Executives from Genworth Financial Inc. said Wednesday that the company’s Genworth Life Insurance Company (GLIC) unit could see its solvency level deteriorate if state insurance regulators fail to approve $6 billion in additional long-term care insurance (LTCI) rate increases.
(Related: Genworth Reports Higher Earnings)
Kelly Groh, the Richmond, Virginia-based insurer’s chief financial officer, talked about GLIC’s risk-based capital (RBC) ratio and overall capital levels during a conference call the company held to go over first-quarter earnings with securities analysts.
The company reported that its long-struggling LTCI unit generated $42 million in net income for the quarter on $1.1 billion in revenue, compared with a $27 million net loss on $1 billion in revenue for the year-earlier quarter.
The LTCI unit did a little better than GLIC’s closed blocks of life and annuity business.
But GLIC’s RBC ratio fell to 195% in the first quarter, from 198% in the fourth quarter of 2018, and from 279% in the first quarter of 2018, according to Genworth.
RBC Ratio Terminology
An RBC ratio is a standardized indicator that shows roughly how well an insurer is equipped to meet its insurance and annuity obligations.
Groh told securities analysts that Genworth reports RBC ratios expressed in terms of the “company action level,” rather than in terms of the “authorized control level.”
State insurance regulators take an insurer over when its risk-based capital level falls under the authorized control level.
State regulators require an insurer to explain how it will improve its finances when its RBC level falls to the company action level, which is 200% of the authorized capital level.
GLIC’s 195% RBC ratio is 195% of the company action level RBC ratio level, but 390% of the authorized control level RBC ratio level, Groh said.
GLIC’s RBC Ratio
Groh emphasized to the securities analysts that Genworth is not taking responsibility for helping GLIC make up for what Genworth believes to be LTCI premiums that are too low.
Genworth is in the process of getting regulator permission to be acquired by China Oceanwide Holdings Group Co. Ltd. of Beijing.
Genworth has agreed, in connection with the deal, to provide $175 million for GLIC.
“The contribution to GLIC is a special one-time commitment made in conjunction with the proposed transaction with Oceanwide,” Groh said. “As we have indicated previously, it is our intention to manage the U.S. life entities on a stand-alone basis, with no future plans to infuse capital into these businesses.”
To meet policyholder obligations, GLIC must count on the one-time $175 million contribution, its $1.9 billion in current statutory capital, and actuarially justified rate actions, Groh said.
Past LTCI Rate Increases
Groh and Tom McInerney, Genworth’s chief executive officer, said Genworth increases LTCI reserves when it believes that trends in LTCI claims and the percentage of LTCI policyholders who keep their policies in force makes that necessary.
In the first quarter, for example, fewer LTCI policyholders dropped their policies than the year before, and the percentage who filed new LTCI claims, and the severity of those new LTCI claims, increased, McInerney said.
“Achieving actuarially justified premium rate increases and benefit reductions through our LTC rate action plan remains a high strategic priority for Genworth,” McInerney said.
From 2012 through the first quarter of 2019, Genworth has succeeded at getting state regulator approvals for LTCI premium approvals with a total net present value of about $11 billion, McInerney said.
Groh said that, in the first quarter, Genworth received 24 new state LTCI premium increase approvals in the first quarters, with a net present value of about $500 million. Those approvals will increase premiums for the affected policyholders an average of 62%, she said.
Future LTCI Rate Increase Reviews
Groh said Genworth sees regulators in most states approving actuarially justified rate action requests.
“These approval amounts have been in line with assumptions used in our margin testing,” Groh said.
Genworth estimates that it still needs to get approvals for additional LTCI premium increases with a net present value of about $6 billion, Groh said.
Genworth’s current rate action plan assumes it will take about 10 years to get the additional rate approvals, and it also includes an implementation schedule for the rate increases already approved but not yet completely implemented, Groh said.
For purposes of state insurance regulators’ accounting, Genworth updates LTCI claim reserves immediately, even before it gets approvals for LTCI rate increases or implements the rate increases, Groh said.
“This creates a timing mismatch between the reserves increases and the offsetting implementation of actuarially justified rate actions,” Groh said. “Therefore we may see variability in statutory results and declining risk-based capital ratios, given the time lag until the premium increase benefits are fully realized and reflected in the financials.”
LTCI Rate Increase Resistance
McInerney said he believes that all state insurance regulators now recognize that LTCI issuers face significant needs for actuarially justified premium increases.
There have been “40 to 45 states” that have been “really stepping up and giving significant premium increases on some policy forms,” McInerney said. “There are some states that are behind. And so, I do believe that one of the challenges in the industry and among the 50 states is, there are some states that are very far along in giving very significant premium increases to Genworth and to other companies, and then there are other states that are well behind.”
The states that are approving big LTCI rate increases seem to be putting pressure on the other states, McInerney said.
“I think they need to put some pressure on their fellow regulators and commissioners to step up more,” McInerney said.
China Oceanwide Deal Approvals
McInerney noted that Genworth and China Oceanwide have now received the necessary deal approvals from Fannie Mae, Freddie Mac a number of non-U.S. regulators.
The companies still need some approvals from regulators in Canada.
To pay for the deal, China Oceanwide will need to get regulatory approval to convert currency into dollars and transfer funds, McInerney said.
McInerney said that regulators have reviewed China Oceanwide’s finances and believe that the company has the liquid assets needed to complete the deal.
“We obviously have been doing our own due diligence,” McInerney said.
Genworth believes that China Oceanwide has significant financial assets and cash, and that China Oceanwide can use assets located outside of China to pay for the deal if the company has trouble with using assets in China to pay for the deal, McInerney said.
Links to Genworth’s latest earnings release and financial supplement are available here.
Information about how to listen to the Genworth conference call recording is available here.
— Read Genworth Has Canada Problems, on ThinkAdvisor.