (available online at NOLHGA’s Web site) and in hard-copy format.

Administrators Education Steering Committee

Holly Wilding has been working with members of the Administrators Education Steering Committee to coordinate the topics and secure presenters for GA Education Day. GA Education Day will be the first-ever full day of educational opportunities for GA administrators and is scheduled to be held on April 29 in connection with the April 30 MPC Meeting in Raleigh. Topics selected include: long-term-care insurance; new life and annuity products and features; GA subrogation rights (a review of statutory and common law rights and GA subrogation rights against an estate and third parties, using actual case examples); and accounting guidelines for guaranty associations and GA administrative expense allocations.

Assessment Data Survey (ADS)

2006 data survey results were released to guaranty associations and insurance commissioners on September 30, 2007. Of the 85 largest annuity writers, 60 required follow-up. Primary issues dealt with deposit and separate account (SA) reporting. Overall, 110 companies that had SA business required follow-up because fee income had not been included in the assessment base (this was a new concept beginning with the 2006 filings). This issue required significant efforts and numerous contacts to get companies to respond. The following table summarizes changes in premium as the result of such follow-up and the inclusion of SA fees:

Premium Change as a Result of Follow-up
Premium Increase from SA Fees


Life
2.91%
4.5%


Allocated Annuity
3.73%
8.7%


A&H
0.08%
0.0%


Unallocated Annuity
-3.63%
16.2%

In late fall, a new issue began to emerge as a result of the inclusion in the health account of premiums related to Medicare Advantage and Medicare Part D drug plans. A number of member companies have protested recent health assessments, claiming that premiums associated with Medicare are not subject to assessment. This issue also was raised in the Universal Health Care case. The Coverage/Claims Committee is reviewing the subject.

Also, before year-end, staff began a disaster recovery planning process for ADS by reviewing PwC systems, documentation, and databases. Review efforts will continue into first quarter 2008.

Communications Committee

The Communications Committee met by teleconference in November 2007 to discuss the design and content of public Web pages for NOLHGA-related insolvencies. These pages will present non-confidential information on insolvencies and will be geared for public audiences, such as policyholders, the media, researchers interested in the guaranty system, and even legislators investigating the state-based guaranty system. They will be available on the NOLHGA site and the sites of any guaranty associations that wish to link to them. The Web pages are being developed to (A) answer questions people might have about insolvencies in a way that is available and accessible at all times and (B) enhance the prestige of the associations and the guaranty system as a whole by establishing personnel within the guaranty system as insolvency experts—the best resources for insolvency information on cases both old and new.

The committee recommended several revisions to the draft design template and proposed content, and a revised draft of the Web pages was being prepared at year-end.

Guaranty System Modernization Task Force

Assessment Subgroup
The final report of the subgroup was provided to the full committee for further consideration of issues on December 10, 2007. The report addresses 10 areas from the original 2005 report on which the committee requested follow-up analysis. These areas dealt with testing of assessment data survey premium data, assessment refunds/credits, evaluation of assessment software programs, and feasibility of the creation of a centralized member insurer database. It is anticipated that further work on the centralized database issue will be done in 2008/2009 once the committee reviews the concerns discussed in the report and provides further direction.

Accounting Subgroup
Supporting the efforts of the GSMTF Accounting Working Group, the Vice President of Accounting and Finance, Manager of Insurance Services, and Manager of Information Systems developed and launched an online application form designed to collect guaranty association financial information. We received 49 out of 52 guaranty associations’ financial data before the NOLHGA Board of Directors meeting in October. The compiled data was distributed to the NOLHGA Board members in the fourth quarter. Going forward, the application will be used for annual collection of guaranty association financial information.

MPC Update

NOLHGA staff provided administrative, logistical, and professional support for the January 2008 meeting of the full MPC, which was held in Phoenix. A summary of meeting activity can be found in the February 1 issue of the NOLHGA Wire.

NAIC Update

Receivership Task Force

On November 28, 2007, Peter Gallanis, Bill O’Sullivan, and Joni Forsythe participated in a telephone conference of the NAIC’s Receivership and Insolvency (E) Task Force. Set out below is a summary of the key discussion items covered during the November 28 call:

The Receivership Technology and Administration Working Group, a subgroup of the task force, presented for review and adoption its proposed Receivership Data Privacy and Security Policy and Information Security Procedures, along with copies of the November 19 comment letters submitted by NOLHGA and the ACLI noting serious concerns with respect to the scope and application of the policy and procedures. Following discussion, the task force voted to adopt the proposed policy with some amendments but to defer adopting the more detailed procedures in light of interested party concerns. The task force indicated that it would continue to consider alternative options and “friendly amendments” to the exposed procedures based on regulator and interested party suggestions.

