Genworth Says Higher Premiums Blunt Long-Term Care Errors
By Zachary Tracer
Dec. 4 (Bloomberg) -- Genworth Financial Inc., the largest seller of long-term care coverage, is counting on periodic rate increases of 2 percent to 4 percent to maintain profit targets, after larger insurers retreated from the business to limit risk.
“I don’t think it’s prudent to be in this business unless you can, over time, re-rate policies to reflect the difference between how actual reality played out versus your original assumptions,” Chief Executive Officer Tom McInerney said today in an interview. “You have to ultimately have a return in the mid-teens range. If it’s less than that, on a risk-adjusted basis, investors shouldn’t invest in the business.”
McInerney has been limiting benefits on new coverage and seeking regulators’ permission to lift rates by more than 50 percent on some policies sold in prior decades. That contrasts with the approach of larger rivals MetLife Inc. and Prudential Financial Inc., which halted long-term care sales in recent years as costs climbed for the coverage, which helps pay for home-health aides or residence in nursing homes.
It’s difficult to predict fluctuations in interest rates, the proportion of customers who will hold on to their policies over time, and the number of policyholders who eventually use the benefits, McInerney said. There are typically about 20 years between when someone purchases a policy and when it’s used.
“We don’t have to get everything correct today on morbidity or mortality or lapse or interest rate assumptions,” McInerney said on a conference call that Richmond, Virginia-based Genworth held today to discusses the business. “We can correct for that by seeking these more frequent, proactive rate increases.”
That’s different than life insurance, where premiums on most policies stay the same over time, and with how long-term care insurance has typically been managed, McInerney said. It’s more similar to health coverage, where insurers can adjust premiums each year.
Genworth, which also offers life and mortgage insurance, has more than doubled this year in New York trading as rising home prices helped it post profits for the first time since 2007 at the unit backing U.S. home loans. McInerney, who joined in January, has been telling analysts for months that the company would provide more details on its long-term care business at today’s event.
McInerney’s company gained 0.7 percent to $15.25 at 4:15 p.m. in New York. Its advance this year is the best on the 21-company Standard & Poor’s 500 Insurance Index. Genworth still trades at the biggest discount to book value in the index.
McInerney said today that reserves are adequate for long-term care coverage and provided analysts with details on how the levels change based on interest rates and claim assumptions. Analysts had been pushing for information about how Genworth will cope with low interest rates and the possibility of higher-than-expected claims costs.
Insurers that still offer the coverage have tightened policy terms and increased prices, said Laura Bazer, an analyst at Moody’s Investors Service. Premiums have increased about 30 percent over the past five years, according to Jesse Slome, who runs the American Association for Long-Term Care Insurance.
“It’s hard to find a happy medium in a policy that meets the needs of people and is affordable,” Bazer said in an interview before today’s conference call. “The benefit has to be worth the cost.”
Manulife Financial Corp.’s John Hancock unit offers individual coverage in the U.S., after suspending sales of group policies in 2010. Mutual of Omaha Insurance Co., Northwestern Mutual Life Insurance Co. and Aegon NV’s Transamerica unit were among the largest sellers of individual coverage in the third quarter, along with Genworth, according to data compiled by industry group Limra.
Genworth has requested rate increases on some groups of policies sold from 1974 to 2007, which are projected to add about $280 million to annual premium. The company said today it’s achieved about $155 million of that figure.
The insurer is also requesting premium increases of 6 percent to 13 percent on some contracts sold from 2003 through last year. Some of the rate increases requested on the older policies were greater than 50 percent, Genworth said last year.
“It is impossible to be in this business long-term, if you have to set all of your assumptions based on the date the policy is issued and you can never change or re-rate the policies,” McInerney said. “I wouldn’t be comfortable, as the CEO of Genworth, going forward in this business if, at the end, the regulators come out in a place where they won’t allow us to get these smaller, more proactive rate increases.”