Insurers Quantify DAC Changes

If replacement activity is similar this year to what it has been in past years, the SOP 05-01 adjustment will have the biggest effect on the individual annuities and group protection businesses, Lincoln says.

Another insurer, Hartford Financial Services Group Inc., Hartford, says adopting SOP 05-01 will lead to $15 million to $20 million in extra expenses, after taxes, in 2007, if exchange activity holds steady.

SOP 05-01 also will result in a cumulative adjustment of about $50 million to $65 million, after taxes, the company estimates.

Hartford will record the adjustment as a reduction in retained earnings as of Jan. 1, 2007, and there will be no effect on net income or core earnings, company spokesman David Potter says.

The SOP will have “relatively little impact” on variable annuities, because “The Hartford historically has experienced very little replacement activity,” Potter says. “If this low level of exchange activity continues, there is going to be little impact from SOP 05-01.”

The main effect of the SOP 05-01 adjustment will be on the group benefits business, because the SOP will require Hartford to amortize the cost of group benefits policies over 3 years, rather than over 5 years, the company says.

Implementing SOP 05-01 will be costly to the insurance industry both in terms of money and systems development time, says Douglas Barnert of Barnert Associates, New York.