Benefits Division
As a multi-line carrier, the Benefits division offers employment-based benefits
products and services targeted primarily at employers, unions and public agencies.
These products and services include medical stop-loss insurance; group life,
disability income, and accidental death and dismemberment insurance (collectively,
"group life and DI"); and limited benefit medical insurance.
Our customers are primarily small and mid-sized employers that use knowledgeable
employment-based benefits brokers, consultants and insurance company representatives
who understand their financial needs and employee profiles. We work closely
with employment-based benefits brokers, consultants and employers to design
customized benefit plans that meet each employer’s particular requirements.
We believe that our experience and expertise in the employment-based benefits
markets provides us with opportunities to cultivate close distributor relationships
and to provide employers with innovative and customer-centric benefits plans.
We aim to maintain pricing discipline and focus on profitable growth, striving
to underwrite and renew only business that is in line with our long-term profitability
target. The loss ratio, one of our key metrics of profitability, indicates the
portion of each dollar of premium that is used for policyholder claims. Our
target loss ratio range for the Benefits division reflects the mix of our businesses.
Medical Stop-Loss
We provide medical stop-loss insurance to employers that self-fund their employee
health plans. Employers that self-fund pay all claims and administrative costs.
Our product helps employers to manage health expenses by reimbursing individual
claim amounts above a certain dollar deductible and by reimbursing aggregate
claims above total dollar thresholds. In addition, we also offer underwriting
services and consulting through our managing general underwriter (MGU). Our
medical stop-loss product and services are targeted primarily at entities with
200 to 5,000 employees. Medical stop-loss represented approximately 83% of Benefits
division premiums in 2014.
Medical stop-loss pricing reflects the employer group’s claims experience
and risk characteristics. The employer group’s claims experience is reviewed
at the time the policy is issued and annually at renewal thereafter, resulting
in ongoing adjustments to pricing. The key pricing and underwriting criteria
are medical cost trends, the employer’s selected provider network discount
structure, the employer group’s demographic composition (including the
age, gender and family composition of the employer group’s members), the
employer’s industry, geographic location, regional economic trends, plan
design and prior claims experience. Additionally, we manage our profitability
and risk by purchasing reinsurance coverage to limit our exposure to losses.
Refer to "– Reinsurance" for discussion of our reinsurance coverage.
Our market leadership in medical stop-loss insurance is evidenced by the size
of our block of business and our strong track record of profitability. We believe
that over time this market is positioned for growth as additional employers
continue to explore self-funding options for complying with the Patient Protection
and Affordable Care Act (PPACA). However, in the short term, we face significant
competition in this market, including from large and highly rated insurance
carriers, many of which use similar distribution channels and are increasing
their focus on medical stop-loss. Pricing in the medical stop-loss insurance
market has proven to be cyclical over time, and there is significant competition
for market share among the carriers. We believe our consistent competitive pricing
and customer service will facilitate long-term profitable growth.
Group Life and Disability Income
Our group term life insurance product provides benefits in the event of an insured
employee’s or dependent’s death. The death benefit can be based
upon an individual’s earnings or occupation, or can be a set dollar amount.
We offer basic and supplemental benefits for group term life. We also offer
optional accidental death and dismemberment coverage as a supplement to our
term life insurance policies. This coverage provides benefits for an insured
employee as a result of accidental death or injury. Group life and DI represented
approximately 8% of Benefits division premiums in 2014.
Our group short- and long-term disability income insurance protects an employee
against loss of income due to illness or injury. Our group short-term disability
(STD) income coverage generally provides benefits for up to 26 weeks following
a short waiting period. Our group long-term disability (LTD) income coverage
provides benefits following a longer waiting period and provides benefits throughout
prolonged periods of disability. Benefits can be a set dollar amount or based
upon a percentage of earnings. We utilize an advocacy-based approach to claims
management, which focuses on providing personalized administrative and clinical
support. We believe this approach helps employers to effectively manage claims
and encourages positive outcomes. We also offer absence management services
for fully insured policyholders.
There is strong sales competition for group life and DI products. As employers
have focused on ensuring that their medical coverage is in compliance with new
PPACA rules, we have seen lower than expected quote activity in the marketplace.
Further, well-known insurers that are established in this market benefit from
greater name recognition in this heightened competitive environment. However,
over time we expect that our strong relationships with benefits brokers and
strong service culture will help us drive growth in the market.
Pricing for group life and DI products varies based on the size of the account.
Premium rates for smaller groups reflect the benefit plan, demographics, industry,
and location of the employer. Rates for larger groups also incorporate the group’s
claims experience using credibility factors. Recent historical case-level experience
is examined over time, typically three to five years for LTD and one to three
years for STD, in the rate setting process. Initial rates are guaranteed for
a fixed period of time, which is typically three years and renewed bi-annually
thereafter. We are seeking to build scale in this line of business over time.
Therefore, total expenses, including claims and operating expenses, are expected
to exceed revenues in 2015. Due to the current small size of our block, we expect
volatility in our results.
