MFC and the John Hancock LTC Fiasco

In their 2Q10 Quarterly Report to Shareholders, MFC stated:

The Company expects to complete its annual review of all actuarial methods and assumptions in the third quarter. In that regard, we expect that the methods and assumptions relating to our Long Term Care (“LTC”) business may be updated for the results of a comprehensive long-term care morbidity experience study, including the timing and amount of potential in-force rate increases. The study has not been finalized but is scheduled to be completed in the third quarter. We cannot reasonably estimate the results, and although the potential charges would not be included in the calculation of Adjusted Earnings from Operations, they could exceed Adjusted Earnings from Operations for the third quarter. There is a risk that potential charges arising as a result of the study may not be fully tax effected for accounting and reporting purposes.

JH LTC sales in the second quarter increased by 72 per cent compared to the prior year. This reflected the increased group sales from new member enrollments and new group clients as well as increased retail sales in advance of price increases and product re-positioning to improve margins. The Federal Long Term Care Insurance Program, where John Hancock is now the sole carrier, also contributed to the increase in sales from the prior year. As a result of the price increases, JH LTC retail sales are expected to slow during the second half of the year.

In both the second quarter of 2010 and 2009, John Hancock reported unfavourable long-term care morbidity experience. A comprehensive morbidity experience study is expected to be completed in the third quarter of 2010 and if the study concludes that the recent level of experience is expected to continue, price increases and policy liability increases would be required.

In the 3Q10 News Release they stated:

[Chief Financial Officer Michael] Bell added, “There were a number of notable items impacting our financial results this quarter. We completed our annual review of all actuarial methods and assumptions in the third quarter, and this resulted in a total net charge of just over $2 billion. This reserve strengthening included a significant charge related to our John Hancock Long-Term Care (“LTC”) business, where we completed a comprehensive long-term care claims experience study, including an assessment of the positive expected impacts of in-force rate increases.”

John Hancock Long-Term Care (“JH LTC”) sales increased 20 per cent in the third quarter compared to the prior year, driven by sales of retail products which increased in advance of June new business price increases taking effect. As a result of the recently completed claims experience study and the continuing low interest rate environment, JH LTC has temporarily suspended new group sales and is planning other retail product changes. JH LTC sales are expected to decline in the fourth quarter of 2010. In addition, JH LTC will be raising premiums on in-force business and is actively working with regulators to implement increases that are on average 40 per cent and affect the majority of the in-force business.

They also provide a handy table of their enormous actuarial charge:

(C$ millions)
Policy Liabilities
To Net Income
Attributable to
Mortality and morbidity
   Long-term care $1,161 $ (755)
   Other (258) 182
Lapses and policyholder behaviour 648 (485)
Expenses (116) 104
Investment returns
   Variable annuity parameter update 872 (665)
   Ultimate reinvestment rates/grading for corporate spreads 441 (309)
   Other 94 (175)
Other valuation model methodology and model refinements (10) 72
Net Impact $2,832 $(2,031)

This charge of over a billion dollars on LTC pricing is explained as follows:

Long-term care mortality and morbidity changes

John Hancock Long-Term Care completed a comprehensive long-term care claims experience study, including estimated favourable impacts of in-force rate increases. As a result:

  • Expected claims costs increase primarily due to increased ultimate incidence at higher attained ages, anti-selection at older issue ages and improved mortality, partially offset by better experience on business sold in the last seven years due to evolving underwriting tools. These collectively resulted in an increase in Active Life Reserves of $ 3.2 billion.
  • Disabled Life Reserves were also strengthened by $0.3 billion to reflect emerging continuance and salvage experience for Retail and Fortis blocks.
  • Claims margins were harmonized for the pre and post rate stabilization blocks. The reduction in margins resulted in a reserve release of $0.2 billion.
  • Expected future premium increases reduced reserves by $2.2 billion resulting in a total of $3.0 billion of future premium increases assumed in the reserves. Premium increases averaging approximately 40 per cent will be sought on 80 per cent of the in-force business. We have factored into our assumptions our best estimate of the timing and amount of state approved premium increases. Our actual experience obtaining price increases could be materially different than we have assumed, resulting in further policy liability increases or reserve releases which could be material.

Kimberly Lankford reported in October:

The specific size of the increase may vary, depending on your age and when you purchased the policy, says Marianne Harrison, president of John Hancock Long-Term Care. The increase applies to both individual and group policies, and the largest increases will be restricted to older policies. But the rate hike will not apply to Leading Edge or Custom Care II Enhanced policies, two of their newer policies that are subject to stricter standards for setting premiums. Nor will the price hikes affect the long-term-care policy run by John Hancock for federal employees, which already had a premium increase of up to 25% in the spring.

But for many policyholders, the proposed price hike comes on top of a rate increase of 13% to 18% in 2008. The other long-term-care insurance leaders, Genworth and MetLife, also increased premiums for many of their policies around that time.

