SEC v. Assurant: A $3.5 Million Accounting Lesson

In a complaint filed January 21, 2010, the SEC asserts Assurant used improper accounting methods to record payments that the company received. The SEC charges Assurant with violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-11, and 13a-13.  As a result, the SEC claims Assurant overstated its reported net income by nearly 10% for the third quarter in 2004.  Assurant has agreed to pay a civil penalty of $3.5 million without admitting or denying the charges. 

According to the SEC, Assurant Solutions, a subsidiary of Assurant, entered into an Aggregate Stop Loss Reinsurance treaty with American Re-Insurance Company (“American”) dating back to 1992 and renewed annually.  The treaty consisted of a written policy shifting the risk of losses from Assurant Solutions to American in certain conditions and an oral verbal agreement on the side known as a “handshake” agreement.  The handshake agreement conveyed that if American paid more in claims than Assurant Solutions paid in premiums, then Assurant Solutions would reimburse American for the difference.  The handshake agreement also stipulated that if Assurant Solutions paid more in premiums than American paid in claims, then American would pay the difference to Assurant Solutions. 

Pursuant to the handshake agreement, American made a payment of $10 million to Assurant Solutions in 2004.  Assurant accounted for the $10 million using reinsurance accounting, whereas under generally accepted accounting principles (“GAAP”), Assurant should have accounted for the payment using deposit accounting. 

Under GAAP, the deposit accounting method treats the payment as a return of a deposit or loan payment.  The deposit accounting method is used where there is no risk transfer and only affects the balance sheet of a company’s financials.  The reinsurance accounting method is used when risk has been transferred to the reinsurer under a reinsurance treaty.  This method allows the company to offset losses with the recovery payment and reduces the amount of losses on a company’s income statement.  Since the handshake agreement contained a reimbursement provision, under GAAP this would negate the transfer of risk and require deposit accounting. 

Assurant’s agreed upon civil penalty of $3.5 million also takes into account failure to comply with subpoenas in a timely manner. 

The primary materials for this case may be found on the DU Corporate Governance Website.