IN THE COMMONWEALTH COURT OF PENNSYLVANIA

IN RE: Senior Health Insurance : 

Company of Pennsylvania :

In Rehabilitation : No. 1 SHP 2020

RE: Application for Approval of the Plan of Rehabilitation for Senior Health 

Insurance Company of Pennsylvania

BEFORE: HONORABLE MARY HANNAH LEAVITT, Judge

FILED: August 24, 2021

OPINION AND ORDER
i

TABLE OF CONTENTS

Page

I. Introduction ..............................................................

II. Findings of Fact .........................................................

A. Business and History of SHIP .....................................

B. SHIP’s Financial Condition ........................................

C. Rehabilitation Plan ..................................................

D. Hearing on Second Amended Plan ................................

i. Rehabilitator’s Evidence ....................................

a. Patrick Cantilo........................................

b. Marc Lambright ......................................

c. Vincent Bodnar .......................................

ii. Intervening Regulators’ Evidence .........................

a. Frank Edwards .......................................

iii. Intervenor NOLHGA’s Evidence .........................

a. Peter Gallanis .........................................

b. Matthew Morton .....................................

iv. Intervening Agents and Brokers’ Evidence ..............

a. Daniel Schmedlen ....................................

v. Intervening Health Insurers’ Evidence ...................

vi. Intervening Policyholders’ Evidence .....................

a. James Lapinski .......................................

b. Rose Marie Knight ...................................

III. Standard of Review .....................................................

IV. Legal Analysis ............................................................

A. The Second Amended Plan Serves a Rehabilitative 

Purpose and is within the Discretion of the Rehabilitator......

1. Goals of the Plan .............................................

2. No Contrary Evidence .......................................

B. The Goals of the Plan Could Not be Achieved in 

Liquidation ...........................................................

1. Liquidation Will Not Address the Funding Gap .........

2. Liquidation Will Perpetuate the Inequitable 

Premium Rate Structure ....................................

3. Liquidation Involves Inherent Delays .....................

1

2

2

4

5

10

11

11

26

27

31

31

33

33

35

37

37

39

39

39

40

41

42

42

42

44

44

45

45

46
ii

4. Policyholders Will Have Fewer Choices 

 in Liquidation ................................................

C. The Plan Meets the Legal Standards for Confirmation .........

1. The Plan’s Rate Approval Mechanism and 

Issue-State Rate Approval Alternative are Permissible 

Under Pennsylvania Law and the United States 

Constitution ...................................................

2. The Plan Satisfies all Constitutional Requirements .....

i. The Plan Satisfies Pennsylvania’s Interpretation 

of Carpenter ..............................................

ii. The Intervening Regulators’ Interpretation of 

Carpenter is Flawed .....................................

3. The Plan is Feasible to the Extent Required by 

Pennsylvania Law ...........................................

4. The Plan is Fair and Equitable .............................

D. Other Concerns and Objections Raised at the Hearing are 

Overruled or Have been Adequately Addressed ................

1. Intervening Regulators’ Application for 

Reconsideration ..............................................

2. Policy Restructuring .........................................

3. Policyholder Communications .............................

4. COVID-19 Pandemic .......................................

5. Funding Gap and SHIP’s Balance Sheet ..................

6. Timing .........................................................

V. Conclusions of Law .....................................................

VI. Conclusion ...............................................................

48

48

48

61

62

64

65

68

69

69

75

75

76

77

77

78

79
1

I. Introduction

Before the Court is the application of Jessica K. Altman, Pennsylvania 

Insurance Commissioner, which she filed in her capacity as Statutory Rehabilitator 

of Senior Health Insurance Company of Pennsylvania (SHIP). By this application, 

the Rehabilitator seeks approval of her Second Amended Plan of Rehabilitation 

(Second Amended Plan or Plan) for SHIP pursuant to Section 516(d) of Article V of 

The Insurance Department Act of 1921 (Article V), Act of May 17, 1921, P.L. 789, 

added by the Act of December 14, 1977, P.L. 280, 40 P.S. §221.16(d). The 

Rehabilitator has the statutory responsibility to develop a plan to correct the 

conditions that caused SHIP’s hazardous financial condition. Giving deference to 

the Rehabilitator’s discretion in formulating this Plan, this Court must decide 

whether to approve the Plan, approve the Plan with modifications, or disapprove the 

Plan.

At present, SHIP has approximately $1.4 billion in assets and $2.6 

billion in liabilities, producing a deficit of approximately $1.2 billion (also referred 

to as the Funding Gap). The Second Amended Plan’s ultimate goal is to eliminate 

the Funding Gap by increasing premium revenue and modifying the existing terms 

of most of the approximately 39,000 policies in force. The Plan is structured to 

maximize policyholder choice in several ways. Depending on his circumstances and 

preferences, a policyholder may choose to continue his policy with all benefits and 

terms unchanged by paying the actuarially justified annual premium for that policy. 

Alternatively, the policyholder may choose to reduce some policy coverages as more 

suitable to the policyholder’s current circumstances in order to avoid or temper a 

premium increase. A policyholder who is 95, for example, may decide to reduce the 
2

maximum coverage period from 10 to 5 years in lieu of paying the premium required 

for a policy with a 10-year period of coverage. 

The Second Amended Plan also seeks to correct SHIP’s discriminatory 

premium rate structure. At present, SHIP policyholders pay substantially different 

premiums for the same coverages. The difference in premiums is attributed to the 

decisions of different state regulators on SHIP’s proposed rate increases. The state 

where the policy is issued retains authority for all rate increases, even after the 

policyholder moves to another state. Policyholders whose state of issue has

approved the requested rate increase pay more for the same coverages than 

policyholders whose state of issue has disapproved the requested rate increase. As 

a result, the former group of policyholders pays more than its fair share of the costs 

of providing the coverages and the latter group pays less than its fair share. The 

Second Amended Plan seeks to eliminate these inequities.

The Court conducted a hearing on the Second Amended Plan from May 

17, 2021, through May 21, 2021. The parties submitted post-hearing briefs on June 

21, 2021, and June 28, 2021. On July 21, 2021, the Rehabilitator and Intervening 

Agents and Brokers filed an application for the Court’s approval of a settlement

agreement, which will amend Part VI.N of the Plan. The Rehabilitator’s application

for approval of the Second Amended Plan is ready for disposition, with the exception 

of Part VI.N, on which a decision will be deferred for 30 days to allow a hearing on 

the Rehabilitator’s settlement agreement with the Intervening Agents and Brokers. 

II. Findings of Fact

A. Business and History of SHIP

SHIP is a Pennsylvania life and health insurance company. Its origins 

date to 1887, when its corporate predecessor, the Home Beneficial Society,
3

commenced business. By the 1980s, the company was known as American 

Travelers Insurance Company and was primarily writing long-term care insurance. 

In 1996, the company was acquired by, and merged into, CIHC, Inc., a 

wholly-owned subsidiary of Conseco, Inc., and renamed Conseco Senior Health 

Insurance Company. In 2002, Conseco, Inc. filed a petition for reorganization under 

Chapter 11 of the United States Bankruptcy Code.1 In 2003, Conseco, Inc. emerged 

from bankruptcy as CNO Financial Group. In 2003, Conseco Senior Health 

Insurance Company ceased writing long-term care insurance and limited its 

operations to the administration and servicing of existing policies. In October 2008, 

Conseco Senior Health Insurance Company changed its name to Senior Health 

Insurance Company of Pennsylvania (SHIP), and its ownership was transferred from

CNO Financial Group to the newly-formed nonprofit Senior Health Care Oversight 

Trust, which has managed the run-off of SHIP’s long-term care insurance business

since 2008.

SHIP was licensed in 46 states (excluding Connecticut, New York, 

Rhode Island, and Vermont), the District of Columbia, and the U.S. Virgin Islands. 

Through its predecessors, SHIP issued approximately 645,000 long-term care 

policies; as of December 31, 2020, 39,148 policies remained in force. Exhibit (Ex.)

RP-33 at 3.

2

 SHIP’s policies cover long-term care services provided in congregant 

settings, such as nursing homes and assisted living facilities, as well as home-based

health care services and adult day care. The states with the greatest number of SHIP 

1

11 U.S.C. §§101-1532.

2 As of the date of the hearing on the Plan, SHIP had approximately 45,000 policies in force that 

are not long-term care policies. These policies are not material to the Second Amended Plan or 

the proposed rehabilitation of SHIP; they do not consume SHIP resources, either because they are 

reinsured or because claims under those policies are paid through a trust which is adequately 

funded.
4

long-term care policies in force as of December 31, 2020, are Texas with 4,960 

policies; Florida with 4,040 policies; Pennsylvania with 3,862 policies; California 

with 3,183 policies; and Illinois with 1,753 policies. Ex. RP-22 at 2. By contrast, 

the three states represented by the intervening state regulators in this matter have 

comparatively fewer policies in force; as of year-end 2020, there were 316 policies 

in force in Maine, 296 in Massachusetts, and 1,287 in Washington. Id.

The average age of a SHIP long-term care policyholder is 86, and the 

average age of a policyholder on claim is 89. Only 53% of SHIP long-term care 

policyholders pay premium. This is because the remaining 47% of policyholders 

either are on premium waiver3 or have previously taken a non-forfeiture option, 

which allows the policyholder to discontinue paying premiums in exchange for a 

period of coverage equal to the premiums previously paid to the company less any 

benefits previously received. Approximately 13% of SHIP’s long-term care 

policyholders are on claim, and the Rehabilitator expects that number to rise to 32% 

of all policyholders by 2050. Ex. RP-56 at 21. The Rehabilitator also expects the 

volume of SHIP’s claims to continue outpacing its premium collections. 

Specifically, in the absence of the Rehabilitator’s plan, SHIP will pay another $3 

billion in claims but collect only $230 million in premiums. Id. at 20.

B. SHIP’s Financial Condition

SHIP has approximately $1.4 billion in assets and $2.6 billion in

liabilities, i.e., a Funding Gap of $1.2 billion. Ex. RP-31 at 1-2. The major causes 

3 Approximately 99% of SHIP’s long-term care policies provide that a policyholder who receives 

benefits under his policy for a specified period of time (such as 90 days) is no longer required to 

pay premiums for coverage after that time period as long as the policyholder remains eligible for 

benefits or receives a specified level of care. “Once the policyholder’s eligibility for benefits ends, 

the policyholder is required to resume paying premiums.” Ex. RP-55 at 86 (Second Amended 

Plan). 
5

of SHIP’s insolvency were the use of erroneous actuarial assumptions to develop 

initial premium rates, poor investment returns, high operating costs, and the inability 

to obtain the approval of actuarially justified rate increases from state insurance 

regulators. Two significant adverse events exacerbated SHIP’s financial situation. 

In 2018, following the appointment of a Special Deputy Rehabilitator and a revision 

of SHIP’s key actuarial assumptions, SHIP recorded a $374 million premium 

deficiency reserve; a $44 million increase in claim reserves; and a $176 million 

investment loss from the so-called Beechwood investment program. These

accounting entries increased SHIP’s 2018 deficit by $500 million. See Ex. RP-56 at 

23. In 2019, revised actuarial assumptions required an increase in reserves, thereby 

adding another $400 million to SHIP’s deficit. Id. SHIP’s annual premium revenue 

as of December 31, 2020, is $58 million. Id. at 14.

C. Rehabilitation Plan

Given SHIP’s negative capital and surplus, the Insurance Department 

applied to this Court for an order placing SHIP in rehabilitation, with the consent of 

the Senior Health Care Oversight Trust and SHIP’s directors. On January 29, 2020, 

the Court granted the application and appointed the Pennsylvania Insurance 

Commissioner to serve as Rehabilitator of SHIP; to take steps to address SHIP’s 

financial challenges; and to protect its policyholders and other creditors. 

The Rehabilitator engaged a Special Deputy Rehabilitator, Patrick 

Cantilo, and actuarial consultants, including Oliver Wyman, to study SHIP’s 

financial condition and to manage the company while they developed corrective 

measures. On April 22, 2020, the Rehabilitator filed a plan for the rehabilitation of

SHIP. The Court issued a case management order which, inter alia, solicited formal 
6

and informal comments from any interested person. Several intervened to offer 

comments on the rehabilitation plan and participate in any proceedings, including:

4

1) The Maine Superintendent of Insurance, the Massachusetts 

Commissioner of Insurance, and the Washington Insurance 

Commissioner (Intervening Regulators);

2) The National Organization of Life and Health Guaranty 

Associations (NOLHGA);

3) ACSIA Long Term Care, Inc.; Global Commission Funding LLC; 

LifeCare Health Insurance Plans, Inc.; Senior Commission Funding 

LLC; Senior Health Care Insurance Services, Ltd., LLP; and United 

Insurance Group Agency, Inc. (Intervening Agents and Brokers);

4) Anthem, Inc.; Health Care Service Corporation; Horizon Health

Care Services, Inc. d/b/a Horizon Blue Cross Blue Shield of New

Jersey; and UnitedHealthcare Insurance Company (Intervening 

Health Insurers); and

5) James Lapinski, a policyholder and agent, and Georgianna Parisi, a 

policyholder.

After reviewing the formal and informal comments, the Rehabilitator 

filed an amended rehabilitation plan on October 21, 2020. Following a second 

comment period and a pre-hearing conference, the Rehabilitator filed the Second 

Amended Plan on May 3, 2021.

The Second Amended Plan is designed to be implemented in three 

phases. Phase One, beginning immediately upon Court approval, is the principal 

phase and seeks to reduce substantially or eliminate the Funding Gap. This phase 

identifies the SHIP policies that require modification because their current premium

4 The original intervening persons also included Transamerica Life Insurance Company and 

Primerica Life Insurance Company, both of which issued policies reinsured and administered by 

SHIP. These parties are no longer actively participating in the proceeding.
7

falls below the “If Knew Premium” for the benefits provided by the policies. Ex. 

RP-55 at 10. The If Knew Premium rate is the rate that, if charged from inception, 

would have produced an underwriting loss ratio of 60% for each policy form. Id. at 

27. If Knew Premium rates are intended to price policies adequately on a lifetime 

basis, but not to recoup losses due to inadequate pricing in the past. Further, the 

policyholder’s age and current medical condition are not taken into account when 

setting the If Knew Premium rate. The If Knew Premium is an accepted 

methodology for setting premiums for long-term care insurance policies.

Policyholders whose current premium (including the premium they 

would be paying but for a premium waiver) falls below the If Knew Premium for 

the policy’s benefits will be required to elect one of four options:

Option 1: continue paying the current premium or maintain 

the premium waiver if one is in effect, but if the current or waived 

premium is less than the If Knew Premium, have the policy 

benefits reduced in accordance with Plan provisions so that the 

premium for the reduced benefits (including waived premium) is 

equal (on an If Knew Premium basis) to the current premium. 

The benefit reductions will be selected automatically by the Plan.

Option 2: select certain policy endorsements that provide 

essential benefits (sometimes greater than the benefits provided

by Option 1) for an actuarially justified premium. The maximum 

benefit period is capped at four years, the maximum daily benefit 

is capped at $300 and inflation protection is capped at 1.5%.

Option 2A: an enhanced alternative with a five-year benefit 

period and 2% inflation rider. Options 2 and 2A will not be 

subject to further rate increases or benefit reductions in Phase 

Two of the Plan. Options 2 and 2A are designed to provide 

reasonable coverage at reasonable premium rates.

Option 3: Non-forfeiture Option (NFO) through which the 

policyholder will receive a Reduced Paid-up (RPU) policy 

providing limited benefits but for which no future premiums will 
8

be charged. Under the Plan, this option will include more 

generous benefits than the typical industry non-forfeiture option 

or reduced paid-up policy, most notably in that it will offer as 

much as a 30-month benefit period unless the current policy has 

a shorter benefit period. Moreover, policyholders who select this 

option will never have to pay additional premiums and this policy 

will never lapse.

Option 4: retain the current policy benefits and pay the 

corresponding If Knew Premium (unless equal to or lower than 

the policyholder’s current premium). For many policyholders 

this may require a substantial increase in premium.

See Ex. RP-55 at 11-12. Policyholders who presently pay a premium at or above the 

If Knew Premium may elect Option 2 or Option 3 if preferable, given their present

circumstances. Otherwise, these policyholders will not have their policies modified 

in any respect.

Before making an election, each policyholder will receive information

detailing the premiums and benefits associated with each option. Special elections

will apply to policyholders who are not currently paying premium due to a premium 

waiver provision in their or their spouses’ policies. Most of these policyholders have 

a current premium (what they would be paying but for the waiver) that is lower than 

the If Knew Premium. These policyholders will be required to pay a differential 

premium, which represents the difference between (1) the premium they would be 

paying but for the premium waiver in effect (the current premium), and (2) the If 

Knew Premium appropriate for their policy coverages. Ex. RP-55 at 12. Should the 

premium waiver terminate, these policyholders will then be required to pay the full 

applicable If Knew Premium. Similar options will be offered to policyholders on 

claim.
9

For every policyholder there will be a default option that applies

automatically if no election is made. For the policyholder whose current premium 

falls at or above the If Knew Premium, the default option leaves the policy 

unchanged. For the policyholder whose current premium falls below the If Knew 

Premium, the default option will be identified in the election materials. For 

policyholders on premium waiver, the default option will be Option 1 (the benefit

downgrade). Where the nonforfeiture option would provide these policyholders 

better benefits than the downgrade, Option 3 will be the default option. For 

policyholders paying premium, Option 2 (basic policy endorsements) will be the 

default option.

In Phase Two of the Second Amended Plan, the results of Phase One 

will be evaluated to determine whether additional policy modifications may be 

necessary for certain policies that are still underpriced. It is expected that 

modifications in Phase Two will largely be based on achieving a self-sustaining 

premium for every policy. The goal of Phase Two will be to eliminate any Funding 

Gap not eliminated in Phase One. In Phase Three, the Rehabilitator will complete 

the run-off of SHIP’s long-term care insurance business remaining in force.

