A new accounting requirement affecting treatment of deferred acquisition costs will be costing insurance companies millions of dollars, according to quarterly earnings reports.
Two major life insurers, Lincoln Financial Group, Philadelphia, and The Hartford, Hartford, Conn., addressed the cost in earnings releases.
Effective Jan. 1, 2007, companies are required to comply with Statement of Position 05-1 adopted by the Financial Accounting Standards Board, Norwalk, Conn.
SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition costs in Connection with Modifications or Exchanges of Insurance Contracts, was adopted by the FASB on Jan. 30 in a 4-3 vote. The SOP is retroactive to Jan. 1, 2007.
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The SOP addresses how DAC and the value of business acquired should be treated. Costs for contracts are spread out over the life of a policy, but SOP 05-01 specifically addresses internal replacement of life insurance contracts.
Lincoln Financial says the adoption of SOP 05-1 impacts lapsation assumptions used in the amortization of DAC and the value of business acquired on certain blocks of business. Consequently, according to Lincoln Financial, it is estimated that DAC and VOBA assets will be reduced by between $75 million and $100 million, pre-tax. The deduction will be taken from retained earnings with no impact on net income or income from operations.