AcSEC Presentation NTLD Task Force

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AcSEC PresentationNTLD Task Force

• June 19, 2001

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What Do We Want to Accomplish Today?

• Conclude on Transition
• Start Reviewing SOP
• Presentation of the Deferred Amount for Sales
  Inducements
• Accounting for Transfers from the General Account
  to Separate Accounts

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Separate Account Presentation

• This SOP establishes new criteria for separate
  accounts to qualify for summary total
  presentation and valuation.
• Companies that have separate accounts that no
  longer qualify for summary totals will have to
  reclassify and revalue as part of the general
  account.

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Transition - Assets Reclassified to the General
Account from Separate Accounts

• Task Force Recommendation
• Any revaluation adjustment due to the
  reclassification of assets from separate accounts
  to the general account should be reported in a
  manner similar to the cumulative effect of change
  in accounting principle in accordance with APB
  20, Accounting Changes, through net income or
  comprehensive other income, as appropriate.

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Transition Issues Relating to FAS 115 Securities

• Transition provisions could be different if
  considered a transfer between FAS 115 categories
  or an initial adoption of FAS 115
• Transfers between FAS 115 categories occur at
  current carrying value with no cumulative
  adjustment.
• Initial adoption of FAS 115 allowed for reversal
  of previously recorded holding gains and losses
  through earnings as a cumulative adjustment.

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Separate Account Transition ExampleMarket Value
Adjusted Contracts (MVA)

• Some companies had assets underlying MVA
  contracts at fair value, with liability at MVA
  balance.
• SOP conclusion is that these contracts do not
  qualify for separate account presentation and the
  liability should be at accreted value.
• Results in liability revalued through cumulative
  adjustment.

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Separate Account Transition ExampleMarket Value
Adjusted Contracts (MVA)

• For the reclassification of the related assets
• If treated as a transfer between FAS 115
  categories, the current fair value will become
  the new basis with no cumulative adjustment.
• If treated as initial adoption of FAS 115, the
  original amortized cost or fair value, as
  applicable, will become the new basis with a
  possible cumulative adjustment to reverse the
  previously recorded holding gains and losses.

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Transition Issues Relating to FAS 115 Securities

• Task Force Recommendation
• To treat as initial adoption of FAS 115
• Unclear whether assets carried at market in
  separate account was considered FAS 115 election
  of intent.
• If actually an election of intent, circumstances
  were different from what the SOP is recommending.
  
• Given the nature of the guidance on
  reclassification and liability valuation, related
  asset transfer and revaluation also should be
  treated as cumulative adjustments.

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Seed Money

• For separate accounts meeting the criteria in
  paragraph 10 of the SOP, the contract holder
  relationship generally allows for the purchase of
  additional units in the separate accounts,
  therefore, the assets underlying the insurance
  enterprises interest in the separate account
  should be considered held for sale and accounted
  for accordingly .
• Bonds and Stocks, AFS or Trading
• Mortgage Loans, FAS 65
• Real Estate, FAS 121

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Transition for Seed Money

• Task Force Recommendation
• All reclassification of seed money assets to be
  treated as cumulative effect.
• This conclusion is similar to prior transition
  conclusion for FAS 115 securities.
• Achieves similar transition for all types of
  asset reclassification from separate accounts to
  general account.

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Contractually Referenced Pool of Assets

• For contracts that provide a return based on the
  total return of a contractually referenced pool
  of assets, the amounts credited to the accreted
  account balance should be based on the fair value
  of the referenced pool of assets at the balance
  sheet date.
• For example Pension Participating Contracts
• Transition guidance is needed for debt or equity
  securities subject to FAS 115 contained in the
  referenced pool of assets.

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Transition - Contractually Referenced Pool of
Assets

• Task Force Recommendation
• Debt or equity securities, subject to FAS 115,
  may be reclassified to trading with the
  revaluation adjustment recognized as a cumulative
  effect similar to the liability transition
  adjustment.

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Determination of Significance of Mortality and
Morbidity Risk

• For contracts that offer death benefit or other
  insurance benefit features, the SOP interprets
  the test for significance of mortality and
  morbidity risk.
• If significant, a liability should be established
  in addition to the account balance.