The Second Amended Plan corrects the condition that caused SHIP’s 

insolvency: the underpricing of policies. The Plan will address the Funding Gap by 

increasing premiums or modifying policy coverages. The Rehabilitator has 

concluded that a modification of coverages will do more to reduce the Funding Gap

than premium increases. Further, many policyholders are paying for more coverage 

than they are likely to use. 

The Rehabilitator designed the Plan around the core principle of 

policyholder choice. All policyholders will have at least one option for preserving 
10

their current coverage (by paying an increased premium) and at least one option for 

preserving their current premium (by reducing policy benefits). The Plan’s premium 

rate structure takes rate increase history and product differences into account, and it 

will develop premium rate increases based solely on the characteristics of each 

policy and not on the policyholder’s state of residence or the state where the policy 

was issued.

The payment of commissions owed to agents under agreements made 

prior to the inception of rehabilitation proceedings will be suspended under the 

Second Amended Plan until policyholders’ claims have been paid in full and 

adequate provision made for reasonably anticipated future claims. Accrual of 

commissions will also be suspended as of the effective date of the Plan, i.e., the date 

the policyholder elections become effective. Claims for commissions owed to 

agents and brokers will be subordinated to policyholder claims. The Plan’s 

treatment of agent and broker commissions reflects the Rehabilitator’s belief that 

most policyholders do not maintain a close relationship with their agent after 

purchasing their policy. They typically contact SHIP or another trusted professional 

when they have questions about their policy. 

D. Hearing on Second Amended Plan

At the hearing on the Second Amended Plan, the Rehabilitator offered 

testimony from the following witnesses: Special Deputy Rehabilitator Patrick

Cantilo, who was admitted as an expert in insurer insolvency matters, specifically as 

to long-term care insurers; Marc Lambright, an actuarial consultant to the 

Rehabilitator, who testified as a fact witness; and Vincent Bodnar, an actuarial 

consultant to the Rehabilitator, who was admitted as an actuarial expert and as an

expert on long-term care insurance, including product development and sales 
11

practices, the rate setting and approval process for insurers, and the liquidation of 

financially troubled insurers.

i. Rehabilitator’s Evidence

a. Patrick Cantilo

Special Deputy Rehabilitator Patrick Cantilo provided the history of the

business of SHIP, summarized above, and his involvement in the rehabilitation since 

2018. 

He first discussed the effects of the COVID-19 pandemic on SHIP’s 

business and financial condition. Cantilo testified that since the beginning of the 

pandemic in 2020, SHIP has experienced a moderate increase in mortality, i.e., more 

of its insureds died than would normally be expected, which generated a moderate 

increase in policy lapses. There was a small increase in morbidity, i.e., the expected

incidence of disease. The pandemic adversely affected SHIP’s expected yield on 

invested assets. Cantilo opined that the aggregate effects of the pandemic had a 

relatively moderate impact on SHIP’s financial condition and are not material to the 

Second Amended Plan.

Cantilo focused his testimony on the approximately 39,000 long-term 

care policies of SHIP. Approximately 53% of SHIP’s current policyholders are 

paying premium, generating $58 million in revenue as of year-end 2020. The 

remaining 47% of policyholders are on claim, have previously selected a nonforfeiture option or are on premium waiver. See Ex. RP-56 at 14. Many 

policyholders have been paying less premium than is necessary to fund their 

coverages, and this premium deficiency has existed for years. SHIP policies that 

create the greatest liability have a 5% compounded inflation rider; unlimited lifetime 

benefits; and are non-tax qualified, meaning that they have lower benefit triggers 
12

and shorter elimination periods. The effect of the inflation rider has been to increase 

the maximum daily benefit up to $650, without regard to actual inflation levels or 

the actual cost of the policyholder’s care. Cantilo testified that the inflation rider is 

a “big contributor” to SHIP’s overall deficit. Notes of Testimony (N.T.), 5/17/2021, 

at 34. 

Cantilo testified that the majority of policyholders pay an annual 

premium of less than $2,500 per year. N.T., 5/17/2021, at 37-38. See Ex. RP-56 at 

14. The group is 71% female, and the majority are in their 80s and 90s. 

Approximately 70% of the policies in force provide comprehensive coverage for 

both home health care and facility care in either an assisted living facility or nursing 

home. Inflation protection is a feature of 47% of these policies. The majority of 

policies, 54%, provide between one and four years of benefits; 27% provide lifetime 

benefits. Ex. RP-56 at 17.

Cantilo opined that SHIP’s claims, when compared to premiums, do not 

present “a good picture.” N.T., 5/17/2021, at 41. The number of policies in force

has declined since SHIP began operating in 2009, and at present, the claim costs 

outpace the premium revenue. Of the total premium revenue that SHIP is expected 

to collect prior to the expiration of the policies in force, approximately $7.4 billion,

it has already collected $7.1 billion. Stated otherwise, SHIP expects to collect only

about $300 million in additional premium. On the other hand, SHIP’s expected

claims during that same period total approximately $11 billion; it has paid only $7.7 

billion so far. In short, SHIP can expect to pay another $3 billion in claims but to

collect only $300 million in premium, unless its business is restructured in a 

rehabilitation. 
13

Cantilo testified that SHIP is not atypical in the industry. Long-term

care insurers collect more premium than needed in the early years of writing policies. 

They invest the excess, put it aside, and then tap into those invested assets to pay 

claims. When a company stops writing new business, as SHIP did 18 years ago, the

premium curve begins to flatten and the claim curve begins to rise. Cantilo testified 

that the assets set aside for the purpose of paying claims did not earn the expected 

income that was needed to meet liabilities.

Cantilo discussed the reasons for SHIP’s insolvency, beginning with 

the erroneous actuarial assumptions made when the policies were first issued. SHIP

underestimated the number of people who would become ill and qualify for benefits. 

At the same time, SHIP overestimated how quickly people would recover and stop 

needing care, referred to in the industry as morbidity improvement. SHIP overstated 

mortality by assuming more people would die before submitting claims than actually 

did. Relatedly, SHIP overestimated the number of policies that would lapse by 

reason of death or non-payment of premium. Cantilo estimated that through 2040, 

when most of the block of business will have terminated, the aggregate effect of the

erroneous actuarial assumptions approximately equals the total deficit of $1.2 

billion. See Ex. RP-56 at 29. 

Another factor in SHIP’s insolvency is its investment history. SHIP 

experienced lower market yields than it anticipated while it was selling and pricing 

its long-term care policies. To counter the effects of economic conditions, in 2009,

SHIP invested in two programs, the Beechwood program and Roebling Re. Instead, 

these programs produced investment losses between $150 million and $300 million

(as reported in 2018).
14

Cantilo testified that a significant cause of SHIP’s insolvency is its 

discriminatory premium rate structure. As SHIP management realized its premium 

rates were inadequate, it began seeking premium rate increases from state regulators 

across the country from 2009 to 2021. SHIP received wildly different rate approvals. 

See Ex. RP-56 at 45. Cantilo testified that from 2009 to 2019, SHIP lost $312 million 

in cumulative premium due to rejected rate increase filings, or $371 million using

an assumed 3.5% interest rate of return on investments. N.T., 5/17/2021, at 63-64; 

Ex. RP-56 at 50-51. The different responses of state regulators to SHIP’s requested

rate increases have created a discriminatory rate structure, which has been the focus 

of criticism in the regulatory community. Policyholders whose state of issue has

approved rate increases are effectively subsidizing policyholders whose state of 

issue has not approved rate increases. Similarly situated policyholders are paying 

vastly different premiums for the same coverage. Cantilo opined that this has created 

an unfortunate side effect: states inclined to approve actuarially justified rate

increase requests become hesitant to do so because of the failure of other states to 

act in kind.

The Rehabilitator’s team had to decide whether to pursue a 

rehabilitation or liquidation of SHIP. Cantilo testified that the team chose 

rehabilitation because SHIP is financially able to provide a reasonable package of

coverages to the remaining 39,000 policyholders. The Rehabilitator also considered 

that, in a liquidation, guaranty association coverage will be triggered, resulting in 

taxpayers contributing hundreds of millions of dollars to pay claims of policyholders

who have not paid an appropriate premium. Rather than shifting the burden of the 

inadequate premium to taxpayers, the team concluded that the better course was to 

right-size the existing policies to an actuarially justified premium. Acknowledging 
15

that no rehabilitation plan will magically restore SHIP to solvency, Cantilo testified 

the Second Amended Plan will, at a minimum, substantially reduce the Funding Gap

and correct SHIP’s inequitable premium rate structure. He explained that the Plan 

must be implemented quickly because of the advanced age of the policyholders.

In preparing the Second Amended Plan, the Rehabilitator relied on the 

combined expertise of Cantilo; Vincent Bodnar and other actuarial analysts at Oliver 

Wyman; Robert Robinson, who was appointed Chief Rehabilitation Officer of SHIP 

and who served as Chief Rehabilitation Officer and Chief Liquidation Officer for 

Penn Treaty;5 Pennsylvania Insurance Department legal counsel and staff; and SHIP 

technical staff. The Rehabilitator also sought and considered the input of state 

insurance regulators, staff of the National Association of Insurance Commissioners, 

policyholders and other formal and informal commenters. The Rehabilitator’s team 

prepared extensive analyses of SHIP’s finances, its policyholders, the long-term care 

insurance market, and other matters relevant to SHIP’s condition and prospects for 

rehabilitation. Key data and information have been made available to interested

persons through a data site, which included actuarial files relating to assumptions 

and analyses, a seriatim actuarial file for every policy at issue, and tailored reports 

related to the Second Amended Plan.

Cantilo explained how the Second Amended Plan will operate. He 

described it as “completely scaleable,” meaning that the elements of the Plan can 

5 Penn Treaty Network America Insurance Company, a Pennsylvania insurer, and its subsidiary, 

American Network Insurance Company (collectively, Penn Treaty), provided long-term care 

insurance to over 126,000 policyholders in all 50 states and the District of Columbia. Penn Treaty 

became insolvent for many of the same reasons that SHIP is insolvent, i.e., benefit-rich policies 

were underpriced at inception and the company’s active live reserves became understated. Penn 

Treaty was placed into rehabilitation by the Pennsylvania Insurance Commissioner on January 6, 

2009. Rehabilitation ultimately proved unsuccessful, and on March 1, 2017, this Court ordered 

the liquidation of Penn Treaty. 
16

respond to changes in the amount of the Funding Gap as SHIP moves through Phase 

One and into Phase Two and Phase Three. N.T., 5/17/2021, at 97. In Phase One, 

the policyholder’s options are based on the If Knew Premium, and in Phase Two the 

options will be developed to establish a self-sustaining premium structure.

6

 Cantilo 

testified that it was important to give each policyholder at least two options: (i) retain 

his current coverages by paying the actuarially justified premium (Option 4) or (ii)

retain his current premium by adjusting coverages to match that premium (Option 

1). Between those two options there is a non-forfeiture option (Option 3) that is 

more generous than a non-forfeiture option in liquidation and basic policy options

(Options 2 and 2A), which provide a reasonable package of long-term care coverage 

at an affordable price.

Cantilo testified that the If Knew Premium was selected to establish the 

premium in Phase One because it is generally accepted by regulators across the 

country; it was the methodology used by guaranty associations to increase premium

rates for policyholders in the Penn Treaty liquidation; it is an easy rate methodology 

to explain to policyholders; and it achieves the goal of putting policyholders on a 

level playing field when it is calculated on a seriatim basis.

Cantilo explained in detail each Phase One option in the Second 

Amended Plan. Option 1 is the downgrade option. It allows the policyholder to

keep his current premium but reduces benefits until the premium is adequate, on an 

If Knew basis. The policyholder will not choose which benefits to downgrade, 

which was discovered to be too complicated in the Penn Treaty liquidation. The 

methodology for reducing benefits under Option 1 will proceed in the following 

6 The scope of Phase Two can only be determined after the completion of Phase One and an 

assessment of the remaining Funding Gap. Cantilo anticipates that the Rehabilitator will return to 

the Court at that point in the rehabilitation process.
17

sequence: elimination of benefit restoration provisions; elimination of benefit 

extension provisions; adoption of tax-qualified benefit triggers; discontinuation of 

return of premium provisions; removal of inflation protection and locking of 

maximum daily benefit at current levels; conversion from indemnity to 

reimbursement of actual expenses up to the maximum daily benefit amount; 

reduction in the maximum daily benefit; extension of any elimination period to 90 

days and applying it to each period of care; reduction in the policy’s maximum 

benefit period; elimination of all premium waiver provisions; and conversion of the 

policy to a pool of money with a reduction of the maximum benefit period to the 

amount required to match the current premium. Ex. RP-55 at 45-46; Ex. RP-56 at 

69. If the first revision is sufficient to match the policy’s coverages to the existing 

premium, no further coverage modifications will be made.

Under Option 2, the policyholder selects basic policy coverages and a 

corresponding If Knew Premium. After extensive policyholder outreach, the 

Rehabilitator selected the key components of long-term care that most policyholders 

desire if they cannot afford the most expensive package of coverages. These include 

a maximum benefit period equal to the lesser of the current benefit period or four 

years; a maximum daily benefit equal to the lesser of 80% of the current daily benefit 

or $300 for nursing facility care;

7

and an annual inflation adjustment capped at 1.5%. 

Option 2A, which is an enhanced version of Option 2, provides a maximum benefit 

period of five years and an annual inflation adjustment of 2% for a higher premium. 

Policyholders who elect Option 2 or 2A will not be expected to participate in Phase 

Two of the Second Amended Plan.

7 The maximum daily benefit for facility care other than nursing home care is $225. The maximum 

daily benefit for home health care is $150.
18

Option 3 is the non-forfeiture option, which offers the policyholder a 

maximum benefit period of 2.5 years and a maximum daily benefit equal to the lesser 

of 80% of the current daily benefit or $300 for nursing facility care.8 Cantilo 

contrasted Option 3 with the standard non-forfeiture option in the industry, which

offers the policyholder the equivalent of accumulated premium less claims. 

Typically, this results in only several months of coverage, particularly where the 

policy is rich in benefits. By contrast, Option 3 provides a reasonable alternative to 

a “luxurious” policy. Policyholders who elect Option 3 will not be required to 

participate in Phase Two of the Plan. 

Option 4 allows the policyholder to keep his current coverages by

paying the If Knew Premium. Cantilo testified that this option is the least favored 

by the Rehabilitator because if the majority of policyholders choose this option the 

Funding Gap will only be reduced by half. N.T., 5/17/2021, at 191. This is because 

the If Knew Premium does not cover the prior years of premium inadequacy.

Cantilo explained that the options will vary depending on whether the

policyholder is on claim or paying premium. A policyholder on premium waiver 

may choose to pay a differential premium, i.e., the difference between the waived

premium and the If Knew premium. The policyholder may choose not to pay the 

differential premium, but the benefits of his policy will be reduced in a 

commensurate amount. Cantilo testified that the rationale behind the differential 

premium is to apportion the burden of rehabilitation among all policyholders, not 

just the subset still paying premium. It would be unfair for the 13% of policyholders 

on premium waiver to be immunized from a premium adjustment at the expense of 

the other 87%.

8 The maximum daily benefit for facility care other than nursing home care is $225. The maximum 

daily benefit for home health care is $150.
19

Cantilo described the option election process, which will begin with the 

Rehabilitator sending every policyholder a packet of information containing three 

sections. The first section describes the policyholder’s current policy, including the 

monthly premium, available benefits, maximum policy value and the applicable 

statutory guaranty association limit were SHIP to be liquidated. The second section 

provides information on each option and how it changes the key provisions of the 

policy, e.g., duration of benefit period and maximum daily benefit amount. The 

amount of the maximum policy value not covered by the applicable guaranty 

association is also provided. The third section contains two key pieces of 

information: the policyholder’s estimated annual premium should a liquidation be 

ordered and the policyholder’s estimated self-sustaining premium in Phase Two of 

the rehabilitation. Cantilo explained that these two numbers will enable 

policyholders to better choose among the options, especially since Options 1 and 4 

will subject them to Phase Two.

To create user-friendly policyholder election materials, the

Rehabilitator has engaged consultants who specialize in preparing Medicare 

supplement materials. The election forms will use graphics and be intuitively easy 

to follow. The Rehabilitator also plans to post a video tutorial online to guide the 

policyholder through the election forms. Cantilo testified that the Rehabilitator’s 

goal is 100% policyholder participation. If a policyholder whose current premium 

is below the If Knew Premium does not make an election by the deadline, there are 

default options. For policyholders on premium waiver, the default option is Option 

1, the downgrade option, unless Option 3 will provide better coverage, in which case 

it will be the default. For policyholders paying premium, the default option is Option 

2, the basic policy endorsements.
20

The Rehabilitator conducted considerable outreach about the 

rehabilitation of SHIP beginning in the early stages of the rehabilitation. The 

Rehabilitator participated in regular meetings of the National Association of 

Insurance Commissioners and organized numerous meetings and conference calls 

with state regulators. The goal was to design a rehabilitation plan to address all 

concerns, particularly those expressed about state-of-issue responsibility for 

premium rate review. The Rehabilitator set up a secure data site for interested 

persons that contains all of the exhibits to this proceeding, including the seriatim 

actuarial files for every policy. Individual reports were generated for each state 

explaining how resident policyholders of that state would fare under the plan. 

To date, the Rehabilitator has received comments from approximately 

100 policyholders. Cantilo testified that this was far fewer than the number of 

comments in Penn Treaty. As expected, most policyholder concerns related to 

reduction of benefits and rate increases. Cantilo was surprised how many 

policyholders were supportive of a rehabilitation and the plans submitted by the 

Rehabilitator.

