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SSAP 43 Prospective Approach Amortized Cost Basis Method (August, 2009)

Article Summary:

The Asset module offers a “SSAP 43 prospective 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 on either one of the prospective or retrospective methodologies. The prospective approach was originally implemented in AXIS version 12.5.01.001.

How SSAP 43 Prospective Approach is Modeled in AXIS

In the Asset cell assumption screen, a “SSAP 43 prospective approach” option was added to the “Amort cost basis method” switch. The SSAP 43 prospective approach in AXIS is currently supported with Moody's Analytics structured cashflow service, with BondEdge’s cashflow service, or with mortgage calculation type assets modeled in AXIS.

SSAP 43 Prospective Approach Calculation

  1. The book yield can be entered by the user or calculated by AXIS. If the user does not enter the book yield it is calculated as the yield at the in force date which equates the present value of projected cash flows to the Amortized cost basis entered in the Inforce Volumes section. The cash flows used include principal and interest cash flows. There are two options available:
  1. “Calculate using pricing cashflows”. With this approach the cash flows are based on the current and projected yield curves from the scenario. These are the same cash flows displayed in the Calendar Year Results Report.
  2. “Calculate using anticipated cashflows”. With this approach the cash flows are based on the yield curve at the inforce date, i.e. assuming no future yield curve changes. This option is required for mortgage assets calculated directly in AXIS.
  1. If the initial book yield is negative, i.e. the sum of undiscounted future cashflows is less than the Amortized cost basis entered in the Inforce Volumes section, the book yield is set to zero and the amortized cost is written down to the sum of undiscounted future cashflows. The amount of writedown will appear on a new Calendar Year row called “Income from asset writedown.”
  2. The amortized cost is rolled forward on the pricing cashflows using the book yield. 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)
                                                                    
  3. In the case when amortized cost at the end of the projection period is positive, this amount will be written down to zero. This case may occur when the initial anticipated cashflow is chosen to calculate book yield and this cashflow differs from the pricing cashflow used to roll forward the amortized cost.

IRR Recalculation

  1. When using Moody's Analytics or BondEdge structured cashflow services, the user can choose to periodically update IRR in the future through the “IRR recalculation” switch. There are two options available:
  1. “Recalculate every N years”.
  2. “Recalculate every year for M years then every N years”.
  1. IRR is recalculated at the end of the recalculation month by equating the amortized cost of that month to the anticipated cashflow that is based on the current scenario’s yield curve up to and including the recalculation month (after which it is held constant for the remainder of the projection period).
  2. If the recalculated IRR is negative, it is treated the same as in the initial IRR case. The writedown is recorded in the recalculation month.

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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