Thursday, August 11, 2016

No. 174: Long-Term Care Insurance—Another Nail in the Coffin

For 25 years I have expressed the opinion that the financing of long-term care (LTC) is a problem that cannot be solved through the mechanism of private insurance. During that period, many nails have been driven into the coffin of LTC insurance, but in recent years the number has been increasing. Here I provide background on the subject, describe a few recent developments, and discuss a July 2016 shocker and its aftermath.

An Offer from Union Fidelity Life
In 1987 I received in the mail questionable promotional material from Union Fidelity Life Insurance Company about its offer of LTC insurance. I wrote to a company spokesman expressing concern. A company executive responded by saying the insurance was in the developmental stage. He invited me to serve as a consultant, but I declined the offer. I wrote about the incident in the February 1988 issue of The Insurance Forum. That was my first article about LTC insurance.

A Study by Consumer Reports
The June 1991 issue of Consumer Reports, the monthly magazine of Consumers Union, contained a study critical of LTC insurance marketing practices and policy provisions. The study did not rate any LTC insurance policies as "excellent" or "very good." In the August 1991 issue of the Forum I explained the reasons for the policy provisions and why there can never be "excellent" or "very good" LTC insurance policies. I said the LTC exposure violates certain principles necessary for the proper functioning of private insurance, and the troublesome policy provisions are an effort to address those violations. I expressed the opinion that the problem of financing LTC cannot be solved through private insurance.

An Offer from a Genworth Predecessor
In 1997 I received in the mail a questionable promotional letter about guaranteed renewable LTC insurance offered by General Electric Capital Assurance Company, a predecessor of Genworth Financial. The letter contained this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes in your health." I wrote to the company expressing concern that the sentence, although technically correct, was deceptive. I said the letter should make clear that the company has the right to increase premiums on a class basis. The company officer who had signed the letter defended it by saying, among other things, that the company had never raised rates on existing policyholders and had an "internal commitment to rate stability." The comments are ironic in view of Genworth's huge premium increases in recent years. Later, without telling me, the company quietly removed the sentence from its promotional letters. The first of my two articles about the incident was in the May 1997 issue of the Forum.

Policy Transfers
Over the years most of the companies selling LTC insurance have gotten out of the business. In 2003, for example, Teachers Insurance and Annuity Association of America (TIAA), which caters primarily to the academic market, stopped selling LTC insurance and transferred its 46,000 existing policies to Metropolitan Life Insurance Company. Many of my academic colleagues, who had bought LTC insurance from TIAA because of its stellar reputation, were furious. The first of my three articles about the transfer was in the March/April 2004 issue of the Forum.

A California LTC Insurance Sales Letter
In 2007 California mailed a sales letter to six million citizens of the state urging them to buy LTC insurance. A front-page story in The Wall Street Journal, which discussed the sales letter, prompted me to write on the subject. The sales letter was on California stationery showing the state seal and the name of then-Governor Arnold Schwarzenegger. A private lead-development company drafted the letter, and it was accompanied by a postage-paid reply card. The lead-development company sold the reply cards to LTC insurance agents.

My article was in the July 2008 issue of the Forum. I explained, in more detail than in my August 1991 article, the reasons why the financing of LTC cannot be handled through private insurance.

The Conseco Separation
In 2008 Indiana-based Conseco, Inc., which is now CNO Financial Corp., announced a plan to separate itself from Pennsylvania-domiciled Conseco Senior Health Insurance Company (CSHI), a financially troubled LTC insurance subsidiary. Over a period of 11 years, Conseco had poured $915 million of capital into CSHI to keep the company solvent.

The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer CSHI to the trust, and rename the company Senior Health Insurance Company of Pennsylvania (SHIP). The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. Later, when he was a former commissioner, he testified during a court proceeding in the Penn Treaty case (discussed below) that he had approved the plan because Conseco had threatened to allow CSHI to become insolvent if he did not approve the plan. In other words, the commissioner handed off the CSHI problem to later commissioners. The first of my three articles about the separation was in the November 2008 issue of the Forum.

