Given the current financial mess that resulted from unsound and ill advised financial practices my total amazement at certain of the state insurance regulators for allowing insurance companies to count such silly things as deferred income taxes in their capital computations is mind boggling. Anyone else remember the industry meme the past 6 months repeated by paid insurance industry shills like Robert Hartwig of the Insurance disInformation Institute that this was a bank problem and that insurers were financially strong? Financially strong enterprises don’t spend time getting regulatory blessing to cook their books. In fact I’ll go a step further and publicly advise what I’m telling my paying clients, If your bank or insurer counts silly things like their net deferred tax asset as capital, run don’t walk for the door. Simply put it means they are in severe financial distress. In Allstate’s case details have emerged in the national media as to the extent of their problem. We begin at the WaPo:
Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong.
But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance.
One accounting change added $347 million. Another delivered a year-end boost of $365 million.
Allstate’s actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies’ financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families.
This next blurb caused me to shake my head, in the small business world such slack is rarely cut a borrower or small town bank that’s insolvent but then again the guys and gals in small business don’t have armies of high priced lobbyist or revolving door employment arrangements with these state regulators:
For regulators, the insurance companies’ requests can pose a dilemma. At a time of financial peril, is it better to loosen financial standards for insurers and hope they pull through the crisis still able to keep their promises to policyholders? Or would it be more prudent to hold insurers to existing standards, even if that forces them to take costly and painful steps to shore up their financial stability?
Banks enforce a regimen of pain and for good reason. Hundreds of years of human experince doing business in a market economy indicate that is the only cure that can save the economic patient. Banks know how easy it is for a borrower, especially one with no further financial obligations, to blow, squander, waste or otherwise lose someone else’s money. And just like a classic FEMA worker disaster story insurance companies in financial trouble like Allstate and the Hartford want to keep all the expensive toys and stick the rest of us with the bill as the story continues including how investors were mislead on a recent earnings release conference call:
Using accounting changes to make companies look stronger can actually make them weaker. Increasing companies’ reported capital could enable them to pay out more money in the form of dividends, leaving them with less money in hand to deal with unexpected problems and make good on their policies.
Late last year, a life insurance lobbying group sought emergency industry-wide relief from an array of standards governing the reserves and capital that insurers must maintain. A national committee of state regulators last week rebuffed that request. Nonetheless, companies have been pursuing special dispensations from individual states, and some are finding a sympathetic ear.
Allstate’s home regulator in Illinois approved one of the company’s accounting changes during the fourth quarter of last year, retroactive to Sept. 30, Allstate reported.
The company made the other change anticipating that the National Association of Insurance Commissioners would later endorse the approach, Allstate spokeswoman Maryellen Thielen said. Instead, the NAIC executive committee rejected the proposal on Jan. 29, leaving the question for individual states to resolve, Thielen said in an e-mail.
In a Jan. 29 conference call with investment analysts, Allstate executives said they already had regulators’ blessing.
“They look at it favorably because it’s indicative of the strength of the company,” Allstate Controller Samuel Pilch said when an analyst asked about the approximately $700 million of capital the company generated through accounting changes.
“I think, as Sam said, regulators are involved in it and aware of it and approve it,” Allstate Chairman and chief executive Thomas J. Wilson added, according to a transcript of the call.
Industry representatives and some regulators argue that existing financial standards are too conservative and that they needlessly constrain companies.
Insurers are regulated at the state rather than the federal level, and the NAIC, which has only limited power to influence state regulations, helps coordinate standards among the states. The NAIC tries to prevent a “race to the bottom” in which insurers move to states with weaker regulations, New York Insurance Superintendent Eric Dinallo said last year in testimony to Congress.
Now, it’s every state for itself. The result could be that some companies have to measure and report their financial strength differently from state to state, regulators said. Changing the accounting rules for particular companies or companies based in particular states could make it harder to compare insurers or to track changes in their financial condition…………
In a news release last week reporting on its financial performance in 2008, Allstate said Illinois gave it permission during the fourth quarter of last year to change the way it accounts for certain annuities. The change blunted the effect of deteriorating market conditions, increasing the Allstate Life Insurance Co. subsidiary’s financial cushion by $347 million as of Sept. 30.
Though Allstate reported that the Illinois Division of Insurance approved that change during the fourth quarter of 2008, a spokeswoman for the regulator said the change wasn’t approved until Jan. 28 — the same day Allstate issued the earnings report for last year. Illinois spokeswoman Anjali Julka provided a copy of the letter from the regulator to Allstate approving the request, which was dated Jan. 28.
Allstate spokeswoman Thielen declined to comment on the discrepancy.
In its news release last week, Allstate said it also changed the way it accounts for deferred tax assets, contributing $365 million to the Allstate Insurance Co. subsidiary’s estimated regulatory surplus of $13.4 billion as of Dec. 31. The company reported that the $365 million involved a practice “we have submitted for approval.” That change has not been approved, Julka said.
Asked how that squared with Allstate executives’ statements to the contrary during last week’s conference call, Thielen declined to comment.
In a bit of housekeeping Mr CLS at Yahoo ALL was kind enough to give us this link on the Willow Re debt placement that is now in default. I’ll end this post with a bleg for help; help with links like the WaPo story Brian gave us yesterday and espeically help compiling the total subprime backed Cat bond exposure that can be calculated with the links in the Cat in the bag post. It is clear insurers are being squeezed from both ends, from the investment side and from cracks in their reinsurance programs that will require even more scarce capital.
Are the problems with subprime largely behind us? Russell was kind enough to link us on The Big Picture which is an excellent financial blog. Barry’s post yesterday linked a rather lengthy list of RMBS, aka subprime debt downgrades from Moodys that in turn will trigger provisions that require more collateral from the financial guarantor (companies like AIG, Morgan Stanley, Goldman Sachs, etc). As these transactions unwind there is no telling where the next financial problem will kick up.
Speaking of AIG I was wondering how we were doing with our massive taxpayer funded investment in the house that Greenberg burned down. Luckily for us, Sam Friedman’s boys were wondering the same thing and we have this courtesy of the National Underwriter:
A report today by the board overseeing the Troubled Asset Relief Program (TARP) shows that the value of the government’s investment in American International Group declined 63 percent within six weeks of the time the money was expended.
The report said the $40 billion investment made in AIG was the worst decision the government made under the TARP, followed by its $20 billion investment in Citigroup, which it valued as of Nov. 24 as worth $10 billion.
The report said the $40 billion investment in AIG, made Sept. 17, 2008, was worth $14.8 billion as of Nov. 10, the date it was valued.
It said that under the programs used for AIG and Citi, both regarded as riskier investments, for every $100 spent the Treasury received assets worth $41.
Overall, in the first 10 transactions under TARP, for each $100 spent the Treasury received assets worth approximately $66.
The report released today of the 10 largest TARP investments the Treasury made during 2008 “raises substantial doubts about whether the government received assets comparable to its expenditures,” the TARP Oversight Board said.
In its latest report, the TARP oversight panel said that “valuation of the transactions is critical because then-Treasury Secretary Henry Paulson assured the public that the investments of TARP money were sound, given in return for full value.”
Our children’s children will be paying for Wall Street’s folly……