Monday, November 15, 2010

Longer Lives Mean More Problems for Life Insurers

My last post on Friday mentioned that MetLife - one of the largest life insurance companies in the world, and arguably one of the better managed ones - has decided to exit the long term care insurance market.

As it turns out, Colin Devine of Citigroup was in town last week, and I had the chance to go hear his presentation. Colin follows the life insurance stocks for Citi and, in my opinion, is one of the best analysts on the Street.

Colin spent a good portion of his luncheon presentation talking about the issues in long term care, as well as the annuity markets, that all of the insurers are facing.

Here are the basic problems: we're all living too long; interest rates are too low; and too many policyholders have figured out that some of the deal that insurers were offering a few years ago were very attractive, and so "lapse ratios" are trending well below expectations.

The first problem of longevity is of course good news for most of us. A couple who reaches the age of 65 has a good chance that at least one spouse will live another 30 years. This is at least 10 years longer than even just a few years ago. Problem is, most recently written insurance policies - including annuities - assumed that most people would not survive much longer than 80 years old, so insurance companies are having to pay out more than they expected.

Low interest rates present a challenge to all investors, and insurance companies are no different. Colin noted that virtually all insurance companies (with the exception of Met, interestingly) assumed a year ago that interest rates were going to move higher in 2010, and so priced policies accordingly. Now that interest rates are 100 basis points lower than they were a year ago, these assumptions are coming back to bite.

Finally, many annuity contracts written over the past decade made promises that are now proving to be very hard to fulfill. For example, Prudential was offering annuity holders a 7% lifetime guaranteed return just a few years ago. Even a cursory glance of investment returns over the last few years will tell you just how far underwater Pru must be on these policies. Even if stock markets move sharply higher in the next few years, it is hard to see how a balanced portfolio of stocks and bonds can achieve a 7% return after fees with interest rates so low.

This Saturday's New York Times carried an article about long term care insurance which is well worth reading. Here's an excerpt, with the full link below:

The good news here is that the {premium} increase seems to be necessary in part because long-term care itself is so good. People are staying alive longer than companies predicted, and they’re continuing to pay their premiums for longer periods of time, too, in order to remain eligible for that care.

But the bad news is that a price increase of this magnitude suggests that some companies had no idea how to set prices on many of their policies. If they have it wrong today too, you could sign up for a $2,500 premium at age 60 and end up paying two or three times as much for it when you’re 85 and on a fixed income.

Long-Term Care Insurance No Longer an Easy Sell -