A U.S. accounting standard setter has allowed insurers that recently sold their long-term insurance business to delist it from their balance sheets if they comply with new accounting rules for valuing certain contracts.
The Financial Accounting Standards Board’s decision on Wednesday aims to help insurers comply with new requirements that are due to take effect for large public companies in early 2023. The FASB delayed implementation of the rule by a year in 2019 and 2020 to give companies more time to prepare.
Under the rule, companies must review the assumptions they use to measure the value of their long-term liabilities related to policies such as annuities and life insurance, and revise them as necessary. Long-term contracts include annuity, endowment, and title insurance agreements, while short-term contracts typically cover property and liability protection.
Initially, insurers who sold or disposed of their long-term policies had to apply the new accounting rule to the valuation of certain contracts when they represented prior periods. This would be a problem for some insurers as they would have to value contracts they no longer owned.
Companies like Cigna Corp.
and Allstate Corp.
have dropped long-term insurance over the past year, in some cases to reduce losses or focus on other lines of business. Assurant sold its funeral insurance business to fellow insurer CUNA Mutual Group for $1.35 billion in August 2021, after Allstate struck a deal in November to offload its life insurance business to Blackstone Inc.,
private investment company. Earlier this year, Cigna sold some of its assets in the Asia-Pacific region to insurance company Chubb Ltd
for 5.4 billion dollars.
“In part, we thought this election would be beneficial because it reduced costs for companies, as well as fears that [it]… can actually result in confusing and misleading information for investors,” FASB board member Christine Botosan said Wednesday.
Insurance companies supported the bailout and said the canceled contracts no longer affected their current operations or future cash flows. Disclosing information about terminated contracts, such as changes in previously recognized earnings or sales, would not be helpful to investors and could become even more confusing, Mary Agolia Heltzel, Cigna’s senior vice president of tax and chief accounting officer, said in July. letter to the FASB.
“We agree with the Board’s conclusion that the determining factor should be whether the contracts are held on the balance sheet as of the effective date of the standard,” she said at the time.
Cigna appreciates the FASB rule, which will reduce confusion and lead to better understanding of financial reporting, a company spokeswoman said Wednesday.
Companies will have to disclose that they have chosen to use the exemption and describe the transactions to which they apply it. The rule is set to take effect for insurers with at least $250 million in public equity early next year, and for private and smaller public insurers in early 2025.
State-owned companies can apply the exemption to two years’ worth of asset disposals, while private insurers are limited to deals that took place within the previous year.
Write Mark Maurer at [email protected]
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