Regulatory Accounting Change Boosts Hartford's Capital
February 12 2009 - 2:50PM
Dow Jones News
Hartford Financial Services Group (HIG) became the first major
life insurer to receive approval from its state regulator to make
use of controversial statutory accounting practices that will boost
its surplus capital.
For Hartford, the changes instilled by Connecticut lifted its
statutory capital surplus by about $1 billion at the end of 2008,
and could boost the company's efforts to market its products.
The change didn't impress investors Thursday as Hartford led a
downward trend among life insurers, trading down 11.5% recently to
$12.02.
Last month, the National Association of Insurance Commissioners
voted against making the changes standard for all insurers, but
some state regulators have said they will allow the changes on a
case-by-case basis. Iowa, Illinois, Ohio and New York have all
issued bulletins regarding permitted practices and will consider
individual requests, according to rating agency A.M. Best.
That doesn't sit well with some observers.
"Life insurers are obviously having some problems with their
portfolios, and I don't see the purpose of trying to hide it," said
Ernie Csiszar, insurance industry director with Bridge Strategy
Group, and former president of the NAIC. He is also a former
director of the South Carolina insurance department.
He said the changes are controversial among insurance
commissioners, and he doesn't know how that will play out as
insurers seek to do business in states with stricter rules in
place.
Andrew Edelsberg, an A.M. Best vice president, said via email
that the agency assesses "the underlying adequacy of an insurer's
balance-sheet strength on a realistic economic basis," and "to some
extent and where appropriate," A.M. Best is already taking the
changes into account in its analysis.
Most of the expected changes will be allowed on a temporary
basis, which will also play into how the rating agency evaluates
the insurers.
One change allows Hartford to account for deferred income taxes
over a three-year period instead of one year, and increase the
asset recognition limit from 10% to 15% of adjusted statutory
capital and surplus.
Deferred-tax assets are credits that a company aims to use to
offset future taxes. They have value to the extent that a company
generates a profit in future years and can put them to use.
Another change relates to the company's statutory reserving
requirement for variable annuities with guaranteed living benefit
riders.
The guidelines prescribed by the NAIC require a stand-alone
asset adequacy analysis reflecting only benefits, expenses and
charges that are associated with the riders for variable annuities
with guaranteed living benefits.
The change allows all benefits expenses and charges associated
with the variable annuity contract to be reflected in the
stand-alone asset adequacy test.
"That surplus account is the critical piece on the insurer's
balance sheet and determines how much business they are allowed to
write," Csiszar said. "It is the crux of everything an insurance
company does."
Other life insurers that have asked their regulators for
permission to make the changes are the Principal Financial Group
Inc. (PFG) and Lincoln National Corp. (LNC).
The change that Connecticut permitted for Hartford increases its
capital surplus by $987 million at the end of 2008, pushing surplus
capital in its life operations to $6.047 billion.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com