The Long-Term Care Insurance Notebook, Early August Edition #1

As the National Association of Insurance Commissioners gathers to meet in Boston and manage industry-wide long-term care insurance issues, it is worth noting a few developments in the sector.

  1. The Federal Insurance Office at the U.S. Treasury Department recently led its inaugural multi-agency LTC task force meeting, led by FIO Director Steve Dreyer. The meeting went well, according to a source. LTC insurance issues are priority for FIO, so look for more from the office on this. A key agency in the task force is the  Department of Health and Human Services. Last fall, Treasury announced it would create an interagency task force to “develop policies to complement reforms at the state level” on LTC insurance. This initiative is part of Treasury’s sector report on asset management and insurance.

  2.  On Aug. 1, rumored LTC asset shopper Wilton Re stepped forward to reinsure $2.7 billion in reserves under  legacy comprehensive and nursing home LTC policies from a subsidiary of CNO Financial Group, Bankers Life and Casualty Co. CNO  agreed to  pay a ceding commission of $825 million to reinsure the business.   Wilton Re may not be done hoovering up LTC reserves from the industry: “This represents the inaugural long-term care insurance transaction for Wilton Re, which we view as in line with our core competencies and the value proposition we bring to our clients,” said Wilton Reassurance Co. CEO Mike Fleitz in a release. CNO likely expects better luck this time with a Connecticut based reinsurer after suffering in a Beechwood Re reinsurance scheme. See #4.

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  3. Life insurance company second quarter 2018 earnings brought hard knocks for some companies’ books, and the market could be braced for more as these companies take their LTC medicine in doses. Most significantly, Unum Group said it anticipates a $750 million after-tax increase to LTC reserves after continued evaluation of its block. And the reckoning might not be over, according to Unum as well as the market, where investors have pushed Unum’s share price down  from above $40 per share to hover around $35 or $36 per share since the July 31 earnings report.
  4. “Given the current market sentiment around this line of business throughout our industry, we will look to finalize this work in the third quarter to provide greater clarity to our shareholders,” stated Unum CEO Richard McKenney in the July 30 earnings release. Although Unum said the charge is not expected to exceed $750 million,  life insurance sector analysts at Evercore ISIS have written that they have concerns that the charge perhaps isn’t “addressing the adverse experience” that Unum has compared with its statutory assumptions. On Aug. 1, Prudential Financial announced second quarter earnings  with an LTC hit from its closed block of business  that analysts viewed as larger than expected, or $1.5 billion on a GAAP basis and $600 million on a statutory basis. Pru stated in its earnings release that its net income for the second quarter reflected “a pre-tax loss of $1.6 billion from divested businesses, driven by the annual review of actuarial assumptions in the Long-Term Care business, which included the removal of the morbidity improvement assumption.” These incidents could prove to not be unique, as the life insurance industry all marched to the same beat of faulty actuarial assumptions before exiting the business or changing the product and its prices.                                                                                                                                                 As the Society of Actuaries has noted in a 2014 LTC paper, LTC insurance is”among the riskiest insurance products sold,” because it is driven by more assumptions with more variance than most insurance products. Assumptions it listed are incidence rates, recovery rates, lapse rates, death rates, utilization rates, inflation scenarios and  interest rates. ” Most of the LTC policies” issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population,” the NAIC and the Center for Insurance Policy & Research said in a 2016 paper.
  5. On July 24, runoff LTC insurer Senior Health Insurance Co. of Pennsylvania, or SHIP, filed suit against Beechwood Re Ltd. and some of its affiliates and directors in the U.S. District Court for the Southern District of New York. In the suit, SHIP alleges “deceit, intentional misconduct, and extreme incompetence in the promotion and sale of investments to SHIP and in Beechwood’s subsequent mismanagement and misuse” of $320 million in SHIP policyholder reserves. One defendant, the Platinum Partners co-CIO, is scheduled for a criminal trial in January 2019 for his association with associated with New York hedge fund Platinum Partners, L.P.,  the suit alleges. Platinum Partners was intertwined with Beechwood when it was formed. SHIP and Beechwood entities had struck investment management agreements that allegedly guaranteed SHIP an annual return of 5.85%. Beechwood instead used SHIP’s funds over a period of years “to prop up and perpetuate highly speculative, distressed, and fraudulently valued investments that did not suit or benefit SHIP,” the complaint alleged. Beechwood gave inflated and false investment returns when it continued to collect big advisory fees from SHIP, the complaint alleged.
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    It states that Beechwood, the asset manager, and its related entities, referred to  collectively as the “Beechwood Advisors,”  were formed as a mechanism “to funnel money into Platinum Partners, L.P. “…to prolong their existing Ponzi-like scheme.” Attempts to reach Beechwood Re were unsuccessful. Its website appears dissolved, as it has been sold off,  and  information on the Bermuda government website appears to be dated. Beechwood Re was and is a reinsurer domiciled in Grand Cayman, but was placed in controllership in July 2017, after this  alleged scheme ultimately was exposed, according to the complaint. Beechwood Re had previously reinsured LTC insurance from CNO Financial, which cut its ties to Beechwood in the fall of 2016.  CNO and its subsidiaries terminated reinsurance agreements with Beechwood Re and sought to recapture about $550 million of closed block LTC liabilities, the company stated onSept. 29, 2016. CNO also took a loss on the termination and sued Beechwood Re executives. The Pennsylvania Insurance Department, where SHIP is domiciled, although it, like Conseco Senior Health Insurance Co, is based in Carmel, Indiana. responded to a query by noting that it monitors  the financial condition of insurers licensed in the state and doesn’t comment on any insurer’s financial status unless an official action related to that financial status is taken by the department. A representative of the  SHIP Trust did not respond with a comment. One insurance lawyer who studies insolvency cautioned that if SHIP is taking hits on its assets and liabilities t from this and from its other offshore adventure, Barbados-based Roebling Re, it could put a lot of pressure on SHIP’s surplus. SHIP’s Schedule S shows Roebling Re took over a billion of reserve liabilities in exchange for reserve credit to SHIP,  but Beechwood appears to have provided a surplus note, which were reported to be put into Platinum investments, this person noted.  For more background information on how SHIP could be facing increasing financial peril, see Joe Belth’s detailed reports. The lead lawyer representing SHIP in the suit, Aidan McCormack, DLA Piper LLP, declined to comment on ongoing litigation.