The principal concerns raised by state insurance regulators related to 

the following areas: (1) treatment of reinsurance assumed; (2) setting of premium 

rates by the Rehabilitator and this Court rather than by state-of-issue regulators; (3) 

desirability of liquidation instead of rehabilitation; and (4) feasibility of the Second 

Amended Plan. Cantilo discussed each of these areas in turn.

On the first concern, Cantilo explained that SHIP’s assumed 

reinsurance involved approximately 2,000 long-term care policies originally issued 

by American Health and Life, Primerica and TransAmerica, or the predecessors of 

those companies. SHIP’s predecessors entered into agreements to reinsure 100% of 
21

these policies and administer claims. In the case of TransAmerica, on December 29, 

2020, this Court approved an agreement by which TransAmerica recaptured its 

policies from SHIP. Cantilo opined that the recapture was consistent with industry 

norms.

With regard to premium rates, Cantilo acknowledged the objections of 

the Intervening Regulators. They contend that the state where the policyholder 

resided when the policy was issued is solely responsible for the regulation of the 

policy’s premium rate. Cantilo opined that this makes sense for solvent insurers, but 

when an insurer enters rehabilitation, the domiciliary state has sole responsibility for 

the insolvent insurer and the restructuring of its business. This responsibility

includes the adjustment of premiums and policy coverages where necessary to 

correct the insurer’s financial condition. 

Cantilo testified that the Intervening Regulators’ legal assertion that 

they have the right to review and approve premium rates for policies issued by SHIP 

in their states creates “some ironic consequences.” N.T., 5/17/2021, at 157. For 

example, 34 policies issued in Maine, 84 policies issued in Massachusetts and 89 

policies issued in Washington are held by policyholders who now reside in other 

states. Thus, the Intervening Regulators assert the right to set the rates for 207 

policyholders who live outside of their states. Ex. RP-56 at 97. Further, 21

policyholders who reside in Maine, 83 policyholders who reside in Massachusetts

and 87 policyholders who reside in Washington had their policies issued in other 

states. Under the Intervening Regulators’ legal assertion, other state regulators 

would set the rates for 191 policyholders residing in the states represented by 

Intervening Regulators. Id. at 98. In short, their inflexible view of rate regulation

results in approximately 400 policyholders residing in Maine, Massachusetts and 
22

Washington having their rates set by states in which they do not reside. The better 

approach, in Cantilo’s view, is for the domiciliary regulator of an insurer in 

rehabilitation to manage rate and contract modifications as part of a comprehensive 

rehabilitation plan.

Nevertheless, the Second Amended Plan contains an Issue State Rate 

Approval Option. As Cantilo explained, every state will be given the option of 

opting out of the rate approval section of the Second Amended Plan. If a state opts 

out, the Rehabilitator will file an application to increase premium rates for policies 

issued in that state to the If Knew Premium level. No rate increase will be sought 

for policies on premium waiver or which are already at or above the If Knew 

Premium. The Rehabilitator will file the application on a seriatim basis to eliminate 

subsidies and restore a level playing field. The regulator for the opt-out state will 

then render a decision on the application; if it is only partially approved, the 

Rehabilitator will downgrade the benefits for the affected policies.9 Cantilo testified 

that this is essential to eliminate the subsidies that exist between policyholders across

states by virtue of uneven rate increase approvals over the years. Each opt-out state 

policyholder will still have four options, which are not exactly the same as those 

offered in the Second Amended Plan. They are: (1) pay the approved premium and 

have benefits reduced to match; (2) accept a downgrade of benefits to match the 

current premium; (3) accept an issue-state non-forfeiture option; or (4) keep the 

current benefits and pay the If Knew Premium. Cantilo pointed out that the nonforfeiture option available to opt-out policyholders will not be as generous as the 

enhanced non-forfeiture option in Option 3 of the Second Amended Plan. There will 

also be no “basic policy benefits” option, i.e., Option 2 in the Plan.

9

If the state takes no action on the rate application within 60 days, it will be deemed denied.
23

Cantilo next addressed the Intervening Regulators’ argument that 

immediate liquidation of SHIP is preferable to rehabilitation. In this regard, the 

Intervening Regulators focus on the present value of future benefits less the present 

value of future premiums, also referred to as the “Carpenter value,” to support their 

view that policyholders would fare better in a liquidation. N.T., 5/17/2021, at 175.10 

Cantilo criticized this measure because it does not give an accurate picture of a 

policyholder’s situation. He offered the example of an actual 92-year-old SHIP 

policyholder currently paying $2,761 for a policy with unlimited benefits. Ex. RP56 at 102. Using the Intervening Regulators’ preferred methodology, the “Carpenter

value” of that policy is $33,890, which is higher than the “Carpenter value” produced

under any of the four Plan options. However, to receive this value of $33,890, the 

policyholder would have to pay $11,520 in annual premium. By contrast, this

policyholder could choose Option 3, a paid-up policy with a slightly lower 

“Carpenter value” of $33,550. With a paid-up policy, however, this policyholder 

would receive 2.5 years of coverage and never pay another premium. Cantilo offered 

other examples where Option 3 would be the best option for a policyholder, given 

the amount of premium the policyholder would be required to pay to the guaranty 

association in a liquidation. See, e.g., Ex. RP-56 at 103. Cantilo opined that these

are not exceptions; “[t]here are many cases where the raw projection of future 

benefits less future premium doesn’t really tell you what the real value of the policy 

is.” N.T., 5/17/2021, at 177.

Cantilo discussed several different ways to compare the value of the 

Plan options to what would be available in a liquidation. Using the Intervening 

10 “Carpenter value” refers to the United States Supreme Court’s decision in Neblett v. Carpenter, 

305 U.S. 297 (1938), which is often cited for the proposition that, in order for a rehabilitation plan 

to be constitutional, policyholders must fare as well in rehabilitation as they would in a liquidation.
24

Regulators’ standard of present value of future benefits less present value of future 

premiums, 85% of policyholders will have at least one option as favorable as 

liquidation and 15% will not. Ex. RP-56 at 105. Using the present value of future 

benefits divided by annual premiums, those numbers are 79% and 21%. Id. at 106. 

Using the maximum policy value divided by annual premium, those numbers are 

89% and 11%. Id. at 107. Using the maximum policy value less present value of 

future premiums, those numbers are 96% and 4%. Id. at 108. Finally, using the 

Rehabilitator’s preferred standard of maximum policy value, also referred to as the 

“benefit account value” or “lifetime maximum benefit” in some policies, id. at 104, 

100% of policyholders will have at least one option in the Plan that offers the same 

or a better value than in a liquidation. Id. at 109. 

Cantilo acknowledged that these are actuarial techniques that rely on 

the exercise of professional judgment. He opined that the maximum policy value is

what policyholders use when they purchase an insurance policy, i.e., the maximum 

daily benefit and the maximum benefit period.

Cantilo offered additional reasons to explain why rehabilitation is 

preferable to liquidation. First and foremost is the value of policyholder choice. 

Second, the Second Amended Plan contains features that would not be available to 

policyholders in liquidation, such as an option to retain their current policy level of 

coverage, which may exceed the applicable guaranty association cap, by paying the 

If Knew Premium. Third, there is the enhanced non-forfeiture option that provides

reasonable coverage for no additional premium. In a liquidation, the non-forfeiture 

option would be locked into the policy’s present coverages and terms, which may 

result in a very short period of coverage. Fourth, the Plan reduces or eliminates the 

subsidies in the current rate structure, which cannot be done in a liquidation. 
25

Finally, Cantilo testified about the likelihood of success of the Second 

Amended Plan. He opined that the Plan is designed to eliminate the Funding Gap

over three phases. This is not likely to happen in Phase One, but Phase One will 

materially reduce the Funding Gap. 

Cantilo offered an exhibit illustrating the amount of the Funding Gap 

reduction under 11 hypothetical policyholder election scenarios. In general, the 

more that policyholders elect to pay the If Knew Premium for their current benefits 

(Option 4), the worse the outcome for the Funding Gap. For example, in Scenario 

1, where 7% elect Option 1, 8% elect Option 2 or 2A, 4% elect Option 3 and 81% 

elect Option 4, the Funding Gap is reduced by $525 million. Ex. RP-56 at 113. At 

the other extreme, in Scenario 11, where a very small number of policyholders elect 

Option 4 and the rest split evenly among Options 1, 2, 2A and 3, the Funding Gap is 

completely eliminated. Id. This underscores how the policyholders will be the 

masters of the fate of SHIP. No matter how much of the Funding Gap is eliminated

in Phase One, SHIP will be in better shape if it eventually has to be liquidated 

because the discriminatory subsidies in the premium rate structure will be 

eliminated, and the policies will be right-sized for the premium the policyholder is 

willing to pay.

On examination by the Intervening Health Insurers, Cantilo testified 

that the SHIP policies contain provisions that allow SHIP to modify the premium 

rate. Some policies provide that rate increases will require the approval of state 

regulators, while others specify that rate increases may be sought only where an

increase is warranted given the claims experience of the cohort of policyholders 

covered by the same policy form. Cantilo stated that these provisions are standard 

in long-term care insurance policies. The Rehabilitator designed the If Knew 
26

Premium methodology in the Second Amended Plan to be consistent with the

standardsfor setting long-term care insurance premium rates, which are substantially 

the same in every state.

b. Marc Lambright

Marc Lambright, an accident and health insurance actuary with Oliver 

Wyman, testified for the Rehabilitator. Lambright testified that the Pennsylvania 

Insurance Department engaged Oliver Wyman in early 2017 to conduct a targeted 

examination of SHIP’s reserves and the assumptions used by its actuarial firm, 

Milliman, to set the reserves. Following its examination, Oliver Wyman submitted 

a report making several observations: Milliman’s cash flow testing assumptions

were too optimistic; claim reserves for the preceding years were inadequate; and the 

Beechwood investment program was riskier than assumed in the 2016 cash flow test 

report. Ex. RP-56 at 53. Oliver Wyman made several recommendations for the 

ongoing financial monitoring of SHIP. They included using more recent experience 

to develop morbidity, lapse and termination assumptions. Id. Milliman largely 

rejected Oliver Wyman’s recommendations.

In 2018, after SHIP was placed under the supervision of the Insurance 

Department, Cantilo asked SHIP to devise a corrective action plan.11 Cantilo also 

asked Oliver Wyman to continue analyzing SHIP’s financial condition. Lambright 

testified that much of 2018 was spent pressing SHIP to substantiate some of its 

actuarial assumptions. Lambright testified that the Beechwood investment losses 

($176 million) and the premium deficiency reserve booked in 2018 ($347 million) 

had a significant impact on SHIP’s financial picture. N.T., 5/18/2021, at 374. In 

11 Section 510(a) of Article V authorizes the Insurance Commissioner to “make and serve upon 

the insurer and any other persons involved, such orders ... as are reasonably necessary to correct, 

eliminate or remedy” the insurer’s condition that required the supervision. 40 P.S. §221.10(a). 
27

2019, Lambright assisted Vincent Bodnar as he built the corrective action plan that 

would become the rehabilitation plan.

c. Vincent Bodnar

Vincent Bodnar, an actuary at Oliver Wyman with a specialty in longterm care insurance, testified as an expert witness. Bodnar performed actuarial work 

for the Rehabilitator and was involved in developing the Second Amended Plan, 

including the Phase One options to be offered to the policyholders. 

Bodnar described the seriatim model as the core of the Second 

Amended Plan. A seriatim model, which produces actuarial projections for each 

policy individually, has become the industry standard in the past five years. The 

input to the seriatim model consists of individual policyholder characteristics such 

as age, gender, issue age, benefit features of the policy, and the premium charged. 

Applied to the input file are actuarial assumptions, including morbidity and mortality 

rates, lapse rates, and exhaustion rates, which Oliver Wyman has developed using

SHIP’s historical experience. The seriatim model projects future premiums and 

future claims for each policy on a month-by-month basis. N.T., 5/18/2021, at 397.

Bodnar explained that the If Knew Premium methodology employed in 

Phase One determines the premium an insurer would charge had it known when the 

policy was issued what it knows today, i.e., that it would experience lower returns

on investments, lower mortality rates, lower lapse rates, and higher claim incidence 

rates. The If Knew Premium assumes a 60% lifetime loss ratio from inception of a 

policy, i.e., the use of 60% of expected premium to pay benefits to policyholders. 

The other 40% of expected premium is used to pay salaries, administrative overhead, 

premium taxes, federal taxes and profit for the insurer. The goal of the lifetime loss 

ratio is to establish a premium level that is reasonable in relation to the benefits paid. 
28

The 60% lifetime loss ratio is the benchmark required for a premium rate increase 

in most states. The If Knew Premium methodology employed in Phase One will be 

actuarially justified and will not recoup past underpricing losses, although several 

states allow such recoupment. In the Penn Treaty liquidation, guaranty associations

sought premium rate increases from the states based on an If Knew Premium 

methodology similar to the one employed in Phase One.

Because the Second Amended Plan intends to set premium rates on a 

seriatim basis, each policyholder will receive an individual premium increase 

calculated on the benefit features of his policy and the policyholder’s characteristics. 

The model does not consider individual claim experience but, rather, “all the various 

variants that make up a given assumption” for a risk class. N.T., 5/18/2021, at 412. 

By contrast, in a traditional rate application process, insurers request state approval 

of an aggregate premium rate increase, although their models might be developed 

on a seriatim basis. 

Bodnar testified that it is common for an insurer to receive mixed 

responses to a premium rate increase request from state regulators because each state 

has its own approach to reviewing rates. Additionally, the rate review process 

typically takes between 90 days and 2 years. Protracted rate reviews with drastically 

different outcomes have resulted in some SHIP policyholders paying a premium 

rate that subsidizes the inadequate premium rates of other SHIP policyholders. The 

Second Amended Plan seeks to eliminate this inequitable discrimination in premium 

payments. 

Based on his experience with insurance product development and 

consumer choices, Bodnar testified that, generally, policyholders look at maximum 

policy value, i.e., the maximum daily benefits, elimination period and premium rate,
29

in choosing an insurance policy. Bodnar considered all these factors in developing 

the options in the Second Amended Plan. Option 1 allows policyholders to retain 

their current premium rates with reduced benefits. Options 2 and 2A provide

policyholders with basic policy coverages at corresponding If Knew Premium rates. 

The basic policy retains the key components of long-term care insurance and reduces 

or eliminates some features, such as a 4.5% inflation rider, that are not so important 

to policyholders. The maximum daily benefit, although reduced, would continue to 

provide meaningful coverage to most policyholders. The policyholders who elect 

Option 2 or 2A would not be subject to a rate increase in Phase Two, which is an 

appealing feature. In the Penn Treaty liquidation, policyholders were offered a 

benefit reduction option similar, but not identical to, Options 1 and 2 or 2A, but 

Bodnar did not recall how that affected their premium level. N.T., 5/19/2021, at

517, 520. By contrast, the Second Amended Plan proposes to offer policyholders 

three options by which to reduce their coverages and save premiums. 

Option 3 of the Second Amended Plan offers a non-forfeiture option,

which allows policyholders to receive up to 2.5 years of coverage and stop paying 

any additional premium. This is more generous than the standard non-forfeiture 

option, which caps coverage to the amount of premiums the policyholder has paid 

from inception. Policyholders in the Penn Treaty liquidation who chose the standard 

non-forfeiture option received continued coverage for a shorter period of time, 

sometimes only months. Id. at 435. 

Option 4 of the Second Amended Plan allows policyholders to keep 

their current policy benefits and pay the If Knew Premium rate to retain those 

benefits. The guaranty associations in the Penn Treaty liquidation did not offer an 

equivalent option to policyholders whose coverages exceeded the statutory limits. 
30

Instead, they offered a rate increase option that retained the policy’s coverages up to 

the statutory maximum amount allowed for each resident.

Bodnar explained how the different Phase One options relate to Phase 

Two of the Plan. Policyholders who elect Options 1 and 4 and have a policy 

providing coverage in excess of the guaranty association limits will be subject to a 

rate increase in Phase Two. Phase Two seeks to deploy a self-sustaining premium 

rate methodology, which will keep the lifetime loss ratio at 60% and thus be 

actuarially justified. Phase Two is not absolutely necessary under the Second 

Amended Plan because Phase One could close the Funding Gap, or the assumptions 

deployed in Phase One could play out differently than projected. Bodnar opined that 

any meaningful reduction in the Funding Gap during the rehabilitation would be a 

success.

Bodnar opined that a rehabilitation as proposed in the Second Amended 

Plan, as opposed to an immediate liquidation, presents policyholders with better 

options; sets the premium rates to equitable levels; and reduces SHIP’s Funding Gap. 

There is no formulaic method to determine whether policyholders are better off in a 

rehabilitation or in a liquidation; the so-called “Carpenter test” is not an actuarial 

test. Policyholders who choose Option 4 will have a policy with a net present value

greater than or equal to what they would have in liquidation because it will not be 

capped at the level set forth in the applicable guaranty association statute. However,

Option 4 has the least effect on reducing the Funding Gap. N.T., 5/19/2021, at 512-

513.

Bodnar opined that policyholders are likely to consider the maximum 

policy value/premiums analysis or the maximum policy value analysis in making 

determinations. The present value analysis, or “Carpenter test,” is appropriate for 
31

evaluating the impact of the Phase One options on SHIP’s liabilities. However, he 

explained that policyholders do not use a present value analysis when they choose 

their long-term care insurance coverage. Nor would they rely solely on the present 

value analysis to select one of the options offered under the Second Amended Plan. 

