State insurance regulators this week cleared an accounting change that would allow insurance companies to bulk up their capital and statutory-surplus levels.
At the National Association of Insurance Commissioners' winter meeting in San Francisco, regulators voted 33 to 22 in favor of a tax treatment that would allow insurers to apply deferred tax assets toward more of their statutory surplus.
A tax-deferred asset is an asset that reflects a likely future reduction in taxes.
Regulators changed two components in their calculations for deferred tax assets for 2009 and 2010's annual results.
This will allow certain carriers that meet the regulators' risk-based-capital requirements to raise their capital and surplus by admitting more deferred tax assets.
One change expands the loss carryback time frame from one year to three. Net operating losses incurred during the current reporting year can be applied to earnings during that three-year period, thus reducing the amount of tax that should have been paid. The resulting tax benefit can then be applied to future earnings, effectively lowering an insurer's tax bill.
The other change allows carriers to either consider deferred tax assets as statutory capital and surplus as realizable within a three-year period, up from a one year period — or allow the deferred tax assets to comprise 15% of a carrier's statutory capital and surplus, up from 10%. Between those two alternatives, insurers must choose the lesser option.
The new calculations, which are temporary, will be effective for carriers' year-end-2009 financial statements. The full effect of these changes will be disclosed in the notes to financial statements in the insurers' statutory filings.
Consumer advocates and some insurance regulators have objected to the proposed change in the treatment of deferred-tax-assets. They argue that, as deferred-assets, the tax credits are unavailable to an insurer if there's a sudden need for cash.
The rule change will certainly help bolster carriers' capital reserves. Insurers can add about $11 billion in capital to their balance sheets from the measure, confirmed Whit Cornman, a spokesman with the American Council of Life Insurers.
The measure was originally part of a nine-part proposal that the ACLI pitched the regulators last winter in an attempt to seek capital relief through rule changes. The industry trade group failed to get its request approved immediately.
This year, however, individual states began approving components of the proposal in their respective jurisdictions.
"The changes to accounting rules for deferred tax assets approved by the NAIC will provide a much more accurate picture of an insurer's financial strength,” Paul Graham, the ALCI's chief actuary, said in a statement. “The new rules allow life insurers to count more of their DTA as statutory capital that was previously walled off under the old rules.”
Regulators noted that the rule lightens some of the “overconservatism” in the accounting assumptions. “Insurance regulators have long understood the need for conservatism in insurers' financial statements as evidenced by our current conservative reserving requirements, disallowance of assets for acquisition costs and non-admission of many other assets,” Roger Sevigny, NAIC's president, said in a statement.
