New Variable Product Accounting Rules Approach

The SOP also offers guidance on guaranteed minimum income benefits: If a GMIB is not accounted for under FAS 133, which addresses derivatives, an insurer should establish an additional liability if the present value of the expected annuitization payments at the annuitization date exceeds the expected account balance at the expected annuitization date.

Other types of products addressed in the SOP are two-tier annuities and variable annuities with guaranteed minimum accumulation benefits. The SOP also could affect accounting for variable life insurance.

Earlier this month, American International Group Inc., New York, announced that the SOP will require it to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuity and variable life contracts, and to modify certain disclosures and financial statement presentations for these products. AIG says it expects to take a charge of about $200 million after income taxes in the first quarter of 2004 to comply with the guidelines.

The charge will not be material to AIG's financial condition or liquidity, AIG says.

In general, the SOP will affect the way that the industry recognizes liabilities for variable annuity guarantees, says Mark Thresher, chief financial officer at Nationwide Financial Services Inc., Columbus, Ohio.

But Nationwide maintains Generally Accepted Accounting Principles reserves for GMDBs and GMIBs, Thresher says. The company ended the third quarter with $22 million in reserves, net of reinsurance.

About 95% of the reserves back guaranteed death benefits, rather than guaranteed income benefits, Thresher says.

Before 2002, Nationwide reinsured most variable product guarantee risk. But guarantee reinsurance dried up in 2002, and now the company reinsures about 60% of the guarantee risk, Thresher says.

Thresher says the reserves Nationwide has established are consistent with the requirements in the new SOP.

Hartford Life Insurance Company, Simsbury, Conn., will establish a $30 million to $40 million reserve for products with guarantees, says Tom Campbell, a Hartford Life corporate actuary.

Campbell cites a Hartford Life modified guaranteed annuity as an example of a product affected by the SOP. Hartford thinks of the annuity as a separate account, but the new SOP may lead the company to put the annuity in the general account, Campbell says.

A fourth company, the U.S. arm of AXA S.A., Paris, established $33 million in reserves for variable annuity income and death benefit guarantees in January 2002. AXA also changed its method of accounting for liabilities associated with VA GMDBs and GMIBs. Before January 2002, AXA expensed the benefits as it incurred them.