Investment Accounting and Reporting Updates

Transcription

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2 Investment Accounting and Reporting Updates Session 103

3 Learning Objectives 1. Review recent guidance updates and how these changes will impact your investment reporting 2. Address current regulatory topics being discussed that relate to investment accounting 3. Provide a guideline for best practices to ensure that you keep current with changes in accounting guidance

4 Presenters Tip Tipton, CPA, CGMA Financial Analyst, Accounting Policy Thrivent Financial Zach Brown, CPA Insurance Services Product Owner Clearwater Analytics Coordinates GAAP and SAP 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 Manages cross-functional product enhancement teams Liaison between internal and external stakeholders Communicates product benefits and features Market expert for product implementation of new asset classes Regulatory accounting and reporting expert

5 Survey Results What Is The Total Size Of Your Organization s Investment Portfolio? ACCOUNTING BASES REPORTED ON 37% 5% 58% SAP US GAAP IFRS [PERCENTAGE ] 7% 14% 7% [PERCENTAGE ] [PERCENTAGE ] $0 to $100M $100M+ to $500M $1B+ to $5B $10B+ to $20B $20B+ to $50B $50B+

6 Survey Results What Specific NAIC Investment Accounting And Reporting Issues Is Your Company Concerned With Over The Next Year? (Check all that apply.)

7 Survey Results What Specific FASB Investment Accounting And Reporting Issues Is Your Company Concerned With Over The Next Year? (Check all that apply.)

8 Agenda 1. NAIC Updates 2. FASB Updates 3. Other 4. Best Practices

9 NAIC Updates

10 NAIC - Investment Risk-Based Capital Working Group RBC for Cash Collateral for Derivative Transactions Adopted WHAT Revise the RBC treatment of cash collateral for derivative transactions. WHY The cash collateral would be separated from the all other category for AVR and RBC, and provided with factors more appropriate to the risk. TAKEAWAYS Risk factors decrease from 1.3% to 0.4% for derivatives collateral pledged Changes effective for the 2015 RBC calculation Corresponding changes to AVR will be made in 2016 CATF I effective 12/31/2015

11 NAIC - Investment Risk-Based Capital Working Group Commercial Mortgage Loans Discussed Reviewing the risk factors for commercial mortgage loans that were adopted in 2013 (RBC) and 2014 (AVR) for possible changes Need to have bond factors finalized before changes are reviewed Real Estate Discussed Reviewing proposed changes to the risk factors for real estate that would reduce the RBC risk factor from 15% to 8.5% Expected to be addressed during the Summer National Meeting

12 NAIC - Investment Risk-Based Capital Working Group Base Risk Factors for Corporate Bonds - Discussed WHAT Increase the granularity of designations Proposal to move from 6 to 14 designations WHY More precise credit quality designations TAKEAWAYS Begin evaluating potential impact to RBC Implementation challenges Change in investment strategy Formal proposal at Summer NAIC Meeting Moody's NAIC Designation C1 Factor (%) Ratings Current Propoosed Current Propoosed Aaa Aa Aa Aa A A A Baa Baa Baa Ba Ba Ba B B B Caa 1, 2,

13 NAIC - Capital Adequacy Task Force Broker Receivables - Proposed The proposed 2015 RBC factors for Broker s Receivables ( CA) Life / Fraternal 1.4 % 1.4 % Property / Casualty 2.4 % 2.7 % Health 2.4 % 2.6 % Restricted Asset RBC Charge for Assets on Deposit with State - Discussed Discuss the possibility of reducing the RBC charge for assets held on deposit with the state for the benefit of all policyholders The additional risk charge is 1.3% in addition to the standard risk charge for the type of investment (e.g. mostly bonds)