Today SHIP continues to run off the LTC business; that is, SHIP is not selling new LTC insurance policies. In February 2015, in a sign of financial trouble, and with the approval of another Pennsylvania insurance commissioner, SHIP borrowed $50 million by issuing a five-year surplus note, on which interest and principal payments must be approved in advance by the commissioner. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based CNO affiliate.

SHIP needed the infusion to bring its risk-based capital above regulatory action level. However, it is not clear how a capital-starved company in runoff can afford to pay interest and principal on a surplus note. Indeed, it appears SHIP has yet to make an interest payment. In other words, SHIP remains a problem for CNO despite the separation. Whether SHIP will remain solvent until all its business runs off remains to be seen. (Beechwood Re was mentioned in a front-page story in The Wall Street Journal on July 26, 2016, because of ties to Platinum Partners, a $1.25 billion hedge fund that is under investigation by the Securities and Exchange Commission and two sets of federal prosecutors.)

The Rehabilitation of Penn Treaty
In 2009 Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance company, became insolvent. The Pennsylvania insurance commissioner filed in state court a preliminary rehabilitation plan and said he intended to file a formal rehabilitation plan later. Instead, he filed a petition to liquidate the company. Penn Treaty's parent company intervened and opposed the liquidation petition. The case led to a bench trial, after which the judge denied the liquidation petition and ordered the commissioner to develop a rehabilitation plan. The commissioner filed an amended rehabilitation plan and later a second amended plan. Most recently the commissioner filed a liquidation petition. If approved, it would trigger coverage by state guaranty associations and assessments against other insurance companies. I wrote about the Penn Treaty case in the August 2012 issue of the Forum.

Claims Practices at Ability Insurance
Several companies in the LTC insurance business, after getting out of the business, transferred their existing LTC insurance policies to Nebraska-domiciled Ability Insurance Company. The company became the defendant in a lawsuit in federal court. The plaintiff alleged that the company's claims practices were outrageous. In April 2012, after a jury trial, the company was hit with a $12.3 million judgment, including $10 million of punitive damages. In December 2012 the Nebraska director of insurance placed the company under a supervision order. In January 2013 a private equity firm acquired the company.

I wrote about Ability in the May 2013 issue of the Forum. In the process I learned of a claims practice I had never seen before. The company tried—over the telephone on recorded calls—to persuade elderly persons who had filed claims to withdraw their claims. An investigatory firm retained by the Nebraska director discovered the practice and the recordings. The callers often provided deceptive and even false information in the calls. What was even more astounding was that callers often made their pitches to persons who did not have the claimant's power of attorney.

A Recent Development at Genworth
In February 2016 Genworth Financial announced a "strategic update" that included actions "aimed at separating and isolating" the company's LTC insurance business. One action was a "destacking plan" that would transfer ownership of a life insurance and annuity company (Genworth Life and Annuity Insurance Company, or GLAIC) from the LTC company (Genworth Life Insurance Company, or GLIC) to a holding company. Genworth said the destacking plan was subject to regulatory approvals. I discussed this and related matters in three posts—Nos. 144 (2/16/16), 154 (4/7/16), and 155 (4/13/16).

On page 97 of its 10-Q quarterly report filed with the Securities and Exchange Commission on August 3, 2016, Genworth mentioned the destacking plan. The company said:
We originally targeted to complete these actions by the middle of 2017. However, after discussions with regulators, we believe as a first step, we may only be able to distribute a portion of GLAIC to the holding company, which we expect to complete by the end of the first half of 2017. In addition, we anticipate that a further reduction in GLIC's ownership of GLAIC may occur in the future if GLIC's operating results improve.
The July 2016 Shocker
The federal Long-Term Care Security Act of 2000 requires the U.S. Office of Personnel Management (OPM) to make it possible for federal employees to buy LTC insurance that is paid for entirely by the employees. OPM created the Federal Long Term Care Insurance Program (FLTCIP). In 2002, after competitive bidding, OPM awarded a seven-year contract to a consortium of John Hancock Life & Health Insurance Company and Metropolitan Life Insurance Company. The two companies formed Long Term Care Partners (LTCP) to administer the program. In 2009, after competitive bidding, OPM awarded the second seven-year contract to Hancock alone, and LTCP became a subsidiary of Hancock. In July 2016 OPM awarded the third seven-year contract to Hancock, which was the only bidder and one of the few major companies still selling LTC insurance. OPM then announced huge premium increases.

