IASA Wisconsin Statutory Accounting 101. March 24, 2015

Transcription

1 IASA Wisconsin Statutory Accounting 101 March 24, 2015

2 Rich Pullara Insurance Solutions Specialist Clearwater Analytics Molly Petrowiak Insurance Team Lead Clearwater Analytics

3 Agenda Guiding SSAPs GAAP and STAT Differences Regulatory Reporting It s in the Details Supplemental Investment Risk Interrogatories Risk Based Capital Other Schedules SVO Designation Process

4 Statutory Accounting Principles

5 Terminology GAAP STAT SSAP VOS IFRS ORSA ACLI IASA NASVA IP LEI BACV Generally Accepted Accounting Principles Statutory Accounting Treatment Statement of Statutory Accounting Principles Valuation of Securities Task Force International Financial Regulation Standards Own Risk Solvency Assessment American Council of Life Insurers Insurance Accounting System Association North American Securities Valuation Association Interested Parties Legal Entity Identifier Book Adjusted Carrying Value

6 Guiding SSAPs SSAP No. 26 Bonds excluding loan back and structured securities SSAP No. 30 Investments in common stock (excluding investments in common stock of subsidiary, controlled, or affiliated entities) SSAP No. 32 Investments in preferred stock SSAP No. 43R Loan backed and structured securities SSAP 100 Fair value measurements

7 SSAP No. 26 Bonds Broad definition of bonds, excluding loan back and structured securities Any securities representing a creditor relationship, whereby this is a fixed schedule for one or more future payments U.S. treasury securities, U.S. government agency securities, municipal securities, corporate bonds, bank participations, convertible debt, CD with fixed schedule of payment, commercial paper, ETFs (that qualify for bond treatment), Class 1 bond mutual funds

8 SSAP No. 30 Investments in Common Stock Broad definition of common stocks Securities that represent a residual ownership in a corporation Publically traded common stocks, master limited partnerships trading as common stock and American deposit receipts only if the security is traded on the New York, American, or NASDAQ exchanges Publically traded common stock warrants shares of mutual funds except for certain money market funds, Class 1 bond funds, and exchange traded funds

9 Mutual Funds Mutual funds are typically common stock unless: It s a money market fund with U.S. direct obligations/full faith and credit exempt list on the Class 1 list Bond mutual fund

10 U.S. Direct Obligations/Full Faith and Credit Exempt List Must maintain a MMK rating of AAA-m (S&P) or AAAmf (Moody s) Stable NAV of $1 per share Maximum of 7 day redemption 100% of assets in direct obligations of U.S. government or securities backed by U.S. government Class 1 list: same, except for 97% requirement

11 Bond Fund List Highest credit ratings by NAIC CRPs Must declare a dividend of investment income No derivatives, leveraged notes, foreign currencies

12 SSAP No. 32 Investments in Preferred Stock Broad definition of preferred stocks Any class or series of shares for which the holders have any preference, either as to payment of dividends or distribution of assets on liquidation over the holder of common stock Redeemable preferred stock includes mandatory sinking fund preferred stock and payment-in-kin (PIK) Perpetual preferred stock-nonredeemable and redeemable at the option of the issuer

13 SSAP No. 43R Loan-Backed and Structured Securities Loan-backed securities are securitized assets for which the payment of interest and principal is directly proportional to the payments received by the issuer from the underlying assets. Structured securities are loan-backed securities that have been divided into two or more classes, for which the payment of interest and/or principal of any class of securities has been allocated disproportionately to payments received from the underlying assets.

14 SSAP No. 43R Loan-Backed and Structured Securities Cont d Guidance on recording other-than-temporaryimpairments (OTTI) on loan-backed and structured securities SSAP No. 43R applies to all investments held by the reporting entity subsequent to September 30, 2009 Decision tree for determining OTTI for loan-backed securities

15 SSAP No. 43R Summary Additional SSAP effective 2010 Must be filed annually Filed securities are modeled by 3 rd parties Modeling results are used to determine designation and valuation PIMCO and BlackRock perform the modeling

