Following the rule change, insurers will be allowed to amortize interest rate-related losses over time equivalent to 10% of their statutory surplus. The statutory surplus is the difference between insurers' assets and liabilities, money that can be used to pay policyholders in unforeseen circumstances.
The new regime has some safeguards. A key metric of an insurer's financial health, its risk-based capital ratio, would have to be at least 300% after adjustments to be allowed to defer interest rate-related losses. Prudential would have been able to reverse about $1.3 billion of $1.8 billion in bond losses last year had the new rules been in place, Chief Financial Officer Ken Tanji told analysts on the company's second-quarter earnings call.
The change will also increase Prudential's risk-based capital ratio to 409% from 383%, according to an SEC filing. Staying close to the 400% threshold is a target many insurers seek to achieve a better credit rating.
, which has "very little" negative IMR, would see little immediate financial impact from the change but would be able to be more flexible with its hedging program when it comes to accepting losses, chief financial officer Steven Zabel told analysts on August 2.