If investors breathed a sigh of relief over this weekend’s announcement that Genworth had sold itself to a Chinese real estate and financial services concern, there was no such relief among insurance agents.
Genworth said its buyer, China Oceanwide, had neither any intention nor “any future obligation” to offer more capital to support Genworth’s legacy long-term care insurance business, Genworth said in a news release.
This despite Sunday’s announcement of $1.1 billion in additional capital to help Genworth meet a 2018 debt payment, inject cash to help the company’s troubled U.S. life insurance business and restructure the company for long-term survival.
“It makes us tell our Genworth clients that the company is still alive — that ship hasn’t sunk yet — that’s all it really does,” said Derick S. Guyton, a long-term care specialist and regional sales consultant in North Myrtle Beach, S.C.
Guyton is one of hundreds of long-term care insurance agents around the country struggling to explain why LTCi premiums continue rising as companies like Genworth and Unum look to make up for underpriced LTCi policies.
On Sunday, Genworth, announced it had been sold for $2.7 billion, or $5.43 per share in cash.
Premium Hikes in Triple-Digits
Premium hikes are coming as a shock to policyholders, many of whom are on fixed incomes. Some policyholders have been notified of yearly increases of as much as 120 percent, according to Jesse Slome, director of the American Association for Long-Term Care Insurance.
“Insurers offer options that enable the individual to continue paying the same amount and perhaps even less, but people are understandably upset and often want to know if other options exist," he said.
Over the past 18 months, Genworth and other insurers have sought — and been granted — approval from state regulators to raise premiums on thousands of in-force long-term care policies. Sunday’s news of the Genworth-China Oceanwide deal promised more rate hikes to come.
“Genworth will also continue to focus on its key operational priorities, most notably executing its multi-year LTCi rate action plan, which is essential to stabilizing the financial position of the legacy LTCi business,” Genworth said.
Some critics of the deal called it a “hastily arranged weekend sale.” However, without the deal, Genworth would have been forced to find “less attractive asset sale strategic alternatives” as a way to reduce debt and address ratings pressure.
“We think this deal is the best option,” Genworth president and CEO Thomas McInerney said in a conference call with analysts Monday.
LTC Reserve Charge of Up to $450 Million
The depth of Genworth’s long-term care claim reserve deficiencies keep reoccurring like a bad dream. One Wall Street analyst Monday expressed surprise in a note to clients that Genworth had even found a buyer.
On Sunday, Genworth unveiled another round of long-term care claim reserve changes, this time for approximately $400 million to $450 million pretax, the company said in a government filing.
The discovery is expected to result in an after-tax charge to earnings of $260 million to $300 million. Analysts will be keen to learn more when Genworth executives hold their third-quarter earnings call at 8 a.m. Nov. 4.
Fitch Ratings has downgraded Genworth's insurer financial strength ratings to 'BB' from 'BB+'. In addition, the IFS ratings have been placed on Rating Watch Evolving.
“We are frankly very surprised that Genworth found a buyer and believe the stock would have been down meaningfully on the LTC charge if they didn’t,” analyst Ryan Krueger with Keefe, Bruyette & Woods said in a note to clients.
“Now we expect a modest move in the shares Monday, as a spread to deal price should remain for regulatory risk,” he wrote.
The deal with China Oceanwide, a privately held company, is expected to close in the middle of 2017. Krueger and other analysts questioned the Genworth CEO on whether regulators would give their consent.
A deal announced last November by the Chinese Anbang Insurance Group to buy Fidelity & Guaranty Life last year is still pending and hasn’t received approval from New York and Iowa regulators, analysts noted.
But McInerney said the China Oceanwide deal was structured specifically with regulatory approval in mind.
A Tainted Line of Business
Guyton said China Oceanwide’s fear of touching Genworth’s long-term care business isn’t helping the U.S. long-term care industry. This segment of the market has suffered from many insurers leaving as low interest rates take their toll on investment portfolios.
Every time a policyholder reads about a long-term care insurance rate increase, it’s another reason for people to object to buying long-term care coverage.
“No matter who you are with, you will see rate increases, but now clients are going to see rate increases go up and people are going to shy away from it,” Guyton said.
As part of the $2.7 billion transaction, China Oceanwide contributed an additional $600 million of cash to Genworth to address the debt maturing in 2018, as well as $525 million of cash to the company's U.S. life insurance businesses.
China Oceanwide’s contribution is in addition to $175 million of cash previously committed by Genworth Holdings to the U.S. life insurance businesses, Genworth said.
Genworth executives have blamed the company’s financial difficulties on low interest rates, higher claim costs and lower-than-anticipated policy lapses.
Even so, the private long-term care market remains viable as people live longer and as U.S. policymakers seek to encourage private long-term care coverage as a way of defraying the burden on taxpayer subsidized programs like Medicaid.
LTCi Market Better Off With Genworth
There’s no question that agents and policyholders are better with Genworth remaining with the market than without. Helping the company remain solvent is good for clients because it means the company can play its claims obligations.
Around a dozen companies including Northwestern Mutual, Genworth, John Hancock, New York Life and Mutual of Omaha still market traditional long-term care insurance, according to the AALTCI.
Long-term care insurers paid out $8.15 billion in claim benefits to policyholders in 2015, an increase of nearly 4 percent over 2014, according to AALTCI statistics.
About 260,000 individuals received long-term care insurance benefits last year. That's an increase from the 250,000 individuals who were recipients of a long-term care benefit in 2014, the AALTCI said.
Guyton, who has worked with Genworth for many years, said the company traditionally has been good at supporting its long-term care agents, and Genworth distribution managers put a lot of time and thought into marketing materials.
“Let’s see what happens,” he said. “I hope they do a big turnaround because for us it would be good to have a company that dropped that far and rise to the top again.”
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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