Montana recently joined five other states in which Genworth Financial Inc. has suspended sales of long-term care insurance following a dispute between the company and regulators over proposed rate increases on in-force policies.
In response to a series of objections submitted by the regulator, a Genworth executive criticized one of the methodologies used to evaluate the requested rate increases and highlighted the importance of the company's ongoing multiyear rate action plan as it pertains to its continued solvency. Through that methodology, Montana seeks to minimize or eliminate carriers' recouping of past losses in reviewing requests for LTC rate increases by basing its calculation of the lifetime loss ratio of the business through an assumption that applies all premium increases at the time of a policy's inception, something industry trade groups have labeled "phantom premium."
Genworth is targeting adding $8 billion in future cash flow over a period of five-to-seven years through the action plan, which represents its primary approach to stabilizing its LTC business. The company said that higher premiums and/or benefit modifications are "critical" to increasing the capital levels needed to support the business. And while Genworth is party to a merger agreement with China Oceanwide Holdings Group Co. Ltd., the Chinese company is not obligated to or does not intend to contribute additional capital to the legacy LTC business.
Genworth said in its most recent 10-Q that it obtained 24 filing approvals from 10 states in the first quarter, representing a weighted-average increase of 28% on approximately $72 million in annualized in-force premiums. The Montana filings would appear to be among those approvals, but the rate increases Genworth obtained significantly lag the amounts the company requested; it originally characterized those as being significantly below the maximum actuarially justified hikes.
The sales suspension was scheduled to take effect May 21, seven weeks after Genworth temporarily halted sales in Florida. Sales suspensions in Massachusetts, New Hampshire, Vermont and Hawaii have been in place for several years. Genworth's decision to stop sales in Hawaii took effect in April 2017. A common thread among several of those states, including Montana, has been regulatory resistance to the magnitude of the rate increases the insurer has sought on in-force business.
Rate increases requested by Genworth Life Insurance Co. in Montana in September and October 2017 ranged from 56.4% overall on its Choice 2 and Choice 2.1 policy forms that were in use in the state from 2004 through 2011, to 85.1% on its PCS policy forms that had been sold in the state from 1994 through 2003. The Montana regulator, however, balked at those requests and instead extended offers, which Genworth accepted, for rate increases in the single-digits and low double-digits, including only 4.4% on the PCS forms and 7.3% on the Choice 2 and 2.1 forms.
"Even when including the requested rate increases, the lifetime loss ratios for most of these blocks are still expected to exceed 100%, failing to ever be profitable," Jamala Arland, a Genworth vice president and actuary, said in a March 8 letter to Montana regulators.
Arland alleged that the state had "continually denied" the full requested amount of rate increases over a number of years. Hikes have become even more difficult to obtain since the implementation of methodology that she criticized as neither accurate nor sound and supportive of a scenario where a carrier could face "solvency issues."
In Genworth Life's situation, Arland said that the company's 2016 cash-flow testing results found that it had between $1 billion and $1.5 billion of positive margin, but that range was dependent upon its success in achieving the $8 billion worth of future rate actions. The margin has since declined to between $500 million and $1 billion, she added.
"To the extent that [cash-flow testing] projects raising less than $7 [billion to $]7.5 billion from future rate actions, [Genworth Life] would be facing insolvency," Arland said. If a certain number of states adopted Montana's methodology for evaluating rate actions, Genworth Life "would not be able to achieve the Multi-Year Rate Action Plan ... on which our positive solvency margin depends," she warned.
None of the sets of policy forms for which the company sought the rate increases had annualized written premiums of more than $2.1 million. Montana ranked as the third-smallest market for Genworth Life and Genworth Life of New York based on individual LTC earned premiums, accounting for only 0.2% of those companies' nationwide result. Genworth still ranked as the state's largest individual LTC writer, ahead of Ability Insurance Co., John Hancock Life Insurance Co. (U.S.A.), Thrivent Financial for Lutherans, and Northwestern Long Term Care Insurance Co.
A Genworth spokeswoman declined to comment specifically on the Montana situation. More generally, she said that Genworth has maintained that "if we are unable to achieve satisfactory, actuarially justified rate increases from state regulators, we will consider all our options, including the suspension of new sales and, in some cases, litigation."
