DID YOU KNOW...Google launched an auto insurance comparison-shopping site in California in March and hopes to offer the service nationwide by next year, according to The Wall Street Journal.

The Council of Insurance Agents & Brokers’ Commercial P/C Market Index Survey found that premium pricing was slightly lower and demand generally was up for commercial P&C insurance in the fourth quarter of 2014.

Insured losses from severe winter weather in the U.S. this year are projected to exceed $1 billion, according to Impact Forecasting, Aon Benfield’s catastrophe model development team.

Towers Watson’s 2015 Insurance Industry Outlook Survey found that 77 percent of life and P&C insurers around the globe expect market conditions to remain flat or worsen somewhat over the next three years.

A recent report from Standard & Poor’s Ratings Services says it anticipates further mergers and acquisitions in the global reinsurance industry, emphasizing that the future will require greater scale.

SPRING 2015www.bdo.com

SEC HOT BUTTONS FOR THE INSURANCE INDUSTRY By John Green

THE NEWSLETTER OF THE BDO INSURANCE PRACTICE

At least once every three years, the Securities and Exchange Commission (SEC) is required to review the 10K

filings of every publicly traded company. The SEC issues comment letters to the registrant under review and these letters are publicly available. Periodically, we like to review the SEC’s hot topics, as reported in the comment letters, because they are important to publicly traded insurance companies and many of these issues will be incorporated into private company generally accepted accounting principles (GAAP) or statutory reporting in the future.

Overall, for the six months ended June 30, 2014, there was a 25 percent decrease in the number of comment letters as compared to the first six months of 2013. Issues noted

in comment letters that apply across all industries include:

• Management Discussion and Analysis (MD&A)

• Valuation of investments• Fair value measures• Business combinations• Goodwill/impairment• Consolidations• Internal Control over Financial

Reporting (ICFR)• Income taxes

These topics are largely repeats from prior years. The focus on ICFR is an area that the SEC will continue to scrutinize as a result of the new COSO framework that has been adopted by many registrants. For registrants

Contact: Lumsden & McCormick, LLP Steven LoVullo, CPA 716-856-3300 slovullo@lumsdencpa.com

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Issues Breakdown on 10-K and 10-Q Comment LettersAll Registrants

Issues Referenced2014

(1/1-6/30)2013

(1/1-6/30)

Taxonomy# of

Letters# of

Registrants% of All Letters

# of Letters

# of Registrants

% of All Letters

% Change in “% of All Letters”

Results of Operations (MD&A) 518 263 14.8% 798 387 16.9% -12.7%

Fair value measurement, estimates, use (incl. VSOE) 463 258 13.2% 668 363 14.2% -6.7%

Revenue recognition (incl. deferred revenue) issues 310 150 8.8% 428 195 9.1% -2.5%

Tax expense/benefit/deferral/other (FAS 109) issues 294 141 8.4% 428 209 9.1% -7.6%

Non-GAAP measures (incl. EBIT, EBITDA issues) 282 145 8.0% 416 203 8.8% -8.8%

Liquidity issues (MD&A) 264 152 7.5% 412 219 8.7% -13.8%

Acquisitions, mergers, and business combinations 259 130 7.4% 328 158 7.0% 6.2%

PPE Issues – Intangible assets and goodwill 250 123 7.1% 393 183 8.3% -14.4%

Fin statement segment reporting ((FAS 131) subcategory) issues 234 116 6.7% 396 184 8.4% -20.5%

Critical Accounting Policies and Estimates (MD&A) 218 121 6.2% 308 164 6.5% -4.8%

Contingencies & Commit, legal, (FAS 5 or IAS 37) accounting issues 207 109 5.9% 344 180 7.3% -19.0%

Executive compensation plan disclosure issues 203 107 5.8% 350 160 7.4% -22.0%

Source: www.AuditAnalytics.com 508.476.7007

that have retained the old COSO framework, expect comments with future filings. For registrants that file restated or revised financial statements to correct prior errors, the SEC requires a discussion of ICFR with the presumption that the controls were not adequate since an error occurred.

