Capital and Surplus Relief, Take Two: Permitted Accounting Practices

24 February 2009 Publication
Authors: Kevin G. Fitzgerald

Legal News Alert: Insurance

With deadlines for insurance companies to file their financial statements rapidly approaching, a few state regulators have chosen to address the concerns of their domestic insurance companies in need of capital and surplus relief. Following the National Association of Insurance Commissioners (NAIC) Executive Committee’s rejection of nine “emergency measures” proposed by the American Council of Life Insurers (ACLI) (see Foley’s alert on this topic at, most insurers are left with the option of obtaining any necessary relief from their domestic regulator in the form of a permitted accounting practice (PAP). The NAIC’s Accounting Practices and Procedures Manual’s preamble empowers the domiciliary state regulator to approve a request for an accounting practice that departs from the manual. While protocol generally involves regulators processing these requests on an individual basis, at least two states have taken a different approach in light of the current economic climate.

Traditionally, an insurer seeking to use an accounting method that deviates from the statutory accounting principals must apply to its domestic regulator by providing the nature of the request, the quantitative effect of the change on the insurer’s financials, and the effect of the request on a legal entity basis on its parent and all affiliated insurance companies. The regulator, after evaluation of the company’s PAP request, can accept or deny it. If accepted, the regulatory authority must provide notice to all other jurisdictions in which the company is licensed and, in general, must give notice 30 days before the change will go into effect. The PAP notification should include a detailed description of the permitted accounting practice request, whether the request has previously been granted, the financial statement filing date in which the PAP will be reflected, the financial statement line items the PAP will affect, and the total financial impact to capital and surplus for all approved PAPs.

To date, Connecticut, Indiana, Illinois, and New York have granted such PAP requests in order to ease capital and surplus concerns of individual companies. Several other states have signaled a willingness to grant PAPs in the event that they are requested. Two states, Iowa and Ohio, issued bulletins on February 3, 2009 that make one form of the capital and surplus relief sought by the ACLI available to all of their domestic insurance companies. In these states, insurers can request to use the treatment for deferred tax assets (DTA) that was presented to the NAIC Executive Committee in January 2009, which allows a DTA to be used for three years with a 15-percent cap of statutory capital and surplus. While both provide DTA relief, the bulletins are not exactly alike: Ohio requires insurers that apply for the DTA benefit to have a risk-based capital level of 250 percent, while Iowa has no such specification. Iowa, however, does not consider the increase in admitted assets and statutory surplus resulting from the DTA adjustment to be in the definition of admitted assets and surplus for purposes of determining any regulatory trigger that involves such assets and/or surplus. This includes, but is not limited to, triggers in the holding company systems act, investment limitations, and grounds for rehabilitation and liquidation. The Ohio Department of Insurance says 20 companies will receive capital relief under this provision. In Iowa, 10 companies appear to benefit from the provision. In both cases, companies that seek to take advantage of the DTA changes must still file a PAP request with the state’s insurance regulator and complete all notice requirements contained in the NAIC manual’s preamble. 

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our insurance clients and colleagues.

Please contact your Foley attorney or the individuals listed below if you have any questions about these issues or want additional information regarding insurance matters:

Kevin G. Fitzgerald
Milwaukee, Wisconsin

Sarah E. Molenkamp
Milwaukee, Wisconsin