IN THIS EDITION:

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

Introduction

In October 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 August Board meeting in Colorado Springs, staff has focused primarily on the following matters: (i) providing coordination and support for insolvency task force activity; (ii) preparing for the Annual Meeting; (iii) coordinating the September MPC meeting; (iv) constituency relationship work; (v) supporting efforts on the Model Act initiative and the development of consistent positions on important coverage issues; (vi) advancing objectives of the Education Project; (vii) strengthening relationships with regulators, industry, and key trade associations; and (viii) providing support for Board committees and subgroups.

Current insolvency activity is focused primarily (but not exclusively) on Penn Treaty Insurance Company (Pennsylvania), Executive Life of New York, Lincoln Memorial (Texas), National States Insurance Company (Missouri), Imerica Life and Health Insurance Company (Arkansas), and the “Thunor Trust” (Marty Frankel) companies.

NOLHGA Meetings

2011 Annual Meeting

The program for the 2011 Annual Meeting was finalized. Confirmed speakers are:

• Thomas E. Henning: Chairman, President, and CEO, Assurity Life Insurance Company
• Carl A. Hess: Global Head of Investment, Towers Watson
• John M. Huff: Director, Missouri Department of Insurance; Member, Financial Stability Oversight Council
• Jack Messmore: Acting Director, Illinois Dept. of Insurance
• Clarence Page: Political Commentator & Pulitzer Prize–Winning Columnist
• Andrew L. Paone, CFA: Senior Relationship Manager, Financial Reserves Management Team, Wellington Management
• Nick Thompson: Senior Vice President, Regulatory Affairs, UnitedHealth Group, Inc.
• Susan E. Voss: President, NAIC; Commissioner, Iowa Insurance Division

In addition, the Annual Meeting Web page went live, and the registration brochure was mailed in August. In addition to the Major Insolvencies Briefing, this year’s meeting will also feature a presentation on investment strategies for guaranty associations. Promotional e-mails were also sent to prospective attendees.

Legal Seminar

Staff is in the process of negotiating contracts with the Fairmont Copley Plaza Hotel in Boston to host the 2012 Legal Seminar, and the Ritz-Carlton Hotel in Chicago to host the 2013 Legal Seminar.

Constituency Relationships

ACLI

On September 6, Peter Gallanis and Bill O’Sullivan participated in the ACLI’s Insurance Guaranty Working Group teleconference. The call was scheduled in response to the ACLI Board’s request for recommendations on enhancing disclosure about guaranty association protection. There was extensive discussion of possible alternatives, but ultimately the group focused on the possibility of allowing companies to refer consumers to an objective, outside source of information (e.g., the NOLHGA Web site) to obtain pre-sale disclosure about guaranty association coverage. As a next step, ACLI staff will prepare a draft proposal for the working group’s consideration.

NALC

On September 23, Peter Gallanis addressed the Fall meeting of the National Alliance of Life Companies, discussing with members the solvency experience of the life industry and the guaranty system through the financial crisis and the Dodd-Frank Act and pending implementation projects.

NAIC

Staff participated in the following NAIC teleconferences:

Receivership Insolvency Task Force Teleconference (August 3): Among other matters, the task force discussed the possible need to create an exception to the Model Act’s advertisement prohibition to allow pre-sale disclosure of guaranty association coverage to pension plan fiduciaries.

Life Actuarial Task Force (LATF) Teleconference (September 6): The purpose of the call was to discuss the task force’s draft report on “non-unit linked” (i.e., non-variable), separate account products. The report raised a number of potential concerns with the use of separate accounts in connection with non-unit linked products, including that certain policyholders may receive preferential treatment. The report also raised issues about guaranty association coverage and the reporting of premium for guaranty association assessment purposes. The task force emphasized that its report was still in draft form and did not yet contain recommendations. Before proceeding to complete the report, the task force decided to obtain input from the Financial Condition (E) Committee, in particular on whether the draft report identified all the relevant issues. On September 19, the Financial Condition (E) Committee reviewed LATF’s report and voted to expose it for comments from regulators and interested parties. Comments were due on October 19.

