Impaired intangible assets stress insurance earnings, Moody's says

Impaired intangible assets will continue to pressure insurance companies as earnings continue to erode, according to a report from Moody’s Investors Service in New York. Intangible assets include goodwill generated by branding and market penetration. It also encompasses the value of business acquired and deferred-acquisition costs. The former is the present value of margins or profits expected from insurance contracts that are acquired in a business combination, while the latter represents the deferred sales costs that are related to gaining new business. These intangible assets have become impaired, and though charges related to these assets are non-cash in nature, they affect carriers’ earnings and equity. Meanwhile, declining equity could later lead to insurers’ breaching their debt covenants or loan agreements, Moody’s noted in its April 27 report, which covered life, multiline and European carriers. Though the firm’s analysts will look through these non-cash charges to reveal the underlying value of a business, write-downs of these intangible assets often indicate that the future profits at a carrier are bleaker than anticipated by management. Even if the charges are non-cash, negative credit implications can follow asset impairment, Moody’s wrote. For instance, impairments of goodwill could indicate that there has been a change for the worse in operational factors that could hurt profitability. Additionally, deferred acquisition costs that “unlock” — or change — to reflect updated expectations in the light of different market assumptions have been large as of late, primarily as future gross profits in variable annuity businesses have fallen. Charges related to intangible asset write-downs will likely continue this year as profitability continues to slide and losses continue to rise, according to the Moody’s report. The charges will likely show up in first-quarter earnings in coming weeks, according to Moody’s.