Traditional Non-participating (non-dividend-paying) Life Products
Opening GAAP equity may be computed differently due to a variety of issues, from balance sheet optimization to data and system constraints. Some carriers could see equity drop because premium deficiency reserves will be calculated differently. Similarly, the new standard requires companies to calculate reserves using current interest rates, which could be far lower than their historical values. Over the lifetime of traditional products, we expect greater earnings volatility and lower equity volatility, but these may play out differently in the short term.
Life Contingent Limited-Pay Contracts
For these products, the transition will likely decrease equity due to the changes in discount rates and loss recognition, as noted above. LDTI removes provisions for adverse deviations, and this could accelerate profits—but this could be offset by updated assumptions. Then, there are issues with DAC and deferred profit liability. The bottom line: for payout annuity products, changes to equity, profit emergence, and relative volatility will all be highly dependent on a company’s individual circumstances.
Long-Term Care (LTC)
For some time now, there has been a significant bid-ask spread that has held back both would-be buyers and sellers. But, when the transition occurs, changes in the required discount rate and loss recognition events are likely to increase liabilities for many insurers. We could also see more earnings volatility as companies change the way they develop prospective assumptions.
Participating Whole Life
LDTI eliminates shadow DAC adjustments, and this could lead to higher equity as of the transition date. But the impact on profits could vary significantly by carrier, depending on how they estimate gross margins. In general, we expect to see lower volatility for both earnings and equity for this product group going forward.
Universal Life Products
While many universal life insurers will see an increase to equity once the LDTI transition is complete, the effect on profit could vary significantly by carrier. Since DAC and unearned revenue liability is amortized on a constant level basis under the new standard, profitability may depend on subtleties of product design. For insurers with large historical losses, this could add significant expense in future years as they change the way they amortize DAC.
Insurers offering this product category could be affected differently, depending on whether they offer Guaranteed Minimum Benefits (GMxBs). In general, carriers offering GMxBs will need to move to a fair value approach to estimating liabilities; which could increase the liabilities from the current amortized cost method and will increase equity volatility.