LTC Needs a Plan C: Long term care insurance deals start with optimism but face regulatory scrutiny & price, cash challenges

Jan. 5, 2020 —

Long term care insurers have valiantly awaited help with buyouts, risk transfer deals and block purchases but that process has been slow or stymied. Help may not be on the way anytime soon.

Genworth Financial‘s one-time financial rescue by China Oceanwide is on the rocks with no closing seen anytime soon, HC2 Holdings is interested in possibly shedding Continental General Holdings LLC in a bid for cash as it unloads other subsidiaries and potential deals involving insurers’ LTC books of business have been put on hold because of the gap between bid and ask prices, according to sources.

Genworth is hosting a call today to discuss moving forward with its contingencies plans including a likely partial IPO of its sturdy mortgage insurance business to address looming debt, which has been on the table since at least this summer as the pending status of the Oceanwide merger, announced in October 2016, neared its fourth year.

Cash availability issues for the $2.7 billion acquisition by the Chinese financial conglomerate appeared to surface soon after Genworth cleared most, if not all , of its state, federal and international regulatory hurdles through approvals and divestments, a time that also coincide with the Covid-19 pandemic. Oceanwide had been trying to secure $1.8 billion in offshore financing from private equity firm Hony Capital since late summer, and then trying to show Genworth the money would come soon as the merger went through a series of extensions, the latest ending Dec. 31 with no renewal this time.

Oceanwide’s real estate arm has been facing financial challenges, with lawsuits and liens filed against it in California.

The San Francisco Business Journal recently reported on a $14.6 million lawsuit filed in November against Oceanwide Holdings and its general contractors for its centering on Oceanwide’s planned San Francisco mixed use tower. This long-standing, unfinished project was reportedly for sale, to be acquired by Hony Capital for $1.2 billion purchase, a deal anticipated to close a couple of times last year, most recently on Dec. 31. It did not, the Business Times wrote. The newspaper instead reported Jan. 4th that Hony bid’s to buy Oceanwide Center “unravels as deadline to close sale is not extended.”

The business paper said it is “unclear whether there is a path forward for Oceanwide and buyer Hony Capital,” and that “Oceanwide said both parties will ‘continue to explore other cooperation opportunities.'”

Likewise, for the LTC deal, no one is giving up, yet, on paper. LU Zhiqiang, chairman of Oceanwide, remained optimistic for acquiring Genworth in a press release Jan. 4. “We believe the value of the transaction is significant for both parties’ stakeholders, and are continuing to work towards completing the transaction with Genworth,” he said.

In concert with the San Francisco real estate woes, a planned Los Angeles Oceanwide residential and retail building remains also unfinished, and is facing $211.7 million in mechanics liens, according to Levelset.com. According to a Levelset article posted in late August, building contractors were owed “nearly $240 million as of July 2020 while in San Francisco, unpaid work claims have reached close to $50 million as of early July 2020.”

Back in June, given the delays brought about by the Covid-19 pandemic coupled with the need for the firming of overseas financing as U.S. regulatory approvals cleared, Genworth began talking about seeking “evidence” of financing abilities from its partner, China Oceanwide.

Specifically, a June 30 press release by the Richmond-based insurer said it expected to see by Aug, 21 that Oceanwide could give it $1 billion from within Mainland China and $1 billion from outside China from Hony Capital or other acceptable third parties to fund the deal. This dance on funding the deal continued throughout the late summer and the fall.

Hony said it has no comment on the deal for now in an email.

Meanwhile, HC2, after acquiring LTC properties such has Continental and then Humana‘s South Carolina LTC business Kanawha Insurance Co. in 2018, is now entertaining an offer for Continental from a director and beneficial owner of the company, Michael Gorzynski for about $90 million, subject to certain adjustments, consisting of, among other things, a combination of $65 million in cash, according to the indication of interest filed with the Securities and Exchange Commission Dec. 10.

It is unclear if regulators will approve this proposed purchase by a director. HC2 and Continental have faced lawsuit activity involving a whistleblower in their LTC businesses, although former hedge fund impresario Phil Falcone has since departed the investment company.

There is at least one other firm potentially waiting in the wings to see how the situation develops, but the cash needed to take on LTC and its ever-deepening reserve issues after years of underpricing and high utilization, is an overriding issue, according to one source.

Other opportunities for LTC include risk-transfer deals, but although chatter on these arrangements marked much of 2020, potential deals now appear dormant due to a wide price gap between pricing between sellers and buyers, according to a market source.

However, not all agree with such cautionary notes.

“Risk transfer discussions are picking up, making it possible that deals could be announced for the first time in over two years,” wrote equity analysts at Evercore ISI in mid-December after meeting with a leading consulting actuary on the subject.

The analysts pointed to late 2021 as a probable time frame, and said partial risk transfer deals are also on the table for companies with larger blocks, where a full risk transfer real might cost too much in terms of dilution.

Evercore, in its research note, extolled greater transparency and understanding of morbidity assumptions taken by insurers because of new actuarial standards instituted by state regulators. The required adjustments help put policies and reserving practices “on an apples to apples basis,” among companies, Evercore said. However, the new, more informed scrutiny from regulators could result in a need for some LTC insurers to plump up their reserves despite the claims improvement engendered by the Covid pandemic, according to the analysts.

Time will tell, but although LTC insurers are now securing premium increases on a more regular fashion from more state regulators, reserve holes loom and there are a few ongoing LTC insolvencies that continue to haunt involved parties and current policyholders.

SHIP’s rehab challenged by 3 states who wonder, given rate issues, if a liquidation is more equitable

Dec. 2, 2020 — State insurance regulators from three states said in a court filing that they aren’t receiving information they need to evaluate the rehabilitation plan of the now-insolvent Senior Health Insurance Company of Pennsylvania, or SHIP.

The three states intervening in the rehabilitation proceedings before the Commonwealth Court of Pennsylvania are Maine, Massachusetts and Washington State.

