IN THIS EDITION:

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

Introduction

In May 2011, 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 February Board meeting in Dallas, staff has focused primarily on the following matters: (i) providing coordination and support for insolvency task force activity; (ii) FSMC Education Project initiatives; (iii) planning, preparing, and executing the April MPC meeting and presentations; (iv) completing the year-end audit; (v) constituency relationship work; (vi) supporting efforts on the Model Act initiative and the development of consistent positions on important coverage issues; (vii) providing support for Board committees and subgroups; and (viii) preparing for the July Legal Seminar and the October Annual Meeting.

Current insolvency activity continues to focus primarily on Penn Treaty Insurance Company (Pennsylvania); Executive Life of New York; Lincoln Memorial (Texas); National States Insurance Company (Missouri); Executive Life Insurance Company (California); Imerica Life and Health Insurance Company (Arkansas); and Booker T. Washington (Alabama).

NOLHGA Meetings

2011 Annual Meeting

Planning for the 2011 Annual Meeting has begun. A meeting was held in March to work on the preliminary speaker program, and a “Save the Date” postcard was mailed to prospective attendees in April.

2011 Legal Seminar

Planning for the 2011 Legal Seminar (to be held on July 21–22 in San Francisco) is well under way. The program will feature segments on the Dodd-Frank Act, the new federal health insurance law, coordination between guaranty associations and receivers, and industry legal issues that have implications for the guaranty system. A total of 22 speakers are confirmed for the event, including Ted Mathas, New York Life Insurance Company’s CEO, and Dave Jones, the California Insurance Commissioner. Staff also has commenced efforts to market the program to prospective attendees, including the mailing of a “save the date” postcard, e-mailing regular updates on planning, and launching a legal seminar Web page that allows attendees to access information and register for the program.

Constituency Relationships

Guaranty Association Meetings

Peter Gallanis attended the Annual Meeting of the Georgia association on April 21 in Atlanta and briefed the Board, new Insurance Commissioner Ralph Hudgens, and senior members of the Georgia DOI on major insolvency activity and on regulatory developments in Washington and at the NAIC.

Dick Klipstein attended the joint North Carolina/South Carolina guaranty association Annual Meeting on April 28–29 in Myrtle Beach, S.C., to brief Board members on the Penn Treaty insolvency matter.

ACLI

Solvency Committee: Peter Gallanis and Bill O’Sullivan participated in a call of the ACLI’s Solvency Committee on February 25. During the call the Solvency Committee voted to support the NOLHGA Coverage/Claims Committee’s recommendation for covering joint annuities. In addition, the committee heard reports on (1) the ACLI Insurance Guarantee’s work plan relating to the guaranty and receivership systems; (2) efforts to update guaranty association laws in the states; (3) the ELNY and Penn Treaty rehabilitations; and (4) developments with respect to Section 711 of the NAIC Insurer Receivership Model Act dealing with the netting of Qualified Financial Contracts.

Coverage Issues: As part of a Coverage/Claims Committee subgroup, staff participated in numerous discussions with ACLI staff and committees to build consensus on coverage positions with respect to variable products and joint annuities. In order to protect the privileged and confidential nature of the communications, NOLHGA and the ACLI entered into a joint and common interest agreement.

Reinsurance: Peter Gallanis and Bill O’Sullivan continued to work with the ACLI in furtherance of GA Model Act Section 8.N, which provides guaranty associations with the right to succeed to the interests of insolvent insurers under ceded reinsurance treaties. To date, many states have been unwilling to adopt the current version of Section 8.N because the provision is extremely complicated. The ACLI, whose reinsurance members are in favor of the current version of Section 8.N, has asked NOLHGA for support. In response, NOLHGA is working with the Legal Committee and outside counsel to prepare an overview of Section 8.N that highlights the benefits of adopting that provision.

European Union’s European Insurance and Occupational Pensions Authority

Communications and Legal Department staff worked to respond to an inquiry from the European Union’s European Insurance and Occupational Pensions Authority (EIOPA) Task Force on Insurance Guarantee Schemes. One of the EIPOA’s charges is to “contribute to the assessment of the need for a European network of national insurance guarantee schemes,” and the task force submitted a number of questions to NOLHGA concerning guaranty system operations. Responses to this inquiry were returned in late April.

