Life carrier relief a potential headache for advisers

Some states are loosening surplus and capital requirements for life carriers, which is making risk assessments difficult for advisers and analysts.

“The consumer is asking us for more than the company’s rating and tenure,” said Briggs A. Matsko, a certified financial planner and investment adviser representative at California Fringe Benefit, a Sacramento-based affiliate of Lincoln Financial Advisors Corp. of Fort Wayne, Ind.

“They want to know and feel comfortable that the company is going to be able to deliver on its promises and guarantees, as well as what happens if they can’t,” he said.

Insurers lately have been seeking help from their state regulators, asking for permission to boost their statutory capital and surplus levels — the money that allows carriers to stay in business and cushions reserves, respectively — through a change in state accounting rules. And such allowances have already been made in Illinois, Iowa, Ohio and Connecticut.

Some 20 insurers have already requested to use the newly permitted practices in Ohio, according to Carly Glick, assistant director of communications at the Ohio Department of Insurance in Columbus. But she would not identify which companies or how many of the insurers were life carriers.

The help is a boon to carriers, as high market volitility has strained life insurers’ capital levels.

The Hartford (Conn.) Financial Services Group Inc. is one of the carriers that changed its accounting method.

In its 2008 annual report, released Feb. 12, the carrier said that its statutory surplus of $6.05 billion for its life operations included an additional $987 million due to two newly permitted accounting practices.

One method grants reserve relief by allowing The Hartford to realize deferred tax assets — which are normally illiquid — over a period of three years instead of the usual one year. The carrier can also allow those assets to count as 15% of its adjusted statutory surplus and capital instead of the usual 10%.

The second method allowed the company to modify a required asset adequacy analysis of the reserves for variable annuities’ guaranteed lifetime benefits, which results in lowering the reserve limit. Were it not for this modification, The Hartford would have had to raise its net reserves by about $600 million, finance chief Liz Zlatkus said in a Feb. 6 conference call.

During last year’s market turmoil, the value of many VA guarantees was greater than that of the account, and a typical unmodified asset analysis in this case would have required additional reserves.

Combined, the two methods could raise The Hartford’s risk-based-capital levels by as much as 75 percentage points, Ms. Zlatkus said.

Risk-based capital is the amount of capital a life insurer has as it relates to its operations and investment risks.

Hartford Life and Accident Insurance Co.’s estimated year-end 2008 risk-based-capital ratio was 385% prior to an adjustment, compared with 416% in 2007, she said.

Generally, insurance regulators will require an insurer to submit corrective plans when a company’s risk-based-capital ratio falls below 200%.

Allstate Insurance Co. of Northbrook, Ill., is another life carrier that was able to raise its statutory capital and surplus by modifying its ac-counting method. It added $347 million.

Other states, such as Ohio and Iowa, have published bulletins granting carriers based there re-serve relief by allowing some of them to count deferred tax assets toward as much as 15% of their statutory capital and letting them realize the assets over three years.

“People are looking at a lot of fixed annuity products because of the guarantees and their perception of safety, so the insurance companies’ financial strength and health are on their mind more so than before,” said Robert M. Burkarth III, a Southport, Conn., financial adviser at U.S. Wealth Advisors LLC in Braintree, Mass. His firm manages about $50 million.

“The race doesn’t always go to the swift nor the battle to the strong, but that’s the way to bet. If we’re going to look for a winner, you want the strong company.”

Analysts vary on how to assess the benefits carriers receive from tailored in-state practices when determining a company’s risk.

“We look past the individual accounting practices that might be permitted in each state,” said Wallace Enman, vice president and senior accounting analyst at Moody’s Investors Service in New York. The ratings agency had noted that the permitted practices would have a limited impact on the ratings of life insurers.

“States granting permitted practices reduce the inherent conservatism of the states’ regulatory and accounting regime but may improve an insurer’s financial flexibility, a key metric for us,” Mr. Enman said.

Even between Iowa and Ohio, the limitations on rules aren’t equal. Ohio requires life insurers that apply for the deferred-tax-asset benefit to have a risk-based capital level of 250%, while Iowa has no such specification.

A company with a drastic rise in risk-based capital levels after regulatory relief isn’t necessarily equal to a company that didn’t need the help.

Comparing a company that used a permitted practice from a state regulator with one that didn’t’ seek special treatment may require the ratings agency to adjust its metrics in order to improve comparability, Mr. Enman said.

But he also noted that the method change makes statutory accounting less conservative and doesn’t give the insurers an economic benefit.

Andrew Kligerman, a New York-based analyst with UBS Investment Bank in Stamford, Conn., said that the investment community and ratings agencies could discount carriers’ perceived benefit from states’ accounting practices.

However, he also noted that the special treatment doesn’t offer the insurers much permanent help from the credit losses and pressures from guarantees on variable annuities that have helped drag down fourth-quarter and year-end results.

“You can temporarily take away the symptoms, but the disease is still there,” Mr. Kligerman said.

E-mail Darla Mercado at [email protected].