On Friday, Genworth (NYSE:GNW) announced that they will be making major changes to their Long Term Care Insurance product, Privileged Choice Flex. This clearly shows Genworth's re-commitment to their stockholders, as this product was extremely competitive and as a result, they were not making a large profit margin on it. Before this change in their LTC product, Genworth's LTC insurance was consistently 25-30% cheaper than its competitors. This change to increase the profitability of its LTC insurance product has been a long time coming due to the increased lack of profitability of these products stemming from increasing life expectancies and low interest rates. In fact, many insurance carriers, such as Prudential (NYSE:PRU) and MetLife (NYSE:MET), have left the LTC marketplace altogether due to the negative factors mentioned above. This leaves an opening for Genworth to increase market share, but it also calls for an LTC product modification to increase income from these products.
In my opinion, the change that will most benefit shareholders is the elimination of both short pay scenarios on the product: Pay to age 65 and 10-pay. Long term care insurance is typically paid for the lifetime of the insured. Basically, they pay the premium until they die, or until they become eligible for long-term care benefits by not being able to perform 2 of 6 activities of daily living (eating, bathing, continence, etc.) However, it is possible to "pay up" the policy in a shorter amount of time, and once the insured completes the payment period, their benefits are waiting for them if/when they are eligible to go on long term care claim.
Genworth previously offered a 10-pay (pay for 10 years) option and a pay-to-age 65 (payments are due until the client is age 65) option. These short pay options decreased the premium risk to the insured, because it made it less likely for them to stop paying their LTC policy premiums (this would cause a lapse of the policy and a loss of total past premiums paid.) These prepaid options increase the overall risk to the insurance companies and reduce overall profitability of these products. This is why Genworth is getting rid of these options on their LTC products.
Other changes to the product include elimination of the preferred discount (discount on premium for being in good health) and a decrease in couples discount from 40% to 20% (married, both applying, both issued).
They also announced several health conditions that will now automatically disqualify potential clients from getting LTC insurance (where these diseases did not automatically disqualify potential clients before.) These conditions include mental illnesses, such as Schizophrenia and heart issues in combination with tobacco use for 12 months. In addition, they decreased the agent commission on the product 15 percent.
Genworth's decision to essentially destroy their LTC product shows their awareness that long term care insurance is becoming less and less profitable, mostly because a higher percentage of clients end up using their long term care insurance, as people are living longer. This move is definitely a step in the right direction for shareholders and the company. It will increase profitability of their LTC product and decrease future liabilities. This change in policy criteria takes effect July 30, 2012, so I expect that there will be a surge of business throughout the month of July to lock in the lower rates before policy changes go into effect. This could lead to an unexpected revenue spike for Genworth in Q3.
Despite Genworth's changes to it's LTC product, I still expect the company to maintain a strong market presence. These changes have been a long time coming, and there are so few insurance carriers still providing this type of insurance, that I doubt this will have anything but a positive effect on Genworth's financial position.