Specifically, the states have unsuccessfully sought full detailed prepared reports with actuarial models concerning the impact of the now-amended plan and its impact on policyholders generally and from their states, particularly in how these would stack up for policyholders against an actual liquidation of failed long-term care insurer, SHIP.

The three state insurance regulators are concerned that the “differing treatment of policyholders in different States,” based on factors such as previous rate approvals, which are dispensed uniquely state-by-state, will leave some policyholders less well off than they might be in a liquidation, which they argue violates legal precedent of a constitutional standard.

The detailed actuarial “information and modeling is critical to an understanding of the plan and to any evaluation of whether it comports with applicable legal and constitutional standards,” the three intervening states wrote in a Nov. 30 filing in which they were to introduce witnesses for their pleadings.

SHIP has a funding shortfall of more than $1 billion. The rehabilitation plan is designed to take help decrease that gap with its assortment of options, various combination of cuts in benefits and increases in premiums for now-elderly policyholders. But Maine, Massachusetts and Washington State regulators argued that the rehabilitation plan is crafted “on the backs of current policyholders” with anticipated dramatic and costly changes to their expected way of extensive late-life care.

The states also told the court they cannot sufficiently prepare their testimony and exhibits because neither the plan as outlined nor the rehabilitator have shared the detailed analysis and information on actual outcomes for policyholders, theirs included.

“The Rehabilitator, as the proponent of the Amended Plan, has the burden of showing that the Plan satisfies the standards for approval … To date, the State Insurance Regulators have not been apprised of how the Rehabilitator intends to sustain that burden,” they wrote.

“Washington state doesn’t have enough information to be in favor of either rehabilitation or liquidation. Our point is the rehabilitator has the burden to prove that policyholders would be better off under the rehabilitation plan rather than liquidation. Based on the information we have been given to date, that has not yet been proven,” said a spokeswoman for the Office of the Insurance Commissioner for Washington.

The rehabilitator is the insurance commissioner in Pennsylvania, Jessica Altman, along with a special deputy team who oversees the process with necessary actuarial outsourcing.

The goal of the rehabilitation is to prevent a liquidation, which would send SHIP into the hands the state guaranty funds for life and health insurance. It would be the life and health insurers who would then pick up the tab for the shortfall in a liquidation– but only up to the statutory limits for each state. The rehabilaitors feel their plan is better than na liquidation for most of the policyholders most of the time, even with reductions in benefits and price increases.

The only certainty is that someone must pay more than they anticipated to at least partially cover the old promises of the former Conseco Senior Health Insurance Co. — it will be either the policyholders or the industry.

These limits are about $300,000, on average, while many LTC policies are a lot richer in benefits. The annual cost of a private room at a nursing home now exceeds $100,000, while semi-private room nears that amount, according to Genworth Financial‘s annual cost of care survey, released Dec. 2. Assisted living facility annual rates jumped by 6.15% this year to a national median cost of $51,600, it stated. The median cost of a home health aide in the U.S. is $54,912.

“As the scale of the deficit suggests (a deficit of $915 million on liabilities of $2.8 billion is a shortfall of approximately 33%), the revenue increases or benefit cuts that need to be made are large, and the consequences for policyholders are likely to be severe,” the state regulators stated.

U.S. states have historically approached premium increase requests from LTC insurers in a fashion that strove to balance the needs of their consistencies, both the insured and the insurers, as well as public perception. The solvency concerns of these insurers has grown, often direly, due to the grave errors in assumptions at the time the policies were written coupled with modern interest rate environments.

Although the National Association of Insurance Commissioners has undertaken a uniform approach to timely and appropriate rate increases for LTC insurers, the rehabilitation plan for an already insolvent insurer will not benefit from it.

The intervening jurisdictions noted that Altman and her team have chosen to address this cross-state rate “subsidy problem.” They oppose it, argue it is unfair and say it would be applicable not only to SHIP but to “all other national insurers writing types of insurance that are subject to state rate approval.”

“The imposition of different, and much greater, rate increases and benefit cuts in some States than in others will deprive policyholders in the burdened States of contractual benefits at a greater percentage than those in other States. All policyholders, however, paid the premiums they were obligated to pay under the policies and are entitled to receive as much as possible of their contractual benefits,” the states wrote.

“A liquidator takes the policies as she finds them, determines applicable benefits, and … all policyholders nationwide would receive the same distribution percentage, as the statute specifically prohibits subclasses within a priority class,” the states argued after looking at the general menu of benefit cuts and premium hikes the amended rehabilitation plan offered policyholders.

The plan of the rehabilitator though, they said, would “impose different burdens on policyholders in the different States.”

A representative for the rehabilitator did not comment, nor would they in general during legal proceedings, as the court must weigh this filing along with a number of other intervening parties’ narratives of witness testimony and exhibits, all of which were due Nov. 30. However, the rehabilitation team added provisions in the Amended Plan provisions to address many of the state concerns and have shared a lot of detailed information with regulators, according to sources. Most insurance departments throughout the U.S. appear to be on board with the plan.  

The SHIP situation is very serious, said one person with knowledge of the insolvency.

Timeline for SHIP’s insolvency thus far:

Jan. 23, 2020, Pennsylvania Insurance Commissioner Altman filed a petition for an order placing SHIP into rehabilitation.

Jan. 29, 2020 — the Commonwealth Court granted the Petition for rehabilitation and SHIP was placed into rehabilitation.

April 22, 2020 — Commissioner Altman filed the proposed rehabilitation plan.

Oct. 21, 2020– Commissioner Altman filed the amended rehabilitation plan.

This article was updated with comment from Washington State.

OFR advocates prediction markets to help identify systemic risk issues old-school monitoring might miss

Nov. 19, 2020 — The Office of Financial Research is telling the U.S. Congress that the development and use of information markets as a tool for anticipating and managing financial systemic risk would be a valuable complement to the current surveillance system.

