The Wall Street Journal


June 28, 2005








Outside Audit
Reinsurance Accounting
Has Fresh Anomaly

June 28, 2005; Page C3

Here's yet another example that the value of reinsurance is in the eye of the beholder.

Three contracts signed last year by UnumProvident Corp., a big Tennessee life insurer, and Berkshire Hathaway Inc.'s National Indemnity, were accounted for differently by each company.

The difference in accounting -- described by insurance regulators and experts as unusual -- comes amid a broader probe of reinsurance-accounting practices. State and federal authorities have been investigating a four-year-old deal between American International Group Inc. and Berkshire unit General Reinsurance Corp. that involved contradictory accounting and allegedly helped AIG boost its reserves for policyholder claims.

Unum treated the contracts as reinsurance contracts whose goal was to transfer risk of losses from Unum's disability-income insurance business to National Indemnity. The accounting improved certain financial measures watched closely by regulators, rating agencies and investors.

[Insurer's Premium]National Indemnity, on the other hand, treated the business essentially as financing. That is, it booked the contracts as if Unum had merely deposited funds with National Indemnity, which the Omaha, Neb., insurer in turn would use to pay Unum's claims.

Unum says its outside auditor, Ernst & Young LLP, approved its accounting for the Unum transactions. A Tennessee insurance regulator confirms that officials there signed off on the accounting, and Linnea Olsen, Unum's director of investor relations, says Massachusetts insurance regulators, who oversee one of the Unum units involved, also approved the arrangement. A representative of the Massachusetts insurance regulator declined comment on the matter.

"The business purpose of this transaction was to provide protection above our established reserve levels in the event of an adverse risk," says Jim Sabourin, a Unum spokesman. "The company's accounting for this reinsurance transaction was subjected to rigorous accounting and regulatory review."

National Indemnity declined to comment.

In recent weeks, after receiving questions from The Wall Street Journal about the transactions, the Nebraska Department of Insurance has questioned National Indemnity about the disparate accounting treatments, according to the regulator. It isn't known how the company has responded.

The National Association of Insurance Commissioners, which helps state regulators develop and coordinate insurance rules, says while accounting guidelines for life insurers like UnumProvident and property-and-casualty companies like National Indemnity might differ in some ways, they shouldn't lead to one party treating a contract as risk-transfer reinsurance and the other recording it as a low- or no-risk deposit transaction.

Both sets of guidelines are based on generally accepted accounting principles and "have very similar principles for risk transfer," says Scott Holeman, a spokesman for the NAIC.

For Unum, the three contracts were executed at a crucial time: In the second quarter of 2004, when the transactions were announced, Unum's stock was struggling amid declining earnings and unfavorable Wall Street coverage. In May of that year, Standard & Poor's downgraded Unum's credit rating, citing problems with Unum's risk controls and other practices that "led to significant reserve charges and asset impairments."

Under the contracts, Unum paid National Indemnity $707 million in cash and recorded a "reserve credit" of $522 million as well as $141 million in tax and other benefits, according to a document that Unum presented to analysts in spring 2004. Unum's net cost: $44 million. Unum initially would get "maximum payments" from the reinsurer of $783 million, with the reinsurer's "maximum risk limit" growing to "approximately $2.6 billion over time," the document states.

So why would National Indemnity book the pacts as deposits from Unum rather than as a liability that could grow over time? As of Dec. 31, National Indemnity's filings with state regulators showed a total of $733.2 million as a deposit.

Each party may have judged the risk of the contracts differently. Some analysts also note that reinsurance buyers and sellers have different motivations to start with. A buyer typically wants the benefits of reinsurance accounting, which include reducing claims liabilities and offsetting losses with reinsurance proceeds. Meanwhile, reinsurance accounting can have its downside for sellers, because it requires them to book up front the estimated cost of claims under the policy.

--Susan Pulliam contributed to this article.

Write to Karen Richardson at karen.richardson@awsj.com1 and Gregory Zuckerman at gregory.zuckerman@wsj.com2