8-K LTCI Filing Gambit

LTCI SEC filings

What is the process when an LTCI carrier is found to be under-reserved? The 8-K filing offers teaching points of the LTCI Gambit. Here is a recent one from UNUM.

“On May 4, 2020, the Company announced that in connection with a financial  examination of its Maine domiciled Unum Life Insurance Company of America (“Unum America”) subsidiary, which is expected to close at the end of the second quarter, the Maine Bureau of Insurance (the “MBOI”) has concluded that Unum America’s long-term care statutory reserves are deficient by $2.1 billion as of December 31, 2018. As permitted by the MBOI, Unum America will phase in the additional statutory reserves over seven years beginning with year-end 2020 and ending with year-end 2026. The 2020 phase-in amount is estimated to be between $200 million and $250 million. This strengthening will be accomplished by the company’s actuaries incorporating explicitly agreed upon margins into its existing assumptions for annual statutory reserve adequacy testing. These actions will add margin to Unum America’s best estimate assumptions. The Company plans to fund the additional statutory reserves with expected cash flows. The Company’s long-term care reserves and financial results reported under generally accepted accounting principles are not affected by the MBOI’s examination conclusion.

The Company has suspended its current share repurchase authorization and will not repurchase shares in 2020. Additionally, the Company intends to continue to pay its common stock dividend at the current rate.

How much was the share repurchase program costing over the past 3 years? This answer can be found in a recent 10-K Cash Flow from Operating Activities – about $1.2 billion. Add dividends for $0.6 billion bringing the total up to $1.8 billion over 3 years.

Proposed Carrier Best Practices

What do we propose as the best practice for carriers?

  • First, get into an under-reserved state ($2.1 billion will do just fine) by instituting a share buyback program to boost share prices; offer rich dividends too;
  • Be found to be in an under-reserved status by regulators;
  • Admit to the under-reserved state and embark on a multi-year plan to close the reserve gap;
  • Keep chaos at a minimum by 1 change at a time – i.e. maintain the dividend;
  • Institute a cash flow program to pay into reserves, by charging your policyholders; have the regulators enthusiastically support the cash flow program by passing rate increases & crying the insolvency wolf;
  • When the all-clear signal is given, resume the share buyback program;
  • Hope nobody notices.

That’s a plan!

Group CT Partnership +299% filing

Here’s a good start seen in the filing MEAM-131987416 (Policy Form GMB96/CT, inception year 1997) affecting 1,268 CT state workers. Med America, the reinsurer states, “although a substantially larger increase would be needed to return this policy form to its expected loss ratio, the company is limiting its premium rate increase to 299%” (to a lifetime loss ratio of 94%). Since this is the first rate increase ever, the CT DOI grants +50% this time out. By: (1.) the reinsurer not asking for the full increase (which would have brought premiums to 4x original), and (2.) by CT DOI being stingy, the Catch Up damage is significantly worse for policyholders. We show, by our methods, that policyholders of GMB96/CT could in theory be charged 9x original premium. This assumes carriers are permitted to chargeback existing policyholders for underpricing the past 23 years. On the other hand, we believe fair premium is 2.16x without chargebacks.

Is there a problem? Hard to say. It all seems in keeping with the plan to enable UNM to resume their stock repurchases.

Update June 29, 2020

To the CT DOI in May, I inquired whether the DOI reviews the type of UNUM practice in adjudicating rate filings. Asked, not answered (“what happened to UNUM’s response”?), the short of it is “no”. Previously, the CT DOI in public forum has asserted policyholders have an obligation to pay higher (exorbitant) rates to ensure LTCI carrier(s) do not go insolvent. In CT, LTCI carriers can count on the regulator’s support for future rate increases if their reserves are depleted due to share buybacks or excess payment of dividends. So why not? This practice appears to have been green-lighted.

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