Accounting Breaks From States Boosted Risk-Based Capital Ratios for Carriers Last Year Statutory Surplus Levels Also Soared, Acc

A number of insurers saw their risk-based capital ratios and statutory surplus levels soar last year because of accounting breaks they received from their respective state regulators, according to a new report from Moody’s Investors Service.

A combination of permitted accounting practices and prescribed practices — those required by a regulator for all companies domiciled in that state — helped lift insurers’ RBC ratios by varying degrees, according to the report from the New York-based rating agency. Risk-based capital is the amount of capital that a life insurer has as it relates to its investment risks and operations. Permitted accounting practices include special treatments for deferred tax assets.

In normal cases, carriers can realize deferred tax assets — which are normally illiquid — over one year and recognize them as 10% of their adjusted statutory surplus.
With the treatment, insurers can realize these assets over three years and allow them to count as 15% of their statutory surplus. In the case of Scottish Re U.S. Inc. of Wilmington, Del., the company reported an RBC ratio of 207% and a total adjusted capital ratio of $198 million.
However, without permitted and prescribed practices, the insurer’s total adjusted capital level fell into the red by $189 million, giving it an RBC ratio of -198%.
For Hartford Life Insurance Co. of Simsbury, Conn., a benefit of $830 million due to a combination of prescribed and permitted practices, bolstered its RBC ratio to 454%, from 382%.
Meanwhile, Lincoln National Life Insurance Co. of Fort Wayne, Ind., raised its RBC ratio to 392%, a modest gain from 367%, though that boosted its total adjusted capital to $4.9 billion, from $4.6 billion.
The use of certain permitted practices reduced the comparability between insurers’ reported statutory capital and their valuation of assets and iabilities.
Additionally, treatments and practices vary from one state to another. Although carriers won’t consider the capital boost when determining dividends that they send to a holding company from an operating insurer, the treatment can boost RBC ratios and statutory capital levels and help keep companies from violating bank line and debt covenants.