# Consedine v. Penn Treaty Network America Insurance

> Commonwealth Court of Pennsylvania · May 3, 2012 · 63 A.3d 368

URL: https://www.frixlaw.com/law-library/cases/4966931

## Case

- **Full name:** Michael F. CONSEDINE, Insurance Commissioner of the Commonwealth of Pennsylvania v. PENN TREATY NETWORK AMERICA INSURANCE COMPANY, Defendant Michael F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania v. American Network Insurance Company, Re: Petition for Liquidation of Penn Treaty Network America Insurance Company (In Rehabilitation) and American Network Insurance Company (In Rehabilitation)
- **Court:** Commonwealth Court of Pennsylvania
- **Decided:** May 3, 2012
- **Citations:** 63 A.3d 368
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Leavitt
- **Judges:** Leavitt
- **Cited by:** 9 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4966931

## How later opinions describe it (automated extraction)

- explaining that the Insurance Department refused to approve essential premium rate increases, terminated rate increase filings in other states several months before petitioning for conversion, elected not to implement some rate increases which already had been approved, and ot…
- noting that “[i]n [order] to preserve a challenge to the sufficiency of the evidence on appeal, an appellant’s Rule 1925(b

## Opinion text

OPINION AND ORDER
OPINION BY
Judge LEAVITT.
TABLE OF CONTENTS AND GLOSSARY
Page
I. Introduction ..374
II. Syllabus 375
*371 III.Findings of Fact.
A. Business and History of PTNA and ANIC.
i. The Companies.
ii. The Companies’ Products.
iii. OldCo and NewCo Business.
iv. Reserves .
v. Reinsurance.
vi. Financial Condition of the Companies.
vii. Conditions that Led to Rehabilitation.
viii. The Rehabilitation Orders.
ix. April 2009 Preliminary Report and Plan of Rehabilitation ...
x. Rehabilitation Implementation Committee.
xi. Milliman August 2009 PowerPoint Projections.
xii. Termination of New Premium Rate Increase Filings.
B. Companies’ Statutory Surplus as of December 31,2009 .
C. Scope of Expert Evidence.
i. Rehabilitator’s Experts.
ii. Intervenors’ Experts.
iii. Actuarial Projections of the Companies’ Financial Conditions
iv. Actuarial Principles and Concerns.
v. Changes in Milliman’s Projections.
vi. Actuarial Caveats and Limitations.
vii. Credibility of Data Used in Projections.
viii. Actuarial Standard of Practice No. 25.
ix.Actuarial Standard of Practice No. 18.
D. Milliman Expert Report and Testimony.
i. Milliman Morbidity or Claim Costs Assumption.
ii. Milliman Morbidity Improvement Assumption.
iii. Milliman Mortality Assumption.
iv. Milliman Voluntary Lapsation Assumption.
v. Milliman Interest Rate Assumption .
vi. Milliman Claim Adjudication and Wellness Assumption.
vii. Milliman Premium Rate Increase Assumption.
E. United Health Actuarial Services, Inc. Expert Report and Testimony
i. United Health Morbidity or Claim Costs Assumption.
ii. United Health Morbidity Improvement Assumption.
iii. United Health Mortality Assumption.
iv. United Health Voluntary Lapsation Assumption .
v. United Health Interest Rate Assumption.
vi. United Health Claim Adjudication and Wellness Assumption
vii. United Health Premium Rate Increase Assumption .
viii. United Health Agents’ Commission Assumption.
F. Gross Premium Reserve.
G. Ernst & Young Report.
H. State Regulation of Long-Term Care Insurance Rate Making.
I. Impact of Medical Advances on Future Long-Term Care Insurance Claims.
J. Evaluation of Actuarial Projections and Expert Testimony .
IV. Legal Analysis.439
A. Statutory Standard for Conversion of a Rehabilitation to a Liquidation.439
B. Insolvency.441
C. Substantial Increase in Risk of Loss to Policyholders.441
D. Futility of Continued Rehabilitation.446
i. Meaning of “Futility”.446
ii. Rehabilitator’s Case for Futility .448
V. Conclusions of Law.458
*372 VI. Conclusion. .458
GLOSSARY
Active Life Reserve — a reserve established for claims to be presented in the future by active lives.
Active Lives — long-term care insurance policyholders not on claim.
Ario — Joel Ario, former Insurance Commissioner of the Commonwealth of Pennsylvania from 2007-2010.
ANIC — American Network Insurance
Company, a subsidiary of PTNA.
AINIC — American Independent Network Insurance Company, a New York domiciled insurance company and subsidiary of ANIC.
ASOP 18 — Actuarial Standard of Practice No. 18: Long-Term Care Insurance.
ASOP 25 — Actuarial Standard of Practice No. 25: Credibility Procedures Applicable to Accident and Health, Group Term Life and Property/Casualty Coverages.
ASOP 41 — Actuarial Standard of Practice No. 41: Communication.
Assumption — an estimate of an uncertain variable input into a financial model often based upon historic experience of a company and/or industry.
Bodnar — Vincent Bodnar, an actuary and principal with DaVinci Consulting, LLC, retained by NOLHGA in 2009 and later by the Rehabilitator as an expert.
Brookfield — Brookfield Investment Management, Inc., the investment advisor to the Companies.
CBER — “Closed But not Expected to Reopen” claims for which liability exists but is not yet known. It is part of the statutory claim reserve.
Claim Reserve — a reserve established for incurred claims, known and unknown.
Cloutier — Mark Cloutier, former Chief Financial Officer of PTNA.
Company or Companies — refers collectively to PTNA and ANIC.
Conrad — Robert Conrad, a claims specialist employed by the Pennsylvania Insurance Department, Office of Rehabilitations, Liquidations and Special Funds.
Consedine — Michael F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania from 2011 to the present.
Continuance Curves — graphic depiction of the probability that an individual policyholder will stay on claim, based upon historical data on a number of potential factors (age, sex, type of benefit, etc.)
Dalton — Andrew Dalton, an actuary employed by Milliman.
Department — the Pennsylvania Insurance Department.
DiMemmo — Joseph DiMemmo, Deputy Insurance Commissioner, Pennsylvania Insurance Department, Office of Liquidations, Rehabilitations and Special Funds.
Disabled Life Reserve — reserve established for claims of disabled lives that are known. It is part of the statutory claim reserve.
Disabled Lives — long-term care insurance policyholders on claim.
Ernst & Young (E & Y) — actuarial experts retained by the Rehabilitator.
Guaranty Fund — statutory fund established to pay claims of resident policyholders whose insurer is declared insolvent.
Heitkamp — Carl Heitkamp, an actuary employed by UHAS.
Holland — Dr. Stephen Holland, Chief Medical Officer of Univita, Inc. and a testifying expert for Intervenors.
*373 Hunt — William Hunt, former Chief Executive Officer of PTNA and ANIC and a member of the Board of Directors of PTAC.
IBNR — “Incurred But Not Reported” claims for which liability exists but which are not yet known. It is part of the statutory claim reserve.
Intervenors — Eugene Woznicki and PTAC.
Johnson, Stephen — Deputy Insurance Commissioner, Pennsylvania Insurance Department, Office of Corporate & Financial Regulation.
Johnson, Thomas — a principal of Signal Hill and a member of the Rehabilitation Implementation Committee.
Kroll — James Kroll, an actuary employed by PTNA.
LaPierre — Stephen LaPierre, former Executive Vice President of Insurance Operations for the Companies.
Lapse — termination of a policy due to nonpayment of premium, cancellation by the policyholder or death of the policyholder.
Litow- — Mark Litow, an actuary and principal of Milliman. Litow authored a projection report for the Companies dated April 28, 2008, referred to as the Litow Report.
Loss Ratio — the percentage of premium collected that is used to pay claims. Long-term care insurance must have a loss ratio of 60% in most states.
Lucker — Arthur M. Lueker, an actuary with INS Consultants, Inc. and a testifying expert for the Rehabilitator.
Milliman — Milliman, Inc., the actuarial firm retained by the Companies since 2002 to perform actuarial services; subsequently retained by the Rehabilitator to perform actuarial services for both PTNA and ANIC and to provide expert evidence in support of the Rehabilitator in the present litigation.
Minches — David Minches, an actuary and principal of Ernst & Young and testifying expert for the Rehabilitator.
Mohoric — Edward Mohoric, an actuary and principal of Milliman and testifying expert for the Rehabilitator.
Morbidity — a policyholder’s propensity to be on claim.
Morbidity Improvement — a long-term trend in societal changes and improvements in drugs or breakthroughs in technology that improve morbidity over time.
Mortality — the rate of deaths in a specific population.
NAIC — National Association of Insurance Commissioners.
Negative Surplus — see Surplus.
NewCo — long-term care insurance policies sold by the Companies beginning in 2002. NOLHGA — National Organization of Life & Health Insurance Guaranty Associations.
Non-Forfeiture Option — provision in an insurance policy allowing the policyholder to forfeit the policy, cease paying premiums, and receive a refund of some or all of the premiums already paid.
OldCo — long-term care insurance policies sold by the Companies prior to 2002.
Persistency — (1) for claimants, the probability of staying on claim over a certain period of time, or (2) for non-claimants, the propensity for policyholders to stay insured by the Companies.
Petitioner — Insurance Commissioner of the Commonwealth of Pennsylvania, in his capacity as statutory rehabilitator of PTNA and ANIC.
Pfannerstill — Larry Pfannerstill, an actuary and principal of Milliman and testifying expert for the Rehabilitator.
*374 Preliminary Plan — the Preliminary Report and Plan of Rehabilitation for the Companies submitted by the Rehabilitator on April 9, 2009, and describing the Reha-bilitator’s plan for rehabilitation and timetable for implementing the plan.
PTNA — Penn Treaty Network America Insurance Company.
PTAC — Penn Treaty American Corporation, the parent company of PTNA and indirectly ANIC.
Rate Increase or Premium Rate Increase — an increase in the premium rates charged for a long-term care insurance product.
Rehabilitator — Insurance Commissioner of the Commonwealth of Pennsylvania, in his capacity as statutory rehabilitator of PTNA and ANIC.
RIC — the Rehabilitation Implementation Committee for PTNA and ANIC.
Robinson — Robert L. Robinson, Chief Rehabilitation Officer for PTNA and ANIC.
Scenario A, Scenario B — alternative surplus projections for PTNA and ANIC used by Milliman in its September 2009 Report and its October 2009 Report.
Scenario A, Scenario B, Scenario C, Scenario D — alternative rate increase assumptions for PTNA and ANIC developed by Volkmar in his expert report.
Severity — the expense of a claim in long-term care insurance caused by the duration of a claim.
Shock Lapse — sudden termination of policies by policyholders in reaction to a certain event, e.g., a premium rate increase.
Signal Hill — a financial advisory and investment banking company retained during the rehabilitation process to evaluate certain rehabilitation alternatives available to PTNA and ANIC.
Surplus — a company’s assets minus its liabilities. A negative surplus is the amount by which a company’s liabilities exceed its assets.
UHAS — United Health Actuarial Services, Inc., the Intervenors’ actuarial expert in the present litigation.
Unearned Premium Reserve — a reserve established to cover the insurer’s liability to refund premium to policyholders whose policies terminate before the policy’s renewal date.
Volkmar — Karl Volkmar, an actuary and principal of UHAS and a testifying expert for Intervenors.
Waite — Cameron Waite, former Chief Financial Officer and Executive Vice President of PTAC, PTNA and ANIC, and consultant for the Rehabilitator.
Woznicki — Eugene Woznicki, Chairman of the Board of PTAC and PTNA and an Intervenor in this matter.
I. Introduction
Before the Court are the consolidated petitions of Michael F. Consedine, Pennsylvania Insurance Commissioner and Statutory Rehabilitator of Penn Treaty Network America Insurance Company and American Network Insurance Company. By these petitions, the Commissioner, in his capacity as Rehabilitator, seeks to convert the rehabilitations of both Companies into liquidations. The standard governing the petitions is a simple one. The Rehabil-itator must prove that continued rehabilitation will substantially increase the risk of loss to policyholders, creditors and the public or is futile.
Combined, the Companies have approximately $1 billion in assets, no debt and are meeting all obligations as they come due. The Companies’ cash flow, in excess of $200 million per year, has been sufficient to pay all policyholder claims in full and on *375 a timely basis. On these facts, there is no dispute. Likewise, there is no dispute that the Companies will continue to be able to pay all policyholder obligations, timely, for years to come. Nevertheless, the Companies are insolvent because their existing premium rates are too low to fund all expected future claims, and the Companies cannot non-renew these under-priced policies.
The Insurance Commissioner, wearing his hat as a regulator of the Pennsylvania insurance industry, refused to approve the Companies’ aetuarially justified rate increase filings in the amount requested, both before and after rehabilitation. The Commissioner has even discouraged other state regulators from approving rate increases. Now the Commissioner seeks to liquidate the Companies because their premium rates are inadequate.
