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FASB To Ease Valuation Rules For Life Settlements

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When American International Group Inc. released its Form 10-K annual report, it drew attention to efforts by the Financial Accounting Standards Board to give life settlement companies a break.

Life settlement companies buy life insurance policies from consumers who no longer want the policies.

FASB, Norwalk, Conn., is developing an official staff position that should increase the value of assets on a life settlement firm’s books between the day it buys a life insurance policy and the day the life insurer that wrote the policy pays the death benefits.

The change, approved at a FASB meeting in May, would let a life settlement company use the price it pays for a life insurance policy, along with premium payments used to keep the policy in force, as the value of a life insurance policy asset, according to FASB meeting notes.

When a life settlement company collects death benefits on a policy, the company can calculate the income generated by the purchase of that policy by subtracting the “carrying cost” of the policy investment from the policy death benefits, FASB says.

FASB hopes to release a draft staff position on the new approach by June 30.

Currently, FASB Technical Bulletin 85-4, a ruling released in 1985, advises life insurers to use a policy’s cash surrender value as the policy’s carrying value.

In practice, the policy’s cash surrender value may be $0, and it almost always is much lower than the purchase price, says Doug Head, executive director of the Viatical and Life Settlements Association of America, Orlando, Fla.

The VLSAA is happy with the changes FASB plans to make, Head says. “We ought to be able to declare the value of an asset as being at least what we paid for it,” he adds.

The old approach of using the cash surrender value as the policy carrying value “doesn’t accurately reflect the value of the asset,” says Michael Beste, president of the institutional division at Life Partners Holdings Inc., Waco, Texas, a publicly traded life settlement company.

Head declined to talk about the particulars of AIG life settlement accounting, but he says reports suggest AIG used the face value of a policy as the policy’s initial asset value, and then subtracted the purchase price and other costs from the face value as time went on.

If that version of what AIG did is correct, then AIG used an unusual accounting approach, and the accounting changes that shaved millions of dollars from AIG’s life settlement business asset value should not have any effect on asset valuations at life settlement companies that have been following the standard approach and using policy cash surrender value as the basis for setting policy carrying values, Head says.

‘We ought to be able to declare the value of an asset as being at least what we paid for it’


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