New Credit Loss Rules May Smudge Life Insurers' Earning: Moody's

New credit loss forecasting accounting rules could make life insurers’ earnings go up and down a little more, and make their earnings reports harder to compare, according to rating analysts at Moody’s Investors Service.

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

But, overall, the Financial Accounting Standards Board’s new Current Expected Credit Losses (CECL) reporting rules should have only a minor impact, and no impact on insurers’ ratings, Moody’s analysts write in a new commenter.

CECL Basics

FASB developed the CECL rules in an effort to help investors and others understand how changes in interest rates, consumer financial strength, and other factors might affect the performance of the credit arrangements companies have provided.

The CECL standards could apply to life insurers that make mortgage loans, buy mortgage-backed securities, offer reinsurance, or participate in other arrangements that could lead to the risk that another party will fail to make the expected payments.

Companies that report results using FASB’s Generally Accepted Accounting Principles (GAAP) rules already have to report on looming defaults they already know about.

The new rules would require the companies to make default forecasts that include reasonable economic assumptions and other assumptions.

FASB recently postponed the earliest effective date for life insurers to January 2022, from January 2021, because of concerns about implementation.

Smaller insurers and insurers that do not sell stock to the public can wait until January 2024 to move to the CECL standard, according to FASB.

The Moody’s Assessment

The idea of having to forecast future losses, and update the forecasts regularly, may sound hard.

But the Moody’s analysts say adoption of CECL will likely have only a small effect on GAAP equity and is unlikely to change Moody’s view of an insurer’s credit strength.

“Earnings volatility is expected to rise slightly under CECL because of the requirement to embed estimates of the impact of future macroeconomic changes in allowances,” according to a comment from Wallace Enman, a Moody’s vice president, the leader of the team that developed the commentary.

Insurers that have talked about the early effects of the new standard have suggested that it would change GAAP equity by less than 1%, the Moody’s analysts say.

The analysts note that the new rules have no effect on the financial reports insurers file with state insurance regulators, which are prepared using regulators’ Statutory Accounting Principles rules.

But the new rules could reduce “peer comparability,” because “the new standard gives management significant leeway in selecting models, setting macroeconomic assumptions and deciding the length of the forecast period,” the analysts write. “Clear and quantitatively based disclosures will be essential in providing investors with a good understanding of the credit implications of reserve estimates.”

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

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