Re: Financial Services - Insurance (Topic 944) Targeted Improvements to the Accounting for Long- Duration Contracts (ED)

Transcription

1 April 18, 2018 Russell G. Golden, Chairman Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT Re: Financial Services - Insurance (Topic 944) Targeted Improvements to the Accounting for Long- Duration Contracts (ED) Lincoln National Corporation ( LNC, we or us ) and Prudential Financial, Inc. ( PRU, we or us ) appreciate the opportunity to provide additional comments on the FASB Exposure Draft (ED) - Financial Services-Insurance (Topic 944) Targeted Improvements to the Accounting for Long-Duration Contracts (the Exposure Draft ). Both LNC and PRU have been actively involved in outreach related to the FASB s Insurance Contracts project, including commenting on the Exposure Draft (comment letter Nos (LNC) and (PRU)), participation in the public roundtable, observing FASB public meetings on the topic, participation in related industry forums and discussions and informal outreach with users of financial statements (e.g. analysts and investors). We appreciate the Board s efforts to improve, simplify and enhance the accounting and financial reporting for long-duration insurance contracts. While we believe there are positive aspects of the FASB s proposal, we remain concerned about the potential unintended consequences of certain of the proposed changes. Most recently, we conducted a user survey, the results of which we believe to be a comprehensive summary of user opinions of the proposals in the Exposure Draft. The survey request was distributed to 80 users of insurance company financial statements, including (1) investors at some of the leading asset management companies in the world collectively managing more than $30 trillion of assets and (2) equity and fixed income insurance analysts, all of whom have an understanding of insurance company financial statements. The response rate of 50% to the survey reflects a high level of engagement, considering many users may be prohibited from responding to such surveys, and emphasizes the importance and level of concern financial statement users place on these potential accounting changes. We have attached for your review a graphical presentation of the responses (in Appendix A) as well as the full set of survey responses (in Appendix B). The following highlights a few of the most significant insights from the survey results. Broader user outreach by FASB would provide a more complete assessment of stakeholder views The vast majority (82%) of insurance analyst and investor survey participants indicated that the FASB has not engaged with them to date to seek input on the Exposure Draft. With respect to the small number of survey participants that stated the FASB has engaged with them or that they have otherwise provided input to the FASB, all but one noted concerns with the Exposure Draft in their survey responses and comments. Hence, we believe the results of the survey indicate that the proposals in the Exposure Draft are not what users are seeking. We are concerned that the FASB user input to date has been too limited and suggest that the FASB cast a broader net to ensure the appropriate level of input is solicited and received.

2 The proposals will increase financial statement volatility without improving comparability and, thus, users will rely more on non-gaap measures Nearly every survey participant (92%) noted the proposed changes in Exposure Draft would increase financial statement volatility in the GAAP financial measures for life insurance companies. While volatility is appropriate if it reflects the underlying economics of the business, accounting volatility that is not reflective of the economics can be misleading, misinterpreted, and less transparent. As a result, 80% of survey participants said they would rely more on non-gaap measures and other financial metrics to assess the financial performance of a company in the industry. The proposals are also likely to reduce the amount of capital invested in the life insurance industry, as one-third of survey participants indicated they would be less likely to commit capital to the life insurance industry given the elevated volatility. We recognize that the FASB s goals include a desire to increase comparability across companies, but, based on our survey results, users do not agree that the proposals in the Exposure Draft accomplish this goal. For example, as you may be aware, the National Association of Insurance Commissioners (NAIC) has hired a consultant (Oliver Wyman) to assess variable annuity reserves and capital. When survey participants were asked which of (i) the Market Risk Benefits ( MRB ) proposal in the Exposure Draft or (ii) the NAIC project will be more helpful with comparability and transparency, 70% of participants indicated that the NAIC work would be more helpful and only 5% of participants indicated the FASB proposal would be more helpful. The remaining 25% of participants stated that neither proposal was helpful or that they did not have an opinion on the matter. Users do not believe that all market risk benefits should be reported at fair value The survey found that 59% of participants disagree with the proposal to value all Market Risk Benefits (including GMDBs) at fair value with changes recorded through the income statement. Alternatively, 36% agree with the proposal, while 5% were unsure. Notably, of those survey participants that expressed a stronger understanding of the FASB proposals, nearly two-thirds (64%) disagreed with the proposal. Users do not think retrospective unlocking of assumptions is the right approach Two thirds of survey participants disagree with the retrospective unlocking of assumptions on traditional and limited pay (FAS 60/97LP) contracts. Only 20% agree with this approach, while 13% were unsure. Notably, for participants expressing a stronger understanding of the FASB proposals, over three-quarters (77%) disagreed with the retrospective unlocking approach. There is not a consensus view on amortizing DAC over a constant basis 42% of participants disagree with amortizing DAC over a constant basis over the expected life of the contract, while 37% of participants agree with this approach and 21% were unsure. Users agree with discounting future cash flows at a defined rate 61% of participants agree with discounting future cash flows using a current upper-medium grade fixedincome instrument yield (i.e. A-rated), while 26% disagree and 13% were unsure. Additional public roundtables will enable FASB to further engage with users Based on the survey feedback provided by analysts and investors, we are concerned that financial statement users have not been sufficiently engaged in providing feedback to the FASB on this critical topic to the 2

