The US accounting standard-setter allowed insurers that recently sold their long-term insurance business to exclude it from their balance sheets if they comply with a new accounting rule measuring certain contracts.
Wednesday’s move by the Financial Accounting Standards Board aims to help insurance companies meet new requirements due to come into effect in early 2023 for large publicly traded companies. The FASB delayed implementation of the rule by one year in 2019 and 2020 to give companies more time to prepare.
The rule requires companies to review and, if necessary, revise the assumptions they use to value their long-term obligations related to policies such as annuities and life insurance. Long-term contracts include annuities, capital assets, and property insurance policies, while short-term contracts typically cover property and liability coverage.
Originally, insurers that sold or disposed of their long-term policies would have had to apply the new accounting rule to measure certain contracts if they presented prior periods. This would have presented a challenge for some insurers, who would have had to value contracts they no longer owned.
companies like Cigna corp
and Allstate corp
have exited their long-term insurance businesses over the past year, in some cases to reduce losses or to focus on other lines of business. Assurant sold its funeral insurance business to insurer CUNA Mutual Group for $1.35 billion in August 2021, followed by a deal by Allstate in November to transfer its life insurance unit to Blackstone inc,
a private equity company. Cigna sold some of its Asia-Pacific assets to insurer Chubb earlier this year GmbH.
for $5.4 billion.
“One of the reasons we felt this choice would be beneficial was both because it would reduce costs for businesses and because we feared it would [it]… could actually result in confusing and misleading information for investors,” FASB Board Member Christine Botosan said Wednesday.
Insurance companies supported the relief, saying divested contracts were no longer relevant to their ongoing operations or future cash flows. Disclosing information about completed contracts, such as changes in previously reported earnings or sales, would not be useful to investors and could prove more confusing, Mary Agoglia Hoeltzel, Cigna’s senior vice president of tax and chief accounting officer, said in a July letter the FASB.
“We agree with the Board’s conclusion that the determining factor should be whether the contracts are still on the balance sheet at the effective date of the standard,” she said at the time. Cigna did not immediately respond to a request for comment.
Businesses must disclose that they use the relief and describe the transactions to which they apply it. The rule is scheduled to go into effect early next year for insurers with at least $250 million in publicly traded stock and early 2025 for private and smaller public insurers.
Public companies can apply the relief to divestitures that are two years old, while private insurers are limited to deals that took place in the past year.
write to Mark Maurer at [email protected]
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