The National Active and Retired Federal Employees Association expressed outrage, saying: "This massive, 83 percent premium increase will come as a shock to the more than 274,000 federal employees and annuitants and their spouses enrolled in the FLTCIP." The association said participants face an average premium increase of more than $1,300 per year. However, participants have options, including benefit reductions instead of premium increases.

The FIO LTC Insurance Roundtable
On August 4, 2016, in the wake of the July 2016 shocker, the Federal Insurance Office (FIO) in the U.S. Department of the Treasury convened a three-hour "Long Term Care Insurance Roundtable." I think it was a by-invitation-only session. Among the "participants" were insurance companies (Ameriprise, CNA, CNO Financial, Genworth, Guardian Life, Health Care Service Corp., John Hancock, LifeSecure, Massachusetts Mutual, New York Life, Northwestern Mutual, RiverSource, Transamerica, and UnitedHealth), insurance trade and professional organizations (American Academy of Actuaries, American Council of Life Insurers, America's Health Insurance Plans, National Association of Insurance Commissioners, and National Organization of Life and Health Guaranty Associations), state insurance regulators (Connecticut, Florida, Maryland, New York, and Pennsylvania), federal agencies (Department of the Treasury, Department of Health and Human Services, Federal Reserve Board of Governors, Office of Management and Budget, and White House National Economic Council), and nonprofit organizations (AARP, Alzheimer's Association, Bipartisan Policy Center, California Health Advocates, Center for Economic Justice, and National Council on Aging). The agenda had five parts:
  1. Welcome and Opening Remarks from Senior Officials of the U.S. Department of the Treasury. (15 minutes)
  2. Private long-term care insurance and retirement security. Presenters were from Treasury and HHS. (30 minutes)
  3. Cost shift resulting from reduction in private long-term care insurance market. Presenters were from ACLI and AHIP. (1 hour)
  4. State regulation and impact on availability of private long-term care insurance. Presenters were the Connecticut and Pennsylvania insurance commissioners and the president of NOLHGA. (1 hour)
  5. Next steps at the Federal level. The two subtitles were "Further developments of Federal policy in support of private long-term care insurance" and "Follow-up meetings." (15 minutes)
General Observations
State insurance regulators, who approve premium increases on LTC insurance policies, face a dilemma. When they approve increases requested by the companies, policyholders are furious because of the financial burden placed on them. On the other hand, when the regulators deny requested increases, companies may be forced into insolvency. Regulators often compromise by allowing part but not all of the increases, and require companies to offer policyholders the option of benefit reductions instead of increased premiums.

Several state insurance regulators and Congressional committees have held hearings on LTC insurance. I am aware of no one who has publicly expressed agreement with me that the problem of financing LTC cannot be solved by private insurance. The agenda of the August 4 FIO roundtable mentions the need to help private LTC insurance companies but fails to mention the futility of the effort.

It is not clear what would happen to the FLTCIP if, in the bidding for a fourth seven-year contract in 2023, there are no bidders because Hancock has withdrawn from the LTC insurance business and there are no other major companies still engaged in the business. In that event, I think Hancock would run off its LTC business, including the FLTCIP business, and it would no longer be possible to accept enrollment from new federal employees or old federal employees who had not enrolled previously.

Available Material
I am offering a complimentary 36-page PDF containing the documents released at the FIO roundtable (8 pages) and eight Forum articles mentioned in this post (28 pages). Email and ask for the August 2016 package relating to LTC insurance.