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News: Accounting Statement 84-2
STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
425 S. Market Street
San Francisco, CA 94105

Accounting Statement 84-2

December 31, 1984


To: All Insurers Authorized To Transact Insurance In
The State Of California


Subject: Financial Statement Accounting and Reporting for the
Transfers of  Marketable Securities with Put Options


Introduction and Scope
----------------------

This Accounting Statement establishes guidelines for financial
accounting and reporting for transfers of marketable securities with
put options by admitted insuror transferors.  In general, these
transactions involve

     1. A transferor in a tax-loss position.

     2. The transfer of securities (most often, low yielding,
tax-exempt unicipal bonds), either directly or through and
underwriter/broker, to a hird party transferee, the transferee
also receiving options to put the securities back to the transferor
at a specified future date or dates ("expiration date(s)") at a
predetermined, fixed price ("strike price").

     3. The transfer of the underlying securities at prices in
excess of their current market values (presumably, at or near
the book values of the transferors) because of the addition of
the put options.

     4. The transferor reinvesting the proceeds of the
transfers in current, higher yielding, taxable securities
maturing at or near the expiration date(s).

This Accounting Statement applies to insurers transferring
marketable securities with put options only.  Insurers who are
transferees under such agreements should not assume that the
contra of the accounting and reporting guidelines set forth
below applies to transferees.

All domestic insurers who will be directly or indirectly issuing
put options as described herein are advised that, in most cases,
a securities permit issued by this Department is required in order
to sell such options in California.  Foreign insurers will need a
permit only if they plan to directly or indirectly issue options
within the State of California.

Financial Statement Accounting and Reporting
--------------------------------------------

Until the National Association of Insurance Commissioners
prescribes specific statutory accounting requirements or until the
Financial Accounting Standards Board prescribes more specific
accounting guidelines for such transfers as financing or borrowing
transactions.

An insurer transferring marketable securities with put options
should generally assume that the put options will be exercised
(i.e. the securities will be put back to the insurer at the expiration
date(s) at the strike price).  Therefore, the transferor should not
account for the transaction as a sale at the time of the initial
transfer or at any time up to the expiration date(s) unless the
transferor can clearly demonstrate that the transaction is, in
substance, a completed sale (e.g. the transferee receives no
significant future reversionary rights from the transferor or the
expectation of the exercise of the put options is remote).

Hence, initial transfers of marketable securities with put options
should primarily affect only the balance sheet of the transferring
insurer.  The transferring insurer should not reduce its bond
account by the amount of the securities transferred.  Instead, a
liability for the entire repurchase at the strike price should be
credited and an asset (cash) for the initial transfer proceeds should
be debited.  The difference between the liability and the proceeds
of the transfer should be explicitly recognized as deferred interest
expense (an asset).

All bonds transferred subject to put options should be clearly
identified and grouped by CUSIP number at the end of
Schedule D - Part 1 under the caption, "Bonds Transferred With
Put Options".

In order for the deferred interest expense to be considered as an
admitted asset, bonds and short-term investments purchased with the
proceeds of the transfers should be clearly identified and grouped by
CUSIP number at the end of Schedule D - Part 1 (after "Bonds
Transferred...") and/or Schedule DA under the caption "Bonds or
Short-Term Investments Held to Repurchase Bonds Transferred
With Put Options".

Assuming the transferor has matched the maturities of the securities
acquired with the proceeds of transfers with the expirations of the put
options, only the expenses relating to underwriting fees and
transactions costs should affect the statement of operations at the time
of the transfers.  Such underwriting fees and transaction costs should
be charged to investment expenses.  The deferred interest expense
should also be charged to investment expenses over the life of the
options.

Adequate disclosure of the transactions should also be given in the
Notes to Financial Statements of the Annual Statement.  For the
securities transferred, the disclosure should include their aggregate book
value, current market value and repurchase liability summarized by
the expiration date(s) of the applicable put options.  For the securities
purchased and held for possible repurchase, such disclosure should
include their aggregate book value, current market value and par value,
summarized by the maturity dates of such securities.  Such disclosure
should also be made in Quarterly Financial Statements.  In addition,
a reconciliation, substantially in the form of the exemplar attached as
Exhibit I, should be attached to the Notes to Financial Statements of
the Annual Statement only.

Effective Date
--------------

The provisions of this Accounting Statement shall be effective
immediately.


CHUCK QUAKENBUSH
Insurance Commissioner





RECONCILIATION OF MARKETABLE SECURITIES TRANSFERRED WITH PUT OPTIONS


--------------------------------------------------------------------------------------------------------
Expiration Date  Date Securities  Consideration  Amortized                            Strike Price
Of Put Options     Transferred       Received    Book Value  Par Value  Market Value  Of Put Options
--------------------------------------------------------------------------------------------------------
      

PART A:   BALANCE AT BEGINNING OF YEAR*
-------

PART B:   PUT OPTIONS TRANSFERRED DURING THE YEAR*
-------

PART C:   PUT OPTIONS EXERCISED DURING THE YEAR*
-------

PART D:   PUT OPTIONS EXPIRED WITHOUT ANY ACTION DURING THE YEAR*
-------

BALANCE AT END OF THE REPORTING PERIOD
                 (Part A + B - C - D)


* In aggregate by put date


No. 6351q                                        
                                             Exhibit I
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