Because he has not undertaken a meaningful effort to rehabilitate the Companies and, to the contrary, has acted to frustrate rehabilitation, the Commissioner has not met his burden of proof. For this and other reasons set forth in this Opinion, the petitions are denied.
II. Syllabus
On January 6, 2009, this Court ordered the rehabilitation of Penn Treaty Network America Insurance Company (PTNA) and its subsidiary, American Network Insurance Company (ANIC), which are both Pennsylvania life insurers specializing in long-term care insurance. The Court’s order was issued upon application of the Pennsylvania Insurance Commissioner, Joel Ario, who cited the consent of both insurance companies as the sole grounds for the orders of rehabilitation. 1 The orders were issued under Section 515(b) of Article V of the Insurance Department Act of 1921, Act of May 17, 1921, P.L. 789, added by Section 2 of the Act of December 14, 1977, P.L. 280 (Article V), which provides that:
[a]n order of the Commonwealth Court to rehabilitate the business of an insurer shall be issued only after a hearing before the court or pursuant to a written consent of the insurer.
40 P.S. § 221.15(b). The Court’s orders appointed the Insurance Commissioner as Statutory Rehabilitator.
On April 9, 2009, the Rehabilitator submitted a Preliminary Report and Plan of Rehabilitation (Preliminary Plan) that described the history of each company and, in broad terms, described the Rehabili-tator’s plans for rehabilitation and the timetable for implementing the plan. The Preliminary Plan explained that because the premium rates for the Companies’ largest block of business, known as “Old-Co” policies, were inadequate, this business could not be sold to other insurers. For the same reason, capital could not be raised. Accordingly, the Rehabilitator fixed on a course of systematic increases in the OldCo premium rates and reduction of expenses. Attached to the Preliminary Plan were reports from the Companies’ consulting actuarial firm, Milliman, and the Companies’ financial advisor, Signal Hill. These consultants concluded that PTNA could return to a positive surplus by rate increases; by offering policyholders reduced benefit levels; or by offering a non-forfeiture option in lieu of the indicated rate increases. The Rehabilitator reported that he intended to submit a formal rehabilitation plan with more specifics on *376 these options by October 4, 2009, for the Court’s review and approval.
Instead, on October 2, 2009, the Rehabil-itator filed petitions with the Court to convert the rehabilitations of PTNA and ANIC into liquidations. On October 23, 2009, the Rehabilitator filed amended petitions for liquidation to correct an error of $200 million. The correction favored the Companies.
On November 2, 2009, Penn Treaty American Corporation (PTAC), the owner of PTNA, and Eugene J. Woznicki, Chairman of the Board of Directors of PTNA and of PTAC, petitioned to intervene to oppose the liquidation petitions. The Court granted the intervention petition.
The year 2010 was devoted to attempted settlement, discovery and preparation of expert testimony and reports. Trial began on January 3, 2011, but paused while, again, the parties sought an interim resolution. The trial resumed in October of 2011. In all, there were 30 days of hearing testimony, and the Court received thousands of pages of exhibits and documentary evidence. Post-hearing briefs, in the aggregate, exceeded 1,000 pages in length. Closing arguments took place on February 21 and 22, 2012.
The Companies’ business written after 2001, consisting of what they call the “NewCo” policies, is priced correctly and, thus, profitable. The challenge lies with the premium rates for the Companies’ Old-Co policies, which are inadequate to cover the expected future claims. For the past decade, the Companies have pursued rate increase filings on OldCo policies, successfully in some states but not in all. This was not for lack of actuarial justification for those filings. The Rehabilitator’s evidence showed that rate regulation is governed by politics, not actuarial evidence or legal principles. The Rehabilitator has even included Pennsylvania in the list of problem states that have refused to approve the Companies’ actuarially justified rate increase filings for the OldCo policies. This case presents a serious indictment of the existing system of rate regulation of long-term care insurance.
The need for rate relief has increased over time as claims experience developed. In turn, the inadequate rates caused the Companies’ actuaries to conclude that the Companies’ reserves, or liabilities, had to be increased. The inadequate premium rates also caused the Companies to lose their reinsurance. Accordingly, PTNA’s surplus fell to negative $141 million at the point it was placed into rehabilitation. By April of 2009, the actuaries projected PTNA’s surplus to have further declined, to negative $223 million.
The Rehabilitator suggests that management “masked” the true financial condition of the Companies and that the truth was only unearthed by the Rehabilitator’s careful examination. Both claims are unfounded. 2 First, the rate filings and reserves for each company, both before and during rehabilitation, were prepared by actuaries, not by management. Indeed, it was the same actuarial firm, Milliman, that did this work both before and during rehabilitation, and it used the Companies’ claim data for its actuarial work. The Rehabilitator’s *377 own witness, Stephen LaPierre, former Executive Vice President of Insurance Operations for the Companies, offered credible testimony about the efforts of the Companies’ claim department to act promptly on claims and to set responsible claim reserves. Second, it was not the Rehabilitator’s “careful examination” that “unearthed” another financial picture of the Companies. Rather, it was Milliman’s volte-face on its own statutory reserves, or liabilities, that caused the Companies’ indicated surplus to deteriorate.
Nevertheless, there has been a lot of careful and hard work by the rehabilitation team since the takeover. Robert L. Robinson, Chief Rehabilitation Officer, is diligent, knowledgeable and well organized. 3 He is not an expert on long-term care insurance, but he has learned fast. He and his team have worked to understand and manage the daily business affairs of the Companies, and they have brainstormed on a number of approaches for returning the Companies to solvency. Robinson was of the opinion that several rehabilitation options could have been supported when the decision to pursue liquidation was made. Respondent’s Exhibit No. 14 (Ex. R-); N.T. 2/14/11 at 139-42, 165. However, Robinson did not direct Milliman or Signal Hill to draw up a formal plan of rehabilitation; it is not clear that he had authority to issue such a directive.
Robinson reports to Joseph DiMemmo, who is the Deputy Insurance Commissioner for the Office of Liquidations, Rehabili-tations and Special Funds of the Pennsylvania Insurance Department. Intervenors suggest that DiMemmo’s decision to convert the proceeding to a liquidation was made in pique, and they fault DiMemmo’s “angry” decision to shut down work on a rehabilitation plan that included benefit modifications to the OldCo policies as well as premium rate increases. Bureaucrats are allowed to emote and why DiMemmo decided to pursue liquidation is simply irrelevant. The only question addressed by the Court was whether the liquidation petition should be granted on the evidence presented and on the governing law. In any case, the Court presumes that DiMem-mo made the decision to pursue a conversion from rehabilitation to liquidation because he believed it to be the appropriate course.
Because Milkman was part of Robinson’s rehabilitation team and also did consulting work for the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), Intervenors question the firm’s independence. Milli-man’s August 2009 projections caused the Rehabilitator to fix on a kquidation course; the Rehabiktator then offered Milkman’s 2010 expert report in support of Milkman’s 2009 projections. Intervenors ask how Milliman can independently evaluate its own work, and they assert that this purported lack of independence reduces the weight the Court should assign to Milkman’s expert report. The Court understands Intervenors’ point, but it did not factor this point into its consideration of Milkman’s work.
The parties, their consultants and lawyers have been diligent in preparation and presentation of the evidence. The trial was conducted with a commendable level of civility. The post-hearing briefs were *378 thorough and careful. 4 It is the Court’s responsibility to decide the case on the evidence without regard to the sincere convictions of either the Rehabilitator or In-tervenors.
Insolvency exists when an insurer is unable to meet obligations as they come due or because its assets are insufficient to fund all future liabilities. Here, the evidence proved the second type of insolvency; however, the parties sharply disputed the extent of asset deficiency. The Reha-bilitator’s expert, Milliman, projected PTNA’s statutory surplus to be negative $2.1 billion and ANIC’s surplus to be negative $137 million, as of December 31, 2009. Intervenors’ expert, United Health Actuarial Services, Inc., projected PTNA’s statutory surplus to be negative $833 million and ANIC’s surplus to be positive $600,000, as of December 31, 2009. 5
The Court rejects Milliman’s projected surplus. In the space of six months Milli-man increased its claim projections for PTNA by over $1 billion, a revision of a magnitude never before seen by any of the experts who testified. This increase did not result from new claim data received over that period of time but, rather, Milli-man’s negative recast of its own prior projections. Nevertheless, even accepting Milliman’s projected negative surplus, it does not follow that revenues over the next 10 to 20 years cannot be increased in amounts sufficient to pay future claims generated by the OldCo policies over the next 60 years, the majority of which are expected to be presented in the next 10 to 20 years.
In a liquidation, all policyholders will have their policies cancelled in 30 days. At that point the guaranty fund in the state where a particular policyholder resides will offer some kind of replacement coverage. 6 From that point forward, policyholders will pay their premium to the appropriate guaranty fund, but the level of replacement coverage they receive will, in most cases, be less than what they have under their policies issued by PTNA or ANIC. State legislatures generally cap the level of guaranty fund coverage provided to their residents.
The Rehabilitator believes, drawing on hoary Pennsylvania precedent that predates the modern statutory insurance insolvency scheme, that policyholders may sue the estates of PTNA and ANIC for breach of contract caused by the termination of their policies in liquidation. This will enable them, the Rehabilitator theorizes, to recover prospective losses that may arise years after their policies have been cancelled in a liquidation. The Rehabili-tator’s novel argument is inconsistent with the position taken by the Department in other liquidations. 7 The argument also finds no support in the policy itself, which makes no promise about post-liquidation rights. The potential that the Rehabili-tator’s legal argument may find ultimate success is not evidence, and it does not support immediate liquidation.
*379 The Rehabilitator expresses concern that continued rehabilitation may result in some policyholders being treated more favorably than others. This is not very persuasive in light of the fact that a liquidation guarantees widely disparate treatment of policyholders because different states offer different levels of guaranty fund coverage. PTNA policyholders in South Dakota will have their coverage capped at $100,000 even though they may be paying a rate appropriate for a “Cadillac” policy with the highest benefit level. 8 ANIC policyholders in New Jersey will have no limits on their post-liquidation coverage.
The risk facing policyholders is that they will not receive the full level of benefits presently provided in their policies. This risk is the same whether the Companies are liquidated today or in ten years. Indeed, that risk may be reduced over time should states increase the amount of coverage provided by their guaranty funds.
The Rehabilitator purports to speak for the policyholders, but there is no empirical evidence on policyholder preference. Robinson conducted meetings with two small groups of policyholders in Philadelphia, after the decision to pursue liquidation had been made. It is impossible to draw any inference about policyholder preference from Robinson’s report of what these policyholders said at the meetings.
Some states, such as Virginia and South Dakota, have acted responsibly on the Old-Co rate filings. As a result, policyholders there are paying close to the “national rate,” i.e., the amount needed to pay claims in any and all states for a particular product. 9 Other states, including Pennsylvania, have refused to approve actuarially sound rate filings. (Waite) N.T. 2/1/11 at 104 (describing Pennsylvania as a “difficult state”). Rate inequities are the result. Policyholders in South Dakota, for example, are subsidizing policyholders in Pennsylvania; NewCo policyholders are subsidizing OldCo policyholders.
This history does not make continued rehabilitation futile. There is no reason for presuming that state regulators will respond to rate increase filings presented as part of a rehabilitation plan, which itself will show how a turnaround can be achieved, as they have responded in the past to business-as-usual rate increase filings. A liquidation will shift to the taxpayer the ultimate cost of a state’s refusal to grant actuarially sound rate increases because taxpayers will have to reimburse the guaranty funds. The taxpayer burden should factor into the deliberations of the state regulators who are a necessary part of a workout. A rehabilitation plan need not involve only rate increases; it may also involve benefit modifications to the OldCo policies that would cost the policyholders less and still provide them reasonable coverage.
In mid-2009, in anticipation of a liquidation, the Rehabilitator abandoned its policy of aggressive pursuit of rate increases. Commissioner Ario advised state regulators to follow his example and not approve pending rate filings on OldCo business.
*380 In spite of no new rate increases, the 2010 results were more positive than Milli-man had projected. As of December 31, 2010, the Companies have not been forced to liquidate assets to pay claims. In fact, the Companies’ combined assets of approximately $1 billion actually grew in 2010. In 2010, cash flow was approximately $277 million; claims in the amount of $236 million were paid without liquidating assets. This is not to say that the Companies do not have a serious cash flow challenge. They do. Their ability to pay claims, however, is not an immediate problem. Even in the Rehabilitator’s worst case scenario, the Companies will be able to pay existing and future claims for many years.
The Rehabilitator’s evidence did not show that a rehabilitation was tried and failed. Rather, it showed that a rehabilitation plan was abandoned in its nascency. In short, the Rehabilitator did not prove that continued rehabilitation substantially increases the risk to policyholders, creditors and the public or is futile. The quality assets held by the Companies and the existence of guaranty funds provide a safety net for their policyholders during continued rehabilitation. By contrast, liquidation promises immediate harm to the policyholders, creditors and the public, as the Rehabilitator acknowledged to the Court in his Preliminary Plan.
