May 2013


H.R. 1618 – Bill to Increase Employer-Provided Group

On April 18, Representative Michael Burgess (R-TX) introduced a bill that would amend IRC Section 79(a) to increase the dollar limitation on employer-provided group term life insurance that can be excluded from the gross income of the employee.  Currently, the limitation is $50,000.  H.R. 1618 would increase the limit to $375,000 and would institute an inflation adjustment for taxable years beginning after 2013.

The bill was referred to the Committee on Ways and Means.


H.R. 2140 – Insurance Capital and Accounting Standards Act of 2013

On May 23, Representative Gary Miller (R-CA) introduced a bill that would permit insurance companies that are depository holding companies, or are subsidiaries of depository holding companies, to comply with the accounting and capital requirements applicable to the insurance company under state law.

The bill would offer relief from the Dodd-Frank Act requirement that the Federal Reserve’s proposed capital standards for banks must apply also to nonbanks, such as insurers, if they fall under FRB supervision.  Applicable insurance organizations have argued against being subjected to bank-centric capital rules as proposed under the Basel III/Dodd-Frank rule proposals released last June.


Basel Capital Studies – Legislative Update

As noted in last month’s LRA, a number of bills have been proposed in the House and Senate that would require banking regulators to perform assessments of the implications of new capital rules in advance of finalizing any new rules (S. 731, S. 737, H.R. 1221 and H.R. 1341).  None of these proposals progressed in May.  However, S. 731 continues to pick up additional co-sponsors.  The bill has 13 co-sponsors (ten senators cosponsored the bill in May).  The bill is primarily focused on assessing capital rule implications for community and regional banks.


Tax Reform Options – Senate Finance Committee

The Senate Finance Committee has launched a process to begin developing a proposal to reform America’s tax code.  Over the next several months, the committee will convene weekly to discuss a series of topics and collect feedback from members on a wide range of options for taking on tax reform.

On May 23, the Finance Committee released a document titled, Economic Security: Health, Retirement, Life Insurance, Fringe Benefits and Executive Compensation, which included a compilation of possible reforms related to retirement, health insurance, life insurance and annuities, other employee “fringe” benefits and executive compensation.  Noteworthy items include:

  • Currently tax the inside build-up of life insurance contracts;
  • Deny exclusion for death benefit payments above a specified amount;
  • Expand pro rata interest expense disallowance for corporate-owned life insurance (COLI);
  • Revise the limits on deductibility of executive compensation under Section 162(m);
  • Revise the rules related to non-qualified deferred compensation (NQDC), including:
    • Modify or repeal Section 409A;
    • Tax employees on NQDC in the year it is earned (i.e., repeal deferral); and
    • Impose a $1 million limit on NQDC deferrals in a single year; and
  • Revise the rules related to equity-based compensation.

It is worth noting that the proposals put forth do not necessarily have the support of either Chairman Baucus (D-MT) or Ranking Member Hatch (R-UT).


Tax Reform Report – House Ways and Means Committee

On May 6, the Joint Committee on Taxation (JCT) submitted a lengthy report to the Tax Reform Working Groups of the House Ways and Means Committee.  The report provides an overview of the current Internal Revenue Code provisions relevant to areas identified for possible reform (including the taxation of life insurance).  The document also summarizes suggestions for reform based on commentary submitted by the public to the various Tax Reform Working Groups.

Notably, commenters’ suggestions varied and sometimes oppose one another.  The Working Group on Pensions/Retirement received the following suggestions relating to life insurance taxation:

  • Maintain tax-free inside buildup for life insurance and annuity contracts;
  • Repeal tax-free inside buildup for life insurance and annuity contracts;
  • Tax currently the investment income and gain on life insurance policies, while excluding actuarial gain; and

Retain the present-law tax treatment of company-owned life insurance (COLI).



FSOC 2013 Annual Report and Testimony

The Financial Stability Oversight Council (FSOC) recently released its 2013 Annual Report.  On May 21, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on the annual report.  Treasury Secretary Jacob Lew’s testimony to the committee identified, among others, the following key areas of focus:

Wholesale Funding Markets

Mr. Lew advised that the FSOC remains concerned that vulnerabilities in wholesale funding markets, specifically money market mutual funds, could lead to destabilizing fire sales.  He also noted that vulnerabilities remain in the tri-party repo market, particularly with respect to borrowers such as securities broker-dealers.

Interest Rate Risk

There is rising concern that market participants may be inclined to “reach for yield” by investing in lower-grade credit, investing in longer-maturity assets, or increasing leverage given the current low yields and volatility in fixed income markets.   Mr. Lew indicated that yield-seeking behavior is apparent in several markets.

The FSOC annual report makes specific recommendations to regulators and risk managers of banks, broker-dealers, insurance companies and pension funds to be vigilant and scrutinize how potential changes in interest rates could adversely affect their risk profiles.


Market Risk Capital Rule Clarifications

On May 10, the OCC released Bulletin 2013-13 which provides clarification on the treatment of certain foreign exposures and securitization positions under the Market Risk Capital Rule.

Foreign Exposures

As an alternative to external credit ratings, the market risk capital rules use OECD Country Risk Classification (CRC) ratings for determining risk capital requirements for certain sovereign debt positions.  OCC 2013-13 notes that the OECD no longer assigns CRC ratings for certain high-income countries.  The OECD change has no practical impact and, therefore, banks should continue to determine capital requirements consistent with a CRC of zero (unless the sovereign is considered to be in default).

