Prudential Takes On Aflac in Benefits After Health Law

Prudential Financial Inc. and MetLife Inc. are moving onto Aflac Inc.’s turf selling protection against diseases and accidents as the largest insurers seek to add business tied to President Barack Obama’s health overhaul and win valuations like their smaller rival.

MetLife, Prudential and American International Group Inc. are among life insurers that have introduced supplemental health policies. Health insurers including Cigna Corp. are also adding the coverage as the new law limits profits from traditional medical insurance.

Workers may be encouraged to buy policies with payments from employers who are seeking ways to cushion rising costs and the health law’s expanded-coverage requirement. That could push customers into the market led by Aflac, said John Swanick, U.S. insurance advisory practice leader at Grant Thornton LLP. Aflac trades for about 1.7 times book value, while AIG, MetLife and Prudential all sell for less than their measure of assets minus liabilities.

There are “vast opportunities heading our way,” Aflac Chief Executive Officer Dan Amos said on May 22. “At the same time, success does breed competition.”

Obama’s Affordable Care Act, passed in 2010, may extend protection to about 25 million uninsured Americans, according to congressional estimates. It requires more employer-provided coverage, with policies that pay for everything from routine checkups to childbirth. Supplemental insurance, which typically provides cash directly to policyholders if they suffer an accident or illness, is usually bought by employees to help pay expenses not covered by their work plans.

Limiting Risk

MetLife, the largest U.S. life insurer, is adding products as Chief Executive Officer Steven Kandarian seeks business with less risk tied to fluctuations in interest rates and stocks. AIG, led by CEO Robert Benmosche, is pushing to sell more coverage to consumers. Both companies introduced voluntary health policies this year.

Prudential, the No. 2 U.S. life insurer, added a critical-illness policy last year and has ramped up sales efforts, Bob Patience, vice president for voluntary benefits at the group-coverage unit, said by phone. The Newark, New Jersey-based insurer is considering offering accident coverage, he said.

“Employers continue to expect shifting further costs to employees,” Vishal Jain, vice president for strategy and planning at Prudential’s group-insurance business, said in an April 19 interview. “They’re not expecting health-care reform to reduce their health-care cost trend.”

Prudential slipped 0.3 percent to $69.82 at 10:05 a.m. in New York. MetLife advanced 0.2 percent, and Columbus, Georgia-based Aflac declined 0.3 percent. AIG fell 1.4 percent after saying today it didn’t receive a deposit as part of a deal to sell a plane-leasing unit.

U.S. health-care spending is projected to be 19.2 percent of gross domestic product by 2020, up from an estimated 17.8 percent this year, according to a report from the U.S. Centers for Medicare & Medicaid Services.

Rapid Rise

“The cost of major medical continues to go up at such a rapid rate,” Aflac President Paul Amos II said in an interview. “Employers are eventually going to say, ‘Enough is enough.’”

Paul Amos said employers have options. In a move similar to shifting to retirement accounts from pensions, employers may give workers a set amount of cash to pay for coverage they choose. As premiums rise, the workers’ contribution could increase faster than the company’s payout, he said.

Or employers may cut back the scope of coverage they offer and increase deductibles and copays. The Aflac plans help cover gaps in less-costly plans or as deductibles and copays rise, Paul Amos said.

Market Leaders

Aflac was the top seller last year of voluntary coverage, a category that includes disability plans and life insurance, according to Eastbridge Consulting Group Inc., which studies workplace benefits. Unum Group and Allstate Corp. were also among the top providers. Sales of accident policies jumped 12 percent and critical illness increased 17 percent.

Prudential estimates that 20 percent to 30 percent of employers offer accident or critical-illness coverage. That leaves room in the market for many carriers, Patience said. Fewer than 10 percent of Americans purchase a critical-illness policy, according to industry group Limra.

Sun Life Financial Inc. and ING U.S. Inc. also introduced voluntary health policies last year.

Sun Life, based in Toronto, is working to become a top-five seller of group voluntary coverage in the U.S. by 2016, Wes Thompson, Sun Life’s U.S. president, said in a March 2012 presentation. That’s part of a strategy to reduce earnings volatility.

The voluntary coverage may be more profitable than standard medical policies under the new law. Aflac’s U.S. pretax profit margin was 17.7 percent last year. The health law requires companies to spend 85 percent of what they take in from large employers on medical costs. For individual and small-business plans, the figure is 80 percent.

Profitable Products

“Supplemental insurance can be quite profitable,” said Les Funtleyder, health-care strategist at New York-based investment firm Poliwogg LLC. Large medical carriers have “a very good chance to make these into profitable products.”

Cigna, the third-largest health insurer by market value, introduced a critical-care plan and an accident policy last year, said Mike Witwer, vice president for voluntary business at the Bloomfield, Connecticut-based company. UnitedHealth Group Inc., the biggest health insurer, started a plan in 2011.

“There are more new entrants to this business now than there have been in years,” Witwer said. “Health-care costs are going to continue to rise and that particular trend is what has driven voluntary.”

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