III. Findings of Fact
A. Business and History of PTNA and ANIC through Rehabilitation i. The Companies
PTNA and ANIC are Pennsylvania stock life insurance companies headquartered in Allentown, Pennsylvania. PTAC is the sole shareholder of PTNA, and ANIC is a direct and wholly-owned subsidiary of PTNA. 10 The Companies are licensed to issue annuities and life, accident and health insurance policies. PTAC, through its insurance company subsidiaries, has been writing long-term care insurance business since 1972. Historically, the Companies have written a de minimis amount of other insurance coverages, including Medicare supplement policies and life insurance.
As of December 31, 2008, the Companies had approximately 142,000 policyholders generating approximately $290 million of annual in-force premium, 97.7% of which was from long-term care insurance policies, 2.2% from Medicare supplement policies, and 0.1% from other insurance. PTNA and ANIC, until they ceased underwriting in October 2008, wrote new business through a network of over 17,000 independent agents. The Companies are licensed in 44 states and the District of Columbia, and their in-force business is distributed across 49 states and the District of Columbia. As of October 20, 2008, the Companies had 270 employees. The Companies manage claims internally, and as of April 2009, employed 79 individuals in their claims and case management department, including 10 full-time registered nurse case managers, 38 full-time claims examiners and numerous additional support personnel.
ii. The Companies’ Products
The Companies’ principal product is long-term care insurance. Long-term care insurance provides coverage for some of the costs of skilled nursing, intermediate care, custodial care and home health care for a person who needs assistance due to chronic illness or disability. Such care is *381 provided to individuals in their home or in an adult day care facility, nursing home or assisted living facility. To receive this coverage, a policyholder must meet certain benefit triggers, which vary depending on whether the policy is tax qualified or non-tax qualified.
Long-term care insurance policies were designed and sold as non-tax qualified policies prior to federal legislation enacted in 1996, which created tax qualified long-term care insurance policies. Under Section 213 of the Internal Revenue Code, premiums paid for a tax qualified long-term care insurance contract are deductible medical care expenses. 26 U.S.C. § 213 (d)(1)(D). As rephrased from the United States Code, a tax qualified long-term care insurance contract is one that:
(a) provides insurance coverage only for qualified long-term care services;
(b) does not pay or reimburse expenses that are reimbursable under Medicare;
(c) is guaranteed renewable;
(d) does not provide for a cash surrender value or other money that can be paid, assigned or pledged as collateral for a loan, or borrowed;
(e) provides that all refunds of premiums (other than refunds on the death of the insured or on a complete surrender or cancellation of the contract, which cannot exceed the aggregate premiums paid under the contract) and policyholder dividends, or similar amounts, are to be applied as a reduction of future premiums or to increase future benefits; and
(f) satisfies certain consumer protection requirements as well as disclosure and nonforfeitability requirements.
See 26 U.S.C. § 7702B(b)(l) (emphasis added). “Qualified long-term care services” are defined as
necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which—
(A) are required by a chronically ill individual, and
(B) are provided pursuant to a plan of care prescribed by a licensed health care practitioner.
26 U.S.C. § 7702B(c)(l) (emphasis added). A “chronically ill individual” is one who has been certified within the previous 12 months by a licensed health care provider as
(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity,
(ii) having a level of disability similar ... to the level of disability described in clause (i)[, as determined by the Internal Revenue Service in consultation with the Department of Health and Human Services], or
(iii) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.
26 U.S.C. § 770213 (c)(2) (emphasis added). For purposes of federal tax law, “activities of daily living” are “eating, toileting, transferring, bathing, dressing and continence.” 26 U.S.C. § 7702B(c)(2)(B). 11
The Companies, like most long-term care insurance companies, began to focus on selling tax qualified products by the early 2000s. In order to be tax qualified, a policy must conform to the above statutory *382 requirements, most notably with respect to benefit triggers. For example, a sample policy form for PTNA’s tax qualified Assisted Living Plus II product contains the following conditions of eligibility:
Subject to all other provisions, you become eligible to receive the benefits of this Policy when, due to illness or injury:
1) you require Human Assistance with two or more Activities of Daily Living[ 12 ] for a period of at least 90 days; OR
2) you have Severe Cognitive Impairment, (which may be caused by Alzheimer’s disease, Organic Brain Syndrome or senile dementia, etc.)
Ex. R-789, Form No. ALP2-TQ-P(AZ) at 17. Other PTNA and ANIC tax qualified policy forms contain substantially similar language.
By contrast, a non-tax qualified policy contains more benefit triggers, which makes coverage easier to access. For example, one PTNA non-tax qualified Personal Freedom product sets forth the following conditions of eligibility for an Assisted Living Facility:
You become eligible to receive the Assisted Living Facility Benefit when:
1) Your Physician certifies Your confinement to be Medically Necessary. . . . [ 13 ]
OR
2) You are unable to perform two (2) or more of the Activities of Daily Living without human assistance or continual supervision....
OR
3) You are afflicted with Cognitive Impairment. ...
Ex. R-789, Form No. PF2600(PA)-P at 9. 14 The “medically necessary” trigger makes benefits more accessible for a non-tax qualified policyholder.
A “medically necessary” claimant may be able to perform all activities of daily living without assistance. Eligibility is not based upon objective criteria but a subjective standard; ie., a treating physician’s judgment. Accordingly, non-tax qualified policies with a “medically necessary” trigger are “more challenging ... to manage from a claim perspective.” (LaPierre) N.T. 9/19/11 at 226. LaPierre explained that the claim cost management problem has been exacerbated by looser underwriting standards employed by the Companies before 2002. Id. at 227. The Rehabili- *383 tator’s actuary, Edward Mohoric, agreed that “medically necessary” is a lower standard for triggering benefits, requiring the Companies to experience higher claim costs for non-tax qualified policies. N.T. 2/24/11 at 75-76.
The difficulty with managing non-tax qualified policies was set forth in an internal analysis done on October 3, 2010:
While a majority of the long-term care insurance industry began to focus on selling the new [tax qualified] product design in the late 1990s and early 2000s, PTNA continued to sell primarily the [non-tax qualified] product design through 2001. Consequently, 73% of in-force policies are of the [non-tax qualified] design, posing an ongoing challenge to benefit eligibility management.
The 2600 product form, [a non-tax qualified] policy, was marketed between 1996 and 2001. This product form contains the most liberal of all benefit triggers, the Instrumental Activities of Daily Living (“IADL”) benefit trigger. This allows a policyholder to qualify for benefits when they have experienced the least restrictive of physical functioning decline. Benefits currently paid on the 2600 product represented 27% of total claim benefit payments in 2009.
Petitioner’s Exhibit No. 266 (Ex. P — ) at 21-22.
After a predetermined deductible period, a policyholder with a covered claim receives a daily benefit ranging from $60 to $300 per day for a maximum benefit period ranging from one to 10 years. Some policies offer unlimited lifetime benefits. A policyholder will go off claim upon death or if he or she recuperates from the condition that caused the claim. The Companies’ long-term care insurance policies are guaranteed renewable, meaning that policyholders are guaranteed the right to renew their policies irrespective of their age or health as long as they pay their premiums.
Initial premium rates are established at the time the policy is first purchased. The policies provide that premiums will not increase because of the policyholder’s age or medical condition. On the other hand, the policies provide that premiums are subject to increase if such increases become actuarially supported for the entire group of policyholders. The Companies disclosed this fact with a “Premiums Subject to Change” provision on the first page of their policies. Two examples follow:
PTNA — ASSISTED LIVING PLUS II
Premiums Subject To Change — 5 Year Rate Guarantee
The premiums of this Policy can never be changed because your age has changed or because of a change in your individual health. We can change the premiums for this Policy if we change them for everyone that bought this Policy in the same state yours was purchased. We cannot, however, change your premiums during the first five years this Policy is in force. A change in premiums would first have to be filed with the state’s Commissioner of Insurance. Notice of any such change in premiums will be sent at least 45 days in advance of the new premium becoming payable.
Ex. R-789, Form No. ALP2-TQ-P(AZ) at 1.
PTNA — COMPREHENSIVE LONG-TERM CARE POLICY RENEWABILITY GUARANTEED RENEWABLE-PREMIUMS SUBJECT TO CHANGE
This Policy is guaranteed renewable for Your lifetime. It may be kept in force by the timely payment of premiums. We cannot refuse to renew this Policy as long as You pay the premiums. We can *384 change the renewal premium rates. We can only change them if they are changed for all policies in Your state on this Policy Form. Renewal premiums due after a change is implemented will be based on the new rate. Notice of any change in rates will be sent at least thirty-one (31) days in advance.
Ex. R-789, Form PF2600(PA)~P at 1.
As noted, the Companies began writing long-term care policies in 1972. By 2001, the Companies, which had “grown very quickly,” found their claims were “somewhat higher than ... expected.” (Mohoric) N.T. 2/16/11 at 85. As was the entire long-term care insurance industry, PTNA and ANIC were affected by the increased availability of home health care services and assisted living facilities in the 1990’s and 2000’s. Prior to that time, there had been an underutilization of policies because home health care and assisted living facility services were not available in many areas of the United States, or the waiting list to obtain such care was very long. As the availability of such care expanded, long-term care claims began to rise to a degree that no long-term care insurer had anticipated.
As a result of these growing pains, the Companies concluded that they needed to revise the assumptions used to set their claim reserves, ie., the amount set aside to meet future claim liabilities. The historic assumptions for policy persistency and claim frequency and severity had resulted in inadequate claim reserves. The required reserve strengthening placed PTNA’s adjusted capital and surplus below the Regulatory Action Level 15 as of December 31, 2000. In response, PTNA filed a Corrective Action Plan with the Department, and it approved PTNA’s plan on February 12, 2002.
As part of the Corrective Action Plan, PTNA and ANIC paused writing business for six months while they instituted efforts to strengthen their finances. Accordingly, the Companies entered into a reinsurance treaty with Centre Solutions (Bermuda) Limited, which reinsured 100% of the individual long-term care business in effect on December 31, 2001. This treaty was commuted effective May 24, 2005, and the Companies entered into a new reinsurance agreement covering this business with Imagine International Reinsurance Limited (Imagine) effective June 30, 2005. Other significant components of the Corrective *385 Action Plan included making improvements to the Companies’ claims and underwriting departments; writing new and more profitable business; and repricing the existing OldCo business with rate increases.
Milliman recommended and prepared the premium rate increase filings. The first round of rate increases took place in 2001, and this was followed by rate increase filings in 2003, 2005, and 2006. The 2001 rate increase requests averaged 34%, and the Companies received approval for and implemented 92% of the aggregate requested increases. The 2003 rate increase requests averaged 16%, and the Companies received approval for and implemented 80% of the aggregate requested increases. The Companies made rate increase requests in 2005 for those states that had denied the 2003 rate increase requests, in part or in whole. The 2005 rate increase requests averaged 23%, and the Companies received approval for and implemented 66% of the aggregate requested increases. The 2006 rate increase requests averaged 37%, and included the portions of the increases requested in 2005 that were not previously approved. The Companies received approval for 54% of the aggregate requested increases, and continued to pursue the remainder through successive state filings. PTNA and ANIC sought higher rate increases on certain OldCo coverages where the claims experience was worse in comparison to policies without those benefits. These included policy riders that offered inflation protection and policies with an unlimited, ie., lifetime, benefit period. Policies with inflation and lifetime benefits have been subsidized by the other policies.
On each occasion that PTNA and ANIC sought premium rate increases, they offered their policyholders the option of reducing benefits in lieu of a premium rate increase. In September 2008, PTNA and ANIC began offering policyholders a non-forfeiture option whereby policyholders could forfeit their policy, cease paying premiums, and receive a benefit equal to the amount of past premium paid less the amount of any claims paid. By offering the non-forfeiture option, the Companies hoped that state regulators would be “more reasonable in their approach to rate increases.” (Waite) N.T. 1/31/11 at 178.
iii. OldCo and NewCo Business
The Corrective Action Plan called for the development of new and more profitable insurance products. After they resumed writing new business in 2002, PTNA and ANIC began to monitor and manage their business in two main segments: business written prior to January 1, 2002, “OldCo,” and business written after January 1, 2002, “NewCo.” The coverage provided under a particular OldCo or NewCo policy varies according to the consumer’s choice. Certain OldCo riders, such as inflation riders, are not available in NewCo, and NewCo policies are tax qualified. However, OldCo and NewCo products offer the same three basic types of coverages: a nursing home or assisted living facility policy; a home health care policy; and a comprehensive policy, which covers all types of treatment options. Old-Co accounts for approximately 85% of PTNA’s policies and 67% to 70% of ANIC’s policies. (Waite) N.T. 1/31/11 at 133. NewCo accounts for approximately 15% of PTNA’s policies and 30% to 33% of ANIC’s policies. Id. As of December 31, 2008, annualized premium from the New-Co business represented approximately 19% of the Companies’ in-force business, with over 24,000 long-term care insurance policies producing approximately $53 million of annualized premium. Ex. P-335 at 12.
