Today's trading action at Hartford Financial, which was down 35% last we checked, shows just how precarious insurers' balance sheets due to all the risk insurance they have underwritten. A report by the WashingtonPost claims that accounting changes in Allstate's books, specifically focusing on deferred tax assets, boosted its financial appearance by a total of $712 million, while clouding its true liquidity picture. One of the issues is that while insurance companies' lobbies for loosened regulatory requirements and thinner financial cushions had been rebuffed by industry regulators, Allstate found a loophole with its home regulator in Illinois, which approved on of the company's accounting changes during Q4, which was retroactive to Sept. 30.
According to Allstate Controller Sam Pilch, who noted the company already had the broader regulatory body's blessing, "[Regulators] look at it favorably because it's indicative of the strength of the company," when an analyst asked about the approximately $700 million of capital the company generated through accounting changes. Additionally, CEO Tom Wilson added "I think, as Sam said, regulators are involved in it and aware of it and approve it."
Some more from the Post:
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.
The day after the NAIC executive committee voted not to endorse industry-wide relief, Iowa Insurance Commissioner Susan E. Voss announced that she would allow Iowa-based insurers to count more so-called deferred tax assets in their reported capital for last year, much as the insurance lobby had requested. The tax benefits could someday help the companies reduce their tax bills -- or they could eventually expire with no value to the insurers. Unlike cash or other liquid investments, they do not increase a company's ability to pay claims in the meantime.
"Let's face it," Voss said. "This is an unusual time."
Inclusion of the added tax benefits "can be a tool for appropriate financial reporting, or it can be a weapon to mislead investors," said Donald Thomas, an accounting analyst with Gradient Analytics. "It all gets back down to the character of the people making the judgments and the quality of their estimates."
"Although deferred tax assets represent real economic benefits, such assets are of limited use in meeting policyholder obligations in a time of stress," Standard & Poor's, a corporate rating agency, said in a recent report. "Although such a change would increase reported statutory capital and surplus, we are aware that the quality of this capital could be lower," S&P wrote.
Where have we seen this before: regulators constantly loosening regulatory requirements for one reason or another to pretend companies are in good shape when in fact their liquidity is likely in shambles, while using the deferred tax asset strawman as a "repository of value". Didn't the GSEs (Fannie and Freddie) allegedly have billion in deferred tax assets right up until they day the government decided to nationalize them?
The Post concludes rhetorically:
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.
Zero Hedge has no position in any Allstate securities, but cautions anyone who does, to be very, very careful. Sphere: Related Content Print this post