Upon approval of the Second Amended Plan, Bodnar and the actuarial 

team at Oliver Wyman will prepare an actuarial memorandum in support of the If 

Knew Premium rates, similar to what would be submitted to state regulators in a rate 

increase filing. In developing the Second Amended Plan, Oliver Wyman has 

prepared an actuarial report describing the If Knew Premium rating methodology 

and an assumption report, Ex. RP-16 and Ex. RP-17, and has gathered all the 

information needed for the actuarial memorandum. N.T., 5/19/2021, at 460.

ii. Intervening Regulators’ Evidence

a. Frank Edwards

Frank Edwards, the vice president and chief life and health actuary of 

INS Consultants, testified as a fact witness on behalf of the Intervening Regulators. 

Edwards testified that under the Second Amended Plan, policyholders bear the

responsibility for the $1.2 billion Funding Gap through benefit reductions and 

premium increases. By contrast, in liquidation, policyholders would bear a burden 

of approximately $397 million, and the guaranty associations would bear a burden 

of approximately $837 million. This represents the difference between the net 

amount the guaranty associations would pay to policyholders and the distributions 

they would receive from the SHIP estate. Because a rehabilitation does not trigger 

the guaranty associations, these funds will not be available to benefit policyholders 

under the Second Amended Plan.
32

Edwards observed that among the four options in the Second Amended 

Plan for Phase One, Option 4 provides a net present value for approximately 83% of 

policyholders that is greater than they would receive in a liquidation. The other 

options provide policyholders with a net present value that is lower than they would 

receive in liquidation. 

Oliver Wyman presented 10 scenarios to illustrate the potential results 

of the Second Amended Plan for SHIP’s liabilities, each leaving a deficit that ranged

from $699 million to $186 million. Ex. RP-16 at 11. Only Scenario 11, later added, 

eliminates the Funding Gap. Based on the information provided by Oliver Wyman, 

Edwards calculated a “Best Interest” scenario, which assumed that each policyholder 

will choose the option that provides the greatest net present value, or “Carpenter

value.” Ex. SIR 5-4. Option 4 would give 67.13% of the policyholders the greatest 

net present value and would reduce SHIP’s Funding Gap by $184 million. Id.

Edwards addressed a comparison of rehabilitation to liquidation under

Phase Two. Edwards calculated the effects of hypothetical Phase Two premium 

increases on policyholders who selected Option 4 in Phase One. Assuming a

premium increase of 50% in Phase Two, the percentage of policyholders receiving

a net present value greater than in a liquidation under Option 4 drops to 33.89%. 

The percentage of policyholders in a rehabilitation, in the aggregate, that would 

receive a net present value greater than liquidation is 54.57%. Assuming a premium 

increase of 100% in Phase Two, the percentage of policyholders for whom Option 4 

provides a net present value greater than in a liquidation drops to 22.92%. The 

percentage of all policyholders in a rehabilitation, in the aggregate, that would

receive a net present value greater than in a liquidation is 47.21%. Even so, these
33

hypothetical premium increases of 50% and 100% would leave remaining a Funding 

Gap of approximately $858 million and $676 million, respectively. Ex. SIR 5-5.

Edwards observed that the information presented by Oliver Wyman 

indicated that the net present value of Option 2 for policies with benefits in excess 

of guaranty association limits is typically less than the net present value of the 

guaranty association limits. Ex. SIR 5-6.

Edwards did not evaluate Oliver Wyman’s work. He compared the 

Second Amended Plan to liquidation using hypotheticals in which policyholders 

made elections based solely on maximizing the present value of future policy 

benefits minus the present value of future premiums, or the “Carpenter value.”

iii. Intervenor NOLHGA’s Evidence

a. Peter Gallanis

Peter Gallanis, the president of NOLHGA, testified as a fact witness. 

NOLHGA intervened in this proceeding to offer its suggestions on the Second 

Amended Plan; provide background information on the guaranty association system; 

and identify and request certain information material to its guaranty association

members.

NOLHGA’s members are life and health guaranty associations, one for 

each state and the District of Columbia, which are nonprofit entities created by state 

statutes to protect policyholders when a life or health insurance company is 

liquidated. In multi-state insurance insolvencies, the guaranty associations 

collaborate and coordinate through NOLHGA to fulfill their statutory obligations. 

NOLHGA has been involved in approximately 100 multi-state insurance 

receiverships, nine of which involved long-term care insurance. If SHIP goes into 

liquidation, most NOLHGA member guaranty associations would be activated to 
34

provide coverage to SHIP policyholders, subject to the statutory limit on coverage

in the member’s state, which is generally $300,000 per resident. 

Gallanis testified that the Second Amended Plan should emphasize that 

the options that policyholders select in Phase One will be permanent. The Second 

Amended Plan’s discussion of SHIP’s unfunded liability needs clarification, or it 

should be eliminated. The subject need not be addressed until a liquidation may 

occur. 

He testified that the Rehabilitator’s sample Illustrative Policyholder 

Guidance Pages on guaranty association coverage and premium rates in liquidation

could be misleading. In response, NOLHGA prepared a sample Summary of 

Policyholder Protection by Guaranty Associations in Liquidations that it believes 

should be sent to policyholders during Phase One. Ex. N-1. Gallanis believes 

NOLHGA should review all policyholder communications that refer to liquidation 

or guaranty associations and be allowed to comment on these communications 

before they are sent to policyholders.

Gallanis testified that NOLHGA wants more information on SHIP’s 

reinsurance agreements with Transamerica, American Health and Life Insurance 

Company, and Primerica Life Insurance Company. NOLGHA also seeks more 

information on SHIP’s in-force policies that are not long-term care policies.

Gallanis explained that members of a guaranty association are licensed 

life and health insurers. If SHIP is placed under an order of liquidation, the guaranty 

associations will provide resident policyholders with coverage up to the lesser of the 

maximum benefit level provided in the policy or the statutory limit for guaranty 
35

association coverage, which is $300,000 per resident in most states.12 The guaranty 

associations may continue coverage under the policy; work with the receiver to 

transfer the business to a financially solvent insurer; or issue alternative policies. 

The guaranty associations may seek premium rate increases or offer policyholders 

modified benefits based on current premium rates, as was recently done in the Penn 

Treaty liquidation. The guaranty associations generally do not charge premiums to 

policyholders who have been on premium waiver. The options offered by the 

guaranty associations in the Penn Treaty liquidation are illustrative of what could be 

offered in a potential SHIP liquidation. 

In a liquidation, the guaranty associations will assess their member 

insurers, using the methodology set forth in their governing statutes to determine 

each member insurer’s assessment. The member insurers pay the assessments from 

their general accounts. In some states, the member insurers can offset a portion of 

the assessment against state premium taxes that the insurers would otherwise owe. 

Member insurers can also impose surcharges on their policyholders to fund 

assessments. The guaranty associations are not funded by state revenues.

Gallanis explained that NOLHGA does not endorse or oppose the 

Second Amended Plan. NOLHGA intends to monitor the rehabilitation if this Court 

approves the Second Amended Plan, so that the guaranty associations will be 

prepared if SHIP ultimately is liquidated. 

b. Matthew Morton

Matthew Morton, an actuary with the Long Term Care Group and an 

advisor to NOLHGA, testified as a fact witness about guaranty association coverage 

12 The guaranty association limits range between $100,000 in Puerto Rico, $300,000 in 42 states 

and the District of Columbia, $500,000 in 6 states, $615,525 in California, and no limit in New 

Jersey.
36

and premium rate increases in liquidation. Morton assisted NOLHGA in several 

long-term care insurer insolvencies, including the Penn Treaty liquidation. 

In a liquidation, a policyholder receives a continuation of coverage

from a guaranty association. The policy’s benefits are paid in full until the 

policyholder exhausts the maximum benefit amount or maximum coverage period 

set forth in the policy, or until the payments reach the statutory coverage limit. Many 

long-term care policyholders are not affected by the statutory coverage limit 

because: (1) the policy’s maximum benefit amount is less than the statutory coverage 

limit; (2) the policyholder never goes on claim; or (3) the policyholder does not stay

on claim long enough to reach the statutory coverage limit.

In the Penn Treaty liquidation, the guaranty associations implemented 

a nationwide rate increase program, which resulted in 34 states approving 100% of 

the requested rate increases; 11 states approving between 80% and 100% of the 

requested rate increases; and 3 states approving less than 60% of the requested rate 

increases. No state denied a rate increase request. The majority, 44 states, approved 

the initial rate increase filing within 15 months. The guaranty associations spent 6 

to 12 months preparing and filing the rate increase applications. 

The guaranty associations’ methodology for calculating premium rate 

increases in the Penn Treaty liquidation was similar to the If Knew Premium 

methodology proposed in the Second Amended Plan, with two exceptions. First, the 

Second Amended Plan proposes to calculate rate increases seriatim, or individually, 

while Penn Treaty’s rate increase applications were developed on a cohort basis, by

which policyholders were grouped together by policy form. The cohort basis is the 

industry standard for an insurer that is a going concern. Second, the Second 

Amended Plan proposes to calculate rate increases based on the total maximum 
37

value of the policy. In Penn Treaty’s liquidation, the premium rates were calculated 

based on benefits being capped at the guaranty association statutory limits. 

Morton testified that the premium rate increase methodology used by 

the guaranty associations in the Penn Treaty liquidation “largely” addressed the 

inequities in premium rates and the cross-state rate subsidization issue. N.T., 

5/20/2021, at 806. When asked on cross-examination to expound on his 

understanding of “largely,” Morton acknowledged that using a cohort method to 

adjust premium rates results in some policyholders paying more than the If Knew 

Premium. Id. at 817-18. If a seriatim method is used, all policyholders will pay the

If Knew Premium and no more. 

In the Penn Treaty liquidation, the default option for policyholders who 

failed to make elections was to accept the rate increase. Policyholders were offered

policy modifications, including lowering daily benefits or the inflation rider; a 

reduced paid-up policy; or a cash-out option in exchange for termination of the 

policy. Only one state approved the cash-out option. Approximately 76% of the 

Penn Treaty policyholders accepted the rate increase, among which “a little bit less 

than a half” took the option by default; 13% of the policyholders reduced their 

benefits; 8% of the policyholders elected to cash out; and 3% of the policyholders 

elected a reduced paid-up policy. Id. at 812. The guaranty associations treated Penn 

Treaty policyholders on premium waiver the same before and after the liquidation

by continuing the waiver.

iv. Intervening Agents and Brokers’ Evidence

a. Daniel Schmedlen

Daniel Schmedlen, Chief Executive Officer of LTC Global, testified on 

behalf of the Intervening Agents and Brokers. These agents and brokers are all 
38

employed by LTC Global and are paid commissions by SHIP. The commission is 

set forth in the agency agreement and based on a percentage of premium. The 

policyholder pays a premium to the insurer, which deducts a certain percentage of 

the premium and remits it to the agent as a commission. The agent is not obligated 

to contact the insured after issuance of the policy, although the agent might accept 

the initial premium payment on behalf of the insurer.

A sample agent agreement was introduced into evidence by the 

Rehabilitator. It provided that the agent and successors “shall have the vested right 

to receive all commissions payable under this [a]greement.” Ex. RP-10 at 3. 

Schmedlen understood this language as creating the agent’s vested property interest

in that part of any premium collected by SHIP that it owed to the agent as a 

commission. LTC Global expects that its agents will continue to receive 

commissions during SHIP’s rehabilitation, as they did during Penn Treaty’s 

rehabilitation. 

The insurer determines the amount of commission payable to the 

agents. Once a policy is issued and delivered, the agent is paid a commission in 

accordance with the commission schedule set forth in the agency agreement. The

first-year commission is higher than the renewal commission, and the amount of 

renewal commission changes with time. The commission schedule in the sample 

agent agreement showed that the first-year commission ranged from 45% to 70% of 

the first-year premium, depending on the age of the policyholder. After 10 years, 

the commission is typically reduced to a percentage of premium in the “middle single 

digits.” N.T., 5/20/2021, at 850. If the insurer has to refund any portion of the 

premium to the insured, the agent returns his commission to the insurer in proportion 
39

to the refunded premium. Where there is no premium paid, there is no commission

owed to the agent.

v. Intervening Health Insurers’ Evidence

Intervening Health Insurers introduced into evidence six sample 

insurance policies issued by SHIP’s predecessors and assumed by SHIP. The 

policies provided that SHIP may increase premium rates over time without 

specifying the methodology to be used in calculating the rate increases. The policies 

are silent on agent and broker commissions.

vi. Intervening Policyholders’ Evidence

a. James Lapinski

Intervenor James Lapinski, a policyholder of SHIP as well as a broker, 

testified on his own behalf. He expressed concern about the Second Amended Plan’s 

discussion of the impact of the COVID-19 pandemic on the long-term care insurance 

industry. He requested that the Rehabilitator update the discussion with more recent 

data. Lapinski presented a three-page excerpt from the Society of Actuaries report, 

dated September 30, 2020, which indicated that COVID-19 has had an impact on 

emerging long-term care insurance experience through higher mortality and lower 

claim incidence. An excerpt of a newsletter produced by Fairfax County, Virginia, 

suggested that more than 80% of COVID-19 deaths have been adults over 65 years 

old. Further, 34% of COVID-19 deaths in the United States have been seniors living 

in long-term care facilities, which accounts for less than 1% of the U.S. population. 

Lapinski opined that a combination of a decline in claim utilization and increase in 

lapse or cancellation of policies suggests that SHIP has experienced a major decrease 

in claims experience due to the pandemic. 
40

Lapinski presented a balance sheet of SHIP showing that the value of 

SHIP’s bond holdings as of December 31, 2020, declined by approximately $500 

million from the previous year. SHIP’s reported cash on hand and short-term 

investment income also declined from the previous year by approximately $500,000. 

This does not correlate with the decrease in the value of the bonds. Lapinski 

questioned the changes in reserves shown in the balance sheet. Specifically, he 

requested the Rehabilitator to explain the decline in SHIP’s capital and surplus from 

approximately $12 million in 2017 to a deficit of $916 million in 2019, as well as 

the decline in the number of policies in force from 151,000 in 2009 to approximately 

39,000 as of the filing of the Second Amended Plan. Observing that the Second 

Amended Plan contains excerpts from SHIP’s unfiled 2019 statutory financial 

statement and the internal 2020 financial information (see Appendix B of the Second 

Amended Plan), Lapinski requested that SHIP file its 2019 and 2020 statutory 

financial statements before this Court rules on the Second Amended Plan.

Lapinski and his wife pay annual premiums totaling $9,000 for their 

three policies. Over the past 25 years, they have paid over $200,000 in premiums. 

He estimated that skilled nursing facilities cost $500 per day, which they cannot 

afford without insurance coverage. Lapinski raised concerns with the timing of the 

rehabilitation and stated his desire for SHIP to avoid the lengthy process that Penn 

Treaty had gone through prior to liquidation.

b. Rose Marie Knight

Rose Marie Knight, a policyholder, also testified. She agreed with 

Lapinski’s testimony. She has been a policyholder for 22 years and currently pays

an annual premium of $1,200. She questioned why SHIP has not raised her premium 

for the last four or five years. Knight’s policy has a lifetime benefit period. She will 
41

have to pay a higher premium to retain this maximum coverage period under the 

Second Amended Plan. Knight expressed concern about her ability to pay a higher 

premium and becoming a burden on her children. N.T., 5/21/2021, at 935. She 

noted that the government has recently incurred great debts, which will cause 

inflation that “is starting to hit.” Id. at 933-34. 

Both Lapinski and Knight expressed concern and confusion as to the 

Second Amended Plan’s proposed policy restructuring, which they interpreted as 

removing benefits or cancelling guaranty association coverage.

III. Standard of Review

Section 516(b) of Article V authorizes the Rehabilitator to “take such 

action as [she] deems necessary or expedient to correct the condition or conditions 

which constituted the grounds for the order of the court to rehabilitate the insurer. 

... [She] shall have full power ... to deal with the property and business of the 

insurer.” 40 P.S. §221.16(b). The legislatively stated purpose of Article V, to which 

the Court must give effect, is “the protection of the interests of insureds, creditors, 

and the public generally....” and the “equitable apportionment of any unavoidable 

loss” through, inter alia, “improved methods for rehabilitating insurers....” Grode 

v. Mutual Fire, Marine and Inland Insurance Co., 572 A.2d 798, 803 (Pa. Cmwlth. 

1990) (Mutual Fire I) (single-judge opinion) (quoting Section 501 of Article V, 40 

P.S. §221.1).

The Pennsylvania Supreme Court has explained this Court’s role in a 

rehabilitation as follows:

In overseeing the course of rehabilitation to check any abuse of 

discretion by the Commissioner, the Commonwealth Court is 

authorized to “approve or disapprove the plan [of rehabilitation] 

proposed, or may modify it and approve it as modified. If it is 

approved, the rehabilitator shall carry out the plan.” 40 P.S. § 
42

221.16(d). Therefore, in order for the Plan to warrant the 

Commonwealth Court’s imprimatur it must be found to be free 

from any abuse of the Rehabilitator’s discretion.

Foster v. Mutual Fire, Marine and Inland Insurance Co., 614 A.2d 1086, 1091 (Pa. 

1992) (“Mutual Fire II”). Further, “it is not the function of the courts to reassess the 

determinations of fact and public policy made by the Rehabilitator.” Id. Our 

Supreme Court has explained:

‘It has been established as an elementary principle of law that 

courts will not review the actions of governmental bodies or 

administrative tribunals involving acts of discretion in the 

absence of bad faith, fraud, capricious action or abuse of power

.... That the court might have a different opinion or judgment in 

regard to the action of the agency is not a sufficient ground for 

interference; judicial discretion may not be substituted for 

administrative discretion.’

Id. at 1092 (quoting Norfolk and Western Railway Co. v. Pennsylvania Public Utility 

Commission, 413 A.2d 1037, 1047 (Pa. 1980) (emphasis in original)).