In light of the fact that two and a-half dozen high-profile financial stability reviews 2019 failed to recognize a potential pandemic as a threat, conventional monitoring can come up short, according to the OFR, an arm of the U.S. Treasury Department.

“The pandemic illustrated the difficulty for conventional financial stability monitoring to identify true vulnerabilities,” the OFR’s annual report stated.

An information or “prediction” market for systemic risk, where participants who have superior information are rewarded financially while weaker-sourced individuals who wager lose could help reveal hidden information that might forecast or contribute to financial risk, the OFR suggests.

This information might otherwise be costly to ferret out or retrieve, the report’s authors say.

Information or prediction markets are a type of informed wagering with trading done between and among parties looking to make money off the outcome of the way an event breaks or what happens in the future to any number of scenarios. Major U.S. corporations have used them but regulatory barriers remain for wider use, apparently.

“Information markets might facilitate a more suitable allocation of those risks, and thus reduce the chance for systemic crises to emerge,” the paper states. They may also make a market more resilient, as well, according to the thinking, based on some renowned economists’ theories.

Such markets can help to produce forecasts of event outcomes with a lower prediction error than conventional forecasting methods and have been shown capable of producing more accurate and timely signals of weakening financial stability,” argue academic articles, as quoted by OFR. Other citations follow with the same general thesis.

The OFR, which was created under the Dodd-Frank Act a decade ago with a charge to give a report annually to the federal legislators that created it, also noted the obvious — that COVID-19 pandemic has affected all systemic risk categories and increased overall market uncertainty.

The categories the OFR deems high risk now are macroeconomic risk, with potential inflation caused by government intervention and credit risk from highly leveraged corporations, with the potential for defaults and bankruptcies.

Market risk is elevated, but not high, with help from the Federal Reserve, but that could change if valuations rise for not-so-healthy assets, the paper warned.

On the moderate risk scale are liquidity and funding, also helped, along it the markets, by the Federal Reserve’s stabilization efforts, according to the OFR. This also could change.

However, codependence between large providers and users of short-term funding remains a key vulnerability.

On the low end of the risk assessment scale is leverage in the financial system itself, while insolvency and octagon risks “appear contained,” the OFR said. Fortunately, leverage in the U.S. financial system has been restrained since the last financial crisis.

For insurers and banks, the capital buffers now in place “appear to provide an adequate cushion for unexpected losses” in the short term, at least.

The risk posed by cybersecurity threats, natural disasters, Brexit and the transition this fall to alternative reference rates from the old LIBOR system are also potential vulnerabilities are for financial stability overall, the OFZR notes.

The paper also mentions the development of quantum computing presents a longer-term risk.

NAIC to discuss examining insurers’ use of data & potential oversight of 3rd-party vendors in confronting racial inequities in p/c sector

The Special (EX) Committee on Race & Insurance formed by the organization state insurance commissioners to reckon with barriers to diversity, accessibility and inclusion in the insurance sector is starting its work by posing many questions on current practices and data use.

While answers may be on the long-term horizon, regulators are digging into insurers’ manifold use of data and data mining — and even considering their own collection for future analysis, to help achieve racial equality.

The National Association of Insurance Commissioners is wrestling with a path forward on equitable application of all elements of insurance, from underwriting practices to hiring to analysis to agent licensing requirements.

One of the most far-reaching areas where regulation meant to ensure racial equality and fairness could potentially expand in a now data-driven world is in the use of this wealth of information.

Based on an NAIC list of potential issues for the special committee to consider in the property casualty sector is future regulation of third party vendors that create algorithm for pricing.

“Third-party vendors are often not licensed as advisory organizations in the states. These vendors provide supplementary rating information and rating and scoring models for clients but do not file with states,” the Oct. 29 NAIC document says.

The discussion list is part of the NAIC’s materials for a public discussion of p/c subject material Nov. 12. The p/c arena is one of five work-streams under the purview of the NAIC’s special executive level committee. These work-streams are listed below.

The NAIC could also consider collection of information from insurers in order to monitor discrimination and/or disparate impact on communities, according to the discussion points listed.

Another practice state regulators might examine is claims settlement.

For example, some commissioners of insurance might want to know if fraud detection techniques unfairly discriminate by using prior convictions which may be impacted by policing practices.

Regulators will also be discussing access to insurance among disadvantaged groups, and examine the affordability of auto and homeowners insurance looking at past studies and history compiled on the subject. The online shift of insurers and its effect on reaching economically disadvantaged groups will also be probed.

Details for the Thursday meeting are here.

The NAIC is also hosting a public call Nov. 18 to hear from interested parties on work-stream one.

This category includes discussions and statements on the current level of diversity and inclusion within the insurance industry, practices or barriers that potentially disadvantage people of color and/or historically underrepresented groups, steps state regulators and/or the insurance industry can take to increase diversity and inclusion and address practices that potentially disadvantage people of color and/or historically underrepresented groups.

The special committee’s five work-streams, based on the the NAIC’s website, are:

Work-stream One:
Research / analyze level of diversity and inclusion within the insurance industry. Make recommendations on action steps.

Work-stream Two:
Research / analyze level of diversity and inclusion within the NAIC and state insurance regulator community. Make recommendations on action steps.

Work-stream Three:
Examine and determine which practices or barriers exist in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the p/c line of business. Make recommendations on action steps.

Work-stream Four:
Examine and determine which practices or barriers exist in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the life insurance and annuities lines of business. Make recommendations on action steps.

Work-stream Five:
Examine and determine which practices or barriers exist in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the health insurance. Make recommendations on action steps.

SHIP files amended rehab plan, factoring in opt-out states, reduced benefit scenarios; Covid-19 dynamics impacting liabilities

Oct. 23, 2020 — Rehabilitators for the insolvent long term care insurer Senior Health Insurance Company of Pennsylvania filed an amended rehabilitation plan proposal Oct. 21 with the Commonwealth Court of Pennsylvania that addresses options for policyholders in states that want to opt out of the plan, the effect of Covid-19 and changes to calculations and the scope and availability of benefit reductions.

