Insurers' Finances Clouded by Bookkeeping Changes

By David S. Hilzenrath
Washington Post Staff Writer
Friday, February 6, 2009

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.

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?

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.

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