September 10, 2008
The Honorable Christopher Cox, Chairman
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Indexed Annuities and Certain Other Insurance Contracts, File No. S7-14-08
Dear Chairman Cox:
I urge you to adopt the rule proposed in File No.S7-14-08.
The Financial Accounting Standards Board Derivatives Implementation Group in Statement 133 Implementation Issue No. B29 Titled "Embedded Derivatives: Equity-Indexed Annuity Contracts with Embedded Derivatives" latest revision posted on June 16, 2006 at http://www.fasb.org/derivatives/issueb29.shtml states:
"EIAs typically have minimal mortality risk and are therefore classified as investment contracts under FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. EIAs often do not have specified maturity dates; therefore, the contracts remain in the deferral (accumulation) phase until the customer either surrenders the contract or elects annuitization"
I also call your attention to a Munich Re publication titled "Equity-Indexed Annuities in the United States" based on a research paper written by Manfred Bodmayr of Munich Re during his participation as an International Visiting Fellow at Georgia State University that is available for download at http://www.marclife.com/research/pdf/equity.pdf.
This publication provides an excellent overview of Equity-Indexed Annuities. On page 22, in a discussion on pricing EIA products, Mr.Bodmayr states:
"The insurer will hedge future index growth by purchasing index call options with a strike price equal to the minimum contract value."Assuming that over the long-term providers of index call options earn a profit and a return on allocated capital and discount the expected payoff at a risk-free interest rate, I ask the Commission to consider whether Equity-Indexed Annuity policyholders can ever expect to earn more over the long-run on the amount allocated to purchase index call options than a risk-free rate of return less any spreads charged by the insurance company and option market makers.
Sincerely,
Philip Bieluch, FSA, MAAA, FCA