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.
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.
- 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.
- 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.
- “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.
- 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.
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.