16 GAAP and STAT Differences

17 STAT\GAAP Differences GAAP Reports on tax lot level Can choose between constant yield and straight line amortization Adjustments to amortization target date must be retrospective Can choose fiscal year STAT Reports on position level Must use constant yield amortization Can choose retrospective or prospective adjustments to amortization target date Fiscal period must be calendar year

18 Original Value GAAP Original cost Not adjusted for write downs Adjusted for purchase GAAP STAT Actual cost Adjusted for write downs No adjustment for purchase GAAP

19 Book Adjusted Carrying Value Represents either the Book Value or Market Value of Security based on Type of Insurance Company and Credit Quality of Security Property & Casualty Life P&C holds only investment grade 1 and 2 at amortized cost 3 through 4 lower of book or market value Life holds only investment grade 1 5 at amortized cost NAIC 6 lower of book or market value

20 Carrying Value GAAP Fair value Report FX at converted fair value Changes in inflation rates flow though income STAT Book/adjusted carrying value Amortized cost or fair value Currency gain/loss included in BACV Changes in inflation flow through unrealized/realized gain/loss

21 General Ledger Accounts Balance Sheet Method Due and accrued (BS) Accrued interest Interest income Dividend income Cash Income Statement Method Due and accrued (IS) Interest/dividend received Purchase accrued income Sold accrued income Change in accrued income Transferred in accrued income Transferred out accrued income Change in dividend income

22 Regulatory Reporting

23 Type of insurance companies Property and Casualty Life Health Title Fraternal Separate Accounts Yellow Blue Orange Pink Brown Green

24 How are Insurance Companies Different Duration P&C companies, average 1-2 years in duration Life companies, average 10+ years AVR\IMR Asset Valuation Reserve Life Only Interest Maintenance Reserve Life Only Separate Accounts Schedule D at Market Value or Book Value only

25 Quarterly vs. Annual Quarterly due 45 days after QE activity only Annual due 60 days after QE include holdings Additional summary schedules

26 Investment Schedules Statements are a combination of accounting and risk values Some statements show CUSIP-level detail, while others show subtotals/totals Everything is calculated on a lot level, but detailed schedules are always displayed by CUSIP/position level Summary schedules show totals or grouped subtotals

27 What is a Schedule D? Schedule D is a general term used by the insurance industry to describe the quarterly and annual statement investment-related schedules. Schedule D is one of many types of investment schedules that insurance companies produce.

28 NAIC Naming Conventions Schedule Schedule A Schedule B Schedule BA Schedule D Part Part 2 1 Part 2 2 Description All Real Estate Owned Commercial Mortgage Loans Other Long Term Assets Long Term Bonds Preferred Equity Schedule DA Schedule DB Schedule E Short Term Derivatives Cash,

29 Purpose of Investment Schedules Holdings Activity Part 1: Main holdings report as of current period end Part 2: Secondary holdings report as of current period end Part 3: Acquisitions - anything that came in during the given period, such as buys, transfers, etc. Part 4: Disposals - anything that went out during the given period, such as sells, pay downs, redemptions, etc. Part 5: Acquired and fully disposed - any lot that came in and went out fully during the year

30 Purpose of Investment Schedules Verification All activity year-to-date Summary Reports Can be as of reports or spanning a specific period

31 Secret Schedule Decoder Ring The vast majority of the time, you can tell what will be included in a report by the assigned letter and number of the report. For example: What does the DA-1 show? Short term investment holdings What does the D-4 show? Long term investment disposals

32 It s in the details

33 Schedule D Part 1 Reports on all long term bonds owned General Specific Used to subtotal and total asset categories Focused on If security is backed by some kind of governmental body Do the assets have underlying collateral Sub-categories All fixed income security s specific classification/ category per NAIC guidelines

34 NAIC General Categorization U.S. government All other governments U.S. states, territories, and possessions U.S. political subdivisions of states, territories and possessions U.S. special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities of governments and their political subdivision Industrial and miscellaneous Hybrid securities Parent, subsidiaries and affiliates

35 Schedule D Part 2, Section 1 Industrial and miscellaneous Parent, subsidiaries and affiliates Schedule D Part 2, Section 2 Industrial and miscellaneous Mutual funds Money market mutual funds Parent, subsidiaries, and affiliates

