Genworth Financial Inc., now the largest seller of long-term-care coverage, is counting on periodic rate increases of 2% to 4% to maintain profit targets.
“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 Tom McInerney said Wednesday. “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.”
Mr. McInerney has been limiting benefits on new coverage and seeking regulators' permission to lift rates by more than 50% 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 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,” Mr. McInerney said on a conference call that Genworth held Wednesday 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 typically has been managed, Mr. McInerney said. It's more similar to health coverage, where insurers can adjust premiums each year.
Analysts had been pushing for information about how Genworth will cope with low interest rates and the possibility of higher- than-expected claims costs. Mr. McInerney said 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.
Shares of Genworth, which also offers life and mortgage insurance, have 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.
Insurers that still offer long-term-care coverage have tightened policy terms and increased prices, said Laura Bazer, an analyst at Moody's Investors Service. Premiums have increased about 30% 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,” Mr. Bazer said in an interview before Wednesday'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% to 13% on some contracts sold from 2003 through last year. Some of the rate increases requested on the older policies were greater than 50%, 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,” Mr. 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.”