At Last, Death!
Alas, but all good things in the human sphere come to an end. Penn Treaty is the biggest insurer failure since 2004. Now, don’t cry too much. The state guaranty funds will pick up the slack. The banks are jealous of an industry that has so few insolvencies. Conservative state regulation works better than federal regulation.
Or does it? In this case, no. The state insurance regulator allowed a reinsurance treaty to give reserve credit where no risk was passed. The GAAP auditor flagged the treaty and did not allow credit on a GAAP basis, because no risk was passed. No risk passed? No additional surplus; instead it is a loan. I do not get how the state regulators in Pennsylvania could have done this. Yes, they want companies to survive, but it is better to take losses early, than let them develop and fester.
A prior employer asked me about this company as a long idea, because it was trading at a significant discount to book. I told him, “Gun to the head: I would short this. Long-term care is not an underwritable contingency. Those insured have more knowledge over their situation than the insurance company does.” He did nothing. He could not see shorting a company that was less than 50% of book value.
It was not as if I did not have some trust in the management team. I knew the CEO and the Chief Actuary from my days at Provident Mutual. Working against that was when I called each of them, they did not return my calls. That made me more skeptical. It is one thing not to return the call of a buyside analyst, but another thing not to return the call of one who was once a friend.
Aside from Penn Treaty, the only other company that I can think of as being at risk in the long term care arena is Genworth. Be wary there. What is worse is that they also underwrite mortgage insurance. I can’t think of a worse combo: long term care and mortgage insurance.
The troubles at Penn Treaty are indicative of the future for those who fund long term care. Be wary, because the troubles of the graying of the Baby Boomers will overwhelm those that try to provide long term care. That includes government institutions.
October 3rd, 20093:05 am at
alas, the first story on the next bubble to burst… insurance. But an insurance company has the ability to always make their books work by denying claims. They also use less leverage overall at least that’s what we thought.
October 3rd, 200910:54 am at
Words of wisdom indeed. Thanks David.
October 3rd, 20092:24 pm at
The liability limits on the state guaranty funds are not so high relative to tail risk of long term care: http://www.annuityadvantage.com/stateguarantee.htm
October 3rd, 20093:47 pm at
Love your site.
I have long studied LTC insurance offers and it seems like all of them are just asset protection insurance for 100k or 200k but none guarantee premiums will not go up or that the company will be around when you need them. I have decided to self insure. What advice are you giving clients for LTC insurance???
October 4th, 200910:07 pm at
but another thing not to return the call of one who was once a friend.
In retrospect, they were returning a favor to a friend. It’s not like they could be fully honest with you, right? But deep down they must have known the score and decided they didn’t want you getting involved.
October 5th, 20099:58 pm at
it’s not terribly surprising that state regulators might allow reserve credit for a reinsurance transasaction whereas reserve credit was not allowed for GAAP purposes…I have no idea what the reinsurance treaty was about, but statutory reserve credit is likely governed by the 1992 Model Reg for reinsurance, whereas the appropriate GAAP standard is most likely FAS 113…it is quite conceiveable that the transaction met the model reg requirements for reserve transfer, but did not meet the GAAP requirements (although I do not know for certain that was the case)…basically, financial reinsurance exists due to the conservatisms inherent in statutory accounting, at least on the life insurance side…abuses generally take place when companies try to extend financial reinsuranc e to their GAAP financial statements, ala AIG…jmho
October 5th, 200911:00 pm at
Ms. Re, the treaty passed no risks at all, for all practical purposes it was a loan — that’s why the GAAP auditor objected, and why it should not have been allowed vredit for stat purposes. If you’re really curious, it was in the public filings — but I don’t have copies of them from my prior employer.