*386 A significant portion of the NewCo business has targeted a specific segment of the population — those individuals suffering from chronic non-cognitive health conditions that cannot obtain coverage from any other insurer. The Companies decided to target this market niche because competition for this business was low and because they had the claims and underwriting expertise to underwrite and price the business correctly. This non-standard business proved to be successful. As of April 2009, NewCo policies had a profitable underwriting loss ratio and did not need rate increases. NewCo products were priced according to four underwriting classes, A, B, C, or D, with the best risks in the A class and the worst risks in the D class. The Rehabilitator’s actuary, Edward P. Mohoric, testified that the Companies did a “fairly good job” of classifying applicants in the appropriate A, B, C, and D risk classes for NewCo business. N.T. 2/16/11 at 38.
The average annual OldCo premium in 2011 was approximately $2,200. (Waite) N.T. 1/31/11 at 176. NewCo policyholders are charged significantly higher premium rates than their counterparts in the OldCo book of business. Lapse rates in the New-Co book have performed as expected.
The Companies’ returns on the OldCo business have been much lower than expected. This is attributable to, inter alia, the changes wrought by the creation and proliferation of assisted living facilities in the United States; the increase in policyholder persistency; and the extension of claim duration. Lapse rates in the OldCo book have been “lower than originally anticipated.” (Mohoric) N.T. 2/16/11 at 46. This was likely a result of the very favorable premium pricing in the OldCo business, and the inability of OldCo policyholders to purchase comparable coverage at the same price elsewhere, even taking premium rate increases into account. Due to the foregoing factors, the OldCo business has required substantial increases in reserves and premium rate increases.
iv. Reserves
The Companies’ long-term care insurance policies are long duration policies, and this governs the accounting principles used to evaluate the Companies’ financial condition. Liabilities for future policy benefits are determined by actuaries and accountants in accordance with statutory accounting principles.
There are two components to the Companies’ liabilities. The first liability component combines the unearned premium reserve and the active life reserve. The unearned premium reserve covers the amount of premium that would have to be returned to policyholders who cancel their coverage mid-policy year before their premium is earned. The active life reserve is the amount needed to pay the claims of the active lives, ie., healthy policyholders, that have not yet materialized but will at some point in the future. The second liability component is the claim reserve established for incurred claims of the disabled policyholders, ie., policyholders on claim, and it covers both claims reported and those not yet reported.
In 2001, the Companies, with the approval of the Department, increased their active life reserves by $125 million. In 2002, they increased their claim reserves by $83 million. In 2005, the Companies did a review of claimant mortality, which evaluated the probability of death from year to year of policyholders currently on claim. As a result of the review, the Companies increased their claim reserves by $40 million. In 2007, the Companies further increased their claim reserves by approximately $25 million and again in 2008 *387 by $17 million. These adjustments were due to increasing claim development.
v. Reinsurance
Until January 1, 2009, the Companies’ long-term care insurance policies were primarily reinsured by Imagine, an off-shore non-admitted insurance company. In July 2005, Imagine and the Companies entered into a 100% quota share reinsurance treaty covering substantially all of the OldCo business (OldCo Treaty). Effective October 1, 2005, Imagine and the Companies entered into a 75% quota share reinsurance treaty covering NewCo business written after October 1, 2005 (NewCo Treaty). Business written between January 1, 2002, and October 1, 2005, was initially reinsured but was recaptured by the Companies in 2005.
In August 2008, a dispute arose between the Companies and Imagine relating to Imagine’s collateralization of its claim payment obligations under the OldCo Treaty. Because state regulators had failed to approve OldCo premium rate increases requested and justified by the Companies, Imagine asserted that it did not have to collateralize its reinsurance obligations to the Companies. Under Pennsylvania law and applicable statutory accounting principles, the Companies may not reduce their reported claim liabilities by the amounts recoverable from a non-admitted reinsurer unless that reinsurer has collateralized its claim payment obligations to the Companies.
In October 2008, the Companies notified Imagine of their intent to recapture the reinsurance treaty on January 1, 2009. In November 2008, the Companies entered into a settlement agreement with Imagine, by which the Companies were relieved of the obligation to pay Imagine expense and risk charges beyond the first quarter of 2008 for the OldCo Treaty or beyond the second quarter of 2008 for the NewCo Treaty. It was further agreed that the Companies would recapture the policy liabilities under both the OldCo Treaty and the NewCo Treaty effective January 1, 2009, and that the Companies would release approximately $118 million of letters of credit held to secure Imagine’s obligations. The Companies’ December 31, 2008, financial statements reflect substantially all of the recapture’s effects on the Companies’ financial condition.
vi. Financial Condition of the Companies
The Companies have more than $1 billion dollars in assets. As of September 30, 2011, the market value of PTNA’s assets was $889,368,000. Exs. R-1132, 1136. 16 As of September 30, 2011, the market value of ANIC’s assets, not including those of its wholly owned subsidiary AINIC, was $144,682,000. Exs. R-1132,1136. Comparable numbers as of December 31, 2008, for PTNA and ANIC were $889,138,876 and $102,849,736, respectively. Ex. R-894 at 26-27. Thus, since rehabilitation, the market value of the Companies’ assets has grown. The Companies have no debt. The Companies are paying all obligations in a timely manner, including policyholder claims; to date, neither company has had to liquidate assets in order to pay claims. (Robinson) N.T. 2/15/11 at 200.
As of December 31, 2009, the Companies’ combined annualized premium reve *388 nue was $246.8 million. PTNA’s annualized premium revenue was $228.5 million, and ANIC’s was $23.3 million. Ex. P-961 at 1. In 2009, the Companies paid $214.5 million in claims. The following table shows the combined claims payments by the Companies over the past several years and the percentage increase from the previous year:
[[Image here]]
Ex. R-62. As the chart demonstrates, the average annual increase in claims payments has been less than 4%, without any adjustment for inflation.
Mohoric acknowledged in Milliman’s rebuttal report that the “ultimate solvency position of the companies will be determined by cash flows.” Ex. P-969 at 5. His testimony confirmed that position. N.T. 11/2/11 at 6. Commissioner Ario also acknowledged that the issue of cash flow is relevant to an analysis of whether the Companies should be liquidated. N.T. 2/11/11 at 254-55. Karl Volkmar, the actuarial expert retained by the Intervenors, compared actual cash flows for PTNA and ANIC with the projected cash flows implicit in Milliman’s July 2010 Surplus Report using data he received from Milliman. Milliman projected a negative cash flow of $37.76 million for PTNA in calendar year 2010, but the actual negative cash flow was 50% less, ie., $18.7 million. Ex. R-912. Milliman projected a positive cash flow of $5.2 million for ANIC in 2010, but the actual positive cash flow was $8.1 million. Ex. R-912. As of December 31, 2009, PTNA’s additional paid in capital was $114,049,968 and ANIC’s was $4,861,812. Exs. P-729, P-730 at 6.
vii. Conditions that Led to Rehabilitation
The Rehabilitator continues to employ many who served in senior management prior to the Companies’ receivership. The Companies are operationally sound. The rehabilitations of PTNA and ANIC were not caused by cash flow issues but by a need to strengthen reserves for projected claims that are many years distant. The Companies are saddled with inadequate rates on a subset of policies in a subset of problematic states. This situation arose because regulators in key states such as Arizona, California, Florida, Illinois, and Pennsylvania have denied, delayed, or limited needed premium rate increases for the OldCo policies. Ex. P-335 at 45. Meanwhile, regulators in other states, such as South Dakota and Virginia, instituted the rate increases sought for the same policies in a straightforward manner.
*389 The OldCo policies are underpriced based on the current market for long-term care policies, but they were reasonably priced when issued based upon available information. Initial pricing used assumptions generally consistent with industry assumptions at the time. A significant factor that led to the OldCo policies being under-priced, the unanticipated expansion in availability of long-term care facilities and attendant increased utilization of claims, is endemic to the entire long-term care industry. In addition, as a consequence of being underpriced, lapse rates in the Old-Co book have been lower than anticipated.
One OldCo non-tax qualified product, which was sold between 1996 and 2001, provides policyholders with inflation or lifetime benefits, and is referred to as the “Cadillac” policy. This particular product has contributed significantly to the need for rehabilitation.
A secondary reason for the Companies’ financial condition was excess operational capacity. This condition was addressed by reducing overhead and expenses.
viii. The Rehabilitation Orders
The Court’s January 6, 2009, rehabilitation orders “directed” the Commissioner “to rehabilitate the business of Penn Treaty; to take possession of the assets of Penn Treaty; and to administer the Penn Treaty assets in accordance with the orders of this Court.” Ario v. Penn Treaty Network America Insurance Co. (No. 5. M.D. 2009, order filed January 6, 2009) at ¶ B. 17 The Rehabilitator was ordered to “take such actions as are necessary to correct the condition that prompted the Board of Directors’ request for and consent to the rehabilitation of Penn Treaty.” Id. at ¶ 5. The Rehabilitator was ordered to prepare a “preliminary plan of rehabilitation,” id. at ¶ 15, and to “prepare a plan of rehabilitation, which may include a consolidation, merger or other transformation of Penn Treaty and to that end may retain accountants, actuaries, attorneys and other consultants at the expense of Penn Treaty.” Id. at ¶7. As this Court has explained, “[o]nce the course of rehabilitation has been chosen by the Insurance Commissioner, it must be pursued unless and until the Commissioner satisfies this Court that the rehabilitation should be terminated under Section 518(a) of Article V and a liquidation order entered.” Koken v. Legion Insurance Co., 831 A.2d 1196, 1229 (Pa.Cmwlth.2003), aff'd sub nom. Koken v. Villanova Insurance Co., 583 Pa. 400 , 878 A.2d 51 (2005). 18
*390 ix. The April 2009 Preliminary Report and Plan of Rehabilitation
On April 2, 2009, the Rehabilitator filed his Preliminary Plan with the Court. The Preliminary Plan described the background and history of the Companies, their products, the differentiation between New-Co and OldCo policies, reserve situation and financial information, sales, claims management, and rate improvement efforts. The Preliminary Plan set forth the areas in need of corrective action. The Preliminary Plan appended a report prepared by Thomas Johnson, an investment banker at Signal Hill, and a report prepared by Mohoric at Milliman. The Signal Hill report analyzed and recommended various rehabilitation approaches, and the Milliman report discussed surplus projections related to the rehabilitation of PTNA and ANIC. The Preliminary Plan concluded, inter alia, that a liquidation would be harmful to policyholders. Ex. P-335 at 47. It also concluded that general creditors would be no worse off in a rehabilitation because they are expected to receive nothing in liquidation. Id. at 47-48.
The Preliminary Plan lauded the Companies for successfully developing since 2002 a “market niche” in underwriting policies for people with chronic non-cognitive health conditions. These NewCo policies were deemed profitable and needed no rate increases. According to the Preliminary Plan, the “primary cause for the Companies’ financial difficulties is the historical and current inadequacy of the insurance rates being charged for the Companies’ OldCo book of business.” Ex. P-335 at 45. Further, the Preliminary Plan stated:
[T]he only feasible rehabilitation alternative at this time is to increase rates on the OldCo business and reduce expenses (the “Rate Increase Alternative”) [and] the Rate Increase Alternative may be in the best interest of the Companies’ policyholders because, if successful, it will allow PTNA to pay more policyholder claims in full, rather than have benefits limited by state guaranty association maximum limits, and may allow the Companies to divest all or portions of their business in the future.
Id. at 47.
The Preliminary Plan identified the failure by some regulators to approve adequate rate increases on the OldCo policies as the root cause of the need for rehabilitation, noting that only 66% and 54% of the Companies’ aggregate requested increases were approved in 2005 and 2006, respectively. Id. at 21. The Preliminary Plan explained that the rate increases would “vary by state based upon each state’s prior rate increase experience.” Id. at 49. With rate increases, the Rehabilitator would offer policyholders the alternative options of (1) maintaining current rates and accepting reduced benefit levels; or (2) selecting a non-forfeiture option. The Preliminary Plan stated that “aggressively” pursuing premium rate increases for the OldCo policies would correct the condition that caused the Companies to be placed in rehabilitation. This conclusion was supported by the Companies’ actuarial firm, Milliman, which stated that “PTNA can in time return to a positive surplus, and that ANIC can maintain and improve its surplus position by taking [the actions listed in the Plan].” (Pfannerstill) N.T. 3/23/11 at 60; Ex. P-335 at 48.