36 NAIC Specific Classifications Issuer obligations Not backed by other loans and other assets, subject to guidance in SSAP No. 26 Residential mortgage-backed securities Securities directly or indirectly secured by liens on one-tofour family residential properties and subject to guidance in SSAP No. 43R

37 NAIC Specific Classifications Commercial mortgage-backed securities Securities directly or indirectly secured by a lien on one or more parcels of commercial real state with one or more structures located on the real estate and subject to SSAP No. 43R Other loan-backed and structured securities Securities subject to guidance in SSAP No. 43R not included in RMBS or CMBS above

38 Code Code Discloses information on investments that are not under the exclusive control of the reporting entity Code Description Code Description * Class 1 Bond Mutual Funds S Certificates of Deposit # Exchange Traded Funds & Principal STRIP Bonds or Other Zero Coupon Bonds Assets Bifurcated Between Separate Accounts LS Loaned or Leased to Others RA Subject to Repurchase Agreement RR Subject to Reverse Repurchase Agreement DR Dollar Repurchase Agreement DRR Dollar Reverse Repurchase Agreement C Pledged as Collateral CF Pledged as Collateral to FHLB DB Placed Under an Option Agreement DBP Option Agreement Involving Asset Transfers with Put Options R Restricted RF FHLB Capital Stock SD Placed on Deposit with State or Other Regulatory Body M Not Under Exclusive Control of the Reporting Entity O Other

39 Foreign Indicator Matrix Nationality of Issuer Country Issued In Currency of Security Code US Canada Foreign US Canada Foreign US Canada Foreign Y N N Y N N Y N N A N Y N N Y N Y N N B N Y N N N Y Y N N C Y Y Y N Y Y N Y N D N N N N N Y N N Y E Y N N N N Y Y N N F N N Y N N Y Y N N G Y N N N Y N Y N N I N Y N Y N N Y N N R N N Y Y N N Y N N T N Y N Y Y Y N N Y U N Y N Y N N N Y N O Y N N Y N N N N Y

40 Foreign Indicator A Canadian securities issued in Canada and denominated in U.S. Dollars B Canadian securities issued in foreign country but denominated in U.S. Dollars C Securities denominated in Canadian currency D Foreign Securities that are denominated in a foreign currency (excluding Canadian) E - US securities issued in a foreign country other than Canada denominated in U.S. Dollars F Securitas issued in a foreign country that are denominated in U.S. dollar I Canadian securities issued in U.S. and denominated in U.S. dollar R Foreign Securities issued in the U.S. and denominated in U.S. Dollars T Canadian securities denominated in any other foreign currency U Canadian securities issued in U.S. but denominated in Canadian currency O U.S. securities issued in U.S. but denominated in any foreign currency other than Canadian

41 Example Anheuser Busch foreign or domestic? Domicile United States County Issued In United States Local Currency United States Country of Guarantee Belgium County of Incorporation United States Global Ultimate Country Belgium State Code Missouri NAIC Foreign Indicator R or? R foreign securities issued in the US and denominated in US dollars

42 Bond Characteristics If bonds have one or more of the following characteristics, then list the appropriate number(s) Code Description 1 Call option 2 Securities where issuer has right to vary timing of principal and coupon payments 3 Variable coupon securities 4 Terms that may result in principal not being repaid in full 5 Payments linked to foreign exchange rates 6 Securities where payments are determined by the performance of a credit other than that of the issuer 7 Mandatory convertibles 8 Other type of options controlled by issuer

43 Electronic Only Columns D Part 1 Column 23 State abbreviations Applies only to U.S. states, territories, political subdivision, U.S. special revenue Column 24 Fair value hierarchy (SSAP 100) and market indicator for rate used A pricing service B stock exchange C broker or custodian D by reporting entity E unit price established by NAIC Valuation of Securities

44 Electronic Only Columns D Part 1 Column 25 Source A: Identify the pricing service B: Identify the specific stock exchange C: Identify the specific broker or custodian

45 Electronic Only Columns D Part 1, cont. Column 26: Collateral type Identify collateral with code for RMBS, CMBS and other loan back and structured securities Column 27: Call date Column 28: Call price Column 29: Effective date of maturity Column 30: Legal entity identifier

