No brakes on PE deal-making for fixed & VA blocks with more transactions seen in months ahead

Oct. 14, 2021 — The fourth quarter is expected to maintain galloping pace of risk transfer deals as private equity firms expand their share of the life insurance market.

Fixed annuity blocks are capturing the attention of asset managers and analysts as buyers and sellers work out bid/ask prices and firms hire more deal-makers as life insurers seek to shed interest-rate sensitive long-term liability blocks.These blocks currently tend to be annuities and long-term care insurance blocks, although the latter, still heavily beleaguered by historically insufficient premiums despite occasional rate increases, are not finding buyers as readily.

The Federal Insurance Office at the U.S. Treasury is also paying attention to the exponential growth in the past few years to insurance liability risk transfer deals as insurers pivot to less capital-intensive products in this chronic low interest rate environment.

In its annual report delivered in late September, it pointed out that the cash and invested assets of PE-owned life insurers totaled more than $471 billion at the end of 2020 —that’s 11% of the U.S. life insurance industry total. FIO also estimated that the offshore reinsurance affiliates of these PE firms are over $137 billion. 

FIO expressed concern that some potential PE firms investments in reduced liquidity vehicles or investments in highly market sensitive areas such as residential mortgages or collateralized loan obligations “could diminish the insurer’s ability to meet unexpected cash demands.” The Dodd Frank (2010) Act-created office also expressed a touch of concern about “reliance on offshore captive reinsurers” and complex affiliated investments jacking up the complexity of the group’s structure.

Still, this federal monitoring of the deals and the state insurance departments oversight of them should not dampen the market’s enthusiasm or state insurance regulator’s approvals for deals. 

In fact, one person close to the PE interests noted that corporate lending has moved from regulated banks to private lenders who have better loan underwriting and oversight infrastructure, with investors expecting prudent use of capital. 

So, whose next?

MET is one of the only companies that has expressed interest in doing risk transfer on the legacy book without having done a transaction to date.”

The analysts’ review concluded that the risk transfer opportunities for MetLife likely involved smaller block deals in either life insurance or fixed annuities.

On Oct. 8th in an analyst note, Evercore’s Thomas Gallagher and his team also identified, in addition to MetLife, Ameriprise Financial, Principal Financial Group and Equitable Holdings as potentially next-at-bat to make a deal to sell or reinsure their annuity liabilities, as the “risk transfer engine keeps revving.”

Recent headline deals include Lincoln Financial Group’s mid-September agreement with a subsidiary of Resolution Life, to reinsure about $9.4 billion of in-force executive benefit and universal life reserves, resulting in about y $1.2 billion of capital. It plans to use much of the capital to buy back shares. Brookfield Asset Management Reinsurance Partners Ltd. just announced it had closed its previously-announced deal to reinsure up to $10 billion of annuity products issued by American Equity Investment Life Insurance Co., split between $4 billion in-force and another $6 billion liabilities on a flow basis. 

The banner year began with Allstate announcing it was selling off its life insurance unit to Blackstone for $2.8 billion. This followed 2020’s big summer splash when global investment firm’s KKR announced a deal to buy 60% of fixed annuity provider Global Atlantic, a deal valued at $4.7 billion, closing in early 2021. Based on preliminary financials at year-end 2020, the estimated value of its assets to be managed by KKR at closing was $90 billion, Global Atlantic stated in a Feb. 1 press release. 

Although not a PE transaction, Prudential Financial  did ink a deal with Fortitude Group Holdings, parent of Bermuda’s Fortitude Re, to sell a portion of its in-force legacy variable annuity block for $2.2 billion. Prudential explained in a Sept. 15 press release that the de-risking transaction for 17% of its annuity block will help it reduce exposure to traditional VAs with guaranteed living benefits and capital markets sensitivity.

To prepare for more expected deal-making, leading M&A firms are adding to their stable of insurance transactions and regulatory and legal experts. For example, Willkie Farr & Gallagher LLP announced Oct. 6th it had added Prakash “PK” Paran, as a partner in the Insurance Transactional and Regulatory Practice along with new expert reinsurance transaction counsel, adding to a slate of new partners added in April. 

Expect more additions to well-known brands.

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Pru bolsters statutory reserves by $300-plus million for unlocated GAC annuitants

Prudential Insurance Co. of America (PICA) and Prudential Retirement Insurance and Annuity Co. (PRIAC) have added about $302 million in statutory reserves to accommodate potential payouts for thousands of missing annuitants in guaranteed group annuity contracts, according to an April 2021 market conduct exam.

Prudential Financial Inc.’s subsidiary companies identified 13,911 unlocated annuitants as of January 2018 and an almost 4,000 additional missing annuitants on May 1, 2020, who were not caught in the scope fo the initial regulatory exam due to a data deficiency in the initial search criteria, the exam stated.

Statutory reserves related to the missing unlocated annuitants had been understated, thus requiring a bolstering of reserves, state regulators found.

To remedy this, Prudential posted an additional $218 million in statutory reserves as of Dec. 31, 2019 and then an additional $84 million in statutory reserves as of June 30, 2020, to address the situation. The lion’s share of the reserves added were for PICA’s missing annuitants. 

The situation stems from Prudential’s pension risk transfer (PRT) business under which plan sponsors at usually large companies buy annuity contracts from the insurer for their plan participants as a way of offloading risk. 

Prudential has been in the PRT business since 1928 and is a leader in the market. Its total annuitant population under GAC was about 1.9 million three and a-half years ago, according to the exam. 

The company told regulators that it inserted standard valuation laws as not requiring reserves for unlocated annuitants although it considers them “prudent” to hold them.

Before June 30, 2018, the company “released reserves associated with unlocated annuitants from GACs and did not hold reserves for unloaded annuitants for statutory accounting purposes,” the exam stated. This was due to the financial immateriality of the block of business, it claimed. Total GAC reserves for PCA as of year-end 2019 were $69 billion for PICA and $3 billion for PRIAC.