NAIC

In March, Peter Gallanis and Bill O’Sullivan attended the NAIC’s Spring National Meeting in Austin, Texas. The key receivership-related meetings included, among others: 1) the Receivership and Insolvency Task Force (RITF), 2) the Dodd-Frank Receivership Implementation (E) Working Group, and 3) the Financial Condition (E) Committee. In addition, NOLHGA and the NCIGF jointly sponsored the Guaranty Fund Forum luncheon on March 27 to review recent NAIC activities impacting guaranty association interests.

During the meeting, Peter Gallanis, Randy Blumer, and Kevin Griffith gave a confidential briefing to a subgroup of the RITF and Bill O’Sullivan made a presentation to the RITF on guaranty association coverage of non-variable, separate account products.

NCOIL

On March 5, Peter Gallanis made a presentation to NCOIL’s Life Insurance Committee at the quarterly meeting of NCOIL. The presentation addressed initiatives by NOLHGA and ACLI to promote functional uniformity in guaranty association statutes and interpretations.

Other Constituencies

Concerns about pending major insolvencies and federal legislative and regulatory initiatives prompted several informal discussions with several other constituencies, including (among others) AIA, AHIP, and a representative of a major industrial corporation involved with a group of like companies that are interested in increasing the use of annuities for company-sponsored retirement programs.

Also, on March 16, Peter Gallanis and Bill O’Sullivan attended the Seventh Annual Insurance Reform Summit in Washington D.C. The event, which was sponsored by Networks Financial Institute, included speakers from government (both at the federal and state level), industry, and academia, who focused their remarks on recent legal and regulatory developments impacting the insurance industry, including the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Financial Activity

Accounting

In addition to routine accounting-related tasks, the Accounting Department has been involved in overseeing the year-end audit of the 2010 NOLHGA operating financial statements. Staff also calculated and mailed the fourth quarter 2010 quarterly assessments. NOLHGA distributed to affected members approximately $20.4 million received in connection with seven insolvencies and distributed approximately $9.3 million to the TPAs and receivers of five insolvencies.

Assessment Data Survey

The 2010 data requests with the NAIC were updated and delivery dates were finalized. Initial data files were provided to NOLHGA in April. The engagement letter and budget proposal ($250,000) with PwC were completed. Enhancements were made to the data survey database with PwC regarding licensed insurers in an effort to identify which member companies should be included and which companies should be excluded in the state-level data files provided to each guaranty association. This will allow the member company data field to be state specific.

Medicare

Staff completed the review of 2009 premium data related to Medicare, determined which member companies wrote Medicare-related business and which have attempted to exclude Medicare-related premium (and the related amount of premium) from the assessment data survey, and captured state-level Medicare-related premium amounts for use by guaranty associations, if necessary. It is anticipated that the same testing will be performed for the 2007, 2008, and 2010 premium data.

NOLHGA Committee Activity

Accounting Issues Committee

The committee finalized an Excel workbook to assist guaranty associations in tracking time and allocating indirect costs to insolvencies. The program also compiles information to be used in the proof of claim reporting format currently used on NOLHGA’s Web site.

The committee also finalized a tool that allows guaranty association administrators to compare the members of their board to the boards of all the other guaranty associations. This exercise is required for reporting on the 990 form - Schedule R on related or controlling organizations. A presentation was made at the April MPC meeting on both items.

Work was completed on IRS Form 990, SSAP 35R (which deals with accruals for guaranty association assessments), and internal controls. Redrafting of related chapters in the Accounting Guidelines Manual was started. Publication of the revised Manual is expected during the second quarter.

Administrators Education Steering Committee

Holly Wilding worked with the committee to coordinate a presentation on guaranty association assessments, held in conjunction with the April MPC meeting in San Antonio. Speakers on this panel, which presented information on Medicare Parts C&D, assessment protests, assessment refunds, member databases and assessment programs and software, mergers and acquisitions, and related matters, included Mike Surguine, moderator (Arizona); Bart Boles (Texas); William Falck (Florida); Jan Funk (Indiana); Paul Peterson (NOLHGA); and Chuck Renn (Missouri). The presentation was very well received by attendees.