46 BA Other Long Term Assets Used as a catch all for all asset classes Invested assets not clearly or normally includable in any other invested asset schedule High RBC charges

47 BA Categories Fix/variable interest rate investments that have underlying characteristics of bonds, mortgage loans, and other fixed income instruments Real estate Mortgage loans Surplus debentures Collateral loans Non-collateral loans Capital notes Tax credits Working capital finance investments

48 BA Categories, cont. Oil and gas production Transportation equipment Mineral rights

49 Summary Schedules Annual reports used to assist regulators in identifying risks Report Exhibit of Capital Gains (Losses) Exhibit of Net Investment Income Schedule D Part 1B Schedule D Part 1A, Section 1 Schedule D Part 1A, Section 2 Summary Investment Schedule Schedule D Summary By Country 43R Impairments Summary Investment Schedule Description Summary of realized gains/losses, impairment/ losses, FX gains/ losses, and changes in unrealized gains/ losses by asset type Summary of collected & earned income and investment expenses) by asset type Simple B/ACV roll for bonds" (CE, ST, LT) & preferreds by NAIC designation Distribution of expected principal repayment based on grouped times, NAIC category & designation Distribution of expected principal repayment based on grouped times, NAIC category & specific category Summary of BACV of all Investments by detailed asset types Summary of BACV of all Investments by country & NAIC category Required disclosures on current year & some previous impairments of loan-backed securities Groups securities with common risk characteristics

50 Footnotes at Year End Part of annual instructions Note 5 Investments Note 20 Fair value measurement

51 Asset Valuation Reserve Capital required to be set aside in order to cover a company against unexpected debt. The asset valuation reserve serves as a backup for equity and credit losses. A reserve will have capital gains or losses credited or debited against the reserve account.

52 Interest Maintenance Reserve (IMR) Liability reserve, establishment required by the National Association of Insurance Commissioners (NAIC), the purpose of which is to accumulate realized capital gains and losses resulting from fluctuations in the interest rate. These gains and losses in the IMR are amortized and shown as an adjustment to the net investment income over the remaining life of the sold assets.

53 Supplemental Investment Risk Interrogatories

54 Supplemental Investment Risk Interrogatories Purpose: to assist regulators in identifying and analyzing the risks inherent in the entity s investment portfolio Based off net admitted assets The SIRI filings are due by April 1 of the year following the filing date

55 What is Required? All reporting entities are required to answer Interrogatories 1 4, 11 16, 18 19, and if applicable Interrogatories 5 10 must be answered if the holdings of foreign investments is equal to or exceeds 2.5% of the reporting entity s total admitted assets Interrogatory 17 must be answered if the holdings of mortgage loans is equal to or exceeds 2.5% of the reporting entity s total admitted assets

56 SIRI Key Challenges Inconsistent definitions and guidance Difficult to find an aggregated, automated solution Data maintenance expense Unable to tie back to other investment schedules Manual intervention necessary

57 Risk-Based Capital (RBC)

58 What is RBC? Method of measuring minimum amount of capital required Intended to limit risk by requiring more capital for more risk Capital is intended to provide a cushion against insolvency Giant formula calculated in Excel, filed annually w/ NAIC & state Before RBC fixed capital standard based on state, line of business

59 What Are the Components? 3 main areas Asset risk (what Clearwater provides) Focus is different for Life (interest rate) than P&C (credit) This is a much bigger part for Life than for P&C Underwriting risk Most of P&C RBC is here Other risk catastrophe, fraud, etc.

