Moving Forward: The Future of Insurance Industry Investments

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Moving Forward The Future of Insurance Industry
Investments

• Accounting Firm Perspective
• Presented by
• William J. Scannell, CPA
• Johnson, Lauder Savidge, LLP
• NYIA Educational Seminar, February 12, 2009

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Presentation Outline

• Accounting Issues
• Tax Issues
• Regulatory Changes
• Strategies
• Questions Answers

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Accounting for Stocks

• Carry on books at cost
• Adjust to market value at reporting date
• Adjustment is recorded as a change in surplus

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Accounting for Bonds

• Carried on books at amortized cost
• Premium or discount is written off over the life
  of the bond
• Presumption is the Company will hold to maturity

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Asset Impairment

• For bonds
• An impairment shall be considered to have
  occurred if it is probable that the reporting
  entity will be unable to collect all amounts due
  according to the contractual terms of a debt
  security in effect at the date of acquisition

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Asset Impairment

• For stocks
• A decline in the fair value of a stock that is
  determined to be other than temporary.

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Impairment Determination

• Performed at the individual security level
• Indicating factors
• Length of time to which fair value has been less
  than cost
• Financial condition and short-term prospects of
  the issuer
• Intent and ability to retain investment for
  sufficient time to allow for recovery in value

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Asset Impairment measurement

• Rules of Thumb developed to assist in
  evaluation of impairment
• 20 below water
• 6 months below cost
• Identifying impairment is only the beginning of
  the analysis

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Accounting for Impairment

• Write down cost to impaired value
• Loss become recognized reduces net income
• For stocks, moves surplus adjustment above the
  line but no impact on surplus
• bonds, results in immediate reduction in surplus

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Required Disclosures

• Each stock bond in unrealized loss position for
  which other-than-temporary declines in values
  have not been recognized
• Aggregate loss
• Segregated by losses longer than 12 months and
  less than 12 months
• General categories of information considered

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Deferred Taxes

• Assets and liabilities with different statement
  and tax values create deferred tax assets and/or
  deferred tax liabilities
• Deferred tax liabilities are always recognized
• Deferred tax assets, however, are subject to an
  admissiblity test

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Deferred Taxes

• Impaired bonds and stock portfolios give rise to
  deferred tax assets
• Admissibility typically limited to the amount
  realizable in one year unless other deferred tax
  liabilities can offset
• Typically can only be admitted to the extent
  there are realized capital gains in the current
  and two previous years

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Deferred Tax Example 1

• Unearned Premium Reserve - 5,000,000
• DTA 340,000 (5M x 20 _at_ 34)
• 100 reverses in one year
• Unpaid Losses LAE - 6,000,000
• Discount rate of 10 600,000
• DTA 204,000 (600K _at_ 34)
• 100,000 reverses in one year
• Unrealized capital GAIN - 2,000,000
• DTL 680,000 (2M _at_ 34)

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Deferred Tax Example 1

• Deferred Tax Asset (Liability)
• Current
  Noncurrent
• UPR 340K
  0 K
• Loss Reserve 100
  104
• Unrealized Loss
  (680)
• 440
  (576)
• Net Deferred Tax Liability (136) K

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Deferred Tax Example 2

• Unearned Premium Reserve - 5,000,000
• DTA 340,000 (5M x 20 _at_ 34)
• 100 reverses in one year
• Unpaid Losses LAE - 6,000,000
• Discount rate of 10 600,000
• DTA 204,000 (600K _at_ 34)
• 100,000 reverses in one year
• Unrealized capital LOSS - 2,000,000
• DTL 680,000 (2M _at_ 34)

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Deferred Tax Example 1

• Deferred Tax Asset (Liability)
• Current
  Noncurrent
• UPR 340K
  0 K
• Loss Reserve 100
  104
• Unrealized Loss
  680
• 440
  784
• Net Deferred Tax Asset 1,224 K
• Net ADMITTED Tax Asset 440K

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Deferred Tax Example Comparison

• 
  Total Admitted
• DTL - 2 M unrealized gain 136 K 136
  K
• DTA - 2M unrealized loss 1,224
  440
• Effect on ledger 1,360
• Effect on surplus
  576
• Additional surplus hit
  (784) K
• (20 of the unrealized loss for the
  year)

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Tax Implications

• No deduction for unrealized losses
• Realized capital losses can only offset realized
  capital gains
• Remaining loss can be carried back 3 years, then
  carried forward 5 years then is lost

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Regulatory Changes for 2008

• NAIC pending changes relaxing admissibility of
  deferred tax assets
• NYSID stress testing
• Disclosure of sub-prime mortgage disclosure
• Regardless of materiality

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Strategies

• Review portfolio for impaired assets
• Develop a watch list
• Involve investment business advisors
• Document procedure and conclusions
• Analyze deferred assets
• Consider sale of below market assets to recoup
  capital gain tax paid in 2006, 2007 and 2008
• Consider non-tax factors as well before selling

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Questions

• ?

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For further information contact

• William J. Scannell, CPA
• Managing Partner
• Johnson, Lauder Savidge, LLP
• [phone]
• bill_at_jlscpa.com