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MassMutual's reported LTC rate hikes to come on book heavily reinsured by GE

An article by The Wall Street Journal revealing Massachusetts Mutual Life Insurance Co.'s plan to seek large, nationwide rate increases on a majority of its in-force long-term care policies shows additional evidence of the broader woes facing the business that had been brought to the fore by a massive 2017 General Electric Co. reserve charge.

But with the companies party to an LTC reinsurance agreement that spans nearly two decades, the relationship between those two developments may not be merely coincidental.

Under a treaty that took effect in June 2000, MassMutual ranked among the largest accident-and-health cedants to Employers Reassurance Corp., the GE subsidiary that has been in the line of fire since the industrial conglomerate announced the need to materially bolster long-term care reserves. Based on the associated reserve credit of $1.72 billion recorded by MassMutual at year-end, the reinsurance relationship also ranked among the largest in the industry involving the transfer of LTC business between unaffiliated entities.

A disclosure in a 2001 SEC filing indicates that MassMutual entered a coinsurance treaty with Employers Re through which it ceded the risk on its "Signature Care" LTC products and assumed back an unspecified portion of the risk on a yearly renewable term basis. It has, however, been more than 15 years since MassMutual last reported a positive amount of premiums assumed from Employers Re under a yearly renewable term reinsurance agreement.

MassMutual reported $230.1 million in earned premiums on its Signature Care individual LTC product in 2017, up from $218.9 million in 2016. Its in-force policy count was 72,247 as of Dec. 31, 2017. A MassMutual spokeswoman put the amount of long-term care reserves retained by the company at approximately $400 million net of reinsurance.

The company reported a gross active life reserve for guaranteed renewable accident-and-health business, which includes LTC and disability income coverage, of $2.01 billion as of Dec. 31, 2017, but it ceded nearly $1.58 billion of that amount. MassMutual strengthened its gross LTC active life reserves by a gross amount of $659 million between 2015 and 2017, all of which the company said was reflected in ceded reserves, to reflect what it described in its annual statements as "the risk inherent in the cash flows of this business."

The WSJ article stated that MassMutual has more flexibility than most of its peers to absorb poor LTC results. Employers Re is also uniquely positioned in that it is party to a capital maintenance agreement with GE, which has committed to making capital contributions to its insurance units of up to $15 billion over a seven-year period.

Employers Re had $903.3 million of surplus as of March 31, up from $816.5 million at Dec. 31, 2017. Those amounts reflected the effects of a permitted practice granted by the Kansas Insurance Department that effectively forestalled its recognition of $11 billion of a $14.5 billion indicated increase in additional actuarial reserves.

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GE's insurance units factor in many of the industry's largest LTC reinsurance relationships among unaffiliated entities. At the top of that list are a series of agreements related to the transfer and retrocession of years-old business written by what is now known as Brighthouse Life Insurance Co., which at a time was owned by Citigroup Inc., among Genworth Financial Inc. and GE's Union Fidelity Life Insurance Co.

Employers Re's largest LTC reinsurance relationship as a cedant involves its retrocession of certain business to LifeCare Assurance Co., a Woodland Hills, Calif.-based reinsurer and third-party administrator. MassMutual also maintains a reinsurance relationship with LifeCare through which it ceded $29.4 million in premiums in 2017 and reported a modified coinsurance reserve of $101.8 million at year-end.

Though filings for the proposed rate increases referenced in the WSJ were not available, previous MassMutual Signature Care filings in various states reference LifeCare as the administrator of the business and the party authorized by the insurer to make those submissions.

As a reinsurer, Employers Re's largest unaffiliated LTC relationship at year-end 2017 was with Allianz Life Insurance Co. of North America based on the aggregate reserve credit recorded by the cedant of approximately $2.53 billion. Following the MassMutual agreement, Employers Re's next-largest unaffiliated LTC cedants were Lincoln Benefit Life Co. and American United Life Insurance Co., which claimed reserve credits of $1.45 billion and $1.11 billion, respectively.

Allianz CFO Giulio Terzariol confirmed during a May 15 conference call that the company's pre-2001 LTC business, which he characterized as "very bad," was "completely reinsured" by GE. Its post-2001 LTC business, which he said is "definitely better" in its quality, is largely retained by the company.