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V. Capital Markets
The treatment of subordinated debt and preference securities issued prior to 2015 by other E.U. regulators, as well as those jurisdictions which are seeking equivalence under the Solvency II regime (which we discuss in Section VI.K.1 below), could be an interesting development in 2016. Yet to be seen is how rating agencies will respond to the treatment of such capital by regulators; depending on the rating agencies’ responses, some insurance groups might be required to review their own issued debt and engage in liability management activities.
F. SEC Disclosures
In 2015, the staff of the SEC (the “SEC Staff”) continued to concentrate its comments on insurance company Exchange Act disclosure on some of the topics we discussed in the 2014 Year in Review. These include disclosures regarding investments, compliance and regulatory matters, reserves, acquisitions and dispositions, and captives. We discuss each of these in more detail below.
1. Investments
Given the importance of investment portfolios to most insurance companies, the SEC Staff has requested that companies expand or further explain the level of fair value disclosure by class of assets and liabilities, and support the determination of major security types and classes of fixed maturity securities under ASC 320-10-50-1B and ASC 820-10-50-2B. Classes should be determined based upon the nature, characteristics and risk of the assets and liabilities, and by consideration of the level of disaggregated information required under other accounting topics. The SEC Staff has also focused on disclosures surrounding valuation techniques, inputs and assumptions used to determine fair values for each class of assets and liabilities included in the disclosures.
The SEC Staff has also questioned companies’ disclosures about the main factors that affect net derivative results, especially if there have been multiple periods of significant volatility in results, and asked companies to enhance disclosure on the drivers of net derivative gains and losses.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
2. Compliance and Regulatory Matters
The SEC Staff continues to review and comment on statutory and regulatory disclosures required by ASC 944, Financial Services-Insurance, and Rule 4-08(e) of Regulation S-X, relating to dividend restrictions and required statutory capital and surplus levels and the amount by which the companies’ statutory capital and surplus exceed such levels. One of the points that the SEC Staff has consistently emphasized for several years now is that disclosures regarding statutory financial statements should not be labeled “unaudited,” “approximate” or “preliminary” because such statutory financial information is required by U.S. GAAP or SEC regulations and must be audited.
In addition, as some insurance companies have expanded their operations internationally, they have come into direct or indirect contact with countries that the U.S. government has identified as state sponsors of terrorism. The SEC Staff regularly asks companies, especially those with global operations, to provide incremental disclosure about business activities that occur in or with these countries, and qualitative and quantitative factors that a reasonable investor would regard as important in making investment decisions. Any companies with global operation must also consider any foreign insurance regulatory restrictions on capital and surplus and compliance with such restrictions.
3. Reserves
Disclosure regarding insurance companies’ reserving processes continues to be a focal point for both the SEC Staff and investors. The SEC Staff has again requested that companies expand and enhance disclosures related to changes in reserve estimates so that investors are better able to understand the nature of assumptions, the extent of changes in reserve estimates and the reasons for the changes to reserves. Disclosures should explain the impact of certain events, new information or additional experience since the last reporting date that have resulted in a change in estimates, so that it is clear to investors why recognition of losses or changes to reserves occurred in the periods
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