14 NAIC - Blanks Working Group Schedule DB-D-1 Crosscheck and Disclosure Adopted WHAT Add 2 footnote lines to Schedule DB-D- 1 to report the amount of offset Add a crosscheck to the instructions Add a reference for the illustration for Note 5J to tie to Schedule DB-D-1 WHY Blanks pages will reflect changes to SSAP No. 86 adopted by SAPWG TAKEAWAYS Make sure the derivatives lines on the asset and liability pages tie to the respective amount reported in Schedule DB-D-1 Per the Investment Reporting Subgroup issues list, discuss an update to the instructions for Schedule DB-D-1 to better clarify reporting of exchange traded derivatives and central clearinghouse derivatives BWG effective 01/01/2015

15 NAIC - Blanks Working Group Notes 32 and 34 Instructions Adopted WHAT Modify the instructions and illustrations for Notes 32 (Analysis of Annuity Actuarial Reserves and Deposit Type Liabilities by Withdrawal Characteristics) and 34 (Separate Accounts) WHY To modify Notes 32 and 34 to correct inconsistencies between SSAP No. 56 (Separate Accounts) language and the instructions regarding the use of market value and fair value. TAKEAWAYS The modification is a simple clarifying change. Effective 12/31/15

16 NAIC - Blanks Working Group Identifier Challenges BWG WHAT Modification of the instructions for CUSIP and Description. Adding new electronic only columns for Issuer, Issue, SEDOL Code, ISIN Code, and Capital Structure Code. WHY The SVO is attempting to reduce the number of Jump Start Report exceptions based on unidentified securities. This will also assist the SVO in identifying securities in the feeds and improve their ability to provide information to regulators.

17 NAIC - Blanks Working Group Identifier Challenges BWG, cont. TAKEAWAYS New fields may require new data feeds or data contracts Descriptions should match Issue where appropriate Issuer and Issue field Guidance states that the reporting entity is encouraged to use a set of specific sources SEDOL Likely already have, there may be data usage rights issues ISIN Likely already have, there may be data usage rights issues

18 NAIC - Blanks Working Group Identifier Challenges BWG, cont. TAKEAWAYS Capital Structure This is the one data point that may require additional review as not all insurers are bringing in the relevant data to calculate this code 1. Senior Secured Debt 2. Senior Unsecured Debt 3. Senior Subordinated Debt 4. Junior Subordinated Debt 5. Other

19 NAIC - Investment Reporting Subgroup Security Description WHAT Inconsistencies in the way insurers fill out the D, part 1, is making it difficult for regulators to aggregate security exposure The NAIC is considering mandating how this field is filled out to help add clarity and consistency WHY Regulators use this column to determine exposure to issuers, markets, and security modeling types. Consistency is vital.

20 NAIC - Investment Reporting Subgroup Security Description, cont. PROJECT STATUS While the proposal will recommend using an automated source, it will not be a requirement. Populating the field with the ticker (symbol) is not desired. The proposed recommended data sources for the description: Bloomberg Interactive Data Corporation (IDC) Thomson Reuters S&P/CUSIP Descriptions used in either the relevant SEC filing or legal documentation for the transaction.

21 NAIC - Investment Reporting Subgroup Security Description, cont. TAKEAWAYS There is currently no uniformity between data providers Additional Data costs should be reviewed New Contracts New Development costs This will be superseded by the Identifier challenges

22 NAIC - Investment Reporting Subgroup BA Categories WHAT Reviewing the categorization on the Schedule BA (Other Long-Term Assets) WHY BA categories have grown throughout the years and it is uncertain if the current level of detail is required for reporting

23 NAIC - Investment Reporting Subgroup BA Categories, cont. PROJECT STATUS Last BA proposal was to reduce, from over 20, to nine categories: 1. Mortgage Loans 2. Other Fixed Income or Variable Interest Rate Instruments 3. Real Estate 4. Capital Notes, Surplus, etc. 5. Collateral Loans 6. Non-Collateral Loans 7. Low Income Housing Tax Credit 8. Working Capital Finance Investment 9. Any Other Class of Assets Put on hold after industry expressed concerns with changing categories associated with collateral and non-collateral loans