The Model Act Revision Working Group reported on recent developments and efforts to recommence work on the Life and Health Insurance Guaranty Association Model Act. The working group reported that it would be conducting a survey of its members in December to ascertain member preferences with respect to outstanding issues. Based on the results of that survey, the working group plans to have further discussions at NAIC and interim meetings in an effort to resolve the remaining issues.

The Receivership Task Force’s charges for 2008 include (1) providing ongoing support with respect to the “adoption” of the Insurer Receivership Model Act (presumably this refers to adoption by the states), (2) establishment of a separate group to consider at a high level the appropriate treatment of structured settlement annuity contracts in the insolvency context; and (3) updating both the life and health and P&C guaranty association model acts. An additional charge, related to the study of “solvent schemes of arrangement” and similar restructuring mechanisms for possible adoption in the United States, was considered to be outside the scope of receivership matters and was reassigned to a newly formed E Committee subgroup.

Winter NAIC Meeting

Peter Gallanis attended the Winter NAIC meeting in Houston, Texas, in December 2007. Since the Receivership Task Force and its working groups did not hold meetings at this NAIC, the schedule had relatively few guaranty association–related matters. Among the guaranty association–related meetings, Mr. Gallanis participated in a meeting of IAIR’s Receiver/Guaranty Fund Liaison Committee, and NOLHGA and the NCIGF sponsored the Guaranty Fund Managers Forum for the purpose of reviewing NAIC activities potentially impacting guaranty associations and updating attendees on recent insolvency activity.

Financial Activity

In addition to routine year-end related matters and finalizing the 2008 operating budget, the accounting department has been involved with overseeing the planning phase of McGladrey & Pullen’s audit of the 2007 operating financial statements and the calculation and mailing of both the third quarter 2007 quarterly assessments and 2008 annual membership dues. For four insolvencies, NOLHGA distributed funds totaling $8.3M on behalf of its members.

Guaranty Association Assessment Information

Staff completed the compilation of annual guaranty assessment information via an online reporting tool developed in 2006. Reports were provided to senior management on October 27 and uploaded to the NOLHGA Web site by the end of the month. Various reports are available that depict assessment activity by year, by account, by insolvency, and by state. The reports also contain estimates of annual assessment capacity.

Insolvency Financial Cost Information

Insolvency cost estimates were posted to the NOLHGA Web site in November. This data is utilized by member companies to calculate accruals for potential guaranty association assessments. The data files show net cost estimates as of the fall of 2007 by account, by state, and by insolvency. Numerous summary tables are also included along with assessable premium (based on assessment data surveys) to allow for companies to calculate market shares.

In addition to the above, detailed liability information is posted to the Company Information section on the NOLHGA Web site (i.e., gross policy liabilities, covered obligations, assumption costs and direct claims paid, expenses, and recoveries).

Legal Department

Since the October Board meeting, Legal Department staff members have been engaged in the following activities:

Legal Committee

Staff organized a telephonic meeting of the full Legal Committee on December 5. Among other matters, the agenda for the call included: (1) approving a report to guaranty association administrators on the NAIC’s Insurer Receivership Model Act (see next item); (2) reviewing the status of the NAIC project to update the GA Model Act; and (3) receiving a report on a viatical settlement coverage case in Nebraska.

IRMA Report

Legal staff worked with a Legal Committee subgroup on a “Primer” for guaranty association representatives concerning the NAIC’s Insurer Receivership Model Act (IRMA). The Primer provides analysis and recommendations concerning key provisions of IRMA, both good and bad, which affect the rights and interests of GAs.

Coverage/Claims Committee

Staff worked with the Coverage/Claims Committee on the development of a memorandum providing advice to guaranty associations on coverage and assessment issues arising from Medicare Part C and D business. The memorandum was issued to guaranty association administrators early in 2008, and the Coverage/Claims Committee presented its finding at the January MPC meeting in Phoenix.

Support to GAs

Legal staff provided (1) extensive analysis and suggestions to the Nebraska association in support of its efforts to obtain reversal of a summary judgment ruling finding that the association was obligated to cover viatical settlement investment contracts; and (2) a report to the Iowa association analyzing differences between the Iowa Guaranty Association Act and the NAIC Model Act and identifying beneficial provisions from the Model Act for possible adoption in Iowa.

Support to Receivers

Legal staff reviewed documents from NOLHGA’s American Integrity file in response to a request from the receiver for information in connection with prosecuting a reinsurance arbitration claim.

