Fitch: AFG’s Sale of Long-Term Care May Signal Sentiment Shift
AFG's sale represents the first material LTC disposition since CNO Financial Group announced plans to sell a closed block of LTC insurance to Beechwood Re in early 2014.
Success with LTC underwriting has been elusive for insurers. Many companies have discontinued offering LTC products over the last decade as losses have mounted. Several firms remain saddled with the uncertainty of LTC closed blocks. Until recently, limited interest from potential buyers has meant few opportunities to sell runoff LTC businesses outright.
Most of the industry's more traditional buyers of in-force LTC have stayed away in recent years as the industry grapples with above-average underwriting and pricing risk, and high reserve requirements. The product's key risks include morbidity, persistency and exposure to low interest rates. While the product is written on a guaranteed renewable basis, which allows the insurer to increase premium rates on in-force business based on emerging claims experience, premium rate increases are still subject to regulatory approvals.
Fitch believes that the market for LTC transactions would be aided by interest rates rising by 200 bps or more, and as market participants gain a better handle on claim frequency and severity and the impact of mortality on these long duration claims.
For AFG, Fitch views its LTC sale as credit neutral. The move will clean up the AFG's balance sheet, but not without an estimated loss on sale of between
In both 2014 and 2013, AFG reported pretax operating losses of
AFG ceased new sales of LTC in 2010. Renewal premiums on approximately 55,000 policies covering approximately 58,000 lives have continued to be accepted unless those policies lapse. Renewal premiums were
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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