Their balance sheets hammered by investment losses, many
big-name insurers in the US market are enjoying much-needed capital
and surplus relief thanks to a regulatory loophole that enables
state insurance commissioners to permit them to temporarily deviate
from standard accounting procedures.
Not in this state, sums up New York Insurance Department (NYID)
commissioner, Eric Dinallo’s response to special capital and
surplus accounting relief being granted to a growing number of
insurers by regulators under the National Association of Insurance
Commissioners’ (NAIC) “permitted practices” rule.
Dinallo made it abundantly clear that capital and surplus relief
granted to insurers domiciled in other states is not acceptable in
“All such differences must be appropriately reflected in the New
York Annual Statement Supplement by adjusting the insurer’s assets,
liabilities and surplus on a New York basis,” stresses a circular
issued by the NYID.
“New York State Insurance Law sets out a level playing field for
all insurers,” Dinallo said in a statement. “In order that
consumers looking at the reports filed with New York State can
fairly and confidently compare the financial strength of various
insurance companies, these reports must be clear and
Essentially, the permitted practices rule enables insurance
commissioners to use their discretion to authorise insurers to
deviate from accounting practices laid down by the NAIC.
Among the first insurance companies to successfully apply for
relief was The Hartford (Hartford) Financial Services Group which
received a dispensation from the Connecticut Insurance Department
that has effectively boosted its life insurance statutory surplus
by $987 million.
Under relief granted Hartford can in the preparation of its
statutory financial statements apply a less stringent assessment of
its variable annuity guaranteed lifetime benefits reserves, realise
deferred tax assets over three years instead of one year, or to
count 15 percent of its deferred tax assets as part of regulatory
reserves instead of the normal 10 percent. These relief measures
are typical of those applied by other state regulators which also
include those in Ohio, Illinois and Iowa.
To date Ohio has granted relief to the highest number insurers
with seven insurance groups representing 20 life and general
insurance companies benefiting from relief totalling $698 million.
In a statement Ohio’s director of insurance Mary Jo Hudson set out
the rationale for granting relief to insurers.
“In these economic times, the Department considered these
permitted practices only where they would make strong companies
stronger,” said Hudson.
She continued: “The Department only granted these permitted
accounting practices to insurers that have and continue to have,
with or without the permitted accounting practices, strong
financial statements, have demonstrated sound corporate governance
and have furnished the Department with a reasonable strategic
purpose for the request.”
The largest relief granted by Ohio, $447.5 million, went to five
units of Nationwide Corporation Group (NCG), all in the form of a
deferred tax asset concession. The largest portion, $338 million,
went to NGC’s general insurance unit Nationwide Mutual Insurance
while its life insurance unit received relief of $68.9 million. In
the third quarter of 2008 NCG reported a net loss of $346 million
and total assets of $102 billion.
The second-largest chunk of relief granted by Ohio, $87 million,
went to two life insurance units of Ohio National Life Group which
in 2008 reported net income of $146.3 million, an increase of 26
percent compared with 2007, and total equity of $1.53 billion.
Also benefiting from Ohio’s dispensation is Dutch insurer
Aegon’s Western Reserve Life Assurance unit which received deferred
tax-based relief of $45 million.
Far more significant relief was granted to US composite insurer
Allstate by its home-state regulator the Illinois Department of
Financial and Professional Regulation. Relief came in two parts:
deferred tax-based relief of $365 million and annuity-related
relief of $347 million.
In its 2008 annual financial statement Allstate explained that
in respect of annuities the permitted practice approved enabled it
to convert its Allstate Life Insurance Company unit’s market value
adjusted annuities to a book value approach from a market value
separate account approach. Reflecting a widely held view in the
industry that current accounting standards are too conservative,
Allstate noted: “We believe the book value approach is more
reflective of the economics of these products.”
Allstate reported a net loss of $1.13 billion in the fourth
quarter of 2008 and a full-year net loss of $1.68 billion.
According to rating agency Moody’s, Allstate’s statutory surplus
ended 2008 nearly 27 below the 2007 year-end level. Other insurers
not seemingly in as much need of relief as Allstate include life
insurer Lincoln National which was granted relief of $300 million
by the Indiana Department of Insurance. Lincoln National recorded a
net loss of $506 million in the fourth quarter of 2008 and a
full-year $57 million net profit.
Other big-name recipients of relief abound, 10 of these thanks
to the Iowa Insurance Division which has granted unspecified relief
to, among others, Aviva Life & Annuity Company, Principal Life,
Transamerica Life Insurance and ING USA Annuity & Life
Slammed by consumer group
Capital and surplus relief granted to insurers has raised the
ire of consumer group The Consumer Federation of America (CFA).
“Less than three weeks ago, the state insurance commissioners,
through the NAIC, voted not to allow insurance companies to lower
the dollars of consumer protection by shifting those dollars out of
reserves into capital,” said J Robert Hunter, the CFA’s director of
insurance for CFA. “But, in the last few weeks, many of these
commissioners – in Iowa, Connecticut, Ohio and Indiana, for
example, have allowed insurers to use rules like those that were
voted down by the NAIC.”
He was referring to a NAIC meeting on 29 January when reserving
and accounting proposals that would have relaxed insurers’ capital
and surplus requirements were rejected by 9 out of 10 commissioners
making up the NAIC’s executive committee.
In the interests of transparency Hunter called on consumers to
review an insurer’s annual statements filed in its home state and
in New York. He also heaped praise on Dinallo.
“The New York Insurance Department and its Commissioner, Eric
Dinallo, deserve praise from consumers across the nation for
helping them see through a maze of accounting changes and make
better decisions on purchase and maintenance of life and annuity
policies,” said Hunter.