Analysts At Citi See CNO Financial As A Potential M&A Target

Long-term care (LTC) has been a problematic product for life insuring companies, causing continued reserve charges and low profitability, which were a result of lower than estimated lapse rates, higher claims incidence/severity and low interest rates. While this led many insurers to quit offering this product, the legacy closed blocks are still an issue.

Citi recently analyzed the recent SOA claims figures, statutory LTC filings and regulatory rate filings to derive the cause of mistakes made in the past, the existing risks, and future development perspectives.

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Citi drew the following conclusions from the research:

• Referring to LTC as a product with negative reserve development and increasing claims costs, analysts mentioned additional risks to assumptions for interest rates, mortality improvement, and morbidity. Among product with highest risk, Citi mentioned those with comprehensive benefits, lifetime benefit periods, and inflation riders.
• Since insurance companies are getting more conservative in their assumptions, particularly for lapse rates, Citi believes that the quality of reserve estimates will get better as more claims experience emerges. Moreover, Citi thinks that insurers can raise rates even further, based on their analysis of premium rate increase requests.
• Citi predicts more activity of third-party capital interest in LTC blocks, taking into account the already implemented 4 important in-force LTC block transactions in the past three years. Some P/E backed reinsuring companies have shown interest in legacy blocks, because of their long duration liabilities.
• CNO Financial Group Inc CNO is among the most probable targets for M&A deal, taking into account the high prospect of significantly lowering its LTC exposure. The CNO's management forecasted a reduction in LTC exposure by 50 percent in coming 3–6 years.
• In the case of Unum Group UNM, Citi doesn't expect any opportunity to lower the size of the in-force in a near-term, because of the company's immature block of average age of 54.