2004: a grim year for LTC insurance: after a horrendous 2004, writers and distributors of long-term-care insurance rethink their strategies and hope for a rebound.

The long-term-care insurance industry is reeling over last year's individual sales results, the worst year-over-year comparison since marketing and research firm Limra International began collecting statistics in the mid 1980s.

First-year premiums through Sept. 30 were down 28% from a year earlier, Limra reported, and fell for the third time in four years. New premium declined 20% or more for a majority of carriers participating in Limra's survey, and five of the 12 insurers with that rote of decline are in the list of top 10 individual LTC insurance writers.

The number of new lives insured fell even more steeply in each of those years.

Several big LTC writers exited the business in the past two years, and many other carriers are now rethinking whether they should stay in, said Jennifer Douglas, the researcher who compiled the Limra report. "The biggest concern is profitability, but another worry is that the number of LTC-only producers has been declining," she said. "The more successful producers are the ones that specialize in it, but many have felt the need to diversify. The majority are dabbling in it, selling five policies a year or less."

Producers are concerned not only about carriers leaving the business, but that other companies have shown no interest in buying their in-force blocks. Producers also are concerned about rate increases, especially on existing policies, said Douglas. Teachers Insurance and Annuity Association was able to sell its in-force block to MetLife, but Conseco, CNA, Thrivent Financial, IDS and Aegon subsidiary Transamerica all have had to hold on to their blocks for lack of buyers, Douglas said.

Stephen Moses, president of the Center for Long Term Care Financing, a public-policy nonprofit organization, reported in a January e-mail to center members a "rebellion" among the audience at the filth-annual Society of Actuaries Long-Term Care Insurance Conference in Orlando, Fla. "More than once and again at this point, rebellion broke out among the audience, who wanted to skip over questions and answers about technical topics and talk turkey: 'Why are sales down almost 30% this year, and what are you big shots going to do about it?'" he wrote. Moses summarized panelists' answers: "All express optimism, emphasize the promising demographics, repeat the usual reasons why consumers should be buying, blame distribution problems and rate-stability challenges, and state their confusion and frustration that people still don't buy in bigger numbers," he wrote. His explanation for many years has been that most middle-class people won't buy private insurance as long as government continues to pay for long-term care after the insurable event through Medicaid.

The industry has never grown as fast as expected, but the recent sales slump has been fueled by the effects of low lapse rates, the lowest interest rates in a generation and improving mortality. Throw in some greater regulatory requirements, and many insurers have felt compelled to raise rates on both in-force and new business.

Higher rates proved too much for some insurers to overcome. "Some carriers found they couldn't prudently continue in the marketplace with existing blocks without price increases to them," said James Glickman, organizer of the January conference and president and chief executive officer of LifeCare Assurance Co., a reinsurer dedicated exclusively to the LTC market. "If you're a mainline provider and make rate increases on old blocks, you have a harder time selling new business," he said.

Rates actually fell in the mid to late 1990s, but insurers told producers not to worry, that they've never had a rate increase and that there would be no future problem, Glickman recalled. But after subsequent increases on in-force business of 40% or even 100%, agents and clients became skeptical of the industry, even though major players like Genworth Financial, MetLife, John Hancock, UnumProvident and others still have not raised rates on existing business, he said.

The Sales Impact

Even top producers have felt the effects. When CNA raised rates last year by 45% on in-force policies in Colorado, Wilma Anderson said she "got buried by phone calls from clients asking what they should do." Anderson has sold more than 400 LTC policies annually in recent years and offers sales courses to licensed agents through a Littleton, Colo.-based business called The LTC Coach. Anderson said those calls and her contact with prospects caused her to reassess the way she sells LTC insurance. "For the younger individuals, those ages 50 to 64, there are some other ways of purchasing LTC insurance that agents have to adopt to their own practice today in order to survive," she said. In 2004, Anderson's sales of traditional LTC policies fell to 342, "but I actually sold more because I was selling more life insurance and annuities," and LTC coverage was part of the life or annuity sale, she said.

Some insurers, including John Hancock, National Life Insurance Co., and Genworth, add a LTC rider to their traditional life policies, Anderson said. The rider allows policyholders to use part of the death benefit for long-term care, or it establishes a pool of money within the life policy lot LTC use. Almost every annuity on the market today allows the owner to access that money for nursing home care without surrender charges; people choose them over other investments because the annuities, even some variable annuities, guarantee the principal and sometimes even some level of earnings, she said.

UnumProvident offers a disability policy that can convert to a LTC policy at age 65, or even earlier, with no additional underwriting, Anderson said.

To the callers facing rate hikes, options weren't always appealing. Among them: accept lower benefits, cancel the policy, or pay the premium while shopping for other similar products. Clients whose health had worsened or who had owned their policies for a long time often could not find less-expensive coverage. For those, Anderson looked to other options to help clients "lock in what they had." One such option was to use a "1035 exchange" of the cash value of a client's life insurance policy for a new LTC policy with paid-up coverage. Section 1035 of the Tax Code allows for tax-free exchanges of life products.

