The US accounting standard setter allowed insurers that recently sold their long-term insurance business to exclude those on their balance sheets when following the new accounting rule when valuing certain contracts.
Wednesday’s move by the Financial Accounting Standards Board is aimed at helping insurance companies meet the new requirements, which are set to go into effect for large publicly traded companies as early as 2023. The FASB in 2019 and 2020 delayed implementing the rule by a year to give companies more time to prepare. .
Under the law, companies must review the assumptions they use to measure the value of their long-term obligations related to policies such as annuities and life insurance and revise them if necessary. Long-term contracts include contracts for annuities, endowments and title insurance, while short-term contracts often protect assets and liabilities.
Originally, insurers who sold or disposed of their long-term policies would have had to use the new accounting rule when measuring other contracts when reflecting past periods. This would have created problems for other insurers, as they would have had to value contracts they no longer had.
Companies like Cigna Corp.
and Allstate Corp.
in the past year they have shed their long-term insurance businesses, sometimes to reduce losses or to focus on other businesses. Assurant in August 2021 sold its funeral insurance business to insurance partner CUNA Mutual Group for $1.35 billion, followed by Allstate’s agreement in November to offload its insurance to Blackstone. Inc.,
a private company. Cigna earlier this year sold some of its Asia-Pacific assets to Chubb Insurance Ltd.
for $5.4 billion.
“Part of what made us think that this decision would be beneficial was because it would reduce the cost of the company, and because of the concern [it]…could lead to confusing and misleading information for investors,” FASB board member Christine Botosan said Wednesday.
Insurance companies supported the service and said that the contracts that were thrown out are no longer relevant to their current or future operations. Disclosing details of exit contracts, such as changes to previously known benefits or sales, would not be helpful to investors and could be very confusing, Mary Agoglia Hoeltzel, senior vice president of tax and chief accounting officer at Cigna, said in July. letter to the FASB.
“We agree with what the Board has said that what should be if the contracts are still on the balance sheet by the start date,” he said at the time.
Cigna welcomes the FASB rule, which will reduce confusion and create greater understanding of financial statements, a company spokesman said Wednesday.
Companies must explain that they have chosen to use the service and explain what they are using. The rule should apply to insurers with at least $250 million in publicly-purchased shares by early next year and to private and smaller public insurers by early 2025.
Public companies can use the relief for claims made two years ago, while private insurers are limited to claims made in the previous year.
Write to Mark Maurer is Mark.Maurer@wsj.com
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