With the above principles in mind, the Court considers whether the 

Rehabilitator abused her discretion in formulating the Second Amended Plan. The 

Court is also mindful that “the Rehabilitator is constrained by constitutional 

mandate[s].” Mutual Fire I, 572 A.2d at 804.

IV. Legal Analysis

A. The Second Amended Plan Serves a Rehabilitative Purpose and 

is within the Discretion of the Rehabilitator

1. Goals of the Plan

There is no fixed goal that every rehabilitation plan must satisfy to 

obtain this Court’s approval. Specifically, the Pennsylvania Supreme Court has 

stated that a 
43

rehabilitation, in order to be legitimate, does not have to restore 

the company to its exact original condition. So long as the 

rehabilitation properly conserves and equitably administers “the

assets of the involved corporation in the interest of investors, the 

public and others, (with) the main purpose being the public 

good” the plan of rehabilitation is appropriate.

Mutual Fire II, 614 A.2d at 1094 (quoting 2A COUCH ON INSURANCE 2d §22.10).

The unrefuted testimony of the Rehabilitator’s witnesses established 

two overarching goals of the Second Amended Plan: (i) to reduce or eliminate the 

Funding Gap and (ii) to eliminate SHIP’s inequitable and discriminatory premium 

rate structure, which is marked by cross-policyholder subsidies. The Plan will meet 

these goals by setting premium rates for all policyholders pursuant to an actuarially 

sound methodology, the If Knew Premium rate, which is widely accepted by 

regulators across the country, and by offering policyholders meaningful options. 

Instead of being forced to accept rate increases commensurate with their current 

coverages, policyholders will have the option to reduce coverages, thereby reducing 

their indicated premium increase.

In pursuing these goals, the Second Amended Plan addresses one of the 

major causes of SHIP’s financial distress: policy underpricing. The Plan will 

address underpricing by (i) resetting premiums, on a prospective basis, to what they 

would have been without the erroneous actuarial assumptions and (ii) doing so on a 

seriatim basis, thereby ensuring that the premiums going forward are consistent 

across the entire pool of policyholders so that similarly situated policyholders will 

not be paying different premiums. The Plan will give policyholders meaningful 

choices for coverage in lieu of rate increases, without placing the cost of SHIP’s 

historical policy underpricing upon the public through the guaranty association 

system. These goals serve the public good. See Mutual Fire II, 614 A.2d at 1094,
44

n.4 (determining that the state’s interest in “regulat[ing] the fiscal affairs of its 

insurers for the welfare of the public” is a legitimate and significant public purpose).

2. No Contrary Evidence

The Intervening Regulators, who object to the Second Amended Plan 

in its totality, did not introduce an expert witnessto dispute any of the Rehabilitator’s 

actuarial projections, including the impact of the various options on policyholders

and the Funding Gap, or the Plan’s proposed premium rate methodologies. The 

Intervening Regulators’ actuary, Frank Edwards, testified as a fact witness, and he 

acknowledged that he was not asked to evaluate the Rehabilitator’s work.

Edwards’ testimony consisted of “mathematical exercises,” N.T., 

5/19/2021, at 564, that compared the Plan to a liquidation. He assumed that

policyholders are “better off” with the “maximum present value” of their policies. 

Id. at 568. Known as the “Carpenter value,” maximum present value is future 

benefits minus future premiums, adjusted to their present value. Edwards 

acknowledged that he could not opine on policyholder preferences. Cantilo and 

Bodnar, both qualified experts, testified persuasively that policyholders do not make 

choices based on the maximum present value of their policies. Rather, policyholders 

will rely on other metrics, most notably the maximum policy value, such as 

maximum daily benefit and maximum benefit period, to make choices. Using those 

metrics provides a better outcome for policyholders than they would experience in 

liquidation. 

B. The Goals of the Plan Could Not Be Achieved in Liquidation

The Rehabilitator’s evidence demonstrated that immediate liquidation 

of SHIP would be improvident for several reasons. First, a liquidation of SHIP will 

not address the Funding Gap. Second, a liquidation will not address the existing 
45

inequitable premium rate structure and cross-policyholder subsidies. Instead, it will 

perpetuate those problems. Third, a liquidation of SHIP will unnecessarily delay 

any resolution of SHIP’s financial condition. Fourth, the options available to 

policyholders under the Second Amended Plan are better than what would be offered 

by guaranty associations in a liquidation.

1. Liquidation Will Not Address the Funding Gap

As noted, the Funding Gap is largely attributable to significant 

historical underpricing of SHIP’s policies. In a liquidation, the entire cost of this 

shortfall will be shifted to the guaranty association system and, ultimately, to the public. 

As NOLHGA’s Peter Gallanis acknowledged, the guaranty associations will fund 

the cost of the underpricing by assessing their member companies, which, in turn,

fund the assessments from their policyholder generated funds. These insurers will 

then recoup some portion of the loss through premium tax offsets or by raising rates 

they charge to their own policyholders. The Rehabilitator concluded that shifting 

the burden to taxpayers and policyholders of other life and health insurers will not 

serve the “public good.” Mutual Fire II, 614 A.2d at 1094. That determination is 

within her discretion and is entitled to deference. Id. at 1091 (“[T]he involvement 

of the judicial process is limited to the safeguarding of the plan from any potential 

abuse of the Rehabilitator’s discretion.”).

2. Liquidation Will Perpetuate the Inequitable Premium Rate 

Structure

In a liquidation of SHIP, assuming the guaranty associations would 

seek rate increases as they did in the Penn Treaty liquidation, similarly situated 

policyholders will continue to pay different rates. NOLHGA’s actuary, Matthew 

Morton, acknowledged that this is attributable to the guaranty associations’ practice 

of seeking rate increases for cohorts of policyholders. Using a cohort method results 
46

in some policyholders paying more than the If Knew Premium in liquidation. The 

Second Amended Plan will adjust premium rates on a seriatim basis, which 

eliminates the possibility of any policyholder paying more than the If Knew 

Premium.

Further, the guaranty associations must request rate increases from the 

state of issue, not the state where the policyholder resides. The experience from the 

Penn Treaty liquidation showed that states do not act uniformly. For example, 

Florida (one of Penn Treaty’s largest states by premium) granted only 50% of the 

guaranty associations’ requested, and actuarially justified, rate increases for policies 

written in that state. Florida similarly has refused to grant SHIP’s requested rate 

increases, and there is no reason to believe the result would be any different in a 

liquidation. See Ex. RP-53 (showing that since 2009, SHIP has requested 

approximately $62.6 million in premium rate increases from the Florida Insurance 

Department, but only $7.6 million has been approved).

The Intervening Regulators’ States of Maine, Massachusetts and 

Washington are illustrative of the problem. Since 2009, only Massachusetts has 

approved a significant percentage of the rate increases soughtby SHIP. See Ex. RP53 (showing a 90% approval ratio in Massachusetts but an 11% approval ratio in 

Maine and a 63% approval ratio in Washington). The Rehabilitator’s evidence 

demonstrated that a liquidation will not alleviate SHIP’s premium rate inequities and 

cross-policyholder subsidization issues.

3. Liquidation Involves Inherent Delays

At a minimum, a liquidation would cause a material delay in addressing 

the policy underpricing which lies at the root of SHIP’s insolvency. NOLHGA’s 

actuary testified that in the Penn Treaty liquidation it took six months to a year to 
47

prepare and file the rate applications on behalf of the guaranty associations. It took 

an additional 15 months to receive decisions from most of the state insurance 

regulators, with the final state’s approval taking more than 4 years. Bodnar testified 

that the rate approval process can take anywhere from 90 days to 2 years or more. 

Thus, at best, in a liquidation of SHIP it would take nearly two years to prepare, file 

and receive approvals on rate increase requests, and there would be no certainty that

the rates would be approved at the requested actuarially justified level.

By contrast, the Second Amended Plan can be implemented quickly, 

thereby addressing the causes of SHIP’s financial distress, preserving assets, and 

reserving flexibility for Phase Two and beyond. Cantilo testified that it would take 

approximately six months to prepare and transmit election packages to policyholders 

and gather any Issue State Opt-out elections. Upon implementation of the Plan, the

Rehabilitator will know within approximately eightmonths howmuch of the Funding 

Gap will be eliminated. The outcome of Phase One will determine whether Phase 

Two will be necessary and, if so, its scope. While the self-sustaining premium 

methodology proposed for Phase Two is actuarially justified according to Bodnar’s 

undisputed expert testimony, the Rehabilitator may consider alternatives as 

necessary depending on the outcome of Phase One. The Rehabilitator will also 

provide reports to the Court at the appropriate times with her recommendations 

regarding Phase Two. A liquidation does not offer this kind of flexibility. See 

Mutual Fire I, 572 A.2d at 803 (“[T]he benefits of rehabilitation – its flexibility and 

avoidance of inherent delays – are preferable to the static and cumbersome 

procedures of statutory liquidation.”). 
48

4. Policyholders Will Have Fewer Choices in Liquidation

In a liquidation of SHIP, policyholders will not be offered the choices 

provided under the Second Amended Plan. NOLHGA’s witnesses acknowledged 

that the benefit modification offers made by the guaranty associations in the Penn

Treaty liquidation, which were the first of their kind in a long-term care insurance 

liquidation, do not match the options offered under the Plan. Specifically, there was 

no equivalent to the basic policy coverages provided in Option 2/2a. There was no 

enhanced non-forfeiture option similar to Option 3. There was no option similar to 

Option 4 that could provide coverage above the applicable guaranty association cap. 

The Plan provides greater flexibility for policyholders than they would have in 

liquidation by offering meaningful policy modification alternatives that will also

alleviate the Funding Gap and inequitable rate structure.

C. The Plan Meets the Legal Standards for Confirmation

1. The Plan’s Rate Approval Mechanism and Issue-State Rate

Approval Alternative are Permissible Under Pennsylvania Law 

and the United States Constitution

The Intervening Regulators object to the Second Amended Plan for the 

stated reason that the Plan proposes to have premium rates set by the Rehabilitator 

and this Court rather than by state-of-issue regulators. Intervening Regulators’

Memorandum of Law, 6/14/2021, at 41. The Intervening Regulators assert that the 

Rehabilitator’s power under Article V to “direct and manage” the “property and 

business of the insurer,” Section 516(b) of Article V, 40 P.S. §221.16(b), does not 

include authority to change “SHIP’s policies and rates without required regulatory 

approvals.” Intervening Regulators’ Memorandum of Law at 44. They also assert 

that the Plan’s deviation from the ordinary state-by-state rate review process violates 
49

the Full Faith and Credit Clause of the United States Constitution13 and is 

inconsistent with the principle of comity. The Plan’s Issue State Rate Approval 

Option does not cure these infirmities because it is coercive and offers, at most, a 

“nominal deference” to the state of issue’s authority to regulate the premium rates 

for policies issued in that state. Intervening Regulators’ Memorandum of Law at 50,

52.

We begin with a review of Section 516 of Article V, which sets forth 

the powers and duties of the Rehabilitator. It states, in pertinent part, as follows:

(b) The rehabilitator may take such action as he deems necessary 

or expedient to correct the condition or conditions which 

constituted the grounds for the order of the court to rehabilitate 

the insurer. He shall have all the powers of the directors, officers 

and managers, whose authority shall be suspended, except as 

they are redelegated by the rehabilitator. He shall have full 

power to direct and manage, to hire and discharge employes 

subject to any contract rights they may have, and to deal with the 

property and business of the insurer.

* * *

(d) The rehabilitator may prepare a plan for the reorganization, 

consolidation, conversion, reinsurance, merger or other 

transformation of the insurer. Upon application of the 

rehabilitator for approval of the plan, and after such notice and 

hearing as the court may prescribe, the court may either approve 

or disapprove the plan proposed, or may modify it and approve 

13 It states:

Full Faith and Credit shall be given in each State to the public Acts, Records, and 

judicial Proceedings of every other State. And the Congress may by general Laws 

prescribe the Manner in which such Acts, Records and Proceedings shall be proved, 

and the Effect thereof.

U.S. CONST. art. IV, §1. A statute is a “public Act” within the meaning of the Full Faith and Credit 

Clause. Franchise Tax Board of California v. Hyatt, 136 S.Ct. 1277, 1281 (2016) (Hyatt II) (citing 

Carroll v. Lanza, 349 U.S. 411, 412 (1955)). 
50

it as modified. If it is approved, the rehabilitator shall carry out 

the plan. In the case of a life insurer, the plan proposed may 

include the imposition of liens upon the equities of policyholders 

of the company, provided that all rights of shareholders are first 

relinquished. A plan for a life insurer may also propose 

imposition of a moratorium upon loan and cash surrender rights 

under policies, for such period and to such an extent as may be 

necessary.

40 P.S. §221.16(b)(d) (emphasis added).

The Rehabilitator may “take such action as [she] deems necessary or 

expedient to correct the condition” that caused the need for rehabilitation, 40 P.S. 

§221.16(b), and in doing so, she may prepare a rehabilitation plan to “impair the 

contractual rights of some policyholders in order to minimize the potential harm to 

all of the affected parties.” Consedine v. Penn Treaty Network American Insurance 

Co., 63 A.3d 368, 452 (Pa. Cmwlth. 2012) (Penn Treaty) (citing Mutual Fire II, 614 

A.2d at 1094) (emphasis added). This authority includes a reduction of coverage to 

match the policyholder’s existing premium. It has long been understood that the 

legislature has vested the Rehabilitator with broad discretion in proposing a 

rehabilitation plan. Mutual Fire I, 572 A.2d at 804, affirmed, Mutual Fire II, 614 

A.2d at 1086 (observing that the insurance commissioner, as statutory rehabilitator 

of an insurer, is given broader discretion to structure a rehabilitation plan than is 

given to a statutory liquidator). 

In the Mutual Fire rehabilitation, the plan amended the policyholders’ 

contractual right to full payment on covered claims by reducing all claim payments 

by an equal percentage. Here, the Rehabilitator could have done something similar 

by reducing the coverage of each policy to match the premium being paid. This 

would equitably address the Funding Gap. However, this would not give 
51

policyholders a choice. Further, policyholders whose premium is very inadequate 

might find themselves with a policy with very limited coverage. 

Mutual Fire was a different receivership. There, the policies lapsed 

during the rehabilitation, and the sole object of the rehabilitation was to pay 

outstanding claims to the fullest extent possible. By contrast, here, the SHIP policies 

are still in force and will remain in force until SHIP emerges from rehabilitation. In 

this respect, SHIP’s rehabilitation is more complex.

A core cause of SHIP’s insolvency is policy underpricing, and the 

Rehabilitator proposes to “correct the condition” through a combination of benefit 

modifications and premium rate increases. Section 516(b) of Article V, 40 P.S. 

§221.16(b). Policyholders will be able to decide which of the four options offered 

under the Second Amended Plan best fits their individual circumstances. The Plan 

follows the principles of Mutual Fire I and II and extends them to a different context, 

as appropriate for a long-term care insurer. The Plan falls within the Rehabilitator’s 

“broad powers ... to effectuate equitably the intent of the Rehabilitation statutes.” 

Mutual Fire II, 614 A.2d at 1094. The Plan’s mechanism for setting actuarially

justified rates also falls within the Rehabilitator’s broad powers, and they will be 

reviewed by the Court as part of the rehabilitation proceeding. 

Arguably, the only contract “right” given up by the SHIP policyholder 

is the expectation that the state where the policy was issued will approve the 

premium rate for each of the four options in Phase One. No policyholder commented 

on this “right” to state-by-state rate regulation. Policyholder Rose Marie Knight 

expressed concern about the fact that her premium had not been increased for years. 

N.T., 5/21/2021, at 933. 
52

The Intervening Regulators assert that the Plan’s rate approval 

provisions “override the insurance laws of other [s]tates” and, thus, violate the Full 

Faith and Credit Clause of the United States Constitution. Intervening Regulators’

Memorandum of Law at 38. Alternatively, the Intervening Regulators contend that 

this Court should refrain from approving the Plan under the principle of comity 

because the Plan’s “displacement of the rate setting authority of the individual 

[s]tates” is a “blatant intrusion” on the sovereignty of other states. Intervening 

Regulators’ Memorandum of Law at 49. The Court finds no merit to these 

arguments. 

Article V empowers this Court to rehabilitate the business of “a 

domestic insurer or an alien insurer domiciled in this Commonwealth.” Section 

515(a) of Article V, 40 P.S. §221.15(a). As a general rule, the insolvent insurer’s 

state of domicile “has an overriding interest in assuring that the rehabilitation, if 

possible, is effectuated.” Matter of Mutual Benefit Life Insurance Co., 609 A.2d 

768, 777 (N.J. Super. 1992). The court’s “decree approving the rehabilitation plan 

for an insolvent insurer domiciled in its state has a res judicata effect upon out-ofstate policyholders so as to preclude a subsequent attack upon the plan in another 

state.” 1 COUCH ON INSURANCE 3d §5:31. 

Maine, Massachusetts, and Washington have adopted, in substantial 

part, the Uniform Insurers Liquidation Act (UILA),14 which was approved by the 

National Conference of Commissioners on Uniform State Laws in 1939. The UILA 

addressed the difficulties that arise in the receivership of an insolvent insurer with 

assets and liabilities located in several states; the UILA provides a “uniform system 

14 See 24-A Me. Stat. Ann. §4363; In re Liquidation of American Mutual Liberty Insurance 

Company, 747 N.E.2d 1215, 1225 n.13 (Mass. 2001); and American Star Insurance Co. v. Grice, 

865 P.2d 507, 509 (Wash. 1994). 
53

for the orderly and equitable administration of the assets and liabilities of defunct 

multistate insurers.” Altman v. Kyler, 221 A.3d 687, 692 n.6 (Pa. Cmwlth. 2019) 

(quotations omitted). Pennsylvania, on the other hand, adopted the Insurer’s 

Supervision, Rehabilitation and Liquidation Model Act (Model Act) approved by 

the National Association of Insurance Commissioners. See Koken v. Reliance 

Insurance Co., 893 A.2d 70, 76 (Pa. 2006). Following the Model Act, Article V

addresses “the problems of interstate rehabilitation and liquidation by facilitating 

cooperation between states in the liquidation process, and by extending the scope of 

personal jurisdiction over debtors of the insurer outside this Commonwealth.” 

