MBIA, a financial services conglomerate that guarantees billions of dollars in bonds, said yesterday that it was restating its financial results for the last seven years because of improper accounting related to two insurance deals it struck in 1998.
The restatement, which amounted to a $54 million net reduction in profit over the period, is related to financial reinsurance agreements MBIA made with Converium Re, a reinsurer previously known as Zurich Reinsurance Centre.
MBIA said that the restatement would not have a material impact on its financial position. Nevertheless, the disclosure is significant, some analysts said, because it represents the first of what may be many such restatements at companies whose past insurance agreements are now under scrutiny by regulators.
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The issue is a type of contract known as "finite insurance":
When used properly, finite insurance allows insurers or corporations to spread their risk of loss on an asset or business over time and also spread it to other insurers willing to take on more risk in exchange for premiums.
The biggest risk in such a contract emerges when an auditor concludes that it is not really insurance, in which risk is transferred from one party to another, but a financing arrangement in which premiums paid by the company buying the coverage are seen as a deposit or a loan. In such a case, the beneficial accounting treatment given to insurance premiums disappears.
Looks like the next wave of restatements is under way.