Genworth Bets on Long-Term Care as Insurers Flee Market

Genworth Financial Inc. (GNW), the biggest U.S. seller of long-term care coverage, is betting on a rise in interest rates to boost profits as other insurers flee the business.

Genworth, ranked by trade group Limra among the top five long-term care insurance providers since at least 2007, stayed focused on the market as the U.S. population ages and a hedging strategy guards against declines in bond yields. Long-term care was its biggest business last year, generating 29 percent, or $3 billion, of the Richmond, Virginia-based company’s $10.3 billion in revenue.

“If we were in a high interest-rate environment, you wouldn’t see any of them leaving the industry,” said Jesse Slome, executive director of the American Association for Long- Term Care Insurance. For every 0.5 percentage point drop in investment return, he said insurers have to increase premiums by about 15 percent to maintain net income projections.

Rivals retreated as low interest rates cut returns on funds set aside to back policies. Prudential Financial Inc. (PRU), the second-biggest U.S. life insurer, said this month it will stop selling individual long-term care policies amid “challenging economics.” Unum Group (UNM) announced its exit from sales of the product to groups in February after reporting a $425.4 million fourth-quarter loss. No. 1 MetLife Inc. said in 2010 it would stop sales of new long-term care coverage.

“We hedge that interest-rate risk,” Buck Stinson, president of U.S. life insurance for Genworth, said in a phone interview. “We’ll try to take that risk off the table.”

Rates Near Zero

The Federal Open Market Committee raised its assessment of the economy on March 13, repeating that interest rates are likely to stay low at least through late 2014. The central bank in December 2008 lowered its target overnight interest rate to a range of zero to 0.25 percent.

Genworth fell less than 1 percent to $8.74 yesterday in New York. It has risen 33 percent this year, the second-best performance in the 24-company KBW Insurance Index. (KIX)

Long-term care policies provide coverage to help pay for home-health aides or residence in nursing homes or assisted- living facilities. Genworth invests its premiums and relies on portfolio returns to pay claims and book profits.

Genworth Chief Executive Officer Michael Fraizer said in 2009 that he was directing resources to life insurance and long- term care after losses on retirement products and mortgage guaranties. U.S. mortgage insurance has been unprofitable for the company for four straight years through 2011.

Shut It Down

Mark Meiners, a professor of health administration and policy at George Mason University, said some insurers felt “stuck” because they’re facing elevated risk on long-term care and can’t get regulatory approval for higher rates.

“It’s easier to just shut it down when it’s a small part of your business,” Meiners said in a phone interview from Fairfax, Virginia.

MetLife CEO Steven Kandarian said this month that the retreat from long-term care and the decision to scale back offerings of variable annuities will help “strike the right balance between growth, profitability and risk.” MetLife (MET) has been focusing on expansion in Latin America and Asia after the purchase in 2010 of American Life Insurance Co. for about $16 billion.

The number of Americans age 65 and older may more than double to 71 million by 2030, and about 70 percent will require some form of long-term care, according to a 2010 industry research report by Prudential. “We see the underlying consumer need as being undeniable,” Genworth’s Stinson said.

The insurer said last month that it had received approvals to charge policyholders more in 39 U.S. states as of Dec. 31.

“Genworth’s people are looking at this and saying, ‘Down the line, this could be an exceedingly profitable business for us,’” said Slome.

To contact the reporter on this story: Andrea Ludtke in New York at aludtke@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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