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AALTCI tries to explain effects of interest rates

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The American Association for Long-Term Care Insurance (AALTCI) is working to educate the investment community about the effects of interest rates on issuers of private long-term care insurance (LTCI).

Jesse Slome, the group’s executive director, recently used a blog on Motley Fool to spread the word about the relationship between interest rates and earnings on LTCI reserves.

U.S. interest rates have started to rise in recent months after falling to record lows.

Slome cited LTCI specialist Claude Thau’s observation that a 1-percentage-point increase in rates generates $100 million in extra earnings on a $10 billion insurance company bond portfolio.

Six publicly traded insurers with large blocks of LTCI business on their books are using $41 billion in reserves to support that business, Slome said.

If rates go up 1 percentage point, the six companies would have $410 million in extra revenue.

If rates rise 3 percentage points, as some are predicting, the companies could add about $1.2 billion in new revenue.

“Obviously, added future earnings are only one aspect of ultimate income and profitability,” Slome said.

But the possibility that rates could continue to rise is a reason for optimism about the future performance of LTCI, Slome said.

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