Prospective Accounting Guidance
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses. The current guidance delays the recognition of credit losses until a probable loss has occurred. The new guidance requires credit losses for securities measured at amortized cost to be determined using current expected credit loss estimates. These estimates are to be derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and will be recorded through a valuation account. The same method will be used for available-for-sale securities, but the valuation account will be limited to the amount by which the fair value is below amortized cost. The standard is effective for us in the first quarter of 2020. Implementation of the new guidance requires a modified retrospective approach without restatement, which means the first cumulative adjustment required will be a charge to retained earnings, with subsequent changes in the valuation account reported in the income statement. The financial statement impact will be determined by the nature of the portfolio held and the economic conditions at the time of implementation.
In establishing a current expected credit allowance for held-to-maturity fixed income securities under the new accounting standard, the Company will use a probability of default and loss given default methodology based on the securities credit rating and maturity date of the specific security. The amount is currently estimated to be in the range of $250,000 to $400,000. This estimated amount will change depending on the amount of held-to-maturity fixed income securities, the credit ratings and maturity dates of those securities, at the time of implementation of the new current expected credit loss accounting standard.
In establishing a current expected credit allowance for reinsurance recoverables under the new accounting standard, the Company will use a probability of default and loss given default methodology based on the credit ratings of our reinsurers. The amount is currently estimated to be in the range of $400,000 to $600,000. This estimated amount will change depending on the amount of reinsurance recoverables and the ratings of our reinsurers at the time of implementation of the new current expected credit loss accounting standard.
The Company’s internal working group has evaluated the remainder of the balance sheet assets, including available-for-sale securities and net premiums receivable, and determined the implementation of the new credit loss guidance in relation to those assets will have an immaterial impact on the financial statements.
The estimated impacts could change based upon economic changes, events or conditions. The Company will continue to monitor and evaluate the financial impact as the implementation date approaches.
All other issued but not yet effective accounting and reporting standards as of September 30, 2019 are either not applicable to the Company or are not expected to have a material impact on the Company.
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