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1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Lunch & Learn Capital Gains & Losses April.

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Presentation on theme: "1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Lunch & Learn Capital Gains & Losses April."— Presentation transcript:

1 1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Lunch & Learn Capital Gains & Losses April 29, 2010

2 2 DRAFT Objectives Financial Statement Impact Strategies Partnering I III IV V Tax Background II

3 3 DRAFT Objectives I Manage & Reduce Valuation Allowance Risk On Deferred Tax Assets 1 Minimize Cash Taxes On 2010 Gains Taking Strategy 2 Increase Surplus By Reducing Non-Admitted Deferred Tax Assets 3 Utilize Capital Loss Carryovers 4 Goal: Maximize Financial Statement & Economic Returns To CUNA Mutual

4 4 DRAFT General Rules II Tax Capital Gains & Losses Relevance Need Sale Or Exchange To Trigger Tax Event –Exception For Certain Worthless Investments Assets Are Capital Unless Explicitly Excluded –Most Investments Are Capital –Exceptions: Certain Tax Hedges, Partial Worthlessness, Foreign Exchange Capital Gains Offset Ordinary Losses; Capital Losses Do Not Offset Ordinary Income –Ordinary Means Business Income –Net Capital Losses Need To Match Capital Gains In Other Periods More Restrictive Carryover Rules For Capital Losses –Back 3, Forward 5 Years; Versus 3/15 For Ordinary Life Losses In Lifecos (2/20 For Nonlife) –Life / Nonlife Crossover Rules Unused Losses (Including Unrealized) Are Carried On The Balance Sheet

5 5 DRAFT Deferred Taxes II Book Basis > Tax Basis –Future Tax Losses > Book –Future Tax Gains < Book –Examples Accelerated Tax Depreciation In Leases Market Value > Tax Basis Deferred Tax Liabilities (DTL) Non-Interest Bearing –Increase Condition Implication Tax Basis > Book Basis –Future Tax Losses > Book –Future Tax Gains < Book –Examples Impairments Not Currently Allowed For Tax Decreases In Market Value Unused Capital Loss Carryforwards Deferred Tax Assets (DTA) Non-Earning –Monetize –Sustain

6 6 DRAFT Deferred Tax Position III Interest Rate Risk –Estimate $20-30 Change In Portfolio Value Per 10 bps –1% Upward Shift Could Create $ Additional DTA Impairment Risk $ Millions, Unless Noted

7 7 DRAFT Valuation Allowance Capital Gains Strategies Reduce Risks Valuation Allowance Required Unless Utilization >50% Likely –Cannot Assume Credit Losses Will Recover Valuation Allowance Risks –Additional Impairments –Planning Strategies –Rising Rates III Acceptable Proof For Recoverability –Recovery Via Holding To Maturity –Capital Loss Carryback, If Any –Future Capital Gains That Can Be Scheduled To Cover Losses –Technically Sound Strategies (Prudent and Feasible, Execution Not Necessary) Recoverability Demonstrated At 4Q 2009 And 1Q 2010 –Extension Losses Covered By Assertion That We Will Hold To Maturity

8 8 DRAFT The Calculation III StepAction GAAP View 4Q20101Q20104Q20094/1/20091Q2009 Aggregate Unrealized Tax Losses In Portfolio– If Losses < 0, Then Stop 1 Unrealized Tax Losses(591)(649)(741) (1258) 1 4Q 2010 Amounts Are Illustrative Only – Could Be In Income Or Equity 5 Record Valuation Allowance Valuation Allowance 5 Adjust (Self-Reversing Items, Ordinary, etc.)– If Gains > Losses, Then Stop 2 Adjustments Unrealized Capital Losses(251)(309)(359)(507)(551) 2 Unrealized Capital Gains Identify Existing Unrealized Capital Gains– If Gains > Losses, Then Stop 3 Remaining Capital Losses(25)(83)(161)(409)(453) 3 Planning Strategies Identify Planning Strategies– If Losses > Gains, Then Valuation Allowance 4 Excess (Deficiency) (83)(127) 4 $ Millions (428)

9 9 DRAFT Key Elements III Restricted List Partial Worthlessness On Eligible Investments Unrealized Capital Gains Planning Strategies