Hartford-based PRIAC is in the process of an acquisition proposition by a Denver-headquartered subsidiary of Great-West Life & Annuity Insurance Co., Empower Retirement. The price tag for Prudential’s full-service retirement business is $3.55 billion according to M&A documents. The transaction is subject to a public hearing by the Connecticut Department of Insurance once the application, filed Aug. 17, is deemed complete.

However, Prudential agreed it would ask for the insurance commissioner’s approval to reduce its reserves in the future for unlocated annuitants. 

The reserve impact associated with introducing a location contingency into the statuary reserve calculation was about $97 million between the two companies, according to the exam. 

Regulators did note that the number of located annuitants changes constant, with new ones added to the list and found annuitants removed. The exam did give props to Prudential for locating most missing annuitants within the first two years of their retirement date. 

The addition to statutory reserving have no impact on GAAP reserves and is said to be considered fully resolved. 

The exam, officially led by Prudential group-wide supervisor and lead state New Jersey, with the Connecticut Department of Insurance participating in relation to its domiciled company, PRIAC, found certain failures related to procedures to contact annuitants of reimbursement contracts approaching a normalized retirement date, along with some other administrative shortcomings retaliated to documentation and privacy notices. 

State regulators had given companies, under the subsidiaries of industry giant Prudential Financial Inc. until the end of September to confirm corrective actions noted in the internal audit and implement safeguards, which is not seen as a problem, as the company finished its own internal audit at the end of 2020. 

The exam is signed by David Wolf, examiner-in-charge of the New Jersey Department of Banking Insurance. Wolf and the NJ DBI did not return requests for information. 

The missing annuitant situation can be substantial to a company if it goes deep and wide enough and involves extensive and material shortcomings identified by the state regulator and federal oversight agencies.

This was the situation with MetLife Inc. a few years ago. It paid almost $20 million in a settlement with New York regulators and pay group annuity contract policyholders hundreds of millions in total in delayed or retroactive benefits to more than 13,700 missing GAC policyholders. Unlike MetLife, Prudential didn’t uncover a material weakness in its financial reporting nor did it have Securities and Exchange Commission filings or a steep penalty levied by the federal investments overseer. MetLife did try to reach the annuitants twice in letters before writing them off, which was considered inadequate by regulators. Prudential’s systems keeps the annuitants on its systems and they are searched for until found or death is confirmed, according to New Jersey’s market conduct exam findings. 

Even now, MetLife and the U.S. Department of Labor have recently locked horns over a subpoena the agency issued over the missing annuitants.

According to a summary by health and benefits firm Mercer, the DOL first opened an investigation “to determine whether MetLife, the plan sponsors that purchased GACs or anyone else involved in the transactions violated ERISA” in 2019 and then subpoenaed MetLife this year, looking for more information about how the New York company was planning on its internal fixes. MetLife argued that DOL does not have jurisdiction over state insurance law and that this was not an ERISA matter and DOL went to court to try to enforce its subpoena, claiming it does have jurisdiction over unpaid benefits under ERISA.

FIO adopts leadership role in climate change risk; eyes tools to collect & measure data for solvency & improve consumer coverage

UPDATES with NAIC COmment Sept. 7th

Aug. 31, 2021 — The Federal Insurance Office is teeing up a potential apparatus for only the collection of data from insurers on climate-related financial information as well as staking out a fleshed- out leadership role in insurance supervisory-adjacent and market-based best practices.

It is acting to fulfill an existing presidential Executive Order on climate change risk to the financial sector in its own arena of insurance and made clear it intends to undertake a thorough and all-encompassing job. The US. has experienced a dramatic increase in the frequency and severity of climate-related disasters with a corresponding increase in economic losses in the past 40 years, it stated.

FIO issued a request for information (RFI) in a formal notice Tuesday to get feedback on how it could work with the insurance industry, stakeholders and state regulators in monitoring, assessing and mitigating climate change financial risks, including through the use of data collection and a possible open-source centralized database. It also includes a sharp focus on improving insurance coverage and prices in underserved communities.

In its lengthy request, FIO suggested it might look under the hood of the existing state insurance regulatory framework to gauge whether the state system’s oversight is capable, as is, to maintain financial stability maintenance with climate change events bearing down on the country in the years ahead. 

The U.S. Treasury Department-based office asks a series of questions that reflect a need for much more detailed information from insurers on everything from underwriting to investing, and how it can best meet three climate-related priorities it has now laid out. 

In doing so, FIO was not shy about its new role in climate change risk assessment. It said it plans to increase its engagement on these issues by taking “a leadership role in analyzing how the insurance sector may help mitigate climate-related risks.” 

The three areas FIO, led by Director Steven Seitz, is addressing are insurance supervision and regulation, insurance markets and mitigation/resilience and insurance sector engagement. 

FIO stated it plans to examine existing state supervisory practices and resources.These will include, at a minimum, examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling and even stress testing.

The 2010 Dodd-Frank Act-created entity warned it could go ahead to fill any “gaps” —if any — in existing insurance supervision, if they exist, with regard to climate-related financial risks. This is a function of its intent to maintain financial stability. 

It is uncertain how FIO would go about filling any gaps it found.

The watchdog office has the power to monitor, collect data, enter into information-sharing agreements with states advise the Treasury secretary, pre-empt state law in narrow circumstances and has subpoena powers, as well, related to international covered agreements and in the less favorable treatment of a non U.S. insurer than a domestic insurer.

President Biden’s May 20, 2021 executive order told the Treasury secretary to have FIO “assess climate-related issues or gaps in the supervision and regulation of insurers” as part of the Financial Stability Oversight Council‘s analysis of financial stability, and to identify, with state regulators, the potential for major disruptions of private insurance coverage in areas vulnerable to climate change impacts…” Treasury Secretary Janet Yellen chairs the FSOC and has a broad directive to undertake climate change risk assessment and remediation work.

A big financial risk concern the new RFI revealed is a “lack of available data” for assessing climate change risk to the balance sheet of insurers. 