The MD&A comments were by far the largest. In particular, the SEC requested additional

CONTINUED FROM PAGE 1

SEC HOT BUTTONS

disclosures regarding the results of operations. In this area, the SEC wants to see registrants clearly explain the nature of variations from prior reporting periods, changes in key metrics and associated impact to the registrant’s financial statements.

With respect to the insurance industry, there are a number of specific SEC comments including:

• Statutory disclosures• Regulatory capital and regulatory orders• Claims/low interest rate environment• Captive subsidiaries• Reinsurance receivables• Reserves and loss adjustment expenses• Deferred Acquisition Costs (DAC)

The SEC continues to be concerned about the disclosures surrounding statutory

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capital, specifically dividend restrictions of subsidiaries, as well as financial statement items that require significant management estimates such as DAC, loss reserves and investment valuations. The SEC would like to see registrants clearly disclose the methods and assumptions used to arrive at estimated amounts as well as the risk factors that impact operations and financial results.

STATEMENT OF CASH FLOWS

In a December 8, 2014, SEC Staff Speech, T. Kirk Crews of the Office of the Chief Accountant indicated that while the number of restatements over the past five years has remained relatively consistent, restatements due to errors in the statement of cash flows continue to increase annually. The SEC Staff is considering why the statement of cash flows seems to be increasingly prone to error. They suggest that registrants consider the following aspects of their process and controls for the preparation of the statement of cash flows:

Information – How are you collecting the financial data necessary to prepare the statement of cash flows? What processes are in place to ensure this information is complete and accurate, especially to the extent new or nonrecurring transactions have occurred? Are there manual processes that are ad hoc that could be standardized or automated?

People – Do those individuals preparing the statement of cash flows understand the principles in Topic 230? Are there ways you can provide them with better training to perform their job? Do those individuals reviewing the statement of cash flows have enough expertise to identify and prevent misstatements in their review process?

Timing – Are there ways to prepare and review the statement of cash flows earlier in the financial statement closing process?

CONTINUED FROM PAGE 2

SEC HOT BUTTONS

SEC SPECIFIC REQUIREMENTS FOR INSURANCE COMPANIES

Publicly traded insurance companies are required to supplement their financial statement disclosure checklists with insurance industry specific requirements of the SEC and GAAP. The sources of the supplemental disclosures are SEC Industry Guide No. 6 – Disclosures Concerning Unpaid Claims and Claims Adjustment Expenses of Property and Casualty Underwriters, and Regulation S-X Article 7 – Insurance Companies.

Guide 6 requires that information be furnished if reserves for unpaid property & casualty claims and claims adjustment expenses of the registrant and its consolidated subsidiaries, its unconsolidated subsidiaries and its 50 percent-or-less owned equity basis investees (taken in the aggregate after intercompany eliminations) exceed one-half of the common stockholders’ equity of the registrant and its consolidated subsidiaries as of the beginning of the latest fiscal year. Except where noted, the information furnished pursuant to Guide 6 shall be for the latest annual period for which financial statements are required. Article 7 contains specific guidance for the content and format of an insurance company’s balance sheet, income statement and supplementary information.

LOOKING FORWARD

A number of regulatory issues will undoubtedly become the source of SEC comments in the near future. Many of the provisions of the Dodd-Frank Act are now being implemented, some of which will affect insurance companies. As the provisions of Solvency II and the National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA) are implemented, additional disclosures regarding enterprise risk management (ERM) and capital adequacy will likely become a topic for the SEC. One thing is for sure: like death and taxes, public company disclosures can only increase and never decrease.

For more information, please contact John Green at jgreen@bdo.com.