Conference risk?: ‘Team USA’ a no-show at Moscow IAIS

The Basel-based standard setter for insurance regulation held its 11th annual global seminar in Moscow toward the end of July. It was notable for its high-level discussions on   on the high-wire implementation of an agreeable international insurance capital standard and systemic risk,  for a newly-published paper on climate change’s insurance sector  risk  — and for the lack of American regulators in attendance.

Advancing American interests in international financial regulatory negotiations and meetings is one of the Trump Administration’s “core principles” in “Executive Order 13772  regardign fianncial system regualtion, released Feb. 3, 2017.

Members of the National Association of Insurance Commissioners, representing each U.S. state and territory, U.S. Federal Reserve Board and the U.S. Treasury’s Federal Insurance Office, collectively referred to by some affectionately as “Team USA,” are very active and at times, high-ranking, members of the International Association of Insurance Supervisors. However, their principals and staff, for the most part, if not in total, did not attend the conference, as they have for other such IAIS global seminars in world capitals like London and Budapest, attendees said.

Sources representing government officials answered uneasily, or  cited security concerns, but did not specify if they were digital, physical or otherwise. The U.S. absence was definitely noted, one attendee told the Rider from the meeting, which was held at the Hyatt Petrovsky Park.

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NAIC-paid consumer advocates also did not attend the meeting, one citing family schedule conflicts as the meeting does occur in summer.

The U.S. is usually no slacker at the IAIS in participation, and sends dozens of its commissioners and staff  at times to far-flung foreign metropolises to partake in these discussions and boasts state regulators who help lead influential committees.

Nor is the U.S. unnoticed when it comes to size of dues. The 2016 IAIS public document on annual member fees reveals the U.S. paid a total of 458,300 CHF in dues to the IAIS for 2016, with the NAIC fee as the lion’s share of that, at 408,300 CHF. The CHF, or Swiss franc, is currently worth $1.01 U.S. dollar.

The Fed and FIO each paid 25,000 CHF in dues for 2016, the document shows. Most other jurisdictions appear to pay 25,000 CHF or less, with some, like Switzerland, China, China, Hong Kong, Brazil and Austria paying double that, while the next-highest fee structure appears to be 86,400 CHF for Canada, one regulatory agency in Australia, the U.K.’s Prudential Regulation Authority, Chinese Taipei and Italy, for example. Some countries have more than one agency member, but total dues for about any  jurisdiction other than the U.S. is well under 200,000 CHF. Russia’s IAIS dues stood at 31,500 CHF for 2016.

The annual IAIS seminar came at a tense time in relations between the U.S. and Russia, to be sure.  U.S. intelligence community has concluded Russian state actors have interfered in the U.S. election process and are still trying to exert influence. There have been high-profile indictments and plea deals in a collusion and influence investigation, while U.S. President Trump had openly bragged about a closed meetingwith Russia’s powerful leader, Vladimir Putin, in Helsinki, the week prior.

