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LTCI in the Doghouse

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Long-term care insurance (LTCI) issuers seem to have entered the astrological quadrant of “can’t get a break.”

Low interest rates are depressing LTC insurers’ investment earnings, and rating analysts and securities analysts are skeptical.

Fitch Ratings, Chicago, gave a recent LTCI industry review the headline “Unfavorable Results, Uncertain Outlook.”

“Fitch views LTC insurance as one of the most risky products sold by U.S. life insurers,” the rating agency said. “Given the long-tail nature of the liability, mispricing the LTC product can negatively affect insurers’ earnings and capital for many years.”

Colin Devine of Citi, New York, suggested before third-quarter earnings came out that investors might be treating insurers with large blocks of variable annuity, no-lapse universal life or LTC business as if they were all high-risk operations and valuing their shares accordingly.

Brokers are posting rumors on message boards about the possibility that at least one major LTCI carrier could suspend new sales this spring.

But, out in the field, “this year has been a very good year,” says Steve Forman, a senior vice president at Long Term Care Associates Inc., Bellevue, Wash., a large LTCI distributor. “Business has been surprisingly good.”

Consumers are spending again, Forman says.

Steve Sperka, a vice president at Northwestern Long Term Care Insurance Company, Milwaukee, says LTCI premium volume is up about 40% to 50% at his company this year.

The industry as a whole “is starting to see some growth again,” Sperka says.

Insurers are now generating about $6.6 billion in LTCI premium revenue per year from providing LTCI coverage to about eight million people, and they are selling 350,000 new policies per year, according to the American Association for Long-Term Care Insurance (AALTCI), Westlake Village, Calif.

LIMRA, Windsor, Conn., says total LTCI sales are about 5% higher this year than they were a year ago.

LTC insurers are paying about $4 billion LTC claims per year, up 53% from the 2007 total, according to the AALTCI.

Analysts describe LTCI as a product with a “long tail” because consumers may hold the product for many years before they file claims, and, in some cases, the claims themselves can stay open for many years.

LTCI issuers usually can count on interest earnings on investments in bonds to help contribute significant amounts to revenue. Right now, low rates are depressing portfolio yields.

In the past, LTCI issuers said most of their problems with product profitability had to do with the low rates, and the fact that policy lapses have been much lower than the actuaries had originally expected. Policyholders hang on to policies even when carriers increase rates substantially.

This year, some carriers are saying that claims are also a challenge. Genworth Financial Inc., Richmond, Va. (NYSE:GNW), for example, increased LTC claim reserves for 2010 by $262 million, to $3.7 billion.

Genworth has noticed an increase in the severity and duration of LTCI claims, particularly in older issued policies, the company says.

Genworth’s LTCI operating income fell to $31 million for the third quarter, from $44 million for the third quarter of 2010.

But Genworth did report an operating profit for the LTCI product line, not a loss, and LTCI sales have been 46% higher for the first three quarters than they were during the first three quarters of 2010, the company says.

Some of the sales growth appears to be due to overall sales growth in the market, Genworth says.

Another major LTCI player—John Hancock, Boston, a unit of Manulife Financial Corp., Toronto (TSX:MFC)—increased LTC operating revenue to $700 million, from $624 million, and it increased LTCI sales to $70 million, from $49 million.

John Hancock has been increasing prices significantly, and that led to a 73% drop in retail LTCI sales during the third quarter. The increase in sales was due mainly to strong sales through a voluntary LTCI program for federal employees.

Company executives describe John Hancock as being in a “retooling phase.”

In the group market, John Hancock is servicing existing clients and exploring a new product concept, the executives say.

But “we are committed to this market,” John Hancock executives say. “We feel that the future for this type of insurance is strong given U.S. demographics and the coming increases in need for care.”

Laura Bazer, a vice president at Moody’s Investors Service, New York, says LTCI is a product that should be very useful to an aging population.

The question is whether insurers price the product in a way that is affordable for consumers and profitable for themselves, Bazer says.

“Companies are getting better at understanding how the product is utilized,” Bazer says. “It still is a challenging and higher risk kind of product.”

Northwestern has tried to adjust for the risk by taking a somewhat unusual approach to selling LTC insurance: Instead of selling coverage for the lowest possible price, the company starts out charging somewhat higher premiums, then compensates policyholders if experience proves to be better than expected by paying dividends.

Northwestern LTC policy dividends will increase to about $12.8 million in 2012, from $11.2 million this year.

In addition to low rates, uncertainty about claims and uncertainty about lapse rates, another major obstacle continues to be getting consumers and employers to understand and recognize the need for the product.

When Prudential Financial Inc., Newark, N.J. (NYSE:PRU), commissioned a recent employer survey, it found that only 33% of the participating employers said they offer a voluntary LTC program, compared with 35% that offer critical illness insurance and 52% that offer dental insurance.

Many consumers continue to assume a relative or a friend will care for them if they need it, even though 58% of the consumers surveyed for Genworth say they are unwilling to quit their job or work less to provide long-term care for friends or relatives.

Genworth and other big LTCI carriers have been trying to raise awareness by joining to run a Long Term Care Awareness Month campaign this month.

“Genworth’s ongoing goal, but particularly during Long Term Care Awareness Month, is to encourage consumers to not only initiate a conversation about long term care planning with their families, but to give them the tools they need to create a plan for their future care and overall financial well-being,” said Buck Stinson, president of Genworth’s LTC operation.

At Northwestern, market researchers have found that Americans seem to be far more aware of long-term care than of LTC insurance. When that company commissioned a survey, it found that about 80% of the participants acknowledged the need for LTC planning, but 45% said they were not sure how they would handle LTC needs. Only 28% said they were saving for LTC needs.

 Compounding this is other Prudential survey data noting that on an individual basis, about 25% of people surveyed did not have the foggiest notion of what nursing home care costs. A similarly-sized group of respondents, however, indicated were aware that LTCI could be used to pay for it.

So the bad news is that consumers continue to be confused. The good news, however, is that this same widespread confusion means there is plenty of room for growth.

Sperka says he is confident the LTCI market will grow and remain competitive, despite the drubbing the product is getting from analysts this year.

“Many of the carriers are committed to this market over the long term,” Sperka said. “Consumers definitely need this.”


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