N-O-vation

This topic first surfaced for me from a fellow blogger, Joe Belth, who has been studying insurance practices for a very long time.

First, what is novation? For that, I refer you Joe’s web-site. An alternate description can be found at the web-site Investopedia. Besides novation, other corporate shell games are discussed here to shine light on current LTCI industry practices.

Why is novation important? It is often the case that a parent company wishes to dispose of an ailing LTCI division that could hamper corporate earnings for years. This was discussed at a recent CT LTCI forum by the Department of Insurance. Joe’s No. 220 blog titled “Connecticut Violates the Constitutional Rights of Insurance Policyholders” suggests CT might be in-line with the plan of having strong carriers jettisoning their dogs (without disclosing to those most affected).

Examples can be found where such transfers, sale of business line, or similar other methods leaves policyholders’ position more financially vulnerable than before. Note that this is true not only for LTCI but for other insurance product lines (e.g. variable annuities containing complex, many moving parts promises). If you bought LTCI or other long duration product from an insurer with a AAA-rated and that was a critical deciding factor, are you now happy that the party responsible to honor your prospective future benefit is considered weak hands?

If you read Joe’s blog carefully, you should carefully note the phrase “If the policyholder consents…”. Say you receive a letter informing you that your LTCI policy is now headed to a China-mart insurer (see footnote example #1) with unknown credentials. What is the likelihood that you also receive a note asking for your consent? Zero, by default you consent. The default rules are not set up in your favor.

What could be your response if you receive a surprising letter informing you that your debtor (obligator) is a company you have never heard of before? One action would be to inform the sender by registered letter that you do not consent to your policy being part of the corporate shell game transaction. You would only do this to protect your interest but only upon assurance that your current company appears to be the financially stronger than the prospective one.

I have to believe insurance was never intended to call upon policyholders to consider corporate shell games & due diligence nonsense.

1. China Oceanwide Transaction

On October 21, 2016, Genworth Financial, Inc. (“Genworth Financial”) entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of Asia Pacific Insurance (the “Merger”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

Genworth Financial and China Oceanwide continue to work towards satisfying the closing conditions of the Merger as soon as possible. In December 2018 and January 2019, we received the remaining approvals from our U.S. domestic insurance regulators…(For full discussion, click on the following SEC Edgar link)

GENWORTH FINANCIAL, INC., FORM 10-K, ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018, p4.

2. Private Equity Firms Are Acquiring Long-Term Care Insurance Policies. What Will It Mean For Policyholders?

…Kudos to Reuters reporter David French for spotting this trend, just the latest example of the deep trouble long-term care insurance carriers find themselves in. Most insurers have long-since stopped selling policies—perhaps only a dozen or so remain in the market. But even those who are no longer active are stuck with billions of dollars in liabilities from future claims on old policies…”

by Howard Gleckman, Senior Contributor at Forbes

LTCI Public Meeting in CT

A group of CT LTCI Consumer activists learned that when the term solvency is put forth by regulators, in this case the CT Dept. of Insurance (DOI), it refers to an entire insurance company, including multiline companies who might offer life insurance, annuities, property & casualty, other lines. On Wednesday, Oct. 16th 2019, a public forum was held to discuss this and other related LTCI topics. Stakeholders who appeared were legislators, policyholders, reporters, agent / brokers, and consumer activists.

Posted by State Senator Saud Anwar on Wednesday, October 16, 2019
CT Officials discuss LTCI issues, including solvency concerns

Key points from the presenters:

  • The LTCI industry is on shaky ground. One company (Penn Treaty) has already been declared insolvent and presenter(s) said that several unnamed others are on a watch list. Should I worry if I have my annuity with a company having a large exposure to LTCI?
  • What happens when a company does go insolvent and the effect on policyholders, other insurers who are charged an assessment, and potentially the taxpayer.
  • LTCI insurers need large rate increases to remain solvent due to what their models tell them about future claims projections.
  • The DOI is available to explain to policyholders what some of their options are in addition to paying the increased premiums or reduced coverage, particularly as it relates to non-forfeiture (i.e. lapse policy, but retain benefits). It was suggested that policyholders work with their advisors, including those that sold them the product.
  • Some states allow for a multiline parent company to spin-off their LTCI division such that other lines-of-businesses are protected (as well as shareholders) while the spun-off company “twists in the wind” (policyholders).
  • NAIC task force will be looking for constructive, compromised solutions in 2020 that might be favorable to both policyholders and carriers.

On the last point, “don’t hold your breathe”! It is to states’ discretion what they chose to implement from NAIC proposals.

As a participating member of this forum, I found the format too one-way, stifling, and orchestrated without input from the Consumer side. This forum was heavily weighted with discussion about solvency without consideration of possible remedies that would protect consumers’ interests.

As an attendee, I couldn’t help wonder, “where have state regulatory agencies and NAIC been all these (30) years to allow the LTCI industry get into such a condition”?

Greenspan, LTCI, and rates

Whatever you think of Alan Greenspan, he was in the news yesterday. Greenspan reflected on the current worldwide development of negative interest rates. “It will not be long before the spread of negative interest rates reaches the U.S., former Federal Reserve Chairman Alan Greenspan said”.

This is on LTCI-watch as claims-based modeling, an essential tool used by carriers to support a rate increase uses a discount factor (aka investment return; interest rate) that is currently pegged at 4.5%. The figure largely reflects yields of composite long-dated bonds with a mix of maturity dates. As older bonds with higher yields are retired, newer lower yield bonds replace those with an effect of lowering the overall discount factor.

“The 30-year U.S. rate traded at 1.95% midday Wednesday. It reached an all-time low last week.

There are currently more than $16 trillion in negative-yielding debt instruments around the world as central banks try to ease monetary conditions to sustain the global economy”.

Note that in the past LTCI carriers blame low interest environment as a risk to the sustainability of the LTCI product line. You can find this in most industry source documents, such as rate filings, SEC 10-K filings, others. We know that historical, carriers have shed that risk by delivering rate increases to the LTCI consumer.

I took a recent rate filing by a major LTCI insurance carrier and analyzed the effect of a lower long-term yield environment. PHs of this particular carrier have experienced raised rates in 8 out of the last 10 years (2009 – 2019, level premium before 2009) with 1 due next year, despite a consolidated book-of-business dating back to the early 1990s. In the carrier’s recent CT rate increase grant, the loss-ratio was lowered to 1.06 meaning the carrier is still claiming to be losing money from their LTCI business. Hypothetically re-modeling with a lowered 3% and 2% long-duration rate raises the loss-ratio to 1.20 and 1.31 — losing even more money.

In a lower long-term yield environment going forward, who would bear that risk associated with higher loss-ratios? In the past, it has been the LTCI Consumer. Would this change?

The industry might counter with, “well, in a lower or negative yield environment, inflation of costs will be lower”. Do you believe this counter-claim and, if you do, how much lower do you think health (LTC) costs would be (relative to the decline of investment returns)? Further, did the counter-claim argument hold true in the past decade? That era was also characterized as an unusually low yield environment. Refer back to the carrier case above to help answer these questions.