In short, it was identified early in the process that a rehabilitation required the aggressive pursuit of actuarially justified premium rate increases. (Mohoric) N.T. 2/23/11 at 133; (Pfannerstill) N.T. 3/23/11 at 56-57. Each additional dollar generated by actuarially justified premium rate increases will benefit the estate as a whole because it will produce more funds to pay *391 claims. (Waite) N.T. 2/1/11 at 46-47. The Preliminary Plan concluded that “[t]he more quickly and aggressively rate increases and expense reductions are implemented, the sooner PTNA’s surplus can become positive and ANIC’s financial position can be improved.” Ex. P-335 at 50; (Pfannerstill) N.T. 3/23/11 at 60-61.
x. Rehabilitation Implementation Committee
Robert L. Robinson was retained by the Rehabilitator to serve as Chief Rehabilitation Officer of the Companies. Robinson was selected on the basis of his extensive insurance experience. This included work on the rehabilitation of Fidelity Mutual Life Insurance Company and work with Summit National Life Insurance Company, Colonial Penn Insurance Company, Leucadia National Corporation and Penn Mutual Life Insurance Company. Robinson educated himself on the long-term care insurance industry and examined the Companies’ functions, management and organization.
Robinson was tasked with organizing the operational aspects of the Companies’ rehabilitation. Robinson created a Rehabilitation Implementation Committee (RIC) to oversee the rehabilitation efforts. Robinson ran the RIC meetings, which were held every Friday beginning in January 2009. Joseph DiMemmo and Preston Buckman, Special Funds Counsel, represented the Department as members of the RIC. Officers and directors of the Companies served on the RIC, including William Hunt, Mark Cloutier, Cameron Waite, Stephen LaPierre and others. Robinson testified that it was important for the RIC to include members of senior management of the Companies because of their familiarity with the business. N.T. 2/3/11 at 230. Two of PTNA’s long-time actuaries at Mil-liman, Edward Mohoric and Larry Pfan-nerstill, were members of the RIC. Other members of the RIC included Thomas Johnson, an investment banker at Signal Hill, and attorneys from the law firm of Cozen O’Connor, the Rehabilitator’s outside counsel.
Robinson assigned the RIC members to subcommittees with the intention that they would collectively frame a rehabilitation plan. Robinson also conducted frequent meetings with members of management, upon whom he relied for their expertise of long-term care insurance issues; he relied on the consultants to analyze and explain the circumstances confronting the Companies.
xi. Milliman August 2009 PowerPoint Projections
On August 18, 2009, Milliman made a PowerPoint presentation entitled “Penn Treaty — Projections and Assumptions Review.” Ex. P-530. The August 2009 presentation contained the following summary comparison of morbidity results:
[[Image here]]
Ex. P-530 at 4. The dramatic increase in the present value of future claims from April 2009 to August 2009 was attributed to Milliman’s (1) discontinuance of its well *392 ness assumption (2) reduction in its morbidity improvement assumption and (3) substantial increases to its claim costs assumption. Ex. P-530 at 9.
Commissioner Ario testified that he attended a “pre-meeting” led by Mohoric before the RIC’s September 14, 2009, meeting to discuss the problematic numbers in the August 18, 2009, presentation. N.T. 2/11/11 at 44-45. Ario recalled that “coming out of that we said, okay, well if these numbers don’t change, and we need to look at, you know, what we’re going to do, and I think everybody was thinking, you know, probably towards liquidation. And then we had the September 14th [meeting].Id. at 45.
The August 18, 2009, presentation contained the following caveats and limitations:
• This information is presented in DRAFT format for discussion purposes at this time and is subject to change. We will provide documentation once assumptions are finalized.
• This information is intended to assist the discussion relating to the morbidity assumptions and the resulting financial projections. This information may not be appropriate, and should not be used, for other purposes.
• Penn Treaty’s actual results will likely differ from these estimates. Penn Treaty should monitor its emerging results and take corrective action when necessary.
Ex. P-530 at 2; see also (Volkmar) N.T. 10/26/11 at 100-02.
xii. Termination of New Premium Rate Increase Filings
Premium rate increase filings terminated on August 1, 2009, for PTNA and a month later for ANIC. This decision was made by DiMemmo without the knowledge or approval of the Court or Commissioner Ario, and contrary to Milliman’s recommendation at the time that premium rate increase filings continue. The decision to stop seeking rate increases by way of new filings was made out of a sense of “fairness” or “perceived fairness” to policyholders. N.T. 3/23/11 at 63 (Pfannerstill testified that DiMemmo believed that “it was not appropriate to put the burden of the rehabilitation on the policyholders.”); N.T. 2/14/11 at 220 (Robinson testified that what drove the decision was the perceived unfairness to the policyholders). DiMem-mo testified that he decided to terminate the new premium rate increase filings based on “actuarial noise.” N.T. 2/3/11 at 120-21. 19
There is no dispute that the decision to forego new premium rate increase filings cost the Companies hundreds of millions of dollars. (DiMemmo) N.T. 2/3/11 at 174; (Volkmar) N.T. 10/27/11 at 42. It increased the reserve deficiency.
The Rehabilitator elected not to implement some rate increases that had already been approved. For example, Waite testified that “the [R]ehabilitator determined not to implement those particular rate approvals [in Alaska and Nevada].” N.T. 1/31/11 at 224-25; N.T. 2/1/11 at 114-16. Waite explained that “given that those two states had $100,000 guaranty association limits, that in the event [PTNA] and/or [ANIC] ... went to liquidation, we believed it was unfair [to] those policyholders to pay additional premium. That was our rationale.” N.T. 2/1/11 at 115-16.
The Rehabilitator took steps to impede pursuit of actuarially justified premium rate increases. In March of 2010 Commis *393 sioner Ario sent letters to the insurance commissioners of four states in which rate increase applications were pending. The letter advised the commissioners that liquidation petitions had been filed and that his Department would not grant any rate increases for PTNA or ANIC in Pennsylvania. Ex. R-58. DiMemmo testified that the purpose of Commissioner Ario’s letters was to tell his fellow commissioners that they did not have to approve the pending rate increases. N.T. 2/3/11 at 121-25. None of the rate increase requests were granted in those states.
The Rehabilitator also relieved Cameron Waite of his principal duty, which was to pursue premium rate increases on behalf of PTNA and ANIC. Waite’s personal visits to state regulators stopped shortly after the rehabilitation began, ostensibly to reduce costs related to Waite’s travel budget.
Finally, the Rehabilitator elected not to appeal the decisions of state regulators to disapprove actuarially justified premium rate increase filings. Waite testified that Florida, one of the more reluctant states to approve rate increases, was “dead wrong” in its disapprovals. N.T. 2/1/11 at 195. Accordingly, the Companies appealed; the Rehabilitator later abandoned the Florida appeal.
B. The Companies’ Statutory Surplus as of December 31, 2009
The centerpiece of the Rehabilitator’s case in support of his liquidation petitions is the statutory surplus report prepared by Milliman in July 2010. Milliman’s July 2010 Surplus Report showed a decline in each company’s surplus as regards policyholders as of December 31, 2009, that far exceeded the impact expected by the loss of the Imagine reinsurance. The surplus decline was attributed to Milliman’s increase to the Companies’ reserves and reduction in anticipated future premium volume.
Statutory accounting principles govern statutory financial statements. Assets held by an insurance company must be “admitted” before they can be placed on the balance sheet and counted toward the statutory surplus of an insurer. Statutory accounting does not assign value to the intangible value of a business, such as goodwill, as generally accepted accounting principles do. The object of a statutory financial statement is to provide regulators with a snapshot of an insurer’s financial strength at a point in time, which is the last day of the calendar year. It is a liquidation statement in that it tells the reader whether an insurer will be able to pay all claims should it shut down on December 31 and never renew or write another policy. 20 The surplus as regards policyholders answers that question. It is synonymous with net worth.
Milliman’s July 2010 Surplus Report projected revenues and earnings over the next 60 years; it also projected the Companies’ liabilities over that same period. It restated those 60-year projections at their present value in order to set a surplus as of December 31, 2009, for PTNA and ANIC. The statutory reserves determine surplus.
As noted, the claim reserve represents the amount needed to pay incurred claims until they end, which can be many years. The active life reserve represents a more ephemeral liability, i.e., what is estimated to be paid in the future on claims that may or may not develop. To estimate the reserve for future, but yet to be developed *394 claims, the actuaries must conduct an inquiry that is broad in scope. They must estimate the number of policyholders, their mortality, their tendency to morbidity, inflation, deflation, investment earnings, premium volume and future rate increases over a 60-year period. It is a complicated process, and the results are uncertain because the factors that go into the projections keep changing. It is a high wire juggling act to predict what will happen during the period from December 81, 2009, to December 31, 2069, during which time a cure for cancer may be found or an asteroid may hit North America.
Milliman’s July 2010 Surplus Report was rebutted by the report of Intervenors’ expert, Karl Volkmar of United Health Actuarial Services, Inc. The experts reached different conclusions about the surplus of PTNA and ANIC as of December 31, 2009. However, they agree that the Companies’ assets are sufficient to fund all incurred claims, whether or not reported. They also agree that without change to the existing rate structure of the OldCo business, the Companies will not be able to generate the revenue needed to fund the claims that are expected to develop in future years from the presently healthy policyholders.
C. Scope of Expert Evidence
i. Rehabilitator’s Experts
Edward P. Mohoric is a principal with the actuarial consulting firm of Milliman. He joined the firm in 1982 and has served on its board of directors. He is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He is a consulting life actuary, but approximately 50% of his consulting is in the area of long-term care insurance. He has published six articles relating to life insurance, long-term care riders, and mortality considerations and is active in the Society of Actuaries. The parties stipulated to Mo-horic’s qualifications to testify as an actuarial expert about the matters within the scope of his report.
Larry J. Pfannerstill is a principal and consulting actuary with Milliman, which he joined in 1995. He is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He is a consulting health actuary who devotes 65% to 70% of his practice to long-term care insurance. He has published seven articles about long-term care insurance and is active in the Society of Actuaries. The parties stipulated to Pfannerstill’s qualifications to testify as an actuarial expert about matters within the scope of his report.
Arthur M. Lucker is employed by INS Consultants, Inc., a regulatory consulting firm, which he joined in 1997. He is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. Lucker has worked for 38 years as an actuary in the insurance industry. For the past seven years, he has focused on the long-term care industry. He does consulting work for state insurance departments on long-term care insurance regulatory matters, including rate filings. Inter-venors objected to Lucker testifying about national rate regulatory matters because his knowledge is limited to a few states and, further, he could not testify about what will happen in the future. The Court overruled Intervenors’ objections, noting that they went to the weight of Lucker’s testimony as opposed to his qualifications as an expert.
David Minches is an Executive Director in the Insurance and Actuarial Services practice of Ernst & Young, LLP. Minches is an Associate of the Society of Actuaries and a Member of the American Academy of Actuaries. His consulting for long-term care insurance carriers concerns audits and reserve work, and this work consti *395 tutes approximately 10% of his practice. Minches is a life actuary. Under the terms of an engagement letter dated December 21, 2009, Ernst & Young agreed to review Milliman’s proposed revisions to the methods it used to calculate the statutory claim reserves of PTNA and ANIC; Ernst & Young’s review was expressly “limited in scope and time.” Ex. P-56 at 11. The report was the work of Minches, Bob Hanes and Darrel Knapp.
Vincent Bodnar, an actuary and principal with DaVinci Consulting, LLC, was retained by NOLHGA in 2009. Bodnar authored a report for NOLHGA in June 2010 (NOLHGA Report) that projected the financial conditions of the Companies post-liquidation and advised NOLHGA of the liability of its members in a liquidation scenario. Bodnar was later retained by the Rehabilitator in this matter. He authored a second report dated November 9, 2010 (Rebuttal Report), which purported to rebut the report prepared by Interve-nors’ actuarial expert, Karl Volkmar. The Rehabilitator proposed to offer Bodnar’s two reports and his testimony as part of its rebuttal case.
Intervenors filed a motion in limine on November 12, 2010, to exclude Bodnar’s testimony and his two reports. The Court granted the motion. In doing so, the Court agreed with Intervenors that Bod-nar’s NOLHGA Report, which detailed the Companies’ financial picture post-liquidation, was not relevant to their status in rehabilitation or to whether the Rehabili-tator satisfied the legal standard for converting a rehabilitation to a liquidation. Even if the NOLHGA Report were relevant, it was cumulative of Milliman’s assumptions and projections.
