Recent Investment Accounting and Reporting Updates Session...investment accounting and reporting •IASA National and Chapter volunteer •ACLI Accounting Committee member Zach Brown,

IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

Recent Investment Accounting and Reporting Updates

Session 103

Learning Objectives

Review recent guidance updates and how these changes

will impact your investment reporting

Address current regulatory topics being discussed that

relate to investment accounting

Provide a guideline for best practices to ensure that you

keep current with changes in accounting guidance

Presenters

Tip Tipton, CPA, FLMIFinancial Analyst – Accounting Policy

Thrivent Financial

• Coordinates GAAP and STAT

accounting implementations

• Analyzes reporting processes for

efficiency and improvement

• Maintains accounting policy library

• Over 20 years experience with

investment accounting and reporting

• IASA National and Chapter volunteer

• ACLI Accounting Committee member

Zach Brown, CPAInsurance Services Product Owner

Clearwater Analytics

• Manages cross-functional teams for

product enhancements

• Liaison between internal and external

stakeholders

• Communicates product benefits and

features

• Market expert for product

implementation of new asset classes

Agenda

NAIC FASB IASB OtherBest

Practices


Practices

Short-term investment part of a working capital finance program

Initially presented to VOS for approval as an admitted asset in 2011

New categories were added to Schedule BA

WCFI can now be an admitted asset for 2014 reporting

New footnotes were added for disclosure purposes

Higher rate of return than traditional short-terms with only a slight

increase in the RBC risk factor

High SVO filing fees

Working Capital Finance Investments

WHAT

WHY

TAKEAWAY

SAPWG 2013-10

Note 5I(1)

Note 5I(2)

Gross Asset CY Non-Admitted Asset CY Net Admitted Asset CY

a) WCFI Designation 1

b) WCFI Designation 2

c) WCFI Designation 3

d) WCFI Designation 4

e) WCFI Designation 5

f) WCFI Designation 6

g) Total

Working Capital Finance Investments

Book/Adjusted

Carrying Value

a) Up to 180 Days

b) 181 days to 365 Days

c) Total


Practices

SAPWG 2013-10

Global reference code for an entity that engages in a financial

transaction

Added electronic column – effective Q1 2013

Improve identification and evaluation of

counterparties and issuer risk

Ability to aggregate exposures to other entities

Decrease company’s overall operational risks

Legal Entity Identifier


Practices

2012-30 BWG

WHAT

WHY

Not fully operational

CICIs (or pre-LEIs) can be reported on Schedule D

Transitioning many CICIs into the global LEI system

Key Resources:

• https://www.ciciutility.org/

• http://www.leiroc.org



Practices

PROJECT STATUS

2012-30 BWG

https://www.ciciutility.org/

http://www.leiroc.org/

LEI is not required for 2014 reporting

Asked to include available LEIs but not forced to comply

Accessing LEI data

• Pre-LEIs are complimentary via the CICI website

• Manual process and does not include linking of cusips

• Some data vendors provide LEIs with no extra cost

NAIC Q&A Document:

http://www.naic.org/documents/committees_e_app_blanks_related_filing

_issues_lei_guidance.pdf



Practices

TAKEAWAY

2012-30 BWG

http://www.naic.org/documents/committees_e_app_blanks_related_filing_issues_lei_guidance.pdf

Commercial Mortgage Loans

Modify methodology and instructions for the RBC and AVR

Reflect elimination of MEAF used to adjust factors for certain lines

To accurately reflect the actual risk profile of individual mortgage loans

Eliminate the MEAF


Practices

2013-27 BWG

WHAT

WHY

Commercial Mortgage Loans

Life RBC Working Group adopted a new methodology for the RBC

calculation in 2013

The AVR incorporated factors that represented the mid-range of the

factors that will be used upon full implementation

An AVR will be implemented for commercial loan mortgages that will be

parallel with the methodology used for Life and Fraternal RBC

Changes to AVR expected to be adopted during the June conference

calls


Practices

TAKEAWAY

2013-27 BWG

STACR / Mortgage-Referenced Notes

New Structured Agency Credit Risk (STACR)

Issued by Freddie Mac

Not guaranteed by Freddie Mac

Function like an RMBS without

a specific pool of mortgages

More risk allocated to investors

than other FHLMC securities

Not rated


Practices

WHAT

Clarification for guidance that applies to these securities

Not eligible for SSAP 43R treatment

Reported under SSAP No. 26 – Bonds, Excluding Loan-Backed

and Structured Securities

Excluded from the exempt calculation and should be filed through

the SVO

STACR / Mortgage-Referenced Notes


Practices

WHY

TAKEAWAY

Structured Notes

Proposed new disclosure to Note 5-Investments for Structured Notes

Measure pervasiveness of these types of investments

Review definition of Structured Notes to incorporate into the following

disclosure:

CUSIP Identification Actual Cost Fair Value

Book / Adjusted

Carrying Value

Mortgage-Referenced

Security (Y/N)

Total

WHAT

WHY

TAKEAWAY

2014-06 BWGNAIC FASB IASB Other

Best

Practices

Preferred Stock Exchange Traded Funds

ETFs that trade largely in preferred stock carry similar characteristics

to a preferred stock investment

Provisions for placing bond holding ETFs on D1

But no guidance allowing for similar treatment of preferred stock

investing funds

Certain ETFs now eligible for treatment as preferred stock

Can be reported on D-2.1 rather than D-2.2

Significant decrease in the risk factors for AVR and RBC


PracticesSAPWG 2012-30

WHAT

WHY

TAKEAWAY

Single-Member and Single-Asset LLCs – Underlying Asset is Real Estate

Insurance company maintains 100% control and the underlying asset

is real estate

Currently receive BA treatment

Requested to receive Schedule A treatment under SSAP No. 40 as

they more closely resemble a direct investment in real estate

This could dramatically affect

certain RBC calculations

Insurance

Type

BA RBC

Charge

A RBC

Charge

Life 23% pre tax 15% pre tax

P&C 20% pre tax 10% pre tax


Practices

SAPWG 2013-17

WHAT

WHY

TAKEAWAY

SSAP No. 86 Concept Revision

Clarification and possible changes for margin reporting

The daily true up features inherent in certain centrally cleared

derivatives are being reported inconsistently by insurers and the best

practice for how to report on these issues

• The NAIC staff are now in position to start the issue paper for

centrally cleared derivatives which will be released this year

Possible changes for Schedule DB part B


Practices

SAPWG 2013-13

WHAT

WHY

TAKEAWAY

Investment Classification Review

Classification system review the NAIC uses for securities that are

classed outside their industry standard names

NAIC received questions on proper treatment and classification of

certain types of mutual funds

Inconsistency in how these types of investments are reported

Identified for review

• SSAP No. 26 | SSAP No. 30

• SSAP No. 32 | SSAP No. 43R

• SSAP No. 48


Practices

SAPWG 2013-36

WHAT

WHY

• Lack of definitions for certain types of investments

• Variations between SAP definitions and FASB or SEC definitions

• Allowing “look-through” accounting for certain types of investments

• Inconsistencies for reporting items on Schedule D and Schedule BA

• ‘Investment Matrix’ was issued identifying specific items to be

addressed

• Intent for this project’s scope is to be narrow and specific to certain

investment types

Investment Classification Review


Practices

ISSUES IDENTIFIED

TAKEAWAY

SAPWG 2013-36

Separate Accounts Update

Develop guidelines for BOLI & COLI products

Incorporate suggested principles for insulating separate account

assets for non-variable products.

To clarify the accounting and reporting for these types of products

Updated proposal posted to website and comments are due June 6

Monitor the progress of this working group:

• http://www.naic.org/committees_e_sep_acctg_risk_charge.htm


Practices

SARWG

WHAT

WHY

TAKEAWAY

http://www.naic.org/committees_e_sep_acctg_risk_charge.htm

Offsetting/Netting of Assets and Liabilities

The disclosure for Offsetting and Netting of Assets and Liabilities will

now be data captured

To report with similar transactions in the Investment Note

Review if your company offsets and reports certain investments in

accordance with a valid right of offset per SSAP No. 64:

• Net derivatives

• Repurchase and reverse repurchase

• Securities borrowing and securities lending assets and liabilities


Practices

2013-26 BWG

WHAT

WHY

TAKEAWAY

Broker Receivables

ACLI proposes to change to a “settlement date” basis for determining

the RBC charge only

No change is proposed to the “trade date” basis of annual statement

reporting

Result in a more accurate RBC for Life insurers

NAIC staff developed a model that generated weighted average

factors for Life [1.4%], P&C [2.4%] and Health [2.4%]

Won’t be effective until 2015 at the earliest


Practices

Capital Adequacy Task Force

WHAT

WHY

TAKEAWAY

Real Estate / Mortgage Loans / Other

Schedules A, B, and BA: add electronic-only columns for postal code

and property type

Schedules B and BA only, add an electronic-only column for maturity

date

Change the state column to accept the three-character country code

Provide regulators with basic information to better determine risk profiles

Evaluate investments that have a real estate or mortgage loan element

to determine the Postal Code, Property Type, and Maturity Date

2014-11 BWG

WHAT

WHY

TAKEAWAY


Practices

Repurchase Agreements

Provide clear, explicit and consistent accounting and reporting guidance

for Long-duration Repurchase Agreements (repos)

