NU Online News Service, April 28, 9:24 a.m. EDT
Insurers facing eroding profitability and mounting losses are likely to continue listing charges related to impairments of intangible assets against earnings, a rating firm said today.
Moody's Investors Service commented,
"With 2009 earnings likely to remain under much pressure for many insurers, we will likely see additional charges being posted in first-quarter financials," said a report by Wallace Enman, Moody's vice president.
He added, "These charges could eventually have credit implications as the recession and weak capital markets continue."
In recent reporting periods Moody's said insurance companies have reported continuing impairments of intangible assets on their financial statements such as goodwill, deferred acquisition costs and value of business acquired.
Moody's noted that there are generally not liquidity concerns arising from such charges because impairments of intangible assets are non-cash charges that do not result in immediate cash outlays for the affected companies.
Mr. Enman explained, however, that Moody's attempts to look beyond accounting results to the intrinsic economic value of a firm, and charges related to intangible assets or deferred tax assets, do commonly have indirect credit implications.
As an example, he noted that non-cash charges reduce earnings and capital, potentially hurting investor confidence and reducing financial flexibility.
"Moreover, write-downs or write-offs of intangible assets work to reduce shareholders' equity, potentially resulting in firms breaching–or coming closer to breaching–covenants in debt or loan agreements, if such covenants refer to equity triggers without adjustments for intangible assets," said Mr. Enman.
Impairments of goodwill, it was noted, can also be an indication that the reporting unit has experienced an adverse change in operational factors, the business climate, or other conditions that would indicate future profitability may be lower than previously anticipated.
Mr. Enman added, "Firms record tax valuation allowances when their management believes it is 'more likely than not' that the DTAs [deferred tax assets] will not be fully recoverable in the future, because they no longer are sure they will have sufficient future taxable income to realize the benefits of the DTAs."
He said Moody's believes this can be an indication to investors that the company is less optimistic about long-term business prospects, or at least that the tax benefits that would have resulted from prior losses may not be realizable.
The Moody's report is titled "Impairments of Intangible Assets Likely to Pressure Insurers."
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