Audit Committee

The committee met by teleconference on April 13 to review a draft copy of the 2010 audited financial statements and to receive the auditor’s required communications. The auditor’s presentation during the call provided a favorable opinion of the year-end financials.

The committee meeting on May 11 in Chicago included a review of the proposed engagement letter from McGladrey & Pullen to audit NOLHGA’s 2011 operating financial statements. A report on the committee’s activity was made to the Board at its May 12 meeting.

Communications Committee

The committee met by conference call to evaluate the redesigned password-protected section of the NOLHGA Web site. The committee’s suggestions were incorporated into the new design, and the committee will assist in testing the new section of the site when it is operational.

Coverage/Claims Committee

Committee representatives worked to build consensus on committee recommendations for covering joint annuities and variable products as follows:

Joint Annuities: With respect to the recommendation on covering joint annuities, the committee (1) held a call with the MPC Executive Committee; (2) sponsored three “town hall” telephone conferences with guaranty association administrators and their counsel; (3) made a presentation to the MPC in April; and (4) participated in various teleconferences with ACLI representatives. As a result, the MPC Executive Committee, the ACLI Solvency Committee, and the MPC adopted resolutions in support of the committee’s recommendation for covering joint annuities, and individual guaranty associations are currently in the process of considering whether they can support that recommendation.

Variable Product Recommendation: The committee made a presentation to the MPC in April on its recommendation for covering variable products and has scheduled three follow-up calls with guaranty association administrators to further discuss and obtain input on the recommendation. In addition, the committee presented the variable product recommendation to the ACLI’s Coverage Working Group on May 2, and the ACLI Working Group adopted a resolution in support of the recommendation.

Legal Committee

The committee’s next teleconference is scheduled for May 20. Among other matters, the committee will discuss (1) the reinsurance provision under the Model Act and what can be done to support ACLI efforts to build support for that provision; (2) application issues with respect to the amendment of guaranty association acts to incorporate the coverage exclusion for Medicare Part C and D; and (3) the implications to guaranty associations, if any, of health insurers being permitted to write business without being licensed in a state.

MPC Executive Committee Asset Recovery Report Subgroup

The semi-annual Asset Recovery Report was made available to guaranty associations on the NOLHGA Web site on March 1. The report provides details of individual estate information such as what assets, if any, have been distributed or are expected for distribution and what outstanding issues must be resolved prior to estate closure. The report also includes two other reports: the Estate Assets & Net Cost Summary (a chart that numerically illustrates an estimate of total estate assets remaining for all the open multi-state insolvencies) and the Closed Estates Summary (a separate listing of estates that are known to be closed and the dates of closing).

MPC Executive Committee Business Continuity Subgroup

The subgroup held a teleconference in late March and a meeting at the April MPC to review NOLHGA’s business continuity plan and to identify a list of critical issues and their potential effect on guaranty association operations. This is in preparation for the drafting of a document containing informational and procedural details that guaranty associations should have available in the event of a disruption of services due to an emergency or disaster at NOLHGA.

MPC Executive Committee Expense Allocation Subgroup

The subgroup completed a survey of guaranty associations to determine how many associations allocate indirect expenses to insolvency cases and what percentage of those expenses are allocated.

Communications

2010 Year-End Report to the Membership

The NOLHGA 2010 Year-End Report to the Membership was mailed to members in April.

GA Update

The first 2011 issue of GA Update was mailed to subscribers in early May.

GA Update Online

The March 3 issue of GA Update Online included relevant portions of the management report on NOLHGA activities provided to the NOLHGA Board of Directors at its February 2011 meeting.

NOLHGA Journal

The first 2011 issue of the NOLHGA Journal was mailed to subscribers in early February. The second issue should be mailed in June.

Legal Department Activity

Model Act Initiative: Staff continued to coordinate and provide support to the ACLI and individual states on updating guaranty association laws. In particular, staff provided drafting, review, and/or other technical support to the Alaska, Georgia, Kansas, Idaho, Maryland, New Mexico, and Oregon associations in connection with possible GA Act legislation in their states. In addition, a call of the Board GA Laws Committee was held on March 7 to discuss the status of the project and a strategy for completing it.

