Subject: File No. 4-573
From: Arnold Dicke, FSA, MAAA, EA
Affiliation: President, New World Actuaries

November 13, 2008

I am an actuary that consults with life insurance companies in the United States. I am concerned that the current exit value-based accounting paradigm, including the recent clarifications from the SEC, while probably appropriate for short-term transaction-oriented financial institutions, including banks, is inappropriate for institutions that are intermediaries engaged in funding long-term (10 year and longer) obligations.

The purpose of financial accounting is to give useful, actionable information to investors, creditors and others. The relation of the exit value of assets to the exit value of liabilities is critical to the assessment of transaction-oriented institutions, since the maintenance of liquidity is one of their primary concerns. However, such information is usually of very little help in understanding long-term financial intermediaries, except insofar as the exit value paradigm itself may create short term issues. Investors need information about the balance of cash flows over the term of the obligations. When markets are active and orderly on both the asset and the liability side, market prices may suffice, but this is almost never the case for life insurers. For this reason, in the UK and Europe, investment analysts typically insist on reviewing embedded value calculations as a supplement to the financial statements of life insurers.

Company-estimated cash flows are, of course, subject to concerns and require procedural safeguards before reliance can be placed on them. However, for a long-term financial intermediary, cash flow estimates are the basis of long-standing management practices of both company managers and regulators. Actuaries are often responsible for estimating these cash flows and the actuarial profession has made available significant procedural guidance for producing and reviewing these estimates.

My suggestion would be to amend the SFAS 157 hierarchy to require that the company take into account both market prices, to the extent markets are active and orderly and to the extent the business is likely to require liquidation of assets and liabilities in the short run (for example, in the next 3 to 5 years), and the discounted present value of estimated cash flows, to the extent the estimates can be appropriately validated and to the extent that the long-term risks posed by the business are more significant than the liquidity risks. (Of course, some long-term financial intermediaries enter into arrangements, such as options triggered by rating downgrades, which are clearly short-term in nature and should be accounted for as such.) Suitable surrogates for market prices could be provided, as in SFAS 157. Thus, the company would be required to assess the relative importance of short-term liquidity risk and long-term mismatching risk and give appropriate weight to the two methods of assigning fair value.

Thank you for the opportunity to comment on this important issue.