Friday, December 4, 2020

No. 401: Unum Life of America Takes a $2 Billion Hit to Its Long-Term Care Insurance Reserves

The MBOI Examination of ULA
On June 30, 2020, Eric A. Cioppa, the Superintendent of the Maine Bureau of Insurance (MBOI), accepted and made public the Report of Examination of Unum Life Insurance Company of America (ULA) as of December 30, 2018 (Report). On page 19 of the Report are two paragraphs disclosing that ULA suffered a $2 billion hit to the reserves for its long-term care (LTC) insurance business. Here are the two paragraphs (the full Report is in the complimentary package offered at the end of this post):
As discussed in the Summary of Significant Findings and Note 1 to the Comments on the Financial Statements of this Report, the MBOI found ULA's gross LTC reserves to be deficient by $2,085,740,649 as of December 31, 2018 as a result of this examination. On May 1, 2020, the MBOI approved a permitted practice which allows ULA to delay full recognition of the statutory reserve deficiency identified in connection with this examination that would otherwise be required under Statement of Statutory Accounting Principles (SSAP) 54 Individual and Group Accident and Health Contracts. The request was made subject to the confidential Phase in, Guardrails and Monitoring Plan for Unum Life Insurance Company of America LTC Statutory Reserve Strengthening ("Plan"). The reserve increase will be recognized over a seven-year period beginning with the statutory financial statements for the year-ended December 31, 2020 and continue until the statutory financial statement for the year-ended December 31, 2026 according to a defined schedule, as outlined in the Plan. The permitted accounting practice was approved retroactively to December 31, 2018 and December 31, 2019 such that no additional reserves would be required to be reported until year-end 2020. If this permitted practice had not been granted, it is estimated that ULA's net income and surplus at December 31, 2018 would have been reduced by approximately $2.1 billion due to the need to write off the uncollectible reinsurance recoverable and reverse the cession of the $2.1 billion of reserves to Fairwind. The MBOI will monitor ULA's compliance with the Plan during the reserve phase-in period by continuing the limited scope examination.
[ULA] paid dividends of $492,000,000 to Unum Group during 2019. [ULA] paid a dividend to Unum Group of $234,000,000 in the first quarter of 2020.
Fairwind, referred to above, is Fairwind Insurance Company. It is an affiliated captive insurance company with which ULA had entered into reinsurance arrangements. Those arrangements are discussed in the Report.

The Kansas/GE Parallel
The MBOI bailout of ULA bears a striking resemblance to the 2018 bailout of General Electric Company (GE) by the Kansas Insurance Department. I discussed the Kansas/GE matter in No. 258 (March 19, 2018).

In January 2018, GE disclosed it would contribute $15 billion of capital to Employers Reassurance Corporation (ERAC), a GE subsidiary domiciled in Kansas. ERAC requested and the Kansas department approved an arrangement allowing GE to "spread and delay" contributing the additional reserves over the next seven years.

GE also reported that the Securities and Exchange Commission (SEC) was investigating the matter. In October 2020, GE reported that it received a Wells notice from the SEC staff indicating the staff may recommend enforcement action by the SEC. I discussed the Wells notice in No. 395 (October 26, 2020).

General Observations
I do not know whether the SEC will investigate the MBOI bailout of ULA. However, such an investigation would come as no surprise, given the similarity between the MBOI/ULA bailout and the Kansas/GE bailout. In any case, I plan to report further developments relating to both bailouts.

Available Material
I am offering a complimentary 24-page PDF containing the recent MBOI examination report on ULA. Email and ask for the December 2020 package about the MBOI/ULA examination report.