IASA Wisconsin Statutory Accounting 101 March 24, 2015
Rich Pullara Molly Petrowiak Insurance Solutions Specialist Insurance Team Lead Clearwater Analytics Clearwater Analytics
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
Statutory Accounting Principles
Terminology GAAP Generally y Accepted Accounting Principles STAT Statutory Accounting Treatment SSAP Statement of Statutory Accounting Principles VOS Valuation of Securities Task Force IFRS International Financial Regulation Standards ORSA Own Risk Solvency Assessment ACLI American Council of Life Insurers IASA Insurance Accounting System Association NASVA North American Securities Valuation Association IP Interested Parties LEI Legal Entity Identifier BACV Book Adjusted Carrying Value
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
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
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
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
U.S. Direct Obligations/Full Faith and Credit Exempt List – Must maintain a MMK rating of AAA-m (S&P) or AAA- mf ( 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
Bond Fund List Highest credit ratings by NAIC CRPs Must declare a dividend of investment income No derivatives, leveraged notes, foreign currencies
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
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.
SSAP No. 43R – Loan-Backed and Structured Securities Cont’d Guidance on recording other-than-temporary- impairments (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
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
GAAP and STAT Differences
STAT\GAAP Differences GAAP STAT Reports on tax lot level Reports on position level Can choose between Must use constant yield constant yield and straight amortization line amortization Can choose retrospective Adjustments to or prospective amortization target date adjustments to must be retrospective amortization target date Can choose fiscal year Fiscal period must be calendar year
Original Value GAAP STAT Original cost Actual cost Not adjusted for write Adjusted for write downs downs No adjustment for purchase Adjusted for purchase GAAP GAAP
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 – P&C holds only investment grade 1 and 2 at amortized cost – 3 through 4 – lower of book or market value • Life – Life holds only investment grade 1 – 5 at amortized cost – NAIC 6 – lower of book or market value
Carrying Value GAAP STAT Fair value Book/adjusted carrying value Report FX at converted fair Amortized cost or fair value value Currency gain/loss Changes in inflation rates included in BACV flow though income Changes in inflation flow through unrealized/realized gain/loss
General Ledger Accounts Balance Sheet Method Income Statement Method Due and accrued (IS) Due and accrued (BS) Interest/dividend received Accrued interest Purchase accrued income Interest income Sold accrued income Change in accrued income Dividend income Transferred in accrued Cash income Transferred out accrued income Change in dividend income
Regulatory Reporting
Type of insurance companies • Property and Casualty • Yellow • Life • Blue • Health • Orange • Title • Pink • Fraternal • Brown • Separate Accounts • Green
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
Quarterly vs. Annual Quarterly – due 45 days after QE – activity only Annual – due 60 days after QE – include holdings – Additional summary schedules
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
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 .
NAIC Naming Conventions Schedule Description Schedule A All Real Estate Owned Schedule B Commercial Mortgage Loans Schedule BA Other Long Term Assets Schedule D Part Long Term Bonds Part 2 1 Preferred Part 2 2 Equity Schedule DA Short Term Schedule DB Derivatives Schedule E Cash,
Purpose of Investment Schedules Holdings Part 1: Main holdings report as of current period end Part 2: Secondary holdings report as of current period end Activity 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
Purpose of Investment Schedules Verification All activity year-to-date Summary Reports Can be “as of” reports or spanning a specific period
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
It’s in the details
Schedule D – Part 1 Reports on all long term bonds owned General 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 Specific Sub-categories All fixed income security’s specific classification/ category per NAIC guidelines
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
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