24 NAIC - Investment Reporting Subgroup BA Categories, cont. TAKEAWAYS This will likely lead to a reduced BA break out, so insurers with exposure to this schedule should keep this issue on their radar as reclassification may be necessary for some investments The big thing about this review will be the possible changes in RBC charges and even the potential for it to bring up conversations around re-classification and admitted vs. non-admitted decisions

25 NAIC - Investment Reporting Subgroup Collateral Type WHAT Schedule D Part 1 Column 26 is an electronic only column for Collateral Type There are currently 21 possible choices WHY 10 of the 21 comprise nearly 90% of the total investments held by insurers The necessity of this kind of break out is in question

26 NAIC - Investment Reporting Subgroup Collateral Type, cont. PROJECT STATUS Examples of collateral type on the potential chopping block include: 11 Trade Receivables (possible duplication of WCFI that should be held on the BA) 12 Loan 15 Recreational Vehicles 17 Tax Receivables 20 Single Asset Current discussion is around combining these types into other TAKEAWAY Insurers should maintain awareness of this project, especially if they hold securities with some of these more esoteric forms of collateral

27 NAIC - Investment Reporting Subgroup Supplemental Investment Risk Interrogatories WHAT Clarification on reporting foreign issues Further clarification on top 10 issues WHY Interested parties and insurers have expressed concern about the inconsistency of reporting both on foreign securities and on the top ten issuer concentration disclosure Both the definition of foreign and at what level to group issuer concentration have become issues There are currently foreign codes on securities that do not have foreign risk

28 NAIC - Investment Reporting Subgroup Supplemental Investment Risk Interrogatories TAKEAWAYS This is still an open issue with no changes exposed Changes to foreign code as well as the supplemental risk interrogatories may be forthcoming The group has expressed that base 6 is a starting point for issuer concentration but expectations after that is still uncertain The proliferation of foreign code has caused its use on securities that have historically not been considered foreign The treatment of supranational securities is inconsistent and still unclear Insurers should keep any updates in relation to this on their radar

29 NAIC - Valuation of Securities Task Force Catastrophe Bonds WHAT Catastrophe Bonds are investments whose principal repayment is determined based on a triggering event or specified risk WHY At the NAIC 2014 Fall National Meeting, Nationwide, in conjunction with the North American CRO Council, proposed to have the NAIC review their guidance in an effort to increase insurance companies use of this kind of investment The returns on these investments are not correlated with market fluctuations TAKEAWAYS The chairs of Statutory Accounting, Capital Adequacy, Life Risk-Based Capital (RBC), Investment RBC and Blanks met to discuss the proposal. It was decided that the proposal should be referred to the SAPWG to determine whether or not it should develop specific statutory accounting principles for these investments

30 NAIC - Valuation of Securities Task Force 5*/6* and Structured Products WHAT The 5*/6* rule allows insurers to admit assets that temporarily lack enough information or time for the SVO to calculate a designation WHY Recent confusion around what structured securities refers to has meant that insurers are using this election in ways that disagree with NAIC expectations TAKEAWAY The NAIC staff has requested that the term be clarified to apply to a core group of complex corporate securities where data is not available or it is cost prohibitive to acquire the data

31 NAIC - Valuation of Securities Task Force Changes to the SVO Filing Process WHAT Insurers are currently required to file within 120 Days of the original purchase Insurers must also file for annual updates WHY Once done by one insurer, the rating of the security can be shared by other insurers without incurring the cost of the initial filing The goal is to decrease the number of year-end un-assessed securities caused by an uneven distribution of filings The number one culprit seems to be the annual updates to the filings, which insurers wait to do, hoping another insurer will file and incur the cost of the filing

32 NAIC - Valuation of Securities Task Force Changes to the SVO Filing Process, cont.

33 NAIC - Valuation of Securities Task Force Changes to the SVO Filing Process, cont. TAKEAWAYS The list of observations that are currently proposed include: Moving the 120 day rule to 30 days A new system for identifying the initial filer of a security and having that insurer maintain responsibility for maintenance of the filing Require the filing of owned securities shortly after the financial statements become available Having the SVO own the assignment of the Z designation process Suggested elimination or review for relevancy of the 5*/6* process This review could result in an increase in non-admitted assets if insurers are unable to comply with these time lines and an increase in costs associated with initially filing a security Asset Managers responsibility?