State insurance regulatory efforts like the Own Risk and Solvency Assessment (ORSA) that measure for risks that have a material impact on solvency might be too short-term in scope, according to FIO. “These tools may be inadequate to assess climate-related risks, particularly over a longer time horizon,” it aid in the request. FIO also warned that “only six states have regularly collected high-level qualitative data” from insurers on specific climate-related financial risk, citing the National Association of Insurance Commissionerswork

“No federal authority is collecting climate-related financial data specific to the insurance sector,” FIO stated, hinting it could step in to do so. 

In fact, one of the RFI’s 19 questions asks about the advantages and disadvantages of an “open-source, centralized database” for climate-related information on the insurance sector.

Another question asks how FIO can “assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations” so that the industry could meet the U.S. climate goals, including reaching net-zero emissions by 2050. This indicated the federal office might take a hard look into the nuts and blts of measuring risk and setting premiums.

FIO’s engagement with insurance sector “could include insurance sector consideration of underwriting activities, investment holdings, and business operations to support a low emissions economy.” It is unclear what the consideration might entail and if it would result in advice or a best practices framework. 

Climate change’s impact on the availability and affordability of insurance in the private sector is also a focus of the new FIO request.

The office indicated it intends not only to assess coverage in high risk areas and in traditionally underserved markets and communities but to also find solutions to unfair and disparate treatment and coverage inadequacies.

For example, FIO could come up with a best practices model for mitigation in disasters and ways to get more affordable coverage and wider-spread coverage to consumers that need it.

However, the industry and existing state and federal laws might put pressure on the wide-ranging scope of FIO’s intended project. Some say that FIO’s requests and plans are no surprise with no change is imminent. FIO has been operating since 2011 when it opened its doors under its first director, Michael McRaith, who served through the end of the Obama Administration and helped forge the covered agreement on reinsurance collateral with the European Union. FIO also has other roles with the the federal terrorism risk insurance program and in its many reports and consultations.

Nevertheless, FIO sees climate change creating a dangerous snowball effect in the creation expansion of pools for high risk areas run by state and federal government and impacts to economic and financial stability long-term, for which the Administration will want some solutions.

The office also plans to do a deep dive into the insurability of disasters like including wildfires, hurricanes, floods, wind damage, and extreme temperatures caused or made worse by climate change. 

The NAIC responded through a spokesperson by noting it was aware of FIO’s request for information on climate risk and insurance and that it welcomed the Treasury’s interest in the important issue of climate change risk, which it has been working on for over a decade through its membership, it said.

In addition, “there is extensive ongoing work in the areas of disclosure, pre-disaster mitigation, solvency monitoring, and innovation, as well as extensive engagement and coordination with federal and international counterparts,” the NAIC said. “To the extent FIO has questions about state insurance regulation or NAIC’s ongoing workstreams in the area of climate risk, we welcome opportunities for dialogue and collaboration to inform their work.”

Comments are due Nov. 15 through the Federal eRulemaking Portal at

Court approves insolvent LTC insurer SHIP’s rehabilitation plan

Aug. 26, 2021 — The Commonwealth Court of Pennsylvania has approved the amended rehabilitation plan for insolvent long-term care insurer, Senior Health Insurance Company of Pennsylvania (SHIP.) 

The rehabilitation will address SHIP’s “hazardous financial condition” involving about 39,000 in-force policies by increasing premiums and shaving benefits in many cases, according to the court. 

The goal is to avoid liquidation fo the company and a spill of all its liabilities into the state guaranty funds, where benefits could be more severely capped. 

SHIP has a deficit of about $1.2 billion, reflecting $1.4 billion in assets and $2.6 billion in liabilities. It was licensed in 46 states and had issued 645,000 LTC policies, covering services provided in nursing homes and assisted living facilities, as well as home-based health care services and adult day care. 

About 13% of SHIP’s LTC policyholders are on claim, and the Pennsylvania-based rehabilitator expects that number to rise to 32% by 2050., the court’s approval order stated. The order calls for the rehabilitator, the Pennsylvania Insurance Department regulators, to submit an actuarial memo on rates to use in the first phase of the effort, according to a court decision Aug. 24.

In her decision, Judge Mary Hannah Leavitt rejected the arguments of the intervening state regulators from Maine, Massachusetts and Washington State for an opt-out provision of the plan. 

She focused on how the plan would give existing policyholders as much choice as possible in their more narrow outcomes, given the state of the company.

“The Plan is structured to maximize policyholder choice in several ways. Depending on his circumstances and preferences, a policyholder may choose to continue his policy with all benefits and terms unchanged by paying the actuarially justified annual premium for that policy. Alternatively, the policyholder may choose to reduce some policy coverages as more suitable to the policyholder’s current circumstances in order to avoid or temper a premium increase,” the judge noted. 

She offered the example of a 95-year-old policyholder, as SHIP’s customers now are aging seniors.. 

This senior citizen might decide to reduce the maximum coverage period from 10 to five years instead of paying the premium required for a policy with a 10-year period of coverage, she stated. 

The rehab plan also intends to smooth out premiums for similar coverages as currently, SHIP policyholders pay very different rates for the same amount of benefits. This “discriminatory” rate structure is a results of decisions of different state regulators on SHIP’s proposed rate increases, according to Leavitt. 

“Policyholders whose state of issue has approved the requested rate increase pay more for the same coverages than policyholders whose state of issue has disapproved the requested rate increase. As a result, the former group of policyholders pays more than its fair share of the costs of providing the coverages and the latter group pays less than its fair share,” Leavitt wrote.

The Commonwealth Court’s decision following mid-May 2021 hearings.

SHIP filed an rehabilitation application in April 2020 and appointed the Pennsylvania Insurance commissioner to serve as rehabilitator of SHIP and to “ take steps to address SHIP’s financial challenges; and to protect its policyholders and other creditors.” The Pennsyvlani regualtors filed an amended plan in October 2020.

SHIP, founded in 1887 as the Home Beneficial Society, continues to see its financial condition deteriorate. Prior to the filing for rehabilitation in January 2020, it was licensed to do business by state regulators. It has not sold new policies since 2003 and was once part of  Conseco Senior Health Insurance Co.

