Credit Expected Credit Losses - PDF document

���������� ������������ ������������ �������������� IASA Spring Conference ��������������������� • Credit Expected Credit Losses (CECL) � Expected loss model and its’ approach to recognizing changes in credit losses • Other recent market developments • Collateralized Loan Obligations (CLO) and their roles in investment accounting and financial reporting 2 The Auto Club Group - Proprietary and Confidential 1

����������������� • The Financial Accounting Standards Board (FASB) issued ASU 2016- 13 on June 16, 2016. This is the new impairment standard. Credit Expected Credit Loss (CECL). • There are multiple pieces that impact entity’s. • CECL is considered the most impactful banking regulation since Dodd- Frank and the most significant estimate on our financial statements. • The core requirement of CECL is to estimate lifetime expected losses for all loans from inception which differs from OTTI which is based on market value loss. • An entity’s allowance for credit losses should reflect the risk of loss, even when that risk is remote. Mandatory adoption by 12/31/20. Option to early adopt in 2019. 3 The Auto Club Group - Proprietary and Confidential ���������������� !�" • CECL is applicable to: � Premium receivables � HTM debt securities � Loans and loan commitments � Financial guarantees � New investments in leases � Repurchase agreement receivables � Reinsurance receivables • CECL is not applicable to: � Fair value option financial assets � Equity instruments and equity investments � Related party loans � Derivatives 4 The Auto Club Group - Proprietary and Confidential 2

#�#$�%�&���'������(� Current Accounting Future Accounting Incurred Loss Model Expected Loss Model - Considers current information and - Estimates the risk of loss even events when the risk is remote - “Probable” recognition threshold - Losses estimated over the remaining contractual life - Considers past events, current conditions and reasonable and supportable forecasts - No recognition threshold 5 The Auto Club Group - Proprietary and Confidential #�#$�%�&���'������(�! ���������� • Eliminates other-than-temporary impairment model Current Accounting Future Accounting Focus on whether impairment is Focus on whether unrealized loss is other than temporary attributable, at least in part, to credit Recognize OTTI as a reduction of Generally recognize an allowance security’s cost basis for credit losses Recognize reversals of impairment Recognize reversals of impairment as an adjustment to future interest immediately as a reduction of income allowance for credit losses 6 The Auto Club Group - Proprietary and Confidential 3

%�����������%��)�&� • Discounted Cash Flow Analysis • Loss Rate Method • Vintage Analysis • Probability of Default 7 The Auto Club Group - Proprietary and Confidential ���������*������� • Day 1 � AFS Securities � Record at pre-adoption amortized cost and apply “allowance concept” prospectively � Record recoveries with OTTI taken upon receipt � Transaction related disclosures � Cumulative effect of change on retained earnings � Effect of adoption on any line item • Thereafter � Apply CECL model for changes in credit quality which are immediately recognized in income 8 The Auto Club Group - Proprietary and Confidential 4

���������*��������#���+ • Financial Statement Disclosures � Now required to disclose amortized cost basis by each credit quality indicator by class of loan and major security type � New vintage disclosures � New collateral dependent financial asset disclosures � Purchased credit deteriorated asset reconciliation � Allowance roll-forward by type of investment security now required for HTM and AFS securities 9 The Auto Club Group - Proprietary and Confidential �����������#�#$�#���������%�&�� • CECL Committee • CECL Modeling • Develop Reports • Document Process • Assess Impact on Internal Control over Financial Reporting • Capital Planning • Audit & Regulatory Approval • Board Communication 10 The Auto Club Group - Proprietary and Confidential 5

#�#$�#�������� • Determine required members � Finance � Credit � Lending � Risk Management � Operations � Information Technology � Audit • Assign accountability for execution and oversight • Set meeting schedule 11 The Auto Club Group - Proprietary and Confidential #�#$�%�&����* • Define interfaces, workflow and documentation • Determine data needed • Validate data • Methodology selection • Determine modeling software � Excel � Other software options • Parallel runs • Develop Reports to facilitate governance and oversight 12 The Auto Club Group - Proprietary and Confidential 6