The objective of traditional life insurance accounting is to safeguard policyholders. The balance sheet, with surplus conservatively detennined, was the important financial statement used by supervisory authorities. Determination of true earnings only became important with increased public ownership. Obstacles to the application of generally accepted accounting principles are the prevalence of mutual life insurance, the long duration of the life insurance contract and the difficulty of determining the true incidence of earnings. Technical difficulties are involved in the amortization of acquisition expenses, determination of actuarial reserves, the treatment of capital gains, and the incidence of Federal Income Taxes. Even though acquisition expenses represent an investment in new business, there is no certainty that they are recoverable, especially in a new company. While actuarial reserves may appear to be higher than necessary due to the use of a low interest rate, they also bear a close relation to the cash value. There is no agreement between actuaries, accountants and financial analysts as to earnings, because their objectives are dissimilar. The end product of traditional life insurance accounting is the Convention Statement which is submitted to the various State supervisory bodies. Its primary function is to protect the rights of the policyholders and to provide to these supervisory authorities enough information to assure the payment of all claims. One result of this view is that the Balance Sheet shown in the Convention Statement eliminates some assets which are not realizable in cash, and sets liabilities at a safely adequate level. Among the assets which are eliminated are such things as furniture and fixtures, advances made to agents and unamortized acquisition expenses. The method of treatment of the last item is, of course, the center of the discussion between actuaries, accountants and financial analysts. David G. Scott, B. Comm., F.S.A., is Executive Vice President of CNA Financial Corporation. He was President of Continental Assurance Company, 1963-69. Mr. Scott has served as Secretary and as Vice President of the Society of Actuaries. This paper was presented at the 1969 Annual Meeting of A.R.I.A. Need for True Earnings Some indication of this emphasis on the Balance Sheet as the important part of the Convention Statement can be found in the fact that until 1941, the gain from operations was not shown at all. When the gain from operations statement was included, its primary purpose was to tie in the surplus figures from one year end to the next. It was generally recognized that the resulting income statement did not present an accurate picture of the actual earnings in any one year, but it was still held to be an adequate tool of management in the hands of those who directed life insurance companies and is still considered so by many. They felt that their knowledge, experience and instinct enabled them to interpret the Statement and give them an adequate picture of what was happening to the life insurance company, so that they could intelligently draw their own conclusions. Shareholders were generally few in number and were willing to accept a simple balance sheet from management once a year, as an ade-