These changes are update the initial April 2020 filed rehabilitation plan. The plan is effective when the court okays it. So far, there are a number of intervenors and the process can be lengthy even as the company, founded in 1887 as the Home Beneficial Society, sees its financial condition deteriorate. Prior to the filing for rehabilitation in January 2020, it was licensed in 46 states, the District of Columbia and the U.S. Virgin islands. It has not sold new policies since 2003 and was once part of Conseco Senior Health Insurance Co.

The funding gap is expected to be $1.2 billion as of the effective date of rehabilitation. SHIP’s financial condition continues to decline, according to the new document. It is estimated that SHIP’s funding gap is more than $1 billion, up from $916 million at year-end 2019.

The rehab plan is an attempt to square up the insolvent company’s claims with its liabilities through a policyholder menu of premium increases and benefit reductions so it does not have to go into liquidation. The goal is to significantly reduce the funding gap, a scenario best advanced under a combination of options presented to policyholders that would increase premiums and/or reduce the rich benefits in their LTC policies to more affordable but more slender coverage.

The multi-phase plan is designed to provide policyholders what they would get, at a minimum, from state guaranty associations in the event of a liquidation.

If 100% of SHIP’s active and disabled policyholders choose two favored options during phase one of the rehabilitation, SHIP’s entire funding gap would be eliminated and the second phase wouldn’t be necessary, the rehabilitators said.

These options are roughly, keeping the current premium and downgrading benefits and taking basic policy endorsements at the so-called “if knew ” premium or the realistic cost if the actuaries who wrote the policies a few decades ago, or less, actually knew what the future held–longevity, lower interest rates, the endurance of chronic diseases and much higher cost of facility or home medical care.

The rehabilitation team, led by Pennsylvania Insurance Commissioner Jessica Altman and Special Deputy Rehabilitator Patrick Cantilo, looked at liquidation, according to the new document, but decided against it to instead offer policyholders additional choices to address their individual needs with the ability for current coverage to stay in place if they are willing and able to pay the much-higher premium rate increase.

The rehab team also looked at a “good bank-bad” bank scenario but found the process would be very complex and would require insurance licenses in the states, where most of those licenses have now been pulled.

In jurisdictions/states that will object to the proposed plan or opt-out, policyholders wouldn’t be permitted to select from th full menu of the plan’s options but still have choices, albeit with some policies downgraded to a lower benefit level. Some states have already filed to intervene in the proceedings.

Of interest is what SHIP is finding with respect to the virulent Covid-19 virus’s mortality and morbidity. Preliminary data indicates that COVID-19 might be causing a decrease in the number of claims filed, and, as expected, and an increase in the number of deaths among the aging population insured by SHIP.

The average SHIP LTC policyholder is 86 and the average claimant is 89 years-old, according to the document. Covid-19 mortality might “reduce slightly SHIP’s deficit,” the rehabilitator stated, but this effect could be temporary.

However, another feature of Covid-19 — the economy — is impacting the bottom line, too.

Many SHIP policyholders have delayed making their required premium payment, the document said, and while SHIP is allowing the delays per regulatory agencies to a degree, “these payments aggravate substantially SHIP’s financial difficulties.” The rehabilitator made clear this forgiveness of premium payments cannot go on forever, and will likely lead to an increased amount of terminations. In fact, there have already been a slight increase in such non-payment of premium terminations.

SHip’s policies and claimants are declining, as the amended document lays out. By June 30, 2020, SHIP had 42,559 of direct policies, of which 5,402 were on claim. Total of administered LTC policies was therefore 44,673, of which 5,753 were on claim.

At the end of 2019, SHIP had 45,518 of direct policies, with 5,776 on claim. SHIP was administering a total of 47,785 policies of which 6,152 were on claim.

The rehabilitators warned that generally, policyholders whose policies were issued in states that have not approved rate increases over preceding years will face higher premium increases or benefit reductions under the plan, to avoid cross-subsidization between and among states.

*SHIP is now known as SHIP in Rehabilitation, so is not an actual licensed insurer The National Organization of Life & Health Guaranty Associations notes that SHIP is obligated for the LTC policies of the following companies: • Transport Life Insurance Co. • American Travelers Life Insurance Co. • United General Life Insurance Co. • Continental Life Insurance Co. due to the fact they merged into or were acquired by the former Conseco.

Outgoing Texas insurance commissioner: NAIC must be accountable, responsive and transparent to assure state-based regulation survives & thrives

UPDATED with NAIC response given before publication; Commissioner Kent’s last day was Sept. 30. The governor is expected to announce a new commissioner soon.

Oct. 14 — A former insurance commissioner who has been actively involved with national insurance regulatory and modernization initiatives has penned a sharp critique of the National Association of Insurance Commissioners that questions its hefty growth over the years and the sufficiency of its oversight. 

“The NAIC is likely at a crossroads regarding its identity. It will need to decide whether it is a member services organization or primarily a monopoly service provider,” wrote former Texas Department of Insurance Commissioner Kent Sullivan in a September analysis that was prepared at the request of several state legislators. It was sent to all state commissioners, as well, a recipient noted.

Sullivan wrote the piece while he was still commissioner. His last day in office was Sept. 30, the Department informed.

Sullivan, who had been Texas insurance commissioner since October 2017 and who, in August, notified the governor he would be stepping down when a replacement has been found, has been active in many high-profile NAIC life insurance, solvency and actuarial committees and also served on an advisory committee at the Federal Insurance Office.

The former private practice litigation lawyer and appeals court justice offered his views on challenges such as organizational consistency, accountability clarity, transparency and speed of change which he thinks the NAIC must address in order to maintain the primacy of state insurance regulation.

