100 North Greene Street
Greensboro, North Carolina 27401
May 23, 2002
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
c/o rule-comments @ sec. gov
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-08-02
Proposed Rule: Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Website Access to Reports
Dear Mr. Katz:
Jefferson-Pilot Corporation appreciates the opportunity to comment on this rule proposal.
We support the SEC's goal of having financial information and related disclosures made available to the public on a timely basis. But as both an issuer and a large institutional investor in our insurance business, we think it is equally important that the financials and related disclosures including MD&A be accurate and complete as well as thoroughly reviewed and analyzed.
We have carefully studied both your proposal and our own processes and timelines for generating financial statement data and then the required narrative disclosures including footnotes and MD&A. We participated in the preparation of the comment letter being submitted by the American Council of Life Insurance (ACLI), and we generally support the comments raised in their letter.
Because of our significant concern about the specific proposed new filing deadline for Form 10-K and even more for the Form 10-Q, we offer the following more specific comments.
In brief, we believe that accelerating the filing deadline for Form 10-Q to 30 calendar days will adversely affect the quality of our review process and the resulting MD&A and other disclosures. For Form 10-K, we have somewhat less concern but believe that more than 60 days would be preferable and less likely to affect the quality of our analysis and resulting disclosures. As further discussed below, we urge that you adopt the alternative deadlines of 15 calendar days after the issuer's earnings release for Form 10-Q, and 40 calendar days after release for Form 10-K.
The proposing release suggested that advances in information technology should allow companies to file their reports more quickly. Technology has helped us gather information more quickly. But, it has not significantly reduced the time we need (a) to analyze results and (b) to draft the narrative disclosures and to review them with management, counsel, our auditors, and our Board's Audit Committee. The requirements for the narrative disclosure, including the MD&A and footnotes, have increased substantially over time and other current or anticipated proposals will increase them further. In turn, the involvement of executive management and the Audit Committee has increased along with the quantity and complexity of the disclosure. In finalizing new rules you should keep in mind the important distinction between the processes involved in preparing the financial data for an earnings release, and the processes involved in preparing the narrative analysis and other disclosures.
To help restore confidence in financial markets, we generally support many elements of the President's 10-point plan and other SEC proposals or suggested proposals to, for example, expand MD&A disclosures. But for this same reason, we suggest that an overly aggressive acceleration of Forms 10-K and 10-Q filing deadlines may be counterproductive to improved quality of the disclosures and improved processes involving Audit Committee review and dialogue with management and the auditors.
Our Specific Concerns
We start by pointing out three specific factors that make compliance with earlier deadlines more problematic for life insurers than for most other industries.
1. The major reason that we believe the proposed new deadlines are not realistic is our need for extensive actuarial calculations. These include valuations not only of liabilities but also of deferred policy acquisition costs (DAC), value of business acquired (VOBA) and goodwill, including estimated and actual gross profits calculations and recoverability analyses and the related judgments concerning the need for possible adjustments that would affect earnings. Because of these actuarial and valuation issues, as is the case with many life insurers, we do not release earnings until shortly before 30 days after the end of the period. Indeed, many insurers release after day 30. This year our quarterly earnings releases are planned for April, July and October 29.
Most of our business is universal life, variable universal life and annuity products governed by FAS 97. DAC, VOBA and goodwill are major asset categories and a major reason that our earnings already reflect significant judgments and estimates. Thus, we voluntarily disclosed accounting for DAC, VOBA and goodwill as one of our critical accounting policies. Further, we appear to have been the only life insurer to also provide a sensitivity analysis on DAC and VOBA. So, we already realize the tremendous amount of effort and technical support required for critical accounting policy disclosures to perform the sensitivity analysis after all of the financial statement amounts have been calculated.