Life Insurance and Annuity (A) Committee Teleconference (September 23): The purpose of the call was to discuss a memorandum from the Life Actuarial Task Force which referred the issue of “contingent annuities” to the committee for its consideration. Among other matters, the memorandum raised issues about whether “contingent annuities” should be viewed as insurance or a type of financial guaranty. The memorandum also raised the issue of whether there would be guaranty association coverage for such products and, if so, whether it would create undue risks for guaranty associations. A number of industry representatives on the call spoke in favor of the product. The committee will further discuss contingent annuities during the NAIC Fall meeting in November.

Financial Activity

Accounting

The Accounting Department has been involved in finalizing the 2012 operating budget. The proposed 2012 operating budget was approved by the committee on September 6 and, subject to any final revisions, will be presented to the Board for approval at its October meeting.

In addition to routine accounting-related tasks, staff also calculated and mailed the second quarter 2011 quarterly assessments.

Also, $88.9 million was distributed to affected members (a combination of $4.4 million in premium collection refunds for Lincoln Memorial and National States; $34.3 million and $27.4 million in estate distributions related to London Pacific and American Integrity, respectively; and $12.7 million and $10.1 million in early access distributions related to Franklin American Life (a Thunor Trust company) and American Chambers, respectively); $5.4 million was distributed to TPAs and receivers to fund claims and expenses for six active insolvencies.

Assessment Data Survey

Staff completed the review of companies requiring follow-up (78 companies) and corrections to their data survey filings. Of these 78 companies, 19 filed corrected data surveys. As part of this final review process, we have also completed final trend tests in state-level premium data in preparation of releasing the data to guaranty associations and insurance commissioners. Data files were released to guaranty associations and insurance commissioners on September 30.

In addition to completing the 2010 data survey review, NOLHGA staff reviewed changes in guaranty association acts for the past year and submitted updated charts to the NAIC for the 2011 formulas used on the Adjustment Exhibit* during September.

Finally, NOLHGA staff also held conference calls with NAIC staff to educate them on the use and workings of the data survey reporting forms along with some of the key testing NOLHGA undertakes. The initial focus appeared to be on separate account premium reporting. The goal as stated by the NAIC is to determine if there are any improvements in the annual statement reporting that could be implemented to increase the accuracy of the data survey filings and reduce the level of testing NOLHGA needs to undertake. We anticipate future discussions on these topics.

* The Adjustment Exhibit is the second page of the annual statement form used to report assessable premium data by state. It is used to capture differences in state guaranty association acts related to assessable premium. These differences primarily relate to unallocated annuities.

Data Discussions with A. M. Best

Staff members participated in a number of conference calls with A. M. Best analysts who are undertaking a study on life and health liquidations and recovery ratios by policyholders. The discussions centered on educating the A. M. Best personnel on the data reported on NOLHGA’s Web site regarding cost information on insolvencies we have been involved in (this is the same data published each Fall for member companies to establish accruals for guaranty association assessments) along with estimated recovery ratios on guaranty association costs that NOLHGA staff has calculated. As a result of these discussions, we are clarifying the reporting for several cases in which reinsurance reserve credits were transferred to an assuming carrier.

Insolvency Data System (NIRS) Updated

The NOLHGA Insolvency Reporting System (NIRS) resides on a stand-alone desktop. This database houses all the base information on insolvencies, guaranty association assessment information, capacity information, and insolvency cost data. Unfortunately, the hard drive on this computer failed and was unable to be repaired. Fortunately, NOLHGA’s Systems Department was able to reestablish the database on a laptop computer located in the office. As a result of this system failure, we contacted the outside consultant who built the NIRS database in the hopes of updating the database to run off more recent Windows and SQL-server platforms along with building a number of other improvements to improve access to the database by NOLHGA staff.

The consultant was able to upgrade the NIRS database to current platforms, and it temporarily resides on a stand-alone laptop in the office. She also performed a number of limited tests on the database, and it appears to be functioning properly. NOLHGA staff anticipates testing the database during October, and anticipates that additional enhancements will be made during the fourth quarter, along with relocating the database onto a dedicated server. All NIRS files on the laptop are backed up regularly, and these backups will continue when NIRS is moved to a dedicated server.

