(Bloomberg) — New York State’s financial-services regulator is pressing insurers including American International Group Inc., Lincoln National Corp. and Principal Financial Group Inc. to boost reserves at units in the state, a person familiar with the matter said.
The group of insurers, which also includes Sun Life Financial Inc. and Manulife Financial Corp.’s John Hancock unit, may have to increase assets held to back payouts by $4 billion, said the person, who asked not to be identified because the matter isn’t public. The person wouldn’t say by how much each insurer needs to increase reserves. The regulator will work with firms on the implementation schedule, the person said.
The New York Department of Financial Services is requiring additional reserves as Superintendent Benjamin Lawsky stops using new regulations for one type of coverage. The rules were meant to boost reserves, and failed to do so at 11 of 16 firms evaluated by Lawsky, he said in a letter to state watchdogs yesterday. The results call into question the so-called principles-based reserving, which reduces reliance on formulas, he wrote.
The new regulations “hardly quell the gamesmanship and abuses associated with the setting of reserves,” Lawsky said. The standards are “an unwise move away from reserve requirements that are established by formulas and diligently policed by insurance regulators.”
Life insurers have strong reserves for the universal life products, and increasing them isn’t necessary, Paul Graham, chief actuary at the American Council of Life Insurers, an industry group, said in an interview. He said the new rules were meant to tailor reserves to the products being sold, not to force companies to hold more.
Thomas Leonardi, Connecticut’s insurance commissioner, said in a statement that he disagrees with Lawsky’s view. The new rules are needed to account for complex products and different levels of risk among companies, he said.
“Staying with the old system does not address this problem,” he said.
Manulife is working with regulators and believes that “any potential impact is manageable within our existing capital plans,” said Sean Pasternak, a spokesman for the Toronto-based insurer. Genworth Financial Inc. has “more than adequate reserves” and no longer sells the products in New York that drew Lawsky’s scrutiny, said Al Orendorff, a spokesman for the Richmond, Virginia-based insurer.
“It is premature to speculate on the potential impact of New York’s proposed actions, as the specific reserving requirements and any phasing-in of those reserves is unknown at the present time,” he said.
The Standard and Poor’s 500 Life & Health Insurance Index slipped 0.6 percent today. The New York Times reported on Lawsky’s letter late yesterday. Representatives of other insurers had no immediate comment or couldn’t be reached.
Tighter restrictions could “reduce the unencumbered capital insurers such as Lincoln and Principal could have for share buybacks, dividend increases and for mergers and acquisitions,” Barclays Plc analysts led by Jay Gelb said in a note to investors today. “We do not expect much clarity on this issue near term, so it could be an overhang for some time.”
Of 16 companies that are major sellers of universal life policies with secondary guarantees, five increased reserves under the new standards, according to Lawsky’s letter. The agreement that established the rules prevented the companies from lowering reserves, he said.
Lawsky said the rules also fail to satisfy his concerns about reinsurance transactions that some life companies conduct with affiliates. He’s called the risk transfers “shadow insurance,” and said some companies are using them to make their reserves appear larger than they are.
MetLife Inc., the largest U.S. life insurer, said in May that it had stopped selling universal life insurance with lifetime secondary guarantees. Radnor, Pennsylvania-based Lincoln has also scaled back from universal life sales.
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