This comes at a time when this apparatus, fixed under the 1945 federal McCarran-Ferguson Act, is “increasingly challenged domestically by the authority of the Federal Reserve and the Treasury Department, and from abroad by such groups as the International Association of Insurance Supervisors and the Financial Stability Board,” Sullivan wrote.

Issues of friction between state sovereignty over insurance oversight and NAIC positions on interstate or national matters are one of the focuses of the critique. 

Sullivan raised an instance of NAIC support for an amicus brief on behalf of the multi-state compact for insurance regulation, funded by an NAIC loan, a position the Texas Department declined to support due to a lack of details. States were just expected to just sign on without knowledge of the NAIC’s underlying legal position, Sullivan alleged. The organization then came out in support of the larger compact over a conflicting state statute in Colorado, he wrote.

Sullivan made references to other opaque areas of the $124.5 million budgeted, almost-500 person organization, from its tax filings to how its membership is sometimes kept in the dark, to the detriment of transparency and potentially states’ needs.

However, when a coordinated, multi-state approach is indeed needed, the NAIC can take precious time, though, he argued, pointing to inconsistency in state actions as contributing to the long-term care insurance solvency crisis. He noted his department had, along with others, urged a national approach, but that states continue to await final work product and recommendations from” an executive level task force made up of insurance commissioners. 

The NAIC LTC Task Force has reported making progress on its workstreams such as multi-state rate coordiantion and is scheduled to meet virtually at the organization’s fall national meeting Dec. 4th.

The commissioner, who will be returning to private practice, expressed frustration with a Texas Department initiative, too, involving a thwarted artificial intelligence solution that was at first supposed to address “immediate and serious problems” there in reviewing policy forms. He said the NAIC’s primary technology, named SERFF, is antiquated.

Yet, after spendings “hundreds of hours of time” on the project between the Department and NAIC commissioners in leadership positions within the organization, the AI project suffered an “abrupt (and unilateral) change in direction” when the NAIC delayed the modernization project, he said. The results of this project have yet to be furnished. 

The NAIC responded by stating that “we whole-heartedly share former Commissioner Sullivan’s assessment that the NAIC needs to survive and succeed.’  To that end, we will keep working collaboratively with our members and legislative colleagues to aggressively protect consumers and ensure that the U.S. remains a world-class insurance market now and into the future.”

The Texas department website notes that it regulates the second-largest insurance market in the nation and the seventh-largest globally. Sullivan’s leadership on modernization”has led to faster service in complaint resolution and agent licensing, an increase in online licensing applications, and a major organizational restructuring,” it touts.

Sullivan also included as an attachment in his critique then-Connecticut insurance commissioner Tom Leonardi’s well-publicized invective against the NAIC’s from December 2013, which famously began, “We have met the enemy and he is us!

Sullivan noted that Leonardi’s letter referred to the NAIC officer selection process as “student council elections.” He wrote that in his experience, these “elections still lack meaningful discussion of important substantive issues.”

However, in 2020, the NAIC leadership did respond quickly to member concerns on national crises, events, and structural inequities with its CoronaVirus Resource Center, “a place where everything every state has done for bulletins, to directives, to regulations, to any alert is in one central location,” as a recent podcast conversation between NAIC CEO Michael Consedine and NAIC President and South Carolina Insurance Director Ray Farmer pointed out. In July, it then created a special committee on Race and Insurance in which “everything is on the table,” according to Farmer.

SHIP’s proposed rehab plan could bring a lot of hands on decks while cutting some reinsurers cut loose

Sept. 16, 2020

Updated with Washington state’s permission from the court to join as an intervenor, Sept. 18 .

The court overseeing the rehabilitation plan for insolvent insurer Senior Health Insurance Co. of Pennsylvania, (SHIP) has some items of note to consider now that the deadline for comments and extended intervenor applications closed Sept. 15. 

The Maine superintendent of insurance and the Massachusetts commissioner of insurance have asked to intervene in the SHIP case and court documents reveal there are concern about rate increases in the future and ones not granted in the past from various insurance regulators involved.

Also, the rehabilitation plan is seeking to exclude some reinsurance polices from joining in. 

LTC insurers face solvency challenges now because rates set in the past do not match the towering costs of paying claims now for a variety of reasons, including higher longevity accompanied by chronic and expensive health problems, suppressed interest rates and lower lapse rates than anticipated when policies were underwritten.

The quandary facing many state insurance regulators was and remains whether to allow enormous rate hikes that could eat into the pensions of aging policyholders or to help LTC insurers achieve loss ratios that would keep them afloat. Keeping rates artificially low to help policyholders avoid rate shock as liabilities mounted and outstripped assets brought about the insolvency of SHIP. 

Maine and Massachusetts insurance regulators have requested intervention on behalf of all other state regulators, according to documents filed with the Commonwealth Court of Pennsylvania. The proposed rehabilitation plan won’t be implemented until it is approved by the court. 

The rehabilitator appointed by statute Jan. 29, when the order of rehabilitation was filed, is the insurance commissioner of Pennsylvania, Jessica Altman.

The rehabilitator said she accepts Maine and Massachusetts regulators involvement “for the limited purposes of calling or examining witnesses or introducing exhibits at the hearing.”However, she asked the court that all other requests for relief be denied.

Her lawyers are refuting other states’ claims that her plan “purports to set aside laws and replace them for a process for setting rates on a nationwide basis.” 

Instead, the plan “is designed to protect the interests of the insureds, creditors and the public by proposing corrective action to restore SHIP as a financially self-sustaining long-term care insurance company. The Proposed Plan seeks to achieve these goals and objectives in a fair and equitable way for over 45,000 policyholders,” Altman told the court.

In a filing Aug. 21, the rehabilitator argues that SHIP, in business in Maine from 1991 until its license was suspended this March, had sought approval there for LTC policy rate increases between 2011 and 2019 but hadn’t gotten them for the most part.