34 NAIC - Valuation of Securities Task Force Non-Recourse Loans WHAT A non-recourse loan is a loan where the cash flows are derived from loans to organizations that meet certain charitable criteria WHY These underlying loans have no obligation to pay and the organization s viability is questionable since it is based on charitable contributions TAKEAWAY Recently the SVO realized it had been providing designations on these types of securities but was not authorized to rate them. They pulled the ratings from the VOS database which caused the insurers difficulty in filing their annual reports

35 NAIC - Valuation of Securities Task Force Derivative Instruments Model Regulation (#282) WHAT Financial Condition Committee (responding to a request by the Executive Committee) has requested that the VOS Task Force review the Derivative Instruments Model Regulation (#282) against the NAIC s Model Law Development criteria. WHY There have been many changes in the derivative landscape over the past few years and the current model may no longer be useful or applicable The VOS Task Force has requested that NAIC staff coordinate and bring together industry experts to review how these changes could or have affected the current model as well as how insurers could or should utilize derivatives in their businesses.

36 NAIC - Valuation of Securities Task Force Derivative Instruments Model Regulation (#282), cont. TAKEAWAYS There could be a change in the model or a whole new model for states to use as reference in forming regulatory rules and limitations for derivative transactions This could lead to changes in the laws of specific states who could react to the model changing. If you operate in a state that has specific guidance on allowable derivative transactions this may be a relevant topic to monitor There are plans to have several open meetings to discuss possible changes

37 NAIC - Valuation of Securities Task Force Private Letter Ruling Projects WHAT The VOS Task Force initially proposed that insurers be required to file private placements with the NAIC, even if they had a CRP rating WHY The SVO claimed that in many cases the rating was not being monitored and may be irrelevant Industry pushed back and the project was refocused to concentrate on reducing the number of exceptions on Jumpstart reports TAKEAWAY The SVO has not had any recent discussions with industry on the topic but intends to continue the dialogue this year. NAIC staff plan to review 2014 filings to determine if the unexplained exceptions have persisted into the current filing year. SVO is working on adding new data feeds and the related BWG project on identifiers should reduce the number of false positives on the Jumpstart reports

38 NAIC - Statutory Accounting Principles Working Group Surplus Notes WHAT As part of the investment classification review, the guidance for Surplus Notes (currently a BA asset) is being reviewed WHY Questions and inconsistencies have arisen as to the guidance on how insurers handle Surplus notes Current Guidance: Capital or surplus debenture(s) must not be valued in excess of the lesser of the value determined above or amortized cost Above there are paragraphs referencing both a statement factor and outstanding face value Differences between the statement value and these reference amounts could potentially be put through capital and surplus or treated as a non-admitted asset

39 NAIC - Statutory Accounting Principles Working Group Surplus Notes , cont. TAKEAWAY The current proposed revision clarifies the following: Surplus Notes with a NAIC 1 rating should be reported at amortized cost. Surplus Notes that are not rated by a CRP, or have a rating other than NAIC 1, shall be reported at the lower of amortize cost or fair value. Simplifies previous guidance in SSAP No. 41 in regards to valuation changes.

40 NAIC - Statutory Accounting Principles Working Group Short Sales WHAT WHY The agenda item requests specific guidance from the Working Group on the reporting of Short Sales Traditionally the NAIC has referred insurers to their state of domicile TAKEAWAYS Key information that will be discussed: How a stock short sale is used Concept of unlimited losses for stock short sales Naked short sales GAAP treatment within existing derivative guidance Current statutory guidance How short sales are used by securities borrowing transactions It is anticipated that after industry provides feedback on this item, there will be discussion on changes to SSAP guidance, or possibly a new issue paper.