The Moscow IAIS program featured top regulators from the U.K., Japan,  Italy, Taiwan, Mexico, Australia, Bermuda, Russian, of course, along with the World Bank, and Jonathan Dixon, the IAIS secretary-general.

Stakeholders from U.S. companies and consulting firms  did attend the July 23-27 meeting, with major U.S. life insurance company representatives there, as well as their trade group, the American Council of Life Insurers, sources noted.

For instance, MetLife’s head of regulatory policy and global government relations, Joe Engelhard,was listed as a speaker on a July 26 panel with Alberto Corinti, chair of the  IAIS’ Macroprudential Committee and a board member of the Institute for the Supervision of Insurance in Italy about mitigating systemic risk. The panel was moderated by Victoria Saporta, chair of the IAIS executive committee and executive director of the Prudential Policy Directorate at the Bank of England.

Stateside, the conversations will continue near the harbor of Boston.

On Aug. 4, IAIS secretariat, Romain Paserot, is scheduled to hold an early evening Q&A session with interested parties at the NAIC’s summer national meeting, according to the U.S. insurance regulatory standard-setter’s meeting agenda. Paserot oversees capital and solvency for the IAIS, as well as its operations, according to an online IAIS flowchart.

Only a couple of hours before Paserot takes questions,  the NAIC’s ComFrame Development and Analysis Working Group chaired by Connecticut Commissioner Katharine Wade, is scheduled to update the group in the vaunted insurance capital standards as well as on the continued work for the development of a common framework for supervision of internationally active insurance groups. ComFrame was a central agenda item at the Moscow global seminar.

 Paserot is expected to help lead these discussions, according to a preview of the agenda online.


PCI’s Sampson will be at helm of combined p/c lobbying giant

Update Dec. 21, 2018 from my article at P&C Specialist:

P&C Trade Groups Plan Merger to Create Lobbying Powerhouse

A summer update on a June 2018 post about the creation of a new lobbying and industry advocacy powerhouse, P/C Trades in Merger Talks:

The leader of the combination of the American Insurance Association and the Property Casualty Insurers Association of America will be longtime PCI CEO David Sampson, according to an Aug. 1 memo to insurance executives from Sampson and PCI Board Chairman Kurt Bock, CEO of PCI member company Country Financial.

Sampson will be CEO of the merged property/casualty behemoth, “with the goal of retaining and integrating key staff of both organizations,” according to the memo.

However, the board of the combined entity will be filled with current board memberships of AIA and PCI, and PCI’s leaders said they expect the combination to right-side itself over about three-year process, according to the memo and an accompanying joint recommendation note.

PCI is headquartered

in Chicago but has a large office and presence in Washington, where it is close to Congress; AIA is based in Washington DC. Both are very active at the state and regional level and send multiple representatives to meet with state regulators and legislators as well as U.S. Congresspersons.

In the name of equanimity,  the powerful new entity’s  executive committee of up to 12 members would equally represent both trades for the first four years, according to PCI’s memo and attached note. These first years are referred to as “the trust building period” by PCI, which says on its webpage it represents 1,000 member companies and 340 insurance groups writing 38% of the U.S. home, auto, and business insurance market with $245 billion in premiums per year.

In contrast, AIA states on press releases its membership is comprised of more than 330 companies, collectively writing more than $134 billion in annual premiums.

The combined group, not accounting for overlap, merged entities or those  companies who leave, if any, would total companies who together write $379 billion in annual premium.

Helming the combined entity as chairman of the board  in a two-year rotation will be current AIA Board Chair and Munich Re America CEO Tony Kuczinski, followed by a new PCI board chair, PCI told its CEO membership in a memo. Of course, this is subject to the successful approval and completion of a merger. The note championed Kuczinski and Munich Re as “highly-regarded partners of many PCI companies.”

Back in mid-June, PCI  leaders acknowledged they had been exploring a potential merger with AIA, which is now headed by industry veteran John Degnan, who took the president/CEO role last year after a long career.

PCI and AIA representatives did not immediately return an email inquiry on its alert to members.

Another major p/c trade group, the National Association of Mutual Insurance Companies bills itself as the largest U.S. property/casualty insurance trade association, and its numbers are larger than PCI’s although many of its companies are mutuals and smaller in size, or less global. Indianapolis-based NAMIC represents more than 1,400-member companies and 40% of the p/c market in the U.S., with companies writing  $253 billion in annual premiums.

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