 “SHIP’s proposed rate increases for 2011 and 2019 were disapproved by Maine, Altman’s filing pointed out. She argued the rate requests were not excessive and denied claims that SHIP “failed to demonstrate that the requests met required standards and/or applicable regulations.” 

Altman also noted that the Maine superintendent approved SHIP’s 2016 rate increase but at a at a level lower than requested. 

The top insurance regulators from Maine and Massachusetts have requested that the court “extend the time for other state insurance regulators to join” beyond the deadline, with a letter attached from Washington State Insurance Commissioner Mike Kreidler addressed to Maine Superintendent Eric Cioppa and Massachusetts Insurance Commissioner Gary Anderson.

Washington state’s intervention request was approved by the court Sept. 18. The judge ordered that Washington can join with the intervention of the Maine superintendent of insurance and the Massachusetts commissioner of insurance.

It has submitted comments, which reflected the same policyholder premium increase concerns as Massachusetts and Maine.

“The Court should permit Maine and Massachusetts to intervene in this proceeding, but the Court should deny their eleventh-hour request (purportedly on behalf of all other state insurance regulators) to extend the Court’s deadline for seeking intervention,” she argued. 

The intervening states are concerned about the effect of the rehabilitation on policyholders, and want to delve into the actuarial models used to find out more about how customers in their states would be impacted –and have a say in any changes.

The rehabilitator said she wouldn’t oppose the Washington commissioner’s application to intervene if it filed by Sept. 15, 2020.

Legal representatives for Maine and Massachusetts and the special deputy rehabilitation did not return emails request for comment.

It is unclear from the docket whether he has. 

Other groups that have filed to intervene include policyholders, agents and brokers, the health insurers Aetna Life Insurance Co., Anthem, Inc., Health Care Service Corp., Horizon Blue Cross Blue Shield of New Jersey, and UnitedHealthcare Insurance Co., as well as the National Organization of Life and Health Insurance Guaranty Associations and Transamerica Life Insurance Co. Transamerica did not return an email query.

The health insurers point out that the guaranty associations will be triggered upon a liquidation order and they will together be responsible for 27% of assessments from that liquidation. 

A SHIP liquidation will cost the companies “hundreds of millions of dollars,” in guarnaty fund assessments, the health insurers stated in their July 31 application to intervene. 

Liquidation will occur if the rehabilitation plan can’t close the liability funding shortfall of between $500 million and $1 billion. 

Of interest, the Pennsylvania Insurance Commissioner Jessica Altman and the Special Deputy Receivers for SHIP, Patrick Cantilo, have changed the proposed rehabilitation plan to exclude the reinsured LTC insurance policies of Transamerica Life, Primerica Life Insurance Co. and American Health & Life Insurance Co

SHIP currently reinsures and administers these policies and the original plan filed in April said they would be treated the same as policies issued by SHIP, the notice on SHIP’s website stated. 

“However, although the rehabilitator wants them out, the notice said it remains possible that SHIP, or its subsidiary Fuzion Analytics, Inc., will continue administering these reinsurance policies.

If this amended exclusion is granted, Transamerica, Primerica, and American Health & Life policies the reinsured policyholders will not be asked (or have the ability) to make elections under the Plan and SHIP will not be financially responsible for claims arising under these policies, according to the note. Also, SHIP won’t be able to count their policy premiums as assets if they are excluded. 

 If SHIP does indeed enter liquidation, policyholders won’t be getting benefits from any life and health insurance guaranty association. Instead, the companies themselves will be responsible for these policies and any claims covered by these policies.

After a series of high profile, multi-million unpaid benefits regulatory settlements, The Principal pays $145,000 for exam-related costs

Updated with number of remaining exams, per California.

Sept. 13, 2020 — Principal Life Insurance Co. and Principal National Life Insurance Co. and state regulators quietly settled a death benefits exam underway for seven and a half-years for $145,000, a small cost amounting to housekeeping compared with the multi-million dollar settlements incurred by other life insurers undergoing similar exams.

Without admitting “any liability whatsoever,” The Principal agreed to the amount to cover the “examination, compliance and monitoring costs incurred by the departments associated with the multi-state examination. 

The Principal’s exam began in December 2012, a spokesperson for the company and the California Department of Insurance confirmed. 

The action could indicate that the unpaid benefit exams for life insurers are now winding down after the enormous settlements and high-profile cases that emerged at the outset of the state regulatory process.

A settlement was reached in June and a copy filed with state insurance departments in July. The $145,000 remittance covered “the examination, compliance and monitoring costs incurred by the departments associated with the Multi-State Examination.”

A handful of state insurance departments launched Social Security Administration’s Death Master File targeted examinations of life insurers beginning back in 2011 to review practices into whether policyholders’ beneficiaries were getting paid when the contract holder died. 

The lead states in the DMF initiative are California, Florida, Illinois, New Hampshire, North Dakota, and Pennsylvania. •

They sought unpaid death benefits due under the insurers’ life insurance policies and annuity contracts as well as unpaid proceeds due under matured annuities.

These state regulators, with the use of the auditing firm Verus Financial LLC, combed through insurers’ policies and procedures and use of the DMF database for unclaimed property.

In the case of The Principal, the regulators stated they found only “potential concerns regarding the adequacy of the company’s policies and procedures” in getting insurance policies paid in timely manner to beneficiaries, according to the settlement. 

The company said it disputes any potential concerns identified by the Departments and denies any wrong-doing or engaging in any activities but said it wished to resolve and differences instead of creating or prolonging any further proceedings. 

The company agreed to use its best efforts to find and contact the beneficiary, making at least two attempts to contact the beneficiary in writing at the address maintained in the company records and other standard protocols as a matter of course. 

Life and annuity insurers had paid over $9.7 billion to life insurance beneficiaries nationwide,” as a result of the multi-state exams as of August 2018, the California department trumpeted in 2018 in detailed report of the multi-state exam process. The group of “insurers have escheated approximately $33 million in unclaimed benefits to state unclaimed property officials, the report stated.

