The Summary

Last week, as the FASB decided not to defer the November 15, 2007 effective date of FAS 157, GAAP filers lost all hope for the ability to delay its adoption and preparation of related disclosures.  The pronouncement requires companies to group their investments into the following categories:

  • Level 1 – Rate is an unadjusted quote from an active market
  • Level 2 – Rate was derived from “observable” inputs
  • Level 3 – Rate derived from some “unobservable” inputs
  • FAS 157 also requires companies to disclose a 1/1/2007 – 12/31/2007 roll-forward of their Level 3 investments.  For reference, Citigroup’s 10Q SEC filing for June 2007 includes a good example of these disclosures.

To aid our clients in preparing these FAS 157 disclosures, AAM will be providing a report to clients that groups our pricing between the three categories.  Please contact your client service representative for more information.

The Details

AAM obtains our pricing primarily from Interactive Data Corporation (IDC).  Security prices that are not available from IDC or securities where the IDC prices are not reflective of fair value are priced based upon broker quotes.

Based on guidance received from IDC, we believe that  the IDC prices used by AAM can be considered either Level 1 or Level 2. In addition, based on a review of how other companies have implemented FAS 157 and our interpretation of these new disclosure requirements, we believe broker-provided pricing can be considered Level 2.  In the rare event where there are securities that are priced internally at AAM, using internal assumptions (without the support of broker-provided information), we will classify these securities as  Level 3 for FAS 157.  As with any newly issued accounting guidance, we strongly urge you to discuss your application of the guidance with your auditors and would appreciate any feedback.

On the NAIC Horizon

The NAIC – Securities Valuation Office (SVO) has put forth a proposal that a new Schedule D column be added, which requires insurers to classify investments among the following categories:

  1. Rate is determined by SVO
  2. Rate is determined by an approved pricing service
  3. Rate is determined by a stock exchange.
  4. Rate is determined by a broker or custodian
  5. Rate is determined by the insurer

This proposal is currently being looked at by the NAIC Blanks Working Group and will likely be added to the agenda this December for comment.  We do not anticipate that this proposal will be implemented for year 2007 statutory reporting.

Joseph A. Borgmann
Vice President – Investment Accounting

Disclaimer: This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. Any opinions and/or recommendations expressed are subject to change without notice.

This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient.

Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.