Accounting Reforms Rankle Balance Sheets.

One requires insurers to account for earnings volatility; another changes how annuity premiums are tallied.

The U.S. Securities and Exchange Commission is trying to change the way insurers record earnings, which could create problems for publicly traded companies. "You'd have to be out of your mind to want to be a publicly traded insurance company right now," said Paul Medini, a partner with PricewaterhouseCoopers.

For years, insurance companies have relied on built-up reserves to conceal volatility and smooth earnings, he said. Now, the SEC is saying insurers must show the volatility. This change in accounting procedures doesn't bode well for publicly traded insurance companies, which must show steady growth to keep analysts at bay and shareholders happy.

Federal Accounting Standard 133, which takes effect next year, defines an insurance contract as one that "entitles the holder to be compensated only if, as a result of an identifiable insurance event, the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk."

Hartford Life Insurance Co. doesn't expect to feel the effects of the new standard, because it uses only derivatives to hedge short-term cash flow, Chief Financial Officer David Foy said.

But another standard, FAS 97--created to track variable annuities--"can introduce significant volatility into the balance sheet," Foy said. FAS 97 requires insurers to count premiums they receive from variable annuities as deposits, which go straight to the company's asset base.

By comparison, with FAS 60--which covers traditional products, such as whole life, term life and group life--premiums are credited directly to the income statement.