The states with the most SHIP LTC policies in force as of Dec. 31, 2020, are Texas, Florida and Pennsylvania. The three states represented by the intervening state regulators in this matter have much fewer policies in force, according to the court opinion and order.

For more on how this affects policyholders, see:

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New York regulator balks at life insurers’ new powers to assume improved policyholder mortality

Aug. 18, 2021 –A new amendment that allows life insurance in an industry beleaguered by low returns has sparked concern from New York State insurance regulators. 

During the final meeting of its summer conference on Aug. 17, the National Association of Insurance Commissioners adopted an amendment that allows insurers to use in their calculations a “prudent” level of mortality improvement for their contracts beyond the valuation or contract-setting date. This move would allow life insurers to cast a bet that mortality improves over time when calculating the reserves they put aside to back policies.

“Insurers should not be allowed to assume that experience improves from where things are today when setting their reserves,” New York Department of Financial Services’ top insurance regulator Mi Chi To cautioned fellow commissioners at the meeting of the executive/plenary committee in a hybrid live/video-streamed meeting.

In her argument, she cited the unknowns of the long-term effects of Covid-19 on mortality as well as the pressures life insurers were under in today’s challenging persistent low interest rate environment

The sustained low interest rates impact industry reserve margins and capital adequacy, according to Fitch Ratings, as it outlined in a December 2020 wire report. These now chronic low interest rates impact all major product lines of life insurers , particularly guaranteed universal life insurance, payout and other fixed annuities, and long-term care insurance, Fitch said. In general, better mortality assumptions decrease the need for heftier reserves. 

New York’s To said that the newly-adopted NAIC measure flies in the face of not only fundamental principles of statutory accounting, but also of ultimately of consumer protection.

Despite the votes not being in her favor among fellow regulators, she advised that insurers should not be allowed to assume that experience improves “from where things are today” when setting their reserves.

It is not clear whether her concerns would lead to any action or separate regulatory guidelines at some point from the New York DFS for insurers doing business in the state. 

“At minimum, we respectfully believe that it is really an awkward time to be considering the possibility of changing mortality assumptions in the middle of during a pandemic at a time when unfortunately no one knows the lasting effects of Covid on future mortality,” To said.

The American Academy of Actuaries and the Society of Actuaries noted in a joint presentation last December to the NAIC’s Life Actuarial Task Force that Covid-19 could have potential longer-term impacts that could come from survivors with impaired health as well as from their delays in healthcare and testing during the pandemic. 

The amendment, known as 2020-10, was adopted by the task force Aug. 12 at its meeting. 

Another SOA slide deck presentation to the NAIC in August citing Centers for Disease Control and Prevention statistics showed mortality rates for 2020 increased 4.4% over 2019, excluding Covid. With Covid, they were 16.1% higher. Heart issues as a cause of death had its largest increase in 20 years in 2020, according to the statistics while lower cancer steadily continued as a trend.

Before Covid, in 2019, life expectancy at birth was 78.8 years for the total U.S. population, an increase of 0.1 year from  2018, according to the CDC

But setting sufficient reserves come first, according to New York’s executive superintendent for insurance. 

“We, of course, understand the immense pressure life insurers are under in terms of setting their reserves given how long interest rates have remained at extremely low levels. We know this is a critical issue for the industry,” she said.

She said solvency regulators “are all laser-focused” on the reserve challenges of life insurers. “We are certainly open to discussing whether there are any regulatory changes that would be appropriate to provide relief to address this issue, but we really do not believe this amendment is the solution,” To said.

Insurance commissioners from New Mexico and Louisiana joined New York in opposition to the measure, saying they shared her concerns about the new allowance to assume mortality improvement past the valuation date of life insurance policies. 

Biden to FSOC: Get to Work on Climate Change Financial Risk Now

May 21, 20121 — The Financial Stability Oversight Council got its marching orders Thursday from the Biden Administration –make climate-related financial stability and other financial risks a priority.

The Executive Order is a plan to put this in place throughout the federal government, to be led among the financial regulatory agencies by Treasury Secretary Janet Yellen, chairperson of FSOC. The approach is part of a “whole-of-government approach to Mitigating Climate-Related Financial Risk,” according to the EO.

In a statement, Yellen said she will be prioritizing this work while noting that, back in March, she had kicked off her first FSOC meeting as chair (she had been an FSOC member as Federal Reserve Board chair previously and gave a shout-out to the work the Fed is doing on climate risk) discussing climate change.

Highly-engaged FSOC members have already begun analyzing the issues within their jurisdictions, Yellen said in a statment following the climate-related financial risk EO yesterday.

The next FSOC meeting is scheduled for June 11. Although the preliminary agenda calls for the meeting includes money market mutual fund reform and the transition from LIBOR and money market mutual fund reform, climate change discussions are now a prioerity and will likely get attention.

Yellne promised yesterday that FSOC will work with its members to bolster climate-related financial disclosures and other data dources to improve measuring potential risk and exposure.

Yellen is tasked as FSOC chair under the EO with publishing a report before the end of the year on ecommendations to mitigate finanial stability risks, including in the insurance sector. In the insurance sector, FSOC has a voting independent insurance expert member, Tom Workman, and a nonvoting member, the director of the Federal Insurance Office, Steven Seitz. There are 10 voting members total. Five members who do not have a vote act in a an advisory role.

“This work will be challenging, and we cannot delay this hard work any longer,” Yellen said in her statement.

Yellen intends to increase the scope of the climate change risk assessment and mitigation efforts as part of a global effort, as well.

“I will also work to ensure that Treasury engage fully with our global partners through the G-7, G-20, and Financial Stability Board, helping to promote a strong and consistent global approach. Our pensions, our savings – our future livelihoods – depend on the financial sector to build a more sustainable and resilient economy. We all need to have the best tools and the best data to make well-informed decisions,” the Treasury secretary said.

Sen. Dianne Feinstein, D-Calif., who authored the pending  Addressing Climate Financial Risk Act, to help ability of federal regulators deal with climate change risk within the financial system, responded to the EO by noting that risks are greatly impacting the insurance sector and its customers.

“Reducing our carbon emissions is the best tool to fight climate change. But climate change is already creating a strain on our financial system. For instance, wildfires are driving up property insurance cost, making it less available. Farmers are being forced to contend with more severe droughts. And sea-level rise is undermining homes and critical infrastructure,” Feinstein said in a press release yesterday following the EO,” Feinstein stated in a press release.

Feinstein also wrote a letter to Seitz at FIO last September asking for a report on the effect the scourge of increased wildfires have and will continue to have on private insurance markets and recommendations to make the market more affordable in the face of these increased risks.

A digital review of several most recent FSOC annual reports found that climate change and severe weather like wildfires and rising sea levels were not even mentioned. When fire was discussed it was only in reference to “fire sales,” or the disorderly liquidation of assets to meet margin requirements or other urgent cash needs.

This is happening not a minute too soon said a source previously associated with FSOC. This person noted some California insurers have been at the forefront of trying to assess and mitigate climate change risk from the beginning.

In a March 2021 article for American Progress calling for a more vigorous FSOC, its associate director for economic policy Gregg Gelzinis broke down the threats: “The increase in frequency and severity of wildfires, floods, hurricanes, droughts, and other weather events will decrease the value of physical property, disrupt supply chains, compress corporate profits, drive up insurance claims and reduce the availability of insurance, and generally limit the ability of affected borrowers to repay debt,” he wrote.

“Climate-driven environmental shifts, such as rising sea-levels, will compound these impacts.” Financial institutions could then suffer massive losses, triggering further loss exposure for investors at all levels of the financial system, Gelzinis warned.

However, at the state level, some insurance commissioners have been fully engrossed in climate change issues for multiple years now.

Washington State Insurance Commissioner Mike Kreidler has held summits on the topic and devoted his department’s resources to it. The National Association of Insurance Commissioners will be hosting a panel next week as part of its annual international issues forum on climate risk and resilience. The May 26 discussion will be moderated by Andrew Mais, NAIC secretary-treasurer and Connecticut’s commissioner of insurance, who has been actively engaged on the topic. California’s insurance department has a climate change working group under Commissioner Ricardo Lara.

The NAIC has an executive level climate and resiliency task force and adopted an insurer climate risk disclosure data survey in 2010. However, in response to its latest survey released by the NAIC and its Center for Insurance Policy and Research late last November, researchers found that “few insurers” had reported changing their investment strategy in response to considerations of the impact of climate change on its investment portfolio. The NAIC has a nonvoting member on the FSOC, currently Eric Cioppa, Maine’s insurance superintendent and a recent NAIC president.

The EO also requires the national climate advisor and the director of the National Economic Council to develop, a comprehensive climate-risk strategy to zero in on any and all climate-related financial risk to government programs, assets, and liabilities. This work should be be done in 120 days, it says, and will also identify the public and private financing needed to reach economy wide net-zero emissions by 2050. The work must also advance economic opportunity for workers, especially in disadvantaged communities and communities of color.

‘Over and done with:’ China Oceanwide withdraws Genworth application from Virginia SCC

April 23, 2021 — China Oceanwide Holdings Group Co. Ltd. asked for its application to acquire Genworth Financial Inc. to be withdrawn in a letter to Virginia regulators, formally ending an almost five year attempt to purchase the long-term care insurer.

The acquisition was publicly proposed in October 2016, although Genworth had been courting would-be buyers privately in the months before it made its choice to go with the Beijing-based conglomerate, offering $5.43 per share or $2.7 billion.

In the end, after numerous state federal regulatory approvals and re-approvals were won in the U.S., and even after Genworth sold its majority stake in its mortgage insurance subsidiary in Canada to remove any hurdles there, China Oceanwide could not raise the funds needed to finance the deal, and Genworth elected to terminate the merger April 6.

China Oceanwide’s letter to the Virginia State Corporation Commission through its lawyers was short and curt. It noted that the application had been approved by the SCC’s Bureau of Insurance on Jan. 11, 2019, and re-approved on March 31, 2020.

“We are submitting this letter to inform the Bureau that pursuant to the notice of termination, dated April 6, 2021, provided on behalf of Genworth to China Oceanwide, Genworth has exercised its right to terminate the Merger Agreement and abandon the Proposed Acquisition pursuant to Section 8.2(a) of the Merger Agreement, with such termination effective as of April 6, 2021. In light of the foregoing, China Oceanwide respectfully requests that the Application be withdrawn from the Commission and the Bureau,” the filing on Bland & Sorkin letterhead said.

Thus ends the saga, although Genworth is planning on moving forward with an IPO of its mortgage insurance subsidiary, which it announced earlier this week.

 Although no state regulators have commented despite inquiries and Genworth is in a quiet period before earnings and generally cannot comment, one equity analyst wrote after Genworth terminated the merger that it could face solvency issues in the future without the cash infusion of about $525 million to be given to Genworth’s. life insurance businesses. 

“Our understanding is that GNW has no intention of supporting GLIC with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” warned Evercore ISI analyst Thomas Gallagher in a research note April 7. The note regarded Ameriprise Financial, Inc., which had reinsured half of its LTC block, about $2.7 billion, Genworth’s subsidiary, Genworth Life Insurance Co. or GLIC.

The analyst was gaming out what would happen in a dire solvency event to Ameriprise’s reinsurance contract with Genworth, as it has reinsured half of its LTC block to GLIC, which it noted had year-end RBC ratio of 229% “and so it is probably okay for now, but worth watching if the RBC dips below 200%, a level at which regulatory oversight and surveillance would increase,” the analyst wrote.

The life businesses must rely on their consolidated statutory capital of about $2.3 billion as of the end of the third quarter 2020, stated Tom McInerney, Genworth’s CEO, on a conference call in February to discuss year-end earnings. He touted though, the fact the company secured, on a cumulative net present value basis about $14.5 billion of approved LTC premium rate increases since 2012. “As we’ve discussed in the past, we have no plans to infuse additional capital into, or extract capital from, our U.S. Life Insurance businesses,” McInerney stated.