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Insurance organizations face a dizzying array of risk management, financial reporting and regulatory challenges that have intensified

in both frequency and the severity of potential damage in recent years. Cybersecurity is just one of many issues that have grown exceedingly complicated and worrisome. But where do management’s responsibilities in protecting the organization end and a board member’s begin?

It’s a question that many are asking, but there are no clear answers. One thing that is certain is that the board’s role is changing. Board members have greater risk management responsibilities today and are expected to be more proactive, especially in organizations with high public visibility. That requires a bigger time commitment than in the past. Instead of waiting for management to surface issues that the corporate board would advise on, it’s now the board’s job to dig deeply into enterprise-wide risk management at the outset so that they have the understanding and expertise to provide the necessary governance and oversight.

The “Tone at the Top” is vital to achieving a successful enterprise risk management system, according to the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tone at the Top, established by both executive management and the board, sets the organization’s commitment to integrity and ethical values, the importance of maintaining effective internal control and the expectation that all employees have a responsibility to play a part in maintaining an effective system of internal controls. Boards and executive management are also challenged with how to achieve the corporate strategy they have set out while minimizing risks to the organization. It forces them to consider the appropriate balance of risk versus return. How do organizations manage risk exposures while still effectively achieving their strategic goals?

So what issues are chipping away at board members’ time? A recent study conducted by BDO USA’s Corporate Governance practice found that being educated on the latest regulatory changes, assessing the impact of new financial reporting requirements, addressing the growing risk of cyberattacks and managing executive compensation were a few of the major issues corporate boards were dealing with last year. And board members indicated that risk management and succession planning are areas that ought to have more emphasis.

All of this leaves even the most proactive board members debating where they can have the most impact. In what areas should they be pushing more aggressively and asking questions of management? How can they understand more about the risks facing the organization?

Following is a list of common questions board members should be asking to better understand organizational risk exposure:

1 What uncertainties exist that require greater board focus? Do we have the appropriate expertise internally, or availability of external resources, to address these uncertainties?

2 How extensive is our enterprise risk management assessment? To what extent are the individual business units involved in assessing risk in their areas of expertise and familiarity? How often is this assessment updated? What is our process for addressing specific areas of vulnerability?

3 What are we doing to develop and retain younger managers who have the potential to lead the organization in the future with the requisite knowledge, initiative and shared vision to execute the strategic goals of the organization?

4 How adaptive is our executive management team and overall organization to the required changes needed to respond to market opportunities and/or emerging risks?

5 Have we sufficiently considered our vulnerability to cyberthreats? How are we leveraging necessary technology advancements to optimize growth while protecting against costly cyberattacks?

6 How are changes imposed by insurance regulatory authorities and rating agencies impeding our ability to take advantage of market opportunities? How is our management team responding to those challenges?

7 How are we responding to the potential shift in customer loyalty in an environment of innovation and changing customer preferences?

8 How do we align our risk exposure with earnings objectives and the overall strategic plan? How do risk and uncertainty factor into our strategic decision process?

According to David Martin, author of Risk and the Smart Investor, “Risk management must be transformed into a cornerstone of effective strategic actions and corporate governance – and fully integrated into executive and investment decisions, organizational structures and corporate cultures. Meanwhile, failure to adapt to the new reality can be lethal.” Executive management teams and boards that take measures to adjust to the new norm of corporate governance can successfully marry opportunities for strategic growth with a culture of responsibility, responsiveness, adaptability and long-term sustainability.

For more information, please contact Barb Woltjer at bwoltjer@bdo.com.