Consumers are more educated now than just a few years ago, according to Anderson. "Here in the Denver area, we have some very big seminar players," she said. "Now that I've turned 55, I could go out for lunch every day of the week. Almost every one of these individuals who puts on a seminar talks about LTC insurance as part of estate planning, as part of protecting your assets. The agent who wins at this now is going to be the agent who listens to what consumers say they want, listens to how they've accumulated assets or not accumulated them, hears whatever their concerns are, and finds a product to fit the client's needs. It's no longer about just having one product to offer."

Jesse Slome, president of Sales Creators Inc. and publisher of LTCi Sales Strategies magazine, spoke of "an enormous disconnect that is hurting sales at a time the opposite should be taking place.

"There's no question 2004 was not a good year overall," said Slome, who is also a co-founder of the American Association for LTC Insurance. "But if you keep painting a negative picture without looking at the positives, it's like saying this winter has had six cold days, and we'll never have a sunny day again. Then you wonder why agents say that insurers are leaving and rates are going up."

Brighter Outlook?

The positive side of the equation is that four companies in 2004 experienced sales growth of 20% or more, two companies reported 10% to 20% increases and more companies are looking to enter the business, Slome said. He predicted that as interest rates rise, insurers may start to lower premiums as they compete.

And just as Mercedes Benz found a way to offer less-expensive cars when it had saturated its affluent market, Slome predicted that insurers will offer policies with shorter-term protection but lower prices, and that government will help promote them. The federal and state governments, "which pay the lion's share of LTC costs," understand that they need to get the middle class covered, and the way to do that is by offering them a "middle-of-the-road policy," he said.

Despite industry lobbying, Congress is not going to grant an above-the-line tax deduction for LTC premiums, Slome said. But it has created a pilot program in Virginia, Nevada, Arkansas, New Jersey and Idaho, financed by federal money, to mail messages to residents from 50 to 70 years old urging them to buy LTC insurance, he said. Meanwhile, a Congressional bill seeks to eliminate the ban on state partnership programs, which promise buyers of LTC insurance protection from the state seizing their assets to pay for nursing home care after their policies' benefits run out. Four states had set up state partnership programs in the 1990s before Congress banned the formation of more.

Another positive of 2004 is that some small LTC writers "did box-office business" selling to business owners, said Slome. Their agents had developed alliances with certified public accountants, and together they sold LTC policies as "one of the last great tax-deductible items," he said. The professionals use limited-pay policies with the last payment coinciding with an executive's retirement date. Once paid up, they are no longer subject to rate increases. Owners have been known to ask for more expensive coverage because they are looking for more tax deductions, Slome said.

Slome sees "enormous potential" for growth in the group market, which he said is still in its first stage of development and will undergo significant change. He predicts guaranteed issue at the workplace for as few as 25 lives, and he said a major carrier is now entering the group marketplace. The two-year-old federal employee work-site program administered by MetLife and John Hancock "raised awareness and the high bar," he added, and it is getting ready for another open enrollment.

In a white paper released in January, consulting and actuarial firm Milliman argued that "true" group LTC insurance could boost sales. Most policies sold at the workplace are currently individual policies sold through employers, and too few employees end up with coverage. Authors Jonathan Shreve and Jill Van Den Bos said more employees would buy coverage if the package is designed consistent with other group employee insurance, including lower commissions, an employer contribution and vesting.

Glickman said other factors should help the industry. One is a pending move by the National Association of Insurance Commissioners to change risk-based-capital requirements in a way that would reduce the cost of capital for companies entering the business and increase the return on equity lot all. Over the next two to four years, he expects twice as many companies to be in the business, with sales growing 2.5 to three times. On the actuarial side, the positive effects of improving morbidity will offset the negative effects of improving mortality, Glickman said. He predicted "very strong sales results and penetration" in 2006 through 2008.

Douglas said that even if penetration remains less than 10%, sales will increase as more baby boomers enter the age group that buys LTC policies. "The industry, employers, government and Limra need to unite and send out positive messages," she said. "The product can do a lot of good for individuals and the country." But she is not expecting a rapid turnaround. "I'm expecting sales to grow in 2005, but we'll be comparing figures to a dismal year. I don't expect to see these declines again."

Learn More

Metropolitan Life Insurance Co.

A.M. Best Company # 06704

Distribution: Career agents, LTC specialists, independent agents, wirehouses, banks, contracts with AARP and federal government

Genworth Financial

A.M. Best Company # 69555

Distribution: LTC specialists, financial advisers

John Hancock Life Insurance Co.

A.M. Best Company # 06681

Distribution: Career agents, independent agents and other third-party producers

UnumProvident Corp.

