On November 24th, the IRS released its 2009 – 2010 Priority Guidance Plan which contains 315 projects set to be completed over a twelve-month period. The most significant BOLI/COLI related project included in the plan is a revenue ruling regarding the tax-free exchange of life insurance contracts subject to IRC §264(f). Another BOLI/COLI related project is guidance on the treatment of age 100 maturity under IRC §7702 based on comments to Notice 2009-47. In Notice 2009-47, the Service requested comments regarding its proposed safe harbor for contracts with maturity dates beyond age 100 and other related matters.
On November 6th, the IRS released PLR 200945032 ruling that the taxpayers (which surrendered bank-owned life insurance policies after incurring rather extraordinary losses) may deduct losses on the policies under IRC §165. The amount of the loss deduction for each of the policies must be computed by subtracting the applicable tax basis of each policy from the surrender proceeds of each policy. The tax basis of the policies shall equal the sum of the premium payments, adjusted for various credits and deductions, less the cost of insurance protection during the period that the policy was held.
The PLR also states that no portion of any such loss, of which there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, will be allowed until the taxable year in which it can be ascertained with reasonable certainty that such reimbursement will or will not be received.
On November 5th, the International Accounting Standards Board (IASB) published a proposal that would require banks outside the U.S. to report expected losses on their lending much earlier. The proposal would allow banks to provide for expected losses over the duration of a loan, rather than, as now, waiting until the losses have occurred. Provisioning had been criticized before the current financial crisis because it allowed financial directors to build up a “cookie jar” of reserves that they later used to smooth away poor performance. To counter this, the IASB also proposed forcing banks into detailed footnote disclosures. Under the new system, a bank will have to estimate the likely future losses on its loans, subtracting this provision from its earnings over the lifetime of the loans.
Earlier this year we reported that a federal district court judge dismissed a lawsuit against Wal-Mart stores claiming that Wal-Mart did not have insurable interest. In that decision, the court applied Florida insurable interest laws as written in 2000 and found that the plaintiffs did not have standing to bring an action on insurable interest. In July 2008, the Florida legislature amended Florida’s insurable interest statute to provide that an insured or his or her personal representative may sue for benefits paid under an insurance contract procured by a party lacking an insurable interest. The Atkinson plaintiffs filed an appeal in the 11th Circuit and the appellate court has filed a certified question to the Florida Supreme Court to determine whether the Florida amendment should be applied retroactively. Given the potential ramifications of this matter, we are in discussions with various carriers regarding what actions they may take with Florida Supreme Court.
On November 10th, Sen. Dodd (D-CT) unveiled a 1,136 page regulatory reform bill that would consolidate financial regulators, impose higher capital requirements on larger financial institutions, remake the derivatives industry and include the creation of a single consumer protection commission. The draft included combining the federal banking regulators (i.e., replacing the OCC and OTS as well as some duties of the Federal Reserve) into a new agency dubbed the Financial Institutions Regulatory Administration. It would also give a panel of regulators – including the Treasury and Federal Reserve – power to monitor big or complex financial institutions seen as posing a potential threat to the economy.
The House Financial Services Committee has passed amendments to the Federal Insurance Office Act (H.R. 2609) that clearly retain state authority over the business of insurance. The Federal Insurance Office in the Treasury Department will be charged with the collection of insurance data to advise Treasury on domestic and international policy issues, report to Congress every two years and create federal policies related to international insurance issues. One passed amendment made clear that international agreements would not preempt the state prudential regulation of U.S. insurers. The NAIC has issued statements supporting the recent amendments.
The House Financial Services Committee also passed a critical amendment to the Financial Stability Improvement Act introduced by Rep. Barney Frank (D-MA) earlier this month. The Act would create a Financial Services Oversight Council, chaired by the Treasury Secretary. The Committee passed an amendment offered by Rep. Kanjorski (D-PA) that would empower federal regulators to rein in and dismantle financial firms that are so large, interconnected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy. This amendment expands a segment of the Financial Stability Improvement Act, by enabling federal action to address financial companies that are deemed “too big to fail” before resolution authority is needed. The amendment transfers such mitigatory action from the Federal Reserve to the Financial Services Oversight Council, but would require the Council to consult with the President before taking extraordinary mitigatory actions. A financial company would also have the right to appeal any actions. Insurer associations have expressed their concern over the Council’s proposed authority to designate “financial companies” which expressly includes U.S. and foreign non-bank financial institutions for heightened prudential regulation. Insurers are concerned that holding companies of insurers and insurers themselves could be subject to bank centric regulatory provisions that fundamentally conflict with the insurance regulatory model.
The Private Fund Investment Advisors Registration Act passed the House Financial Services Committee last month. If enacted as proposed, the Registration Act would require advisors to hedge funds and other unregistered investment companies to register with and provide information to the SEC. There would be exemptions for advisors of funds with less than $150M in assets under management and for certain small business investment companies. The registration requirement would take place one year after the Act is passed.
The New York State Insurance Department has ordered life insurers in the state to adjust assumptions about investment portfolio calls, prepayments and defaults to reflect the true state of the economy. The Department has spelled out detailed rules for reporting December 31, 2009, reserves “and other solvency” issues in a letter to carriers. In the past, life insurers often could rely on rough, standard estimates of factors such as how often homeowners responsible for the mortgages supporting residential mortgage-backed securities might pay off loans early. However, in the Department letter to carriers, it stated that such examples cited by regulation may no longer be appropriate.
Earlier this month, the members of the NAIC approved a proposal to develop a new model for determining the regulatory treatment of residential mortgage-backed securities (RMBS). The new model will produce ratings designations for approximately 18,000 RMBS owned by U.S. insurers at the end of 2009. The NAIC action reflects a loss of confidence in the ratings for RMBS historically produced solely by nationally recognized statistical rating organizations (NRSROs) such as Moody’s and S&P. Until now, these ratings have been used by regulators to score RMBS securities for solvency regulation. Subsequent to running a request for proposal (RFP), the NAIC announced it has selected PIMCO as a third party consultant to assist in developing its ratings financial models. Regulators plan to finalize designations and risk-based capital price ranges by year-end. Companies will be able to report their 2009 annual statement results due March 1, 2010, using the new designations.