Create regulatory parity between short and long duration repos

Ascertain that long-duration repos will be admitted assets

If your company owns long-duration repos, track progress on these

discussions at the Restricted Asset Subgroup website:

http://www.naic.org/committees_e_app_restricted_asset_sg.htm


Practices

Restricted Asset Subgroup

WHAT

WHY

TAKEAWAY

http://www.naic.org/committees_e_app_restricted_asset_sg.htm

Investment Risk-Based Capital

Recalculation of RBC factors

Investigating if there is a better way to tie the factors to the actual

default rates of securities

IRBCWG has the non-modeled fixed income asset factors

Now available for testing by industry

SVO recalibration project may be leveraged

• 13X3 system discussed (13 designation levels, 3 collateral types)


Practices

WHAT

WHY

TAKEAWAY

Recalibration Project

Increase the granularity of designations

Potentially move from 6 to 14 designations

More precise credit quality designations

Current proposal includes expansion of +/-

system

Preliminary assessment of impact of

changes to this system has been

performed


Practices

WHAT

WHY

TAKEAWAY

Hybrid Financial Instruments

Hybrid Securities with embedded derivatives may require bifurcation of

the option

Determining factor is deciding whether the “embedded feature is

considered clearly and closely related to the host contract”

In following ASC 815-15, the step to determine whether the host

security is more akin to debt or equity, requires judgment to decide

what method to use

This has caused diversity in practice


Practices

WHAT

WHY

Common approaches used to determine whether the host contract is

more akin to equity or debt:

• “Whole Instrument” approach – all terms and conditions are

considered including the embedded feature

• “Chameleon” approach – all terms and conditions are considered

except the embedded feature

The “whole instrument” approach should be used when the security is

sold in the form of a share

Yet to determine how entities “would consider the relevant terms and

features of the hybrid instrument and weigh such features”

Continued deliberation on June 12

Hybrid Financial Instruments


Practices

TAKEAWAY

Other Items

Additional disclosures required for certain transfers accounted as sales

by transaction type

Final ASU to be issued during Q2 2014

Require disclosures in an investment company’s financial statements

that will provide transparency into the risks, returns, and expenses of an

investee that is also an investment company

To be determined whether to proceed with issuance of a proposed ASU


Practices

TRANSFERS AND SERVICING: REPURCHASE AGREEMENTS

AND SIMILAR TRANSACTIONS

INVESTMENT COMPANIES: DISCLOSURES ABOUT INVESTMENTS

IN ANOTHER INVESTMENT COMPANY

Other Items

To improve, through disclosure, financial reporting about a reporting

entity’s exposure to liquidity risk and interest rate risk

The Board will reconsider the objective of the project


Practices

ACCOUNTING FOR FINANCIAL INSTRUMENTS: INTEREST RATE DISCLOSURE

Receivables-Troubled Debt Restructurings by Creditors

Reclassification of residential real estate collateralized consumer

mortgage loans upon foreclosure

To reduce diversity by clarifying when an in substance repossession or

foreclosure occurs

Record foreclosed residential real estate when (1) the creditor obtains

legal title or (2) the borrower conveys all interest to the creditor

Disclose (1) the amount of residential real estate held by the creditor

and (2) residential mortgage loans that are in the process of foreclosure


Practices

ASU 2014-04

WHAT

WHY

TAKEAWAY

PCC and FASB will mutually agree on a set of criteria to decide if/when

alternatives U.S. GAAP are warranted for private companies. The PCC

will review and propose alternatives within U.S. GAAP to address the

needs of users of private company financial statements.

PCC serves as the primary advisory body to the FASB on the

appropriate treatment for private companies for items under active

consideration on the FASB’s technical agenda

Improve process of setting accounting standards for private companies

Insurers should be aware of changes in this new body of guidance

Private Company Council (PCC)


Practices

WHAT

WHY

TAKEAWAY

PCC issued an amendment allowing for hedge accounting treatment

without effectiveness testing if certain criteria are met

Private companies without access to fixed rate funding often enter into

swap agreements to convert their floating rate exposure to fixed

Often causes income volatility since the entities are not sophisticated

enough to comply with hedge accounting requirements

Primarily applies to private companies who have issued debt.

