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Insurance and Contractholder Liabilities

3 Months Ended

Mar. 31, 2020

Insurance and Contractholder Liabilities

A.Account Balances – Insurance and Contractholder Liabilities

As of March 31, 2020, December 31, 2019 and March 31, 2019, the Company’s insurance and contractholder liabilities were comprised of the following:


	March 31, 2020										December 31, 2019				March 31, 2019
(In millions)	Current		Non-current		Total		Current		Non-current		Total		Total
Contractholder deposit funds	$	613	$	7,086	$	7,699	$	600	$	7,139	$	7,739	$	7,947
Future policy benefits	541		9,110		9,651		553		9,281		9,834		9,691
Unpaid claims and claim expenses
Integrated Medical	2,982		18		3,000		2,875		17		2,892		2,961
Other segments	2,544		3,575		6,119		2,529		3,474		6,003		5,725
Unearned premiums	480		360		840		453		360		813		779
Total	7,160		20,149		27,309		7,010		20,271		27,281		27,103
Insurance and contractholder liabilities classified as liabilities of business held for sale⁽¹⁾	(2,130)		(4,311)		(6,441)		(2,089)		(4,219)		(6,308)
Total insurance and contractholder liabilities	$	5,030	$	15,838	$	20,868	$	4,921	$	16,052	$	20,973	$	27,103

⁽¹⁾ Amounts classified as Liabilities of business held for sale primarily include $5.1 billion of unpaid claims,$726 million of contractholder deposit funds and $640 million of future policy benefits as of March 31, 2020 and $4.9 billion of unpaid claims, $717 million of contractholder deposit funds and $653 million of future policy benefits as of December 31, 2019.

Insurance and contractholder liabilities expected to be paid within one year are classified as current.

B.Unpaid Claims and Claim Expenses – Integrated Medical

This liability reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities.

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at March 31, 2020 and March 31, 2019.

Activity in the unpaid claims liability for the Integrated Medical segment for the three months ended March 31, was as follows:


	Three Months Ended
(In millions)	March 31, 2020		March 31, 2019
Beginning balance	$	2,892	$	2,697
Less: Reinsurance and other amounts recoverable	303		264
Beginning balance, net	2,589		2,433
Incurred costs related to:
Current year	6,661		6,095
Prior years	(152)		(117)
Total incurred	6,509		5,978
Paid costs related to:
Current year	4,271		3,786
Prior years	2,027		1,908
Total paid	6,298		5,694
Ending balance, net	2,800		2,717
Add: Reinsurance and other amounts recoverable	200		244
Ending balance	$	3,000	$	2,961

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims of certain business for which the Company administers the plan benefits without any right of offset. See Note 10 for additional information on reinsurance.

Variances in incurred costs related to prior years’ unpaid claims and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions were as follows:


	Three Months Ended
(Dollars in millions)	March 31, 2020						March 31, 2019
	$		%⁽¹⁾		$		%⁽²⁾
Actual completion factors	$	63	0.3	%	$	55	0.2	%
Medical cost trend	89		0.3		62		0.3

Total favorable variance	$	152	0.6	%	$	117	0.5	%

(1)Percentage of current year incurred costs as reported for the year ended December 31, 2019.

(2)Percentage of current year incurred costs as reported for the year ended December 31, 2018.

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

Prior year development increased shareholders’ net income by $62 million ($78 million before-tax) for the three months ended March 31, 2020, compared with $39 million ($50 million before-tax) for the three months ended March 31, 2019. Favorable prior year development in both periods reflects lower than expected utilization of medical services.

C.Unpaid Claims and Claim Expenses – Group Disability and Other and International Markets

Liability balance details. The liability details for unpaid claims and claim expenses are as follows:


(In millions)	March 31, 2020 ⁽¹⁾		March 31, 2019
Group Disability and Other
Group Disability and Life	$	5,084	$	4,786
Other Operations	209		194
Total Group Disability and Other	5,293		4,980
International Markets	826		745
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	6,119	$	5,725

⁽¹⁾ Includes unpaid claim amounts classified as Liabilities of business held for sale.

Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.


	Three Months Ended
(In millions)	March 31, 2020⁽¹⁾		March 31, 2019
Beginning balance	$	5,816	$	5,432
Less: Reinsurance	184		156
Beginning balance, net	5,632		5,276
Incurred claims related to:
Current year	1,473		1,428
Prior years:
Interest accretion	42		38
All other incurred	46		(32)
Total incurred	1,561		1,434
Paid claims related to:
Current year	490		474
Prior years	946		856
Total paid	1,436		1,330
Foreign currency	(25)		(7)
Ending balance, net	5,732		5,373
Add: Reinsurance	178		158
Ending balance	$	5,910	$	5,531

⁽¹⁾ Includes Unpaid claims amounts classified as Liabilities of business held for sale.

Reinsurance in the table above reflects amounts due from reinsurers related to unpaid claims liabilities. The Company’s insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses. See Note 10 for additional information on reinsurance.

The majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts. Interest earned on assets backing these liabilities is an integral part of pricing and reserving. Therefore, interest accreted on prior year balances is shown as a separate component of prior year incurred claims and reported

in Medical costs and other benefit expenses in the income statement. This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period. The remaining prior year incurred claims amount primarily reflects updates to the Company’s liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability. Assumptions reflect the Company’s expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business. Unfavorable prior year incurred claims for the three months ended March 31, 2020 primarily reflected unfavorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve. Favorable prior year incurred claims for the three months ended March 31, 2019 primarily reflected favorable life loss ratio experience relative to expectations reflected in the prior year reserve, partially offset by unfavorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve.