Fitch: Long-Term Care Insurance Draws Renewed Concerns

CHICAGO--()--The announcement last week that Genworth (NYSE: GNW, Insurer Financial Strength Rating: A-/Rating Outlook: Stable) would be conducting a comprehensive review of the adequacy of its long-term care (LTC) claim reserves during third-quarter 2014 is marking some renewed concerns for the industry. Genworth's announcement likely means other LTC providers, most of which are life insurers, are potentially examining reserve assumptions as well, according to Fitch Ratings.

Genworth is by far the largest player in the approximately $7 billion (premiums earned) individual LTC insurance market, ahead of John Hancock, MetLife, CNO Financial Group and Aegon US, among more than a dozen others. Genworth reported a $66 million after-tax, year-over-year decline in earnings in the first half of 2014 to higher incurred losses resulting from higher frequencies and severities on new and existing claims.

Fitch views LTC insurance as one of the more risky products in a life insurer's product suite due to above-average underwriting and pricing risk, and high reserve requirements. The product's key risks include morbidity, persistency and exposure to low interest rates. While the product is written on a guaranteed renewable basis, which allows the insurer to increase premium rates on in-force business based on emerging claims experience, premium rate increases are subject to regulatory approvals.

Historically unfavorable underwriting results have been negatively affected by overly generous product features and inadequate pricing, which has driven several insurers (e.g. MetLife and Prudential) from the business. More recently, weak industry results have been further affected by low interest rates.

The market's interest benefit ratio, a measure of the sum of incurred claims and change in active life reserve to the earned premiums, runs over 100% for most firms, not a good measure. When netting the benefit value of investment income to the ratio's numerator, most ratios drop below 100%, although perhaps as many as one-third of LTC providers still landed above the 100% mark in Fitch's last detailed analysis of the product.

LTC insurance has been thought to have a bright future given the graying of populations and its importance in potentially alleviating state- and federal-sponsored senior care funding. Some state governments offer tax credits on annual premiums paid. New York's credit, for example, is 20%. However, industry repricing based on emerging experience has driven the cost of the product outside the reach of many potential customers. The penetration rate of LTC insurance among persons 45 to 70 years old remains stubbornly in the midsingle-digit range.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Douglas Meyer, CFA, +1 312-368-2061
Managing Director
Insurance
70 West Madison Street
Chicago, IL
or
Matthew Noll, CFA, +1 212-908-0652
Senior Director
Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Douglas Meyer, CFA, +1 312-368-2061
Managing Director
Insurance
70 West Madison Street
Chicago, IL
or
Matthew Noll, CFA, +1 212-908-0652
Senior Director
Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com