GA Assessments

The collection of 2010 guaranty association assessment activity was completed. The request asks for guaranty associations to submit assessed, called, and refunded activity by insolvency and by account. Staff anticipates uploading the data to NIRS, generating reports, and uploading the reports to the NOLHGA Web site during October and November.

Medicare Part C and D

Similar to 2009 data capture, we continued capturing prior year Medicare Part C and D premium data for 2007 and 2008. The goal is to determine those member companies that write Medicare Part C and D business; identify those that have attempted to exclude Medicare Part C and D premium (and the related amount of premium) from the assessment data survey; and compile state-level Medicare Part C and D premium amounts for use by guaranty associations, if necessary. The 2010 premium data were captured and compiled during the 2010 assessment data survey process. We anticipate providing this data for all years to guaranty associations during the fourth quarter of 2011.

NOLHGA Committee & Subgroup Activity

GSMTF Accounting Subgroup: Survey to Collect GA Financial Information

On July 6, an e-mail request was sent to all guaranty associations to fill out the annual online survey to collect financial information and to send in copies of their audited financial statements to the Manager of Insurance Services before July 29. Survey responses were received from all 52 guaranty associations. The financial information has been compiled and summarized. A summary report will be posted on the NOLHGA Web site in mid-October. An article describing the financial status of the guaranty system as a whole appears in this year’s second issue of GA Update.

MPC Executive Committee Asset Recovery Report Subgroup

The September 1, 2011, Asset Recovery Report was made available to guaranty associations on NOLHGA’s Web site on August 31. The semi-annual report provides 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 of all the open multi-state insolvency cases; and the Closed Estates Summary, a separate listing of estates that are known to be closed and the dates of closing.

Administrators Education Steering Committee

In connection with the September MPC meeting in Reston, the committee hosted an Annuities 201 presentation. Patricia Kelley, Vice President of Compliance at Prudential Insurance Company, and Kristine Kattmann, Vice President & Fixed Annuity Business Line Leader at the Lincoln Financial Group, built upon information learned at a former educational session held in 2009. The session focused on general account annuity products and benefits and the promises insurance companies are making in these products. This type of education helps guaranty association administrators with the frequent calls they receive from consumers about products they either have purchased or are considering purchasing.

Communications Committee

The committee met by conference call in late September to review the proposed redesign of the password-protected portion of the NOLHGA Web site and offer their suggestions on ways to improve the design and functionality of the site.

Coverage/Claims Committee

Committee representatives (including staff) have engaged in the following activities: (1) held in-person or telephonic meetings with eight guaranty associations that had raised concerns about the committee’s recommendation for covering variable annuities; (2) created a work plan for addressing the remaining coverage issues with respect to variable products; (3) met with industry and outside legal experts to obtain additional background information on group annuity contracts issued in connection with qualified pension plans (GACs); and (4) created a work plan for addressing coverage issues for GACs.

Legal Committee

The committee’s Amicus Subgroup met by teleconference on July 28 and voted to provide amicus support for the Georgia Insurers Insolvency Pool (which is the P&C guaranty fund in Georgia). The specific issue to be addressed is whether GIIP has standing to challenge the constitutionality of an amendment to its enabling act that was enacted for the purpose of providing retrospective guaranty fund coverage for a special class of claimants. The denial of standing in this case is significant because it would undermine GIIP (and by logical extension similarly situated guaranty associations) from carrying out the statutory purpose of evaluating, determining, and denying invalid claims for coverage. NOLHGA’s amicus brief, which will be filed on a joint basis with the NCIGF and PCI, will focus on the issue of associational standing.

Communications

GA Update

The second 2011 issue of GA Update was distributed at the 2011 Annual Meeting and then mailed to subscribers. The issue includes an article about the redesigned portion of the NOLHGA Web site, an update on guaranty system financials, a “get to know the NOLHGA Chairman” interview with Incoming Chairman Tom Ronce, and regular features on NOLHGA’s activities and new state guaranty association Board members.

GA Update Online

The August 25, 2011, issue of GA Update Online included relevant portions of the management report on NOLHGA activities provided to the NOLHGA Board of Directors at its August 2011 meeting.