We continue to invest in our infrastructure for our growing group life and DI
business. This includes continued development of our administration and leave
management systems, which provide integrated claim administration abilities
across our products and allow for flexibility in plan design. By providing absence
management services along with our suite of group life and DI products, we believe
we provide an attractive value proposition for our clients.
Limited Benefit Medical
Our limited benefit medical insurance is a fixed indemnity plan sold to employers
as health coverage for employees not otherwise eligible to participate in major
medical plans, including employees that are part-time, seasonal or temporary
workers. Limited benefit medical insurance can also serve as supplemental coverage
to major medical insurance.
Our product does not qualify as minimum essential coverage under PPACA and is
exempt from other provisions and restrictions under the act. While this limits
the market for our product, we believe that there continues to be attractive
opportunities for limited benefit medical coverage to supplement employers'
high-deductible or minimum essential coverage plans.
Limited benefit medical pricing reflects expected utilization of benefits, based
on employer contribution and employee participation levels. Pricing and underwriting
factors include the employer group’s demographic composition (including
the age, gender and family composition of the employer group’s members),
and the employer’s industry, geographic location, and regional economic
trends. The claim experience of each employer group is reviewed annually at
renewal and repriced for alignment with our pricing targets.
Income Annuities
We offer retail immediate annuities that guarantee a series of payments that
continue either for a certain number of years or for the remainder of an annuitant’s
life. Payments can begin immediately or can be deferred several years into the
future.
Our earnings from this segment are driven by the spread on our investment of
contract holder deposits versus the interest rate assumptions we used to set
reserves for these contracts, less acquisition and administrative expenses.
We are not able to reset the rates on our Income Annuities' products, and therefore
our spread is impacted by interest margin compression. During periods of low
interest rates, the investment assets backing these reserves are at risk of
prepayment causing reinvestment at lower rates, which reduces the margin we
earn on our reserves.
The segment also has a portion of reserves, representing longer term liabilities,
that are supported by equity and equity-like investments. Earnings on most of
these securities are driven by changes in fair value which are recognized in
realized gains (losses) and not reflected in net investment income, adjusted
operating income, or interest spread metrics. However, we expect returns on
these equity investments to increase long term net income over time. Further,
earnings increase or decrease on the contracts that contain life contingent
payments depending upon our mortality experience. Mortality gains and losses
represent the difference between actual and expected reserves released on our
life-contingent annuities. Mortality experience is volatile and can fluctuate
significantly from period to period.
Immediate annuities provide for contractually guaranteed payments that typically
begin within one year of issue. In exchange for a single premium, immediate
annuities provide a fixed amount of income for either a defined number of years,
the annuitant’s lifetime or the longer of the two. Certain products, known
as longevity annuities, enable the customer to select a payment start date several
years after contract purchase, which we believe provides customers with a cost
effective means of funding a future income stream.
Generally, our immediate annuities do not provide for surrender or policy loans
by the contract holder. We offer a liquidity feature on certain products that
allows the contract holder to periodically reduce a portion of the future payments
in exchange for a present value lump sum. We also offer a feature that allows
beneficiaries to convert remaining non-life contingent benefits to a lump sum
after the death of the annuitant.
Individual Life Division
Overview
Our Individual Life division sells life insurance products that focus on the
creation and protection of our clients' wealth by providing products that protect
against financial hardship or preserve wealth as part of an estate plan. We
offer universal life insurance products that provide protection for the insured,
and may include a buildup of cash value that can be used to meet the policyholder’s
financial needs during his or her lifetime. Our individual term life products
provide life insurance coverage with guaranteed level premiums for a specified
period of time, with little or no buildup of cash value. We also offer institutional
life insurance products to banks and other corporate institutions to insure
the lives of their employees, usually officers and other highly compensated
employees.
For our universal life products, earnings are driven by investment margins,
risk charges on policyholder account balances relative to mortality experience,
and expense margins (charges assessed to our policyholders less expenses incurred
to manage our business). Mortality experience also drives earnings on our term
and traditional life products. For our BOLI product, earnings are driven by
return on assets (ROA), which includes investment margin, cost of insurance
revenue, and mortality experience. BOLI ROA is calculated as total revenues,
including net investment income and cost of insurance charges, less total policyholder
benefits and claims as a percentage of BOLI account values.
Products
Universal Life Insurance
We offer universal life insurance products with a range of product and secondary
guarantee features. These provide policyholders with death benefit coverage
while accumulating assets on a flexible, tax-favored basis, and may include
the ability to access the cash value of the policy through a policy loan, partial
withdrawal, or full surrender. Our most popular UL product carries a secondary
guarantee in the form of a lapse protection benefit (LPB) rider, offering guaranteed
premiums while potentially maintaining some cash accumulation value. In 2014,
we introduced a survivorship UL product, which offers the ability to insure
two lives and provide for estate planning through payment of the death benefits
upon the death of the second insured. We also offer single premium life (SPL),
which provides a lifetime death benefit for a single premium payment.
We credit premium payments and interest to the policyholder’s account,
and we deduct expense and risk charges. The mortality risk charge is referred
to as cost of insurance charges (COI), which generally increases from year to
year as the insured ages. Most of our UL policies also include surrender charge
provisions for early termination and partial withdrawals.