41 NAIC - Statutory Accounting Principles Working Group Prepayment Penalties & Amort of Callable Bonds WHAT Modification to SSAP 26 to deal with callable bond amortization and prepayment penalties WHY Clarify accounting guidance on make whole calls and continuously callable bonds Clarify that prepayment penalties should flow through the realized G/L portion of investment income TAKEAWAY Three proposed changes to the SSAP will instruct companies to: Report prepayment penalties and acceleration fees as realized gains (difference between consideration and book adjusted carrying value) at time of early liquidation. Provide illustrations and revisions to the proper accounting treatment of continuously callable bonds utilizing the Yield to Worst methodology. Clarify that bonds with make whole provisions follow the yield to worst methodology, without exception.

42 NAIC - Statutory Accounting Principles Working Group Investments in SCAs WHAT Solicitation of feedback on improved consistency in the determination of measurement method for Investments in Subsidiary, Controlled, and Affiliated Entities WHY Concern about reporting entities transferring non-admitted assets into a noninsurance SCA or avoiding state specific rules through insurance SCA investments TAKEAWAYS Because the valuation of non-insurance SCA investments is based on audited GAAP financials, there is concern about valuation of these investments Proposed change to restrict the amount of assets held in an SCA to qualify as admitted assets Investments in Insurance SCAs are based on the statutory value, which can vary by state Proposed changes include the requirement that valuations of insurance SCAs be done as calculated per the AP&P Manual

43 NAIC - Statutory Accounting Principles Working Group Treatment of Non-Cash Items in the Cash-Flow Statements - Adopted WHAT For purposes of the cash flow statement, cash is defined to include cash, cash equivalents and short-term investments (no change) Expands disclosure of non-cash items to include non-cash operating items in addition to financing and investing items WHY Clarifies that the Statement of Cash Flow shall only include transactions involving cash TAKEAWAY Evaluate non-cash transactions related to investments so you can ensure proper presentation in the Statement of Cash Flow Effective 12/31/15

44 NAIC - Statutory Accounting Principles Working Group Single-Member and Single-Asset LLCs Real Estate - Adopted WHAT WHY A single real estate property investment that is wholly-owned by an LLC that is directly and wholly-owned by the reporting entity shall be reported on Schedule A if certain criteria are met These more closely resemble a direct investment in real estate TAKEAWAY Beneficial through lower risk charge and reduced audit costs UPDATE Proposed SAPWG clarifies that an encumbrance by an unrelated party is permitted within this guidance Proposed BWG requires! in Schedule A, Part 1, Column 2 Effective 1/1/15

45 NAIC - Statutory Accounting Principles Working Group Investment Classification Review - Discussion WHAT Exposed four discussion documents related to investment classifications under SSAP No. 26. WHY Security Definition Contractual Amount of Principal Due ETF Analysis Non-Bond Definitions Proposes a comprehensive project to review the investment SSAPs with suggestions to clarify definitions, scope, and the accounting method/related reporting

46 NAIC - Statutory Accounting Principles Working Group Investment Classification Review Discussion, cont. TAKEAWAYS By incorporating the US GAAP definition of a security, it will be clear that some investments within scope of SSAP No. 26 do not meet the definition of a bond By requiring all SSAP No. 26 investments to have a contractual amount of principle due, ETF s and mutual funds would be eliminated from the scope of SSAP No. 26 Identify non-bond items (e.g. Loan Participations; Loan Syndication; TBA Securities; Hybrids; Convertible Securities) in your portfolio and review the definitions in this document for consistency ETFs will be reported in a separate schedule and require a fair value measurement method or NAV as a practical expedient

47 FASB Updates

48 FASB - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures WHAT Requires entities to account for repurchase-to-maturity transactions as secured borrowings Changes in accounting guidance on linked repurchase financing transactions is expected to result in these being reported as secured borrowings Expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions). Effective 1/1/15 WHY The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements

49 FASB - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, cont. TAKEAWAYS More consistent accounting of repurchase agreements by reporting them as secured borrowings New disclosures of repos, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings SAP IMPLICATIONS In response to ASU , the following options are being considered: Incorporate a derecognition (sale) accounting approach for all repurchase agreements Follow a secured borrowing for all repurchase agreements Incorporate a modified sale/secured borrowing approach for statutory accounting Recommends that the guidance for repurchase agreements and securities lending be removed from SSAP 103 and create a new SSAP Proposal to state that long-term repos are non-admitted in SSAP 103

50 FASB - Accounting for Investments in Qualified Affordable Housing Projects WHAT Permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Effective 1/1/15 WHY Permits the entity to present the investment s performance net of the related tax benefits as part of income tax expense Simplify the amortization method an entity uses TAKEAWAY To qualify for proportional amortization method, 5 conditions must be met The investor is a limited liability entity that is a flow-through entity for both legal and tax purposes All LIHTC investors to disclose certain information

51 FASB - Accounting for Investments in Qualified Affordable Housing Projects, cont. SAP IMPLICATIONS SAPWG proposes to adopt ASU with the following modifications: Continued application of a modified amortized cost methodology for insurer reporting entities (SSAP No. 93 doesn t permit the use of the effective yield method) A gross presentation in the income statement (i.e. the amortization will be reflected as a component of investment income and the use of the tax credits and other benefits will continue to be reflected as a decrease to income tax expense) BWG proposes additional disclosures required by the proposed modifications to SSAP No. 93: The amount of low-income housing tax credits and other tax benefits recognized during the years presented The balance of the investment recognized in the statement of financial position for the reporting periods presented

52 FASB - Receivables - Troubled Debt Restructurings by Creditors WHAT WHY Reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure Effective 1/1/15 To reduce diversity by clarifying when an in substance repossession or foreclosure occurs TAKEAWAY 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

53 FASB - Receivables - Troubled Debt Restructurings by Creditors, cont. SAP IMPLICATIONS SAPWG adopted, with modification, ASU and shall be applied prospectively from the date of adoption (March 28, 2015) ASU guidance has been modified to remove the restrictions limiting it to residential real estate with a consumer mortgage loan. The guidance reflected in this statement shall encompass all foreclosed mortgage loans collateralized by real estate. Additionally, ASU guidance has been modified to require a lower-of valuation method for the real estate collateral recognized from a foreclosure. This guidance will result in a deferral of any gain as a result of a mortgage loan foreclosure BWG will add instructions for a new disclosure to Note 5A for Mortgage Loans Derecognized as a Result of Foreclosure

54 FASB - Receivables -Troubled Debt Restructurings by Creditors WHAT Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure WHY Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables Reduce the diversity by requiring certain government-guaranteed mortgage loans to be classified as an other receivable upon foreclosure when 3 conditions are met TAKEAWAY Identify all residential and nonresidential mortgage loans with certain government guarantees (e.g. FHA, VA)

55 FASB - Receivables - Troubled Debt Restructurings by Creditors, cont. SAP IMPLICATIONS SAPWG adopted ASU and shall be applied prospectively from the date of adoption (March 28, 2015) Added a disclosure related to the foreclosure of mortgage loans BWG proposes adding paragraph 8 to Note 5A to provide data on Mortgage Loans Derecognized as a Result of Foreclosure : Aggregate amount of mortgage loans derecognized Real estate collateral recognized Other collateral recognized Receivables recognized from a government guarantee of the foreclosed mortgage loan

56 FASB - Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives WHAT Require that an entity disclose (in both interim and annual reporting periods) the carrying amount, measurement attribute, and line item within the balance sheet and the income statement in which each bifurcated embedded derivative and its related host contract are presented. Topic 815 WHY To increase the transparency and usefulness of the information provided in the notes to financial statements about hybrid financial instruments that contain bifurcated embedded derivatives. TAKEAWAY Consider all assets and liabilities in scope for this proposal, especially insurance contracts NAIC

