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.

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.

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.

Voss said she would decide on a case-by-case basis whether to let Iowa insurers make expanded use of the tax assets. She said she wouldn't allow anything that would jeopardize consumers' ability to get claims paid. Iowa will require companies to disclose the effect of the accounting change, and it will prevent them from using the change to pay larger dividends, deputy commissioner James Armstrong said.

Iowa-based insurers include Transamerica Life, ING and Principal Life Insurance, a part of Principal Financial Group.

"This change allows companies to present a financial statement that more accurately portrays the company's financial position," Susan Houser, a Principal Financial Group spokeswoman, said in an e-mail.

In a similar vein, Ohio this week embraced some of the proposals the NAIC had been considering. Ohio's insurance regulator, Mary Jo Hudson, said she would allow financially sound companies to apply the changes to regulatory reports for 2008, which are due in less than a month. Hudson said she acted in light of economic conditions and to keep Ohio-based insurers competitive with insurers from other states.

Illinois regulator Michael T. McRaith declined to comment on Allstate's accounting changes, saying he would not discuss any specific company. "Our practice is . . . to be fair-minded and reasonable," he said.

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.

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