Unum’s Exit of Group Long-Term Care Business Is Credit Positive

Unum’s Exit of Group Long-Term Care Business Is Credit Positive

Last Monday, Unum Group (financial strength A3 positive) announced that it will discontinue new sales of group long-term care (LTC) insurance during the first quarter of 2012. The decision to exit group LTC is credit positive for Unum as it keeps the risks and potential losses from this business line from growing. Unum’s exit from the group side of the business follows its 2009 decision to discontinue individual LTC sales.

Exiting LTC has become an industry trend as other companies, including Guardian Life Insurance Company (financial strength Aa2 stable) and MetLife (financial strength Aa3 stable) have put their LTC business into runoff within the last year or so. Many companies with older blocks of LTC continue to grapple with a drag on returns on capital resulting from poor LTC performance. Exhibit 1 below lists the insurers that have stopped selling LTC, while Exhibit 2 lists the top 10 LTC insurers.

LTC insurance is designed to meet the long-term care needs of a growing elderly population. Policies typically offer a specified benefit that can be applied to a number of health-related expenses (i.e., nursing home, home health care, assisted living, etc.) when a policyholder is no longer able to perform certain “activities of daily living.” Claims may not emerge for many years and benefits could be paid out 30 years or more after the policy was originally written. Far fewer policies have lapsed than insurers expected, which has led to more claims than expected.

Persistent low interest rates played a part in Unum’s decision to exit the business and underscore the interest-rate sensitivity, particularly related to reinvestment risk, associated with LTC’s long-tailed liabilities. In addition, because LTC is a relatively new product, industry claims data is less reliable than for more seasoned products. LTC assumptions about future mortality, morbidity, policyholder lapses, and LTC usage have been subject to considerable deviation as experience develops. Optimistic actuarial assumptions have led to under-pricing and under-reserving for much of the industry’s LTC insurance.

Unum increased reserves on its existing book of business in fourth-quarter 2011 to reflect a more prolonged low interest rate environment, lower expected lapses, increased expected longevity and worsening morbidity. Discontinuing sales will limit Unum’s exposure to additional earnings and capital pressure. The company will, nevertheless, face challenges in managing the closed block of LTC, particularly if interest rates remain low or frequency and severity of claims worsen. One of Unum’s levers in managing the closed block of LTC business will be increasing prices, although that entails some uncertainty, as it requires regulatory approval and can take time to implement. Most LTC players have sought sizable rate increases from regulators because original pricing has been insufficient to support current actuarial assumptions.

Since LTC represented less than 5% of Unum’s operating earnings, the decision to withdraw from the market will not have a material impact on Unum’s overall credit profile, although it will cap the company’s exposure. Profitability of the closed block of LTC business going forward will be strongly influenced by the degree of conservatism baked into the company’s new reserve assumptions and its ability to increase prices on existing policies.