A.M. Best Special Report: Canadian Life Insurers Converge to International Financial Reporting Standards

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From International Desk - Special Reports

OLDWICK, N.J., Apr 23, 2012 (BUSINESS WIRE) -- Quarterly 2011 results for Canadian life insurance companies clearly show that interest rate movements and equity-market volatility dramatically impacted reported valuations of both assets and liabilities. It is important to note that more volatile earnings in 2011 were not solely due to the conversion to Canadian International Financial Reporting Standards (IFRS-C). A.M. Best Co. found that the sharp decline in income and consequent drop in regulatory capital reported by a number of Canadian companies was more a result of mark-to-market accounting already in place than conversion to IFRS-C.

The Canadian Accounting Standards Board (AcSB) requires IFRS-C reporting for interim and annual financial statements relating to annual periods beginning on or after January 1, 2011. However, for now, Canadian Generally Accepted Accounting Principles (CGAAP) continues to be acceptable for investment companies or segregated accounts of life insurance companies in Canada.

The goal of IFRS is to improve financial reporting by establishing a single set of consistent, comparable reporting standards that align across all accounting regimes globally. As movement continues toward a more global economy, reliable, clear and consistent financial reporting becomes paramount and offers an improved basis for decision making for businesses, investors, regulators and rating agencies. However, this convergence poses technical accounting challenges to the insurance industry, including changes to actuarial, tax and regulatory matters, systems and processes for Canadian life insurance companies.

A.M. Best now has seen the Canadian life insurance industry complete what has become known as Phase I of the convergence to IFRS-C. The AcSB has executed a "phase-in" approach to IFRS-C convergence for life insurance companies because of the complicated nature of insurance accounting and to manage large potential impacts that changes in accounting regimes can have on an insurer's reported results. While the first phase of implementation has been completed, the second phase's requirements and implementation date still are uncertain.

As A.M. Best assesses the initial outcome of IFRS-C implementation, the need for a globally consistent financial reporting framework becomes more apparent. While there were numerous adjustments to starting balance sheets as a result of adoption of IFRS-C, A.M. Best notes that the direct impact of IFRS-C Phase I on the financial results for the year, for the most part, was relatively modest. This is because when converting to IFRS-C, any changes in the carrying value of the invested assets that support insurance liabilities are offset by a corresponding change in the insurance liabilities. The modest financial impact of IFRS-C Phase 1 may appear at odds with the volatile reported results of certain Canadian insurers. Volatile results occurred because net insurance liabilities under IFRS-C have retained the existing valuation methodology (Canadian Asset Liability Method [CALM]) used under prior CGAAP. A.M. Best believes the volatility in 2011's results was driven more by existing mark-to-market insurance accounting rather than implementation of Phase I of IFRS-C.

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Courtesy: marketwatch

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