John Hancock is raising rates after a study found that the number of claims, the length of claims and the use of benefits from 1990 to 2010 were much higher than the company had expected — particularly the open-ended expense of providing lifetime benefits in an era when people live longer thanks to medical advances and then require extensive long-term care. “The claims on the lifetime coverage on our older policies were higher than our original policy assumptions,” says Harrison. (John Hancock stopped selling new policies with lifetime benefits in June 2010.)

“This is a last resort, from our perspective,” says Harrison. “But this is not a viable product if we do not have the appropriate money there to pay claims in the long term.”

It has also been reported:

[Marianne Harrison, president of John Hancock Long Term Care] is disclosing the rate increase and group policy suspension in a telephone conference with the company’s LTC insurance distributors [September 20, 2010].

Hancock announced the moves after its recent claims study showed unfavorable claims patterns, Harrison said in an interview.

Hancock’s claims studies, conducted every few years, examine LTC morbidity and termination claim trends based on actual experience. The last time Hancock undertook a thorough LTC claims review was in 2006, the company says.

This year’s study encompassed both open and closed claims, looking at all LTC claims Hancock received from 1990 to 2010.

As the LTC block continued to mature, Hancock’s latest study found it had twice the number of claims it found in its 2006 study. For older policy holders—ages 80 and up—the block had 4 times as many.

The severity and duration of claims in 2010 also were much higher than in 2006, Harrison says, while claims terminations were lower than expected.

Hancock has more than 1.2 million LTC insurance customers–700,000 individual, 350,000 group, and 224,000 under the federal program. Of all these policies, 47,000 have received benefits. Hancock says it has paid more than $3 billion in LTC claims, and now pays more than $1.5 million in claims per day.

Hancock announced in January:

John Hancock has launched a new interactive microsite,, to help brokers and consultants explore and establish LTC insurance plans for businesses with up to 1,000 employees.

“Over the past 22 years, we have seen LTC insurance increase in popularity among large employers,” said Marianne Harrison, President, John Hancock Long-Term Care. “Today, we’re seeing small and mid-size employers showing greater interest in meeting the LTC needs of their employees, yet few of them know who to turn to for LTC advice and services. This site, in addition to the access to our team of experts, will be very helpful to brokers and consultants who want to provide this important coverage to businesses throughout the US.”

All this may be compared with the action taken by their competitors:

Genworth Financial Inc. says it will raise rates 18% on two older blocks of comprehensive long term care (LTC) insurance.
The policies, no longer marketed, were sold by two Genworth subsidiaries, Genworth Life and Genworth Life of New York.

Genworth, Richmond, Va. (NYSE:GWN), is increasing the rates because the percentage of policyholders in the blocks who have let policies lapse has been lower than expected, the company says.

Now, I will be the first to agree that insurance is a complicated business. And I will also agree wholeheartedly that I am not an expert on insurance and its pricing. But this fiasco goes to the root of investor confidence in MFC, because it is a very real indication that questions need to be asked about their basic competence.

This is a massive write-off, and the degree of under-pricing indicated by the proposed rate increases is astronomical. How can you possibly underprice something by 40% and not know that something is out of whack? Why was a major sales initiative on this product initiated in January, only to have sales through that channel cancelled in October? Shouldn’t you have a reasonable idea of profitability before you spend money on new increasing sales?

Isn’t anybody looking at a report of actual versus actuarial claims expenses and thinking ‘Claims are at 200% of projections for this product, and at 400% for this subgroup … gee, maybe we should have a proper look at it’?

Why was the actuarial review of LTC not done sooner? The prior one was in 2006, so that’s four years between reviews. How are the topics for review chosen? Is there some system of monitoring in place so that an informed decision can be made regarding the areas in which review is required? If not, why not? If so, then it seems as if the system failed: write-offs and price increases on this scale indicate that the review was well overdue. If there is a system, why did it fail and how can investors have any confidence that it will not fail in the future?

Update 2010-11-11: MetLife is exiting the LTC business:

MetLife Inc., the largest U.S. life insurer, will halt the sale of new long-term care coverage after citing “financial challenges” in the business.

Long-term care policies provide coverage to help pay for home-health aides or residence in a nursing home or assisted- living facility. New York-based MetLife will accept applications for new coverage through Dec. 30 and continue to honor previously written contracts after that date, the company said.

“Many Americans remain at risk for needing long-term care services,” MetLife said. The insurer is reviewing a way to combine the coverage with other contracts “ which the company believes can effectively address the long-term care financing needs of the public as well as its business goals.”

One Response to “MFC and the John Hancock LTC Fiasco”

  1. […] Volume continued at elevated levels. All entries in the Performance table are in the black and my snarky remarks about MFC on the weekend appear to have attracted considerable interest … from […]

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