A.M. Best Special Report: U.S. Long-Term Care -- 2006 Market Review.

OLDWICK, N.J. -- According to a recent special report by A.M. Best Co., over the past several years, the individual long-term care insurance industry has been impacted by numerous challenges, which have led to declining sales and lower-than-expected overall profitability. Consequently, individual long-term care sales are running only near the early to mid-1990s levels, as many companies have de-emphasized this product line due to less than anticipated profitability, and as the products themselves have become considerably more expensive over the past five years.

The market continues to be concentrated among a limited number of large carriers, and the top 10 companies continue to represent the vast majority of total business. Genworth remains the largest writer of individual long-term care policies. Smaller carriers continue to find it more difficult to compete within this industry. A significant portion of the premium growth has been generated by premium rate increases rather than new sales. Additionally, no participant in the industry, including the leading companies, has reported consistently healthy statutory profits on the long-term care blocks. Despite current demographic trends that suggest increased demand for long-term care, statistics show that current penetration is only 10% and has not reached the high levels predicted for the industry years ago.

Approximately half of long-term care policyholders have coverage with a company that no longer actively sells long-term care insurance. The regulatory climate has forced undisciplined insurers to exit the market, while the larger, better-capitalized carriers were able to remain active in this product line. Some carriers left the market as a result of financial or strategic difficulties, while others have remained, repriced products and tightened underwriting practices. Since 2000, six companies listed among the top 10 individual long-term-care producers (Aegon, CNA, Conseco Senior Health, Fortis, IDS Life and Lincoln Benefit) have stopped selling new business in this product line.

A.M. Best has observed some newer players, such as Guardian and New York Life, entering the market in recent years. New competitors have tended to be large, strongly capitalized and well-diversified organizations. The new entrants benefit from having more industry data on which to base their pricing and assumptions than did their forerunners in the long-term care market, which currently are grappling with how to best manage their underperforming, older blocks.

Over the past number of years, there has been a very limited number of potential acquirers of long-term care business because of the poor performance of the older blocks of business. A.M. Best believes another potential future solution to move these risks off insurance companies' books and release capital might be the securitization of more seasoned blocks. At this point, though, securitization for long-term care business is more theory than reality.

On a positive note, long-term care writers have become more disciplined with respect to the market and have become more aware of the challenges of the industry. Many companies have realized the primary focus should be generating profitable growth as opposed to being market driven.

Based on the expanding senior population, which is maintaining longer and healthier life spans, A.M. Best expects the long-term care insurance market to grow over time. To date, however, the long-term care industry has not been able to penetrate the market to the extent previously expected. A.M. Best believes that sustained, positive sales momentum is not likely for at least a few years.

The individual long-term care market likely will continue to experience growing pains for awhile. A.M. Best continues to have a negative outlook on the individual long-term care segment overall, as it will take additional time to conclude whether the current products being sold are priced accurately.

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.