3 insurance industry. As such, there is a risk that the views of financial statement users are not being fully incorporated in the proposed targeted changes to the accounting for long-duration insurance contracts. The vast majority of responders said they likely would be interested in participating in a roundtable. We expect a user to sponsor at least one public roundtable event within the next couple months, as we know the interest is high and extends well beyond the user community, including preparers, academics, and regulators. We strongly urge the FASB to actively participate in the roundtable with the stakeholder community and solicit the input of those users impacted by the current proposals. We are concerned about the potentially significant unintended consequences We believe that any changes made to existing U.S. GAAP should result in an improvement to the reliability and understandability of financial statements. While, as previously stated, we believe there are positive aspects of the FASB s proposal, we remain concerned about the potentially significant unintended consequences of certain of the proposed changes which will result in making the financial statements less useful to financial statement users. This belief is supported by the results of the survey summarized in this letter. Additionally, while the industry has provided significant feedback on the critical aspects of the standard included in the survey, there are additional significant issues that we believe are not widely well understood (i.e. transition issues, unearned revenue reserve amortization, etc.). Given the far reaching nature, complexity and potentially significant financial statement impacts of the proposal, we believe detailed and extensive field testing is required to more fully understand all of its implications. We appreciate your attention to this letter and know you will welcome the views of all to ensure a wellinformed and rational outcome is achieved. Appendix A to this letter includes a graphical presentation of the responses and comments; Appendix B to this letter includes the complete results of the survey. We appreciate the opportunity to express our views on issues related to the FASB s proposed changes to the accounting for long-duration insurance contracts. If you have any questions regarding our comments please contact one of us directly. Sincerely, Randal J. Freitag Robert M. Falzon Lincoln Financial Group Prudential Financial, Inc. Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer Cc: Marc A. Siegel, FASB Board Susan M. Cosper, Technical Director, FASB Alex Casas, FASB Staff Michael Monahan, ACLI 3

4 Appendix A INSLD-18 FASB Survey Results April 18,

5 40 users participated in survey, split across analysts and investors with varied levels of understanding the proposals Both investors and analysts participated Level of familiarity varied 5.0% 7.5% 20.0% 17.5% 45.0% 55.0% Stronger 55% Lower 45% 30.0% 20.0% Investor Analyst (1 = lowest; 6 = highest) 2

6 Has FASB reached out for input? INSLD-18 FASB did not reach out to users and those that did provide comments were not supportive of proposals Have you provided comments to FASB? 17.5% 27.5% 82.5% 72.5% No Yes No Yes Almost all of comments to FASB are not supportive 1 8 Relatively supportive Not supportive 3

7 Respondents believe financial statement volatility will increase and they will rely more on non-gaap financials Financial statement volatility will increase 92.5% Increased reliance on non-gaap financials 10.0% 7.5% 12.5% INSLD % 2.5% 5.0% 0.0% Increase No change I do not know Decrease Increase my reliance on non-gaap financial statements Increase my reliance on GAAP financial statements No change No opinion Only 27.5% would look through the volatility as the financial statements would be more comparable across peers while 80.0% would. rely more on non-gaap and other financial metrics (statutory, free cash flow, etc.) and 1/3 would be less likely to commit capital to the life insurance industry 4

8 Disagree with MRB and retrospective unlocking proposals Value all Market Risk Benefits (including GMDBs) at fair value INSLD-18 Retrospective unlocking of assumptions on FAS 60 contracts 59% of participants disagree with proposal 64% of users that expressed a stronger understanding of the FASB proposals disagree 67% of participants disagree with proposal 77% of users that expressed a stronger understanding of the FASB proposals disagree 35.9% 36.4% 5.1% 20.5% 18.2% 12.8% 4.5% 59.0% 63.6% 66.7% 77.3% Total Stronger understanding Total Stronger understanding Note: Stronger understanding represents level of familiarity with the FASB proposals of 4 or above on a scale of 1 to 6; 1 being the lowest and 6 being the highest. 5

9 Agree with discounting future cash flows at defined rate; there is not a majority view on DAC amortization Discount future cash flows using an uppermedium grade fixed-income instrument 61% of participants agree with proposal 64% of users that expressed a stronger understanding of the FASB proposals agree Amortize DAC over a constant basis Users opinions were more mixed 42% of participants disagreed, 37% agreed, and 21% were unsure 61.5% 63.6% 36.8% 38.1% 21.1% 14.3% 12.8% 25.6% 36.4% 42.1% 47.6% Total Stronger understanding Total Stronger understanding Note: Stronger understanding represents level of familiarity with the FASB proposals of 4 or above on a scale of 1 to 6; 1 being the lowest and 6 being the highest. 6

10 NAIC VA review will provide more transparency than MRB proposal; prospective unlocking better reflects experience Which project will better increase transparency? 5.0% 10.0% What unlocking method better reflects actual experience? 20.0% 15.0% 70.0% 15.0% 65.0% NAIC/Oliver Wyman No opinion Neither FASB Prospective Retrospective I do not know 7