57 FASB - Accounting for Financial Instruments: Hedging WHAT This project addresses issues related to hedge accounting for financial instruments and non-financial items Will not adopt IFRS 9 What are the implications of a reasonably effective threshold for hedges of financial assets and liabilities WHY To make targeted improvements to the hedge accounting model TAKEAWAY Continue to monitor the FASB s progress on this issue Still in initial deliberations

58 FASB - Accounting for Financial Instruments: Classification and Measurement WHAT Investments in equity securities would be measured at fair value through net income, unless they qualify for the proposed practicability exception Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option would recognized in OCI Disclosure of the fair value of financial instruments measured at amortized cost would no longer be required for entities that are not public business entities WHY To incorporate targeted improvements

59 FASB - Accounting for Financial Instruments: Classification and Measurement, cont. TAKEAWAY Expected to impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments Final ASU expected to be issued during the 4 th quarter 2015 Effective date to be aligned with the Impairment project? Not converged with IFRS Drafting final standard

60 FASB - Accounting for Financial Instruments: Impairment WHAT Recognize an allowance for management s current estimate of lifetime expected credit losses for loans, trade receivables, HTM debt securities and certain other financial assets measured at amortized cost The OTTI model used today for AFS debt securities would be modified to require an allowance for credit impairment rather than a direct write-down Upon acquiring a PCI asset, the entity would recognize as its allowance for expected credit losses the amount of contractual cash flows not expected to be collected as an adjustment that increases the cost basis of the asset Entities would be required to make disclosures about the credit quality of certain financing receivables by year of origination (i.e. vintage)

61 FASB - Accounting for Financial Instruments: Impairment, cont. WHY To develop a single credit loss model for financial assets that enables more timely recognition of credit losses TAKEAWAY Begin identifying all contractual cash flows that the entity does not expect to collect over the contractual life of the financial asset Final ASU expected to be issued during the 4th quarter 2015 Effective date to be aligned with the Classification and Measurement project? Not converged with IFRS Drafting final standard

62 Other Updates

63 Money Market Fund (MMF) Reform WHAT US Securities and Exchange Commission adopted operational and structural amendments to the rule set that governs money market funds WHY Address MMFs susceptibility to heavy redemptions in times of stress Increase transparency of MMF risk Preserve MMF benefits

64 MMF Reform, cont. TAKEAWAYS Removing the valuation exception for MMFs and requiring a floating NAV Limited to Prime Institutional Prime MMFs and does not include Retail or Government Funds Government funds can voluntarily impose liquidity fees and gates Creating new tools for boards to prevent heavy redemptions: Liquidity fees Suspend redemptions temporarily ( gate ) Definition of Weekly Liquid Assets for Gates and Fees New Diversification Requirements Additional Stress Testing Increased transparency

65 MMF Reform, cont. ACCOUNTING IMPACTS Valuation Tracking unrealized Gains/Losses Classification SEC: Shareholders may question whether or not floating NAV MMF s should be classified as cash equivalents on the balance sheet. NAIC: Have been some movements as funds reclassify and change their strategies. Could impact D2.2 vs DA classification Operational GL Changes Pricing Controls and Data Potential Disclosures: FAS157 Levels Sweep Account Assets

66 Best Practices

67 How to Stay Current on Guidance Changes PARTNER WITH PROVIDERS Auditors Software Providers Consultants DON T FOLLOW JUST ONE BASIS SAP NAIC U.S. GAAP FASB PCC FASB IFRS IASB

68 How to Stay Current on Guidance Changes GET INVOLVED Attend an NAIC National Meeting (3 times per year) Participate in NAIC Conference Calls (via Chorus Call dial-in number) Join an industry trade group (e.g. ACLI, NAMIC, AIA, AHIP, RAA) Network at IASA events (e.g. Annual Conference, Local Chapters) Respond to exposure drafts from the NAIC, FASB, IASB

69 Questions?

70 Please Complete the Session Evaluation Form on the Conference App and Include Your Conference Registration ID# to be Included in a Drawing for a Free Conference Registration for the 2016 Annual Conference! NOTE: Your Conference Registration ID# is Located at the Bottom Left Hand Corner of Your Badge.