A change in accounting for equity securities brings volatility to some re/insurance companies' 2018 net earnings, Fitch Ratings said.
Since Jan. 1, companies that report under U.S. GAAP have been required to recognize gains and losses on the fair value of equity investments through their income statement. Before, they were allowed to reflect the changes through accumulated other comprehensive income, or AOCI, and the changes were only recognized through their income statement when they were realized through a sale or impairment, according to Fitch.
The accounting change was a bid to make the U.S. more in line with international accounting practices. The Financial Accounting Standards Board said the change is meant to improve financial reporting by providing relevant information about the companies' equity investments and reducing the number of items recognized in other comprehensive income.
Fitch's analysis of the financial results of a group of 38 property and casualty re/insurers revealed that the group would have had a $9 billion higher pretax income for the first quarter of 2018, as compared to the reported $6.3 billion, if not for the accounting change. With the change in place, the group posted a 59% decrease in pretax income for the period compared with the first quarter of 2017.
The rating agency said companies with significant allocations to equity investments would be particularly affected. With the equity markets generally declining in the first quarter, 32 of the 38 companies reported lower financial results from a decline in fair value of equities, Fitch said. Cincinnati Financial Corp. and Berkshire Hathaway Inc., which have above industry average equity allocations, posted the largest changes in pretax income from their reported to adjusted values estimated at negative 134% and negative 124%, respectively, the rating agency said.
