Employers Reassurance Corp. will bear the brunt of the large long-term care reserve deficiencies disclosed in January by General Electric Co. following the completion of a comprehensive review of its insurance exposures, newly obtained filings reveal.
The Kansas-domiciled Employers Re and unit Union Fidelity Life Insurance Co. reported statutory net losses of $2.33 billion and $1.21 billion, respectively, in 2017 as a result of large increases in their aggregate reserves for the accident-and-health business, which includes long-term care. But in the case of Employers Re, its result for the period could have been many times worse without its receipt of a permitted accounting practice from the Kansas Insurance Department.
Employers Re reinsures long-term care insurance under years old agreements with multiple cedants, including Massachusetts Mutual Life Insurance Co., Lincoln Benefit Life Co. and Allianz Life Insurance Co. of North America.
The notes to Employers Re's 2017 annual statement indicate that the company would have posted a net loss of $13.32 billion under statutory accounting principles, which would require the full recognition of the indicated increase in additional actuarial reserves. The permitted practice granted by the Kansas regulator allows Employers Re to spread the recognition of the indicated increase over a period from 2017 to 2023.
"Absent the permitted practice, the company would have required an additional capital contribution from its parent under the terms of the existing Capital Maintenance Agreement in place," Employers Re said in the filing.
The company received a $3.50 billion cash contribution from GE Capital US Holdings Inc. on Feb. 21 and obtained regulatory approval to apply that amount as a paid-in adjustment to surplus, effective Dec. 31, 2017. Employers Re made a $1 billion cash contribution to Union Fidelity Life, which received the same accounting treatment.
GE has committed to capital contributions of approximately $15 billion over a seven-year period to its insurance business to be funded from within its GE Capital subsidiary. It recorded an after-tax GAAP charge of $6.2 billion in the fourth quarter of 2017 as it revealed the review of insurance liabilities resulted in an $8.9 billion increase to future policy benefit reserves.
Employers Re's statement of actuarial opinion reported that the 2017 reserve review revealed a total indicated additional actuarial reserve of $14.5 billion, an increase of $13.2 billion from year-end 2016. The additional actuarial reserve showing on the company's annual statement totals $3.49 billion, resulting from the permission the company obtained to phase-in the increase.
In light of the reserve review's findings, Employers Re said it reconstructed its future claim cost projection curves based on trends it observed involving older claimant ages and later-duration policies.
"A growing proportion of ... policyholders are starting to reach the prime claim-paying period of 80 years old and higher," Employers Re said in the filing. "The reconstructed ... curves were appreciably steeper than previous projections."
The company's use of state permitted and prescribed practices is not uncommon in the insurance industry, but the magnitude of its effect on Employers Re's 2017 income statement appears to be without recent precedent.
A best-efforts review of disclosures in the notes to annual statements by individual property and casualty and life entities finds that the largest change in net income owing to a state permitted or prescribed practice in the previous decade may have been a $3.34 billion financial crisis-era swing in 2009 for bond insurer Syncora Guarantee Inc. with approval from the New York Insurance Department.
Among life entities, Pacific Life Insurance Co.'s 2008 and 2009 net income varied in each year by more than $1.10 billion from the amounts calculated under statutory accounting principles. The changes, which were positive on a reported basis in 2008 and negative in 2009, pertained to practices permitted and prescribed by the Nebraska Department of Insurance regarding certain types of reserves.
More broadly, the application of state permitted and prescribed practices had an immaterial impact on U.S. life industry net income in recent years. It will be much more meaningful in 2017 and, it would appear, in future years given the size of the Employers Re adjustment.
Employers Re said the amount of the additional actuarial reserves it recognizes in its annual statements for 2018 through 2023 will be calculated by taking a percentage of the difference between the total estimated reserve adjustment as determined by the current year's cash-flow testing and the 2016 additional actuarial reserves. The company will then subtract the amount of the change in those reserves that it recognized in each of the preceding years.
