The recent volatility in the financial statements of Canadian life insurers is largely due to differences in accounting practices, which should even out over time, says Moody’s Investors Service in a new report.
The report notes that the results of Canadian lifecos have recently proven much more volatile than their U.S. counterparts, and it says this is primarily attributable to differences in accounting.
For instance, the insurance liabilities of Canadian life insurers are revalued each period as underlying assumptions change (interest rates, mortality, lapse rates, etc.), whereas insurers preparing financials under U.S. GAAP do not immediately recognize changes in underlying assumptions for all products. And, guaranteed minimum benefits embedded in variable annuity products are generally marked to market each period under Canadian rules, whereas under U.S. GAAP only guaranteed living benefits are marked to market immediately.
“U.S. GAAP allows firms to smooth out (to an extent) the effect of changes in assumptions, interest rates, and equity levels into their earnings over time rather than having to recognize the effect immediately,” it says.
In the long run, the results for insurers on both sides of the border should converge, it says, as market fluctuations should affect the underlying economics of U.S. and Canadian insurers equally. “Either losses experienced by Canadian firms in recent quarters will eventually make their way to US insurers’ bottom lines if conditions do not change, or if conditions do change (e.g., interest rates increase), Canadian insurers will reverse recent charges,” it says.