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ACLI concerned with US GAAP proposal

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The American Council of Life Insurance (ACLI) is expressing concern to the Federal Reserve Board and other federal banking agencies over a proposal that suggests insurance companies with thrifts or savings and loans would be required to account for their total consolidated liabilities in accordance with U.S. GAAP, not the traditional statutory accounting principles. 

These companies are not required under state insurance law to prepare financial statements in accordance with GAAP now, although public companies do file GAAP, but mutual firms do not need to file GAAP and do not for statutory accounting purposes.

“In effect, these insurance companies would be required to create entirely new accounting procedures and systems simply to produce the single number called for…,” wrote Julie A. Spiezio, ACLI SVP and deputy general counsel in a letter to the federal banking agencies.

“This requirement would be extraordinarily burdensome, costly and inappropriate,” she argued. “Imposing such a requirement is not in keeping with the council’s (Financial Stability Oversight Council) own recommendation.”

Section 622 of the Dodd-Frank Act establishes a financial sector concentration limit that generally prohibits a financial company from merging or consolidating with, acquiring most of the assets, or acquiring control of another company if the acquisition would result in consolidated liabilities topping 10 percent of the aggregate consolidated liabilities of all financial companies. 

FSOC was required under the Dodd-Frank Act’s section 622 to make recommendations regarding modifications to the financial sector concentration limit, Spiezio said. 

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) requested comment in February on proposed revisions to agency information collection activities in the area of consolidated reports of condition and income.

The banking agencies are proposing to implement a number of revisions to the Call Reports requirements in 2013. 

The revision would add a new item applicable to a bank or savings association that is a subsidiary of a parent holding company like an insurance company.

It would require the company or subsidiary to report annually the total consolidated liabilities of its parent holding company for the Fed’s oversight of the financial sector concentration limit established by section 622.

No one specified how GAAP versus SAP liabilities line up or compare in dollar amounts for these instances, but insurers vastly advocate for SAP to reflect better the insurance company balance sheets, which SAP is more attuned to, they say.

Spiezio points out in her April 19 letter to the banking agencies that in January 2011, the FSOC published a study recommending that the liabilities of a financial company that is not subject to consolidated risk-based capital rules very similar to those for banks should be calculated pursuant to GAAP or other “appropriate accounting standards” where applicable. This is for purposes of financial concentration. 

The ACLI argues that a number of insurance companies own savings associations and do not prepare GAAP financial statements and that “other appropriate accounting standards” for such companies would be statutory accounting principles. It has argued this point in a previous comment letter on the FSOC study. 

Of tangential interest, the federal banking powers that be are not as keen on SAP as they are GAAP, whether for concentration measurement or solvency measurement reasons.

In a conference call to discuss its first quarter earnings May 2, Prudential Vice Chairman Mark Grier said that the company is spending a lot of time trying to explain why its GAAP balance sheet is not a very good representation of solvency and risk. 

The industry, and Prudential, as evidenced from letters to the Fed over the past months, are trying to explain to the Fed and FSOC members the whole business of separate accounts and participating policies, insurance reserving activities and product design as it impacts liquidity.

“I think we’re being heard with respect to the concerns that Prudential, as well as others in the industry, are expressing about the inappropriate application of bank-centric capital models to insurance companies,” Grier said.

It remains to be seen (or heard), by whom.

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