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CA Department of Insurance

Accounting Statement 89-3

STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
425 Market Street
San Francisco, CA 94105


                                                Accounting Statement 89-3
                                                November 28, 1989


TO:       All Insurers Admitted to do Business in California
and Other Interested Persons

SUBJECT:  "Sale" of Future Revenues or Securitization of
Non-admitted or Unrecorded Assets


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

This Accounting Statement establishes the guidelines for accounting
and reporting for the "sale" of future revenues or securitization of
non-admitted or unrecorded assets.  In general, these transactions
involve the following:

     An insurer enters into a transfer agreement (usually nonrecourse)
     with a nonaffiliated financial institution whereby the insurer
     transfers the right to a portion of its future revenues (usually
     premium revenues) and receives cash payment from the financial
     institution.  These transactions are sometimes referred to as
     "securitizations" and are sometimes characterized as selling
     "deferred acquisition costs".  In the case of future premium revenues
     transferred represents the amount in excess of the net valuation
     premium on specified policies.  The term of the agreement and the
     maximum amount to be repaid are specified.  Interest is paid on the
     principal amount received until such amount is totally amortized or
     until the agreement expires, whichever occurs first.

While this Department is currently aware of only life insurers entering
into those transfer transactions, it is possible that transactions could
be arranged for property/casualty insurers.  Therefore, this Accounting
Statement is applicable to all insurers.

Financial Statement Accounting Disclosure:
------------------------------------------

The requisite accounting and disclosure for the transactions described
generally above is as follows:

1.   The immediate recognition of proceeds from certain
     transactions characterized as "sale" of future revenues in income
     and/or surplus is inconsistent with Statutory Accounting Principles. 
     Accordingly, a liability should be established for the amount of the
     proceeds; the liability may be reduced as the proceeds are repaid. 
     (This accounting requirement is consistent with the requirement
     being established in the National Association of Insurance
     Commissioners Accounting Manual.)

2.   With regards to transactions which have been entered
     into prior to the date of this Accounting Statement no exemptions
     from the required accounting (i.e., establishment of a liability)
     will be allowed unless specific prior approval by the domiciliary
     state of the insurer involved was granted.  Absent specific prior
     approval, such transactions shall be considered financing
     arrangements.  (This requirement is consistent with standards
     established by the National Association of Insurance Commissioners
     Emerging Issues (EX4) Working Group, June 5, 1989.)

3.   The liability so established for such transactions may
     be reported as "borrowed money" with a fully descriptive footnote
     or as a separate write-in liability.

Effective Date:
---------------

The provisions of this Accounting Statement shall be effective
immediately.  Therefore, the annual statement as of December 30, 1989
and all subsequent annual and quarterly statements shall include the
required accounting and disclosure.
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