The so-called Bodnar Rebuttal Report was excluded for several reasons. First, it was produced by the Rehabilitator on November 9, 2010, just three weeks before the hearing was scheduled to begin and two weeks after Bodnar testified by deposition that he did not intend to present a written report on Volkmar’s work. The Court agreed with Intervenors that their receipt of this report, which raised many new issues, so close to trial was prejudicial. What the Rehabilitator couched as “rebuttal evidence” to be introduced through Bodnar was in actuality evidence that should have been introduced as part of the Rehabilitator’s case-in-chief. Second, there was no prejudice to the Reha-bilitator because the Rehabilitator had other witnesses, ie., Lucker, Pfannerstill and Mohoric, who were prepared to rebut key aspects of Volkmar’s report, including, for example, the likelihood of obtaining necessary rate increases. Finally, Bod-nar’s Rebuttal Report did not actually rebut Volkmar’s findings and conclusions. It responded to issues raised by Volkmar concerning the NOLHGA Report. Because the NOLHGA Report was excluded for the reasons set forth above, Bodnar’s responses to Volkmar’s concerns about that report became irrelevant.
ii. Intervenors’ Experts
Stephen K. Holland, M.D. is the chief medical officer of Univita, Inc., a long-term care insurance administrator. He serves as an advisor to the California Legislative Advisory Committee on Access to Insurance for Disabled Employees, as a peer reviewer for the Annals of Internal Medicine and as a member of the Health Enhancement Program Advisory Committee in Seattle, Washington. Holland was certified by the American Board of Internal Medicine in 1984. He has over 24 years of experience in long-term care insurance. Holland has published approximately 20 articles and a manual relating to long-term care underwriting, and has lectured at numerous conferences on long-term care insurance risk management. *396 He is a member of the International Society to Advance Alzheimer’s Research and Treatment. He was offered as an expert in the field of medicine and, specifically, medical aspects of long-term care insurance claims. This included the following: morbidity compression; the major conditions and diseases that give rise to long-term care insurance claims; past, current and expected medical research and medical advances relating to those conditions; and the impact of these advances on long-term care insurance claims, including those of PTNA and ANIC. The Court admitted Holland as an expert to testify on the matters as listed above.
Karl G. Volkmar is a principal of United Health Actuarial Services, Inc., which he joined in 2003. He is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, and a Fellow of the Conference of Consulting Actuaries. He serves on the American Academy of Actuaries Individual and Small Group Market Task Force and is vice chair and health section representative to the Society of Actuaries. He is a consulting health actuary, and devotes 35% to 40% of his time to long-term care insurance engagements. He has published several articles on health insurance matters and is active in the Society of Actuaries. The parties stipulated to Volkmar’s qualifications to testify as an actuarial expert about matters within the scope of his report.
iii. Actuarial Projections of the Companies’ Financial Condition
Intervenors and their actuary believe that future premium revenue, enhanced by rate increases, together -with earnings on assets and cash flow can cover the future claims that will develop over the next 60 years. The Rehabilitator and his actuaries believe otherwise. Notably, however, the Rehabilitator’s actuaries cited political, not actuarial reasons, for their pessimism. Each actuarial firm prepared projections in support of their active life reserves, which was central to their respective surplus statements for PTNA and ANIC.
To develop their projections, the actuaries used, principally, seven categories of actuarial assumptions. They are (1) Morbidity or Claim Costs; (2) Morbidity Improvement; (3) Mortality; (4) Voluntary Lapsation; (5) Investment or New Money Rate; (6) Claim Adjudication and Wellness; and (7) Premium Rate Increases. Each assumption relates to a particular aspect of the long-term care insurance business of PTNA and ANIC and predicts the development of that business aspect over the course of the next 60 years. Because the Companies are not writing new policies, their business is described as a closed block of business. It consists of approximately 142,000 policyholders, of which approximately 8,000 are on claim. The assumptions try to predict the amount of premium that will be paid by the existing population of policyholders; the extent and timing by which that population of policyholders will decline in number by reason of policyholder death or policy lapse; the investment income that will be earned from assets and from premium revenue that will be collected from those policyholders over the years to come; and the number and amount of claims that will be presented by those policyholders.
The actuaries for both sides agree that neither PTNA nor ANIC satisfies the minimum statutory surplus requirements needed to be in good standing and able to write new business. The actuaries disagree on the amount of that surplus deficiency.
The Rehabilitator’s actuary opined that as of December 31, 2009, PTNA’s statute- *397 ry surplus was negative $2.1 billion and ANIC’s statutory surplus was negative $137.0 million. The breakdown of Milli-man’s surplus projections is shown below:
[[Image here]]
Ex. P-961 at 16 (as modified). The gross premium reserve has nothing to do with a return of unearned premium; it is a reserve that tests statutory reserves. It increased the Companies’ apparent deficit.
Intervenors’ actuary reached different surplus conclusions. He opined that as of December 31, 2009, PTNA’s statutory surplus was negative $333 million and ANIC’s statutory surplus was positive $600,000. 21
The Rehabilitator’s expert opined that as of December 31, 2009, the present value of the Companies’ future claims to be paid over the next 60 years is $4.1 billion, assuming an earnings rate of 5.74% over that period. Intervenors’ actuary opined that as of the same date, the present value of future claims is $2.7 or $2.9 billion, depending on whether an earnings rate of 6.4% or 5.74% is assumed.
The Companies’ surplus deficiency predicts a future inability to pay future claims but not a present inability to pay incurred claims. As noted, the Companies’ cash flow, approximately $1 billion every 3.4 years, has been sufficient to fund the incurred claims. The challenge is whether the Companies can meet future claim obligations by increasing the premium rates faster than new claims develop from now until the last policy in the closed book of business terminates 60 years from December 31, 2009. The Rehabilitator believes they cannot, and Intervenors believe they can. On this difference the actuarial evidence was extensive.
iv. Actuarial Principles and Concerns
Long-term projections, such as the 60-year projections developed for the Companies, are highly sensitive to the assumptions, which means that a small change in an assumption will have a big impact on the projections. This is because some assumptions are compounded over time. The longer the projections, the greater the *398 impact of one assumption change upon those projections.
Sensitivity testing measures the extent to which an assumption change will affect the projections. Milliman’s sensitivity testing was done by changing one assumption at a time. Intervenors’ expert, Volk-mar, testified that changing more than one assumption at a time is more realistic because it measures the aggregate and compounding effect of changes. In any case, Milliman’s sensitivity testing showed that changing even one assumption has a significant impact. For example, increasing the Milliman morbidity improvement assumption by 1% per year produces a $500 million dollar improvement in the Companies’ claim projections.
The actuaries agreed that credible data are needed to develop reliable assumptions and valid projections. Because the long-term care insurance industry is fairly new, credible data are lacking. The Actuarial Standards Board has adopted Actuarial Standard of Practice (ASOP) No. 25, which applies to long-term care insurance. ASOP 25 defines credibility as “[a] measure of the predictive value in a given application that the actuary attaches to a particular body of data.” 22 Ex. R-896 at 1, ¶ 2.1. ASOP 25 requires an actuary to select credibility procedures that produce reasonable results, do not bias the results, are practical and balance responsiveness and stability. Giving “consideration to the need to balance responsiveness and stability” means that an actuary’s methodology should incorporate experience as it develops, i.e., be responsive, but balance responsiveness against the need for stability to avoid wide swings in the use of that data that would otherwise be produced by immediate incorporation of new experience. To achieve stability, the actuary incorporates new data in a way that smooths the grading of historical data and the new data; responsiveness is the degree to which an actuary responds to or reflects the new experience as it emerges. (Volk-mar) N.T. 10/25/11 at 152.
Actuaries can assign zero to 100% credibility to a block of data. An assumption based on data with low or partial credibility produces less certain results. The degree of credibility to assign data is a matter of actuarial judgment. Where company data are not fully credible, actuaries augment company data with industry data to improve the credibility of the data used to make projections.
Attachment 5 to Volkmar’s Report consists of a May 28, 2008, “Summary of Discussions” of a Credibility Subgroup of the Long-Term Care Reserving Work Group of the American Academy of Actuaries. The Rehabilitator’s actuary, Mohoric, was a member of the Credibility Subgroup. In its May 2008 summary, the Credibility Subgroup reported that the “rule of thumb” is to require 1,082 claims in a cell for full credibility. Ex. R-911 at 10. The Rehabilitator notes that this “rule of thumb” is not a formal standard that has been adopted by the subgroup or the Academy. Mohoric testified that he treated 13 to 15 claims in a claim cell as credible. N.T. 2/24/11 at 143-45.
The Milliman actuaries used “best estimate assumptions” for their projections. A “best estimate assumption” is one, in the actuary’s judgment, that falls in the 50th percentile because there is an equal probability that actual experience will fall above or below the experience predicted by the assumption. There is no single “best estimate;” different actuaries may each choose different “best estimates.” Not all of Mil- *399 liman’s assumptions were “best estimate” or “50/50” assumptions; for example, its rate increase assumption was based upon discussions between Milliman and members of the Companies’ management assigned to rate regulation. (Pfannerstill) N.T. 3/24/11 at 18-19.
Volkmar used what he termed “reasonable assumptions,” not “50/50” assumptions. He testified that “best estimates” were not required for these projections where the goal is to develop a full continuum of results. N.T. 10/25/11 at 176. Volkmar’s goal was to evaluate the Companies’ ability to meet obligations as they come due, as opposed to meeting statutory surplus standards. Volkmar clarified that a “best estimate” describes an actuary’s attempt to choose the middle ground. Id. at 177. Mohoric confirmed that Milliman’s “best estimates” did not represent scientific analysis. N.T. 2/22/11 at 34; N.T. 2/24/H at 15-16. Volkmar testified that the assumptions in his report, which he detailed in his testimony, were “reasonable” given his experience in long-term care insurance actuarial consulting and consistent with the work he has done for other clients.
v. Changes in Milliman’s Projections
Milliman has served as the Companies’ actuary since 2001. In 2009, its assumptions and corresponding projections for the Companies changed dramatically. Milli-man increased the present value of future claims for the Companies from $2.6 billion in April 2009 to $4.1 billion in July 2010. This had a corresponding negative impact on Milliman’s surplus calculations.
Volkmar prepared a Comparison Chart, Ex. R-1057, to show the key projection results, which include (1) the present value of claims to be projected in the next 60 years; (2) the year surplus projections turn positive and the risk-based capital (RBC) ratio 23 exceeds 200% for PTNA and ANIC; and (3) the starting statutory surplus for PTNA and ANIC. The Comparison Chart also shows the changes that Milliman made to the seven categories of assumptions between September 2008 and July 2010. The Rehabilitator did not challenge the accuracy of the information in the Comparison Chart.
The year before the Companies’ receivership, Milliman authored two formal projection reports: the April 28, 2008, “Litow Report” authored by senior Milliman actuary, Mark Litow, and a September 20, 2008, “Appraisal Report.” In 2009, Milli-man prepared two more formal projection reports: the report done to support the Rehabilitator’s April 2, 2009, Preliminary Plan and a September 14, 2009, report done to support the Rehabilitator’s liquidation petition. On October 15, 2009, Mil-liman issued an amended report to correct a $200 million error in the September 2009 report. On July 7, 2010, Milliman prepared a surplus projection report as evidence for the Rehabilitator’s use at trial. The 2009 and 2010 reports were prepared under the direction of Mohoric.
The 2008 Appraisal Report projected the present value of projected future claims for PTNA and ANIC at $2.5 billion (as recalculated by Volkmar using an interest rate that was consistent with the interest rates used in the later Milliman reports). The earlier Litow Report had set the present value of projected future claims at $2.2 billion for the OldCo business. The April 2009 report projected the present value of future claims at $2.6 billion. These three Milliman surplus reports offer claim projections within a range of $2.2 to $2.6 billion. This changed. Milliman’s October 2009 Report increased projected future *400 claims by more than $1 billion. “Scenario A” in the October 2009 Report set a present value for projected future claims at $3.4 billion, and “Scenario B” set that value at $3.9 billion. 24 Ex. P-1021. The July 2010 Surplus Report increased the claim projections even more, setting the value at $4.1 billion. The changes in projected claims from 2008 to 2010 are illustrated in the following table:
[[Image here]]
See Ex. R-1057. The increase of $1.5 billion between April 2009 and July 2010 is a 58% change. The changes between April and October of 2009 are illustrated in the following table:
[[Image here]]
See Ex. R-1057.
The increases in projected claims impacted each company’s projected surplus as illustrated in the following table:
[[Image here]]
See Ex. R-1057. The increase in surplus deficiency adversely affected the Compa *401 nies’ ability to return to an RBC ratio of 200%, ie., the level of surplus needed to be solvent and able to be discharged from receivership, as shown in the following table:
[[Image here]]
See Ex. R-1057.
The actuaries for both the Rehabilitator and Intervenors agreed that Milliman’s volte-face on its projected future claims was without precedent in their experience. Between April and October 2009, Milliman increased projected claims by 51%. Volk-mar testified that in over two decades of consulting for long-term care insurance companies, the largest claim projection increase he had seen was 20%, which happened when the insurance company changed its actuaries. In that case, the former and new actuaries worked for two years to reconcile the different results, and the company did not act upon the new results until a new, independent actuary did an independent evaluation using the same data.
