S&P Expects More Big Life Insurer 'Assumption Unlocking' Charges

More life insurers could soon announce the kinds of big, “non-cash” charges that Lincoln Financial and Prudential Financial put in their earnings for the third quarter, an S&P Global Ratings analyst said today.

Carmi Margalit, the life insurance sector lead at S&P Global, predicted that the charges will make earnings reports based on publicly traded companies’ U.S. generally accepted accounting principles (GAAP) look ugly.

But the charges should have little effect on the financial reports the insurers file with state insurance regulators, based on regulators’ own statutory accounting principles, and the charges are unlikely to affect how S&P sees those insurers, Margalit said.

“Overall,” he said, “we don’t think it’s a rating driver.”

What It Means

Fourth-quarter earnings reports that spook investors early next year might not have much bearing on whether life insurers can make good on life and annuity benefits promises to your clients.

The Charges

Life insurers use huge portfolios of bonds and other investments to support long-term life insurance, annuity, disability insurance and long-term care insurance obligations.

GAAP rules once let life insurers smooth over changes in the value of assets and obligations, but now, GAAP calls for insurers to put the effects of changes in asset value assumptions in their earnings.