Receivership Law

Legal staff continued to provide technical input and comments on proposed receivership legislation based on the Insurer Receivership Model Act (IRMA). Efforts during the quarter were focused primarily on proposed legislation in Pennsylvania and Oklahoma. At the request of the Pennsylvania association, staff has continued to participate in teleconferences with the Pennsylvania Insurance Department and industry representatives to discuss and resolve issues affecting guaranty associations. Although some progress has been made, there is still much industry concern regarding various issues, including the handling of large deductible reimbursements in property and casualty insolvencies. Accordingly, it remains unclear whether a bill in Pennsylvania will be introduced in 2008.

In Oklahoma, the Insurance Department has been working on drafts of two specific IRMA provisions which relate to statutes of limitation and powers of a liquidator. The most recent draft raised concerns regarding the powers of a liquidator with respect to covered or partially covered policies. Staff has continued to work with the Oklahoma guaranty association to submit comments addressing concerns in the revised drafts.

Document Retention

Legal staff, working with the Chief Operating Officer and other staff members, continued work to: (1) update NOLHGA’s document management policy; (2) identify archiving and other practical solutions for better managing the organization, retention, and appropriate disposal of NOLHGA’s paper and electronic documents; and (3) make recommendations to management on preparing NOLHGA to respond to future discovery requests for electronic information. Specific work included identifying key “policy” issues and possible solutions with respect to managing NOLHGA’s documents and preparing an initial draft of an updated document management policy.

In addition, staff prepared a report in support of efforts to develop “litigation hold” procedures for NOLHGA’s electronic information. The report, among other matters, surveyed NOLHGA’s IT systems, network configurations, and data handling protocols; identified logistical considerations and challenges relevant to implementation of a litigation hold with respect to NOLHGA’s IT systems; and summarized possible procedures for capturing electronic information from the NOLHGA servers and back-up system.

Privacy

Staff supported the Life and Annuity Privacy Working Group’s efforts to develop an appropriate privacy program for multi-state life or annuity insolvencies. These efforts included preparing a work plan for the project and organizing two subgroups to execute the work plan. Substantial progress has been made on this project, including a preliminary investigation into the relevant legal and factual considerations. Staff also provided support to the Health Privacy Implementation Working Group, which has several initiatives planned for 2008. These include (1) developing a privacy checklist for health insolvency task forces and (2) preparing a recorded privacy training program for administrators.

Westlaw Contract

Staff negotiated a renewal contract with Westlaw for a three-year flat rate term, resulting in expanded content and savings of more than $313 per month going forward.

Communications Update

GA Update

The October 2007 issue of GA Update (Volume 5, Issue 2) was distributed at the 2007 Annual Meeting in October and was then mailed to all subscribers. The issue featured articles on NOLHGA’s strategic planning initiatives, Rhode Island’s limited runoff scheme statute, Jim Lenaghan of the New Jersey guaranty association, and NOLHGA’s activities.

NOLHGA Journal

The first NOLHGA Journal of 2008 was mailed in early February. It features an interview with Mark Peters, head of the New York Liquidation Bureau; coverage of NOLHGA’s 2007 Annual Meeting; and an article on the NAIC’s Financial Analysis Working Group (FAWG) by Randy Blumer of the Wisconsin guaranty association.

Insolvency Reporting Framework

The Director of Communications and the Manager of Insurance Services jointly produced a framework for obtaining information on active insolvencies. This information will be used to provide updates and content for the public insolvency Web pages being designed by the Communications Committee.

Systems & Technology

Assistance for the GAs

The Systems Department continues to assist administrators by answering telephone and e-mail inquiries requesting technical support.

GA Community of Practices

Development continued on the GA Community of Practices bulletin board application. This was one of the recommendations that came out of the Jeslen Report in connection with the Board’s Strategic Planning initiative. The product enables members to post questions, answers, and comments in various insolvency-related forums. The MPC Executive Committee volunteered to test the application to determine whether it might be of value to NOLHGA’s membership. During the trial period, the Manager of Information Systems conducted several training sessions that familiarized MPC Executive Committee members with the Web site. The Executive Committee has since suggested several enhancements that would make the site more user-friendly. The Community of Practices concept is expected to be released to a wider audience (GA administrators and NOLHGA Board members) before the end of March 2008.

Document Search

A search tool is under development to enable users to easily locate documents on the NOLHGA Web site. Once the user submits the search term(s), the tool will search all document content and properties that contain words matching the search term(s). Search results are listed according to relevance. The results are filtered to exclude any material that is confidential to the user’s access group. The search tool is expected to launch before the end of March 2008.

Constituency Relationships

On October 17, Joni Forsythe attended the Annual Meeting of the Arkansas Life and Health Insurance Guaranty Association and provided an in-depth report concerning key issues for guaranty associations under the NAIC’s 2005 Insurer Receivership Model Act and state IRMA-based legislative initiatives. On November 2, Peter Gallanis made a presentation to the Board of the California guaranty association.