NOLHGA Journal

The final 2011 issue of the NOLHGA Journal was mailed to subscribers in September. It featured an interview with Missouri Insurance Director (and Annual Meeting speaker) John Huff, coverage of the 2011 Legal Seminar, an edited transcript of the Legal Seminar interview of New York Life’s Tad Mathas, and the President’s Column.

Legal Department Activity

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

Model Act Initiative: Staff continued to work with the ACLI and individual states on updating guaranty association laws across the country. A report will be made on these efforts during the Board meeting.

MPC Security Procedures: The Security Advisory Committee (which includes two staff members) continued its work to implement the MPC Security Procedures by year-end. In September, the committee made a presentation to the MPC on implementing the Security Procedures and distributed written guidance to guaranty associations on complying with their responsibilities under the Security Procedures. In addition, the committee anticipates releasing an online security training program in October. Finally, the committee plans to conduct outreach calls with individual guaranty associations during the month of October to answer questions and provide further support.

Model Act Legislative History: Staff continued work on compiling a legislative history for the NAIC Life and Health Insurance Guaranty Association Model Act. This project is a substantial undertaking and involves researching over 40 years of NAIC proceedings. The ultimate goal is to organize and incorporate relevant NAIC legislative history into NOLHGA’s Annotated Guaranty Association Model Act (which is a compilation of court decisions interpreting various guaranty association laws). A substantial portion of the research phase of the project is targeted for completion this year. This will permit an updated Annotated Model Act with legislative history to be published sometime next year.

Other Matters: Staff also: (1) updated the guaranty association law summaries on NOLHGA’s Web site; (2) continued to monitor a case pending in the Federal District of New Hampshire (i.e., US Department of Labor v. The Home Insurance Company) that involves a federal government challenge to state receivership priority law; (3) performed research relating to unallocated annuities, fraternal benefit societies, and other subjects; (4) responded to a request from NAIC staff to review and provide comments on a report to the International Association of Insurance Supervisors on the U.S. receivership/guaranty association systems; (5) provided other “help desk” support to members and other constituencies regarding guaranty association legal issues; and (6) provided support on MPC resolution and authority issues.

Systems/Technology/Web Site

Technology Brochure

The Systems Department completed the development of a new brochure, Keeping Pace with Technological Change. This publication provides NOLHGA’s members with an overview of technology concepts and trends, recommendations for purchasing computer hardware and software, and information on security and encryption. The brochure was distributed at this year’s Annual Meeting in Chicago. The last Technology Brochure—a product of the GSMTF Technology Subgroup—was released in 2005, and technology has advanced significantly in the past six years.

Events Section Redesign

The Communications, Insurance Services, and Information Systems Departments have completed a new layout for the Events section of the NOLHGA Web site. The new section debuted in early October.

The new calendar layout draws more attention to NOLHGA’s meetings and events and enables 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.

Network Systems Status

During this quarter, the Systems Department completed upgrading the staff computers’ operating systems from Windows XP to Windows 7. The next step will be to reinstall PGP Whole Disk Encryption, which unfortunately needed to be uninstalled prior to the upgrade. We expect to have all the staff computers completed by October 30.

The department also completed researching disaster recovery solutions to provide faster recovery times in case of a disaster and to locate a new colocation site outside the DC metropolitan area. Recommendations have been submitted to management, and we expect to proceed with relocation to the new colocation site by year-end.

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

The Manager of Technology Systems was appointed to the Security Advisory Committee to provide assistance in finalizing the Security Implementation Plan; he recently presented the encryption segment of a committee presentation during the MPC meeting in Reston, Virginia. The committee continues to meet and discuss the development and testing of the online security training program.

The September edition of the NOLHGAnet was developed and distributed to guaranty association administrators and NOLHGA staff in September.

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

Web Site Access Project

The Communications, Insurance Services, and Information Systems Departments continued their work on simplifying password access to the NOLHGA Web site and completing the redesign of that portion of the site. On September 26, 2011, a message was sent to all non-member password-holders notifying them of the impending transition to a members-only password section. In addition, the departments met by conference call with the Communications Committee to obtain members’ feedback on the new site design.

The redesigned password section of the site went live in early October, with the new members-only access rules in place.