Posted on Wed, May. 07, 2008

Wachovia Corp.'s first-quarter loss got even bigger on Tuesday.

In a securities filing, the Charlotte bank said it was updating last month's earnings report, nearly doubling the loss in the period to $708 million, or 36 cents per share, because of a writedown related to its life insurance portfolio.

The increased loss is the latest blow to Wachovia, which has disclosed a regulatory settlement and an expected hit to second-quarter earnings in recent weeks.

The new numbers will be recorded in the bank's quarterly filing with the Securities and Exchange Commission, which is expected soon. Changes to earnings reports happen occasionally. Last year, the bank reduced previously announced third-quarter profits because of a legal settlement.

The nation's No. 4 bank by assets said it was taking an additional $315 million writedown in the first quarter after reviewing agreements related to its bank-owned life insurance portfolio. The bank said it's possible the agreements could still result in gains in future quarters.

Bank-owned life insurance, or BOLI, is insurance a financial institution takes out on its own employees. It benefits the bank in various ways: The insurance can provide the company a payout when employees die, even after they leave the company.

The policies also serve as investments that produce earnings that aren't taxed.

In 2004, regulators issued a bulletin that stated that this type of insurance can be an appropriate way to help banks pay for the rising cost of employee benefits. But they also cautioned against a variety of risks, including unexpected tax liabilities and earnings hits if an insurance company doesn't fulfill its obligations.

Other banks also may face potential fallout from these investments. Cincinnati-based Fifth Third Bancorp took a $177 million writedown in the fourth quarter of last year because of life insurance writedowns.

"This is the next shoe to fall for the big banks," Edwin Peacock, whose Charlotte-based Pomfret Financial Co. sells bank-owned life insurance, told Bloomberg News. "What happened at Wachovia is going to happen at many of the big banks."

According to the 2004 regulatory bulletin, banks, when buying these insurance policies, can choose an option where the insurance carrier sets up a separate account containing assets tied to the value of the policy. The insurance carrier owns the assets, but they are beyond the reach of creditors if the carrier would become insolvent.

In addition, banks can take out "stable value protection," or SVP, contracts issued by insurance companies or third parties to protect banks from a decline in value of these assets. While designed as an additional protection, these contracts also can be an extra risk if an SVP provider can't make a payment, the bulletin notes.

In Tuesday's filing, Wachovia said it was taking writedowns after reviewing "stable value agreements" provided by a third-party guarantor. Wachovia spokeswoman Christy Phillips-Brown declined to identify the guarantor. She said the company has had the agreements over an extended time.

In its annual report, Wachovia said its total bank-owned life insurance portfolio was valued at $15 billion at the end of December, up from $13.3 billion at the end of 2006. The bank had total assets of $783 billion at the end of the first quarter.

The company's life insurance portfolio helped cut its federal taxes by $183 million in 2007, according to its annual report. The bank had an income tax expense of $2.5 billion last year.

In 2005, the Observer reported that Wachovia began boosting the amount of life insurance it takes out on employees. The bank said the extra income would help cover the cost of offering "competitive and comprehensive" benefits to employees.

At Wachovia, earnings and payouts from BOLI policies cover about 10 percent of the cost of medical and other benefits for all employees, Phillips-Brown said. The bank obtains the consent of all employees who are covered by the insurance, she said. Regulators and lawmakers have raised concerns about companies taking out insurance unbeknownst to their workers.

Tuesday's filing continued a run of bad news for the bank. Wachovia surprised investors last month when it reported a $393 million first-quarter loss, compared to a $2.3 billion profit a year earlier. On the same day, the bank also announced a 41 percent dividend cut and an $8 billion capital infusion to shore up its balance sheet.

Since then, Wachovia has agreed to a settlement over its ties to telemarketers that could reach $144 million and announced an expected second-quarter charge of up to $1 billion because of a court ruling involving certain leasing transactions.

Even with the increased first-quarter loss, Phillips-Brown said the bank has one of the strongest capital positions in the financial services industry. Wachovia shares on Tuesday rose about 30 cents, or 1 percent, to $30.08.