#163 | IBTs and Corporate Division Laws

In the wake of GE’s massive $15B hit from its legacy Long-Term Care insurance block and continued struggles in the broader LTCi market, the NAIC has taken up the charge in 2019 to examine a national framework for insurance business transfers (IBTs) and corporate divisions ways for life insurers to restructure their liabilities. At their core, both strategies are means for an established life insurer to spinoff of a particular block of business to a new life insurer. Sounds reasonable. But as they say, the devil’s in the details. While some states have taken a fairly circumspect approach, others essentially allow life insurers to carve off any block of business carte blanche and without the need for a public hearing, policyholder approval, an evaluation by an independent expert, notification of other states and, in some situations, without even needing the approval of the domestic commissioner. When I said carte blanche, I meant carte blanche. And if the majority of life insurers get their way, the NAIC-adopted national statutes will be just as loose.

The benefits to life insurers are obvious. Using an IBT or corporate division is a cleaner and far simpler way of shedding a bad block than traditional restructuring alternatives. But more importantly, the valuation process for a division or transfer is actuarial rather than financial. You don’t need an investor story for the new company. Instead, the actuaries place a value on the block of business so that, if the state requires it, the new life insurer is “as strong” as the old life insurer. The problem is that insurance liabilities, particularly complex and long-dated ones like LTC, have nearly an infinite number of valuations depending on assumptions and accounting. You can pretty much bet that the transferring life insurer will capitalize the new company as thinly as possible while still maintaining the veneer of actuarial professional standards – especially given that NewCo doesn’t get a voice in the process of determining its own capitalization. If the benefits to life insurers are obvious, the benefits to policyholders are quite a bit less obvious. I’m not actually sure there are any.

Right now, the CD/IBT discussion primarily revolves around LTCi. The reality is that life insurers have blocks of LTCi that are uneconomical at practically any rate and those blocks potentially threaten to bring down the whole enterprise. The argument, I suppose, is that IBTs and corporate divisions are a way to cut out the cancer so it doesn’t kill the patient – nevermind that the cancer, in this case, is insurance sold to ordinary folks for the most difficult time in their lives. But LTCi isn’t the real issue. It’s chump change compared to the absolutely massive liabilities built up through Guaranteed UL, Variable Annuities with Living Benefits, GICs, pension takeovers and other complex, long-dated, highly economically sensitive transactions. It seems like LTCi is being used as the tip of the spear to allow life insurers to have a new tool to shed damn near any business they like at any time with virtual impunity – at least, that’s how they’d like the laws to be written.

For producers, blank-check IBT and corporate division laws undermine the core promise represented by the insurance contract for the insurance company to be bound to its obligations. When you sell a product from a particular life insurer, you have faith in that particular life insurer to fulfill its promise to your client. What happens if that life insurer can peel off your client’s product into a dubiously capitalized new company at will? The promises remain, but the ability to fulfill them has changed. We’ve seen this movie before with the host of life insurers that have carved off books using other restructuring tools. The difference between those and IBTs/CDs is that these new tools require much less scrutiny. There’s nothing holding life insurers back from peeling off “bad” blocks of business other than reputational damage. Loose IBTs and corporate division statutes are a free pass for reckless behavior – not unlike the so-called Greenspan Put of the 1990s and early 2000s, where it was received wisdom on Wall Street that the Fed would step in to bail out financial institutions if things really got bad. We all know how that turned out.