Executives at Genworth Financial say the looming Penn Treaty insolvency could help Genworth persuade state insurance regulators to approve more long-term care insurance premium increases.
The Richmond, Virginia-based company has been a major source of mortgage insurance, life insurance and annuities, but it’s been especially prominent as a player in the private long-term care insurance market. U.S. long-term care insurance issuers have been struggling with financial problems caused by low interest rates, long-term care insurance policyholders’ tendency to cling to their policies more tightly than expected, and long-term care insurance claimants’ tendency to use more policy benefits than expected.
Thomas McInerney, Genworth’s president, said today during a conference call with securities analysts that many insurance regulators find approving large long-term care insurance premium increase requests politically difficult.
But, when regulators fail to approve the premium increases insurers need to keep blocks of long-term care insurance business solvent, that “can lead to significant problems,” McInerney said.
Penn Treaty was a relatively small Pennsylvania-based insurer that helped create the modern long-term care insurance industry. Regulators took it into receivership after deciding that the company’s obligations were growing faster than the company’s ability to pay claims, and the company had a hard time getting state regulators to approve rate increases.
In most states, the guaranty funds that back life insurers lack significant pre-funded reserves. A guaranty fund handles a big insolvency by sending assessment bills to its state’s surviving life insurers.
If an long-term care insurance issuer fails because regulators fail to approve premium increases, “the insurance industry has to fund the state guaranty fund assessment,” McInerney told the securities analysts.
Most state insurance regulators recognize the need to protect life insurers against big guaranty fund assessments, and those regulators are likely to continue to approve actuarially justified long-term care insurance premium increases, McInerney said.
McInerney and other Genworth executives appeared on the conference call to discuss the company’s earnings for the third quarter, and the company’s pending acquisition by Beijing-based China Oceanwide Holdings Group Co. Ltd.
Genworth is reporting a $332 million net loss for the third quarter on $2.1 billion in revenue, compared with a $238 million net loss on $2.1 billion in revenue for the third quarter of 2015.
The net loss figure includes a number of unusual charges, including adjustments to assumptions about how big long-term care insurance policyholders’ future claim costs might be. The loss from continuing operations, before income taxes, fell to $125 million, from $351 million.
Genworth stopped active sales of new life and annuity products earlier this year after it faced new financial concerns. During the third quarter, new sales of fixed annuities fell to $1 million from $260 million in the third quarter of 2015.
Sales of universal life fell to $1 million from $2 million.
Sales of individual long-term care insurance coverage fell to $2 million from $7 million.
Group long-term care insurance outperformed other company units: Sales of group long-term care insurance increased to $3 million during the latest quarter from $1 million.
During the conference call, Genworth gave some numbers that may show much consumers still value long-term care insurance benefits.
Genworth has already implemented waves of long-term care insurance premium increases in an effort to improve long-term care insurance block profits. The company assumed that some policyholders would agree to pay the higher premiums, but that others would cut their out-of-pocket costs by accepting lower levels of long-term care insurance benefits.
Kelly Groh, Genworth’s chief financial officer, said that for now, at least, premium increases seem to be doing more to increase premium revenue than to cut benefits obligations.
“While the premium component of rate actions continues to increase, we are seeing a lower impact related to policyholders electing to reduce benefits or take the nonforfeiture option,” Groh said.
That could be because long-term care insurance policyholders value long-term care insurance benefits so highly they will pay more to keep the benefits in place.
But Groh noted that the high persistency numbers could also be related to how the company implements rate increases, and when the policyholders’ responses to increases are due.
China Oceanwide deal
McInerney said during the call that Genworth sees the pending acquisition by China Oceanwide as a deal that should appeal to regulators.
Genworth is trying to restructure the company so that the units that sell ordinary life and annuity products no longer have to be directly financially responsible for the main long-term care insurance unit.
China Oceanwide has agreed to contribute $1.2 billion to that “de-stacking,” and it’s a patient, privately held company, not a publicly held company that faces pressure to meet quarterly earnings targets, McInerney said.
Lu Zhiqiang, China Oceanwide’s chairman, is intensely aware that China is a country with a rapidly aging population, and about 200 million people over the age of 65, McInerney said.
“We could possibly help China Oceanwide establish a successful LTC insurance business in China,” McInerney said.
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