11 Users are interested in engaging with FASB INSLD-18 Would you be interested in participating in a roundtable? Up to 82% would participate 48.7% 33.3% 18.0% Yes Maybe No 8

12 Appendix B INSLD-18 Q1 Are you a user of financial statements? Answered: 40 Skipped: 0 100% 80% 60% 40% 20% 0% Yes No ANSWER CHOICES Yes No RESPONSES % % 0 TOTAL 40

13 Q2 If yes, in what role? Answered: 40 Skipped: 0 Fixed income investor Fixed income analyst Equity analyst Equity investor ANSWER CHOICES Equity analyst Equity investor Fixed income analyst Fixed income investor RESPONSES 42.50% % % % 5 TOTAL 40

14 Q3 How familiar are you with the Targeted Improvements to the Accounting for Long-Duration Contracts being proposed by FASB? (1 is not at all familiar; 6 is extremely familiar.) Answered: 40 Skipped: ANSWER CHOICES RESPONSES 7.50% % % % % % 2 TOTAL 40

15 Q4 In my opinion these changes would: Answered: 40 Skipped: 0 No opinion No change Increase my reliance on GAAP financial statements Increase my reliance on non-gaap financial statements ANSWER CHOICES Increase my reliance on non-gaap financial statements Increase my reliance on GAAP financial statements No change No opinion RESPONSES 70.00% % % % 4 TOTAL 40

16 Q5 Have you provided any comments or input to FASB? Answered: 40 Skipped: 0 Yes No ANSWER CHOICES Yes No RESPONSES 27.50% % 29 TOTAL 40

17 Q6 If you answered yes to the previous question, please provide your perspective below (if you are comfortable doing so). Answered: 12 Skipped: 28

18 Q7 Has FASB reached out to you for input? Answered: 40 Skipped: 0 Yes No ANSWER CHOICES Yes No RESPONSES 17.50% % 33 TOTAL 40

19 Q8 There are currently two projects underway to increase comparability across companies for products with market risks: (1) The FASB is making changes to accounting for market risk benefits and (2) the NAIC is working with Oliver Wyman on VA reserving and capital treatment. Which is more in line with what you think will help in terms of comparability and transparency? Answered: 40 Skipped: 0 No opinion FASB Neither NAIC/Oliver Wyman ANSWER CHOICES FASB NAIC/Oliver Wyman Neither No opinion RESPONSES 5.00% % % % 6 TOTAL 40

20 Q9 Which method of unlocking assumptions (on traditional and limited pay contracts) do you believe is more reflective of actual experience and cash flow emergence? Answered: 40 Skipped: 0 I don t know Retrospective Prospective ANSWER CHOICES Prospective Retrospective No difference I don t know RESPONSES 65.00% % % % 8 TOTAL 40

21 Q10 What are your views on the 4 specific proposals? Answered: 39 Skipped: 1 100% 80% 60% 40% 20% 0% Value all Market Risk Benefits (including... Retrospective unlocking of assumptions on traditional a... Discount future cash flows using a current upper-medium... Amortize DAC over a constant basis over the expected life... Agree Disagree Unsure as I have not been engaged Value all Market Risk Benefits (including GMDBs) at fair value with changes recorded through the income statement AGREE DISAGREE UNSURE AS I HAVE NOT BEEN ENGAGED 35.90% % 23 TOTAL 5.13% 2 39 Retrospective unlocking of assumptions on traditional and limited pay (FAS 60) contracts 20.51% % % 5 39 Discount future cash flows using a current upper-medium grade fixedincome instrument (i.e. A-rated) 61.54% % % 5 39 Amortize DAC over a constant basis over the expected life of the contract 36.84% % % 8 38

22 Q11 Do you expect the net effect of these changes to increase or decrease financial statement volatility? Answered: 40 Skipped: 0 100% 80% 60% 40% 20% 0% Increase Decrease No change I do not know ANSWER CHOICES Increase Decrease No change I do not know RESPONSES 92.50% % % % 2 TOTAL 40

23 Q12 If volatility increased, I would... (Select all that apply.) Answered: 40 Skipped: 0 100% 80% 60% 40% 20% 0% Be less likely to commit capital to the life insuranc... Look through the volatility as the financial statements wo... Rely more on non-gaap and other financial metrics... No opinion ANSWER CHOICES Be less likely to commit capital to the life insurance industry Look through the volatility as the financial statements would be more comparable across peers Rely more on non-gaap and other financial metrics (statutory, free cash flow, etc.) No opinion RESPONSES 32.50% % % % 0 Total Respondents: 40

24 Q13 Please provide any additional information you would like to share in the space below. Answered: 13 Skipped: 27

25 Q14 If offered, would you be interested in participating in a roundtable discussion to get more information and/or provide input? Answered: 39 Skipped: 1 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Yes No Maybe ANSWER CHOICES Yes No Maybe RESPONSES 48.72% % % 13 TOTAL 39