Private equity eyes long-term care insurance

There's a risk advisers could see quality of care suffer for their clients in these sorts of deals

Nov 16, 2018 @ 4:57 pm

By Greg Iacurci

Private-equity investors are eyeing insurers' long-term-care business with increasing fervor, according to insurance executives and analysts, which could present problems for financial advisers whose clients hold affected policies.

"A lot of private-equity firms are looking at it quite actively," said Naveed Irshad, head of North American legacy businesses at Manulife Financial Corp., during the insurer's recent third-quarter earnings call. "So it's certainly an avenue we're exploring," he added.

Manulife owns John Hancock, which stopped selling new individual long-term-care insurance policies last year and is among the largest underwriters of traditional long-term-care policies, covering about 1 million individuals, according to the most recent data from the American Association for Long-Term Care Insurance.

Suneet Kamath, an analyst at Citigroup Global Markets Inc., alluded to a similar trend during Prudential Financial Inc.'s third-quarter earnings presentation, saying he'd "heard on different calls that private equity is kind of sniffing around long-term care."

Prudential chief financial officer Robert Michael Falzon, responding to a question from Mr. Kamath as to investors' interest in Prudential's business, said the firm consistently evaluates those opportunities and "long-term care would be included in that evaluation." Prudential underwrites more than 200,000 long-term-care policies.

A long-term-care transaction could take any number of forms. For example, a private-equity investor could buy a block of long-term-care policies outright and take over servicing of them, or assume the payment of claims while the insurer continues to service the policy.

The biggest risk for advisers and consumers in a deal involving private equity would be the ongoing quality of care — for example, claim servicing could be worse in the future depending on how the policies are sold off and who's servicing them, Jamie Hopkins, an insurance expert with The American College of Financial Services, said.

Apart from that, the private-equity firm would be governed by the same insurance rules that apply to the existing policy underwriter, so Mr. Hopkins doesn't envision much additional risk for stakeholders. Any premium increases would still need to be approved by the state insurance regulators.

There have been a handful of big deals between private-equity investors and insurers announced within the past year. Voya Financial Inc., for example, sold off more than $50 billion worth of annuities to three private-equity firms. That business is housed within a company called Venerable Holdings Inc. The Hartford Financial Services Group sold off roughly $48 billion of annuity contracts to a group of six investors.

Moody's Investors Services said in a recent research note that it expects the trend of life insurers selling off legacy blocks of business to continue in 2019, given favorable economic conditions such as rising interest rates and a sizable inventory of legacy businesses.

Many insurers have had to make large infusions of cash toward long-term-care reserves as they've revised some of their underlying actuarial assumptions. Prudential, for example, took a $1.5 billion pre-tax charge on its legacy LTC business in the second quarter. That's on top of $700 million the company added to its LTC reserves in 2012.

Sales of standalone, traditional LTC insurance have also fallen off severely. The industry sold fewer than 70,000 policies last year, a tenth of the number it sold about two decades ago.

"There will be some good deals in that area because there are people that just want to get out of it," said Mr. Hopkins.

And there's an "abundance of alternative capital" that will support more deals, Moody's said.

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