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Insurance and Contractholder Liabilities

9 Months Ended

Sep. 30, 2020

Insurance and Contractholder Liabilities

A.Account Balances – Insurance and Contractholder Liabilities

As of September 30, 2020, December 31, 2019 and September 30, 2019, the Company’s insurance and contractholder liabilities were comprised of the following:


	September 30, 2020						December 31, 2019						September 30, 2019
(In millions)	Current		Non-current		Total		Current		Non-current		Total		Total
Contractholder deposit funds	$	624	$	7,038	$	7,662	$	600	$	7,139	$	7,739	$	7,789
Future policy benefits	597		9,505		10,102		553		9,281		9,834		9,808
Unpaid claims and claim expenses
U.S. Medical	3,182		18		3,200		2,875		17		2,892		3,061
Other segments	2,521		3,714		6,235		2,529		3,474		6,003		5,857
Unearned premiums	449		379		828		453		360		813		755
Total	7,373		20,654		28,027		7,010		20,271		27,281		27,270
Insurance and contractholder liabilities classified as liabilities of business held for sale(1)	(2,150)		(4,441)		(6,591)		(2,089)		(4,219)		(6,308)
Total insurance and contractholder liabilities	$	5,223	$	16,213	$	21,436	$	4,921	$	16,052	$	20,973	$	27,270

(1) Amounts classified as Liabilities of business held for sale primarily include $5.2 billion of unpaid claims, $759 million of contractholder deposit funds and $646 million of future policy benefits as of September 30, 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 – U.S. 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 $3.0 billion at September 30, 2020 and $2.8 billion at September 30, 2019.

Activity, net of intercompany transactions, in the unpaid claims liability for the U.S. Medical segment for the nine months ended September 30 was as follows:


	Nine Months Ended
(In millions)	September 30, 2020		September 30, 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	18,935		18,169
Prior years	(126)		(159)
Total incurred	18,809		18,010
Paid costs related to:
Current year	16,061		15,555
Prior years	2,363		2,160
Total paid	18,424		17,715
Ending balance, net	2,974		2,728
Add: Reinsurance and other amounts recoverable	226		333
Ending balance	$	3,200	$	3,061

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 for the nine months ended September 30 were as follows:


	Nine Months Ended
(Dollars in millions)	September 30, 2020				September 30, 2019
	$		%(1)		$		%(2)
Actual completion factors	$	47	0.2	%	$	87	0.4	%
Medical cost trend	79		0.3		72		0.3

Total favorable variance	$	126	0.5	%	$	159	0.7	%

(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 $30 million ($38 million before-tax) for the nine months ended September 30, 2020, compared with $68 million ($86 million before-tax) for the nine months ended

September 30, 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)	September 30, 2020 (1)		September 30, 2019
Group Disability and Other
Group Disability and Life	$	5,206	$	4,887
Other Operations	162		189
Total Group Disability and Other	5,368		5,076
International Markets	867		781
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	6,235	$	5,857

(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.


	Nine Months Ended
(In millions)	September 30, 2020(1)		September 30, 2019
Beginning balance	$	5,816	$	5,432
Less: Reinsurance	184		156
Beginning balance, net	5,632		5,276
Incurred claims related to:
Current year	4,277		4,205
Prior years:
Interest accretion	118		117
All other incurred	(12)		(59)
Total incurred	4,383		4,263
Paid claims related to:
Current year	2,435		2,422
Prior years	1,702		1,594
Total paid	4,137		4,016
Foreign currency	5		(26)
Ending balance, net	5,883		5,497
Add: Reinsurance	190		171
Ending balance	$	6,073	$	5,668

(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 that relate to a business held for sale. 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. Favorable prior year incurred claims for the nine months ended September 30, 2019 primarily reflected favorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve and favorable reserve development for life, accident and voluntary driven by lower than expected incidence.