Gallagher wrote that Ameriprise’s total potential total economic exposure to LTC is $5.4 billion.

To market, to market: Genworth Financial files intent to IPO mortgage insurance sub after scuttling Oceanwide deal

April 19, 2021 — Genworth Financial is planning on going to market with its mortgage insurance subsidiary, triggering its Plan B in the wake of its collapsed deal with China Oceanwide Holdings Group Co., Ltd. 

In a filing for a proposed offering April 19 with the Securities and Exchange Commission, Genworth Mortgage Holdings Inc. stated that recent data reveals continued optimism in the resilience of the U.S. housing market while more available and attractive risk transfer alternatives have improved the mortgage insurance industry’s risk profile.

Genworth hasn’t yet determined the number of shares to be offered nor the price range for the proposed offering.

In deciding the time was ripe for a future IPO, GMHI also touted what it sees as the strength, durability and diversity of its customer relationships among its 1,800 active customers across the mortgage origination market. These include national banks and other mortgage lenders, such as local and community bankers and credit unions.

An index from the National Association of Realtors measuring homebuyer’s mortgage payment ability using median levels of income and pricing increased to 170 in December 2020, up from 158 in 2017, according to GMHI’s new filing. 

Total capitalization of the mortgage company is listed as about $4.62 billion as of Dec. 31, 2020.

Genworth Financial mentioned it was weighing the possible spin off its mortgage insurance business well over a year ago, before the Covid-19 pandemic struck the globally, while it was still struggling to complete its acquisition by China Oceanwide, mainly through gaining all remaining jurisdictional regulatory approvals. This was before funding the proposed acquisition, first announced in October 2016, became the last, final and probably fatal issue for deal. Genworth Financial called off the merger two weeks ago.

Genworth Financial, the parent, expects to indirectly own at least 80% of the mortgage insurer’s common stock following the deal’s completion. A tax allocation agreement between the parties depends on the parent company’s continuing ownership of at least that much. 

“Our parent’s indebtedness and potential liquidity constraints may negatively affect us,” GMHI warned in the filing. 

GMHI operates under GSE (government sponsored enterprises like Fannie Mae and Freddie Mac) restrictions, which mean that’s liquidity must not fall below 13.5% of its outstanding debt. 

However, if Genworth Financial no longer owns directly or indirectly 50% or more of our common stock, Fannie Mae has agreed to reconsider the GSE restrictions.

Parent company Genworth sold all of its common shares in Genworth Mortgage Insurance Australia Ltd. in March to help fund its ongoing settlement with AXA, leaving a balance owed of $338 million, which is subject to increase, the mortgage insurance company stated in the filing. 

Genworth told the mortgage subsidiary that under the AXA settlement, the holding company plans to repay or reduce upcoming debt maturities with money made from the offering of its 2025 senior notes. 

The significant financial settlement with AXA was announced in July 2020 and involves losses from allegations of misspelling payment protection insurance underwritten by two companies that AXA acquired from Genworth in 2015. The liability case was argued under the High Court in the U.K. Under the terms of the settlement, Genworth had to pay AXA $125 million last July, in addition to a former interim cash payment the year before and deferred cash payments totaling approximately about (converted from pounds sterling) $442 million in two installments in 2022 and to pay a significant portion of all future mis-selling losses incurred by AXA, which the company will invoice each quarter. 

J.P. Morgan and Goldman Sachs & Co. LLC will be the joint book-running managers for the proposed offering.

The company has been buffing the image of its mortgage insurance subsidiary for awhile. North Carolina-based Genworth Mortgage Insurance rolled out a colorful and detailed 29-page investor presentation Aug. 17, 2020, touting the subsidiary company’s strengths, such as leadership, capitalization, risk management and operating performance over the years.

The presentation, led by Dan Sheehan, Genworth CFO and CIO, Genworth Mortgage Insurance CEO Rohit Gupta and CFO Dean Mitchell, served as a primer in the structure of the company as well as a lesson in how Genworth Mortgage is very much a separate entity from that of Genworth, the long-term care insurer, which faces a set of very different challenges.

Photo by Laura James on

State insurance regulators challenge SHIP rehab plan, wonder if policyholders will get a fair shake

April 10, 2021 — Parties to the rehabilitation of Senior Health Insurance Co. of Pennsylvania, or SHIP, are disputing the best way to treat insolvent long-term-care insurer’s policyholders when billions of dollars and end-of-life care coverage are at stake. 

Rehabilitators and at least a dozen state insurance commissioners intervening, suing or supporting the interveners in the case have stepped up their rhetoric and involvement on how SHIP should proceed. They did so in pre-hearing memos filed April 5th with the Commonwealth Court of Pennsylvania.

While those tasked with attempting rehabilitate the insurer want to avoid liquidation, some state regulators definitely don’t believe that their policyholders will be better off with the amended rehabilitation plan. 

These state insurance regulators dove right into the math of the finances while the rehabilitators focused on choice and quality rather than the ultimate purse holdings. 

The rehabilitation plan “would require policyholders to absorb more than$800 million more than a liquidation. The Plan balances the SHIP deficit on the backs of the policyholders rather than bringing in additional funds through the guaranty associations,” argued commissioners from the intervening states of Massachusetts, Maine and Washington State, the latter of which hosts the longest-serving insurance commissioner in history, Mike Kreidler.

These regulators were joined with new letters of support from commissioners from Connecticut, Louisiana, Maryland, Mississippi, New Jersey, South Carolina, Vermont and Wisconsin.

 “The only evident purpose of the Plan is to avoid triggering the guaranty associations, when they were created to protect policyholders in the event of an insolvency such as this,” the intervening insurance regulators stated. 

When state guaranty associations are triggered in a liquidation, limits for benefits range from about $100,000 to a maximum limit of $615,525 in California, with the vast majority of states (42 states plus the District of Columbia) having a threshold of $300,000. 

