NU Online News Service, Jan. 6, 3:33 p.m. – U.S. insurers may be using overly optimistic assumptions about variable annuities in financial statements developed according to Generally Accepted Accounting Principles, according to a new report from analysts at Moody’s Investors Service, New York.
The assumptions could hurt the insurers’ earnings if they turn out to be wrong, the analysts warn.
The analysts note that insurers can change reported VA profits by managing assumptions about stock market returns, assumptions about policyholder behavior and other assumptions used to amortize the cost of acquiring the policies. Companies can use the assumptions to defer including deferred acquisition costs for years, but, when insurers finally do recognize a long-delayed DAC charge, as they eventually must, it will be larger than would have been the case otherwise, the analysts write.
Insurers can also manipulate amortization assumptions for deferred acquisition costs, so that they can carry inflated intangible asset balances on their GAAP balance sheets. The Moody’s analysts say these intangibles are then at risk of being judged unrecoverable and written down.