The Securities and Exchange Commission said yesterday that Colonial Penn Group Inc., failed materially to comply with the securities laws by repeatedly revealing too little about CPG's ties to the two largest organizations of elderly Americans, the National Retired Teachers Association and the affiliated American Association of Retired Persons.
The SEC also said that the Philadelphia-based insurance conglomerate's filings had not divulged its accumulation of as much as $30 million to $40 million in excess reserves from group-health policies. The so-called "redundancy" occurred from 1978 to 1980 as the result of an unrevealed "target-loss ratio" for predicting claims payouts which has since been eliminated.
Climaxing a lengthy investigation, the commission announced that it had simultaneously instituted an administrative proceeding and accepted a settlement offer consenting to an agency order. The company neither admitted nor denied the facts, findings, or conclusions set out in the order.
Under the settlement, CPG will make fuller disclosures about its reserves and its methods for computing them. It also agreed to cooperate with E. Paul Barnhart, a St. Louis consultant who already has been retained to review and report on CPG's accident and health reserves and the extent to which they accord with commonly accepted actuarial standards.
Since its founding in the mid-1950s, CPG has sold multiple types of insurance and other services primarily to members of the two associations -- NRTA, formed in 1947 for retired educators, and the much larger AARP, formed in 1958 and open to all older Americans. In 1980, for example, association members accounted for all but $36 million of the $310 million in premiums generated by CPG's health insurance operations.
In September 1980, the associations, injecting competition into the sale of health insurance to their members for the first time, chose Prudential Insurance Co. of America to underwrite a program enrolling 2.5 million members. Prudential committed itself to paying claimants at least 75 cents of each premium dollar -- nearly 15 cents more than the historic average CPG payout.
The Prudential contract was the result of an unprecedented assertion of independence in which NRTA-AARP also opened their publications to advertisers unconnected with CPG, which previously had been the only advertiser used. The association also ended the right of their "honorary presidents" to attend directors' and executive committee meetings unless invited. Until 1978, the only honorary president was Leonard Davis, CPG's largest stockholder.
To promote and preserve the good will of the associations that were making CPG, in many years, the nation's most profitable large corporation, the company involved itself deeply in NRTA and AARP affairs, using what the SEC termed its "significant input" to enhance its ability to compete for the business of their members.
The SEC said that CPG filings for the years 1976 through 1980 "did not describe adequately CPG's business and its relationship with the associations," partly by failing to "disclose its dependence on a single customer or customer group, the loss of whom could have a material adverse effect on the issuer's business."