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LTCI Issuers May Be Counting on Health Improvement That Isn't Coming: Prudential

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Prudential Financial Inc. is adding $1.4 billion to its long-term care insurance (LTCI) reserves, to reflect the possibility that improvement in the ability of the insureds to function may not show up.

Back in 2012, when Prudential stopped selling new LTCI policies, it had few LTCI policyholders collecting benefits. It used data from outside sources to set the assumptions used to decide how much to set aside to pay claims, according to Robert Falzon, the company’s chief financial officer.

Prudential had assumed that morbidity levels would improve about 1% per year, just as mortality tends to improve each year.

Now, Falzon told securities analysts Thursday, during a conference call, Prudential has more information about its policyholders’ claims. After in-house analysts reviewed claim data, “we felt there was no discernible trend toward morbidity change,” Falzon said.

(Related: GE Shortfall Just Part of Insurance Industry’s $100 Billion Gap)

Prudential’s $1.4 billion charge will increase the LTCI reserves Prudential records under U.S. Generally Accepted Accounting Principles (GAAP) by about 27%, to $6.6 billion.

GAAP accounting rules are the rules that apply to all companies that sell stock to the public.

State insurance regulators use their own Statutory Accounting Principles to review insurers’ performance. Because the statutory LTCI reserves have more room for error built in, the statutory reserves will increase by only about 9%, to $7 billion., Prudential says.

Falzon said he believes Prudential’s new skepticism about moribidity improvement among LTCI policyholders is different from what competitors are including in their LTCI reserving assumptions.

If Prudential is correct about the lack of overall improvement in the ability of LTCI policyholders to function, and if other companies have included similar morbidity improvement assumptions in their LTCI reserving assumptions, that suggests that other LTCI issuers may eventually have to make similar adjustments to their reserves.

To explain the reserve addition to the securities analysts, Prudential gave the analysts some general data about its LTCI policy block:

  • Prudential reached June 30 with 211,156 in-force LTCI policies on its books, including 74,358 individual LTCI policies and 136,798 group policies.
  • 4,492 of the policyholders were collecting LTCI benefits.
  • The average age of a policyholder was 52.
  • The average age when a policyholder started collecting benefits was 78.
  • The company is collecting about $422 million LTCI premiums per year.

Prudential announced the LTCI reserve addition Wednesday, in connection with the release of its earnings for the second quarter.

More information about Prudential’s earnings, including a link to a conference call slidedeck and a recording of the conference call, is available here.


Prudential as a whole is reporting $200 million in net income for the second quarter on $13 billion in revenue, compared with $496 million in net income on $13 billion in revenue for the second quarter of 2017, in spite of the LTCI reserve addition.

The Newark, New Jersey-based company’s revenue figures exclude revenue from the LTCI block and from other businesses that company classifies as being divested.

After-tax adjusted operating income, which excludes a variety of unusual gains and charges, increased to $1.3 billion, from $919 million.

  • Total sales of U.S. individual fixed and variable annuities increased to $2.1 billion, from $1.5 billion.
  • New annualized premiums from U.S. individual life insurance policies fell to $142 million, from $153 million, but sales of variable life increased to $35 million, from $26 million.
  • U.S. group life sales fell to $46 million, from $56 million, but group disability sales held steady at $14 million.

“Our businesses are performing very well,” John Strangfeld, Prudential’s chief executive officer, said during the conference call. “They’re supported by a strong balance sheet.”

— Read Unum Could Add Up to $750 Million to LTCI Reserveson ThinkAdvisor.

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