A change in statutory accounting rules by the National Association of Insurance Commissioners could help insurers’ financial flexibility, but it will not impact their ratings, said an analyst with Moody’s Investors Service.
The rating firm today released its Weekly Credit Outlook report, saying that last Monday’s action by the NAIC to adopt changes to statutory accounting rules pertaining to income taxes for the fourth quarter of 2009 will allow U.S. insurers to book a higher amount of deferred tax assets (DTA) and boost their reported statutory surplus.
However, while that change will give insurers more financial flexibility, it will not affect their overall economics, which will not impact their ratings, Wallace Enman, vice president, senior accounting analyst for Moody’s, said in an interview.
Mr. Enman explained that the NAIC change is an accounting treatment that allows insurers to take some assets that were previously considered nonadmitted and could not be applied to DTA and have them become admitted assets for the tax benefit.
In the report, Moody’s said the change would result “in a modest improvement to insurer financial flexibility; given the modest benefit, no rating impact is expected.”
Under the old NAIC guidelines, insurers were limited to applying admitted assets if the DTA could be realized within one year of the balance sheet date. That time period was extend to one-to-three years. Asset recognition was limit to 10 percent of adjusted surplus previously, and that limit was expanded from 10 percent to 15 percent of adjusted surplus.
“We expect statutory surplus and RBC [risk based capital] ratios to improve for many companies as a result of the less conservative DTA rules,” Moody’s said.
Mr. Enman noted that some states had made the changes already, but the NAIC change makes it national.
He said it is difficult to know how many companies will benefit from the changes without a full analysis of each company’s financials.
To at least have some understanding of the potential benefit to some carriers, a list of 12 companies accompanied the report, six of which were property and casualty companies. Mr. Enman said it was a random list of insures with substantial nonadmitted DTAs at the end of 2008.
The percentage of nonadmitted DTAs compared to surplus was close to 200 percent for two companies, well over 100 percent for one, and close to 100 percent for three others.
Radian Group was listed with nonadmitted DTA as a percentage of surplus of 195 percent, and Genworth Financial Group came in with 111 percent.
American International Group, which came in at 84 percent, only applied to the life business.
The report also addressed the financial crisis of Dubai World and its affect on the U.S. insurance industry, saying that there was low exposure there.
U.S. insurers’ investment exposure through bonds totals approximately $590 million, the report said, “or less than 0.02 percent of cash and invested assets.” It added that this exposure is modest and would not result in rating actions.
The p&c industry’s exposure stands at $132 million, while the life industry is at $458 million.
NU Online News Service, Dec. 14, 3:21 p.m. EST
A change in statutory accounting rules by the National Association of Insurance Commissioners could help insurers’ financial flexibility, but it will not impact their ratings, said an analyst with Moody’s Investors Service.
The rating firm today released its Weekly Credit Outlook report, saying that last Monday’s action by the NAIC to adopt changes to statutory accounting rules pertaining to income taxes for the fourth quarter of 2009 will allow U.S. insurers to book a higher amount of deferred tax assets (DTA) and boost their reported statutory surplus.
However, while that change will give insurers more financial flexibility, it will not affect their overall economics, which will not impact their ratings, Wallace Enman, vice president, senior accounting analyst for Moody’s, said in an interview.
Mr. Enman explained that the NAIC change is an accounting treatment that allows insurers to take some assets that were previously considered nonadmitted and could not be applied to DTA and have them become admitted assets for the tax benefit.
In the report, Moody’s said the change would result “in a modest improvement to insurer financial flexibility; given the modest benefit, no rating impact is expected.”
Under the old NAIC guidelines, insurers were limited to applying admitted assets if the DTA could be realized within one year of the balance sheet date. That time period was extend to one-to-three years. Asset recognition was limit to 10 percent of adjusted surplus previously, and that limit was expanded from 10 percent to 15 percent of adjusted surplus.
“We expect statutory surplus and RBC [risk based capital] ratios to improve for many companies as a result of the less conservative DTA rules,” Moody’s said.
Mr. Enman noted that some states had made the changes already, but the NAIC change makes it national.
He said it is difficult to know how many companies will benefit from the changes without a full analysis of each company’s financials.
To at least have some understanding of the potential benefit to some carriers, a list of 12 companies accompanied the report, six of which were property and casualty companies. Mr. Enman said it was a random list of insures with substantial nonadmitted DTAs at the end of 2008.
The percentage of nonadmitted DTAs compared to surplus was close to 200 percent for two companies, well over 100 percent for one, and close to 100 percent for three others.
Radian Group was listed with nonadmitted DTA as a percentage of surplus of 195 percent, and Genworth Financial Group came in with 111 percent.
American International Group, which came in at 84 percent, only applied to the life business.
The report also addressed the financial crisis of Dubai World and its affect on the U.S. insurance industry, saying that there was low exposure there.
U.S. insurers’ investment exposure through bonds totals approximately $590 million, the report said, “or less than 0.02 percent of cash and invested assets.” It added that this exposure is modest and would not result in rating actions.
The p&c industry’s exposure stands at $132 million, while the life industry is at $458 million.
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