Fitch: AFG's Sale of Long-Term Care May Signal Sentiment Shift

CHICAGO--()--American Financial Group's announcement last week to sell its runoff long-term care (LTC) insurance business to HC2 Holdings Inc., a nontraditional insurance buyer and a diversified holding company controlled by Harbinger Capital, may indicate a shift in market sentiment toward investing in LTC, says Fitch Ratings. The shift could provide the opportunity for insurers with runoff LTC books to free up capital and improve their overall risk profiles.

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 $105 million and $115 million. At Dec. 31, 2014, AFG's long-term insurance reserves were $807 million. AFG reported that the sale will provide excess capital of between $80 million and $90 million and will finalize its exit from supplemental medical insurance lines of business.

In both 2014 and 2013, AFG reported pretax operating losses of $10 million on runoff LTC and life insurance. In 2012 the company recorded a $153 million pretax loss-recognition charge related to LTC plus an operating loss of $4 million.

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 $74 million and $76 million in 2014 and 2013, respectively.

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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Contacts

Fitch Ratings
Martha M. Butler, CFA
Senior Director
Insurance
+1 312-368-3191
70 West Madison Street
Chicago, IL
or
Douglas Meyer, CFA
Managing Director
Insurance
+1 312-368-2061
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212-908-0652
33 Whitehall Street
New York, NY
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Martha M. Butler, CFA
Senior Director
Insurance
+1 312-368-3191
70 West Madison Street
Chicago, IL
or
Douglas Meyer, CFA
Managing Director
Insurance
+1 312-368-2061
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212-908-0652
33 Whitehall Street
New York, NY
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com