Wall Street Supports Long-Term Care Payments While Insurers Bitter to Spend Costs

NEW YORK (Reuters) – US insurers are turning to Wall Street financial assistants for debt relief on their long-term care contracts, posing a challenge to regulators worried about how new players in the sector will manage the risks involved.

These policies help support the provision of care to those who are unable to cope with daily tasks, such as bathing and cooking, by funding life support or retirement homes. Many of them have become financially toxic to insurers because of the soaring costs of health care and the increasing longevity of their lives.

Some investment firms are willing to accept these SLD contracts, betting that they can invest contract premiums to generate returns high enough to cover payments or even make a net profit.

Although these transactions promise financial relief to insurers, they are not risk free. LTC commitments may be large enough to weigh on conglomerates such as General Electric Co. If premiums on alleged LTC contracts are poorly invested, funds may be insufficient to cover payments, industry experts say.

"Some of these transactions include non-traditional players, which we question because of their expertise in managing these liabilities, as well as very aggressive assumptions about reserves and cash flow," said Anthony Beato, director of the rating agency Fitch. Assessments.

People at the forefront of insurance regulation describe industry regulators trying to balance things out between lightening the need to ease the financial strain on insurers and making sure they run smoothly. risky operations.

"There is a tendency to encourage the operation of a private long-term care insurance market to meet the needs of baby boomers," said Fred Andersen, Chief Actuary of the Minnesota Department of Commerce, about regulation. general with respect to these transactions.

The viability of long-term care policies that support older and disabled people is at stake. Without private insurance, they would be forced to pay for their own care or rely on already overburdened state and federal programs such as Medicaid. .

In the United States, about 12 million people will need such assistance by the end of the decade, according to the US Department of Health and Human Services. This number will explode as the number of retirees increases; Americans over 65 should more than double to 98 million by 2060.

The long-term care market has already contracted because of the financial difficulties that insurers are facing. In the United States, fewer than 70,000 new long-term care policies were purchased in 2017, up from 372,000 in 2004, according to the latest data from the National Association of Insurance Commissioners (NAIC). The average annual insurance premium for long-term care rose from $ 1,677 in 2000 to $ 2,772 in 2015, according to NAIC data.

(Chart: How insurers manage the risks of long-term care plans – tmsnrt.rs/2OqeGHL)

POLICIES CHANGE HANDS

Two large transactions in long-term care facilities have occurred in the last 12 months, and insurance executives and negotiators say they expect more activity this year.

Continental General Insurance Company (CGIC), a subsidiary of HC2 Holdings Inc., veteran hedge fund veteran Philip Falcone, has completed the acquisition of the company's $ 2.4 billion long-term care business. Humana Health Insurance Inc.

This was the second transaction of this type for CGIC, which also acquired the dependency activities of American Financial Group Inc in 2015.

In September, Wilton Re, who belongs to the Canada Pension Plan Investment Board, reinsured the dependency contracts of CNO Financial Group Inc., which means that CNO has continued to work on its own. administer the contracts, but Wilton Re took over the investment of premiums and guaranteed payments.

Humana and CNO had to pay $ 203 million and $ 825 million, respectively, to the financial companies so that their LTC portfolios would be erased.

Analysts believe that such one-time fees are better for insurers than allowing long-term care contracts to drain their finances. In a report released last October, Fitch said many US insurers with long-term care portfolios are expected to allocate at least 10 percent more cash to reserves covering these contracts in 2019.

Prudential Financial Inc. and Unum Group were among the insurance companies that announced in 2018 that they had to commit additional liquidity to fund future LTC obligations. An insurer, Penn Treaty, collapsed in 2017 under the weight of its SLD obligations.

General Electric, which announced last year that it would take an after-tax charge of $ 6.2 billion and would constitute additional reserves of $ 15 billion to cover its LTC commitments, also looking for a buyer for his SLD portfolio, Reuters reported.

Paris risky

NOC's first attempt to seek relief from its long-term care portfolio was reduced in 2016 following a reinsurance contract with Beechwood Re, founded by two Wall Street veterans.

Beechwood then collapsed after investing a portion of the policy premiums in Platinum Partners, a hedge fund that bowed because of its risky bets and whose leaders were indicted in an investigation of federal fraud in the United States in December 2016.

As a result, CNO was forced to re-absorb the LTC portfolio by $ 550 million and to collect an after-tax charge of $ 53 million.

Ann Frohman, founder of Frohman Law Office and former director of the Nebraska Department, said that US state regulators charged with avoiding such unsuccessful deals are focusing more on the reserves set up by investment firms than about how they invest the premiums of LTC policies. of insurance.

"In addition to the current requirements, one of the areas for improvement would be to require all states to submit their investment assumptions to LTC portfolios to rigorous tests against economic conditions such as the financial crisis," Frohman said.

According to Fitch's Beato, some companies taking over LTC portfolios are also investing in bad credit, which is more likely to suffer losses in the event of an economic downturn.

Wilton Re declined to comment on how he invests the premiums of SLD policies, while a spokesman for CGIC said his goal was to generate higher returns with higher quality assets.

Although some insurers do not rely on risky investments, regulators say they must also pay attention to companies seeking to avoid paying certain claims to improve their profitability.

"It's always a concern," said Jessica Altman, Pennsylvania's Insurance Commissioner.