PrefBlog

In a prior post I discussed IFRS and the Assets-to-Capital Multiple with respect to banks and their mortgage securitization habits, but I’ve just realized there’s another nuance lying in ambush behind the thickets of regulation.

The OSFI Draft Advisory on Conversion to International Financial Reporting Standards (IFRSs) by Federally Regulated Entities (FREs) states:

With respect to life insurance entities, current CGAAP specifically requires that segregated funds should be accounted for separately (off balance sheet). However, IFRSs do not specifically address accounting for segregated funds. As a result, most segregated funds are expected to require consolidation treatment because of the “control” tests in IAS 27 and SIC 12. Most life insurers are, therefore, expected to report their segregated fund assets and liabilities on balance sheet through a one-line reporting format rather than commingled with other asset and liability categories.
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OSFI is not issuing any additional accounting guidance or clarification in this area at this time.

OSFI will consider the accounting treatment of segregated funds if it becomes apparent that life insurers intend to commingle assets and liabilities, rather than use the expected one-line reporting format.
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With respect to segregated funds, risk based capital requirements already exist and OSFI requires that the current treatment continue. Therefore, although segregated funds will appear on the balance sheet, they would not attract asset specific capital charges outside of the existing Segregated Fund Risk charge.

This is interesting in light of recent OSFI speeches by Julia Dickson:

As OSFI regulates non-operating insurers acting as holding companies, we are considering updating our current regulatory guidance for these entities to promote a more integrated and consistent approach to determining regulatory capital requirements. For example, OSFI’s MCCSR tests could be used to evaluate the group’s consolidated risk-based capital – and a test similar to the asset-to-capital multiple (ACM) test could be used to evaluate leverage.

… and her speech-tester, Mark White:

For example, OSFI’s Minimum Continuing Capital and Surplus Requirements (MCCSR) tests could be used to evaluate a financial group’s consolidated risk based capital – and an ACM like-test could be used to evaluate leverage.

These speeches were reported on PrefBlog in the posts OSFI Looking Closely at Lifeco Consolidated Capital and OSFI to Address Double-Leverage?, respectively.

If we look at, for instance, the Manulife 4Q09 Report we see that total capital is $33.2-billion, and total funds under management are $440-billion, which includes the general fund of $187-billion and seg-funds (on balance sheet, but not included in “Total Assets”) of about $192-billion.

After consolidation – particularly if mutual funds, etc., are consolidated – we could see reported total assets change dramatically:

Capital of 33.2 implies an ACM of about 14x; not only have we not been particularly thorough in digging up off-balance sheet committments, but it should also be remembered that a big chunk of these AUM are equities and should logically be constrained by a lower ACM than the banks’ loan-based accounts.

Life could well get interesting in the next few years!

This entry was posted on Tuesday, February 16th, 2010 at 5:13 pm and is filed under Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.