Continental General Insurance Company, an insurance company subsidiary of HC2, is paying Humana $10,000 to acquire the stock of Humana's KMG America Corp. subsidiary.
KMG America is the parent of Kanawha Insurance Company, a company that is providing stand-alone long-term care insurance for about 31,000 people. Humana has been running the Kanawha LTCI business as a "closed block" business, meaning that it continues to administer existing policies but does not sell new LTCI policies.
HC2 and Continental General
HC2, a New York-based conglomerate, invests in companies in many different industries. In 2015, the company hired James Corcoran, a former New York state insurance superintendent, to help it get into the LTCI business.
Stand-alone LTCI was a hot product in the 1990s, but the product has fallen into disfavor in recent years because of strict state rate increase regulations, the effects of prolonged low interest rates on insurance company earnings on the assets supporting the LTCI obligations, and the effects of insurers' problems with predicting policyholder behavior.
Continental General, which has administrative offices in Austin, Texas, has focused on getting control of closed blocks of LTCI business from insurers that no longer want the business. In many cases, companies that now went to dispose of closed blocks of LTCI business must put more cash into the blocks, or pay the acquirers in some other way, rather than collecting significant cash payments from the acquirers.
As a result of past deals, Continental General now provides long-term care insurance, life insurance and annuity coverage for about 93,000 people, according to Humana.
The Deal Terms
HC2 says in its press release about the KMG/Kanawha deal that, as of June 30, Kanawha had about $150 million in statutory capital and surplus, with about $2.3 billion in cash and invested assets.
Once the Humana deal is completed, the company would have about $3.5 billion in cash and invested assets, HC2 says.
Humana says in its own release that it expects to record a net loss of $400 million in connection with the transaction. That impact would include a $900 million pretax loss and the release of $500 million in tax benefits.
A copy of the KMG stock purchase agreement filed with the U.S. Securities and Exchange Commission shows that Humana has staffed KMG through an arrangement with an outside employer of record since the end of 2007. HC2 has agreed to continue the benefits of any "business employees" who end up staffing KMG after the deal is completed under roughly the same terms as were in effect before the deal was completed.
In one section of the deal agreement, Humana promises that Kanawha did all that it could to make sure the insurance agents who wrote its business were properly licensed and appointed.
In a second section in the agreement, HC2 agrees to stop using Humana's name as quickly as possible, but Continental Generation would have permission to continue to use existing supplies of printed materials that carry Humana's name until the supplies ran out.
In a third section, the parties note that Humana is still trying to find other buyers, reinsurers or coinsurers for all or part of the Kanawha business. Under the terms of that provision, Humana would get to collect any payments the other parties make, but it also would have to make any payments owed to the other parties in connection with those deals. HC2 would not have to pay the other parties.
Humana and HC2 hope to complete the deal by Sept. 30, 2018.
The deal is subject to approval by the South Carolina Department of Insurance.
Philip Falcone, president of HC2, says in a statement that the Kanawha deal "marks another significant milestone in the growth of our insurance subsidiary."
Since HC2 got into the LTCI business, it has "looked at numerous potential acquisitions in the space."
Falcone appears to imply in his statement that that the company is ready to do more deals.
"We believe this transaction is further validation of our platform and our strategy and represents industry recognition as the counterparty of choice for future LTC transactions," Falcone says. "We look forward to leveraging this platform to generate meaningful growth."
Humana indicates in its own press releases that it believes Continental General is serious about being in the LTCI block administration business.
"Humana recognizes that the acquisition of [the Kanawha] business by a company like CGIC will benefit policyholders because of CGIC's significant experience with and concentrated focus on the commercial long-term care insurance market," Humana says.
—Read Long-Term Care Insurance Block Buyer Briefs Investors on ThinkAdvisor.