Jumbo LTC rate hike for Hancock not likely, say analysts

State insurance regulators are not likely to approve John Hancock’s recently announced long-term-care rate hikes, denting third-quarter profits for the insurer’s parent company, Manulife Financial Corp., according to analysts.
“When investors ask what kind of third-quarter charge [Manulife] might take, I’d say it’s as much as $1 billion,” said Mario Mendonca, an analyst with Genuity Capital Markets. “I’m not giving them a lot of credit in my numbers for success in raising rates; to the extent they do, that might be a positive surprise.”
Last month, John Hancock Life Insurance Co., the second-largest provider of long-term-care insurance, announced to distributors that it would raise premiums on in-force LTC business by an average of about 40% for individual and group policies, citing a higher incidence of claims and longer life spans among the policyholders. An information packet the carrier sent to distributors indicated that it expected to file for rate hikes in September and October, with the first round of state approvals expected in January.
But experts cast doubt on whether the carrier will get the rate increase, particularly at that magnitude. Analysts expect resistance from several state insurance regulators, including those in Florida, California and New York. Failure to get the increases won’t threaten the company, but it will strain earnings, analysts said. Charges against companies’ reserves always reduce earnings.
“Florida is a little more stringent in giving out rate increases,” said Jeffrey Lane, an analyst with A.M. Best Co. Inc. “Many states give a portion of what insurers ask for. Some states are more difficult than others; they take more time to approve the increases.”
In Florida, John Hancock is the biggest seller of long-term-care insurance, according to Dan Keating, chief actuary for the state’s Office of Insurance Regulation. Mr. Keating and Mary Beth Senkewicz, Florida’s deputy insurance commissioner, hadn’t yet seen the rate hike paperwork but noted that the state has the actuarial horsepower and experience data to perform a thorough rate review process.
Florida’s review process for individual LTC business requires all rates to go through regulatory approval prior to going into effect, according to data from the National Association of Insurance Commissioners. It also has rate stabilization regulation in place, requiring carriers to ensure that the rates are enough to cover expected costs under “moderately adverse” experience. Rate stabilization rules also limit how high and how often insurers can file for rate increases.
Florida insurance regulators also scan through experience data in the state to determine whether the assumptions carriers are using are reasonable.
“We extensively probe the company to find out why they want to change things,” Mr. Keating said. “We cover more areas than other states, and because of that, rate increases aren’t as easy to come by.”
A handful of companies have requested rate increases as high as the 40% average John Hancock seeks. But Mr. Keating can recall only one time when state regulators have granted a request near that magnitude, which was made years ago by the now-defunct Conseco Senior Health Insurance Co.
Customers lapsed on their coverage following the Conseco increase, he added.
“Policyholders who have had consistent rate increases, so that their premiums are much higher than when they first purchased the policy — a good deal of them lapse,” Mr. Keating said. “It’s a concern with John Hancock. But one thing that helps them is that they had a 13% rate increase on individual policies two years ago, and other than that, they’ve never raised rates.”
In the case of John Hancock, rate increase approval from state regulators will have a direct impact on the earnings of Manulife. The higher the rate increase, the lower the charge against the company’s earnings, analysts said.
John Hancock spokeswoman Melissa Berczuk did not respond to several calls for comment.

For an expanded version of this story, see the Oct. 4 issue of InvestmentNews or visit InvestmentNews.com. on that day.