April Fool! Watch Out for Insurers' First Quarter Earnings
A Los Angeles Times story today focused on the expanding American International Group (AIG) crisis, and then went on to say that “its problems extend across most of its business lines, including its massive life insurance…operations.” The Times story goes on to say that other insurers may also be in trouble and have asked for federal (read TARP) assistance.
That is no surprise to BNET Financial readers. We’ve reported that, under cover of the American Council of Life Insurers (ACLI), an estimated 12 insurers have gone hat in hand to the feds seeking money. The ACLI is, of course, keeping their names secret.
Given the going over that Congress got from constituents over the AIG bonus fiasco, the life insurers’ reception is likely to be extremely unfriendly, rivaling the welcome that auto executives got when they cruised into a Congressional hearing on their private jets. Also leveraged against insurers is the fact that their executives tend to draw big paychecks: Prudential’s CEO gets $14 million a year in salary and bonus after a year in which the company lost $1.1 billion. That’s still less than the $25 million that his predecessor got.
This same group of insurers cried the blues in January before the National Association of Insurance Commissioners (NAIC), the quasi-regulatory body for the insurance industry, and got nowhere. Their argument has been and continues to be that their investment portfolios have fallen with the market.
That strategy is unlikely to make Congress shed a single tear. Members will point out that Joe Sixpack has suffered similar losses in his 401k. The only difference is that insurers are required to keep minimum capital requirements in order to meet their obligations to policyholders, and drifting below those levels may result in downgrades from the credit agencies.
Given this dilemma, what’s an insurer to do? Well, in normal times the natural incentive is to make earnings look as good as possible. That results in those big CEO performance bonuses worth millions of dollars.
But this isn’t the time or place for a CEO to publicize his greed, particularly if he wants money from Congress. On the contrary, it is the precise moment for “kitchen sink accounting,” where you throw in all the real and possible losses you might have, will have, or have had and just didn’t want to talk about. In other words, insurers will likely take The Big Bath in their first quarter earnings report.
Who knows? The losses may be real. At the very least, they will probably get some sympathy, and that’s a rare thing, particularly for an insurer.
Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and is the author of The Woman Who Rode the Wind, a novel about early flight.
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