Also, for life insurers, FAS 60, 97, 113, 133 and 142 now require a significant amount of compilation time and review effort. We expect that future disclosure rules will create additional timing problems. For instance, the new proposed rule on disclosure of critical accounting policies could require even greater new processes for sensitivity testing and added disclosure for us and place an added burden on our actuarial function. In addition, the International Accounting Standards Board has proposed a statement of position for insurance accounting radically different than the model currently in place in the U.S. The FASB has indicated that it will study the proposal and possibly adopt it. This could have an onerous impact on our closing and review process.
Acceleration of the filing deadlines would require compressing the time for generation and release of earnings, which would likely cause us to increase our use of estimates in the development of actuarial values that drive earnings, thus reducing the precision of our reported earnings as well as our analysis.
2. As noted in the ACLI letter, life insurers are simultaneously required to file detailed statutory annual and quarterly financial statements with the state insurance departments, separately for each of our life insurance subsidiaries. These statements are prepared on a statutory accounting basis, which varies greatly from GAAP. The same accounting staff prepares the two sets of financial statements, and the same actuarial staff supports and analyzes both sets of statements. Therefore, we are concerned that significant additions to staff may be necessary for us to meet your proposed deadlines - and still may not solve our concerns about the quality of our disclosures given the compressed time for senior management and other reviews.
3. We also are concerned about the ability of our auditors to complete their audit under the proposed deadlines. By the end of your proposed implementation schedule, we do not believe we can complete our financial statements with footnotes and the related MD&A with auditable supporting data very much more quickly than in our current timeframe. Therefore, we fear that our auditors may not then have adequate time to thoroughly audit our statements and review our MD&A, especially given the continual increase in required disclosures. We fear a significant hardship on insurance company auditors since they audit both our statutory and GAAP financial statements, as well as our separate account filings with the SEC for our variable products. We are concerned that the quality of the audits may suffer.
1. Your proposing release says that a major reason for the proposal is to supply detailed analysis and disclosure including MD&A more quickly after the earnings release. You asked for comment on the alternative of requiring a company to file within a specified number of days after its earnings release but not later than the current reporting deadlines. We urge you to adopt this alternative, and suggest 15 calendar days for Form 10-Q and 40 calendar days for Form 10-K. We don't believe that "one size fits all" if you are going to accelerate filing deadlines. Investors and analysts have no difficulty seeing on our website our proposed earnings release date and conference call timing with Webcast, and thus would not be confused if our reporting deadline is keyed to the release date. This alternative could reduce the undue hardship that we would face due to the extra time needed for actuarial work for our insurance business, after we close out our transaction processing and validate the data which the actuaries then must analyze. For companies who do not face the challenges we insurers face and can more quickly release earnings, this will accelerate their filings closer to the earnings press release date.
2. If you adopt shorter deadlines for accelerated filers based on the end of the reporting period, we strongly urge you to adopt a two-year transition period for full implementation. This would allow us an appropriate amount of time to explore and develop process and procedural changes. This is critical for us since we also may need to make significant changes in our actuarial processes in light of proposed new reporting and accounting requirements.
We currently could not meet the proposed Form 10-Q deadline of 30 days. We could currently meet the 60 day year-end reporting requirements only with great difficulty and expense, and with less precision in our numbers and with lower quality disclosures. A very long transition period would be necessary to alter our processes and add and train staff in order to comply with substantially earlier deadlines. And that would not alleviate our concerns about the quality of both reported results and the narrative disclosures with sufficient review time.
In passing, we note that we support the proposal concerning Website access to reports to facilitate investor access to these reports. We already post our Forms 10-K and 10-Q in PDF format on our site and can post Forms 8-K as well. We also post our earnings press releases, in which we provide a variety of statistical data by segment including key drivers to profitability. As an institutional investor, we suggest that you consider encouraging companies, as best practices:
We thank you for the opportunity to comment on the proposal rule. We would be pleased to discuss our comments in more detail at your convenience.
Theresa M. Stone
Chief Financial Officer
Reggie D. Adamson
Chief Accounting Officer