Section 501(c) of Article V, 40 P.S. §221.1(c). 

Because Maine, Massachusetts, and Washington have adopted the 

UILA and Pennsylvania has adopted the similar Model Act, a single, cohesive, 

uniform handling of SHIP’s rehabilitation through a single state is consistent with 

those laws. Notably, the laws of Maine, Massachusetts and Washington also 

designate the domiciliary insurance commissioner as the receiver of an insurer 

undergoing liquidation or rehabilitation.15 The Intervening Regulators have 

presented no reason to set aside Pennsylvania’s primacy in SHIP’s receivership.

Nor does the Full Faith and Credit Clause require this Court to apply 

the insurance rate regulatory laws of Maine, Massachusetts, and Washington with 

respect to the establishment of the If Knew Premium rate in the Second Amended 

Plan. The purpose of the full faith and credit command 

was to alter the status of the several states as independent foreign 

sovereignties, each free to ignore obligations created under the 

laws or by the judicial proceedings of the others, and to make 

them integral parts of a single nation throughout which a remedy 

15 See 24-A Me. Stat. Ann. §4364; Mass. Gen. Laws Ann. 175 §180B; Wash. Rev. Code 

§48.99.020.
54

upon a just obligation might be demanded as of right, irrespective 

of the state of its origin.

Baker by Thomas v. General Motors Corporation, 522 U.S. 222, 232 (1998) (citation 

omitted). Congress’ Full Faith and Credit Act16 requires that “all courts ... treat a 

state court judgment with the same respect that it would receive in the courts of the 

rendering state.” Standard Chartered Bank v. Ahmad Hamad Al Gosaibi and 

Brothers Co., 99 A.3d 936, 941 (Pa. Super. 2014) (citing Matsushita Electric 

Industrial Co. v. Epstein, 516 U.S. 367, 373 (1996)).

The relevant precedent differentiates between the credit owed to laws

and the credit owed to judgments under the Full Faith and Credit Clause. Baker, 522

U.S. at 232. The Full Faith and Credit Clause “does not compel a state to substitute 

the statutes of other states for its own statutes dealing with a subject matter [] which 

it is competent to legislate.” Id. (citation omitted). Instead, “it is frequently the case 

under the Full Faith and Credit Clause that a court can lawfully apply either the law 

of one State or the contrary law of another.” Franchise Tax Board of California v. 

Hyatt, 538 U.S. 488, 496 (2003) (Hyatt I). By contrast, “[a] final judgment in one 

State, if rendered by a court with adjudicatory authority over the subject matter and 

persons governed by the judgment, qualifies for recognition throughout the land.” 

Baker, 522 U.S. at 233. A court may be guided by the forum state’s public policy 

16 It provides:

Such Acts, records and judicial proceedings or copies thereof, so authenticated, 

shall have the same full faith and credit in every court within the United States and 

its Territories and Possessions as they have by law or usage in the courts of such 

State, Territory or Possession from which they are taken.

28 U.S.C. §1738. 

Likewise, the Pennsylvania legislature has enacted the Uniform Enforcement of Foreign 

Judgments Act, which defines “foreign judgment” as “any judgment, decree, or order of a court of 

the United States or of any other court requiring the payment of money which is entitled to full 

faith and credit in this Commonwealth.” 42 Pa. C.S. §4306.
55

in determining the law applicable to a controversy, but there is no “public policy 

exception” to the full faith and credit due a court’s judgment. Id. at 233.

At issue here is whether the Second Amended Plan, if approved by this 

Court, would give full faith and credit to the insurance laws of Maine, 

Massachusetts, and Washington. The Court concludes that it would. 

In Carroll v. Lanza, 349 U.S. 411 (1955), the United States Supreme 

Court considered a negligence action brought by a Missouri worker against a general 

contractor in Arkansas, where he sustained injuries. Both Missouri and Arkansas 

had enacted a workers’ compensation law that provided the exclusive remedy of the 

employee for a work-related injury. The Arkansas law, however, also allowed the

injured employee to pursue common-law tort claims against a third party. The 

Supreme Court held that the Full Faith and Credit Clause did not make Missouri’s 

statute a bar to enforcement of Arkansas’ law. Arkansas had sufficient grounds to 

apply its own law because of its interest in protecting persons injured within its 

borders and, thus, “opened its courts to negligence suits against prime contractors, 

refusing to make relief by way of workmen’s compensation the exclusive remedy.” 

Id. at 412-13. In sum, Missouri law (compared with Arkansas Law) embodied “a 

conflicting and opposed policy,” and Arkansas law did not embody “any policy of 

hostility to the public Acts of Missouri.” Id. at 413. 

Likewise, in Hyatt I, 538 U.S. 488, a former California resident who 

had moved to Nevada brought tort actions in Nevada state court against the 

California franchise tax board, alleging negligent misrepresentation, invasion of 

privacy, fraud, and other torts in connection with the board’s assessments and 

penalties for taxes he allegedly owed. The Nevada Supreme Court applied Nevada 

law, which gave state agencies immunity for negligence but not for intentional torts. 
56

Accordingly, the Nevada Supreme Court ordered the trial court to dismiss the 

negligence claim for lack of jurisdiction but allowed the intentional tort claims to 

proceed to trial. The tax board appealed. 

The United States Supreme Court upheld the Nevada Supreme Court’s 

decision. The Court emphasized that the Full Faith and Credit Clause does not 

require one state to apply another state’s law that violates its “own legitimate public 

policy.” Id. at 497 (internal quotations omitted). Nevada’s choice of law in that case 

did not “exhibi[t] a policy of hostility to the public Acts of a sister State.” Id. at 499 

(citing Carroll, 349 U.S. at 413). Further, Nevada had “sensitively applied 

principles of comity with a healthy regard for California’s sovereign status” by 

“relying on the contours of Nevada’s own sovereign immunity from suit as a 

benchmark for its analysis.” Id. at 499. 

Following remand, a jury found in the taxpayer’s favor and awarded 

him almost $500 million in damages and fees. The tax board again appealed to the 

Nevada Supreme Court, arguing that the Full Faith and Credit Clause required 

Nevada to limit damages to $50,000, the maximum that Nevada law would permit 

in a similar suit against its own agencies. The Nevada Supreme Court affirmed $1 

million of the award. Instead of applying the Nevada statute applicable to suits 

against Nevada’s own agencies, the Nevada Supreme Court applied a special rule 

for one case. On further appeal, the United States Supreme Court held that this 

decision of the Nevada Supreme Court violated the Full Faith and Credit Clause 

because it lacked the “healthy regard for California’s sovereign status” and 

“reflect[ed] a constitutionally impermissible policy of hostility to the public Acts of 

a sister State.” Franchise Tax Board of California v. Hyatt, 136 S.Ct. 1277, 1282-

83 (2016) (Hyatt II) (citation omitted).
57

In the case sub judice, the evidence demonstrated that the Rehabilitator 

will use the If Knew Premium methodology in the implementation of the Plan. This 

methodology will assume a 60% lifetime loss ratio, which is the benchmark for a 

premium rate increase in Pennsylvania and most other states. The If Knew Premium 

methodology is used by insurance regulators nationwide to set long-term care 

insurance premium rates. The self-sustaining premium to be implemented in Phase 

Two of the Plan will likewise use a 60% lifetime loss ratio. See 31 Pa. Code 

§89a.117 (“Benefits under long-term care insurance policies shall be deemed 

reasonable in relation to premiums provided the expected loss ratio is at least 

60%[.]”).

A review of the insurance statutes of Maine, Massachusetts, and 

Washington shows that these sister states share Pennsylvania’s interest in ensuring 

that long-term care insurance premium rates are not excessive, unfairly 

discriminatory, or unreasonable in relation to the benefits provided under the 

policy.17 This commonly-shared interest will be advanced, rather than impaired, by 

the Second Amended Plan, which seeks to correct SHIP’s discriminatory premium 

rate structure; sets the premium rates to appropriate levels; and employs the If Knew 

17 The Maine Insurance Code requires that the state insurance regulator determine that the rate 

filings on health insurance policies comply with “the requirements that rates not be excessive, 

inadequate or unfairly discriminatory.” 24-A Me. Stat. Ann. §2736. The insurance statute in 

Massachusetts provides that the insurance commissioner may “disapprove such form of policy if 

the benefits provided therein are unreasonable in relation to the premium charged, or if it contains 

any provision which is unjust, unfair, inequitable, misleading or deceptive, or which encourages 

misrepresentation as to such policy[.]” Mass. Gen. Laws Ann. Ch. 175 §108(8)(A). Likewise, the 

insurance statute in Washington provides that long-term care insurance rate increases are not 

permitted “if the benefits provided therein are unreasonable in relation to the premium charged.” 

Wash. Rev. Code §48.18.110. These standards are similar to the Pennsylvania standard for 

adjusting long-term care insurance premium rates. See Section 353 of The Insurance Company 

Law of 1921, Act of May 17, 1921, P.L. 682, as amended, added by the Act of June 23, 1931, P.L. 

904, 40 P.S. §477a.
58

Premium methodology to establish a premium level that is reasonable in relation to 

the benefits paid.

Alternatively, under an Issue-State Rate Approval Option, a state may

opt out of the rate approval section in the Plan. If a state opts out, the Rehabilitator 

will file an application to increase rates for policies issued in that state to the If Knew 

Premium level. The regulator for the opt-out state will render a decision on the 

Rehabilitator’s rate increase application; if it is only partially approved, the 

Rehabilitator will downgrade the benefits under the affected policies accordingly. 

Cantilo testified that policyholders in an opt-out state will still have four options, 

although they are not exactly the same as those offered in the Second Amended Plan. 

This does not render the Issue-State Rate Approval Option “coercive” or “nominal,” 

as the Intervening Regulators assert; rather, it provides the issue state with a 

meaningful way to control the mix of benefit reductions and premium rate increases. 

It prevents the opt-out state from interfering with Pennsylvania’s ability to 

rehabilitate SHIP. In sum, the Second Amended Plan gives a “healthy regard” for 

the insurance laws of other states by “relying on the contours of [Pennsylvania 

insurance law] as a benchmark for its analysis.” Hyatt I, 538 U.S. at 499.

The Second Amended Plan does not follow the ordinary rate review 

process for a solvent insurer, but it preserves the substantive rights of SHIP’s 

policyholders to have their premium reviewed by a qualified actuary and an 

insurance regulator to ensure that the rate is actuarially justified and reasonable in 

relation to the benefits. The Plan changes the forum for the premium determinations 

to the state responsible for the rehabilitation of SHIP, i.e., Pennsylvania. The 

conflict between Pennsylvania law and the laws of Maine, Massachusetts, and 

Washington, if any, is one of procedure, to which this Court owes no deference. See 
59

Wilson v. Transport. Ins. Co., 889 A.2d 563, 571 (Pa. Super. 2005) (citation omitted)

(the “choice of law” analysis applies only to conflicts of substantive law, which 

“creates the rights and duties of the parties to a judicial proceeding”). 

The insistence of the Intervening Regulators that the Rehabilitator 

submit rate increase applications to 46 states, the District of Columbia, and the U.S. 

Virgin Islands renders a rehabilitation of SHIP an impossibility. Pennsylvania has 

a compelling interest in enforcing Article V, which protects “the interests of 

insureds, creditors, and the public generally” through

(i) early detection of any potentially dangerous condition in an 

insurer, and prompt application of appropriate corrective 

measures; (ii) improved methods for rehabilitating insurers, 

involving the cooperation and management expertise of the 

insurance industry; (iii) enhanced efficiency and economy of 

liquidation, through clarification and specification of the law, to 

minimize legal uncertainty and litigation; (iv) equitable 

apportionment of any unavoidable loss; (v) lessening the 

problems of interstate rehabilitation and liquidation by 

facilitating cooperation between states in the liquidation process, 

and by extending the scope of personal jurisdiction over debtors 

of the insurer outside this Commonwealth; and (vi) regulation of 

the insurance business by the impact of the law relating to 

delinquency procedures and substantive rules on the entire 

insurance business.

Section 501(c) of Article V, 40 P.S. §221.1(c) (emphasis added).18 Furthermore, as 

this Court observed in Mutual Fire I,

the benefits of rehabilitation—its flexibility and avoidance of 

inherent delays—are preferable to the static and cumbersome 

procedures of statutory liquidation. The statute’s purpose is, in 

the end, that to which we must give effect. That legislatively 

18 Section 501(b) of Article V states that its provisions “shall be liberally construed to effect the 

purpose stated in subsection (c).” 40 P.S. §221.1(b).
60

stated purpose is “the protection of the interests of insureds, 

creditors, and the public generally....” and the “equitable 

apportionment of any unavoidable loss” through, inter 

alia, “improved methods for rehabilitating insurers....” Section 

501 of the Act, 40 P.S. §221.1. No interest is served by adding to 

the delay which has already occurred in this case. On the 

contrary, the goals of Article V of the Act are better served by a

rehabilitation which effectively ensures more distribution in a 

shorter period of time than would occur in liquidation.

572 A.2d at 803.

Here, the evidence established that the ordinary rate filing process often 

involves 6 to 12 months of preparation and years of review in some states. “No 

interest is served by adding to the delay which has already occurred in this case.” 

Mutual Fire I, 572 A.2d at 803. Further, a state-by-state rate filing process would 

not address the inconsistent rate approvals from state insurance regulators, which 

leave SHIP with less revenue than needed and similarly situated policyholders 

paying vastly different premiums for the same coverage. Cantilo credibly testified 

that the Plan’s premium rate methodologies and approval mechanisms are necessary 

to address the inequities in SHIP’s current rate structure. The use of the If Knew 

Premium across all policies will put all policyholders on a level playing field because

it is calculated on a seriatim basis. 

In sum, under Article V, the Rehabilitator has the authority to propose, 

and this Court has the authority to approve, the Second Amended Plan’s provisions 

regarding the establishment of premium rates for the four policyholder options in 

Phase One. The Full Faith and Credit Clause does not require the Rehabilitator to 

submit these premium rates to 46 states, the District of Columbia, and the U.S. 

Virgin Islands for their review and approval. This would fracture Pennsylvania’s 

“own legitimate public policy” in the rehabilitation of SHIP, a Pennsylvania-
61

domiciled insurer. Hyatt I, 538 U.S. at 497. In no way does this aspect of the Second 

Amended Plan reflect “a policy of hostility to the public Acts of a sister State.” Id.

at 499. To the contrary, the interests of Maine, Massachusetts, and Washington in 

ensuring that long-term care insurance premium rates are not excessive, unfairly 

discriminatory, or unreasonable to the benefits provided will be advanced, rather 

than impaired, by the Plan. 

Finally, the Court rejects the Intervening Regulators’ arguments on 

comity. Application of comity is “a matter of judicial discretion,” and Pennsylvania 

courts exercise comity “when application of another state’s law contradicts no public 

policy of Pennsylvania and instead furthers a Pennsylvania policy.” Chestnut v. 

Pediatric Homecare of America, Inc., 617 A.2d 347, 350 (Pa. Super. 1992). The 

Plan has “sensitively applied principles of comity with a healthy regard” for the 

insurance laws of other states by “relying on the contours of [Pennsylvania insurance 

law] as a benchmark for its analysis.” Hyatt I, 538 U.S. at 499.

Once this Court renders a judgment on the Second Amended Plan, it is 

Maine, Massachusetts, and Washington that owe this Court’s judgment full faith and 

credit. See Underwriters National Assurance Co. v. North Carolina Life and 

Accident and Health Insurance Guaranty Association, 455 U.S. 691 (1982). See 

also 1 COUCH ON INSURANCE 3d §5:31 (discussing state court’s violation of Full 

Faith and Credit Clause by refusing to treat prior judgment of another state’s 

insurance rehabilitation court as res judicata). 

2. The Plan Satisfies all Constitutional Requirements

The Intervening State Insurance Regulators argue that the Second 

Amended Plan is unconstitutional because it does not satisfy the standard that 

“[c]reditors and policyholders must fare at least as well under a rehabilitation plan 
62

as they would under a liquidation.” Koken v. Fidelity Mutual Life Insurance Co., 

803 A.2d 807, 826 (Pa. Cmwlth. 2002) (citing Neblett v. Carpenter, 305 U.S. 297

(1938)). In applying the Carpenter standard, this Court is guided by the three-part 

test adopted in Mutual Fire II.

19

 The “threshold inquiry” is whether the state action 

“has operated to substantially impair a contractual relationship” in violation of 

Article I, Section 10 of the United States Constitution and Article I, Section 17 of 

the Pennsylvania Constitution.20 Mutual Fire II, 614 A.2d at 1094 n.4. An 

impairment of contractual rights is not a per se violation of law. Id. If a particular 

policyholder is found to be worse off under a rehabilitation plan, the impairment 

could be considered “substantial,” but the Court still needs to determine whether (1) 

the rehabilitator has acted for a legitimate and significant public purpose and (2) the 

adjustment of contractual rights is reasonable and of a nature appropriate to that 

public purpose. Id. To that end, the Court must be mindful that Article V is intended 

to protect “the interests of insureds, creditors, and the public generally[.]” Section 

501(c) of Article V, 40 P.S. §221.1(c). 

i. The Plan Satisfies Pennsylvania’s Interpretation of Carpenter

Under the so-called “Carpenter test,” a rehabilitation plan should be 

confirmed if creditors will fare at least as well under the plan as they would in 

liquidation. Mutual Fire II, 614 A.2d at 1093-94. As our Supreme Court has 

19 Several of the objectors to the Mutual Fire rehabilitation plan argued that the plan impaired their 

contractual rights. In analyzing their argument, our Supreme Court expressly adopted the threepart test announced by the United States Supreme Court in Energy Reserves Group, Inc. v. Kansas 

Power and Light Co., 459 U.S. 400, 411 (1983), for determining when a state law may impair a 

contractual right. Mutual Fire II, 614 A.2d at 1094 n.4. Thus, whether an alleged contractual 

impairment is caused by a receiver’s workout plan or a statute, the analysis is the same.

