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

While charges will make earnings reports based on generally accepted accounting principles look ugly, they will likely have little effect on issuer ratings.

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.

Lincoln put a $2 billion, interest-rate-driven “assumption unlocking charge” in its earnings for the third quarter, which ended Sept. 30, and Prudential put a $1.4 billion unlocking charge in its earnings.

Lincoln and Prudential took the charges partly because they are expecting rising interest rates to affect policyholder decisions to keep or drop products, as well as to affect the current market value of their assets.

“ We think there’s probably more of that to come,” Margalit said.

S&P recently cut its ratings on Lincoln to A+, from AA-, but that was because Lincoln’s earnings have been soft, not because of the assumption unlocking charges, he added.

He noted that S&P expects life insurers to hold most bonds to maturity, rather than having to sell bonds early and realize interest-related market-value losses

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