  • SHIP facts as described in court memos: 
  • 41,000 policyholders
  • $2.6 billion (almost) in liabilities 
  • $1.4 billion (almost) in assets
  • $1.224 billion — SHIP funding gap as of June 30,2020
  • 86 — average long-term care policyholder age
  • 89 — average age of SHIP claimant 
  • 47 — Number of states involved should guaranty funds be triggered
  • 1/29/2020 – Commonwealth Court of Pennsylvania enters rehabilitation order 
  • 4/22/2020 Rehabilitators, led by Pennsylvania Insurance Commissioner Jessica Altman, file their plan with Court 
  • 10/21/2020 Rehabilitators file amended plan after considering comments 
  • 05/03/21 Rehabilitators will file an updated proposed rehabilitation plan by this date for Court hearing

Life insurers, health insurance and HMOs pay into the fund to varying degrees depending on state laws. While this is straightforward in amount, the rehab plan seeks to fill the funding gap through a more complex system of increasing premiums and/or reducing benefits, so policyholders will often have to make some difficult decisions in terms of their coverage or how much they can afford to pay to keep their rich policies. 

The rehabilitators said they were anticipating the state regulators’ arguments and said the solution is a lot more complicated than easy math.

In one of the plan’s policy modifications options, policyholders would provide “at least the benefit value that the Guaranty Association would provide in liquidation for every policyholder whose current policy provides benefits in excess of those limits,” according to the rehabilitator’s memo. This means that these policyholders might indeed do better in liquidation if their benefits are less than what the state limit is. 

Other insurance commissioners have sued the rehabilitation plan. South Carolina Insurance Director Ray Farmer, the immediate past president of the National Association of Insurance Commissioners filed Dec. 10, for a declaratory judgment that the proposed plan is invalid and unenforceable to the extent it does not comply with South Carolina’s regulatory authority to set rates and benefits. The matter is pending in federal court.

Jim Donelon, Louisiana’s long-standing insurance commissioner, filed a complaint in U.S. District Court in September 2020 seeking a declaratory judgment that the rehabilitator’s cannot impose rate and benefit modifications on Louisiana policies without complying with Louisiana’s laws and regulations, and also seeking as well a permanent injunction against implementation or enforcement of the proposed plan if it is approved.

 “In the case of a company like SHIP with its unique insurance coverages, a simple arithmetic computation cannot suffice to determine whether policyholders fare better or worse under particular circumstances,” they stated.

“Approximately 85% of SHIP’s policyholders are offered at least one option under the amended plan no less favorable than what they would have in liquidation, and perhaps materially better,” they noted in their memo.
Their memo said it offers policyholder choices, unlike a liquidation would, and allows an array of coverage cuts and premium hikes to suit individual circumstances, which include ailments and longevity expectations. Other considerations that are material but not easily quantified, they argued, include inflation protection percentages offered, lifetime benefits, or just five-year or two-year benefit periods, elimination periods, indemnity versus reimbursement models and benefit triggers.

The rehabilitators offered an example of a policyholder given a six-year benefit period at substantial cost when, due to her heath condition, she reasonably does not expect to live more than one or two more years.

Another example they offered is the ability to have up to 30 months of coverage for no additional premium for some policyholders, an alternative that would not be a available in liquidation, “even if the plan offered in liquidation might have more valuable benefits.”These choices offered are more meaningful and cannot be quantified readily, the rehabilitators argued. 

In addition,“a substantial number of policyholders’ policies and policy rates will be unaffected by the plan,” they said. These policyholders will have at least one option where they will receive at least as much in benefits as would be provided by their respective guaranty associations. Using “simple arithmetic comparison,” it might seem as if about 15% of SHIP’s policyholders wouldn’t do as well under the plan as they would in liquidation, they acknowledged.

The rehabiliators used legal and regulatory precedent to argue that although some individual interests would be more adversely affected or compromised, the plan was designed on the whole to be fair and equitable to policyholders, creditors and the public in general, the constituency of the whole overriding the individual. 

Courts haven’t adopted a formulaic or mathematical test for satisfying the standard that policyholders as a group should fare at least as well under a rehab plan as they would have in liquidation. The courts have not, however, adopted a formulaic or mathematical test for the satisfaction of this standard.

The modification mechanism in the rehab plan uses is designed to “maximize policyholder choice by relying on each individual’s circumstances and chosen preferences—an invaluable benefit to policyholders which would not be available if SHIP were liquidated immediately and the state guaranty associations assumed responsibility for coverage,” the rehabilitators argued. 

However, the rehab plan will allow objecting states to opt-out and offer their own rates for policyholders under a revised rate proposal, according to the memo. 

There are others intervening, including various insurance agents and brokers’ who allege the plan “unlawfully seeks to suspend [their] rights to receive earned commissions,” as well as the National Organization of Life and Health Insurance Guaranty Associations. NOLHGA its expected to offer possible modifications to the plan and discuss the impact on the guaranty associations could be impacted by the plan, both in terms of potential future obligations to policyholders and as claimants against SHIP’s estate.

The entire rehabilitator’s memo with analytics and presentations and lawsuit updates can be found here: 

The entire interveners memo with exhibits can be found here:

Litigation from Donelon and Farmer can be found here: 

LTC New Blotter, April 2021: Curtains and Fresh Starts — Genworth, GE and the Regulators

April 6, 2021 —

1 . The prolonged merger agreement between China Oceanwide and Genworth Financial is finally over, after Genworth pulled the plug after the market closed April 6. Oceanwide was not able to show Genworth the money, and wants to have the freedom to move forward with a likely partial IPO of its U.S. mortgage insurance business. No time frame was given for such an offering.

Stateside, this could mean Genworth’s long-term care insurance business could deteriorate faster, analysts warned. “Our understanding is that GNW has no intention of supporting GLIC [Genworth Life Insurance Co.] with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” said Evercore ISI equity analyst Thomas Gallagher in a research note April 7. What happens to Genworth’s enormous legacy LTC block will be of regulatory interest without the anticipated cash infusion from China Oceanwide. Gallagher’s research note focused on the news’ effect on covered company Ameriprise Financial, which has reinsured half of its LTC block to Genworth’s life insurance subsidiarity, which is probably okay for now with a 229% RBC ratio at year-end, he said. A 200% RBC is the threshold for regulatory involvement, generally. The company also has over $1 billion in debt coming due later this year.

