A life and long-term care (LTC) insurance company sought to add a block of in-force LTC insurance to its insurance portfolio in order to achieve economies of scale. They asked Milliman to determine both the viability of this potential book of business and the impact on future profitability.

Setting a value on a LTC insurance business

An in-force book of LTC insurance's value depends on many different facets of the business. Broken down to its most basic components, the value of future benefits and expenses relative to the value of future premiums determines the purchase price. Many influences can impact those basic components and final purchase price. For this client, Milliman carefully considered the following influences:

• Underwriting – The underwriting of many older blocks of LTC business occurred when the industry just started learning about LTC risks and underwriting techniques. As a result, some risks—such as cognitive claims—were not appropriately screened. Milliman addressed this by making appropriate adjustments to expected future claim levels.
• Contractual features – Some policies bury features in the policy contracts and present additional risks that need to be accounted for in examining future LTC benefits. Our evaluation considered items such as nonforfeiture guarantees or contractual provisions for assisted living facility coverage that were not priced for.
• Regulatory environment – The current and anticipated future regulatory environment can influence expected LTC profits. Sometimes, ailing blocks of LTC business require rate increases to keep the book of business viable from an in-force management point of view. The regulatory environment can influence the degree to which necessary increases can be implemented. Milliman relied on its extensive experience in working with regulators in filing for LTC rate increases to estimate the feasibility and financial impact of any future rate increases.
• Experience – Examining available claim experience on an in-force book of business requires careful consideration and understanding of key claim drivers and the relationships between policy benefits, claims, and persistency. Milliman worked to uncover why early policy duration experience is either "good" or "bad" and to what extent that experience should be reflected in the projection of future morbidity levels. We also considered changes in morbidity due to dynamic incidence and claim severity patterns.
• Synergies – Potential synergies such as the acquisition of a new administration system or marketing/sales force can significantly impact the attractiveness of an LTC acquisition. We considered these potential synergies in addition to the financial synergies with respect to profitability and equity needs.

Further, sensitivity tests surrounding the final assumptions helped to determine the potential variability in future results from the potential acquisition.

Purchase GAAP accounting

Milliman determined the purchase price of the LTC block of business on a statutory basis with careful consideration of surplus levels, reserves, discount rates, and tax impacts.

The client expressed concerns about future GAAP profits and return on equity and the potential financial integration from a GAAP point of view. To address this, pro forma balance sheets and GAAP income statement projections were developed, as were projected lifetime returns on equity.

Milliman also developed the GAAP value of business acquired (VOBA) using the same projections as with the purchase price. The GAAP VOBA is typically a positive value that is amortized off over the future life of the business. However, the VOBA was negative in this case because of some complicating issues and the condition of this block of business. Milliman worked with the client to best address the negative VOBA in a manner that would be true to the client's historical financial approach and that would be approved by its auditors.

The resulting GAAP projection of future earnings and equity was integrated into the company's GAAP projections for its own LTC business, which allowed the client to assess the overall impact of the potential acquisition on its future GAAP results.

Complete picture of the business enables sound financial decision

Milliman's assistance helped the client determine the most appropriate purchase price for this LTC book of business. In addition, our models and approach helped determine the GAAP financial impact of the potential acquisition. The client presented a bid for the in-force LTC book of business and understood the risks and financial consequences of their bid. With insight provided through Milliman, the client gained the knowledge needed to quickly and accurately assess subsequent opportunities.