The outside firm who auditing insurance companies to identify unclaimed property also got a percentage of the remittances to states’ unclaimed property funds. 

The first such multi-state settlement, in February 2012, was with Prudential Financial for $17 million, to be split among the states participating in the settlement. MetLife’s settlement followed, reaching $40 million, in August 2012.

State regulators in the lead states alleged that the life insurance industry “selectively used” the DMF database to cut off their payments to deceased annuity holders but did not use the database when it came to seeking information on the death of policyholders to whose beneficiaries they would owe payouts. 

In general, if insurers cannot not find the beneficiaries after searching for them, they are required to send the money to the state controller as unclaimed property. 

Many insurers adamantly denied they had done anything intentionally and vowed to proactively check the DMF database regularly. 

Over the next few years, many life insurers, representing 80% of the market followed Prudential and MetLife in settlements with the lead state regulators. 

“As a result of the state insurance regulator settlements, in addition to paying benefits to beneficiaries, insurers have paid approximately $180 million to states that participated,” the Californiadepartment said in its report. It has listed the many life insurance companies with which it had negotiated settlements. The report noted that the lead states had wrapped up, by then, exams and settled with 25 insurers. Lead state regulators have five remaining exams on life insurers still open, a spokesperson from the California department said Sept. 17.

California’s report identified two “small life insurers” who it accused of fighting regulators’ attempts to settle and instead, turning to litigation. The plaintiff insurers in these cases have said they felt there was no justification for an audit because there was no reason to believe they weren’t in compliance with state unclaimed property laws to begin with.

Thrivent Financial, one of these two life insurers referenced, prevailed in its lawsuit against the state of California in 2018 after arguing “that two California unclaimed property regulations were invalid,” according to JMS Advisors. This decision had repercussions for other states’ guidance.

China Oceanwide furnishes evidence of funding, preserving deal to acquire Genworth

UPDATED Sept. 1 with Hony Capital involvement

Aug. 31 — Genworth Financial Inc.’s proposed merger with China Oceanwide Holdings Group Co., Ltd. survived to live another day as the Chinese conglomerate gave the long- term care and mortgage insurer assurance that it could pay for the company, according to a late evening press release.

Genworth had given China Oceanwide an Aug. 31 deadline to furnish evidence of funding for the deal.

Genworth said that its board of directors and its management team looked at what China Oceanwide had furnished as evidence to show it had the necessary funding for Genworth’s previously-agreed-upon price tag of $2.7 billion and had found the information “satisfactory.”

Therefore, it said “Genworth therefore does not intend to exercise its right to terminate the merger agreement as of August 31, 2020.” 

However, no mention was made in the release of Hony Capital, China Oceanwide’s investment partner or from where the funding is coming.

Genworth spokeswoman Julie Westermann did add the following day that the company believes “Oceanwide will pursue the same funding path that was disclosed in August 2018, whereby approximately $1B will be funded from mainland China and the balance funded by a bridge loan facilitated through Hony Capital.”

Westermann noted that the specific information that Oceanwide provided to Genworth regarding its funding progress is confidential so the company cannot we cannot share additional details now. 

The proposed merger, first announced in October 2016, before the last presidential election, had been previously extended to Sept. 30, 2020, its 15th such extension. China Oceanwide was supposed to meet the interim funding milestones by showing evidence of $1 billion of country-approved funding for the transaction plus evidence of another additional $1 billion from Hony.

Specifically, China Oceanwide was to show Genworth’s management that it had about $1 from sources in Mainland China to fund the acquisition of Genworth; and that Hony and/or other acceptable third parties had committed to provide $1 billion or more from sources outside of China to fund the transaction.

The Richmond, Va.-based company’s executives have said previously that the Hony funding commitment, first reached in 2018, only became an issue after the COVID-19 pandemic roiled global capital and financial markets beginning this past winter.

“We believe the funding is progressing well and that Oceanwide is working to close the transaction by September 30, 2020,” said James Riepe, non-executive chairman of the Genworth Board in the release. He based this on what he called regular discussions over the past few months between himself, CEO Tom McInerney and China Oceanwide.

“The August 31st milestone was important to both inform Genworth’s ongoing review process as well as provide an important update to our shareholders ahead of the September 30, 2020 deadline, particularly in light of the market disruptions driven by the global pandemic,” McInerney stated.

LU Zhiqiang, chairman of Oceanwide, said the company had been constrained by the global Covid-19 pandemic, is making progress and is committed to bringing Genworth’s “long term care insurance expertise to China and the rest of Asia”

The U.S. regulatory approvals had formerly been sewn up, subject to confirmation from the Delaware Department of Insurance that the acquisition of its life and LTC unit can go forward proceed under the existing approval. 

Genworth disclosed also today in its release that they are speaking with the federal mortgage supervisors issuers Fannie Mae and Freddie Mac, both government- sponsored enterprises, “about their previous approval of the transaction,” indicating this is not completely settled yet.

China Oceanwide also needs to receive clearance for currency conversion and transfer of funds from SAFE. 

 Genworth has also been moving forward on plans to fulfill its near-term financial obligations, which include liabilities from an announced settlement with AXA S.A. on alleged mis-selling of policies belong to its self -off business and about $1 billion of debt maturing in 2021.

Genworth announced Aug. 21that its indirect wholly-owned subsidiary, Genworth Mortgage Holdings, Inc. completed its $750 million offering of senior notes due 2025, with about $450 million of the proceeds distributed to GMHI’s direct parent, Genworth Holdings. Under its agreement with AXA, Genworth Holdings intends to repay or reduce upcoming debt maturities from the net proceeds of the senior note offering.

