March 3, 2021

Philip Falcone’s Second Act in Long-Term-Care Insurance Turns Ugly

Long-term care has been a troubled insurance product for well over a decade, causing financial…

Long-term care has been a troubled insurance product for well over a decade, causing financial pain to many insurers and their customers. Now, one executive’s plan to make money where others have failed has backfired.

Serious pricing mistakes loomed from the start. For policyholders, this has meant double- and even triple-digit premium-rate increases over the years. Insurers have collectively taken tens of billions of dollars of charges against earnings as they bolstered their reserves.

The difficult situation in long-term care provided an opening five years ago for Philip Falcone, a former hedge-fund manager looking for redemption. Mr. Falcone had admitted wrongdoing in 2013 for borrowing $113 million from his hedge fund to pay his taxes, even as investors weren’t allowed to withdraw their money. He agreed to an $18 million civil settlement with the Securities and Exchange Commission that included a five-year ban from the securities industry.

In 2015, Mr. Falcone started his long-term-care plan.

Over the next couple of years, the diversified conglomerate he was running obtained regulatory approvals to acquire two small insurance carriers that were no longer selling the insurance but had policies being wound down. Tied to the acquisitions, insurance departments in at least three states—Florida, Ohio and South Carolina—restricted Mr. Falcone from involvement in day-to-day operations.

Today, Mr. Falcone has left the conglomerate. A former regulator he hired to run the conglomerate’s insurance operation was fired and has filed a federal whistleblower complaint against the company. And the conglomerate is in talks to sell the insurance operation, known as Continental Insurance Group Ltd.

Mr. Falcone declined to comment for this article.

State regulators, meanwhile, are still trying to figure out how to stabilize the struggling long-term-care insurance industry.

Mr. Falcone, then chairman and chief executive of HC2 Holdings Inc., was well known when he entered the long-term-care insurance industry. A Harvard University ice-hockey standout from Minnesota, he had shot from relative obscurity running Harbinger Capital Partners to riches and stardom after successful bets in 2007 against the U.S. housing market.

In turning to insurance in the wake of the SEC settlement, he aimed to turn the newly acquired carriers into a cost-efficient platform for acquiring additional closed blocks of long-term-care policies to run off. Along the way, HC2 would earn investment-management fees for the conglomerate, he told HC2 shareholders.

Mr. Falcone hired James Corcoran, New York state’s top insurance regulator in the 1980s, to run Continental.

Over time, Mr. Corcoran became concerned by what he described in a 2019 memo to the insurer’s independent board members as Mr. Falcone’s “continuing interjections into [Continental’s] day-to-day transactions, affairs and operations that include what look like threats and intimidation” in regards to investments. He wrote that those actions possibly violated the conditions put on Mr. Falcone in the insurance-department deal approvals.

Some of Mr. Corcoran’s concerns are laid out in the publicly available whistleblower complaint. Additional detail is contained in a lawsuit filed in a Texas state court last May by Continental against Mr. Corcoran accusing him of breach of contract and other employment-related wrongdoing. Mr. Corcoran says in his legal response that the lawsuit is frivolous and was filed in retaliation for his whistleblowing about Mr. Falcone.

Continental withdrew the suit late last year. By then, Mr. Falcone had left HC2, as activist shareholders pressured the conglomerate over its flagging share price, and the conglomerate had new management.

Specifically, in the legal filings, Mr. Corcoran said Mr. Falcone pushed Continental to invest in HC2 affiliates as well as make at least two other specific investments. One of those took the form of more than $10 million in loans to an upstart gem and jewelry business named Arcot Finance LLC. Continental’s regulatory filings for 2019 indicated the investment had lost money.

According to a letter in the court filings quoting an HC2 lawyer, Mr. Falcone believed he was providing useful investment advice based on his experience and knowledge, and was acting within regulatory boundaries.

In an interview, Mr. Corcoran says he spoke up about Mr. Falcone’s actions “to protect the insurance company and its policyholders.”

The investments at issue represent a small slice of Continental’s $4.4 billion portfolio. In general, state insurance departments permit small quantities of affiliated investments provided terms are fair to the insurer.

Mr. Corcoran, along with an independent Continental director, raised concerns about Mr. Falcone to the Texas Department of Insurance in 2019. In early 2020, the department was examining the insurer’s related-party activities, affiliated agreements, investments and corporate governance, according to Continental’s regulatory filings.

A spokesman for the department said it couldn’t comment because of confidentiality laws.

In a letter to shareholders before his June 2020 departure, Mr. Falcone wrote that “recent regulatory headwinds have made it increasingly difficult for the insurance business to meet [HC2’s] return hurdles, so we have decided to pursue its sale.”

Last spring, businessman Avram Glazer became HC2’s new chairman. In December, HC2 said it was in deal talks with an entity controlled by Michael Gorzynski, an HC2 director who led the activism against the company and joined its board. Mr. Gorzynski subsequently was named Continental’s executive chairman.

In a Feb. 12 emailed comment, Mr. Gorzynski declined to comment on the deal talks, but said a new leadership team at the insurer is “addressing legacy issues head-on,” including reducing exposure to affiliated investments. It has hired an unaffiliated investment manager for a portion of the portfolio.

Corrections & Amplifications
Philip Falcone isn’t a party in legal disputes between James Corcoran and HC2 Holdings and its Continental Insurance Group unit. An earlier version of the headline of this article implied he was. Mr. Corcoran ran HC2’s insurance division, not one of many insurance companies as implied in the earlier headline. (Corrected on March 3.) HC2 Holdings Inc.’s insurance unit invested in gem and jewelry company Arcot Finance LLC. An earlier version of this article misspelled the company’s name as Arcot Financing. (Corrected on March 2)

Write to Leslie Scism at [email protected]

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