From the March 2009 issue of Investment Advisor • Subscribe!

March 1, 2009

Insurance Update: Around for the Long Term?

With other financial giants falling daily, what about Long-Term Care insurers?

Bad news is making headlines everywhere; long-term care insurance is no exception. On January 6, Penn Treaty Network America Insurance Company and American Network Insurance Company, a Penn Treaty subsidiary, were placed under the statutory control of the Pennsylvania Insurance Department by a court Order of Rehabilitation. On January 8, Genworth Financial Inc. announced it was notifying some 1,000 employees that their jobs were being eliminated. And Genworth's stock has tumbled--though it's far from the only one.

According to Buck Stinson, president of Genworth, the company's falling stock price is not an overall indicator of the company's strength. "If you look broadly at the life insurance industry, the index was off 70% to 80% of market cap in 2008," he says. "Our company is certainly impacted by that." Genworth's large mortgage insurance operation, he says, has colored investors' views, but he adds that if emotion is discounted, what remains is a company with underlying financial strength. He points to Genworth's ratings and reserves, saying, "The stock price is going to land where it is depending on where investors' fears and emotions are going to drive it."

Genworth's LTC business is flourishing, he adds, citing the new strategic marketing relationship with the National LTC Network and its growing product base. Although the layoffs announced amount to some 14% of its global employee base, that will not affect LTC policyholders; in fact, Stinson explains, Genworth is adding to its already 300-plus staff of LTC claims personnel.

According to Melissa Fox at the Pennsylvania Insurance Department, Penn Treaty policyholders need not worry about their policies either, but should keep paying premiums to maintain coverage. The rehabilitation order gave the state insurance commissioner, Joel Ario, authority to preserve the company's assets and oversee its current financial situation and operations. Any rehabilitation plan, adds Fox, will give payment priority to policyholder claims.

Jesse Slome, president of the American Association for Long-Term Care Insurance (AALTCI), says the industry is getting unfairly hammered. "What happened with Penn Treaty is really different," he says. "It's been some years in the making, and . . . a lack of capital may have put the final nails in the coffin for a small business."

Regarding Genworth, he says, "With LTC insurance, it's just not subject to the same kind of capital risk exposure that other types of businesses and investments are, because it's a very--no pun intended--long-term business." The premiums companies collect, he explains, are not expected to be paid in claims for anywhere from eight to 13 years. So there's no immediate effect, he says, unlike the mortgage market, in which suddenly "huge percentages of your houses are going into foreclosure."

He adds that LTC insurance isn't immune to economic travails. Falling interest rates hit the investments that back up policies. "For every 1% drop," he explains, "a company needs between a 10% and 15% premium increase, going back to the time that the policy was issued," to make up for lost income. So companies ask for rate increases on older blocks of business, for which "they didn't visualize having to reinvest at half the rate they got" at the policies' issuance. To compare, Slome suggests people consider how much Social Security cost-of-living increases have amounted to over a period of six years, compared to the increase in a LTC policy in the same period.

Another factor to consider is the lapse rate. Stinton points out that Genworth has paid out over $5 billion. However, policies during the 1970s-1990s were originally priced estimating a 5% lapse rate, something he points out is not unique to Genworth but common throughout the industry. The actual lapse rate has turned out to be between 1% and 3%, a rate now factored into policy pricing.


Marlene Y. Satter, a freelance business writer who can be reached at harpwriter@verizon.net.

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