20 Article I, Section 10 of the United States Constitution states, in pertinent part: “No State shall 

... pass any ... Law impairing the Obligation of Contracts[.]” U.S. CONST. art. 1, §10. Article I,

Section 17 of the Pennsylvania Constitution states: “No ... law impairing the obligation of 

contracts ... shall be passed.” PA. CONST. art. I, §17.
63

explained, this does not mean that every single policyholder must satisfy that test. 

See id. at 1102 (“individual interests might have to be sacrificed or compromised in 

order to preserve the ultimate goal of [the rehabilitation] process[.]”); see also Penn 

Treaty, 63 A.3d at 453 (“[Carpenter] did not establish the broad principle that a 

rehabilitation plan is per se invalid unless every policyholder will fare as well in 

rehabilitation as in liquidation.”). Instead, the Court is guided by the three-part test 

established by Mutual Fire II. Penn Treaty, 63 A.3d at 453.

Under that test, if a particular policyholder is found to be worse off 

under a rehabilitation plan than in liquidation, and that impairment is “substantial,”

the Court should confirm the plan so long as the Rehabilitator has acted for a 

legitimate and significant public purpose and the contractual modification is

reasonable and appropriate to that public purpose. Id. In this regard, “[t]he Court

must consider the greater good, including the consequences to the larger class of 

policyholders and the taxpaying public.” Id. (citing Vickodil v. Insurance 

Department, 559 A.2d 1010, 1013 (Pa. Cmwlth. 1989)).

The Second Amended Plan meets that test. Even assuming, arguendo,

that the Plan substantially impairs policies, it serves a legitimate and significant 

public purpose, and the policy modifications are reasonable and appropriate to that 

purpose. At the hearing, Special Deputy Rehabilitator Cantilo aptly observed:

And the question that we were debating [was], is it reasonable, if 

a policyholder has been paying a quarter for a dollar’s worth of 

insurance for decades, to adopt, as the workout plan, a plan in 

which the taxpayers step up to pay their remaining 75 cents.

And what we concluded is that we could rightsize the policy, and 

we could create a set of options for policyholders that would 

enable them to get fundamental [long term care] coverage but 

pay reasonable rates like the rest of the country for that coverage 

and not shift all that burden to the taxpayers.
64

N.T., 5/17/2021, at 78-79. In short, the Plan narrows the Funding Gap, promotes

fairness and equity among policyholders, and appropriately balances the interests of 

the policyholders and the broader taxpaying public.

ii. The Intervening Regulators’ Interpretation of Carpenter is 

Flawed

The Intervening Regulators urge a rigid application of Carpenter, i.e., 

that all policyholders must fare as well in rehabilitation as they would in liquidation. 

To that end, the Intervening Regulators compared the net present value ofthe benefits 

policyholders will receive under the Second Amended Plan with the net present 

value of the benefits they can expect to receive in a liquidation. Notably, the Court 

in Carpenter was comparing the cash payment to policyholders under a 

rehabilitation plan with the cash payment they would receive in a liquidation, at a 

time when there was no guaranty association protection for policyholders.21 Here, 

the alternatives are not cash payments but continued insurance coverage. The value 

comparison of coverage to SHIP policyholders in a rehabilitation as compared to a 

liquidation cannot be reduced to dollar amounts. 

The Intervening Regulators’ metric is one not actually used by

policyholders when making the decision to purchase long-term care insurance. As 

testimony from Cantilo and Bodnar established, consumers choose their policy 

benefits and limits according to their personal circumstances. For example, a 

21 The judicially created requirement that a rehabilitation must treat policyholders better than 

would a liquidation pre-dates the creation of guaranty associations. Arguably, guaranty 

association protection should not be part of that analysis because the associations exist as a matter 

of legislative grace. Legislatures can repeal the guaranty association statutes or reduce the benefit 

caps. As it is, there is commonality but not uniformity. In any event, the existence of guaranty 

association protection was part of the Rehabilitator’s analysis and, practically speaking, that 

protection cannot be ignored. Nor can its cost to other stakeholders, i.e., policyholders of the 

guaranty associations’ member insurers and taxpayers.
65

policyholder may wish to protect his estate against dissipation by an extended stay 

in a nursing home. Each policyholder will have different goals and different 

financial situations that will affect the type and amount of coverage they purchase. 

Not a single witness testified that the liquidation value of a policy figures into this 

analysis. Cantilo and Bodnar opined that the comparison methodology 

policyholders use is the maximum policy value, not the Carpenter value. Cantilo 

provided compelling examples of actual SHIP policyholders whose Carpenter

value, using the Intervening Regulators’ proposed net present value metric, would, 

in fact, produce a poor option for that policyholder. See Ex. RP-56 at 102-03. The 

Court credits Cantilo’s statement that “[t]here are many cases where the raw 

projection of future benefits less future premiums [doesn’t] really tell you what the 

real value of the policy is.” N.T., 5/17/2021, at 177.

In any event, even under the Intervening Regulators’ metric, 85% of 

SHIP policyholders will be offered one option with a value equal to or higher than 

the value of the policy they will have in liquidation. Several other metrics produced 

even higher percentages of policyholders who will fare at least as well under the 

Plan as in liquidation.

3. The Plan is Feasible to the Extent Required by Pennsylvania 

Law

The Intervening Regulators argue that the Second Amended Plan is not 

feasible because it is unlikely to eliminate the Funding Gap and restore SHIP to 

solvency. To begin, there is no statutory requirement in Pennsylvania that a 

rehabilitation plan must be “feasible” in order to be approved, nor has that standard 

been adopted in our decisional law. The only reference to feasibility anywhere in 

Pennsylvania law occurred in the Mutual Fire receivership during the 

implementation of an already approved rehabilitation plan. Mutual Fire II, 614 A.2d 
66

1086. The Intervening Regulators have not cited any other case in which 

“feasibility” appears. Notably, in Mutual Fire, the rehabilitator raised “feasibility” 

to support a request to modify the Court-approved rehabilitation plan. Id. at 1090. 

The Intervening Regulators’ attempt to read a non-existent pre-approval “feasibility” 

requirement into Article V has no support in Mutual Fire II.

The Intervening Regulators argue that a “feasible” rehabilitation plan 

must be “reasonably likely to succeed in restoring the company to solvency” in order 

to be approved. Intervening Regulators’ Post-Hearing Memorandum at 5. 

First, the Court notes that the meaning of “company solvency” is 

context specific. The peak of SHIP’s activity in the insurance marketplace was in 

the late 1990s, when it had more than 300,000 policies in force. N.T., 5/17/2021, at 

40; Ex. RP-56 at 18. By 2003, when SHIP discontinued writing new business and 

went into run-off, the number of policies in force was already in a steep decline. Id.

The Second Amended Plan, if successful, will restore SHIP to what it was prereceivership, i.e., an insurer winding down its long-term care insurance business and

able, as a going concern, to continue coverage and pay the claims of its existing 

policies. The Court rejects the Intervening Regulators’ suggestion that a return to 

solvency by SHIP requires more than a return to its pre-receivership status. SHIP 

had long ceased being an active and growing presence in the insurance marketplace. 

Second, the Pennsylvania Supreme Court has stated that “[s]o long as 

the rehabilitation properly conserves and equitably administers ‘the assets of the 

involved [insurer] in the interest of investors, the public and others, (with) the main 

purpose being the public good’ the plan ... is appropriate.” Mutual Fire II, 614 A.2d 

at 1094 (quoting 2A COUCH ON INSURANCE 2d §22.10). Simply, the Court rejected 
67

the notion that a rehabilitation plan must contemplate a resuscitation of the insolvent 

insurer’s operations. 

Under any outcome, the Second Amended Plan will materially reduce 

the Funding Gap and significantly improve SHIP’s financial condition. The 

Intervening Regulators offered no substantive evidence to overcome the 

Rehabilitator’s evidence on this issue. The Intervening Regulators correctly point 

out that the ultimate goal of the Mutual Fire rehabilitation plan was to restore the 

company to solvency. The Second Amended Plan has, as its ultimate goal, SHIP’s 

return to solvency. It “does not have to restore the company to its exact original 

condition.” Mutual Fire II, 614 A.2d at 1094. 

Further, as a matter of public policy the rehabilitation of an insurer,

where possible, is the preferred course. Penn Treaty, 63 A.3d at 440 (recognizing 

liquidation as a remedy of last resort); Koken v. Legion Insurance Co., 831 A.2d 

1196, 1230 (Pa. Cmwlth. 2003) (same); and Mutual Fire II, 614 A.2d at 1094 (same). 

As this Court explained, “a liquidation, no matter how ‘successful,’ is certain to 

cause harm to the policyholders, creditors and taxpaying public[.]” Penn Treaty, 63 

A.3d at 461.

In summary, Article V does not require the Second Amended Plan be 

“feasible” in order to be approved, and the Intervening Regulators’ arguments to the 

contrary simply voice a disagreement with the Rehabilitator’s exercise of discretion. 

The Plan will eliminate or reduce the Funding Gap, which is a legitimate purpose. 

The ultimate goal of the Second Amended Plan is to return SHIP to the level of

solvency needed to run-off its long-term care insurance business.
68

4. The Plan is Fair and Equitable

As stated, SHIP’s current premium rate structure is unfairly 

discriminatory because policyholders with substantially similar coverage are not 

paying the same premium, thereby burdening some policyholders with subsidizing 

the premium payments of other policyholders. This Court has recognized that 

eliminating these unfair “subsidies between policyholders in different states and 

between different groups of policyholders” is itself a legitimate goal of 

rehabilitation. Penn Treaty, 63 A.3d at 443, 460. 

The Intervening Regulators argue that unless the Plan maintains SHIP’s 

current unequal treatment of policyholders on a state-by-state basis, then the Plan is 

unlawful. The Intervening Regulators’ position fails for several reasons.

First, the Intervening Regulators lack standing to assert the claim that 

the Plan treats “policyholders in different States differently.” Intervening 

Regulators’ Post-Hearing Memorandum at 32. They expressly disavowed that they 

were appearing in a parens patriae or other representative capacity for policyholders 

in their states. N.T., 5/19/2021, at 541-47. Even so, the Intervening Regulators 

failed to present any evidence showing how policyholders in their respective states 

would be unfairly treated by the Plan’s proposal to eliminate unfair subsidies 

between groups of policyholders.

Second, the Plan will end the existing unequal treatment of similarly 

situated policyholders. The Intervening Regulators strain to characterize some 

policyholders as receiving “more” by “suffering smaller benefit cuts” when 

compared to other policyholders receiving “less” by “suffering greater benefit cuts.” 

Intervening Regulators’ Post-Hearing Memorandum at 38. This is a function of the 

fact that many policyholders presently pay an inadequate premium. The Court 
69

rejectsthe Intervening Regulators’ characterization of right sizing premium to policy

coverage as itself an act of unequal treatment.

To eliminate the unfair subsidies between policyholders, the change in 

rates or coverages will have a greater impact on the more underpriced (and oversubsidized) policies that have benefited at the expense of other policyholders. The

Plan will require similarly situated policyholders to pay the same premium for the 

same coverage. The Plan’s elimination of unfair subsidies between policyholders 

aligns with this Court’s precedent in the Penn Treaty receivership, which recognized 

that a rehabilitation plan may properly eliminate such subsidies. Penn Treaty, 63 

A.3d at 443, 460.

Third, the Intervening Regulators improperly invoke Section 544(b) of 

Article V, 40 P.S. §221.44(b), which states that no subclasses may be created within 

the policyholder class in a liquidation. As a threshold matter, this is a rehabilitation,

not a liquidation. More fundamentally, the Plan does not give “some policyholders 

greater consideration than others.” Intervening Regulators’ Post-Hearing 

Memorandum at 35. To the contrary, the Second Amended Plan treats similarly 

situated policyholders the same regardless of the state in which their policy was 

issued.

D. Other Concerns and Objections Raised at the Hearing are 

Overruled or Have Been Adequately Addressed

1. Intervening Regulators’ Application for Reconsideration

At the close of the hearing on May 21, 2021, this Court granted the 

Rehabilitator’s oral motion “for judgment in the nature of a directed verdict” against 

the Intervening Regulators regarding the Issue State Rate Approval Option in the 

Second Amended Plan. N.T., 5/21/2021, at 981. The Rehabilitator argued that the 

Intervening Regulators did not present any evidence that their interests would be 
70

harmed by the Issue State Rate Approval Option, and as such, their objection to the 

Issue State Rate Approval Option cannot serve as a basis for this Court to disapprove

the Plan. Id. at 986-88.

On June 1, 2021, the Intervening Regulators filed an application for 

reconsideration for the stated reason that the Rehabilitator’s motion was vague, was 

made without notice and lacked support in the applicable court rules. More 

specifically, the Intervening Regulators contend that the term “[I]ssue [S]tate [R]ate 

[A]pproval [O]ption” is not “meaningful,” as “it is impossible to tell” whether it was 

referring to the “opt-out” provision under the Second Amended Plan. Application 

for Reconsideration at 7. They also contend that a motion for a directed verdict can

be filed only in a “jury case” or an “adversarial proceeding,” which is not the case 

here. Id. at 8, 12. Even so, to grant a motion for a directed verdict requires this 

Court to consider “all of the evidence before it in the light most favorable to the 

[Intervening] Regulators.” Id. at 14. They assert that the Rehabilitator’s motion 

“[f]ails on the [r]ecord” because Cantilo and Bodnar testified that the Plan seeks to 

“supersede the existing state rate approval system,” which would impact state 

regulators and policyholders. Id. at 14-15. The Intervening Regulators’ arguments 

are not persuasive. 

To begin, the Rehabilitator’s motion for a directed verdict was not 

vague. In moving for a directed verdict, the Rehabilitator’s counsel stated that “the 

[Intervening Regulators] have failed to put on any evidence which would or could 

support an interest they purport to represent with respect to the issue[] state rate 

approval option.” N.T., 5/21/2021, at 981-82. Counsel went on to assert that “absent 

any testimony as to the ways in which a regulator is constrained or harmed by that 

option, the [Intervening Regulators] here have no argument to present which would 
71

show that [the option] does not sufficiently address the concerns that they have raised 

at some earlier stage in these proceedings.” Id. at 986. The Intervening Regulators 

objected to the motion for the reason that granting a directed verdict would be 

improper under the circumstances as the case presents “significant open legal 

issues.” Id. at 989. The Rehabilitator’s counsel responded:

To be clear, we’re only seeking the directed verdict on the [I]ssue 

[S]tate [R]ate [A]pproval [O]ption issue. I don’t have here where 

it was raised in the memorandum. We’re not seeking a directed 

verdict as to, generally, the questions of whether the [P]lan is fair 

and equitable or the exercise of the [R]ehabilitator’s discretion 

generally. This is a narrow motion, Your Honor, on the [I]ssue 

[S]tate [R]ate [A]pproval [O]ption and the opt-out offer 

thereunder[.]

Id. at 991.

After hearing arguments from both parties, the Court granted the 

motion. It stated that “there is an opt-out option that preserves the right of the [] ... 

state of issue to pursue a state rate approval powers and [Intervening Regulators’] 

witness did not address why the [P]lan was deficient ... in that way.” Id. at 994. In 

short, the motion was not vague. 

This Court also rejects the Intervening Regulators’ argument that the 

Rehabilitator’s motion for a directed verdict lacked due notice. The Intervening 

Regulators do not cite, and this Court did not find, any legal authority which would 

have required such notice. The Rehabilitator did not need to disclose her litigation 

strategy at the hearing with the Intervening Regulators. In any event, the Intervening 

Regulators were given an opportunity to file with this Court an application for 

reconsideration, which they did on June 1, 2021.
72

Nor did the Intervening Regulators cite any legal authority to support 

their proposition that a directed verdict can only be entered in a jury trial. Notably, 

the Intervening Regulators’ proposition is at odds with their earlier position that this 

Court should have ruled on the legal issues before holding an evidentiary hearing on 

the Second Amended Plan. 

Pennsylvania Rule of Appellate Procedure 106 provides: 

Unless otherwise prescribed by these rules the practice and 

procedure in matters brought before an appellate court within its 

original jurisdiction shall be in accordance with the appropriate 

general rules applicable to practice and procedure in the courts 

of common pleas, so far as they may be applied.

PA. R.A.P. 106. However, the Intervening Regulators point to Pennsylvania Rule of 

Appellate Procedure 3783(b), which provides that “[t]he Pennsylvania Rules of Civil 

Procedure shall apply to adversarial proceedings.”

22 PA. R.A.P. 3783(b). Because 

an action to rehabilitate an insurer pursuant to Article V is a “formal proceeding,” 

not an “adversarial proceeding,” PA. R.A.P. 3772(f), the Intervening Regulators 

argue that it is not subject to the Rules of Civil Procedure. 