EIGHT QUESTIONS YOUR BOARD AND AUDIT COMMITTEE SHOULD BE ASKING MANAGEMENTBy Barb Woltjer

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DEDUCING THE DEDUCTION: FINAL REGULATIONS CREATE COMPENSATION COMPLICATIONS By Sara Hendrix, CPA, BDO USA

On September 23, 2014, the IRS issued final regulations on the $500,000 limit imposed under the

Affordable Care Act (ACA), on the deduction for compensation paid by a “covered health insurance provider” (CHIP). The final regulations provide critical guidance on several issues, including both the application of the controlled group rules for purposes of determining whether an entity is regarded as a CHIP, and rules for allocating compensation to a specific year of service (particularly in the case of compensation payable in a subsequent tax year(s)). Section 162(m)(6) of the Internal Revenue Code was enacted as part of the ACA in order to limit the compensation expense deduction available to certain health insurance providers that are regarded as CHIPs. For tax years beginning after December 31, 2012, an issuer of health insurance is treated as a CHIP if they receive 25 percent or more of their gross premiums from “minimum essential coverage” (MEC), generally defined as coverage that individuals are required to maintain to avoid incurring ACA penalties. This MEC includes any employer-provided health insurance coverage, individual market coverage, and governmental coverage (such as Medicare or TRICARE).

Adding to the complexity under these rules, the determination of whether a health insurance issuer is a CHIP can vary with each tax year as compensation and revenue streams change. The deduction limitation may apply in one tax period, but the entity may be exempt in subsequent or prior periods. And the exceptions to the rule are complex and cross tax years, applying to both current and deferred compensation. They also apply to tax years beginning January 1, 2013, meaning some insurers will have to revisit past tax years and re-evaluate their liability.

Every entity sharing common control with a CHIP (defined by the Internal Revenue Code as being in the same “aggregate group”) is also, by that association, subject to the compensation deduction limit. In addition,

the $500,000 deduction limitation applies to compensation provided all employees, directors, and (in certain cases) independent contractors within the CHIP aggregate group, and not just the top-four highest compensated employees as under the $1M compensation limit imposed on public companies.

Common types of aggregate groups include parent-subsidiary entities, affiliated service groups or non-corporate entities under common control. As the distinction between healthcare provider and insurer blurs, it stands to reason that more hospitals and long-term care providers could find themselves subject to CHIP tax provisions if they provide insurance themselves or enter a common control arrangement with an insurer.

By understanding the exceptions to Section 162(m)(6) and considering strategic compensation planning, insurers and those under common control can both limit their tax burden and retain more control over cash flow.

PLANNING AHEAD FOR CHIP STATUS

Each taxpayer that has the potential to be defined as a CHIP should perform a thorough evaluation of its revenue streams and compensation policies on an annual basis to ensure that they are prepared for the possible limitations that Section 162(m)(6) may provide.

Affected entities may be able to design base compensation, or long-term incentive and deferred compensation arrangements in order to avoid/minimize the deduction limit. One option includes spreading compensation out over a number of tax years. While deferred compensation is subject to the provision, an organization that knows it will fall under CHIP provisions one year but not the following may opt to defer bonuses or other compensation to limit its tax burden and retain control over cash flow.

UNDERSTANDING EXCEPTIONS TO CHIP STATUS

De Minimis ExceptionThe IRS provides an exception for de minimis premiums. Under this exception, an aggregate group that would otherwise be a CHIP is not subject to the compensation limitation if the premiums for minimum essential coverage received by all members of the aggregate group are less than 2 percent of the gross revenue of the aggregate group for the tax year. Further, the final regulations provide a “grace period” to permit entities to adjust and adapt to a change in their status as a CHIP, or a member of the aggregate group of a CHIP: The deduction limit will not apply in the first year that premiums exceed 2 percent of the gross revenue if the aggregate group qualified for the de minimis exclusion in the prior tax year.

Revenue Exceptions Not Considered PremiumsA health insurance issuer is defined as a CHIP only if it receives premiums from providing minimum essential coverage. Entities that are concerned about their potential CHIP status should examine all of their revenue streams with someone who understands the revenue exceptions.

