U.S. GAAP Accounting Standards Update 2018-12 – Financial Services – Insurance Topic 944: Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) is now effective for public companies and will be effective for year-end 2025 for other reporters. The implementation of LDTI has resulted in fundamental changes to companies’ reported financial results, as could be seen in the restated 2022 results presented by a cross section of public life/health insurers.
| Insurer | Percentage change in retained earnings |
|---|---|
| MetLife | –3.9% |
| Prudential | –5.0% |
| Corebridge Financial | +12.9% |
| Globe Life | +6.6% |
| UNUM | +1.8% |
| Lincoln Financial | –11.7% |
The primary drivers to the changes in U.S. GAAP reported figures were:
These changes do increase the relevance of U.S. GAAP figures, as intended by the Federal Accounting Standards Board. Companies have spent significant amounts of resources retooling their financial reporting capabilities in order to produce LDTI-compliant results; however, with all of this enhancement, a question remains: Is there still a need for separate management reporting?
Unlike external financial reporting, management reporting is internally focused and is primarily a tool to aid in decision making and control. Such reporting should strive to provide information that is relevant to the decision makers. Management information (MI) should have the following core characteristics:
Insurers have traditionally used economic metrics such as value of new business (VNB) to meet the demands of MI and address perceived shortcomings in GAAP metrics. The core question now is whether the revised GAAP metrics provide enough additional useful information to warrant doing away with separate information.
VNB provides predictive/confirmatory value, as it immediately reflects the full effect of management choices. As an example, the effect of a change in a company’s reinsurance program will be immediately reflected in full in the VNB. Similarly, changes in pricing that can affect volume are also immediately reflected in VNB, whereas typical GAAP measures (e.g., GAAP Return on Equity) will only fully reflect the effects of margin-volume trade-offs over time.
VNB also reflects enhanced comparability across business lines, as the measurement model directly incorporates a risk adjustment and is ultimately the same framework. In contrast, U.S. GAAP continues to maintain two models (one for long-duration and one for short-duration contracts). This makes it difficult to compare short-duration and long-duration business lines consistently.
The understandability of both VNB and LDTI GAAP metrics may be an issue. Both frameworks require the use of detailed projections that necessitate multiple assumptions about future experience. But the interpretation of VNB is extremely simple: A positive VNB is accretive, and a negative VNB is destructive. These can be viewed entirely nominally and still provide useful information. In contrast, GAAP measures can only be useful if contextualized by another GAAP figure (e.g., the prior year’s figure or a plan figure).
Both VNB and GAAP are now (under LDTI) current assumption frameworks. As a result, both measures change automatically as conditions change; however, as VNB also directly incorporates capital changes, it provides a more robust response to the external environment.
VNB, when calculated appropriately, provides a complete measure of expected risk-adjusted new business performance. As a result, VNB delivers valuable additional information not provided by U.S. GAAP metrics in a timely manner, even after the implementation of LDTI. We believe that focusing on improving VNB will typically lead to improved new business discipline and ultimately improved enterprise value; however, implementing VNB is not a simple undertaking. A full-scale implementation requires patience and discipline, and like all fundamental changes, it will take a little while to begin to see progress.
Mark is a Senior Director in the Insurance Consulting and Technology business. He has over 15 years of experience working with U.S. domestic and international insurers on topics that include capital modeling, risk management, financial modeling and reporting, and M&A.
