July 19, 2002

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-16-02
Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies

Dear Mr. Katz:

The GAAP Financial Reporting Principles Subcommittee (the Committee) of the American Council of Life Insurers (ACLI) appreciates the opportunity to provide its comments to the U.S. Securities and Exchange Commission (the Commission) concerning the above Proposed Rule. The ACLI is the principal trade association of life insurance companies, representing 399 members that account for, in the aggregate, 75 percent of the assets of legal reserve life insurance companies in the United States.

The ACLI supports the Commission's goal of increasing the transparency of financial information made available to the public. As the life insurance industry is one of the largest institutional investors in the United States, the ability to obtain reliable and understandable financial data is critical to the success of the industry. Therefore, the proposed disclosure concerning critical accounting policies is of great interest to life insurers as both a supplier and user of financial statements, analyses and disclosures.

General Observations

The Committee believes that qualitative disclosures concerning the estimation process are critical to a fair presentation of the financial statements and, therefore, agree with the overarching objectives of the Proposed Rule. The Committee also believes those objectives can be achieved through enhanced qualitative disclosures, without the added burden of the quantitative disclosures proposed. The financial statements of life insurance companies are comprised of many estimates (e.g., policy reserves, deferred acquisition costs and value of business acquired) that are based on actuarial assumptions (e.g., future mortality, morbidity, persistency and investment returns) representing management's best estimates. While it is important for the reader to understand that various assumptions were utilized in preparing the financial statements, the quantitative information proposed for disclosure would likely overwhelm the reader with volumes of potentially meaningless data. The Committee does not use the word "volumes" lightly. Simple changes of a single actuarial estimate, such as expected mortality, would require dynamic models of significant proportions, one for each type of product sold. That is because life insurers may react to changes in future assumptions by changing their pricing structures on inforce business. For example, companies may change their policyholder dividends on participating policies and may alter mortality charges on universal life policies. Additionally, each product line will be impacted differently. For instance, assuming increased mortality levels will reduce payout annuity reserves, but result in increased life insurance reserves. The Committee cannot overemphasize that the amount of effort and associated costs to determine the impact of a company-wide assumption change is extremely high.

Meanwhile, the Committee believes that the associated benefit of disclosing the quantified results is minimal. Because the estimates are not independent of each other, the range of reasonable effects of the estimates cannot be determined simply by adding the reasonable ranges of each of the estimates together. The Committee does not believe that reasonable conclusions will be able to be drawn from these quantifications, and the ability to explain the results in terms that will be clear to the reader is questionable.

Finally, the Committee is concerned with the significant additional preparation time needed to comply with this Proposed Rule, especially in light of the SEC's recent Proposed Rule concerning accelerated reporting requirements.

Reactions to Certain Questions Contained in the Proposal

Question: Is the definition (of critical accounting estimates) appropriately tailored?

Answer: No. The proposed definition of "critical accounting estimates" is too complex and should be reconsidered. It is very subjective in nature and specific loss contingencies, such as pending or threatened litigation and asserted or unasserted claims and assessments, should be excluded from the scope.

Question: Should we require in MD&A a discussion of the impact that alternative accounting policies acceptable under GAAP would have had on a company's financial statements even when a company did not choose to apply the alternatives?

Answer: No. The Committee does not believe that it is a company's responsibility, or is it prudent to disclose the quantified results of accounting policies that weren't chosen. Further, we are concerned that disclosures about the effects of applying alternative accounting policies or assumptions would result in the proliferation of "pro forma" financial information. This has the potential to expose the company to an increased risk of lawsuits, as shareholders and other interested parties may assert they were damaged by the choice (or non-choice) of a certain accounting policy or assumption. For example, one could argue that if a different accounting policy or assumption were used, a different business decision might have been made.

Question: Should we require in MD&A a discussion of the impact of a company's choice among accounting methods under GAAP that are used in the company's industry (for example, the completed contract and the percentage of completion methods of accounting for construction-type contracts)? Should we require that type of disclosure only where a company uses a method under GAAP that is not generally used by other companies in the industry?

Answer: No. In addition to the reasons shown for the previous question, it is not always apparent which methods of accounting other companies within the industry generally use, as such information is often proprietary and not generally publicly available.

Question: Beyond a company's initial adoption of those policies, should we require disclosure in MD&A regarding a company's reasons for choosing, and the effects of applying, accounting policies used for unusual or innovative transactions or in emerging areas?

Answer: Generally Accepted Accounting Principles already require certain disclosures about significant accounting policies (APB No. 22, Disclosure of Accounting Policies), changes in accounting estimates (APB No. 20, Accounting Changes) and uncertainties about possible future changes in accounting estimates (AICPA SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties). The Committee believes that the FASB should be encouraged to update those pronouncements to improve the related footnote disclosures, including requiring a clear disclosure of the basis for a company's initial selection of a material accounting policy.

Question: Should we require that the critical accounting estimates disclosure in the MD&A undergo an auditor examination comparable to that enumerated in AT §701?

Answer: No. The Committee believes that the current requirements concerning the auditors' involvement with the MD&A are appropriate for the examination of critical accounting estimates. For example, professional standards (SAS 8, Other Information in Documents Containing Audited Financial Statements) already require the auditor to read and consider the consistency of other information, such as MD&A, in documents containing audited financial statements. The separate examination or review of MD&A by auditors would be costly for registrants and yet would not result in any appreciable improvement in the content or quality of MD&A.


The Committee recommends that the Commission reconsider this Proposed Rule in its current form. While the Committee does not object to the disclosure requirement regarding the methodology employed in developing the estimates, the assumptions standing behind those estimates contain proprietary information and should not be disclosed. In addition, the costs of quantifying and presenting the estimated impact of a multitude of assumption changes far exceed the benefits provided to the user of the financial statements. The Committee believes that the objectives of the Proposed Rule could be achieved by requiring companies provide enhanced qualitative, non-quantified, disclosure of the estimates used and reasons for using them. In the event that the Commission decides to implement this Proposed Rule, the Committee would request that an extended phase-in (including field tests) be used for the quantitative disclosure of the effect of changes in the estimates, as life insurance companies would need to build the appropriate sensitivity models to satisfy the requirements as proposed.

The Committee thanks you for the opportunity to comment on the Proposed Rule and would be pleased to discuss our comments with the Commission or its staff at its convenience, if desired.


Paul S. Graham, III
Chief Actuary
American Council of Life Insurers