An upcoming accounting standards update (ASU) could have a noticeable effect on life insurers’ earnings in the coming year, securities analysts say.
Colin Devine and other analysts at Citi Investment Research & Analysis, New York, write about that possibility in a commentary on ASU 2010-26, a document developed by the Financial Accounting Standards Board (FASB), Norwalk, Conn., that could affect how life insurers handle “deferred acquisition costs” (DAC) — the expenses associated with selling and renewing insurance products.
The update limits insurers’ ability to classify DAC expenses as capital costs, rather than ordinary operating costs. Insurers can spread out, or amortize, capital costs over a number of quarters but are supposed to record ordinary operating costs in the quarter the costs are incurred. ASU 2010-26 will let insurers treat sales costs as capital costs only when the sales costs actually lead to sales. Insurers must treat the cost of unsuccessful sales efforts as operating costs.
Citigroup analysts estimate the DAC change could reduce 2012 and 2013 publicly traded life insurer earnings by about 5% to 7% and reduce the insurers’ book value by an average of about 10%.
How insurers use DAC reflects the types of products the companies sell and the distribution and marketing systems the companies use as well as the companies’ accounting strategies, the analysts say.
DAC tends to less significant for shorter duration group insurance products and higher on longer duration policies such as individual life policies, variable annuities and long term care insurance policies, the analysts say.
- Allison Bell