Thursday, September 12, 2019

No. 332: Long-Term Care Insurance—An Update on the General Electric Litigation and Other Matters

In No. 329 (August 28, 2019), I discussed the whistleblower report by Harry Markopolos on accounting issues at General Electric Company (GE), with special attention to GE's accounting for its long-term care (LTC) insurance legacy problems. Here is an update on some matters I addressed there, and other related items.

The NAIC LTC Insurance Task Force Meeting
In No. 310 (April 22, 2019), I discussed the formation of a new LTC insurance task force by the National Association of Insurance Commissioners (NAIC). The chairman of the new task force is Scott A. White, the Virginia insurance commissioner. On August 4, 2019, the new task force met during the summer national meeting of the NAIC in New York City. I obtained the minutes from the NAIC website. (The minutes are in the complimentary package offered at the end of this post.) At the outset of the meeting,
Commissioner White said state insurance regulators have been grappling with the issue of long-term care insurance (LTCI) for many years. Several different NAIC working groups and task forces have been focused on addressing the inconsistency among the states in rate review practices and concerns over potential reserve inadequacies within the industry... Commissioner White said it is also fair to say that as state insurance regulators have had discussions, there are strong views but a lack of consensus on how to move forward.
I have said it more bluntly. In No. 313 (May 20, 2019), for example, I said the new task force will "kick the can down the road" as its predecessors have done.

Commissioner White went on to say the new task force has held five regulator-only meetings and identified six "workstreams" to accomplish the goals of the new task force: (1) Multistate Rate Review Practices, (2) Restructuring Techniques, (3) Reduced Benefit Options and Consumer Notices, (4) Valuation of LTCI Reserves, (5) Non-Actuarial Variations, and (6) Data Call Design and Oversight. Commissioner White also said:
The Task Force is currently in the planning stages and will likely continue through the end of August. He said he anticipates some of the workstreams will become full working groups, with significant interaction in open sessions. However, some workstreams will continue to operate in a confidential setting until work products begin to develop, at which time the Task Force will conduct its business in open session. The Task Force has been charged with delivering a proposal on these and other related matters to the Executive (EX) Committee by the 2020 Fall National Meeting.
The A. M. Best Commentary on LTC Insurance
On August 28, 2019, A. M. Best, a major rating firm, issued a five-page commentary entitled "GE's Long-Term Care Exposure Magnifies Counterparty Risk for Several Insurers," and subtitled "Uncertainty about LTC reserving complicates insurers' analysis of counterparty exposure." Here is the first paragraph of the commentary:
Long-term care (LTC) insurance has been the source of many concerns and discussions in the industry for some time. Sentiment surrounding LTC results has been negative for years, driven by poor performance. The poor performance was due to inadequate pricing related to factors such as low interest rates, lapse rates, mortality, morbidity, and policyholder utilization assumptions, among others. These factors led to large losses and significant reserve increases on inforce business and drove many insurers to depart from the market.
One exhibit in Best's commentary shows information from reinsurance exhibits in the 2018 statutory statements filed in March 2019 by 20 insurance companies. The exhibit focuses on two reinsurance companies owned by GE: Employers Reassurance Corporation and Union Fidelity Life Insurance Company. Best refers to those two reinsurance companies together as the "ERAC Group."

The exhibit shows the amount of reserve credit taken by each of the 20 insurance companies for reinsurance with the ERAC Group. For each of the 20 insurance companies, the reserve credit taken for reinsurance with the ERAC Group is shown as a percentage of the ceding insurance company's capital and surplus. Of the 20 insurance companies, seven have at least $1 billion of reserve credit taken for reinsurance with the ERAC Group. Those seven companies, with the ratio (as a percentage) of reserve credit taken for reinsurance with the ERAC Group to capital and surplus shown in parentheses, are: Genworth Life of New York (1,403.8%), Genworth Life and Annuity (519.3%), Genworth Life (443.8%), Lincoln Benefit Life (410.8%), American United Life (194.8%), Allianz Life of North America (46.0%), and Massachusetts Mutual Life (14.4%).

Shareholder Litigation Against GE
In No. 257 (March 12, 2018) and No. 298 (December 10, 2018), I wrote about shareholder litigation that began in November 2017 against GE and several of its current and former top officers. The plaintiffs are large shareholders who allegedly suffered losses because of major charges taken by GE in connection with its operations, including its legacy LTC insurance problems. There were several related lawsuits, all of which were consolidated and assigned to U.S. District Judge Jesse M. Furman. (See, for example, Sjunde AP-Fonden v. GE, U.S. District Court, Southern District of New York, Case No. 1:17-cv-8457.)

On September 20, 2018, GE moved to dismiss the consolidated complaint. On October 12 the plaintiffs opposed the motion to dismiss the consolidated complaint.

On February 27, 2019, new plaintiffs filed another lawsuit against GE, and said the new lawsuit was related to the old lawsuits. The new lawsuit was accepted as related to the old lawsuits and was assigned to Judge Furman.

On March 4 the judge ordered all the parties to confer and submit to him by March 13 a joint letter with suggestions on how to proceed. On March 13 the parties submitted the letter. On March 15 the judge adopted the suggestion and ordered the parties to submit to him, within two weeks after he rules on the pending motion to dismiss the old consolidated lawsuit, another joint letter on how to proceed. When I posted No. 329 on August 28, the judge had not yet ruled on the motion to dismiss the old consolidated lawsuit.

On August 29 the judge issued an opinion and order relating to the motion to dismiss the old consolidated lawsuit. He granted GE's motion to dismiss the old consolidated lawsuit
except as to (1) Plaintiffs' Section 10(b) and Rule 10b-5 claims concerning (a) factoring in GE's 2016 Form 10-K and (b) GE's failure to disclose factoring in its Class Period financial statements, which survive against GE and Bornstein; and (2) for now, Plaintiffs' Section 29(a) claims against each Individual Defendant.
The comments quoted above are in the concluding section of Judge Furman's lengthy and complex opinion and order. He went on to explain why he has decided to give the plaintiffs an opportunity to amend the claims he dismissed. He ordered the parties to confer and submit to him, by September 19, a joint letter with their suggestions about the next steps in the litigation. One possibility is the filing of what would be the fifth amended consolidated complaint. (The full opinion and order is in the complimentary package offered at the end of this post.)

General Observations
Several non-regulators made comments at the August 4 meeting of the NAIC's new LTC insurance task force. However, those non-regulators were handicapped because they had no knowledge of what had happened at the five regulator-only (secret) sessions. Regulators at the August 4 meeting undoubtedly have in their possession a summary of the discussions that occurred during the secret sessions. I would like to see the summary. My address for regular mail is P.O. Box 245, Ellettsville, IN 47429. If an envelope with no return address appears in my regular mail, I would be grateful.

Best's commentary on LTC insurance is copyrighted, and Best denied my request for permission to include it in the complimentary package I am offering to readers at the end of this post. However, on September 4 Best issued a press release about the commentary, and has no objection to my offering the press release, which is in the package. The press release includes a link for obtaining access to the commentary.

Available Material
I am offering a complimentary 71-page PDF consisting of the minutes of the August 4 meeting of the NAIC's new LTC insurance task force (13 pages), Best's September 4 press release about its commentary on GE's LTC exposure (1 page), and Judge Furman's August 29 opinion and order (57 pages). Email and ask for the September 2019 package about LTC insurance and GE.