The curtain-call on the $5.43 per share deal came as no surprise but it did come more than three months after the 17th and final extensions of the merger agreement, on Dec. 31, 2020. Genworth’s board of directors “has concluded that Oceanwide will be unable to close the proposed transaction within a reasonable time frame and that greater clarity about Genworth’s future is needed now in order for the company to execute its plans to maximize shareholder value. Thus, the board decided to terminate the Oceanwide merger agreement,” stated James Riepe, Genworth’s board chairman in a press release. The LTC insurer left the possibility of working together on the table. “Genworth continues to share Chairman Lu‘s vision of bringing long-term care solutions to the aging population in China.

Both parties believe there are significant, compelling opportunities to address critical societal needs outside of the U.S,” stated said Genworth president and CEO, Tom McInerney. Genworth, over the course of about four and a-half years jumped through scores of hoops to try to close the deal, from getting regulatory approvals in key states, promising to contribute $100 million to New York-domiciled insurance company, Genworth Life Insurance Co. of New York, selling its interest in its Canadian mortgage insurance unit after failing to get a timely regulatory approval there and even having some LTC employees begin to learn Mandarin.

The Richmond, Va.-based company is focused in its revised strategic plan so it has been settling debt and legal matters in the last year or so, including the sale of Genworth’s interest in its Australian mortgage insurance business, its $750 million debt offering at the U.S. mortgage insurance holding company and the negotiation of a settlement with AXA S.A.

On the plus side for the business, Genworth has been steadily getting needed rate increase requests from states and won a recent lawsuit in New Hampshire where its life company challenged amended regulations promulgated by the state’s insurance department retroactively limiting rate increases for LTC insurance policies for over 6,000 New Hampshire residents, according to the opinion summary. Genworth argued against this under the takings clause of the state and federal constitution. The New Hampshire Supreme Court concluded that the regulations invalid and reversed a lower court opinion. The state Supreme Court ruled in February “that New Hampshire’s regulation that places certain caps on long-term care insurance premium rate increases exceeds the Insurance Commissioner’s rulemaking authority and, therefore, is invalid,” noted law firm Faegre Drinker Biddle & Reath LLP on its blog.

“The litigation around this matter remains pending and open, therefore we are unable to comment beyond that.The Department has and will continue to review the ruling to understand its implications and determine if any interim actions are necessary on long term care insurance rates,” a spokeswoman for the New Hampshire department said last month.

It is unclear what will be the fate of Genworth’s North Carolina shell company which was to house new, modern hybrid-type LTC products under the proposed merger with China Oceanwide. The merger proposition spanned three presidencies in its negotiations, numerous delays, hard-won jurisdictional approvals and re-approvals, a dance with HONY Capital on its potential investment in the Chinese conglomerate — and many lawyers.

2. UPDATE April 11, 2021: DUE to new and unforeseen CONFIDENTIAL CoRPORATE LEGAL Strictures, this personnel move will not take place. Both parties are said to be disappointed. Bodnar, WHO WAS SET TO MODERNIZE THE LTC WORLD UNDER GE’S STEWARDSHIP is currently at Oliver Wyman where he will remain at least through mid-April. Ex-Genworth chief actuary, Vince Bodnar, who had continued his career as a partner at Oliver Wyman after departing Genworth about two years ago, will be joining GE on or around April 19th as its chief claims modernization officer, he says, to help with its LTC portfolio through a new approach to claims reduction among its insurers and retrocessionaires. This modern approach utilizes pre-claims intervention models under development now and gleaned from membership-driven continuing care communities in the U.S.

The veteran actuary will be responsible for developing and implementing these pre-claims intervention programs along with other similar initiatives with LTC blocks GE has reinsurered over the years even as it has run up great liabilities for these benefit-rich policies. It has been more than three years since GE Capital announced that after reserve testing its run-off LTC portfolio, North American Life & Health, would take a GAAP pre-tax charge of $9.5 billion for the fourth quarter of 2017, and make statutory reserve contributions of about $15 billion over seven years.

Bodnar, who will report to Tim Kneeland CEO of NALH in Kansas, will help conduct pilot programs to measure impacts of pre-claims interventions in health, wellness and social behaviors to help policyholders stay healthier and more autonomous for longer, pushing off the need for more expensive facility-care.

Bodnar has said that actuaries are learning that the most effective interventions are not health or medical interventions. Instead, they are related to social, community and family caregiver support. The cost of care for the aging has risen far beyond the amount at which long-ago actuaries first priced older LTC policies, and now the industry must figure out ways to address the mammoth shortfall.

On a recent webinar hosted by Oliver Wyman and insure-tech provider Montoux , Bodnar said the LTC insurance industry has close to $200 billion in reserves for their in-force blocks but that the present value of future benefits is well in excess of that.

“If you can improve outcomes by 10%, that is a $20 billion financial impact,” he said during the webinar. “There is a prize besides saving the entire system money here,” Bodnar said. “Most people do want age in their home, reserve value, contribution to society. We owe into our elderly, our society, age in place as long was we can.” There are regulatory hurdles to overcome, from privacy concerns to discrimination worries to rebating issues. At least one leading insurance commissioner has said that regulators are willing to listen.

3. The National Association of Insurance Commissioners will be hosting its executive-level LongTerm Care Task Force Committee April 9 at its virtual spring national meeting.

Reports from subgroups on the multi-state rate review process, reduced benefit options and LTC financial solvency are expected. The rate review process is central to the granting of future premium hike requests across the nation as it strives to create a more consistent approach for reviewing rate increase filings that make sense on an actuarial basis and do not lead to one state subsidizing another’s artificially lower increases. Consumer advocates are concerned about many of the factors at play, including the potential and incidence for lapses after rate increases and lost asset protection after choosing a reduction in benefits from the original policy. Previously, the NAIC’s Executive Committee and the Internal Administration Subcommittee had also considered hiring an outside legal consultant to help them on policy issues regarding the restructuring LTC policies.