May 23, 2002

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

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 Securities Exchange Commission concerning the 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 SEC's goal of having accurate financial information made available to the public on a timely basis. The life insurance industry is one of the largest institutional investors in the United States, and the ability to obtain timely financial data is critical to the success of the industry. Therefore, the proposed acceleration of filing deadlines is of great interest to life insurers as both a supplier and user of financial statements, analyses and disclosures.

In an effort to provide the SEC with useful information, and to appropriately reflect the industry's comments, the ACLI developed a survey of its member companies in which we requested information on life insurance companies' own financial reporting processes, and their thoughts on accelerated filing deadlines as they relate to the life insurance industry. A copy of the survey is attached for your information. The survey responses reflect nearly 25% of the stock life insurance industry as measured by General Account assets¹. We hope the information gathered is useful in your deliberations concerning the proposed rule.

The Committee met recently to discuss the proposal. Based upon the survey results and meeting discussion, we offer the following comments and express the following concerns with respect to the proposed rule:

Specific comments Pertaining to the Life Insurance Industry

1. Life insurers have significant constraints to accelerating the filing of 10-Qs and 10-Ks. Because life insurers are regulated by the states, insurers are simultaneously required to file detailed unaudited statutory annual and quarterly financial statements with the state insurance departments 60 days and 45 days after period end, respectively. The annual statutory statements, due March 1st, have a substantial number of exhibits and disclosure requirements. The statutory statements are prepared on a different accounting basis, which serves to compound the difficulty of preparing accelerated SEC required filings. Given the statutory/regulatory requirements, which are based on calendar year-end reporting, the life insurance industry is not well suited to change their fiscal year end.
    
2. In 80% of the survey responses (calculated as a percentage of number of respondents and not assets), the same accounting staff prepares the two sets of financial statements. In 90% of the responses (in number), the same chief actuary is responsible to attest to both sets of statements. Only the largest companies reported that they have separate accounting staffs and actuaries dedicated to recording accounting results, compiling data, and reviewing the two sets of external accounting reports. Therefore, it is possible that significant additions to staff may be necessary for some companies to meet the accelerated deadlines and requirements as proposed.
    
3. Respondents pointed out that, while the audited statutory annual financial reports are currently due by June 1st, the state regulators are proposing to accelerate the due date to April 1st, which will only serve to increase the filing burdens placed on both auditors and insurance company accounting staff.
    
4. The respondents were asked to list processes, which, in their current form, would provide a barrier to meeting the accelerated deadlines as proposed. Actuarial calculations, which include liability valuations and deferred acquisition costs review and analyses, (including estimated and actual gross profits calculations and recoverability analyses) were cited in almost every survey response as the prime reason life insurers would have difficulty accelerating the filing deadlines. Acceleration would likely cause an increased use of estimates in the development of actuarial values. In addition, the determination of some insurance liabilities as of the balance sheet date, such as incurred but unreported claims, are inherently dependent on developments during a post-balance sheet period and are prone to being less faithfully measured if an accelerated schedule reduces the evaluation period. Finally, there is a timing lag in reporting often associated with reinsurance and joint ventures, both significant to insurance companies who must rely on collecting data from reinsurers and investees after the balance sheet date.
    
5. Only a few respondents noted expense and investment systems as process barriers for accelerating reporting deadlines. Years ago, the industry struggled to find or develop appropriate systems to meet their reporting needs in these two areas. While technological advances in the last several years have well served the life insurance industry, more complex accounting and disclosure requirements have significantly offset these advances and related improvements in financial reporting processes. Statements of Financial Accounting Standards 97, 133, and newly the implemented 142, require a significant amount of compilation time and review effort for life insurers.
    
6. Our industry expects complexity in discerning and complying with proposed new accounting and reporting standards currently being developed. There is significant concern that future disclosure rules will create additional procedural impediments that cannot be determined at this time. For instance, the SEC proposed rule, Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, would create a need for new processes for sensitivity testing and added disclosure for life insurance companies. In addition, the Financial Accounting Standards Board (FASB) projects on Consolidation have yet to be finalized, exposed and analyzed. The impact on life insurance industry investments (such as asset backed securities) could be onerous. A proposed Statement of Position, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, limited in scope to the life insurance industry will be exposed for comment in the next several weeks. The impact of implementation of the proposed guidelines has yet to be assessed by the industry. Additional FASB projects are being addressed on a fast pace; and again, the impacts to the industry cannot be measured at this time, but are expected to be significant.
    
7. If implemented as proposed, 74% percent of the companies responding could not currently meet the 10-Q deadline of 30 days. In addition, 50% of the companies indicated that they could not currently meet the year-end reporting requirements. In either case, at least a one-year transition period (10% responded two years) would be necessary to alter processes to be able to comply with the proposed deadlines.
    
   Specific concerns from the Life Insurance Industry Related to Auditor's Review
    
8. Several respondents expressed concern with respect to the ability of public accounting firms to complete their audits within the required timeframe. Even if the life insurance industry was able to comply with the accelerated deadlines within the proposed implementation timeframe, we have no confidence in the ability to provide the completed financial statements and auditable supporting data in advance of the current timeframe. Therefore, we fear that the auditors may not have adequate time to thoroughly audit the disclosures given the continued increase in required disclosures in conjunction with acceleration of the deadlines. There appears to be a significant hardship on insurance company auditors since they audit both statutory and GAAP (as mentioned earlier, the statutory audited financial statements filing deadline is proposed to be accelerated by 60 days), and these auditors usually have additional calendar-year clients as well. The quality of the audit may suffer under the proposed compressed timelines. It is possible that additions to company staff may be necessary for some companies to provide the required support to auditors within the timeframes proposed.
    
9. Companies expressed a concern that, in order to file in the proposed 30 days, they would have to have the financial statements, disclosures, and MD&A completed and reviewed by senior management and auditors by the 27th day to allow time for review by the Board of Directors' Audit Committee, which is required by SEC rules.

Suggested Alternative Approaches to Acceleration as Specified in the Proposed Rule

As a result of our survey, we offer the following suggested alternatives for consideration in regards to the proposed rule:

1. The SEC has stated that a major reason for the proposal is to supply detailed discussion, analysis and disclosure within an accelerated timeframe with respect to the earnings release. As an alternative, the SEC should consider modifying its proposal in order to require a company to file its quarterly and annual financial statements and disclosures within a specified number of days after its earnings release (but by the current reporting deadlines). This could reduce the undue hardship that we believe the insurance industry would face under this proposal, while satisfying the need for timely analyses and disclosure (closer to the press release date). In addition, this alternative may serve to stagger the auditor workload as well. Those companies who desire to accelerate the reporting deadlines, may do so. Those with hardships can continue to work on their processes and accelerate as desired.
    
2. In absence of Recommendation #1, we would request that a one- to two-year transition be used in implementation. This would allow those companies requiring significant systems and procedural changes an appropriate amount of time to make those changes. This is especially important in the life insurance industry, where significant changes may need to be made to actuarial calculations in light of proposed reporting and accounting requirements, which are in addition to the compressed timelines contained in the proposed rule.

We thank you for the opportunity to comment on the proposed rule and would be pleased to discuss our survey results in more detail with the Commission or its staff at its convenience, if desired.

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

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