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Future Policy Benefit Reserves
 9 Months Ended
Sep. 30, 2023
Insurance [Abstract]  
Future Policy Benefit Reserves 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.
The cash flow assumption updates for the third quarter of 2023 resulted in an $8 million pretax increase in the LFPB. Persistency updates were unfavorable due to revisions to lapse rates. Morbidity updates were favorable driven by claim severity assumption updates, and there was a favorable impact from outperformance on premium rate assumptions. Adjusted to reflect the application of the LDTI accounting standard, the cash flow assumption updates for the third quarter of 2022 resulted in a $186 million pretax increase to the LFPB, primarily driven by the unfavorable impact of increased cost of care inflation offset by favorable premium rate assumptions.
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)
20232022
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 rate3,919 3,855 
     Effect of changes in cash flow assumptions (1)
28 352 
     Effect of actual variances from expected experience (1)
(112)(40)
Adjusted balance, January 13,835 4,167 
Interest accrual153 161 
     Net premiums: earned during period(332)(341)
Balance, end of period at original locked in discount rate3,656 3,987 
     Effect of changes in discount rate(67)40 
Balance, September 30$3,589 $4,027 
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 rate17,347 16,803 
     Effect of changes in cash flow assumptions (1)
36 538 
     Effect of actual variances from expected experience (1)
(45)(21)
Adjusted balance, January 117,338 17,320 
Interest accrual723 730 
     Benefit & expense payments(945)(708)
Balance, end of period at original locked in discount rate17,116 17,342 
     Effect of changes in discount rate(873)(134)
Balance, September 30$16,243 $17,208 
Net LFPB, September 30$12,654 $13,181 
(1) As of September 30, 2023 and 2022, the re-measurement gain (loss) of $(75) million and $(205) 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.
The following table presents earned premiums and interest expense associated with the Company’s long term care business recognized on the Condensed Consolidated Statement of Operations.
Periods ended September 30Three MonthsNine Months
(In millions)
2023202220232022
Earned premiums$112 $118 $340 $356 
Interest expense191 192 570 569 
The following table presents undiscounted expected future benefit and expense payments, and undiscounted expected future gross premiums.
As of September 30
(In millions)
20232022
  Expected future benefit and expense payments$33,217 $34,496 
  Expected future gross premiums5,557 6,034 
Discounted expected future gross premiums at the upper-medium grade fixed income instrument yield discount rate were $3,711 million and $4,102 million as of September 30, 2023 and 2022.
The weighted average effective duration of the LFPB calculated using the original locked in discount rate was 12 years as of September 30, 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 September 30As of December 31
202320222022
   Original locked in discount rate5.24 %5.28 %5.27 %
Upper-medium grade fixed income instrument discount rate5.78 5.39 5.23 
For the three and nine months ended September 30, 2023, immediate charges to net income resulting from adverse development that caused the NPR to exceed 100% for certain cohorts were $109 million and $152 million. For each of the three and nine months ended September 30, 2022, immediate charges to net income resulting from adverse development that caused the NPR to exceed 100% for certain cohorts were $154 million.
For the three and nine months ended September 30, 2023, the portion of losses recognized in a prior period due to NPR exceeding 100% for certain cohorts which, due to favorable development, was reversed through net income were $26 million and $37 million. For the three and nine months ended September 30, 2022, the portion of losses recognized in a prior period due to NPR exceeding 100% for certain cohorts which, due to favorable development, was reversed through net income was less than $1 million and $1 million