Bottom Line: Accruals may be better for age of full disclosure

PRUDENTIAL'S Mick Newmarch yesterday called upon rival life insurers to rally round the flag of accruals accounting. For all the Pru's enthusiasm for this arcane crusade, some of the potential recruits are sceptical or unwilling.

Accruals accounting is a way of taking a substantial early profit on the long-term savings contracts life insurers sell. For the Pru, accruals convert the pounds 444m made on life business last year into a profit of pounds 807m, and the group pre- tax profit is pounds 769m instead of pounds 406m. Its shareholders also find themselves with an accrued interest of pounds 2.8bn in the life fund, which boosts their funds to pounds 3.3bn. This has the happy corollary of giving the Pru a debt-equity ratio of 21 per cent instead of nearly 140 per cent.

Despite appearances, accruals accounting is not just an easy way to flatter profits and financial strength. Even conservative offices such as Britannic Assurance accept that the system of statutory profits gives a poor idea of the value of company and its business. The costs of selling new business and establishing reserves can depress the profits of a company that increases sales of (eventually profitable) contracts.

Prudential's second set of accruals numbers offered some insights into what the approach may offer. The 1992 life profit of pounds 807m was 9 per cent higher than the pounds 738m reported for 1991, but much of the interest was not in the totals but in their constituent parts.

For example, although the contribution of Prudential Assurance, the main life business, rose from pounds 431m to pounds 487m, this was largely driven by new business sales, from which profits increased by 30 per cent to pounds 226m. But profits from the business already on the books fell by 31 per cent because of poor investment returns in Australia and losses on property investments in Canada. Such features will not always show up in the statutory numbers.

While analysts seem to be warming to the prospect of additional information, many life offices remain unenthusiastic. Calculation of accruals figures is costly and takes a great amount of additional work. So far, only BAT Industries, the owner of Allied Dunbar and Eagle Star, has followed the Pru's lead.

Legal & General doggedly favours an embedded value approach, which involves discounting the future profits from business already written. TSB, which like other banks also uses this approach, is also reluctant to change, arguing that accruals accounting is even more dependent upon management assumptions about key variables.

The outlook for insurance accounting is further confused by the EC's forthcoming accounts directive, which some believe may outlaw embedded value. Accruals accounting seems to offer more and better information than embedded value, which is to its advantage in this age of full disclosure. But this argument will probably not be enough to win the day.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore