Accounting & Tax

MBIA to Restate Seven Years of Results

This is the second major insurer this year to revise its financials due to accounting for complex reinsurance agreements, and more companies may fo...
Stephen TaubMarch 9, 2005

MBIA Inc. announced that it will restate its financials for the past seven years as a result of its accounting for two complex reinsurance agreements made in 1998 with Converium Re, previously known as Zurich Reinsurance North America. The restatement could delay the filing of MBIA’s 2004 audited financial statements, according to the company.

The company added its restatement would not be material (which raises some questions for the moderator of the CFO Blog).

MBIA is the second major insurer this year — after RenaissanceRe Holdings Ltd. — to revise its financials due to their accounting for such insurance, according to The Wall Street Journal.

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In November, MBIA received subpoenas from the Securities and Exchange Commission and the New York Attorney’s General Office related to nontraditional reinsurance arrangements, also called finite insurance. According to The New York Times, other companies that have received such subpoenas include American International Group, Ace Ltd., St. Paul Travelers, Zurich Reinsurance, and Berkshire Hathaway subsidiary General Reinsurance.

Reinsurance helps insurance companies lay off some of their risk on other companies. From an accounting standpoint, however, it can prove problematic when it is determined that the agreements amount to a financing arrangement rather than a true transfer of risk from one company to another.

In a statement, MBIA explained that it faced $170 million in losses on $265 million of bonds issued by the Allegheny Health, Education and Research Foundation and insured by MBIA. Under two agreements, the insurer added, Converium reimbursed MBIA for $70 million of the $170 million loss. In exchange, MBIA agreed to do $101 million in business with Converium.

As a result of the restatement, MBIA will record a $70 million loss for the third quarter of 1998 — in effect, now recording the full amount of the $170 million loss related to the Allegheny bonds. The after-tax loss of about $47 million will reduce that year’s previously reported net income by 11 percent.

MBIA estimated that its earnings will be reduced by about $6 million in 1999, $4 million in 2000, and $3 million in 2001. The restatement will have little effect on 2002 results and will boost earnings in 2003 and 2004.

Shortly after MBIA’s announcement, Fitch Ratings announced that the insurer’s AAA rating for insurer financial strength and its AA rating for long-term debt would remain unchanged.