A temporary regulatory change has softened the blow on US life insurers' capitalization from a significant decline in their aggregate interest maintenance reserves during the third quarter.
The total interest maintenance reserve (IMR) liability for life sector general accounts was at $8.84 billion as of Sept. 30, down from $12.20 billion on June 30. The US life insurance industry had $19.18 billion in total IMR liability in general accounts at year-end 2022.
A number of life insurers began admitting their negative IMR balances as an asset after regulators adopted an optional limited-time interpretation during the National Association of Insurance Commissioners (NAIC)' summer national meeting intended to reduce the impact of losses from sales of investments due solely to interest rate movements.
At least one insurance executive had previously cited the change as "helpful" since it enables an insurer to admit negative IMR generated from taking losses and selling investments up to a limit set by the company's surplus. As of Sept. 30, 113 individual insurance subsidiaries have reported a negative IMR balance as an admitted asset.
Accounting tweak
Under prior statutory accounting rules, realized capital gains and losses on bonds due to changes in market interest rates are deferred to IMR and not immediately recognized in income or surplus. To the extent those deferred losses reached such a level that the IMR balance turns negative, it was then recognized as a non-admitted asset and negatively impacted capitalization.
US insurers in some cases have been willing to sell lower-yielding bonds that dropped in value in order to take advantage of significantly higher rates, which would seem beneficial to their long-term financial footing, although under the previous IMR accounting rules, it would have caused a negative near-term impact to capitalization.
The NAIC's adopted interpretation for negative IMR treatment will be effective through Dec. 31, 2025, and automatically nullified Jan. 1, 2026, although the effective date could be subject to change. Several life insurers adopted the temporary NAIC guidance beginning with their third-quarter statutory financial statements.
IMR after Q3 2023
As of Sept. 30, The Northwestern Mutual Life Insurance Co. again held the largest negative IMR within its general account among US life insurers, with its reserves sitting at negative $2.15 billion. The mutual insurer continues to use a permitted accounting practice that the Wisconsin Insurance Commissioner had granted the carrier, which allows for the admissibility of a net negative IMR balance. The insurer entered the negative IMR as a contra liability.
Prudential Financial Inc. had the second largest IMR with $1.06 billion of total negative IMR within its general account, all of which it admitted as an asset. The insurer admitted as an asset an additional $200 million of the $1 billion of total negative IMR within its separate account.
In an email, a spokesperson for Prudential addressed the decision to put more in its general account by saying that "in the IMR instructions prescribed by regulators, insurers must first admit general account IMR and then separate account IMR to the extent that the company has capacity under the admissibility cap."
