UPDATE: Insurers Seek Relaxed Capital Rules That Hartford Won
February 12 2009 - 6:27PM
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 by around $1 billion.
It won't be the last.
"Quite a few" life insurers have made similar requests to their
state regulators, and decisions should start coming soon, said
Commissioner Thomas E. Hampton of the D.C. Department of Insurance,
Securities and Banking, in an interview with Dow Jones Newswires
Thursday.
Life insurers that receive permission to use the accounting
treatments in their statutory financial statements could find
themselves on more solid capital footing, at least on paper, and
the change could allow some insurers to write more business.
"The decisions will provide The Hartford with added financial
flexibility while ensuring that the company is appropriately
capitalized for its customer commitments during this challenging
economic period," said spokeswoman Shannon Lapierre, in an emailed
statement.
The change didn't impress investors Thursday as Hartford led a
downward trend among life insurers, closing at $12.54 Thursday,
down 7.7%.
Last month, the National Association of Insurance Commissioners
voted against making the changes standard for all insurers, but
left the door open for state regulators to allow the changes for
insurers that are domiciled in their state, where regulators may
have individualized knowledge of an insurer's standing.
Insurance departments in Iowa, Illinois, Ohio and New York have
all said they will consider the 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.
The NAIC is developing a process for states to review requests
made in others states, and some may decide not to extend the
relaxed rules to business done in their state, said Washington
D.C.'s Hampton, who chaired the committee hearings considering the
changes.
If a state says no, an insurer would be limited to the more
restrictive rules in that state, which could affect how much
business the insurer could write in that state, or even whether an
insurer falls below regulatory levels, Hampton said.
Companies that receive permission to use the relaxed capital
standards may not see a bump in their ratings due to the
change.
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.
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