Accounting Rules Could Scare Some Life Insurers Private: S&P

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.”