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The new long-duration insurance contract accounting rules could make some U.S. life insurers’ results go up and down so much that the insurers will have to give up having publicly traded stock.

(Related: Accounting Group Postpones Major Life Insurer Rule Shift)

Peggy Poon and other analysts at S&P Global Ratings suggest that possibiity in an analysis of the possible impact of the Financial Accounting Standards Board’s Accounting Standards Update 2018-12.

ASU 2018-12 may not have a big effect on U.S. life insurers immediately.

Eventually, however, the new standards “could drive many insurers to shift their strategies,” the S&P analysts write.

“We believe the primary impact of the new standards will be changes to strategy, reporting, or ownership structure as insurers, particularly those that are publicly held, try to educate their investors and constituents.”

Insurer Accounting Basics

All U.S. insurers prepare financial statements using state insurance regulators’ Statutory Accounting Principles (SAP) rules.

“Publicly traded insurers” — insurers with many stockholders — also prepare financial statements using the U.S. Generally Accepted Accounting Principles (GAAP) rules.

FASB is a Norwalk, Connecticut-based group that oversees the GAAP standards. It has no direct effect on the SAP standards.

ASU 2018-12 calls for insurers to report regularly on what changes in assumptions about interest rates and other factors are doing to the estimated value of their insurance and annuity benefits obligations.

Insurers like Genworth Financial Inc. and Unum Group are already trying to build the results of “assumption reviews” in their GAAP financial statements.

A typical life insurer with long-duration obligations might generate a few billion dollars of revenue each year and have tens of billions of dollars of long-term benefits obligations. The means that, even if “assumption unlocking” changes the estimated value of the obligations by a small percentage, the small adjustment could lead to hundreds of millions of dollars in gains, or charges.

The Impact

FASB recently postponed the effective dates of the new GAAP long-duration contract reporting rules.

If and when ASU 2018-12 takes full effect, that could cause publicly traded life insurers de-emphasize, or even sell, units that produce “longer-tail lines of business,” such as annuities and long-term care insurance, the analysts write.

U.S. life insurers could go down the same path United Kingdom life insurers went down after the adoption of the European Union’s Solvency II insurer financial health rules, the analysts write.

“Many publicly held life insurance companies that have significant market exposures or particularly complex liability profiles already trade at a discount relative to book value,” the analysts write. “We expect this to continue as investors struggle to reconcile the increased volatility in the business. We could also see some insurers or business lines transferred to private ownership, since the cost of capital for a publicly held company may rise significantly if insurers cannot overcome the stigma of volatile reported results.”

Mutual insurers that voluntarily report GAAP earnings could stop doing that, and the flight away from insurance company GAAP accounting could make the SAP rules more important, the analysts write.

Life insurers now using swaps, derivatives and similar arrangements to power products such as indexed annuities and manage other types of life insurance and annuity risk.

If ASU 2018-12 reduces life insurers’ GAAP shareholders’ equity, that could hurt life insurers’ access to swaps and derivatives, because many of the agreements behind those arrangements include minimum net worth requirements, the analysts write.

SOP 03-1

The idea of benefits assumption updates has already put the GAAP earnings of insurers with large blocks of long-term care insurance on the books on a rollercoaster.

The S&P analysts point out that ASU 2018-12 could also affect issuers of whole life, term life, disability insurance.

The account rules could have a significant impact on blocks of fixed annuities or variable annuities reserved under FASB’s Statement of Position 03-1, or SOP 03-1.

SOP 03-1 applies to variable annuities with guaranteed minimum death benefits, guaranteed minimum income benefits, and guaranteed lifetime withdrawal benefits.

“Also, for fixed indexed annuities, living benefit riders are covered under the standard,” the analysts write.

A chart shows that three insurers may each have more than $140 billion in variable annuity account value guarantees reserved under SOP 03-1.

“These exposures do not necessarily mean the new standards will have a negative or positive impact on the reported shareholders’ equity of the companies in the charts,” the analysts write.

Some companies may have hedging arrangements or other strategies for managing GAAP earnings volatility, the analysts write.

The analysts note that they illustrated the effects of the new accounting rules on SOP 03-1 partly because insurers have been good about reporting on SOP 03-1 obligations.

That implies that insurers may have large amounts of other types of reserves that could become drivers of life insurers’ GAAP earnings volatility.

Related

The S&P analysis is available, behind a paywall, here.

— Read Life Insurers Face Another Big, Hairy Accounting Shifton ThinkAdvisor.

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