The Rehabilitator has not explained the reason for Milliman’s sharp increase in expected future claims, except to note that underwriting for PTNA was “loose.” Re-habilitators’ Reply Brief at 118, ¶284. Underwriting is a screening process that tries to identify applicants who select “against the company, the policyholder knowing they’re going to be on claim very soon.” (Pfannerstill) N.T. 3/22/11 at 137. After a time, underwriting “wears off’ because it is no longer a factor in predicting the likelihood of a claim. Id. In this regard, the Rehabilitator did not address Intervenors’ expert testimony that the effects of underwriting wear off after 5 to 7 years.
Volkmar opined that “[g]iven the significant recent changes, from an actuarial standpoint, I don’t think it is appropriate to rely on [the Milliman projections] in this context.” N.T. 10/26/11 at 33. By “in this context,” he meant a liquidation of PTNA and ANIC. Volkmar also testified that there was no reason to act quickly because the Companies have the assets needed to meet their obligations in the near term. Milliman did not opine that a rehabilitation was futile, as an actuarial matter.
vi. Actuarial Caveats and Limitations
Milliman’s July 2010 Surplus Report was issued with several caveats and limitations. One caveat in that Report states that:
[A]ctual required reserves will only be known once sufficient time has passed such as all claim payments have been made. Actual reserves will vary from estimated values for various reasons, including random fluctuations in claims. Penn Treaty should continue to monitor emerging experience as it develops.
Ex. P-962 at 14. Another caveat states that the “historical experience in the later duration since onset of claim, [ie.,] the ‘tail’ of the continuance curves, was not credible.” Id. at 9. Projections of future payments not based on credible data are not reliable. (Mohoric) N.T. 2/22/11 at 79-80; (Volkmar) N.T. 10/25/11 at 182-83. The caveats in the July 2010 Surplus Re *402 port relate not only to projected future claims but also to premium rate increases, the timing of those rate increases, lapsation, expense rates and investment income. The July 2010 Surplus Report states that “new data may or may not change conclusions drawn from the projections and analysis included herein.” Ex. P-961 at 2.
Milliman’s August 2009 PowerPoint illustrating its projections included caveats, but it did not include a specific one on credibility. The October 2009 Report acknowledged the absence of credible claim data for policyholders older than 90 years but otherwise does not present a detailed credibility caveat comparable to that in the July 2010 Surplus Report. 25
Volkmar’s Report contained caveats and limitations similar to those presented by Milliman in its July 2010 Surplus Report. Rehabilitator’s Reply Brief at 54-55, ¶ 142.
vii. Credibility of Data Used in Projections
As noted, the projections produced from low credibility data contain a degree of uncertainty. A significant portion of the projected future claims are attributed to policyholders who are older than 90 years and have held their policies for many years. The July 2010 Surplus Report states that: (1) data for policyholders at attained ages 90-plus are not fully credible; (2) credibility is low for policies with a duration longer than 16 years; and (3) claim durations longer than 42 months are not fully credible. The different claim costs in Scenario A and Scenario B of Milliman’s October 2009 Report are largely attributed to differences in projected future claims by those holding policies longer than 16 years. Pfannerstill testified that “[Milliman] will not have actual experience to determine which scenario is occurring for possibly another ten years.” N.T. 3/24/11 at 80-81.
Claims to be presented by policyholders above age 90 represent 29% of the present value of future claims as projected by Mil-liman. Ex. R-903 at 1. Projected claims to be presented by policyholders with policies longer than 16 years represent 71% of the present value of future claims, as projected by Milliman. Id. at 2. To a significant extent, therefore, Milliman’s claim projections are based upon data with low credibility. As part of an internal peer review, a Milliman actuary noted the lack of credible data to support the projections and advised addressing that fact in its reports. Ex. R-350; (Mohoric) N.T. 2/22/11 at 135-37.
viii. Actuarial Standard of Practice No. 25
Actuarial Standard of Practice No. 25 (ASOP 25) provides “guidance to actuaries in the selection of a credibility procedure and the assignment of credibility values to sets of data including subject experience and related experience.” Ex. R-896 at 1. Mohoric testified that he did not apply the credibility mandates of ASOP 25 because he believed it applied only to group experience refunds or rate making. Volkmar testified that ASOP 25 is not so limited and is mandatory. N.T. 10/25/11 at 148; N.T. 10/26/11 at 21-22. Milliman did not balance responsiveness and stability when making credibility judgments. Specifically, Mohoric stated that he did not give any consideration to stability. N.T. 11/1/11 at 25. 26
*403 Pfannerstill defined credibility as having “enough data to form an assumption that when you apply that assumption and look at it in a retrospective basis, the assumption turns out to be true.” N.T. 3/24/11 at 58.
Volkmar disagreed with Mohoric’s testimony that data were credible if there were 13, 14, or 15 claims in a cell. 27 N.T. 10/26/11 at 85. The Credibility Subgroup of the American Academy of Actuaries’ Long-Term Reserving Work Group, in which Mohoric participated, notes that 1,082 claims in a cell is a “rule of thumb” for full credibility. Ex. R-911 at 10. Volkmar did not explain how, or if, using a 1,082 claims per cell “rule of thumb” for full credibility would have changed the way the projections were calculated.
ix. Actuarial Standard of Practice No. 18
Actuarial Standard of Practice No. 18 (ASOP 18) sets forth recommended practices for actuaries involved in, inter alia, designing, pricing and evaluating liabilities for long-term care insurance contracts. ASOP 18 states as follows with respect to recommending premium rate increases:
In developing [recommended rates], the actuary should not use assumptions that are unreasonably optimistic.... In particular, the actuary should not rely on anticipated future premium rate increases to justify the selection of unreasonably optimistic assumptions when recommending premium rates. On the other hand, the actuary should not use assumptions that are unreasonably pessimistic.
Ex. P-2002 at 6, ¶ 3.3. ASOP 18 was introduced on the last day in the last hour of the hearing in the Rehabilitator’s redirect examination of his rebuttal witness, Mohoric. (Mohoric) N.T. 11/2/11 at 64-65. Intervenors objected because ASOP 18 had not been produced or discussed in the Rehabilitator’s direct case, Intervenors’ case, in the Rehabilitator’s rebuttal case or in Intervenors’ cross-examination of the Rehabilitator’s rebuttal witness. The exhibit was admitted because it had been referenced in Milliman’s July 2010 Surplus Report. See Ex. P-961 at 3. Counsel for the Rehabilitator described ASOP 18 as “not a document that’s necessary for an evidentiary point. It’s a standard of practice applicable to the actuaries.” N.T. 11/2/11 at 72. Mohoric testified about Paragraph 3.2, which pertains to assumption setting, and did not testify about Paragraph 3.3 of ASOP 18. Id. at 65.
D. Milliman Expert Report and Testimony
i. Milliman Morbidity or Claim Costs Assumption
The “morbidity” or “claim costs” assumption produces the ultimate claim costs expected from the approximate 142,000 policies in existence as of December 31, 2008, over the course of 60 years. Claim costs vary by age, sex and benefit period; by benefit configuration; by selection factors related to when the policy was underwritten; as well as other factors, such as availability of providers to a potential claimant.
*404 The July 2010 Surplus Report sets forth Milliman’s future claim projections. Pfan-nerstill developed the disabled life reserve, which is the amount needed to pay the 8,000 existing claims to completion. James Kroll, in-house actuary for the Companies, developed the reserves for the incurred but not reported claims (IBNR) and the closed but expected to reopen claims (CBER). The statutory claim reserves consist of the disabled life reserve, the IBNR reserve and the CBER reserve.
To develop his disabled life reserve, Pfannerstill abandoned Milliman’s prior methodology and devised a new methodology “to calculate the reserves and to revise several assumptions, including the continuance curves and other adjustment factors used in the calculation process.” Ex. P-962 at 1. The continuance curves measure claim development by age; sex; type of benefit; and type of claim, e.g., cognitive impairment or cancer. The continuance curve estimates how long an existing claim will last. The continuance curve is the same as a continuance table; it determines the duration of claims to the point that they zero out. (Pfannerstill) N.T. 3/22/11 at 23-24.
Using his new methodology, Pfannerstill revised the continuance curves to increase the length of time a policyholder is expected to remain on claim in a nursing home, in an assisted living facility or in his own home but with paid assistance. Pfanners-till used data “for claims incurred from January 1, 2002, through December 31, 2009, with payments through December 31, 2009[,] to develop an initial set of continuance curve tables ... [, which] include 39,413 claims and approximately $1.2 billion in claim payments.” Rehabilitator’s Reply Brief at 56, ¶ 145 (quoting the Milli-man continuance curve report). The new methodology increased the disabled life reserve as of December 31, 2009, by $94.3 million, ie., from $398 million to $494.1 million. This is an increase of 23.6%. Rehabilitator’s Proposed Findings of Fact at 89, n 424, 425.
The continuance curves drive the claim reserves. As the Rehabilitator describes the process, the “continuance curves feed into the claim cost study and the claim cost study flows into the corporate model.” Rehabilitator’s Reply Brief at 56, ¶ 145. “Corporate model” is another term for “projection.” The claim reserves form the basis of the active life reserve, which is the amount needed to be held for “future claims expected in excess of future premium.” Ex. P-961 at 12.
Milliman’s claim costs assumption focused on more recent experience, 2006 to 2009, because it was believed that this experience was “most likely [to] reflect future claims.” Ex. P-963 at 1. During this period, claims were higher than in preceding years. In comparing its claim costs assumption to historical experience, Milliman sought to achieve an actual to expected “ratio [of] 1.00 over the most recent calendar years, keeping in mind the influence of the claim reserve and IBNR on calendar years 2008 and 2009.” Ex. P-963 at 1. The exercise of comparing an assumption to historical experience is known as fitting. Milliman’s fit showed that its claim costs assumption projected a lower incurred claim reserve for the 2006-2009 period than was actually set by the Companies’ claim department.
The Companies experienced a jump in paid claims in 2006, which drove the increase in their claim reserve. Approximately 85% to 90% of the 2009 incurred claims consists of a reserve that estimates how much will be needed to pay the 2009 claims. Sixty percent of the 2008 claims are reserve. These more recent periods of incurred claims, which consist primarily of estimates not actual payments, dramatical *405 ly affected Milliman’s claim costs assumption. To illustrate the impact, Volkmar explained that claims payments increased incrementally at approximately $1.5 million per month, or $63 million over 42 months, from mid-2006 to the end of 2009. This $68 million increase in paid claims increased the present value of all projected future claims by $1.7 billion. (Volkmar) N.T. 10/26/11 at 121.
The Litow Report was authored in 2008 by Mark Litow, a Milliman senior actuary, to analyze PTNA OldCo claims experience for use in projections. 28 It concluded that the rate of increase in incurred claims, which had slowed down in the period 2002 to 2004, would continue, and produce a flatter slope in the continuance curves. Milliman’s April 2009 Report to the Reha-bilitator updated the Litow Report assumptions by increasing claims on all policies, not just on OldCo business. The April 2009 Report assumed an increase in claims of 5% that would be caused by healthy policyholders seeking coverage from other insurers in response to the rehabilitation order. Milliman’s August 2009 PowerPoint assumed a claims deterioration factor of 25% caused by shock lapses in the first projection year and then grading down to 0% over 10 years. The October 2009 Report further increased claim costs by using what Pfannerstill described as a “quick and dirty” approach. N.T. 3/23/11 at 140-41. Thereafter, Pfan-nerstill undertook the above-referenced continuance curve study that abandoned Litow’s methodology; Pfannerstill’s report is part of the July 2010 Surplus Report.
Milliman’s July 2010 Surplus Report used a claim costs assumption consistent with that used in Scenario B of the October 2009 Report. The report splits the aggregate claim costs into frequency and severity assumptions and then recombines them. It assumed an anti-selection factor of 5% to be caused by cumulative premium rate increases prompting healthy policyholders to look for coverage elsewhere.
Milliman’s “2009 Guidelines” combine data from Milliman’s longterm care clients and are used as a starting point for pricing new products for an insurance company client with no data or actual experience. The 2009 Guidelines indicate trends in the industry, not the experience of a particular company, which will have its own policies with different benefit designs, markets and claims processing systems. Milliman used the curves in the 2009 Guidelines as a benchmark, ie., as a “visual aide” to determine if the slope should be “steep, ... medium steep, [or] should be flat.” (Pfan-nerstill) N.T. 3/24/11 at 47. Pfannerstill’s continuance curve report also states that the Guidelines impact “termination rates for months 43 through 54 as the termination rates for those months are based on a blend of actual experience and the termination rates from the Guidelines.” Ex. P-962 at 9. The Guidelines showed a pattern of steeper claim costs, industry wide.
