Some years ago many insurance carriers wrote tranches of long-term care (“LTC”) life insurance policies which have proved to be toxic. These “toxic” LTC policies – primarily written between 1999-2004 – were at the heart of a scathing critique of General Electric (tkr: GE) last week which ultimately accused the company of accounting fraud. While we have been critical of GE over the past two years, the company was not the only insurer to unwittingly write bad LTC policies which suffered from rosy assumptions around long-term healthcare costs and lifespan. Spiking premiums and loss ratios, dwindling cash positions, asset sales, and corporate and personal disruption mark the fallout. The toxic LTC policies will be a bane for years to come. Many insurers, insureds and ancillary players will suffer. A few (Technology service providers that can demonstrate a hard ROI), will profit from the disruption.
We gleaned a few insights while reviewing insurers’ statutory filings, experience reports, rate increase applications and related information:
- Annual premium increases are here to stay for the toxic LTC policy tranches. Insurers will continue to seek premium increases (many in the triple-digit percentages), for years to come to offset claims, loss ratios and potential reserve increases associated with the toxic LTC policies written during the late 1990’s-early 2000’s. See end of this note for examples of the toxic LTC policy tranches.
- Expect insurers to increase reserves to mitigate toxic LTC policy risk. Investors should question the adequacy of reserve levels for all of the “toxic” LTC policies written during the late 1990’s-early 2000’s period. Premium increases are unknowable, finite and therefore limited in their ability to offset LTC policy risk.
- Low interest rates are sub-optimal for earning an ROI on policy reserves. The artificially low interest rate environment that has become “normal” does not make it easy for insurers to generate a meaningful ROI on policy reserves. Therefore, the need exists for insurers to combine regular premium increases with reserve increases.
- Statutory reporting and state filings would benefit from additional clarity. We encountered examples where insurers conflated “policies in force” figures with “lives in force” in statutory filings. We recommend that insurers emphasize the reporting of unit-level metrics such as “lives in force” or “insureds in force” which provide insight beyond “policy in force” counts. This would be useful in cases where a single policy is associated with multiple insureds (spouses for example). Further, all insurers ought to follow standardized reporting for these metrics. The current reporting dynamic feels a bit like deconstructing the elements of ABC Software’s “Adjusted EBITDA” calculation so that it may be compared to XYZ Software’s “Adjusted EBITDA” figure in a like-for-like manner.
- Fallout from the toxic LTC policies will negatively impact most technology providers that sell to insurers who wrote these policies. However, there are a few potential bright spots. Technology providers that offer Outsourced Services and/or Tech-Enabled Services that can demonstrate an immediate, hard ROI are likely to gain traction during this disruptive period. Insurers will work to de-risk (i.e. trim balance sheets, reduce FTEs, improve operating efficiency) and those that can facilitate the de-risking stand to gain. Accenture (tkr: ACN), Cognizant (tkr: CTSH), IBM Global Services (tkr: IBM), Solera (private), SS&C Technologies (tkr: SSNC) and Verisk (tkr: VRSK) are among the well-positioned. See our earlier article “We Expect Outsourcing Providers to Gain Traction with Insurance Carriers”.