Proposed changes in U.S. accounting standards aimed at bringing them in line with those used by European firms would "radically transform" the accounting methodology used by property and casualty and life insurers, according to an investment banking firm.
An investor's note from Sandler O'Neill & Partners, a specialist in financial firms, said the proposed new standard would also increase earnings volatility and "alter the relevance of historical valuation measures, such as book value and return-on-equity."
Sandler O'Neill officials said in the note that the "goal of these new standards is to increase transparency, while the exact result of these standards would be to significantly decrease transparency, in our view."
The firm went on to say that, "We quite prefer the current GAAP accounting standards and/or one that correctly allows an investor to analyze a company's underwriting and investment performance individually."
Sandler O'Neill's views on the issue were contained in a comment letter written by Joe Longino, a principal at Sandler O'Neill & Partners, sent to the Financial Accounting Standards Board on Dec. 15 on behalf of the firm in response to FASB's paper, "Preliminary Views on Insurance Contracts," on Sept. 17.
Sandler O'Neill said its observations were a result of a joint contract with the International Accounting Standards Board to revise accounting standards for insurance contracts. IASB published an exposure draft titled "Insurance Contracts" on July 30.
A major concern with the proposed changes is that it might not provide users of financial statements with "a consolidated view of a company like what GAAP standards convey currently," according to Mr. Longino.
Specifically, such items such as premiums and losses might no longer be on the income statement for the longer-tail writers on both the life and p&c side.
He wrote that his view is that the new method will provide a bifurcation between the risk and residual margins.
Each segment of the business would have an independent income statement and each of these could look different, he said.
Sandler O'Neill officials said their main concerns with the proposed changes are with the increased volatility that investors will have to absorb and which might not be indicative of the underlying business, "as well as the potential lack of apples-to-apples comparisons between companies."
The firm added, "While we do not like the proposed changes, we view the merging of standards used by IASB and FASB as inevitable."
They added that it is "just a matter of what form it takes and how detrimental it is to the insurers."
The investment note also stated: "We offer the caveat that we are relatively new to these proposed changes and are still trying to educate ourselves on the potential brave new world for insurance accounting standards.
"Our message to investors is that more study is needed by the FASB, insurance companies, investors, and by us," the firm added.
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