GE's long-term-care insurance woes are symptomatic of ailing industry

Traditional LTC insurers continue to be dogged by miscalculations on old policies

Feb 9, 2018 @ 4:49 pm

By Greg Iacurci

The long-term-care insurance industry is struggling, and executives and analysts have seized on General Electric Co.'s recent travails to illustrate the point.

Nearly a month ago, General Electric Co. disclosed a $6.2 billion charge associated with old long-term-care insurance policies on the company's books. GE Capital, the firm's financial services unit, plans to set aside roughly $15 billion over seven years to support the company's insurance reserves.

John Flannery, GE's chairman and CEO, called the revelation "deeply disappointing" at the time, especially since the charge relates to a legacy insurance block that's been in run-off for more than a decade.

Other insurers such as Genworth Financial Inc., which covers the greatest number of long-term-care insurance policyholders, have had to take similar steps to prop up their balance sheets.

"The charges GE is taking and the charges Genworth took in 2014 and 2016 illustrate the severity of the issues facing LTC insurers," Kelly Groh, chief financial officer at Genworth, said Wednesday on the company's fourth-quarter earnings call with analysts.

Genworth inked a $345 million charge in 2014 related to the underpricing of old insurance policies; in 2016, it announced it needed to up its reserves by an estimated $400 million to $450 million to cover future claims.

Humphrey Lee, an analyst at Dowling & Partners, also called out GE's financial struggles during a call on Manulife Financial Corp.'s earnings, saying the multibillion-dollar charge "kind of caught people by surprise."

Steven Finch, chief actuary at Manulife — parent company of John Hancock Life Insurance Co., among the largest LTC insurers by policies sold — said on the same call that "the size of the charge GE announced I think was very notable to many in the market."

The long-term-care insurance industry has been dogged by a number of factors, including persistently low interest rates, increasing longevity and a spike in health care costs.

Insurers and their LTC products have also suffered a degree of reputational damage related to cost increases on in-force policies that forced consumers to pay more money in premiums or have their policies lapse. Many companies mispriced old policies because of incorrect assumptions about long-term interest rates and policy lapse rates, and have sought the price increases from regulators to make up for these miscalculations.

In March 2017, a Pennsylvania court approved the liquidation of Penn Treaty Network America Insurance Co. and a subsidiary, American Network Insurance Co., due to financial difficulties. They covered roughly 74,000 long-term-care policyholders.

The industry sold fewer than 70,000 policies last year, just a tenth of the 700,000 purchased in 2000, according to the American Association for Long-Term Care Insurance.

Of the top five largest LTC insurers by number of policyholders, only one, Genworth, still writes new business, according to Jesse Slome, AALTCI's executive director.

John Hancock exited the business last year.

"The traditional LTC space is in some trouble. At this point, there are only a handful of companies offering the product," said Phil Jackson, an insurance planner at ValMark Financial Group. "We typically only show [traditional LTC insurance] as an option for the purpose of selling against it."

The GE announcement "reinforces the trouble the business is in," he added.

Ms. Groh, Genworth's CFO, said the GE charges demonstrate the need for insurers to be able to prop up their businesses through increases on policyholder premiums and benefit modifications, which "ensure the adequacy of cash flows and reserves to pay future claims."

Both Manulife and Genworth executives alluded to planned rate increase on in-force policies during their recent earnings calls. Genworth has achieved "significant annual premium increases" from 2013 to 2017, amounting to an estimated $8 billion in net present value, Ms. Groh said.

"Genworth will continue to seek additional annual premium increases on our in-force policies under our multiyear rate action plan over the next five years to seven years," she added.

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