LTCI charges cut life industry earnings

February 27, 2015 at 12:21 PM

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Low interest rates may have hurt the performance of life insurers' long-term care insurance (LTCI) units more than the performance of other interest-sensitive operations.

Analysts at Moody's Investors Service say charges for increasing LTCI reserves led to a drop in total U.S. life company operating earnings. The companies' earnings fell to $27 billion in 2014, down 4 percent from the 2013 total, the analysts say.

The companies' total annual net income rose 31 percent, to $23 billion.

Increases in fee income, stock-based account values and prepayments helped net income by pushing investment income higher.

Insurers increased LTCI reserves partly because of low interest rates but partly because of rising claim costs. Low interest rates can hurt the performance of disability insurance products, but price increases helped life insurers' disability units in 2014, the analysts say.

In the future, "if rates don't rise as forecast, investment income and spread margins will continue to diminish," the analysts say. "In particular, a prolonged low interest rate environment would further pressure the [LTCI] business."

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