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

"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 Shift, on ThinkAdvisor.

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