Attachment 18 to Volkmar’s Report shows the progression of claim costs changes made by Milliman from report to report. Ex. R-813. Claim costs for certain policy benefit designs in the July 2010 Surplus Report were 46% to 130% higher than what was contained in the 2008 Appraisal Report. Attachment 18 to Volk-mar’s Report demonstrates the explosive *406 effect of Milliman’s adjustments to its claim costs assumption. For example, the July 2010 Surplus Report adjusted the ultimate claim costs assumption 29 for attained age of 95, making it 130% higher than it was in the Appraisal Report. The dramatic increase in claim costs at higher attained ages and longer policy durations affects the entire block of business as it gets projected forward with the 130% increase in claim costs.
Volkmar found the July 2010 Surplus Report to offer more detail on Milliman’s development of its claim costs assumption. However, Volkmar raised three criticisms: (1) lack of appropriate consideration of historical experience; (2) lack of transition from the former model and assumption paradigm developed in 2008 by Litow to the new model and assumption paradigm developed by Pfannerstill after the Reha-bilitator decided to seek a liquidation; and (3) lack of appropriate consideration of data credibility, including its leveraged impact on claim projections. (Volkmar) N.T. 10/26/11 at 103-29.
Volkmar testified that Milliman should have undertaken a detailed reconciliation analysis with respect to the historical experience covered in the Litow Report. N.T. 10/26/11 at 106-07. The Rehabili-tator rejoins that this reconciliation was done by Pfannerstill in his continuance curve report. See Ex. P962. This continuance curve report does not explain, however, how the Companies’ historical experience supported results so different from those in the Litow Report.
According to Volkmar, an appropriate transition from the earlier assumption and modeling paradigms to the ones used in the July 2010 Surplus Report would have merged prior and emerging experience in a systematic way over time, consistent with the mandate of ASOP 25. Instead, there is discontinuity and a huge jump in the claim projections, which nearly doubled between the September 2008 Appraisal Report and the July 2010 Surplus Report. Volkmar testified that, “Mr. Mo-horic and Mr. Pfannerstill ... reacted to data that was not fully credible and extrapolated that data into the future. And that led to a significant increase in projected claims ... as high as 65% within four to five months’ time.” N.T. 10/26/11 at 112-13.
Stephen LaPierre, who formerly headed the Companies’ claims department, now works as a consultant for the Rehabili-tator. LaPierre worked closely with Robert Conrad, a claims specialist employed in the Department’s Office of Rehabilitations, Liquidations and Special Funds.
In early 2010, LaPierre reported to Conrad that the rate of growth in the Companies’ average open claim count had dropped by 0.25% in 2009 as had the rate of increase in paid claims, particularly those relating to cognitive deficit claims. Cognitive claims paid dollars also dropped. In turn, Conrad communicated this information to DiMemmo in a February 22, 2010, memorandum, which presented claims data by gender and age, number of claims, payments by state, premiums by state, and diagnostic code claims for the time period 2003 to 2009. The Conrad Memorandum reported that “the rate of growth for paid claims dropped by approximately 3.5% between 2008 and 2009.” Ex. R-59 at 1. The Conrad Memorandum also reported “cognitive claims paid dollars dropped from an average annual increase *407 of 5.4% between 2005 and 2008 to a rate of [0].57% between 2008 and 2009.” Id.
LaPierre provided Conrad a spreadsheet that tracked the claim dollars spent by PTNA and ANIC each year, by each claim condition, for the period 2003 to 2009. The spreadsheet shows that the increase in claims dollars paid annually by the Companies between 2003 and 2009 was in rough parity with the general rate of inflation. The changes in actual claim payments are summarized in the following table:
[[Image here]]
Ex. R-62.
The Rehabilitator does not explain the sudden increase in paid claims in 2006. Rehabilitator’s Reply Brief at 95-96, ¶ 232. Mohoric testified that industry wide, claims increased over time as services, particularly assisted living facilities, became more available. However, this trend had developed long before 2006.
Volkmar described the Milliman process as “leveraging” the incremental claims increase from a short period of time to produce a huge increase in the projected claims over a long period of time. He opined that feeding low-credibility data onto incurred claims data was multiplicative. Volkmar testified that there is no basis for assuming that where claims increase dramatically at a distinct point in time, such as 2006, they will continue to increase at that rate.
ii. Milliman Morbidity Improvement Assumption
The “morbidity improvement” assumption predicts the expected improvement in policyholder morbidity over time. For example, in ten years, a 70-year-old is expected to be healthier and less likely to produce a claim than a 70-year-old of today. This phenomenon impacts expected claims. For example, if an 80-year-old individual has an expected claim of $100 in 2012 and an 81-year-old individual has an expected claim of $110 in the same year, a 1% morbidity improvement posits that by the time the 80-year-old reaches age 81 (in 2013), his claim cost will be $109, not $110. Rehabilitator’s Proposed Findings of Fact at 27, ¶ 125.
Milliman reduced the morbidity improvement assumption between April and August of 2009. Milliman’s changes to the morbidity improvement assumption are illustrated in the following table:
*408 [[Image here]]
Ex. R-1057.
Litow developed a morbidity improvement assumption of 2.5% per year, based on a detailed study that showed results as high as 3.9% for some categories of policyholders. The average of these results was 2.5%, which Pfannerstill described as “slightly aggressive.” (Pfannerstill) N.T. 8/28/11 at 154-55. Milliman used a 2.5% morbidity improvement assumption in its April 2009 Report. Id. In its October 2009 Report, Milliman used a morbidity improvement assumption of 1.2% per year for Scenario A, which it arrived at by taking the square root of the prior 2.5% assumption. This calculation had no precedent in the experience of Mohoric, Pfan-nerstill or Volkmar. Nor is there any support in the actuarial literature for “a square root approach.” For Scenario B, Milliman chose a morbidity improvement assumption of 1.5% for 10 years and 1% for the remainder of the projection period. Mohoric testified that morbidity improvement is a matter of judgment that “leans more in the art side than science when you’re projecting [far] into the future.” N.T. 2/24/11 at 81. Mohoric also testified that assuming a 1.5% morbidity improvement “forever” would also be reasonable. Id. at 83. Mohoric referred to a study by Eric Stallard of Duke University, which showed that there is “certainly” a morbidity improvement of anywhere from 1.5% up to 2.5%. N.T. 2/16/11 at 147-48.
Pfannerstill testified that Milliman reduced the morbidity improvement assumption because “paid claims were increasing.” N.T. 3/22/11 at 152-53. He estimated that the reduction in the morbidity improvement assumption accounted for approximately 30% of Milliman’s increase in projected claims from $2.6 bil *409 lion to $4.1 billion. N.T. 3/22/11 at 112. Volkmar calculated that Milliman’s reduction in the morbidity improvement assumption between its 2008 Appraisal Report and its July 2010 Surplus Report caused a $530.9 million decline in the projected value of cash flows for the Companies. For PTNA alone, the change was negative $472.4 million, or a 38% change.
iii.Milliman Mortality Assumption
The “mortality” assumption predicts the probability of death of a policyholder, both the policyholder on claim and the one not yet on claim. Milliman’s mortality assumption was based upon an aggregate mortality study done in 2005 using data through September 30, 2003.
iv.Milliman Voluntary Lapsation Assumption
The “voluntary lapsation” assumption predicts the number of policies that are terminated by choice of the policyholder, as opposed to a termination by policyholder death.
Milliman changed its voluntary lapsation assumptions in its various reports and presentations, which are illustrated in the following table:
[[Image here]]
Ex. R-1057. The aggregate impact was positive $277.4 million for the Companies. This is because Milliman excluded the impact of anti-selection in the lapse assumption analysis and, instead, used it in its morbidity analysis.
v.Milliman Interest Rate Assumption
The “reinvestment rate” or “new money rate” assumption predicts the earnings a company expects to make on its assets and cash flow. 30 It assumes that asset earn *410 ings are reinvested at the assumed new money rate.
Milliman used a reinvestment interest rate assumption of 7.54% in the April 2009 Report; lowered it to 5.92% in the October 2009 Report; and lowered it again to 5.74% in the July 7, 2010 Report. Milli-man’s changes in its interest rate assumptions are illustrated in the following table:
[[Image here]]
Ex. R-1057. Volkmar used two separate interest rate assumptions, a 5.74% rate and an interest rate that begins at 5.34% and then grades to 6.4% over five years. The parties stipulated that the interest rate assumptions of both actuaries are reasonable.
The net impact of Milliman’s revision to its interest rate assumption was negative $320 million, which represents a 23% reduction of the net premium and an 11% reduction in cash flow.
vi. Milliman Claim Adjudication and Wellness Assumption
The “claim adjudication and wellness” assumption predicts reductions in claims that are expected because of improvements in claim adjudication or improvements in morbidity that result from policyholders participating in wellness programs aimed at improving cognitive health and detecting conditions that may lead to claims earlier.
Milliman’s September 2008 Appraisal Report assumed a 9% reduction in future claims by 2011 due to claim adjudication and the wellness program, but that number was reduced to 6% by 2015 in the April 2009 Report. Scenario A in the October 2009 Report assumed up to a 6% reduction over six years; the wellness assumption was eliminated from Scenario B. The changes Milliman made to the claim adjudication and wellness assumption are illustrated in the following table:
[[Image here]]
Ex. R-1057.
Intervenors offered evidence to show that the Companies’ wellness program and improved claims processing were having a favorable impact on their claim costs. During LaPierre’s tenure, the Companies offered three wellness programs: the Brain Fitness Program designed by Posit Science that addressed cognitive health; the life line screening program that provided earlier detection of certain medical conditions; and the emergency response program that gave certain policyholders the means to call for help in the event of a fall or accident. LaPierre testified that he strongly supported the wellness programs *411 because they provide a valuable benefit to policyholders and address, positively, the circumstances that can lead to a claim.
Cognitive claims make up approximately one-third of the expected claim costs for the Companies. Approximately 10,000 policyholders participated in Posit Science’s Brain Fitness Program at a cost of $100 per participant, or $1 million per year. Milliman did an analysis that indicated that claim experience for policyholders in the cognitive exercise group was approximately 35% better than a matched sample group. Milliman quoted a contract price of $15,000 to do an analysis of the second year of data from policyholders enrolled in the Brain Fitness program. LaPierre asked Posit Science to pay the cost of the study, and Posit Science offered to split the cost of the study with PTNA. The Rehabilitator declined the offer.
On April 23, 2010, LaPierre wrote a memo supporting the wellness programs based on positive claims data through 2009. LaPierre differentiated the Brain Fitness Program used by the Companies from another program which required fewer hours of participation and was reported to have limited benefit. Ex. R-955 at 3. LaPierre compared 6,200 PTNA policyholders in the program against 6,200 PTNA policyholders who did not use the program. Claim experience for the cognitive exercise group was approximately 35% lower than the experience of the matched sample group. Id. LaPierre also testified at trial that the rate of increased claim payment for cognitive claims between 2005-2008 was over 5% per year; it dropped to 0.6% in 2008-2009, the year that the Brain Fitness Program was in place. N.T. 9/19/11 at 266.
The Department’s claims specialist, Robert Conrad, accepted LaPierre’s study and testified that the drop in cognitive claims was trending favorably. Nevertheless, the Rehabilitator terminated the Posit Science program. No one consulted Conrad about the decision to stop the wellness program, and he did not know how the decision was made. After the wellness program was cancelled, Milliman removed the wellness assumption from the projections. This removal reduced expected cash flow by $190 million.
vii. Milliman Premium Rate Increase Assumption
The “premium rate increase” assumption presents the expected future rate increases that will generate revenue.
Milliman used a variety of aggregate rate increase assumptions in its various reports and presentations, which are illustrated in the following table:
[[Image here]]
*412 [[Image here]]
Ex. R-1057.
Milliman’s April 2009 Report assumed a “routine method” of pursuing rate increases and projected positive surplus for PTNA by 2020. Its October 2009 Report assumed slightly higher-than-routine rate increases in Scenario A and lower-than-routine increases in Scenario B. The July 2010 Surplus Report chose the more pessimistic Scenario B rate increase assumption.
Milliman’s rate increase assumptions stop at 10 years even though the claims projections go out 60 years. Mohoric testified that it was the Rehabilitator’s decision not to project any rate increases beyond the 10-year point. He also explained that after 10 years, the block of business remaining should be low enough in population that rate increases would become less relevant. Pfannerstill testified that the rate increase assumptions in the reports are not “best estimates,” i.e., have an equal probability that actual experience will fall above or below the experience predicted by the assumption. Pfannerstill used his judgment, with guidance from Robinson and Waite, to set Milkman’s “estimation” of what could be “reasonably achieved.” N.T. 3/23/11 at 50. Pfannerstill issued a report that the maximum allowable rate increase is one “needed on future premium to solve for a lifetime loss ratio of 60%.” Ex. P-968 at 3. His report also stated that the “maximum allowable rate increase for PTNA is 58% and the maximum allowable

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4966931. Public record. Not legal advice.