60 What Do the Results Mean? If you don t meet RBC: Company action Regulatory action Authorized control Mandatory control File a report Increased scrutiny on report Commissioner can take over Commissioner must take over Tripwire system Confidential filings cannot view on SNL

61 Other Schedules

62 Schedule A Reports on all directly owned real estate Includes: land, buildings, or permanent improvements Excludes: indirectly owned real estate (ex. Joint venture owned) Used to identify property occupied by reporting entity, property held for income completion, and property held for sale Report Content Notes A 1 Real estate held at period end Only required at year end A 2 Acquisitions of real estate during the period Required every quarter, normally don t include transfers, exchanges, or CACs A 3 Disposals of real estate during the period Required every quarter, normally don t include transfers, exchanges, or CACs A Verification Year-to-date roll forward of book/adjusted carrying value Required every quarter

63 Schedule B Reports on mortgage loans Includes: residential, commercial, and other real estate backed and owned loans Used to identify mortgages in good standing, restructured mortgages, mortgages in and at risk of foreclosures Report Content Notes B 1 Mortgage loans held at period end Only required at year end B 2 Acquisitions of mortgage loans during the period Required every quarter, normally don t include transfers, exchanges, or CACs B 3 Disposals of mortgage loans during the period Required every quarter, includes transfers but normally don t include exchanges, or CACs B Verification Year-to-date roll forward of book/ adjusted carrying value Required every quarter

64 Schedule DB Reports on all derivative instruments Includes: options, warrants, caps, floors, collars, swaps, forwards, futures SSAP No. 86 Hedging, income generation, replication strategies Used to determine intent (SSAP No. 86) of derivative investment strategy and the associated risk and exposures of each

65 DB A1 Report Content Notes Options, caps, floors, collars, swaps, and forwards open at period end Only required at year end DB A2 Options, caps, floors, collars, swaps, and forwards terminated during the period Required every quarter DB B1 Futures open at period end Only required at year end DB B2 Futures terminated during the period Required every quarter DB D1 Counterparty exposure for all derivatives open at period end Only required at year end DB B2 Collateral for all derivatives open at period end Only required at year end DB Part A Verification DB Part B Verification Year-to-date roll forward of book/adjusted carrying value for DB part A, sections 1 & 2 Year-to-date roll forward of book/adjusted carrying value for DB part B, sections 1 & 2 Required every quarter Required every quarter DB C1 Replication/ synthetic assets (RSATs) open at period end Only required at year end DB C2 Year-to-date roll forward of open RSATs Required every quarter DB Verification Year-to-date roll forward of book/ adjusted carrying value, fair value and potential exposure Required every quarter

66 SVO Designation Process

67 SVO Policies and Responsibilities 1. Analysis of credit risk for purposes of NAIC designation 2. Valuation analysis to determine a unit price 3. Identification and analysis of securities that contain other nonpayment risk 4. Other analytical assignments requested by the VOS/TF or members of the regulatory community

68 SVO Designation Process Most securities do not require filing Government-backed or sponsored Automatically NAIC 1 Rated & monitored by an approved rating organization Credit rating is converted into designation Securities not meeting a filing exemption must be filed annually Exception for loan-backed and structured securities

69 NAIC Designations 1 Highest quality investment (A AAA) 2 Investment grade (BBB) 3 Medium quality (BB) 4 Low quality (B) 5 Lowest quality not in/near default 6 In or near default

70 NAIC Designations, cont. P&C holds only investment grade 1 and 2 at amortized cost Life holds only investment grade 1 5 at amortized cost Worse designation = higher RBC charge Proposal to increase number of designation classes in the works

71 Filing Exempt & NRSRO Filing exempt exempt from filing with certain conditions National Recognized Statistical Rating Organization Must be rated at least annually Moody s Investors' Service Standard and Poor s Fitch Ratings Dominion Bond Ratings Service (DBRS) AM Best Company (A.M. Best) Morningstar Credit Ratings Kroll Bond Rating Agency Egan Jones Rating Company

72 5 Star/6 Star 5 6 Only assigned by SVO for corporate, municipal, and structured securities that have never been rated by an NAIC CRP Given after review of completed and executed principal and interest certification form May be assigned by the insurer for corporate, municipal and to structured securities that have never been rated by an NAIC CRP SVO may assign if security was a 5* in the past and no newer documentation received

73 Not Rated NR For bonds: Information to arrive at NAIC designation not available to SVO Received too late to be processed Bonds with NR will be deleted from the VOS database if is not fixed by end of the first quarter following year end

74 Z NAIC designation reported by the insurance company was not derived or obtained form the SVO Submit to SVO within 120 days of acquisition Not be used for securities that are exempt from filing

75 Questions?

76 clearwateranalytics.com