A.M. Best Company # 69743

Distribution: Independent brokers and agents, benefits consultants, direct sales force, marketing agreements with other insurers

For ratings and other financial strength information about these companies, visit www.ambest.com.

Key Points

* The poor LTC market caused writers and producers to take drastic steps.

* LTC producers in the future will likely have to offer a variety of products, including those that offer LTC insurance as a rider.

* Selling less expensive policies with lesser benefits can get the market back on track.

* Due to changing external factors, the market is likely to improve.

* Government has a stake in the success of private LTC insurance.

2004: Long-Term-Care's Bad Year

Top Writers *, Individual LTC Insurance, Based on New Premiums

(Alphabetically Listed)

3Q04 YTD

Allianz Life

Bankers Life and Casualty

Genworth Financial

John Hancock

Lincoln Benefit Life

Massachusetts Mutual

MetLife

Northwestern

Prudential

UnumProvident

Share 87%

* Based on participating carriers

Source: Limra International

New premium slipped further in
2004's first three quarters.

Individual LTC Insurance
Sales Trends

               Percent change *

        No. of Policies
            (Lives)        Premiums

2000           10              12
2001           -8              -5
2002            4               5
2003          -11              -7
3Q04          -31             -28

Note: Table made from bar graph.

* Percent change in policies (lives) and annualized
new premiums from same period prior year

Source: Limra International

Just seven of 23 carriers experienced growth during the first three
quarters of 2004.

Percent Change in Individual LTC Insurance Annualized
New Premiums

(3Q 2004)

Percent change    Number of companies

-20% or less              12
-19 to -10%                0
-9.9 to -5%                2
-4.9 to 0%                 2
0 to 4.9%                  0
5 to 9.9%                  1
10 to 19.9%                2
20% or more                4

Note: Table made from bar graph.

* Growth from same period prior year.

Source: Limra International

Average Annual Premiums for Leading
LTC Insurance Sellers in 2002

                With 5% Comp.           With a          With Inflation
                    Inflation    Nonforfeiture          and Protection
Age     Base       Protection          Benefit   Nonforfeiture Benefit

40      $422             $890             $537                  $1,117
50      $564           $1,134             $715                  $1,474
65    $1,337           $2,346           $1,646                  $2,862
79    $5,330           $7,572           $6,479                  $8,991

NOTE: Premiums are generally for a $150 daily benefit amount, for
four years of coverage, and a 90-day elimination period.

Source: America's Health Insurance Plans

Why Three Writers Bucked 2004's Ebbing Tide

A broad business mix led MetLife Inc. to growth in new long-term-care premium last year, one of only seven carriers to achieve that distinction. The top five writers last year, in alphabetical order, were Allianz Life of North America, Bankers Life and Casualty, Genworth Financial, John Hancock and MetLife, according to Limra International.

"We had a wonderful year, a very strong year," said Joyce Ruddock, MetLife's vice president for Long Term Care. "We're number one in group sales, number three in individual and number three overall."

MetLife markets in four channels: individual, employer, association marketing with AARP, and the federal LTC insurance program along with John Hancock. Producers include career agents, LTC specialists, independent agents, wirehouses and banks.

While the industry has leaned toward richer plan designs, MetLife has always been a proponent of simplicity, affordability and good communication, Ruddock said. Based on LTC utilization numbers, people on average require three years. "A majority of Americans would do well with shorter-duration plans," said Ruddock. "I see that as a shift in the industry in order to make LTC insurance more affordable and better meet the actual needs of consumers." She added that MetLife is thinking of offering combination products, though they haven't been very popular. "Intuitively, they make sense," she said. "I think they'll evolve as niche products."

Allianz Life Insurance Co. was not among Limra's list of top 10 writers in 2003, but it surged up nine places in the ranking to finish fifth last year, according to Jay Melquist, senior vice president of LTC sales and marketing. He said the most significant element of the company's winning strategy is its "fabulous" group of independent agents. Allianz, which has been in the business since 1990, has relationships with about 300 independent marketing offices and more than 150,000 producers, including some that were new last year.

"They seem to bring us quality business and have good relationships with customers," Melquist said. "We provide good products and good service, and we've managed our book so we haven't had to take rate increases." Allianz wrote about $24 million of first-year premium last year, and it reached 100,000 LTC insureds, he said. Allianz' products generally provide rich benefits with lots of options, he added.

New York Life Insurance Co.'s LTC sales were flat last year, but it announced in February it will begin paying a dividend on its newest product, LTCSelect Premier. The dividend will be in the form of a premium reduction on policies in force for at least three years.

The dividend is small, only 0.5%. "But the message is important," said Kenneth A. Grubb, senior vice president, Long Term Care. "This is the first dividend, and we will consider dividends annually. If the experience improves, the dividends will be greater." New York Life said it is the only insurer in the market today to declare a long-term-care insurance dividend.

New York Life sells "a fully comprehensive product," one that will offer value no matter how long-term care is provided 30 or even 40 years from now, said Grubb.