Some long-term care insurance companies are turning over their existing policies to private equity firms and other outside investors, a move that will wipe massive liabilities off their books but could put policyholders at risk. The problem: Unlike traditional insurance companies, private equity investors may be investing premiums in high-yielding but speculative securities such as junk corporate bonds. Such a step could boost their returns but, if the investments go bust, leave the firms short of assets to pay claims.
Kudos to Reuters reporter David French for spotting this trend, just the latest example of the deep trouble long-term care insurance carriers find themselves in. Most insurers have long-since stopped selling policies—perhaps only a dozen or so remain in the market. But even those who are no longer active are stuck with billions of dollars in liabilities from future claims on old policies.
Firms such as Genworth and Prudential have taken charges in excess of $2 billion in recent years to reserve for those likely claims. General Electric Co, which stopped selling long-term care policies years ago, took a $6.2 billion charge in 2018 and warned investors it likely would have to set aside $15 billion over the next seven years to pay claims on its old policies.
Those claims are potentially so costly that rather than selling them, insurers are paying investors to take them off their hands. Reuters reported that Humana Inc. paid Continental General Insurance Co. $203 million to take over $2.4 billion in policies. CNO Financial Group paid another firm $825 million to take responsibility for investment premiums and for guaranteeing claims. General Electric reportedly is shopping its long-term care insurance portfolio to private investors as well.
This is a significant departure from past practice, when carriers who exited the business often sold their existing policies to former competitors. But for the past decade, the market for old, high-risk policies dried up. Now, the carriers who once sold the policies literally can’t give them away.
Similarly, this latest trend is different from the common practice of carriers turning over administration, premium collections, and claims to outside firms—a step that can reduce costs. In those cases, the carriers remain responsible for investing premiums and ultimately for paying claims.
These new deals shift claims risk to investors who may know little about the long-term insurance business. But the biggest risk may be to policyholders.
The traditional long-term business model worked like this: A carrier would sell a policy to a consumer who typically was in her 50s and who would pay premiums for perhaps 20 or 30 years before going to claim. The insurer would pay the claims—and take some profit– with those decades of investment earnings.
But state insurance regulators, who worried about the long-term financial stability of insurers, limited their investments to super-safe government bonds. That created a huge problem. For more than a decade, interest rates have been at or near historic lows, leaving insurers with little or no return on their investments. The only way they could pay claims was to raise premiums or reduce earnings.
Private equity firms reportedly are taking bigger chances with those premium dollars to satisfy investors looking for higher returns than they’d earn from an insurance company. And that raises the risk that they could fall short when it comes time to pay claims. It may also affect how the firms that take over administration of policies service their claims.
While many long-term care insurance companies have stopped selling new policies, most have continued to pay claims with no interruption. But not all. In 2017, Penn Treaty American Corp. collapsed, leaving it up to state insurance guaranty programs to cover at least some benefits.
Given persistently low interest rates and their ongoing struggles to manage long-term care risks, it is no surprise that carriers are turning over their old books of business to private equity. Perhaps Wall Street will find an efficient new way to run the troubled business. But it is a trend policyholders should keep a close eye on.