American Express Resolves Dispute With SEC
Federal securities regulators and American Express agreed Tuesday to settle a 2-year-old complaint charging the company with inflating its insurance income in 1981 and 1982 through improper accounting procedures.
In settling the issue, American Express neither admitted nor denied violating generally accepted accounting principles. Nor will it have to restate its financial results for the years in question--results that its outside accountant, Arthur Young & Co., had approved without reservation.
The company agreed, however, to modify its accounting practices in future transactions.
The Securities and Exchange Commission also will require American Express to inform its shareholders of the settlement, to amend future government filings that contain 1981 and 1982 financial data and to try to persuade Fireman’s Fund Insurance Cos.--formerly a wholly owned insurance subsidiary of American Express but now an independent firm--to do likewise.
The SEC charged American Express with improperly accounting for two transactions that Fireman’s Fund entered into with Hannover Ruckversicherungs, a West German firm, and Insurance Co. of North America, now a Cigna Corp. subsidiary.
These were portrayed as reinsurance transactions, through which a primary insurance company shares portions of the risk that it has assumed with other insurers in exchange for a share of the premium income.
Fireman’s Fund, the SEC claimed, had not really used the transactions to dilute its risk but had simply deposited money with the two companies, later withdrawing it to even out “erratic earnings.” These transactions began in 1981, when the property-casualty insurance business began a cycle of rampant rate cutting followed by rising insurance losses that have produced the current tight market for certain forms of commercial liability insurance.
“The transactions thus enabled American Express, through Fireman’s Fund, to present a favorable earnings picture to shareholders during the downward phase of the industry underwriting cycle,” the SEC charged. The complaint contended that the practice enabled the parent company to increase its pretax income by about $54 million in 1981 and by about $40 million in 1982.
A spokesman for Fireman’s Fund declined to comment on the settlement, pointing out only that the company has been independent of American Express since last October, when American Express sold 49% of its holding, retaining a 45% stake. The remaining 6% of the shares are held by a stock ownership plan maintained for Fireman’s Fund employees.
In its 1985 annual report, Fireman’s Fund--in discussing the SEC investigation--noted that the five-member commission had instructed its staff to discuss a settlement with American Express to resolve the complaint. American Express is paying all legal costs and expenses incurred in the investigation, the report added.
In a statement, American Express noted that accounting for the disputed transactions in the manner sought by the SEC would have trimmed its 1981 annual net income 5.7% to $494.13 million from $524 million; 1982 net would have decreased by 3.6% to $560.08 million from $581 million.
American Express said it agreed to the settlement to end “expenditure of corporate resources” on an investigation regarding “a former subsidiary that has since become an independent entity.”
Commissioner Edward Fleischman dissented, saying he opposed pressing the case against American Express. He parted company with his four SEC colleagues on seeking to compel American Express to follow a given accounting method. SEC policy has been to “respect accounting judgments made in an appropriate professional manner” unless they violate “authoritative guidance” or “an official statement by the commission or its staff to the contrary,” he said.
