The Future For Long-Term Care Insurance Companies

Jesse is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The negative-sounding headlines about departures of insurance companies that offered long-term care insurance and those now seeking double digit premium increases could lead one to believe that the industry's future is indeed dim.

Having spent most of the past two decades focused on long-term care insurance and working with many of the industry's bright minds, I fear many investors and are coming to their erroneous conclusions simply because we live in the “age of the sound bite.”  The same, I guess could be said about current and prospective policyholders.

With that in mind, I thought it would be helpful to provide some layman's perspective and address an aspect heretofore not reported on: the potential for future profitability of the long term care insurance product line.  I use the term layman because I am neither a financial analyst, nor an actuary.  But, in my role as Executive Director of the American Association for Long-Term Care Insurance I do extensive research and read most everything that is published.  Finally, our support comes from insurance professionals who are members, not from the insurance companies themselves.

A primary culprit behind the decision of insurers like Prudential Financial (NYSE: PRU), MetLife (NYSE: MET) and Unum Group (NYSE: UNM) to cease selling new long term care insurance policies has been due to two reasons.  The factor that pushed several into making a decision over the past months has been the steady decline of interest rates.  Low interest rates are to long-term care insurance what $4-a-gallon gasoline is to the 8-cylinder SUV car marketplace.  It is a game changer in terms of reducing the potential market size, requiring greater reserves and reducing overall product line profitability.

The second factor is what I refer to as critical mass.  While in the long term care insurance world, MetLife and Unum both ranked among the top-five insurers, the total number of policy holders (about 900,000 for Unum and 700,000 for MetLife) paled in comparison to other lines of business.  Prudential was even smaller with just around 200,000 policyholders, many of them in the true group marketplace where some content the future financial risks are highest.  There was general consensus over time that the long-term care insurance marketplace was limited in size.  Requiring significant reserves, it is understandable why a company would focus on other product lines and markets that are larger and potentially more lucrative.  Today, more than ever, critical mass matters.

In terms of the future, there is a significant difference that I believe can be easily overlooked if all one digests are the sound bite headlines.  While gasoline prices may never again drop below $2 a gallon simply due to worldwide demand, the low level of interest rates we currently are experiencing are not likely to last forever.  And, that bodes well for the future profitability of long term care insurers.

There is a correlation between investment earnings and the premiums charged for long-term care insurance.  When calculating costs for coverage, the actuaries will tell you that about half of the targeted income comes from each source and that for every one percent decline in interest rates and insurer needs a 10 percent premium increase to maintain their targeted balance.  The decline in investment earnings has been the major culprit causing insurers to raise premiums or give policyholders the option of paying the same amount in exchange for a changed benefit package.

When interest rates and investment earnings rise, all those premium dollars paid for both new policies as well as the recurring premiums for existing policies will be invested at higher amounts.  So too will be maturing investments.  The result, increased earnings.   Insurers like Genworth Financial (NYSE: GNW) had some 1.2 million policyholders as of 2010, the latest available industry data published in the 2012 LTC Insurance Sourcebook, stand to gain significant profitability increases.

John Hancock which is owned by Manulife Financial (NYSE: MFC) had nearly one million and both companies are still active selling new policies.  John Hancock is in the process of introducing a new concept in long term care insurance coverage which makes protection more affordable and while their sales have been slower over the past year, many experts predict they could again be a most significant player in the U.S. marketplace. 

Among the top five companies in terms of covered lives, Unum had just over 910,000, MetLife some 700,000 and Continental Casualty just over 410,000.  Of course all of these companies are multi-line insurers and long-term care insurance tends to comprise a rather small part of their overall business (with the exception of Genworth).  But an increase in interest returns also affects the potential profitability for other business lines including life insurance, disability and fixed annuities.

Lastly, while many have been predicting the demise of the long term care insurance industry for years, it is important to note that sales for the first nine months of 2012 increased by roughly eight percent. 

The need for long term care planning by an aging American population has not diminished.  The number of insurers in the marketplace is smaller but consumer interest and purchasing is higher than in recent years.   When interest rates rise as they inevitably will the product line and the companies offering this product are poised to benefit.  That will be good news for policyholders who fear future premium increases as well as investors.  Just a different way of looking at things in the age of the sound bite.

JesseSlome has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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