I was asked to venture out of my ivory tower to attend a user-preparer roundtable as an invited guest in NY yesterday on the subject of insurance contract accounting proposals issued by FASB and IASB–two boards that write accounting rules in US and internationally. Some 90 people, including CFOs of major insurance firms, analysts, and institutional investors attended. A report on the proceedings by one of the attendees this morning is appended below after my own observations and reactions.
Since the Insurance Contract accounting has been on the agenda for some time, and subject to the Boards’ “due process”, I was surprised at the virtually unanimous, even vehement, rejection of the proposal by the CFOs of insurance companies and the buy as well as sell-side analysts in the room. It made me wonder if the “due process” is working or the room was full of people who had just landed from mars. I heard some talk about those who criticize the Boards’ proposals being lectured to, treated discourteously, or black-listed out of subsequent consultations by members of the Boards or the staff.
The following para is from email from an institutional investor who (I was surprised to learn) had found and read the Bromwich, Macve and Sunder paper in last Fall’s issue of Abacus and invited me on June 8 to attend the session (I mention this only as a straw to clutch for those who are still interested in theory; I did not even know that this project was on the Boards’ agendas):
“My only regret that I didn’t call out the boards on the issued highlighted in your Hicksian Income paper. They (i.e., the Boards) have used the complexity and apparent theoretical justification to avoid and preempt debate on this very dubious proposed model. This model is indeed one of the key investor concerns about the proposal. Anyone in the industry can intuitively tell that this model is flawed but we need the theoretical insight to prove its wrong. You can provide that and have indeed in your paper. Thank you for this. Without your help, the boards simply will NOT listen or acknowledge this concern.”
As some of you know, I am not one who thinks that investors are the only users of corporate financial reports. With the Boards determined to serve the information needs of investors, I returned home after seeing a roomful of upset institutional investors who have difficulty containing their anger at the proposals intended to serve them better. What is the missing link here? I seek help to figure this out.
I can’t help being surprised that someone out there read the turgid prose of our research paper. And not everyone in the world of business thinks that asset-liability-view-driven standards being forced on them are based on sound verified theory, not just ideology or personal preference of who occupies the chair.
Report on Insurance Accounting Roundtable by a Participant
A roundtable/panel discussion was held on June 9 debating proposed changes to
insurance accounting. Panel members on the debate consisted of industry CFOs from
ACE, Hartford, MetLife, Principal, Protective, SunLife and Travelers, an academic
from Yale, as well as a number of buy-side and sell-side analysts.
The overwhelming majority of panel members seemed to have a negative response to
the proposed changes to insurance contract accounting, although some constructive
feedback was also provided as to how we could make the current U.S. accounting
The meeting was well attended by both fixed income and equity investors, as well as
members of the IASB and the FASB. Members of the SEC were also on the phone.
Some key takeaways from the meeting were as follows:
Investor surveys conducted by three sell-side equity analysts covering both the P&C
and life sector identified a lack of support for the proposed changes to insurance
accounting. One of the more interesting data points from these surveys, in our
opinion, was that more than 90% of respondents believed the new standards would
make insurance financial statements more difficult to understand.
The academic from Yale provided an interesting historical background on accounting
overhauls, including examples of work done that could indicate unintended
consequences are a potential outcome of starting from a fresh slate. He also
questioned the term “fair value” and its appropriateness, as the potential move to
“accounting from markets” as opposed to “accounting for markets” may not prove to
be useful for making investing decisions based on the long-term economics of the
Several of the CFOs in the room gave some perspective on the issue, with one for a
major life company concerned that the changes could make the life sector
“uninvestable.” There were also concerns with the IASB and FASB not speaking with
one voice and the political fight that has essentially mounted between these two
bodies. There were concerns around how this could affect investor confidence as a
Other items for consideration were the concept that life insurers and pension funds
are the largest providers of capital for long-term funding needs of the market, and
how some of these changes could potentially alter that investing behavior.
The notion of accounting fatigue for investors and management teams was a valid
concern, in our minds, as other changes are being digested at this time. One CFO
indicated regulatory and accounting changes are seen as one of the top risks his
company is dealing with right now.
The proposals in their current form also gave some on the panel concerns around the
level of adjustments necessary to illustrate the underlying earnings run rate. We’ve
expressed concerns on this issue as well, as it could damage the integrity of operating
income, in our opinion. Elevated volatility was also highlighted as a result of the new
model, with headline risk potentially weighing on items such as public confidence.
Other concerns expressed by investors were the even further removal from
comparability to other industries following these changes and the struggles portfolio
managers may have investing in the sector as a result. There were cost of capital
concerns expressed by CFOs on the panel as a result of this view.
The consensus view seemed to support the notion of leaving the P&C model alone in
its current format, although some suggestions for improvement were offered on the
disclosure front for this sector. These items included something akin to Schedule P
triangles provided in the GAAP statements and better disclosure around PMLs for
On the life side, some recommendations for improvement focused primarily on FAS
60 and FAS 97, with one investor suggesting that perhaps the life sector should follow
what some P&C companies do in performing either an annual or biennial reserve
review, with any changes in assumptions flowing through reserves. A clearer
allocation/guideline between what is allocated to DAC and reserves was also offered
up. Investors should be aware that the same architect who helped develop these items
that investors want fixed in the U.S. is also involved in the new proposals.
Boiling the discussion down to valuation, there was a clear concern about the
overhang the proposals could have on trading multiples, while for bondholders we
think the proposals could alter the discussion of whether life insurance spreads in
particular remain cheap or simply trade wide if the proposals are adopted.