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.
