FASB To Ease Valuation Rules For Life Settlements

In practice, the policy's cash surrender value may be $0, and it almost always is much lower than the purchase price, says Doug Head, executive director of the Viatical and Life Settlements Association of America, Orlando, Fla.

The VLSAA is happy with the changes FASB plans to make, Head says. "We ought to be able to declare the value of an asset as being at least what we paid for it," he adds.

The old approach of using the cash surrender value as the policy carrying value "doesn't accurately reflect the value of the asset," says Michael Beste, president of the institutional division at Life Partners Holdings Inc., Waco, Texas, a publicly traded life settlement company.

Head declined to talk about the particulars of AIG life settlement accounting, but he says reports suggest AIG used the face value of a policy as the policy's initial asset value, and then subtracted the purchase price and other costs from the face value as time went on.

If that version of what AIG did is correct, then AIG used an unusual accounting approach, and the accounting changes that shaved millions of dollars from AIG's life settlement business asset value should not have any effect on asset valuations at life settlement companies that have been following the standard approach and using policy cash surrender value as the basis for setting policy carrying values, Head says.

'We ought to be able to declare the value of an asset as being at least what we paid for it'