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SSAP 43 Retrospective Approach Amortized Cost Basis Method for BondEdge Assets (October, 2009)

Article Summary:

The Asset module offers a "SSAP 43 retrospective approach" amortized cost basis method in accordance with NAIC reporting.


Background

 

The SSAP No. 43 Loan-backed and Structured Securities NAIC accounting regulation establishes statutory accounting principles for investments in loan-backed securities and structured securities. The amortized cost of these securities is to be calculated using either one of the prospective or retrospective methodologies. This article describes the retrospective approach that was originally implemented in AXIS version 12.5.02.001.

 

How SSAP 43 Retrospective Approach is Modeled in AXIS

 

In the Asset cell assumption screen, a "SSAP 43 retrospective approach" option was added to the "Amort cost basis method" switch. Currently, the SSAP 43 retrospective approach in AXIS is only available with BondEdge's cashflow service. To enable this method, the "Calendar year results" switch must be set to "6 - Use external asset models" and the "External asset models" switch must be set to "1 - Use BondEdge's cashflow service".

 

SSAP 43 Retrospective Approach Calculation

  1. The book yield is calculated by AXIS as the yield at the purchase date which equates the present value of future cashflows to the purchase price entered in the Asset Features section. Note that the purchase price entered in the Asset Features section should be the purchase price per $1,000 par value, not the purchase price per asset. The par value entered in the Asset Features section must be $1,000. The cashflows must be the anticipated principal and interest cashflows projected by BondEdge, i.e. the IRR method switch must be set to "1 - Calculate using anticipated cashflows".

  2. The amortized cost basis at the inforce date is the value entered in the Inforce Volumes section.

  3. The first recalculation point is always at the first policy month end after the inforce date. The amortized cost basis at this month end is the resulting amortized cost basis, by rolling forward the purchase price on the historical cashflows using the book yield, from the purchase date up until the calculation date. The amortized cost is always floored at zero. Loosely speaking, the equation used is:

          Amort cost (t) = Amort cost(t-1) * (1 + IRR) - Interest cashflows(t) - Prepayment cashflows(t)

  1. If the book yield calculated is negative, the roll forward from the purchase date to the calculation date will be done using this negative yield, and it will be written down to the sum of undiscounted future cashflows at the calculation date. This amount of writedown will be displayed in the "Income from asset writedown" row in the Calendar Year Results. After a writedown has been recorded, the Amort cost basis method will revert to the prospective approach for the remaining lifetime of the asset and use 0% as the IRR until the next recalculation date. The book yield calculated may also be limited by the settings of the "IRR Validation" switch.

  2. The historical cashflows from the purchase date until the inforce date can be input using the Historic cashflow table in the Asset Features section. When calculating the book yield, a combination of the cashflows from the Historic cashflow table (purchase date to inforce date), pricing cashflows from BondEdge (inforce date to calculation date), and the future anticipated cashflows (calculation date onwards) from BondEdge are used.

  3. In the case when the amortized cost at the end of the projection period is positive, this amount will be written down to zero.

IRR Recalculation

  1. For the SSAP 43 retrospective approach, the user must recalculate the IRR periodically through the "IRR recalculation" switch. The two allowed options are:

a. "Recalculate every N years"

b. "Recalculate every year for M years then every N years"

  1. The IRR is recalculated at the end of each recalculation month by equating the purchase price at the purchase date to the present value of a combination of the cashflows from the Historic cashflow table, the historic BondEdge pricing cashflows, and the anticipated BondEdge cashflows.

  2. If the recalculated IRR is negative, it is treated the same as the initial IRR case. The writedown is recorded in the recalculation month.

  3. Between IRR recalculation points, the amortized cost basis is projected by rolling it forward using the previously calculated IRR.

Calendar Year Report Outputs

 

In Calendar Year reports, a new row has been added called "Income from Asset Writedown." This new calendar year row displays the amount of asset writedown that may occur due to a negative book yield or a positive ending amortized cost. The asset writedown will also flow into the "Gross Investment Income" row. The results of the amortized cost calculation will appear on the "Amortized Cost Basis" row which is part of the "Total Book Value of Invested Assets".

 

If you need assistance in finding and using this new feature, please contact GGY.

 

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