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Transition - Determination of Significance of
Mortality and Morbidity Risk

• For contracts that are inforce on the date of
  initial application of this SOP, the
  determination of significance of mortality and
  morbidity could be performed either at
• Contract Inception
• Prospectively (no redetermination for existing
  contracts)
• Date of Adoption

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Contract Inception

• For each contract a calculation of reasonable
  outcomes as of the contract inception, without
  the use of hindsight.
• Pros
• Consistent with FAS 97 transition and other
  restatement guidance
• Cons
• Documentation
• Verification
• Use of hindsight
• Differs from FAS 97 as no restatement allowed by
  this SOP

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Prospective

• Test is performed only on newly issued
  contracts.
• Pros
• Only time the test can be done using only
  expectations
• Only method that does not use hindsight to change
  the designation of a contract
• Cons
• Noncomparability of contracts sold before and
  after adoption if SOP test would give a different
  designation
• Determination of significance was previously
  based on best estimate, not expected value as
  defined in this SOP

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Date of Adoption (Task Force Recommendation)

• Reperform significance test for all inforce
  contracts using actual to date and current
  expectations for the future.
• Pros
• More practical than contract inception
• All contracts will be on new SOP
• Cons
• Revisiting a test that should have been done at
  contract inception under FAS 97, now using
  actuals to date
• Allows for changing of designation based on
  experience after inception, which would not be
  allowed for new issues

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Liability Valuation Guidance

• Accreted account balance is based on the highest
  contractually determinable balance that will be
  available in cash or its equivalents without
  reduction for future fees and charges expected to
  be assessed.
• A liability should not be reported for
  annuitization options.

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Transition - Adjustments from Applying Liability
Valuation Guidance

• Task Force Recommendation
• Any adjustments resulting from applying the
  liability valuation guidance (accreted account
  balance), other than for amounts deferred for
  sales inducements, should be reported in a manner
  similar to the cumulative effect of a change in
  accounting principle in accordance with APB 20,
  Accounting Changes, through net income.
• For amounts previously accrued under EITF Topic
  D-41, there also will be an offsetting cumulative
  adjustment in other comprehensive income.

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Sales Inducements

• Sales inducements that are explicitly identified
  in the contract and meet the specified criteria
  should be deferred and amortized over the life of
  the book of contracts.
• Amortization of deferred sales inducements should
  use the same methodology and assumptions used to
  amortize capitalized acquisition costs under FAS
  97.
• Amortization should be reported as a component of
  benefit expense.

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Transition - Deferral of Costs Incurred for
Sales Inducements

• Task Force Recommendations
• SOP guidance for sales inducements is effective
  for new contracts entered into after December 31,
  2002 and should be applied prospectively.
• Costs incurred for sales inducements prior to
  initial application of this SOP, whether
  capitalized or not, should not be adjusted to the
  amounts that would have been deferred had this
  SOP been in effect when those costs were
  incurred.
• An adjustment of the liability as a result of
  sales inducements that meet the criteria of this
  SOP should result in an adjustment to the
  deferred asset.

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Transition - Deferral of Costs Incurred for
Sales Inducements

• Pros
• Consistent with transition for SOP 98-1
• If expensed in the past, records for
  capitalization may not exist
• Cons
• Inconsistent with liability and investment asset
  transition

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Transition - Amortization of Costs Incurred for
Sales Inducements

• Guidance of this SOP concerning amortization
  should be applied to any unamortized sales
  inducement costs capitalized prior to initial
  application of this SOP that continue to be
  reported as a deferred asset after the effective
  date.
• Consistent with transition for SOP 98-1.

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Transition - Adjustments to Unamortized Deferred
Acquisition Costs

• Any adjustments to unamortized deferred
  acquisition costs or present value of future
  profits as a result of adopting this SOP should
  be reported in a manner similar to the cumulative
  effect of a change in accounting principle in
  accordance with APB 20, Accounting Changes,
  through net income.
• For amounts previously reported under EITF Topic
  D-41, there also will be a cumulative adjustment
  in other comprehensive income.

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• Other Topics not yet discussed by AcSEC

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Sales Inducements

• AcSEC Tentative Conclusion Sales inducements
  that are explicitly identified in the contract
  and meet the specified criteria should be
  deferred and amortized over the expected life of
  the contracts.
• Task Force Recommendation the deferred amount
  of sales inducement costs should be reported on
  the balance sheet as a deferred asset.
• Amount is amortized in the same manner as DAC
• Clearer to have all deferred amounts in the same
  area

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Transfers to Separate Accounts

• AcSEC Tentative Conclusion The insurance
  enterprise should retain the general account
  classification and accounting basis for assets
  transferred from the general account to separate
  accounts in which the insurance enterprise has an
  ownership interest, to the extent of the general
  accounts proportionate interest in the separate
  account.
• Task Force Recommendation
• Losses on such transfers should be recognized
  immediately in earnings.
• Gains on transfers should be recognized to the
  extent of contract holders proportionate
  interest in the separate account. If the
  separate account subsequently sells the asset to
  third party the remaining gain should be
  recognized.