10 10 DRAFT Partial Worthlessness Cumulative Ordinary Tax Deductions = ~385 (~135 Benefit To Capital DTA) III Ordinary Deduction Allowed For Certain Assets –Non-Corporate Issuers (e.g. Regular REMIC Interests) –High Certainty (Default Not Required) –To Extent Of Principal Loss (Extension Loss Not Deductible) Other Considerations –IRS Industry Issue Character and Timing Benefits –Ordinary Versus Capital –Carryovers –No Need To Be Completely Worthless To Take Tax Writeoff Cumulative GAAP Impairment: $835M

11 11 DRAFT Strategies IV Potential Transactions –RE-REMIC –Coupon Stripping –Lend Zero Coupon Bonds –Selling Assets In Gain Position –Other Idea Generation

12 12 DRAFT MCA/Finance Success CDO Sales V Conditions Held In Impaired CDOs – Tax Benefit For Losses Not In SAP Surplus –Pre-Tax Loss (185) Had Reduced Surplus –Tax Benefit (65) Did Not Increase Surplus Due To Surplus Limit Appetite To Recognize Capital Gains 1 Cumulative Impairment 2 Gain Amount 3 Prior Impairment, Illustration Only - Actual Sale Was 83 Transactions Results Sold 70 3 In Impaired CDOs Sold 70 2 In Securities Cash: No Tax Payment (Gains Offset Losses) GAAP: 45 After –Tax Gain SAP: 25 Surplus Increase Amounts Are Illustrative Only $ Millions

13 13 DRAFT 2010 Partnering V $ Millions Maximize Outcomes –Evaluate & Quantify Potential Strategies –Measured Gains Taking – CDO Dispositions Better Data Align Measurement Systems

14 14 DRAFT Appendix

15 15 DRAFT RE-REMIC Issue Debt (Regular And Residual Interests) Backed By MBS Collateral Sell Senior Tranche To External Party Follow Ups –Surplus/Required Capital Impact –Regulatory View –Rating Agency View IV Example –Pool MBS –Worth $100, Book Basis $120, Tax Basis $250 And Par $500 –Issue Debt –Senior $10 2 Year Tranche And Other Tranches –Sell Senior Tranche To 3 rd Party –Tax Impact –Capital Loss – Based On Proportion Of Debt Sold = (100 – 250) * 10% = (15) –Ordinary Deduction – Recognized Proportionately To Retained Debt = (150) – (15) = (135) –Other Considerations


17 17 DRAFT Coupon Stripping Example –Assume 15 Year Bond, $100 Principal, 3% Semi-Annual Coupon –Could Create $3 Capital Gain Per $100 Face Amount –Strip 6-Month Coupon And Sell For $3 –Remaining Tax Basis Is $97 (Equals Value) –In 6 Months The Bonds Value Accretes to $100 –Tax Basis Remains $97 Provided Stripped Coupon Is De Minimis –De Minimis If Stripped Coupon Is Less Than ¼% Times Years To Maturity Strip Upcoming Coupon From Long Duration Bonds Amount Stripped Creates Potential Capital Gains Follow Ups –Capacity To Strip Bonds –Impact On Ability To Pledge Stripped Bonds As Collateral Accelerates Cash Recognition IV

18 18 DRAFT Lend Zero Coupon Bonds Example –Purchase $100 Zero Coupon Bond For $70 –Loan The Bond –Basis Remains $70 During Term Of Security Loan –No OID To Securities Lender –Purchaser From Securities Lender Accrues The OID –Accretion Creates Capital Gain Upon Closing The Loan –Capital Gain = Principal * Interest Rate Acquire And Lend Zero Coupon Bonds Potential Capital Gains = Accretion While On Loan Follow Ups –Market Availability Of High-Yielding Zeros –Asset/Liability Matching –Lending Appetite (Internal And External) IV

19 19 DRAFT Other Strategies Sell Appreciated Securities And Repurchase Similar Securities IV Partnerships Sell Other Assets (Mortgage Loans, Subsidiaries, Etc.) Follow Ups –Identify Appreciated Assets –Determine & Optimize GAAP & SAP Impact (NII, DAC Recoverability, Cash Flow Testing, etc.) –Drill Down On Partnerships –Quantify Other Opportunities New Rules

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