1. Amounts received under an indemnity reinsurance contract and amounts defined to be direct services payments, for example, are not treated as premiums for purposes of Section 162(m)(6). Specifically, health insurance issuers may reinsure a portion of their risks by entering into indemnity reinsurance contracts with various reinsurers. The final regulations affirmed that premiums received under an indemnity reinsurance contract are not treated as premiums from providing health insurance coverage, provided that under the reinsurance contract (1) the reinsuring company agrees to indemnify the health

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The market for cat bonds and insurance-linked securities (ILS) has revolutionized the reinsurance

industry in recent years, with insurers increasingly turning to the capital markets to transfer peak risk, instead of to the traditional reinsurance companies such as Munich Re and Swiss Re. On the other side of the market, alternative investors—private equity, hedge funds and, more recently, pension funds—are increasingly comfortable with cat bonds and ILS, which have produced annualized returns of more than 8 percent over the last 12 years, the Financial Times reports. Since their performance is not linked to that of other assets, they are an attractive option for investors looking to diversify their risks.

The outstanding cat bond and ILS market reached an all time high of over $23 billion in 2014, and the outlook is strong for 2015, according to niche news source Artemis, which specializes in the space. A BNY Mellon report from the end of last year predicted that the cat bond market would reach $50 billion by 2018.

Traditional reinsurance companies have been hit hard by the new reinsurance model. In recent years, alternative capital—supported by low interest rates—has flooded into ILS and cat bonds, driving down prices in the traditional reinsurance world. Ratings agencies have taken a bearish stance toward the reinsurance sector as a whole, with Moody’s Investors Service (Moody’s) downgrading the sector’s outlook from “stable” to “negative” in June. Moody’s expects catastrophic reinsurance prices to drop 10 to 15 percent in 2015.

Fears over the arrival of “fast” money seem to have been somewhat overstated. Artemis notes that capital from maturing bonds is continuing to be reinvested in the industry, along with new inflows from other sources. However, a Moody’s research report released in September stated that interest rate rises, even small ones, have caused some funds to pull back due to inadequate returns. The report also points out that the reliability of the alternative capital model has yet to be tested by a major U.S. catastrophic event.

Nonetheless, the cat bond market looks set to continue to grow. Michael Millette, partner and managing director at Goldman Sachs said in an interview with insurancelinked.com, “There are many elements of traditional reinsurance that are useful and convenient and the very best reinsurance programs will feature a mixture of the two.” Most commonly, programs will have a ratio of 70 percent traditional reinsurance, 30 percent cat bonds, although some may go up to a 50:50 ratio, he said.

Brokers will increasingly be called upon to offer cat bonds and other ILS to their investment clients, as what was once an extremely boutique product becomes more accepted in the investing world, according to Artemis. For example, London-based insurance and reinsurance brokerage Alwen Hough Johnson recently gained authorization from the U.K.’s Financial Conduct Authority (FCA) approval to launch a new capital markets broking unit AHJ Capital Markets Ltd, specializing in ILS and cat bonds.

PErspective in Insurance is a feature examining the role of private equity in the insurance industry

PErspective in Insuranceinsurance issuer for all or part of the risk of the loss and (2) the health insurance issuer retains its liability to the individual insured.

2. Some health insurance issuers enter into arrangements with third parties to provide, manage or arrange for the provision of services by physicians, hospitals or other healthcare providers. Under these arrangements, the health insurance issuer may pay compensation to the third party in the form of capitated, prepaid periodic or other payments for these services (referred to as “direct service payments”). The third party may also bear some or all of the risk in the event that the compensation is insufficient to cover the full cost of providing and managing these services.

The final regulations provide that these direct service payments made by a health insurance issuer are not treated as premiums for purposes of Section 162(m)(6), regardless of whether the third party is subject to healthcare provider, health insurance or other regulatory requirements under state law.