PCC Derivatives Hedging


Practices

ASU 2014-03

WHAT

WHY

TAKEAWAY

IFRS and Investments

Replacing IAS 39 with IFRS 9: Financial Instruments

Effective date January 2018

The project has been split into three phases:

• Phase 1: Classification & Measurement

• Phase 2: Impairment Methodology

• Phase 3: Hedge Accounting

New standard takes a single approach to determining the measurement

treatment of financial assets

Based on how an entity manages its financial instruments and the

contractual cash flow characteristics of the assets


Practices

WHAT

IAS 39 vs. IFRS 9

IAS 39 IFRS 9

Classified as:

Fair Value through Profit & Loss

Held to Maturity

Loans & Receivables

Available for Sale

Classified as:

Amortised Cost

Fair Value

OCI as the residual FV category FVTPL as the residual FV category

Reclassification into the FVTPL category after

initial recognition is prohibited. Reclassifications

out of FVTPL are permitted subject to meeting

certain criteria

Reclassifications are required when there is a

change in business model

Incurred Loss model for impairment Expected Loss model for impairment


Practices

Financial Instruments – Classification and Measurement

Re-deliberating aspects of FASB’s tentative classification and

measurement model and IFRS 9: Classification and Measurement

Reduce key differences between FASB and IASB models

Citing the complexity known is better than the complexity unknown,

FASB decided to abandon the contractual cash flow characteristics test

and the business model test

FASB continues to re-deliberate about classification

Likely that convergence with IFRS 9 in equity security treatment will

happen


Practices

WHAT

WHY

TAKEAWAY

IFRS 9 moves to a three bucket expected credit loss approach

Reflects the deterioration in the credit quality of the assets

• Bucket One – Financial assets where there has been no identified

credit deterioration since initial recognition

• Bucket Two / Three – Once transferred from Bucket One, the assets

would have an allowance measured as the lifetime expected credit

losses. For bucket Two, this is at a portfolio level, while Bucket Three

would be at the individual instrument level. Portfolios would be

transferred from Bucket One to Bucket Two, while individual

instruments would be transferred to Bucket Three.

IFRS 9 and Impairment


Practices

WHAT

Financial Instruments – Impairment

Considered changing the model for impairment recognition removing

the “probable threshold” approach

In favor of an approach that better reflects the deterioration of credit

quality

To provide a common solution for impairment accounting and

incorporation of the IFRS 9 three bucket approach


Practices

WHAT

WHY

Financial Instruments – Impairment

Significant issues about understanding, operationalizing, and auditing

were raised through feedback

As of March 12, 2014 FASB had decided not to pursue an exposure

draft for the three bucket approach

FASB continues to deliberate about alternative approaches to

impairment of financial instruments

Convergence seems less and less likely with IASB’s continuing pursuit

of the three bucket model


Practices

TAKEAWAY

CURRENT STATUS

IFRS 9 and Hedging

Principle-based approach rather than rule-based in FAS 133

• Align risk management with hedge accounting

• Include Qualitative measures

• Application of Judgment

• Forward Looking approach

Expands the addressable risks

• Hedging aggregated exposures

• Hedging non-financial items

Non-Derivative assets can be considered hedging instruments

Extensive new disclosures


Practices

WHAT

Financial Instruments – Hedging

FASB decided to perform research on the hedging phase of the project

Current feedback has found that U.S. constituents expressed support

for the certain aspects of IASB proposals

FASB may perform additional outreach activities for more feedback

FASB has not spent significant time on the hedging phase of its

financial instruments project

It is unclear to what extent the provisions of the IASB new model will

affect future FASB discussions


Practices

WHAT

WHY

TAKEAWAY

MBS Margining

Federal Reserve Bank of NY Treasury Market Practices Group (TMPG)

put forward a recommendation to introduce margin requirements for all

forward settling MBS transactions in late 2012

The posting of margin is a common practice in the trading of agency

MBS between members of the Mortgage-Backed Securities Division

(MBSD) of the Fixed-Income Clearing Corporation, which became a

central counterparty (CCP) in April 2012

Margining is less common in bilateral agency MBS trading between

dealers and customers that are not MBSD members


Practices

WHAT

WHY

MBS Margining

Recommended that margining apply to four agency MBS categories:

• To-Be-Announced (TBA) transactions

• Specified Pool transactions

• Adjustable-Rate Mortgage (ARM) transactions

• Collateralized Mortgage Obligation (CMO) transactions

Recommended that counterparties enter into a master agreement that

defines the margining aspects of relationships:

• Frequency and timing of collateral calls

• Collateral eligibility

• Thresholds, valuations, and liquidation terms


Practices

TAKEAWAY

Stay Current on Guidance Changes

Auditors

Software Providers

Consultants

SAP – NAIC

U.S. GAAP – FASB

PCC – FASB

IFRS – IASB


Practices

PARTNER WITH PROVIDERS

DON’T JUST FOLLOW ONE BASIS

Stay Current on Guidance Changes


Practices

GET INVOLVED

Attend an NAIC meeting

Join an industry trade group (e.g. ACLI, AIA, AHIP)

Network at IASA events

Respond to exposure drafts from the FASB, IASB, NAIC

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Documents

Recent Investment Accounting and Reporting Updates Session...investment accounting and reporting •IASA National and Chapter volunteer •ACLI Accounting Committee member Zach Brown,