Not all insurers with long-term care exposure are telling the same, worrying story to investors. In fact, Toronto-based Manulife Financial Corp. (MFC) is confident it is not in the same position as its U.S. peers.
The company reported solid quarterly results with core earnings of 64 cents per share topping estimates, helped by robust demand in Asia and better-than-expected policyholder experience in Canada and the U.S.
Shares of Manulife rose 1.9% to $18.52.
LTC policyholder experience was favorable, compared to expectations of a neutral experience. That means that more policyholders lived than expected during the period, meaning they kept paying their premiums. First-quarter LTC policyholder experience can be stronger because of the flu season, said TD Securities analyst Mario Mendonca. He estimated LTC policyholder experience between $25 million and $30 million.
Still, the TD Securities analyst did not annualize this level of gains as he expects "subsequent quarters to be neutral to slightly positive/negative."
Management, however, remains "comfortable" with its reserves designated for the LTC business, Steven Finch, Manulife's chief actuary, said during a conference call with analysts.
Because Canadian GAAP reserves are 30% higher than U.S. statutory reserves, Canadian accounting captures reserve deficiencies far sooner than U.S. GAAP and statutory reserves, Mendonca said.
The insurance company with a market capitalization of $36 billion merged in 2004 with John Hancock Financial Services, one of the largest long-term care insurance providers in the U.S. While approximately 1.2 million outstanding long-term care policies remain in effect, John Hancock said in late 2016 that it would no longer sell any new policies.
Manulife followed suit in November 2017, announcing that it will cease selling new individual long-term care insurance policies in Canada as of Nov. 30.
"While LTC is definitely worth watching, at this time we do not expect a material LTC charge in [the third quarter of 2018]," Mendonca said. The firm raised its price target on Manulife stock by $1 to $29, while maintaining its Buy recommendation.
But that confidence in LTC reserves is not shared with Unum Group (UNM) . The Chattanooga, Tenn.-based company reported an increase in its LTC interest-adjusted loss ratio, prompting concerns amongst analysts about potential reserve charges.
Unum's interest-adjusted loss ratio for the LTC business was 96.6%, compared to 88.6% during the same period a year prior. Management previously gave guidance of 85% to 90% for the LTC interest-adjusted loss ratio.
The increase this quarter was related to higher claims incidence and less favorable policy terminations, Unum said. This would mark the third quarter that the interest-adjusted loss ratio is above 93%, and a higher percentage is less favorable.
"That could reflect normal volatility, or indicate claims experience is worsening," Wells Fargo analyst Sean Dargan said in a May 1 research note.
The deterioration in Unum's LTC loss ratio "cast a shadow over otherwise solid underwriting results," said Evercore ISI analyst Thomas Gallagher, and there's now a higher chance that Unum will need to take a statutory charge related to the LTC reserves.
The company's statutory LTC reserves are $1.1 billion higher than GAAP reserves and are expected to increase to $1.3 billion to $1.4 billion by year-end.
"However, management was not willing to express the same confidence as it did last quarter that LTC should not impact its capital management plans for the foreseeable future," said Keefe, Bruyette & Woods analyst Ryan Krueger. "While this certainly could still be the case, and UNM reiterated that it has a lot of room for fine-tuning its statutory reserve assumptions."
Unum's Chief Financial Officer Jack McGarry told analysts Wednesday the company sees good overall trends with its LTC rate increase program, which management believes "is the most effective way to manage the long-term care block over the long term."
J.P. Morgan analyst Jimmy Bhullar expects the company to continue seeking price hikes to offset margin deterioration in the LTC book.
Still, Bhullar said LTC reserve charges are a major concern as low interest rates and deteriorating industry-wide claims trends tend to drive reserve charges over time.
"Unum's LTC reserves assume an investment yield of about 5.0% in 2018 and 2019, roughly in-line with actual earned yields, but the assumption grades up to 6.5% to 6.75% thereafter," Bhullar said. "Aside from rates, UNM's LTC reserves are susceptible to deteriorating industry-wide claims trends due to increasing life expectancies and healthcare cost inflation."
Shares of Unum fell 1.8% to $39.05 on Thursday.
Insurance company American International Group Inc. (AIG) stock fell 5.3% as harsh winter weather weighed on profits. But the company's long-term care exposure is relatively minimal.
"We have a very small [LTC] portfolio on Legacy, it's about $400 million," Sid Sankaran, CFO of AIG, said during a conference call with analysts. "The sensitivity analysis that we've run is that if everybody lived to the end of the mortality table, our reserves would double. So you have $100 million in actives and $300 million in the remainder."
That said, Sankaran said AIG doesn't have "issues in long-term care."