Compensation Subject to Limitation – Current and Deferred

The $500,000 compensation limitation applies to both current and deferred compensation paid to applicable individuals. Current compensation generally includes salaries or bonuses paid within 2½ months of year-end. Deferred compensation (referred to as “deferred deduction remuneration,” or “DDR” under Section 162(m)(6)) is compensation that is deductible in a tax year(s) after the year in which the related services were performed, such as non-qualified deferred compensation, stock option compensation, long-term incentive compensation arrangements or severance.

The $500,000 compensation limit applies first to the current compensation received. If this current compensation is less than $500,000 for that tax period, the remaining amount is applied to any deferred compensation earned in that year. The final regulations provide complicated rules for assigning DDR to one or more years of service. DDR must be allocated to the tax years in which the services were performed, and the $500,000 compensation

limit for a particular tax year is applied to the portion of compensation allocated to that year. In addition, the regulations allocate DDR to years of service differently, depending upon the type of compensation arrangement in issue. The method for allocating the compensation generally must be applied

consistently for each type of compensation arrangement, and/or for each employee.

Sara Hendrix is a tax senior director at BDO. She can be reached at shendrix@bdo.com.

CONTINUED FROM PAGE 3

DEDUCING THE DEDUCTION

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MAY May 11-13 LOMA Financial Inforum 2015Hyatt Regency BaltimoreBaltimore, Md.

May 17-20AAMGA 89th Annual Meeting 2015Gaylord National Resort & Convention CenterNational Harbor, Md.

May 21-22NAIC 2015 International Insurance ForumCapital HiltonWashington, D.C.

JUNEJune 7-10 IASA’s 2015 Annual Educational Conference and Business Show*Mandalay Bay Las Vegas, Nev.

June 14-17IIS Global Insurance ForumWaldorf Astoria HotelNew York, N.Y.

JULY July 15-17ACLI’s Compliance & Legal Sections Annual MeetingCaesars PalaceLas Vegas, Nev.

July 16-19NCOIL 2015 Summer MeetingHilton Indianapolis Hotel & SuitesIndianapolis, Ind.

MARK YOUR CALENDAR… CONTACT:

RICHARD BERTUGLIAAssurance Partner / New York212-885-8342 / rbertuglia@bdo.com

DOUG BEKKERTax Partner / Grand Rapids616-776-3685 / dbekker@bdo.com

PHIL FORRETAssurance Partner / Dallas214-665-0769 / pforret@bdo.com

CARLA FREEMANAssurance Partner / Los Angeles310-557-0300 / cfreeman@bdo.com

JAY GOLDMANAssurance Partner / Atlanta404-979-7237 / jgoldman@bdo.com

JOHN GREENAssurance Partner / New York212-885-8174 / jgreen@bdo.com

BRENT HORAKAssurance Partner / Dallas214-665-0661 / bhorak@bdo.com

TIMOTHY KOVELSr. Tax Director / New York631-501-9600 / tkovel@bdo.com

ALBERT LOPEZPartner and Regional Business Line Leader / Miami305-420-8008 / alopez@bdo.com

IMRAN MAKDAAssurance Partner and Insurance Practice Leader / New York212-885-8461 / imakda@bdo.com

BARB WOLTJERAssurance Partner and Insurance Practice Leader / Grand Rapids616-802-3368 / bwoltjer@bdo.com

BDO INSURANCE PRACTICE

BDO’s Insurance practice understands the complexities of the industry and the implications for your business. Whether you’re looking to tap our extensive SEC experience in order to enter the public market, discuss the latest insurance accounting and reporting requirements from the NAIC, or comply with state regulatory agencies, BDO’s Insurance practice provides proactive guidance to our clients. We know that no two insurers are alike, and we tailor our services accordingly. We’re proud of our industry focus and experience, and our commitment to delivering the right team with relevant industry experience, both as we begin our relationship and for the long term.

ABOUT BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 152 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

© 2015 BDO USA, LLP. All rights reserved.

*BDO will be at booth #639; we encourage you to visit if you attend.

People who know Insurance, know BDO.