LTC company restructuring parameters sugested by NAIC Q&A to first focus on solvency; could consider splits, captive reinsurance

Aug. 2, 2020 — The National Association of Insurance Commissioners is considering a potential restructuring of how insurers hold long term care insurance policies to find a way to carve out the business from companies general accounts, perhaps resulting in a model that separates the faltering LTC business from healthier lines through reinsurance or a new runoff facility. 

These options could include, as contemplated by some state regulators and/ or the NAIC , a good bank/bad bank scenario, as varied out under the controversial but upheld 2009 restructuring of MBIA Insurance Corp., a facility to runoff LTC businesses the use of captive reinsurance. At stake are hundreds of billions of dollars in benefits for millions of U.S. policyholders.

In a Q&A issued by the NAIC in late July in response to a batch of consolidated questions from would-be bidders and interested parties, the standard-setting organization for state insurance regulators said the goal is to find solutions that avoid insurance company receivership. The project would evaluate all LTC business, open and closed, and stick to solvent transactions in its first phase.

The NAIC had announced July 8 that it was taking proposals to find a new regulatory framework that would allow insurers to separate policies from one another. They could accomplish this, as envisioned, through a restructuring or a transfer of blocks of business with the purposed of separating LTC “policies from insurers’ general accounts” to precent a host of current industry maladies. These include oversized increases of rates by some states to compensate for those states that are raising rates, the billions of dollars of potential risks to states’ guaranty funds and current state laws on separating policies from the insurer’s general account.

The Q&A said solutions could possibly involve consideration of captives but noted that state legislative changes that might be required for any restructuring would only be addressed in the second phase of the project. For example, legislation could be required in many states for a split runoff facility or other mechanism.

The NAIC and state regulators are in the process of a years-long initiative to address the growing solvency challenges of the LTC industry, even as several of these insurers, like Penn Treaty companies and Senior Health Insurance Company of Pennsylvania, have entered rehabilitation or liquidation proceedings in recent years. Other companies, like Prudential Financial, State Farm and MetLife have closed their blocks in the past decade and the one with the highest number of policyholders now, Genworth Financial, as part of a public company, is in the final throes of a merger attempt with a Chinese conglomerate buyer. 

According to the American Association for Long-Term Care Insurance, LTC insurers paid out $10.3 billion to over 303,000 claimants in 2019, an amount that has increased annually. The total number of individuals with LTCI coverage was 7.2 million in 2014, according to a 2016 NAIC report on the state of the market, its challenges and future. However, at the time, the maximum potential benefit value in policies came in at a little less than $2 trillion, according to the same report, with a then-expected payout if everyone used 100% of their benefits at the time of $800 billion.

The sheer numbers pressure regulators to address policyholder needs and business structures at a time when paid premiums, even with rate hikes and diminished benefits increasingly permitted by the states coupled with years of anemic interest rates on company funds aren’t enough now to cover future claims. 

Not all state regulators would necessarily be on board with the final report of the legal consultant  —  some would be concerned with the fate policyholders carved out of the more solvent arms of a large multi-line insurer and its general accounts.

Private investors and hedge funds are also contemplating deals involving legacy blocks of LTC business, but these have been slow endeavors which have been taking a long time to review and value, industry participants have noted.

The winner of the contract for the first phase is not the one who will necessarily carry out phase 2, according to the NAIC response to questions on the contract proposal. 

A draft report is expected two to three months after a contract is signed with selected hired legal team, expected be finalized October 2020.

Confidentiality will apply to the preliminary work on the report done by the law firms under attorney-client privilege, according to the NAIC. 

In response to a question on whether there is a goal of avoiding cross-state or interstate rate stabilization with closed blocks or if the concern would also include new products, the NAIC responded that the project is to evaluate all long-term care business, therefore closed and open.

Pulling teetering or frail business lines from the general accounts is not generally used in insurance companies, but the structure prevailed in court battle involving the old MBIA when it split its structured financial product business from its healthy, traditional municipal bond business in response to the market lashings of the financial crisis.

“The reorganization was intended to generate market confidence and increase liquidity in the municipal bond market,” according to a bulletin by the law firm Morrison & Foerster LLP in March 2009. Four years later, in March 2013, New York’s Supreme Court upheld then-New York Insurance Superintendent Eric Dinallo’s decision after a challenge by Societe General SA.