Alternative Asset Opportunities says its interim report for the six months to December 2015 referred in some detail to insurers applying increases to applicable premium rates. These are known as ‘cost of insurance’ (COI) increases. COI increases have historically been very rare and, although they can be implemented each year by the insurer, until September 2015 the Company had not experienced any such increases since its launch in 2004. To date, only three of the Company’s 26 insurers have applied COI increases, on seven out of the 75 policies in the portfolio with a face value of $6m, with an average increase of 10% (as referred to in the interim report).
A small number of insurers have recently applied aggressive COI increases to premium rates for some classes of policy. So far, they have received only one confirmed notice of such an aggressive increase from Banner Life Insurance Company, but they have now been advised by our Investment Manager that on a further six policies issued by Transamerica Life Insurance Company (with a face value of $9.9m out of a total portfolio face value of $118m) substantial increases may be made which, if implemented, would raise the future premiums payable on these policies by 97% on average. Such increases would take effect between June and October 2016 resulting in additional premiums of approximately USD$800,000 in the year to 30 June 2017. The impact on the valuation of these six policies would be a reduction of 51%, which would have a negative impact on the Company’s net asset value of around 5%.
Clearly the Board is extremely concerned by this possible development. If other insurers decide to implement increases of the order of magnitude indicated by Transamerica, this could have a significant adverse effect on the Company’s net asset value.
It would appear that insurers are not required to provide a detailed explanation to policy holders to justify COI increases and therefore it is not clear why premiums should be increased. The aggressive increase in premiums by certain insurers has resulted in a number of class actions in the USA against them, two of the recipients being the two insurance companies named above. In conjunction with their advisers they are monitoring developments carefully and will update shareholders in due course.
UPDATE 26 May 2016
The company is now in a position to provide further information relating to COI increases.
The company’s portfolio currently comprises 81 US Universal Life Policies (ULPs), issued on 70 lives, with a face value of $117.6m. Average age of lives assured is 92 years.
ULPs, subject to limitations, allow the policyholder to vary the amount and timing of premium payments and the face value of the policy. The insurance company accumulates cash values by crediting premium payments and interest accumulated in respect of the policy to a fund from which deductions are made for expenses and the cost of providing the insurance. The insurance company declares the rates at which the interest is to be credited to the policy, with most insurers guaranteeing a minimum rate of interest.
Many policyholders pay more in the early years than the actual COI to build up a cushion against subsequent age-related premiums. The company has, in general, paid the minimum amount required to keep the policies in force. Each policy includes a provision which permits the insurer to increase premium rates in certain circumstances. These vary by insurer but usually refer to mortality rates, interest rates, expenses and tax.
A typical clause is: “The maximum guaranteed cost of insurance rates shown on the Policy Summary are based on the Insured’s age, sex and rate class for the Initial Stated Amount and each increase in the Stated Amount. We may use lower than those shown. We will base any future changes in these rates only on Our future expectations as to investment earnings, mortality, expenses and persistency. Nothing in this policy will be effected by Our actual mortality and expenses. We will determine the current rates for the Initial Stated Amount and for each increase to the Stated Amount at the start of each Policy Year and will guarantee them for that Policy Year. Any change We make in the current rates will be on a uniform basis for insured’s of the same age, sex duration and rate class.”
The maximum rates in policies owned by the company are on average approximately 3.5x the existing premium. In some policies the contract terms allow these increases to be partially mitigated. To date, 13 policies, with a face value of $15.9m, will see COI increases ranging from 5% to 100% (the latter assuming the latest expectations regarding Transamerica’s intentions come to pass). The company’s portfolio contains a further 12 policies with a face value of $14.7m issued by insurance groups known to have already applied COI increases elsewhere, but where our policies remain unaffected.
Litigation: The company previously made reference to recent class-action litigation taking place in the US in response to actual and proposed COI increases which are perceived to be excessive and for which the explanations given to policyholders appear to be inadequate. The company is not currently involved in any litigation and is unable to comment on the merits or expected outcomes from the class-actions, but the Board shares the widespread outrage at the magnitude of some of the recently proposed increases. Industry observers suggest it will take a minimum of two years for these actions to be concluded.
Trade bodies have registered their protests with State Regulators who supervise the operations of the Insurers and the Company intends to do likewise.
Outgoings for the 13 months to 30 June 2017 (including COI premium increases) are estimated at $10.6m assuming no mortalities and no further premium increases beyond those recently intimated. The Company currently has cash balances of $7.8m with undrawn bank facilities of $10m. The Board therefore considers the Company’s financial position to be robust.
It is the Board’s current intention to retain all maturity proceeds within the business to fund ongoing operational requirements.
The statement concludes by saying that “It is difficult to predict what, if any, further COI increases are in the pipeline but should the Board become aware of any increases that will have a material impact on the Company, shareholders will be advised. The Board, with its team of advisers, will continue to evaluate all options to optimise the outcome for shareholders.”
TLI : Alternative Assets hit by insurance costs