PD 17 IMPLICATIONS OF SECTION 3855 CIA General Meeting

Mike Lombardi October 19, 2006 Chicago

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2006 Developments

 Town Hall (April, 2006)  CIA Annual Meeting (June, 2006)  CLIFR Educational Note  OSFI  Guideline D-10  MCCSR Changes  CLHIA Tax Proposal  AA Seminar (September, 2006)  CIA General Meeting (October, 2006)

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Panelists

 Mike Lombardi  Gianni Fiacco  Igor Afanassiev  Ty Faulds

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Accounting changes

 3 new accounting standards effective January 1,2007  S.3855 Financial Instruments – Recognition and Measurement  S.3865 Hedges  S.1530 Comprehensive Income  Amendments  S.4211 Replaces S.4210 – Life Insurance Enterprises  AcG9 Financial Reporting by Life Insurance Enterprises  Applies to all entities but affects the life insurance industry in a unique way due to linkage between asset and liability measurement  Will significantly change the measurement of financial instruments and the presentation and disclosure of the financial statements

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Accounting changes (cont’d)

 All financial instruments must be classified  Held To Maturity    Held For Trading Available For Sale Loans and receivables  Once and for all designation at inception based on management’s intention  No restatement of prior periods  Restate the opening balance sheet  to recognize assets/liabilities at fair value  to write-off previously deferred gains/losses  to adjust opening surplus as a result of the above

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Issues

 Available for Sale anomaly  Portfolio tainting rules  OSFI restrictions on Fair Value options  CALM implications  MCCSR impact  Tax impact  Transition and implementation issues  Impact on financial reporting and disclosure

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Current MCCSR Requirements

 Assets are valued at amortized cost or moving average market on the balance sheet  Assets supporting surplus are recognized at market (net of taxes) for Capital Available purposes  55% of unrealized unamortized gains recognized in Tier 2C

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Guideline D-10

 OSFI has issued criteria for the use of the Fair Value Option  Requirements  Use must eliminate or significantly reduce mismatch, or  A group of financial assets, financial liabilities or both is managed and performance is evaluated on a fair value basis, in accordance with a documented risk management strategy

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MCCSR Rules Instrument Type Held for Trade & FVO AFS Loans AFS Debt and Equities Available Capital Required Capital

Accumulated net after tax unrealized gains/losses included in Tier one capital available Balance sheet (market) values used to determine capital required Accumulated net after tax unrealized Balance Sheet values (amortized cost) gains/losses not included in capital used to determine capital required available Accumulated net after tax unrealized losses Tier 1 capital deducted from Accumulated net after tax unrealized gains included in Tier 2A capital Balance sheet (market) values used to determine capital required

Held to Maturity Instruments

Accumulated net after tax unrealized gains/losses not included in capital available Balance sheet values (amortized cost) used to determine capital required

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