Additionally, banks should continue to assign a specific risk-weighting factor of 0.25 percent, 1.0 percent, or 1.6 percent (depending on the remaining maturity of the position) to a covered position that is an exposure to a public sector entity, depository institution, foreign bank, or credit union, if the applicable sovereign entity does not have a CRC assigned to it but is a member of the OECD.

Securitization Positions: Simplified Supervisory Formula Approach 

To measure the specific risk of a securitization position, the market risk capital rule includes the Simplified Supervisory Formula Approach (SSFA).  The SSFA takes into account the nature and quality of the underlying collateral.  The SSFA includes a variable (W) designed to increase the capital requirement for a securitization exposure when delinquencies in the underlying assets of the securitization increase. Under the capital rule, an exposure is “delinquent” if it is 90 days or more past due, subject to a bankruptcy or insolvency proceeding, in the process of foreclosure, held as real estate owned, in default, or has contractually deferred interest payments for 90 days or more.

Commenters have noted that the term “delinquencies” can be read to include deferrals of interest that are unrelated to the performance of the loan or the borrower, including contractually permitted payment deferrals provided for in certain federally guaranteed student loan programs.  The OCC clarified that the meaning of “delinquency” in the market risk capital rule should be read to exclude from the calculation of W, loans with contractual provisions that allow deferral of principal and interest, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed, and the periods of deferral are not initiated based on changes in the creditworthiness of the borrower.


FRB Mid-Year Stress Tests

Eighteen large U.S. bank holding companies are required to submit the results of their company-run, midyear stress tests to the Federal Reserve on July 5.  In the midyear test, which is being conducted for the first time in 2013, each firm develops its own baseline, adverse, and severely adverse scenarios to best reflect its individual operations and risks.



Baker v. American Greetings Corp. (Settlement Update)

As noted in last month’s LRA, the parties jointly filed for preliminary approval of a class action settlement on April 19.  On May 22, an order was entered granting the joint motion for preliminary approval of the settlement agreement.  The order reflects the proposed settlement details we previously identified, including that the aggregate amount of the settlement is $12.5 million and that one third of that award will go to plaintiffs’ counsel.

A fairness hearing has been set for 9/20/2013.



FASB Exposure Draft – Credit Losses (Subtopic 825-15)

As noted in our Ad Hoc LRA on May 13, the FDIC held a teleconference on May 16 to address significant aspects of the FASB proposal to change the accounting for credit losses.  The FASB comment period expired on May 31.

The proposal would replace the current impairment model with an approach based on expected credit losses.  The FDIC made a presentation available on its website discussing key aspects of the proposal, including recognition, measurement and scope.



JCT Estimated Budget Effects of President’s Fiscal Year 2014 Budget Proposal

On May 10, the Joint Committee on Taxation released an analysis of the revenue provisions contained in the President’s 2014 Fiscal Year budget proposal.  The format is similar to Summary Tables provided in the President’s proposal.  Below is a comparison of the projected budget impact for the proposed insurance-related reforms.

Provision Obama Budget Proposal JCT Analysis Difference
Modify rules that apply to sales of life insurance contracts 641 857 216
Modify proration rules for life insurance company general and separate accounts 5,101 4,832 (269)
Expand pro rata interest expense disallowance for corporate-owned life insurance (COLI) 5,919 6,765 846


Ad Hoc LRA – May 13, 2013

Financial Institution Letter (Revised): Banker Teleconference on FASB Proposal to Change the Accounting for Credit Losses

We briefly covered this accounting proposal in our April monthly LRA update.  The comment period runs through the end of May.  We wouldn’t expect this to have a significant impact on accounting for BOLI portfolios given that they are generally “investment grade” only and the definition of investment grade includes an expectation of full and timely repayment of principal and interest.  Still, the topic could have some indirect implications for BOLI (e.g., if securities get downgraded).

The proposal will clearly have more significant implications for other banking activities.  Per the notice from the FDIC below, a call will be held this Thursday on the topic.

From: FDIC Subscriptions

Sent: Monday, May 13, 2013 1:16 PM

To: Tradyn Foley

Subject: FIL-18-2013 (REVISED): Banker Teleconference on FASB Proposal to Change the Accounting for Credit Losses

The FDIC is reissuing FIL-18-2013 to update the telephone number for the banker teleconference.

Financial Institution Letter (Revised)                                                                                            FIL-18-2013

Banker Teleconference on FASB Proposal to Change the Accounting for Credit Losses   May 9, 2013


The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that would change recognition and measurement of credit losses for financial and regulatory reporting purposes.  The FASB’s comment period closes May 31, 2013.  The FDIC will host a free 90-minute teleconference at 1:00 p.m. EDT, May 16, 2013, to discuss the proposal with interested bankers.  Employees of all FDIC-supervised institutions are invited to participate.

Statement of Applicability to Institutions under $1 Billion in Total Assets:

This Financial Institution Letter applies to all FDIC-supervised institutions.


FDIC-Supervised Banks (Commercial and Savings)

FDIC Supervised Savings Associations

Complete Financial Institution Letter: