Long Term Care (LTC) insurance is one of the riskiest products offered by the U.S. life insurers and, Prudential Financial (NYSE:PRU), the second biggest life insurer in the U.S., has joined peers MetLife (NYSE:MET), Guardian Life, Allianz Life and Unum Group in exiting this business. 
Prudential will stop the sales of new individual long-term care coverage by the end of this month, but it will continue to offer group long-term care insurance and guarantee existing contracts.
Long-term care policies help individuals finance the cost of nursing home, in-home, and assisted-living care. It is difficult for an insurer to accurately estimate the number of claims, the cost of care or the life expectancy of their clients before writing a long-term care policy.
The pricing and management of LTC product has proved to be challenging for insurance companies and added regulatory burden has made it difficult for insurers to make up for any losses via premium increases. Insurers who were optimistic about the initial pricing assumption in LTC policies are now forced to accept significantly lower returns or losses due to higher-than-expected claims and historically low interest rates.
Interest rate risk is probably the single biggest factor in Prudential and other companies getting out of this business. Long-term care policies usually have claims for an extended period of time, which makes the LTC business more vulnerable to interest rate risk. Low interest rates significantly reduce investment income needed by insurance companies to honor claims. Thus, we can expect to see more insurance companies exiting the LTC insurance business and a spike in new policy rates by those who choose to stay.
We have a price estimate of $54 on Prudential’s stock, about 15% below the current market price.Notes:
- Prudential Financial Halts Sale of Individual Long-Term Care, March 8, 2012, Bloomberg [↩]