The Intervening Regulators overlook the precept that the Court has 

discretion to conduct a statutory proceeding as is expedient and appropriate to move 

the case to a conclusion in a methodical fashion. See, e.g., In re Tax Sale Held 

22 Rule 3772(c) defines “adversarial proceeding” as 

[a]ny action (1) initiated by the rehabilitator or liquidator against persons other than 

the insurer, (2) asserting a right or interest afforded by Article V and for which 

neither Article V nor prior orders of the Court provide an avenue for redress, and 

(3) that the Court determines shall be governed by Pa. R.A.P. 3783 (adversarial

proceedings) as an adversarial proceeding.

PA. R.A.P. 3772(c). Pennsylvania Rules of Appellate Procedure 3771 to 3784 (Summary and 

Formal Proceedings Against Insurers) apply to all actions in the Commonwealth Court arising 

under Article V. PA. R.A.P. 3771-3784.
73

September 10, 2003 by Tax Claim Bureau of County of Lackawanna, 859 A.2d 15, 

18 (Pa. Cmwlth. 2004) (recognizing that while a trial court is not required to use the 

Pennsylvania Rules of Civil Procedure in tax sale proceedings, it has discretion to 

use the Rules of Civil Procedure where appropriate).

Here, the Rehabilitator seeks approval of the Second Amended Plan in 

this Court’s original jurisdiction.23 Pennsylvania Rule of Civil Procedure 226(b)

provides that a trial court may, “[a]t the close of all the evidence ... direct a verdict 

upon the oral or written motion of any party.” PA. R.C.P. No. 226(b). This Court 

has affirmed the entry of a directed verdict following a single-judge bench trial. See, 

e.g., Geschwindt v. Wagner, 1 A.3d 970 (Pa. Cmwlth. 2010) (affirming directed 

verdict entered by trial court following bench trial). This Court has entered directed

verdicts in matters brought within its original jurisdiction. See, e.g., Pennsylvania 

Human Relations Commission v. School District of Philadelphia, 651 A.2d 177 (Pa. 

Cmwlth. 1993) (granting a school district’s motion for a directed verdict by treating 

it as a motion for a compulsory nonsuit24 against the Pennsylvania Human Relations 

Commission on the ground that it had failed to demonstrate that mandatory 

desegregation measures were feasible). 

A directed verdict can be entered in one of two circumstances:

one, the movant is entitled to judgment as a matter of law and/or 

two, the evidence is such that no two reasonable minds could 

23 42 Pa. C.S. §761(a)(3) (This Court has “original jurisdiction of all civil actions or proceedings 

... [a]rising under Article V of the act of May 17, 1921 (P.L. 789, No. 285), known as ‘The 

Insurance Department Act of 1921.’”).

24 While the trial court may, “[a]t the close of all the evidence ... direct a verdict upon the oral or 

written motion of any party,” PA. R.C.P. No. 226 (emphasis added), “the court, on oral motion of 

the defendant, may enter a nonsuit on any and all causes of action if, at the close of the plaintiff’s 

case on liability, the plaintiff has failed to establish a right to relief.” PA. R.C.P. No. 230.1(a)(1)

(emphasis added).
74

disagree that the outcome should have been rendered in favor of 

the movant. With the first, the court reviews the record and 

concludes that, even with all factual inferences decided adverse 

to the movant, the law nonetheless requires a verdict in his favor. 

Whereas with the second, the court reviews the evidentiary 

record and concludes that the evidence was such that a verdict 

for the movant was beyond peradventure.

Hall v. Episcopal Long Term Care, 54 A.3d 381, 395 (Pa. Super. 2012) (quoting 

Campisi v. Acme Markets, Inc., 915 A.2d 117, 119 (Pa. Super. 2006)).

The issue raised in the Rehabilitator’s motion for a directed verdict is a 

narrow one: whether the Issue State Rate Approval Option is unlawful as the 

Intervening Regulators alleged. This is a mixed question of law and fact. The 

Intervening Regulators assert that the Issue State Rate Approval Option is coercive 

and provides them with no meaningful review of the rate filings. In their application 

for reconsideration, the Intervening Regulators contend that the “opt-out” provision 

cannot be “separated from the larger concern over superseding [s]tate rate approval 

statutes[.]” Application for Reconsideration at 7. 

The Intervening Regulators did not present any evidence to support 

their challenge to the opt-out provision of the Plan. Cantilo credibly testified that if 

a state chooses to exercise the Issue State Rate Approval Option, the Rehabilitator 

will file an application on a seriatim basis to increase rates for policies issued in that 

state. The Intervening Regulators assert that the requirement that opt-out states act 

within 60 days and review the rate filings on a seriatim basis is “inconsistent” with 

“state practices.” Application for Reconsideration at 16. However, no evidence in 

the record supports this claim.

In sum, the Intervening Regulators did not show that the Issue State 

Rate Approval Option is unconstitutional or otherwise is harmful to their interests. 
75

Collectively, those interests involve approximately 2,000 of the 39,000 

policyholders affected by the Plan. Ex. RP-22 at 2. This Court properly entered a 

directed verdict on the Intervening Regulators’ objection to the Issue State Rate 

Approval Option. However, this Court disagrees with the Rehabilitator’s 

proposition that the Intervening Regulators should be dismissed from the 

rehabilitation proceeding. The Rehabilitator’s motion was a narrow one, as was this 

Court’s order granting the motion. 

For the foregoing reasons, this Court denies the Intervening Regulators’ 

application for reconsideration.

2. Policy Restructuring

NOLHGA and Lapinski raised concerns about the policy restructuring 

provisions in the Second Amended Plan that impact SHIP’s tax liability. The 

restructuring will address potential taxable income owed by SHIP for cancellation 

of indebtedness and will bifurcate policy liabilities into funded and unfunded 

portions. This policy restructuring will not affect coverage for policyholders either 

now or in the event of a liquidation. Cantilo testified that the restructuring does not 

affect policyholder choices and will not be performed on a seriatim basis. N.T., 

5/17/2021, at 143. 

As a result of the concerns raised at the hearing, the Rehabilitator will 

file a separate application with this Court to address the restructuring and tax issues. 

N.T., 5/21/2021, at 996. All parties will have an opportunity at that point to raise 

objections.

3. Policyholder Communications

NOLHGA raised concerns regarding policyholder communications,

especially with respect to information related to guaranty associations and their 
76

coverage limit. However, NOLHGA’s president and fact witness, Peter Gallanis,

acknowledged that the Rehabilitator has not refused to engage with NOLHGA 

regarding its concerns with the Plan or consider NOLHGA’s proposed changes. 

N.T., 5/20/2021, at 686. NOLHGA is free to propose modifications to the Plan and 

continue to communicate with the Rehabilitator, as NOLHGA has done to date.

Gallanis acknowledged that the Rehabilitator is a “capable commissioner” who 

understands the “important aspects” of the guaranty association system. Id. at680. 

4. COVID-19 Pandemic 

Policyholder James Lapinski raised concerns regarding the impact of 

COVID-19 on long-term care insurance experience through higher mortality and 

lower claim incidence. With regard to this issue, Cantilo credibly testified that SHIP 

has experienced a moderate increase in mortality since the beginning of the 

pandemic in 2020, which generated a moderate increase in lapses of policies. The 

pandemic also caused a small increase in morbidity and adversely affected SHIP’s 

expected yield on invested assets. However, the actuarial report prepared by Oliver 

Wyman shows that the aggregate effects of the pandemic had a moderate impact on 

SHIP’s financial condition and are not material to the implementation of the Second 

Amended Plan. N.T., 5/17/2021, at 26; N.T., 5/21/2021, at 944. 

Lapinski requested that the Second Amended Plan’s discussion on 

COVID-19 be updated with more recent data. Oliver Wyman’s actuarial report 

noted the evolving nature of COVID-19’s impact and stated that while certain 

assumptions “were developed based on claims data predating the effects of COVID19[,] [the actuarial team] will consider the effects of COVID-19 when [they] update 

[their] actuarial assumptions in 2021.” Ex. RP-16 at 28. As Bodnar testified, upon 

approval of the Plan, Oliver Wyman will prepare an actuarial memorandum in 
77

support of the If Knew Premium rates, similar to one that would ordinarily be 

submitted to state regulators in a rate increase filing. All parties will have an 

opportunity at that point to raise objections.

5. Funding Gap and SHIP’s Balance Sheet

Lapinski questioned the size of SHIP’s Funding Gap and the decline of 

SHIP’s capital and surplus and value of its bond holdings as reflected in its balance 

sheet ending December 31, 2020. In that regard, Cantilo provided extensive 

testimony on SHIP’s hazardous financial condition, the causes of SHIP’s insolvency,

and the actions taken by the Pennsylvania Insurance Department prior to 

rehabilitation. The evidence that the Second Amended Plan will substantially reduce 

the Funding Gap and address SHIP’s inequitable rate structure was extensive. As 

for the decline in the value of SHIP’s bond holdings, Cantilo credibly explained that 

it was due to a decline in yield in the markets in which SHIP’s bonds were invested, 

which added to SHIP’s deficit from 2019 to 2020. N.T., 5/21/2021, at 950-51.

6. Timing

Finally, Lapinski raised concerns with the timing of the rehabilitation 

proceeding and stated his desire for SHIP to avoid the lengthy process that Penn 

Treaty went through prior to liquidation. This Court shares Mr. Lapinski’s desire to 

address SHIP’s financial condition swiftly, as does the Rehabilitator. Cantilo 

testified that the Plan can be implemented quickly: within eight months of approval,

the Rehabilitator anticipates receiving policyholder elections, which will enable her 

to measure the precise impact of Phase One on SHIP’s Funding Gap. N.T., 

5/18/2021, at 339-40. 
78

V. Conclusions of Law

1. The Rehabilitator is authorized to “take such action as he deems 

necessary or expedient to correct the condition or conditions which constituted the 

grounds for the order of the court to rehabilitate the insurer.” Section 516(b) of 

Article V, 40 P.S. §221.16(b). This includes preparing “a plan for the reorganization, 

consolidation, conversion, reinsurance, merger or other transformation of the 

insurer.” Section 516(d) of Article V, 40 P.S. §221.16(d).

2. Upon application of the Rehabilitator for approval of a plan of 

rehabilitation, and after notice and a hearing thereon, “the court may either approve

or disapprove the plan proposed, or may modify it and approve it as modified. If it 

is approved, the rehabilitator shall carry out the plan.” Section 516(d) of Article V, 

40 P.S. §221.16(d).

3. “[I]t is not the function of the courts to reassess the determinations 

of fact and public policy made by the Rehabilitator[]” in formulating a plan of 

rehabilitation. Mutual Fire II, 614 A.2d at 1091. “Rather, the involvement of the 

judicial process is limited to the safeguarding of the plan from any potential abuse 

of the Rehabilitator’s discretion.” Id. 

4. The Rehabilitator’s evidence established that the Second Amended 

Plan will conserve and equitably administer the assets of SHIP in the interest of 

policyholders, creditors and the public, “with the main purpose being the public 

good.” Id. at 1094. The Plan is designed to return SHIP to its pre-receivership status 

as a run-off company able to meet its obligations as they come due.

5. The Rehabilitator’s evidence established that the Second Amended 

Plan will reduce or eliminate the Funding Gap and eliminate SHIP’s inequitable and 
79

discriminatory premium rate structure by offering policyholders meaningful choices 

to modify their long-term care insurance policies. 

6. The Rehabilitator’s evidence established that policyholders will fare 

as well or better under the Second Amended Plan than they would in liquidation. 

The Plan will provide the benefits of rehabilitation, such as flexibility and the 

accelerated disposition of claims, which is preferable to the static procedures of 

liquidation. 

7. The Rehabilitator is authorized under Article V to establish 

actuarially sound premium rates for SHIP policyholders, as needed to rehabilitate 

SHIP, and without the additional approval of the state insurance department where 

the policy was initially issued.

8. The Rehabilitator did not abuse her discretion in formulating the 

Second Amended Plan.

VI. Conclusion

The Rehabilitator has made a compelling case in support of her Second 

Amended Plan of Rehabilitation. Indeed, her evidence was not contradicted on any 

material fact. The Intervening Regulators suggest that they would have exercised 

their discretion differently, but this is not a basis for the Court to disapprove the Plan.

The opposition of the Intervening Regulators is based upon their belief 

that the state-by-state regulation of premium rates must be the starting point of any 

plan to rehabilitate an insolvent insurer. The Court has several responses.

First, the standard for an appropriate premium rate is substantially the 

same in every state: the premium must be reasonable in relation to the coverage 

provided in the policy. The evidence presented at the hearing demonstrated that the 

premium rates used in the four options in Phase One of the Second Amended Plan 
80

will satisfy that standard. The Rehabilitator will be tasked with proving satisfaction 

of thatstandard in her actuarial memorandum. The Intervening Regulators presented 

no evidence that she cannot or will not be able to do so.

Second, the Issue State Rate Approval Option preserves the state-bystate procedure for those states that share the concerns of the Intervening Regulators. 

To the extent a state does not believe that the Rehabilitator, and this Court, should 

be solely responsible for the task of establishing the seriatim premiums used for the 

four policyholder options in Phase One, the state can assume responsibility to do so 

by opting out of this aspect of the Second Amended Plan.

Neither SHIP’s policies nor state rate regulatory statutes insulate 

policyholders from paying a reasonable premium for their coverage. To the 

contrary, they require the opposite. The Second Amended Plan will advance, not 

undermine, a reasonable and non-discriminatory premium rate structure, which is 

the point of rate regulation.

Essentially, the Intervening Regulators exalt the process by which 

insurance premium rates are set over the rehabilitation of an insolvent insurer whose 

condition was caused by an inadequate and discriminatory premium structure. As 

was established by the Rehabilitator’s evidence, a rehabilitation of SHIP cannot be 

accomplished by placing the correction of the company’s premium rates into the 

hands of 46 states.

In all respects, the Second Amended Plan satisfies applicable 

constitutional requirements. Neither the Full Faith and Credit Clause nor principles

of comity require this Court to apply the insurance rate regulatory laws of other states

when considering a plan to rehabilitate SHIP, a Pennsylvania domiciled insurer in 

receivership. Nevertheless, the Seconded Amended Plan, consistent with Article V,
81

does not evidence “a policy of hostility” to the laws of sister states. Rather, it 

advances their shared interests in insurance premium rates that are not unfairly 

discriminatory and reasonable in relation to the benefits provided in the policy. 

The Intervening Regulators support a liquidation because it will require 

guaranty associations to solve SHIP’s Funding Gap. However, a liquidation will do 

nothing to address SHIP’s discriminatory premium structure. As NOLHGA’s

actuary, Matthew Morton, explained, guaranty associations can make rate filings 

with the state of issue but only on a cohort basis, for the segment of policies covered 

by the filing guaranty association. As a consequence, Morton opined that in a 

liquidation, many SHIP policyholders will pay more than the If Knew Premium rate 

for their coverage while others will pay less. Guaranty associations have no 

opportunity to propose or implement the seriatim If Knew Premium rate that is 

central to the Second Amended Plan’s correction of the current inadequate and 

discriminatory premium rate structure. This reason alone supports the 

Rehabilitator’s decision not to liquidate SHIP.

There is nothing unfair about expecting every policyholder to pay an 

actuarially justified premium for their coverage. That is expected in any insuring 

system. In the case of SHIP, it will not happen in the absence of the implementation 

of the Second Amended Plan.

The Rehabilitator has persuaded the Court that rehabilitation is 

preferred for another reason. A liquidation will place the burden of an actuarially 

justified premium upon the policyholders of member insurers of the applicable 

guaranty associations and, ultimately, upon the taxpayers in those states. No one 

has provided the Court with an explanation as to why, as a matter of policy, the 

premium burden of SHIP’s policyholders should be borne by others.
82

For these reasons, the Court rejects the arguments of the Intervening 

Regulators. The Court concludes that the Rehabilitator has appropriately exercised 

her discretion in devising a plan that will address SHIP’s financially hazardous 

condition while protecting the interests of the policyholders, creditors and public 

generally.

 ____________________________________________

 MARY HANNAH LEAVITT, President Judge Emerita
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

IN RE: Senior Health Insurance : 

Company of Pennsylvania :

In Rehabilitation : No. 1 SHP 2020

O R D E R

AND NOW this 24th day of August, the Court hereby ORDERS as 

follows:

1. The Application for Approval of the Plan of Rehabilitation for 

Senior Health Insurance Company of Pennsylvania (SHIP) filed by Jessica K. 

Altman, Insurance Commissioner of the Commonwealth of Pennsylvania, in her 

capacity as Statutory Rehabilitator of SHIP, is GRANTED. The Second Amended 

Plan of Rehabilitation, filed on May 3, 2021, is APPROVED, with the exception of 

Section VI.N of the Plan (relating to suspension of agent and broker commissions).

2. The Court defers resolution of the Joint Application for Approval 

of Settlement Agreement, filed by the Rehabilitator and Intervenors ACSIA Long 

Term Care, Inc., Global Commission Funding LLC, LifeCare Health Insurance 

Plans, Inc, Senior Commission Funding LLC, Senior Health Care Insurance 

Services, Ltd., LLP, and United Insurance Group Agency, Inc., pending a hearing to 

be scheduled by separate order. The Rehabilitator shall continue paying 

commissions until Phase One of the Second Amended Plan of Rehabilitation is 

implemented.

3. The Rehabilitator shall promptly submit an actuarial memorandum 

in support of the If Knew Premium rates to be used in Phase One of the Second 

Amended Plan of Rehabilitation to the Pennsylvania Insurance Department for its 

review and approval.
4. The Rehabilitator, in her capacity as Insurance Commissioner,

shall designate an appropriate deputy insurance commissioner to review the actuarial 

memorandum submitted to the Insurance Department. Thereafter, the Rehabilitator 

shall submit the approved actuarial memorandum to the Court.

 ____________________________________________

 MARY HANNAH LEAVITT, President Judge Emerita