Life companies say a major accounting change will have some effect on assets but no noticeable effect on net income.
The companies are starting to implement Statement of Position 05-01, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.
Members of the Financial Accounting Standards Board, Norwalk, Conn., voted 4-3 Jan. 30 to adopt SOP 05-01 with an effective date of Jan. 1, 2007.
SOP 05-01 affects how insurers treat DAC in connection with internal replacements of life insurance contracts.
Lincoln National Corp., Philadelphia, says adoption of SOP 05-1 will affect lapsation assumptions used in the amortization of DAC and the value of business acquired for some blocks of business.
Adopting SOP 05-01 will reduce DAC and VOBA assets by $75 million and $100 million before taxes, according to Lincoln.
The deduction will be taken from retained earnings, with no effect on net income or income from operations, the company says.
In 2007, SOP 05-01 could lead to about $15 million to $20 million in additional DAC and VOBA amortization, pretax, Lincoln says.
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.