Reduced benefit option imbalances in LTC can impact Medicaid, cause finance issues and confuse consumers, groups warn

Aug. 23, 2020 — Life and health insurers’ representatives are warning state regulars that a reduction in benefits for long term care policies, part of a strategy to keep LTC blocks solvent, could impact state Medicaid budgets, among other undesirable and unintended effects.

The insurers’ groups also are worried about the solvency or financial stability of the remaining block of LTC business. That could happen if the choices policyholders make to even cease their contracts lead to adverse selection, they warn.

The insurers’ grapple with ill effects driven by regulatory reverse-engineering of LTC rates and once-rich policy benefits to fit the actuarial risk of today, not the risk actuaries in the past formulated in error for LTC insurance. Consumer advocates argue, though, that won’t happen if RBOs stick to actuarial equivalence in the overall rate for the coverage offered.

“State Medicaid budgets could be impacted to the extent that the policyholder becomes eligible for and starts receiving benefits under their policy and continues to need care after the benefits under their LTC policy are exhausted,” stated a letter written by two Washington trade groups to insurance regulators.

Those constructing the array of reduced benefit options must look at what happens to the remaining policyholders and the rest of the company’s finances if certain policyholders drop coverage or pay new amounts in premiums as well as on the impact on the state Medicaid budgets, said the American Council of Life Insurers and American Association of Health Insurance Plans.

Their letter is up for discussion by the National Association of Insurance Commissioners’ Reduced Benefit Options Subgroup of the Long Term Care Task Force.

“To what extent could anti-selection take place, placing the financial stability of the remaining block of business at further risk?” the Aug. 3 letter asked. 

Health insurers and life insurers pick up the tab for liquidations of LTC insurers through the state guaranty funds, in some states evenly, under recent legislation intended to even the burden, and in others, statutorily health insurers still have more of the onus. Taxpayers also end up paying.

The ACLI and AHIP are also asking about the “impact on remaining policyholders and company finances, and [the] impact on Medicaid budgets if regulators are driving reduced LTCI benefits.

“State Medicaid budgets could be impacted to the extent that the policyholder becomes eligible for and starts receiving benefits under their policy and continues to need care after the benefits under their LTC policy are exhausted,” the insurance groups explained. It’s a complex question that needs further analysis, they said in the letter signed by actuary Jan M. Graeber of ACLI and Ray Nelson, a consulting actuary for AHIP. 

The more people who have LTC insurance, rather than dropping their coverage, though, will actually help Medicaid budgets, argued NAIC consumer advocate from the Center for Economic Justice, Birny Birnbaum

The insurance groups also wrestled with the possibility of actually going current policyholders fewer choices to help manage the decision-making process.

“Should regulators, in some cases, encourage a company to offer fewer options to reduce the complication in decisions policyholders will face?” the insurance groups asked. They believe “too many options [such as multiple inflation choices] can cause consumer confusion with respect to the decision-making process.”

They agreed that each company should prioritize very clear communications to policyholders and make as many appropriate choices as possible available to them. This would be addressed during the rate and form filing with the state regulators. 

In its comment letter ACLI goes on at length about the differences in LTCI products, in LTC insurer marketing strategies and in LTC policyholder motivations culminating in ACLI’s demand for LTC RBO flexibility and for policyholders to “contact the carrier to understand the range of options that are available to them.”

However, Birnbaum said the group “completely” disagrees with insurers counseling policyholders on RBO choices due to potential conflicts of interest as the two parties will weigh them differently, but due to their past performances.

“LTC insurers have a pathetic track record of demonstrating they actually understand the products they are selling,” Birnbaum stated.

Instead, the RBO should be “based on the actuarial equivalence of the overall rate of the policy, not limited to expected claims, so anti-selection would not be an issue, according to Birnbaum. “Stated differently, the expected after-tax return on invested capital should be identical for the new, higher rate and any of the RBOs,” he wrote in his Aug. 11 letter.

The letters are addressed to Jessica Altman, Pennsylvania’s insurance commissioner and chair of the subgroup. The group is set to meet Aug. 24 on the response to the NAIC’s RBO Principle document, exposed in early July. The goal is to create a framework to provide guidance for policyholders as LTC insurers with claim payouts outstripping premium increases create RBO offers for them.

Consumer advocates are expressing worries about the plan going forward, as well.

“Our primary concern for policyholders is that long standing coverage be preserved and that the options they select to reduce cost maintain reasonable amounts and duration of coverage,” stated Bonnie Burns of California Health Advocates and an NAIC consumer representative. She told Altman that most of the policyholders that come to CHA or local groups are actually “confused about the information they received and worried about losing coverage or making the wrong choice.”

In fact, Burns noted, “some considered just giving up their coverage.”

 The charge of the parent task force is to develop a consistent nation approach for LTC premium rate increases as well as other options, such has reduced or otherwise modified benefits. Some states had long complained they were subsidizing others when they allowed rate hikes for the seriously under-priced insurance while other states did not allow much, if any, of a premium increase in order to protect the policyholders fro rate shock. This has led to instability in the LTC blocks as they struggle with solvency and financial stability issues.

LTC policies were initially underwritten in a time when interest rates were higher and assumed to stay that way, mortality was lower, health care costs were much lower and the percentage of people living a long time with chronic illnesses was not anticipated. Thus, rates were much lower than they needed to be.

Insurers have been reporting that Covid-19 deaths have benefitted quarterly earnings in the near-term from higher policyholder mortality and fewer amounts of submitted claims, but some say that there is a backlog of usage and nursing home and health care aide care that will kick in once the pandemic significantly eases its grip in the U.S. 

But, if the health crisis does allow for rate decreases because of mortality trends or more efficient, cheaper treatments, “policyholders who have selected a RBO because of higher rates should also have the option of reinstating original benefit levels if rates decrease,” Birnbaum told regulators. He said he wants to have policyholders have flexibility, too, and have an upside if experience does again shift, arguing that much of the fission has been one-sided, in favor of the insurer in recent discussions.