MPC Security Procedures: Staff continued to work with the Security Advisory Committee on the implementation of the MPC Security Procedures. The committee, which met several times by phone, is currently focused on (1) providing written guidance to guaranty associations on complying with the safeguarding requirements of the procedures (e.g., use of encryption software) and (2) developing an online program for training guaranty association, NOLHGA, and other system representatives on their responsibilities under the security procedures. The committee’s objective is to complete implementation of the procedures by year-end.

Conflicts/Antitrust Questionnaire: Staff conducted the annual questionnaire process under NOLHGA’s antitrust compliance policy and conflicts of interest/business ethics policy. All persons subject to the policies completed the compliance questionnaires. The results were as follows: (1) there were no disclosures made in connection with the antitrust questionnaire, and (2) there were a small number of affirmative responses/disclosures in connection with the conflicts questionnaire. Following review, staff concluded that the conflict questionnaire disclosures either had been previously addressed or were matters that did not raise material issues under the policy. Staff provided the Conflicts Committee with a detailed report on the conflict disclosures along with a recommendation that no action be taken.

Other Matters: Staff also engaged in the following activities: (1) provided NOLHGA’s outside auditors with a letter on “loss contingencies” in connection with the 2010 audit; (2) provided “help desk” support to members and other constituencies regarding guaranty association legal issues, including with respect to an inquiry from the U.S. Government Accountability Office on coverage of retained asset accounts; (3) organized a staff “purge” day pursuant to NOLHGA’s document retention procedures on March 23; (4) researched and provided advice to management on the need to retain originally signed copies of agreements; (5) provided support on MPC/insolvency authority and conflict issues and drafted engagement and other agreements; and (6) supported efforts to update the MPC Asset Recovery report.

Systems/Technology/Web Site/Other

Web Site Redesign

The Communications, Insurance Services, and Information Systems Departments continued to meet with NOLHGA management to discuss a new design for the password-protected section of the NOLHGA Web site, with the goal of making the most-useful information on the site easier for members to access. The departments also met with the Communications Committee (via conference call) to request their input on the new design. Work on implementing the new design continues.

In addition to the new design, the departments met with NOLHGA management and the Legal Department to discuss simplifying the rules in place for accessing the password-protected section of the site. The parties are attempting to determine if that section could be converted into a “GA members only” section without compromising the confidentiality of the information in the section or lessening the value of the site to members and non-members. Work on this aspect of the redesign project is ongoing.

Events Section Redesign

The Communications, Insurance Services, and Information Systems Departments are planning a new layout for the Events section of the NOLHGA site. The new layout will draw more attention to NOLHGA’s meetings and events and will enable visitors to quickly jump to different periods of time. Additionally, visitors will find it easier to distinguish among the various types of events posted to the section. Meeting materials and reports, which are currently posted on NOLHGA’s event Web pages, will be consolidated in a new Meeting Materials & Reports section.

Insolvency Web Page Updates

The Communications and Insurance Services Departments sent out a 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. This request is made each quarter. Several updates were made to various Web pages.

Network Systems Status

The Systems Department began researching faster bandwidth options for the office. Currently, we are receiving 3.0 mbps of bandwidth from our current Internet Service Provider (ISP), and with the addition of the video conferencing system and the advancement of Internet technologies, there is a need to improve our bandwidth speed. We will continue to interview ISPs until we find the best suitable option for NOLHGA.

In addition, the department began exploring options to improve systems disaster recovery by examining newer technologies for faster recovery times in case of a disaster, as well as locating a co-location site a little farther outside of the D.C. metropolitan area. With our Quest server serving multiple purposes, it became important to have technologies in place for a faster recovery in case of a disaster. The department continues to work on finding viable solutions.

In March, and with the assistance of Vicor Business Consulting, the accounting software, MAS-90, was upgraded from version 4.2 to 4.4 successfully.

The Systems Department also held a brief video conferencing training session for the staff. The session demonstrated the features of the video conferencing system. Four video conference meetings have successfully been held since the installation.

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

Having been appointed to the Security Advisory Committee, the Manager of Technical Systems provided assistance in the drafting of the Security Implementation Plan. The plan is still in the early developmental stages as the committee continues to meet and fine-tune the plan.

In addition, the department continues to assist the guaranty association administrators fairly frequently by answering technical support calls and responding to e-mails.