Future Policy Benefit Reserves

3 Months Ended

Mar. 31, 2023

Future Policy Benefits Reserves

Future policy benefits reserves are related to the Company's run-off long term care business, which is included in the Life & Group segment.

The determination of Future policy benefits reserves requires management to make estimates and assumptions about expected policyholder experience over the remaining life of the policy. Since policies may be in force for several decades, these assumptions are subject to significant estimation risk. As a result of this variability, the Company’s future policy benefits reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.

The LFPB is computed using the net level premium method, which incorporates cash flow assumptions and discount rate assumptions. Under the net level premium method, the LFPB is equal to the present value of future benefits and claim settlement expenses less the present value of future net premiums. Net premiums are equal to gross premiums multiplied by the NPR. The NPR is generally the ratio of the present value of benefits and expense payments to the present value of gross premiums, expected over the lifetime of the policy. As a result of the modified retrospective adoption of ASU 2018-12, the Company’s NPR calculation incorporates the original locked in discount rate and the reserve balance as of the transition date of January 1, 2021.

The key cash flow assumptions used to estimate the LFPB are morbidity, persistency (inclusive of mortality), anticipated future premium rate increases and expenses. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. Expense assumptions relate to claim adjudication. The Company has not elected the practical expedient that allows locking in the expense assumption. The discount rate is determined using the upper-medium grade fixed income instrument yield curve.

The Company has elected to update the NPR and the LFPB for actual experience on a quarterly basis. A quarterly assessment is also made as to whether evidence suggests that cash flow assumptions should be updated. Annually in the third quarter, actuarial analysis is performed on policyholder morbidity, persistency, premium rate increases and expense experience. This analysis, combined with judgment, informs the setting of updated cash flow assumptions used to estimate the LFPB. Actuarial analysis includes predictive modeling, actual to expected experience comparisons and trend analysis. Applicable industry research is also considered.

Quarterly, to derive the upper-medium grade fixed income instrument yield discount rate assumption, the Company uses a published spot rate curve constructed from single-A rated U.S. dollar denominated corporate bonds. The Company uses linear interpolation to determine yield assumptions for tenors that fall between points for which observable rates are available. For cash flows that are projected to occur beyond the tenor for which market-observable rates are available, the Company applies judgment to estimate a normative rate which the Company grades to over 10 years.

Quarterly, the updated NPR is used to derive an updated LFPB as of the beginning of the current quarter measured at the original locked in discount rate. The updated LFPB is then compared to the existing carrying amount of the liability as of the same date (measured at the original locked in discount rate) to determine the re-measurement gain (loss), which is presented parenthetically within the Insurance claims and policyholders’ benefits line on the Condensed Consolidated Statements of Operations.

Insurance contracts are grouped into cohorts according to issue year. Contracts assumed through reinsurance are generally included within the same cohorts as contracts issued directly by the Company, according to issue year. The issue year for assumed contracts is defined according to the date that the Company’s assumption of insurance risk incepted. For assumed contracts that were reinsured concurrently with the issuance of the underlying direct contract, issue year is defined as the year that the underlying policy was issued. For contracts that were already in-force when assumed by the Company, issue year is defined as the year in which the reinsurance agreement incepted. For group long term care business, issue year is defined as the year the individual insurance certificate was issued. Long term care is the Company's only long-duration product line, therefore, cohorts are not further disaggregated by product.

The following table summarizes balances and changes in the LFPB.


	(In millions)		2023				2022
	Present value of future net premiums
	Balance, January 1		$	3,993			$	4,735
Effect of changes in discount rate	(74)				(880)
Balance, January 1, at original locked in discount rate	3,919				3,855
Effect of changes in cash flow assumptions (1)	—				—
Effect of actual variances from expected experience (1)	(49)				(18)
Adjusted balance, January 1	3,870				3,837
Interest accrual	52				53
Net premiums: earned during period	(111)				(112)
Balance, end of period at original locked in discount rate	3,811				3,778
Effect of changes in discount rate	154				525
Balance, March 31	$	3,965			$	4,303

	Present value of future benefits & expenses
	Balance, January 1		$	17,472			$	22,745
Effect of changes in discount rate	(125)				(5,942)
Balance, January 1, at original locked in discount rate	17,347				16,803
Effect of changes in cash flow assumptions (1)	—				—
Effect of actual variances from expected experience (1)	(50)				(23)
Adjusted balance, January 1	17,297				16,780
Interest accrual	242				241
Benefit & expense payments	(302)				(233)
Balance, end of period at original locked in discount rate	17,237				16,788
Effect of changes in discount rate	704				3,517
Balance, March 31	$	17,941			$	20,305




	Net LFPB		$	13,976			$	16,002

(1) As of March 31, 2023 and 2022, the re-measurement gain (loss) of $1 million and $5 million presented parenthetically on the Condensed Consolidated Statement of Operations is comprised of the effect of changes in cash flow assumptions and the effect of actual variances from expected experience.

Earned premiums associated with the Company's long term care business were $115 million and $120 million for the three months ended March 31, 2023 and 2022.

The following table presents undiscounted expected future benefit and expense payments, and undiscounted expected future gross premiums.


	As of March 31
(In millions)	2023		2022
Expected future benefit and expense payments	$	33,759	$	33,674
Expected future gross premiums	5,729		5,969

Discounted expected future gross premiums at the upper-medium grade fixed income instrument yield discount rate were $4,046 million and $4,567 million as of March 31, 2023 and 2022.

The weighted average effective duration of the LFPB calculated using the original locked in discount rate was 12 years as of March 31, 2023 and 2022.

The weighted average interest rates in the table below are calculated based on the rate used to discount all future cash flows.


	As of March 31				As of December 31
	2023		2022		2022
Original locked in discount rate	5.26	%	5.31	%	5.27	%
Upper-medium grade fixed income instrument discount rate	4.92		3.67		5.23

For the three months ended March 31, 2023, immediate charges to net income resulting from adverse development that caused NPR to exceed 100% were $13 million. There were no such charges for the three months ended March 31, 2022. The portion of losses recognized in a prior period due to NPR exceeding 100% which, due to favorable development, was reversed through net income for the three months ended March 31, 2023 and 2022 was $11 million and $1 million.